MANAGEMENT’S DISCUSSION AND ANALYSIS Regulatory Outlook (1) Overall, Capstone expects these factors to contribute to higher Adjusted EBITDA for the utilities-water segment in 2014 compared with 2013. Bristol Water's capital program is aimed at improving and expanding Bristol Water's network of reservoirs, treatment facilities, water mains and pipes in order to continue providing high quality water to customers, reducing the amount of water lost to leakage, and positioning Bristol Water to effectively serve a growing population. Bristol Water will continue its work on PR14 to gain Ofwat approval for a business plan that includes future pricing for services and capital expenditure plans for AMP6. Bristol Water is expected to continue its strong operational performance, which will generate cash flow for dividends and reinvestment in the capital expenditure program. In 2014, Capstone expects Bristol Water's financial results to reflect: For the regulatory year ended March 31, 2013, Bristol Water achieved leakage levels of 42 MI/d, and had a SIM score of 86, which ranked fourth  overall out of 19 companies in the industry. For the nine months ended  December 31, 2013 of the current regulatory year, which excludes the seasonally high period for pipe bursts, Bristol Water had leakage levels of  40 MI/d and was ranked 12th after the first three SIM survey scores. Management continues to focus on achieving key regulatory output targets, including leakage of less than 50 million litres of water per day  (“Ml/d”) in 2013/2014, and is targeting a top quartile ranking in Ofwat’s Service Incentive Mechanism (“SIM”) customer service measure. Strong performance on the SIM, which is measured through customer  satisfaction surveys and quantitative data related to complaints, can result in an increased revenue allowance for Bristol Water in the next  regulatory period. The company submitted its five-year business plan for the 2014 price  review ("PR14") in early December. In 2014, Ofwat will respond to  Bristol Water's submission and approve the pricing Bristol Water is  permitted to apply to customers’ charges in the five-year AMP6 period  commencing in April 2015. Bristol Water is a regulated business subject to supervision by the  industry regulator, Ofwat.  (1) See page 20 for a description of various other material factors or assumptions underlying our outlook. 32 CAPSTONE INFRASTRUCTURE CORPORATION • Regulated capital value ("RCV") nominal growth between 5% and 6% as Bristol Water delivers its capital expenditures of approximately $123,000 (£70,000). Growth in RCV leads to future revenue growth as the system expands. In 2014, expenditures on capital projects will begin to taper off in the second half of the year as Bristol Water approaches its AMP5 approved expenditures. • Operating costs to grow between 4% and 5% primarily from inflation and price increases, thereby partially offsetting revenue growth; and • Revenue growth from a 6.4% approximate increase in the regulated water tariff commencing April 1 2014; Note: All data above refl ects fiscal years ended as at March 31, 2014  represents the estimated values at March 31, 2014. 0 10 20 30 40 50 60 2006 2007 2008 2009 2010 2011 2012 2013 Mega Litres per day (ML/day) $_{pp}$ Actual (Annual) $_{pp}$ Target (Annual) 150 175 200 225 250 275 300 325 350 375 400 425 2006 2007 2008 2009 2010 2011 2012 2013 2014 RC V (in millions of £ ’s) $_{pp}$ Actual Achieved RCV $_{pp}$ Regulator Deemed RCV GROWTH IN REGULATED CAPITAL VALUE Water Leakage Versus Target WATER LEAKAGE VERSUS TARGET