Algonquin Power & Utilities Corp. – Management’s Discussion & Analysis Critical Accounting Estimates and Polices Estimated useful lives and recoverability of Long-Lived Assets and Intangibles Valuation of Deferred Tax Assets Accounting for Rate Regulation 2012 Annual Report 67 Accounting guidance for regulated operations provides that rate-regulated entities account for and report assets  and liabilities consistent with the recovery of those incurred costs in rates if the rates established are designed  to recover the costs of providing the regulated service and if the competitive environment makes it probable that  such rates can be charged and collected. This accounting guidance is applied to Liberty Utilities’ operations.  Certain expenses and revenues subject to utility regulation or rate determination normally reflected in income  are deferred on the balance sheet as regulatory assets or liabilities and are recognized in income as the related  amounts are included in service rates and recovered from or refunded to customers. Regulatory assets and  liabilities are recorded when it is probable that these items will be recovered or reflected in future rates.  Determining probability requires significant judgment on the part of management and includes, but is not limited  to, consideration of testimony presented in regulatory hearings, proposed regulatory decisions, final regulatory  orders and industry practice. If events were to occur that would make the recovery of these assets and liabilities  no longer probable, these regulatory assets and liabilities would be required to be written off or write down. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that  some portion or all of the deferred tax assets will not be realized and provides any necessary valuation  allowances as required. Although management believes the assumptions, judgments and estimates are  reasonable, changes in tax laws and changes in operations could significantly impact the amounts provided for  income taxes in our financial statements . Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes  are recognized, at currently enacted income tax rates, to reflect the tax effect of temporary differences between  the financial and tax basis of assets and liabilities, as well as operating loss and tax credit carryforwards. The  amount of deferred tax assets recognized is limited to the amount of the benefit that is more likely than not to be  realized. The carrying value of long-lived assets, including identifiable intangibles, is reviewed whenever events or  changes in circumstances indicate that such carrying values may not be recoverable. Some of the factors APUC  considers as indicators of impairment include whether a facility is operating, its plan for return to service,  external influences such as natural disasters, energy pricing and profitability and changes in regulation.  Unforeseen events and changes in circumstances and market conditions and material differences in the value of  long-lived assets and intangibles due to changes in estimates of future cash flows, interest rates, regulatory  matters and operating costs could negatively affect the fair value of APUC’s assets and result in an impairment  charge. The provisions for depreciation of utility property and equipment for financial reporting purposes are made on  the straight-line method based on the estimated service lives of the assets. Depreciation rates on utility assets  are subject to regulatory review and approval, and depreciation expense is recovered through rates set by  ratemaking authorities. The recovery of those costs is dependent on the ratemaking process. Non-regulated  property and equipment are depreciated on a straight-line basis over useful lives of the related assets.  Management believes the lives and methods of determining depreciation are reasonable, however, changes in  economic conditions affecting the industries could result in a reduction of the estimated useful lives of those  non-regulated assets or in an impairment write-down of the carrying value of these properties. APUC’s significant accounting policies are discussed in Note 1 to the consolidated financial statements.  Management believes the following accounting policies involve the application of critical accounting estimates.  Accordingly, these accounting estimates have been reviewed and discussed with the Audit Committee of the  Board of Directors of APUC. The preparation of consolidated financial statements requires management to make estimates and assumptions  that affect the reported amounts of assets and liabilities, related amounts of revenues and expenses, and  disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates  relate to the useful lives and recoverability of depreciable assets, recoverability of deferred tax assets, rate- regulation, unbilled revenue, pension and postretirement benefits, and fair value of derivatives. Actual results  may differ from these estimates.