To reproduce:

1. Open the project, attached by user (animation_timeline_repro.zip)
2. Select "lily" asset in the Project View
3. Note the Generic Animation Type
4. Enter Play mode
5. Observe the animations
6. Change Animation Type to Humanoid
7. Press Update reference clips button
8. Enter Play mode
9. Observe the animations

Expected: animations blend between animations played by Animator and animations, played by Timeline when Animation type is set to either Generic or Humanoid
Actual: Animation Type set to Generic prevents animations blending between Animator and Timeline

Reproduced in 2017.1.0b1, 2017.1.0b5, 2017.1.0b6, 2017.2.0a1
Could not test for regression, Timeline introduced in 2017.1