MANAGEMENT’S DISCUSSION AND ANALYSIS FOURTH QUARTER 2013 HIGHLIGHTS Capstone's EBITDA increased by $8,740, or 19.3%, compared with the fourth quarter of 2012. Revenue  increased by $15,637, or 16.5%, due to increases of $7,973 from the power segment and $7,664 from Bristol Water. The power segment  increase reflected $5,714 from the addition of ReD, $1,981 from increased power generation at Erie Shores due to better wind conditions, and $733 of higher revenue at Cardinal due to higher power rates. Bristol Water's revenue increased primarily due to a favourable foreign exchange rate and higher regulated water tariffs charged to customers, which adjust annually on April 1. Expenses increased by $5,172, or 9.4%. Equity accounted income (loss)  decreased by $ ) 3,051, or 84.8%, primarily due to Värmevärden, which had a deferred tax recovery in 2012 based on a decrease in enacted tax rates. Glen Dhu and Fitzpatrick contributed $608. Interest income  increased by $ e 129, or 14.4%, due to higher average cash balances at corporate in 2013. Other gains and (losses)  increased by $916, or 242%, primarily due to a gain of $1,253 on the fair value of the financial instruments, partially offset by losses on the disposal of capital assets at Bristol Water. Foreign exchange gain (loss) increased by $ ) 533 due to the impact of the appreciation of the Swedish krona on the loan receivable. Interest expense  increased by $ e 2,811, or 25.4%, primarily due to $1,887 of additional interest for ReD project debt and convertible debentures, and  a $699 increase at Bristol Water as debt increased to fund capital expenditures. Income tax provision  was a net expense in both years. The 2013 current income tax expense of  n $1,744 was primarily due to $1,494 of Part XII.6 tax and reassessments for the shortfall of CRCE attributable to the flow-through shares originally issued by ReD. The 2012 current income tax recovery of $1,237 was due to Bristol Water's refund of prior years taxes paid. The deferred income tax expense in both years was primarily due to differences between accounting and income tax depreciation. •  Operating expenses increased by $3,222, primarily due to Bristol Water ($1,740) and the addition of ReD ($1,475). Bristol Water's increase was primarily due to foreign exchange appreciation. •  Administrative expenses , which included s $260 in costs for ReD, were consistent with the fourth quarter of2012. •  Project development costs increased by $1,818, primarily reflecting costs associated with the acquisition of ReD. In addition, Capstone's power development subsidiary, launched in December 2012, incurred $551 higher costs. 48 CAPSTONE INFRASTRUCTURE CORPORATION Three months ended Dec 31, 2013 Dec 31, 2012 Revenue 110,291 94,654 Operating expenses (54,885) (51,663) Administrative expenses (3,169) (3,037) Project development costs (2,097) (279) Equity accounted income (loss) 545 3,596 Interest income 1,022 893 Net pension interest income 515 767 Other gains and (losses), net 538 (378) Foreign exchange gain (loss) 1,209 676 Earnings before, interest, taxes, depreciation and amortization 53,969 45,229 Interest expense (13,858) (11,047) Depreciation of capital assets (14,571) (12,194) Amortization of intangible assets (2,878) (2,582) Income (loss) before income taxes 22,662 19,406 Income tax recovery (expense) Current (1,744) 1,237 Deferred (4,908) (3,712) Total income tax recovery (expense) (6,652) (2,475) Net income 16,010 16,931 Net income attributable to: Shareholders of Capstone 10,441 12,909 Non-controlling interest 5,569 4,022 16,010 16,931