Westport Fuel Systems Annual Report 2016

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FY2016 Annual Report · Westport Fuel Systems

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WESTPORT FUEL SYSTEMS INC.

2016 ANNUAL REPORT

1750 West 75th Avenue, Suite 101

Vancouver, British Columbia V6P 6G2

Canada

T +1 604-718-2000

F +1 604-718-2001

www.wfsinc.com

Table of Contents

LETTER TO SHAREHOLDERS

SUSTAINABILITY REPORT

CATALYST FOR INNOVATION

KEY COLLABORATIONS

THE REPORT: OUR APPROACH AND SCOPE

FOOTNOTES

MANAGEMENT'S DISCUSSION & ANALYSIS

BUSINESS OVERVIEW AND GENERAL DEVELOPMENTS

SELECTED ANNUAL FINANCIAL INFORMATION

RESULTS FROM OPERATIONS

CAPITAL REQUIREMENTS, RESOURCES & LIQUIDITY

SHARES OUTSTANDING

CRITICAL ACCOUNTING POLICIES & ESTIMATES

NEW ACCOUNTING PRONOUNCEMENTS & DEVELOPMENTS

DISCLOSURE CONTROLS & PROCEDURES

SUMMARY OF QUARTERLY RESULTS

RELATED PARTY TRANSACTIONS

BUSINESS RISKS & UNCERTAINTIES

AUDITOR REPORTS

CONSOLIDATED FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEET

CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME (LOSS)

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

CONSOLIDATED STATEMENTS OF CASH FLOWS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

RECENT MATERIAL ANNOUNCEMENTS

INFORMATION FOR SHAREHOLDERS

2 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Letter To Shareholders

Letter to Shareholders

Dear Fellow Shareholders,

2016 was a transformative year that brought together two industry
leaders to form Westport Fuel Systems, the global leader in
advanced clean-burning fuel systems and components. We entered
2016 with clear goals and we are pleased to report our progress
plus next steps to make Westport Fuel Systems a sustainable,
profitable company that delivers value to customers, employees
and shareholders.

With our merger closed on June 1, 2016, we immediately began
executing on our integration plans. Our global leadership team is
focused on improving operating efficiencies and reducing expenses
while ensuring that we continue to provide our customers with
leading products and technology solutions and exceptional service.
At year-end, we had already achieved almost a substantial portion
of our stated merger synergy targets plus higher Adjusted EBITDA
from operations in the third and fourth quarters.

We accelerated our efforts to capture operating efficiencies and
reduce our expenses by consolidating
the manufacturing,
distribution and corporate footprint, and stream-lining our corporate
costs. The results of these efforts started to emerge in the second
half of 2016 and with additional work and activities underway, we
expect to see more improvements in 2017.

The strategic review of the product and brand portfolio that began
upon the close of the merger was completed in late 2016. In early
2017 we sold the assets of the Auxiliary Power Unit (“APU”)
business for $70 million and announced plans to divest the majority
of assets remaining in the Industrial Business Segment. By
narrowing our focus along with improving our financial base, we
can concentrate on growing market share for our unmatched
alternative fuel technologies and bringing to market new products
that can drive results for the long term. It is our knowledge, technical
expertise, deep patent portfolio, and strategic OEM relationships
that make Westport Fuel Systems the leader in our market.

The efforts to strengthen our balance sheet were successful in 2016,
beyond the closing of the merger. The Cartesian investment brought
additional cash to support our global growth initiatives through
upfront payments and a convertible note. Additionally, we
completed other non-core asset sales around the globe. In 2017,
we expect to build on this success with additional non-core asset
sales and further right-sizing of our cost structure.

We are pleased to report that our Westport High Pressure Direct
Injection 2.0 ("Westport™ HPDI 2.0") technology advanced
through the validation and testing phases. We are on track to ship
the first commercial components to our OEM launch partner by end
of 2017, a significant milestone for the company.

This is the culmination and commercialization of many years of work
and highlights our expertise and experience along with a deep
patent portfolio that makes Westport Fuel Systems a market leader.

We are excited about the potential of Westport™ HPDI 2.0 as it
provides customers with cost savings, lower GHG emissions, and
the ability to run entirely on renewable fuels - all while matching the
performance of vehicles fueled by diesel.

Today Westport Fuel Systems is the premier global company for
the engineering, manufacturing, and supply of alternative fuel
systems and components. We are driving innovation to power a
cleaner tomorrow by delivering performance, fuel efficiency and
environmental benefits to address the challenges of climate change
and urban air quality. Serving customers in more than 70 countries
through our leading transportation and automotive brands, over 600
patents and applications, and with a dedicated team of employees,
we can change the way the world moves.

Calendar year 2017 is well underway with the momentum to build
on our transformation and the strong finish to 2016. Our key
initiatives for 2017:

• Launch Westport™ HPDI 2.0 commercial components to our

OEM partner

• Execute our strategic plan and portfolio rationalization

• Strengthen our balance sheet

• Capture remaining merger synergies and drive operational

excellence

The 2017 year is already off to a good start and we look forward to
updating you as we make further progress. On behalf of our Board
of Directors, the management team and employees around the
world, thank you for your continued interest and support of Westport
Fuel Systems.

Sincerely,

Nancy S. Gougarty
Chief Executive Officer

Ashoka Achuthan
Chief Financial Officer

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 3

Sustainability Report

Sustainability
Report

Driving Innovation to
Power a Cleaner Tomorrow

Compared to other primary energy use sectors including electricity,
industry, and buildings, transportation is the most difficult to
decarbonize because of the challenge of economically replacing
the energy density of fossil fuels. The current global transportation
energy mix is still dominated by petroleum derived fuels like gasoline
and diesel (approximately 90%) but we are witnessing the
emergence of a more diversified or poly-fuel mix as natural gas,
liquid biofuels, electric vehicles, and hydrogen fuel cells are gaining
market share through an ability to compete on price, range, and
performance.1

Canada and other G20 economies have ratified the Paris
Agreement in November 2016 committing to deep decarbonization
targets to limit average temperature rise to less than 2°C, and are
working on plans to limit temperature rise to 1.5°C. We simply need
to accelerate the deployment of clean-technology and low carbon
transportation solutions and increase the rate of market penetration.

the ambitious 80%-by-2050 emission reduction

The extent to which the transport sector is able to make progress
on
targets
incorporated within the Paris Agreement and diversify beyond oil,
will be a function of ongoing technology breakthroughs on both fuels
and vehicles, political action, shifting demographics, and a range
of new public policy considerations that will not only influence how
people and freight are moved, but how and where we live.

Our 2016 Sustainability Report highlights the new Westport Fuel
Systems updates, progress, and challenges in reaching our vision
of a sustainable transportation future. We continue to strive to create
leading edge technologies that meet or exceed the requirements
of legislation and industry codes and standards to shift the
transportation sector to gaseous fuels. Working in conjunction with
our partners, we are committed to delivering low-emission gaseous
fuel solutions that will meet the demand for high-efficiency, high-
performance, and low-carbon transportation.

A Catalyst For Innovation

The heightened focus on the environmental performance of the
transportation sector with more stringent requirements
for
increased engine efficiency, improved urban air quality, and
greenhouse gas ("GHG") emission reductions has put pressure on
engine and vehicle manufacturers, but also introduced an
opportunity for collaboration and innovation.

4 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

New Engine Efficiency Standards

The United States Environmental Protection Agency (“EPA”) and
the National Highway Traffic Safety Administration (“NHTSA”)
jointly released the Phase 2 GHG emissions and fuel efficiency
standards for medium- and heavy-duty vehicles in August 2016.
These rules are the product of nearly two years of extensive
consultation with industry partners and set a high standard for the
freight sector.

Freight transport by road is a vital part of the North American
economy but also a major source of GHG emissions. The new EPA/
NHTSA rules for GHG emissions and fuel efficiency from medium-
and heavy-duty trucks will create a new competitive dynamic in the
trucking industry. Westport Fuel Systems is well-positioned to
deliver best-in-class engines and vehicles that meet increasingly
stringent regulatory frameworks.

Next generation natural gas engines and vehicles including
Westport High Pressure Direct Injection 2.0 (Westport™ HPDI 2.0)
and Enhanced Spark Ignition ("Westport™ ESI") technologies
comply with the new rule and offer significant GHG emission
reduction benefits through the combination of low-carbon fuels and
high-efficiency engines. In particular, Westport™ HPDI 2.0 has
been proven to deliver diesel-like performance and fuel efficiency
while providing a reduction in GHG emissions of 18-20% compared
to current diesel engines.

Improved Urban Air Quality

The California Air Resources Board (“CARB”) adopted optional low
oxides of nitrogen (“NOx”) emission standards for on-road heavy-
duty engines in 2013. For California to meet its 2023 and 2023
ambient ozone air quality standards, CARB estimates that it will
require a 90% reduction in NOx emissions below 2010 baseline
levels measured in the South Coast air basin.2

The Cummins Westport ISL G Near Zero became the first mid-range
engine in North America to receive emissions certifications from
both the U.S. EPA and CARB that meet the 0.02 g/bhp-hr optional
Near Zero NOx Emissions standards for medium-duty truck, urban
bus, school bus, and refuse applications. Methane emissions have
also been cut dramatically through the combined use of closed
crankcase ventilation and revised catalyst formulations.

According to CARB, when fueled by renewable natural gas ("RNG"),
a transit bus using the ISL G NZ has total emissions equivalent to
a battery electric bus powered by electricity generated in a clean
natural gas fueled power plant.3

The Potential Of RNG

Transportation grade natural gas is increasingly being produced
from non-fossil sources, in the form of renewable natural gas or

Sustainability Report | A Catalyst for Innovation

This chart shows the fuel carbon intensity on a per unit energy basis. For example, for 1 MJ of energy of CNG made from landfill gas and used in an engine, the
total amount of CO2 WTW that results is about 85% lower than using 1 MJ of diesel. This chart addresses only the fuel, and as such does not take into account
engine tailpipe emissions of methane, or any differences in engine efficiency.

biomethane. Feedstocks for RNG include landfill gas (“LFG”),
municipal solid waste (“MSW”), waste water treatment plants
(“WWTP”), or agricultural manure. Substantial carbon intensity
reductions can be achieved by turning these waste products into
transportation fuel, thereby eliminating direct emissions of carbon
dioxide ("CO2") and methane that occur naturally and without any
end-use benefit.

There is an urgent need for sustainable, low-carbon solutions for
the transportation and energy sectors. Because natural gas
vehicles can operate with 100 percent renewable natural gas or any
percentage of blended renewable and conventional gas, they are
a promising technology for freight transportation now and into the
future as renewable fuels are expected to represent a greater
market share of fuel consumed.

When vehicle efficiency and tailpipe emissions are accounted for,
RNG (in this case from landfill gas) can reduce the greenhouse gas
emissions of natural gas heavy duty trucks by approximately 75%
compared to the level produced from equivalent diesel trucks.4

Key Collaborations In 2016

Industry leadership begins with outreach and dialogue and we have
contributed to many technical working groups, committees, and
advisory panels to learn, share our expertise, and help build a body
of knowledge about natural gas vehicles, their benefits, and
challenges with deployment.

While the economic value proposition remains the primary driver of
natural gas for transportation, policy makers, OEM partners and
industry stakeholders are looking to the other compelling energy,
environmental, and sustainability benefits. It is critical for Westport
Fuel Systems to contribute sound, intelligent, data driven, and
defensible analysis to a discussion on sustainable mobility and the
transition to alternative fuels.

Business For Social
Responsibility

Landfill Gas fuel carbon intensity from GREET (greet.es.anl.gov) life-cycle
emissions model maintained by Argonne National Labs.

FUTURE OF FUELS WWW.BSR.ORG

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 5

The scope of this report relates only to our operations in British
Columbia, Canada. We recognize the limitation of this narrow scope
given the global reach of the new Westport Fuel Systems. As much
of 2016 was spent in post-merger integration activities and product
portfolio rationalization, we have identified a need to extend the
scope of our sustainability report to encompass all of our global
operations and are working to establish processes to achieve this
goal. While the majority of our engine testing and development
occurs in Vancouver, we recognize that we must tell a more
complete story about our activities, success and challenges. This
report discloses data from January to December 2016. Historical
data from the past four fiscal years have been included for
comparative purposes, where appropriate.

Report Content

This report has been developed in accordance with the Global
Reporting Initiative ("GRI") G3 standard reporting guidelines. The
GRI is an independent institution that provides a standard
framework for sustainability reporting across companies and
industries. We have applied the principles of materiality and
stakeholder inclusiveness as recommended by the GRI to assess
the relevance of sustainability priorities to Westport Fuel Systems
and our stakeholders.

Westport has self-declared this report to correspond to application
level B in the six-level grid of the GRI G3 guidelines. Application
Level B requires us to disclose our performance on at least twenty
core economic, social and environmental indicators.

Determining Material Issues

The intent of the new GRI G4 materiality review process is to ensure
that content included in our annual sustainability report represents
the key environmental, economic, and social issues that are most
critical to our stakeholders.

In 2016 we undertook an extensive internal risk management
exercise which will guide and supplement our process for
determining materiality in accordance with the framework of the
new G4 reporting guidelines. We reviewed our existing mechanisms
for gathering stakeholder feedback and sought additional input
where possible to organize our findings using the prioritization
matrix system recommended by GRI.

Sustainability Report | Key Collaborations

Westport Fuel Systems has been a member of Business for Social
Responsibility (“BSR”) since 2012 and was a founding member of
the Future of Fuels working group. The mission of Future of Fuels
is to identify and promote transportation fuel pathways that enhance
the sustainability and availability of emerging alternative fuel
choices. The working group’s objectives are to develop tools and
research to map, measure, and manage a sustainable transition to
low-carbon commercial freight, convene value chain stakeholders
to identify and address the greatest challenges to the deployment
of sustainable fuels, and build partnerships that catalyze and test
low-carbon commercial freight solutions.

In 2016, Future of Fuels launched its Fuel Tool developed by
technical experts and member companies including PepsiCo, Shell,
Suncor, Coca-Cola, UPS, Volvo, Walmart, and Westport Fuel
Systems. It is an interactive tool able to provide data for fleet owners
to measure the average climate emissions for different fuels and
technology, to understand the range of related environmental
impacts, and enable them to implement practices to achieve desired
sustainability results from their fleet and suppliers.

Environmental Defense Fund

PUMP TO WHEELS METHANE
LEAKAGE STUDY

The Environmental Defense Fund (“EDF”) has a history of cross-
sector collaboration and balanced environmental analysis. In 2012,
the EDF initiated a series of studies with academic and industry
partners to better understand the source and quantity of methane
emissions along the natural gas supply chain. Westport Fuel
Systems was a core supporting member of a multi-partner study
initiated by EDF and conducted by the Center for Alternative Fuels,
Engines and Emission (“CAFEE”) at West Virginia University.

The study was published in 2016 in the journal Environmental
Science & Technology and offers a critical baseline by which
ongoing product and technology enhancements can be measured,
as it represents the first significant effort to quantify actual in-use
methane emissions from natural gas filling stations and heavy-duty
vehicles. The natural gas vehicle industry has already implemented
technology solutions to dramatically minimize, or in some cases,
eliminate the largest sources of methane emissions from vehicle
tailpipe, crankcase ventilation, and dynamic venting that were
identified in the study.

Our Approach And Scope

This is our eighth published sustainability report, documenting our
strategy, programs and achievements related to the environment,
the safety of people and products, our employees, and our
community.

6 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

GRI INDICATOR INDEX

LEGEND

AA1

(we report on this indicator)

BB2

(we partially report on this indicator)

ECONOMIC PERFORMANCE

EC1

EC2

Direct economic value generated and distributed

(2016 Audited Financial Statements)

Financial implications and risks and opportunities of climate change

(Climate Change Risks and Opportunities)

SOCIAL PERFORMANCE

HR3

LA1

LA3

LA6

LA7

SO1

SO2

SO3

PR1

PR2

Employee training on human rights

(Human Rights)

Total workforce by employment type, employment contract, and region

(Employee)

Benefits provided to full-time, part-time and temporary employees

(Employee)

Workforce represented in Occupational Health and Safety Committees

(Health and Safety)

Rates of injury, occupational disease, lost days, and work-related
fatalities

(Health and Safety)

Nature, scope and effectiveness of programs to manage impact on
communities

(Community Impacts)

Percentage and total number of business units analyzed for risks
related to corruption

(Anti-Corruption Efforts)

Percentage of employees trained on anti-corruption policies and
procedures

(Anti-Corruption Efforts)

Life cycle stages: health and safety impacts of products-assessed for
improvements

(Product Responsibility)

Total number of incidents of non-compliance with regulations and
voluntary codes concerning health and safety impacts of products

(Health and Safety)

ENVIRONMENTAL PERFORMANCE

EN3

EN4

EN5

EN6

EN7

EN8

Direct energy consumption by primary energy source

(Energy)

Indirect energy consumption by primary source

(Energy)

Energy saved due to conservation and efficiency efforts

(Energy)

Initiatives to provide energy-efficient or renewable based products and
reductions

(Energy)

Initiatives to reduce indirect energy consumption and reductions
achieved

(Energy)

Total water withdrawal by source

(Water)

EN16 Total direct and indirect greenhouse gas emissions

Gas Emissions)

(Greenhouse

EN18

EN22

EN23

EN28

Initiatives to reduce GHG emissions and reductions achieved

(Greenhouse Gas Emissions)

Total amount of waste by type and disposal method

(Waste Generation and Diversion)

Total number and volume of significant spills

(Waste Generation and Diversion)

Value of fines and non-monetary sanctions for environmental non-
compliance

(Environmental Compliance)

Social Performance Indicators

HUMAN RIGHTS

Westport Fuel Systems is dedicated to preserving all fundamental
and universally recognized human rights as outlined by the United

Sustainability Report | Report Content

the

Nations and
International Labour Organization. Our
commitment is stated and reinforced by our Code of Conduct which
is reviewed and signed annually by each of our employees.

TOTAL WORKFORCE

Westport Fuel Systems is committed to providing a healthy work
environment, defined by respectful relationships, professional
development and advancement potential and an execution-focused
culture to capitalize on business opportunities. We are dedicated
to ensuring that Westport Fuel Systems remains an employer of
choice in all our locations. A similar benefits package is offered to
both full-time and part-time employees.5

HEALTH AND SAFETY

The health and safety of our employees, facilities, and communities
is an integral part of Westport Fuel Systems operations. When
gauging world-class safety performance, recordable injury rates
and lost-time injury rates are statistical, comparative industry
measures. Our results are indicative of our ongoing and significant
commitment to injury prevention, risk mitigation, regulatory
compliance, and continuous safety improvement.

Our Health and Safety Committee members are champions for
workplace safety. Westport Fuel Systems maintains a Health and
Safety Committee in British Columbia or approximately one
Committee for every 300 employees. Our Committee is made up
of cross-functional management and employee representatives
who advise and recommend action on any unresolved workplace
health and safety issues brought to them.

SAFETY INCIDENTS

as of Dec. 31 2016 2015 2014 2013 2012

Recordable injury
frequency
Recordable injury rate6
Lost time injury frequency
Lost time injury rate7

0.00

0.33

0.96

1.22

0.46

0.00

0.33

0.32

0.49

0.23

Our Vancouver-based employees achieved a significant safety
milestone as we did not record any recordable injuries or lost time
injuries in 2016. We continue to put the health and safety of our
employees at the center of our operational priorities.

Community Impacts

The importance of being a good neighbour is captured within our
Environmental Policy statement. Westport Fuel Systems
geographic location, with our technical facilities adjacent to homes,
schools, and other businesses requires us to monitor and manage
the potentially adverse impacts our operations might have on our
immediate neighbors. Our Facilities Engineering Group maintains
a preventative maintenance schedule for key equipment to

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 7

Sustainability Report | Report Content

minimize the likelihood of environment releases and noise levels in
excess of municipal by-laws. Westport Fuel Systems responds to
community concerns regarding our facilities, infrastructure, noise
levels and environmental impacts in a timely manner. We did not
receive any external complaints in 2016.

Anti-Corruption Efforts

Our expectations for individual integrity and ethical, moral and legal
conduct are outlined in our Code of Conduct. The Code of Conduct
has mandated compliance with all applicable laws in the
jurisdictions where we operate and has always prohibited the giving
or receiving of improper payments to influence business decisions.
In addition, Westport Fuel Systems maintains a confidential ethics
hotline to provide an avenue for employees to raise concerns about
corporate conduct. The policy includes the reassurance that they
will be protected from reprisals or victimization for “whistle blowing”
in good faith.

Product Responsibility

Quality and safety are imperatives across the product life cycle. Our
Quality Management System ("QMS") is certified to ISO 9001:2008
standards for the design, assembly and commercialization of its
LNG fuel systems. Westport Fuel Systems QMS comprises the
organization’s policies and procedures that aim to ensure that
customer requirements are met with consistency, resulting in
enhanced customer confidence and satisfaction. The QMS, other
internal requirements and engineering systems have contributed to
no incidents of non-compliance with regulations and voluntary
codes concerning the health and safety impacts of our products.
Internal systems and processes have been established to ensure
that the health and safety impacts of our products are assessed in
each of the following life-cycle stages:

HEALTH AND SAFETY IMPACTS
ASSESSED AT LIFE-CYCLE STAGE

Development of product concept
Research and development
Certification
Manufacturing and production
Marketing and promotion
Storage, distribution, and supply
Use and service
Disposal, reuse or recycling

Status
YES

YES

PARTIAL

Community Engagement

Being active in the community has always been central to Westport
Fuel Systems values. Since 2002, Westport Fuel Systems has been
a strong supporter of the United Way of the Lower Mainland. From
modest beginnings, our annual workplace campaign has grown

8 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

steadily and in 2016 our cumulative fundraising total reached $1.34
million CDN.

UNITED WAY OF THE LOWER
MAINLAND COMMUNITY SCHOOLS

Westport Fuel Systems is a proud partner of the United Way and
Vancouver School Board’s Community Schools Program.
Community schools provide safe and structured after-school
activities to students aged 6-12. After-school programs play a critical
role in providing structured, supervised time for children to be active,
to develop positive social skills, and to build overall capabilities.
Studies have linked participation in these programs with greater
academic success, increased self-confidence and self-esteem, and
better relationships with peers and adults.

Through this partnership, Westport Fuel Systems employees lead
classes over seven weeks
in cooking, acrobatics, guitar,
electronics, and visual arts at Lloyd George Elementary School.

CANADIAN BLOOD SERVICES

Westport Fuel Systems has been a member of the Canadian Blood
Services’ Partners for Life Program since 2001. This nationwide
program is designed to encourage group donations from business
and community organizations. Each year, we set a target,
coordinate group donations and allow employees to take time from
work to donate.

Environmental
Performance Indicators

ENVIRONMENTAL COMPLIANCE

Compliance with applicable federal, provincial, and municipal
regulations is a baseline environmental performance standard and
we believe that leading organizations must go beyond minimum
environmental requirements. Since its inception in 1996, Westport
Fuel Systems has not received any fines or non-monetary sanctions
for environmental non-compliance.

WATER

is an

It is expected that climate change will impact global water resources.
increasingly critical component of each
Water use
organization’s sustainability performance. Despite this, only the
largest industries in British Columbia have water meters with data
logging capability and the city of Vancouver does not currently
provide meters to light industrial or commercial customers such as
Westport Fuel Systems.

Our calculations indicate that Westport Fuel Systems facilities
cumulatively have an average daily rate of water use of
approximately 13.5 m³ per day. Engine and fuel system component

testing activities use process water that flows in a closed-loop
thereby minimizing total water withdrawals. Water conserving
domestic appliances and fixtures have been installed at all locations
in an effort to further reduce our impact. We recognize that providing
only an estimate and not actual water use is a limitation of our current
sustainability report.

ENERGY CONSUMPTION

Our energy consumption in 2016 was comparable to 2015. This is
due in part to product development cycles but also to our ability to
test components on systems capable of recycling fuel, and a greater
focus on energy efficiency improvements. The bulk of our LNG test
rigs continue to operate on liquid nitrogen and we continue to return
power to the grid through the use of transient dynamometers in our
test cells.

ENERGY CONSUMPTION

(values in gigajoules)

DIRECT

Diesel

LPG

LNG

CNG
NG returned

Net direct
consumption

INDIRECT
Electrical

for the 12 months ending Dec. 31
2014

2015

2013

2012

2016

414

749

2,000

2,722

2,250

5,714

5,436

21,730

8,559

8,466

18,991

18,887

35,449

38,148

28,802

(500)

(4,351)

(13,937)

(1,024)

(1,860)

24,619

20,721

45,242

48,405

37,693

10,065

12,576

16,249

14,956

12,239

GREENHOUSE GAS EMISSIONS

The Greenhouse Gas Protocol developed by the World Business
Council on Sustainable Development (“WBSCD”) is the globally
accepted standard for greenhouse gas emissions accounting. The
organizational boundary of this inventory includes all of Westport
Fuel Systems British Columbia-based facilities and includes both
scope one and scope two emissions. We have not measured scope
three emissions to date.

GREENHOUSE GAS INVENTORY8
(unaudited)

Sustainability Report | Report Content

Finding comparable organizations against which to benchmark our
GHG emissions remains a challenge, as the research and
development of new engine technologies is necessarily an energy-
intensive process. There are currently no regulatory requirements
for a company of our size to disclose its emissions.9 The process
of compiling a GHG inventory provides an important foundation for
understanding reduction opportunities and measuring progress.
internationally-
Westport Fuel Systems works
recognized Carbon Disclosure Project to inventory and make public
our GHG emissions. We have identified future opportunities to
reduce the impacts of our operations, as well as opportunities to
integrate climate change risk into our risk management procedures
and overall business strategy.

through

the

WASTE GENERATION
AND DIVERSION

Waste reduction, reuse and recycling programs are well established
and well-maintained. Using formulas based on bin size and
frequency of collection, Westport Fuel Systems generates
approximately 200 tonnes of waste annually. Reducing the amount
of waste sent to landfill remains a priority and we have launched
employee education and awareness efforts to communicate the
importance of minimizing the amount of waste generated.

We extend the opportunity for employees to recycle electronics,
batteries, confidential paper, and some hazardous waste like paint
through our waste minimization program. Our Facilities Engineering
Group tracks the amount of waste recycled via our hazardous waste
program, scrap materials collection and office waste initiatives.

TYPES OF HAZARDOUS AND SOLID
WASTE RECYCLED
Absorbent pads
& materials

Beverage
containers

Aluminum

Batteries

Cardboard

Coolant

Diesel

E-waste

Filters/rags

Light bulbs

Lube oil

Organics &
kitchen waste

Paper

Steel

Hard & soft
plastic

Plastic oil pails

Solvents

Viscor

Wastewater

Wood

(values in tonnes CO2
equivalent)

Total Scope 1
Direct Emissions
Total Scope 2
Indirect Emissions
Total GHG
impact

for the 12 months ended Dec. 31
2014

2013

2015

2012

2016

1,442.8

1,272.8

2,389.7

2,576.1

2,224.2

251.0

303.0

413.0

387.0

288.0

1,693.8

1,575.8

2,802.7

2,963.1

2,512.2

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 9

Sustainability Report | Footnotes

Footnotes

1. http://www.bsr.org/reports/BSR_Future_of_Fuels_Understanding_Impacts_of_Fuels.pdf

2. https://www.arb.ca.gov/msprog/hdlownox/hdlownox.htm

3. http://www.gladstein.org/pdfs/On-Road_Pathways.pdf and https://www.forbes.com/sites/trucksdotcom/2016/04/11/natural-gas-engine-cummins-on-way/

#1ff0f9e5d8ba

4. The graphs shown here are illustrative, based on the assumptions within GREET, the lifecycle emissions model maintained by Argonne National Labs. However,
the carbon intensity of renewable natural gas can be highly variable based on the type of feedstock, the geography, energy consumption to produce the
biomethane, and the outcome for the feedstock if not used to make RNG.

5. Part-time employees must work at least three days per week to be eligible
for the same benefits package as full-time employees. Casual employees
or contractors are not eligible for benefits.

6. The recordable injury incident rate is the annualized rate of occupational injuries and illness per 100 employees. It is a calculation of the number of injuries x

200,000/employee hours worked. First aid classified injuries are not included.

7. The lost time injury rate is a calculation of the total number of lost time injuries x 200,000/employee hours worked. Lost days refer to scheduled work days

and the count begins on the next scheduled work day immediately after the injury.

8. The GHG Protocol methodology used at this time only includes emissions associated with fuel consumption and not energy and emissions associated with

fuel production, distribution and transport.

9. In Canada, Large Final Emitters (“LFEs”)—facilities that emit the equivalent of 100,000 tonnes or more of carbon dioxide (CO2) equivalents per year—are

required to disclose their emissions.

10 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Management's
Discussion and
Analysis

Basis of Presentation

This Management’s Discussion and Analysis (“MD&A”)
for
Westport Fuel Systems Inc. (formerly known as Westport
Innovations Inc.; “Westport Fuel Systems”, the “Company”, “we”,
“us”, “our”) is intended to assist readers in analyzing our financial
results and should be read in conjunction with the audited
consolidated financial statements, including the accompanying
notes, for the fiscal year ended December 31, 2016. Our
in
consolidated
accordance with generally accepted accounting principles in the
United States (“U.S. GAAP”). The Company’s reporting currency
is the U.S. dollar. This MD&A is dated as of March 31, 2017.
Additional information relating to Westport Fuel Systems, including
our Annual Information Form (“AIF”) and Form 40-F, is available on
SEDAR at www.sedar.com and on EDGAR at www.sec.gov. All
financial information is reported in U.S. dollars unless otherwise
noted.

financial statements have been prepared

Forward Looking Statements

This MD&A contains forward-looking statements that are based on
the beliefs of management and reflects our current expectations as
contemplated under the safe harbor provisions of Section 21E of
the United States Securities Act of 1934, as amended. Such
statements include but are not limited to statements regarding the
orders or demand for our products, our investments, cash and
capital requirements, the intentions of partners and potential
customers, the performance of our products, our future market
opportunities, availability of funding and funding requirements, our
estimates and assumptions used in our accounting policies, our
accruals, including warranty accruals, our financial condition, timing
of when we will adopt or meet certain accounting and regulatory
standards and the alignment of our business segments. These
statements are neither promises nor guarantees but involve known
and unknown risks and uncertainties that may cause our actual
results, levels of activity, performance or achievements to be
materially different from any future results, levels of activity,
performance or achievements expressed in or implied by these
forward looking statements. These risks include risks related to
revenue growth, operating results, liquidity, industry and products,
general economy, conditions of the capital and debt markets,
government or accounting policies and regulations, technology
innovations, as well as other factors discussed below and elsewhere
in this report, including the risk factors contained in the Company’s
most recent AIF filed on SEDAR at www.sedar.com. The forward-

Management's Discussion and Analysis

looking statements contained in this MD&A are based upon a
number of material factors and assumptions which include, without
limitation, market acceptance of our products,

product development delays in contractual commitments, the ability
to attract and retain business partners, competition from other
technologies, price differential between natural gas and liquefied
petroleum gas, unforeseen claims, exposure to factors beyond our
control as well as the additional factors referenced in our AIF.
Readers should not place undue reliance on any such forward
looking statements, which speak only as of the date they were made.
We disclaim any obligation to publicly update or revise such
statements to reflect any change in our expectations or in events,
conditions or circumstances on which any such statements may be
based or that may affect the likelihood that actual results will differ
from those set forth in the forward looking statements except as
required by applicable legislation.

The forward looking statements contained in this document speak
only as of the date of this MD&A. Except as required by applicable
legislation, Westport does not undertake any obligation to release
publicly any revisions to these forward looking statements to reflect
events or circumstances after this MD&A, including the occurrence
of unanticipated events. The forward looking statements contained
in this MD&A are expressly qualified by this cautionary statement.

Business Overview
and General Developments

Fuel Systems Solutions, Inc. ("Fuel Systems") and Westport
Innovations Inc. ("Westport"), two companies with a strong
foundation of innovation and technology leadership in the
alternative fuels space were both key players in the development
of the global market for gaseous fueled engines and vehicles for
transportation and industrial applications. The merger of these two
leaders in June 2016 has created Westport Fuel Systems, a premier
global company for the engineering, manufacturing, and supply of
alternative fuel systems and components.

Our new corporate vision - “Driving Innovation to Power a Cleaner
Tomorrow” - encompasses our mandate to deliver best in-class
alternative fuel engines, fuel systems, and components. Global
trends in greenhouse gas emission reduction regulations and
increasingly stringent urban air quality requirements further
solidifies our strategy to develop technology solutions and
commercialize products that original equipment manufacturers
("OEMs") will need to meet demanding regulatory frameworks. With
a broad range of alternative fuel capabilities in liquefied petroleum
gas ("LPG"), compressed natural gas ("CNG"), liquefied natural gas
("LNG"), renewable natural gas ("RNG"), and hydrogen and our
innovative proprietary technologies, Westport Fuel Systems is well
positioned in key on-road, industrial, and high horsepower market
segments.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 11

Management's Discussion and Analysis | Business Overview and General Developments

Our Automotive and Industrial businesses are the solid foundation
of our market leadership position and source of competitive
advantage. We have been able to realize synergies through a post-
merger strategic assessment of our entire portfolio with emphasis
on streamlining our operating lines as well as our product and brand
portfolios. The outcome of this work has been a more focused
portfolio with capital and resources targeted to the businesses that
will drive long-term profitability.

In the Automotive segment, we are leveraging our increased scale,
customer base, and global sales and distribution networks to
continue growing market share; a strategy we believe will lead to a
stronger financial position. In addition to our significant operational
competency in well-established automotive and industrial markets,
our investment in new technologies is expected to drive future
growth. Westport Fuel Systems has a track record of innovation,
specialized engineering capabilities, and a deep patent portfolio
resulting in a strong intellectual property position. We are on track
to ship the first commercial Westport High Pressure Direct Injection
2.0 ("Westport™ HPDI 2.0") components to our European OEM
launch partner in 2017. Our fully integrated Westport™ HPDI 2.0
system matches the “diesel-like” power, torque, and fuel economy
benefits of a true compression ignition engine powered by natural
gas, with reduced greenhouse gas emissions, and the capability to
run entirely on renewable fuels.

Westport Fuel Systems has a compelling value proposition. We
offer technology solutions for global environmental challenges, we
occupy a premier technology leadership position, and we have a
range of brands and products for diverse applications and markets.
Our team has the specialized technical knowledge and engineering
that can conceive, prototype, demonstrate, and
talent
commercialize the next generation of gaseous fueled technologies
with our OEM partners. Our operationally focused leadership team
has deep expertise in successful organizational restructuring,
customer satisfaction, and financial discipline. We are building a
sustainable, profitable company that delivers value to customers,
shareholders, employees, and the environment.

During 2016, the end markets for our Automotive business
continued to be challenging as a result of low oil prices. However,
we did see encouraging signs of growth in the fourth quarter of
2016, with our revenue increased by 5% sequentially over the third
quarter, and these continued into the early part of 2017. Overall we
have seen some market consolidations among suppliers, and we
have added market share in some markets as weaker players exit
the industry. Importantly, our Automotive and Industrial divisions
were profitable in both the third and fourth quarters of 2016.

Liquidity and Going Concern

12 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

aggregate, that raise substantial doubt about the Company’s ability
to continue as a going concern within one year after the date that
the financial statements are issued. This evaluation initially does
not take into consideration the potential mitigating effect of
management’s plans that have not been fully implemented as of
the date the financial statements are issued. When substantial
doubt exists under this methodology, management evaluates
whether the mitigating effect of its plans sufficiently alleviates
substantial doubt about the Company’s ability to continue as a going
concern. The mitigating effect of management’s plans, however, is
only considered if both (1) it is probable that the plans will be
effectively implemented within one year after the date that the
financial statements are issued, and (2) it is probable that the plans,
when implemented, will mitigate the relevant conditions or events
that raise substantial doubt about the entity’s ability to continue as
a going concern within one year after the date that the financial
statements are issued. Generally, to be considered probable of
being effectively implemented, the plans must have been approved
before the date that the financial statements are issued. This
standard was adopted by the Company at December 31, 2016.

The Company's financial statements have been prepared on the
basis that the Company will continue as a going concern.

At December 31, 2016, the Company's cash and cash equivalents
were $60.1 million and its long-term debt was $79.0 million, of which
$48.1 million matures in 2017. The Company incurred significant
recurring losses and negative cash flows from operating activities
during 2016, 2015 and 2014, and anticipates incurring additional
losses and cash outflows through 2017, largely due to the start up
of production and commercial distribution of HPDI in the fourth
quarter of 2017.

Principal Conditions or
Events that Require
Management's Consideration

The factors which raise substantial doubt as to the Company’s ability
to continue as a going concern are as follows:

a. Forecast operating and capital investment requirements: After
the merger with Fuel Systems and given the low oil price
environment experienced in most of 2015 and 2016, the
Company has been rationalizing its operations to achieve the
necessary synergies required in order to become cash flow
positive from operations. The Company expects to generate
positive cash flows from operations throughout its business in
2017 and beyond except for its Technology Investments
segment where the Company expects significant costs for final
development, testing and capital expenditures on its HPDI
program with a major OEM in fiscal 2017. Overall, the Company
forecasts negative cash flows from operating activities in 2017.

b. Significant debt maturing in 2017 is the CDN$55.0 million
Debentures ("Debentures") maturing on September 15, 2017.

Management's Discussion and Analysis | Business Overview and General Developments

This debt is classified as current liabilities on the consolidated
balance sheet as at December 31, 2016. Details of this loan
can be found in note 15(a) to the consolidated financial
statements.

Management's Assessment
and Conclusion

Management's Plans

Management considered the following factors and management’s
plans to alleviate or mitigate substantial doubt:

a. Asset sales: In conjunction with its rationalization and synergy
program, the Company has a number of initiatives to simplify
the number of businesses that the Company will focus on. As
a result, the Company has identified a number of non-core
assets that it has or would make available for sale, subject to
appropriate terms and conditions in the circumstances. The
Company has been active in discussions with interested parties
and two of these initiatives are in the final stages of negotiation.
The Company expects final binding agreements to be signed
in April 2017 and closing to occur shortly thereafter. These two
non-core assets sales are expected to contribute significant
proceeds to the Company and would be used to fund the
forecasted operating and capital investment requirements for
HPDI commercialization. The Company continues to examine
other assets to determine whether it is in the best interest of
the Company to monetize these assets in the next year or
continue to hold and invest in these assets. The Company’s
decisions with respect to these assets may depend on its ability
to raise additional financings as discussed below. The
Company's Board of Directors has approved a sales process
and timeline for the sale of certain assets in the event that the
financing is not obtained when required.

b. Maturing Debt: The holders of

the CDN$55.0 million
Debentures have the option to extend, a maximum of six times,
the maturity date for an additional period of six months each
time (i.e. if all extensions made, an additional three years)
provided that greater than CDN $10.0 million of the aggregate
principal amount of the Debentures remains outstanding. At
the date of these financial statements, the Debenture holders
have not elected to extend and have until August 1, 2017 to do
so. The Company has engaged financial advisors to assist with
alternative sources of funding. As of the date of these financial
statements, the Company has held discussions and received
interest including draft term sheets from potential lenders that
would allow the Company to refinance a portion of the
Debentures. In addition, the Company has initiated discussions
with a representative of the Debenture holders on extending
or replacing the Debentures with new financing. While there
can be no assurance that the Company will be able to borrow
on terms that are acceptable to the Company, management
believes that it is probable that new loan(s) to refinance a
portion of the Debentures, either with the Debenture holders
or new lenders, will be entered into on a timely basis.

Management is confident that the cash on hand at December 31,
2016 of $60.1 million, the estimated proceeds from the sales of non-
core assets and the estimated proceeds from financing as
discussed above will provide the cash flow necessary to fund
operations over the next year to March 31, 2018 and as a result,
Management has determined that substantial doubt has been
alleviated by Management’s plans at a probable level of assurance.
Management cautions the readers that there is no absolute
assurance that the Company will be able to conclude all of the non-
core assets sales and raise the financing necessary, under
satisfactory terms and conditions, to continue as a going concern.
If the Company was not to continue as a going concern, significant
adjustments may be required to the carrying value of its assets and
liabilities in the accompanying consolidated financial statements
and the adjustments could be material.

Merger Integration

The process of the merger integration is underway, and significant
achievements have been made to integrate the two businesses.

Items to highlight are as follows:

• The executive team is in place with Nancy Gougarty, CEO,
Ashoka Achuthan, CFO, Andrea Alghisi, COO of the Automotive
and Industrial divisions, Thom Rippon, CTO and EVP, Innovation
Group and Jack Keaton, EVP, Innovation Group.

• Facility integration and closures commenced and will continue
as management assesses the various business lines and
manufacturing facilities. Facilities in Argentina, China, the U.S.
(New York, Plymouth, Sterling Heights and Union City) and
Vancouver, Canada were either closed, sold, merged or in the
case of Vancouver, a decision was made not to relocate into the
new office space. An $11.8 million restructuring charge for these
facility closures was recorded. The annual savings and costs
avoided as a result of closed or vacant facilities are approximately
$4.3 million annually (Note 14 "Restructuring" of our annual
consolidated financial statements).

• The closure of the New York office and the merger of two public
companies to one public company was completed by September
30, 2016. This will result in savings in Board of Director fees, audit
fees, insurance fees, listing fees, and personnel expenses. The
annual savings are forecasted to be $4.4 million per year,
excluding $0.5 million of rent, which is captured above.

• The US Automotive business of Fuel Systems was merged into
Westport Fuel Systems Dallas during the quarter ended
September 30, 2016.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 13

Management's Discussion and Analysis | Business Overview and General Developments

• Reductions in workforce in the Corporate and Technology
Investments group in Vancouver are forecasted to be annual
savings of $2.5 million. A $4.0 million restructuring charge
resulted from this reduction in workforce.

• Our post merger integration task forces continue to review the
business and operations to determine other synergies and
efficiencies. Additionally, these task forces are capturing and
consolidating restructuring actions of Westport and Fuel Systems
that were underway at the time of the merger. Approximately $19
million in annual savings have been achieved to date. Total annual
savings and merger synergies of $30 million are on track and
expected to be achieved by 2018.

• Inventory and accounts receivable have been reduced by $32.1
million from the second quarter of 2016 (first consolidated quarter
of Westport Fuel Systems) to the fourth quarter of 2016. Working
capital management will continue to be a top priority of the
Company.

HPDI

Westport’s next generation of HPDI technology, Westport™ HPDI
2.0 will provide heavy duty vehicle and engine OEMs with a vertically
integrated natural gas solution with competitive price and
comparable performance, and fuel economy. Earlier generation
natural gas engines for heavy duty trucks use spark ignition to
initiate natural gas combustion, which reduces the high torque and
fuel efficiency that is the hallmark of current diesel engines. Spark
ignition uses a lower compression ratio and develops higher
exhaust temperatures than the diesel engine upon which it is based,
thereby requiring extensive changes of both internal and external
engine components and, in most cases, changes to the vehicle’s
powertrain and cooling systems.

Like a diesel engine, Westport™ HPDI 2.0 system uses
compression ignition to initiate combustion. Our fully integrated
Westport™ HPDI 2.0 system matches the power, torque, and fuel
economy and thermal characteristics of the base diesel engine, with
minimal change to engine components. It is the only natural gas
engine technology that can achieve thermal efficiency within 1% of
current generation high efficiency heavy duty diesel engines, with
inherently low methane emissions.

Westport™ HPDI 2.0 system components are designed to integrate
easily with modern, highly efficient diesel base engines, and have
been developed and validated to meet the quality and durability
standards required for heavy duty long haul trucks.

A key component of the Westport™ HPDI 2.0 system is a new family
of high pressure fuel injectors, co-developed with Delphi Automotive
PLC, that is designed to provide better cost, smaller size and
improved packaging compared to prior generation Westport™
HPDI injector designs. Westport’s cryogenic technologies enable
the use of LNG for fuel storage on the vehicle, which results in
smaller and lighter fuel tanks compared to CNG fuel storage
systems. The Westport™ HPDI 2.0 system includes new LNG fuel

14 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

tanks and pumps that have been completely redesigned for reduced
cost, improved quality and much higher durability than earlier
generation LNG tank systems.

A critical issue facing heavy duty truck OEMs is increasing pressure
to reduce greenhouse gas emissions from their vehicles. In the U.S.,
the Environmental Protection Agency (“EPA”) and NHTSA jointly
introduced new Greenhouse Gas and Fuel Efficiency Standards in
August 2016. These new Standards require heavy duty truck OEMs
to reduce the average greenhouse gas emissions from the trucks
they sell by 25% from the current level by 2027. Similar standards
are under consideration in other jurisdictions, including the
European Union.

The Westport™ HPDI 2.0 system reduces greenhouse gas
the equivalent diesel engine by
emissions compared
approximately 20% on a tank-to-wheels basis when using geologic
natural gas. The system is also capable of using 100% renewable
fuels, such as methane from landfill sites or municipal wastewater
treatment sources, as well as a renewable diesel pilot fuel. When
using these fuels, greenhouse gas emissions can be reduced by
80% or more compared to the equivalent diesel engine.

OEMs have a choice from many technologies, including more
efficient tires, intelligent transmissions, waste heat recovery and
improved aerodynamics, all of which can contribute to the reduction
of greenhouse gas emissions. But none of these technologies
provides a 20%, or higher, reduction in greenhouse gases in a single
step. The Company believes that our HPDI system will provide
OEMs with an attractive option for their greenhouse gas reduction
requirements.

High-horsepower applications (16 litre or greater) including
locomotives, mine-haul trucks, and marine vessels face similar
regulatory pressure to reduce greenhouse gas emissions. These
demanding engine applications consume large amounts of fuel and
often operate in jurisdictions where LNG offers a significant cost
advantage over diesel, thereby also providing more favourable
economics for the use of natural gas. Westport Fuel Systems’
proprietary technologies for fuel storage and delivery such as the
P200 cryogenic pump for high-volume applications like locomotive
tenders and mine-haul trucks is an example of our innovation in
natural gas fuel supply expertise.

Our first Westport™ HPDI 2.0 customer, a European heavy duty
truck OEM, will launch the first application of this technology into
their heavy duty truck line in late 2017, with series production to
start in early 2018. Product development for this program is now
essentially complete, and we are currently engaged in the final
validation of manufacturing processes and field testing with
selected truck fleets.

Operating Business Units

As a result of the merger with Fuel Systems, we analyzed our
operating segments and the principal focus of the operating
business units are summarized below:

Management's Discussion and Analysis | Business Overview and General Developments

AUTOMOTIVE BUSINESS SEGMENT
(PREVIOUSLY BRANDED AS
WESTPORT OPERATIONS)

The Westport Fuel Systems Automotive segment designs,
manufactures and sells CNG & LPG components and systems for
passenger cars, light-duty trucks and medium-duty vehicles
including OEM, delayed OEM (“DOEM”) & Aftermarket segments.
The portfolio of products includes pressure regulators, injectors,
electronic control units, valves and filters, in addition to complete
bi-fuel, mono-fuel and dual-fuel LPG and CNG conversion kits.

The Automotive segment also designs, manufactures, and sells a
wide range of CNG compressors and refueling systems, from BRC
FuelMaker home appliance for individuals or small fleets, to
complete refueling stations branded CUBOGAS.

We serve more than 70 countries with a strong customer base in
Europe, the Americas, Asia, and a growing presence in Africa.
Products are either sold directly to the OEM or through a local
distributor. We supply a large number of global OEMs including
Volkswagen, Tata, GAZ, FCA, General Motors, Ford, Maruti Suzuki,
Honda, Volvo Car, Hyundai, and Kia as well as Aftermarket
distributors and customers.

INDUSTRIAL BUSINESS SEGMENT

The Westport Fuel Systems Industrial division designs and
manufactures alternative fuel components and systems for off-road
mobile and stationary equipment, and heavy-duty on-road vehicles
as well as the development of complete emissions certified and
non-certified engines for forklifts and other industrial equipment. In
addition, our auxiliary power unit (“APU”) products for Class 8 diesel
trucks and locomotives offer significant environmental benefits and
cost of operation savings by reducing or displacing diesel fuel usage
while these engines idle. Fuel system components and systems are
primarily sold under the IMPCO, Beam-Garretson, and GFI brands,
engines under the Westport Power brand and APU’s under the
ComfortPro brand.

Engines in forklifts, aerial platforms, sweepers, turf equipment,
power generators and other industrial equipment have long been
workhorses of developed countries and comprise a significant
portion of our global business. With key jurisdictions seeking a
broader consensus on the regulation of emission sources in an
attempt to further reduce air pollution, many countries have
legislated, and we believe will continue to legislate, emission
standards for this type of equipment.

Our industrial brands focus on serving the market with fuel systems,
services and emission certified engine packages. With the
imposition of new emissions regulations, OEMs will require
advanced technologies that permit the use of gaseous fuels in order
to satisfy not only new regulations but also their customers’
requirements for durability, performance and reliability.

All of our products are designed, tested and validated in accordance
with our own internal requirements, as well as tested and certified
with major regulatory and safety agencies throughout the world,
including Underwriters Laboratories in North America, TÜV in
Europe, and the EPA and the California Air Resources Board
(“CARB”) in the U.S..

CORPORATE AND TECHNOLOGY
INVESTMENTS SEGMENT

The Corporate & Technology Investments segment is responsible
for current and advanced research and development programs,
corporate oversight, and general administrative duties. Examples
of our leading technologies include fully integrated combustion
solutions, fuel injectors, and fuel storage and delivery solutions
including cryogenics. The corporate oversight and general
administrative functions for the Company are grouped under this
unit.

fuel economy. Developed

Westport’s next generation of HPDI technology, Westport™ HPDI
2.0 will provide global vehicle and engine OEMs with a vertically
integrated natural gas solution with attractive price, performance,
to OEM quality standards,
and
Westport™ HPDI 2.0 system components are manufactured in
partner facilities, offer ready integration into OEM operations
globally. A key component of the Westport™ HPDI 2.0 system is a
brand new family of high pressure fuel injectors, co-developed with
Delphi, designed to provide better cost, smaller size and improved
packaging compared to prior generation Westport™ HPDI injector
designs. Westport and Delphi have entered into a joint development
agreement which will combine our intellectual property and
engineering strengths to co-develop and manufacture high-
pressure natural gas fuel injectors designed for multiple engine
OEMs. The family of injectors are developed with core components
of Westport's HPDI 2.0 fuel system.

CUMMINS WESTPORT INC.
JOINT VENTURE

CWI, our 50:50 joint venture with Cummins, Inc. ("Cummins"),
serves the medium and heavy-duty on highway engine markets.
CWI engines are offered by many OEMs for use in transit, school
and shuttle buses, conventional trucks and tractors, and refuse
collection trucks, as well as specialty vehicles such as short-haul
port drayage trucks and street sweepers. CWI is the leading supplier
of natural gas engines to the North American medium- and heavy-
duty truck and transit bus industries.

All CWI natural gas engines are dedicated 100% natural gas
engines. The fuel for CWI engines can be carried in tanks on the
vehicle as CNG or LNG. All engines are also capable of operating
on up to 100% RNG.

CWI is a Delaware corporation owned 50% by Westport Power Inc.
("WPI"), a wholly-owned subsidiary of Westport Fuel Systems, and
50% by Cummins. The board of directors of CWI is comprised of

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 15

Management's Discussion and Analysis | Business Overview and General Developments

three representatives from each of Westport Fuel Systems and
Cummins. On February 19, 2012, Westport Fuel Systems,
Cummins and CWI entered into a Second Amended and Restated
Joint Venture Agreement (the "Amended JVA") governing the
operations of CWI which amended the focus of CWI's future product
development investments to North American markets, including
engines for on-road applications between the displacement range
of 5.9 litres through 12 litres, and to have these engines
manufactured in Cummins' North American plants.

The purpose of the joint venture is to engage in the business of
selling, marketing and developing spark-ignited natural gas or
propane engines for on-highway use. CWI utilizes Cummins' supply
chain, back office systems and distribution and sales networks. The
joint venture term is scheduled to end on December 31, 2021.

WEICHAI WESTPORT INC.
JOINT VENTURE

Weichai Westport inc. ("WWI") is a joint venture between Westport,
Weichai Holding Group Co. Ltd. ("Weichai") and Hong Kong
Peterson (CNG) Equipment Ltd. focusing on the Chinese market.
WWI develops, manufactures and sells advanced, alternative fuel
engines and parts that are widely used in city bus, coach, and heavy-
duty truck applications in China or exported to other regions globally.
On April 20, 2016, the Company sold a portion of its economic
interest in WWI to Cartesian Capital Group ("Cartesian"), a related
party, for an upfront payment of $6.3 million plus a potential future
payment based on Cartesian's return on investment. A loss on sale
of investment of $5.2 million was recognized in the quarter ended
June 30, 2016. On August 20, 2016, the Company sold a portion
of the investment to Weichai Power Co., Ltd and Weichai for $7.4
million and recognized a gain on sale of $2.7 million. In addition,
the Company received a dividend of $3.2 million from WWI net of
withholding taxes. Commencing April 20, 2016, the Company no
longer has the ability to exercise significant influence over the joint
venture and, therefore, with effect from that date accounts for its
interest by the cost method.

Adjustment to
Financial Information

The Company has adopted a change in accounting policy for
warranties as adopted by the Company's joint venture, CWI. All
comparative numbers have been adjusted to reflect the new policy.
See Income from investments sections in this MD&A or note 8(a)
in the consolidated financial statements for additional details.

16 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Selected Annual
Financial Information

The following table sets forth a summary of our financial results for
2016, 2015 and 2014. The 2016 results include seven months
results from Fuel Systems as a result of the merger. As reflected in
the consolidated financial statements note 8(a), the net losses

in 2015 and 2014 have been adjusted for a change in accounting
policy at CWI.

SELECT CONSOLIDATED
STATEMENTS OF OPERATIONS DATA

(expressed in millions of USD,
except per share amounts
and shares outstanding)

Total revenue[1]
Gross margin[2]
GM %
Net loss[3]
Net loss per share
—basic and diluted[3]
Weighted average
shares outstanding

Years ended December 31
2015
(Adjusted)

2014
(Adjusted)

2016

224.9

103.3

130.6

48.3

21.5%

(97.6)

(1.07)

18.1

17.5%

(99.2)

(1.55)

29.6

22.7%

(148)

(2.34)

91,028,504

64,109,703

63,130,022

1. 2016 revenue includes sales from Fuel Systems' business for the seven-

month period since the June 1, 2016 merger.

2. Gross margin is calculated as revenue less cost of product revenue. The
Company has modified current and prior years' gross margin to include
manufacturing depreciation in cost of sales, which is the presentation
historically adopted by Fuel Systems, that the Company has elected to
adopt for the entire group.

3. Included in the year ended December 31, 2016 is a bargain purchase
gain of $35.8 million related to the acquisition of Fuel Systems. The net
losses for 2015 and 2014 have been adjusted to reflect the change in
accounting policy adopted by CWI. See income from investments
sections in this MD&A or note 8(a) in the consolidated financial statements
for additional details on the change in accounting policy.

The following table sets forth a summary of our financial position
as at December 31, 2016 and December 31, 2015:

SELECTED BALANCE SHEET DATA

(expressed in millions of United States dollars)

Dec 31,
2016

Dec 31,
2015
(Adjusted)

Cash and short-term investments

60.9 $

Total assets

331.5

27.8

213.7

Long-term debt, including current
portion

Long-term royalty payable, including
current portion

Total Liabilities

Shareholders' equity

62.5

21.6

246

85.4

—

142.1

71.6

Management's Discussion and Analysis | Selected Annual Financial Information

The following table sets forth a summary of the financial results of
CWI for 2016, 2015 and 2014.

REVENUES (2016 / 2015)

SELECTED CWI STATEMENTS OF
OPERATIONS DATA

(expressed in millions of U.S. dollars)

Years ended
Dec 31

2016

2015

Change
$

Automotive - Westport

86.9 $

100.1 $

(13.2)

(13)%

(expressed in millions of United States dollars)

Years ended Dec 31
2015
(Adjusted)

2014
(Adjusted)

2016

Automotive - Fuel
Systems

Total Automotive

Total revenue

Gross margin

GM %

$ 276.5

$ 331.9

$ 337.2

Industrial - Fuel Systems

77.1

101.4

71.7

27.9%

30.6%

21.3%

Corporate and
Technology Investments

Net income before income taxes

16.7

48.1

26.2

CWI

WWI

Net income attributable to the
Company

78.2

165.1

54.7

5.1

276.5

29.9

N/A

100.1

N/A

3.2

331.9

186.0

78.2

65.0

54.7

N/A

65 %

N/A

1.9

59 %

(55.4)

(17)%

(156.1)

(84)%

5.6

16.3

9.8

Total segment revenues

531.3 $

621.2 $

(89.9)

(14)%

Results from Operations

Less: Equity investees'
revenues

Total consolidated
revenues

306.4

517.9

(211.5)

(41)%

224.9 $

103.3 $

121.6

118 %

The following tables summarize results by segment for 2016, 2015
and 2014.

Automotive

Items Affecting
Comparability of Results

The year ended December 31, 2016 includes seven months of Fuel
Systems' results and this is reported in the "Automotive - Fuel
Systems" and "Industrial" segments in the tables below. In addition,
WWI results are only included in total segment revenue for the three
months ended March 31, 2016, as WWI has no longer been
considered an operating segment in subsequent periods due to the
Company's reduced interest pursuant to a sale to the Cartesian
Capital Group (Cartesian).

The Company’s 2015 income statement does not include any Fuel
Systems results. However, where meaningful, information for Fuel
Systems for the prior year has been provided for comparison
purposes.

Revenue

2016 / 2015

Total consolidated revenues increased $121.6 million, or 118% from
$103.3 million in 2015 to $224.9 million in 2016.

The following table summarizes revenues by segment for the year
ended December 31, 2016 compared to the year ended December
31, 2015:

Automotive revenue for the year ended December 31, 2016 was
$165.1 million compared to $100.1 million for 2015. Total revenue
includes sales from Fuel Systems' business for the seven-month
period since the June 1, 2016 acquisition. Excluding the acquisition,
Westport's automotive revenue declined 13% in 2016 compared to
2015. Approximately, 2% of this decrease is due to the decline in
the Euro against the U.S. dollar. The remaining decrease is due to
softness in the end markets of Europe, Argentina and the United
States as a result of low oil prices and other factors impacting local
economies.

Fuel Systems' Automotive revenue for the seven months period
since the acquisition through to December 31, 2016 was $78.2
million compared to $100.1 million for the same seven months
period from 2015. Sales in Europe and Argentina have been
impacted by lower exchange rates and softer end markets resulting
from the decline in oil prices. Sales in the final quarter of 2016 were
the strongest of the year as some stability returned to oil prices in
the latter half of the year.

Industrial

Industrial revenue for the year ended December 31, 2016 was $54.7
million. This revenue is entirely from the Fuel Systems' business
for the period since the June 1, 2016 acquisition and compares to
$54.9 million for the seven months from the prior year.

Corporate and Technology Investments

Corporate and Technology Investments revenue for the year ended
December 31, 2016 increased $1.9 million, or 59% from $3.2 million
to $5.1 million. The increase is primarily driven by revenue
generated through new OEM partnerships related to the Company's

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 17

Management's Discussion and Analysis | Results from Operations

HPDI technology. The Company met several key milestones in
relation to HPDI during 2016 with OEM partners.

unfavourable impacts of foreign currency translation from the Euro
to the US dollar equivalent.

Corporate and Technology Investments

Revenue for the year ended December 31, 2015 decreased $0.4
million or 11% from $3.6 million to $3.2 million. The decrease is
primarily driven by unfavourable impacts of foreign currency
translation from the Canadian to the US dollar equivalent.

CWI

CWI revenue for the year ended December 31, 2015 decreased
$5.3 million, or 2% from $337.2 million to $331.9 million. CWI
product revenue for the year ended December 31, 2015 decreased
$9.6 million, or 3%, to $274.0 million on sales of 9,940 units
compared to $283.6 million and 10,512 units for the year ended
December 31, 2014, which was primarily attributed to the decline
of the price of oil and other macroeconomic conditions. CWI parts
revenue for the year ended December 31, 2015 was $57.8 million
compared with $53.7 million for the year ended December 31, 2014
which was primarily attributed to the increase of natural gas engine
population in service.

WWI

WWI revenue for the year ended December 31, 2015 decreased
$432.5 million, or 70%, from $618.5 million to $186.0 million. WWI
shipped 15,956 units in 2015 compared with 51,006 units for the
year ended December 31, 2014. Westport’s WWI results were in-
line with general market conditions in China and in-line with diesel
truck sales. Truck demand remains subdued, as demonstrated by
the decrease of recent monthly commercial vehicle sales in China
year-over-year, according to China Association of Automotive
Manufacturers ("CAAM").

Gross Margin

2016 / 2015

Total consolidated gross margin increased $30.2 million, or 167%
from $18.1 million in 2015 to $48.3 million in 2016.

The following table presents gross margin by segment for 2016
compared to 2015:

CWI

CWI revenue for the year ended December 31, 2016 decreased
$55.4 million, or 17% from $331.9 million to $276.5 million. CWI
product revenue for the year ended December 31, 2016 decreased
$68.8 million, or 25%, to $205.2 million on sales of 7,232 units
compared to $274.0 million and 9,940 units for the year ended
December 31, 2015, which was primarily attributed to weak market
demand caused by sustained lower oil prices and competition with
higher efficiency diesel engines. CWI parts revenue for the year
ended December 31, 2016 was $71.2 million compared with $57.8
million for the year ended December 31, 2015 which was primarily
attributed to a higher engine population in service.

2015 / 2014

Total segment revenues decreased $465.1 million, or 43% from
$1,086.3 million in 2014 to $621.2 million in 2015.

The following table summarizes total revenue by segment for the
years ended December 31, 2015 compared to the year ended
December 31, 2014:

REVENUES (2015 / 2014)

Years ended
Dec 31

2015

2014

Change
%
$

100.1 $

127.0 $ (26.9)

(21)%

3.2

331.9

186.0

3.6

337.2

618.5

(0.4)

(11)%

(5.3)

(2)%

(432.5)

(70)%

621.2 $ 1,086.3 $ 465.1

(43)%

517.9

955.7

(437.8)

(46)%

103.3 $

130.6 $ (27.3)

(21)%

(expressed in millions of U.S. dollars)
Automotive - Westport
Corporate and
Technology Investments
CWI
WWI
Total segment revenues
Less: Equity investees'
revenues
Total consolidated
revenues

Automotive

Automotive Westport revenue for the year ended December 31,
2015 decreased $26.9 million, or 21% from $127.0 million to $100.1
million. Automotive - Westport was impacted significantly by the
decline in the price of oil and the strengthening of the US dollar.
Revenue from European operations for the year ended December
31, 2015, including the Prins Autogassystemen Holding B.V.
("Prins") acquisition increased by €6.2 million, while revenue from
North American operations decreased by approximately $17.1
million. The decrease in revenue from North American operations
was driven by decreases in Westport's Ford qualified vehicle
modifier ("QVM") business, decreased sales of Westport iCEPACK,
and a decrease in engineering service contracts. A further decrease
of approximately $12.0 million in revenue was driven by

18 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Management's Discussion and Analysis | Results from Operations

Change

margin percentage would have been $15.6 million and 29%,
respectively, compared to $15.1 million and 28% for the seven
months from the prior year.

GROSS MARGIN (2016 / 2015)

Year
ended
Dec
31,
2016

% of
Revenue

Year
ended
Dec 31,
2015
(Adjusted)
(1)

% of
Revenue

CWI

$ 14.5

16.7% $

14.9

14.9% $ (0.4)

(3)%

15.3

19.6%

N/A

N/A 15.3

N/A

29.8

14.4

18.0%

26.3%

14.9

N/A

14.9% 14.9 100 %

N/A 14.4

N/A

Gross margin decreased $24.3 million to $77.1 million, or 27.9% of
revenue for the year ended December 31, 2016, compared to
$101.4 million or 30.6% of revenue, for the year ended December
31, 2015 as a result of a 27% decrease in engines sold during the
period.

2015 / 2014

4.1

80.4%

3.2

100.0% 0.9

28 %

77.1

27.9%

101.4

30.6% (24.3)

(24)%

3.0

10.0%

21.4

11.5% (18.4)

(86)%

$ 128.4

24.2% $ 140.9

22.7% $(12.5)

(9)%

Total consolidated gross margin decreased $11.5 million or 39%
from $29.6 million in 2014 to $18.1 million in 2015.

The following table presents gross margin by segment for 2015
compared to 2014:

(expressed in millions
of U.S. dollars)

Automotive -
Westport

Automotive -
Fuel Systems

Total
Automotive

Industrial

Corporate and
Technology
Investments

CWI

WWI

Total segment
gross margin

Less:
Equity
investees'
gross margin

80.1

26.1%

122.8

23.7% (42.7)

(35)%

Total
consolidated
gross margin $ 48.3

21.5% $

18.1

17.5% $30.2 167 %

1. The net losses for 2015 have been adjusted to reflect the change in
accounting policy adopted by CWI. See income from investments
sections in this MD&A or [note 8a] in the consolidated financial statements
for additional details on the change in accounting policy.

Automotive

Gross margin increased $14.9 million to $29.8 million,or 18.0% of
revenue, for the year ended December 31, 2016 compared to $14.9
million or 14.9% of revenue for the year ended December 31, 2015.
The increase in gross margin was a result of the merger with Fuel
Systems. Excluding the merger and the decrease in 2016 inventory
obsolescence provision compared to 2015, Automotive gross
margin would have decreased by $3.6 million. The decrease is due
to a 13% decrease in revenue and changes in product mix in our
European businesses.

Fuel Systems' gross margin includes $1.4 million for amortization
of the inventory fair value adjustment recorded on acquisition.
Excluding this adjustment, the gross margin and gross margin
percentage would have been $16.7 million and 21%, respectively
compared to $19.5 million and 19.5% for the seven months from
the prior year. The increase in the gross margin percentage was
the result of direct material cost reduction activities, restructuring
of the US automotive business and lower warranty charges.

Industrial

Gross margin is entirely from the Fuel Systems' business for the
period since the June 1, 2016 acquisition and includes $1.2 million
for amortization of the inventory fair value adjustment recorded on
acquisition. Excluding this adjustment, the gross margin and gross

GROSS MARGIN (2015 / 2014)

Year
ended
Dec 31,
2015
(Adjusted)
(1)

Year
ended
Dec 31,
2014
(Adjusted)
(1)

% of
Revenue
(Adjusted)
(1)

Change

% of
Revenue
(Adjusted)

$
(Adjusted)
(1)

%
(Adjusted)

14.9

14.9% $ 26.0

20.5% $ (11.1)

(43)%

3.2

100.0%

3.6

100.0%

(0.4)

(11)%

101.4

30.6%

21.4

11.5%

71.7

52.5

21.3%

29.7

41 %

8.5% (31.1)

(59)%

$ 140.9

22.7% $ 153.8

14.2% $ (12.9)

(8)%

122.8

23.7% 124.2

13.0%

(1.4)

1 %

(expressed in
millions of
U.S. dollars)

Automotive
- Westport
Corporate
&
Technology
Investments

CWI

WWI

Total
segment
gross
margin

Less:
Equity
investees'
gross
margin

Total
consolidated
gross margin $

18.1

17.5% $ 29.6

22.7% $ (11.5)

(39)%

1. The net losses for 2015 and 2014 have been adjusted to reflect the change in
accounting policy adopted by CWI. See Income from investments sections in this
MD&A or note 8(a) in the consolidated financial statements for additional details on
the change in accounting policy.

Automotive - Westport

Automotive - Westport gross margin decreased $11.1 million to
$14.9 million, or 14.9% of revenue, for the year ended December
31, 2015 compared to $26.0 million, or 20.5% of revenue for the
year ended December 31, 2014. The decrease in gross margin
percentage is due to inventory obsolescence charges of $8.7 million
in 2015 compared to $2.1 million in the prior year. Adjusted gross
the
margin would have been 23.6% of revenue without

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 19

Management's Discussion and Analysis | Results from Operations

obsolescence, compared to 22.1% in the prior year. Gross margin
also decreased due to lower revenue and changes in product mix.

CWI

CWI gross margin increased $29.7 million to $101.4 million, or
30.6% of revenue from $71.7 million or 21.3% of revenue for the
year ended December 31, 2015. The increase in CWI gross margin
percentage was due primarily to a favourable decrease in net
warranty adjustments and net extended coverage claims compared
to the year ended December 31, 2014. Reliability of the ISL G engine
has continued to improve as a result of hardware and calibration
changes. See Income from investments sections in this MD&A or
note 8(a) in the consolidated financial statements for additional
details on the change in accounting policy.

WWI

WWI gross margin decreased $31.1 million to $21.4 million, from
$52.5 million. The decrease in gross margin relates to a decrease
in the number of engines sold. Gross margin as a percentage of
revenue increased from 8.5% to 11.5% as a result of changes in
product mix and product pricing.

Research & Development
Expenses

2016 / 2015

The following table presents details of research and development
(“R&D”) expense by segment for 2016 compared to 2015:

RESEARCH & DEVELOPMENT
(2016 / 2015)

Years ended Dec 31

Change

the Canadian to the US dollar equivalent. Automotive Fuel Systems
R&D expenses decreased $1.3 million. Fuel Systems' Automotive
R&D expense for the seven months ended December 31, 2016 was
$5.7 million, compared to $7.0 million for the seven months from
the prior year, a decrease of $1.3 million, due to restructuring and
reduction in workforce at the US Automotive business.

Industrial

Industrial R&D expenses for the seven months since the Fuel
Systems' acquisition during the year ended December 31, 2016
were $4.1 million compared to $4.0 million for the seven months
from the prior year.

Corporate and Technology Investments

Corporate and Technology Investments research and development
expenses increased $0.7 million from $39.2 million to $39.9 million
as the Company prepares for the 2017 commercial launch of
Westport™ HPDI 2.0.

2015 / 2014

The following table presents details of R&D expense by segment
for the year ended December 31, 2015 compared to year ended
December 31, 2014:

RESEARCH & DEVELOPMENT
(2015 / 2014)

Years ended
Dec 31

Change

(expressed in millions of U.S. dollars)

2015

2014

Automotive - Westport

13.6 $

21.3 $

(7.7)

(36)%

Corporate and Technology
Investments

Total research and
development

39.2

55.3

(16.1)

(29)%

52.8 $

76.6 $ (23.8)

(31)%

(expressed in millions of U.S. dollars)

2016

2015

Automotive - Westport

9.7 $

13.6 $

(3.9)

(29)%

Automotive

5.7

15.4

4.1

N/A

13.6

N/A

39.9

39.2

5.7

1.8

4.1

0.7

N/A

13 %

N/A

2 %

Automotive R&D expenses decreased $7.7 million due to reduction
in program expenses, decreased headcount, and favorable impacts
of foreign currency translation from the Euro and the Canadian to
the US dollar equivalent.

59.4 $

52.8 $

6.6

13 %

Corporate and Technology Investments

Automotive - Fuel Systems

Total Automotive

Industrial - Fuel Systems

Corporate and Technology
Investments

Total research and
development

Automotive

Corporate and Technology Investments R&D expenses decreased
$16.1 million from $55.3 million to $39.2 million due to reduction in
program expenses, prioritizing of investment programs, decreased
headcount and favorable impacts of foreign currency translation
from the Canadian to the US dollar equivalent.

Automotive Total Automotive R&D expenses for the year ended
December 31, 2016 increased by $1.8 million primarily due to the
R&D costs associated with Fuel Systems, offset by lower R&D costs
of Westport. The Westport R&D expense decreased $3.9 million as
a result of closing the Australia research facility in June 2016,
reductions in program expenses, decreased headcount, and
favorable impacts of foreign currency translation from the Euro and

20 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Selling, General and
Administrative Expenses

2016 / 2015

The following table presents details of Selling, General and
Administrative (“SG&A”) expense by segment for 2016 compared
to 2015:

SELLING, GENERAL &
ADMINISTRATIVE (2016 / 2015)

Years ended
Dec 31

Change

(expressed in millions of U.S. dollars)

2016

2015

Automotive - Westport

16.3 $

18.3 $

(2.0)

(11)%

Automotive - Fuel
Systems

Total Automotive

11.8

N/A

11.8

28.1 $

18.3 $

Industrial - Fuel Systems

6.0

N/A

54 %

N/A

2 %

9.8

6.0

0.7

35.1

34.4

69.2 $

52.7 $

16.5

31 %

Corporate and Technology
Investments

Total selling, general
and administrative

Automotive

Automotive SG&A expenses for the year ended December 31, 2016
increased by $9.8 million primarily due to the SG&A expenses from
Fuel Systems offset by lower SG&A expense of Westport. Westport
SG&A expenses decreased $2.0 million due to a reduction in
workforce. Fuel Systems' Automotive SG&A expenses for the seven
months ended December 31, 2016 was $11.8 million compared to
$19.1 million for the seven months from the prior year, a decrease
of $7.3 million due to restructuring and reduction in workforce of the
US Automotive and Argentina businesses.

Industrial

Industrial SG&A expenses for the seven months ended December
31, 2016 were $6.0 million compared to $6.5 million for the seven
months from the prior year.

Corporate and Technology Investments

Corporate and Technology Investments SG&A expenses increased
$0.7 million due to an increase of $2.5 million relating to merger
transaction costs compared to 2015, offset by lower salary
expenses from our restructuring activities.

2015 / 2014

The following table presents details of SG&A expense by segment
for the year ended December 31, 2015 compared to the year ended
December 31, 2014:

Management's Discussion and Analysis | Results from Operations

SELLING, GENERAL &
ADMINISTRATIVE (2015 / 2014)

(expressed in millions of U.S. dollars)

2015

2014

Years ended
Dec 31

Change

Automotive - Westport
Corporate and Technology
Investments
Total selling, general
and administrative

Automotive SG&A

18.3 $

30.5 $ (12.2)

(40)%

34.4

35.3

(0.9)

(3)%

52.7 $

65.8 $ (13.1)

(20)%

Automotive SG&A expenses decreased $12.2 million due to
decreased headcount and favorable impacts of foreign currency
translation from the Euro and the Canadian to the US dollar
equivalent.

Corporate and Technology Investments

Corporate and Technology
Investments SG&A expenses
decreased $0.9 million due to decreased headcount and favorable
impacts of foreign currency translation from the Canadian to the US
dollar equivalent. Within 2015 SG&A are costs of $4.5 million related
to the merger between the Company & Fuel Systems. Without these
merger costs, SG&A would have decreased 15.3% year over year.

Restructuring

Restructuring expenses recognized for the year ended December
31, 2016 were $19.0 million. Beginning in the third quarter of 2016,
the Company initiated a series of restructuring activities which
include the consolidation of facilities in Argentina, Canada, China
and the United States. This resulted in an implementation of a
reduction in workforce resulting in employee severance, onetime
termination benefits and contract termination costs. Refer to the
consolidated financial statements note 14 for additional details.

Foreign Exchange
Gains & Losses

Foreign exchange gains and losses reflected net realized gains and
losses on foreign currency transactions and the net unrealized gains
and losses on our net U.S. dollar denominated monetary assets
and liabilities in our Canadian operations that were mainly
composed of cash and cash equivalents, short-term investments,
accounts receivable and accounts payable. In addition, the
Company has foreign exchange exposure on Euro denominated
monetary assets and liabilities where the functional currency of the
subsidiary is not the Euro. For the year ended December 31, 2016,
we recognized a net foreign exchange loss of $6.4 million with the
decline in the Canadian dollar and Euro relative to the U.S. dollar.
A majority of the foreign exchange loss for the year ended December
31, 2016 is unrealized.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 21

Management's Discussion and Analysis | Results from Operations

For the year ended December 31, 2015, we recognized a net foreign
exchange gain of $11.6 million with the movement in the Canadian
dollar relative to the U.S. dollar. This compares to a net foreign
exchange gain of $3.4 million for the year ended December 31,
2014.

Depreciation & Amortization

Depreciation and amortization for the year ended December 31,
2016 was $16.0 million compared to $13.7 million for the year ended
December 31, 2015 and $18.7 million for the year ended December
31, 2014. The amount included in cost of sales was $4.7 million for
the year ended December 31, 2016, $1.9 million for the year ended
December 31, 2015 and $3.1 million for the year ended December
31, 2014. The increase in 2016 is due to the acquisition of Fuel
Systems and consolidation of property, plant and equipment.

Income From Investments

Income from investments primarily relates to our 50% interest in
CWI, accounted for by the equity method. Up until the end of the
first quarter of 2016, the Company also recorded its 35% interest
in WWI using the equity method; however, due to our sale of a
portion of our economic interest in WWI on April 20, 2016, we no
longer have the ability to exercise significant influence and,
therefore, with effect from that date we account for our interest using
the cost method. The decrease in income from investments results
primarily from lower revenues and gross margins for CWI in the
current year compared to the prior year and due to the change in
accounting policy described below.

During the fourth quarter of 2016, CWI changed its method for
determining its warranty liability to exclude, from the estimated cost
to settle claims, the parts margin it expects to earn on parts sold
and used to service warranty claims. This change was accounted
for as a change in accounting policy and the comparative balances
were adjusted on a retrospective basis. The Company's income
from investments, accumulated deficit and long-term investments
have been adjusted to reflect this change in accounting policy. The
effect of the change was to increase the income from investments
in 2014 by $1.6 million, decrease the income from investments in
2015 by $0.8 million and decrease the income from investments in
2016 by $4.0 million. Opening accumulated deficit at January 1,
2014 was decreased by $3.2 million.

22 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

INCOME FROM INVESTMENT
ACCOUNTED FOR BY THE
EQUITY METHOD

(expressed in millions of U.S. dollars)

CWI – 50% interest income
(loss)

WWI

Other

Years ended Dec 31
2015
(Adjusted)

2014
(Adjusted)

2016

5.6 $

16.4 $

0.2

—

1.0

0.2

9.8

6.0

0.1

Income from investment
accounted for by the equity
method

5.8 $

17.6 $

15.9

Interest On Long-term Debt
and Amortization of
Discount Expense

Interest on long-term debt and amortization of discount expense
primarily relates to our interest expense on Canadian dollar and
Euro denominated debentures.

INTEREST ON LONG-TERM DEBT
& AMORTIZATION OF DISCOUNT
EXPENSE

(expressed in millions of U.S. dollars)

Years ended Dec 31
2014
2015
2016

Canadian debentures
– 9% per annum

Senior financing facilities

Convertible note – 9% per annum

Amortization of discount and non-
cash interest expense

3.7 $

3.9 $

0.7

0.9

5.5

0.9

—

0.7

Total Interest on long-term debt

10.8 $

5.5 $

3.7

1.6

—

0.5

5.8

Interest on long-term debt for the year ended December 31, 2016
of $10.8 million is higher compared to the year ended December
31, 2015 due to additional interest accrued on the convertible debt
and the Cartesian royalty payable.

Interest on long-term debt for the year ended December 31, 2015
of $5.5 million was lower compared to the year ended December
31, 2014 due to favorable impacts of foreign currency translation
from the Euro and the Canadian to the US dollar equivalent.

Bargain Purchase Gain

Bargain purchase gain from acquisition of Fuel Systems was $35.8
million as the fair value of assets acquired and liabilities assumed
exceeded the total of the transaction date fair value of consideration
paid.

Income Tax Expense

Income tax expense for the year ended December 31, 2016 was
$5.0 million compared to an income tax expense of $0.7 million for
the year ended December 31, 2015 and an income tax recovery of
$0.6 million for year ended December 31, 2014.

The increase for the year ended December 31, 2016 primarily
relates to higher distributable earnings from our investment in CWI.
The increase in income tax expense for the year ended December
31, 2015 compared to the year ended December 31, 2014 primarily
relates to lower distributable earnings from our investment in CWI
and a recovery of the deferred income tax liability relating to the
intangible and goodwill impairment charges.

Capital Requirements,
Resources and Liquidity

This “Capital Requirements, Resources and Liquidity” section
contains certain forward looking statements. By their nature,
forward-looking statements require us to make assumptions and
are subject to inherent risks and uncertainties. Readers are
encouraged to read the “Forward Looking Statements” and “Basis
of Presentation” sections of this MD&A, which discusses forward-
looking statements and the “Business Risks and Uncertainties”
section of this MD&A and of our AIF.

Key elements to our continuing liquidity are refinancing our debt
when it comes due and the sale of non-core assets. While our
Automotive and Industrial divisions generate positive cash flows,
these cash flows are not sufficient to offset the significant capital
investment and research and development expenditures required
to support our HPDI production start-up during 2017. The majority
of the HPDI investment, both in terms of R&D and capital spend
completes in 2017.

At December 31, 2016, the Company's cash and cash equivalents
and short term investments were $60.9 million and our longterm
debt was $79.0 million, of which $48.1 million matures in 2017. The
Company incurred significant recurring losses from operations as
well as negative cash flows from operating activities during 2016,
2015 and 2014, and anticipates incurring additional losses and
negative cash flows through 2017. See the Business Overview and
General Developments section in this MD&A for further discussion
on liquidity and going concern.

Asset Sales

During 2016, the Company completed the following significant asset
sales:

(i) The Company sold a portion of its economic interest in WWI to
Cartesian and to Weichai related companies for $13.7 million. (See

Management's Discussion and Analysis | Results from Operations

note 8(b) "Weichai Westport Inc." of our consolidated financial
statements).

(ii) On July 29, 2016, the Company sold its test cell and other assets
in Plymouth, Michigan for $12.2 million. A gain of $1.4 million was
recorded on the sale.

Further asset sales are expected as we continue to integrate Fuel
Systems and align the two businesses.

As at December 31, 2016, our cash, cash equivalents and short-
term investment position was $60.9 million, an increase of $33.1
million from $27.8 million at December 31, 2015. Cash and cash
equivalents consist of guaranteed investment certificates, term
deposits and bankers acceptances with maturities of 90 days or
less when acquired. Short-term investments consist of investment
grade bankers’ acceptances, term deposits and commercial paper.
We invest primarily in short-term paper issued by Schedule 1
Canadian banks, R1 high rated corporations and governments.

The Company has sustained net losses since inception and as at
December 31, 2016 has an accumulated deficit of $956.9 million.
The Company’s ability to continue as a going concern is dependent
on its available cash, its ability to find new sources of financing or
raise cash through the sale of assets while in pursuit of operating
profitability. There can be no assurance that the Company will be
successful in achieving its objectives. Management believes that
the cash balances available as of December 31, 2016, proceeds
from asset sales, cost cutting measures and its ability to find new
sources of financing, provide sufficient funds for the Company to
meet its obligations beyond the next 12 months. The accompanying
financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.

Cash Flow from
Operating Activities

We prepare our statement of cash flows using the indirect method.
Under this method, we reconcile net loss to cash flows from
operating activities by adjusting net loss for those items that impact
net loss but may not result in actual cash receipts or payments
during the period. These reconciling items include but are not limited
to depreciation and amortization, stock-based compensation
expense, unrealized
from
investments accounted for by the equity method, provisions for
inventory reserves and doubtful accounts, and changes in the
consolidated balance sheet for working capital from the beginning
to the end of the period.

foreign exchange gain,

income

2016 COMPARED TO 2015

In 2016, our net cash flow used in operating activities was $79.6
million, an increase of $10.5 million from the net cash flow used in
operating activities in the year ended December 31, 2015. The
increase was primarily driven by our increased loss from operations.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 23

Management's Discussion and Analysis | Capital Requirements, Resources & Liquidity

2. On January 11, 2016, The Company entered into a financing agreement
with Cartesian to support the Company's global growth initiatives. The
financing agreement immediately provided $17.5 million in cash (the
“Tranche 1 Financing”). In consideration for the funds provided to the
Company, Cartesian is entitled to royalty payments in respect of the
Tranche 1 Financing based on the greater of (i) a percentage of amounts
received by the Company on select high pressure direct injection systems
and joint venture products in excess of agreed thresholds through 2025
and (ii) stated fixed amounts per annum (referred to as the long-term
royalty payable). The carrying value is being accreted to the expected
redemption value using the effective interest method, which is
approximately 23% per annum. Throughout the entire term of these
financing arrangements, the Company is required to meet certain financial
and non-financial covenants. As of December 31, 2016, the Company is
in compliance with all covenants under the financing arrangements.

3. The Company is obligated to repay funding received from Industrial
Technologies Office ("ITO") in the form of royalties equal to the greater
of $1.0 million (CDN $1.4 million) or 0.33% of the Company's gross annual
revenue from all sources, including CWI, provided that gross revenue
exceeds $10.1 million (CDN$13.5 million) in any aforementioned fiscal
year, until the earlier of March 31, 2018 or until cumulative royalties total
of $21.0 million (CDN$28.2 million) has been repaid. As at December 31,
2016, $2.6 million remains accrued in accounts payable and accrued
liabilities (December 31, 2015 - $2.4 million). As at December 31, 2016,
cumulative royalties of CDN $13.0 million have been paid.

Shares Outstanding

For the year ended December 31, 2016, the weighted average
number of shares used in calculating the loss per share was
91,028,504. During the year ended December 31, 2016, we granted
684,402 RSUs and PSUs (together the “Share Units”). The
Common Shares, share options and Share Units outstanding and
exercisable as at the following dates are shown below:

SHARES OUTSTANDING

(weighted average exercise
prices are presented in
Canadian dollars)

Common Shares
outstanding
Share Units

Outstanding (1)(2)
Exercisable

Dec 31, 2016

Mar 30, 2017

Shares / units WAEP

110,109,092

110,213,277

6,664,591

1,891,008

N/A

6,453,457

2,288,156

N/A

1. As at December 31, 2016, excludes 6,740 (March 30, 2017 - 0) of phantom
share units, respectively, which when vested, are exercisable in exchange
for a cash payment and do not result in the issuance of common shares.

2. As at December 31, 2016, includes 1,695,000 (March 30, 2017 -
1,670,000) PSUs with payout levels ranging between 0% and 150% upon
achieving the required performance criteria over the measurement
period. None of these PSUs are currently known to be issuable based
on the prior achievement of the required 150% conversion ratio as at the
date hereof, however such awards have not yet vested.

CASH FLOW FROM
INVESTING ACTIVITIES

Our net cash from investing activities consisted primarily of cash
acquired from the acquisition of Fuel systems, dividends received
from joint ventures and the sale of assets and investments, offset
by purchases of property, plant and equipment property (“PP&E”).

2016 COMPARED TO 2015

In 2016, our net cash flow received from investing activities was
$76.6 million, an increase of $60.2 million. The acquisition of Fuel
Systems during the period included $45.3 million of acquired cash
which resulted in positive cash flows from investing activities. The
sales of the Weichai investment and Plymouth plant asset also
returned positive investment cash flows of $13.0 million and $11.7
million, respectively. Dividends received from joint ventures
decreased by $7.1 million to $13.4 million, primarily as a result of
lower revenue and profits at CWI.

Cash Flow from
Financing Activities

2016 COMPARED TO 2015

In 2016, Our net cash flow from financing activities increased
compared to 2015 by $34.3 million, due to proceeds from the
Cartesian financing: issuance of $17.5 million in the form of
convertible debt and $17.5 million in royalties payable. In 2015, our
net cash used for financing activities was $2.9 million, because our
repayment of operating lines of credit and long term facilities was
greater than our infusion of cash from drawing on operating lines
of credit.

CONTRACTUAL CASH FLOWS

(expressed in millions of
U.S. dollars)

Carrying
Amount

Contractual
Cash
Flows

< 1yr

1-3
yrs

4-5
yrs

> 5
yrs

Accounts payable
and accrued
liabilities

Long-term debt,
principal(1)
Long-term debt,
interest(1)
Long-term royalty
payable(2)
Operating lease
commitments

Royalty payments
(3)

$ 93.2 $

93.2 $ 93.2

—

79.0

79.7

48.8

4.4

22.2

4.3

—

11.7

4.9

3.9

2.7

0.2

21.6

46.0

1.5

9.6

16.8

18.1

10.8

57.0

9.3

16.8

10.8

20.0

2.6

3.8

0.1

3.8

—

$207.2 $ 291.4 $157.8 $ 38.5 $ 52.5 $ 42.6

1. For details of our long-term debt, principal and interest, see note 15 of

the consolidated financial statements.

24 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Management's Discussion and Analysis | Critical Accounting Policies & Estimates

Critical Accounting
Policies and Estimates

Our consolidated financial statements are prepared in accordance
with U.S. GAAP, which requires us to make estimates and
assumptions that affect the amounts reported in our consolidated
financial statements. We have identified several policies as critical
to our business operations and in understanding our results of
operations. These policies, which require the use of judgment,
estimates and assumptions in determining their reported amounts,
include our accounting of CWI as variable interest entity, warranty
liability, revenue recognition, inventories, and property, equipment,
furniture and leasehold improvements. The application of these and
other accounting policies are described in Note 3 of our calendar
year 2016 annual consolidated financial statements. Actual
amounts may vary significantly from estimates used.

Revenue Recognition

The Company recognizes revenue upon transfer of title and risk of
loss, generally when products are shipped provided there is (1)
persuasive evidence of an arrangement, (2) there are no
uncertainties regarding customer acceptance, (3) the sales price is
fixed or determinable and (4) management believes collectibility is
reasonably assured.

The Company recognizes service revenue from research and
development arrangements based on the contracts and the ability
of the Company to measure its performance. Depending on the
contract, revenues may be recognized using the milestone,
percentage of completion, or completed contract methods of
accounting. All costs incurred related to revenue earned from
research and development contracts are recorded as research and
development expense as incurred.

Variable Interest Entities

Inventories

A variable interest entity (“VIE”) is any type of legal structure not
controlled by voting equity but rather by contractual and/or other
financial arrangements. Interests in VIEs are consolidated by the
company that is the primary beneficiary. The Company’s interest in
CWI is a VIE but it is determined that there is no primary beneficiary.

Warranty Liability

Estimated warranty costs are recognized at the time we sell our
products and included in cost of revenue. We use historical failure
rates and costs to repair product defects during the warranty period,
together with information on known products to estimate the
warranty liability. The ultimate amount payable and the timing will
depend on actual failure rates and the actual cost to repair. We
review our warranty provision quarterly and record adjustments to
our assumptions based on the latest information available at that
time. Since a number of our products are new in the market,
historical data may not necessarily reflect actual costs to be
incurred, and this exposes the Company to potentially significant
fluctuations in liabilities and our statement of operations. New
product launches require a greater use of judgment in developing
estimates until claims experience becomes available. Product
specific experience is typically available four or five quarters after
product launch, with a clear experience trend not evident until eight
to twelve quarters after launch. We generally record warranty
expense for new products upon shipment using a factor based upon
historical experience from previous engine generations in the first
year, a blend of actual product and historical experience in the
second year and product specific experience
thereafter.
Adjustments to and estimated future direct warranty costs are
accrued and charged to cost of revenue in the period when the
related revenues are recognized while indirect warranty overhead
salaries and related costs are charged to cost of revenue in the
period incurred.

The Company’s inventories consist of the Company’s fuel system
products (finished goods), work-in-progress, purchased parts and
assembled parts. Inventories are recorded at the lower of cost and
net realizable value. Cost is determined based on the lower of
weighted average cost or first-in, first-out and net realizable value.
The cost of fuel system product inventories, assembled parts and
labour and production
work-in-progress
overhead including depreciation. The Company provides inventory
write-downs based on excess and obsolete inventories determined
primarily by future demand forecasts. In addition, the Company
records a liability for firm, noncancelable, and unconditional
purchase commitments with manufacturers for quantities in excess
of the Company’s future demand forecast consistent with its
valuation of excess and obsolete inventory.

includes materials,

Property, Plant and Equipment
and Intangible Assets

We consider whether or not there has been an impairment in our
long-lived assets, such as equipment, furniture and leasehold
improvements and intangible assets, whenever events or changes
in circumstances indicate that the carrying value of the assets may
not be recoverable. If such assets are not recoverable, we are
required to write down the assets to fair value. When quoted market
values are not available, we use the expected future cash flows
discounted at a rate commensurate with the risks associated with
the recovery of the asset as an estimate of fair value to determine
whether or not a write down is required.

IMPAIRMENT OF PROPERTY,
PLANT AND EQUIPMENT

During the year ended December 31, 2016, the Company recorded
an impairment charge of $2.7 million. The impairment resulted

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 25

Management's Discussion and Analysis | Critical Accounting Policies & Estimates

primarily from the write-down of engineering test equipment. The
method used to determine the fair value of the equipment was based
on utilization of assets and was recorded in the Corporate and
Technology segment.

INTANGIBLE ASSETS

Based on the revenue and operating results and decline in the oil
price, the Company concluded there were impairment indicators as
of November 30, 2016 and November 30, 2015 requiring the
performance of a long-lived assets impairment test for customer
contracts, technology and other intangibles. The Company
completed its assessments at November 30, 2016 and November
30, 2015 respectively and concluded that intangible assets were
not impaired.

New Accounting
Pronouncements
and Developments

Adopted in 2016

GOING CONCERN

In August 2014, the FASB issued ASU 2014-15. Presentation of
Financial Statements - Going Concern provides guidance about
management’s responsibility
is
substantial doubt about an entity’s ability to continue as a going
concern, along with the required disclosures.

to evaluate whether

there

CHANGE IN ACCOUNTING POLICY

As previously noted, CWI changed its method for determining its
warranty liability to exclude, from the estimated cost to settle claims,
the parts margin it expects to earn on parts sold and used to service
warranty claims. These changes were accounted for as change in
accounting policy and the comparative balances were restated on
a retrospective basis. The Company's income from investments,
accumulated deficit and long-term investments balances have been
adjusted to reflect this change in accounting policy.

To Be Adopted In The Future

REVENUE

In May 2014, Financial Accounting Standards Board (“FASB”)
issued ASU 2014-09, Revenue From Contracts With Customers
(“Topic 606”). Topic 606 removes inconsistencies and weaknesses
in revenue accounting requirements, provides a more robust
framework for addressing revenue issues, improves comparability
of revenue recognition practices across entities, industries,

26 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

jurisdictions and capital markets, provides more useful information
to users of financial statements through improved disclosure
requirements and simplifies the preparation of financial statements
by reducing the number of requirements to which an entity must
refer. The guidance in this update supersedes the revenue
recognition requirements in Topic 605, Revenue Recognition, and
most industry-specific guidance throughout the Industry Topics of
the Codification. Topic 606 is effective for public entities with
reporting periods beginning after December 15, 2017. The
Company is evaluating the impact of this new standard to the
financial statements.

SIMPLIFYING THE MEASUREMENT
OF INVENTORY (TOPIC 330)

In July 2015, the FASB issued ASU 2015-11, which requires an
entity to measure inventory at the lower of cost or net realizable
value, which consists of the estimated selling prices in the ordinary
course of business, less reasonably predictable cost of completion,
disposal, and transportation. For public entities, the updated
guidance is effective for fiscal years beginning after December 15,
2016, including interim periods within those fiscal years. The
guidance is to be applied prospectively with earlier application
permitted as of the beginning of an interim or annual reporting
period. The Company does not anticipate a material impact to the
Company’s financial statements as a result of this change.

INVENTORY LEASES (TOPIC 842)

In February 2016, the FASB issued ASU 2016-02, which increases
transparency and comparability among organizations by
recognizing lease assets and lease liabilities on the balance sheet
and disclosing key information about leasing arrangements. ASU
2016-02 is effective for fiscal years beginning after December 15,
2018, and interim periods within those years for public business
entities with early adoption permitted. The Company has not yet
evaluated the impact of the adoption of this new standard.

STATEMENT OF CASH FLOWS
(TOPIC 230): CLASSIFICATION OF
CERTAIN CASH RECEIPTS AND
CASH PAYMENTS

In August 2016, the FASB issued ASU 2016-15, which provides
cash flow classification guidance on eight specific cash flow issues
to reduce diversity in practice for which authoritative guidance did
not previously exist. ASU 2016-15 is effective for public entities in
annual and interim periods in fiscal years beginning after December
15, 2017, with early adoption permitted. The Company does not
anticipate a material impact to the Company's financial statements
as a result of this change.

Management's Discussion and Analysis | Disclosure Controls & Procedures

Disclosure Controls and
Procedures and Internal
Controls Over Financial
Reporting

Evaluation of Disclosure
Controls and Procedures

Our disclosure controls and procedures are designed to provide
reasonable assurance that relevant information is gathered and
reported to senior management, including the Chief Executive
Officer (“CEO”) and the Chief Financial Officer (“CFO”), on a timely
basis such that appropriate decisions can be made regarding public
disclosures. As of the end of the period covered by this report, we
evaluated, under the supervision and with the participation of
management, including the CEO and CFO, the effectiveness of the
design and operation of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (“Exchange Act”).

The CEO and CFO have concluded that as of December 31, 2016,
our disclosure controls and procedures were effective to ensure
that information required to be disclosed in reports we file or submit
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified therein and accumulated
and reported to management to allow timely discussions regarding
required disclosures.

Management's Report
On Internal Control Over
Financial Reporting

The Company's management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rule 13a-15(f) promulgated under the
Exchange Act. Our internal control over financial reporting is
designed under our supervision, and affected by the Company’s
board of directors, management, and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting
and the preparation of the Company’s consolidated financial
statements for external reporting purposes in accordance with U.S.
GAAP and the requirements of the SEC, as applicable. There are
inherent limitations in the effectiveness of internal control over
financial reporting, including the possibility that misstatements may
not be prevented or detected. Accordingly, even effective internal
controls over financial reporting can provide only reasonable
assurance with respect
financial statement preparation.
Furthermore, the effectiveness of internal controls can change with
circumstances.

All internal control systems, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. Because of the
inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues have been
detected. The design of any system of controls is based in part on
certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its
stated goals under potential future conditions, regardless of how
remote. Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial
statement preparation and presentation. Management, including
the CEO and CFO, has evaluated the effectiveness of our internal
control over financial reporting, as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act, in relation to criteria described in
Internal Control-Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of
the Treadway
Commission (“COSO”). Based on this evaluation, management has
determined that our internal control over financial reporting was
effective as of December 31, 2016.

KPMG LLP, our independent registered public accounting firm, has
audited our consolidated financial statements and expressed an
unqualified opinion thereon. KPMG has also expressed an
unqualified opinion on the effective operation of our internal control
over financial reporting as of December 31, 2016. KPMG's audit
report on effectiveness of internal control over financial reporting is
included in the consolidated financial statements of this filing.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 27

Management's Discussion and Analysis | Summary of Quarterly Results

Summary of Quarterly Results

Discussion of The Quarter Ended December 31, 2016

Our revenues and operating results can vary significantly from quarter to quarter depending on the timing of product deliveries, product mix,
acquisitions, product launch dates, research and development project cycles, timing of related government funding, impairment charges, stock-
based compensation awards and foreign exchange impacts. Net loss has and can vary significantly from one quarter to another depending on
operating results, gains and losses from investing activities, recognition of tax benefits and other similar events.

The following table provides summary unaudited consolidated financial data for our last eight quarters:

SELECTED CONSOLIDATED QUARTERLY OPERATIONS DATA (unaudited and adjusted(5))

(expressed in millions of United States dollars except for per share amounts)

2015

2016

Three months ended: Mar 31

Jun 30

Sep 30

Dec 31

Mar 31

Jun 30(1)

Sep 30

Dec 31

Product revenue
Service and other revenue
Total revenue
Cost of product and parts revenue(2)
Gross margin
Gross margin percentage
Net loss for the period
EBITDA(3)
Adjusted EBITDA(4)
Loss per share

Basic
Diluted

Income from unconsolidated joint ventures

CWI net income attributable to the Company(5)
WWI net income attributable to the Company

27.0

24.6

21.3

24.9

23.5

44.0

73.5

79.5

1.0

28.0

23.1

3.2

27.8

18.6

1.0

22.3

21.5

0.2

25.1

22.1

0.5

24.0

17.6

4.9

9.2

0.8

3.0

6.4

0.4

44.4

34.4

10.0

17.5%

33.1%

3.6%

12.0%

26.7%

22.5%

(17.4) $ (20.1) $

(37.2) $

(24.5) $

(24.6) $

3.7

(11.9) $ (14.4) $

(32.3) $

(20.5) $

(19.3) $

10.6

2.6

76.1

62.8

13.3

0.9

80.4

61.8

18.6

17.5%

23.1%

(33.5) $

(43.2)

(24.0) $

(31.6)

(9.4) $

(7.3) $

(9.6) $

(13.5) $

(11.9) $

(10.3) $

(7.8) $

(9.1)

(0.27) $ (0.31) $

(0.58) $

(0.38) $

(0.27) $ (0.31) $

(0.58) $

(0.38) $

0.05

0.04

(0.31) $

(0.43)

(0.31) $

(0.43)

5.7

0.3

3.8

0.1

3.7

0.1

3.1

0.5

0.2

1.5

2.8

0.8

—

1. Includes the one month period of results from the merger with Fuel Systems and a bargain purchase gain of $42.9 million for the three months ended June

30, 2016, and further reduced by $7.1 million to $35.8 million for the three months ended December 31, 2016.

2. The Company has modified current and prior quarters' gross margin to include manufacturing depreciation in cost of sales, which is the presentation historically

applied by Fuel Systems that the Company has elected to adopt for the entire group.

3. The term EBITDA (earnings before interest, taxes, depreciation and amortization) does not have a standardized meaning according to U.S. GAAP. See non-

GAAP measures for more information.

4. The term Adjusted EBITDA is not defined under U.S. GAAP and is not a measure of operating income, operating performance or liquidity presented in
accordance with U.S. GAAP. Westport Fuel Systems defines Adjusted EBITDA as EBITDA adjusted for amortization of stock-based compensation, unrealized
foreign exchange gain or loss, and non-cash and other adjustments. See non-GAAP measures for more information.

5. The Company's income from investments, retained earnings and long-term investments have also been adjusted to reflect a change in accounting policy in

its joint venture, CWI. See consolidated financial statements note 8(a).

Three Months Ended December 31, 2016 & 2015

Our consolidated revenue for the three months ended December 31, 2016 was $80.4 million, a increase of $55.3 million, or 220.3%, from $25.1
million for the three months ended December 31, 2015. The increase in revenue was primarily a result of the merger with Fuel Systems.

Our consolidated net loss for the three months ended December 31, 2016 was $43.2 million, or a loss of $0.43 per share compared to a net
loss of $24.5 million, or a loss of $0.38 per share, for the three months ended December 31, 2015. The increase in net loss primarily relates
to higher operating costs in 2016 as a result of the merger, an adjustment to the bargain purchase gain recorded in the fourth quarter of 2016
and lower income from investments.

Non-GAAP Measures

We use certain non-GAAP measures to assist in assessing our financial performance. Non-GAAP measures do not have any standardized
meaning prescribed in U.S. GAAP and are therefore unlikely to be comparable to similar measures presented by other companies.

28 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Management's Discussion and Analysis | Summary of Quarterly Results

EBITDA

The term EBITDA (earnings before interest, taxes, depreciation and amortization) is a non-GAAP financial measure. The Company defines
EBITDA as loss before income taxes adjusted for interest expense (net) and depreciation and amortization.

Management believes that EBITDA is an important indicator commonly reported and widely used by investors and analysts as an indicator of
the Company’s operating performance and ability. The intent is to provide additional useful information to investors and analysts and such
measures do not have any standardized meaning under U.S. GAAP. These measures should not be considered in isolation or as a substitute
for measures of performance prepared in accordance with U.S. GAAP. Other issuers may define EBITDA differently.

QUARTERLY EBITDA DATA

2015

2016

Three months ended:

Mar 31

Jun 30

Sep 30

Dec 31

Mar 31

Jun 30

Sep 30

Dec 31

Loss before income taxes
Interest expense, net(1)

Depreciation

EBITDA

(16.9) $

(19.5) $

(37.0) $

(25.1) $

(24.7) $

4.2 $

(32.3) $

(39.8)

1.4

3.6

1.6

3.5

1.4

3.3

1.3

3.3

2.3

3.1

2.7

3.7

3.1

5.2

4.3

3.9

(11.9) $

(14.4) $

(32.3) $

(20.5) $

(19.3) $

10.6 $

(24.0) $

(31.6)

1. Interest expense, net is defined as the aggregate of bank charges, interest, and other, interest on long term-debt and amortization of discount.

EBITDA decreased by $6.6 million from a loss of $24.0 million for the three months ended September 30, 2016 to a loss of $31.6 million in the
three months ended December 31, 2016 primarily as a result of an adjustment to the bargain purchase gain recorded in the fourth quarter of
2016 and lower income from investments.

Adjusted EBITDA

The terms EBITDA and Adjusted EBITDA are not defined under U.S. GAAP and are not measures of operating income, operating performance
or liquidity presented in accordance with U.S. GAAP. Adjusted EBITDA is used by management to review operational progress of its business
units and investment programs over successive periods and as a long-term indicator of operational performance since it ties closely to the
unit’s ability to generate sustained cash flows.

QUARTERLY ADJUSTED EBITDA DATA

Three months ended:

Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31

$ (11.9) $ (14.4) $ (32.3) $ (20.5) $ (19.3) $

10.6 $ (24.0) $ (31.6)

2015

2016

EBITDA

Stock based compensation

Unrealized foreign exchange (gain) loss

Goodwill impairment

Asset impairment

Inventory impairment from product line closure

Bargain purchase gain

Merger and financing costs

Amortization fair value inventory adjustment recorded on
acquisition

(Gain) loss on sale of investments

Loss on disposal of assets

Restructuring, termination and other exit costs

Other

Adjusted EBITDA

3.5

0.5

4.0

1.3

2.3

4.1

2.9

(7.1)

3.4

(2.9)

4.7

(1.2)

3.3

(8.0)

18.7

5.5

3.2

1.3

2.1

2.0

0.3

0.8

1.0

4.3

0.4

1.9

(3.9)

17.5

0.2

(42.9)

4.5

0.7

6.3

4.1

1.2

8.1

2.7

1.3

7.1

(0.3)

1.5

0.9

(9.4) $

(7.3) $

(9.6) $ (13.5) $ (11.9) $ (10.3) $

(7.8) $

(9.1)

1. The Company's income from investments, retained earnings and long-term investments have also been adjusted to reflect a change in accounting policy in

its joint venture, CWI. See consolidated financial statements note 8(a).

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 29

Management's Discussion and Analysis | Summary of Quarterly Results

The Company defines Adjusted EBITDA as EBITDA adjusted for
stock-based compensation, unrealized foreign exchange gain or
loss, and non-cash and other unusual adjustments. Adjusted
EBITDA has limitations as an analytical tool, and when assessing
the Company’s operating performance, investors should not
consider Adjusted EBITDA in isolation, or as a substitute for net loss
or other consolidated statement of operations data prepared in
accordance with U.S. GAAP. Among other things, Adjusted EBITDA
does not reflect the Company’s actual cash expenditures. Other
companies may calculate similar measures differently than
Westport Fuel Systems, limiting their usefulness as comparative

tools. The Company compensates for these limitations by relying
primarily on its U.S. GAAP results.

Related Party Transactions

Related party balances and transactions have increased due to the
Cartesian financing and acquisition of Fuel Systems. See Note 20
of the Consolidated financial statements as at December 31, 2016
for details of related party transactions.

Subsequent Events

On March 24, 2017, the Company renegotiated its €10.0 million
senior revolving financing facility with annual payments on the
principal ranging from €0.7 million to €2.2 million until the loan is
paid off in full on December 31, 2022. See note 15(b) of the
consolidated financial statements for details.

Business Risks
And Uncertainties

An investment in our business involves risk and readers should
carefully consider the risks described in our AIF and other filings on
www.sedar.com and www.sec.gov. Our ability to generate revenue
and profit from our technologies is dependent on a number of
factors, and the risks discussed in our AIF, if they were to occur,
could have a material impact on our business, financial condition,
liquidity, results of operation or prospects. While we have attempted
to identify the primary known risks that are material to our business,
the risks and uncertainties discussed in our AIF may not be the only
ones we face. Additional risks and uncertainties, including those
that we do not know about now or that we currently believe are
immaterial may also adversely affect our business, financial
condition, liquidity, results of operation or prospects. A full
discussion of the risks impacting our business is contained in the
AIF for the year ended December 31, 2016 under the heading “Risk
Factors” and is available on SEDAR at www.sedar.com.

30 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Reports

Independent Auditors’
Report Of Registered
Public Accounting Firm

To the Shareholders of Westport Innovations Inc.

We have audited the accompanying consolidated financial
statements of Westport Innovations Inc., which comprise the
consolidated balance sheet as at December 31, 2015, the
consolidated statements of operations and comprehensive income,
shareholders’ equity and cash flows for the years ended December
31, 2015 and December 31, 2013 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
U.S. 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
and the standards of the Public Company Accounting Oversight
Board (United States). 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. An audit also
includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by

Reports

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
Westport Innovations Inc. as at December 31, 2015, and its
consolidated results of operations and its consolidated cash flows
for the years ended December 31, 2015 and December 31, 2013,
in accordance with US generally accepted accounting principles.

Comparative Information

Without modifying our opinion, we draw attention to [Note 3(a)] to
the consolidated financial statements which indicates that the
comparative information presented as at and for the year ended
December 31, 2014 has been adjusted for the adoption of new
accounting standards in 2015.

The consolidated financial statements of Westport Innovations Inc.
as at and for the year ended December 31, 2014, excluding the
adjustments described in [Note 3(a)] to the consolidated financial
statements, were audited by another auditor who expressed an
unmodified opinion on those financial statements on March 9, 2015
(October 15, 2015 as to the change in reportable segments
discussed in [Note 23] to the consolidated financial statements).

As part of our audit of the consolidated financial statements as at
and for the year ended December 31, 2015, we audited the
adjustments described in [Note 3(a)] to the consolidated financial
statements that were applied to adjust the comparative information
presented as at and for the year ended December 31, 2014. In our
opinion, the adjustments are appropriate and have been properly
applied.

We were not engaged to audit, review, or apply any procedures to
the December 31, 2014 consolidated financial statements, other
than with respect to the adjustments described in [Note 3(a)] to the
consolidated financial statements. Accordingly, we do not express
an opinion or any other form of assurance on those financial
statements taken as a whole.

Other Matter

We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Westport Innovations Inc.’s internal control over financial reporting
as of December 31, 2015, based on the criteria established in
Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of
the Treadway
Commission ("COSO"), and our report dated March 29, 2016
expressed an unmodified (unqualified) opinion on the effectiveness

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 31

Reports

of Westport Innovations Inc.’s internal control over financial
reporting.

KPMG LLP, Chartered Professional Accountants,
March 29, 2016, Vancouver, Canada

Report Of Independent
Registered Public
Accounting Firm

To the Shareholders of Westport Innovations Inc.

We have audited Westport Innovations Inc.’s (“the Company”)
internal control over financial reporting as of December 31, 2015,
based on the criteria established in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring
the Treadway Commission (COSO). The
Organizations of
Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included
the accompanying “Management’s Report on Financial
in
Statements and Assessment of Internal Control over Financial
Reporting”. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our
audit.

We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our
audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes
in accordance with generally accepted
accounting principles. A company’s internal control over financial
reporting includes those policies and procedures that

1. pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
the assets of the company;

32 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

2. provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made
only in accordance with authorizations of management and
directors of the company; and

3. provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December
31, 2015, based on the criteria established in Internal Control –
Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with Canadian generally
accepted auditing standards and the standards of the Public
Company Accounting Oversight Board (United States), the
consolidated balance sheet of the Company as of December 31,
2015, and the consolidated statements of operations and
comprehensive income, shareholders’ equity and cash flows for the
years ended December 31, 2015 and December 31, 2013 and our
report dated March 29, 2016 expressed an unqualified opinion on
those consolidated financial statements.

KPMG LLP, Chartered Professional Accountants,
March 29, 2016, Vancouver, Canada

Report Of Independent
Registered Public
Accounting Firm

To the Board of Directors and Shareholders of Westport Innovations
Inc.

We have audited, before the effects of the adjustments to
retrospectively apply accounting standards adopted in 2015 as
discussed in Note 3 to the consolidated financial statements, the
accompanying consolidated financial statements of Westport
Innovations Inc. and subsidiaries (the “Company”), which comprise
the consolidated balance sheet as of December 31, 2014, and

consolidated statements of operations and comprehensive (loss)
income, changes in shareholders’ equity and cash flows for the year
ended December 31, 2014 and a summary of significant accounting
policies and other explanatory information, (the 2014 consolidated
financial statements before the effects of the adjustments discussed
in [Note 3] to the consolidated financial statements are not
presented herein).

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
accounting principles generally accepted in the United States of
America, 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.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We conducted our audit in
accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight
Board (United States). 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 the auditor's
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, the auditor
considers internal control relevant to the entity's preparation and
fair presentation of the consolidated financial statements in order
the
in
to design audit procedures
the
includes evaluating
circumstances. An audit also
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.

that are appropriate

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

Opinion

In our opinion, such 2014 consolidated financial statements, before
the effects of the adjustments to retrospectively apply accounting
standards adopted in 2015 as discussed in [Note 3] to the

Reports

consolidated financial statements, present fairly, in all material
respects, the financial position of Westport Innovations Inc. and
subsidiaries as at December 31, 2014, and its financial performance
and its cash flows for the year ended December 31, 2014 in
accordance with accounting principles generally accepted in the
United States of America.

Other Matter

We were not engaged to audit, review, or apply any procedures to
the adjustments to retrospectively apply accounting standards
adopted in 2015 as discussed in [Note 3] to the consolidated
financial statements and, accordingly, we do not express an opinion
on any other form of assurance about whether such retrospective
adjustments are appropriate and have been properly applied. Those
retrospective adjustments were audited by other auditors.

/s/ Deloitte LLP

Chartered Professional Accountants, Vancouver, Canada

March 9, 2015

(October 15, 2015 as to the change in reportable segments
discussed in [Note 23] to the consolidated financial statements)

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 33

Consolidated Financial Statements

CONSOLIDATED BALANCE SHEET

(expressed in thousands of United States dollars, except share amounts)

2016

2015 (Adjusted, [note 8])

ASSETS

Current Assets

Cash and cash equivalents
Short-term investments
Accounts receivable [note 6]
Inventories [note 7]
Prepaid expenses

Long-term investments [note 8]
Property, plant and equipment [note 10]
Intangible assets [note 11]
Deferred income tax assets [note 19b]
Goodwill [note 12]
Other long-term assets

LIABILITIES & SHAREHOLDERS’ EQUITY

Current Liabilities

Accounts payable and accrued liabilities [note 13]
Current portion of restructuring obligation [note 14]
Current portion of deferred revenue
Current portion of long-term debt [note 15]
Current portion of royalty payable [note 16]
Current portion of warranty liability [note 17]

Restructuring obligation [note 14]
Deferred revenue
Long-term debt [note 15]
Long-term royalty payable [note 16]
Warranty liability [note 17]
Deferred income tax liabilities [note 19b]
Other long-term liabilities

SHAREHOLDERS' EQUITY
Share capital [note 18]

Authorized:

Unlimited common shares, no par value
Unlimited preferred shares in series, no par value

Issued:

110,109,092 (2015 – 63,380,819) common shares

Other equity instruments
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income

COMMITMENTS AND CONTINGENCIES [note 21]

60,057 $
848
77,178
70,624
5,055

213,762

13,422
59,682
22,858
3,767
2,923
15,046

331,460 $

93,245 $

5,408

4,656

48,097

1,500

6,834

159,740

8,715

3,559

30,935

20,062

6,936

9,803

6,272

246,022

1,042,410

20,926

10,079

(956,890)

(31,087)

85,438

27,143
696
38,324
35,660
3,475

105,298

35,142
42,527
22,307
2,538
3,008
2,863

213,683

57,454

—

1,779

8,257

—

5,554

73,044

—

1,513

54,190

—

8,437

3,570

1,302
142,056

937,029

16,460

9,837
(859,317)
(32,382)

71,627

See accompanying notes to consolidated financial statements. Approved on behalf of the Board:

Brenda J.
Eprile
Director

Warren Baker
Director

331,460 $

213,683

34 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Financial Statements | Consolidated Statements of Operations & Comprehensive Income (Loss)

CONSOLIDATED STATEMENTS OF OPERATIONS & COMPREHENSIVE INCOME
(LOSS)

(expressed in thousands of United States dollars, except share and per share amounts)

Years ended December 31

2016

2015
(Adjusted, [note 8])

2014
(Adjusted, [note 8])

Product revenue

Service and other revenue

COST OF REVENUE & EXPENSES

Cost of product revenue

Research and development

General and administrative

Sales and marketing

Restructuring, termination and other exit costs [note 14]

Foreign exchange (gain) loss

Depreciation and amortization [note 10] [note 11]

Impairment of long lived assets, net [note 8] [note 10] [note 11] [note 12]

Provision for inventory purchase commitments [note 21b]

Loss from operations

Income from investments accounted for by the equity method

Interest on long-term debt and amortization of discount

Bargain purchase gain from acquisition (note 5)

Interest and other income (expense), net of bank charges

Loss before income taxes
INCOME TAX EXPENSE (RECOVERY) [note 19]

Current

Deferred

220,448 $

97,844 $

4,407

224,895

176,552

59,413

48,204

20,949

19,000

6,408

11,308

4,843

—

346,675

(121,780)

5,838

(10,773)

35,808

(1,656)

(92,563)

2,002

3,008

5,010

5,460

103,304

85,232

52,777

35,201

17,496

—

(11,601)

11,736

22,722

—

213,563

(110,259)

17,551

(5,529)

(186)

(98,423)

1,245

(514)

731

118,015

12,554

130,569

101,053

76,580

40,319

25,489

—

(3,433)

15,536

29,604

4,106

289,254

(158,685)

15,863

(5,849)

114

(148,557)

606

(1,185)

(579)

Net loss for the year

OTHER COMPREHENSIVE INCOME (LOSS)

Cumulative translation adjustment

Comprehensive loss

LOSS PER SHARE

Basic and diluted

(97,573) $

(99,154) $

(147,978)

(1,295)

(16,889)

(96,278) $

(116,043) $

(15,201)

(163,179)

(1.07) $

(1.55) $

(2.34)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

Basic and diluted

91,028,504

64,109,703

63,130,022

See accompanying notes to consolidated financial statements.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 35

Financial Statements | Consolidated Statements of Shareholders' Equity

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(expressed in thousands of United States
dollars, except share amounts)

Common
shares
outstanding

Share
capital

Other
equity
instruments

Additional
paid in
capital

Accumulated
deficit

Accumulated
other
comprehensive
income (loss)

Total
shareholders'
equity

January 1, 2014 (Adjusted [note 8])

62,733,762 $

916,497 $

13,834 $

8,205 $

(612,185) $

(292) $

326,059

Issue of common shares:

On exercise of stock options

43,071

374

—

(132)

On exercise of share units

608,975

10,701

(10,701)

In connection with acquisition

94,914

3,285

Stock-based compensation

Net loss for the year

Other comprehensive loss

—

(3,285)

7,919

—

1,764

—

(147,978)

—

December 31, 2014 (Adjusted [note 8])

63,480,722

930,857

7,767

9,837

(760,163)

Issue of common shares:

On exercise of share units

In connection with acquisition

Stock-based compensation

Net loss for the year

Other comprehensive loss

575,024

325,073

—

5,010

1,162

—

(5,010)

—

13,703

—

(99,154)

—

December 31, 2015 (Adjusted [note 8])

64,380,819

937,029

16,460

9,837

(859,317)

Issue of common shares:

On exercise of share units

845,491

6,639

(6,639)

In connection with acquisition
Beneficial conversion feature on
convertible debt
Stock-based compensation

Net loss for the year

Other comprehensive loss

DECEMBER 31, 2015

44,882,782

98,742

655

—

10,450

—

(97,573)

—

242

—

1,295

110,109,092 $ 1,042,410 $

20,926 $

10,079 $

(956,890) $

(31,087) $

85,438

—

(15,201)

(15,493)

—

(16,889)

(32,382)

—

242

—

9,683

(147,978)

(15,201)

172,805

—

1,162

13,703

(99,154)

(16,889)

71,627

—

99,397

242

10,450

(97,573)

1,295

See accompanying notes to consolidated financial statements.

36 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Financial Statements | Consolidated Statements of Cash Flows

Years ended December 31
2015
(Adjusted [note 8])

2014
(Adjusted [note 8])

2016

(97,273) $

(99,154) $

(147,978)

CONSOLIDATED STATEMENTS OF CASH FLOWS

CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES

(expressed in thousands of United States dollars)

Net loss for the year
Items not Involving Cash

Depreciation and amortization
Stock-based compensation expense
Unrealized foreign exchange gain
Deferred income tax (recovery) expense
Income from investments accounted for by the equity method
Accretion of long-term debt
Impairment of long lived assets, net
Inventory write-downs to net realizable value
Bargain purchase gain from acquisition
Provision for inventory purchase commitments
Change in fair value of derivative liability and bad debt expense
Restructuring obligations

Changes in Non-Cash Operating Working Capital

Accounts receivable
Inventories
Prepaid expenses
Accounts payable and accrued liabilities
Deferred revenue
Warranty liability

CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES

Purchase of property, plant and equipment
Sale of short term investments, net
Maturity (purchase) of short-term investments, net
Acquisitions, net of acquired cash [note 5]
Proceeds on sale of investments
Proceeds on sale of assets
Dividends received from joint ventures

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

Repayment of operating lines of credit and long term facilities
Drawings on operating lines of credit
Finance costs incurred
Proceeds from stock options exercised
Issuance of convertible debt and royalty payable

Effect of foreign exchange on cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
SUPPLEMENTARY INFORMATION

Interest paid
Taxes paid, net of refunds
Non-Cash Transactions

16,015

10,450

6,408

3,008

(5,838)

4,945

4,843

7,104

(35,808)

—

1,670

14,123

(4,675)

26,152

881

(20,650)

(5,212)

(5,473)

(79,630)

(9,347)

1,000

—

45,344

12,965

13,219

13,398

79,579

(12,789)

9,184

—

35,000

31,395

4,570

32,914

27,143

13,654

14,871

(11,601)

(514)

(17,551)

876

22,722

8,743

—

587

—

975

(5,997)

661

9,526

(1,507)

(5,359)

18,666

9,683

(3,434)

(1,185)

(15,863)

2,139

29,604

2,102

—

4,106

1,338

—

11,629

(1,367)

(556)

(4,749)

(5,096)

(5,797)

(69,068)

(106,758)

(4,845)

—

787

—

20,464

16,406

(8,308)

5,432

—

(2,876)

(10,601)

(66,139)

93,282

(10,249)

—

31,369

(3,053)

—

3,200

21,267

(9,540)

17,797

(2,033)

242

—

6,466

(6,206)

(85,231)

178,513

93,282

4,702

871

3,285

60,057 $

27,143 $

4,339 $

2,479

4,551 $

1,238

Shares issued on exercise of share units

98,742

1,162

See accompanying notes to consolidated financial statements.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 37

Financial Statements | Notes to Consolidated Financial Statements

Notes to Consolidated
Financial Statements

1. Company Organization
and Operations

Westport Fuel Systems Inc. (the “Company”, formerly known as
Westport Innovations Inc.) was incorporated under the Business
Corporations Act (Alberta) on March 20, 1995. On June 1, 2016,
the Company merged with Fuel Systems Solutions, Inc. The
Company engineers, manufactures and supplies alternative fuel
systems and components for use in the transportation and industrial
markets on a global basis. The Company's components & systems
control the pressure and flow of gaseous alternative fuels, such as
propane and natural gas used in internal combustion engines.

2. Liquidity and going concern

In August 2014, the FASB issued ASU
Presentation of
Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue as
a Going Concern. Under the new standard, management must
evaluate whether there are conditions or events, considered in the
aggregate, that raise substantial doubt about the Company’s ability
to continue as a going concern within one year after the date that
the financial statements are issued. This evaluation initially does
not take into consideration the potential mitigating effect of
management’s plans that have not been fully implemented as of
the date the financial statements are issued. When substantial
doubt exists under this methodology, management evaluates
whether the mitigating effect of its plans sufficiently alleviates
substantial doubt about the Company’s ability to continue as a going
concern.

The mitigating effect of management’s plans, however, is only
considered if both (1) it is probable that the plans will be effectively
implemented within one year after the date that the financial
statements are issued, and (2) it is probable that the plans, when
implemented, will mitigate the relevant conditions or events that
raise substantial doubt about the entity’s ability to continue as a
going concern within one year after the date that the financial
statements are issued. Generally, to be considered probable of
being effectively implemented, the plans must have been approved
before the date that the financial statements are issued. This
standard was adopted by the Company at December 31, 2016.

These financial statements have been prepared on the basis that
the Company will continue as a going concern. At December 31,

2016, the Company's cash and cash equivalents were $60,057 and
its long-term debt was $79,032, of which $48,097 matures in 2017.
The Company incurred significant recurring losses and negative
cash flows from operating activities during 2016, 2015 and 2014,

38 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

and anticipates incurring additional losses and cash outflows
through 2017, largely due to the start up of production and
commercial distribution of HPDI in the fourth quarter of 2017.

PRINCIPAL CONDITIONS OR
EVENTS THAT REQUIRE
MANAGEMENT'S CONSIDERATION

a. Forecast operating and capital investment
requirements

After the merger with Fuel Systems and given the low oil price
environment experienced in most of 2015 and 2016, the Company
has been rationalizing its operations to achieve the necessary
synergies required in order to become cash flow positive from
operations. The Company expects to generate positive cash flows
from operations throughout its business in 2017 and beyond except
for its Technology Investments segment where the Company
expects significant costs for final development, testing and capital
expenditures on its HPDI program with a major OEM in fiscal 2017.
Overall, the Company forecasts negative cash flows in 2017.

b. Maturing debt

Significant debt maturing in 2017 is the CDN $55,000 Debentures
("Debentures") maturing on September 15, 2017. This debt is
classified as current liabilities on the consolidated balance sheet as
at December 31, 2016. Details of this loan can be found in [note
15a] to these consolidated financial statements.

MANAGEMENT'S PLANS

Management considered the following factors and management’s
plans to alleviate or mitigate substantial doubt:

a. Asset sales

In conjunction with its rationalization and synergy program, the
Company has a number of initiatives to simplify the number of
businesses that the Company will focus on. As a result, the
Company has identified a number of non-core assets that it has or
would make available for sale, subject to appropriate terms and
conditions in the circumstances. The Company has been active in
discussions with interested parties and two of these initiatives are
in the final stages of negotiation. The Company expects final binding
agreements to be signed in April 2017 and closing to occur shortly
thereafter. These two non-core assets sales are expected to
contribute significant proceeds to the Company and would be used
to
investment
requirements for HPDI commercialization.

forecasted operating and capital

fund

the

The Company continues to examine other assets to determine
whether it is in the best interest of the Company to monetize these
assets in the next year or continue to hold and invest in these assets.
The Company’s decisions with respect to these assets may depend

on its ability to raise additional financings as discussed below. The
Company's Board of Directors has approved a sales process and
timeline for the sale of certain assets in the event that the financing
is not obtained when required.

b. Maturing debt

The holders of the CDN $55,000 Debentures have the option to
extend, a maximum of six times, the maturity date for an additional
period of six months each time (i.e. if all extensions made, an
additional three years) provided that greater than CDN$10,000 of
the aggregate principal amount of the Debentures remains
outstanding. At the date of these financial statements, the
Debenture holders have not elected to extend and have until August
1, 2017 to do so.

the Company has

The Company has engaged financial advisors to assist with
alternative sources of funding. As of the date of these financial
statements, the Company has held discussions and received
interest including draft term sheets from potential lenders that would
allow the Company to refinance a portion of the Debentures. In
addition,
initiated discussions with a
representative of the Debenture holders on extending or replacing
the Debentures with new financing. While there can be no
assurance that the Company will be able to borrow on terms that
are acceptable to the Company, management believes that it is
probable that new loan(s) to refinance a portion of the Debentures,
either with the Debenture holders or new lenders, will be entered
into on a timely basis.

MANAGEMENT'S ASSESSMENT
AND CONCLUSION

Management is confident that the cash on hand at December 31,
2016 of $60,057, the estimated proceeds from the sales of noncore
assets and the estimated proceeds from financing as discussed
above will provide the cash flow necessary to fund operations over
the next year to March 31, 2018, and as a result, Management has
that substantial doubt has been alleviated by
determined
Management’s plans at a probable level of assurance. Management
cautions the readers that there is no absolute assurance that the
Company will be able to conclude all of the non-core assets sales
and raise the financing necessary, under satisfactory terms and
conditions, to continue as a going concern. If the Company was not
to continue as a going concern, significant adjustments may be
required to the carrying value of its assets and liabilities in the
the
accompanying consolidated
adjustments could be material.

financial statements and

3. Significant accounting policies

A. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of the
Company, its wholly owned subsidiaries and variable interest

Financial Statements | Notes | 2. Liquidity and Going Concern

entities (“VIEs”) for which the Company is considered the primary
beneficiary. All intercompany balances and transactions have been
eliminated on consolidation.

These consolidated
in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”).

financial statements are presented

B. FOREIGN CURRENCY
TRANSLATION

The Company’s functional currency is in the Canadian dollars and
its reporting currency for its consolidated financial statement
presentation is the United States dollar. The functional currencies
for the Company's subsidiaries include the following: United States,
Canadian ("CDN") and Australian dollars, Euro, Argentina Peso,
Chinese Renminbi (“RMB”), Swedish Krona, Japanese Yen and
Indian Rupee. The Company translates assets and liabilities of non-
U.S. dollar functional currency operations using the period end
exchange rates, shareholders’ equity balances using the weighted
average of historical exchange rates, and revenues and expenses
using the monthly average rate for the period with the resulting
exchange differences recognized in other comprehensive income.

Transactions that are denominated in currencies other than the
functional currency of the Company’s operations or its subsidiaries
are translated at the rate in effect on the date of the transaction.
Foreign currency denominated monetary assets and liabilities are
translated to the applicable functional currency at the exchange
rate in effect on the balance sheet date. Non-monetary assets and
liabilities are translated at the historical exchange rate. All foreign
exchange gains and losses are recognized in the statement of
operations, except for the translation gains and losses arising from
available-for-sale instruments, which are recorded through other
through disposal or
comprehensive
impairment.

income until realized

Except as otherwise noted, all amounts in these financial
statements are presented in U.S. dollars. For the periods
presented, the Company used the following exchange rates:

FOREIGN CURRENCY TRANSLATION

Year end
exchange
rate

Avg. for yr. ended

(expressed in thousands of
United States dollars)

2016 2015 2016 2015 2014

Canadian Dollar
Australian Dollar
Euro
Argentina Peso
RMB
Swedish Krona
Japanese Yen
Indian Rupee

0.74

0.72

1.06

0.06

0.14

0.11

0.01

0.72

0.73

1.09

0.08

0.15

0.12

0.01

0.02

0.76

0.74

1.11

0.07

0.15

0.12

0.01

0.02

0.78

0.75

1.11

0.11

1.16

0.12

0.01

0.02

0.91

0.90

1.33

0.12

0.16

0.15

0.01

0.02

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 39

Financial Statements | Notes | 3. Significant Accounting Policies

C. CASH AND CASH EQUIVALENTS

Cash and cash equivalents includes cash, term deposits, bankers
acceptances and guaranteed
investment certificates with
maturities of ninety days or less when acquired. Cash equivalents
are considered as held for trading and recorded at fair value with
changes in fair value recognized in the consolidated statements of
operations.

D. ACCOUNTS RECEIVABLE, NET

Accounts receivable are measured at amortized cost. The
Company maintains allowances for doubtful accounts for estimated
losses resulting from the inability of its customers to make required
payments. Past due balances over 90 days are reviewed
individually for collectability. If the financial condition of the
Company’s customers were to deteriorate, adversely affecting their
ability to make payments, additional allowances would be required.
Based on management’s assessment, the Company provides for
estimated uncollectible amounts through a charge to earnings and
a credit to a valuation allowance. Balances that remain outstanding
after the Company has used reasonable collection efforts are
written off through a charge to the valuation allowance and a credit
to accounts receivable.

E. INVENTORIES

The Company’s inventories consist of the Company’s fuel system
products (finished goods), work-in-progress, purchased parts and
assembled parts. Inventories are recorded at the lower of cost and
net realizable value. Cost is determined based on the lower of
weighted average cost or first-in, first-out . The cost of fuel system
product inventories, assembled parts and work-in-progress
includes materials, labour and production overhead including
depreciation. The Company provides inventory write-downs based
on excess and obsolete inventories determined primarily by future
demand forecasts. In addition, the Company records a liability for
firm, noncancelable, and unconditional purchase commitments
with manufacturers for quantities in excess of the Company’s future
demand forecast consistent with its valuation of excess and
obsolete inventory.

F. PROPERTY, PLANT AND
EQUIPMENT

Depreciation expense on equipment used in the production and
manufacturing process is included in cost of sales. All other
depreciation is included in the depreciation and amortization
expense line on the statement of operations.

Property, plant and equipment are stated at cost. Depreciation is
provided as follows:

40 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

PROPERTY, PLANT AND EQUIPMENT
DEPRECIATION

Assets

Buildings

Basis

Rate

Straight-line

15 years

Computer equipment and software

Straight-line

Furniture and fixtures

Straight-line

3 years

5 years

Machinery and equipment

Straight-line

8-10 years

Leasehold improvements

Straight-line

Lease term

G. LONG-TERM INVESTMENTS

The Company accounts for investments in which it has significant
influence, including VIEs for which the Company is not the primary
beneficiary, using the equity method of accounting. Under the
equity method, the Company recognizes its share of income from
equity accounted investees in the statement of operations with a
corresponding increase in long-term investments. Any dividends
paid or payable are credited against long-term investments. The
Company accounts for investments in which it does not exercise
significant influence using the cost method of accounting.

H. FINANCIAL LIABILITIES

Accounts payable and accrued liabilities, short-term debt and long-
term debt are measured at amortized cost. Transaction costs
relating to long-term debt are netted against long-term debt and
are amortized using the effective interest rate method.

I. RESEARCH AND DEVELOPMENT
COSTS

Research and development costs are expensed as incurred and
are recorded net of government funding received or receivable.

J. GOVERNMENT ASSISTANCE

The Company periodically applies for financial assistance under
available government incentive programs, which is recorded in the
period it is received or receivable. Government assistance relating
to the purchase of property, plant and equipment is reflected as a
reduction of the cost of such assets. Government assistance
related to research and development activities is recorded as a
reduction of the related expenditures.

K. INTANGIBLE ASSETS

Intangible assets consist primarily of the cost of intellectual
property, trademarks, technology, customer contracts and non-
compete agreements. Intangible assets are amortized over their
estimated useful lives, which range from 5 to 20 years.

L. IMPAIRMENT OF LONG-LIVED
ASSETS

The Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. If such
conditions exist, assets are considered impaired if the sum of the
undiscounted expected future cash flows expected to result from
the use and eventual disposition of an asset is less than its carrying
amount. An impairment loss is measured at the amount by which
the carrying amount of the asset exceeds its fair value. When
quoted market prices are not available, the Company uses the
expected future cash flows discounted at a rate commensurate
with the risks associated with the recovery of the asset as an
estimate of fair value.

M. GOODWILL IMPAIRMENT

Goodwill is recorded at the time of purchase for the excess of the
amount of the purchase price over the fair values of the
identifiable ,assets acquired and liabilities assumed. Goodwill is
not amortized and instead is tested at least annually for impairment,
or more frequently when events or changes in circumstances
indicate that goodwill might be impaired. This impairment test is
performed annually at November 30. Future adverse changes in
market conditions or poor operating results of underlying assets
could result in an inability to recover the carrying value of the
goodwill, thereby possibly requiring an impairment charge.

A two-step test is used to identify a potential impairment and to
measure the amount of impairment, if any. The first step is to
compare the fair value of the reporting unit with its carrying amount,
including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill is considered not impaired; otherwise,
goodwill is impaired and the loss is measured by performing step
two. Under step two, the impairment loss is measured by comparing
the implied fair value of the reporting unit goodwill with the carrying
amount of goodwill.

Fair value is determined using widely accepted valuation
techniques, which may include discounted cash flows and market
multiple analyses. These types of analyses contain uncertainties
because they require management to make assumptions and to
apply judgment to estimate industry economic factors and the
profitability of future business strategies.

N. WARRANTY LIABILITY

Estimated warranty costs are recognized at the time the Company
sells its products and are included in cost of revenue. The Company
provides warranty coverage on products sold for a period ending
two years from the date the products are put into service by
customers. Warranty liability represents the Company’s best
estimate of warranty costs expected to be incurred during the
warranty period. Furthermore, the current portion of warranty
liability represents the Company’s best estimate of the costs to be

Financial Statements | Notes | 3. Significant Accounting Policies

incurred in the next twelve-month period. The Company uses
historical failure rates and costs to repair defective products to
estimate the warranty liability. New product launches require a
greater use of judgment in developing estimates until claims
experience becomes available. Product specific experience is
typically available four or five quarters after product launch, with a
clear experience trend not evident until eight to twelve quarters
after launch. The Company records warranty expense for new
products upon shipment using a factor based upon historical
experience from previous engine generations in the first year, a
blend of actual product and historical experience in the second year
and product specific experience thereafter. The amount payable
by the Company and the timing will depend on actual failure rates
and cost to repair failures of its products.

O. REVENUE RECOGNITION

The Company recognizes revenue upon transfer of title and risk of
loss, generally when products are shipped provided there is (1)
persuasive evidence of an arrangement, (2) there are no
uncertainties regarding customer acceptance, (3) the sales price
is fixed or determinable and (4) management believes collectibility
is reasonably assured.

P. INCOME TAXES

The Company accounts for income taxes using the asset and
liability method. Under this method, deferred income tax assets
and liabilities are determined based on the temporary differences
between the accounting basis and tax basis of the assets and
liabilities and for loss carry-forwards, tax credits and other tax
attributes, using the enacted tax rates in effect for the years in which
the differences are expected to reverse. The effect of a change in
tax rates on the deferred income tax assets and liabilities is
recognized in income in the period that includes the enactment
date.

The Company recognizes deferred income tax assets to the extent
the assets are more-likely-than-not to be realized. In making such
a determination the Company considers all available positive and
negative evidence, including future reversals of existing taxable
temporary differences, projected future taxable income, tax-
planning strategies, and results of recent operations. If it is
determined that, based on all available evidence, it is more-likely-
than-not that some or all of the deferred income tax assets will not
be realized, a valuation allowance is provided to reduce the
deferred income tax assets.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 41

Financial Statements | Notes | 3. Significant Accounting Policies

The Company uses a two-step process to recognize and measure
the income tax benefit of uncertain tax positions taken or expected
to be taken in a tax return. The tax benefit from an uncertain tax
position is recognized if it is more-likely-than-not that the position
will be sustained upon examination by a tax authority based solely
on the technical merits of the position. A tax benefit that meets the
more-likely-than-not recognition threshold is measured as the
largest amount that is greater than 50% likely to be realized upon
settlement with the tax authority. To the extent a full benefit is not
expected to be realized, an income tax liability is established. Any
change in judgment related to the expected resolution of an
uncertain tax position is recognized in the year of such a change.

4. Accounting Changes

A. NEW ACCOUNTING
PRONOUNCEMENTS
ADOPTED IN 2016

Going Concern

In August 2014, the FASB issued ASU 2014-15. Presentation of
Financial Statements - Going Concern, which provides guidance

about management’s responsibility to evaluate whether there is
substantial doubt about an entity’s ability to continue as a going
concern, along with the required disclosures.

B. CHANGE IN ACCOUNTING POLICY

The Company's joint venture, Cummins Westport Inc ("CWI"),
changed its method for determining its warranty liability to exclude,
from the estimated cost to settle claims, the parts margin it expects
to earn on parts sold and used to service warranty claims. These
changes were accounted for as change in accounting policy and
the comparative balances were restated on a retrospective basis.
The Company's income from investments, accumulated deficit and
long-term investments balances have been adjusted to reflect this
change in accounting policy.

C. NEW ACCOUNTING
PRONOUNCEMENTS TO BE
ADOPTED IN THE FUTURE

Revenue

42 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

to users of financial statements through improved disclosure
requirements and simplifies the preparation of financial statements
by reducing the number of requirements to which an entity must
refer. The guidance in this update supersedes the revenue
recognition requirements in Topic 605, Revenue Recognition, and
most industry-specific guidance throughout the Industry Topics of
the Codification. Topic 606 is effective for public entities with
reporting periods beginning after December 15, 2017. The
Company is evaluating the impact of this new standard to the
financial statements.

Simplifying the Measurement of Inventory
(Topic 330): Inventory

Leases (Topic 842)

Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts
and Cash Payments

5. Business Combinations:

MERGER WITH FUEL SYSTEMS

On June 1, 2016 ("the acquisition date"), the Company completed
a merger with Fuel Systems Solutions, Inc. ("Fuel Systems"). Fuel
Systems shareholders received 2.4755 Westport common shares
for each share of Fuel Systems common stock owned. The
Company issued 44,882,782 common shares to former Fuel
Systems shareholders and 653,532 restricted stock units of the
Company to replace outstanding Fuel Systems restricted stock
units in connection with the merger. No replacement awards were
issued for other equity instruments pursuant to the merger
agreement.

The merger was accounted for as a business combination, with
Westport deemed to be the acquirer. The Company determined the
purchase price using the Nasdaq closing share price on the
acquisition date at $2.20 per share, which resulted in total purchase
consideration of $99,397, which includes the fair value of the
common shares issued of $98,742 and the fair value of the restricted
stock units related to pre-combination services of $655. The
Company incurred total acquisition related costs of $9,890 in 2015
and 2016 under the Corporate and Technology Investments
segment, which were expensed as incurred.

This business combination resulted in a bargain purchase
transaction, as the fair value of assets acquired and liabilities
assumed exceeded the total of the transaction date fair value of
equity issued by $35,808. The Company believes it was able to
acquire the assets of Fuel Systems for less than their fair value due
to the weakness in the alternative fuel sector. The following table
summarizes the final allocation of the purchase price to the fair
values of assets acquired and liabilities assumed at the date of the
the
acquisition, as well as
measurement period.

the adjustments made during

Financial Statements | Notes | 5. Business Combinations

PURCHASE PRICE ALLOCATION

Preliminary
Purchase
Price
Allocation as
of
June 1, 2016

Measurement
Period
Adjustments

Final
Purchase
Price
Allocation as
of December
31, 2016

45,344 $

42,165

72,734

37,192

4,240

1,911

12,962

(58,401)

(15,888)

142,259

(42,862)

—

789

826

600

—

(3,964)

—

(5,305)

—

45,344

42,954

73,560

37,792

4,240

(2,053)

12,962

(63,706)

(15,888)

(7,054)

135,205

7,054

(35,808)

Consideration allocated to:

Cash and cash
equivalents

Accounts receivable

Inventory

Property, plant and
equipment

Intangible assets

Deferred income
taxes, net

Other assets

Accounts payable and
accrued liabilities

Other liabilities

Total net identifiable
assets

Bargain purchase gain

Total

99,397 $

— $

99,397

The fair value of $42,954 of accounts receivable acquired was
based on the amounts expected to be collectible.

The fair value of $73,560 assigned to inventory was based on
estimated selling prices net of selling costs associated with finished
goods, and replacement value for raw materials and unassembled
components.

Property, plant and equipment of $37,792 was determined based
on depreciated replacement cost values.

The fair value of intangible assets of $4,240 primarily relates to
brand value associated with the BRC, IMPCO and ComfortPro
brands. The intangible assets are being amortized over their
estimated useful life of ten years.

The fair value of $63,706 assigned to accounts payable and accrued
liabilities acquired was based on the expected amount to be paid
and contingent liabilities recognized at the acquisition date.
Adjustments made in the measurement period include $4,000
settlement of a patent infringement and $1,305 to settle remaining
claims.

Since the acquisition date, Fuel Systems' total revenue was
$132,850 and generated a net loss of $5,049.

PROFORMA RESULTS

The following unaudited supplemental proforma information
presents the consolidated financial results as if the acquisition of
Fuel Systems had occurred on January 1, 2015. This supplemental
proforma information has been prepared for comparative purposes
and does not purport to be indicative of what would have occurred

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 43

Financial Statements | Notes | 5. Business Combinations

had the acquisition been made on January 1, 2015, nor are they
indicative of any future results.

8. Long-term Investments

PROFORMA RESULTS

Revenue

Revenue for the year

Fuel Systems (prior to
merger)

Proforma revenue for the year

Net loss

Years ended Dec 31
2015

2016

224,895

103,304

96,833

321,728

263,397

366,701

Net loss for the year

(97,573)

(99,154)

Fuel Systems, net of
transaction costs (prior to
merger)
Proforma adjustments(1)
Proforma net loss for the year

(6,249)

(47,135)

(28,951)

(1,575)

(132,773) $

(147,864)

1. Includes adjustments for the bargain purchase gain, additional interest
expense for the convertible debt in all periods, and for transaction costs
related to the merger with Fuel Systems.

6. Accounts Receivable

ACCOUNTS RECEIVABLE

Dec 31,
2016

Dec 31,
2015

Customer trade receivable

73,341 $

35,517

Due from related parties [note 20]

Other receivables

Income tax receivable

Allowance for doubtful accounts

488

5,010

1,638

(3,299)

77,178 $

1,165

3,617

1,047

(3,022)

38,324

7. Inventories

INVENTORIES

Purchased parts

Work-in-process

Finished goods

Total

Dec 31,
2016

Dec 31,
2015

46,475 $

4,403

19,746

70,624 $

20,864

3,485

11,311

35,660

During the year ended December 31, 2016, the Company recorded
write-downs to net realizable value of approximately $7,104 (year
ended December 31, 2015 - $8,743; year ended December 31,
2014 - $2,102).

44 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

LONG-TERM INVESTMENTS
Dec 31,
2016

Dec 31,
2015

Cummins Westport Inc. (a)

Weichai Westport Inc. (b)

Other equity accounted investees

Total long-term investments

10,950

1,824 $

648

13,422 $

14,762

19,065

1,315

35,142

A. CUMMINS WESTPORT INC.

The Company entered into a joint venture with Cummins Inc.
(Cummins) on March 7, 2001. The joint venture term is scheduled
to end on December 31, 2021 and can be terminated under certain
circumstances before the end of the term, including in the event of
a material breach of the agreement by, or in the event of a change
of control of, one of the parties.

On February 20, 2012, the joint venture agreement ("JVA") was
amended and restated to provide for, among other things,
clarification concerning the scope of products within CWI. In
addition, the parties have revised certain economic terms of the
JVA. Prior to February 20, 2012, the Company and Cummins shared
equally in the profits and losses of CWI. Under the amended JVA,
profits and losses are shared equally up to an established revenue
baseline, then any excess profit will be allocated 75% to the
Company and 25% to Cummins.

The Company has determined that CWI is a variable interest entity
("VIE"). Cummins and Westport each own 50% of the common
shares of CWI and have equal representation on the Board of
Directors. No one shareholder has the unilateral power to govern
CWI. The Board of Directors has power over the operating decisions
and to direct other activities of CWI that most significantly impact
CWI’s economic performance as set forth in the governing
documents. As decision-making at the Board of Directors’ level
requires unanimous approval, this power is shared. Accordingly
neither party is the primary beneficiary.

The Company recognized its share of CWI’s income and received
dividends as follows:

CWI REVENUES & EXPENSES

Years ended Dec 31

2016

2015
(Adjusted)

2014
(Adjusted)

Investment income under the
equity method
Dividends received

$ 5,606 $

16,339 $

10,198

20,646

9,777

3,200

Financial Statements | Notes | 8. Long-term Investments

dealers and used to service warranty claims. This change was
accounted for as a change in accounting policy and the comparative
balances were restated on a retrospective basis, with the following
after tax impact to CWI and the Company:

CWI TAX IMPACT

CWI INCOME

Product revenue
Parts revenue

CWI
Impact

Company
Impact

Cost of revenue and expenses

Years ended Dec 31

2016

2015
(Adjusted)

2014
(Adjusted)

$ 205,235 $ 274,033 $ 283,551

71,230

57,849

53,683

276,465

331,882

337,234

Opening accumulated deficit decrease
(January 1, 2014)

Increase to 2014 income from investment

Decrease to 2015 income from investment

6,314 $

3,157

3,283

(1,533)

1,641

(766)

Decrease to 2016 income from investment

(8,064)

(4,032)

Net change to accumulated deficit
(December 31, 2016)

—

Assets, liabilities, revenue and expenses of CWI, as adjusted for
the change in accounting policy, are as follows:

CWI ASSETS & LIABILITIES

December
31, 2016

December
31, 2015
(Adjusted)

Current assets

Cash and short-term investments
Accounts receivable
Other current assets

95,623 $
5,018

209

Long-term assets

Property, plant and equipment
Deferred income tax assets

Total assets
Current liabilities

Current portion of warranty
liability

Current portion of deferred
revenue

Accounts payable and
accrued liabilities

Long-term liabilities
Warrant liability
Deferred revenue
Other long-term liabilities

Total liabilities

114,053

4,632

287

1,212

46,177

166,361

1,074

45,231

147,245

26,206 $

30,922

20,070 $

13,858

7,125 $

53,401 $

27,282 $

41,788 $
2,863 $
71,933 $

11,852

56,632

31,461

45,859

2,908

80,228

125,334 $

136,860

Cost of product and parts revenue

199,317

230,508

265,584

Research and development

36,066

30,165

21,131

General and administrative

1,136

1,414

1,202

Sales and marketing

23,047

21,236

22,514

Foreign exchange (gain) loss

Bank charges, interest and other

695

817

805

Income from operations
Interest and investment income
Income before taxes
Income tax expense (recover)

Current
Deferred

Income for the year

260,269

284,168

311,270

16,196

47,714

25,964

552

367

260

16,748

48,081

26,224

4,680

19,785

21,514

856

5,536

11,212

(1,565)

(13,754)

18,220

29,861

7,760

18,464

B. WEICHAI WESTPORT INC.

On April 20, 2016, the Company sold a portion of its economic
interest in Weichai Westport Inc. (WWI) to Cartesian Capital Group
(Cartesian), a related party, for an upfront payment of $6,300 plus
a potential future payment based on Cartesian's return on
investment. A loss on sale of investment of $5,238 was recognized
in the quarter ended June 30, 2016. On August 20, 2016, the
Company sold a portion of the investment to Weichai Power Co.,
Ltd and Weichai Holding Group Co., Ltd for $7,372 and recognized
a gain on sale of $2,696. In addition, the Company received a
dividend of $3,200 from WWI net of withholding taxes. Commencing
April 20, 2016, the Company no longer has the ability to exercise
significant influence over the joint venture and, therefore, with effect
from that date accounts for its interest by the cost method.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 45

Financial Statements | Notes | 9. Variable Interest Equity

9. Variable Interest Equity

Cummins and Westport each own 50% of the common shares of
CWI and have equal representation on the Board of Directors. No
one shareholder has the unilateral power to govern CWI. The Board
of Directors has power over the operating decisions and to direct
other activities of CWI that most significantly impact CWI’s
economic performance as set forth in the governing documents.
As decision-making at the Board of Directors’ level requires
unanimous approval, this power is shared. Accordingly, neither
party is the primary beneficiary.

The Company has not historically provided and does not intend to
provide financial or other support to CWI that the Company is not
contractually required to provide.

The carrying amount and maximum exposure to losses relating to
VIEs in which the Company holds a significant variable interest but
is not the primary beneficiary, and which have not been
consolidated, were as follows:

Balance at Dec 31

2016

2015 (Adjusted)

Carrying
amount

Maximum
exposure
to loss

Carrying
amount

Maximum
exposure
to loss

Equity method
investment
Accounts receivable

$ 10,950 $ 10,950 $ 14,762 $ 14,762
1,165

1,165

236

10. Property, Plant & Equipment

PROPERTY, PLANT & EQUIPMENT

Cost

Accumulated
depreciation

Net
book
value

December 31, 2016

Land and buildings

4,471 $

1,127 $

3,344

Computer equipment
and software

Furniture and fixtures

Machinery and
equipment

Leasehold
improvements

Total 2016

December 31, 2015

Land and buildings
Computer equipment
and software
Furniture and fixtures

Machinery and
equipment

Leasehold
improvements

9,230

6,703

7,044

2,641

2,186

4,062

77,120

34,754

42,366

14,346

6,622

7,724

$ 111,870 $

52,188 $ 59,682

2,706 $

165 $

2,541

7,171

5,163

6,234

2,084

937

3,079

70,415

36,739

33,676

10,394

8,100

2,294

Total 2015

$ 95,849 $

53,322 $ 42,527

46 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Based on declining revenue and operating results, which were
impacted by lower oil prices, the Company concluded that there
were impairment indicators, requiring the performance of a long-
lived assets impairment test during the years ended December 31,
2016 and 2015.

During the year ended December 31, 2016, the Company recorded
an impairment charge of $2,708. The impairment resulted primarily
from the write-down of engineering test equipment in Vancouver,
Canada. The method used to determine the fair value of equipment
was based on utilization of assets and the write-down was recorded
in the Corporate and Technology Investments segment.

During the year ended December 31, 2015, the Company recorded
an impairment charge of $4,015. The impairment resulted primarily
from the write-down of OrcaTM LNG trailers ("Orcas") which provide
in-yard fleets convenient refueling in the absence of a permanent
liquefied natural gas (LNG) solution. The method used to determine
fair value was recent sales of Orcas and the impairment charge was
recorded in the Automotive business segment.

Depreciation expense for the year ended December 31, 2016 was
$12,836 (year ended December 31, 2015 - $10,703; year ended
December 31, 2014 - $14,106). The amount of depreciation
expense included in cost of sales for the year ended December 31,
2016 was $4,707 (year ended December 31, 2015 - $1,918; year
ended December 31, 2014 - $3,130).

11. Intangible Assets

INTANGIBLE ASSETS

Cost

Accumulated
depreciation

Net
book
value

December 31, 2016

Patents and trademarks $ 20,770 $
Technology
Customer contracts
Other intangibles

11,419

4,735

319

5,093 $ 15,667

3,068

6,053

171

1,667

5,366

148

Total 2016

December 31, 2015

$ 37,243 $

14,385 $ 22,858

Patents and trademarks $ 16,964 $
Technology
Customer contracts
Other intangibles

12,025

4,862

283

4,094 $ 12,870

2,663

4,952

118

2,199

7,073

165

Total 2015

$ 34,134 $

11,827 $ 22,307

Based on declining revenue and operating results, which were
impacted by lower oil prices, the Company concluded there were
impairment indicators as of November 30, 2016 and November 30,
2015 requiring the performance of a long-lived assets impairment
test for trademarks, customer contracts, and technology. The
Company completed its assessments at November 30, 2016 and
November 30, 2015, respectively, and concluded that intangible
assets were not impaired.

During the year ended December 31, 2016, amortization of $3,179
(December 31, 2015 - $2,951; year ended December 31, 2014 -
$4,560) was recognized in the statement of operations.

13. Accounts Payable and
Accrued Liabilities

Financial Statements | Notes | 11. Intangible Assets

12. Goodwill

A continuity of goodwill is as follows:

GOODWILL

Dec 31,
2016

Dec 31,
2015

Balance, beginning of period:

3,008 $

23,352

Measurement period adjustments
[note 4a]

Impairment losses

Impact of foreign exchange
changes

—

149

(18,707)

(85)

(1,786)

Balance, end of period

2,923 $

3,008

The Company completed its annual assessment at November 30,
2016 and concluded the remaining goodwill of $2,923 related to the
Netherlands reporting unit under the Automotive business segment
was not impaired.

Based on the revenue and operating results of the Italian reporting
unit, which is within the Automotive segment in the nine months
ended September 30, 2015, the decline in the outlook for the
remainder of 2015 and future years and the decline in the
Company's share price, the Company concluded there were
impairment indicators requiring an interim goodwill impairment
assessment as of September 30, 2015. Based on the Company's
2015 assessment, it was determined that the carrying amount of
goodwill exceeded the implied fair value of goodwill and as a result,
an impairment of $18,707 was recorded in the Italian reporting unit
in 2015.

For 2016 and 2015, the fair value of the reporting units was
determined using the present value of expected future cash flows
discounted at a rate equivalent to a market participant’s weighted-
average cost of capital. The estimates and assumptions regarding
expected future cash flows and the appropriate discount rates are
in part based upon historical experience, financial forecasts and
industry trends and conditions.

ACCOUNTS PAYABLE & ACCRUED
LIABILITIES

Trade accounts payable
Accrued payroll
Accrued interest
Due to related parties [note 20]
Taxes payable
Other payables

Dec 31,
2016

Dec 31,
2015

70,411 $

42,851

13,356

1,977

1,191

941

5,369

3,839

1,037

—

2,014

7,713

Total

93,245 $

57,454

14. Restructuring, Termination
and Other Exit Obligations:

RESTRUCTURING, TERMINATION
AND OTHER EXIT OBLIGATIONS

Years ended Dec 31, 2016
Termination Lease-exit

Total

Balance, beginning of period

— $

—

Additions
Additions: Interest and other
Payments
Impact of foreign exchange

Balance, end of period
Less: Current portion
Long-term portion

7,198

11,802

19,000

—

509

(3,876)

(1,196)

(5,072)

(44)

(270)

(314)

3,278 $ 10,845 $ 14,123

(2,903)

(2,505)

(5,408)

375 $

8,340 $

8,715

Beginning in the third quarter of 2016, the Company initiated a series
of restructuring activities which included the consolidation of
facilities in Argentina, Canada, China and the United States. This
resulted in an implementation of a reduction in workforce resulting
in employee severance, one-time termination benefits and contract
termination costs associated with the restructuring activities. The
Company incurred a charge of $7,198 associated with such
termination obligations.

The Company recorded restructuring charges on leases during the
year ended December 31, 2016. One lease is in New York, US, and
has a lease end date of March 2017. The Company exited the
premises in September 2016 and is no longer using this space. The
Company has also exited its car service and racing facility in
Cherasco, Italy and has a lease end date of April 30, 2017. The
other lease is in Vancouver, Canada. The Company has a 10 year
lease commitment for 116,000 square feet of office space; however,
the Company has notified the lessor that it does not intend to occupy
the space. With respect to these leases, the Company recorded a

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 47

Financial Statements | Notes | 14. Restructuring, Termination and Other Exit Obligations

C. SENIOR REVOLVING FINANCING

On January 11, 2016, the Company entered into a financing
agreement with Cartesian. As part of the agreement, on June 1,
2016, convertible debt was issued in exchange for 9.0% convertible
unsecured notes due June 1, 2021, which are convertible into
common shares of the Company in whole or in part, at Cartesian's
option, at any time following the twelve month anniversary of the
closing at a conversion price of $2.17 per share. Interest is payable
annually in arrears on December 31 of each year during the term.
The convertible debt is held by a related party as Peter Yu, founder
and managing partner of Cartesian, became a member of the Board
of Directors of the Company in January 2016.

D. OTHER BANK FINANCING

Other bank financing consists of various secured and unsecured
bank financing arrangements that carry rates of interest ranging
from 0.75% to 3.9% and have various maturities out to 2022.
Security includes a building owned by the Company in the
Netherlands and certain accounts receivable in one of our Italian
subsidiaries. Approximately $6,700 of this financing is renewable
as additional accounts receivables are pledged.

E. CAPITAL LEASE OBLIGATIONS

The Company has capital lease obligations that have terms of three
to five years at interest rates ranging from 2.3% to 11.0% (2015 -
3.1%% to 4.9%).

Throughout the entire term of these financing arrangements, the
Company is required to meet certain financial and non-financial
covenants. As of December 31, 2016, the Company is in compliance
with all covenants under the financing arrangements.

The principal repayment schedule of the long-term debt is as follows
for the years ending December 31:

LONG-TERM DEBT REPAYMENT
SCHEDULE

2017

2018

2019

2020

Subordinated
debenture
notes

Senior
revolving
financing

Convertible
debt

Other
bank
financing

Capital
lease
obligations

Total

40,463 $

739 $

— $ 6,449 $

446 $ 48,097

— 1,688

— 1,794

— 1,900

—

316

195

2,199

2,174

2,262

24,300

2021+

— 4,432

17,286

2,552

40,463 $10,553 $ 17,286 $ 9,949 $

781 $ 79,032

charge to earnings of $11,802. The liability is equal to the present
value of rent and other direct costs for the period of time space is
expected to remain contracted but unoccupied, less any expected
rent to be paid to the Company by a tenant under a sublease over
the remainder of the lease term. The cash flows have been
discounted at 15% and the lease is expected to terminate in June
2026.

15. Long-Term Debt

LONG-TERM DEBT

Dec 31,
2016

Dec 31,
2015

Subordinated debenture notes (a) $

40,463 $

Senior financing (b)

Convertible debt (c)

Other bank financing (d)

Capital lease obligations (e)

Balance, end of period

Current portion

Total

10,553

17,286

9,949

781

79,032

(48,097)

30,935 $

38,359

10,859

—

12,435

794

62,447

(8,257)

54,190

A. SUBORDINATED
DEBENTURE NOTES

The subordinated debenture notes are unsecured, mature on
September 15, 2017 and bear interest at 9% per annum, payable
in cash semi-annually in arrears on March 15 and September 15 of
each year during the term. The holders of the Debentures have the
option to extend, a maximum of six times, the maturity date for an
additional period of six months each time (i.e. if all extensions made,
an additional three years) provided that greater than CDN$10,000
of the aggregate principal amount of the Debentures remains
outstanding. At the date of these financial statements, the
Debenture holders have not elected to extend and have until August
1, 2017 to do so.

B. SENIOR FINANCING

The €10,000 senior revolving financing facility is denominated in
Euros and bears interest at the 6-month Euribor plus 2.6% (2.3%
as at December 31, 2016). Subsequent to year end on March 24,
2017, the €10,000
financing facility was renewed. The loan bears
an interest at the 6-month Euribor plus 3.3% and can increase or
decrease by 30 basis points based on an annual leverage ratio
calculation. Interest is paid semi-annually. The Company has
pledged its interest in EMER S.p.A. as a general guarantee for its
senior revolving financing.

48 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

16. Long-term Royalty Payable

17. Warranty Liability

Financial Statements | Notes | 16. Long-term Royalty Payable

On January 11, 2016, The Company entered into a financing
agreement with Cartesian to support the Company's global growth
initiatives. The financing agreement immediately provided $17,500
in cash (the “Tranche 1 Financing”). In consideration for the funds
provided to the Company, Cartesian is entitled to royalty payments
in respect of the Tranche 1 Financing based on the greater of (i) a
percentage of amounts received by the Company on select high
pressure direct injection systems and joint venture products in
excess of agreed thresholds through 2025 and (ii) stated fixed
amounts per annum (subject to adjustment for asset sales). The
carrying value is being accreted to the expected redemption value
using the effective interest method, which is approximately 23% per
annum.

A continuity schedule of the long-royalty payable is as follows:

LONG TERM ROYALTY
PAYABLE SCHEDULE

Balance, beginning of year
Issuance of debentures
Accretion expense
Balance, end of year
Current portion

Long-term portion

MINIMUM REPAYMENTS
INCLUDING INTEREST

2017
2018
2019
2020
2021
2022 and thereafter

Dec 31,
2016

—

17,500

4,062

21,562

(1,500)

20,062

For years
ending
Dec 31

1,500

3,426

6,164

7,722

9,054

18,113

45,979

WARRANTY LIABILITY

Years ended Dec 31
2015

2014

2016

Balance, beginning of year

$ 13,991 $ 23,109 $ 28,845

Warranty assumed on acquisition
Warranty claims
Warranty accruals

5,180

—

1,952

(7,353)

(9,438)

(10,709)

2,811

427

2,734

Impact of foreign exchange
changes

Balance, end of year

Less: Current portion

Long-term portion

(859)

(107)

287

$ 13,770 $ 13,991 $ 23,109

$ (6,834) $ (5,554) $ (9,696)

$ 6,936 $ 8,437 $ 13,413

18. Share Capital,
Stock Options & Other
Stock-based Plans

On June 1, 2016, the Company issued 44,882,782 common shares
to former Fuel Systems' shareholders and 653,532 restricted stock
units in connection with the merger described in note 5.

During the year ended December 31, 2016, the Company issued
845,491 common shares, net of cancellations, upon exercises of
share units and in connection with earn out payments, (year ended
December 31, 2015 – 900,097 common shares). The Company
issues shares from treasury to satisfy stock option and share unit
exercises.

A. SHARE UNITS

The compensation program sets out provisions where the restricted
share units ("RSUs") and performance share units ("PSUs")
(together, the “Units”) will be granted to the Company’s executive
if performance milestones are achieved as
management
determined at the discretion of the Human Resources and
Compensation Committee of the Company’s Board of Directors.
These performance milestones are focused on achievement of key
cash management, profitability and revenue growth objectives.
Vesting periods and conditions for each Unit granted pursuant to
the Westport Omnibus Plan are at the discretion of the Board of
Directors and may include time based, share price or other
performance targets.

The value assigned to issued Units and the amounts accrued are
recorded as other equity instruments. As Units are exercised or
vested and the underlying shares are issued from treasury of the
Company, the value is reclassified to share capital.

During the year ended December 31, 2016, the Company
recognized $10,450 (year ended December 31, 2015 - $14,871;

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 49

Financial Statements | Notes | 18. Share Capital, Stock Options & Other Stock-based Plans

year ended December 31, 2014 – $9,683) of stock-based
compensation associated with the Westport Omnibus Plan and the
former Amended and Restated Unit Plan.

AGGREGATE INTRINSIC VALUES
OF SHARE UNITS

A continuity of the Units issued under the Westport Omnibus Plan
and the former Amended and Restated Unit Plan as of December
31, 2016, December 31, 2015 and December 31, 2014 are as
follows:

STOCK OPTION PLAN SUMMARY

(stock option
values expressed
in Canadian
dollars)

Outstanding,
beginning of
period

Granted

Exercised /
Vested

Forfeited /
Expired

Outstanding,
end of year

Options
exercisable,
end of year

Dec 31, 2016

Dec 31, 2015

Dec 31, 2014

WAEP

9,657,921 $ 7.62 5,337,873 $ 10.27

1,200,591 $ 23.68

684,402

2.90 5,556,630

6.74

5,792,162

10.54

(845,491)

10.26

(575,024)

11.49

(608,975)

19.52

(2,832,241)

6.60

(661,558)

10.34 (1,045,905)

21.75

6,664,591 $ 6.75 9,657,921 $ 7.62

5,337,873 $ 10.27

1,891,008 $ 7.77 1,150,294 $ 9.58

142,166 $ 11.67

WAEP = weighted average exercise price (C$)

During 2016, 684,402 (2015 - 5,556,630) share units were granted
to employees. This included 684,402 RSUs (2015 - 2,861,630) and
nil PSUs (2015 - 2,695,000). Values of RSU awards are generally
determined based on the fair market value of the underlying
common share on the date of grant. RSUs typically vest over a three
year period so the actual value received by the individual depends
on the share price on the day such RSUs are settled for common
shares, not the date of grant. PSU awards do not have a certain
number of common shares that will issue over time - the number
depends on future performance and other conditions tied to the
payout of the PSU. The vesting of the 1,695,000 remaining PSU's
from the 2015 grant is conditional upon Shareholders of Westport
approving an increase in the number of awards available for
issuance pursuant to the Westport Omnibus Plan. As a result these
PSU's are being treated as a liability until this condition is met.

As at December 31, 2016, $6,594 of compensation expense related
to Units has yet to be recognized in results from operations and will
be recognized over a weighted average period of 1.2 years.

B. AGGREGATE INTRINSIC VALUES

The aggregate intrinsic value of the Company’s share units at
December 31, 2016 and 2015 are as follows:

50 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Outstanding

Exercisable

Exercised

(values in CDN$)

Dec 31,
2016

Dec 31,
2015

10,130 $

26,849

2,874

1,285

3,198

1,599

C. STOCK-BASED COMPENSATION

Stock-based compensation associated with the Unit plans and the
stock option plan is included in operating expenses as follows:

STOCK-BASED COMPENSATION
IN OPERATING EXPENSES

Years ended Dec 31
2015

2014

2016

Research and development

6,010 $

9,915 $

1,749

General and administrative

2,334 $

2,224 $

5,884

Sales and marketing

2,106 $

2,732 $

2,050

Total

10,450 $

14,871 $

9,683

19. Income Taxes

A. PROVISION

INCOME TAX PROVISION

Years ended Dec 31

2015
(Adjusted,
Note 8)

2014
(Adjusted,
Note 8)

2016

Loss before income taxes

$ (92,563) $ (98,423) $ (148,557)

Expected income tax recovery

(24,066) $ (25,580) $ (38,628)

Increase (reduction) in income taxes resulting from

Non-deductible stock-based
compensation

2,176 $

3,553 $

2,495

Other permanent differences

5,854 $

(76) $

Withholding taxes

1,109 $

1,429 $

(446)

969

Foreign tax rate differences,
foreign exchange and other
adjustments

Non-taxable income from equity
investment

(4,561) $

(138) $

7,409

925 $

(4,313) $

(4,162)

Change in valuation allowance

32,583 $

21,036 $

25,784

Goodwill impairment

— $

4,820 $

Change in uncertain tax position

301 $

Bargain purchase gain

(9,311) $

— $

4,748

1,252

—

Income tax expense (recovery)

5,010 $

731 $

(579)

The Company’s income tax provision differs from that calculated
by applying the combined enacted Canadian federal and provincial
statutory income tax rate of 26% for the year ended December 31,
2016 (year ended December 31, 2015 – 26%; year months ended
December 31, 2014 – 26%) as follows:

B. DEFERRED INCOME TAX

The significant components of the deferred income tax assets and
liabilities are as follows:

DEFERRED INCOME TAX ASSETS &
LIABILITIES

Dec 31,
2016

Dec 31,
2015

Deferred income tax assets

Net loss carry forwards

191,685 $

129,653

Intangible assets

Property, plant and equipment

Warranty liability

Foreign tax creidts

Inventory

Research and development

Other

10,319

11,829

4,072

5,233

4,104

4,710

17,114

3,792

7,317

4,220

—

2,206

3,140

7,831

Total gross deferred income tax assets

249,066

158,159

Valuation allowance

(245,299)

(153,099)

Total deferred income tax assets

3,767

5,060

(4,945)

(596)

(4,262)

(9,803)

(4,566)

(1,177)

(349)

(6,092)

Deferred income tax liabilities

Intangible assets

Property, plant and equipment

Other

Total deferred income tax liabilities

Total net deferred income tax
liabilities

Allocated as follows

Deferred income tax assets

Deferred income tax liabilities

Total net deferred income tax
liabilities

(6,036) $

(1,032)

The valuation allowance is reviewed on a quarterly basis to
determine if, based on all available evidence, it is more-likely-than
not that some or all of the deferred income tax assets will not be
realized. The ultimate realization of deferred income tax assets is
dependent on the generation of sufficient taxable income during
the future periods in which those temporary differences are
expected to reverse. If the evidence does not exist that the deferred
income tax assets will be fully realized, a valuation allowance has
been provided.

The deferred income tax assets have been reduced by the
uncertain tax position presented in note 19(f).

Financial Statements | Notes | 19. Income Taxes

C. INCOME TAX EXPENSE
/ RECOVERY

The components of the Company’s income tax expense (recovery)
are as follows:

INCOME TAX EXPENSE (RECOVERY)
Net
income
(loss)
before
income
taxes

Current Deferred

Total

Year ended Dec 31, 2016

Canada

United States

Italy

Other

Year ended Dec 31, 2015
(Adjusted, note 8(a))

Canada

United States

Italy

Other

Year ended Dec 31, 2014
(Adjusted, note 8(a))

Canada

United States

Italy

Other

$ (100,143) $

57 $

788 $

845

14,926

(4,324)

192

—

1,440

1,632

(3,022)

1,746

780

2,526

$ (92,563) $ 2,002 $ 3,008 $ 5,010

$ (44,739) $

793 $

228 $ 1,021

(22,227)

(20,695)

(10,762)

389

—

(566)

(176)

(177)

(122)

$ (98,423) $ 1,245 $

(514) $

731

$ (86,143) $

165 $

301 $

466

(49,577)

—

(3,834)

521

(1,463)

(9,003)

(88)

(23)

(942)

(111)

$ (148,557) $

606 $ (1,185) $ (579)

LOSS CARRY-FORWARDS
2020

Expiring in: 2017

2018

2019

2021+

Total

Canada
Italy
United States
Sweden
Other
Total

$ — $ — $ — $ — $ 437,967 $ 437,967

—

972

6,023

4,632

—

16,622

— 110,403

110,403

—

18,843

14,144

18,843

25,771

$ — $ 972 $ 6,023 $ 4,632 $ 597,979 $ 609,606

Certain tax attributes are subject to an annual limitation as a result
of the acquisition of Fuel Systems which constitutes a change of
ownership as defined under Internal Revenue Code Section 382.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 51

(6,036) $

(1,032)

D. LOSS CARRY-FORWARDS

3,767

(9,803)

2,538

(3,570)

The Company has loss carry-forwards in the various tax
jurisdictions available to offset future taxable income as follows:

Financial Statements | Notes | 19. Income Taxes

E. DEFERRED INCOME
TAX LIABILITY

The Company has not recognized a deferred income tax liability
for certain undistributed earnings of foreign subsidiaries which are
essentially investments in those foreign subsidiaries and are
permanent in duration.

F. TAX RESERVES

The Company records uncertain tax positions in accordance with
ASC No. 740, Income Taxes. As at December 31, 2016, the total
amount of the Company’s uncertain tax benefits was $2,745 (year
ended December 31, 2015 - $1,230). If recognized in future
periods, the uncertain tax benefits would affect our effective tax
rate. The Company files income tax returns in Canada, the U.S.,
Italy, and various other foreign jurisdictions. All taxation years
remain open to examination by the Canada Revenue Agency, the
2013 to 2016 taxation years remain open to examination by the
Internal Revenue Service and the 2011 to 2016 taxation years
remain open to examination by the Italian Revenue Agency, and
various years remain open in the other foreign jurisdictions.

20. Related Party Transactions

The Company is reporting a larger number of related party
transactions compared to 2015 as a consequence of the
appointments of Mr. Peter Yu (Cartesian financing) and Mr. Mariano
Costamagna (Fuel Systems merger) as directors of the Company.
Subsequent to year end, Mr. Costamagna resigned from the Board
of Directors. The following table sets forth amounts that are included
within the captions noted on the consolidated balance sheets,
representing related party transactions with the Company:

RELATED PARTY TRANSACTIONS

Receivables

Entities related to Mariano
Costamagna (a)

Cummins Westport Inc. (b)

Ideas & Motion S.r.L. (c)

Total

Payables

Entities related to Mariano
Costamagna (a)

Years ended Dec 31

2015

2014

237 $

236

—

1,165

—

488 $

1,165

1,191 $

—

A. ENTITIES RELATED TO MARIANO
COSTAMAGNA INCLUDE:

Bianco S.p.A, TCN S.r.L., Biemmedue S.p.A, MTM Hydro S.r.L.,
Immobiliare IV Marzo, Delizie Bakery S.r.L., Galup S.r.L., TCN Vd

52 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

S.r.L., Europlast S.r.L., A.R.S. Elettromeccanica S.r.L., Ningbo
Topclean Mechanical Technology Co. Ltd., and Erretre S.r.L..

B. PURSUANT TO THE AMENDED
AND RESTATED JOINT VENTURE
AGREEMENT

Westport engages in transactions with CWI (see note 8 (a)).
Amounts receivable relate to costs incurred by the Company on
behalf of CWI. The amounts are generally reimbursed by CWI to
the Company in the month following the month in which the payable
is incurred.

C. IDEAS & MOTION S.R.L

Ideas & Motion S.r.L Is an Italian consulting and services company
in which the Company owns an equity ownership interest of 14.28%.

OTHER RELATED PARTY
TRANSACTIONS

2016

Purchases Sales Purchases Sales

Related party company

Entities related to
Mariano Costamagna (a) $

Cummins Westport Inc.
(b)

Ideas & Motion S.r.L. (c)

2,592 $

412 $

— $ —

— 2,744

—

— 5,742

—

Total

2,592 $ 3,199 $

— $ 5,742

D. OTHER TRANSACTIONS WITH
RELATED PARTIES:

The Company leases buildings under separate facility agreements
from IMCOS Due S.r.L., a real estate investment company owned
100% by Mariano Costamagna and members of his immediate
family. The terms of these leases reflect the fair market value of
such properties based upon appraisals. The Company made
payments to IMCOS Due S.r.L. of $1,475 for the year ended
December 31, 2016 (2015 - nil).

Peter Yu, founder and managing partner of Cartesian, was elected
as a Director in January 2016 in connection with the Investment
Agreement. The convertible debt (note 15(c)) and royalty payable
(note 16) are related party balances. In addition, the Company sold
a portion of its economic interest in WWI to Cartesian (note 8(b)).
The Company has not made any cash payments to Cartesian
relating to the convertible debt or royalty payable as at December
31, 2016, but has accrued interest in accordance with the terms of
the agreements.

21. Commitments
and Contingencies

A. CONTRACTUAL COMMITMENTS

The Company has obligations under operating lease arrangements
that require the following minimum annual payments during the
respective fiscal years:

CONTRACTUAL COMMITMENTS
2017
2018
2019
2020
2021
Thereafter
Total

9,347

9,134

7,686

6,298

4,548

19,996

57,009

As disclosed in note 14, the Company has recorded restructuring
charges on several leases. Any income received from subleasing

the leases will reduce the minimum annual payments required by
the Company. For the year ended December 31, 2016, the
Company incurred operating lease expenses of $5,675 (year ended
December 31, 2015 - $3,763; year ended December 31, 2014 -
$3,879).

The Company is a party to a variety of agreements in the ordinary
course of business under which it is obligated to indemnify a third
party with respect to certain matters. Typically, these obligations
arise as a result of contracts for sale of the Company’s product to
customers where the Company provides indemnification against
losses arising from matters such as product liabilities.

The potential impact on the Company’s financial results is not
subject to reasonable estimation because considerable uncertainty
exists as to whether claims will be made and the final outcome of
potential claims. To date, the Company has not incurred significant
costs related to these types of indemnifications.

The Company is engaged in certain legal actions in the ordinary
course of business and believes that the ultimate outcome of these
actions will not have a material adverse effect on our operating
results, liquidity or financial position.

B. PURCHASE COMMITMENTS

The Company purchases components from a variety of suppliers
and contract manufacturers. During the normal course of business,
in order to manage manufacturing lead times and help ensure
adequate component supply, the Company enters into agreements
with suppliers and contract manufacturers. A portion of our reported
estimated purchase commitments arising from these agreements
are firm, noncancelable, and unconditional commitments. The
Company may be subject to penalties, and may lose important

Financial Statements | Notes | 21. Commitments and Contingencies

suppliers, if it is unable to meet its purchase commitments. In 2014,
the Company entered into several long-term fixed price contracts
to purchase parts to produce certain products. These contracts
represent firm purchase commitments which are evaluated for
potential market value losses. The Company estimated a loss on
these firm purchase commitments with reference to the estimated
future sales price of these products and recognized a provision for
inventory purchase commitments of $4,106 in 2014. The provision
is recognized in other payables in accounts payable and accrued
liabilities. During 2015 and 2016, no additional loss for provision for
inventory purchase commitments was accrued and the provision
has been drawn down to $751 as at December 31, 2016.

22. Segment Information

The financial information for the Company’s business segments
evaluated by the Chief Operating Decision Maker ("CODM")
includes the results of CWI as if they were consolidated, which is
consistent with the way the Company manages its business
segments. As CWI is accounted for under the equity method of
accounting, an adjustment is reflected in the tables below to
reconcile the segment measures to the Company’s consolidated
measures.

The Company’s business operates in four operating segments:

AUTOMOTIVE BUSINESS SEGMENT
(PREVIOUSLY BRANDED AS
WESTPORT OPERATIONS)

The Westport Fuel Systems Automotive division designs,
manufactures and sells compressed Natural Gas (CNG) and liquid
petroleum gas (LPG) components and systems for passenger cars
and light-duty trucks and medium-duty vehicles including OEM,
delayed OEM (“DOEM”) and Aftermarket. The portfolio of products
includes pressure regulators, injectors, electronic control units,
valves and filters, in addition to complete bi-fuel, mono-fuel and
dual-fuel LPG and CNG conversion kits.

During the first quarter of 2015, the Company realigned the structure
of the company's internal organization. The realignment combined,
our historical operating segments, Westport Applied Technologies,
Westport On-Road Systems and Westport Off-Road Systems into
a single operating segment, Automotive Business Segment
(previously branded as Westport Operations). This change reflects
the manner in which operating decisions and assessing business
performance is currently managed by the CODM. As the Company
narrows its focus within certain business units, including its
investments in joint ventures, and defers certain products and
related programs, the CODM manages the combined businesses
as a whole. Therefore, the Automotive Business Segment provides
more meaningful information to users of the Company’s financial
statements. All comparable periods presented have been revised
to reflect this change.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 53

Financial Statements | Notes | 22. Segment Information

INDUSTRIAL BUSINESS SEGMENT

Financial information by business segment as follows:

CORPORATE AND TECHNOLOGY
INVESTMENTS SEGMENT

The Corporate and Technology Investments segment is responsible
for current and advanced research and development programs,
corporate oversight, and general administrative duties. The
corporate oversight and general administrative duties function for
the company is grouped under this unit.

CUMMINS WESTPORT INC.
JOINT VENTURE

CWI, our 50:50 joint venture with Cummins, serves the medium and
heavy-duty on highway engine markets. CWI engines are

offered by many OEMs for use in transit, school and shuttle buses,
conventional trucks and tractors, and refuse collection trucks, as
well as specialty vehicles such as short-haul port drayage trucks
and street sweepers.

WEICHAI WESTPORT INC.
JOINT VENTURE

WWI is a joint venture between Westport, Weichai Holding Group
Co. Ltd. (Weichai) and Hong Kong Peterson (CNG) Equipment Ltd.
focusing on the Chinese market. WWI develops, manufactures and
sells advanced, alternative fuel engines and parts that are widely
used in city bus, coach, and heavy-duty truck applications in China
or exported to other regions globally. On April 20, 2016, the
Company sold a portion of its economic interest in WWI [note 8b]
and the Company discontinued reporting of WWI results on an
equity basis. As the Company no longer has significant influence
in the joint venture, the Company does not consider WWI a business
segment.

The accounting policies for the reportable segments are consistent
with those described in note 3. The CODM evaluates segment
performance based on the net operating income (loss), which is
before income taxes and does not include depreciation and
amortization, impairment charges, restructuring charges, foreign
exchange gains and losses, bank charges, interest and other
expenses, interest and other income, gain on sale of long-term
investments and bargain purchase gain.

54 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

REVENUE

Automotive
Industrial
Corporate and Technology
Investments
CWI
WWI

2016

Years ended Dec 31
2015
$ 165,071 $ 100,108 $ 126,988
—

54,662

2015

—

5,162

3,196

3,581

276,465

331,882

29,931

185,967

337,234

618,465

Total segment revenues

531,291

621,153 1,086,268

Less: equity investees' revenue

(306,396)

(517,849)

(955,699)

Total consolidated revenues

$ 224,895 $ 103,304 $ 130,569

OPERATING LOSS

Automotive

Industrial
Corporate and Technology
Investments
Restructuring

Years ended Dec 31

2016

2015

$ (19,157) $ (21,855) $ (35,952)

3,746

—

(76,118)

(77,283)

(92,456)

(19,000)

—

Foreign exchange gain (loss)

(6,408)

11,601

3,433

Impairment of long lived assets,
net
Provision for inventory purchase
commitments
CWI

WWI

(4,843)

(22,722)

(29,604)

—

(4,106)

29,782

51,011

21,555

718

3,784

78,502

Total segment operating loss

(91,280)

(55,464)

(58,628)

Less: equity investees’ operating
income

(30,500)

(54,795)

(100,057)

Consolidated operating loss

(121,780)

(110,259)

(158,685)

ADDITIONS TO LONG-LIVED ASSETS

Automotive
Industrial
Corporate and Technology
Investments
Total consolidated revenues

Years ended Dec 31

2016

2015

3,310 $

1,350 $

2,278

747

—

5,290

3,495

7,971

9,347 $

4,845 $ 10,249

It is impracticable for the Company to provide geographical revenue
information by individual countries; however, it is practicable to
provide it by geographical regions. Product and service and other
revenues are attributable to geographical regions based on location
of the Company’s customers and presented as a percentage of the
Company’s product and service revenues are as follows:

REVENUE BY REGION

% of total product revenue and service
and other revenue, years ended Dec 31
2015

2014

2016

Europe
Americas (including USA)
Asia
Others

54%

32%

12%

48%

40%

12%

—%

47%

42%

11%

—%

As at December 31, 2016, total goodwill of $2,923 (December 31,
2015 - $3,008) was allocated to the Automotive segment.

As at December 31, 2016, total long-term investments of $12,876
(December 31, 2015 - $34,716) was allocated to the Corporate and
Technology Investments segment and $546 (December 31, 2015 -
$426) was allocated to Automotive segment.

Long-lived assets information by geographic area:

LONG-LIVED ASSETS BY REGION

December 31, 2016

Italy

Canada

United States

Rest of Europe

Asia Pacific

Less: equity investees' long
lived assets

Total consolidated long-
lived assets

December 31, 2015

Italy

Canada

United States

Rest of Europe

Asia Pacific

Less: equity investees' long
lived assets

Total consolidated long-
lived assets

Fixed
Assets

Intangible
Assets

Total

26,713 $

19,942 $

46,655

22,157

1,377

23,534

5,613

3,119

3,154

—

4,462

—

5,613

7,581

3,154

60,756

25,781

86,537

(1,074)

—

(1,074)

59,682 $

25,781 $

85,463

6,212 $

19,531 $

25,743

18,875

14,210

3,076

7,767

494

—

5,135

155

19,369

14,210

8,211

7,922

50,140

25,315

75,455

(7,613)

—

(7,613)

42,527 $

25,315 $

67,842

Financial Statements | Notes | 22. Segment Information

Total assets are allocated as follows:

TOTAL ASSETS

Automotive
Industrial
Corporate and Technology
Investments and unallocated assets
CWI
WWI

Less: equity investees’ total assets
Total consolidated assets

Dec 31,
2016
241,975 $

65,717

Dec 31,
2015

157,452

—

23,768

147,245

—

478,705

(147,245)

331,460 $

56,231

171,189

125,724

510,596
(296,913)
213,683

The Company’s long-lived assets consist of property, plant and
equipment (fixed assets), intangible assets and goodwill.

23. Financial Instruments

A. FINANCIAL RISK MANAGEMENT

The Company has exposure to liquidity risk, credit risk, foreign
currency risk and interest rate risk.

B. LIQUIDITY RISK

Liquidity risk is the risk that the Company will not be able to meet
its financial obligations as they are due. The Company has
sustained losses and negative cash flows from operations since
inception. At December 31, 2016, the Company has $60,905 of
cash, cash equivalents and short-term investments.

The following are the contractual maturities of financial obligations
as at December 31, 2016:

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 55

Financial Statements | Notes | 23. Financial Instruments

CONTRACTUAL OBLIGATIONS &
COMMITMENTS

Carrying
amount

Contractual
cash flows

Years

< 1

1–3

4–5

Accounts
payable &
accrued
liabilities

Subordinated
debentures
notes(1)

Senior
revolving
financing(2)

Convertible
debt

Senior
financing(3)

Capital lease
obligations

Long-term
royalty
payable

Operating
lease
commitments
Royalty(4)

$ 93,245 $

93,245 $ 93,245 $

— $ — $ —

40,463

43,727

—

10,553

11,793

1,039

4,026

4,336

2,392

17,286

24,456

1,575

3,150

19,731

—

9,949

10,476

6,893

767

758

2,058

781

826

473

268

—

21,562

45,979

1,500

9,590

16,776 18,113

10,845

2,577

57,009

9,347

16,820

10,846 19,996

3,831

— 3,831

—

$ 207,261 $

291,342 $157,799 $38,452 $52,532 $42,559

1. Includes interest at 9%.

2. Includes interest at rates disclosed in note 15(b).

3. Includes interest at rates disclosed in note 15(b).

4. The Company is obligated to repay funding received from Industrial
Technologies Office ("ITO") in the form of royalties equal to the greater
of $1,005 (CDN $1,350) or 0.33% of the Company's gross annual revenue
from all sources, including CWI, provided that gross revenue exceeds
$10,055 (CDN$13,500) in any aforementioned fiscal year, until the earlier
of March 31, 2018 or until cumulative royalties total of $21,003 (CDN
$28,200) has been repaid. As at December 31, 2016, $2,577 remains
accrued in accounts payable and accrued liabilities (December 31, 2015
- $2,387). As at December 31, 2016, cumulative royalties of CDN $12,991
have been paid.

C. CREDIT RISK

Credit risk arises from the potential that a counterparty to a financial
instrument fails to meet its contractual obligations and arises
principally from the Company’s cash and cash equivalents, short-
term investments and accounts receivable. The Company manages
credit risk associated with cash and cash equivalents and short-
term investments by regularly consulting with its current bank and
investment advisors and investing primarily in liquid short-term
paper issued by Schedule 1 Canadian banks, R1 rated companies
and governments. The Company monitors its portfolio, and its policy
is to diversify its investments to manage this potential risk.

The Company is also exposed to credit risk with respect to
uncertainties as to timing and amount of collectability of accounts
receivable and other receivables. As at December 31, 2016, 91%
(December 31, 2015 - 85%) of accounts receivable relates to
customer receivables, and 9% (December 31, 2015 - 15%) relates
to amounts due from related parties, income tax and value added

56 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

taxes receivables. In order to minimize the risk of loss for customer
receivables, the Company’s extension of credit to customers
involves review and approval by senior management as well as
progress payments as contracts are executed. Most sales are
invoiced with payment terms in the range of 30 days to 90 days.
The Company reviews its customer receivable accounts and
regularly recognizes an allowance for doubtful receivables as soon
as the account is determined not to be fully collectible. Estimates
for allowance for doubtful debts are determined on a customer-by-
customer evaluation of collectability at each balance sheet reporting
date, taking into consideration past due amounts and any available
relevant information on the customers’ liquidity and financial
position.

D. FOREIGN CURRENCY RISK

Foreign currency risk is the risk that the fair value of future cash
flows of financial instruments will fluctuate because of changes in
foreign currency exchange rates. The Company conducts a
significant portion of its business activities in foreign currencies,
primarily the United States dollar and the Euro. Cash and cash
equivalents, short-term
receivable,
accounts payable, and long-term debt that are denominated in
foreign currencies will be affected by changes in the exchange rate
between the Canadian dollar and these foreign currencies.

investments, accounts

The Company’s functional currency is the Canadian dollar. The U.S.
dollar amount of financial instruments subject to exposure to foreign
currency risk reflected in the consolidated balance sheet at
December 31, 2016 is as follows:

FOREIGN CURRENCY RISK IN
BALANCE SHEET

U.S. dollars

Cash and cash equivalents

Accounts receivable

Accounts payable

Long-term debt, including current portion

Long-term royalty payable, including current
portion

9,732

9,780

4,353

17,286

21,562

E. INTEREST RATE RISK

Interest rate risk is the risk that the fair value of future cash flows
of a financial instrument will fluctuate because of changes in market
interest rates. The Company is subject to interest rate risk on certain
long-term debt with variable rates of interest. The Company limits
its exposure to interest rate risk by continually monitoring and
adjusting portfolio duration to align to forecasted cash requirements
and anticipated changes in interest rates.

If interest rates for the year ended December 31, 2016 had
increased or decreased by 50 basis points, with all other variables

Financial Statements | Notes | 23. Financial Instruments

held constant, net loss for the year ended December 31, 2016 would
have increased or decreased by $67.

markets. Level 3 valuations are undertaken in the absence of
reliable Level 1 or Level 2 information.

F. FAIR VALUE OF FINANCIAL
INSTRUMENTS

As at December 31, 2016, cash and cash equivalents and short-
term investments are measured at fair value on a recurring basis
and are included in Level 1.

The carrying amounts reported in the balance sheets for cash and
cash equivalents, accounts receivable, accounts payable and
accrued liabilities approximate their fair values due to the short-
term period to maturity of these instruments.

The Company’s short-term investments are recorded at fair value.
The long-term investments represent our interest in CWI, which is
accounted for using the equity method, and WWI and other
investments, which are accounted for using the cost method.

The carrying values reported in the consolidated balance sheet for
the unsecured subordinated debenture notes (note 15) is greater
than its fair value based on a recent financing the Company
performed with Cartesian (note 16). The approximate fair value of
the unsecured subordinated debenture notes is approximately
$38,848 (CDN $52,159). Additionally, the interest rate on the notes
approximates the interest rate being demanded in the market for
debt with similar terms and conditions. The carrying value reported
in the balance sheet for senior financing agreements (note 15(b))
approximates their fair values as at December 31, 2016, as the
interest rates on the debt is floating and therefore approximates the
market rates of interest. The Company’s credit spread in these
subsidiaries also has not substantially changed from the premiums
currently paid.

The Company categorizes its fair value measurements for items
measured at fair value on a recurring basis into three categories as
follows:

LEVEL 1
Unadjusted quoted prices in active markets for identical assets or
liabilities.

LEVEL 2
Observable inputs other than Level 1 prices such as quoted prices
for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the assets
or liabilities.

LEVEL 3
Inputs for the asset or liability that are not based on observable
market data (unobservable inputs).

When available, the Company uses quoted market prices to
determine fair value and classify such items in Level 1. When
necessary, Level 2 valuations are performed based on quoted
market prices for similar instruments in active markets and/or
model–derived valuations with inputs that are observable in active

24. Subsequent Events

On March 24, 2017, the Company renegotiated its €10,000 senior
revolving financing facility. See [note 15b] to these financial
statements for details.

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 57

Recent Material Announcements

Recent Material
Announcements

On April 17, 2017, Westport Fuel Systems announced that it had
entered into a definitive agreement to sell the assets of its Auxiliary
Power Unit (APU) business. On May 1, 2017, Westport Fuels
Systems announced that it had closed the sale for net proceeds of
approximately $60 million US dollars, after adjusting for estimated
net working capital, transaction costs, hold back amounts and other
deal related expenses. The divestiture is consistent with Westport
Fuel Systems strategy to streamline its business and product lines
and focus on alternative fuel solutions for the transportation and
automotive industries.

58 | WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT

Information for
Shareholders

DIRECTORS & EXECUTIVE OFFICERS
Committees

Name / position

Ashoka Achuthan
CFO

Andrea Alghisi
COO Automotive and
Industrial Group

Residence

Chicago,
Illinois

Tortona,
Italy

Jim Arthurs
Executive Vice President

North Vancouver,
British Columbia

Warren J. Baker
Director

Brenda J. Eprile
Chair & Director

Nancy S. Gougarty
CEO and Director

Anthony Harris
Director

Colin Johnston
Director

Avila Beach,
California

North York,
Ontario

Leesville,
South Carolina

Alameda,
California

Turin,
Italy

Jack Keaton
Executive Vice President

Vancouver,
British Columbia

Scott Mackie
Director

Rodney T. Nunn
Director

Milford,
Michigan

Chatham,
Ontario

Thomas G. Rippon
Executive Vice President

White Rock,
British Columbia

Peter M. Yu
Director

New York City,
New York

AU HR NC

•

Start
date

Nov
2013

June
2016

Jan
2014

Sep
2002

Oct
2013

Feb
2013

June
2016

Apr
2014

Sept
2016

Mar
2016

Sep
2013

Jan
2016

Committees are as follows: AU = Audit; HR = Human Resources &
Compensation; NC = Nominating & Corporate Governance

Corporate Information

Information for Shareholders

Legal Counsel
Bennett Jones LLP, Calgary, Alberta, Canada

Auditors
KPMG LLP, Independent Registered Public Accounting Firm,
Vancouver, British Columbia, Canada

Annual Meeting Of
Shareholders
WHEN: Wednesday, June 28, 2017 at 09:00 AM (Eastern)
WHERE: 100 Hollinger Crescent, Kitchener, Ontario

Westport Fuel Systems
on the Net

Topics featured can be found on our websites:

WESTPORT FUEL SYSTEMS

wfsinc.com

FUEL FOR THOUGHT (blog)

blog.westport.com

YOUTUBE

FACEBOOK

TWITTER

youtube.com/westportdotcom

facebook.com/westportdotcom

twitter.com/westportdotcom

CUMMINS WESTPORT

cumminswestport.com

The information on these websites is not incorporated by reference
into this Annual Report. Financial results, Annual Information Form,
news, services, and other activities can also be found on the
Westport Fuel Systems website, on SEDAR at sedar.com, or at the
SEC at www.sec.gov. Shareholders and other interested parties
can also sign up to receive news updates in a variety of formats
including email, Twitter, and RSS feeds: westport.com/contact/
subscriptions

STOCK LISTINGS
NASDAQ
Toronto Stock Exchange

WPRT

Contact Information
1750 West 75th Avenue, Suite 101 Vancouver, BC, Canada V6P
6G2 T 604-718-2000 F 604-718-2001 invest@wfsinc.com

Westport Shareholder Services
Shareholders with questions about their account—including
change of address, lost stock certificates, or receipt of multiple mail-
outs and other related inquiries—should contact our Transfer Agent
and Registrar:

Computershare Trust Company of Canada

510 Burrard Street, 2nd Floor,
Vancouver, BC, Canada V6C 3B9
T 604-661-9400 F 604-661-9401

Forward-Looking Statements

Certain statements contained in this Annual Report constitute
"forward-looking statements". When used in this document, the
words "may", "would", "could", "will", "intend", "plan", "anticipate",
"believe", "estimate", "expect", "project" and similar expressions,
as they relate to us or our management, are intended to identify
forward-looking statements. In particular, this Annual Report
contains forward-looking statements pertaining to the following:

WESTPORT FUEL SYSTEMS INC. 2016 ANNUAL REPORT | 59

Information for Shareholders

• Our efforts to capture operating efficiencies and reduce our

expenses and the results of such efforts in the future;

• Future asset sales and right-sizing of Westport's cost structure

and the results of such activities; and

• The timing and effect of the launch of Westport HPDI 2.0

commercial components with OEM launch partners.

Such statements reflect management's current views with respect
to future events and are subject to certain risks and uncertainties
and are based upon a number of factors and assumptions. Actual
results may differ materially from those expressed in the foregoing
forward-looking statements due to a number of uncertainties and
risks, including the risks described in Westport's Annual Information
Form and in the documents incorporated by reference into this
Annual Report and other unforeseen
risks,
uncertainties, factors and assumptions include, without limitation:

risks. Such

• market acceptance of our products;

• product development delays and delays

in contractual

commitments;

• changing environmental regulations;

• the ability to attract and retain business partners;

• the success of our business partners and OEMs with whom we

partner;

• future levels of government funding and incentives;

• limitations in our ability to successfully integrate acquired

businesses;

• the ability to provide the capital required for research, product

development, operations and marketing; and

• risks related to the merger with Fuel Systems Solutions Inc.,
including, but not limited to: failure to realize the anticipated
benefits of the merger with Fuel Systems and to successfully
integrate the two companies.

You should not rely on any forward-looking statements. Any forward-
looking statement is made only as of the date of this Annual Report.
We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise, except as otherwise required by law. The forward-
looking statements in this Annual Report are expressly qualified by
this cautionary statement.

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