PHASE ONE (Volume 1 of 2)

Transcription

1 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Liberty Utilities (CalPeco Electric) LLC (U 933-E) for Authority to Among Other Things, Increase Its Authorized Revenues For Electric Service, Update Its Energy Cost Adjustment Clause Billing Factors, Establish Marginal Costs, Allocate Revenues, And Design Rates, as of January 1, Application No (Filed May 1, 2015) 2016 GENERAL RATE CASE APPLICATION OF LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (U 933-E) PHASE ONE (Volume 1 of 2) Application Appendices A to B Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety Chapter 2 Operations & Maintenance and Administrative & General Expenses Chapter 3 Energy Cost Adjustment Clause Revenues Chapter 4 Income Tax and Other Taxes Chapter 5 Depreciation Chapter 6 Rate Base Chapter 7 Sales, Customers, and Revenues Forecast Chapter 8 Fuel and Purchased Power Forecasts Chapter 9 Revenue Requirement FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016

2 Table of Contents Page 1 of 253

3 Volume 1 of 2 A GENERAL RATE CASE APPLICATION OF LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (U933-E) TABLE OF CONTENTS Table of Contents 1 Application 3 Appendices Appendix A: Liberty Utilities Financial Statements 21 Appendix B: Algonquin Proxy Statement 51 Exhibit 1 Summary and Results of Operations 121 Chapter 1 Overview & Safety (Michael R. Smart, P.E.) 122 Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) 137 Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) 151 Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) 161 Chapter 5 Depreciation (Kendrick E. Wittman) 173 Chapter 6 Rate Base (Kendrick E. Wittman) 178 Chapter 7 Sales, Customers, and Revenues Forecast (Alain R. Blunier) 193 Chapter 8 Fuel and Purchased Power Forecasts (Alain R. Blunier) 205 Chapter 9 Revenue Requirement (Alain R. Blunier) 212 Volume 2 of 2 Table of Contents 1 Exhibit 2 Cost of Capital/Return on Equity/Rate of Return 3 Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) 4 Chapter 2 Return on Equity (Dr. Roger A. Morin) 15 Exhibit 3 Electric Distribution Programs 127 Chapter 1 Vegetation Management (Jessica Drummond) 128 Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) 136 Chapter 3 Energy Efficiency Programs (Lori L. Williams) 155 Chapter 4 Solar Incentive Program (Lori L. Williams) 181 Exhibit 4 Witness Statements of Qualifications 195 ARB Witness Statement of Qualifications: Alain R. Blunier 196 JD Witness Statement of Qualifications: Jessica Drummond 200 MDL Witness Statement of Qualifications: Michael D. Long 203 RAM Witness Statement of Qualifications: Dr. Roger A. Morin 206 MRS Witness Statement of Qualifications: Michael R. Smart, P.E. 230 KEW Witness Statement of Qualifications: Kendrick E. Wittman 235 LLW Witness Statement of Qualifications: Lori L. Williams 238 Page 2 of 253

4 APPLICATION Page 3 of 253

5 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Liberty Utilities (CalPeco Electric) LLC (U 933-E) for Authority to Among Other Things, Increase Its Authorized Revenues For Electric Service, Update Its Energy Cost Adjustment Clause Billing Factors, Establish Marginal Costs, Allocate Revenues, And Design Rates, as of January 1, Application No (Filed May 1, 2015) 2016 GENERAL RATE CASE APPLICATION OF LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (U933-E) Steven F. Greenwald Vidhya Prabhakaran Davis Wright Tremaine LLP Suite Montgomery Street San Francisco, CA Tel. (415) Fax. (415) Attorneys for Liberty Utilities (CalPeco Electric) LLC May 1, 2015 DWT v Page 4 of 253

6 TABLE OF CONTENTS Page I. BACKGROUND... 3 A. Procedural History...3 B. Liberty Utilities Operations...3 C. Current and Proposed Generation and Supply Resources....4 II. SUMMARY OF APPLICATION... 6 III. RATE DESIGN AND COST ALLOCATION... 8 IV. PROCEDURAL REQUIREMENTS... 8 A. Statutory Authority...8 B. Rule 2.1(a) Applicant Information...8 C. Rule 2.1(b) -- Correspondence...8 D. Rule 2.1(c) Categorization, Need for Hearings, Schedule, and Issues to be Considered...9 E. Rule 2.2 Organization and Qualification to Transact Business...10 F. Rule 3.2(a)(1) Balance Sheet/Income Statement...10 G. Rule 3.2(a)(2) Presently Effective Rates...10 H. Rule 3.2(a)(3) Statement of Proposed Changes and Results of Operations at Proposed Rates...10 I. Rule 3.2(a)(4) Description of Property...10 J. Rule 3.2(a)(5) Summary of Earnings...10 K. Rule 3.2(a)(7) - Depreciation...10 L. Rule 3.2(a)(8) Proxy Statement...11 M. Rule 3.2(a)(10) Type of Rate Change Requested...11 N. Rules 3.2(b), 3.2(c), and 3.2(d) - Service of Notice...11 O. Index of the Exhibits and Appendices to this Application...12 V. CONCLUSION DWT v i Page 5 of 253

7 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Liberty Utilities (CalPeco Electric) LLC (U 933-E) for Authority to Among Other Things, Increase Its Authorized Revenues For Electric Service, Update Its Energy Cost Adjustment Clause Billing Factors, Establish Marginal Costs, Allocate Revenues, And Design Rates, as of January 1, Application No (Filed May 1, 2015) 2016 GENERAL RATE CASE APPLICATION OF LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (U933-E) Pursuant to Article 2 and Rule 3.2 of the California Public Utilities Commission s ( Commission ) Rules of Practice and Procedure ( Rules ), Liberty Utilities (CalPeco Electric) LLC (U 933-E) ( Liberty Utilities ) 1 respectfully submits the following Application. In this Application, Liberty Utilities requests an overall increase in rates totaling $ million annually or percent over present rates, effective January 1, This increase reflects the following components: (1) An authorized Return on Equity of 10.5 percent resulting in an Overall Rate of Return of 7.92 percent; (2) A debt/equity structure of 45 percent/55 percent; 1 In Decision ( D. ) , the Commission approved the transfer of the California electric distribution facilities and the Kings Beach Generation Facility formerly owned and operated by Sierra Pacific Power Company ( Sierra ) to California Pacific Electric Company, LLC ( CalPeco ). The transfer from Sierra to CalPeco became effective as of January 1, CalPeco notified the Commission of its formal change in name to Liberty Utilities (CalPeco Electric) LLC. See Advice Letter 28-E (July 15, 2013). For purposes of consistency, we will refer to the owner of the utility as Liberty Utilities throughout this Application, even during periods when CalPeco and Sierra was the name of the regulated utility providing electric service. DWT v Page 6 of 253

8 (3) An annual increase to Energy Cost Adjustment Clause ( ECAC ) revenues of $0.951 million; (4) An increase to its annual vegetation management program budget of $23,000; (5) An annual increase of $0.700 million to amortize the costs it recorded as of March 31, 2015 in its Catastrophic Emergency Memorandum Account ( CEMA ); (6) An annual increase of $0.130 million to implement its Energy Efficiency programs; and (7) An annual increase of $0.371 million to implement the Solar Incentive Program. Liberty Utilities has designed its proposals in this Application to enable it to continue to provide its customers an enhanced level of customer service, primarily through its emphasis on its local presence and community involvement, and correspondingly to maintain the capability to offer its customers electric system reliability and increased safety by investing in infrastructure, human resources, and vegetation management. In this Application, Liberty Utilities requests an increase in its general rates to continue its focus on safety and reliability and to recover the costs of (1) investment in and the costs associated with the ownership of infrastructure facilities and (2) increases in operations and maintenance ( O&M ) costs. DWT v Page 7 of 253

9 Liberty Utilities intends to file Phase II of this Application as of June 1, In Phase II, Liberty Utilities intends to propose a permanent curtailment rate schedule. 2 Phase II will also include Liberty Utilities proposed rate allocation and rate design. 3 I. BACKGROUND A. Procedural History In 2012, the Commission adopted an all-party settlement in Liberty Utilities 2013 General Rate Case. 4 The settlement did not impose any requirements for Liberty Utilities 2016 General Rate Case with one exception. Liberty Utilities was directed to provide a fixed charge option with its vegetation management rate design proposal. Liberty Utilities will offer the requisite fixed charge option in Phase II of this Application 5 B. Liberty Utilities Operations Liberty Utilities serves approximately 49,000 electric customers in California, in and around the Lake Tahoe Basin. Liberty Utilities California service territory differs greatly from the three major electric utilities in California. It generally encompasses the western portions of the Lake Tahoe basin. Liberty Utilities California customers are located in portions of Placer, El Dorado, Nevada, Sierra, Plumas, Mono, and Alpine Counties. Almost 80 percent of Liberty Utilities customers are located in the Lake Tahoe Basin. The biggest population center is the City of South Lake Tahoe. 2 The Commission approved Liberty Utilities interim Voluntary Curtailment Program for larger than 200 kw customers from November 2014 through December 31, See Resolution E-4694 (Dec. 4, 2014). 3 On April 30, 2015, Liberty Utilities submitted a request for extension of time to comply with Ordering Paragraph 10 of D and be allowed to file its greenhouse gas forecast revenue and reconciliation request ( GHG Revenue and Reconciliation Request ) on or before August 1, 2015 rather than with this Application. If the Commission is not able to grant Liberty Utilities request for an extension to file its GHG Revenue and Reconciliation Request as of August 1, 2015, Liberty Utilities has requested to be allowed to file its GHG Revenue and Reconciliation Request as a supplement to this Application, most likely as part of its Phase II filing. 4 D , mimeo at 9 (Ordering Paragraph 1). 5 D , mimeo at 9-10 (Ordering Paragraph 2). DWT v Page 8 of 253

10 The Liberty Utilities service territory extends from Portola in the north to Markleeville and Topaz Lake in the south. The terrain in Liberty Utilities California service territory is mountainous and heavily forested, with elevations ranging from 9,050 feet in Squaw Valley to just under 5,000 feet at Portola. Most of Liberty Utilities customers are located at elevations greater than 6,000 feet. The electric load within the Liberty Utilities service territory reflects the economic activities in the area. The region has little manufacturing or heavy industry. The economy of the Tahoe Basin is dominated by tourism with the major businesses being hotels, motels, and ski resorts. Approximately half of the electricity Liberty Utilities delivers is to residential customers and approximately 60 percent of residential accounts are second-family homes or rentals. Electric demand peaks for Liberty Utilities in the winter period, particularly during Christmas week when tourism is highest. Results of a customer satisfaction survey conducted in October 2014 confirms that Liberty Utilities quality of service, customer focus, and continued strengthening of its distribution infrastructure is having a positive impact on our customers appreciation of our commitment and corresponding capabilities to provide a safe and reliable product. This most recent survey reports that, 83 percent of Liberty Utilities customers are somewhat satisfied or very satisfied with Liberty Utilities overall customer service. Only six percent responded that they were somewhat dissatisfied or not satisfied by Liberty Utilities overall customer service. C. Current and Proposed Generation and Supply Resources. Liberty Utilities service territory is not geographically or operationally a part of the California Independent System Operator balancing authority. Identical to the circumstances existing when NV Energy operated the California portion of its then multi-state service territory, DWT v Page 9 of 253

11 Liberty Utilities is located within the NV Energy Balancing Authority. As a consequence of its location within the NV Energy Balancing Authority, essentially all the energy delivered into the Liberty Utilities service territory is from supply sources to the East. Liberty Utilities California operations currently include only electric distribution facilities and the Kings Beach Generation Facility ( Kings Beach ). Kings Beach currently represents Liberty Utilities only generation asset. It is a 12 MW diesel facility whose usage is restricted to local area emergency backup. Liberty Utilities procures almost all of the remainder of its power through a full requirements power purchase agreement with Sierra Pacific Power Company dba NV Energy ( Existing NV Energy Services Agreement ). 6 The Existing NV Energy Services terminates as of December 31, On April 24, 2015, Liberty Utilities filed Application ( 2016 NV Energy Services Agreement Application ) requesting Commission approval of the new full services agreement it executed with NV Energy on April 21, 2014 ( 2016 NV Energy Services Agreement ). The term of the 2016 NV Energy Services Agreement is intended to commence January 1, 2016 (i.e., immediately upon the expiration of the Existing NV Energy Services Agreement). In the 2016 NV Energy Services Agreement Application, Liberty Utilities requests that the Commission: (i) approve Liberty Utilities execution of and performance under the 2016 NV Energy Services Agreement; and (ii) authorize it rate recovery for the costs Liberty Utilities will incur pursuant to the 2016 NV Energy Services Agreement. As will be explained, for purposes of this Application, Liberty Utilities bases its forecasts of costs for the 2016 Test Year on the 6 The Commission authorized Liberty Utilities to execute the Existing NV Energy Services Agreement and recover in rates its payments to NV Energy in D Application of Liberty Utilities (CalPeco Electric) LLC (U 933 E) for Authority to Execute 2016 NV Energy Services Agreement and for Rate Recovery of the Costs It Will Incur Pursuant to the Agreement, and Urging Issuance of Expedited Decision Granting Such Relief. DWT v Page 10 of 253

12 assumption that the Commission will timely approve and grant the ratemaking authority the 2016 NV Energy Services Agreement Application requests. 8 On April 17, 2015, Liberty Utilities filed Application seeking Commission approval of its proposed acquisition, ownership and operation of the Luning and the Minden Solar Project ( Solar Projects ) and associated ratemaking ( Solar Projects Application ). As explained in the Solar Projects Application, under Commission ratemaking practices and protocols, Liberty Utilities should in this Application be requesting rate recovery for at least certain of the costs it will incur to acquire, own and operate the Solar Projects. However, in the Solar Projects Application, Liberty Utilities is requesting that the Commission allow it to defer any rate recovery associated with the Solar Projects until January 1, Thus for purposes of this Application, Liberty Utilities assumes that the Commission will grant its request and thus it is requesting no rate recovery associated with the Solar Projects in this proceeding. II. SUMMARY OF APPLICATION Liberty Utilities is committed to providing a high quality of customer service, reliability, and safety and at a cost-efficient cost. The location, climate and terrain of our California service territory pose special challenges and sometimes require relatively greater expenditures to achieve these objectives. 8 Liberty Utilities Witness Blunier in Exhibit 1, Chapter 3, make proposals to address the ratemaking implications in the event that the Commission is not able to timely approve the 2016 NV Energy Services Agreement and it does not become effective as of the January 1, 2016 date this Application assumes. 9 Application of Liberty Utilities (CalPeco Electric) LLC (U 933 E) for the Issuance of a Certificate of Public Convenience and Necessity to Acquire, Own, and Operate the Luning and Minden Solar Projects, Authorize Ratemaking Associated with the Solar Projects Capital Investment and Operating Expenses, and Issuance of Expedited Decision Granting Such Relief. 10 Liberty Utilities is requesting that the Commission authorize it rate recovery for the costs it will incur to acquire, own and operate the Solar Projects commencing as of January 1, 2017 and that the Commission authorize it to seek such rate recovery in its Post-Test Year Adjustment Mechanism filing that Liberty Utilities shall file in October See Solar Projects Application, at 5, 25-26, 42. DWT v Page 11 of 253

13 This Application requests an overall increase to Liberty Utilities current effective rates of $ million annually or percent with an effective date of January 1, Included in the overall annual increase are the following annual incremental increases: $0.951 million in ECAC revenues as described in Exhibit 1, Chapter 3, $23,000 for its vegetation management program as described in Exhibit 3, Chapter 1, $0.700 million to amortize costs recorded in the CEMA as described in Exhibit 3, Chapter 2, $0.130 million for Energy Efficiency programs, as described in Exhibit 3, Chapter 3, and, $0.371 million for the Solar Initiative Program as described in Exhibit 3, Chapter 4. The main contributors to the increase to Liberty Utilities current effective rates are: Cost recovery for the investments Liberty Utilities is making to install new and upgraded distribution facilities and other infrastructure; Execution in 2014 of a new three-year collective bargaining agreement between Liberty Utilities and International Brotherhood of Electric Workers ( IBEW ) Local 1245 that offers the bargaining unit employees an annual increase of 2.5 percent and a one-time incremental wage increase of 4 percent; The intended hiring of seven employees; A request to increase the Return on Equity to 10.5 percent resulting an Overall Rate of Return of 7.92 percent; and, A request to change the debt/equity structure from the current 48.5 percent/51.5 percent to a debt/equity of 45 percent/55 percent. The request in this Application to increase general rates is based on a forecasted 2016 Test Year. It reflects proposed increases in operating expenses and plant additions. The $ DWT v Page 12 of 253

14 million requested increase in effective rates can be separated into its generation and distribution components as follows: Generation $ (4.107) million Distribution $ million III. RATE DESIGN AND COST ALLOCATION Liberty Utilities will make its proposals for Electric Marginal Costs, Revenue Allocation, and Rate Design in Phase II of this proceeding. It intends to file Phase II on June 1, IV. PROCEDURAL REQUIREMENTS A. Statutory Authority Liberty Utilities files this Application pursuant to Sections 451, 454, 728, 729, 740.4, 795, and 818 of the Public Utilities Code, the Rules, and prior decisions, orders, and resolutions of this Commission. B. Rule 2.1(a) Applicant Information Liberty Utilities is a California limited liability company. It has its principal place of business at 933 Eloise Avenue, South Lake Tahoe, CA C. Rule 2.1(b) -- Correspondence All correspondence and communications with respect to this Application should be addressed or directed as follows: Steven F. Greenwald Vidhya Prabhakaran Davis Wright Tremaine LLP 505 Montgomery Street Suite 800 San Francisco, CA Telephone: (415) Facsimile: (415) stevegreenwald@dwt.com vidhyaprabhakaran@dwt.com DWT v Ken Wittman Manager of Rates & Regulatory Affairs Liberty Utilities (CalPeco Electric) LLC 933 Eloise Avenue South Lake Tahoe, CA Telephone: ken.wittman@libertyutilities.com Page 13 of 253

15 D. Rule 2.1(c) Categorization, Need for Hearings, Schedule, and Issues to be Considered Liberty Utilities proposes that this proceeding be categorized as ratesetting pursuant to Rule 1.3(e). Liberty Utilities acknowledges that hearings may be necessary. Liberty Utilities proposes the following procedural schedule: Application Filed May 1, 2015 Applicants Phase II Testimony Filed Jun. 1, 2015 Protest/Responses to Application Due Jun. 5, 2015 Applicants Reply to Protest/Responses Jun. 15, 2015 Prehearing Conference Jul. 1, 2015 Staff and Intervenor Testimony served Aug. 3, 2015 All Rebuttal Testimony Served Aug. 17, 2015 Hearings, if necessary Aug. 31, 2015 Opening Briefs filed Sep. 14, 2015 Reply Briefs filed Sep. 28, 2015 Proposed Decision issued Nov. 13, 2015 Final Commission Decision issued Dec. 17, 2015 Final Rates Effective Jan 1, 2016 Liberty Utilities believes that the following issues should be considered as part of this proceeding: 1) Is Liberty Utilities request to increase its authorized revenues for electric service, as described above, reasonable? 2) Is Liberty Utilities request to allocate revenues and design rates reasonable? DWT v Page 14 of 253

16 E. Rule 2.2 Organization and Qualification to Transact Business A copy of the Articles of Organization of Liberty Utilities has previously been filed with the Commission as part of Application , Exhibit A. A Certificate of Status for Liberty Utilities issued by the California Secretary of State has previously been filed with the Commission as part of Application , Exhibit A. F. Rule 3.2(a)(1) Balance Sheet/Income Statement Financial statements for Liberty Utilities are attached hereto as Appendix A. G. Rule 3.2(a)(2) Presently Effective Rates Liberty Utilities current rates and charges for electric service are contained in its respective electric tariffs and schedules on file with the Commission and available from Liberty Utilities website at H. Rule 3.2(a)(3) Statement of Proposed Changes and Results of Operations at Proposed Rates The proposed changes and the Results of Operations at Proposed Rates will be provided as part of Phase II. I. Rule 3.2(a)(4) Description of Property An exact description of Liberty Utilities property and equipment is included in Application , Exhibit 8 along with a statement of the original cost thereof, together with a statement of the depreciation reserve applicable thereto. J. Rule 3.2(a)(5) Summary of Earnings A Rate of Return summary is included in Exhibit 2, Chapter 1. K. Rule 3.2(a)(7) - Depreciation A statement of the method of commuting the depreciation deduction for federal income tax purposes is included in Exhibit 1, Chapter 5. DWT v Page 15 of 253

17 L. Rule 3.2(a)(8) Proxy Statement A copy of Algonquin Power & Utilities Corp. s ( Algonquin ) most recent proxy statement, dated May 14, 2014 as sent to shareholders, is attached to this Application as Appendix B. M. Rule 3.2(a)(10) Type of Rate Change Requested This proposed change reflects changes in Liberty Utilities base revenues to reflect the costs Liberty Utilities incurs to own, operate, and maintain its electric plant and to enable Liberty Utilities to provide service to its customers. The proposed change also reflects and passes through to customers the costs to Liberty Utilities to recover, but not over-recover, projected fuel and purchased power costs. N. Rules 3.2(b), 3.2(c), and 3.2(d) - Service of Notice Cities and counties that would be affected by the rate changes resulting from this Application include the cities and towns of South Lake Tahoe, Portola, Kings Beach and Markleeville. Counties affected by the rate changes this Application proposes are Nevada, Placer, Sierra, Plumas, Mono, Alpine and El Dorado. Pursuant to Rule 3.2(b), Liberty Utilities will mail a notice of the filing of this Application and a description, in general terms, of the changes proposed in rates, to each of these governmental entities and the State of California Attorney General and Department of General Services within twenty (20) days following the filing of this Application. Pursuant to Rule 3.2(c), within twenty (20) days following the filing of this Application, Liberty Utilities will publish a notice in a newspaper of general circulation in each county in which the changes proposed here will become effective. This notice will state that a copy of this Application and related attachments may be examined at the Commission's offices and such offices of Liberty Utilities as are specified in the notice. Pursuant to Rule 3.2(d), Liberty DWT v Page 16 of 253

18 Utilities will include a similar notice in the regular bills mailed to all customers within forty-five (45) days of the filing date of this Application. A list of government officials and other potential interested parties to whom either the notice of this Application or this Application will be sent is included in the attached Certificate of Service. O. Index of the Exhibits and Appendices to this Application Liberty Utilities' submission in support of this Application includes the following, which are incorporated herein by reference: EXHIBIT LIST Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) Chapter 5 Depreciation (Kendrick E. Wittman) Chapter 6 Rate Base (Kendrick E. Wittman) Chapter 7 Sales, Customers, and Revenues Forecast (Alain R. Blunier) Chapter 8 Fuel and Purchased Power Forecasts (Alain R. Blunier) Chapter 9 Revenue Requirement (Alain R. Blunier) Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) Chapter 2 Return on Equity (Dr. Roger A. Morin) DWT v Page 17 of 253

19 Exhibit 3 Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Chapter 3 Energy Efficiency Programs (Lori L. Williams) Chapter 4 Solar Incentive Program (Lori L. Williams) Exhibit 4 Witness Statements of Qualifications ARB Witness Statement of Qualifications: Alain R. Blunier JD Witness Statement of Qualifications: Jessica Drummond MDL Witness Statement of Qualifications: Michael D. Long RAM Witness Statement of Qualifications: Dr. Roger A. Morin MRS Witness Statement of Qualifications: Michael R. Smart, P.E. KEW Witness Statement of Qualifications: Kendrick E. Wittman LLW Witness Statement of Qualifications: Lori L. Williams APPENDICES Appendix A: Liberty Utilities Financial Statements Appendix B: Algonquin Proxy Statement /// /// /// DWT v Page 18 of 253

20 V. CONCLUSION Liberty Utilities respectfully requests that the Commission issue a decision on this Application as expeditiously as possible in which it: 1) Grant Liberty Utilities request to increase its authorized revenues for electric service; 2) Grant Liberty Utilities request to allocate revenues and design rates; and 3) Grant Liberty Utilities such other and further relief requested, and as the Commission finds just and reasonable. Respectfully submitted, May 1, 2015 By: /s/ DAVIS WRIGHT TREMAINE LLP Steven F. Greenwald Vidhya Prabhakaran Davis Wright Tremaine LLP Suite Montgomery Street San Francisco, CA Tel. (415) Fax. (415) stevegreenwald@dwt.com vidhyaprabhakaran@dwt.com Attorneys for Liberty Utilities (CalPeco Electric) LLC DWT v Page 19 of 253

21 ! " # $ % &!! $ ' ( ( ) * * + (! " # $ % &!! $, -. (, * * /, ( (, % 0, 1 2 ) * $ ! " # $ % &!! $ Page 20 of 253

22 Appendix A Liberty Utilities Financial Statements Page 21 of 253

23 Financial Statements of LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (formerly California Pacific Electric Company LLC) For the years ended December 31, 2014 and 2013 Page 22 of 253

24 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Algonquin Power & Utilities Corp. We have audited the accompanying financial statements of Liberty Utilities (CalPeco Electric) LLC, which comprise the balance sheets as at December 31, 2014 and 2013, and the statements of comprehensive income, changes in member s interest and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United States 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 financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Page 23 of 253

25 - 2 - 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, the financial statements present fairly, in all material respects, the financial position of Liberty Utilities (CalPeco Electric) LLC as at December 31, 2014 and 2013, and the results of its operations and its cash flows for the years then ended in conformity with United States generally accepted accounting principles. Toronto, Canada April 24, 2015 Page 24 of 253

26 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Balance Sheets (in thousands of U.S. dollars) December 31, December 31, ASSETS Utility plant Utility plant in service $ 177,568 $ 168,182 Less accumulated depreciation (12,178) (8,938) Total 165, ,244 Construction work-in-progress 30,952 16,274 Utility plant - net (note 4) 196, ,518 Goodwill 10,381 10,381 Regulatory assets (note 6) 3,188 3,049 Deferred financing costs Other assets Current assets Cash and cash equivalents Supplies and consumables inventory 4,381 3,728 Accounts receivable, net (note 3) 11,119 12,169 Prepaid expenses and other Current portion of regulatory assets (note 6) 5,739 1,146 21,619 17,672 LIABILITIES AND MEMBER'S INTEREST $ 233,242 $ 207,530 Member's interest Member's capital (note 10) $ 66,077 $ 66,077 Retained earnings 26,287 15,751 Accumulated other comprehensive loss (825) (598) Total member's interest 91,539 81,230 Long-term liabilities (note 8) 70,000 70,000 Regulatory liabilities (note 6) 17,625 20,493 Pension obligation (note 9) 1,905 1,711 Advances in aid of construction (note 5) 14,753 14,767 Current liabilities Accounts payable and accrued liabilities 10,118 8,157 Current portion of customer deposits Current portion of regulatory liabilities (note 6) 348 5,808 Due to related parties (note 7) 26,283 4,641 37,420 19,329 Commitments (note 11) See accompanying notes to financial statements $ 233,242 $ 207,530 1 Page 25 of 253

27 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Statement of Changes in Member's Interest (in thousands of U.S. dollars ) Member's capital Accumulated earnings Accumulated other comprehensive loss Total Balance, December 31, 2012 $ 66,077 $ 4,588 $ (738) $ 69,927 Net income - 11,163-11,163 Other comprehensive income Balance, December 31, 2013 $ 66,077 $ 15,751 $ (598) $ 81,230 Net income - 10,536-10,536 Other comprehensive income - - (227) (227) Balance, December 31, 2014 $ 66,077 $ 26,287 $ (825) $ 91,539 See accompanying notes to financial statements 3 Page 26 of 253

28 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Statements of Comprehensive Income (in thousands of U.S. dollars) Year ended December 31, Revenue: Residential $ 37,204 $ 38,723 Commercial 33,397 33,979 Other 2,629 2,781 73,230 75,483 Expenses: Energy purchased 36,427 38,592 Operating costs 15,671 14,770 Taxes other than income taxes 2,899 2,810 Depreciation of utility plant 5,007 4,648 Other amortization ,231 61,047 Operating income 12,999 14,436 Interest expense 2,995 3,519 Other income (566) (234) 2,429 3,285 Earnings before income taxes 10,570 11,151 Income tax expense Current 34 (12) Net income 10,536 11,163 Other comprehensive income (loss): Change in unrealized pension and other post-retirement expense, net of tax of nil and nil, respectively (note 9) (227) 140 Comprehensive income $ 10,309 $ 11,303 See accompanying notes to financial statements 2 Page 27 of 253

29 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Statements of Cash Flows (in thousands of U.S. dollars) Year ended December 31, Cash provided by (used in): Operating Activities: Net income $ 10,536 $ 11,163 Items not affecting cash: Depreciation of utility plant 5,007 4,648 Cost of equity funds used for construction purposes (561) (228) Other amortization Net change in pension obligation (210) 187 Changes in other operating items (note 12) 6,224 (5,179) 21,322 10,916 Financing Activities: Decrease in customer deposits (52) (39) Increase in advances in aid of construction 770 1,664 Refunds of advances in aid of construction (449) (602) Increase in other assets (981) 36 (712) 1,059 Investing Activities: Additions to utility plant (20,714) (12,160) (20,714) (12,160) Decrease in cash and cash equivalents (104) (185) Cash and cash equivalents, beginning of the year Cash and cash equivalents, end of the year $ 64 $ 168 Supplemental disclosure of cash flow information: Cash paid during the year for interest expense $ 3,733 $ 3,733 Non-cash transactions: Utility plant acquisitions in accruals $ 3,342 $ 545 See accompanying notes to financial statements 4 Page 28 of 253

30 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) Liberty Utilities (CalPeco Electric) LLC (the Company ), formerly known as California Pacific Electric Company LLC, is a limited liability company organized on April 14, 2009 under the laws of California. The Company is in the business of providing regulated electric distribution service to approximately 47,000 customers in the Lake Tahoe region of California. The Company is 100% owned by Liberty Utilities Co. ( Liberty Utilities ). 1. Significant accounting policies a) Basis of preparation: The financial statements and accompanying notes have been prepared in accordance with generally accepted accounting principles in the United States ( U.S. GAAP ) and are presented in U.S. dollars. The Company has historically experienced higher demand for electricity during the winter rather than during the summer period since the utility serves a number of ski hills and resorts in its service territory. However, starting in 2013, as a result of the decoupling mechanism approved by the regulator (note 6), the Company s earnings are no longer affected by differences in delivery volumes from levels assumed when rates were approved. b) Accounting for rate regulated operations: The Company is subject to rate regulation overseen by the California Public Utilities Commission ( CPUC ). The CPUC provides the final determination of the rates charged to customers. The Company s activities are accounted for under the principles of U.S. Financial Accounting Standards Board Accounting Standard Codification Topic 980, Regulated Operations ( ASC 980 ). Under ASC 980, regulatory assets and liabilities that would not be recorded under U.S. GAAP for non-regulated entities are recorded to the extent that they represent probable future revenue or expenses associated with certain charges or credits that will be recovered from or refunded to customers through the rate making process. Included in note 6, Regulatory matters, are details of regulatory assets and liabilities, and their current regulatory treatment. In the event the Company determines that its net regulatory assets are not probable of recovery, it would no longer apply the principles of the current accounting guidance for rate-regulated enterprises and would be required to record an after-tax, non-cash charge (credit) against income for any remaining regulatory assets (liabilities). The impact could be material to the Company s reported financial condition and results of operations. 5 Page 29 of 253

31 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 1. Significant accounting policies (continued) b) Accounting for rate regulated operations (continued) The Company s accounts are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission ( FERC ). c) Cash and equivalents: Cash and cash equivalents include all highly liquid instruments with an original maturity of three months or less. d) Accounts receivable: Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses adjusted to take into account current market conditions and customers financial condition, the amount of receivables in dispute, and the receivables aging and current payment patterns. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company does not have any off-balance sheet credit exposure related to its customers. e) Supplies and consumables inventory: Supplies and consumables inventory (other than capital spares and rotatable spares, which are included in property, plant, and equipment) are charged to inventory when purchased and then capitalized to plant or expensed, as appropriate, when installed, used or become obsolete. These items are stated at the lower of cost and replacement cost. f) Utility plant: Utility plant amounts are recorded at cost. The costs of acquiring or constructing utility plant include the following: materials, labor, contractor and professional services, construction overhead directly attributable to the capital project (where applicable), and allowance for equity funds used during construction ( AFUDC ). 6 Page 30 of 253

32 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 1. Significant accounting policies (continued) f) Utility plant (continued) AFUDC represents the cost of borrowed funds (allowance for borrowed funds used during construction) and a return on other funds (allowance for equity funds used during construction). Under ASC 980, an allowance for funds used during construction projects that are included in rate base is capitalized. This allowance is designed to enable a utility to capitalize financing costs during periods of construction of property subject to rate regulation. The AFUDC capitalized that relates to borrowed funds is recorded as a reduction to interest expense on the statements of comprehensive income. The AFUDC capitalized that relates to equity funds is recorded as other income on the statements of comprehensive income AFUDC capitalized on regulated property: Allowance for borrowed funds $ 842 $ 329 Allowance for equity funds Total $ 1,403 $ 557 Improvements that increase or prolong the service life or capacity of an asset are capitalized. Maintenance and repair costs are expensed as incurred. The Company s depreciation is based on the estimated useful lives of the depreciable assets in each category and is determined using the straight-line method. The range of estimated useful lives and the weighted average useful lives are summarized below: Range of useful lives Weighted average useful lives Land and land rights Plant - electricity Equipment, office furniture and improvements Page 31 of 253

33 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 1. Significant accounting policies (continued) f) Utility plant (continued) Contributions in aid of construction ( CIAC ) represent amounts contributed by customers and governments and developers for the cost of utility plant. It also includes amounts initially recorded as advances in aid of construction (note 5) but where the advance repayment period has expired. These contributions are recorded as a reduction in the cost of utility plant and are amortized at the rate of the related asset as a reduction to depreciation expense. In accordance with accounting policies approved by FERC, when the depreciable utility plant of the Company is replaced or retired, the original cost plus any removal costs incurred (net of salvage) are charged to accumulated depreciation with no gain or loss reflected in results of operations. Gains and losses will be charged to results of operations in the future through adjustments to depreciation expense. g) Goodwill: Goodwill represents the excess of the purchase price of an acquired business over the fair value of the net assets acquired. Goodwill is not included in the rate base on which regulated utilities are allowed to earn a return and is not amortized. During the fourth quarter of each year, and when indicators of impairment are present, the Company assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit to which goodwill is attributed is less than its carrying amount. If it is more likely than not that a reporting unit s fair value is less than its carrying amount or if a quantitative assessment is elected, the Company calculates the fair value of the reporting unit. The carrying amount of the reporting unit s goodwill is considered not recoverable if the carrying amount of the reporting unit as a whole exceeds the reporting unit s fair value. An impairment charge is recorded for any excess of the carrying value of the goodwill over the implied fair value. Goodwill is tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. h) Impairment of long-lived assets: The Company reviews utility plant for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable. Recoverability is measured by comparing the carrying amount of an asset to undiscounted expected future cash flows. If the carrying amount exceeds the recoverable amount, the asset is written down to its fair value. 8 Page 32 of 253

34 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 1. Significant accounting policies (continued) i) Customer deposits: Customer deposits result from the Company s obligation by its regulator to collect a deposit from its customers of its facility under certain circumstances when services are connected. The deposits are refundable as allowed under the regulatory agreement. The deposits bear monthly interest and are applied to the customer account after 12 months if the customer is found to be creditworthy. j) Pension and other post-employment plans: The Company has established a defined benefit pension plan, and an other postemployment benefit ( OPEB ) plan for its employees. The Company recognizes the funded status of its defined benefit pension plans and other post-employment benefit plans on the balance sheets. The Company s expense and liabilities are determined by actuarial valuations, using assumptions that are evaluated annually as at December 31, including discount rates, mortality, assumed rates of return, compensation increases, turnover rates and healthcare cost trend rates. The impact of modifications to those assumptions is recorded as actuarial gains and losses in accumulated other comprehensive income ( AOCI ) and amortized to net periodic cost over future periods using the corridor method. The costs of the Company s pension for employees are expensed over the periods during which employees render service and are recognized as part of operating costs in the statements of comprehensive income. k) Recognition of revenue: Revenue related to utility electricity sales and distribution is recorded based on metered electricity consumptions by customers, which occurs on a systematic basis throughout a month, rather than when the electricity is delivered. At the end of each month, the electricity delivered to the customers from the date of their last meter read to the end of the month is estimated and the corresponding unbilled revenue is calculated. These estimates of unbilled revenue are based on the ratio of billable days versus unbilled days, amount of electricity procured during that month, historical customer class usage patterns, line loss and current tariffs. Beginning in 2013, in accordance with the revenue decoupling mechanism approved by its regulator, the Company is required to charge approved annual delivery revenue evenly over its fiscal year. As a result, the difference between delivery revenue calculated based on metered consumption and approved delivery revenue is recorded as a regulatory asset or liability to reflect future recovery or refund, respectively, from customers (note 6). 9 Page 33 of 253

35 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 1. Significant accounting policies (continued) l) Income taxes: The Company is a limited liability company and is a disregarded entity for income tax purposes. Accordingly, it is not subject to federal income taxes or state income taxes. The tax on the Company s net income is borne by the member through the allocation of taxable income. Net income for financial statement purposes may differ significantly from taxable income of the member because of differences between the tax basis and financial reporting basis of assets and liabilities and the taxable income allocation requirements under the operating agreement. The aggregate difference in the basis of the net assets for financial and tax reporting purposes cannot be readily determined because it is based on the information regarding the member s tax attributes. m) Financial instruments: Accounts receivable are measured at amortized cost. Long-term liabilities are measured at amortized cost using the effective interest method, adjusted for the amortization or accretion of premiums or discounts. Transaction costs that are directly attributable to the issuance of financial liabilities are recorded in deferred financing costs. Deferred financing costs, premiums and discounts on long-term debt are amortized on a straight-line basis over the term of the financial liability as required by the regulator. The Company enters into Power Purchase Agreements ( PPA ) for load serving requirements. These contracts meet the exemption for normal purchase and normal sales and as such, are not required to be recorded at fair value as derivatives and are accounted for on an accrual basis. Counterparties are evaluated on an ongoing basis for nonperformance risk to ensure that it does not impact the conclusion with respect to this exemption. n) Fair value measurements: The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels: Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. 10 Page 34 of 253

36 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 1. Significant accounting policies (continued) n) Fair value measurements (continued) Level 2 Inputs: Other than quoted prices included in Level 1, inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date. o) Commitments and contingencies: Liabilities for loss contingencies arising from environmental remediation, claims, assessments, litigation, fines, and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Legal costs incurred in connection with loss contingencies are expensed as incurred. p) Related party transactions: Related party transactions have been recorded at the exchange amounts agreed to by the parties to the transactions. q) Use of estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these financial statements and the reported amounts of revenue and expenses during the year. Actual results could differ from those estimates. During the years presented, management has made a number of estimates and valuation assumptions, including the useful lives and recoverability of utility plant, the annual impairment testing of goodwill, timing effect of regulated assets and liabilities, pension and OPEB obligations. These estimates and valuation assumptions are based on present conditions and management s planned course of action, as well as assumptions about future business and economic conditions. Should the underlying valuation assumptions and estimates change, the recorded amounts could change by a material amount. 11 Page 35 of 253

37 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 2. Recently issued accounting pronouncements a) Recently adopted accounting pronouncements: The Financial Accounting Standards Board ( FASB ) issued ASU , Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This newly issued accounting standard requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred income tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except in some specific situations. The adoption of this standard did not have an impact on the Company s financial position or results of operations. The FASB issued ASU , Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date. This newly issued accounting standard provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this guidance is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. Examples of obligations within the scope of this update include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The adoption of this standard did not have an impact on the Company s financial position or results of operations. b) Recent accounting pronouncements not yet adopted: The FASB issued ASU , Income Statement: Extraordinary and Unusual Items (Subtopic ), to simplify income statement classification by removing the concept of extraordinary items from U.S. GAAP. As a result, items that are both unusual and infrequent will no longer be separately reported net of tax after continuing operations. ASU may be applied prospectively or retrospectively to all prior periods presented in the financial statements. The standard is effective for periods beginning after December 15, Early adoption is permitted, but only as of the beginning of the fiscal year of adoption. The adoption of this standard is not expected to have an impact on the Company's results of operations. The FASB and the International Accounting Standards Board have jointly issued a new revenue recognition standard codified in U.S. GAAP as ASU , Revenue from Contracts with Customers (Topic 606). This newly issued accounting standard provides accounting guidance for all revenue arising from contracts with customers and affects all entities that enter into contracts to provide goods or services to their customers unless the contracts are in the scope of other U.S. GAAP requirements, such as the leasing literature. ASU is required to be applied for fiscal years and interim 12 Page 36 of 253

38 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 2. Recently issued accounting pronouncements (continued) b) Recent accounting pronouncements not yet adopted (continued) 3. Accounts receivable periods beginning after December 15, 2016 using either a full retrospective approach for all periods presented in the period of adoption or a modified retrospective approach. The Company is currently assessing the impact the adoption of this standard might have on its financial position or results of operations. The FASB issued ASU , Presentation of Financial Statements Going Concern. This new standard provides that in connection with preparing financial statements for each annual and interim reporting period, an entity s management should evaluate whether there are 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. ASU will be effective for the annual reporting period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. The adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. The FASB issued ASU , Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This newly issued accounting standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU is required to be applied prospectively for fiscal years beginning after December 15, 2014 and interim periods beginning after December 15, The adoption of this standard is not expected to have an impact on the Company s financial position or results of operations. Accounts receivable as of December 31, 2014 include unbilled revenue of $6,305 (December 31, $7,033). Accounts receivable as of December 31, 2014 is presented net of allowance for doubtful accounts of $157 (December 31, $188). 13 Page 37 of 253

39 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 4. Utility plant Utility plant of the Company consists of electricity distribution assets used to distribute electricity within a specific geographic service territory to supply end users with electricity. These assets include poles, towers and fixtures, low-voltage wires, transformers, overhead and underground conductors, street lighting, meters, metering equipment and other related equipment Land and land rights $ 3,835 $ 3,835 Plant - electricity 168, ,610 Equipment, office furniture and improvements 5,170 4, , ,182 Accumulated depreciation (12,178) (8,938) 165, ,244 Construction work-in-progress 30,952 16,274 Net utility plant $ 196,342 $ 175, Advances in aid of construction The Company has various agreements with real estate development companies (the developers ) conducting business within the Company s service territories, whereby funds are advanced to the Company by the developers to assist with funding some or all of the costs of the development. These amounts are recorded as advances in aid of construction ( AIAC ). In many instances, AIAC can be subject to refund but the refund is non-interest bearing. Refunds of AIAC are made over periods generally ranging from 10 to 20 years. Advances not refunded within the prescribed period are usually not required to be repaid. After the prescribed period has lapsed, any remaining unpaid balance is transferred to CIAC and recorded as an offsetting amount to the cost of utility plant. In 2014, $335 was transferred from AIAC to CIAC ( $110). 6. Regulatory matters The Company is subject to rate regulation by the CPUC, and the FERC in some instances. The CPUC has jurisdiction with respect to rate, service, accounting procedures, issuance of securities, acquisitions and other matters. The Company operates under cost-of-service regulation as administered by CPUC. The Company uses a test year in the establishment of its rates and pursuant to this method, the determination of the rate of return on approved rate base and deemed capital structure, together with all reasonable and prudent costs, establishes the revenue requirement upon which the Company s customer rates are determined. 14 Page 38 of 253

40 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 6. Regulatory matters (continued) The Company is accounted for under the principles of ASC 980. Under ASC 980, regulatory assets and liabilities that would not be recorded under U.S. GAAP for non-regulated entities are recorded to the extent that they represent probable future revenues or expenses associated with certain charges or credits that will be recovered from or refunded to customers through the rate-setting process. The Company is required to file a rate case with its regulator on a regular three year cycle. Rate cases seek to ensure that the Company has the opportunity to recover its operating costs and earn a fair and reasonable return on its capital investment as allowed by the regulatory authority under which the Company operates. On February 17, 2012, the Company filed a general rate case and on November 29, 2012, approval of the All Parties General Rate Case Settlement ( Settlement ) was received from the CPUC and was effective January 1, As an element of the decision, a revenue decoupling mechanism and a vegetation management memorandum account was agreed upon. The revenue decoupling mechanism will decouple base revenue from fluctuations caused by weather and economic factors. The vegetation management memorandum account allows for the tracking and pass through of vegetation management expenses, one of the largest expenses of the utility. Post Test Year Adjustment Mechanism ( PTAM ) The PTAM allows the Company to update its rates annually by a cost inflation index. In addition, rates are allowed to be updated to recover the return on investment and associated depreciation of major capital projects. Renewables Portfolio Standard The Company is required to satisfy the current 20% California Renewables Portfolio Standard requirement. The 20% California Renewables Portfolio Standard is currently met through deliveries under a PPA that is structured in a manner which satisfies the CPUC resource adequacy ( RA ) requirements, and is designed to enable the California Utility to comply with the associated RA reporting requirements. 15 Page 39 of 253

41 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 6. Regulatory matters (continued) Regulatory assets and liabilities consist of the following: Regulatory assets: Rate case costs (i) $ 821 $ 977 Energy cost adjustment clause (ii) Vegetation management (iii) 2,738 2,160 Rate adjustment mechanism (iv) Other 4,452 1,058 Total regulatory assets 8,927 4,195 Less current regulatory assets (5,739) (1,146) Non-current regulatory assets $ 3,188 $ 3,049 Regulatory liabilities: Energy cost adjustment clause (ii) Rate adjustment mechanism (iv) $ - - $ 7, Cost of removal (v) 17,931 16,873 Other (vi) 42 1,136 Total regulatory liabilities 17,973 26,301 Less current regulatory liabilities (348) (5,808) Non-current regulatory liabilities $17,625 $ 20,493 i) Rate case costs: The costs to file, prosecute and defend rate case applications are referred to as rate case costs. These costs are capitalized and amortized over the period of rate recovery granted by the CPUC. The Company does not earn a return on these amounts but receives recovery of these costs in rates over the periods prescribed by the regulator (three years). ii) Energy cost adjustment clause ( ECAC ): ECAC is designed to recover or refund power supply costs that are caused by the fluctuations in the price of fuel and purchased power. 16 Page 40 of 253

42 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 6. Regulatory matters (continued) ii) Energy cost adjustment clause ( ECAC ) (continued): Under deferred energy accounting, to the extent actual purchased power costs differ from purchased power costs recoverable through current rates, that difference is not recorded on the statements of comprehensive income, but rather is deferred and recorded as a regulatory asset or liability on the balance sheets. These differences are reflected in adjustments to rates and recorded as an adjustment to cost of electricity in future periods, subject to regulatory review. The Company also records and is eligible to recover a carrying charge on such deferred balances. iii) Vegetation management: The costs to maintain vegetation around the distribution lines are referred to as vegetation management. These costs are capitalized and amortized over the period of rate recovery granted by the CPUC. The Company does not earn a return on these amounts but receives recovery of these costs in rates over the periods prescribed by the regulator (three years). iv) Rate Adjustment Mechanism: The Company is subject to a revenue decoupling mechanism approved by the regulator which requires charging approved annual delivery revenues on a systematic basis over the fiscal year. As a result, the difference between delivery revenue calculated based on metered consumption and approved delivery revenue is recorded as a regulatory asset or liability to reflect future recovery or refund, respectively, from customers. In addition, retroactive rate adjustments for services rendered but collected over a period not exceeding twenty-four months is accrued upon approval of the Final Order. v) Cost of removal: The regulatory liability for cost of removal represents amounts that have been collected from rate payers for costs that are expected to be incurred in the future to retire utility plant. vi) Other: These amounts relate to mandated initiative programs. 7. Due to related parties Due to related parties represents advances for current operating costs and reimbursement for management and accounting services provided by entities related to Liberty Utilities as well as other third-party costs incurred by entities related to Liberty Utilities on behalf of the Company. These amounts do not bear interest and have no fixed repayment terms. Total amounts allocated for 2014 and 2013 were $2,339 and $2,030, respectively. 17 Page 41 of 253

43 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 7. Due to related parties (continued) Periodically there are advances due to and from related parties. Such advances do not bear interest and are due on demand. As of December 31, 2014, the amount payable to related parties amounts to $26,283 ( $4,641). 8. Long-term liabilities In 2011, the Company issued $70,000 senior unsecured notes consisting of $45,000 bearing an interest rate of 5.19% and maturing on December 29, 2020, and $25,000 bearing an interest rate of 5.59% and maturing on December 29, The notes are interest only, payable semiannually with principal due on maturity. The notes have certain financial covenants which must be maintained on a quarterly basis. The Company was in compliance with the covenants, as of December 31, As of December 31, 2014, the Company had accrued nil in interest expense ( nil). Interest paid on the long-term liabilities in 2014 was $3,733 ( $3,733). 9. Pension and other post-retirement benefits The Company has a defined benefit cash balance pension plan covering substantially all of its employees, under which employees are credited with a percentage of base pay plus a prescribed interest rate credit. The plan interest credit rate varies from year to year based on the five-year U.S. Treasury bonds yield plus 0.25%. Employees benefits under the plan are fully vested upon completion of three years of service. The Company s policy is to make contributions within the range determined by generally accepted actuarial principles. The Company also has an other post-employment benefit ( OPEB ) plan providing health care and life insurance coverage to eligible retired employees. Eligibility is based on age and length of service requirements and, in most cases, retirees must cover a portion of the cost of their coverage. a) Net pension and OPEB obligation: The following table sets forth the projected benefit obligations, fair value of plan assets, and funded status of the Company s plans as of December 31: 18 Page 42 of 253

44 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 9. Pension and other post-retirement benefits (continued) Pension benefits OPEB Change in projected benefit obligation Projected benefit obligation, at beginning of year $1,315 $ 665 $ 840 $ 997 Modifications to pension plan (404) Service cost Interest cost Actuarial loss (gain) (279) Benefits paid - (56) - (2) Projected benefit obligation, at end of year $ 1,845 $ 1,315 $ 1,263 $ 840 Change in plan assets Fair value of plan assets, at beginning of $ 444 $ 182 $ - $ - year Actual return on plan assets Employer contributions Benefits paid - (57) - (2) Fair value of plan assets, at end of year $ 1,202 $ 444 $ - $ - Unfunded status $ (642) $ (871) $ (1263) $ (840) Amounts recognized in the balance sheet consists of: Non-current liabilities $ (642) $ (871) $ (1,263) $ (840) Net amount recognized $ (642) $ (871) $ (1,263) $ (840) The accumulated benefit obligation for the pension plan was $1,699 and $1,224 as of December 31, 2014 and 2013, respectively. (a) Net pension and OPEB obligation (continued) The amounts recognized in AOCI were as follows: AOCI Pension OPEB Balance, January 1, 2013 $172 $ 566 Current year net actuarial loss (gain) 7 (279) Current year prior service loss Amortization of net actuarial loss (22) (25) Balance, December 31, 2013 $ 336 $ 262 Current year net actuarial loss Current year prior service loss (credit) (404) - Amortization of net actuarial loss (4) (15) Amortization of prior service loss (credit) (14) - Balance, December 31, 2014 $ 277 $ Page 43 of 253

45 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 9. Pension and other post-retirement benefits (continued) b) Assumptions: Assumptions used to determine the net benefit cost for 2014 and 2013 were as follows: Pension benefits OPEB Discount rate 4.59% 3.59% 4.89% 4.03% Expected return on assets 5.50% 5.50% N/A N/A Rate of compensation increase 3.00% 4.00% N/A N/A Health care cost trend rate: Before age % 8.00% Age 65 and after 7.50% 8.00% Assumed Ultimate Medical Inflation Rate 5.00% 5.00% Year in which Ultimate Rate is reached Assumptions used to determine benefit obligation for 2014 and 2013 were as follows: Pension benefits OPEB Discount rate 3.15% 4.59% 3.94% 4.89% Rate of compensation increase 3.00% 3.00% N/A N/A The Company used the new mortality tables (RP-2014) and the mortality improvement scale (MP-2014) that were recently released by the Society of Actuaries in the current year assumptions. This change resulted in an increase to the pension and OPEB obligations of approximately $75. In selecting an assumed discount rate, the Company uses a modeling process that involves selecting a portfolio of high-quality corporate debt issuances (AA- or better) whose cash flows (via coupons or maturities) match the timing and amount of the Company's expected future benefit payments. The Company considers the results of this modeling process, as well as overall rates of return on high-quality corporate bonds and changes in such rates over time, to 20 Page 44 of 253

46 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 9. Pension and other post-retirement benefits (continued) determine its assumed discount rate. The rate of return assumptions are based on projected long-term market returns for the various asset classes in which the plans are invested, weighted by the target asset allocations. The effect of a one percent change in the assumed health care cost trend rate ( HCCTR ) for 2014 is as follows: 2014 Effect of a one percentage point increase in the HCCTR on: Year-end benefit obligation $ 147 Total service and interest cost 13 Effect of a one percentage point decrease in the HCCTR on: Year-end benefit obligation $ (108) Total service and interest cost (10) c) Benefit costs: The following table lists the components of net benefit costs for the pension plans and OPEB recorded as part of operating costs in the statements of comprehensive income. Pension benefits OPEB Service cost $ 489 $ 472 $ 76 $ 87 Interest cost Expected return on plan assets (35) (12) - - Amortization of net actuarial loss Net benefit cost $ 553 $ 529 $ 136 $ 149 The net actuarial loss for the defined benefit pension plan and OPEB that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $7 and $14, respectively. d) Plan assets: The Company s investment strategy for its pension and post-retirement plan assets is to maintain a diversified portfolio of assets with the primary goal of meeting long-term cash requirements as they become due. The Company's target asset allocation is 49.7% in equity securities and 50.3% in debt securities. 21 Page 45 of 253

47 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 9. Pension and other post-retirement benefits (continued) The fair value of investments as of December 31, 2014, by asset category, are as follows: Asset class Level 1 Percentage Equity securities $ % Debt securities % e) Cash flows: The Company expects to contribute $537 to its pension plans and $13 to its post-retirement benefit plans in The expected benefit payments over the next ten years are as follows: Pension plan $ 129 $118 $ 134 $ 161 $ 202 $ 1,545 OPEB Member s capital The Company is a single member limited liability corporation. As of December 31, 2014, there are 61,789,763 issued membership units of equity of the Company outstanding ( ,789,763), all of which belong to Liberty Utilities. 11. Commitments The Company is involved in various litigation arising out of the ordinary course and conduct of its business. Although such matters cannot be predicted with certainty, management does not consider the Company s exposure to such litigation to be material to these financial statements. Accruals for any contingencies related to these items, if any, are recorded in the financial statements at the time it is concluded that its occurrence is probable and the related liability is estimable. 22 Page 46 of 253

48 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 11. Commitments (continued) The Company has outstanding purchase commitments for power purchases and vehicle leases. Detailed below are estimates of future commitments under these agreements: Thereafter Total Purchased power $40,754 $ - $ - $ - $ - $ - $40,754 Operating leases Total $41,021 $ 46 $ 46 $ 7 $ - $ - $41,120 The Company leases vehicles as part of its operations. The terms of these leases have varying maturity dates that continue up to The payments are fixed over the term of the lease. The Company has entered into a five-year all-purpose PPA to provide its full electric requirements at certain average cost rates that have been approved by the Company and its supplier. The PPA has an effective starting date of January 1, 2011 with a five-year renewal option. The commitment amounts included above are based on market prices as of December 31, However, the effects of purchased power unit cost adjustments are mitigated through a purchased power rate-adjustment mechanism. 12. Changes in other operating items The change in other operating items consists of the following: Accounts receivable $ 1,050 $ (235) Prepaid expenses 145 (202) Supplies and consumables inventory (653) (893) Accounts payable and accrued liabilities (1,381) (131) Due to/from related parties 21,642 (299) Net regulatory assets and liabilities (14,579) (3,419) $ 6,224 $ (5,179) 23 Page 47 of 253

49 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 13. Financial instruments a) Fair value of financial instruments: Carrying amount Fair value Carrying amount Fair value Long-term liabilities $70,000 $77,696 $70,000 $72,828 The Company has determined that the carrying value of its short-term financial assets and liabilities approximates fair value as of December 31, 2014 and 2013 due to the short-term maturity of these instruments. Long-term liabilities (Level 2 inputs) are at fixed interest rates. The estimated fair value is calculated using the current interest rates. Advances in aid of construction has a carrying value of $14,753 as at December 31, 2014 ( $14,767). Portions of these non-interest bearing instruments are payable annually through 2024, including new customer connections, customer consumption levels, and future rate increase. However, amounts not paid by the contract expiration date become non-refundable. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables. The fair value of these amounts would be less than their carrying value due to the non-interest bearing feature. Fair value estimates are made at a specific point in time, using available information about the financial instrument. These estimates are subjective in nature and often cannot be determined with precision. The Company s accounting policy is to recognize transfers between levels of the fair value hierarchy on the date of the event or change in circumstances that caused the transfer. There were no transfers into or out of Level 1, Level 2 or Level 3 during the years ended December 31, 2014 or b) Risk management: In the normal course of business, the Company is exposed to financial risks that potentially impact its operating results. The Company employs risk management strategies with a view to mitigating these risks to the extent possible on a cost-effective basis. The Company does not enter into derivative financial agreements for speculative purposes. 24 Page 48 of 253

50 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 13. Financial instruments (continued) Credit risk Credit risk is the risk of an unexpected loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Company s financial instruments that are exposed to concentrations of credit risk are primarily cash and cash equivalents and accounts receivable. The Company limits its exposure to credit risk with respect to cash equivalents by ensuring available cash is deposited with large financial institutions in the U.S. all of which have a credit rating of A or better. Credit risk related to the accounts receivable balance of $11,119 is spread over thousands of customers. The Company has processes in place to monitor and evaluate this risk on an ongoing basis including background credit checks and security deposits from new customers. In addition, the CPUC allows for a reasonable bad debt expense to be incorporated into rates and therefore recovered from rate payers. As of December 31, 2014, the Company s maximum exposure to credit risk for these financial instruments was as follows: 2014 Cash and cash equivalents $ 64 Accounts receivable 11,276 Allowance for doubtful accounts (157) Liquidity risk $ 11,183 Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they fall due. The Company's approach to managing liquidity risk is to ensure, to the extent possible, that it will always have sufficient liquidity to meet liabilities when due. 25 Page 49 of 253

51 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Notes to the financial statements December 31, 2014 and 2013 (in thousands of U.S. dollars, except as noted) 13. Financial instruments (continued) Liquidity risk (continued) The Company s liabilities mature as follows: Long-term debt obligations Advances in aid of construction Due less than 1 year Due 2-3 years Due 4-5 years Due after 5 years Total $ - $ - $ - $ 70,000 $70, ,753 14,753 Purchase obligations 10, ,117 Interest on long-term debt 3,733 7,466 7,466 10,720 29,385 Other obligations Total $ 14,521 $ 7,466 $ 7,466 $ 95,473 $124, Comparative figures Certain of the comparative figures have been reclassified to conform to the financial statement presentation adopted in the current year. 26 Page 50 of 253

52 Appendix B Algonquin Proxy Statement Page 51 of 253

53 May 14, 2014 Algonquin Power & Utilities Corp. NOTICE OF ANNUAL MEETING OF COMMON SHAREHOLDERS MANAGEMENT INFORMATION CIRCULAR Dear Shareholder, We invite you to attend the Annual Meeting of Common Shareholders on Wednesday, June 18, It will be held at the Oakville Conference Centre, 2515 Wyecroft Road, Oakville, Ontario, L6L 6P8, at 4:00 p.m. (Eastern Time). The Board of Directors and management are looking forward to meeting with you to discuss the achievements in 2013 and outline some of our plans for the future of Algonquin Power & Utilities Corp. The meeting will provide an opportunity to ask questions and meet with management, the Board of Directors and fellow shareholders. At the meeting, shareholders will be voting on a number of matters. Please take the time to read this Management Information Circular. It contains important information about the business to be conducted at the meeting, the Board of Director nominees, the Board of Director s corporate governance practices, and our approach to compensation. It is important that you exercise your vote, either in person at the meeting, or by completing and sending in your proxy or voting instruction form prior to the meeting. We look forward to seeing you. Yours Sincerely, (signed) Kenneth Moore Kenneth Moore Chair of the Board of Directors (signed) Ian Robertson Ian Robertson Chief Executive Officer It is important to vote your shares. Please submit your vote before the date indicated on your voting instruction form, or by Tuesday, June 17, 2014 if voting by proxy. Page 52 of 253

54 Notice of Annual Meeting of Common Shareholders of Algonquin Power & Utilities Corp. Date Wednesday, June 18, 2014 Time 4:00 p.m. (Eastern Time) Place Oakville Conference Centre 2515 Wyecroft Road Oakville, Ontario, L6L 6P8 Business of the Annual Meeting of Common Shareholders At the meeting, shareholders will be asked to: 1. Receive the financial statements for the year ended December 31, 2013 and the auditor s report on the statements; 2. Appoint the auditor; 3. Elect directors; 4. Consider, and if thought fit, pass an advisory resolution (the full text of which is set out in Schedule A to this Circular) approving the Corporation s approach to executive compensation, as further described in the Circular; 5. Consider, and if thought fit, pass a resolution (the full text of which is set out in Schedule B to this Circular) approving the adoption of the Corporation s performance and restricted share unit plan, as fully described in Schedule C to this Circular; and to 6. Consider any other business that may be properly brought before the Annual Meeting of Common Shareholders or any adjournment. By order of the Board of Directors (signed) Kenneth Moore Kenneth Moore Chair of the Board of Directors May 14, 2014 Important If you are unable to attend the meeting in person, please complete, sign and return the enclosed form of proxy to the Corporation, c/o CST Trust Company, in the envelope provided for that purpose, or deliver it by mail to the Corporation, c/o CST Trust Company, P.O. Box 721, Agincourt, Ontario, M1S 0A1, or by facsimile to or , or by electronic mail to proxy@canstockta.com so as to arrive not later than 4:00 p.m. (Eastern Time) on June 17, Page 53 of 253

55 MANAGEMENT INFORMATION CIRCULAR May 14, 2014 We are sending you this Management Information Circular to solicit proxies by and on behalf of management of Algonquin Power & Utilities Corp. for use at our Annual Meeting of Common Shareholders on June 18, 2014, or any adjournment. You are entitled to receive notice of and vote at the meeting if you were a shareholder as of the close of business on May 12, We encourage you to review this Circular and exercise your right to vote. Enclosed with this Circular is a proxy or voting instruction form. The solicitation will be made primarily by mail, but proxies may also be solicited personally, in writing or by telephone by employees of the Corporation, the directors ( Directors ) of the Corporation or by the Corporation s transfer agent, CST Trust Company, at a nominal cost. The costs of solicitation will be borne by the Corporation. Algonquin, the Corporation, we and our means Algonquin Power & Utilities Corp., unless otherwise indicated. Common Shareholder, shareholder, you and your means a holder of common shares ( Common Shares ) of Algonquin Power & Utilities Corp. All dollar amounts in this Circular are expressed in Canadian dollars unless otherwise indicated. The information in this Circular is as of May 12, 2014 unless we have stated otherwise. Approval of this Circular The Board of Directors has approved the content and sending of this Management Information Circular. (signed) Kenneth Moore Kenneth Moore Chair of the Board of Directors Algonquin Power & Utilities Corp. May 14, Page 54 of 253

56 Caution concerning forward-looking statements and non-gaap Measures Forward-looking statements Certain statements included herein contain forward-looking information within the meaning of certain securities laws. These statements reflect the views of Algonquin with respect to future events, based upon assumptions relating to, among others, the performance of Algonquin s assets and the business, interest and exchange rates, commodity market prices, and the financial and regulatory climate in which it operates. These forward looking statements include, among others, statements with respect to the expected performance of Algonquin, its future plans and its dividends to shareholders. Statements containing expressions such as anticipates, believes, continues, could, expect, estimates, intends, may, outlook, plans, project, strives, will, and similar expressions generally constitute forward-looking statements. Since forward-looking statements relate to future events and conditions, by their very nature they require Algonquin to make assumptions and involve inherent risks and uncertainties. Algonquin cautions that although it believes its assumptions are reasonable in the circumstances, these risks and uncertainties give rise to the possibility that actual results may differ materially from the expectations set out in the forward-looking statements. Material risk factors include the impact of movements in exchange rates and interest rates; the effects of changes in environmental and other laws and regulatory policy applicable to the energy and utilities sectors; decisions taken by regulators on monetary policy; and the state of the Canadian and the United States ( U.S. ) economies and accompanying business climate. Algonquin cautions that this list is not exhaustive, and other factors could adversely affect results. Given these risks, undue reliance should not be placed on these forward-looking statements. In addition, such statements are made based on information available and expectations as of the date of this document and such expectations may change after this date. Algonquin reviews material forward-looking information it has presented, not less frequently than on a quarterly basis. Algonquin is not obligated to nor does it intend to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise, except as required by law. Non-GAAP Financial Measures The terms adjusted net earnings, earnings before interest, taxes, depreciation and amortization ( EBITDA ) and adjusted earnings before interest, taxes, depreciation and amortization ( Adjusted EBITDA ) are used throughout this document. The terms adjusted net earnings, EBITDA and Adjusted EBITDA are not recognized measures under United States Generally Accepted Accounting Principles ( GAAP ). There is no standardized measure of adjusted net earnings, EBITDA and Adjusted EBITDA, consequently Algonquin s method of calculating these measures may differ from methods used by other companies and therefore may not be comparable to similar measures presented by other companies. EBITDA is a non-gaap metric used by many investors to compare companies on the basis of ability to generate cash from operations. Algonquin uses these calculations to monitor the amount of cash generated by Algonquin as compared to the amount of dividends paid by Algonquin. Algonquin uses Adjusted EBITDA to assess the operating performance of the Corporation without the effects of (as applicable): depreciation and amortization expense, income tax expense or recoveries, acquisition costs, litigation expenses, interest expense, gain or loss on derivative financial instruments, write down of intangibles and property, plant and equipment, earnings attributable to non-controlling interests and gain or loss on foreign exchange, earnings or loss from discontinued operations and other typically non-recurring items. Algonquin adjusts for these factors as they may be non-cash, unusual in nature and are not factors used by management for evaluating the operating performance of the Corporation. Algonquin believes that presentation of this measure will enhance an investor s understanding of Algonquin s operating performance. Adjusted EBITDA is not intended to be representative of cash provided by operating activities or results of operations determined in accordance with GAAP. Adjusted net earnings is a non-gaap metric used by many investors to compare net earnings from operations without the effects of certain volatile primarily non-cash items that generally have no current economic impact or items such as acquisition expenses or litigation expenses and are viewed as not directly related to a company s operating performance. Net earnings of Algonquin can be impacted positively or negatively by gains and losses on derivative financial instruments, including foreign exchange forward contracts, interest rate swaps and energy forward purchase contracts as well as to movements in foreign exchange rates on foreign currency denominated debt and working capital balances. Adjusted weighted average shares outstanding represents weighted average shares outstanding adjusted to remove the dilution effect related to shares issued in advance of funding requirements. Algonquin uses adjusted net earnings to assess its performance without the effects of (as applicable): gains or losses on foreign exchange, foreign exchange forward contracts, interest rate swaps, acquisition costs, litigation expenses and write down of intangibles and property, plant and equipment, earnings or loss from discontinued operations and other typically non-recurring items as these are not reflective of the performance of the underlying business of Algonquin. Algonquin believes that analysis and presentation of net earnings or loss on this basis will enhance an investor s understanding of the operating performance of its businesses. It is not intended to be representative of net earnings or loss determined in accordance with US GAAP. A calculation and analysis of adjusted net earnings, EBITDA and Adjusted EBITDA can be found in the Corporation s most recent Management s Discussion & Analysis filed on SEDAR at 2 Page 55 of 253

57 VOTING INFORMATION You are asked to vote on the following items: Election of Directors; Appointment of Ernst & Young LLP as auditors; An advisory resolution to accept the approach to executive compensation disclosed in this Circular; and A resolution (the full text of which is set out in Schedule B to this Circular) approving the adoption of the Corporation s performance and restricted share unit plan, as further described in this Circular, and as fully set out in Schedule C to this circular. A simple majority of the votes cast by proxy or in person will constitute approval of matters voted on at the Meeting, except as otherwise specified. On May 12, 2014, the record date established for notice of the Meeting, there were 207,450,360 outstanding Common Shares that are eligible to vote. Each outstanding Common Share is entitled to one vote. All Shareholders as of the record date are entitled to vote at the Meeting, or any adjournment, either in person or by proxy. To the knowledge of the Directors and officers of the Corporation, as of the date of this Circular, no person or company beneficially owned, directly or indirectly, or controlled or directed 10% or more of the Corporation s Common Shares, except Emera Incorporated ( Emera ), that directly owns 50,126,766 Common Shares, representing 24% of the outstanding Common Shares. As described in a strategic investment agreement between Emera and the Corporation, Emera has control and direction over 15% of the Common Shares directly owned by Emera, while the remaining Common Shares owned by Emera are subject to contractual obligations generally requiring Emera to vote in favour of matters recommended by the Board of Directors for approval by shareholders of the Corporation. VOTING INSTRUCTIONS You can vote your Common Shares by proxy or in person at the Meeting. Please follow the instructions below based on whether you are a registered or beneficial (non-registered) shareholder. Beneficial (non-registered) Shareholders You are a non-registered shareholder ( Non-Registered Holder ) if you hold Common Shares through an intermediary such as a securities broker, trustee, financial institution, or depository such as CDS Inc. Non-Registered Holders should carefully follow the instructions of their intermediaries and their intermediaries service companies regarding the voting process. The Corporation has distributed copies of the meeting materials to intermediaries for further distribution to Non- Registered Holders. Intermediaries are required to forward the meeting materials to Non-Registered Holders and receive voting instructions from them unless a Non-Registered Holder has waived the right to receive the meeting materials. Intermediaries often use service companies to forward the meeting materials to Non-Registered Holders. Generally, Non-Registered Holders who have not waived the right to receive the meeting materials will: (a) (b) be given a voting instruction form which must be completed and signed by the Non-Registered Holder in accordance with the instructions on the form (which may, in some cases, permit the completion of the voting instruction form by telephone, fax or internet); or less typically, be given a proxy which has already been signed by the intermediary, restricted as to the number of Common Shares beneficially owned by the Non-Registered Holder, but which is 3 Page 56 of 253

58 otherwise uncompleted. The Non-Registered Holder who wishes to submit the proxy should properly complete and deposit it with the Corporation or CST Trust Company, as described in the notice of meeting. This proxy need not be signed by the Non-Registered Holder. The purpose of these procedures is to permit Non-Registered Holders to direct the voting of the Common Shares which they beneficially own. Voting in person at the Meeting We do not have unrestricted access to the names of our non-registered shareholders. If you attend the Meeting, we may have no record of your shareholdings or entitlement to vote, unless your intermediary has appointed you as proxyholder. Should a Non-Registered Holder who receives a proxy signed by the intermediary wish to attend and vote at the Meeting in person (or have another person attend and vote on behalf of the Non-Registered Holder), the Non- Registered Holder should: strike out the names of the persons named in the proxy and insert the name of the Non-Registered Holder (or such other person) in the blank space provided. Do not fill in the voting instructions because you will be voting at the meeting. When you arrive at the Meeting, present yourself to a representative at the registration table. A Non-Registered Holder who receives a voting instruction form should follow the instructions for voting in person that are provided on the voting instruction form. Changing your vote If you have already sent your completed voting instruction form to your intermediary and you change your mind about your voting instructions, or want to vote in person at the Meeting, contact your intermediary to find out whether this is possible and what procedure to follow. Registered Shareholders You are a registered shareholder if you have a share certificate for Common Shares and they are registered in your name or if you hold Common Shares through direct registration. You will find a form of proxy in this package. Voting by proxy Voting by proxy means you are giving the person or persons named in your form of proxy the authority to attend the Meeting, or any adjournment, and vote your Common Shares for you. Please mark your vote, sign, date and follow the return instructions provided in the enclosed form of proxy. By doing this, you are giving the Directors or officers of Algonquin who are named in the form of proxy the authority to vote your Common Shares at the Meeting, or any adjournment. You can choose another person or company to be your proxyholder, including someone who is not a shareholder of Algonquin. You can do so by inserting the name of the person or company in the blank space provided on the form of proxy. If you appoint someone else, he or she must be present at the Meeting to vote your Common Shares. Voting at the Meeting You do not need to complete or return your form of proxy. Simply attend the Meeting and present yourself to a representative at the registration table. You will be provided with ballots in order to vote at the Meeting. 4 Page 57 of 253

59 Changing your vote A Shareholder who has given a proxy may revoke the proxy by delivering a signed written notice, including another proxy, to the Corporation as provided below. A Shareholder may also revoke a proxy in any other manner permitted by law, but prior to the exercise of such proxy in respect of any particular matter. How your proxy will be voted On the form of proxy, you can indicate how you want your proxyholder to vote your Common Shares, or you can let your proxyholder decide for you. If you have specified on the form of proxy how you want your Common Shares to be voted on a particular issue then your proxyholder must follow your instructions. If you have not specified on the form of proxy how you want your Common Shares to be voted on a particular issue, then your proxyholder can vote your Common Shares as he or she sees fit. Processing the votes Proxies are counted by our transfer agent, CST Trust Company. CST Trust Company protects the confidentiality of individual shareholder votes, except if: the shareholder clearly intends to communicate his or her individual position to the board or management; or it is necessary to comply with legal requirements. Voting results Following the Meeting, a report on the voting results will be available in the investor centre of our website at and will be filed with securities regulators at Meeting minutes The minutes of the Meeting will be available in the investor centre of our website at and printed copies may be obtained free of charge from the Corporation by contacting: Chief General Counsel & Corporate Secretary, Algonquin Power & Utilities Corp., 2845 Bristol Circle, Oakville, Ontario, Canada L6H 7H7. To be effective, proxies must be deposited with the Corporation, by mail to CST Trust Company, P.O. Box 721, Agincourt, Ontario, M1S 0A1, or by facsimile to or , or by electronic mail to proxy@canstockta.com not later than 4:00 p.m. (Eastern Time) on June 17, 2014 or, if the Meeting is adjourned, not later than 48 hours, excluding Saturdays, Sundays and holidays, preceding the time of such adjourned meeting. Proxies may also be delivered to the chair of the Meeting before the commencement of the Meeting or any adjournment thereof. 5 Page 58 of 253

60 MATTERS TO BE ACTED ON AT THE MEETING 1. Receipt of Financial Statements The audited consolidated financial statements of the Corporation for its fiscal year ended December 31, 2013 are included in the Annual Report, which has been mailed to shareholders, is available in electronic format on Algonquin s website at and will also be presented at the Meeting. 2. Appointment of Auditor The Audit Committee has reviewed the performance of Ernst & Young LLP, including its independence relating to the audit and recommends the re-appointment of Ernst & Young LLP as Auditors. Ernst & Young LLP have been auditors of the Corporation since In the absence of a contrary instruction, the persons named in the enclosed form of proxy intend to vote FOR the appointment of Ernst & Young LLP as auditors of the Corporation to hold office until the next annual meeting of Shareholders or until a successor is appointed. 3. Election of Directors The Corporation s articles provide that the Board is to consist of a minimum of three (3) and maximum of twelve (12) directors. The number of Directors to be elected at the Meeting is seven (7). The seven (7) persons proposed for nomination for election as Directors are listed in the Director Nominees section of this circular. Under the Corporation s by-laws, Directors are elected annually. Each Director elected at the Meeting will hold office until the next annual meeting or until his or her successor is duly elected or appointed. In the absence of a contrary instruction, the persons named in the enclosed form of proxy intend to vote FOR the appointment as Directors of the proposed nominees whose names are set out in the Director Nominees section of this circular, each of whom has been a Director since the date indicated opposite the proposed nominee s name. Management does not contemplate that any of the proposed nominees will be unable to serve as a Director but, if that should occur for any reason prior to the Meeting, the persons named in the enclosed form of proxy reserve the right to vote for another nominee in their discretion. 4. Advisory Vote on Executive Compensation In May 2012, the Board adopted a policy to annually provide Shareholders with an advisory vote, based on the Model Say on Pay Policy for Boards of Directors published by the Canadian Coalition for Good Governance. The Board believes that Shareholders should have the opportunity to fully understand the objectives, philosophy and principles the Board has used in its approach to executive compensation decisions and to have an advisory vote on the Board s approach to executive compensation. We hope that Shareholders will carefully review the Statement of Corporate Governance Practices section beginning at page 18 and Statement of Executive Compensation Practices section beginning at page 27 of this Circular before voting on this matter. The Compensation Discussion and Analysis section discusses the Corporation s compensation philosophy and approach to executive compensation, what our named executive officers are paid and how their level of compensation is determined. This disclosure has been approved by the Board of Directors on the recommendation of the Corporate Governance Committee. We encourage any Shareholder who has comments on the Corporation s approach to executive compensation to forward these comments to the Chair of the Corporate Governance Committee at Algonquin Power & Utilities Corp., 2845 Bristol Circle, Oakville, Ontario, L6H 7H7, Attention: Chief General Counsel & Corporate Secretary. At the Meeting, Shareholders will have the opportunity to vote on the Corporation s approach to executive compensation through consideration of the advisory resolution set out in Schedule A of this Circular. 6 Page 59 of 253

61 As this is an advisory vote, the results will not be binding upon the Board. However, the Board will take into account the results of the vote, together with feedback received from Shareholders in the course of Shareholder engagement activities, in considering its approach to executive compensation in the future. Unless otherwise instructed, the persons designated in the form of proxy intend to vote FOR the advisory resolution on executive compensation. 5. Performance and Restricted Share Unit Plan Effective January 1, 2011, the Corporation adopted a performance share unit plan for employees of the Corporation and its participating affiliates (the Original PSU Plan ), under which employees could be awarded performance share units ( PSUs ) which track the value of the Corporation s Common Shares over time, and which could be paid out following vesting in cash or in Common Shares purchased on the open market. On March 6, 2014, the Board approved amendments to the Original PSU Plan, to allow plan awards to be paid in whole or in part with Common Shares issued from treasury, to allow restricted share units ( RSUs ) to be awarded under the plan, to conform provisions of the plan to TSX requirements or general corporate governance principles and to make certain other consequential amendments. The Original PSU Plan, with the amendments approved by the Board in March 2014 (as amended, the PSU and RSU Plan ), has been approved by the Toronto Stock Exchange (the TSX ), subject to Shareholder approval at the Meeting. If the PSU and RSU Plan is approved by Shareholders at the Meeting, the plan will become effective as of the date of the Meeting. The primary terms of the PSU and RSU Plan are described below, and the full text of the plan is included as Schedule C to this circular. Purposes of the PSU and RSU Plan The purposes of the PSU and RSU Plan are to (i) promote a significant alignment between employees of the Corporation and the growth objectives of the Corporation, (ii) associate a portion of participating employees compensation with the performance of the Corporation over the long term and (iii) retain critical employees to drive the business success of the Corporation. Participants Grants may be made under the PSU and RSU Plan to executives or other employees of the Corporation or of any affiliate of the Corporation. For the purpose of the PSU and RSU Plan, an affiliate is any corporation, partnership or other entity (i) in which the Corporation, directly or indirectly, has majority ownership interest or (ii) which the Corporation controls. Committee The PSU and RSU Plan, like the Original PSU Plan, will be administered by a committee (the Committee ) consisting of designated executives of the Corporation or its relevant affiliates or, in respect of any grants made to such designated executives, the Board or a committee designated by the Board. The Committee has the authority, among other things, to (i) make grants of PSUs or RSUs to participants under the PSU and RSU Plan as reflected in an award agreement thereunder (an Award Agreement ); (ii) determine the terms of the grants of PSUs and RSUs, including vesting terms, any performance criteria applicable to PSUs, the manner of settlement of PSUs and RSUs and the consequence of a termination of employment of the participant; (iii) determine whether and the extent to which performance criteria applicable to the vesting of a PSU or other conditions to the vesting of a PSU or RSU have been satisfied or are to be waived or modified; (iv) amend the terms of any outstanding Award Agreement (but only with consent of the relevant participant where an amendment would materially adversely affect the existing rights of the participant with respect to then outstanding PSUs or RSUs, except where the amendment is required to comply with applicable law); (v) determine whether any adjustments to the terms of the PSUs or RSUs are required to reflect stock dividends, stock splits or other corporate reorganizations affecting the Common Shares, and the terms of those adjustments; (vi) interpret the PSU and RSU Plan and any Award Agreements; and (vii) make other determinations deemed necessary or advisable for the administration of the PSU and RSU Plan. 7 Page 60 of 253

62 Award Determination Awards granted under the PSU and RSU Plan will be made with a specified dollar value (the Award Value ) as of the date of grant, as determined by the Committee. In the case of PSUs, the Committee may determine any performance criteria applicable to the PSU. The number of PSUs granted to a participant for a performance period is determined by dividing the Award Value for the award to such participant divided by the Market Value of the Common Shares as at the end of the calendar quarter immediately preceding the date of the award, rounded down to the next whole number. The number of RSUs granted to a participant is determined by dividing the Award Value of the award provided to the participant in the form of RSUs by the Market Value of the Common Shares as at the end of the calendar quarter immediately preceding the date of the award, rounded down to the next whole number. The Market Value for purposes of the PSU and RSU Plan is (i) the volume-weighted average trading price of the Common Shares on the TSX (or such other stock exchange in Canada on which the Common Shares are traded) for the five trading days preceding the date in question, or (ii) if the Common Shares are not traded on a stock exchange, the fair market value of the Common Shares as determined by the Committee. Adjustments to PSUs and RSUs Whenever cash dividends are paid on the Common Shares during the performance period applicable to a particular Award Agreement, additional PSUs or RSUs ( Dividend PSUs or Dividend RSUs ), as applicable, will be credited to the participant s PSU or RSU account, as applicable. The number of Dividend PSUs or Dividend RSUs to be so credited will be calculated by dividing (i) the amount of the cash dividend that would have been paid to the participant if each of the PSUs and RSUs recorded in the participant s account as at the record date for the cash dividend had been Common Shares by (ii) the Market Value on the date on which the dividend is paid on the Common Shares. In the event of any stock dividends, stock splits or other corporate reorganizations affecting the Common Shares, proportionate adjustments to reflect such change or changes will be made with respect to the number of PSUs and RSUs outstanding under the PSU and RSU Plan, on a basis proportionate to the number of PSUs and RSUs in the participant s account or some other appropriate basis, all as determined by the Committee. Vesting and Payment of Awards Each whole PSU and RSU will give a participant the right to receive either Common Shares or a cash payment, as determined by the Committee, in accordance with the terms of the PSU and RSU Plan and the applicable Award Agreement. A participant will have no right to receive Common Shares or a cash payment with respect to any PSUs or RSUs that do not become vested. On the first day immediately following the end of a performance period in respect of a PSU grant, the relevant PSUs (including Dividend PSUs) in the participant s PSU account maintained by the Corporation will vest in an amount equal to the number of relevant PSUs multiplied by a performance adjustment factor, as determined by the Committee in accordance with the participant s Award Agreement. Where the performance adjustment factor is zero, no such PSUs will vest. Any PSUs that do not become vested are forfeited by the participant. RSUs (including Dividend RSUs) will vest on the vesting dates specified in the relevant Award Agreement, in such proportion as may be determined in accordance with the Award Agreement. Any RSUs that do not become vested are forfeited by the participant. Where a participant s vested PSUs or RSUs have been designated by the Committee as payable in Common Shares, the participant will receive a number of Common Shares equal to (i) the number of vested PSUs as of the last day of the relevant performance period or (ii) the number of RSUs that have been designated for payment in Common Shares on the vesting date. Where a participant s vested PSUs or RSUs have not been designated by the Committee as payable in Common Shares, the participant will receive a cash payment equal to (i) in the case of PSUs, the Market Value of the Common Shares as of the last day of the relevant performance period multiplied by the number of vested PSUs or (ii) in the case of RSUs, the Market Value of the Common Shares determined as of the vesting date of such RSUs multiplied by the number of vested RSUs. 8 Page 61 of 253

63 Funding of Awards to be Paid in Common Shares PSU or RSU awards that are paid in Common Shares may be paid by Common Shares issued from treasury or by Common Shares purchased on the open market. The maximum number of Common Shares that are issuable under the PSU and RSU Plan to pay awards is limited to an aggregate of 500,000 Common Shares. Any issuances of Common Shares from treasury to pay awards will be issued at a price per Common Share equal to the Market Value on the date of issuance. Any purchases of Common Shares pursuant to the PSU and RSU Plan will be made on the open market by a broker designated by the Corporation who is independent of the Corporation in accordance with rules of the stock exchange on which the Common Shares are listed and who is a member of such stock exchange. Insider Participation Limit Awards under the PSU and RSU Plan will not be paid in Common Shares issued from treasury if, at the time of such issuance, such issuance could result, at any time, in: (i) the number of Common Shares reserved for issuance to Insiders (as defined in the TSX rules) under such plan, together with Common Shares reserved for issuance to Insiders under all other Securities- Based Compensation Arrangements (as defined in the TSX rules), exceeding 10% of the issued and outstanding Common Shares; or (ii) the issuance to Insiders, within a one year period, of a number of Common Shares under such plan, together with Common Shares that may be issued to Insiders under all other Securities-Based Compensation Arrangements, exceeding 10% of the issued and outstanding Common Shares. Death, Absences, Termination of Employment, Change of Control Where a participant s employment is terminated by reason of the participant s death prior to the vesting of the participant s PSUs or RSUs, (i) the PSUs credited to the participant s account as at December 31 of the year preceding the participant s death will continue to be eligible for vesting and (ii) the RSUs credited to the participant s account as at December 31 of the year preceding the participant s death will vest as of the participant s date of death. Where a participant takes a leave of absence from the Corporation or an affiliate, as applicable, for a period of at least 90 days prior to the end of the performance period (in the case of PSUs) or the vesting date (in the case of RSUs), the participant s PSUs and RSUs will continue to be eligible for vesting, but at a prorated rate based on the number of whole and partial months that the participant was an active employee between the date of the award and the end of the performance period (in the case of PSUs) or the vesting date (in the case of RSUs). Where the leave of absence extends beyond the end of a performance period for PSUs or a vesting date for RSUs and the participant fails to return to full-time employment within 180 days after such end of performance period or vesting date, no PSUs or RSUs that would otherwise have vested will vest, and the participant will receive no payment or compensation therefor. In the event that, during a performance period for PSUs or prior to the vesting date for RSUs, a participant s employment is terminated by the Corporation or an affiliate for any reason or the participant voluntarily terminates his or her employment with the Corporation or an affiliate, no portion of the PSUs or RSUs that would otherwise vest at the end of the performance period or on the vesting date, as applicable, will vest, and the participant will receive no payment or compensation therefor. Subject to the terms of the relevant Award Agreement, in the event of a change of control of the Corporation, the PSUs and RSUs credited to the account of the participant as at the date of the change of control, will become vested PSUs and RSUs on a one-for-one basis on the date of change of control, unless otherwise determined by the Committee. As soon as practical following the change of control, the participant will, at the discretion of the Committee, receive a payment in cash and/or Common Shares equal to the number of vested RSUs or PSUs, as applicable, multiplied by the price at which the Common Shares are valued for the purposes of the transactions giving rise to the change of control. 9 Page 62 of 253

64 No Shareholder Rights PSUs and RSUs are not Common Shares and will not entitle a participant to any shareholder rights, including, without limitation, voting rights, dividend entitlement or rights on liquidation. Assignment The assignment or transfer of the PSUs or RSUs, or any other benefits under the PSU and RSU Plan, will not be not permitted, other than by operation of law. Administration and Amendments to the Plan Unless otherwise determined by the Board, the PSU and RSU Plan will be administered by the Committee. The Corporation (or an affiliate, as applicable) may withhold any amount payable to a participant, either under the PSU and RSU Plan or otherwise, or may require the sale of such number of Common Shares, in each case as may be necessary to permit the Corporation (or the affiliate, as applicable) to comply with applicable provisions of any federal, provincial, state or local law relating to the withholding of tax or other required deductions. The PSU and RSU Plan may be amended or terminated at any time by the Committee in whole or in part, provided that: (i) no amendment of the plan will, without the consent of the participants affected by the amendment, or unless required by applicable law, adversely affect the rights of such participants with respect to PSUs or RSUs granted prior to the date of the amendment; (ii) no amendment of the plan will be effective unless such amendment is approved by the TSX; and (iii) approval by a majority of the votes cast by shareholders present and voting in person or by proxy at a meeting of shareholders of the Corporation shall be obtained for any: (a) amendment for which, under the requirements of the TSX or any applicable law, shareholder approval is required; (b) reduction of the purchase price of Common Shares issued or purchased to pay awards granted under the plan or the cancellation and reissuance of awards under the plan; (c) extension of the term of an award under the plan beyond the original expiry date of the award; (d) any amendment to remove or exceed the insider participation limit; (e) an increase to the maximum number of Common Shares issuable from treasury under the plan; (f) amendments to eligible participants that may permit the introduction or non-employee Directors on a discretionary basis; (g) allowance of awards granted under the plan to be transferable or assignable other than for estate settlement purposes; or (h) amendment to the amendment provision of the plan. Resolution approving the PSU and RSU Plan At the Meeting, Shareholders will be asked to consider, and if thought advisable, pass, with or without amendment, a resolution (the PSU and RSU Plan Resolution ) to approve the PSU and RSU Plan, the full text of which is set out in Schedule B to this Circular. In order to be effective, the PSU and RSU Plan Resolution must be approved by a simple majority of 50% plus one vote of the votes cast by the Shareholders in respect thereof at the Meeting. In the absence of a contrary instruction, the persons named in the enclosed form of proxy intend to vote FOR the PSU and RSU Plan Resolution, unless the Shareholder who has given the proxy has directed that the Common Shares represented thereby be voted against such resolution. 10 Page 63 of 253

65 DIRECTOR NOMINEES The following tables set forth the name and background information with respect to the seven (7) persons proposed for nomination for election as Directors, including the name and jurisdiction of residence of such person, principal occupation or employment for the past five (5) years and a summary of their experience, the date each such person was first elected as a Director, and the number of Common Shares beneficially owned, directly or indirectly, or over which control or direction is exercised, by such person (as furnished by the respective nominee). The aggregate number of Common Shares held by Directors and officers of the Corporation is 991,283 which represents 0.48% of the issued and outstanding Common Shares. Christopher Ball is the Executive Vice President of Corpfinance International Limited, and President of CFI Capital Inc., both of which are investment banking boutique firms. From 1982 to 1988, Mr. Ball was Vice President at Standard Chartered Bank of Canada with responsibilities for the Canadian branch operation. Prior to that, Mr. Ball held various managerial positions with the Canadian Imperial Bank of Commerce. He is also a member of the Hydrovision International Advisory Board, was a director of Clean Energy BC, and is a recipient of the Clean Energy BC Lifetime Achievement Award. Christopher Ball Age 63 Toronto, Ontario, Canada Director since: 2009 (1) Independent Chair of the Audit Committee Compensation Committee Security ownership guideline: $180,000 Total value of securities held: $338,424 Securities Held: Common Shares: 24,200 valued at $193,600 as at May 12, 2014 Deferred Share Units: 18,103 valued at $144,824 as at May 12, 2014 Board/Committee membership attendance Board Audit Committee Compensation Committee 10/10 5/5 5/5 (1) Prior to becoming a director of the Corporation, from 2002 to 2009, Mr. Ball served as a Trustee of Algonquin Power Income Fund, the predecessor organization to the Corporation. 11 Page 64 of 253

66 Christopher Huskilson has been the President and Chief Executive Officer of Emera, a North American energy and services company, since November He is also Chair of Emera Maine, a Director of Nova Scotia Power Inc. and serves as the Chair or as a Director of a number of other Emera affiliated companies. Mr. Huskilson has held a number of positions within Nova Scotia Power Inc. and its predecessor, Nova Scotia Power Corporation, since June Mr. Huskilson holds a Bachelor of Science in Engineering and a Master of Science in Engineering from the University of New Brunswick. Security ownership guideline: $nil (2) Total value of securities held: $nil (2) Christopher Huskilson Age 56 Wellington, Nova Scotia, Canada Director since: 2009 (1) Non-Independent (CEO of Emera, a 24% Shareholder) Chair of the Compensation Committee Corporate Governance Committee Securities Held: Mr. Huskilson does not own any Shares personally. Mr. Huskilson is the CEO of Emera which corporation owns 50,126,766 Shares valued at $401,014,128 as at May 12, Deferred Share Units Owned: N/A (3) Board/Committee membership attendance Board Governance Committee Compensation Committee 10/10 3/5 5/5 (1) Prior to becoming a Director of the Corporation, from July 2009 to October 2009, Mr. Huskilson served as a Trustee of Algonquin Power Income Fund, the predecessor organization to the Corporation. (2) Mr. Huskilson is the President and Chief Executive Officer of Emera which owns 50,126,766 Common Shares of the Corporation. The Board determined that the guidelines are not applicable to Mr. Huskilson personally. (3) Director fees can be paid in part by the issuance of DSUs, as elected by each director. Director fees owed to Mr. Huskilson are paid directly to Emera. As a result no DSUs are held by Mr. Huskilson. Christopher Jarratt Age 55 Oakville, Ontario, Canada Director since: 2010 Non-Independent (Vice Chair of Algonquin) Christopher Jarratt has over 25 years of experience in the independent electric power and utility sectors. Mr. Jarratt is a founder and principal of Algonquin Power Corporation Inc., a private independent power developer formed in 1988 which is the predecessor organization to APCo and Algonquin. Between 1997 and 2009, Mr. Jarratt was a principal in Algonquin Power Management Inc. which managed APCo (formerly Algonquin Power Income Fund). Since 2010, Mr. Jarratt has been a board member and served as Vice Chair of Algonquin. Prior to 1988, Mr. Jarratt was a founder and principal of a consulting firm specializing in renewable energy project development and environmental approvals. Mr. Jarratt earned an Honours Bachelor of Science degree from the University of Guelph in 1981 specializing in water resources engineering and holds a Professional Engineering designation. In 2009, Mr. Jarratt completed the Chartered Director program of the Directors College (McMaster University) and holds the certification of Ch. Dr. (Chartered Director). In addition, Mr. Jarratt was co-recipient of the 2007 Ernst & Young Entrepreneur of the Year finalist award. Security ownership guideline: $1,245,270 Total value of securities held: $3,694,224 Securities Held: Common Shares: 434,026 (1) valued at $3,472,208 as at May 12, 2014 Performance Share Units: 27,752 valued at $222,016 as at May 12, 2014 Board/Committee membership attendance Board 10/10 (1) Mr. Jarratt owns 323,074 Common Shares and Algonquin Power Corporation (CKJ) Inc. (a private corporation owned by Mr. Jarratt) owns 110,952 Common Shares. Mr. Jarratt exercises control and direction over the Common Shares owned by Algonquin Power Corporation (CKJ) Inc. 12 Page 65 of 253

67 Kenneth Moore is the Managing Partner of NewPoint Capital Partners Inc., an investment banking firm. From 1993 to 1997, Mr. Moore was a senior partner at Crosbie & Co., a Toronto midmarket investment banking firm. Prior to investment banking, he was a Vice-President at Barclays Bank where he was responsible for a number of leveraged acquisitions and restructurings. Mr. Moore holds a Chartered Financial Analyst designation. Additionally, he has completed the Chartered Director program of the Directors College (McMaster University) and has the certification of Ch. Dir. (Chartered Director). Kenneth Moore Age 56 Toronto, Ontario, Canada Director since: 2009 (1) Independent Chair of the Compensation Committee Corporate Governance Committee Security ownership guideline: $450,000 Total value of securities held: $490,448 Securities Held: Common Shares: 18,000 valued at $144,000 as at May 12, 2014 Deferred Share Units: 43,306 valued at $346,424 as at May 12, 2014 Board/Committee membership attendance Board Audit Committee Compensation Committee 10/10 5/5 5/5 (2) Prior to becoming a director of the Corporation, from 1998 to 2009, Mr. Moore served as a Trustee of Algonquin Power Income Fund, the predecessor organization to the Corporation. Ian Robertson Age 54 Oakville, Ontario, Canada Director since: 2010 Non-Independent (CEO of Algonquin) Ian Robertson is the Chief Executive Officer of the Corporation. Mr. Robertson is a founder and principal of Algonquin Power Corporation Inc., a private independent power developer formed in 1988 which was a predecessor organization to Algonquin. Mr. Robertson has over 23 years of experience in the development of electric power generating projects and the operation of diversified regulated utilities. Mr. Robertson is an electrical engineer and holds a Professional Engineering designation through his Bachelor of Applied Science degree awarded by the University of Waterloo. Mr. Robertson earned a Master of Business Administration degree from York University and holds a Chartered Financial Analyst designation. Additionally, he has completed the Chartered Director program of the Directors College (McMaster University) and has the certification of Ch. Dir. (Chartered Director). Commencing in 2013, Mr. Robertson has served on the Board of Directors of the American Gas Association. Security ownership guideline: $1,559,025 Total value of securities held: $3,735,960 Securities Held: Common Shares: 432,250 (1) valued at $3,458,000 as at May 12, 2014 Performance Share Units: 34,745 valued at $277,960 as at May 12, 2014 Board/Committee membership attendance Board 10/10 (1) Mr. Robertson directly owns 327,514 Common Shares and Techno Whiz Kid Inc. (a private corporation owned by Mr. Robertson) owns 104,736 Common Shares. Mr. Robertson exercises control and direction over the Common Shares owned by Techno Whiz Kid Inc. 13 Page 66 of 253

68 Masheed Saidi Age 59 Dana Point, California, United States Director since: New Nominee Independent Masheed Saidi has 30 years of operational and business leadership experience in the electric utility industry. Ms. Saidi is an Executive Consultant of Energy Initiatives Group, a specialized group of experienced professionals that provide technical, commercial and business consulting services to utilities, ISOs, government agencies and other organizations in the energy industry. Between 2005 and 2010, Ms. Saidi was the Chief Operating Officer and Executive Vice President of US Transmission for National Grid USA, for which she was responsible for all aspects of US transmission business. Ms. Saidi previously served on the Board of Directors on the Northeast Energy and Commerce Association. She serves as Chairman of the Board of Directors for the non-profit organization Mary s Shelter. She earned her Bachelors in Power System Engineering from Northeastern University and her Masters of Electrical Engineering from the Massachusetts Institute of Technology. She is a Registered Professional Engineer (P.E.) Security ownership guideline (1) : $180,000 Total value of securities held: $8,000 Securities Held: Common Shares: 1,000 valued at $8,000 as at May 12, 2014 Deferred Share Units: Nil Board/Committee membership attendance Board N/A (2) (1) Ms. Saidi has until 2019 to achieve ownership targets under the guideline (2) Ms. Saidi is a new nominee to the board of directors George Steeves is the principal of True North Energy, an energy consulting firm specializing in the provision of technical and financial due diligence services for renewable energy projects. From January 2001 to April 2002, Mr. Steeves was a division manager of Earthtech Canada Inc. Prior to January 2001, he was the President of Cumming Cockburn Limited, an engineering firm, and has extensive financial expertise in acting as a chair, director and/or audit committee member of public and private companies, including the Corporation, and formerly Borealis Hydroelectric Holdings Inc. and KMS Power Income Fund. Mr. Steeves received a Bachelor and Masters of Engineering from Carleton University and holds the Professional Engineering designation in Ontario and British Columbia. Additionally he has completed the Chartered Director program of the Directors College (McMaster University) and has the certification of Ch. Dir. (Chartered Director). George Steeves Age 64 Aurora, Ontario, Canada Director since: 2009 (1) Independent Chair of the Corporate Governance Committee Audit Committee Security ownership guideline: $180,000 Total value of securities held: $319,224 Securities Held: Common Shares: 17,241 (2) valued at $145,928 as at May 12, 2014 Deferred Share Units: 21,662 valued at $181,296 as at May 12, 2014 Board/Committee membership attendance Board Audit Committee Governance Committee 10/10 4/5 5/5 (1) Prior to becoming a director of the Corporation, from 1997 to 2009, Mr. Steeves served as a Trustee of Algonquin Power Income Fund, the predecessor organization to the Corporation. (2) Mr. Steeves directly owns 14,327 Common Shares and Mr. Steeves spouse owns 2,914 Common Shares. Mr. Steeves exercises control and direction over the Common Shares owned by his spouse. 14 Page 67 of 253

69 Director Skill Matrix The following chart outlines the key areas of expertise and experience for each Director nominee. Christopher Ball Christopher Huskilson Christopher Jarratt Ken Moore Ian Robertson Masheed Saidi George Steeves Independent: In accordance with Section 1.4 of National Instrument CEO/Senior Executive: CEO or senior executive experience with large publicly traded organization Governance/Other Directorships: Director of public company and/or significant governance role Customer/Stakeholder: Experience in managing stakeholders or represents stakeholder group Energy Sector: Senior executive experience in the energy sector Utility Sector: Senior executive experience in the utility sector Mergers & Acquisitions/Growth Strategy: Senior executive experience with mergers, acquisitions and/or business growth strategy Compensation and Human Resources: Understanding and experience with human resources issues and compensation policies Financial: Senior financial executive experience Legal and Regulatory: Legal and regulatory experience 15 Page 68 of 253

70 NON-MANAGEMENT DIRECTOR COMPENSATION Compensation Decision Making Process The compensation of directors is designed to: attract and retain highly skilled and experienced individuals to serve on Algonquin s Board; ensure alignment with long-term Shareholders interest; and recognize the substantial time commitment required to oversee management of the Corporation. With a view to aligning the interests of Directors and shareholders and providing market competitive compensation, the Compensation Committee reviews the amount and form of non-management Directors compensation. The Compensation Committee considers the responsibilities and time commitment required of Algonquin Directors and reviews the competitiveness of board compensation against Canadian corporations with comparable scope and complexity. Directors who are also officers of Algonquin receive no remuneration as Directors. In fiscal 2013 Algonquin paid its non-management Directors the following compensation: Annual Retainers Amount ($) Chairman of the Board 150,000 Other Director Board Retainer 60,000 Additional Retainers: Chair of Audit Committee 10,000 Chair of Corporate Governance Committee 7,500 Chair of Compensation Committee 7,500 Director Deferred Share Unit Plan Directors have the ability to elect to receive some or all of their annual remuneration in the form of Deferred Share Units ( DSUs ). In 2013, Messrs. Moore and Ball elected to receive 50% of their annual remuneration in DSUs. Mr. Steeves elected to receive 66.7% of his annual remuneration in DSUs. Mr. Huskilson s Director remuneration is paid directly to Emera. As a corporation is not permitted to own DSUs, 100% of Mr. Huskilson s annual remuneration was paid to Emera in cash. With the exception of the Chairperson of the Board of Directors, Directors are also entitled to receive additional remuneration for attending meetings of the Board or of a committee of the Board in the amount of $1,500 per meeting attended in person or by telephone. The Directors are entitled to be reimbursed for their reasonable outof-pocket expenses incurred in connection with the conduct of the Corporation s business. In the fiscal year ended December 31, 2013, the Corporation paid each Director as indicated below on account of retainer and meeting attendance fees. 16 Page 69 of 253

71 Non-Management Director Compensation Table Director Kenneth Moore Chair of the Board Fees Earned (1) Share- Based Awards (3) Option- Based Awards Non-equity Incentive Plan Compensation Pension Value All other Compensation Total (1) ($) ($) ($) ($) ($) ($) ($) 75,000 75, ,000 Christopher J. Ball Chair of the Audit Committee George Steeves Chair of the Corporate Governance Committee 71,000 35, ,000 52,478 45, ,500 Christopher Huskilson (2) Chair of the Compensation Committee 94, ,500 (1) Amounts disclosed represent the aggregate remuneration paid to each Director for (a) attending quarterly meetings, the annual Shareholder meeting, committee meetings, the annual budget approval meeting and business development meetings; and (b) if applicable, acting as chair of the Board and/or Board committees. (2) Director fees owed to Christopher Huskilson are paid directly to Emera (3) Messrs. Ball, Moore and Steeves elected to receive part of their 2013 payments in the form of DSUs. A DSU has a value equal to one Common Share. DSUs cannot be redeemed until the Director retires, resigns, or otherwise leaves the Board. Indebtedness of Directors and Others No current or former directors or officers of Algonquin, or any of its subsidiaries, had any loans with Algonquin or any of its subsidiaries at any time in Page 70 of 253

72 STATEMENT OF CORPORATE GOVERNANCE PRACTICES National Instrument Disclosure of Corporate Governance Practices ( NI ) and National Policy Corporate Governance Guidelines ( NP ) of the Canadian Securities Regulators requires the disclosure by each listed reporting issuer of its approach to corporate governance. This statement discloses the Corporation s corporate governance practices. The Directors consider that the Corporation has complied with the guidelines set out in the NP (the Guidelines ). Corporate Governance Highlights Highlights The Chair of the Board, Chair of the Audit Committee, and Chair of the Governance Committee is independent in accordance with National Instrument Audit Committees. The Board oversees the Corporation s strategy and actively participates in the annual strategic planning process which results in the strategic plan. The Board oversees the Corporation s risk management. The Board has a written mandate for the Chair of the Board, the Chair of Committees and the CEO. New Directors receive a formal orientation process. New Directors are recruited on the basis that they will make a strong contribution and have the background, skills and experience needed by the Board in view of the Corporation s strategy. All Directors are provided support for continuing education to familiarize them with the businesses, investments and risks of the Corporation to enhance their contribution as Directors of the Corporation. Creating a culture of integrity begins with the tone at the top. Directors, officers and employees are required annually to sign an acknowledgement that they have reviewed and understand the Corporation s Standards of Business Conduct. The Corporation has a policy whereby all meetings of the Board of Directors and all committees provide an opportunity for an in-camera session at which management of the Corporation is not present. The Board is exposed to levels of management within the Corporation in addition to executive management. It is believed that Board exposure to other levels of management advances the succession planning for the Corporation. The Board annually assesses its performance in order to find ways to improve its effectiveness and the performance of the Chair, individual Directors and the Board committees. Board of Directors Director Independence The Board has determined that in accordance with National Instrument Audit Committees ( NI ) all nominees, with the exception of Messrs. Robertson, Jarratt and Huskilson, are considered independent within the meaning of NI Mr. Robertson and Mr. Jarratt, as Chief Executive Officer and Vice Chair, respectively, are the only Directors employed by the Corporation. Mr. Huskilson is the Chief Executive Officer of Emera which owns 50,126,766 Common Shares of the Corporation. Mr. Ken Moore, the Chair of the Board, is independent within the meaning of NI Page 71 of 253

73 Mandate of the Board of Directors The Board of Directors has a written mandate to set the strategic direction of the Corporation and to oversee its implementation by management of the Corporation. A copy of the Mandate of the Board of Directors is provided in Schedule D. Strategic Planning The executive management in collaboration with the Board develops a strategic plan which is presented to the Directors at a mid-year strategic retreat for approval by the Board. The development of the annual strategic plan includes input and presentations from levels of management other than executive management with the objective of introducing such individuals to the Board members and vice versa. Pursuant to the Mandate of the Board of Directors, oversight and guidance of the Corporation s strategy is one of the primary roles of the Board. Directors participate in the development of the corporate strategy which determines the annual and long term objectives for the Corporation. The Board regularly evaluates the performance of the Corporation in relation to the approved strategy. Risk Management The Board of Directors is responsible for overseeing risk. Pursuant to the Mandate of the Board of Directors, the Board is responsible for overseeing the implementation by management of appropriate systems to identify, report, and manage the principal risks faced by the Corporation. The Mandate of the Board of Directors details the responsibility of the Board by reviewing the implementation by management of systems to manage risks and review reports by management relating to the operation of and any material deficiencies in these systems. In addition, the Board verifies that internal, financial, non-financial and business control and information systems have been established by management and that the Corporation is applying appropriate standards of corporate conduct for such controls. The Board is also responsible for reviewing the Corporation s insurance program, its uninsured exposure, and business continuity and disaster recovery plans. The Board receives quarterly updates from management on the status of risk management activities and initiatives being undertaken by the Corporation. Directors Meet without Management The Board of Directors has adopted a policy whereby all scheduled and unscheduled meetings of the Board of Directors and all committee Meetings, as a matter of course, provide an opportunity for an in-camera session at which management of the Corporation is not present. For the year ended December 31, 2013, all Board of Director and committee meetings had in-camera sessions with management of the Corporation not in attendance. Independent Chair Mr. Ken Moore, the Chair of the Board, is an independent Director. The position description of the Chair of the Board requires that the Chair be independent. Directors Membership on Other Public Company Boards Other than as disclosed below, none of the proposed nominees for election as Directors serves as a director on the board of directors of a public company. Mr. Christopher Huskilson currently serves as a director on the board of directors of Emera, and on Emera affiliated boards including Nova Scotia Power Inc., ICD Utilities Ltd., Light & Power Holdings Ltd., Barbados Light & Power Company Ltd., and Bangor Hydro Electric Company. Common Memberships on Boards of Public Companies There are currently no common memberships on boards of public companies among the Corporation s Directors. Majority Voting for Election of Directors In May 2011, the Board adopted a majority voting policy with respect to the election of Directors. In March 2014, the Board adopted amendments to the policy to comply with amendments to the TSX Company Manual that will 19 Page 72 of 253

74 come into effect on June 30, 2014 and will apply to annual shareholder meetings of TSX-listed issuers held after June 30, Under the Corporation s majority voting policy, as amended, where a nominee for Director (the Subject Director ) is not elected by at least a majority (50% + 1 vote) of the votes cast with regard to his or her election, the Subject Director must immediately tender his or her resignation to the Board. The Corporate Governance Committee of the Board will, within 90 days of the shareholder s meeting, determine whether to accept the Subject Director resignation, which resignation should be accepted absent exceptional circumstances. The resignation will become effective when accepted by the Board. As soon as practicable following receipt of the resignation of the Subject Director: (a) the Corporation will issue a press release with the Board s decision including, in the case of the Board not accepting the resignation, the reasoning behind such decision, and (b) the Board may (i) leave the resultant vacancy in the Board unfilled until the next annual meeting of shareholders of the Corporation; (ii) fill the vacancy through the appointment of a Director whom the Board considers to merit the confidence of the shareholders of the Corporation; or (iii) call a special meeting of the shareholders of the Corporation to consider the election of a nominee recommended by the Board to fill the vacant position. The Subject Director will not participate in any meetings of the Board at which his or her resignation is considered. Following any uncontested meeting at which Directors are elected, the Corporation will issue a news release disclosing the detailed voting results for each director candidate. If a formal count is not conducted, votes represented by proxy shall be disclosed. The majority voting policy applies only in circumstances involving an uncontested election of Directors, meaning an election in which the number of nominees for Director is equal to the number of Directors to be elected. In 2013, individual Directors received support from Shareholders, and since the adoption of the Majority Voting Policy, all Director nominees have received a majority for vote at the Corporation s meetings of Shareholders. Board and Director Assessments The Board recognizes the value of assessing its effectiveness in order to find ways to improve its effectiveness and the performance of the Chair, individual Directors, and the Board committees including committee Chairs. In August 2013, the Board of Directors adopted a guideline for the Board and Director performance assessment review process. The guideline includes assessing, at least annually by all Directors, the effectiveness and contribution of the Board as a whole, the Chair of the Board, the chairs of all committees and each of the individual Directors. In accordance with the guideline, the Corporate Governance Committee annually determines the process by which individual Director assessments will be undertaken. The process may include the use of questionnaires, one-on-one interviews between individual Directors and the Board Chair, or such other process the Corporate Governance Committee determines appropriate. A report of the assessment is developed and presented to the Board of Directors at the conclusion of the assessment. The report includes the identification of issues arising from the assessment, an action plan for improvement and the progress is monitored by the Corporate Governance Committee. In December 2013, the Chair of the Board interviewed each Director as part of the annual assessment review process. The following questions were sent to each Director in advance of the interview for their consideration: Assessment of the Board: the Directors were asked to assess the effectiveness of the Board of Directors and suggest improvements. Assessment of the Board Committees: the Directors were asked to assess the effectiveness of the individual committees, including committees that the Director is, and is not a member of. Self-Assessment: the Directors were asked to assess their own performance as Directors and committee members, including what might make them more effective. 20 Page 73 of 253

75 Peer Assessment: The Directors were asked to provide comments on the performance of their peer Directors. The assessment of the Chair of the Board was conducted in a meeting of all Directors that was led by the Chair of the Corporate Governance Committee and excluded the Board Chair. The results of the assessment of the Chair were provided to the Chair in a one-on-one meeting between the Chair and the Chair of the Corporate Governance Committee. In addition, the meeting also provides an opportunity for the Chair to share the results of the individual Director meetings with the Chair of the Corporate Governance Committee and to jointly develop action plans where necessary. The Corporate Governance Committee prepared a report detailing the findings and results of the 2013 Board and Director Performance Assessment and this report was presented to the Board. Director Share Ownership Guidelines In order to align the interests of non-management Directors and Shareholders, the non-management Directors are subject to share ownership guidelines whereby they are expected to own Common Shares and/or DSUs with a value of not less than three times the Annual Director s Retainer within a specified timeframe of five years. For the status of each Director nominee under the Director Share Ownership Guidelines, see their biographies listed earlier in this Circular. The guideline states that if a non-management director s share ownership falls below the minimum guidelines due to a decline in the share price, such director will have three (3) years to restore compliance. Board Size The Articles of Incorporation provide that the number of Directors on the Corporation s Board must not be less than three (3) and not more than twelve (12). Seven (7) Director nominees are being proposed for election at the Meeting. Board Diversity The Board recognizes the benefits of promoting diversity, both within Algonquin and at the Board of Directors level. In assessing candidates and selecting nominees for the Board, diversity is an important factor considered by the Governance Committee. To ensure there is sufficient gender diversity on the Corporation s Board of Directors, the Corporation has nominated two female Directors for election at the annual Shareholders meeting on June 18, The list of Director nominees includes one woman out of seven Director nominees, or 14 per cent. Nomination of Directors The Corporate Governance Committee serves as the Director nominating and evaluation committee and will recommend new Directors as the need arises. The Corporate Governance Committee is responsible for providing the Corporation with a list of nominees for election as Directors at the Corporation s annual meeting of Shareholders. The Corporate Governance Committee creates and reviews the criteria for selecting Directors by assessing the personal qualities, business experience and qualifications of current Directors. It also assesses the Corporation s ongoing needs and circumstances, geographical representation and the overall experience of the Board. In recruiting new Directors, the Corporate Governance Committee considers the background, skills and experience desired for Directors in view of the Corporation s strategy and activities. It develops a plan for the recruitment of additional director nominees who can provide those characteristics. Director nominees must, in the opinion of the Corporate Governance Committee, be able to contribute to the broad range of issues which come before the Board for consideration. They must be able to devote the time necessary to prepare for and attend meetings of the Board and committees of the Board to which they may be appointed. The Corporate Governance Committee regularly evaluates the expected turnover of Directors in advance of their retirement from the Board and develops an effective succession plan that includes creating overlap, where possible, between new Directors and retiring ones. 21 Page 74 of 253

76 Director Recruitment Process The Corporate Governance Committee uses the services of a search consulting firm in order to assist it in identifying suitable Director candidates. When the Corporation engages a search consulting firm, it requests the development of a list of potential candidates based on the criteria developed by the Corporate Governance Committee for the selection of a new Director. The consulting firm screens candidates and discusses potential candidates with Corporate Governance Committee members, and creates a list of primary candidates. Based on this list, the search firm determines the interest and availability of the potential candidates. This process is designed carefully to provide the best opportunity for strong Board candidates. Each potential Director candidate is interviewed by the Chair of the Board, the Corporate Governance Committee Chair, the Chief Executive Officer, and in most cases by additional Directors. In 2013, the Corporate Governance Committee initiated a process to expand the Board of Directors. The Corporate Governance Committee believes that expansion of the Board will benefit the Corporation through board diversity (both gender and geographic), the addition of independent Board members, and the broadening of the skill set of the Board. The Corporate Governance Committee believes that expansion of the Board by one (1) member will contribute to the achievement of these benefits. Committees of the Board of Directors Audit Committee The Board has established an audit committee ( Audit Committee ) comprised of Mr. Christopher Ball (Chair), Mr. Kenneth Moore and Mr. George Steeves, all of whom are independent and financially literate for purposes of NI The responsibilities and operation of the Audit Committee are more particularly set out in the Corporation s Audit Committee Charter, a copy of which is included as a schedule to the annual information form of the Corporation for the year 2013 and is available on SEDAR at Corporate Governance Committee The directors have established a Corporate Governance Committee comprised of three (3) of the directors of Algonquin, Mr. George Steeves (Chair), Mr. Christopher Huskilson and Mr. Kenneth Moore. The Corporate Governance Committee: serves as the director nominating and evaluating committee; is responsible for reviewing Algonquin s corporate governance practices; and considers from time to time the effectiveness of the Directors and whether an increase to the number of directors is warranted. Compensation Committee The directors have established a Compensation Committee, comprised of Directors Mr. Christopher Huskilson (Chair) and Mr. Christopher Ball. Both Mr. Huskilson and Mr. Ball have direct experience regarding executive compensation matters.the Compensation Committee is responsible for reviewing Directors compensation and making recommendations to the Board on an annual basis, or more frequently if required. In addition, the Compensation Committee will make recommendations to the Board regarding the philosophy and compensation of executive officers of the Corporation, and report on executive compensation in compliance with Canadian securities law requirements. The process by which executive compensation is established is described below under the heading Statement of Executive Compensation. Mr. Huskilson is the chair of the Compensation Committee and is not considered to be an independent director in accordance with NI Accordingly, the Board conducted a review of the circumstances with respect to Mr. Huskilson s independence and whether such non-independence in accordance with NI could be reasonably expected to interfere with the exercise of Mr. Huskilson s independent judgement as Chair of the Compensation Committee. On the basis that Mr. Huskilson has extensive compensation experience, is CEO of 22 Page 75 of 253

77 Emera (which owns a 25% interest in the Corporation), and that the interests of non-emera shareholders and Emera are aligned, the Board concluded that the non-independence of Mr. Huskilson does not interfere with his judgement as Chair of the Compensation Committee. Position Descriptions Position Description for Chair of the Board of Directors Under the position description for the Chair of the Board of Directors, the Chair is to provide leadership for the Board. In addition, the Chair is to ensure that Board and Shareholder meetings function effectively, provides leadership of the Board and its committees and provides advice and counsel to Directors and the Chief Executive Officer. The Chair participates in the recruitment of Directors and the assessment of Director performance. The position description of the Chair of the Board requires that the Chair provide leadership for the Directors and serve as chair of Board and Shareholders meetings. The Chair of the Board also: (a) in consultation with members of the Board and management of the Corporation, sets the agenda for each meeting of the Board; (b) provides input to the Corporate Governance Committee on its recommendation to the Board for approval of (i) candidates for nomination or appointment to the Board; and (ii) members and chairs of committees of the Board; (c) (d) (e) assesses whether the Directors and their committees have appropriate administrative support, access to personnel of the Corporation and access to outside advisors for the purposes of the Board fulfilling its mandate; in consultation with the Corporate Governance Committee, leads the review and assessment of Board meeting attendance, performance and compensation of the Board and individual directors and the composition of the Board; and executes all contracts, documents or instruments in writing which require his signature. Position Description of Committee Chairs The Board has adopted position descriptions for each committee chair which detail the duties of the committee chairs. Each committee chair is required to provide leadership to the committee members and support the committee s effective operation in order to fulfill its mandate. The position description for the committee chairs provides that each committee chair shall: (a) chair all committee meetings; (b) provide leadership for the committee; (c) act as the communication link between the Board and the applicable committee; (d) review formal communications from the committee to the Board before dissemination to the Board; (e) ensure that all matters requiring committee review or approval are brought to the committee in a timely and appropriate manner; (f) co-ordinate, in consultation with the Chair of the Board, the agenda, information packages and related events for committee meetings with senior management of the Corporation; and (g) set the frequency of committee meetings and review such frequency from time to time as considered appropriate or as requested by the Board. Position Description for CEO The roles and responsibilities of the President and Chief Executive Officer are contained in his employment contract which provides that he is Chief Executive of the Corporation. The President and Chief Executive Officer s employment contract is reviewed by the Compensation Committee and is approved by the Board of Directors. 23 Page 76 of 253

78 Director Orientation and Continuing Education The Board and management believe that for Directors to be effective they must be knowledgeable about the Corporation, its strengths and challenges, and the business environment in which the Corporation operates. In addition, the effectiveness of the Board is enhanced by Directors forming collegial working relationships with other Directors and management. Director Orientation Process New Directors are provided with a formal orientation to the Corporation that familiarizes them with the businesses, the corporate structure, other Directors and key personnel of the Corporation. The orientation process is designed to provide an opportunity for new Directors to meet senior management and become familiar with their areas of responsibility. New Directors receive an in-depth orientation to the Corporation s executive leaders, businesses, strategy, financial information and governance practices that allows them to effectively integrate with the operation of the Board. The Board and management have built and continue to expand a long-term program of training for Directors to enhance their effectiveness and reinforce a collegial working relationship among members of the Board. Orientation sessions are attended by the President and Chief Executive Officer, the Chief Financial Officer and other executive officers or leaders of key subsidiaries. The Chair also attends one-on-one orientation meetings with a new Director. In addition, external meetings are arranged for new Directors as part of the orientation plan including site visits, meeting with the Corporation s auditors and meeting with Corporate counsel. A reference manual is provided to the Director in advance of the orientation sessions which includes the following: Public disclosure documents including Annual Reports, recent annual and interim Management s Discussion & Analysis, Financial Statements, Management Information Circular and Annual Information Form; Governance documents including Board and committee charters, policies and guidelines; and Other documents such as strategic plan and business plan, guide to the Corporation s management structure, succession plan, minutes of Board meetings and minutes of committee meetings Continuing Education for Directors Directors are provided the opportunity to update, educate and inform themselves in areas they request or that management believes are relevant to issues facing the Corporation. Directors receive briefing reports and materials from management in advance of all meetings. Regular communication is also provided to Directors between meetings to provide updates on developments that may affect the Corporation or its subsidiaries. Directors are encouraged to participate in external education sessions that are related to the business of the Corporation and the performance of their duties as Directors of the Corporation. Directors are entitled to reimbursement for related out-of-pocket expenses incurred in attending relevant education sessions. From time to time, the Board receives specialized presentations from external parties and management on various matters of significance to the Corporation. Directors participated in education sessions and received education materials about specific topics in 2013 as follows: Education Presentations Date Participants Presentation by external consultant on Power Business Outlook and the influence of shale gas on the energy sector Presentation by management expert on Compressed Natural Gas (CNV) and Liquefied Natural Gas (LNV) April 23, 2013 July 19, 2013 Board of Directors Board of Directors Presentation by external consultant of System of Audit Quality Control March 13, 2013 Audit Committee Presentation on Equity Valuation Methodologies for Diversified Infrastructure Companies May 9, 2013 Board of Directors 24 Page 77 of 253

79 Board Policies Whistleblower Policy The Corporation has a whistle-blower s policy entitled Procedures for the Reporting of Irregularities and Dishonesty (the Procedures ). These Procedures establish a method for dealing appropriately with any complaints made by employees of irregular or dishonest accounting, internal accounting control, auditing matters, or fraudulent or illegal activity by any employee or employees. Any employee who in good faith reports such activity will be protected from threats of retaliation, or discrimination because of the report. Any employee who retaliates against another employee who reports such activity could face disciplinary action under the Procedures. If an employee believes that retaliation has occurred, the employee may submit a complaint in writing to the Director, Internal Audit. Reports under the Standards for Business Conduct and Procedures for the Reporting of Irregularities and Dishonesty are addressed by the Corporation, and on a quarterly basis the Internal Audit department informs the Audit Committee of all reports and their status. Code of Business Conduct and Ethics Policy The Board has adopted a written Code of Business Conduct and Ethics ( Code of Conduct ) that applies to everyone at Algonquin and its subsidiaries. Directors, officers and employees are required to annually acknowledge that they have reviewed and understand the Code of Conduct. The Code of Conduct is available on Algonquin s website at or a copy may be obtained by contacting the Ethics Officer, Algonquin Power & Utilities Corp., 2845 Bristol Circle, Oakville, ON, L6H 7H7. The Board regularly reviews the Code of Conduct, and in 2013 made revisions in order to update the content in keeping with best practices. The Board monitors compliance with the Code of Conduct and there have been no instances of any waiver of compliance with the Code of Conduct for any Director or officer. Insider Trading Policy The Corporation has an insider trading policy ( Insider Trading Policy ) which places restrictions on those in a special relationship with Algonquin (including insiders) when trading Algonquin Common Shares. The Corporation s insider trading policy includes the following measures: Restriction from trading Algonquin Common Shares during regular quarterly and annual trading blackout periods when financial results are being prepared and have not yet been publicly disclosed. These periods currently begin on the last day of a quarter or fiscal year and end at the close of trading on the second trading day after financial results have been issued publicly; Communication of the dates for regular blackout periods; Restrictions on trading any securities which gain in value if the value of Algonquin securities decline in the future (e.g. short selling), call options or put options; and Prohibition from communicating inside information to others other than in the necessary course of business. All reporting insiders are required to disclose all trading activity. As required by law, reporting insiders must file insider reports via the internet-based System for Electronic Disclosure by Insiders (SEDI). Management regularly reviews the Insider Trading Policy to ensure it reflects current best practices and developments. Corporate Disclosure Policy The Board has approved a corporate disclosure policy to ensure that communications to investors and potential investors are timely, factual and accurate, and that the information is disseminated in accordance with all applicable legal and regulatory requirements to the investing public, analysts and the media. 25 Page 78 of 253

80 Conflicts of Interest Directors are required to declare any conflict of interest which they may have in a matter before the Board. In any matter requiring approval of the Board, a Director is prohibited by the Corporation s Articles of Incorporation from voting in respect of the matter in which the Director is interested. 26 Page 79 of 253

81 STATEMENT OF EXECUTIVE COMPENSATION PRACTICES All dollar amounts in this Statement of Executive Compensation are expressed in Canadian dollars unless otherwise indicated. Compensation Highlights Compensation Highlights Third Party consultants are used by the Compensation Committee to develop compensation for executives that is competitive in the market and comparable to benchmarked comparators. A pay for performance philosophy has been adopted by the Compensation Committee in developing compensation for executives. Caps on payouts, vesting requirements and share ownership requirements are part of the overall plan design. All members of Compensation Committee are knowledgeable and experienced individuals who have the necessary background and expertise to fulfil their duties. The compensation programs have been developed to align well with Corporate strategy. Executive pay is aligned with shareholder interests by having a significant component at risk and tied to both short and long term objectives. Minimum share ownership requirements are in place for Named Executive Officers. Substantial portion of long term incentive is deferred to discourage executives from taking short term or excessive risks. The inclusion in employment contracts for senior officers of double trigger provisions for change of control mitigates the risk arising from termination. Compensation Philosophy The Corporation s compensation philosophy for executive officers generally follows three underlying principles: (i) to provide compensation packages that encourage and motivate performance; (ii) to be competitive with other entities of similar size and scope of operations so as to attract and retain talented executives; and (iii) to align the interests of its executive officers with the long-term interests of the Corporation and its Shareholders. When determining compensation policies and individual compensation levels for the Corporation s executive officers, the Compensation Committee takes into consideration a variety of factors. These factors include the overall financial and operating performance of the Corporation, the Compensation Committee s overall assessment of (i) each executive officer s individual performance and contribution towards meeting business objectives; (ii) each executive officer s level of responsibility; (iii) each executive officer s length of service; and (iv) industry comparables. Compensation Governance The Compensation Committee is responsible for reviewing the alignment of Algonquin s compensation programs, including incentive pay programs, with the Corporation s strategic plans and risk profile, Algonquin s performance, and risk management principles. The Compensation Committee annually reviews compensation for the Chief Executive Officer and senior management of the Corporation. The Compensation Committee oversees the administration of the incentive plans providing for the award of annual incentives, stock options, PSUs and deferred share units in accordance with the provisions of the respective plans. In addition, the Compensation Committee annually reviews compensation for the directors, Chair of the Board and Chair of committees of the Corporation. The Compensation Committee reviews, and recommends to the Board of Directors, compensation policies and processes and any new incentive compensation and equity compensation plans or changes to such plans. In addition to selecting and recommending the appointment of the Chief Executive Officer to the Board, the Compensation Committee is responsible for reviewing and approving the overall executive compensation plan 27 Page 80 of 253

82 philosophy and guidelines, and for reviewing directors compensation on an annual basis, or more frequently if required, and making recommendations to the Board. In addition, the Compensation Committee reviews and approves management succession plans, and approves the appointment and reviews compensation of officers reporting directly to the Chief Executive Officer as well as approves the grant of stock options. The Compensation Committee also has responsibility for assessing, on an annual basis, the performance of the Vice Chair and Chief Executive Officer, and discussing the performance of the executive team. Succession Planning and Leadership Development The Compensation Committee has responsibility for ensuring that a succession planning process is in place for senior management of Algonquin and its affiliates, and to review this process on an annual basis. Succession planning is viewed by the Compensation Committee as an ongoing priority of identifying and developing talent, leadership and skills to ensure the Corporation has the continued capability to meet future strategic objectives and fulfill key organizational roles in the future. The Compensation Committee is mandated to make recommendations to the Board of Directors with respect to succession planning including: (i) policies and principles for the selection and performance review of the executive officers, and potential successors to the executive officers; (ii) policies and plans regarding succession in the event of an emergency or the retirement of an executive officer; and (iii) appointing, training and monitoring potential successors to executive officers. The Compensation Committee requires that senior management of Algonquin at least annually review the performance of their team members and develop plans for personal growth and career advancement. Where employees are considered potential successors, a long term professional development plan is established to further align the employees personal development plan with the long term succession needs of the Corporation. Where no internal succession candidate is identified, the Corporation expects to source a potential successor through external hiring. In this instance, a plan would be established to provide for filling the role on an interim basis pending the external hire. Annual Compensation Decision Making Process The Corporation has developed a comprehensive annual process for making decisions about compensation for the executive officers of the Corporation. This process involves the following steps: Management analyzes data (including peer group information, compensation trend information and internal equity considerations) and performance against objectives, and the Chief Executive Officer makes recommendations regarding executive compensation for the senior officers including the Named Executive Officers to the Compensation Committee, other than for the Chief Executive Officer and Vice Chair. The Compensation Committee reviews and considers these recommendations, as well as the compensation for the Chief Executive Officer and Vice Chair of the Corporation, using benchmark information, with the assistance of external compensation consultants and information as required, and makes recommendations to the Board. The Board considers and grants final approval for executive compensation decisions, with decisions regarding the Chief Executive Officer and Vice Chair being made by the non-executive directors of the Board (being all Board members other than the Chief Executive Officer and Vice Chair). The foregoing process is generally completed within the first quarter of each new financial year of the Corporation. As part of the process, the Compensation Committee, in consultation with the Board also sets performance objectives for the Chief Executive Officer and Vice Chair for the coming year. Performance objectives for the other senior officers of the Corporation are set with the approval of the Chief Executive Officer. For the purpose of determining bonus awards under the Corporation s short-term performance incentive plan, the Board also approves the Corporation s corporate scorecard, which consists of a series of corporate objectives against which corporate performance is measured, with the results being used to calculate bonuses for executive officers and other employees of the Corporation. The corporate scorecard is established annually for each financial year of the Corporation. 28 Page 81 of 253

83 Algonquin engages the services of independent compensation consultants such as Mercer LLC ( Mercer ) and Towers Watson ( Towers ), to compile market information on senior management compensation relating to base salary, short-term and long-term incentives. A complete benchmarking review takes place every two (2) years and the scope of services includes competitive market reviews of senior executive compensation levels; review and observations of current executive compensation philosophy; policies and practices; and a review of pay and performance comparators. The Compensation Committee reviews compensation data based on a comparator group of companies, primarily power and regulated utilities and other energy industry enterprises that are of a similar size and scope as the Corporation. While the intention is to use a consistent list of comparators from year to year, the comparators used for compensation review are subject to periodic change due to: (a) the availability of relevant pay data, (b) mergers and acquisitions, and (c) relevance of new comparators based on updated financial metrics. The rationale for incorporating the energy industry is that senior talent can migrate between similar organizations (i.e. industry, scale, complexity). The Compensation Committee uses independent compensation advisors to monitor the effectiveness of the Corporation s compensation policies, plans and programs to ensure that the Corporation is competitive and able to attract, retain and motivate executives (as well as all other employees) in accordance with corporate strategy and to achieve the Corporation s goals. The Compensation Committee also monitors compensation policies, plans and programs to ensure that they are appropriate to each executive s expertise, responsibility and performance, and the performance of the Corporation. Compensation Advisors The Compensation Committee, from time to time, retains the services of independent advisors as needed in order to assist in fulfilling its duties. In 2013, the Compensation Committee and the Corporation engaged the services of compensation consultants Mercer as advisors to provide independent advice, compensation analysis and other information for compensation recommendations. Mercer provided counsel on the competitiveness and appropriateness of compensation practices and comparator groups for Algonquin and its affiliates. The scope of services includes bench marking competitive market reviews of senior executive compensation levels, review and observations of current executive compensation philosophy, policies and practices, and a review of pay and performance comparators. In order to determine appropriate compensation levels relative to the Corporation s competitive market, consultants retained by the Compensation Committee in 2013 developed a comparator group of Canadian and United States organizations in Algonquin s business sectors (independent power producers and utilities and other sectors of similar complexity). The methodology targeted companies with revenues of approximately one-half to two times those of Algonquin in order to find appropriate comparators in terms of size and complexity (the Comparator Group ). Mercer, in consultation with the Compensation Committee determined that given the business sectors and geographic location of Algonquin s business, an appropriate comparator group would be comprised of approximately 20 United States and Canadian entities split 60% and 40% respectively. Canadian comparators included: Emera Inc, Calfrac Well Services Ltd., ShawCor Ltd., Fortis BC Holdings Inc., Altagas Ltd., Mullen Transportation Inc., Capital Power Corp., Secure Energy Services Inc., Savanna Energy Services Corp. and Northland Power Inc. United States based comparators included: ITC Holdings Corp., Aqua America Inc., Empire District Electric Co., MGE Energy Inc., California Water Service, Chesapeake Utilities Corp. and Atlantic Power Corp. The fees paid by Algonquin to its advisors for the work performed are: In 2013, Algonquin paid $34,979 in fees to Mercer for compensation advice In 2012, Algonquin paid $19,776 and $36,894 in fees to Mercer and Towers respectively for compensation advice. 29 Page 82 of 253

84 Risk Management and Compensation As part of the Board and Compensation Committee s oversight responsibilities of the design and administration of the Corporation s executive compensation programs, the Compensation Committee identifies and discusses design features or processes that may potentially represent conflicts of interest and/or inducements for unnecessary or excessive risk-taking by senior executives. The Corporation has compensation policies and practices in place to ensure that a Named Executive Officer ( NEO ) or individual at a principal business unit does not take inappropriate or excessive risk, such as: Short-term incentive plans include caps on payouts. The PSU plan includes caps on payouts. Termination and severance provisions in the event of a change in control include a double trigger Executive share ownership requirements align the interests of senior officers with interests of shareholders. Inclusion of non-financial performance measures in incentive compensation programs are in place. The Board has discretion to amend the final payout of the incentive compensation programs. Officers of the Corporation and each of its subsidiaries are not permitted to hedge their economic risk with respect to their holdings of equity securities and equivalents to securities granted as compensation. In summary, the Compensation Committee concluded that the Corporation s compensation programs did not create inordinate risk to the shareholders because an appropriate system of checks and balances were in place to mitigate the level of risk undertaken by management. For 2013, the Compensation Committee conducted a compensation risk review and considered that in fact there were no significant changes: in the compensation programs or design; in the Corporation s business strategy; and any other relevant circumstance; and therefore determined there was no increase in compensation risk. The Compensation Committee also satisfies itself as to the adequacy of the information it receives, the independence of the review, and reporting of financial results on which certain important compensation decisions (e.g., the amount of annual incentive to be paid) are based. These existing safeguards notwithstanding, the Compensation Committee and Board will continue to review the relationship between enterprise risk and the Corporation s executive compensation plans and policies to confirm they continue to be optimally aligned with shareholder interests while maintaining an acceptable level of risk exposure. Compensation Discussion & Analysis Named Executive Officer Compensation This section discusses the elements of compensation for the five (5) NEOs in 2013 discussed in this Management Information Circular; namely: Ian Robertson, Chief Executive Officer, Algonquin Christopher Jarratt, Vice Chair, Algonquin David Bronicheski, Chief Financial Officer, Algonquin David Pasieka, President, Liberty Utilities Michael Snow, President, Algonquin Power Co. 30 Page 83 of 253

85 Executive Compensation Philosophy The Corporation s compensation philosophy for executive officers generally follows three underlying principles: (i) to provide compensation packages that encourage and motivate performance; (ii) to be competitive with other entities of similar size and scope of operations so as to attract and retain talented executives; and (iii) to align the interests of its executive officers with the long-term interests of the Corporation and its Shareholders. When determining compensation policies and individual compensation levels for the Corporation s executive officers, the Compensation Committee takes into consideration a variety of factors. These factors include the overall financial and operating performance of the Corporation, the Compensation Committee s overall assessment of (i) each executive officer s individual performance and contribution towards meeting business objectives; (ii) each executive officer s level of responsibility; (iii) each executive officer s length of service; and (iv) industry comparables. Compensation Mix The Corporation has implemented a compensation program that is applicable to all of its employees. This program, which is referred to as the Corporation s Compensation Program, is based on concepts of market competitiveness and internal equity, taking into account the roles and responsibilities of each employee of the Corporation. The program is designed to attract, retain and motivate outstanding talent in a competitive business environment, to reward participants when corporate and personal objectives are achieved, and to promote a highperformance culture among the Corporation s employees. Alignment of employee and long-term Shareholder interests is promoted through a performance-based compensation system linked directly to a corporate scorecard, as addressed below. The compensation components are: base salary; short-term performance incentives, consisting of cash bonus awards; a long-term incentive program, which includes an Executive Stock Option Plan and PSU and RSU Plan; and a retirement plan, a health plan and other benefits. Algonquin s compensation program is designed to be competitive in relevant labour markets, including both shortterm and long-term performance goals which link compensation to the Corporation s performance as measured by specific financial results. In keeping with the Corporation s philosophy to link senior executive compensation to corporate performance and to motivate senior executives to achieve exceptional levels of performance, the Corporation has adopted a model that includes both base salary and at-risk compensation, comprised of short-term performance incentives (which is subject to targets being achieved), and long-term incentives linked to total Shareholder value. The at-risk components depend on achieving corporate, subsidiary business units, and individual performance objectives. These objectives are described in scorecards that establish measurable financial, growth, operations, stakeholders and employee objectives that, if achieved, add value to the Corporation or its affiliates. The NEO s performance against the Scorecard is measured and rated. Each Executive must achieve a level of performance for any payment against a particular objective, failing which there is no payment against such objective. Accordingly, incentive compensation plans are designed to pay larger amounts for superior performance and smaller amounts if target performance is not achieved. One of the objectives in the Scorecard is based on EBITDA which is a non-gaap metric used by many investors to compare companies on the basis of the ability to generate cash from operations. The Corporation uses Adjusted EBITDA as one of the metrics to assess the operating performance without the effects of depreciation and amortization expense, income tax expense or recoveries, acquisition costs, interest expense, gain or loss on derivative financial instruments, write down of intangibles and property, plant and equipment, earnings attributable to non-controlling interests and gain or loss on foreign exchange. The Compensation Committee and the Board believe that this non-gaap Adjusted EBITDA measure provides an understanding of the Corporation s operating performance. 31 Page 84 of 253

86 The following table shows the percentage weighting of each component of the Total Target Compensation for the Named Executive Officers in Name Base Salary Short-Term Performance Incentive Long-Term Incentive Total Pay at Risk (%) (%) (%) (%) Ian Robertson 38% 27% 35% 62% Christopher Jarratt 38% 27% 35% 62% David Bronicheski 50% 25% 25% 50% David Pasieka 51% 23% 26% 49% Michael Snow 51% 23% 26% 49% Base Salary Base salary of the NEOs of the Corporation is established at levels which are meant to be competitive with other companies and entities similar, and of comparable size, to the Corporation. Base salary is not a function of any specific relationship to the performance of the Corporation and is reviewed annually by the Compensation Committee in consultation with the Board of Directors as described earlier. In setting the recommended salaries of the NEOs, the Compensation Committee takes into consideration the advice and recommendations provided by the independent advisor which is based on the salaries paid to other executive officers in the Comparator Groups in the power generation and utilities sectors. Short-Term Performance The short-term incentive plan of the Corporation (the Short-Term Performance Incentive ) is a cash bonus plan, the purpose of which is to align compensation with corporate targets and results, and thereby promote behaviours which benefit the interests of the Corporation and its shareholders, and to reward personal achievements in a graduated fashion with awards at the highest employee grades of the Corporation being linked more directly to overall corporate performance. Incentives are calculated and paid annually using the scorecard, as described below. NEOs are eligible for a discretionary short-term performance incentive based on a percentage of base salary if certain pre-set corporate and personal goals are achieved. Each year, these goals and objectives are reviewed by the Compensation Committee and approved by the Board. These goals are intended to be aligned with the goals and targets of the Corporation for that year. The Scorecard is based on pre-set goals for the Corporation, and is approved by the Board Algonquin Corporate Scorecard On an annual basis, the Board of Directors approves the scorecard that sets forth corporate objectives and target levels to be achieved on which the majority of the Short-Term Performance Incentive for the NEOs is based. The Scorecard for Algonquin is developed and recommended by management for approval by the Compensation Committee and Board of Directors at the beginning of each year. The Scorecard objectives are based on the Corporation s business plan for the year and establish performance targets for each objective. Objectives on the 2013 scorecard included: achievement of predetermined financial objectives for the Corporation (Adjusted EBITDA, earnings per share and cash flow per share); achievement of predetermined growth objectives; achievement of predetermined operations objectives; achievement of predetermined objectives related to Algonquin stakeholders; and achievement of predetermined employee engagement objectives 32 Page 85 of 253

87 The relative weight of each performance measure is approved by the Compensation Committee and varies among the executive team and each of the NEOs. A portion of the short-term incentive for each of the Presidents of Liberty Utilities Co. and Algonquin Power Co. is based on scorecards that are developed for each business. Long-term Incentive The long-term incentive element of compensation for the NEOs includes participation in an Executive Stock Option Plan (the Stock Option Plan ), as described below as well as participation in the PSU and RSU Plan as described in Schedule C to this Circular. In 2013, the Stock Option Plan and the PSU and RSU plan each made up 50% of the target long-term compensatory value for each of the NEOs. The number of stock options and PSUs/RSUs granted to the NEOs is determined by the Compensation Committee based on management s recommendations and on information provided by an independent advisor. Stock option and PSU/RSU grants are based on the level of responsibility within the Corporation; generally, the level of grant increases with the level of responsibility. The stock options and PSUs/RSUs increase or decrease in value in proportion to the increase or decrease in the market price of Algonquin s Common Shares over the term of a particular grant. The fair value of stock option grants is based on the Black-Scholes valuation methodology as it is an appropriate and commonly used methodology to value stock options. For the options granted in 2013, the Black-Scholes value ratio was determined to be equal to 10.6% of the closing share price of $7.72 as of March 13, The Black-Scholes value ratio was determined using the following assumptions: Date Term (1) (years) Volatility (2) (%) Dividend Yield (%) Risk Free Rate March 13, % 4.6% 1.4% (1) The safe harbour term used is equal to ((time to expiry + 3) / 2) (2) The volatility of the share price has been estimated as the average daily volatility since the Algonquin Power Income Fund, the predecessor organization to the Corporation, converted to a corporation. Executive Stock Option Plan The purpose of the Stock Option Plan is to attract, retain and motivate individuals as key service providers to the Corporation and its affiliates and to advance the interests of the Corporation by providing such persons with the opportunity, through share options, to acquire a proprietary interest in the Corporation. The Stock Option Plan authorizes the Board to issue stock options ( Options ) to directors, officers or employees of the Corporation or any affiliate (an Eligible Individual ), a corporation controlled by an Eligible Individual or any person/company, partnership, trust or corporation engaged to provide management or consulting services for the Corporation or any affiliate ( Eligible Persons ). The aggregate number of Common Shares that may be reserved for issuance under the Stock Option Plan must not exceed 10% of the number of Common Shares outstanding at the time the Options are granted. For greater clarity, the Stock Option Plan is reloading in the sense that, to the extent that Options expire or are terminated, cancelled or exercised, the Corporation may make a further grant of Options in replacement for such expired, terminated, cancelled or exercised Options, provided that the 10% maximum is not exceeded. No fractional Common Shares may be purchased or issued under the Stock Option Plan. In addition, under the Stock Option Plan: subject to the terms of the Stock Option Plan, the number of Common Shares subject to each Option, the exercise price of each Option, the expiration date of each Option, the extent to which each Option vests and is exercisable from time to time during the term of the Option and other terms and conditions relating to each Option will be determined by the Board from time to time; (%) 33 Page 86 of 253

88 subject to any adjustments pursuant to the provisions of the Stock Option Plan, the exercise price of any Option shall in no circumstances be lower than the Market Price (as defined below) of the Common Shares on the date on which the Board approves the grant of the Option; Options will be personal to the grantee and will be non-transferable and non-assignable, except in certain limited circumstances; the maximum number of Common Shares which may be reserved for issuance to insiders under the Stock Option Plan, together with the number of Common Shares reserved for issuance to insiders under any other securities based compensation arrangement, shall be 10% of the Common Shares outstanding at the time of the grant; the maximum number of Common Shares which may be issued to insiders under the Stock Option Plan and all other security based compensation arrangements within a one year period shall be 10% of the Common Shares outstanding at the time of the issuance; non-employee director participation in the Stock Option Plan is limited to the lesser of (i) a reserve of 1% of the Common Shares outstanding for non-employee directors as a group and (ii) an annual equity award value of $100,000 per director; if the expiration date for an Option occurs during a Blackout Period (as defined below) or within ten (10) business days after the expiry date of a Blackout Period applicable to a person granted Options (an Optionee ), then the expiration date for that option will be extended to the 10th Business Day after the expiry date of the Blackout Period. A Blackout Period is a period of time during which the Optionee cannot exercise an Option, or sell Common Shares issuable pursuant to the exercise of Options, due to applicable policies of the Corporation in respect of insider trading); and except in certain circumstances, the term of an Option shall not exceed ten (10) years from the date of the grant of the Option. Under the Stock Option Plan, Market Price of the Common Shares is defined as the volume weighted average trading price of such Common Shares on the TSX (or, if such Common Shares are not then listed and posted for trading on the TSX, on such stock exchange in Canada on which such Common Shares are listed and posted for trading as may be selected for such purpose by the Board) for the five (5) consecutive trading days immediately preceding such date, provided that in the event that such Common Shares did not trade on any of such trading days, the Market Price will be the average of the bid and ask prices in respect of such Common Shares at the close of trading on all of such trading days and provided that in the event that such Common Shares are not listed and posted for trading on any stock exchange, the Market Price will be the fair market value of such Common Shares as determined by the Board in its sole discretion. The Stock Option Plan provides that, except as set out in the Stock Option Plan or any resolution passed at any time by the Board or the terms of any option agreement or employment agreement with respect to any Option or an Optionee, an Option and all rights to purchase Common Shares pursuant thereto shall expire and terminate immediately upon the Optionee who holds such Option ceasing to be an Eligible Individual. Where an Optionee (other than a service provider) resigns from the Corporation or is terminated by the Corporation for cause, the Optionee s unvested options shall immediately be forfeited and the Optionee s vested options may be exercised for a period of thirty (30) days after the date of resignation or termination. Where an Optionee, other than a service provider, retires from the Corporation or ceases to serve the Corporation or an affiliate as a director, officer or employee for any reason other than a termination by the Corporation for cause, the Optionee s vested options may be exercised within ninety (90) days after such retirement or termination. The Board may in such circumstances accelerate the vesting of unvested Options then held by the Optionee at the Board s discretion. In the event that an Optionee, other than a service provider, has suffered a permanent disability, Options previously granted to such Optionee shall continue to vest and be exercisable in accordance with the terms of the grant and the provisions of the Stock Option Plan, but no additional grants of Options may be made to the Optionee. 34 Page 87 of 253

89 If an Optionee, other than a service provider, dies, all unexercised Options held by such Optionee at the time of death immediately vest, and such Optionee s personal representatives or heirs may exercise all Options within one (1) year after the date of such death. All Options granted to service providers shall terminate in accordance with the terms, conditions and provisions of the associated option agreement between the Corporation and such service providers, provided that such termination shall occur no later than the earlier of (i) the original expiry date of the term of the Option and (ii) one (1) year following the date of termination of the engagement of the service provider. Options may be exercised in accordance with the specific terms of their grant and by the Optionee delivering the exercise price to the Corporation for all of the Options exercised. The Optionee may also surrender Options and receive in exchange for each such Option, the amount by which the Market Price of the Common Shares exceeds the exercise price of the Option (the In-the-Money Amount ). If the Optionee elects to surrender any Options in exchange for the In-the-Money Amount, the Corporation will determine whether to pay such amount in cash or in Common Shares representing the equivalent of the In-the-Money Amount based on the Market Price of the Common Shares at the date of exercise, in each case net of an amount equal to any withholding taxes. In the event that the Common Shares are at any time changed or affected as a result of the declaration of a stock dividend, a Common Share subdivision or consolidation, the number of Common Shares reserved for Option shall be adjusted accordingly by the Board to such extent as it deems proper in its discretion. If, after the grant of an Option and prior to its expiry: (a) the Common Shares are reclassified, reorganized or otherwise changed (a Share Reorganization ), otherwise than as specified in the immediately preceding paragraph, or (b) subject to the Corporation s right to allow the exercise of vested and unvested Options following the occurrence of certain transactions, the Corporation shall consolidate, merge or amalgamate with or into another corporation (a Merger, with the resulting corporation being the Successor Corporation ), the Optionee will receive, upon the subsequent exercise of his or her Options in accordance with the Stock Option Plan, the number of shares or securities of the appropriate class of the Corporation or Successor Corporation, as the case may be, that the Optionee would have received if on the record date of such Share Reorganization or Merger the Optionee were the registered holder of the number of Common Shares to which the Optionee was prior thereto entitled to receive on exercise of his or her Options. The Board may amend, suspend or discontinue the Stock Option Plan or amend Options granted under the Stock Option Plan at any time without Shareholder approval; provided, however, that: (a) approval by a majority of the votes cast by Shareholders present and voting in person or by proxy at a meeting of Shareholders of the Corporation is obtained for the following amendments: i. any amendment for which, under the requirements of the TSX or any applicable law, shareholder approval is required; ii. reduction of the exercise price, or cancellation and reissuance of options or other entitlements, of noninsider options granted under the Stock Option Plan; iii. extension of the term of options beyond the original expiry date of non-insider options; iv. changing the eligible participants that may permit an increase to the limit previously imposed on nonemployee director participation; v. permitting options granted under the Stock Option Plan to be transferable or assignable other than for estate settlement purposes; vi. amending the Stock Option Plan s amendment provisions; and (b) the consent of the Optionee is obtained for any amendment which alters or impairs any Option previously granted to an Optionee under the Stock Option Plan. Notwithstanding the other provisions of the Stock Option Plan, if: (a) the Corporation proposes to amalgamate, merge or consolidate with any other corporation (other than a wholly-owned Affiliate) or to liquidate, dissolve or wind-up; 35 Page 88 of 253

90 (b) (c) an offer to purchase or repurchase all of the Common Shares shall be made to all holders of Common Shares which offer has been approved or accepted by the Board; or the Corporation proposes the sale of all or substantially all of the assets of the Corporation as an entirety, or substantially as an entirety, so that the Corporation shall cease to operate any active business, then, the Corporation will have the right, upon written notice thereof to Optionees, to permit the exercise of all such Options, whether or not vested, within the twenty (20) day period next following the date of such notice and to determine that upon the expiration of such twenty (20) day period, all rights of the Optionee to such Options or to exercise same (to the extent not theretofore exercised) shall ipso facto terminate and cease to have further force or effect whatsoever. The TSX rules require the Stock Option Plan to be put before Shareholders for re-approval within three (3) years of the date of the original meeting to approve the Stock Option Plan and every three (3) years thereafter. As of May 14, 2014, the number of outstanding options is 5,537,129 which is 2.7% of the total outstanding Common Shares of the Corporation. The number of available options is 15,207,907 which is 7.3% of the total outstanding Common Shares of the Corporation. The number of Common Shares that have been issued pursuant to the plan is Nil. The number of Common Shares that have been issued pursuant to the plan as a percentage of the outstanding Common Shares is 0%. The table below summarizes certain ratios regarding the Stock Option Plan, namely dilution, burn rate and overhang as defined in the table and measured as a percentage of the total number of Common Shares outstanding as of December 31, 2013, 2012 and Dilution (total number of options outstanding divided by total number of Common Shares outstanding) Burn Rate (total number of options granted in a fiscal year, minus expired options, divided by the total number of Common Shares outstanding) Overhang (total options outstanding plus the number of options available to be granted pursuant to the Stock Option Plan, divided by the total number of Common Shares outstanding) PSU and RSU Plan December 31, December 31, December 31, % 2.0% 1.8% 0.4% 0.7% 1.0% 10.0% 10.0% 10.0% The purposes of the PSU and RSU Plan are to (i) promote a significant alignment between employees of the Corporation and the growth objectives of the Corporation, (ii) associate a portion of participating employees compensation with the performance of the Corporation over the long term and (iii) retain critical employees to drive the business success of the Corporation. In 2013, the PSU and RSU Plan made up 50% of the target longterm compensatory value for each of the NEOs. The primary terms of the PSU and RSU Plan are described beginning on page 7 of this circular, and the full text of the plan is included as Schedule C to this circular. Other Executive Benefits The Corporation provided executives with additional benefits in accordance with the compensation program objectives and for the purpose of retention and motivation. As part of their compensation, the NEOs are eligible to receive some of the following: Life and Accidental Death and Dismemberment (ADD) Insurance coverage; Medical expenses and medical insurance re-imbursements; Supplementary retirement plan contributions; Monthly car allowance, as applicable; Health and Wellness coverage; and A fitness allowance for a recreational and/or social club 36 Page 89 of 253

91 Some of these items are considered as taxable benefits and are reported in the Summary Compensation Table for the NEOs. Executive Share Ownership Guidelines To align the interests of senior management with the interests of shareholders, Corporation ownership guidelines were introduced for NEOs and senior management in The guidelines indicate ownership levels must be achieved within five (5) years of becoming a designated executive officer. Corporation ownership includes Common Shares or share equivalents. Ownership criteria is defined in terms of a multiple of the executive s base salary. The following table summarizes the ownership guidelines: Executive Chief Executive Officer, Vice Chair Chief Financial Officer, President Division President, Executive Vice President Target Ownership 3 times base salary 2 times base salary 1 times base salary The guideline provides a transition period of five (5) years to achieve the ownership requirement; however, notwithstanding the foregoing, each member of the executive management team is expected to hold Common Shares and/or vested or unvested RSUs/PSUs valued at a minimum of 10% of their base salary within the first year of joining the Corporation or transitioning to an executive management position. The Common Share and/or share equivalent ownership for those NEOs governed by the ownership guidelines are set out below. The estimated value is based on the closing price of Algonquin s common shares on May 12, 2014 of $8.00. NEO Multiple of Base Salary Ownership guideline value Shares/share equivalents (1) Estimated Value Minimum of ten percent Target Status ($) (#) ($) Ian Robertson 3x 1,559, ,995 3,735,960 Achieved Target achieved Chris Jarratt 3x 1,245, ,778 3,694,224 Achieved Target achieved David Bronicheski 2x 596,550 54, ,592 Achieved Target by 2018 David Pasieka 1x 263,714 24, ,864 Achieved Target by 2018 Mike Snow 1x 263,714 13, ,480 Achieved Target by 2018 (1) Includes Common Shares and vested and unvested RSUs/PSUs NEOs that have not achieved the target ownership under the guideline have until 2018 to achieve the target. Equity Compensation Plan Information The table below indicates the number of securities to be issued upon exercise of outstanding options under the Stock Option Plan, the weighted average exercise price of the options and the number of securities remaining available for future issuance under equity compensation plans as of May 14, Equity Compensation Plan Category Number of securities to be issued upon exercise of outstanding options (a) (#) Weightedaverage exercise price of outstanding options (b) ($) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) Plans approved by security holders 5,537, ,207,907 Plans not approved by security holders Total 5,537, ,207,907 (c) (#) 37 Page 90 of 253

92 Performance Graph The following graph compares the Corporation s cumulative total Shareholder return (assuming an investment of $100 on January 1, 2009) on the units of the Algonquin Power Income Fund (the Units ) during the period January 1, 2009 to October 27, 2009 and on the Common Shares during the period October 27, 2009 to January 1, 2014 with the cumulative returns of the S&P/TSX Composite Stock Index during the period January 1, 2009 to January 1, The data is provided for Units prior to October 27, 2009 and for Common Shares on and after October 27, 2009 as, pursuant to the unit exchange offer, unitholders of Algonquin Power Income Fund exchanged their Units for Common Shares on a one-for-one basis effective October 27, Algonquin Power & Utilities Corp. Relative Performance Value of $100 Invested on January 1, 2009 (Assumes reinvestment of all distributions/dividends) In 2013, the total shareholder return for the Corporation was 12.4% (compared with 13.0% for the S&P/TSX Composite Index). During the same period, total annual salaries and annual incentives for the NEOs increased an average of 25.7% as compared to annual salaries and annual incentives in 2012, and specifically, the total annual salary and annual incentive for the CEO increased 61.7% in Total Shareholder Return vs. NEO Compensation At the end of 2013, the Corporation undertook an analysis of the alignment between the NEOs total compensation and the experience of shareholders. The analysis looked at the NEOs total compensation using the first full year in which the Corporation had converted from an income trust (2010) as the basis for comparison. The total NEO compensation results were then compared to the shareholder experience, as measured by total shareholder return over the same periods. The analysis concluded that the Corporation s compensation framework provided a close alignment between the NEOs compensation and the shareholder experience over the measured periods. The analysis showed that the shareholders experience, as measured by the total shareholder return on an annual basis each calendar year between December 31, 2010 and December 31, 2013 averaged 19%. The annual NEO compensation percentage increase as measured by the total annual compensation paid to the NEOs over the same periods averaged approximately 22%. The following presents the comparison over the periods of interest: 38 Page 91 of 253

93 Period Average Compensation Adjustment for NEO Team (1) Annual Total Shareholder Return (including dividend re-investment) % 34% % 12% % (2) 12% Average 22% 19% (1) A portion of these amounts relates to long-term incentives. The value of these amounts are tied to future individual performance and continuing shareholder returns. (2) A portion of the 2013 compensation adjustment included market adjustments to better align NEO compensation with the median compensation levels of the Comparator Group, as discussed on page 29. Algonquin s compensation philosophy has a significant component of NEO compensation consisting of longterm incentives (grants of PSUs and stock options), which are designed to focus executives on the long-term success of the Corporation. These long-term incentives are directly affected by changes in Algonquin s common share price and Algonquin s total shareholder return. This helps create a direct correlation between the shareholder experience and the compensation paid to senior executives. Executive Compensation Information Executive Performance Highlights The strong performance of the Corporation in 2013 was highlighted by significant increases in operating revenues, net income, adjusted net earnings per share, cash flows, assets, share price and dividends. The performance of the Corporation is the result of the efforts and individual achievements of all employees within the organization. Since the first full year since the Corporation converted to a corporate structure (January 2010), shareholders have experienced a total shareholder return of 140 per cent and approximately $1.3 billion in shareholder value has been created. Over that same period, the S&P/TSX Composite Index has provided returns of 124 per cent. The following summarizes some of the achievements of the NEOs: Ian Robertson, Chief Executive Officer, Algonquin Power & Utilities Corp. The Corporation has been led by Mr. Robertson over the past four (4) years and during his tenure as Chief Executive Officer, Mr. Robertson has consistently delivered value to shareholders. During Mr. Robertson s tenure as Chief Executive Officer, the Corporation has undergone a transformative change from a high payout income trust to a fiscally conservative, growth-focused power and utilities corporation. The Corporation has exhibited significant growth including increasing the market capitalization by nearly three (3) times since the beginning of In 2013, Mr. Robertson led the organization which achieved the following: EBITDA for 2013 reached $227 million, representing a more than 100% increase over 2012 results. Growth in earnings per share of $0.28 also represented a material increase over 2012 results. Such earnings per share were delivered from the successful growth initiatives completed late in 2012 and over the course of Growth initiatives announced during 2013 represented approximately $500 million of enterprise value which materially exceeded the $300 million objective established for the year. The organization made material progress in growing the management team in the areas of human resources, shared services, risk management and internal audit professionals. Chris Jarratt, Vice Chair, Algonquin Power & Utilities Corp. Mr. Jarratt has been in the role of Vice Chair over the past four (4) years and during his tenure in this role, Mr. Jarratt has been a significant contributor to the success of the organization. Mr. Jarratt is a director and full time member of the executive team which has consistently delivered value to the shareholders of the Corporation. In 2013, Mr. Jarratt achieved the following: 39 Page 92 of 253

94 Led numerous Board of Directors initiatives which added material value to the Corporation including development of an annual Board of Directors plan, enhanced corporate governance practices, and executive compensation practices. Participated with the Chief Executive Officer and Board of Directors in the development of the corporate strategy. Actively executed on development and acquisition growth initiatives which significantly surpassed corporate growth objectives. Successfully completed several projects and initiatives of significant importance and value to the Corporation, including resolution of several related party transactions. David Bronicheski, Chief Financial Officer, Algonquin Power & Utilities Corp. Mr. Bronicheski completed a successful year as the Corporation s Chief Financial Officer. In 2013, Mr. Bronicheski achieved the following: The establishment of an Enterprise Risk Management initiative through the organization. The re-financing of Liberty Utilities Co. s bank credit agreement, expanding the facility from $100 million to $200 million and broadened the lending syndicate. Successfully executed two private placements in the United States, raising U.S.$140 million in connection with several utility acquisitions. Strengthened the Corporation s balance sheet over the past several years which supported an upgrade in 2013 of the Corporation s credit rating to BBB with a stable outlook from Standard & Poor s. The upgraded rating has significantly lowered the Corporation s cost of capital. David Pasieka, President, Liberty Utilities Co. David Pasieka has been the President of Liberty Utilities Co. since In 2013, Mr. Pasieka achieved the following: Delivered strong safety and financial results. Successful execution of an organization growth strategy which included both organic rate base growth and the completion of the New England gas acquisition in Massachusetts. Successful rate cases in Arizona, California, Georgia and Missouri as well as having acquisitions approved by the regulator in Massachusetts, Georgia and Arkansas. Providing leadership to a team which successfully integrated previously announced acquisitions in Georgia, New Hampshire and Arkansas into the Liberty Utilities Co. organization. Mike Snow, President, Algonquin Power Co. Mike Snow has been the President of Algonquin Power Co. since In 2013, Mr. Snow achieved the following: Delivered strong safety and financial results and exceeded asset availability targets. Successfully integrated the recently acquired wind assets in the United States: Minonk, IL (200MW), Senate, TX (150MW), Sandy Ridge, PA (50MW) and Shady Oaks, IL (109.5MW). Successfully developed and constructed a 10MW solar farm in Cornwall, Ontario, the Corporation s first solar power generation facility. Substantial organizational growth including enhancing asset management, operations, and business development teams which support the Corporation s 1,100MW of operating assets across North America as well as the planned build out of 350 MW of contracted project development pipeline. 40 Page 93 of 253

95 Summary Compensation Table The following table sets forth information concerning compensation earned from the Corporation and its subsidiaries for the financial year of the Corporation ended December 31, 2013 for each of the individuals who were at December 31, 2013, the Chief Executive Officer, the Chief Financial Officer, the Vice Chair, the President of Algonquin Power Co., and the President of Liberty Utilities Co. Short term incentive plan awards for 2013 paid to the NEOs reflect performance in 2013 above target levels established for the year, as well as the level of shareholder returns achieved. Name and Principal Position Ian Robertson CEO, Algonquin Power & Utilities Year Salary Share- Based Awards (4) Option- Based Awards (5) Non-Equity Incentive Plan Compensation Savings Plan Contributions (7) All Other Compen- Sation ($) ($) ($) ($) ($) ($) ($) 519, , , ,354 1, , , ,095 Annual Incentive Plans (1) 633, , ,508 Total Compensation Long- Term Incentive Plans ,505 17,791 17,442 34,477 42,300 42,121 1,695,099 1,012, ,667 Christopher Jarratt Vice Chair, Algonquin Power & Utilities , , , ,291 1,500 1, , , , , , , ,740 17,791 17,442 24,773 29,695 28,517 1,152, , ,173 David Bronicheski CFO, Algonquin Power & Utilities , , ,500 76,069 1,500-74, , , , , , ,959 14,046 13,770 16,880 13,528 14, , , ,758 David Pasieka (2) ,714 67,428 65, ,591-16,847 16, ,108 President, Liberty Utilities (6) 245,914 76,962 1, , , , , ,800 4,618 16,300 3, , ,966 Michael Snow (3) President, Algonquin Power Co (6) 263, , ,000 67,428 1,500-65, , , ,515 98,489 59,066 (1) The annual incentive plan amounts for Messrs. Robertson, Jarratt, Bronicheski, Pasieka and Snow represent their discretionary bonus paid per the short-term incentive plan which is based on a Corporation scorecard. (2) David Pasieka became an NEO in September 2011 upon his appointment as President of Liberty Utilities Co., and as such data for 2011 is for a partial year only. (3) Michael Snow became an NEO in May 2011 upon his appointment as President of Algonquin Power Co., and as such data for 2011 is for a partial year only. (4) Grant date fair value of Common Shares granted under the Employee Share Purchase Plan and units under the PSU and RSU Plan. Prior to 2013, values include only Common Shares granted under the Employee Share Purchase Plan. (5) Grant date fair value of stock option grants is based on the Black-Scholes valuation methodology. (6) Amounts shown for David Pasieka and Michael Snow are for payment for partial years for 2011 as their employment with the Corporation began in September and May, respectively. (7) Amounts shown are contributions made by the Corporation for individuals under APUC s Deferred Profit Sharing Plan ,135 6,104 6,900 16,760 15,216 5, , , , Page 94 of 253

96 The following table sets out in detail All Other Compensation earned by the NEOs as reported in the Summary Compensation Table above. Name Year Perquisites Insurance Premiums (2) Car Other Allowance Perquisites (1) Total All Other Compensation ($) ($) ($) ($) ,520 17,597 5,360 34,477 Ian Robertson ,520 18,552 12,228 42, ,520 18,258 12,343 42, ,520 7,893 5,360 24,773 Christopher Jarratt ,520 5,404 12,771 29, ,520 6,405 10,592 28, ,520-5,360 16,880 David Bronicheski ,520-2,008 13, ,520-2,715 14, ,400-5,200 16,600 David Pasieka ,400-4,900 16, , , ,400-5,360 16,760 Michael Snow ,400-3,816 15, , ,700 (1) Other perquisites include annual health assessment, health and fitness club membership, medical benefit supplement (2) Insurance premiums include life, disability and medical reimbursement plan amounts. 42 Page 95 of 253

97 Outstanding Option Based Awards The following table describes all option-based awards as at December 31, 2013 for each NEO that is eligible for such award. Name Number of Options Option Exercise Price Number of Common Shares to be issued upon Exercise of Options Option Expiration Date Value of unexercised In-the-Money options Ian Robertson 494,388 $ ,388 August 12, 2018 $1,626, ,146 $ ,146 March 22, 2019 $802, ,413 $ ,413 March 14, 2020 $392, ,366 $ ,366 March 13, Christopher Jarratt 436,224 $ ,224 August 12, 2018 $1,435, ,423 $ ,423 March 22, 2019 $707, ,963 $ ,963 March 14, 2020 $300,119 38,548 $ ,548 June 19, 2020 $30, ,293 $ ,293 March 13, David Bronicheski 229,592 $ ,592 August 12, 2018 $755, ,538 $ ,538 March 22, 2019 $372, ,917 $ ,917 March 14, 2020 $182,467 91,463 $ ,463 March 13, David Pasieka 172,242 $ ,242 September 13, 2019 $291, ,625 $ ,625 March 14, 2020 $164,220 15,234 $ ,234 June 19, 2020 $11,883 72,713 $ ,713 March 13, Michael Snow 171,642 $ ,642 June 21, 2019 $291, ,625 $ ,625 March 14, 2020 $164,220 15,234 $ ,234 June 19, 2020 $11,883 72,713 $ ,713 March 13, Employment Arrangements The Corporation entered into an executive employment agreement with each of Mr. Robertson, the Chief Executive Officer, Mr. Jarratt, Vice Chair, and Mr. Bronicheski, the Chief Financial Officer of the Corporation, on June 23, The Corporation entered into an executive employment agreement with Mr. Pasieka, the President of Liberty Utilities on September 1, 2011 and Mr. Snow, President of APCo on May 24, All such executive employment agreements are collectively referred to as the Employment Agreements. Termination for Cause, Resignation and Change of Control If the NEOs are terminated for cause, each individual will not be entitled to any advance notice of termination or payment in lieu of notice. Each may resign at any time during the term of his Employment Agreement by providing not less than sixty (60) days prior written notice to the Corporation. Upon resignation, each will not be entitled to 43 Page 96 of 253

98 any payment other than any amounts that the Corporation is required to pay in accordance with applicable laws and the Employment Agreements, including payment of accrued but unused vacation and expenses owing. Within twelve (12) months following a change in control of the Corporation, if Messrs. Robertson, Jarratt or Bronicheski are terminated or choose to resign, each is entitled to receive compensation equal to the following (i) a lump sum payment equal to twenty-four (24) months of base salary (at the then applicable base salary rate); (ii) a lump sum payment equal to the targeted annual incentive payment; (iii) continuation of benefits, car allowance and pension for twenty-four (24) months or a lump sum payment in lieu thereof; and (iv) all unvested performance share units, and all unvested stock options which shall be exercisable within ninety (90) days. Within twelve (12) months following a change in control of the Corporation, if Messrs. Snow or Pasieka are terminated or choose to resign, each is entitled to receive compensation equal to the following (i) a lump sum payment equal to twelve (12) months of base salary (at the then applicable base salary rate); (ii) a lump sum payment equal to the targeted annual incentive payment; (iii) continuation of benefits, car allowance and pension for twelve (12) months or a lump sum payment in lieu thereof; and (iv) all unvested performance share units, and all unvested stock options which shall be exercisable within ninety (90) days. The change of control termination provisions can be triggered upon the occurrence of any one party being entitled to cast 50% or more of the votes attached to all Common Shares of the Corporation and within 12 months of such occurrence, a material change to the employment conditions or duties of the executive that would materially adversely affect the nature and status of his or her responsibilities including, any change in title, position, or reporting relationship. Upon such events, the executive may elect with 90 days to terminate employment and receive change of control incremental amounts. Termination for Reasons other than Cause Upon termination without cause, Messrs. Robertson, Jarratt or Bronicheski are entitled to the following amounts in lieu of notice: (i) a lump sum payment equal to eighteen (18) months of base salary (at the then applicable base salary rate), (ii) a lump sum payment equal to the targeted annual incentive payment; (iii) continuation of benefits for eighteen (18) months or lump sum payment in lieu thereof, (iv) all unvested performance share units which would have vested within eighteen (18) months of the last day of employment and (v) all unvested stock options which would have vested within eighteen (18) months of termination and which are exercisable within ninety (90) days of termination. Upon termination without cause, Messrs. Snow and Pasieka are entitled to the following amounts in lieu of notice: (i) a lump sum payment equal to twelve (12) months of base salary (at the then applicable base salary rate); (ii) a lump sum payment equal to the targeted annual incentive payment; (iii) continuation of benefits for twelve (12) months or lump sum payment in lieu thereof, (iv) all unvested performance share units which would vest upon the end of the fiscal year in which termination occurs; and (v) all unvested stock options which would have vested within eighteen (18) months of termination and which are exercisable within ninety (90) days of termination. 44 Page 97 of 253

99 Summary Termination Table Assuming that the triggering event requiring the foregoing payments occurred on December 31, 2013 and that the Employment Agreements were in effect on such date, the NEOs would be entitled to receive the following incremental amounts: Named Executive Officer Type of Termination Salary Entitlement Bonus Entitlement Options Share- Based Awards Benefits Total Payout Ian Robertson Christopher Jarratt David Bronicheski David Pasieka Michael Snow Termination without Cause Termination upon Change of Control Termination without Cause Termination upon Change of Control Termination without Cause Termination upon Change of Control Termination without Cause Termination upon Change of Control Termination without Cause Termination upon Change of Control ($) ($) ($) ($) ($) ($) 779, , , ,781 8,040 2,213,003 1,039, , , ,708 33,760 2,797, , , , ,186 8,040 1,802, , , , ,581 33,760 2,274, , , , ,853 8,040 1,036, , , , ,138 33,760 1,323, , , ,431 65,928 5, , , , ,431 65,928 33, , , , ,665 65,928 5, , , , ,665 65,928 42, , Page 98 of 253

100 Schedule A Advisory Vote on Approach to Executive Compensation of Algonquin Power & Utilities Corp. (the Corporation ) RESOLVED, on an advisory basis, and not to diminish the role and responsibilities of the Board of Directors, that the Shareholders accept the approach to executive compensation disclosed in the management information circular delivered in advance of the 2014 annual meeting of the Shareholders of the Corporation. 46 Page 99 of 253

101 Schedule B RESOLVED THAT: PSU and RSU Plan Resolution 1. performance and restricted share unit plan for employees of the Corporation and its participating affiliates, as described in the management information circular of the Corporation dated, 2014, is hereby is hereby approved, ratified and confirmed; and 2. any director or officer of the Corporation is hereby authorized to do all such things and execute all such documents and instruments as may be necessary or desirable to give effect to the above resolution. 47 Page 100 of 253

102 Schedule C Performance and Restricted Share Unit Plan for Employees of Algonquin Power & Utilities Corp. and its Participating Affiliates 1. PREAMBLE AND DEFINITIONS 1.1 Title and Conflict. Adopted with effect from January 1, 2011, as amended March 6, 2014 The Plan described in this document shall be called the Performance and Restricted Share Unit Plan for Employees of Algonquin Power & Utilities Corp. and its Participating Affiliates. In the event of any conflict or inconsistency between the Plan described in this document and the Award Agreement (as defined below), the terms and conditions of the Award Agreement shall prevail. The Plan shall be governed and interpreted in accordance with the laws of the Province of Ontario. 1.2 Purpose of the Plan. The purposes of the Plan are: (i) to promote a significant alignment between employees of the Corporation and the participating Affiliates and the growth objectives of the Corporation and the participating Affiliates; (ii) (iii) to associate a portion of participating employees compensation with the performance of the Corporation and its participating Affiliates over the long term; and to attract and retain the critical employees to drive the business success of the Corporation and its participating Affiliates. 1.3 Definitions Account has the meaning set out in Section Affiliate means any corporation, partnership or other entity (i) in which the Corporation, directly or indirectly, has majority ownership interest or (ii) which the Corporation controls. For the purposes of this definition, the Corporation is deemed to control such corporation, partnership or other entity if the Corporation possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such corporation, partnership or other entity, whether through the ownership of voting securities, by contract or otherwise Applicable Law means any applicable provision of law, domestic or foreign, including, without limitation, applicable securities and tax legislation, together with all regulations, rules, policy statements, rulings, notices, orders or other instruments promulgated thereunder, and Stock Exchange Rules Award Agreement means the written or electronic agreement between the Corporation and a Participant under which the terms of an award are established, as contemplated by Section 4.1, together with such schedules, amendments, deletions or changes thereto as are permitted under the Plan. 48 Page 101 of 253

103 1.3.5 Award Date means the effective date of a grant of PSUs or RSUs, as applicable, to a Participant as stated in the applicable Award Agreement Award PSUs means the number of PSUs awarded to a Participant in respect of a Performance Period and as stated in the applicable Award Agreement Award RSUs means the number of RSUs awarded to a Participant in as stated in the applicable Award Agreement Award Value means the value, in dollars, of an award made to a Participant and as stated in the applicable Award Agreement, which is provided under the Plan in the form of PSUs or RSUs, as the case may be Board means the Board of Directors of the Corporation Change in Control shall be deemed to have occurred for purposes of this Plan if: (i) there is any change in the holding, directly or indirectly, of securities of the Corporation (or the participating Affiliate by which the applicable Participant is employed) or of any voting rights attached to any securities of the Corporation (or the participating Affiliate by which the applicable Participant is employed), as a result of which any corporation or other person, or a group of corporations or persons acting in concert, or corporations or persons associated with or affiliated with any such corporation, person or group within the meaning of the Securities Act (Ontario), would be entitled to cast 50% or more of the votes attached to all shares of the Corporation (or the participating Affiliate by which the applicable Participant is employed) that may be cast to elect directors of the Corporation (or the participating Affiliate by which the applicable Participant is employed); or (ii) (iii) Incumbent Directors cease to constitute a majority of the Board of the Corporation (for the purposes of this paragraph, an Incumbent Director shall mean any member of the Board who is a member of the Board immediately prior to the occurrence of a contested election of directors of the Corporation); or the Board adopts a resolution to the effect that, for the purposes of this Plan, a Change in Control of the Corporation (or the participating Affiliate by which the applicable Participant is employed) has occurred, or that such a Change in Control is imminent, in which case, the date of the Change in Control shall be deemed to be the date specified in such resolution, provided that the Change in Control actually occurs Committee means, in relation to Awards to Participants other than members of the Senior Management Committee, the Senior Management Committee and, in relation to Awards to any member of the Senior Management Committee, the Board or such committee of the Board which may be designated by the Board as the Committee with respect to such Awards Corporation means Algonquin Power & Utilities Corp. and any successor corporation, whether by amalgamation, merger or otherwise Disability means a physical or mental incapacity of the Participant that has prevented the Participant from performing the duties customarily assigned to the Participant for one hundred and eighty (180) calendar days, whether or not consecutive, out of any twelve (12) consecutive months and that in the opinion of the Corporation, acting on the basis of advice from a duly qualified medical practitioner, is likely to continue to a similar degree. 49 Page 102 of 253

104 Dividend Equivalent Units has the meaning set out in Section Insider has the meaning ascribed to this term for the purposes of the Stock Exchange rules relating to Securities-Based Compensation Arrangements Market Value at any date in respect of the Shares means the volume weighted average trading price of such Shares on the Toronto Stock Exchange (or, if such Shares are not then listed and posted for trading on the Toronto Stock Exchange, on such stock exchange in Canada on which such Shares are listed and posted for trading as may be selected for such purpose by the Committee) for the five (5) consecutive trading days immediately preceding such date, provided that in the event that such Shares did not trade on any of such trading days, the Market Value shall be the average of the bid and ask prices in respect of such Shares at the close of trading on all of such trading days and provided that in the event that such Shares are not listed and posted for trading on any stock exchange, the Market Value shall be the fair market value of such Shares as determined by the Committee in its sole discretion Participant means such executive or other employee of the Corporation or any Affiliate as the Committee may designate to receive a grant of PSUs or RSUs under the Plan pursuant to an Award Agreement Performance Adjustment Factor means the performance adjustment factor (either upwards or downwards) calculated following the end of the Performance Period in accordance with the Award Agreement Performance Criteria means, in respect of a grant of a PSU, such financial and/or personal performance criteria as may be determined by the Committee in respect of a grant of PSUs to any Employee or Employees and set out in an Award Agreement. Performance Criteria may apply to the Corporation, an Affiliate, the Corporation and its Affiliates as a whole, a business unit of the Corporation or group comprised of the Corporation and one or more Affiliates, either individually, alternatively or in any combination, and measured either in total, incrementally or cumulatively over a specified Performance Period, on an absolute basis or relative to a pre-established target, to previous years results or to a designated comparator group Performance Period means, in respect of a grant of a PSU, the particular designated time period(s) in respect of which the Performance Criteria are assessed and determined to be satisfied by the Committee in order for such PSU to become a Vested PSU as set forth in the Award Agreement applicable to such grant Period of Absence means, with respect to a Participant, a period of time that lasts for at least ninety (90) days throughout which the Participant is on a leave of absence from the Corporation or an Affiliate that has been approved by the Corporation or Affiliate, as applicable, a Statutory Leave, or is experiencing a Disability Plan means this Performance and Restricted Share Unit Plan for Employees of Algonquin Power & Utilities Corp. and its Participating Affiliates, including any schedules or appendices hereto, as such may be amended from time to time and as attached to an Award Agreement PSU Balance in respect of any particular date means the number of PSUs recorded in a Participant s Account in respect of a particular Performance Period, which shall include the PSU Award plus all Dividend Equivalent Units in respect of such PSUs. 50 Page 103 of 253

105 PSU means a unit granted to a Participant that is represented by a bookkeeping entry on the books of the Corporation, the value of which on any particular date shall be equal to the Market Value and which generally becomes Vested, if at all, subject to the attainment of certain Performance Criteria and satisfaction of such other conditions to Vesting, if any, as may be determined by the Committee RSU means a unit granted to a Participant that is represented by a bookkeeping entry on the books of the Corporation, the value of which on any particular date shall be equal to the Market Value and which generally becomes Vested, if at all, following a period of continuous employment of the Participant with the Corporation or an Affiliate Securities-Based Compensation Arrangement means a stock option, stock option plan, employee stock purchase or ownership plan or any other compensation or incentive mechanism of the Corporation involving the issuance or potential issuance, from treasury, of Shares or other securities of the Corporation to employees, insiders or service providers, including a share purchase from treasury which is financially assisted by the Corporation by way of a loan, guarantee or otherwise Senior Management Committee means the Chief Executive Officer of the Corporation with the input of the Chief Financial Officer of the Corporation and the President of the Corporation or, in relation to an Award to a Participant employed by a participating Affiliate, the President of such Affiliate, or such other committee or individuals which may be appointed by the Chief Executive Officer of the Corporation to, among other things, interpret, administer and implement the Plan in relation to Awards to Participants other than the members of the Senior Management Committee Share means a common share of the Corporation and such other share as may be substituted for it as a result of amendments to the articles of the Corporation, arrangement, reorganization or otherwise, including any rights that form a part of the common share or substituted share Statutory Leave means, with respect to a Participant, a period of time throughout which the Participant is on a leave of absence to which he or she is entitled under applicable legislation and following which he or she has the right, pursuant to such legislation, to return to active employment with the Corporation or an Affiliate Stock Exchange means the Toronto Stock Exchange, or if the Shares are not listed on the Toronto Stock Exchange, such other stock exchange on which the Shares are listed, or if the Shares are not listed on any stock exchange, then on the over-the-counter market Stock Exchange Rules means the applicable rules of the Stock Exchange Vested means the applicable conditions for payment or other settlement in relation to a whole number, or a percentage (which may be more or less than 100%) of the number of Award PSUs or Award RSUs determined by the Committee, (i) have been met; or (ii) have been waived or deemed to be met pursuant to the terms of the Plan or the applicable Award Agreement, and Vest or Vesting have a corresponding meaning Vesting Date means, with respect to a PSU or RSU, the date on which the applicable conditions for payment or other settlement of such PSU or RSU are met, deemed to have been met or waived as contemplated in Section Page 104 of 253

106 2. CONSTRUCTION AND INTERPRETATION 2.1 Gender, Singular, Plural. In the Plan, references to the masculine include the feminine; and references to the singular shall include the plural and vice versa, as the context shall require. 2.2 Governing Law. The Plan shall be governed and interpreted in accordance with the laws of the Province of Ontario and any actions, proceedings or claims in any way pertaining to the Plan shall be commenced in the courts of the Province of Ontario. 2.3 Severability. If any provision or part of the Plan is determined to be void or unenforceable in whole or in part, such determination shall not affect the validity or enforcement of any other provision or part thereof. 2.4 Headings, Sections. Headings wherever used herein are for reference purposes only and do not limit or extend the meaning of the provisions herein contained. A reference to a section or schedule shall, except where expressly stated otherwise, mean a section or schedule of the Plan, as applicable. 3. EFFECTIVE DATE AND EMPLOYMENT RIGHTS 3.1 Effective Date. The Corporation is establishing the Plan effective January 1, No Employment Rights. Nothing contained in the Plan shall be deemed to give any person the right to be retained as an employee of the Corporation or of an Affiliate. For greater certainty, a period of notice, if any, or payment in lieu thereof, upon termination of employment, wrongful or otherwise, shall not be considered as extending the period of employment for the purposes of the Plan. 4. PSU AND RSU GRANTS AND PERFORMANCE PERIODS 4.1 Awards of PSUs and RSUs. The Plan shall be administered by the Committee. The Committee shall have the authority in its sole and absolute discretion to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan subject to and not inconsistent with the express provisions of this Plan, including, without limitation, the authority to: determine the Award Value for each award under an Award Agreement; make grants of PSUs and RSUs in respect of any award under an Award Agreement; determine the Award Date for grants of PSUs and RSUs, if not the date on which the Committee determines to make such grants under an Award Agreement; determine the Participants to whom, and the time or times at which, awards shall be made and PSUs and RSUs shall be granted under an Award Agreement; approve or authorize the applicable form and terms of the related Award Agreements; determine the terms and conditions of awards, and grants of PSUs and RSUs in respect thereof, to any Participant, including, without limitation the following, (A) the number of PSUs and RSUs to be granted; (B) the Performance Period(s) applicable to PSUs; (C) 52 Page 105 of 253

107 the Performance Criteria applicable to PSUs and any other conditions to the Vesting of any PSUs and RSUs granted hereunder; (D) the conditions, if any, upon which Vesting of any PSUs or RSUs will be waived or accelerated without any further action by the Committee; (E) the extent to which the Performance Criteria must be achieved in order for any PSUs to become Vested PSUs and the multiplier, if any, that will be applied to determine the number of PSUs that become Vested PSUs having regard to the achievement of the Performance Criteria; (F) the circumstances in which a PSU or RSU shall be forfeited, cancelled or expire; (G) the consequences of a termination of employment with respect to a PSU or RSU; (H) the manner of settlement of Vested PSUs and Vested RSUs; and (I) whether and the terms upon which any Shares delivered upon settlement of a PSU or RSU must continue to be held by a Participant for any specified period; determine whether and the extent to which any Performance Criteria applicable to the Vesting of a PSU or other conditions applicable to the Vesting of a PSU or RSU have been satisfied or shall be waived or modified; amend the terms of any outstanding Award Agreement provided, however, that no such amendment, shall be made at any time to the extent such action would materially adversely affect the existing rights of a Participant with respect to any then outstanding PSU or RSU related to such Award Agreement without his or her consent in writing and provided further, however, that the Committee may amend the terms of an Award Agreement without the consent of the Participant if complying with Applicable Law; determine whether, and the extent to which, adjustments shall be made pursuant to Section 5.3 and the terms of any such adjustments; interpret the Plan and Award Agreements; prescribe, amend and rescind such rules and regulations and make all determinations necessary or desirable for the administration and interpretation of the Plan and Award Agreements; determine the terms and provisions of Award Agreements (which need not be identical) entered into in respect of awards hereunder; and make all other determinations deemed necessary or advisable for the administration of the Plan. 4.2 Eligibility and Award Determination In determining the Participants to whom awards may be made and the Award Value (and accordingly the number of PSUs and RSUs to be granted) for each award (subject, in the case of PSUs, to adjustment based on achievement of Performance Criteria), the Committee may take into account such factors as it shall determine in its sole and absolute discretion The PSUs granted to a Participant for a Performance Period shall be determined by dividing the Award Value determined for the Participant for such Performance Period by the Market Value as at the end of the calendar quarter immediately preceding the Award Date, rounded down to the next whole number The RSUs granted to a Participant shall be determined by dividing the Award Value of an award to be provided to the Participant in the form of RSUs by the Market Value as at the 53 Page 106 of 253

108 end of the calendar quarter immediately preceding the Award Date, rounded down to the next whole number For greater certainty and without limiting the discretion conferred on the Committee pursuant to this Section, the Committee s decision to approve a grant of PSUs in any Performance Period, or any grant of RSUs shall not entitle any Participant to an award of PSUs in respect of any other Performance Period or any future grant of RSUs; nor shall the Committee s decision with respect to the size or terms and conditions of an award require it to approve an award of the same or similar size or with the same or similar terms and conditions to any Participant at any other time. No Participant has any claim or right to receive an award or any PSUs or RSUs An Award Agreement shall set forth, among other things, the following: the Award Date of the award evidenced thereby; the number of PSUs or RSUs, as applicable, granted in respect of such award; the Performance Criteria applicable to PSUs and any other conditions to the Vesting of the PSUs or RSUs, as applicable; in the case of PSUs, the applicable Performance Period; and may specify such other terms and conditions as the Committee shall determine or as shall be required under any other provision of the Plan. The Committee may include in an Award Agreement terms or conditions pertaining to confidentiality of information relating to the Corporation s operations or businesses which must be complied with by a Participant including as a condition of the grant or Vesting of PSUs or RSUs. 4.3 PSUs and RSUs. Each whole PSU and RSU will give a Participant the right to receive either a Share or a cash payment, as determined by the Committee, in an amount determined in accordance with the terms of the Plan and the applicable Award Agreement. For greater certainty, a Participant shall have no right to receive Shares or a cash payment with respect to any PSUs or RSUs that do not become Vested PSUs or RSUs, as the case may be, under Article ACCOUNTS, DIVIDEND EQUIVALENTS AND REORGANIZATION 5.1 Account. An account ( Account ) shall be maintained by the Corporation for each award made to each Participant pursuant to an Award Agreement and which will be credited with an opening balance equal to the Award PSUs and/or Award RSUs granted pursuant to such Award Agreement. PSUs or RSUs that fail to vest pursuant to Article 7, or that are paid out to the Participant or his legal representative, shall be cancelled and shall cease to be recorded in the Participant s Account as of the date on which such PSUs or RSUs, as applicable, are forfeited or cancelled under the Plan or are paid out, as the case may be. 5.2 Dividend Equivalent Units. Whenever cash dividends are paid on the Shares during the Performance Period applicable to a particular Award Agreement, additional PSUs or RSUs, as applicable, will be credited to the Participant s Account in accordance with this Section 5.2 ( Dividend Equivalent Units ). The number of such additional PSUs or RSUs to be credited to the Participant s Account in respect of any particular dividend paid on the Shares will be calculated by dividing (i) the amount of the cash dividend that would have been paid to the Participant if each of the PSUs and RSUs recorded in the Participant s Account as at the record date for the cash dividend had been Shares by (ii) the Market Value on the date on which the dividend is paid on the Shares. Dividend Equivalent Units shall Vest and be paid at the same time as the PSUs or RSUs, as applicable, to which they relate and shall be considered to be designated as payable in Shares or in cash as the related PSUs or RSUs in the Participant s Account are so designated. 5.3 Adjustments. In the event of any stock dividend, stock split, combination or exchange of shares, capital reorganization, consolidation, spin-off or other distribution (other than normal cash dividends) of the Corporation s assets to shareholders, or any other similar changes affecting the Shares, proportionate adjustments to reflect such change or changes shall be made with respect to the number of PSUs and RSUs outstanding under the Plan, or securities into which the Shares are 54 Page 107 of 253

109 changed or are convertible or exchangeable and as may be substituted for Shares under this Plan, on a basis proportionate to the number of PSUs and RSUs in the Participant s Account or some other appropriate basis, all as determined by the Committee in its sole discretion. 6. FUNDING OF PSU AWARDS BY SHARE PURCHASES OR ISSUANCES 6.1 Maximum Number of Shares Issuable from Treasury. The maximum number of Shares that are issuable under the Plan to pay awards under the Plan shall be an aggregate of 500,000 Shares. 6.2 Purchases of Shares on Open Market. Any purchases of Shares pursuant to the Plan shall be made on the open market by a broker designated by the Corporation who is independent of the Corporation in accordance with Stock Exchange Rules and who is a member of the Stock Exchange. Subject to the foregoing part of this Section 6.1, any such designation may be changed from time to time. 6.3 Issuances of Shares from Treasury. Any issuances of Shares from treasury to pay awards as contemplated by Section 7.3 shall be issued at a price per Share equal to the Market Value on the date of issuance. 6.4 Insider Participation Limit. Awards under the Plan shall not be paid in Shares issued from treasury if, at the time of such issuance, such issuance could result, at any time, in: the number of Shares reserved for issuance to Insiders under the Plan, together with Shares reserved for issuance to Insiders under all other Securities-Based Compensation Arrangements, exceeding 10% of the issued and outstanding Shares; or the issuance to Insiders, within a one year period, of a number of Shares under the Plan, together with Shares that may be issued to Insiders under all other Securities-Based Compensation Arrangements, exceeding 10% of the issued and outstanding Shares. 7. VESTING AND PAYMENT OF PSU AWARDS 7.1 Vesting of PSUs. Upon the first day immediately following the end of the Performance Period, the PSU s represented by the PSU Balance as at such date shall vest, with the number of Vested PSUs being equal to the PSU Balance as at such date multiplied by the Performance Adjustment Factor as determined by the Committee in accordance with the Award Agreement. For certainty, in the event the Performance Adjustment Factor is equal to zero, no PSU s will vest. Except where the context requires otherwise, each PSU which vests pursuant to Article 7 shall be referred to herein as a Vested PSU. PSUs which do not become Vested PSUs in accordance with this Article 7 shall be forfeited by the Participant and the Participant will have no further right, title or interest in such PSUs. The Participant waives any and all right to compensation or damages in consequence of the termination of employment (whether lawfully or unlawfully) or otherwise for any reason whatsoever insofar as those rights arise or may arise from the Participant ceasing to have rights or be entitled to receive any Shares or cash payment under the Plan pursuant to this Section Performance Criteria. The PSUs granted to a Participant under an Award Agreement and Section 4.1 (and the related Dividend Equivalent PSUs) shall become Vested PSUs only upon the Committee s determination with respect to the Performance Adjustment Factor in accordance with the Award Agreement applicable to such PSUs or have been waived in accordance with Section Vesting of RSUs. Award RSUs shall Vest on the Vesting Date(s) specified in the Award Agreement for such Award RSUs, together with Dividend Equivalent Units granted in respect of such Award RSUs, in such proportion as is may be determined in accordance with such Award Agreement. Except where the context requires otherwise, each RSU which vests pursuant to Article 55 Page 108 of 253

110 7 shall be referred to herein as a Vested RSU. RSUs which do not become Vested RSUs in accordance with this Article 7 shall be forfeited by the Participant and the Participant will have no further right, title or interest in such RSUs. The Participant waives any and all right to compensation or damages in consequence of the termination of employment (whether lawfully or unlawfully) or otherwise for any reason whatsoever insofar as those rights arise or may arise from the Participant ceasing to have rights or be entitled to receive any Shares or cash payment under the Plan pursuant to this Section Payment in Shares. In the event that a Participant s Vested PSUs or Vested RSUs have been designated by the Committee as payable in Shares, the Participant or his legal representative, as applicable, shall receive a number of Shares equal to the number of Vested PSUs credited to the Participant s Account as of the last day of such Performance Period and the number of Vested RSUs credited to the Participant s Account on the Vesting Date thereof that have been designated for payment in Shares (rounded down to the nearest whole number of Shares). The Shares shall be distributed to the Participant or his legal representative, as applicable, in a single transfer no later than six (6) months following the last day of the Performance Period (or, in the event of the Participant s death, no later than six (6) months following the date of the Participant s death). 7.5 Payment in Cash. In the event that a Participant s Vested PSUs or Vested RSUs have not been designated by the Committee as payable in Shares, the Participant or his legal representative, as applicable, shall receive a cash payment equal to: (i) in the case of PSUs, the Market Value determined as of the last day of the Performance Period multiplied by the number of Vested PSUs credited to his PSU Account as of the last day of such Performance Period, (rounded down to the nearest whole number of PSUs); and (ii) in the case of RSUs, the Market Value determined as of the Vesting Date of such RSUs multiplied by the number of Vested RSUs credited to his Account as of the Vesting Date (rounded down to the nearest whole number of PSUs). Subject to Section 10.10, the cash payment shall be made to the Participant or his legal representative, as applicable, in a single lump sum no later than six (6) months following the last day of the Performance Period or Vesting Date, as applicable (or, in the event of the Participant s death, no later than six (6) months following the date of the Participant s death), less any applicable statutory withholdings or deductions. 7.6 Death, Period of Absence Death. Where the employment of a Participant terminates during a Performance Period in the case of PSUs or prior to a Vesting Date in the case of RSUs by reason of the Participant s death: (i) the PSUs credited to the Participant s Account as at December 31 of the year immediately preceding the Participant s date of death shall continue to be eligible to become Vested PSUs in accordance with Sections 7.1 and 7.2; and (ii) the RSUs credited to the Participant s Account as at December 31 of the year immediately preceding the Participant s date of death shall Vest as of the Participant`s date of death. The Participant shall be entitled to receive in cash or in Shares (or a combination thereof), as specified by the Committee, a payment relating to such Vested PSUs and/or RSUs determined in accordance with Sections 7.4 or 7.5. For greater clarity, the number of Vested PSUs used to calculate the value of the payment shall equal the number of Vested PSUs determined in accordance with Sections 7.1 and 7.2 as at December 31 of the year immediately preceding the Participant s date of death Period of Absence. In the event of a Participant s Period of Absence during a Performance Period for PSUs or prior to a Vesting Date for RSUs and subject to this Section and Section 7.6.4, PSUs and RSUs credited to the Participant s Account immediately prior to the commencement of such Period of Absence (and any related Dividend Equivalent PSUs and RSUs) shall continue to be eligible to become Vested in accordance with the provisions of Sections 7.1 and 7.2 and the Participant shall be entitled to receive in cash or in Shares (or a combination thereof), as specified by the Committee in respect of such Vested PSUs and Vested RSUs determined in accordance 56 Page 109 of 253

111 with Section 7.4 or 7.5, as applicable, except that the number of Vested PSUs and Vested RSUs used to calculate the value of the payment shall equal the number of Vested PSUs or Vested RSUs, as applicable determined in accordance with Section 7.1 and 7.2 multiplied by a fraction, the numerator of which equals the number of whole and partial months in the Performance Period for which the Participant actively performed services for the Corporation or an Affiliate and the denominator of which equals the number of whole and partial months in the Performance Period; in the case of PSUs, or in the period from the Award Date to the Vesting Date of such RSUs For greater clarity, no additional PSUs or RSUs (whether pursuant to Section 4.1 or in the form of Dividend Equivalent Units) shall be granted to a Participant following his or her date of death or during his or her Period of Absence, including following his or her date of Disability Notwithstanding Section 7.6.2, where a Participant experiences a Period of Absence that extends beyond the end of a Performance Period for PSUs or a Vesting Date for RSUs and fails to return to active full-time employment with the Corporation or an Affiliate within one hundred and eighty (180) days following the end of such Performance Period or such Vesting Date, no portion of the PSUs subject to such Performance Period or RSUs that would otherwise Vest on such Vesting Date shall Vest and the Participant shall receive no payment or other compensation in respect of such PSUs or RSUs or loss thereof, on account of damages or otherwise. 7.7 Other Terminations of Employment. In the event that, during a Performance Period with respect to PSUs or prior to a Vesting Date with respect to RSUs, (i) the Participant s employment is terminated by the Corporation or an Affiliate of the Corporation for any reason, or (ii) a Participant voluntarily terminates his employment with the Corporation or an Affiliate of the Corporation, including due to retirement, no portion of the PSUs subject to such Performance Period or RSUs that would otherwise Vest on such Vesting Date shall Vest and the Participant shall receive no payment or other compensation in respect of such PSUs or RSUs or loss thereof, on account of damages or otherwise; provided that any Vested PSUs and Vested RSUs will be settled in accordance with Sections 7.4 and Change in Control. Notwithstanding any other provision of the Plan, but subject to the terms of any Award Agreement or any employment agreement between the Participant and the Corporation or any Affiliate, in the event of a Change in Control, all PSUs and RSUs credited to each Account (including for greater certainty Dividend Equivalent Units) which have not become Vested PSUs or Vested RSUs, shall become Vested PSUs and Vested RSUs on the basis of one (1) PSU becoming one (1) Vested PSU and one (1) RSU becoming one (1) Vested RSU, as at the time of Change in Control (unless otherwise determined by the Committee). As soon as practicable following a Change in Control each Participant shall, at the discretion of the Committee, receive in cash or in Shares (or a combination thereof) a payment equal to the number of such Vested PSUs and Vested RSUs (as determined pursuant to this Section 7.7) credited to the Participant s Account at the time of the Change in Control (rounded down to the nearest whole number of Vested PSUs and Vested RSUs) multiplied by the price at which the Shares are valued for the purpose of the transaction or series of transactions giving rise to the Change in Control, or if there is no such transaction or transactions at the Market Value on the date of the Change in Control, less any statutory withholdings or deductions. Notwithstanding the foregoing, where a Change in Control occurs and no Shares are distributed and no cash payments are made to a Participant within thirty (30) days following the Change in Control, the Corporation shall cease to have the discretion to provide the Participant with Shares and shall be required to pay (or cause an Affiliate to pay) to the Participant in respect of his Vested PSUs and Vested RSUs and Dividend Equivalent Units the amount determined in accordance with the cash payment formula set out above. 57 Page 110 of 253

112 8. CURRENCY 8.1 Currency. All references in the Plan to currency refer to lawful Canadian or United States currency as indicated. 9. SHAREHOLDER RIGHTS 9.1 No Rights to Shares. PSUs and RSUs are not Shares and neither the grant of PSUs or RSUs nor the fact that Shares may be acquired by, or provided from, the Corporation in satisfaction of Vested PSUs or Vested RSUs will entitle a Participant to any shareholder rights, including, without limitation, voting rights, dividend entitlement or rights on liquidation. 10. ADMINISTRATION 10.1 Committee. Unless otherwise determined by the Board, the Plan shall be administered by the Committee Delegation and Administration. The Committee may delegate to any one or more directors, officers or employees of the Corporation and/or its participating Affiliates such duties and powers relating to the Plan as it may see fit. The Committee may, in its discretion, delegate such of its powers, rights and duties under the Plan, in whole or in part, to any committee or any one or more directors, officers or employees of the Corporation and/or its participating Affiliates as it may determine from time to time, on terms and conditions as it may determine, except the Committee shall not, and shall not be permitted to, delegate any such powers, rights or duties to the extent such delegation is not consistent with Applicable Law Effects of Committee s Decision. Any interpretation, rule, regulation, determination or other act of the Committee hereunder shall be made in its sole discretion and shall be conclusively binding upon all persons Liability Limitation. No member of the Committee, the Board or any officer, director or employee of the Corporation or any Affiliate shall be liable for any action or determination made in good faith pursuant to the Plan or any Award Agreement under the Plan. To the fullest extent permitted by law, the Corporation and its Affiliates shall indemnify and save harmless each person made, or threatened to be made, a party to any action or proceeding in respect of the Plan by reason of the fact that such person is or was a member of the Committee or the Board or is or was an officer, director or employee of the Corporation or an Affiliate Compliance with Laws and Policies. The Corporation s issuance of any PSUs and RSUs and its obligation to make any payments or discretion to provide any Shares hereunder is subject to compliance with Applicable Law. Each Participant shall acknowledge and agree (and shall be conclusively deemed to have so acknowledged and agreed by participating in the Plan) that the Participant will, at all times, act in strict compliance with Applicable Law and all other laws and any policies of the Corporation applicable to the Participant in connection with the Plan including, without limitation, furnishing to the Corporation all information and undertakings as may be required to permit compliance with Applicable Law. Such laws, regulations, rules and policies shall include, without limitation, those governing insiders or reporting issuers as those terms are construed for the purposes of Applicable Laws Withholdings. So as to ensure that the Corporation or an Affiliate, as applicable, will be able to comply with the applicable provisions of any federal, provincial, state or local law relating to the withholding of tax or other required deductions, the Corporation, or an Affiliate may withhold or cause to be withheld from any amount payable to a Participant, either under this Plan, or otherwise, such amount, or may require the sale of such number of Shares, as may be necessary to permit the Corporation or the Affiliate, as applicable, to so comply. 58 Page 111 of 253

113 10.7 No Additional Rights. Neither designation of an employee as a Participant nor the establishment of an Award Value for or grant of any PSUs or RSUs to any Participant entitles any person to the establishment of an Award Value, grant, or any additional grant, as the case may be, of any PSUs or RSUs under the Plan Amendment, Termination. The Plan may be amended or terminated at any time by the Committee in whole or in part, provided that: no amendment of the Plan shall, without the consent of the Participants affected by the amendment, or unless required by Applicable Law, adversely affect the rights accrued to such Participants with respect to PSUs or RSUs granted prior to the date of the amendment; no amendment of the Plan shall be effective unless such amendment is approved by the Stock Exchange; and approval by a majority of the votes cast by shareholders present and voting in person or by proxy at a meeting of shareholders of the Corporation shall be obtained for any: amendment for which, under the requirements of the Stock Exchange or any applicable law, shareholder approval is required; reduction of the purchase price of Shares issued or purchased to pay awards granted under the Plan or the cancellation and reissuance of awards under the Plan; extension of the term of an award under the Plan beyond the original expiry date of the award; any amendment to remove or exceed the insider participation limit set out in Section 6.4; an increase to the maximum number of Shares issuable from treasury under the Plan; amendments to eligible Participants that may permit the introduction or nonemployee directors on a discretionary basis; allowance of awards granted under the Plan to be transferable or assignable other than for estate settlement purposes; or amendment to this Section Administration Costs. The Corporation will be responsible for all costs relating to the administration of the Plan. For greater certainty and unless otherwise determined by the Committee, a Participant shall be responsible for brokerage fees and other administration or transaction costs relating to the transfer, sale or other disposition of Shares on behalf of the Participant that have been previously distributed to or provided to the Participant pursuant to the Plan Compliance with Section 409A of the U.S. Internal Revenue Code. Notwithstanding any provision in this Plan or an Award Agreement to the contrary, to the extent a Participant is subject to taxation under the U.S. Internal Revenue Code of 1986, as amended (the U.S. Tax Code ), then any PSUs and RSUs awarded to such Participant shall be interpreted and administered so that any amount payable with respect to such awards shall be paid in a manner that is either exempt from or 59 Page 112 of 253

114 11. ASSIGNMENT compliant with the requirements of Section 409A of the U.S. Tax Code and the applicable regulatory and other guidance issued thereunder ( Section 409A ). In furtherance of the foregoing, and notwithstanding Section 7.4 or 7.5 to the contrary, if any PSU or RSU awarded under this Plan would constitute non-exempt deferred compensation for purposes of Section 409A, then payment shall be made to the Participant or his legal representative, as applicable, in a single lump sum, less any applicable statutory withholdings or deductions, either (1) during the immediately following calendar year if the last day of the Performance Period or the Vesting Date, as applicable, is December 31, or (2) if (1) does not apply, no later than 90 days following the last day of the Performance Period or Vesting Date, as applicable (or, in the event of the Participant s death, no later than 90 days following the date of the Participant s death), provided that the Participant does not have a right to designate the year of the payment. Neither the Committee, the Corporation nor its directors, officers or employees make any representations or warranties regarding the tax treatment of any payments under the Plan and none of them shall be held liable for any taxes, interest, penalties or other monetary amounts owed by a Participant as a result of the application of Section 409A Assignment. The assignment or transfer of the PSUs or RSUs, or any other benefits under this Plan, shall not be permitted, other than by operation of law. 60 Page 113 of 253

115 Schedule D ALGONQUIN POWER & UTILITIES CORP. MANDATE OF THE BOARD OF DIRECTORS 1. PURPOSE (a) The board of directors (the Board ) of Algonquin Power & Utilities Corp. (the Corporation ) has the power and authority to supervise the activities and manage the investments and affairs of the Corporation. The Board, directly and through its committees, shall manage, or supervise the management of, the business and affairs of the Corporation. 2. MEMBERSHIP, ORGANIZATION AND MEETINGS (a) (b) (c) (d) (e) General - The composition and organization of the Board, including: the number, qualifications and remuneration of directors; residency requirements; quorum requirements; meeting procedures and notices of meetings are as established by the Corporation s articles of incorporation (the Articles ) and by-laws (the By-Laws ), as amended and restated from time to time. Independence - The Board shall establish independence standards for the Board in accordance with the binding requirements of any stock exchanges on which the Corporation s securities are listed and all other applicable laws (collectively, the Applicable Requirements ), and, at least annually, shall determine the independence of each director in accordance with these standards. Independence of Chair of the Board / Lead Director The Chair of the Board shall be an independent director, unless the Board determines that it is inappropriate to require the Chair of the Board to be independent, then the independent directors shall select from their number a director who will act as Lead Director and who will assume responsibility for providing leadership to enhance the effectiveness and independence of the Board. The Lead Director shall be chosen at a meeting of independent directors that is not attended by non-independent Board members or management of the Corporation. The Chair of the Board, if independent, or the Lead Director if the Chair of the Board is not independent, shall act as the effective leader of the Board and ensure that the Board s agenda will enable it to successfully carry out its duties. The Chair of the Board shall not be the chief executive officer of the Corporation. Access to Management and Outside Advisors - The Board shall have unrestricted access to the management and employees of the Corporation and its subsidiary entities. The Board shall have the authority to retain external legal counsel, consultants or other advisors to assist them in fulfilling their responsibilities and to set and pay the respective compensation of these advisors without consulting or obtaining the approval of any Corporation officer. The Corporation shall provide appropriate funding, as determined by the Board, for the services of these advisors. Secretary and Minutes - The Board shall request that an officer of the Corporation, external legal counsel or any other person act as secretary of each meeting of the Board. Minutes of meetings of the Board shall be recorded and maintained and subsequently presented to the Board for approval. 61 Page 114 of 253

116 (f) Meetings Without Management - At each meeting of the Board, directors shall, under the oversight of the Chair of the Board or the Lead Director, as applicable, meet without management being present. 3. ELECTION OF DIRECTORS (a) (b) Voting for Individual Directors At each annual meeting of the shareholders, the Corporation shall submit to its shareholders the name of each candidate being recommended by the Board for election by the shareholders. In an uncontested election of directors (as defined under Section 3.2), shareholders shall be asked to vote (or withhold from voting) on each individual director (rather than on a slate of directors). In a contested election of directors, the Corporation will retain the discretion to use slate voting. Majority Voting in Director Elections - In this Policy, an uncontested election shall mean an election at a shareholder s meeting of the Corporation in which the number of nominees for director ( Director ) shall be equal to the number of Directors to be elected. In a contested election, this Policy shall not apply and nominees shall be elected by plurality voting. In an uncontested election of Directors, where a nominee for Director (the Subject Director ) is not elected by at least a majority (50% + 1 vote) of the votes cast with regard to his or her election, the Subject Director must immediately tender resignation to the board of directors (the Board ). The Corporate Governance Committee of the Board shall, within 90 days of the shareholder s meeting, determine whether to accept the Subject Director resignation, which resignation should be accepted absent exceptional circumstances. The resignation shall become effective when accepted by the Board. As soon as practicable following receipt of the resignation of the Subject Director: (i) (ii) the Corporation shall issue a press release with the board s decision including, in the case of the Board not accepting the resignation, the reasoning behind such decision, and the Board may (i) leave the resultant vacancy in the Board unfilled until the next annual meeting of shareholders of the Corporation; (ii) fill the vacancy through the appointment of a Director whom the Board considers to merit the confidence of the shareholders of the Corporation; or (iii) call a special meeting of the shareholders of the Corporation to consider the election of a nominee recommended by the Board to fill the vacant position. The Subject Director shall not participate in any meeting of the Board or committee of the Board at which the resignation is considered. However, the Subject Director shall remain active and engaged in all other Board and other applicable Board committee activities, deliberations and decisions during this process. If each member of the Corporate Governance Committee received a Majority Withheld Vote at the same election, then the independent Directors who did not receive a Majority Withheld Vote shall appoint a committee amongst themselves to consider whether to accept the Subject Director resignation, provided that if the only Directors who did not receive Majority Withheld Votes in the same election constitute three or fewer Directors, all Directors may participate in the action regarding whether to accept the resignation of the Subject Directors. This Policy, on an annual basis, shall be fully described in the materials sent to shareholders of the Corporation in connection with a meeting at which Directors are to be elected. Following any uncontested meeting at which Directors are elected, the Corporation shall issue a news release disclosing the detailed voting results for each director candidate, which shall include one of the following: 62 Page 115 of 253

117 (i) (ii) (iii) the percentages of votes received for and withheld for each director; the total votes cast by ballot with the number each director received for ; or the percentages and total number of votes received for each director. If a formal count is not conducted, votes represented by proxy shall be disclosed. The Board may at any time in its sole discretion supplement or amend any provision of this policy in any respect, subject to compliance with the TSX Company Manual. The Board will have the exclusive power and authority to administer this policy, including without limitation the right and power to interpret the provisions of this policy and make all determinations deemed necessary or advisable for the administration of this policy. All such actions, interpretations and determinations which are done or made by the Board in good faith will be final, conclusive and binding. 4. FUNCTIONS AND RESPONSIBILITIES The Board shall have the functions and responsibilities set out below. In addition to these functions and responsibilities, the Board shall perform such duties as may be required by the Applicable Requirements, the Articles and the By-Laws. (a) Strategic Planning (i) (ii) (iii) Strategic Plans - At least annually, the Board shall review and, if advisable, approve the Corporation s strategic planning process and short- and long-term strategic plans prepared by management of the Corporation. In discharging this responsibility, the Board shall review the plans in light of management s assessment of emerging trends, opportunities, the competitive environment, risk issues and significant business practices. Business Plans - The Board shall review and, if advisable, approve the Corporation s annual business plans. Monitoring - At least annually, the Board shall review management s implementation of the Corporation s strategic and business plans. The Board shall review and, if advisable, approve any material amendments to, or variances from, these plans. (b) Risk Management (i) (ii) General - At least annually, the Board shall, with the assistance of the Audit Committee, review reports provided by management of the Corporation of material risks associated with the businesses and operations of the Corporation s subsidiary entities, review the implementation by management of systems to manage these risks and review reports by management relating to the operation of and any material deficiencies in these systems. Verification of Controls - The Board shall, with the assistance of the Audit Committee, verify that internal, financial, non-financial and business control and information systems have been established by management and that the Corporation is applying appropriate standards of corporate conduct for these controls. (c) Human Resource Management (i) General - At least annually, the Board shall, with the assistance of management, review the Corporation s approach to human resource management and executive compensation. 63 Page 116 of 253

118 (ii) (iii) Succession Review - At least annually, the Board shall, with the assistance of the Compensation Committee, as applicable, review the Chair of the Board and the senior management succession plans of the Corporation including its Chief Executive Officer. Integrity of Senior Management - The Board shall, to the extent feasible, satisfy itself as to the integrity of senior management of the Corporation. (d) Corporate Governance (i) (ii) (iii) General - At least annually, the Board shall, in conjunction with the Corporate Governance Committee, review the Corporation s approach to corporate governance. Board Independence - At least annually, the Board shall, in conjunction with the Corporate Governance Committee, evaluate the independence standards established by the Board and the Board's ability to act independently from management in fulfilling its duties. Ethics Reporting- At least annually, the Board shall, in conjunction with the Corporate Governance Committee, review reports provided by management relating to compliance with, or material deficiencies of, the Corporation s Code of Business Conduct and Ethics. (e) Financial Information (i) (ii) (iii) General - At least annually, the Board shall, in conjunction with the Audit Committee, review the Corporation s internal controls relating to financial information and reports provided by management on material deficiencies in, or material changes to, these controls. Integrity of Financial Information - The Board shall, in conjunction with the Audit Committee, review the integrity of the Corporation s financial information and systems, the effectiveness of internal controls and management's assertions on internal control and disclosure control procedures. Financial Statements The Board shall review the recommendation of the Audit Committee with respect to the annual financial statements and Management s Discussion & Analysis ( MD&A ) of such financial statements to be delivered to shareholders. If appropriate, the Board shall approve such financial statements and MD&A. (f) Communications (i) (ii) General - At least annually, the Board in conjunction with management shall review the Corporation s overall communications strategy, including measures for receiving feedback from the Corporation s shareholders. Disclosure - At least annually, the Board shall review management's compliance with the Corporation s disclosure policies and procedures. The Board shall, if advisable, approve material changes to the Corporation s disclosure policies and procedures. (g) Committees of the Board (i) Board s Committees - The Board has established the following committees of the Board: the Audit Committee, the Corporate Governance Committee, the Disclosure Committee and the Compensation Committee. Subject to applicable law and the Articles and By- Laws of the Corporation, the Board may establish other committees or merge any committee of the Board with any other committee of the Board. 64 Page 117 of 253

119 (ii) (iii) (iv) (v) Committee Charters - The Board has approved charters for each committee and shall approve charters for each new committee of the Board. At least annually, each charter shall be reviewed, and, based on recommendations of the Corporate Governance Committee and the Chair of the Board, as applicable, approved by the Board. Delegation to Committees - The Board has delegated for approval or review the matters set out in each committee's charter to that committee. Consideration of Committee Recommendations - As required, the Board shall consider for approval the specific matters delegated for review to committees of the Board. Board/Committee Communication - To facilitate communication between the Board and each committee of the Board, each committee chair shall provide a report to the Board on material matters considered by the committee at the first Board meeting after each meeting of the committee. 5. RESPONSIBILITIES OF INDIVIDUAL DIRECTORS (a) (b) Responsibilities Set out in the Mandate A director shall review and participate in the work of the Board necessary in order for the Board to discharge the duties and responsibilities set out in accordance with this mandate. Meeting Preparation and Attendance In connection with each meeting of the Board and each meeting of a committee of the Board of which the director is a member, a director shall: (i) (ii) (iii) review thoroughly the material provided to the director in connection with the meeting, provided that such review is practicable in the view of the time at which such material was delivered to the director; attend all scheduled meetings (absent extenuating circumstances) of the Board and meetings of committees on which a director serves; and attend each meeting in person to the extent practicable (unless the meeting is scheduled to be held by phone or video-conference). (c) (d) Assessment A director shall participate in such processes as may be established by the Board for assessing the Board, its committees and individual directors. Other Responsibilities A director shall perform such other functions as may be delegated to that director by the Board or any committee of the Board from time to time. 6. OWNERSHIP GUIDELINES (a) (b) Director Equity Ownership Guidelines All directors are expected to maintain a meaningful equity ownership interest in the Corporation in order to align their interests with those of the shareholders. In particular, each director shall maintain equity ownership (the Director Equity Guideline ) of a value equal to approximately three times the value of his or her annual cash retainer. Timing of Compliance Directors will have up to five years from the latter of the time of initial appointment or election to the Board or the adoption of the policy related to the Director Equity Guideline to achieve the Director Equity Guideline. The Board may vary the time for compliance in extenuating circumstances. 65 Page 118 of 253

120 (c) Valuation Equity ownership will be calculated on the basis of the market value of the Common Shares of the Corporation at the time such valuation is made, subject to the Board s discretion with regard to short-term fluctuations in the market price of the Common Shares. 7. ORIENTATION, SELF-ASSESSMENT AND EVALUATION (a) (b) Each director shall participate in orientation and continuing education programs developed for the Board. At least annually, the Board shall along with the Corporate Governance Committee conduct regular assessments of the overall effectiveness of the Board, its committees, the Chair of the Board and the Chairs of the committees of the board taking into consideration the relevant mandates and terms of reference. The Board shall also conduct an assessment of the contributions of individual directors. The assessments of individual directors will take into account, among other things, self-assessments, confidential peer-review surveys completed by each director and the consideration of the competencies and skills that each director is expected to bring to the Board. 8. CURRENCY OF MANDATE The mandate was last revised and approved by the Board of Directors of Algonquin Power & Utilities Corp. as of March 14, Page 119 of 253

121 Testimony Page 120 of 253

122 Exhibit 1 Summary and Results of Operations Page 121 of 253

123 Chapter 1 Overview & Safety Page 122 of 253

124 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) TABLE OF CONTENTS I. Introduction...1 II. Liberty Utilities California Utility Operations...2 A. Liberty Utilities Operations and Customer Service...2 B. Current and Proposed Generation and Supply Resources...4 III. The Vision of Liberty Utilities Co. s Family of Utilities...6 IV. Liberty Utilities Risk Management Policy and Procedures...8 V. Liberty Utilities General Rate Case Application...10 VI. Summary of Filing...11 DWT v Exhibit 1 1-i Page 123 of 253

125 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) I. INTRODUCTION My name is Michael R. Smart, P.E. My primary work location is 701 National Avenue, Tahoe Vista, California I am the President of Liberty Utilities (CalPeco Electric) LLC (U-933E) ( Liberty Utilities ). 1 Exhibit 4, MRS, entitled Witness Statements of Qualifications: Michael R. Smart, P.E. summarizes my background, education, and experience. I am sponsoring this Policy Overview with respect to Liberty Utilities general rate case application for its 2016 Test Year. Liberty Utilities has designed its proposals in this Application to enable it to continue to provide our customers an enhanced level of customer service, primarily through our emphasis on our local presence and community involvement, and correspondingly to maintain the capability to offer our customers electric system reliability and increased safety by investing in infrastructure, human resources, and vegetation management. In this Application, Liberty Utilities requests an increase in its general rates to continue its focus on safety and reliability and to recover the costs of (i) investment in and the costs associated with the ownership of infrastructure facilities and (ii) increases in Operations and Maintenance ( O&M ) costs. 1 In Decision ( D. ) , the Commission approved the transfer of the California electric distribution facilities and the Kings Beach Generation Facility formerly owned and operated by Sierra Pacific Power Company dba NV Energy ( NV Energy ) to California Pacific Electric Company, LLC ( CalPeco ). The transfer from NV Energy to CalPeco became effective as of January 1, CalPeco notified the Commission of its formal change in name to Liberty Utilities (CalPeco Electric) LLC. See Advice Letter 28-E (July 15, 2013). For purposes of consistency, we will refer to the owner of the utility as Liberty Utilities throughout this Application, even during periods when CalPeco and NV Energy was the name of the regulated utility providing electric service. DWT v Exhibit Page 124 of 253

126 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) Liberty Utilities is also requesting revisions to its Energy Cost Adjustment Clause ( ECAC ) Billing Factors. Liberty Utilities is projecting an under-collection balance in its Energy Cost Adjustment Account as of December 31, 2015 of $1.788 million. It accordingly proposes the California Public Utilities Commission ( Commission ) authorize an increase in ECAC Billing Factors revenues, as described in Liberty Utilities Witness Blunier s testimony in Exhibit 1, Chapter 3. Liberty Utilities intends to file Phase II of this Application as of June 1, In Phase 8 9 II, we intend to propose a permanent curtailment rate schedule. 2 Liberty Utilities proposed rate allocation and rate design. Phase II will also include II. LIBERTY UTILITIES CALIFORNIA UTILITY OPERATIONS A. Liberty Utilities Operations and Customer Service Liberty Utilities serves approximately 49,000 electric customers in California, in and around the Lake Tahoe Basin. Liberty Utilities California service territory differs greatly from the three major electric utilities in California. It generally encompasses the western portions of the Lake Tahoe basin. Liberty Utilities California customers are located in portions of Placer, El Dorado, Nevada, Sierra, Plumas, Mono, and Alpine Counties. Almost 80 percent of Liberty Utilities customers are located in the Lake Tahoe Basin. The biggest population center is the City of South Lake Tahoe. 2 The Commission approved Liberty Utilities interim Voluntary Curtailment Program for larger than 200 kw customers from November 2014 through December 31, See Resolution E-4694 (Dec. 4, 2014). DWT v Exhibit Page 125 of 253

127 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) The Liberty Utilities service territory extends from Portola in the north to Markleeville and Topaz Lake in the south. The terrain in Liberty Utilities California service territory is mountainous and heavily forested, with elevations ranging from 9,050 feet in Squaw Valley to just under 5,000 feet at Portola. Most of Liberty Utilities customers are located at elevations greater than 6,000 feet. The electric load within the Liberty Utilities service territory reflects the economic activities in the area. The region has little manufacturing or heavy industry. The economy of the Tahoe Basin is dominated by tourism with the major businesses being hotels, motels, and ski resorts. Approximately half of the electricity Liberty Utilities delivers is to residential customers and approximately 60 percent of residential accounts are second-family homes or rentals. Electric demand peaks for Liberty Utilities in the winter period, particularly during Christmas week when tourism is highest. Results of a customer satisfaction survey conducted in October 2014 confirms that Liberty Utilities quality of service, customer focus, and continued strengthening of our distribution infrastructure is having a positive impact on our customers appreciation of our commitment and corresponding capabilities to provide a safe and reliable product. According to the survey, 83 percent of Liberty Utilities customers are somewhat satisfied or very satisfied with Liberty Utilities overall customer service. Only six percent responded that they were somewhat dissatisfied or not satisfied by Liberty Utilities overall customer service. DWT v Exhibit Page 126 of 253

128 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) B. Current and Proposed Generation and Supply Resources Liberty Utilities service territory is not geographically or operationally a part of the California Independent System Operator balancing authority. Identical to the circumstances existing when NV Energy operated the California portion of its then multi-state service territory, Liberty Utilities is located within the NV Energy Balancing Authority. As a consequence of its location within the NV Energy Balancing Authority, essentially all the energy delivered into the Liberty Utilities service territory is from supply sources to the East. Liberty Utilities California operations currently include only electric distribution facilities and the Kings Beach Generation Facility ( Kings Beach ). Kings Beach currently represents Liberty Utilities only generation asset. It is a 12 MW diesel facility whose usage is restricted to local area emergency backup. Liberty Utilities procures almost all of the remainder of its power through a full requirements power purchase agreement with Sierra Pacific Power Company dba NV Energy ( Existing NV Energy Services Agreement ). 3 The Existing NV Energy Services terminates as of December 31, On April 24, 2015, Liberty Utilities filed Application XXX 4 ( 2016 NV Energy Services Agreement Application ) requesting Commission approval of the new full services agreement it executed with NV Energy on April 21, 2014 ( 2016 NV Energy Services Agreement ). The term of the 2016 NV Energy Services Agreement is intended to commence January 1, 2016 (i.e., 3 The Commission authorized Liberty Utilities to execute the Existing NV Energy Services Agreement and recover in rates its payments to NV Energy in D See Application of Liberty Utilities (CalPeco Electric) LLC (U 933 E) for Authority to Execute 2016 NV Energy Services Agreement and for Rate Recovery of the Costs It Will Incur Pursuant to the Agreement, and Urging Issuance of Expedited Decision Granting Such Relief ( 2016 NV Energy Services Agreement Application ). DWT v Exhibit Page 127 of 253

129 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) immediately upon the expiration of the Existing NV Energy Services Agreement). In the 2016 NV Energy Services Agreement Application, Liberty Utilities requests that the Commission: (i) approve Liberty Utilities execution of and performance under the 2016 NV Energy Services Agreement; and (ii) authorize it rate recovery for the costs Liberty Utilities will incur pursuant to the 2016 NV Energy Services Agreement. As will be explained, for purposes of this Application, Liberty Utilities bases its forecasts of costs for the 2016 Test Year on the assumption that the Commission will timely approve and grant the ratemaking authority the 2016 NV Energy Services Agreement Application requests. 5 On April 17, 2015, Liberty Utilities filed Application seeking Commission approval of its proposed acquisition, ownership and operation of the Luning and the Minden Solar Project ( Solar Projects ) and associated ratemaking ( Solar Projects Application ). As explained in the Solar Projects Application, under Commission ratemaking practices and protocols, Liberty Utilities should in this Application be requesting rate recovery for at least certain of the costs it will incur to acquire, own and operate the Solar Projects. However, in the Solar Projects Application, Liberty Utilities is requesting that the Commission allow it to defer 5 Liberty Utilities Witness Blunier in Exhibit 1, Chapter 3, makes proposals to address the ratemaking implications in the event that the Commission is not able to timely approve the 2016 NV Energy Services Agreement and it does not become effective as of the January 1, 2016 date this Application assumes. 6 See A , Application of Liberty Utilities (CalPeco Electric) LLC (U 933 E) for the Issuance of a Certificate of Public Convenience and Necessity to Acquire, Own, and Operate the Luning and Minden Solar Projects, Authorize Ratemaking Associated with the Solar Projects Capital Investment and Operating Expenses, and Issuance of Expedited Decision Granting Such Relief ( Solar Projects Application ). DWT v Exhibit Page 128 of 253

130 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) 1 any rate recovery associated with the Solar Projects until January 1, Thus for purposes of 2 3 this Application, Liberty Utilities assumes that the Commission will grant its request and thus it is requesting no rate recovery associated with the Solar Projects in this proceeding. 4 5 III. THE VISION OF LIBERTY UTILITIES CO. S FAMILY OF UTILITIES Liberty Utilities is a part of a family of regulated water, 8 gas, and electric distribution and 6 transmission utilities that currently operates in 10 states ( Liberty Utilities Co. ). 9 As part of Liberty Utilities Co., Liberty Utilities integrates the shared corporate vision to strive to be the best utility in the eyes of our customers, regulators, and shareholders by providing safe, reliable and high quality services. The utilities within the Liberty Utilities Co. family make safety our most important priority. We make it a focus to embed a safety culture into our normal routine. We purposely schedule a safety moment in every meeting to emphasize the strong culture of safety and constantly reinforce that culture with a disciplined approach of safety trainings, events, and symposiums. At Liberty Utilities, this enhanced safety culture is manifested by a fostering environment that facilitates shared learnings to be imparted through near-miss reporting, a robust Joint Health & Safety Committee particularly committed to ensuring employee safety, 7 Liberty Utilities is requesting that the Commission authorize it rate recovery for the costs it will incur to acquire, own, and operate the Solar Projects commencing as of January 1, 2017 and that the Commission authorize it to seek such rate recovery in its Post-Test Year Adjustment Mechanism filing that Liberty Utilities shall file in October See Solar Projects Application, at 5, 25-26, In Application , currently pending before the Commission, Liberty Utilities co. is requesting to acquire Park Water Company and Apple Valley Ranchos Water Company in California. 9 Liberty Utilities Co. also has currently pending an application before the Montana Public Service Commission to acquire Mountain Water Co. Assuming Liberty Utilities Co. obtains the necessary regulatory approvals and completes the acquisition of Mountain Water Co., Montana will represent the 11 th state in which it will and operate regulated electric, natural gas, and water utilities. DWT v Exhibit Page 129 of 253

131 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) performing safety stand-downs, holding safety symposia, and establishing a health and safety matrix, to name just a few specifics. Another important aspect of Liberty Utilities corporate vision is to ensure a local utility feel. We create a local utility first by having a regional president located on the ground in the service territory, ensuring local decision making, and having as many functions as possible and beneficial be provided directly in and by the local community. This emphasis on the local Lake Tahoe-area service territory is particularly important for Liberty Utilities. I serve as the local regional president with my ears to the ground and my fingers on the pulse of my local community. The employees and I are directed to be attentive to the requirements and concerns of our community, our customers, and our regulators and have been accordingly empowered to make decisions based on local conditions. This local emphasis best enables Liberty Utilities, and the other Liberty Utilities Co. companies, to be particularly customer-centric. Walk-in customer service centers are the very core of our philosophy. Our aim is to make our employees feel empowered to provide the very best in service to customers who they consider to their neighbors and part of their communities. Local autonomy does not require sacrificing the benefits of being part of a larger organization, particularly with respect to strategic support. The Liberty Utilities Co. model offers experienced strategic planning and analysis services to all of its operating utilities. Thus, Liberty Utilities and the customers we serve within our service territory benefit from the strategic services a variety of highly experienced corporate representatives offer. They provide support across a wide gamut of areas ranging from environmental health and safety to financial standards DWT v Exhibit Page 130 of 253

132 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) 1 2 to information technology and are also able to leverage the experience gained through helping to guide public utilities in a variety of jurisdictions and industries. 3 4 IV. LIBERTY UTILITIES RISK MANAGEMENT POLICY AND PROCEDURES Liberty Utilities adopted in 2013 a formal risk management program instituted by our ultimate parent company Algonquin Power & Utilities Corp. ( Algonquin ). Our program objectives are to protect our people and assets, improve decision making capabilities and eliminate potential surprises that could have a negative impact on the company, property, the public, or our personnel. The goal of our program is not to eliminate all possible risks. The more realistic and possible achievable goal is to be aware of the risks inherent in providing electric utility service, and then mitigate against these risks, particularly those risks whose consequences are unacceptable, becoming realized. Liberty Utilities Co. adopted this risk management program nationally across all its operating utilities to ensure a consistent risk assessment approach and to share information about addressing similar risks in a uniform manner. At Liberty Utilities, we developed a subset of 16 different Key Risk categories to organize our data. Under each category, our local management team identified potential risks and assigned a Risk Score based on the Risk Impact and Risk Likelihood that range from 1 to 25. Low Risk (1-4) Medium Risk (5-9) High Risk (10-15) Extreme Risk (16-25) DWT v Exhibit Page 131 of 253

133 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) We then assigned each risk a Risk Owner who has the responsibility to develop a Risk Treatment Plan whose purpose is to identify action items to mitigate, reduce or minimize the risk. The Liberty Utilities management team in Lake Tahoe reviews the Risk Treatment Plan and progress of the plan and updates it quarterly. We utilize an online risk register database program to enter, maintain and track all of the risk data. The Algonquin Board of Directors also reviews the risk register to ensure financial and personnel resources are available to meet the needs as well as to support the progress of the Risk Treatment Plans. Some of our risks include items that support many of our ongoing programs and capital projects. Wild land fire risk is mitigated through our vegetation management program. Reliability risk is mitigated through our proposed upgrade to our 625/650 lines 10 and purchase of substation back-up equipment. All Liberty Utilities employees participate in risk assessment and awareness training and they accordingly become part of the process. We recognize that conditions change, frequently during the course of the day or as projects progress, which require our employees to remain diligent in their daily work activities. This level of involvement allows employees to communicate risks to their managers and supervisors and thus best ensure that risks are identified early and can be addressed in a timely and efficient manner. 10 See D granted Liberty Utilities a permit to construct Phase 1 of the 625 and 650 line upgrade project and to construct Phase 2 and 3 in the future subject to verification through a Tier 2 Advice Letter filing. DWT v Exhibit Page 132 of 253

134 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) V. LIBERTY UTILITIES GENERAL RATE CASE APPLICATION Liberty Utilities is committed to providing a high quality of customer service, reliability, and safety and at a cost-efficient cost. The location, climate and terrain of our California service territory pose special challenges and sometimes require relatively greater expenditures to achieve these objectives. This Application requests an overall increase to Liberty Utilities current effective rates of $ million annually or percent with an effective date of January 1, Included in the overall annual increase are the following annual incremental increases: $0.951 million in ECAC revenues as described in Exhibit 1, Chapter 3; $23,000 for its vegetation management program as described in Exhibit 3, Chapter 1; $0.700 million for Catastrophic Emergency Memorandum Account costs as described in Exhibit 3, Chapter 2; $0.130 million to implement its Energy Efficiency programs, as described in Exhibit 3, Chapter 3; and $0.371 million to implement the Solar Initiative Program as described in Exhibit 3, Chapter 4. The main contributors to the increase to Liberty Utilities current effective rates are: Cost recovery for the investments Liberty Utilities is making to install new and upgraded distribution facilities and other infrastructure; Execution in 2014 of a new three-year collective bargaining agreement between Liberty Utilities and International Brotherhood of Electric Workers ( IBEW ) Local 1245 that offers the bargaining unit employees an annual increase of 2.5 percent following a one-time wage increase of 4 percent; The intended hiring of seven additional employees; DWT v Exhibit Page 133 of 253

135 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) A request to increase the Return on Equity to 10.5 percent resulting an overall rate of return of capital of 7.92 percent; and A request to change the debt/equity structure from the current 48.5 percent/51.5 percent to a debt/equity ratio of 45 percent/55 percent. The request in this Application to increase general rates is based on a 2016 forecasted test year. It reflects proposed increases in operating expenses and plant additions. The $ million requested increase in effective rates can be separated into its generation and distribution components as follows: Generation $ (4.107) million Distribution $ million VI. SUMMARY OF FILING The exhibits supporting Liberty Utilities General Rate Case application consist of chapters setting forth the testimony of witnesses on the following subject matter: 1) Summary and Results of Operations i) Exhibit 1, Chapter 1 (this Exhibit) ii) Exhibit 1, Chapter 2 details Liberty Utilities forecasted 2016 O&M expenses. It is sponsored by Michael D. Long iii) Exhibit 1, Chapter 3 details Liberty Utilities ECAC revenues. It is sponsored by Alain R. Blunier. iv) Exhibit 1, Chapter 4 details Liberty Utilities projected 2016 income and other taxes. It is sponsored by Kendrick E. Wittman. DWT v Exhibit Page 134 of 253

136 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) v) Exhibit 1, Chapter 5 details Liberty Utilities proposed 2016 depreciation expense. It is sponsored by Kendrick E. Wittman. vi) Exhibit 1, Chapter 6 details Liberty Utilities projected rate base. It is sponsored by Kendrick E. Wittman. vii) Exhibit 1, Chapter 7 provides a summary of Liberty Utilities projected 2016 sales, customers and revenues. It is sponsored by Alain R. Blunier. viii) Exhibit 1, Chapter 8 provides a summary of Liberty Utilities fuel and purchase power forecasts. It is sponsored by Alain R. Blunier. ix) Exhibit 1, Chapter 9 details Liberty Utilities proposed revenue requirement. It is sponsored by Alain R. Blunier. 2) Cost of Capital/Return on Equity/Rate of Return i) Exhibit 2 details Liberty Utilities proposed capital structure, cost of capital, return on equity, and rate of return. It is sponsored by Alain R. Blunier (Chapter 1) and Dr. Roger A. Morin (Chapter 2). 3) Electric Distribution Programs i) Exhibit 3, Chapter 1 details Liberty Utilities proposed vegetation management expenses. It is sponsored by Jessica Drummond ii) Exhibit 3, Chapter 2 details Liberty Utilities expenses tracked in the Catastrophic Emergency Memorandum Account. It is sponsored by Kendrick E. Wittman. DWT v Exhibit Page 135 of 253

137 Liberty Utilities (Liberty Utilities Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 1 Overview & Safety (Michael R. Smart, P.E.) iii) Exhibit 3, Chapter 3 details Liberty Utilities proposed 2016 Energy Efficiency program expenses. It is sponsored by Lori L. Williams. iv) Exhibit 3, Chapter 4 details Liberty Utilities proposed 2016 California Solar Initiative Program. It is sponsored by Lori L. Williams. 4) Witness Statements of Qualifications As stated above and as supported by the subsequent chapters, applicant Liberty Utilities respectfully requests that the Commission approve the general rate relief in accordance with its Application. DWT v Exhibit Page 136 of 253

138 Chapter 2 Operating & Maintenance and Administrative & General Expenses Page 137 of 253

139 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Michael D. Long. My business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric), LLC ( Liberty Utilities ) as Director of Finance. 2. Q: Does Exhibit 4, MDL, entitled Witness Statements of Qualifications: Michael D. Long accurately summarize your background, education, and experience? A: Yes, it does. 3. Q: What is the purpose of your direct testimony? A: I am sponsoring Liberty Utilities 2016 forecasted Operations & Maintenance and Administrative & General ( O&M/A&G ) expenses. My testimony on forecasted 2016 O&M/A&G expenses does not include expenses projected to be incurred for vegetation management, Catastrophic Events Memorandum Account expenses, and expenses associated with Liberty Utilities Energy Efficiency programs and Solar Incentive Program. The costs we are projecting for these areas are addressed in Exhibit 3, Chapter 1, Exhibit 3, Chapter 2, Exhibit 3, Chapter 3, and Exhibit 3, Chapter 4 respectively. DWT v Exhibit Page 138 of 253

140 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) II. DEVELOPMENT OF FORECASTED 2016 O&M/A&G EXPENSES METHODOLOGY 1. Q: Explain how Liberty Utilities derived the 2016 forecasted O&M/A&G expenses that that you are addressing in your testimony. A: The process to forecast 2016 O&M/A&G expenses started with the actual expenses Liberty Utilities incurred in calendar year 2014 (Base Year). The 2014 Base Year labor expenses were adjusted for known and measurable changes, such as increases to salaries due to Liberty Utilities recently negotiated collective bargaining agreement, filling of vacant positions, and the planned hiring of new employees. When compared to 2014, a portion of the salary increase forecasted reflects the annualization of the salaries relating to the filling of three positions that were vacant at the end of 2014 and the addition of seven new full time positions. The 2014 Base Year non-labor expenses were decreased by eliminating all nonrecurring costs. Correspondingly, we increased these non-labor costs to incorporate any known and measurable incremental increases or new expenses that would occur in Finally, the adjusted 2014 Base Year recorded expenses (labor and non-labor) were then increased by inflation factors to arrive at Liberty Utilities 2016 forecasted O&M/A&G expenses. The inflation factor is a compounded rate (1.031 percent) based on the 2015 and 2016 Consumer Price Index obtained from Bloomberg. As explained in Liberty Utilities Witness Michael R. Smart s testimony in Exhibit 1, Chapter 1 and in the Solar Projects Application, Liberty Utilities is projecting that DWT v Exhibit Page 139 of 253

141 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) both the Luning and Minden Projects are to be operational in late Thus, under existing Commission ratemaking policies and protocols we should in this Application include the O&M/A&G costs that Liberty Utilities will incur to operate the Solar Projects into the forecast. However, as explained in the Solar Projects Application, Liberty Utilities is requesting that any rate recovery for costs associated with the Solar Projects be deferred until January 1, Thus, for purposes of this Application, we are not including any O&M/A&G expenses associated with the Solar Projects into this forecast of O&M/A&G expenses. 8 9 III. PROPOSED 2016 FORECASTED O&M/A&G EXPENSES 1. Q: Quantify the amount of O&M/A&G expenses Liberty Utilities is forecasting for 2016 for the areas covered by your testimony. A: $ million. When compared to the recorded O&M/A&G expenses incurred in the Base Year, this amount projects a net increase of $2.0 million or 13.1 percent. 2. Q: You state that the forecasted increase in labor expenses is attributable in part to the recently negotiated collective bargaining agreement. Please explain the background of this increase in labor costs. A: Fifty-nine of Liberty Utilities employees are members of the International Brotherhood of Electric Workers ( IBEW ) Under the terms of the Liberty Utilities collective bargaining agreement with the IBEW, the parties are obligated to negotiate a new agreement every three years. Our existing agreement expired in July DWT v Exhibit Page 140 of 253

142 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) In mid-2014, Liberty Utilities negotiated a new collective bargaining agreement with the IBEW which is effective for the period August 2014 to August The new collective bargaining agreement provides for an annual wage increase of 2.5 percent for all years of the contract. In 2015, in addition to the annual wage increase of 2.5 percent, a one-time wage increase of 4 percent went into effect. This four percent increase was to offset the reduction in Cash Balance contributions of an average of two percent and the reduction of the employer match for 401k from six percent to four percent. All subsequent general wage increases will be derived from the level that includes this one-time 2015 incremental four percent wage increase. 3. Q: You have stated that Liberty Utilities intends to add seven new full time positions by Describe the functions these new positions will perform. A: The new positions range from performing administrative functions such as assisting the Manager of Human Resources to administrative assistants that support office functions. Liberty Utilities also plans to add a utility planner and a meter technician. DWT v Exhibit Page 141 of 253

143 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) Q: Please explain the reasons for the differences between 2014 recorded and 2016 projected Other Power Generation and Distribution Expenses? A: Other Power Generation and Distribution Expenses Increase / % (000's) Forecasted Recorded (Decrease) Inc / (Dec) Labor $ 3,005 $ 2,238 $ % Non-Labor 2,389 2,713 (324) -11.9% 4 5 a. Labor $ 5,394 $ 4,951 $ % After eliminating the impact of inflating the 2014 Base Year expenses to the 2016 forecasted costs ($90,000), labor costs increased $0.677 million. This increase is attributable to the impact of the recently negotiated collective bargaining agreement, filling of one position that was vacant at the end 2014 and the addition of three new full-time equivalents. b. Non-Labor Non-labor expenses decreased $0.395 million due to the anticipated termination of Transition Service Agreements ( TSAs ) with Sierra Pacific Power Company dba NV Energy ( NV Energy ). As part of its acquisition in 2011 of the former NV Energy California service DWT v Exhibit Page 142 of 253

144 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) 1 territory, Liberty Utilities executed a master TSA with NV Energy. 1 Under the terms of the TSA, NV Energy has been providing a variety of services to Liberty Utilities on a utility-based cost-of-service basis. With respect to Other Power Generation and Distribution Expenses, as of January 1, 2016, Liberty Utilities intends to cease relying on NV Energy providing the TSA services and contract with outside vendors. This transition reflects that the terms for several of the TSA functions that NV Energy has been performing has terminated; with respect to certain additional TSA services, Liberty Utilities has decided to replace NV Energy with third-party vendors. Partially offsetting this reduction in non-labor expenses is an increase in costs of $71,000 reflecting the inflation factor. 1 The Commission authorized Liberty Utilities to execute the master TSA in D See D , mimeo at 27, 55, 58 (Findings of Fact 15 and 34). DWT v Exhibit Page 143 of 253

145 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) Q: Please explain the reasons for the differences between 2014 recorded and 2016 projected Customer Care Expenses. A: Customer Care Expenses Increase / % (000's) Forecasted Recorded (Decrease) Inc / (Dec) Labor $ 2,248 $ 1,643 $ % Non-Labor % 4 5 a. Labor $ 3,213 $ 2,533 $ % After eliminating the impact of inflating the 2014 base year expenses to the 2016 forecasted costs ($68,000), labor costs for Customer Care increased $0.537 million. This increase is primarily attributable to the higher employee compensation associated with the revised collective bargaining agreement. b. Non-Labor Liberty Utilities determined in 2014 that the Accumulated Provision for Uncollectible Accounts was greater than the amount required to cover potential write-offs of customer accounts receivables. To reduce this excess amount, the reserve was lowered and 2014 bad debt expense reduced correspondingly. To reflect a normalized bad debt expense for the Base Year, the bad debt expense was increased by $51,000. This normalization of the 2014 bad DWT v Exhibit Page 144 of 253

146 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) debt expense was based on the two-year average of Liberty Utilities 2013 and 2014 bad debt expenses. Additionally non-labor expenses increased $25,000 for the inflation of Base Year costs (2014) to forecasted costs (2016). 6. Q: Please explain the reasons for the differences between 2014 recorded and 2016 projected Administrative and General Expenses. A: Administrative and General Expenses Increase / % (000's) Forecasted Recorded (Decrease) Inc / (Dec) Labor $ 3,415 $ 2,020 $ 1, % Non-Labor 5,198 5,728 (530) -9.3% 7 8 a. Labor $ 8,613 $ 7,748 $ % Labor costs increased on a net comparison basis by $1.292 million between the 2014 base year expenses and the 2016 forecasted costs for O&M/A&G. This increase is attributable to the impact of annual salary increases, filling of two positions that were vacant in 2014 and the addition of four new full-time equivalents. Forecasted labor costs are also increasing by an additional $0.103 million to reflect the inflation factor. Also contributing to the statistical increase in the labor component is the revision of the reporting of the Corporate Allocated Costs. In 2014, Liberty Utilities inadvertently DWT v Exhibit Page 145 of 253

147 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) recorded corporate allocated labor costs as non-labor costs. Accordingly the 2016 forecasted corporate-allocated labor costs properly reflected in the table above as a labor cost, do not represent an increase in labor or total A&G costs between 2014 and 2016; rather a portion of the increase in labor costs suggested above represents simply a reclassification of the corporateallocated labor costs from non-labor to labor. b. Non-Labor Non-Labor costs decreased $530,000 due to the following: (000's) Incremental Decrease in Corporate Allocated Costs $ (1,183) Increase in Outside Services - Termination of TSA's 405 Increase in Amortization of Incremental General Rate Case Costs 315 Elimination of Non-Recurring Costs Recorded in 2014 (219) Other (42) Inflation of Base Year Costs (2014) to Forecasted Costs (2016) $ (530) As explained before, a portion of the decrease in Corporate Allocated Costs (costs allocated from Liberty Utilities parent company) results from the reclassifying corporateallocated labor costs from non-labor to labor (i.e., this reduction corresponds to an offsetting increase in corporate-allocated labor costs to labor A&G and thus does not reflect a net reduction DWT v Exhibit Page 146 of 253

148 Liberty Utilities (CalPeco Electric), LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) in costs). The level of Corporate Allocated Costs designated as non-labor A&G has also been reduced in response to the acquisition of other utilities by Liberty Utilities parent company, which allows for the reduction in Liberty Utilities percentage of the costs allocated from the parent company. As explained in the Other Power Generation and Distribution Expenses section above, Liberty Utilities anticipates terminating certain of TSAs with NV Energy and having third-party contractors instead provide these services. Non-labor expenses are also increasing because of anticipated increases in the incremental costs relating to this proceeding. Liberty Utilities is proposing that these incremental general rate case costs be recovered over a three-year period IV. CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. DWT v Exhibit Page 147 of 253

149 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 2 COST OF SERVICE STUDY TABLE 1-2A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 1 of 3 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No. Operation & Maintenance Expens Factor California Generation Distribution No 1 Production Expense-Other 1 2 Operation Supervision & Engineering _G $ Fuel _G Generation Expenses _G Misc Other Power Gen Exp _G Total Operation Maintenance Supervision & Engineering _G Structures _G Generating & Elec Plant _G Misc Other Pwr Gen Plant _G Total Maintenance _G Total Production Expense-Other Other Power Supply Expense Purchased Power _G 39,973 39, Sys Control & Load Dispatch _G Other Expenses _D ECAC Energy Cost Differential _G Energy Cost Amortization _D Total ECAC Total Other Power Supply Expense 39,973 39, Total Production Expense $ 40,023 $ 40,023 $ - 28 Page 148 of 253

150 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 2 COST OF SERVICE STUDY TABLE 1-2A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 2 of 3 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No. Operation & Maintenance Expens Factor California Generation Distribution No 1 Distribution Expense 1 2 Operation Supervision & Engineering _D $ 464 $ - $ Load Dispatching _D Station Expenses _D Overhead Line Expenses _D Underground Line Exp _D St Lt & Signal Sys Exp _D Meter Expenses _D Customer Installation Exp _D Misc Distribution Exp _D 2,668-2, Rents _D Total Operation 4,460-4, Maintenance Supervision & Engineering _D Structures _D Station Equipment _D Overhead Lines _D Underground Lines _D Line Transformers _D St Lt & Signal Sys Exp _D Meter Expenses _D Misc Distribution Plant _D (20) - (20) Total Maintenance Total Distribution Expense 5,344-5, Customer Accounts Expense Supervision _D Meter Reading Expense _D Cust Records & Collection Exp _D 2,062-2, Uncollectible Accounts Exp _R Misc Customer Accounts Exp _D Total Customer Accounts Expense $ 3,138 $ 80 $ 3, Page 149 of 253

151 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 2 COST OF SERVICE STUDY TABLE 1-2A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 3 of 3 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No. Operation & Maintenance Expens Factor California Generation Distribution No 1 Customer Service & Information Expense Supervision _D $ - $ - $ Customer Assistance _D Advertising _D Miscellaneous _D Total Customer Serv & Info Expense Administrative & General Expense A&G Salaries _10 3, , Office Supplies & Exp _10 1, , Admin Exp Transferred _10 (1,276) (19) (1,257) Outside Services Employed _10 1, , Property Insurance _ Injuries & Damages _ Pensions & Benefits Pensions _ Benefits _ Pensions & Benefits _11 1, , Frnachise Tax Requirements _D Regulatory Commission Exp _ Duplicate Charges _ Misc General Exp _ Rents _ Total Operation 8, , Maint of General Plant _ Total Administrative & General Expense 8, , Total Operation & Maintenance Exp $ 57,193 $ 40,245 $ 16, Page 150 of 253

152 Chapter 3 Energy Cost Adjustment Clause Revenues Page 151 of 253

153 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Alain R. Blunier. My business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC, ( Liberty Utilities ) as a Rate Analyst II. 2. Q: Does Exhibit 4, ARB, entitled Witness Statements of Qualifications: Alain R. Blunier, accurately summarize your background, education, and experience? A: Yes, it does. 3. Q: What is the purpose of your direct testimony in this chapter? A: In this chapter, I am supporting the requested revision to Liberty Utilities Energy Cost Adjustment Clause ( ECAC ) Billing Factors. The Billing Factors are a combination of: (i) the recovery of Liberty Utilities projected 2016 fuel and purchased power costs ( Offset Rate ); and (ii) the amortization of the projected accumulated balance in the ECAC Balancing Account as of December 31, 2015 ( Balancing Rate ). The specific revisions to the ECAC Billing Factors for each rate class, as reflected in Liberty Utilities ECAC Tariff, will be proposed in the rate design section in Phase 2 of this Application. DWT v Exhibit Page 152 of 253

154 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) 1 2 II. BACKGROUND 1. Q: Why is Liberty Utilities filing its request to adjust its ECAC Billing Factors as part of its General Rate Case application? A: Liberty Utilities ECAC Tariff requires that in a calendar year in which Liberty Utilities files a General Rate Case application, Liberty Utilities is to also propose revisions to its ECAC Billing Factors as part of its General Rate Case application Q: Describe the components of Liberty Utilities proposed Offset Rate. A: Liberty Utilities proposed Offset Rate is based on two components: (i) the 2016 forecasted purchased power costs; and (ii) the 2016 forecasted fuel costs. As I describe in Exhibit 1, Chapter 8, Liberty Utilities forecasted purchased power costs in 2016 are derived entirely from its new full-requirements contract with NV Energy ( 2016 NV Energy Services Agreement ) that, if approved by the California Public Utilities Commission ( Commission ), will begin January 1, Liberty Utilities filed Application XX on April 24, 2015 seeking Commission approval of the 2016 NV Energy Services Agreement and requested Commission approval, in all events, by December 15, Liberty Utilities Tariff, Preliminary Statement 6, Energy Cost Adjustment Clause, Sheet No Application of Liberty Utilities (CalPeco Electric) LLC (U 933 E) for Authority to Execute 2016 NV Energy Services Agreement and for Rate Recovery of the Costs It Will Incur Pursuant to the Agreement, and Urging Issuance of Expedited Decision Granting Such Relief ( 2016 NV Energy Service Agreement Application ) at 2. DWT v Exhibit Page 153 of 253

155 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) Q: Describe Liberty Utilities proposed Balancing Rate. A: Liberty Utilities proposed Balancing Rate reflects the three-year amortization of the total $1.788 million projected to be the accumulated under-collection balance in the Energy Cost Adjustment Account as of December 31, 2015, or $0.596 million per year. 5 6 III. RATE RELIEF REQUESTED 1. Q: Quantify the ECAC Billing Factors revenue that Liberty Utilities is 7 requesting A: Liberty Utilities is requesting an annual decrease in Offset Rate revenue of $3.939 million and an annual increase in the Balancing Rate revenue of $4.890 million. These two factors result in a request to increase the ECAC Billing Factors revenue by $0.950 million or 2.38 percent. 2. Q: Explain the reasons why Liberty Utilities is able to request a decrease in its Offset Rate revenue. A: The Offset Rate revenue decrease is primarily a result of the price reductions Liberty Utilities negotiated in the 2016 NV Energy Services Agreement as compared to the current contract with NV Energy that expires December 31, 2015 ( Existing NV Energy Services Agreement ). In total and assuming the Commission approves the 2016 NV Energy Services Agreement to become effective by January 1, 2016, Liberty Utilities projects a price decrease of $3.939 million in 2016 in its costs to be incurred under the 2016 NV Energy Services DWT v Exhibit Page 154 of 253

156 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) Agreement. To account for the price reductions, Liberty Utilities requests to decrease its Offset Rate revenue. 3. Q: Please describe the price reductions the 2016 NV Energy Services Agreement offers Liberty Utilities and its customers. A: The price reductions that Liberty Utilities obtained in the 2016 NV Energy Services Agreement include: (i) (ii) (iii) A reduction in the $/kwh Demand Charge from $12.02/kW to $9.37/kW (an over 20 percent reduction) that equates to an annual savings of approximately $2.34 million; 3 A reduction in the effective price that Liberty Utilities will pay for energy, projected to exceed $0.20 million annually, due to a reduction in the percentages the 2016 NV Energy Services Agreement assumes for transmission and distribution line losses; 4 A reduction in the amount that Liberty Utilities will pay for energy based on NV Energy agreeing to limit its purchases of Renewables Portfolio Standard ( RPS ) energy from five designated geothermal producers; 5 3 See 2016 NV Energy Services Agreement Application at 4, The 2016 NV Energy Services Agreement reduces the distribution line loss factor from to percent and the transmission line loss factor from to percent. See 2016 NV Energy Services Agreement Application at 4, See 2016 NV Energy Services Agreement Application at 14. DWT v Exhibit Page 155 of 253

157 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) (iv) (v) A reduction in the monthly amount of the Distribution Charges due to an updated projection of anticipated energy deliveries; 6 and A reduction in the Demand Charge payable for September associated with a revision to the September Contract Demand level Q: Describe the consequences on the forecasted purchase power costs in 2016 in the event that the Commission does not authorize Liberty Utilities to begin taking service under the 2016 NV Energy Services Agreement as of January 1, A: The 2016 NV Energy Services Agreement Application explains that in the event that the 2016 NV Energy Services Agreement does not become effective as of January 1, 2016, the Existing NV Energy Services Agreement will remain in place for an additional four months and Liberty Utilities will need to solicit, negotiate, and obtain regulatory approval for 13 any alternative agreement during that period. 8 For the four months in which the Existing NV Energy Services Agreement will remain effective, the purchased power costs will be higher than those reflected in the current forecast. As explained above and in the 2016 NV Energy Services Agreement Application, the 2016 NV Energy Services Agreement offers substantial cost reductions relative to the Existing NV Energy Services Agreement. 6 See 2016 NV Energy Services Agreement Application at 4, See 2016 NV Energy Services Agreement Application at See 2016 NV Energy Services Agreement Application at 23. DWT v Exhibit Page 156 of 253

158 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) Q: In the event that the Commission does not approve the 2016 NV Energy Services Agreement as January 1, 2016, does Liberty Utilities have any proposals to adjust its ECAC rates to account for that contingency? A: First and foremost, we believe that it is in the best short-, intermediate-, and long-term interests for the Commission to timely authorize Liberty Utilities to be able as of January 1, 2016 to continue to procure its full electric requirements under the 2016 NV Energy Services Agreement. However, in the event that the Commission either rejects the 2016 NV Energy Services Agreement or is unable to timely approve it, Liberty Utilities can propose two alternatives. The first would be to allow Liberty Utilities to update its forecast of purchased power costs to reflect that the higher cost under the Existing NV Energy Services Agreement will remain in effect at least through the initial portion of The other alternative would be to allow the Offset Rate to be set based on the current forecast, which assumes that the 2016 NV Energy Services Agreement will become effective as of January 1, The problem with the latter approach is that, by definition, Liberty Utilities will be under-collecting its actual purchased power costs during at least the initial months of 2016 and thus, this under-collection will likely trigger the need for an ECAC revenue increase to commence as of January 1, DWT v Exhibit Page 157 of 253

159 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) Q: Please explain the reason for Liberty Utilities need to increase its Balancing Rate revenue. A: In its 2013 General Rate Case application, Liberty Utilities projected that it would have an over-collection as of December 31, 2012 in its Energy Cost Adjustment 5 Account of almost $13 million. 9 Accordingly, the settlement of the 2013 Liberty Utilities General Rate Case application provided for Liberty Utilities to return this ECAC over-collection by decreasing its Balancing Rate by $4.294 million for each 2013, 2014, and As of December 31, 2015, the prior over-collection will be fully amortized and we now project the Balancing Rate revenue portion of the Energy Cost Adjustment Account balance to be an undercollection of $1.788 million. Thus, the need to increase the Balancing Rate revenue in 2016 by $4.890 million results from replacing the prior annual Balancing Rate of $4.294 million in refunds with a proposed collection of $0.596 million. 7. Q: How does Liberty Utilities propose to amortize the accumulated balance in the Energy Cost Adjustment Account? A: Liberty Utilities proposes to amortize the projected accumulated balance in the Energy Cost Adjustment Account over a three-year period IV. CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. 9 See Amended Application at Exhibit 2, Chapter 2, Table 2.1, line 16. DWT v Exhibit Page 158 of 253

160 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 3 ENERGY COST ADJUSTMENT CLAUSE TABLE 1-3A CALCULATION OF 2016 REVENUE REQUIREMENT PAGE 1 OF 1 (a) (b) (c) (d) (e) (f) (G) Ln Revenue Revenue Ln No Description F&U Factor Requirement Proposed Current Change Change - % No 1 Total Fuel & Purchased Power (F&PP) $ 40,194, Fuel Inventory Revenue Requirement Subtotal Energy Related Costs Recoverable Through ECAC (Ln 1 + Ln 3) 40,194, Franchise & Uncollectibles % 532, Total Energy Related Costs Recoverable Through ECAC (Ln 5 + Ln 7) $ 40,727, Total System MWH Sales 611, Average ECAC - Offset Rate (Mills) $ $ 40,326,934 44,266,348 $ (3,939,414) -8.90% ECAC Balance at December 31, 2015 $ 1,764, Franchise & Uncollectibles % 23, Adjusted Balance 1,788, Balancing Rate Revenue Requirement (3 Year Amortization) $ 596, California Mwh Sales 605, Balancing Rate (Mills) ,080 (4,294,301) 4,890, % ECAC Billing Factor (Mills)/ Revenue Requirement $ $ 40,923,014 $ 39,972,047 $ 950, % 28 Page 159 of 253

161 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 3 ENERGY COST ADJUSTMENT CLAUSE TABLE 1-3B FORECAST OF MONTHLY ACTIVITY PAGE 1 OF 1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) 2016 Forecasted Ln Ln No Jan. Feb. March April May June July Aug. Sept. Oct. Nov Dec. No 1 MWH Firm Sales: 1 2 Retail Sales 66,213 56,817 56,539 47,700 42,384 42,241 45,453 45,161 43,026 43,756 51,596 64, Wholesale Sales Total Sales 66,969 57,589 57,286 48,348 42,685 42,561 45,800 45,495 43,382 44,076 52,077 65, % California Jurisdiction 98.87% 98.66% 98.70% 98.66% 99.30% 99.25% 99.24% 99.26% 99.18% 99.27% 99.08% 99.02% Beginning Balance $ 1,764,859 $ 1,708,675 $ 1,747,485 $ 1,631,009 $ 1,433,397 $ 1,263,023 $ 1,113,165 $ 1,092,798 $ 1,090,108 $ 952,811 $ 898,554 $ 1,024, Cost of Fuel & Purchase Power $ 4,410,459 $ 3,880,834 $ 3,703,160 $ 3,024,809 $ 2,675,632 $ 2,688,044 $ 3,034,671 $ 3,032,269 $ 2,755,386 $ 2,885,669 $ 3,601,176 $ 4,502, Plus: Fuel Inventory Net Cost for Recovery 4,410,462 3,880,837 3,703,163 3,024,812 2,675,635 2,688,047 3,034,674 3,032,272 2,755,389 2,885,672 3,601,179 4,502, California Jurisdictional Cost 4,360,624 3,828,834 3,655,022 2,984,280 2,656,906 2,667,886 3,011,610 3,009,833 2,732,795 2,864,606 3,568,048 4,458, Net Offset Rate Revenue (4,352,644) (3,735,003) (3,716,729) (3,135,695) (2,786,220) (2,776,809) (2,987,931) (2,968,751) (2,828,387) (2,876,439) (3,391,756) (4,236,318) ECAC Deferral 7,980 93,831 (61,708) (151,416) (129,314) (108,922) 23,679 41,082 (95,592) (11,832) 176, , Net Balancing Rate Revenue (64,337) (55,208) (54,938) (46,349) (41,184) (41,045) (44,165) (43,882) (41,807) (42,517) (50,134) (62,618) Adjustments Interest Ending Balance $ 1,708,675 $ 1,747,485 $ 1,631,009 $ 1,433,397 $ 1,263,023 $ 1,113,165 $ 1,092,798 $ 1,090,108 $ 952,811 $ 898,554 $ 1,024,809 $ 1,184, Carrying Charge Rate 0.12% 0.13% 0.12% 0.12% 0.11% 0.11% 0.13% 0.12% 0.12% 0.12% 0.12% 0.14% 33 Page 160 of 253

162 Chapter 4 Income Tax and Other Taxes Page 161 of 253

163 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Kendrick E. Wittman. My primary work location address is 6891 North Lake Boulevard Suite 122, Tahoe Vista, California and my business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ), as the Manager of Rates and Regulatory Affairs and have responsibility for Liberty Utilities calculation of rate base, depreciation and taxes and am sponsoring its testimony in this proceeding on these subjects. In this capacity, I have calculated the forecasted income tax expenses. 2. Q: Does Exhibit 4, KEW, entitled Witness Statement of Qualifications: Kendrick E. Wittman accurately summarize your background, education, and experience? A: Yes it does. 3. Q: What is the purpose of your direct testimony in this chapter? A: The purpose of my testimony in this chapter is to provide the ratemaking consequences of the income taxes that Liberty Utilities is obligated to pay. This chapter presents Liberty Utilities estimated income tax data for 2014 and its projected tax data for the 2016 Test Year. The amounts of income tax are reflected in the Adjustments, Escalations and Jurisdictionalization in Table 1-9C. The schedules provided in this section are as follows: Exhibit 1 DWT v Page 162 of 253

164 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) 1 TABLE DESCRIPTION A Tax Expense Summary 1-4B Deferred Income Tax Expense 1-4C Taxes Other Than Income Taxes 4. Q: What income tax expense and other taxes is Liberty Utilities projecting for the 2016 Test Year? taxes. II. A: Liberty Utilities projects $7.753 million in income tax expenses and other METHODOLOGY AND INCOME TAX PAYMENTS, ASSOCIATED ACCOUNTING AND RATEMAKING 5. Q: How did you develop Liberty Utilities estimate of income tax for ratemaking purposes? A: As a standalone California utility, Liberty Utilities will pay only State of California and Federal income taxes. It currently owns assets only within the State and thus its depreciation for state tax purposes will be based exclusively on California law Q: What tax rates are you projecting for the 2016 Test Year? A: For the 2016 Test Year, the current statutory tax rates of 34 percent and 8.84 percent are used for Federal income tax and California franchise tax calculations, respectively. 1 As explained in the testimony of Liberty Utilities Witness Michael Smart in Exhibit 1, Chapter 1 and in the Solar Projects Application, Liberty Utilities in this Application is seeking no rate recovery associated with the Luning and Minden Solar Projects that it anticipates to become operational in late Thus, the plant balance from which we derived our income tax expenses does not include any investment in either of the Solar Projects. Exhibit 1 DWT v Page 163 of 253

165 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) III. TABLE 1-4B 1. Q: Explain the entries to Line 2, Bad Debt Reserve. A: Line 2, Bad Debt Reserve reflects the difference between the book deduction based on an estimated accrued reserve, and the tax deduction based on the direct writeoff method. 2. Q: Explain the entries to Line 4, CIAC and Customer Advances. A: Line 4, Contributions in Aid of Construction ( CIAC ) and Customer Advances are contributions toward plant Liberty Utilities received from its customers. Tax Ruling Advisory 86 made such contributions a taxable event under modified Internal Revenue Code Section 118, effective January 1, For California franchise tax purposes these contributions are also taxable. For book purposes, these items do not represent income. Liberty Utilities included the incremental advance activity for deferred tax calculation purposes, but excluded the acquired advance balance. 3. Q: Explain the entries for Line 6, Depreciation-Liberalized. A: Line 13, Depreciation-Liberalized is the deduction for Federal tax depreciation and amortization. The related accumulated deferred taxes are a rate base reduction. Exhibit 1 DWT v Page 164 of 253

166 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) 1 2 IV. TAXES OTHER THAN INCOME 1. Q: In the preceding section of your testimony, you explained the ratemaking accounting for various income tax entries. Does Liberty Utilities pay taxes in addition to income taxes? A: Yes. The following questions and answers cover taxes other than income tax for the 2016 Test Year. Taxes other than income represent payroll, property, and business taxes, and franchise fees. Table 1-4C presents data for the 2016 Test Year. 2. Q: How did Liberty Utilities project payroll taxes for the 2016 Test Year? A: Liberty Utilities projected payroll taxes based on the escalated labor expenses multiplied by the specific payroll tax percentages. 3. Q: How did Liberty Utilities project franchise fees for the 2016 Test Year? A: Franchise fees are based off of 2014 accrued amounts and existing franchise agreements. No escalation factors were applied. 4. Q: How did you project property taxes for the 2016 Test Year? A: Property taxes are derived from estimates of assessed values multiplied by projected rates. The assessed values were derived by adjusting the assessed values noted on the property tax bills for the 2015 and 2016 additions to plant in service. The projected rates were derived by applying a growth factor to the property tax rates. The growth Exhibit 1 DWT v Page 165 of 253

167 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) factor is the simple average of the and weighted average property tax rates. V. TAX DEPRECIATION 1. Q: Please provide an overview of this portion of your testimony. A: The following questions and answers sets forth the manner in which Liberty Utilities calculates its Federal and California tax depreciation and the deferred taxes due to liberalized depreciation. The Federal and California tax depreciation sections first describe the calculation of the respective tax basis, and then explain the methodology Liberty Utilities employed to calculate the depreciation. A. Federal Tax Depreciation 1. Q: Explain the manner in which Liberty Utilities has calculated its tax basis. A: The Tax Reform Act of 1986 requires the following adjustments to the book basis to arrive at the correct tax basis for years after 1986: a) Allowance for Funds Used During Construction ( AFUDC ) is eliminated; b) Avoided Interest is added in accordance with Section 263A of the Internal Revenue Code of 1986 ( Uniform Capitalization Rules ); c) Property taxes related to construction work in progress are added in accordance with the Uniform Capitalization Rules; and Exhibit 1 DWT v Page 166 of 253

168 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) d) CIAC deemed taxable by Section 118(b) of the Internal Revenue Code of 1986 are added. The major tax basis adjustments have been estimated to arrive at tax basis. Assets that do not require any modifications (i.e., vehicles, land, and land rights) have the same tax basis as the book. 2. Q: Explain the manner in which you selected the depreciation rates to be applied for purposes of calculating the depreciation expenses projected in Exhibit 1, Chapter 5 and included in the Revenue Requirement table in Exhibit 1, Chapter 9. A: Liberty Utilities is calculating the Allowable Federal Tax Depreciation using accelerated rates and depreciation methods established by the Internal Revenue Service. The depreciation rates are set by the Internal Revenue Service according to the type of asset. These rates are not related directly or indirectly to the book depreciation rates authorized by this Commission. 3. Q: Identify and explain the various depreciation methods that Liberty Utilities is employing. A: Liberty Utilities is using the Modified Accelerated Cost Recovery System depreciation method as it acquired all assets as of January 1, Exhibit 1 DWT v Page 167 of 253

169 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) B. California Tax Depreciation 1. Q: Explain the manner in which Liberty Utilities is calculating the California tax basis. A: The California Revenue and Taxation Code adopted the Uniform Capitalization Rules. Liberty Utilities has accordingly made the following adjustments to its book basis to calculate its California tax basis: a) AFUDC is eliminated; b) Avoided Interest, as calculated per the Uniform Capitalization Rules, is to be added; c) Property taxes related to construction work in progress is added to conform to the Uniform Capitalization Rules; and d) CIAC, effective January 1, 2000 deemed taxable by Section of the Revenue and Taxation Code, are added Q: How did Liberty Utilities calculate the allowable rates for California tax depreciation? A: Liberty Utilities calculated the allowable California tax depreciation by using accelerated depreciation methods established by the California Franchise Tax Board, including the double declining balance ( DDB ) and straight-line ( S/L ) depreciation methods. The depreciation methods Liberty Utilities is using are: Exhibit 1 DWT v Page 168 of 253

170 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) VI. Asset Group Method Life Steam Production DDB 28 Structures DDB 45 Distribution DDB 30 Distribution Land Rights S/L 41 Auto DDB 4 Light Trucks DDB 5 Heavy Trucks DDB 5 Office Furniture DDB 10 Computer Software S/L 5 CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. Exhibit 1 DWT v Page 169 of 253

171 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 4 TAX EXPENSE SUMMARY TABLE 1-4A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (IN THOUSANDS) (a) (b) (c) Ln FORECAST FORECAST Ln No TAX SUMMARY Adjusted California Jurisdiction No 1 UNEMPLOYMENT INSURANCE TAX $ 320 $ FEDERAL INSURANCE CONTRIBUTION ACT SUBTOTAL PAYROLL TAXES AD VALOREM TAX: 8 9 CALIFORNIA 3,206 3, FRANCHISE FEES SUBTOTAL TAXES OTHER THAN INCOME 4,912 4, FEDERAL INCOME TAX - ADJUSTMENTS FEDERAL INCOME TAX - DEFERRED ADJUSTMENTS 2,863 2, CALIFORNIA CORPORATION FRANCHISE TAX (816) (816) TOTAL TAX EXPENSE $ 7,938 $ 7,753 (1) (1) $1 difference due to rounding 25 Page 170 of 253

172 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 4 FERC ACCOUNT 410 DEFERRED INCOME TAX EXPENSE TABLE 1-4B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (IN THOUSANDS) (a) (b) (c) (d) Ln Ln No DEFERRED INCOME TAXES ACTUAL FORECAST FORECAST No 1 NORMALIZED ITEMS*: 1 2 BAD DEBT RESERVE $ (1) $ - $ (1) CUSTOMER ADVANCES/ CONTRIBUTIONS IN AID OF CONSTRUCTION 162 (324) (324) DEPRECIATION - LIBERALIZED 2,882 4,820 2, TOTAL NORMALIZED $ 3,044 $ 4,496 $ 2, * Amounts reflect actual forecasted activity versus the CA average. 11 Page 171 of 253

173 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 4 TAXES OTHER THAN INCOME TAXES TABLE 1-4C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (IN THOUSANDS) (a) (b) 2016 Ln Forecast Ln No Item Description California Jurisdiction No 1 Total Ad Valorem Taxes $ 3, Payroll Taxes 3 4 Federal Insurance Contributions Act Unemployment Total Payroll Taxes Franchise Fees Total Taxes Other Than Income $ 4,855 9 Page 172 of 253

174 Chapter 5 Depreciation Page 173 of 253

175 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 5 Depreciation (Kendrick E. Wittman) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Kendrick E. Wittman. My primary work location address is 6891 North Lake Boulevard Suite 122, Tahoe Vista, California and my business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric), LLC ( Liberty Utilities ), as the Manager of Rates and Regulatory Affairs and have responsibility for Liberty Utilities calculation of rate base, depreciation and taxes and am sponsoring its testimony in this proceeding on these subjects. 2. Q: Does Exhibit 4, KEW, entitled Witness Statement of Qualifications: Kendrick E. Wittman accurately summarize your background, education, and experience? A: Yes. 3. Q: What is the purpose of your direct testimony in this chapter? A: My testimony in this chapter explains the manner in which Liberty Utilities has calculated depreciation expenses for purposes of ratemaking II. SUMMARY OF CALCULATION 1. Q: Please provide a summary of your calculation of Liberty Utilities depreciation expenses. expense is $5.306 million. A: Liberty Utilities projected 2016 California-jurisdictional depreciation DWT v Exhibit Page 174 of 253

176 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 5 Depreciation (Kendrick E. Wittman) 1 2 III. METHODOLOGY 1. Q: How did you determine the depreciation rates to be used in the forecasted depreciation expenses? A: In late 2014, Liberty Utilities conducted a new depreciation study to determine the forecasted depreciation expenses. The results of the study recommend an overall depreciation rate of 2.21 percent which is 0.12 percent less than the overall depreciation rate of 2.33 percent we adopted from Sierra Pacific and used in the 2013 General Rate Case application (Application No ). 2. Q: Explain how you calculated the projected depreciation expense on a monthly basis. A: Liberty Utilities forecasted 2016 depreciation expense is based on Liberty Utilities forecasted plant balances during each month in 2015 and The plant balance is comprised of the existing plant balance as well as net additions for 2015 and The projected monthly depreciation expense was calculated by multiplying the projected month-end plant balances by the respective monthly depreciation rates. Capital spend is categorized by the major unit(s) of electric plant recorded on a particular job and each major unit of electric plant has a related and specific depreciation rate. The monthly depreciation rates are calculated by dividing the annual depreciation rate by twelve. Plant balances are determined through an internal review of job closures with the Area Planners, Area Operations Managers and the Vice President of Operations. Only closed DWT v Exhibit Page 175 of 253

177 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 5 Depreciation (Kendrick E. Wittman) jobs are deemed used and useful and therefore eligible to be added to plant in service. All capital spending for closed jobs are summarized by month and by major unit. These summarized totals determine the projected month-end plant balances. In addition, and as explained in the testimony of Liberty Utilities Witness Michael Smart in Exhibit 1, Chapter 1 and in the Solar Projects Application, Liberty Utilities in this Application is seeking no rate recovery associated with the Luning and Minden Solar Projects that it anticipates to become operational in late Thus, the plant balance from which we derived our depreciation expenses does not include any investment in either of the Solar Projects. The projected 2016 depreciation expense is summarized in Table 1-5A IV. CONCLUSION 1. Q: Does this conclude your direct testimony? A. Yes, it does. DWT v Exhibit Page 176 of 253

178 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 5 DEPRECIATION EXPENSE TABLE 1-5A FOR THE FORECASTED PERIOD ENDED DECEMBER 31, 2016 PAGE 1 OF 1 (IN THOUSANDS) (a) (b) (c) California Ln Jurisdictional Ln No Description Total Amount No 1 Production $ 265 $ Transmission Distribution 3,580 3, Intangible General Common Total $ 5,357 $ 5, Page 177 of 253

179 Chapter 6 Rate Base Page 178 of 253

180 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 6 Rate Base (Kendrick E. Wittman) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Kendrick E. Wittman. My primary work location address is 6891 North Lake Boulevard Suite 122, Tahoe Vista, California and my business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ), as the Manager of Rates and Regulatory Affairs. In such capacity, I have responsibility for Liberty Utilities calculation of rate base, depreciation and taxes and am sponsoring its testimony in this proceeding on these subjects. In this capacity, I have calculated the forecasted rate base. 2. Q: Does Exhibit 4, KEW, entitled Witness Statements of Qualifications: Kendrick Wittman accurately summarize your background, education, and experience? A: Yes. 3. Q: What is the purpose of your direct testimony in this chapter? A: My testimony in this chapter presents Liberty Utilities proposal for rate recovery of its investment as reflected in its rate base II. RATE BASE ACCOUNT 1. Q. Please quantify the amount that Liberty Utilities proposes to have placed into its rate base. A: Liberty Utilities proposes to set rates based on a California-jurisdictional rate base of $ million. This figure is comprised of: a. Net Plant in Service $ million DWT v Exhibit Page 179 of 253

181 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 6 Rate Base (Kendrick E. Wittman) b. Total Rate Base Additions $4.463 million c. Total Rate Base Deductions ($ million) 2. Q: Please describe the assets that comprise Liberty Utilities rate base. A: Liberty Utilities owns and operates electric distribution and general plant assets in the Lake Tahoe area of California. The general plant assets are comprised of the Kings Beach Generating Station used for emergency back-up and peak load support. 3. Q: Describe Liberty Utilities development of the amounts associated with plant. A: Liberty Utilities used actual plant balances as of December 31, 2014 and forecasted its capital expenditures and related closures for 2015 and 2016 based on anticipated projects. Liberty Utilities determination of actual plant balances as of December 31, 2015 includes $3.272 million of capital expenditures made under the auspices of the Catastrophic Emergency Memorandum Account activation described in greater detail in my testimony in Exhibit 3, Chapter 2. Liberty Utilities forecast also includes $18 million in capital expenditures related to Phase 1 of the 625/650 Upgrade project that the Commission authorized in Decision Q: What rate base components and assumptions did Liberty Utilities use to calculate its rate base amounts for this GRC? A: First, Liberty Utilities has used an Allowance for Funds Used During Construction rate of 6.59 percent for both 2015 and Second, plant additions for 2015 and DWT v Exhibit Page 180 of 253

182 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 6 Rate Base (Kendrick E. Wittman) were based on projected construction projects. Third, no inflation factors or plant escalators were used in the project cost calculations. Fourth, project costs reflect current material and burdened labor costs. Fifth, the overall projected increase in Liberty Utilities 2016 labor costs relative to 2014 actual labor costs is based on the projected level of new hires and the annualization of 2014 salaries and overhead. For purposes of projecting the labor costs to be capitalized to forecast the 2016 Test Year rate base, Liberty Utilities then allocated the projected 2016 Test Year labor costs between Operations and Maintenance ( O&M ) and capital projects. With respect to the plant additions for 2015 and 2016 described above, as explained in Liberty Utilities Witness Smart s testimony in Exhibit 1, Chapter 1 and in the Solar Projects Application, Liberty Utilities is projecting that both the Luning and Minden Projects are to be operational in late Thus under existing Commission ratemaking policies and protocols, we should, in this Application, include a portion of the costs that Liberty Utilities will incur to acquire, own, and operate the Solar Projects into the forecast for the rate base. However, as explained in the Solar Projects Application, Liberty Utilities is requesting that any rate recovery for costs associated with the Solar Projects be deferred until January 1, Thus, for purposes of this Application, we are not including any costs associated with the Solar Projects into the forecast of rate base. DWT v Exhibit Page 181 of 253

183 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 6 Rate Base (Kendrick E. Wittman) Q: Describe Liberty Utilities methodology to calculate the amounts associated with materials and supplies to be included in rate base. A: Liberty Utilities used the actual materials and supply balances as of December 31, 2014, reduced for material required on large jobs closing to plant, and then applied an escalation factor to each of the remaining categories. The escalation factor of percent is a compounded, annual inflation rate for the two year period based on the 2015 and 2016 Consumer Price Index obtained from Bloomberg. 6. Q: Explain Liberty Utilities methodology to derive the amounts to be included in rate base associated with prepayments and other additions. A: Liberty Utilities used actual balances as of December 31, 2014 and applied an escalation factor to each of the categories. The escalation factor of percent is a compounded, annual inflation rate for the two-year period based on the 2015 and 2016 Consumer Price Index obtained from Bloomberg. 7. Q: Describe Liberty Utilities methodology for determining the amount of cash working capital in rate base. A: Liberty Utilities conducted a lead lag study to determine its cash working capital. The lead lag study is in accordance with Standard Practice U-16 dated March We utilized payment transaction detail to identify the required inputs for calculating dollar days and subsequent individual lead/lag days. DWT v Exhibit Page 182 of 253

184 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 6 Rate Base (Kendrick E. Wittman) Q: Describe Liberty Utilities methodology for determining customer advances. A: Liberty Utilities methodology to project customer advances was based on the balance as of December 31, We examined the historical year-end balances and calculated the annual percentage change as well as the most recent four-year average. The percentage used was five percent. This rate was compounded and applied to the December 31, 2014 balance. 9. Q: What is Liberty Utilities methodology for determining accumulated deferred income taxes and deferred income tax credits? A: Liberty Utilities treatment of accumulated deferred income taxes and deferred income tax credits is discussed in my testimony in Exhibit 1, Chapter 4 on Income Tax and Other Taxes. Projected balances were derived from actual balances as of December 31, Q: Describe Liberty Utilities methodology to calculate the amount of other reductions in rate base. A: The methodology varied based on the individual items. For the uncollectible balance, Liberty Utilities used actual balances as of December 31, 2014 and applied an escalation factor to each of the categories. The escalation factor of percent is a compounded, annual inflation rate for the two-year period based on the 2015 and 2016 Consumer Price Index obtained from Bloomberg. For the tax gross-up balances, the projected DWT v Exhibit Page 183 of 253

185 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 6 Rate Base (Kendrick E. Wittman) amounts were calculated by multiplying the effective Federal tax rate and the forecasted advance amounts based on the 2015 and 2016 plant additions. The cost of removal balance was derived from the proposed depreciation expense rates noted in the depreciation study III. CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. DWT v Exhibit Page 184 of 253

186 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 6 RATE BASE TABLE 1-6A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 of 1 (IN THOUSANDS) (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No 1 Gross Plant in Service $281,172 $278, Provision for Accumulated Depreciation (76,797) (76,036) 2 3 Net Plant in Service 204, , Additions to Net Plant 6 7 Materials and Supplies 4,055 4, Prepayments Other Additions Working Capital 1, Total Additions to Net Plant 6,143 4, Reductions to Net Plant Customer Advances (13,437) (13,437) Accumulated Deferred Taxes (19,412) (19,206) Accumulated Deferred Investment Tax Credits (ITC) Other Reductions (23,124) (23,124) Total Reductions to Net Plant (55,973) (55,768) Total Rate Base $154,544 $150, Page 185 of 253

187 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 6 GROSS PLANT IN SERVICE TABLE 1-6B OR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (IN THOUSANDS) (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No GROSS PLANT IN SERVICE 1 Production $ 14,261 $ 14, Transmission Distribution 242, , Intangible 8,913 8, General 15,364 15, Other Total Gross Plant $ 281,172 $ 278, Page 186 of 253

188 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC PROVISION FOR ACCUMULATED DEPRECIATION FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) EXHIBIT 1, CHAPTER 6 TABLE 1-6C PAGE 1 OF 1 (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No 1 PROVISION FOR ACCUMULATED DEPRECIATION 1 2 Production $ (2,884) $ (2,863) Transmission Distribution (67,243) (66,567) Intangible (2,669) (2,669) General (4,001) (3,938) Other Total Provision for Accumulated Depreciation $ (76,797) $ (76,036) 14 Page 187 of 253

189 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 6 MATERIALS AND SUPPLIES TABLE 1-6D FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (IN THOUSANDS) (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No 1 MATERIALS AND SUPPLIES 1 2 Fuel - Coal $ - $ Fuel - Oil Other - Direct 4,055 4, Stores Expense Undistributed Total Material and Supplies $ 4,055 $ 4, Page 188 of 253

190 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC PREPAYMENTS, OTHER ADDITIONS AND WORKING CAPITAL FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) EXHIBIT 1, CHAPTER 6 TABLE 1-6E PAGE 1 OF 1 (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No Prepayments $ 322 $ Total Prepayments $ 322 $ Other Additions $ - $ $ - $ Working Capital Cash Working Capital $ 1,765 $ 1, Franchise Collections Total Working Capital $ 1,765 $ 1, Page 189 of 253

191 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC CUSTOMER ADVANCES FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) EXHIBIT 1, CHAPTER 6 TABLE 1-6F PAGE 1 OF 1 (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No 1 CUSTOMER ADVANCES 1 2 Transmission $ - $ Distribution (13,437) (13,437) Total Customer Advances $ (13,437) $ (13,437) 6 Page 190 of 253

192 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC ACCUMULATED DEFERRED INCOME TAXES & ACCUMULATED DEFERRED INVESTMENT TAX CREDITS FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) EXHIBIT 1, CHAPTER 6 TABLE 1-6G PAGE 1 OF 1 (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No 1 ACCUMULATED DEFERRED INCOME TAXES & 1 2 ACCUMULATED DEFERRED INVESTMENT TAX CREDITS 2 3 Liberalized Depreciation $ (19,951) $ (19,745) CIAC & Customer Advances Other (Uncollectible Reserve) (2) (2) Total Accumulated Deferred Income Taxes $ (19,412) $ (19,206) ACCUMULATED DEFERRED INVESTMENT TAX CREDITS $ - $ - 11 Page 191 of 253

193 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC OTHER REDUCTIONS FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) EXHIBIT 1, CHAPTER 6 TABLE 1-6H PAGE 1 OF 1 (a) (b) (c) California Ln Jurisdictional Ln No Total Amount No 1 OTHER REDUCTIONS 1 2 Customer Advances Tax Gross-Up $ (3,352) $ (3,352) CIAC -Tax Gross-Up $ (227) $ (227) Employee Benefits Injuries and Damages Reserve Uncollectibles (162) (162) Other - Accrued Cost of Removal (19,383) (19,383) Total Other Reductions $ (23,124) $ (23,124) 14 Page 192 of 253

194 Chapter 7 Sales, Customers and Revenues Forecast Page 193 of 253

195 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 7 Sales, Customer and Revenues Forecast (Alain R. Blunier) 1 I. INTRODUCTION AND SUMMARY Q: Please state your name, occupation, and business address. A: My name is Alain R. Blunier. My business address is 933 Eloise Avenue, 4 5 South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ), as a Rate Analyst II Q: Does Exhibit 4, ARB, entitled Witness Statements of Qualifications: 7 8 Alain R. Blunier accurately summarize your background, education, and experience? A: Yes Q: What is the purpose of your direct testimony in this chapter? A: The purpose of my testimony in this chapter is to explain and describe the 11 sales, customers, and revenue forecasts for this filing II. FORECASTS A. SALES AND CUSTOMERS FORECAST prepared? January Q: When were the sales and customer forecasts used in this filing A: The sales and customer forecasts used in this filing were developed in Q: What periods do the forecasts cover? A: Sales and customers forecasts are for the period 2015 through DWT v Exhibit Page 194 of 253

196 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 7 Sales, Customer and Revenues Forecast (Alain R. Blunier) 1 3. Q: Describe your methodology to forecast Liberty Utilities sales and customer forecast. A: Ken Parris of Business Economic Analysis and Research develops Liberty Utilities sales and customer forecasts. Mr. Parris has over 35 years of experience in the utility industry and has been the Principal of Business Economic Analysis and Research since Mr. Parris used the following methodology to forecast sales for Liberty Utilities: 1. For the residential and commercial rate classes, Mr. Parris used historic calendar month customer class billing data to develop monthly use as well as customer counts by customer class. Using billing period start and end dates, Mr. Parris calculated daily use for each customer and then totaled daily use by calendar month for all retail customers. Mr. Parris then used these usage and customer counts to develop customer and usage models specific to each rate group. He then converted the total monthly calendar use to use per customer. 2. Mr. Parris developed class specific sales and customer forecasts using the results from customer and use-per-customer regression models for each rate class. 3. The first regression model forecasts the number of customers by customer class (existing and proposed) in the service territory. The regression model projects future customer counts based on a time trend of customer growth. DWT v Exhibit Page 195 of 253

197 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 7 Sales, Customer and Revenues Forecast (Alain R. Blunier) The actual customer class-specific forecast then applies the monthly growth in predicted customers to the existing customer count for each customer class. 4. The second regression model forecasts the use per customer for each customer class. Several variables factor into the use-per-customer model including: monthly intercept adjustments heating degree days ( HDD ) cooling degree days ( CDD ) a time trend to capture changes in market conditions due to new technologies and energy conservation. 5. These two regression models (the customer forecast and the use-percustomer) are combined and used to estimate the total sales forecast for the forecast years. 6. The sales forecast for the irrigation, outside lighting, and street lighting customer classes were based on the average sales by month for the time period. B. REVENUE FORECAST Q: Explain your forecast of revenues. A: Liberty Utilities forecasts total revenues of $ million in the Test Year. In addition to retail sales to its customers, Liberty Utilities also derives revenues from DWT v Exhibit Page 196 of 253

198 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 7 Sales, Customer and Revenues Forecast (Alain R. Blunier) wholesale customers, the Distribution Capacity Agreement ( DCA ), and the Emergency Backup Services Agreement ( EBSA ). Revenue forecast by customer class will be part of Phase II of the Application customers. Q: Identity and explain the revenues that you forecast from wholesale A: Liberty Utilities forecasts revenues from wholesale customers in 2016 of 7 8 $1.026 million based upon Mr. Parris forecasted energy usage projection multiplied by the average energy usage rate charged to our wholesale customers in Q: Explain the background of the revenues associated with the DCA. A: Under the DCA, Liberty Utilities allows NV Energy to use a small amount of capacity on Liberty Utilities distribution facilities to serve a small number of NV Energy retail electric customers in Nevada and near the California and Nevada border. NV Energy requested that Liberty Utilities provide this service because it is most cost-effectively able to serve these customers by having its power flow into California and on to Liberty Utilities facilities and then have the energy flow back into the NV Energy facilities in Nevada to serve these customers. Both the Commission and FERC approved the parties entering and operating under the DCA. 1 1 D , mimeo at 47-48, (Findings of Fact 34, 39) 62 (Conclusions of Law 16), and 63 (Ordering Paragraph 2). See December 7, 2010 FERC Letter order accepting Liberty Utilities November 10, 2010 filing of an executed Distribution Capacity Agreement and a Reliability Support Agreement with Sierra Pacific Power Company in Docket No. ER ; see also D , mimeo at 4-6 (Findings of Facts 1-3; Ordering Paragraph 1). DWT v Exhibit Page 197 of 253

199 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 7 Sales, Customer and Revenues Forecast (Alain R. Blunier) Q: Identify and explain the revenues that you forecast from the DCA. A: Liberty Utilities forecasts DCA revenues in 2016 of $51,444 based on 3 forecasted throughput Q: Identify the revenues you forecast from the EBSA. A: Liberty Utilities forecasts a decrease in revenues from $0.124 million per month to $0.110 million per month beginning January 1, 2015 through December 31, 2017 primarily due to depreciation of the Kings Beach Generating Station used to provide emergency backup service. 9 III. CONCLUSION Q: Does this conclude your direct testimony? A: Yes, it does. DWT v Exhibit Page 198 of 253

200 Liberty Utilities (CalPeco Electric) LLC Present Rates Revenues 12 Months Ending December 2013 Exhibit 1, Chapter 7 Table 1-7A Page 1 of 3 Forecast Customer Customer Distribution Distribution Transmission Transmission Generation Generation ECAC Base ECAC Base ECAC Amort ECAC Amort Veg Mgmt Veg Mgmt PPP - EE PPP - EE Total Dec 2013 Chrg Price Revenues Price Revenues Price Revenues Base Price Revenues Price Revenues Price Revenues Price Revenues Price Revenues Revenues RESIDENTIAL: D-1 Customer Billing Dets 425,497 $7.10 $3,020,454 $3,020,454 Tier 1 Baseline Energy 83,344,202 $ $3,946,724 $ $414,561 $ $5,142,566 ($ ) ($633,416) $ $368,866 $ $60,008 $9,299,309 Tier 2 Excess Energy 172,106,034 $ $8,149,996 $ $1,573,506 $ $14,959,750 ($ ) ($1,308,006) $ $761,710 $ $123,916 $24,260,873 RESIDENTIAL: DM-1 Customer Billing Dets 0 $7.10 $0 $0 Tier 1 Baseline Energy 0 $ $0 $ $0 $ $0 ($ ) $0 $ $0 $ $0 $0 Tier 2 Excess Energy 0 $ $0 $ $0 $ $0 ($ ) $0 $ $0 $ $0 $0 RESIDENTIAL: DS-1 Customer Billing Dets 0 $7.10 $0 $0 Tier 1 Baseline Energy 0 $ $0 $ $0 $ $0 ($ ) $0 $ $0 $ $0 $0 Tier 2 Excess Energy 0 $ $0 $ $0 $ $0 ($ ) $0 $ $0 $ $0 $0 Sub-Meter Disc Units 0 $ ( ) $0 $0 RESIDENTIAL: CARE Customer Billing Dets 43,212 $5.68 $245,395 $245,395 Tier 1 Baseline Energy 16,346,281 $ $420,694 $ $81,308 $ $1,008,610 ($ ) ($124,232) $ $72,346 $ $11,769 $1,470,495 Tier 2 Excess Energy 13,849,566 $ $273,882 $ $126,622 $ $1,203,828 ($ ) ($105,257) $ $61,296 $ $9,972 $1,570,343 Employee Discounts ($27,654) ($27,654) TOTAL RESIDENTIAL Customer Billing Dets 468,709 Tier 1 Baseline Energy 99,690,483 Tier 2 Excess Energy 185,955,600 Total Energy & Revenue 285,646,083 $3,238,195 $12,791,296 $0 $2,195,996 $22,314,754 ($2,170,910) $1,264,218 $205,665 $39,839,214 Employee Discounts Customer Billing Dets 336 $7.10 $2,385 $2,385 Tier 1 Baseline Energy 192,372 $ $9,110 $ $957 $ $11,870 ($ ) ($1,462) $ $851 $ $139 $21,464 Tier 2 Excess Energy 223,172 $ $10,568 $ $2,040 $ $19,399 ($ ) ($1,696) $ $988 $ $161 $31,459 50% ($27,654) $55,309 Page 199 of 253

201 Liberty Utilities (CalPeco Electric) LLC Present Rates Revenues 12 Months Ending December 2013 Exhibit 1, Chapter 7 Table 1-7A Page 2 of 3 Forecast Customer Customer Distribution Distribution Transmission Transmission Generation Generation ECAC Base ECAC Base ECAC Amort ECAC Amort Veg Mgmt Veg Mgmt PPP - EE PPP - EE Total Dec 2013 Chrg Price Revenues Price Revenues Price Revenues Base Price Revenues Price Revenues Price Revenues Price Revenues Price Revenues Revenues A-1: <= 20 kw Customer Billing Dets 55,086 $13.44 $740,472 $740,472 Energy 74,554,787 $ $3,839,790 $ $777,717 $ $6,188,309 ($ ) ($566,616) $ $329,966 $ $53,679 $10,622,845 A-1: > 20 kw Customer Billing Dets 2,298 $13.44 $30,890 $30,890 Energy 22,719,777 $ $1,170,135 $ $237,001 $ $1,885,821 ($ ) ($172,670) $ $100,554 $ $16,358 $3,237,199 TOTAL A-1 Customer Billing Dets 57,384 Total Energy & Revenue 97,274,564 $771,362 $5,009,926 $0 $1,014,718 $8,074,130 ($739,287) $430,520 $70,038 $14,631,406 A-2 (>= 50 kw and <= 200 kw) Customer Billing Dets 2,748 $92.54 $254,311 $254,311 WINTER-Demand 138,634 $7.81 $1,083,223 $0.00 $0 $0.00 $0 $ $0 $1,083,223 SUMMER-Demand 67,228 $0.00 $0 $5.08 $341,844 $0.00 $0 $ $0 $341,844 WINTER-Energy 42,617,364 $ $671,993 $ $0 $ $2,924,865 ($ ) ($323,892) $ $218,783 $ $30,685 $3,522,434 SUMMER-Energy 22,686,595 $ $0 $ $369,145 $ $2,495,200 ($ ) ($172,418) $ $116,465 $ $16,334 $2,824,726 Total Energy 65,303,959 Power Factor % $12 $82 $33 $255 ($23) $16 $2 $377 V & T Discount % ($73) ($506) ($205) ($1,561) $143 ($97) ($14) ($2,312) Total A-2 Revenue $254,250 $1,754,793 $0 $710,818 $5,418,759 ($496,190) $335,167 $47,008 $8,024,604 A-3 (> 200 kw) Customer Billing Dets 660 $ $424, $460,680 $885,377 ON - WINTER-Demand 295,073 $4.77 $1,408,297 $1.55 $457,548 $0.00 $0 $0.00 $0 $1,865,845 MID - WINTER-Demand 281,397 $1.42 $399,584 $1.07 $300,339 $0.00 $0 $0.00 $0 $699,923 ON - SUMMER-Demand 73,276 $2.66 $194,914 $9.90 $725,432 $0.00 $0 $0.00 $0 $920,347 MAXIMUM DEMAND 371,368 $3.87 $1,437,194 $0.00 $0 $0.00 $0 $0.00 $0 $1,437,194 ON - WINTER-Energy 16,465,191 $ $252,905 $ $0 $ $1,114,038 ($ ) ($125,135) $ $0 $ $11,855 $1,253,663 MID - WINTER-Energy 37,286,536 $ $489,199 $ $0 $ $2,571,291 ($ ) ($283,378) $ $0 $ $26,846 $2,803,959 OFF - WINTER-Energy 30,259,378 $ $209,395 $ $0 $ $1,713,495 ($ ) ($229,971) $ $0 $ $21,787 $1,714,705 ON - SUMMER-Energy 17,013,053 $ $346,045 $ $0 $ $1,148,531 ($ ) ($129,299) $ $0 $ $12,249 $1,377,527 OFF - SUMMER-Energy 14,133,863 $ $155,331 $ $0 $ $747,872 ($ ) ($107,417) $ $0 $ $10,176 $805,962 Total Energy 115,158,021 Power Factor % $153 $1,767 $536 $2,635 ($316) $166 $30 $4,972 V & T Discount % ($1,576) ($18,162) ($5,506) ($27,080) $3,249 ($1,710) ($308) ($51,094) Total A-3 Revenue $423,273 $4,876,470 $0 $1,478,349 $7,270,782 ($872,268) $459,136 $82,636 $13,718,379 PA (Int. Irrigation) Customer Billing Dets 120 $13.44 $1,613 $1,613 Energy 491,989 $ $5,325 $ $4,810 $ $33,652 ($ ) ($3,286) $ $2,177 $ $354 $43,032 $44,646 Page 200 of 253

202 Liberty Utilities (CalPeco Electric) LLC Present Rates Revenues 12 Months Ending December 2013 Exhibit 1, Chapter 7 Table 1-7A Page 3 of 3 Forecast Customer Customer Distribution Distribution Transmission Transmission Generation Generation ECAC Base ECAC Base ECAC Amort ECAC Amort Veg Mgmt Veg Mgmt PPP - EE PPP - EE Total Dec 2013 Chrg Price Revenues Price Revenues Price Revenues Base Price Revenues Price Revenues Price Revenues Price Revenues Price Revenues Revenues Street Light Service HPS Street Lights Rates in $ per Lamp per mo. 5, kwh/mo. 811 $ $6,569 $ $24 $ $2,419 ($ ) ($162) $ $146 $ $16 $9,013 9, kwh/mo. 4,471 $ $36,305 $ $224 $ $16,881 ($ ) ($1,252) $ $1,118 $ $134 $53,409 22, kwh/mo. 2,584 $ $22,688 $ $233 $ $17,212 ($ ) ($1,344) $ $1,266 $ $155 $40,209 SL Charges (Per Pole) New Wood Pole 1,757 $ 5.63 $9,894 $9,894 New Metal Pole (< 22,000 Lumen) 666 $ 7.76 $5,169 $5,169 New Metal Pole (>=22,000 Lumen) 297 $ 7.88 $2,343 $2,343 Underground Serv (Per 130 Ft Length) 912 $ 3.81 $3,474 $3,474 Total SL Revenue $0 $86,442 $0 $480 $36,512 ($2,758) $2,530 $305 $123,513 Outdoor Light Service HPS Outdoor Lights Existing, Overhead Pole Rates by Lumen 5, kwh/mo. 6,888 $ $44,634 $ $344 $ $17,727 ($ ) ($1,378) $ $895 $ $138 $62,361 9, kwh/mo. 6,549 $ $43,485 $ $524 $ $21,695 ($ ) ($1,834) $ $1,179 $ $196 $65,245 16, kwh/mo. 2,231 $ $15,439 $ $290 $ $10,927 ($ ) ($982) $ $669 $ $134 $26,477 22, kwh/mo. 73 $ $537 $ $11 $ $443 ($ ) ($41) $ $28 $ $4 $983 OLS Charges (Per Pole) New Wood Pole 74 $ 6.01 $445 $445 New Metal Pole (< 22,000 Lumen) 111 $ 7.93 $881 $881 New Metal Pole (>=22,000 Lumen) - $ 8.43 $0 $0 Underground Serv (Per 130 Ft Length) 111 $ 4.07 $452 $452 Total OLS Revenue $0 $105,874 $0 $1,169 $50,791 ($4,234) $2,771 $472 $156,844 Total Revenue $4,688,693 $24,630,126 $0 $5,406,341 $43,199,381 ($4,288,934) $2,496,520 $406,478 $76,538,605 Total kwh & $/kwh 564,909,525 $ $ $ $ $ ( ) $ $ $ Page 201 of 253

203 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Exhibit 1 Chapter 7 SALES FOR RESALE (WHOLESALE) Table 1-7B Page 1 of 1 Ln Ln No Sales for Resale (Wholesale) No 1 December 31, Revenue kwh Ave. Rate Revenue kwh 3 4 January $ 85, , February $ 126, , March $ 89, , April $ 89, , May $ 44, , June $ 44, , July $ 29, , August $ 34, , September $ 60, , October $ 38, , November $ 96, , December $ 86, , $ 826, ,850, $ 1,026,301 6,020, Page 202 of 253

204 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Exhibit 1 Chapter 7 DISTRIBUTION CAPACITY AGREEMENT Table 1-7C FORECAST OF REVENUES 2016 Page 1 of 1 Ln No Ln No Revenue Revenue 1 January $ 4, $ 4, February $ 4, $ 4, March $ 4, $ 4, April $ 4, $ 4, May $ 4, $ 4, June $ 4, $ 4, July $ 4, $ 4, August $ 4, $ 4, September $ 4, $ 4, October $ 4, $ 4, November $ 4, $ 4, December $ 4, $ 4, $ 51, $ 51, Page 203 of 253

205 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC Exhibit 1 Chapter 7 EMERGENCY BACKUP SERVICE AGREEMENT Table 1-7D FORECAST OF REVENUES 2016 Page 1 of 1 Ln No Ln No Revenue Revenue 1 January $ 123, $ 110, February $ 123, $ 110, March $ 123, $ 110, April $ 123, $ 110, May $ 123, $ 110, June $ 123, $ 110, July $ 123, $ 110, August $ 123, $ 110, September $ 123, $ 110, October $ 123, $ 110, November $ 123, $ 110, December $ 123, $ 110, $ 1,486, $ 1,325, Page 204 of 253

206 Chapter 8 Fuel and Purchased Power Forecasts Page 205 of 253

207 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 8 Fuel and Purchase Power Forecast (Alain R. Blunier) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Alain R. Blunier. My business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ), as a Rate Analyst II. 2. Q: Does Exhibit 4, ARB, entitled Witness Statements of Qualifications: Alain R. Blunier accurately summarize your background, education, and experience? A: Yes. 3. Q: What is the purpose of your direct testimony in this chapter? A: My testimony in this chapter explains Liberty Utilities 2016 fuel and purchased power forecast for purposes of computing the revenues and costs to be accounted for in its Energy Cost Adjustment Clause ( ECAC ) mechanism II. FORECASTS 1. Q: Identify the components of the purchased power forecast. A: Liberty Utilities developed its purchased power forecast utilizing the NV Energy Services Agreement billing rates, NV Energy s forecasted energy costs and demand forecasts, and Liberty Utilities kwh usage forecast prepared by Ken Parris of Business Economic Analysis and Research. As I explain in my testimony in Exhibit 1, Chapter 3 on ECAC revenues, on April 24, 2015, Liberty Utilities submitted Application No XXX seeking approval of and rate recovery for the costs it will incur associated with the 2016 NV Energy Services Agreement. DWT v Exhibit Page 206 of 253

208 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 8 Fuel and Purchase Power Forecast (Alain R. Blunier) Our forecast of purchased power costs assumes that the Commission will timely approve the 2016 NV Energy Services Agreement and thus Liberty Utilities electric customers will begin to realize the benefits of its lower prices as of January 1, In Exhibit 1, Chapter 3, I propose two possible responses in the event that the Commission is not able to approve the 2016 NV Energy Services Agreement on a schedule that allows it to become effective as of January 1, Q: Describe the kwh usage forecast. A: Table 1-8A sets forth the 2016 kwh usage forecast by rate class we used. We separated the retail usage forecasts into individual sales categorized by customer class. We prepared sales forecasts for each customer class: residential, commercial, industrial, irrigation, highway, street lighting, and sales for resale (i.e., wholesale). The usage forecast separates residential customer classes into California Alternative Rates for Energy ( CARE ) and Non- CARE classes, and separates the large commercial customer class between ski resorts and other large customers. 3. Q: Explain how you use the kwh usage forecast to develop the power purchase forecast. A: The purchased power forecast, shown in Table 1-8B, is derived by first taking the kwh retail usage forecast for all customer classes and applying the line loss factor of 6.29 percent derived from the 2016 NV Energy Services Agreement to derive the monthly DWT v Exhibit Page 207 of 253

209 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 8 Fuel and Purchase Power Forecast (Alain R. Blunier) energy kwh forecast. The monthly energy kwh forecast is then multiplied by NV Energy s forecasted energy rate to determine a forecast of the monthly energy charge. To determine its forecast of monthly demand charges, Liberty Utilities multiplied the reduced Demand Charge in the 2016 NV Energy Services Agreement 1 by the monthly billing demand (kw) forecast NV Energy provided. To develop its forecast of monthly Transmission Charges, Liberty Utilities multiplied the transmission billing rate from the 2016 NV Energy Services Agreement by the transmission demand (kw) NV Energy forecasted. Liberty Utilities forecast of its monthly Distribution Charge is based on the reduction in the 2016 NV Energy Services Agreement of the Monthly Distribution Charge from $22,700 to $19, projected purchase power costs of $ million. The total of these charges provides the Q: How was Liberty Utilities fuel usage forecast prepared? A: Liberty Utilities derives its fuel usage forecast, provided in Table 1-8C, by averaging the actual fuel Liberty Utilities used each year for the past three years. Accordingly, Liberty Utilities projects fuel usage of $65,659 for III. CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. 1 In Application XXX, Liberty Utilities explains that the 2016 NV Energy Services Agreement reduces the Demand Charge for the current $12.02/kW-month to $9.37/kW-month. See Application at See Application at 17. DWT v Exhibit Page 208 of 253

210 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER kwh USAGE FORECAST BY RATE CLASS TABLE 1-8A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (a) (b) (c) (d) (e) (f) (g) (h) (I) (j) (k) (l) (m) (n) (o) (p) Ln Ln No (a)+(b)+(c) (f)+(g)+(h)+(i) (e)+(j) (k)+(l)+(m)+(n)+(o) No Residential Seasonal Residential Permanent Residential CARE All Residential Total Small Commercial Medium Commercial Large Commercial Non Ski Large Commercial Ski Non residential Residential & Nonresidential Irrigation Outside Lighting Street Lighting Resale Retail and Resale Total Total Total Total 1 2 Jan 15,764,689 13,670,738 3,961,425 33,396,852 10,723,910 5,834,783 8,180,848 7,961,128 32,700,668 66,097,520 12,945 59,549 42, ,286 66,968, Feb 13,995,371 11,684,458 3,438,683 29,118,512 9,638,495 5,228,271 7,417,509 5,325,560 27,609,834 56,728,346 2,161 54,433 32, ,020 57,589, Mar 13,711,209 11,901,100 3,563,871 29,176,180 9,866,200 4,927,890 7,813,914 4,665,980 27,273,983 56,450,163 1,867 54,917 32, ,560 57,285, Apr 10,836,638 10,276,020 3,169,748 24,282,406 8,738,230 4,258,197 7,022,568 3,271,889 23,290,884 47,573,290 42,825 53,449 30, ,840 48,348, May 8,870,859 9,288,190 2,894,117 21,053,165 8,355,373 4,345,777 6,763,027 1,588,885 21,053,062 42,106, ,460 54,825 37, ,787 42,684, Jun 9,217,986 8,603,297 2,637,795 20,459,077 8,765,195 4,300,900 7,207,977 1,291,958 21,566,030 42,025, ,802 53,909 32, ,158 42,561, Jul 10,666,788 8,535,803 2,592,232 21,794,823 9,405,060 4,797,192 7,741,535 1,234,514 23,178,300 44,973, ,516 53,142 32, ,752 45,800, Aug 10,272,126 8,428,694 2,594,124 21,294,943 9,246,022 4,824,742 7,971,209 1,272,494 23,314,467 44,609, ,348 53,905 32, ,690 45,495, Sep 9,072,548 8,601,601 2,685,880 20,360,029 8,522,180 4,563,048 7,664,854 1,450,802 22,200,883 42,560, ,324 51,746 31, ,725 43,382, Oct 9,017,901 9,521,162 3,036,812 21,575,874 8,468,779 4,067,981 6,744,512 2,576,599 21,857,871 43,433, ,073 54,896 33, ,955 44,076, Nov 11,098,551 11,274,097 3,592,880 25,965,529 8,999,725 4,036,635 6,521,658 5,909,133 25,467,151 51,432,680 80,670 50,902 31, ,178 52,076, Dec 14,800,457 13,038,441 4,137,672 31,976,570 10,533,409 4,882,311 7,792,524 9,169,298 32,377,542 64,354,112 2,677 53,715 32, ,277 65,079, Total 137,325, ,823,600 38,305, ,453, ,262,578 56,067,726 88,842,134 45,718, ,890, ,344,637 1,932, , ,047 6,020, ,347, Page 209 of 253

211 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 8 CALCULATION OF 2016 PURCHASE POWER FORECAST TABLE 1-8B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m) (n) (o) (p) Line Line No Note Description January February March April May June July August September October November December Total No Total purchased power cost $ 4,404,988 $ 3,875,363 $ 3,697,688 $ 3,019,338 $ 2,670,160 $ 2,682,572 $ 3,029,199 $ 3,026,797 $ 2,749,915 $ 2,880,197 $ 3,595,704 $ 4,497,069 $ 40,128,990 2 Page 210 of 253

212 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER FUEL USAGE FORECAST TABLE 1-8C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 PAGE 1 OF 1 (a) (b) (c) (d) Ln Ln No Year Fuel Cost Average Forecast No 1 FERC $ 51, $ 37, $ 107, Total $ 196,978 $ 65, $ 65,659 8 Page 211 of 253

213 Chapter 9 Revenue Requirement Page 212 of 253

214 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 9 Revenue Requirement (Alain R. Blunier) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Alain R. Blunier. My business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ), as a Rate Analyst II. 2. Q: Does Exhibit ARB, entitled Witness Statement of Qualifications: Alain R. Blunier accurately summarize your background, education, and experience? A: Yes, it does. 3. Q: What is the purpose of your direct testimony in this chapter? A: In this chapter, I am sponsoring Liberty Utilities calculation of its revenue requirement II. RESULTS OF OPERATIONS (REVENUE REQUIREMENT) 1. Q: Please describe how Liberty Utilities calculates its revenue 14 requirement A: Liberty Utilities calculates its revenue requirement by allocating revenues and expenses jurisdictionally into two portions - California and FERC. The California portion is then split into the Generation and Distribution components for rate design purposes. The Generation and Distribution components are totaled. Utilizing this total, Liberty Utilities is able to derive 1) its total revenue requirement, 2) the additional revenue required to operate, and 3) a Rate of Return on its rate base. DWT v Exhibit Page 213 of 253

215 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 9 Revenue Requirement (Alain R. Blunier) Q: What is Liberty Utilities proposed revenue requirement? A: The projected 2013 unbundled California jurisdictional results of operations are summarized in Table 1-9A. As reflected in Table 1-9A, the 2016 forecasted Rate of Return at present rates is 3.40 percent and an $ million increase in revenues is required to earn the proposed rate of 7.92 percent. The increase in Base Rates that Liberty Utilities is requesting is a percent increase over 2013 Base Rates III. COST OF SERVICE STUDY 1. Q: What does the Table 1-9B titled Cost of Service Study represent? A: This table takes the California jurisdictional information from Table 1-9C and unbundles it into generation and distribution components to establish unbundled electric rates IV. ADJUSTMENTS, ESCALATIONS AND JURISDICTIONALIZATION 1. Q: Please explain what the Table 1-9C titled Adjustments, Escalations and Jurisdictionalization represents. A: Table 1-9C takes the 2014 recorded information and adjusts it for known and measurable changes including escalation of the information to 2016 dollars. The 2016 adjusted information is then allocated to Liberty Utilities California and FERC jurisdictions. DWT v Exhibit Page 214 of 253

216 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 1 Summary and Results of Operations Chapter 9 Revenue Requirement (Alain R. Blunier) Q: What is the basis for the jurisdictionalization of Liberty Utilities recorded information? A: Consistent with methodologies approved by the Commission, Liberty Utilities jurisdictionalization methodology reflects the most current cost relationships between the two jurisdictions. V. CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. DWT v Exhibit Page 215 of 253

217 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 SUMMARY OF RESULTS OF OPERATIONS - TOTAL ELECTRIC TABLE 1-9A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 1 of 3 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Less Forecast General Rate Plus Total Forecast ECAC & Results Additional Revenue ECAC, Revenue Ln. Results of Vegetation Ex ECAC Revenue Requirement VM, CEMA Requirement Ln. No. Development of Return Operations Management {col. (a) - col. (c)} Required {col. (d) + col. (e)} EE and SIP {col. (f) + col. (g)} No. 1 Operating Revenues 1 2 Sales Revenue $ 73,697 $ (39,973) $ 33,724 $ 11,400 $ 45,123 $ 40,923 $ 86, Other Operating Revenue Revenue Credits 1,367-1,367-1,367-1, Energy Efficiency (EE) 367 (367) Solar Initiative Program (SIP) Vegetation Management (VM) 2,500 (2,500) ,523 2, Catastrophic Event Memo Acct. (CEMA) Total Operating Revenues 78,257 (42,840) 35,416 11,400 46,816 45,011 91, Operating Expenses Fuel & Purchased Power 39,973 (39,973) (0) - (0) 40,923 40, ECAC Total Fuel & Purchased Power Expense 39,973 (39,973) (0) 0 (0) 40,923 40, VM, CEMA, EE, SIP 2,867 (2,867) ,088 4, Other O&M Expense 17,220-17, ,224-17, Total Operation & Maintenance 60,060 (42,840) 17, ,223 45,011 62, Depreciation & Amortization Expense 5,306-5,306-5,306-5, Taxes Other Than Income 4,855-4, ,985-4, Deferred Income Taxes 2,830-2,830-2,830-2, Amortization of ITC Federal Income Tax ,504 3,846-3, California Corporate Franchise Tax (329) - (329) Total Operating Expenses 73,065 (42,840) 30,225 4,637 34,862 45,011 79, Operating Income $ 5,192 $ - $ 5,192 $ 6,762 $ 11,954 $ 0 $ 11, Rate Base Gross Plant in Service $ 278,268 $ - $ 278,268 $ - $ 278,268 $ - $ 278, Accum Prov for Depr & Amort (76,036) - (76,036) - (76,036) - (76,036) Net Plant in Service 202, , , , Additions ConstructIon Work In Progress Materials & Supplies 4,011-4,011-4,011-4, Prepayments Other Additions Working Capital 1,802-1,802 (1,670) Total Additions 6,133-6,133 (1,670) 4,463-4, Deductions Customer Advances for Construction (13,437) - (13,437) - (13,437) - (13,437) Accumulated Deferred Income Tax (19,206) - (19,206) - (19,206) - (19,206) Other Deductions (23,124) - (23,124) - (23,124) - (23,124) Total Deductions (55,768) - (55,768) - (55,768) - (55,768) Rate Base $ 152,597 $ - $ 152,597 $ (1,670) $ 150,927 $ - $ 150, Rate of Return (%) 3.40% 3.40% 7.92% 7.92% 49 Page 216 of 253

218 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 SUMMARY OF RESULTS OF OPERATIONS - GENERATION TABLE 1-9A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 2 of 3 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Forecast General Rate Plus Forecast Less Results Additional Revenue ECAC, Adjusted Ln. Results of ECAC Ex ECAC Revenue Requirement VM, CEMA Revenue Ln. No. Development of Return Operations Components {col. (a) - col. (c)} Required {col. (d) + col. (e)} EE and SIP {col. (f) + col. (g)} No. 1 Operating Revenues 1 2 Sales Revenue $ 45,380 $ (39,973) $ 5,406 $ (5,057) $ 349 $ 40,923 $ 41, Other Operating Revenue Revenue Credits 1,316-1,316-1,316-1, Energy Efficiency (EE) Solar Initiative Program (SIP) Vegetation Management (VM) Catastrophic Event Memo Acct. (CEMA) Total Operating Revenues 46,695 (39,973) 6,722 (5,057) 1,665 40,923 42, Operating Expenses Fuel & Purchased Power 39,973 (39,973) (0) - (0) 40,923 40, ECAC Total Fuel & Purchased Power Expense 39,973 (39,973) (0) - (0) 40,923 40, VM, CEMA, EE, SIP Other O&M Expense (2) Total Operation & Maintenance 40,245 (39,973) 271 (2) ,923 41, Depr & Amort Expense Taxes Other Than Income (58) Deferred Income Taxes Amortization of ITC Federal Income Tax 1,842-1,842 (1,554) California Corporate Franchise Tax (81) - (81) (443) (524) - (524) Total Operating Expenses 42,704 (39,973) 2,731 (2,057) ,923 41, Operating Income $ 3,991 $ - $ 3,991 $ (3,000) $ 992 $ - $ Rate Base Gross Plant in Service $ 14,303 $ - $ 14,303 $ - $ 14,303 $ - $ 14, Accum Prov for Depr & Amort (2,906) - (2,906) - (2,906) - (2,906) Net Plant in Service 11,397-11,397-11,397-11, Additions ConstructIon Work In Progress Materials & Supplies Prepayments Other Additions Working Capital 1,275-1, ,016-2, Total Additions 1,498-1, ,239-2, Deductions Customer Advances for Construction Accumulated Deferred Income Tax (1,018) - (1,018) - (1,018) - (1,018) Other Deductions (98) - (98) - (98) - (98) Total Deductions (1,116) - (1,116) - (1,116) - (1,116) Rate Base $ 11,779 $ - $ 11,779 $ 741 $ 12,520 $ - $ 12, Rate of Return (%) 33.89% 33.89% 7.92% 7.92% 49 Page 217 of 253

219 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 SUMMARY OF RESULTS OF OPERATIONS - DISTRIBUTION TABLE 1-9A FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 3 of 3 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Forecast General Rate Plus Forecast Less Results Additional Revenue ECAC, Adjusted Ln. Results of ECAC Ex ECAC Revenue Requirement VM, CEMA Revenue Ln. No. Development of Return Operations Components {col. (a) - col. (c)} Required {col. (d) + col. (e)} EE and SIP {col. (f) + col. (g)} No. 1 Operating Revenues 1 2 Sales Revenue $ 28,317 $ - $ 28,317 $ 16,457 $ 44,774 $ - $ 44, Other Operating Revenue Revenue Credits Energy Efficiency (EE) 367 (367) Solar Initiative Program (SIP) Vegetation Management (VM) 2,500 (2,500) ,523 2, Catastrophic Event Memo Acct. (CEMA) Total Operating Revenues 31,561 (2,867) 28,694 16,457 45,151 4,088 49, Operating Expenses Fuel & Purchased Power ECAC Total Fuel & Purchased Power Expense VM, CEMA, EE, SIP 2,867 (2,867) ,088 4, Other O&M Expense 16,948-16, ,954-16, Total Operation & Maintenance 19,815 (2,867) 16, ,954 4,088 21, Depr & Amort Expense 5,033-5,033-5,033-5, Taxes Other Than Income 4,625-4, ,813-4, Deferred Income Taxes 2,635-2,635-2,635-2, Amortization of ITC Federal Income Tax (1,500) - (1,500) 5,058 3,558-3, California Corporate Franchise Tax (248) - (248) 1,443 1,195-1, Total Operating Expenses 30,361 (2,867) 27,494 6,695 34,189 4,088 38, Operating Income $ 1,200 $ - $ 1,200 $ 9,762 $ 10,962 $ 0 $ 10, Rate Base Gross Plant in Service $ 263,965 $ - $ 263,965 $ - $ 263,965 $ - $ 263, Accum Prov for Depr & Amort (73,130) - (73,130) - (73,130) - (73,130) Net Plant in Service 190, , , , Additions ConstructIon Work In Progress Materials & Supplies 3,805-3,805-3,805-3, Prepayments Other Additions Working Capital (2,411) (1,883) - (1,883) Total Additions 4,635-4,635 (2,411) 2,224-2, Deductions Customer Advances for Construction (13,437) - (13,437) - (13,437) - (13,437) Accumulated Deferred Income Tax (18,188) - (18,188) - (18,188) - (18,188) Other Deductions (23,026) - (23,026) - (23,026) - (23,026) Total Deductions (54,651) - (54,651) - (54,651) - (54,651) Rate Base $ 140,818 $ - $ 140,818 $ (2,411) $ 138,407 $ - $ 138, Rate of Return (%) 0.85% 0.85% 7.92% 7.92% 49 Page 218 of 253

220 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 1 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Allocation Ln No Operating Revenue Factor California Generation Distribution No 1 Sales Revenue 1 2 Base Sales Revenue $ 33,724 $ 5,406 $ 28, Offset Rate Revenue _G 48,189 48, Balancing Rate Revenue _G (8,216) (8,216) Total Sales Revenue 73,697 45,380 28, Other Operating Revenue (1) See Ln Revenue Credits 9 10 DCA Payments _D EBSA Payments _G 1,316 1, Total Revenue Credits 1,367 1, Total Operating Revenues $ 75,389 $ 46,695 $ 28, (1) Other Operating Revenue Late Charges & Other _R $ - $ - $ Miscellaneous _D Other Operating Revenue $ 326 $ - $ Page 219 of 253

221 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 2 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Allocation Ln No Operating Revenue Factor California Generation Distribution No 1 Operating Revenues 1 2 Sales Revenue $ 73,697 $ 45,380 $ 28, Other Operating Revenue Revenue Credits 1,367 1, Total Operating Revenues 75,390 46,695 28, Operating Expenses 7 8 Fuel & Purchased Power 39,973 39, ECAC Total Fuel & Purchased Power Expense 39,973 39, Other O&M Expense 17, , Total Operation & Maintenance 57,193 40,245 16, Depr & Amort Expense 5, , Taxes Other Than Income 4, , Deferred Income Taxes 2, , Amortization of ITC Federal Income Tax 342 1,842 (1,500) California Corporate Franchise Tax (329) (81) (248) Total Operating Expenses 70,198 42,704 27, Operating Income $ 5,192 $ 3,991 $ 1, Rate Base Gross Plant in Service $ 278,268 $ 14,303 $ 263, Accum Prov for Depr & Amort (76,036) (2,906) (73,130) Net Plant in Service 202,232 11, , Additions ConstructIon Work In Progress Materials & Supplies 4, , Prepayments Other Additions Cash Working Capital 1,802 1, Total Additions 6,133 1,498 4, Deductions Customer Advances for Construction (13,437) - (13,437) Accumulated Deferred Income Tax (19,206) (1,018) (18,188) Other Deductions (23,124) (98) (23,026) Total Deductions (55,768) (1,116) (54,651) Rate Base $ 152,597 $ 11,779 $ 140, Rate of Return (%) 3.40% 33.89% 0.85% 44 Page 220 of 253

222 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 3 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No. Operation & Maintenance Expens Factor California Generation Distribution No 1 Production Expense-Other 1 2 Operation Supervision & Engineering _G $ Fuel _G Generation Expenses _G Misc Other Power Gen Exp _G Total Operation Maintenance Supervision & Engineering _G Structures _G Generating & Elec Plant _G Misc Other Pwr Gen Plant _G Total Maintenance _G Total Production Expense-Other Other Power Supply Expense Purchased Power _G 39,973 39, Sys Control & Load Dispatch _G Other Expenses _D ECAC Energy Cost Differential _G Energy Cost Amortization _D Total ECAC Total Other Power Supply Expense 39,973 39, Total Production Expense $ 40,023 $ 40,023 $ - 28 Page 221 of 253

223 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 4 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No. Operation & Maintenance Expens Factor California Generation Distribution No 1 Distribution Expense 1 2 Operation Supervision & Engineering _D $ 464 $ - $ Load Dispatching _D Station Expenses _D Overhead Line Expenses _D Underground Line Exp _D St Lt & Signal Sys Exp _D Meter Expenses _D Customer Installation Exp _D Misc Distribution Exp _D 2,668-2, Rents _D Total Operation 4,460-4, Maintenance Supervision & Engineering _D Structures _D Station Equipment _D Overhead Lines _D Underground Lines _D Line Transformers _D St Lt & Signal Sys Exp _D Meter Expenses _D Misc Distribution Plant _D (20) - (20) Total Maintenance Total Distribution Expense 5,344-5, Customer Accounts Expense Supervision _D Meter Reading Expense _D Cust Records & Collection Exp _D 2,062-2, Uncollectible Accounts Exp _R Misc Customer Accounts Exp _D Total Customer Accounts Expense $ 3,138 $ 80 $ 3, Page 222 of 253

224 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 5 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No. Operation & Maintenance Expens Factor California Generation Distribution No 1 Customer Service & Information Expense Supervision _D $ - $ - $ Customer Assistance _D Advertising _D Miscellaneous _D Total Customer Serv & Info Expense Administrative & General Expense A&G Salaries _10 3, , Office Supplies & Exp _10 1, , Admin Exp Transferred _10 (1,276) (19) (1,257) Outside Services Employed _10 1, , Property Insurance _ Injuries & Damages _ Pensions & Benefits Pensions _ Benefits _ Pensions & Benefits _11 1, , Frnachise Tax Requirements _D Regulatory Commission Exp _ Duplicate Charges _ Misc General Exp _ Rents _ Total Operation 8, , Maint of General Plant _ Total Administrative & General Expense 8, , Total Operation & Maintenance Exp $ 57,193 $ 40,245 $ 16, Page 223 of 253

225 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 6 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No Depreciation & Amortization Expense Factor California Generation Distribution No Other Production _G $ 264 $ 264 $ Distribution Land Rights _D Structures & Improvmts _D Station Equipment _D Poles, Towers & Fixtures _D Overhead Cond & Devices _D Underground Conduit _D Underground Cond & Devices _D Line Transformers _D Services _D Meters _D Install on Customer Premises _D St Lt & Signal Sys _D Total Distribution 3,543-3, Intangible Plant _ General Plant _ Total Depr & Amort Expense $ 5,306 $ 273 $ 5, Page 224 of 253

226 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 7 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Allocation Ln No Taxes Factor California Generation Distribution No 1 Taxes Other Than Income 1 2 Property Tax - Direct _14 $ 3,173 $ 179 $ 2, Property Tax - Common _ Total Property Tax 3, , Payroll Tax 6 7 FICA _ Unemployment _ Total Payroll Tax Franchise Tax _ Total Taxes Other Than Income 4, , Deferred Income Taxes Tax Depreciation _15 3, , ECAC _G Employee Benefits _ CIAC & Cust Adv _D (324) - (324) Capitalized Differences _ Uncollectibles Reserve _R (1) (0) (0) Total Deferred Income Taxes 2, , Amortization of ITC _ Total Operating Exp Ex Income Tax $ 70,185 $ 40,943 $ 29, Page 225 of 253

227 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 8 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Allocation Ln No Federal Income Taxes Factor California Generation Distribution No 1 Total Operating Revenues $ 75,389 $ 46,695 $ 28, O&M Expense 57,193 40,245 16, Taxes Other Than Income 4, , Operating Expense for Income Tax 62,048 40,475 21, Interest Charges 3, , Net Income Before FIT & Depr 10,075 5,968 4, Total Tax Adjustments. Ln. 34 9, , Taxable Net Income 1,005 5,417 (4,412) Income Tax Rate 34% 34% 34% Federal Income Tax $ 342 $ 1,842 $ (1,500) Federal Income Tax Adjustments - M Depreciation Intangible _11 $ 248 $ 2 $ Production-Other _G $ Distribution _D $ 8,903-8, General - Other _ Total Tax Depreciation 10, , ECAC _G Employee Benefits _ CIAC & Cust Adv _D (814) - (814) Capitalized Differences _ Uncollectibles Reserve _R (2) (1) (1) California Corporate Franchise Tax _17 (329) (81) (248) Total Tax Adjustments 9, , Page 226 of 253

228 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 9 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No Plant In Service Factor Total Generation Distribution No 1 Other Production Non-Depreciable _G $ 164 $ 164 $ Depreciable _G 13,982 13, Total Other Production 14,146 14, Distribution Plant Land _D 2,436-2, Land Rights _D Structures & Improvmts _D Station Equipment _D 18,989-18, Poles, Towers & Fixtrs _D 55,685-55, Overhead Cond & Devices _D 37,384-37, Underground Conduit _D 14,180-14, Underground Cond & Dev _D 48,200-48, Line Transformers _D 29,874-29, Services _D 21,515-21, Meters _D 9,011-9, Install on Customer Premises _D 1,266-1, St Lt & Signal Sys _D Total Depreciable - 237, Total Distribution Plant 240, , Intangible Plant Non-Depreciable _ Depreciable _11 8, , Total Intangible Plant 8, , General Plant Non-Depreciable _11 1, , Depreciable _11 13, , Total General Plant 15, , Gross Plant Non-Depreciable 3, , Depreciable 274,439 14, , Gross Plant $ 278,268 $ 14,303 $ 263, Page 227 of 253

229 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 10 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Acct Allocation Ln No No Acccum Provision for Depr & Amort Factor Total Generation Distribution No Other Production _G $ (2,863) $ (2,863) $ Distribution Land Rights _D (868) - (868) Structures & Improvmts _D (201) - (201) Station Equipment _D (7,708) - (7,708) Poles, Towers & Fixtrs _D (9,895) - (9,895) Overhead Cond & Devices _D (11,578) - (11,578) Underground Conduit _D (4,518) - (4,518) Underground Cond & Dev _D (8,962) - (8,962) Line Transformers _D (7,680) - (7,680) Services _D (9,296) - (9,296) Meters _D (4,227) - (4,227) Install on Customer Premises _D (1,160) - (1,160) St Lt & Signal Sys _D (474) - (474) Total Distribution (66,567) - (66,567) Intangible Plant _11 (2,669) (18) (2,651) General Plant _11 (3,938) (26) (3,912) Total Acc Prov for Depr & Amort (76,036) (2,906) (73,130) Net Plant $ 202,232 $ 11,397 $ 190, Page 228 of 253

230 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 11 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Allocation Ln No Additions & Deduction to Rate Base Factor Total Generation Distribution No 1 Additions To Net Plant 1 2 Construction Work in Progress CWIP $ - $ - $ Working Capital 4 5 Materials & Supplies _12 4, , Less: A/P Stores _ Total Materials & Supplies 4, , Prepayments _ Other Additions _ Cash Working Capital (p. 23) 1,802 1, Less: 0 14 A/P CWIP _ Franchise Collections _ Total Working Capital 1,802 1, Total Additions to Net Plant 6,133 1,498 4, Deductions To Net Plant Customer Advances for Const _D (13,437) - (13,437) Accumulated Deferred Income Tax Liberalized Depreciation _13 (19,745) (1,017) (18,729) Employee Benefits _ CIAC & Customer Advances _D Capitalized Differences _ Uncollectibles Reserve _R (2) (1) (1) Bonds / Debentures _ Total Accum Deferred Income Taxes (19,206) (1,018) (18,188) Other Deductions Cust Advances - Tax Gross-Up _D (3,352) - (3,352) CIAC Advances - Tax Gross-Up _D (227) - (227) Injuries & Damages Reserves _ Employee Benefits _ Uncollectibles _R (162) (98) (64) Other Deferred Credits _D (19,383) - (19,383) Total Other Deferred Dr & Cr (23,124) (98) (23,026) Total Deductions from Net Plant $ (55,768) $ (1,116) $ (54,651) Rate Base $ 152,597 $ 11,779 $ 140, Page 229 of 253

231 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 12 of 15 (IN THOUSANDS) (a) (b) (d) (e) (f) (g) (h) (i) Ln Generation Distribution Ln No Additions & Deduction to Rate Base Total Expense Lag Days Dollar Days Expense Lag Days Dollar Days No 1 Expenses 1 2 Diesel Oil Purchased Power 39,973 39, , ECAC (1) Goods & Services 8, ,224 7, , Uncollectibles Labor 8, , , Pensions Injuries & Damages Depreciation & Amortization Expense 5, , California Corporate Franchise Tax (816) (81) (13,470) (248) (41,242) Property Tax 3, ,837 2, , Franchise Requirements , , Unemployment Tax , FICA , Deferred Income Taxes 2, , Federal Income Taxes Payable (1) 342 1, ,676 (1,500) (249,750) Total Expenses $ 70,198 $ 42,704 1,082,133 $ 27, , Revenue Lag Days Expense Lag Days Net Lag Days Average Daily Expense Cash Working Capital Requirement $ 1,802 $ 1,275 $ Page 230 of 253

232 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 13 of 15 (IN THOUSANDS) (a) (b) (f) (i) Ln Total Ln No Cash Working Capital {col. (f) + col. (i)} Generation Distribution No 1 Synchronization FIT Payable Before Interest Deduction 3 4 Revenue $ 75,389 $ 46,695 $ 28, Less: 5 6 Expense 57,193 40,245 16, Tax Adjustments 9, , Taxes Other Than 4, , Taxable Income Before Interest Deduct 4,271 5,669 (1,398) Income 34.00% Before Interest Deduction 1,452 1,928 (475) Rate Base Ex Cash Working Capital 150,795 10, , Cash Working Capital Ex Interest 1,406 1, Weighted Cost of Long-Term Debt % % Weighted Cost of Preferred Stock % % Synchronization Factors C1 ( ) ( ) C2 ( ) ( ) Sychronized Rate Base $ 152,597 $ 11,779 $ 140, Synchronized Interest $ 3,266 $ 252 $ 3, Federal Income Tax $ 342 $ 1,842 $ (1,500) 31 Page 231 of 253

233 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 14 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Alloc Allocation Ln No No Calculation of Allocation Factors Factor Total Generation Distribution No 1 _G Generation % % % _D Distribution % % % _R Sales Revenue Revenue Dollars $ 74,697 $ 45,379 $ 29, Percent % % % _10 O&M Exp Less Fuel, Purchased Power, ECAC, & A&G Expense Dollars $ 8,608 $ 130 $ 8, Percent % % % _11 Wages & Salaries Production - Operation _G $ - $ - $ Maintenance _G $ Distribution - Operation _D $ 2,442-2, Maintenance _D $ Customer Accounting _D $ 2,199-2, Customer Service & Information _D $ Administrative & General _10 $ 3, , Total Wages & Salaries $ 8,531 $ 56 $ 8, Percent % % % _12 Gross Plant in Service Plant Dollars $ 278,268 $ 14,303 $ 263, Percent % % % _13 Depreciable Plant in Service Plant Dollars $ 274,439 $ 14,131 $ 260, Percent % % % _14 Net Plant in Service Plant Dollars $ 202,232 $ 11,397 $ 190, Percent % % % _15 Tax Depreciation Tax Dollars $ 10,214 $ 633 $ 9, Percent % % % 45 Page 232 of 253

234 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 COST OF SERVICE STUDY TABLE 1-9B FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 15 of 15 (IN THOUSANDS) (a) (b) (c) (d) (e) Ln Alloc Allocation Ln No No Calculation of Allocation Factors Factor Total Generation Distribution No 1 _16 Stores - Other Stores Dollars $ 4,011 $ 206 $ 3, Percent % % % _17 California Corporate Franchis Tax Tax Dollars $ 437,577 $ 107,749 $ 329, Percent % % % 9 Page 233 of 253

235 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 1 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln 2014 Ln No Development of Return Base Year Adjustments Adjusted California FERC No 1 Operating Revenues 1 2 Sales Revenue $ 72,070 $ 3,653 $ 75,723 $ 74,697 $ 1, Other Operating Revenue Revenue Credits 1,378-1,378 1, Total Operating Revenues 73,774 3,761 77,535 76,497 1, Operating Expenses 7 8 Fuel & Purchased Power 40,339-40,339 39, ECAC Total Fuel & Purchased Power Expens 40,339-40,339 39, Other O&M Expense 13,176 4,232 17,409 17, Total Operation & Maintenance 53,515 4,232 57,748 57, Depr & Amort Expense 4, ,356 5, Taxes Other Than Income 3,864 1,048 4,912 4, Deferred Income Taxes (3,339) 4,793 2,863 2, Amortization of ITC Federal Income Tax 194 (785) California Corporate Franchise Tax (962) 146 (309) (329) Total Operating Expenses 57,970 10,093 71,549 70, Operating Income 15,804 (6,333) $ 5,986 5, Rate Base Gross Plant in Service $ 233,406 $ 47,757 $ 281,172 $ 278,268 $ 2, Accum Prov for Depr & Amort (86,081) 9,284 (76,799) (76,036) (763) Net Plant in Service 147,325 57, , ,232 2, Additions ConstructIon Work In Progress Materials & Supplies 3, ,055 4, Prepayments Other Additions Cash Working Capital 1,765-1,765 1,782 (17) Total Additions 6, ,143 6, Deductions Customer Advances for Construction (12,188) (1,249) (13,437) (13,437) Accumulated Deferred Income Tax (2,721) (16,691) (19,412) (19,206) (206) Other Deductions (21,049) (2,075) (23,124) (23,124) Total Deductions (35,958) (20,015) (55,973) (55,768) (206) Rate Base $ 117,422 $ 37,113 $ 154,542 $ 152,577 $ 1, Rate of Return (%) 13.46% 3.87% 3.77% 11.68% 44 Page 234 of 253

236 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 2 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) Ln 2014 Allocation Ln No Operating Revenue Base Year Adjustments Adjusted Factor California FERC No 1 Sales Revenue 1 2 Base Sales Revenue $ 35,751 $ - $ 35,751 $ 34,725 $ 1, Offset Rate Revenue 44,535 3,653 48,188 48, Balancing Rate Revenue (8,216) - (8,216) (8,216) Total Sales Revenue 72,070 3,653 75,723 74,697 1, Other Operating Revenue Revenue Credits 9 10 DCA Payments _ EBSA Payments 1,326-1,326 _1 1, Total Revenue Credits 1,378-1,378 1, Total Operating Revenues $ 73,774 $ 3,761 $ 77,535 $ 76,497 $ 1, Page 235 of 253

237 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 3 of 19 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Ln Acct 2014 Allocation Ln No No Operation & Maintenance Expense Base Year Adjustments Adjusted Factor California FERC No 1 Production Expense-Other 1 2 Operation Supervision & Engineering $ - $ - $ - _1 $ - $ Fuel - - _ Generation Expenses _ Misc Other Power Gen Exp _ Total Operation Maintenance Supervision & Engineering _ Structures _ Generating & Elec Plant _ Misc Other Pwr Gen Plant _ Total Maintenance Total Production Expense-Other Other Power Supply Expense Purchased Power 40,339-40,339 _2 39, Sys Control & Load Dispatch _ Other Expenses _ ECAC Energy Cost Differential _C Energy Cost Amortization _C Total ECAC Total Other Power Supply Expense 40,339-40,339 39, Total Production Expense $ 40,388 $ 2 $ 40,390 $ 40,023 $ Page 236 of 253

238 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 4 of 19 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Ln Acct 2014 Allocation Ln No No Operation & Maintenance Expense Base Year Adjustments Adjusted Factor California FERC No 1 Distribution Expense 1 2 Operation Supervision & Engineering $ 22 $ 450 $ 472 _8 $ 464 $ Load Dispatching 837 (213) 624 _ Station Expenses _ Overhead Line Expenses _ Underground Line Exp 158 (8) 150 _ St Lt & Signal Sys Exp _C Meter Expenses 385 (228) 157 _ Customer Installation Exp 0-0 _ Misc Distribution Exp 2, ,713 _8 2, Rents _ Total Operation 4, ,535 4, Maintenance Supervision & Engineering 0 (0) (0) _ Structures _ Station Equipment 153 (2) 151 _ Overhead Lines _ Underground Lines 144 (3) 141 _ Line Transformers _C St Lt & Signal Sys Exp _C Meter Expenses _ Misc Distribution Plant (9) (11) (20) _9 (20) (0) Total Maintenance Total Distribution Expense 4, ,438 5, Customer Accounts Expense Supervision _ Meter Reading Expense _ Cust Records & Collection Exp 1, ,062 _6 2, Uncollectible Accounts Exp _C Misc Customer Accounts Exp _ Total Customer Accounts Expense $ 1,842 $ 1,296 $ 3,138 $ 3,138 $ - 34 Page 237 of 253

239 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 5 of 19 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Ln Acct 2014 Allocation Ln No No Operation & Maintenance Expense Base Year Adjustments Adjusted Factor California FERC No 1 Customer Service & Information Expense Supervision $ 249 $ (249) $ (0) _C $ - $ Customer Assistance 373 (368) 4 _C Advertising _C Miscellaneous _C Total Customer Serv & Info Expense 690 (615) Administrative & General Expense A&G Salaries 1,494 1,959 3,453 _10 3, Office Supplies & Exp ,383 _10 1, Admin Exp Transferred (759) (531) (1,290) _10 (1,276) (14) Outside Services Employed ,448 _10 1, Property Insurance _ Injuries & Damages _ Pensions & Benefits Pensions _ Benefits _ Total Pensions & Benefits 1, ,946 _11 1, Franchise Requirements _C Regulatory Commission Exp _C Duplicate Charges _ Misc General Exp _ Rents _ Total Operation 5,532 3,094 8,626 8, Maint of General Plant _ Total Administrative & General Expense 5,610 3,097 8,707 8, Total Operation & Maintenance Exp $ 53,515 $ 4,232 $ 57,748 $ 57,193 $ Page 238 of 253

240 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 6 of 19 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Ln Acct 2014 Allocation Ln No No Depreciation & Amortization Expense Base Year Adjustments Adjusted Factor California FERC No Other Production $ 495 $ (230) $ 266 _1 $ 264 $ Distribution Land Rights _ Structures & Improvmts _ Station Equipment 284 (39) 245 _ Poles, Towers & Fixtures _ Overhead Cond & Devices _ Underground Conduit 200 (18) 182 _C Underground Cond & Devices 832 (103) 729 _C Line Transformers _C Services _ Meters _ Install on Customer Premises _C St Lt & Signal Sys _C Total Distribution 3, ,580 3, Intangible Plant _ General Plant _ Total Depr & Amort Expense $ 4,697 $ 659 $ 5,356 $ 5,306 $ Page 239 of 253

241 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 7 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) Ln 2014 Allocation Ln No Taxes Base Year Adjustments Adjusted Factor California FERC No 1 Taxes Other Than Income 1 2 Property Tax - Direct $ 2,144 $ 1,062 $ 3,206 _14 $ 3,173 $ Property Tax - Common _ Total Property Tax 2,144 1,062 3,206 3, Payroll Tax 6 7 FICA 583 (14) 569 _ Unemployment _ Total Payroll Tax 904 (14) Franchise Tax _ Total Taxes Other Than Income 3,864 1,048 4,912 4, Deferred Income Taxes Tax Depreciation (3,500) 5,279 3,188 _15 3, ECAC _C Employee Benefits _ CIAC & Cust Adv 162 (486) (324) _C (324) Capitalized Differences _ Uncollectibles Reserve (1) 0 (1) _C (1) Total Deferred Income Taxes (3,339) 4,793 2,863 2, Amortization of ITC _ Total Operating Exp Ex Income Tax $ 58,738 $ 10,732 $ 70,878 $ 70,185 $ Page 240 of 253

242 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 8 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) Ln 2014 Allocation Ln No Federal Income Taxes Base Year Adjustments Adjusted Factor California FERC No 1 Total Operating Revenues $ 77,535 $ - $ 77,535 $ 76,497 $ 1, O&M Expense 53,515 4,232 57,748 57, Taxes Other Than Income 4,912-4,912 4, Operating Expense for Income Tax 58,427 4,232 62,659 62, Interest Charges 3,307-3,307 3, Net Income Before FIT & Depr 15,801 (4,232) 11,568 11, Total Tax Adjustments. Ln ,613 (1,924) 8,689 8, Taxable Net Income 5,188 (2,308) 2,879 2, Income Tax Rate 34.00% 34.00% 34.00% 34.00% 34.00% Federal Income Tax $ 194 $ (785) $ 979 $ 885 $ Federal Income Tax Adjustments - M Depreciation Intangible $ 273 $ (25) $ 248 _6 $ 248 $ Production-Other 698 (65) 633 _ Distribution 9,917 (920) 8,997 _7 8, General - Other 487 (45) 442 _ Total Tax Depreciation 11,374 (1,055) 10,320 10, ECAC _C Employee Benefits _ CIAC & Cust Adv 204 (1,018) (814) _C (814) Capitalized Differences _ Uncollectibles Reserve (2) 1 (2) _C (2) California Corporate Franchise Tax (962) 146 (816) _C (816) Total Tax Adjustments $ 10,613 $ (1,926) $ 8,689 $ 8,582 $ Page 241 of 253

243 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 9 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) Ln 2014 Allocation Ln No California Corporate Franchise Tax Base Year Adjustments Adjusted Factor California FERC No 1 Total Operating Revenues $ 77,535 $ - $ 77,535 $ 76,497 $ 1, O&M Expense 53,515 4,232 57,748 57, Taxes Other Than Income 4,912-4,912 4, Operating Expense for Income Tax 58,427 4,232 62,659 62, Interest Charges 3,307-3,307 3, Net Income Before FIT & Depr 15,801 (4,232) 11,568 11, Total Tax Adjustments. Ln ,907 3,158 15,064 14, Taxable Net Income 3,894 (7,390) (3,496) (3,717) Income Tax Rate (8.84% x.66) 8.84% 8.84% 8.84% 8.84% 8.84% State Income Tax $ (962) $ (653) $ (309) $ (329) $ California Corporate Franchise Tax Depreciation Intangible $ 281 $ 100 $ 381 _6 $ 381 $ Production-Other _ Distribution 10,205 3,639 13,844 _7 13, General - Other _ Total Tax Depreciation 11,705 4,174 15,880 15, ECAC _C Employee Benefits _ CIAC & Cust Adv 204 (1,018) (814) _C (814) Capitalized Differences _ Uncollectibles Reserve (2) 1 (2) _C (2) _C Total Tax Adjustments $ 11,907 $ 3,157 $ 15,064 $ 14,901 $ Page 242 of 253

244 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 10 of 19 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Ln Acct 2014 Allocation Ln No No Plant In Service Base Year Adjustments Adjusted Factor California FERC No 1 Other Production Non-Depreciable $ 165 $ (0) $ 165 _1 $ 164 $ Depreciable 14,094 (7) 14,087 _1 13, Total Other Production 14,259 (7) 14,261 14, Distribution Plant Land 2, ,462 _7 2, Land Rights _ Structures & Improvmts _ Station Equipment 19, ,412 _5 18, Poles, Towers & Fixtrs 37,474 19,450 56,924 _5 55,685 1, Overhead Cond & Devices 27,031 11,185 38,216 _5 37, Underground Conduit 13, ,180 _C 14, Underground Cond & Dev 46,303 1,897 48,200 _C 48, Line Transformers 28,405 1,469 29,874 _C 29, Services 19,093 2,426 21,519 _4 21, Meters 7,167 1,846 9,013 _4 9, Install on Customer Premises 1,279 (13) 1,266 _C 1, St Lt & Signal Sys _C Total Depreciable 200,146 40, , ,653 2, Total Distribution Plant 202,575 40, , ,089 2, Intangible Plant Non-Depreciable _C Depreciable 5,502 3,405 8,907 _6 8, Total Intangible Plant 5,507 3,406 8,913 8, General Plant Non-Depreciable 1,243 (0) 1,243 _11 1, Depreciable 9,821 4,300 14,121 _11 13, Total General Plant 11,064 4,300 15,364 15, Gross Plant Non-Depreciable 3, ,876 3, Depreciable 229,562 47, , ,439 2, Gross Plant $ 233,406 $ 47,757 $ 281,172 $ 278,268 $ 2, Page 243 of 253

245 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 11 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) Ln Acct 2014 Allocation Ln No No Acccum Provision for Depr & Amort Base Year Adjustments Adjusted Factor California FERC No Other Production $ (2,682) $ (202) $ (2,884) _1 $ (2,863) $ (23) Distribution Land Rights - (887) (887) _5 (868) (19) Structures & Improvmts (190) (15) (205) _5 (201) (5) Station Equipment (7,826) (54) (7,880) _5 (7,708) (172) Poles, Towers & Fixtrs (11,607) 1,492 (10,115) _5 (9,895) (220) Overhead Cond & Devices (16,087) 4,251 (11,836) _5 (11,578) (258) Underground Conduit (4,532) 14 (4,518) _C (4,518) Underground Cond & Dev (13,590) 4,628 (8,962) _C (8,962) Line Transformers (9,474) 1,794 (7,680) _C (7,680) Services (9,849) 551 (9,298) _4 (9,296) (2) Meters (3,934) (294) (4,228) _4 (4,227) (1) Install on Customer Premises (1,152) (8) (1,160) _C (1,160) St Lt & Signal Sys (575) 101 (474) _C (474) Total Distribution (78,816) 11,573 (67,243) (66,567) (676) Intangible Plant (1,493) (1,176) (2,669) _6 (2,669) (0) General Plant (3,090) (911) (4,001) _11 (3,938) (64) Total Acc Prov for Depr & Amort (86,081) 9,284 (76,799) (76,036) (763) Net Plant $ 147,325 $ 57,041 $ 204,373 $ 202,232 $ 2, Page 244 of 253

246 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 12 of 19 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) Ln 2014 Allocation Ln No Additions & Deduction to Rate Base Base Year Adjustments Adjusted Factor California FERC No 1 Additions To Net Plant 1 2 Construction Work in Progress $ - $ - $ - CWIP $ - $ Working Capital 4 5 Materials & Supplies 3, ,055 _10 4, Less: A/P Stores _ Total Materials & Supplies 3, ,055 4, Prepayments _ Other Additions _C Cash Working Capital (p. 23) 1,765-1,765 1,782 (17) Less: A/P CWIP _ Franchise Collections _C Total Working Capital 1,765-1,765 1,782 (17) Total Additions to Net Plant $ 6,055 $ 87 $ 6,143 $ 6,113 $ Deductions To Net Plant Customer Advances for Const (12,188) (1,249) (13,437) _C (13,437) Accumulated Deferred Income Tax Liberalized Depreciation (2,882) (17,069) (19,951) _13 (19,745) (206) Employee Benefits _ CIAC & Customer Advances _C Capitalized Differences _ Uncollectibles Reserve (1) (1) (2) _C (2) Bonds / Debentures _ Total Accum Deferred Income Taxes (2,721) (16,691) (19,412) (19,206) (206) Other Deductions Cust Advances - Tax Gross-Up (3,040) (312) (3,352) _C (3,352) CIAC Advances - Tax Gross-Up (227) - (227) _C (227) Injuries & Damages Reserves _ Employee Benefits _ Uncollectibles (157) (5) (162) _C (162) Other Deferred Credits (17,625) (1,759) (19,383) _C (19,383) Total Other Deferred Dr & Cr (21,049) (2,075) (23,124) (23,124) Total Deductions from Net Plant (35,958) (20,015) (55,973) (55,768) (206) Rate Base $ 117,422 $ 154,542 $ 152,577 $ 1, Page 245 of 253

247 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 13 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) (g) (h) (i) Ln Total Allocation California FERC Ln No Cash Working Capital Expense Factor Expense Lag Days Dollar Days Expense Lag Days Dollar Days No 1 Expenses 1 2 Diesel Oil $ - _2 $ $ - $ $ Purchased Power 40,339 _2 39, , , ECAC (1) - _C Goods & Services 8,072 8, , Uncollectibles Labor 8,669 8, , , Pensions Injuries & Damages Depreciation & Amortization Expense 5,356 5, California Corporate Franchise Tax (816) (816) (135,864) Property Tax 3,206 3, , , Franchise Requirements , , Unemployment Tax , FICA , Deferred Income Taxes 2,863 2, Federal Income Taxes Payable (1) , , Total Expenses $ 71,041 $ 70,253 1,895,302 $ , Revenue Lag Days Expense Lag Days Net Lag Days (7.96) Average Daily Expense Cash Working Capital Requirement $ 1,765 $ 1,782 $ (17) 28 Page 246 of 253

248 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION TABLE 1-9C FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 Page 14 of 19 (IN THOUSANDS) (a) (b) (f) (i) Ln Ln No Cash Working Capital Total California FERC No 1 Synchronization FIT Payable Before Interest Deduction 3 4 Revenue $ 77,535 $ 76,497 $ 1, Less: 5 6 Expense 57,748 57, Tax Adjustments 8,689 8, Taxes Other Than 4,912 4, Taxable Income Before Interest Deduct 6,196 5, Income 34.00% Before Interest Deduction $ 2,103 $ 1,995 $ Rate Base Ex Cash Working Capital $ 152,777 $ 150,795 $ 1, Cash Working Capital Ex Interest $ 1,364 $ 1,386 $ (22) Weighted Cost of Long-Term Debt % % Weighted Cost of Preferred Stock % % Synchronization Factors C1 ( ) ( ) C2 ( ) ( ) Sychronized Rate Base $ 154,542 $ 152,577 $ 1, Synchronized Interest $ 3,307 $ 3,265 $ Federal Income Tax $ 979 $ 885 $ Page 247 of 253

249 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 15 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Allocation Allocation Ln No Number Allocation Name Factor Total California FERC No 1 _1 Production Demand KW Coincident Peak Demand 135, ,822 1, Percent % % % _2 Energy MWH Sales 591,498, ,128,565 5,369, Percent % % % _3 Distribution Demand KW 929, ,544 40, Percent % % % 16 Page 248 of 253

250 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 16 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2013 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Allocation Allocation Ln No Number Allocation Name Factor Total California FERC No 1 Nonduplicate Customers w/o Street Lights 1 2 Residential 41,797 41, A-1 5,302 5, A A PA Sale for Resale Total Nonduplicate Customers w/o Street Lights 47,380 47, Weighting Factors (Meter & Service Drop) Residential A A A PA Sale for Resale Weighted Customers w/o Street Lights Residential 41,797 41, A-1 17,497 17, A-2 1,685 1, A-3 3,874 3, PA Sale for Resale Total Weighted Customers w/o Street Lights 64,965 64, _4 Total Weighted Customers w/o Street Lights Weighted Customers w/o Street Lights 64,965 64, Percent % % % _5 Composite of Allocation Factor 3 & Services & Meters Plant Services & Meters Plant $ 30,532 $ 30,526 $ Percent % % % Allocation Factor % % % Total % % % Percent % % % 40 Page 249 of 253

251 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 17 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2013 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Allocation Allocation Ln No Number Allocation Name Factor Total California FERC No 1 Nonduplicate Customers with Street Lights 1 2 Residential 41,797 41, A-1 5,302 5, A A PA Steet & Highway Lighting Sale for Resale Total Nonduplicate Customers with Street Lights 47,479 47, Weighting Factors (Customer Accts & Customer Serv & Info) Residential A A A PA Steet & Highway Lighting Sale for Resale Weighted Customers with Street Lights Residential 41,797 41, A-1 7,105 7, A-2 1,172 1, A-3 4,413 4, PA Steet & Highway Lighting Sale for Resale Total Weighted Customers withstreet Lights 54,641 54, _6 Total Weighted Customers withstreet Lights Weighted Customers 54,641 54, Percent % % % 34 Page 250 of 253

252 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 18 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2013 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Allocation Allocation Ln No Number Allocation Name Factor Total California FERC No 1 _7 Depreciable Distribution Plant Plant Dollars $ 240,172 $ 237,653 $ 2, Percent % % % _8 Distribution Operations Expense (A\C's ) Expense $ 653 $ 642 $ Percent % % % _9 Distribution Maintenance Expense (A\C's ) Expense $ 923 $ 905 $ Percent % % % _10 O&M Expense Less Fuel, PP, ECAC & A&G Expense $ 8,702 $ 8,608 $ Percent % % % _11 Wages & Salaries Production - Operation _1 $ - $ - $ Maintenance _ Distribution - Operation _8 2,483 2, Maintenance _ Customer Accounting _5 2,248 2, Customer Service & Information _C Administrative & General _10 3,415 3, Total Wages & Salaries $ 8,669 $ 8,531 $ Percent % % % 36 Page 251 of 253

253 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 1, CHAPTER 9 TABLE 1-9C ADJUSTMENTS, ESCALATIONS, AND JURISDICTIONALIZATION Page 19 of 19 FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2013 (IN THOUSANDS) (a) (b) (c) (d) (e) (f) Ln Allocation Allocation Ln No Number Allocation Name Factor Total California FERC No 1 _12 Gross Plant in Service Plant Dollars $ 281,172 $ 278,268 $ 2, Percent % % % _13 Depreciable Plant in Service Plant Dollars $ 277,296 $ 274,439 $ 2, Percent % % % _14 Net Plant in Service Plant Dollars 204, ,232 2, Percent % % % _15 Tax Depreciation Dollars $ 10,320 $ 10,214 $ Percent % % % _C Retail Only % % % 25 Page 252 of 253

254 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Exhibit 1, Chapter 9 CALCULATION OF NET-TO-GROSS MULTIPLIER Table 1-9D 2016 Page 1 of 1 Ln No (a) Description (b) Ln No 1 Gross Operating Revenues Uncollectibles Subtotal Franchise Requirements Subtotal Effective State Tax Rate Subtotal Federal Income Tax Rate 34% (1) Total Net-to-Gross Multiplier (Ln 1 / Ln 14) Uncollectibles & Franchise Fee Factor (Ln 1 / Ln 7) (1) The tax deduction for uncollectibles is based on the write-offs to the reserve, not on the accrual Therefore, the uncollectibles expense in the above calculation is added back before the Federal Income Tax is calculated. 26 Page 253 of 253

255 BEFORE THE PUBLIC UTILITIES COMMISSION OF THE STATE OF CALIFORNIA Application of Liberty Utilities (CalPeco Electric) LLC (U 933-E) for Authority to Among Other Things, Increase Its Authorized Revenues For Electric Service, Update Its Energy Cost Adjustment Clause Billing Factors, Establish Marginal Costs, Allocate Revenues, And Design Rates, as of January 1, Application No (Filed May 1, 2015) 2016 GENERAL RATE CASE APPLICATION OF LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (U 933-E) PHASE ONE (Volume 2 of 2) Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return Chapter 2 Return on Equity Exhibit 3 Electric Distribution Programs Chapter 1 Vegetation Management Chapter 2 Catastrophic Event Memorandum Account Chapter 3 Energy Efficiency Programs Chapter 4 Solar Incentive Program Exhibit 4 Witness Statements of Qualifications FOR THE FORECASTED TWELVE MONTHS ENDING DECEMBER 31, 2016

256 Table of Contents Page 1 of 241

257 Volume 1 of 2 A GENERAL RATE CASE APPLICATION OF LIBERTY UTILITIES (CALPECO ELECTRIC) LLC (U933-E) TABLE OF CONTENTS Table of Contents 1 Application 3 Appendices Appendix A: Liberty Utilities Financial Statements 21 Appendix B: Algonquin Proxy Statement 51 Exhibit 1 Summary and Results of Operations 121 Chapter 1 Overview & Safety (Michael R. Smart, P.E.) 122 Chapter 2 Operations & Maintenance and Administrative & General Expenses (Michael D. Long) 137 Chapter 3 Energy Cost Adjustment Clause Revenues (Alain R. Blunier) 151 Chapter 4 Income Tax and Other Taxes (Kendrick E. Wittman) 161 Chapter 5 Depreciation (Kendrick E. Wittman) 173 Chapter 6 Rate Base (Kendrick E. Wittman) 178 Chapter 7 Sales, Customers, and Revenues Forecast (Alain R. Blunier) 193 Chapter 8 Fuel and Purchased Power Forecasts (Alain R. Blunier) 205 Chapter 9 Revenue Requirement (Alain R. Blunier) 212 Volume 2 of 2 Table of Contents 1 Exhibit 2 Cost of Capital/Return on Equity/Rate of Return 3 Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) 4 Chapter 2 Return on Equity (Dr. Roger A. Morin) 15 Exhibit 3 Electric Distribution Programs 127 Chapter 1 Vegetation Management (Jessica Drummond) 128 Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) 136 Chapter 3 Energy Efficiency Programs (Lori L. Williams) 155 Chapter 4 Solar Incentive Program (Lori L. Williams) 181 Exhibit 4 Witness Statements of Qualifications 195 ARB Witness Statement of Qualifications: Alain R. Blunier 196 JD Witness Statement of Qualifications: Jessica Drummond 200 MDL Witness Statement of Qualifications: Michael D. Long 203 RAM Witness Statement of Qualifications: Dr. Roger A. Morin 206 MRS Witness Statement of Qualifications: Michael R. Smart, P.E. 230 KEW Witness Statement of Qualifications: Kendrick E. Wittman 235 LLW Witness Statement of Qualifications: Lori L. Williams 238 Page 2 of 241

258 Exhibit 2 Cost of Capital/Return on Equity/ Rate of Return Page 3 of 241

259 Chapter 1 Cost of Capital and Rate of Return Page 4 of 241

260 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Alain R. Blunier. My business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ) as a Rate Analyst II. 2. Q: Does Exhibit 4, ARB, entitled Witness Statement of Qualifications: Alain R. Blunier accurately summarize your background, education, and experience? A: Yes, it does. 3. Q: What is the purpose of your direct testimony in this chapter? A: The purpose of my direct testimony in this chapter is to describe the capital structure and cost of debt for Liberty Utilities and to explain the Overall Rate of Return that Liberty Utilities is requesting in this proceeding II. SUMMARY OF CONCLUSIONS AND RECOMMENDATIONS 1. Q: State the overall rate of return that Liberty Utilities is proposing. A: 7.92 percent. 2. Q: Describe the derivation and components of this proposed Rate of 17 Return. 18 A: Liberty Utilities Rate of Return was derived by using the following three 19 components: Proposed 2016 debt/equity capital structure of percent/55.00 percent, respectively. DWT v Exhibit Page 5 of 241

261 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) Proposed 2016 cost of debt of 6.51 percent and proposed weighted cost of debt of 2.14 percent. 3. Proposed Return on Equity of 10.5 percent1 and proposed weighted cost of equity of 5.77 percent. The 2016 requested Overall Rate of Return incorporating the proposed capitalization ratio, cost of debt, and return on equity is 7.92 percent. 3. Q: What debt/equity ratio did the California Public Utilities Commission ( Commission ) approve for Liberty Utilities in the 2013 General Rate Case? A: Liberty Utilities was able to settle its 2013 General Rate Case with the Office of Ratepayer Advocates ( ORA ) and the intervenors. The settlement provided for a debt to equity ratio of 51.5 percent equity to 48.5 percent debt and the Commission approved that ratio in approving the settlement. 4. Q: Explain Liberty Utilities proposal for a debt/equity ratio of 45 percent debt and 55 percent equity. A: Liberty Utilities is proposing this increase in equity to best ensure that Liberty Utilities can remain a low risk for debt financing and thus continue to attract debt financing at competitive low rates. The Commission recently approved a settlement proposing a similar equity ratio (45 percent/55 percent debt/equity) for another small utility, Bear Valley 19 Electric Service ( BVES ). 2 In fact, in that proceeding both BVES and the ORA had both 20 proposed a debt/equity ratio at this level. 3 1 See Testimony of Dr. Roger Morin, Exhibit 2, Chapter 2, at See D , mimeo at Appendix A, 7. 3 See D , mimeo at Appendix A, 7. DWT v Exhibit Page 6 of 241

262 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) The cost of both debt and equity is a function of the entity s overall financial strength and stability. Liberty Utilities believes that a 45/55 percent capitalization ratio represents the optimal capital structure to enable Liberty Utilities to obtain the funds necessary to best serve its electric customers. Additionally, by increasing its percentage of its own funds at risk Liberty Utilities signals its ongoing commitment to serve its customers. 5. Q: Liberty Utilities is proposing to increase the equity portion of its capital structure at a time that debt costs are relatively low from historical standards. Please explain. A: Debt cost is a key aspect in the capitalization equation, but should not be the over-arching focus. Liberty Utilities seeks an appropriate balance. Liberty Utilities benefits its customers by adding common equity as this shifts risk to its owners and facilitates Liberty Utilities ability to attract additional external funding. 6. Q: State Liberty Utilities debt and equity positions as of December 31, A: As of December 31, 2014, Liberty Utilities had actual debt of $ million and equity of $ million. Liberty Utilities debt at that time consisted of $ million of short-term intercompany debt, $0.671 million of customer deposits, and $70 million of long-term debt. Liberty Utilities equity was comprised of $1.268 million of common stock, $ million of common equity, and $ million of retained earnings. DWT v Exhibit Page 7 of 241

263 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) Q: Please explain how Liberty Utilities proposes to change its respective amounts of debt and equity to achieve the requested 45 percent/ 55 percent debt/equity capitalization it is requesting in this application. A: Liberty Utilities is forecasting the following changes that will result in a capitalization ratio of 45 percent/55 percent debt/equity as of December 31, 2016: 1. Customer deposits. Customer deposits will increase by $27,000 from $0.671 million to $0.698 million. This forecast assumes a customer growth factor of 0.53 percent per year for 2015 and 2016, plus accrued applied interest of 1.49 percent per year for 2015 and 2016 based upon the 90-day commercial paper interest rate. 2. Long-term debt. Long-term debt from the initial bond offering used for the acquisition will remain at the current $70 million level. 3. Long-term intercompany debt. The increase in long-term intercompany debt reflects both Liberty Utilities conversion of some current short-term intercompany debt to long-term intercompany debt and funding associated with the Luning and Minden Solar Projects that are the subject of Application The long-term intercompany debt is anticipated to have a 4 A , Application of Liberty Utilities (CalPeco Electric) LLC (U 933 E) for the Issuance of a CPCN and Necessity to Acquire, Own, and Operate the Luning and Minden Solar Projects, Authorize DWT v Exhibit Page 8 of 241

264 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) year term and a 4.2 percent coupon rate. Thus, Liberty Utilities total long-term intercompany debt is projected to be by December 31, 2016, $ million. The 4.2 percent coupon rate is equal to the weighted average of Liberty Utilities Co. debt financing obtained from June 2012 through May Short-term intercompany debt. In addition to the conversion of $18 million of short-term intercompany debt to long-term intercompany debt, Liberty Utilities intends to reduce short-term intercompany debt to $5.058 million. The short-term intercompany debt will be charged at a 1.47 percent monthly interest rate. This anticipated conversion of short-term to longterm intercompany debt coincides with the anticipated completion of capital projects and the related increase in used and useful plant in service. Again, this practice attempts to match the duration of the financing to the useful life of the plant in service. 5. Common Equity. The increase in common equity is associated with the Luning and Minden Solar Projects that are the subject of the Solar Projects Application. Ratemaking Associated with the Solar Projects Capital Investment and Operating Expenses, and Issuance of Expedited Decision Granting Such Relief (April 17, 2015) ( Solar Projects Application ). DWT v Exhibit Page 9 of 241

265 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) Retained Earnings. Retained earnings will increase from $ million to $ million. 7. Common Stock. Common stock will remain at $1.268 million. The end result of Liberty Utilities proposals is that the Commission set rates based on a capitalization structure consisting of total debt of $ million and total equity of $ million, respectively. 8. Q: Please explain the increase in retained earnings you are projecting. A: As of December 31, 2014, Liberty Utilities retained earnings were $ million. Liberty Utilities forecasts that retained earnings will increase by $10.3 million by December 31, Similarly, Liberty Utilities projects its increase to retained earnings in 2016 to be $12.7 million. As a result, Liberty Utilities projects retained earnings of $ million by December 31, Q: What is the cost of debt that you are using for the calculation of Liberty Utilities cost of capital? A: In 2010, Liberty Utilities obtained long-term debt financing through two unsecured notes: one for $45 million at 5.19 percent interest over a 10-year term, and one for $25 million at 5.59 percent over a fifteen-year term. As explained above, we are also intending by January 1, 2017 to convert $18 million of short-term intercompany debt to long-term intercompany debt. This long-term intercompany debt will have a term of 10 years and are currently anticipated to be priced at 4.2 percent. We are intending to finance the acquisitions of the Solar Projects with a portion of this long-term, intercompany debt. DWT v Exhibit Page 10 of 241

266 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 1 Cost of Capital and Rate of Return (Alain R. Blunier) Use of the long-term intercompany debt allows Liberty Utilities to reduce its forecast of the 2016 embedded cost of long-term debt to 4.92 percent 5 and the weighted cost of all debt, based on a 45 percent/55 percent debt/equity ratio is 2.14 percent. 10. Q: Why is Liberty Utilities converting the intercompany short-term debt into intercompany long-term debt? A: The 10-year $45 million unsecured note and the 15-year $25 million unsecured note represent Liberty Utilities only current long-term debt. Thus, the conversion is intended to increase the proportion of long-term debt to short-term debt. Short-term debt is subject to possible volatility related to future coupon rates. Accordingly, long-term fixed rate intercompany financing allows Liberty Utilities to more prudently hedge against such volatility. In addition, Liberty Utilities intends to schedule the loan conversion to coincide with the anticipated placement into service of relatively large capital projects. By converting short-term intercompany debt to a long-term intercompany note, the term and rate become fixed and better align with the depreciation of the assets in service III. CONCLUSION 1. Q: Does that conclude your testimony? A: Yes, it does. 5 $45 million unsecured note at 5.19 percent, $25 million unsecured note at 5.59 percent, and $18 million long-term intercompany debt at 4.2 percent. DWT v Exhibit Page 11 of 241

267 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 1, TABLE 2-1A CORPORATE STRUCTURE PAGE 1 OF 1 RECORDED WEIGHTED COST OF CAPITAL FOR THE PERIOD ENDED DECEMBER 31, 2014 (IN THOUSANDS) (a) (b) (c) (d) (e) Weighted Ln Capital Capital Cost of Cost of Ln No Description Amount Ratio% Capital% Capital% No 1 Debt 1 2 Short-Term Debt $ 26, % 1.47% 0.21% 2 3 Customer Deposits (1) % 0.12% 0.00% 3 5 Long-Term Debt 70, % 5.54% 2.06% Total Debt 96, % 7.13% 2.26% Equity Common Stock 1, % 9.875% 0.07% Preferred Equity % 9.875% 0.00% Common Equity 90, % 9.875% 4.73% Total Equity 91, % 9.875% 4.80% Total Capital $ 188, % 7.06% Notes: Commission approved deposit rate. Liberty Utilities Tariff, Rule No. 7 (1st Revised CPUC Sheet No. 204) Page 12 of 241

268 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 1, TABLE 2-1B CORPORATE STRUCTURE PAGE 1 OF 1 FORECASTED WEIGHTED COST OF CAPITAL FOR THE FORECASTED PERIOD ENDED DECEMBER 31, 2015 (IN THOUSANDS) (a) (b) (c) (d) (e) Weighted Ln Capital Capital Cost of Cost of Ln No Description Amount Ratio% Capital% Capital% No 1 Debt 1 2 Short-Term Debt $ 38, % 1.47% 0.27% 2 3 Customer Deposits (1) % 0.12% 0.00% 3 5 Long-Term Debt 70, % 5.54% 1.84% Total Debt 108, % 7.13% 2.11% Equity Common Stock 1, % 9.875% 0.06% Preferred Equity % 9.875% 0.00% Common Equity 100, % 9.875% 4.72% Total Equity 101, % 9.875% 4.78% Total Capital $ 210, % 6.88% Notes: Commission approved deposit rate. Liberty Utilities Tariff, Rule No. 7 (1st Revised CPUC Sheet No. 204) Page 13 of 241

269 LIBERTY UTILITIES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 1, TABLE 2-1C CORPORATE STRUCTURE PAGE 1 OF 1 FORECASTED WEIGHTED COST OF CAPITAL FOR THE FORECASTED PERIOD ENDED DECEMBER 31, 2016 (IN THOUSANDS) (a) (b) (c) (d) (e) Weighted Ln Capital Capital Cost of Cost of Ln No Description Amount Ratio% Capital% Capital% No 1 Debt 1 2 Short-Term Debt $ 5, % 1.47% 0.02% 2 3 Customer Deposits (1) % 0.12% 0.00% 3 5 Long-Term Debt 128, % 4.92% 2.12% Total Debt 134, % 6.51% 2.14% Equity Common Stock 1, % 10.50% 0.04% Preferred Equity % 10.50% 0.00% Common Equity 163, % 10.50% 5.73% Total Equity 164, % 10.50% 5.77% Total Capital $ 298, % 7.92% Notes: Commission approved deposit rate. Liberty Utilities Tariff, Rule No. 7 (1st Revised CPUC Sheet No. 204) Page 14 of 241

270 Chapter 2 Return on Equity Page 15 of 241

271 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) TABLE OF CONTENTS Page I. INTRODUCTION AND SUMMARY... 1 II.REGULATORY FRAMEWORK AND RATE OF RETURN... 8 III. COST OF EQUITY CAPITAL ESTIMATES A. DCF Estimates B. CAPM Estimates C. Historical Risk Premium Estimate D. Allowed Risk Premiums E. Need for Flotation Cost Adjustment IV. SUMMARY AND RECOMMENDATION ON COST OF EQUITY A. Construction Risk B. Size Effect DWT v i Page 16 of 241

272 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Dr. Roger A. Morin. My business address is Georgia State University, Robinson College of Business, University Plaza, Atlanta, Georgia, I am Emeritus Professor of Finance at the Robinson College of Business, Georgia State University and Professor of Finance for Regulated Industry at the Center for the Study of Regulated Industry at Georgia State University. I am also a principal in Utility Research International, an enterprise engaged in regulatory finance and economics consulting to business and government. I am testifying on behalf of Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities or the Company ) Q: Does Exhibit 4, RAM, entitled Witness Statements of Qualifications: Dr. Roger A. Morin provide your curriculum vitae? A: Yes. 3. Q: Please describe your educational background. A: I hold a Bachelor of Engineering degree and an MBA in Finance from McGill University, Montreal, Canada. I received my Ph.D. in Finance and Econometrics at the Wharton School of Finance, University of Pennsylvania. 1 Liberty Utilities is a California limited liability company which owns and operates an electric distribution system located in the Lake Tahoe area of California. DWT v Exhibit Page 17 of 241

273 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Please summarize your academic and business career. A: I have taught at the Wharton School of Finance, University of Pennsylvania, Amos Tuck School of Business at Dartmouth College, Drexel University, University of Montreal, McGill University, and Georgia State University. I was a faculty member of Advanced Management Research International, and I am currently a faculty member of The Management Exchange Inc. and Exnet, Inc. (now SNL Center for Financial Education LLC or SNL ), where I continue to conduct frequent national executive-level education seminars throughout the United States and Canada. In the last 30 years, I have conducted numerous national seminars on Utility Finance, Utility Cost of Capital, Alternative Regulatory Frameworks, and Utility Capital Allocation, which I have developed on behalf of The Management Exchange Inc. and the SNL Center for Financial Education. I have authored or co-authored several books, monographs, and articles in academic scientific journals on the subject of finance. They have appeared in a variety of journals, including The Journal of Finance, The Journal of Business Administration, International Management Review, and Public Utilities Fortnightly. I published a widely-used treatise on regulatory finance, Utilities Cost of Capital, Public Utilities Reports, Inc., Arlington, Va In late 1994, the same publisher released my book, Regulatory Finance, a voluminous treatise on the application of finance to regulated utilities. A revised and expanded edition of this book, The New Regulatory Finance, was published in I have been engaged in extensive consulting activities on behalf of numerous corporations, legal firms, and regulatory DWT v Exhibit Page 18 of 241

274 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) 1 2 bodies in matters of financial management and corporate litigation. Exhibit 4, RAM, describes my professional credentials in more detail Q: Have you previously testified on cost of capital before utility regulatory commissions? A: Yes, I have been a cost of capital witness before nearly 50 regulatory bodies in North America, including frequent appearances before the California Public Utilities Commission ( CPUC or Commission ) in Application ( A. ) (Sierra Pacific Power.), A (Sierra Pacific Power), A (San Diego Gas and Electric), A (Southern California Edison), A (Southern California Edison), A (Liberty Utilities) 2, and the Federal Energy Regulatory Commission ( FERC ), to name the more recent appearances. Alabama Florida Missouri Ontario Alaska Georgia Montana Oregon Alberta Hawaii Nevada Pennsylvania Arizona Illinois New Brunswick Quebec Arkansas Indiana New Hampshire South Carolina British Columbia Iowa New Jersey South Dakota California Kentucky New Mexico Tennessee City of New Orleans Louisiana New York Texas Colorado Maine Newfoundland Utah CRTC Manitoba North Carolina Vermont Delaware Maryland North Dakota Virginia District of Columbia Michigan Nova Scotia Washington FCC Minnesota Ohio West Virginia FERC Mississippi Oklahoma 12 The details of my participation in regulatory proceedings are provided in Exhibit 4 RAM. 2 The Application was filed under Liberty Utilities prior name California Pacific Electric Company, LLC. DWT v Exhibit Page 19 of 241

275 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: What is the purpose of your testimony in this proceeding? A: The purpose of my testimony in this proceeding is to present an independent appraisal of the fair and reasonable rate of return on the electric utility operations of Liberty Utilities in the State of California with particular emphasis on the fair return on the Company s common equity capital ( ROE ) committed to that business. Based upon this appraisal, I have formed my professional judgment as to a return on such capital that would: (1) be fair to ratepayers, (2) allow the Company to attract capital on reasonable terms, (3) maintain the Company s financial integrity, and (4) be comparable to returns offered on comparable risk investments. I will testify in this proceeding as to that opinion. 7. Q: Please briefly identify the exhibits and appendices accompanying your testimony. A: I have attached to my testimony Table 2-2A through Table 2-2H, and Attachments 2-2A and 2-2B. These exhibits and appendices relate directly to points in my testimony, and are described in further detail in connection with the discussion of those points in my testimony. 8. Q: Please summarize your findings concerning Liberty Utilities cost of common equity. A: Based on the results of various methodologies, current capital market conditions, and current economic industry conditions, I recommend the adoption of a ROE of 10.5 percent. A ROE of 10.5 percent for Liberty Utilities is required in order for the Company DWT v Exhibit Page 20 of 241

276 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) to: (i) attract capital on reasonable terms, (ii) maintain its financial integrity, and (iii) earn a return commensurate with returns on comparable risk investments. 9. Q: What methods have you employed in arriving at such an opinion? A: My recommendation derives from studies I performed using the Discounted Cash Flow ( DCF ), Risk Premium, and Capital Asset Pricing Model ( CAPM ) methodologies. I performed DCF analyses on two surrogates for the Company s electric utility business. They are: (1) a group of investment-grade dividend-paying combination electric and gas utilities, and (2) a group consisting of Value Line s Western Electric Utilities. The companies included in my analysis were required to have the majority of their revenues from regulated electric utility operations. I performed two historical risk premium analyses on the electric utility industry, one based on historical data, the other on returns allowed by regulators. I also performed two CAPM analyses: a traditional CAPM and a method using an empirical approximation of the CAPM ( ECAPM ). The results from the various methodologies were adjusted upward by 40 basis points to account for the Company s higher than average investment risk compared to other regulated utilities. As explained later in my testimony, this adjustment is based on the Company s higher degree of investment risk, as evidenced by its very small size, and its high external financing requirements. DWT v Exhibit Page 21 of 241

277 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) My recommended ROE reflects the application of my professional judgment to the indicated returns from my DCF, Risk Premium, and CAPM analyses, to the Company s current risk environment. 10. Q: Would it be in the best interests of ratepayers for the commission to adopt your recommended percent ROE for Liberty Utilities electric utility operations? A: Yes. My analysis shows that a ROE of percent is required to fairly compensate investors, maintain the Company s credit strength, and attract the capital needed for utility infrastructure and reliability capital investments. Adopting a lower ROE would increase equity and debt costs for ratepayers. 11. Q: Please explain how low allowed ROEs can increase both the future cost of equity and debt financing. A: If a utility is authorized a ROE below the level required by equity investors, the utility will find it difficult to access the equity market through common stock issuance at its current market price. Investors will not provide equity capital at the current market price if the earnable return on equity is below the level they require given the risks of an equity investment in the utility. The equity market corrects this by generating a stock price in equilibrium that reflects the valuation of the potential earnings stream from an equity investment at the risk-adjusted return equity investors require. In the case of a utility that has been authorized a return below the level investors believe is appropriate for the risk they bear, the result is a decrease in the utility s market price DWT v Exhibit Page 22 of 241

278 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) per share of common stock. This resulting decrease of the utility s price for common stock reduces the financial viability of equity financing in two ways. First, because the utility s price per share of common stock decreases, the net proceeds from issuing common stock are reduced. Second, since the utility s market to book ratio decreases with the decrease in the share price of common stock, the potential risk from dilution of equity investments reduces investors inclination to purchase new issues of common stock. The ultimate effect is the utility will have to rely more on debt financing to meet its capital needs As the company relies more on debt financing, its capital structure becomes more leveraged. Because debt payments are a fixed financial obligation to the utility, and income available to common equity is subordinate to fixed charges, this decreases the operating income available for dividend and earnings growth. Consequently, equity investors face greater uncertainty about future dividends and earnings from the firm. As a result, the firm s equity becomes a riskier investment. The risk of default on the company s bonds also increases, making the utility s debt a riskier investment. This increases the cost to the utility from both debt and equity financing and increases the possibility the company will not have access to the capital markets for its outside financing needs. Ultimately, to ensure that Liberty Utilities has access to capital markets for its capital needs, a fair and reasonable authorized ROE of percent is required To provide its customers reliable and safe service, the Company must secure outside funds from capital markets to finance required utility plant and equipment investments DWT v Exhibit Page 23 of 241

279 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) irrespective of capital market conditions, interest rate conditions and the quality consciousness of market participants. Thus, rate relief requirements and supportive regulatory treatment, including approval of my recommended ROE, are essential requirements. 12. Q: Please describe how your testimony is organized. A: The remainder of my testimony is divided into 3 broad sections: (i) (ii) (iii) Regulatory Framework and Rate of Return; Cost of Equity Estimates; and Summary and Recommendation The first section discusses the rudiments of rate of return regulation and the basic notions underlying rate of return. The second section contains the application of DCF, Risk Premium, and CAPM tests. In the third section, the results from the various approaches used in determining a fair return are summarized II. REGULATORY FRAMEWORK AND RATE OF RETURN 1. Q: Please explain how a regulated company s rates should be set under traditional cost of service regulation. A: Under the traditional regulatory process, a regulated company s rates should be set so that the company recovers its costs, including taxes and depreciation, plus a fair and reasonable return on its invested capital. The allowed rate of return must necessarily reflect the cost of the funds obtained, that is, investors return requirements. In determining a company s required rate of return, the starting point is investors return requirements in financial DWT v Exhibit Page 24 of 241

280 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) markets. A rate of return can then be set at a level sufficient to enable the company to earn a return commensurate with the cost of those funds. Funds can be obtained in two general forms, debt capital and equity capital. The cost of debt funds can be easily ascertained from an examination of the contractual interest payments. The cost of common equity funds, that is, investors required rate of return, is more difficult to estimate. It is the purpose of the next section of my testimony to estimate Liberty Utilities cost of common equity capital. 2. Q: What fundamental principles underlie the determination of a fair and reasonable ROE? A: The heart of utility regulation is the setting of just and reasonable rates by way of a fair and reasonable return. There are two landmark United States Supreme Court cases that define the legal principles underlying the regulation of a public utility s rate of return and provide the foundations for the notion of a fair return: 1. Bluefield Waterworks & Improvement Co. v. Pub. Serv. Comm n of W. Va, 262 U.S. 679 (1923), and 2. Fed. Power Comm n v. Hope Natural Gas Co., 320 U.S. 591 (1944). The Bluefield case set the standard against which just and reasonable rates of return are measured: DWT v Exhibit Page 25 of 241

281 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) A public utility is entitled to such rates as will permit it to earn a return on the value of the property which it employs for the convenience of the public equal to that generally being made at the same time and in the same general part of the country on investments in other business undertakings which are attended by corresponding, risks and uncertainties... The return should be reasonably sufficient to assure confidence in the financial soundness of the utility and should be adequate, under efficient and economical management, to maintain and support its credit and enable it to raise the money necessary for the proper discharge of its public duties. 3 The Hope case expanded on the guidelines to be used to assess the reasonableness of the allowed return. The Court reemphasized its statements in the Bluefield case and recognized that revenues must cover capital costs. The Court stated: From the investor or company point of view it is important that there be enough revenue not only for operating expenses but also for the capital costs of the business. These include service on the debt and dividends on the stock. (citation omitted). By that standard the return to the equity owner should be commensurate with returns on investments in other enterprises having corresponding risks. That return, moreover, should be sufficient to assure confidence in the financial integrity of the enterprise, so as to maintain its credit and to attract capital. 4 The United States Supreme Court reiterated the criteria set forth in Hope in Fed. Power Comm n v. Memphis Light, Gas & Water Div., 411 U.S. 458 (1973), in Permian Basin Rate Cases, 390 U.S. 747 (1968), and most recently in Duquesne Light Co. v. Barasch, 488 U.S. 299 (1989). In the Permian Basin Rate Cases, the Supreme Court stressed that a regulatory agency s rate of return order should 3 Bluefield, 262 U.S. at (emphasis added). 4 Hope Natural Gas Co., 320 U.S. at 603 (emphasis added). DWT v Exhibit Page 26 of 241

282 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) reasonably be expected to maintain financial integrity, attract necessary capital, and fairly compensate investors for the risks they have assumed. 5 Therefore, the end result of this Commission s decision should be to allow Liberty Utilities the opportunity to earn a return on equity that is: (1) commensurate with returns on investments in other firms having corresponding risks, (2) sufficient to assure confidence in the Company s financial integrity, and (3) sufficient to maintain the Company s creditworthiness and ability to attract capital on reasonable terms. 3. Q: How is the fair rate of return determined? A: The aggregate return required by investors is called the cost of capital. The cost of capital is the opportunity cost, expressed in percentage terms, of the total pool of capital employed by the utility. It is the composite weighted cost of the various classes of capital (e.g., bonds, preferred stock, common stock) used by the utility, with the weights reflecting the proportions of the total capital that each class of capital represents. The fair return in dollars is obtained by multiplying the rate of return set by the regulator by the utility s rate base. The rate base is essentially the net book value of the utility s plant and other assets used to provide utility service in a particular jurisdiction. While utilities like Liberty Utilities enjoy varying degrees of monopoly in the sale of public utility services, they, or their parent companies, must compete with everyone else in the free, open market for the input factors of production, whether labor, materials, machines, or capital. The prices of these inputs are set in the competitive marketplace by supply and demand, 5 Permian, 390 U.S. at 792. DWT v Exhibit Page 27 of 241

283 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) and it is these input prices that are incorporated in the cost of service computation. This fundamental concept is just as true for capital as for any other factor of production. Since utilities and other investor-owned businesses must go to the open capital market and sell their securities in competition with every other issuer, there is obviously a market price to pay for the capital they require, for example, the interest on debt capital, or the expected return on equity. 4. Q: How does the concept of a fair return relate to the concept of opportunity cost? A: The concept of a fair return is intimately related to the economic concept of opportunity cost. When investors supply funds to a utility by buying its stocks or bonds, they are not only postponing consumption and giving up the alternative of spending their dollars in some other way, they are also exposing their funds to risk and forgoing returns from investing their money in alternative comparable risk investments. The compensation investors require is the price of capital. If there are differences in the risk of the investments, competition among firms for a limited supply of capital will bring different prices. The capital markets translate these differences in risk into differences in required return, in much the same way that differences in the characteristics of commodities are reflected in different prices. The important point is that the required return on capital is set by supply and demand, and is influenced by the relationship between the risk and return expected for those securities and the risks expected from the overall menu of available securities. DWT v Exhibit Page 28 of 241

284 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: What economic and financial concepts have guided your assessment of the Company s cost of common equity? A: Two fundamental economic principles underlie the appraisal of the Company s cost of equity, one relating to the supply side of capital markets, the other to the demand side. On the supply side, the first principle asserts that rational investors maximize the performance of their portfolios only if they expect the returns on investments of comparable risk to be the same. If not, rational investors will switch out of those investments yielding lower returns at a given risk level in favor of those investment activities offering higher returns for the same degree of risk. This principle implies that a company will be unable to attract capital funds unless it can offer returns to capital suppliers that are comparable to those achieved on competing investments of similar risk. On the demand side, the second principle asserts that a company will continue to invest in real physical assets if the return on these investments equals, or exceeds, the company s cost of capital. This principle suggests that a regulatory board should set rates at a level sufficient to create equality between the return on physical asset investments and the utility s cost of capital. 6. Q: How does the Company obtain its capital and how is its overall cost of capital calculated? A: The funds employed by the Company are obtained in two general forms, debt capital and equity capital. The cost of debt funds can be ascertained easily from an DWT v Exhibit Page 29 of 241

285 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) examination of the contractual interest payments. The cost of common equity funds, that is, equity investors required rate of return, is more difficult to estimate because the dividend payments received from common stock are not contractual or guaranteed in nature. They are uneven and risky, unlike interest payments. Once a cost of common equity estimate has been developed, it can then easily be combined with the embedded cost of debt based on the utility s capital structure, in order to arrive at the overall cost of capital (overall rate of return). 7. Q: What is the market required rate of return on equity capital? A: The market required rate of return on common equity, or cost of equity, is the return demanded by the equity investor. Investors establish the price for equity capital through their buying and selling decisions in capital markets. Investors set return requirements according to their perception of the risks inherent in the investment, recognizing the opportunity cost of forgone investments in other companies, and the returns available from other investments of comparable risk. 8. Q: What must be considered in estimating a fair ROE? A: The basic premise is that the allowable ROE should be commensurate with returns on investments in other firms having corresponding risks. The allowed return should be sufficient to assure confidence in the financial integrity of the firm, in order to maintain creditworthiness and ability to attract capital on reasonable terms. The attraction of capital standard focuses on investors return requirements that are generally determined using market value methods, such as the Risk Premium, CAPM, or DCF methods. DWT v Exhibit Page 30 of 241

286 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) These market value tests define fair return as the return investors anticipate when they purchase equity shares of comparable risk in the financial marketplace. This is a market rate of return, defined in terms of anticipated dividends and capital gains as determined by expected changes in stock prices, and reflects the opportunity cost of capital. The economic basis for market value tests is that new capital will be attracted to a firm only if the return expected by the suppliers of funds is commensurate with that available from alternative investments of comparable risk. 9. Q: How does Liberty Utilities cost of capital relate to that of its ultimate owner, Algonquin Power & Utilities Corp. ( APUC )? A: I am treating Liberty Utilities as a separate stand-alone entity, distinct from its ownership because it is the cost of capital for Liberty Utilities that we are attempting to measure and not the cost of capital for its owner s consolidated activities. Financial theory clearly establishes that the cost of equity is the risk-adjusted opportunity cost to the investor, in this case, APUC. The true cost of capital depends on the use to which the capital is put, in this case Liberty Utilities electric utility operations in the State of California. The specific source of funding for an investment and the cost of funds to the investor are irrelevant considerations. For example, if an individual investor borrows money at the bank at an after-tax cost of four percent and invests the funds in a speculative oil extraction venture, the required return on the investment is not the four percent cost but rather the return foregone in speculative projects of similar risk, say 20 percent. Similarly, the required return on Liberty Utilities is the return foregone in comparable risk electric utility operations, and is unrelated to the owner s cost DWT v Exhibit Page 31 of 241

287 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) of capital. The cost of capital is governed by the risk to which the capital is exposed and not by the source of funds. The identity of the shareholder has no bearing on the cost of equity. Just as individual investors require different returns from different assets in managing their personal affairs, corporations should behave in the same manner. A parent company normally invests money in many operating companies of varying sizes and varying risks. These operating subsidiaries pay different rates for the use of investor capital, such as long-term debt capital, because investors recognize the differences in capital structure, risk, and prospects between subsidiaries. Therefore, the cost of investing funds in an operating utility subsidiary such as Liberty Utilities is the return foregone on investments of similar risk and is unrelated to the identity of the investor III. COST OF EQUITY CAPITAL ESTIMATES 1. Q: Dr. Morin, how did you estimate the fair ROE for Liberty Utilities? A: I employed three methodologies: (1) the DCF methodologies, (2) the Risk Premium, and (3) the CAPM. All three are market-based methodologies and are designed to estimate the return required by investors on the common equity capital committed to Liberty Utilities. I have applied the aforementioned methodologies to two portfolios of utilities as a starting point to estimate Liberty Utilities ROE. 2. Q: Why did you use more than one approach for estimating the cost of equity? A: No one single method provides the necessary level of precision for determining a fair return, but each method provides useful evidence to facilitate the exercise of DWT v Exhibit Page 32 of 241

288 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) an informed judgment. Reliance on any single method or preset formula is inappropriate when dealing with investor expectations because of possible measurement difficulties and vagaries in individual companies market data. Examples of such vagaries include dividend suspension, insufficient or unrepresentative historical data due a recent merger, impending merger or acquisition, and a new corporate identity due to restructuring activities. The advantage of using several different approaches is that the results of each one can be used to check the others. As a general proposition, it is extremely dangerous to rely on only one generic methodology to estimate equity costs. The difficulty is compounded when only one variant of that methodology is employed. It is compounded even further when that one methodology is applied to a single company. Hence, several methodologies applied to several comparable risk companies should be employed to estimate the cost of common equity. As I have stated, there are three broad generic methods available to measure the cost of equity: DCF, Risk Premium, and CAPM. All three of these methods are accepted and used by the financial community and firmly supported in the financial literature. The weight accorded to any one method may very well vary depending on unusual circumstances in capital market conditions. I note that California s Office of Ratepayer Advocates ( ORA ) has consistently relied on the three aforementioned methodologies in determining cost of equity capital.6 6 See, e.g., A , [ORA] Report on the Results of Operations for PacifiCorp General Rate Case Test Year 2011, Cost of Capital ( ORA Report ), dated May 10, DWT v Exhibit Page 33 of 241

289 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Each methodology requires the exercise of considerable judgment on the reasonableness of the assumptions underlying the method and on the reasonableness of the proxies used to validate the theory and apply the method. Each method has its own way of examining investor behavior, its own premises, and its own set of simplifications of reality. Investors do not necessarily subscribe to any one method, nor does the stock price reflect the application of any one single method by the price-setting investor. There is no guarantee that a single DCF result is necessarily the ideal predictor of the stock price and of the cost of equity reflected in that price, just as there is no guarantee that a single CAPM or Risk Premium result constitutes the perfect explanation of a stock s price or the cost of equity. 3. Q: Are there any practical difficulties in applying cost of capital methodologies in the current environment of volatility in capital markets and economic uncertainty? A: Yes, there are. All the traditional cost of equity estimation methodologies are difficult to implement when you are dealing with the instability and volatility in the capital markets and the uncertain economy both in the U.S. and abroad. This is not only because stock prices are volatile at this time, but also because utility company historical data have become less meaningful for an industry experiencing change. Past earnings and dividend trends may simply not be indicative of the future. For example, historical growth rates of earnings and dividends have in the more recent years been depressed by eroding margins due to a variety of factors, including the sluggish economy, declining customer use of energy, and falling margins. As a result, this historical data may not necessarily be representative of the future long-term earning DWT v Exhibit Page 34 of 241

290 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) power of these companies. Moreover, historical growth rates may not be necessarily representative of future trends for several electric utilities involved in mergers and acquisitions, as these companies going forward are not the same companies for which historical data are available. A. DCF Estimates 1. Q: Please describe the DCF approach to estimating the cost of equity capital. A: According to DCF theory, the value of any security to an investor is the expected discounted value of the future stream of dividends or other benefits. One widely used method to measure these anticipated benefits in the case of a non-static company is to examine the current dividend plus the increases in future dividend payments expected by investors. This valuation process can be represented by the following formula, which is the traditional DCF model: DWT v Exhibit Page 35 of 241

291 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) where: K e = D 1 /P o + g K e = investors expected return on equity D 1 = expected dividend at the end of the coming year P o = current stock price g = expected growth rate of dividends, earnings, stock price, and book value The traditional DCF formula states that under certain assumptions, which are described in the next paragraph, the equity investor s expected return, K e, can be viewed as the sum of an expected dividend yield, D1/Po, plus the expected growth rate of future dividends and stock price, g. The returns anticipated at a given market price are not directly observable and must be estimated from statistical market information. The idea of the market value approach is to infer Ke from the observed share price, the observed dividend, and an estimate of investors expected future growth. The assumptions underlying this valuation formulation are well known, and are discussed in detail in Chapter 4 of my reference book, Regulatory Finance, and Chapter 8 of my new reference text, The New Regulatory Finance. The standard DCF model requires the following main assumptions: (1) a constant average growth trend for both dividends and earnings, (2) a stable dividend payout policy, (3) a discount rate in excess of the expected growth rate, and (4) a constant price-earnings multiple, which implies that growth in price is synonymous with growth in earnings and dividends. The standard DCF model also assumes that DWT v Exhibit Page 36 of 241

292 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) dividends are paid at the end of each year when in fact dividend payments are normally made on a quarterly basis. 2. Q: How did you estimate Liberty Utilities cost of equity with the DCF model? A: I applied the DCF model to two proxies for Liberty Utilities: (1) a group of investment-grade, dividend-paying, combination electric and gas utilities, and (2) a group consisting of the electric utilities that make up Value Line s Western Electrics group. The proxy companies were required to have at least 50 percent of their revenues from regulated operations. In order to apply the DCF model, two components are required: the expected dividend yield (D1/P0), and the expected long-term growth (g). The expected dividend (D1) in the annual DCF model can be obtained by multiplying the current indicated annual dividend rate by the growth factor (1 + g). From a conceptual viewpoint, the stock price to employ in calculating the dividend yield is the current price of the security at the time of estimating the cost of equity. This is because the current stock prices provide a better indication of expected future prices than any other price in an efficient market. An efficient market implies that prices adjust rapidly to the arrival of new information. Therefore, current prices reflect the fundamental economic value of a security. A considerable body of empirical evidence indicates that capital markets are efficient with respect to a broad set of information. This implies that observed current prices represent the fundamental value of a security, and that a cost of capital estimate should be based on current prices. DWT v Exhibit Page 37 of 241

293 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) In implementing the DCF model, I have used the dividend yields reported in the Value Line Investment Analyzer (VLIA) on-line database as of January Basing dividend yields on average results from a large group of companies reduces the concern that the vagaries of individual company stock prices will result in an unrepresentative dividend yield. 3. Q: How did you estimate the growth component of the DCF model? A: The principal difficulty in calculating the required return by the DCF approach is in ascertaining the growth rate that investors currently expect. Since no explicit estimate of expected growth is observable, proxies must be employed. As proxies for expected growth, I examined the consensus growth estimate developed by professional analysts. Projected long-term growth rates actually used by institutional investors to determine the desirability of investing in different securities influence investors growth anticipations. These forecasts are made by large reputable organizations, and the data are readily available to investors and are representative of the consensus view of investors. Because of the dominance of institutional investors in investment management and security selection, and their influence on individual investment decisions, analysts growth forecasts influence investor growth expectations and provide a sound basis for estimating the cost of equity with the DCF model. Growth rate forecasts of several analysts are available from published investment newsletters and from systematic compilations of analysts forecasts, such as those tabulated by Yahoo Finance and Zacks Investment Research Inc.. I used analysts long-term growth forecasts contained in Yahoo Finance as proxies for investors growth expectations in applying the DCF DWT v Exhibit Page 38 of 241

294 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) model. I also used Value Line s growth forecasts as additional proxies. I note that California s ORA also relies on analysts growth forecasts in its single-stage DCF analyses. 4. Q: Why did you reject the use of historical growth rates in applying the DCF model to electric utilities? A: I have rejected historical growth rates as proxies for expected growth in the DCF calculation for two reasons. First, historical growth patterns are already incorporated in analysts growth forecasts that should be used in the DCF model, and are therefore redundant. Second, published studies in the academic literature demonstrate that growth forecasts made by security analysts are reasonable indicators of investor expectations, and that investors rely on analysts forecasts. This considerable literature is summarized in Chapter 9 of my most recent book, The New Regulatory Finance. 5. Q: Did you consider any other method of estimating expected growth to apply the DCF model? A: Yes, I did. I considered using the so-called sustainable growth method, also referred to as the retention growth method. According to this method, future growth is estimated by multiplying the fraction of earnings expected to be retained by the company, b, by the expected return on book equity, ROE, as follows: g = b x ROE where: g = expected growth rate in earnings/dividends b = expected retention ratio ROE = expected return on book equity DWT v Exhibit Page 39 of 241

295 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Do you have any reservations in regards to the sustainable growth method? A: Yes, I do. First, the sustainable method of predicting growth contains a logic trap: the method requires an estimate of expected return on book equity to be implemented. But if the expected return on book equity input required by the model differs from the recommended return on equity, a fundamental contradiction in logic follows. Second, the empirical finance literature demonstrates that the sustainable growth method of determining growth is not as significantly correlated to measures of value, such as stock prices and price/earnings ratios, as analysts growth forecasts. I therefore chose not to rely on this method. 7. Q: Did you consider dividend growth in applying the DCF model? A: No. The reason is that as a practical matter, while there is an abundance of earnings growth forecasts, there are very few forecasts of dividend growth. Moreover, it is widely expected that some utilities will continue to lower their dividend payout ratios over the next several years in response to heightened business risk and the need to fund very large construction programs over the next decade. Dividend growth has remained largely stagnant in past years as utilities are increasingly conserving financial resources in order to hedge against rising business risks and finance large infrastructure investments. As a result, investors attention has shifted from dividends to earnings. Therefore, earnings growth provides a more meaningful guide to investors long-term growth expectations. Indeed, it is growth in earnings that will support future dividends and share prices. DWT v Exhibit Page 40 of 241

296 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Is there any empirical evidence documenting the importance of earnings in evaluating investors expectations? A: Yes, there is an abundance of evidence attesting to the importance of earnings in assessing investors expectations. First, the sheer volume of earnings forecasts available from the investment community relative to the scarcity of dividend forecasts attests to their importance. To illustrate, Value Line, Zacks Investment, First Call Thompson, Reuters, Yahoo Finance, and Multex provide comprehensive compilations of investors earnings forecasts. The fact that these investment information providers focus on growth in earnings rather than growth in dividends indicates that the investment community regards earnings growth as a superior indicator of future long-term growth. Second, Value Line s principal investment rating assigned to individual stocks, Timeliness Rank, is based primarily on earnings, which accounts for 65 percent of the ranking. 9. Q: Dr. Morin, how did you approach the composition of comparable groups in order to estimate Liberty Utilities cost of equity with the DCF method? A: Because Liberty Utilities is not publicly traded, the DCF model cannot be applied to Liberty Utilities and proxies must be used. There are two possible approaches in forming proxy groups of companies. The first approach is to apply cost of capital estimation techniques to a select group of companies directly comparable in risk to Liberty Utilities. These companies are chosen by the application of stringent screening criteria to a universe of electric utility stocks in an attempt to identify companies with the same investment risk as Liberty Utilities. Examples of DWT v Exhibit Page 41 of 241

297 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) screening criteria include bond rating, beta risk, size, percentage of revenues from electric utility operations, and common equity ratio. The end result is a small sample of companies with a risk profile similar to that of Liberty Utilities, provided the screening criteria are defined and applied correctly. The second approach is to apply cost of capital estimation techniques to a large group of electric utilities representative of the electric utility industry average and then make adjustments to account for any difference in investment risk between the Company and the industry average, if any. As explained below, in view of substantial changes in circumstances in the electric utility industry, I have chosen the latter approach. In the current unstable industry environment, it is important to select relatively large sample sizes representative of the electric utility industry as a whole, as opposed to small sample sizes consisting of a handful of companies. This is because the equity market as a whole and electric utility industry capital market data is volatile at this time. As a result of this volatility, the composition of small groups of companies is very fluid, with companies exiting the sample due to dividend suspensions or reductions, insufficient or unrepresentative historical data due to recent mergers, impending merger or acquisition, and changing corporate identities due to restructuring activities. From a statistical standpoint, confidence in the reliability of the DCF model result is considerably enhanced when applying the DCF model to a large group of companies. Any distortions introduced by measurement errors in the two DCF components of equity return for individual companies, namely dividend yield and growth are mitigated. Utilizing a large DWT v Exhibit Page 42 of 241

298 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) portfolio of companies reduces the chance of either overestimating or underestimating the cost of equity for an individual company. For example, in a large group of companies, positive and negative deviations from the expected growth will tend to cancel out owing to the law of large 4 numbers, provided that the errors are independent. 7 The average growth rate of several companies is less likely to diverge from expected growth than is the estimate of growth for a single firm. More generally, the assumptions of the DCF model are more likely to be fulfilled for a large group of companies than for any single firm or for a small group of companies. Moreover, small samples are subject to measurement error, and in violation of the Central Limit Theorem of statistics.8 From a statistical standpoint, reliance on robust sample sizes mitigates the impact of possible measurement errors and vagaries in an individual company s market data. Examples of such vagaries include dividend suspension, insufficient or 7 If σ i 2 represents the average variance of the errors in a group of N companies, and σ ij the average covariance between the errors, then the variance of the error for the group of N companies, σ N 2 is: 2 N σ N = σ i + σ ij N N If the errors are independent, the covariance between them (σ ij ) is zero, and the variance of the error for the group is reduced to: 2 σ = i N σ As N gets progressively larger, the variance gets smaller and smaller. 8 The Central Limit Theorem describes the characteristics of the distribution of values we would obtain if we were able to draw an infinite number of random samples of a given size from a given population and we calculated the mean of each sample. The Central Limit Theorem asserts: [1] The mean of the sampling distribution of means is equal to the mean of the population from which the samples were drawn. [2] The variance of the sampling distribution of means is equal to the variance of the population from which the samples were drawn divided by the size of the samples. [3] If the original population is distributed normally, the sampling distribution of means will also be normal. If the original population is not normally distributed, the sampling distribution of means will increasingly approximate a normal distribution as sample size increases. 2 1 N DWT v Exhibit Page 43 of 241

299 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) unrepresentative historical data due to a recent merger, impending merger or acquisition, and a new corporate identity due to restructuring. The point of all this is that the use of a handful of companies in a highly fluid and unstable industry may produces fragile and statistically unreliable results. A far safer procedure is to employ large sample sizes representative of the industry as a whole and apply subsequent risk adjustments to the extent that the company s risk profile differs from that of the industry average. I note that the composition of my sample groups of electric utilities produces samples that are very similar to those produced by the California ORA s approach to electric utility comparable groups. 10. Q: Can you describe your first proxy group for Liberty Utilities electric utility business? A: Yes. As a first proxy for Liberty Utilities, I examined a group of investment-grade dividend-paying combination gas and electric utilities meaning that these companies all possess electric utility assets similar to Liberty Utilities. I began with all the companies designated as electric utilities by Value Line, that is, with Standard Industrial Classification codes 4911 to Foreign companies, private partnerships, private companies, non dividend-paying companies, and companies below investment-grade, that is, companies with a Moody s bond rating below Baa3 as reported in AUS Utility Reports January 2015, were eliminated, as well as those companies whose market capitalization was less than $1,000 million, in order to minimize any stock price anomalies due to thin trading. The companies had to be designated combination electric and gas utilities as reported in AUS Utility Reports, January DWT v Exhibit Page 44 of 241

300 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) edition. The final group of 26 companies, shown on Table 2-2A, only includes those companies with at least 50 percent of their revenues from regulated utility operations. I stress that this proxy group as well as the second group of proxy companies described below must be viewed as portfolios of comparable risk. It would be inappropriate to select any particular company or subset of companies from these groups and infer the cost of common equity from that company or subset alone. 11. Q: What DCF results did you obtain for the combination electric and gas utility group using value line growth projections? A: Page one of Table 2-2A shows the raw dividend yield and growth input data for the 26 companies while page two displays the DCF analysis. As shown on Column 3, line 28 of page two of Table 2-2A, the average long-term earnings per share growth forecast obtained from Value Line is 5.21 percent for this group. Combining this growth rate with the average expected dividend yield of 3.60 percent shown in Column 4 produces an estimate of equity costs of 8.81 percent for the group shown in Column 5. Recognition of flotation costs brings the cost of equity estimate to nine percent, shown in Column 6. The need for a flotation cost allowance is discussed at length later in my testimony. If we remove companies whose ROE estimates are less than the cost of debt, namely Integrys Energy, the average cost of equity estimate is 9.19 percent. DWT v Exhibit Page 45 of 241

301 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: What DCF results did you obtain for the combination electric and gas utility group using the Yahoo Finance growth forecast? A: From the original sample of 26 companies shown on page two of Table 2-2B, using the consensus analysts earnings growth forecast published by Yahoo Finance of 5.36 percent instead of the Value Line forecast, the cost of equity for the group is 8.97 percent, unadjusted for flotation cost. Recognition of flotation costs brings the cost of equity estimate to 9.16 percent, shown in Column 6, line 28. If we remove companies whose ROE estimates are less than the cost of debt, namely Entergy Corp., the average cost of equity estimate is 9.35 percent. 13. Q: What DCF results did you obtain for Value Line s Western Electric Utility group? A: As a second proxy for Liberty Utilities, I examined a group consisting of the electric utilities that make up Value Line s Western Utility group. Several California electric utilities are included in this group. Page one of Table 2-2C displays the electric utilities that make up the Western group, excluding those utilities with less than 50 percent of their revenues from regulated utility operations along with the input data for the DCF analysis. Page two of Table 2-2C displays the DCF analysis using Value Line growth projections. As shown on Column 2 of page two of Table 2-2C without the outlying results from IDACORP and Southern California Edison, the average cost of equity costs for the group, adjusted for flotation costs, is 9.2 percent, as shown in Column 5. DWT v Exhibit Page 46 of 241

302 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Using the consensus analysts growth forecast instead of the Value Line growth forecast, the average cost of equity estimate for the group is 9.51 percent. This analysis is displayed on pages one and two of Table 2-2D. 14. Q: Please summarize your DCF estimates. A: The table below summarizes the DCF estimates: DCF STUDY ROE Combination Elec & Gas Utilities Value Line Growth 9.2% Combination Elec & Gas Utilities Analysts Growth 9.4% Value Line Western Elec Utilities Value Line Growth 9.2% Value Line Western Elec Utilities Analysts Growth 9.5% 15. Q: Dr. Morin, please provide an overview of your risk premium analyses. A: In order to quantify the risk premium for Liberty Utilities, I have performed four risk premium studies. The first two studies deal with aggregate stock market risk premium evidence using two versions of the CAPM methodology and the other two studies deal with the electric utility industry. 16. Q: Dr. Morin, do you have an additional comment on the DCF results? A: Yes, I do. The DCF results were predicated on a spot dividend yield as of January Several financial analysts and experts prefer to base the DCF results on a dividend yield calculated over a longer period, six-months in the case of FERC and ORA s DCF approach, and twelve-months in other cases. Page three of Table 2-2A shows the dividend yields calculated in January 2015 and calculated over the previous 12 months for each company in the peer group. The average dividend yield calculated over 12 months exceeds the average dividend DWT v Exhibit Page 47 of 241

303 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) yield calculated on a spot (current) basis differ by 40 basis points. If the DCF results were based on dividend yields calculated over the previous 12 months instead of the dividend yields prevailing in January 2015, the DCF results would be 40 basis points higher. To that extent, I deem my DCF results conservative. B. CAPM Estimates 1. Q: Please describe your application of the CAPM risk premium approach. A: My first two risk premium estimates are based on the CAPM and on an empirical approximation to the CAPM ( ECAPM ). The CAPM is a fundamental paradigm of finance. Simply put, the fundamental idea underlying the CAPM is that risk-averse investors demand higher returns for assuming additional risk, and higher-risk securities are priced to yield higher expected returns than lower-risk securities. The CAPM quantifies the additional return, or risk premium, required for bearing incremental risk. It provides a formal risk-return relationship anchored on the basic idea that only market risk matters, as measured by beta. According to the CAPM, securities are priced such that their: EXPECTED RETURN = RISK-FREE RATE + RISK PREMIUM Denoting the risk-free rate by R F and the return on the market as a whole by R M, the CAPM is stated as follows: K = R F + [β(r M - R F )] This is the seminal CAPM expression, which states that the return required by investors is made up of a risk-free component, R F, plus a risk premium determined by β(r M - DWT v Exhibit Page 48 of 241

304 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) R F ). The latter bracketed expression is known as the market risk premium ( MRP ). To derive the CAPM risk premium estimate, three quantities are required: the risk-free rate (R F ), beta (β), and the MRP, (R M - R F ). For the risk-free rate, I used 4.8 percent, based on forecast interest rates on long-term U.S. Treasury bonds. For beta, I used 0.75 and for the MRP, I used seven percent based on both historical and prospective studies. These inputs to the CAPM are explained below. 2. Q: How did you arrive at your risk-free rate estimate of 4.8 percent in your CAPM and risk premium analyses? A: To implement the CAPM and Risk Premium methods, an estimate of the risk-free return is required as a benchmark. I note that the ORA typically relies on long-term 11 Treasury bond yield forecasts in its implementation of the CAPM. 9 I also relied on noted economic forecasts which call for a rising trend in interest rates in response to the recovering economy, renewed inflation, and record high federal deficits. Value Line, Global Insight, Wall Street Journal Survey, and the Congressional Budget Office all project higher long-term Treasury bond rates in the future. 3. Q: Why did you rely on long-term bonds instead of short-term bonds? A: The appropriate proxy for the risk-free rate in the CAPM is the return on the longest term Treasury bond possible. This is because common stocks are very long-term instruments more akin to very long-term bonds rather than to short-term Treasury bills or intermediate-term Treasury notes. In a risk premium model, the ideal estimate for the risk-free 9 See ORA Report. DWT v Exhibit Page 49 of 241

305 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) rate has a term to maturity equal to the security being analyzed. Since common stock is a very long-term investment because the cash flows to investors in the form of dividends last indefinitely, the yield on the longest-term possible government bonds, that is the yield on 30-year Treasury bonds, is the best measure of the risk-free rate for use in the CAPM. The expected common stock return is based on very long-term cash flows, regardless of an individual s holding time period. Moreover, utility asset investments generally have very long-term useful lives and should correspondingly be matched with very long-term maturity financing instruments. While long-term Treasury bonds are potentially subject to interest rate risk, this is only true if the bonds are sold prior to maturity. A substantial fraction of bond market participants, usually institutional investors with long-term liabilities (e.g., pension funds and insurance companies), in fact hold bonds until they mature, and therefore are not subject to interest rate risk. Moreover, institutional bondholders neutralize the impact of interest rate changes by matching the maturity of a bond portfolio with the investment planning period, or by engaging in hedging transactions in the financial futures markets. The merits and mechanics of such immunization strategies are well documented by both academicians and practitioners. Another reason for utilizing the longest maturity Treasury bond possible is that common equity has an infinite life span, and the inflation expectations embodied in its marketrequired rate of return will therefore be equal to the inflation rate anticipated to prevail over the very long term. The same expectation should be embodied in the risk-free rate used in applying the CAPM model. It stands to reason that the yields on 30-year Treasury bonds will more DWT v Exhibit Page 50 of 241

306 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) closely incorporate within their yields the inflation expectations that influence the prices of common stocks than do short-term Treasury bills or intermediate-term U.S. Treasury notes. Among U.S. Treasury securities, 30-year Treasury bonds have the longest term to maturity and the yields on such securities should be used as proxies for the risk-free rate in applying the CAPM. Therefore, I have relied on the forecast yield on 30-year Treasury bonds in implementing the CAPM and risk premium methods. 4. Q: Dr. Morin, are there other reasons why you reject short-term interest rates as proxies for the risk-free rate in implementing the CAPM? A: Yes. Short-term rates are volatile, fluctuate widely, and are subject to more random disturbances than are long-term rates. Short-term rates are largely administered rates. For example, Treasury bills are used by the Federal Reserve as a policy vehicle to stimulate the economy and to control the money supply, and are used by foreign governments, companies, and individuals as a temporary safe-house for money. As a practical matter, it makes no sense to match the return on common stock to the yield on 90-day Treasury Bills. This is because short-term rates, such as the yield on 90-day Treasury Bills, fluctuate widely, leading to volatile and unreliable equity return estimates. Moreover, yields on 90-day Treasury Bills typically do not match the equity investor s planning horizon. Equity investors generally have an investment horizon far in excess of 90 days. As a conceptual matter, short-term Treasury Bill yields reflect the impact of factors different from those influencing the yields on long-term securities such as common stock. For example, the premium for expected inflation embedded into 90-day Treasury Bills is likely DWT v Exhibit Page 51 of 241

307 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) to be far different than the inflationary premium embedded into long-term securities yields. On grounds of stability and consistency, the yields on long-term Treasury bonds match more closely with common stock returns. 5. Q: What is your estimate of the risk-free rate for purposes of applying the CAPM? A. I have examined the forecast yield on 30-year U.S. Treasury bonds from various prominent sources, including Global Insight, Value Line, CBO, and Wall Street s Economic Forecasting Survey. The forecasts are remarkably consistent, all pointing to a rising yields on U.S. Treasury Bonds in the next several years. Global Insight s long-term forecast for 30-year bonds is 4.9 percent, Value Line s is 4.8 percent, CBO s is five percent, and the Wall Street Economic Forecasting Survey is 4.5 percent. It is also noteworthy that the historical return on long-term U.S. Treasury bonds has averaged 5.1 percent over the long period The average 30-year long-term bond yield forecast for the next several years from the four sources is 4.8 percent. The rising yield forecasts are also quite consistent with the upwardsloping yield curve observed at this time. Based on this consistent evidence, a long-term bond yield forecast of 4.8 percent is a reasonable estimate of the expected risk-free rate for purposes of the CAPM/Empirical CAPM analyses. 6. Q: Why did you ignore the current level of interest rates in developing the proxy for the risk-free rate in a CAPM analysis? A. The CAPM is a forward-looking model based on expectations of the future. As a result, in order to produce a meaningful estimate of investors required rate of DWT v Exhibit Page 52 of 241

308 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) return, the CAPM must be applied using data that reflects the expectations of actual investors in the market. While investors examine history as a guide to the future, it is the expectations of future events that influence security values and the cost of capital. 7. Q: How did you select the beta for your CAPM analysis? A: A major thrust of modern financial theory as embodied in the CAPM is that perfectly diversified investors can eliminate the company-specific component of risk, and that only market risk remains. The latter is technically known as beta (β), or systematic risk. The beta coefficient measures change in a security s return relative to that of the market. The beta coefficient states the extent and direction of movement in the rate of return on a stock relative to the movement in the rate of return on the market as a whole. It indicates the change in the rate of return on a stock associated with a one percentage point change in the rate of return on the market, and thus measures the degree to which a particular stock shares the risk of the market as a whole. Modern financial theory has established that beta incorporates several economic characteristics of a corporation that are reflected in investors return requirements. As a California LLC owned by APUC, Liberty Utilities is not publicly traded, and therefore, proxies must be used. In the discussion of DCF estimates of the cost of common equity earlier, I examined a sample of widely-traded investment-grade dividend-paying combination electric and gas utilities covered by Value Line that have (i) at least 50 percent of their revenues from regulated utility operations, and (ii) a market capitalization that is more than DWT v Exhibit Page 53 of 241

309 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) $1,000 million.10 The average beta for this group is Please see Table 2-2E, page one for the betas of this sample of utilities. I also examined the average beta of the electric utilities with at least 50 percent of their revenues from regulated electric utility operations contained in Value Line s Western Utilities group. The same group was utilized earlier in connection with DCF estimates and is retained for the CAPM analysis. The average beta for the group is 0.76, as shown on page two of Table 2-2E. Based on these results, I shall use the average beta of the two beta estimates, 0.75, as an estimate for the beta applicable to Liberty Utilities. I note that the ORA also relies on Value Line betas in its application of the CAPM to electric utility groups Q: What MRP did you use in your CAPM analysis? A: For the MRP, I used seven percent. This estimate was based on the results of both forward-looking and historical studies of long-term risk premiums. 9. Q: Can you describe the historical MRP study used in your CAPM analysis? A: Yes. The historical MRP estimate is based on the results obtained in the Morningstar (formerly Ibbotson Associates) study, Stocks, Bonds, Bills, and Inflation, 2014 Classic Yearbook. This study, which compiles historical returns from 1926 to 2013, shows that a broad market sample of common stocks outperformed long-term U.S. Treasury bonds by This is necessary in order to minimize the well-known thin trading bias in measuring beta. 11 See ORA Report. DWT v Exhibit Page 54 of 241

310 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) percent over that long period. The historical MRP over the income component of long-term Treasury bonds rather than over the total return is seven percent. Morningstar recommends the use of the latter as a more reliable estimate of the historical MRP, and I concur with this viewpoint. The historical MRP should be computed using the income component of bond returns because the intent, even using historical data, is to identify an expected MRP. This is because the income component of total bond return (i.e., the coupon rate) is a far better estimate of expected return than the total return (i.e., the coupon rate + capital gain), as realized capital gains/losses are largely unanticipated by bond investors. The long-horizon ( ) MRP (based on income returns, as required) is seven percent. 10. Q: On what maturity bond does the Morningstar historical risk premium data rely? A: Because 30-year bonds were not always traded or even available throughout the entire period covered in the Morningstar Study of historical returns, the latter study relied on bond return data based on 20-year Treasury bonds. Given that the normal yield curve is virtually flat above maturities of 20 years over most of the period covered in the Morningstar study, the difference in yield is not material. 11. Q: Why did you use long time periods in arriving at your historical MRP estimate? A: Because realized returns can be substantially different from prospective returns anticipated by investors when measured over short time periods, it is important to employ returns realized over long time periods rather than returns realized over more recent time periods DWT v Exhibit Page 55 of 241

311 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) when estimating the MRP with historical returns. Therefore, a risk premium study should consider the longest possible period for which data is available. Short-run periods during which investors earned a lower risk premium than they expected are offset by short-run periods during which investors earned a higher risk premium than they expected. Only over long time periods will investor return expectations and realizations converge. I have therefore ignored realized risk premiums measured over short time periods. Instead, I relied on results over periods of enough length to smooth out short-term aberrations, and to encompass several business and interest rate cycles. The use of the entire study period in estimating the appropriate MRP minimizes subjective judgment and encompasses many diverse regimes of inflation, interest rate cycles, and economic cycles. To the extent that the estimated historical equity risk premium follows what is known in statistics as a random walk, one should expect the equity risk premium to remain at its historical mean. Since I found no evidence that the MRP in common stocks has changed over time, at least prior to the onslaught of the financial crisis of which has now partially subsided, that is, no significant serial correlation in the Morningstar study prior to that time, it is reasonable to assume that these quantities will remain stable in the future. 12. Q: Should studies of historical risk premiums rely on arithmetic average returns or on geometric average returns? A: Whenever relying on historical risk premiums, only arithmetic average returns over long periods are appropriate for forecasting and estimating the cost of capital, and DWT v Exhibit Page 56 of 241

312 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) 1 geometric average returns are not. 12 I note that in the past the ORA relies on geometric mean returns rather than arithmetic mean returns in its application of the CAPM. 13 Chapter 4 Appendix A of my book The New Regulatory Finance contains a detailed and rigorous discussion of the impropriety of using geometric averages in estimating the cost of capital. Briefly, the disparity between the arithmetic average return and the geometric average return raises the question as to what purposes should these different return measures be used. The answer is that the geometric average return should be used for measuring historical returns that are compounded over multiple time periods. The arithmetic average return should be used for future-oriented analysis, where the use of expected values is appropriate. It is inappropriate to average the arithmetic and geometric average return; they measure different quantities in different ways. Please see Morin, R. A:, The New Regulatory Finance, chapter 11 (2006) for an in-depth discussion regarding the theoretical underpinnings, empirical validation, and the consensus of academics on why geometric means are inappropriate for forecasting and estimating the cost of capital. 12 See Roger A. Morin, Regulatory Finance: Utilities Cost of Capital, chapter 11 (1994); Roger A. Morin, The New Regulatory Finance: Utilities Cost of Capital, chapter 4 (2006); Richard A Brealey, et al., Principles of Corporate Finance (8th ed. 2006). 13 See ORA Report. DWT v Exhibit Page 57 of 241

313 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Can you describe the prospective MRP study used in your CAPM analysis? A: Yes. I applied a prospective DCF analysis to the aggregate equity market using Value Line's VLIA software. The dividend yield on the dividend-paying stocks covered in Value Line s full database is currently 1.93 percent (VLIA 01/2015 edition), and the average projected long-term growth rate is 10 percent. Adding the dividend yield to the growth component produces an expected market return on aggregate equities of percent. Subtracting the risk-free rate of 4.80 percent from the latter, the implied risk premium is 7.13 percent over long-term U.S. Treasury bonds. This estimate is almost identical to the historical estimate of seven percent. The average of the historical MRP of seven percent and the prospective MRP of 7.1 percent is 7.05 percent, which I have rounded to seven percent, which is my final estimate of the MRP for purposes of implementing the CAPM. 14. Q: Dr. Morin, is your MRP estimate of seven percent consistent with the academic literature on the subject? A: Yes, it is, although at the upper end of the range. In their authoritative corporate finance textbook, Professors Brealey, Myers, and Allen 14 conclude from their review of the fertile literature on the MRP that a range of five percent to eight percent is reasonable for 14 Richard A. Brealey, Stewart C. Myers, and Paul Allen, Principles of Corporate Finance, 8 th Edition, Irwin McGraw-Hill, DWT v Exhibit Page 58 of 241

314 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) the MRP in the United States. My own survey of the MRP literature, which appears in Chapter 5 of my latest textbook, The New Regulatory Finance, is also quite consistent with this range. 15. Q: What is your risk premium estimate of the average risk utility s cost of equity using the CAPM approach? A: Inserting those input values into the CAPM equation, namely a risk-free rate of 4.8 percent, a beta of 0.75, and a MRP of seven percent, the CAPM estimate of the cost of common equity is: 4.8 percent x 7.0 percent = 10.1 percent. This estimate becomes 10.4 percent with flotation costs, discussed later in my testimony. 16. Q: Can you describe your application of the empirical version of the CAPM? A: There have been countless empirical tests of the CAPM to determine to what extent security returns and betas are related in the manner predicted by the CAPM. This literature is summarized in Chapter 6 of my latest book, The New Regulatory Finance. The results of the tests support the idea that beta is related to security returns, that the risk-return tradeoff is positive, and that the relationship is linear. The contradictory finding is that the riskreturn tradeoff is not as steeply sloped as the predicted CAPM. That is, empirical research has long shown that low-beta securities earn returns somewhat higher than the CAPM would predict, and high-beta securities earn less than predicted. A CAPM-based estimate of cost of capital underestimates the return required from low-beta securities and overstates the return required from high-beta securities, based on DWT v Exhibit Page 59 of 241

315 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) 1 2 the empirical evidence. This is one of the most well-known results in finance, and it is displayed graphically below A number of variations on the original CAPM theory have been proposed to explain this finding. The ECAPM makes use of these empirical findings. The ECAPM estimates the cost of capital with the equation: K = R F + α + β x (MRP-α ) where the symbol alpha, α, represents the constant of the risk-return line, MRP is the market risk premium (RM - RF), and the other symbols are defined as usual. Inserting the long-term risk-free rate as a proxy for the risk-free rate, an alpha in the range of one percent- two percent, and reasonable values of beta and the MRP in the above DWT v Exhibit Page 60 of 241

316 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) equation produces results that are indistinguishable from the following more tractable ECAPM expression: K = R F (R M - R F ) β (R M - R F ) An alpha range of one percent - two percent is somewhat lower than that estimated empirically. The use of a lower value for alpha leads to a lower estimate of the cost of capital for low-beta stocks such as regulated utilities. This is because the use of a long-term risk-free rate rather than a short-term risk-free rate already incorporates some of the desired effect of using the ECAPM. In other words, the long-term risk-free rate version of the CAPM has a higher intercept and a flatter slope than the short-term risk-free version which has been tested. This is also because the use of adjusted betas rather than the use of raw betas also incorporates some of the desired effect of using the ECAPM.15 Thus, it is reasonable to apply a conservative alpha adjustment. Appendix A contains a full discussion of the ECAPM, including its theoretical and empirical underpinnings. In short, the following equation provides a viable approximation to the observed relationship between risk and return, and provides the following cost of equity capital estimate: K = R F (R M - R F ) β (R M - R F ) 15 The regression tendency of betas to converge to 1.0 over time is very well known and widely discussed in the financial literature. As a result of this beta drift, several commercial beta producers adjust their forecasted betas toward 1.00 in an effort to improve their forecasts. Value Line, Bloomberg, and Merrill Lynch betas are adjusted for their long-term tendency to regress toward 1.0 by giving approximately 66% weight to the measured raw beta and approximately 33% weight to the prior value of 1.0 for each stock: β adjusted = β raw DWT v Exhibit Page 61 of 241

317 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Inserting 4.8 percent for the risk-free rate R F, a MRP of seven percent for (R M - R F ) and a beta of 0.75 in the above equation, the return on common equity is 10.5 percent. This estimate becomes 10.8 percent with flotation costs, discussed later in my testimony. 17. Q: Is the use of the CAPM consistent with the use of adjusted betas? A: Yes, it is. Some have argued that the use of the ECAPM is inconsistent with the use of adjusted betas, such as those supplied by Value Line, Bloomberg, and Morningstar. This is because the reason for using the ECAPM is to allow for the tendency of betas to regress toward the mean value of 1.00 over time, and, since Value Line betas are already adjusted for such trend, an ECAPM analysis results in double-counting. This argument is erroneous. Fundamentally, the ECAPM is not an adjustment, increase or decrease, in beta. The observed return on high beta securities is actually lower than that produced by the CAPM estimate. The ECAPM is a formal recognition that the observed risk-return tradeoff is flatter than predicted by the CAPM based on myriad empirical evidence. The ECAPM and the use of adjusted betas comprise two separate features of asset pricing. Even if a company s beta is estimated accurately, the CAPM still understates the return for low-beta stocks. Even if the ECAPM is used, the return for low-beta securities is understated if the betas are understated. Referring back to the previous graph, the ECAPM is a return (vertical axis) adjustment and not a beta (horizontal axis) adjustment. Both adjustments are necessary. Moreover, the use of adjusted betas compensates for interest rate sensitivity of utility stocks not captured by unadjusted betas. DWT v Exhibit Page 62 of 241

318 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Please summarize your CAPM estimates. A: The table below summarizes the common equity estimates obtained from the CAPM studies. CAPM Method ROE Traditional CAPM 10.4% Empirical CAPM 10.8% C. Historical Risk Premium Estimate 1. Q: Please describe your historical risk premium analysis of the electric utility industry using Treasury bond yields. A: A historical risk premium for the electric utility industry was estimated with an annual time series analysis applied to the utility industry as a whole over the period, using Standard and Poor s Utility Index as an industry proxy. The analysis is depicted on Table 2-2G. The risk premium was estimated by computing the actual realized return on equity capital for the S&P Utility Index for each year, using the actual stock prices and dividends of the index, and then subtracting the long-term Treasury bond return for that year. As shown on Table 2-2G, the average risk premium over the period was 5.7 percent over long-term Treasury bond yields. Given the risk-free rate of 4.8 percent, the implied cost of equity is 4.8 percent percent = 10.5 percent without flotation costs and 10.8 percent with the flotation cost allowance. DWT v Exhibit Page 63 of 241

319 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Dr. Morin, are risk premium studies widely used? A: Yes, they are. Risk premium analyses are widely used by analysts, investors, economists, and expert witnesses. Most college-level corporate finance and/or investment management texts, including Investments by Bodie, Kane, and Marcus, McGraw-Hill Irwin, 2002, which is a recommended textbook for CFA (Chartered Financial Analyst) certification and examination, contain detailed conceptual and empirical discussion of the risk premium approach. Risk premium analysis is typically recommended as one of the three leading methods of estimating the cost of capital. Professor Brigham s best-selling corporate finance textbook, for example, Corporate Finance: A Focused Approach, 4 th ed., South-Western, 2011, recommends the use of risk premium studies, among others. Techniques of risk premium analysis are widespread in investment community reports. Professional certified financial analysts are certainly well versed in the use of this method. Moreover, my historical risk 13 premium methodology is very similar to that used by California s ORA. 16 The only difference is that I rely on long-term Treasury yields instead of the yields on A-rated utility bonds. 3. Q: Are you concerned about the realism of the assumptions that underlie the historical risk premium method? A: No, I am not, for they are no more restrictive than the assumptions that underlie the DCF model or the CAPM. While it is true that the method looks backward in time and assumes that the risk premium is constant over time, these assumptions are not necessarily restrictive. By employing returns realized over long time periods rather than returns realized 16 See infra, III Q2 at 2-16 to DWT v Exhibit Page 64 of 241

320 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) over more recent time periods, investor return expectations and realizations converge. Realized returns can be substantially different from prospective returns anticipated by investors, especially when measured over short time periods. By ensuring that the risk premium study encompasses the longest possible period for which data are available, short-run periods during which investors earned a lower risk premium than they expected are offset by short-run periods during which investors earned a higher risk premium than they expected. Only over long time periods will investor return expectations and realizations converge, or else, investors would be reluctant to invest money. D. Allowed Risk Premiums 1. Q: Please describe your analysis of allowed risk premiums in the electric utility industry. A: To estimate the electric utility industry s cost of common equity, I also examined the historical risk premiums implied in the ROEs allowed by regulatory commissions for electric utilities over the period for which data were available, relative to the contemporaneous level of the long-term Treasury bond yield. This variation of the risk premium approach is reasonable because allowed risk premiums are presumably based on the results of market-based methodologies (DCF, Risk Premium, CAPM, etc.) presented to regulators in rate hearings and on the actions of objective unbiased investors in a competitive marketplace. Historical allowed ROE data are readily available over long periods on a quarterly basis from Regulatory Research Associates (now SNL) and easily verifiable from SNL publications and past commission decision archives. DWT v Exhibit Page 65 of 241

321 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) The average ROE spread over long-term Treasury yields was 5.6 percent over the entire period for which data were available from SNL. The graph below shows the year-by-year allowed risk premium. The escalating trend of the risk premium in response to lower interest rates and rising competition is noteworthy. A careful review of these ROE decisions relative to interest rate trends reveals a narrowing of the risk premium in times of rising interest rates, and a widening of the premium as interest rates fall. The following statistical relationship between the risk premium (RP) and interest rates (YIELD) emerges over the period: RP = YIELD R 2 = 0.51 The relationship is highly statistically significant 17 as indicated by the very high R 2. The graph below shows a clear inverse relationship between the allowed risk premium and interest rates as revealed in past ROE decisions. 17 The coefficient of determination R 2, sometimes called the goodness of fit measure, is a measure of the degree of explanatory power of a statistical relationship. It is simply the ratio of the explained portion to the total sum of squares. The higher R 2 the higher is the degree of the overall fit of the estimated regression equation to the sample data. DWT v Exhibit Page 66 of 241

322 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) 0.09 Risk Premium vs Treasury Bond Yields Risk Premium Inserting the current long-term Treasury bond yield of 4.8 percent in the above equation suggests a risk premium estimate of 6.1 percent, implying a cost of equity of 10.9 percent. 2. Q: Do investors take into account allowed returns in formulating their return expectations? 0.04 y = x R² = % 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Interest Rates A: Yes, they do. Investors do indeed take into account returns granted by various regulators in formulating their risk and return expectations, as evidenced by the availability of commercial publications disseminating such data, including Value Line and Regulatory Research Associates (now SNL). Allowed returns, while certainly not a precise DWT v Exhibit Page 67 of 241

323 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) indication of a particular company s cost of equity capital, are nevertheless important determinants of investor growth perceptions and investor expected returns. 3. Q: Please summarize your risk premium estimates. A: The table below summarizes the ROE estimates obtained from the two risk premium studies. 6 Risk Premium Method ROE 7 8 Historical Risk Premium Electric 10.8% Allowed Risk Premium 10.9% E. Need for Flotation Cost Adjustment 1. Q: Please describe the need for a flotation cost allowance. A: All the market-based estimates reported above include an adjustment for flotation costs. The simple fact of the matter is that issuing common equity capital is not free. Flotation costs associated with stock issues are exactly like the flotation costs associated with bonds and preferred stocks. Flotation costs are not expensed at the time of issue, and therefore must be recovered via a rate of return adjustment. This is done routinely for bond and preferred stock issues by most regulatory commissions, including FERC. Clearly, the common equity capital accumulated by the Company is not cost-free. The flotation cost allowance to the cost of common equity capital is discussed and applied in most corporate finance textbooks; it is unreasonable to ignore the need for such an adjustment. DWT v Exhibit Page 68 of 241

324 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Flotation costs are very similar to the closing costs on a home mortgage. In the case of issues of new equity, flotation costs represent the discounts that must be provided to place the new securities. Flotation costs have a direct and an indirect component. The direct component is the compensation to the security underwriter for his marketing/consulting services, for the risks involved in distributing the issue, and for any operating expenses associated with the issue (e.g., printing, legal, prospectus). The indirect component represents the downward pressure on the stock price as a result of the increased supply of stock from the new issue. The latter component is frequently referred to as market pressure. Investors must be compensated for flotation costs on an ongoing basis to the extent that such costs have not been expensed in the past, and therefore the adjustment must continue for the entire time that these initial funds are retained in the firm. Appendix B to my testimony discusses flotation costs in detail, and shows: (1) why it is necessary to apply an allowance of five percent to the dividend yield component of equity cost by dividing that yield by 0.95 (100 percent - five percent) to obtain the fair return on equity capital; (2) why the flotation adjustment is permanently required to avoid confiscation even if no further stock issues are contemplated; and (3) that flotation costs are only recovered if the rate of return is applied to total equity, including retained earnings, in all future years. By analogy, in the case of a bond issue, flotation costs are not expensed but are amortized over the life of the bond, and the annual amortization charge is embedded in the cost of service. The flotation adjustment is also analogous to the process of depreciation, which allows the recovery of funds invested in utility plant. The recovery of bond flotation expense DWT v Exhibit Page 69 of 241

325 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) continues year after year, irrespective of whether the Company issues new debt capital in the future, until recovery is complete, in the same way that the recovery of past investments in plant and equipment through depreciation allowances continues in the future even if no new construction is contemplated. In the case of common stock that has no finite life, flotation costs are not amortized. Thus, the recovery of flotation costs requires an upward adjustment to the allowed return on equity. A simple example will illustrate the concept. A stock is sold for $100, and investors require a 10 percent return, that is, $10 of earnings. But if flotation costs are five percent, the Company nets $95 from the issue, and its common equity account is credited by $95. In order to generate the same $10 of earnings to the shareholders, from a reduced equity base, it is clear that a return in excess of 10 percent must be allowed on this reduced equity base, here percent. According to the empirical finance literature discussed in Appendix B, total flotation costs amount to four percent for the direct component and one percent for the market pressure component, for a total of five percent of gross proceeds. This in turn amounts to approximately 30 basis points, depending on the magnitude of the dividend yield component. To illustrate, dividing the average expected dividend yield of around five percent for utility stocks by 0.95 yields 5.3 percent, which is 30 basis points higher. Sometimes, the argument is made that flotation costs are real and should be recognized in calculating the fair return on equity, but only at the time when the expenses are incurred. In other words, as the argument goes, the flotation cost allowance should not continue DWT v Exhibit Page 70 of 241

326 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) indefinitely, but should be made in the year in which the sale of securities occurs, with no need for continuing compensation in future years. This argument is valid only if the Company has already been compensated for these costs. If not, the argument is without merit. My own recommendation is that investors be compensated for flotation costs on an on-going basis rather than through expensing, and that the flotation cost adjustment continue for the entire time that these initial funds are retained in the firm. There are several sources of equity capital available to a firm including: common equity issues, conversions of convertible preferred stock, dividend reinvestment plans, employees savings plans, warrants, and stock dividend programs. Each carries its own set of administrative costs and flotation cost components, including discounts, commissions, corporate expenses, offering spread, and market pressure. The flotation cost allowance is a composite factor that reflects the historical mix of sources of equity. The allowance factor is a build-up of historical flotation cost adjustments associated with and traceable to each component of equity at its source. It is impractical and prohibitively costly to start from the inception of a company and determine the source of all present equity. A practical solution is to identify general categories and assign one factor to each category. My recommended flotation cost allowance is a weighted average cost factor designed to capture the average cost of various equity vintages and types of equity capital raised by the Company. DWT v Exhibit Page 71 of 241

327 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Dr. Morin, can you please elaborate on the market pressure component of flotation cost? A: The indirect component, or market pressure component of flotation costs represents the downward pressure on the stock price as a result of the increased supply of stock from the new issue, reflecting the basic economic fact that when the supply of securities is increased following a stock or bond issue, the price falls. The market pressure effect is real, tangible, measurable, and negative. According to the empirical finance literature the market pressure component of the flotation cost adjustment is approximately one percent of the gross proceeds of an issuance. The announcement of the sale of large blocks of stock produces a decline in a company s stock price, as one would expect given the increased supply of common stock. 3. Q: Is a flotation cost adjustment required for a company whose marketto-book ratio exceeds one? A: Yes, it is. It is sometimes alleged that a flotation cost allowance is inappropriate if the utility s common stock is trading above book value. This argument, however, fails to address the simple fact that, in issuing common stock, a company s common equity account is credited by an amount less than the market value of the issue. Therefore, the company must earn slightly more on its reduced rate base to produce a return equal to that required by shareholders. The stock s M/B ratio is irrelevant because flotation costs are present, irrespective of whether the stock trades above, below, or at book value. DWT v Exhibit Page 72 of 241

328 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Is a flotation cost adjustment required for an operating subsidiary like Liberty Utilities that does not trade publicly? A: Yes, it is. It is sometimes alleged that a flotation cost allowance is inappropriate if the utility is a subsidiary whose equity capital is obtained from its owner, in this case, APUC. This objection is unfounded since the parent-subsidiary relationship does not eliminate the costs of a new issue, but merely transfers them to the parent. It would be unfair and discriminatory to subject parent shareholders to dilution while individual shareholders are absolved from such dilution. Fair treatment must consider that, if the utility-subsidiary had gone to the capital markets directly, flotation costs would have been incurred. 10 IV. SUMMARY AND RECOMMENDATION ON COST OF EQUITY Q: Please summarize your results and recommendation. A: To arrive at my final recommendation, I performed DCF analyses on two surrogates for Liberty Utilities: a group of investment-grade dividend-paying combination electric and gas utilities and a group of made up of Value Line s Western Electric group. I also performed four risk premium analyses. For the first two risk premium studies, I applied the CAPM and an empirical approximation of the CAPM using current market data. The other two risk premium analyses were performed on historical and allowed risk premium data from electric utility industry aggregate data, using the forecast yield on long-term utility bonds. The results are summarized in the table below. DWT v Exhibit Page 73 of 241

329 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) STUDY ROE Traditional CAPM 10.4% Empirical CAPM 10.8% Hist. Risk Premium Elec Utility Industry 10.5% Allowed Risk Premium 10.9% DCF Combination Elec & Gas Utilities Value Line Growth 9.2% DCF Combination Elec & Gas Utilities Analysts Growth 9.4% DCF Value Line Western Electrics Value Line Growth 9.2% DCF Value Line Western Electrics Analysts Growth 9.5% The median, average, midpoint, and truncated mean results are all 10 percent. The truncated average removes the outlier and is computed by removing the high and low estimates from the computation of the average. As noted earlier, if the dividend yield component of the DCF model is calculated over a longer period rather than on a current basis as the ORA advocates, the DCF results are 40 basis points higher. As shown on the table below, this in turn raises the average result from all the methodologies by 20 basis points, from 10 percent to 10.2 percent. STUDY ROE Traditional CAPM 10.4% Empirical CAPM 10.8% Hist. Risk Premium Elec Utility Industry 10.5% Allowed Risk Premium 10.9% DCF Combination Elec & Gas Utilities Value Line Growth 9.6% DCF Combination Elec & Gas Utilities Analysts Growth 9.8% DCF Value Line Western Electrics Value Line Growth 9.6% DCF Value Line Western Electrics Analysts Growth 9.9% DWT v Exhibit Page 74 of 241

330 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) The median, average, and midpoint results are all 10.2 percent, and the truncated mean is 10.3 percent. I stress that no one individual method provides an exclusive foolproof formula for determining a fair return, but each method provides useful evidence so as to facilitate the exercise of an informed judgment. Reliance on any single method or preset formula is hazardous when dealing with investor expectations. Moreover, the advantage of using several different approaches is that the results of each one can be used to check the others. Thus, the results shown in the above summary tables must be viewed as a whole rather than each as a stand-alone. It would be inappropriate to select any particular number from the summary tables and infer the cost of common equity from that number alone. From these results taken as a whole, I conclude that a ROE of 10.1 percent is reasonable for the average risk electric utility. 2. Q: Should the cost of equity estimates be adjusted upward to account for Liberty Utilities being more risky than the average electric utility? A: Yes, they should. In view of the Company s massive capital spending program relative to its size over the next five years and its very small size relative to the peer group, as discussed below, I believe that a fair and reasonable ROE for the Company is 10.5 percent. DWT v Exhibit Page 75 of 241

331 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Please comment on Liberty Utilities investment risks relative to other utilities. A: Two major factors drive Liberty Utilities higher risk profile relative to other utilities: 1) the Company s dependence on a huge capital spending program requiring external financing (a.k.a. construction risk), and 2) its very small size. A. Construction Risk 1. Q: Please comment on the construction risks faced by Liberty Utilities. A: The term construction risk refers to the financial risks caused by the magnitude of a company s capital budget relative to its size and its cash flow generating ability. Capital expenditures to meet anticipated increases in demand, refurbish old infrastructure, and achieve renewable energy standards represent an important source of risk. On the one hand, anticipated increases in demand are more difficult to forecast than existing demand. Because of the relatively long lead times associated with utility planning and construction of new plant and infrastructure there is significant risk that demand will be less than the level forecasted when the new capital investment was planned. On the other hand, a large construction program increases both financial and regulatory risks. Liberty Utilities has a massive construction program relative to its size, nearly $101 million scheduled capital spending over the next five years. To place this number in perspective, Liberty Utilities rate base of $220 million would increase by almost 50 percent over the next five years. Or to put it another way, the Company s $101 million capital spending over the next five years almost equals its common equity ownership capital of some $110 million. DWT v Exhibit Page 76 of 241

332 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Liberty Utilities ability (through its parent) to tap capital markets and attract funds on reasonable terms occurs at a crucial point in time when Liberty Utilities has an ambitious capital expenditures program and requires external financing. Liberty Utilities massive construction requirements also have a substantial impact on its financial risk. Liberty Utilities will require substantial external financing over the next few years. It is imperative Liberty Utilities has access to capital funds at reasonable terms and conditions. Liberty Utilities must secure outside funds through its parent company from capital markets to finance new required capacity, irrespective of capital market conditions, interest rate conditions and the quality consciousness of market participants. Construction is one of the key determinants of credit quality, and hence capital costs. The construction budget relative to internal cash generation is a key quantitative determinant of financial risk. Liberty Utilities will need to rely heavily on capital markets to finance its construction program. On debt markets, construction is one of several key determinants of credit quality and, hence, of capital costs. Company future construction plans are scrutinized by bond rating agencies before assessing credit quality. The construction budget in relation to internal cash generation is a key quantitative determinant of credit quality, along with construction expenditures as a proportion of capitalization. Construction to capitalization and common equity ratios are also analyzed by investors and become key determinants of capital costs and funds availability. More generally, the empirical finance literature has demonstrated clearly that construction is a key determinant of a utility s capital costs. DWT v Exhibit Page 77 of 241

333 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Because of Liberty Utilities large construction program over the next few years, rate relief requirements and regulatory treatment uncertainty will increase regulatory risks as well. Generally, regulatory risks include approval risks, lags and delays, potential rate base exclusions, and potential disallowances. Continued regulatory support from the Commission will be required. Reviews of the economic and environmental aspects of new construction can consume as much as one year before approval or denial. Uncertainty of approval increases forecasting and planning risks and complicates the utility s ability to devise an optimum transmission/distribution system. Regulatory approval for financings required for new construction may also be required, injecting additional risks. B. Size Effect 1. Q: Please comment on the Company s very small size and its effect on risk. A: The Company s very small size must also be considered in arriving at the cost of common equity. Liberty Utilities possesses very small revenue and asset bases, both in absolute terms and relative to the other electric utilities in the comparable group. Investment risk increases as company size diminishes, all else remaining constant. The size phenomenon is well documented in the finance literature, and is fully discussed in Chapter 6 of my book The New Regulatory Finance and is also fully discussed in the Morningstar (formerly Ibbotson) Valuation 2014 Classic Yearbook. Small companies have very different returns than large ones and on average those returns have been higher. The greater risk of small stocks does not fully account for their higher returns over many historical periods. The average small stock premium is well in DWT v Exhibit Page 78 of 241

334 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) excess of that of the average stock, more than could be expected by risk differences alone, suggesting that the cost of equity for small stocks is considerably larger than for large capitalization stocks. In addition to earning the highest average rates of return, small stocks also have the highest volatility, as measured by the standard deviation of returns. 2. Q: You stated earlier in your testimony that you adjusted your ROE findings to account for Liberty Utilities higher level of risk compared to the industry. Would you please explain how you derived the magnitude of this adjustment? A: Yes. I increased the ROE of 10.1 percent derived from two samples of companies representative of the electric utility industry by 40 basis points (0.40 percent), from 10.1 percent to 10.5 percent in order to reflect the higher relative risk of the Company associated with its very small size and massive capital spending program relative to its size. The 40 basis points adjustment is based on three reference points: 1) bond yield differentials between utility bonds rated A and those rated BBB, 2) observed beta differentials, and 3) the empirical findings of the vast literature on the size effect on risk. Assuming that the Company s bonds would be rated at most BBB on account of the very small size of the Company, I examined the difference in yield between utility bonds rated A and those rated BBB for my first reference point. The historical yield differential between A rated and BBB rated utility bonds has been approximately 30 basis points in the past three months. For the second reference point, the CAPM formula was referenced to approximate the return (cost of equity) differences implied by the differences in the betas between the average DWT v Exhibit Page 79 of 241

335 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) electric utility company and Liberty Utilities. The basic form of the CAPM, as discussed earlier, states that the return differential is given by the differential in beta times the MRP. To the extent that the Company s beta would be approximately 0.07 higher than the electric utility industry average, that is, one standard deviation higher than the average, the return differential implied by the difference of 0.07 in beta is given by 0.07 times the MRP. Using an estimate of seven percent for the MRP discussed earlier in my testimony in implementing the CAPM, the return adjustment is 7.0 x.07 = 49 or approximately 50 basis points. In summary, the reference points suggest an upward ROE adjustment for Liberty Utilities, based on risk, of 30 and 50 basis points, respectively. Based on all these considerations, I estimate the risk premium to be 40 basis points, the average of the two reference points. 3. Q: Dr. Morin, what is your final conclusion regarding Liberty Utilities cost of common equity capital? A: Based on the results of all my analyses, the application of my professional judgment, and the risk circumstances of Liberty Utilities, it is my opinion that a just and reasonable ROE for Liberty Utilities electric utility operations in the State of California at this time is percent. 4. Q: Is there a relationship between authorized ROE and financial risk? A: There certainly is. The strength of that relationship is amplified for smaller utilities like Liberty Utilities. A low authorized ROE increases the likelihood the utility will have to rely increasingly on debt financing for its capital needs. This creates the specter of a DWT v Exhibit Page 80 of 241

336 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) spiraling cycle that further increases risks to both equity and debt investors; the resulting increase in financing costs is ultimately borne by the utility s customers through higher capital costs and rates of returns. 5. Q: Is Liberty Utilities financial risk impacted by the authorized ROE? A: Yes, it is. A low ROE increases the likelihood that Liberty Utilities will have to rely on debt financing for its capital needs. As the Company relies more on debt financing, its capital structure becomes more leveraged. Since debt payments are a fixed financial obligation to the utility, this decreases the operating income available for dividend growth. Consequently, equity investors face greater uncertainty about the future dividend potential of the firm. As a result, the Company s equity becomes a riskier investment. The risk of default on the Company s bonds also increases, making the utility s debt a riskier investment. This increases the cost to the utility from both debt and equity financing and increases the possibility the Company will not have access to the capital markets for its outside financing needs, or if so, at prohibitive costs. 6. Q: If capital market conditions change significantly between the date of filing your prepared testimony and the date oral testimony is presented, would this cause you to revise your estimated cost of equity? A: Yes. Interest rates and security prices do change over time, and risk premiums change also, although much more sluggishly. If substantial changes were to occur between the filing date and the time my oral testimony is presented, I will update my testimony accordingly. DWT v Exhibit Page 81 of 241

337 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 2 Cost of Capital/Return on Equity/Rate of Return Chapter 2 Return on Equity (Dr. Roger A. Morin) Q: Does this conclude your direct testimony? A: Yes, it does. DWT v Exhibit Page 82 of 241

338 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 2 Combination Elec & Gas Utilities TABLE 2-2A DCF Analysis Value Line Growth Rates PAGE 1 OF 2 (1) (2) (3) Current Projected Dividend EPS Line No. Company Name Yield Growth Line No. 1 Alliant Energy Ameren Corp Avista Corp Black Hills CenterPoint Energy CMS Energy Corp Consol. Edison Dominion Resources DTE Energy Duke Energy Empire Dist. Elec Entergy Corp Integrys Energy MGE Energy Northeast Utilities NorthWestern Corp Pepco Holdings PG&E Corp Public Serv. Enterprise SCANA Corp Sempra Energy TECO Energy UIL Holdings Vectren Corp Wisconsin Energy Xcel Energy Inc Notes: Column 2, 3: Value Line Investment Analyzer, 01/ Page 83 of 241

339 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 2 Combination Elec & Gas Utilities TABLE 2-2A DCF Analysis Value Line Growth Rates PAGE 2 OF 2 (1) (2) (3) (4) (5) (6) Current Projected % Expected Line Dividend EPS Divid Cost of Line No. Company Name Yield Growth Yield Equity ROE No. 1 Alliant Energy Ameren Corp Avista Corp Black Hills CenterPoint Energy CMS Energy Corp Consol. Edison Dominion Resources DTE Energy Duke Energy Empire Dist. Elec Entergy Corp Integrys Energy MGE Energy Northeast Utilities NorthWestern Corp Pepco Holdings PG&E Corp Public Serv. Enterprise SCANA Corp Sempra Energy TECO Energy UIL Holdings Vectren Corp Wisconsin Energy Xcel Energy Inc AVERAGE AVERAGE w/o Integrys Energy Notes: Column 1, 2, 3: Value Line Investment Analyzer, 01/ Column 4 = Column 2 times (1 + Column 3/100) Column 5 = Column 4 + Column Column 6 = (Column 4 /0.95) + Column Exelon eliminated, regulated revenues < 50% 36 Page 84 of 241

340 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Combination Elec & Gas Utilities DCF Analysis Analysts' Growth Forecasts EXHIBIT 2, CHAPTER 2 TABLE 2-2B PAGE 1 OF 2 (1) (2) (3) Current Analysts' Dividend Growth Line No. Company Name Yield Forecast Line No. 1 Alliant Energy Ameren Corp Avista Corp Black Hills CenterPoint Energy CMS Energy Corp Consol. Edison Dominion Resources DTE Energy Duke Energy Empire Dist. Elec Entergy Corp Integrys Energy MGE Energy Northeast Utilities NorthWestern Corp Pepco Holdings PG&E Corp Public Serv. Enterprise SCANA Corp Sempra Energy TECO Energy UIL Holdings Vectren Corp Wisconsin Energy Xcel Energy Inc Notes: Column 2, 3: Value Line Investment Analyzer, 01/ Exelon eliminated, regulated revenues < 50% 30 Page 85 of 241

341 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Combination Elec & Gas Utilities DCF Analysis Analysts' Growth Forecasts EXHIBIT 2, CHAPTER 2 TABLE 2-2B PAGE 2 OF 2 (1) (2) (3) (4) (5) (6) Current Analysts' % Expected Line Dividend Growth Divid Cost of Line No. Company Name Yield Forecast Yield Equity ROE No. 1 Alliant Energy Ameren Corp Avista Corp Black Hills CenterPoint Energy CMS Energy Corp Consol. Edison Dominion Resources DTE Energy Duke Energy Empire Dist. Elec Entergy Corp Integrys Energy MGE Energy Northeast Utilities NorthWestern Corp Pepco Holdings PG&E Corp Public Serv. Enterprise SCANA Corp Sempra Energy TECO Energy UIL Holdings Vectren Corp Wisconsin Energy Xcel Energy Inc AVERAGE AVERAGE w/o Entergy Notes: Column 1, 2: Value Line Investment Analyzer, 01/ Column 3: Yahoo Finance Analyst long-term earnings growth forecast, 01/ Column 4 = Column 2 times (1 + Column 3/100) Column 5 = Column 4 + Column Column 6 = (Column 4 /0.95) + Column 3 36 Page 86 of 241

342 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Value Line Western Electric Utilities DCF Analysis: Value Line Growth Projections EXHIBIT 2, CHAPTER 2 TABLE 2-2C PAGE 1 OF 2 Company % Current Proj EPS Divid Growth Line Yield Line No. (1) (2) No. 1 Avista Corp Black Hills Edison Int'l El Paso Electric Hawaiian Elec IDACORP Inc NorthWestern Corp PG&E Corp Pinnacle West Capital PNM Resources Portland General Sempra Energy Xcel Energy Inc Notes: Column 1, 2: Value Line Investment Analyzer, 01/ Page 87 of 241

343 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 2 Value Line Western Electric Utilities TABLE 2-2C DCF Analysis: Value Line Growth Projections PAGE 2 OF 2 Company % Current Proj EPS % Expected Cost of ROE Divid Growth Divid Equity Line Yield Yield Line No. (1) (2) (3) (4) (5) No. 1 Avista Corp Black Hills Edison Int'l El Paso Electric Hawaiian Elec IDACORP Inc NorthWestern Corp PG&E Corp Pinnacle West Capital PNM Resources Portland General Sempra Energy Xcel Energy Inc AVERAGE AVERAGE w/o IDACORP and Edison Notes: Column 1, 2: Value Line Investment Analyzer, 01/ Column 3 = Column 1 times (1 + Column 2/100) Column 4 = Column 3 + Column Column 5 = (Column 3 /0.95) + Column 2 22 Page 88 of 241

344 LIBERTY UTILITES (CALPECO ELECTRIC) LLC EXHIBIT 2, CHAPTER 2 Value Line Western Electric Utilities TABLE 2-2D DCF Analysis: Analysts' Growth Projections PAGE 1 OF 3 Company % Current Proj EPS Divid Growth Line Yield Line No. (1) (2) No. 1 Avista Corp Black Hills Edison Int'l El Paso Electric Hawaiian Elec IDACORP Inc NorthWestern Corp PG&E Corp Pinnacle West Capital PNM Resources Portland General Sempra Energy Xcel Energy Inc Notes: Column 1: Value Line Investment Analyzer, 01/ Column 2: Yahoo Finance Analyst Long-Term Growth Forecast, 01/ Page 89 of 241

345 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Value Line Western Electric Utilities DCF Analysis: Analysts' Growth Projections EXHIBIT 2, CHAPTER 2 TABLE 2-2D PAGE 2 OF 3 Company % Current Proj EPS % Expected Cost of ROE Divid Growth Divid Equity Line Yield Yield Line No. (1) (2) (3) (4) (5) No. 1 Avista Corp Black Hills Edison Int'l El Paso Electric Hawaiian Elec IDACORP Inc NorthWestern Corp PG&E Corp Pinnacle West Capital PNM Resources Portland General Sempra Energy Xcel Energy Inc AVERAGE Notes: Column 1: Value Line Investment Analyzer, 01/ Column 2: Yahoo Finance Analyst Long-Term Growth Forecast, 01/ Column 3 = Column 1 times (1 + Column 2/ Column 4 = Column 3 + Column Column 5 = (Column 3 /0.95) + Column 2 22 Page 90 of 241

346 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Current vs Average Dividend Yield EXHIBIT 2, CHAPTER 2 TABLE 2-2D PAGE 3 OF 3 Company Name % Avg % Curr Line Divid Yld Divid Yld Line No. 12 Months No. 1 Alliant Energy 3.40% 3.01% 1 2 Ameren Corp. 3.93% 3.62% 2 3 Avista Corp. 4.03% 3.66% 3 4 Black Hills 2.97% 3.13% 4 5 CenterPoint Energy 4.40% 4.44% 5 6 CMS Energy Corp. 3.62% 3.19% 6 7 Consol. Edison 4.26% 3.82% 7 8 Dominion Resources 3.44% 3.23% 8 9 DTE Energy 3.64% 3.23% 9 10 Duke Energy 4.16% 3.78% Empire Dist. Elec. 3.93% 3.54% Entergy Corp. 4.35% 3.76% Exelon Corp. 3.78% 3.39% Integrys Energy 4.09% 3.45% MGE Energy 2.70% 2.46% Northeast Utilities 3.43% 3.10% NorthWestern Corp. 3.27% 2.91% Pepco Holdings 4.65% 3.96% PG&E Corp. 3.74% 3.29% Public Serv. Enterprise 4.03% 3.60% SCANA Corp. 3.96% 3.49% Sempra Energy 2.68% 2.47% TECO Energy 4.70% 4.25% UIL Holdings 4.29% 3.89% Vectren Corp. 3.65% 3.20% Wisconsin Energy 3.52% 3.13% Xcel Energy Inc. 3.83% 3.41% AVERAGE 3.79% 3.42% 29 Source: Value Line Investment Analyzer 1/2015 Page 91 of 241

347 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Combination Elec & Gas Utilities Beta Estimates EXHIBIT 2, CHAPTER 2 TABLE 2-2E PAGE 1 OF 2 (1) (2) Line Line No. Company Name Beta No. 1 Alliant Energy Ameren Corp Avista Corp Black Hills CenterPoint Energy CMS Energy Corp Consol. Edison Dominion Resources DTE Energy Duke Energy Empire Dist. Elec Entergy Corp Integrys Energy MGE Energy Northeast Utilities NorthWestern Corp Pepco Holdings PG&E Corp Public Serv. Enterprise SCANA Corp Sempra Energy TECO Energy UIL Holdings Vectren Corp Wisconsin Energy Xcel Energy Inc AVERAGE Source: Value Line Investment Analyzer 01/ Page 92 of 241

348 LIBERTY UTILITES (CALPECO ELECTRIC) LLC Value Line Western Electric Utilities EXHIBIT 2, CHAPTER 2 TABLE 2-2E PAGE 2 OF 2 (1) (2) Line Line No. Company Name Beta No. 1 Avista Corp Black Hills Edison Int'l El Paso Electric Hawaiian Elec IDACORP Inc NorthWestern Corp PG&E Corp Pinnacle West Capital PNM Resources Portland General Sempra Energy Xcel Energy Inc AVERAGE Source: Value Line Investment Analyzer, 01/ Page 93 of 241

349 LIBERTY UTILITES (CALPECO ELECTRIC) LLC MRP Calculations EXHIBIT 2, CHAPTER 2 TABLE 2-2F PAGE 1 OF 1 Line Line No. (1) (2) No. 1 Dividend Yield (spot times (1+g) D/P Forecast Growth (DPS, EPS) g DCF Return S&P 500 K Risk-Free Rate R f DCF Market Risk Premium DCF MRP Ibbotson Historical Mkt Risk Premium HIST MRP Average Mkt Risk Premium AVG MRP Source: Value Line Investment Analyzer 01/ Page 94 of 241

350 Exhibit 2, Chapter 2 Table 2-2G LIBERTY UTILITES (CALPECO ELECTRIC) LLC 2014 Utility Industry Historical Risk Premium (1) (2) (3) (4) (5) (6) (7) Utility Long-Term 20 year S&P Equity Government Maturity Bond Utility Risk Bond Bond Total Index Premium Line No. Year Yield Value Gain/Loss Interest Return Return Over Bond Returns Line No % 1, % 1, % -0.54% % % % % % % 1, % % % % 1, % 76.63% 71.10% % 1, % 20.69% 14.66% % % % % % 1, % 22.45% 16.44% % 1, % 11.26% 4.58% % 1, % % % % % % % % % 15.39% 19.95% % % 46.07% 43.92% % 1, % 18.03% 15.24% % 1, % 53.33% 43.15% % % 1.26% 1.38% % % % % % 1, % 4.01% 0.63% % 1, % 31.39% 24.46% % % 3.25% 3.57% % % 18.63% 23.32% % % 19.25% 18.08% % 1, % 7.85% 4.29% % 1, % 24.72% 21.67% % % 11.26% 12.00% % % 5.06% 9.29% % 1, % 6.36% -0.31% % % 40.70% 45.67% % % 7.49% 12.20% % 1, % 20.26% 6.46% % % 29.33% 30.25% % 1, % -2.44% -9.34% % % 12.36% 11.37% % % 15.91% 12.54% % % 4.67% 3.98% % % -4.48% -8.33% % % -0.63% 6.92% % % 10.32% 9.62% % % % % % 1, % 16.56% 5.35% % 1, % 2.41% -9.98% % % 8.15% 2.41% % % % % % % % % % % 44.49% 41.33% % 1, % 31.81% 14.94% % % 8.64% 9.53% % % -3.71% -2.99% % % 13.58% 14.30% % % 15.08% 19.04% % % 11.74% 9.11% % 1, % 26.52% -6.06% % % 20.01% 16.75% % 1, % 26.04% 12.00% % 1, % 33.05% 2.42% 55 Page 95 of 241

351 Exhibit 2, Chapter 2 Table 2-2G % 1, % 28.53% 2.31% % % -2.92% 1.07% % 1, % 18.27% 8.89% % 1, % 47.80% 28.64% % % -2.57% -8.05% % 1, % 14.61% -5.72% % 1, % 8.10% 0.38% % 1, % 14.41% -0.82% % % -7.94% -0.12% % 1, % 42.15% 11.56% % % 3.14% 4.74% % 1, % 24.69% 9.77% % 1, % 14.82% 1.53% % % -8.85% 0.89% % 1, % 59.70% 38.05% % % % % % 1, % % % % % 26.11% 24.63% % 1, % 24.22% 15.68% % 1, % 16.79% 8.97% % % 20.95% 20.13% % 1, % 19.36% 9.08% % 1, % % % % % 11.94% 29.07% % 1, % 5.49% -5.03% % 1, % 19.88% % % 1, % 1.99% -1.60% % % 13.26% 28.59% % 1, % 28.61% 20.15% Mean 5.7% Source: Bloomberg Web site: Standard & Poors Utility Stock Index % Annual Change, Jan. to Dec Dec. Bond yields from Ibbotson SBBI 2014 Classic Yearbook (Morningstar) Table A-9 Long-Term Government Bonds Yields 89 Page 96 of 241

352 Exhibit 2, Chapter 2 Table 2-2H Allowed Equity Risk Premium Authorized Indicated Treasury Electric Risk Line Date Bond Yield 1 Returns 2 Premium (1) (2) (3) % 13.93% 6.0% % 12.99% 3.8% % 12.79% 3.6% % 12.97% 4.8% % 12.70% 4.3% % 12.55% 5.3% % 12.09% 4.8% % 11.41% 4.9% % 11.34% 3.4% % 11.55% 5.5% % 11.39% 4.7% % 11.40% 5.4% % 11.66% 6.2% % 10.77% 4.0% % 11.43% 5.9% % 11.09% 5.3% % 11.16% 6.3% % 10.97% 5.9% % 10.75% 5.9% % 10.54% 5.9% % 10.36% 5.5% % 10.36% 5.9% % 10.46% 7.4% % 10.48% 5.9% % 10.34% 6.2% % 10.29% 7.8% % 10.17% 7.8% % 10.02% 6.4% % 10.00% 6.7% Average 5.75% 11.31% 5.6% Sources: 1 Morninstar 2014 Classic Yearbook Table A-9 2 SNL (Regulatory Research Associates), Regulatory Focus. 10/10/2014 Note: Treasury bond yield for 2014 is an estimate Page 97 of 241

353 Exhibit 2, Chapter 2 Table 2-2H 9.0% 8.0% Allowed Risk Premium % 6.0% 5.0% 4.0% 3.0% 2.0% Page 98 of 241

354 Exhibit 2, Chapter 2 Table 2-2H 0.09 Risk Premium vs Treasury Bond Yields Risk Premium y = x R² = % 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% Interest Rates IF YIELD = 4.80% THEN Risk Premiu 6.10% Cost of Equity 10.90% Page 99 of 241

355 Exhibit 2 - Chapter 2 Attachment 2-2A Page 100 of 241

356 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 1 of 15 Attachment 2-2A CAPM, EMPIRICAL CAPM The Capital Asset Pricing Model (CAPM) is a fundamental paradigm of finance. Simply put, the fundamental idea underlying the CAPM is that risk-averse investors demand higher returns for assuming additional risk, and higher-risk securities are priced to yield higher expected returns than lower-risk securities. The CAPM quantifies the additional return, or risk premium, required for bearing incremental risk. It provides a formal risk-return relationship anchored on the basic idea that only market risk matters, as measured by beta. According to the CAPM, securities are priced such that their: EXPECTED RETURN = RISK-FREE RATE + RISK PREMIUM Denoting the risk-free rate by R F and the return on the market as a whole by R M, the CAPM is: K = R F + β(r M - R F ) (1) Equation 1 is the CAPM expression which asserts that an investor expects to earn a return, K, that could be gained on a risk-free investment, R F, plus a risk premium for assuming risk, proportional to the security's market risk, also known as beta, β, and the market risk premium, (R M - R F ), where R M is the market return. The market risk premium (R M - R F ) can be abbreviated MRP so that the CAPM becomes: K = R F + β x MRP (2) The CAPM risk-return relationship is depicted in the figure below and is typically labeled as the Security Market Line (SML) by the investment community. DWT v Page 101 of 241

357 CAPM and Risk - Return in Capital Markets Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 2 of 15 Return Average Stock Market Risk Premium SML R f R f = Risk-free rate Treasury Bills Corporate Bonds Utility Stock Average Stock Beta Risk A myriad empirical tests of the CAPM have shown that the risk-return tradeoff is not as steeply sloped as that predicted by the CAPM, however. That is, low-beta securities earn returns somewhat higher than the CAPM would predict, and high-beta securities earn less than predicted. In other words, the CAPM tends to overstate the actual sensitivity of the cost of capital to beta: low-beta stocks tend to have higher returns and high-beta stocks tend to have lower risk returns than predicted by the CAPM. The difference between the CAPM and the type of relationship observed in the empirical studies is depicted in the figure below. This is one of the most widely known empirical findings of the finance literature. This extensive literature is summarized in Chapter 13 of Dr. Morin s book [The New Regulatory Finance, Public Utilities Report Inc., Arlington, VA, 2006]. DWT v Page 102 of 241

358 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 3 of 15 Risk vs Return Theory vs. Practice Return Theory Average Return CAPM lower than Empirical Line for low Beta Stocks Market Risk Premium Practice Risk-Free Beta < 1.0 Beta = 1.0 Beta A number of refinements and expanded versions of the original CAPM theory have been proposed to explain the empirical findings. These revised CAPMs typically produce a risk-return relationship that is flatter than the standard CAPM prediction. The following equation makes use of these empirical findings by flattening the slope of the risk-return relationship and increasing the intercept: K = R F + + (MRP- ) (3) where is the "alpha" of the risk-return line, a constant determined empirically, and the other symbols are defined as before. Alternatively, Equation 3 can be written as follows: K = R F + a MRP + (1-a) β MRP (4) where a is a fraction to be determined empirically. Comparing Equations 3 and 4, it is easy to see that alpha equals a times MRP, that is, =axmrp DWT v Page 103 of 241

359 Theoretical Underpinnings Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 4 of 15 The obvious question becomes what would produce a risk return relationship which is flatter than the CAPM prediction, or in other words, how do you explain the presence of alpha in the above equation. The exclusion of variables aside from beta would produce this result. Three such variables are noteworthy: dividend yield, skewness, and hedging potential. The dividend yield effects stem from the differential taxation on corporate dividends and capital gains. The standard CAPM does not consider the regularity of dividends received by investors. Utilities generally maintain high dividend payout ratios relative to the market, and by ignoring dividend yield, the CAPM provides biased cost of capital estimates. To the extent that dividend income is taxed at a higher rate than capital gains, investors will require higher pre-tax returns in order to equalize the after-tax returns provided by high-yielding stocks (e.g. utility stocks) with those of low-yielding stocks. In other words, high-yielding stocks must offer investors higher pre-tax returns. Even if dividends and capital gains are undifferentiated for tax purposes, there is still a tax bias in favor of earnings retention (lower dividend payout), as capital gains taxes are paid only when gains are realized. Empirical studies by Litzenberger and Ramaswamy (1979) and Litzenberger et al. (1980) find that security returns are positively related to dividend yield as well as to beta. These results are consistent with after-tax extensions of the CAPM developed by Breenan (1973) and Litzenberger and Ramaswamy (1979) and suggest that the relationship between return, beta, and dividend yield should be estimated and employed to calculate the cost of equity capital. As far as skewness is concerned, investors are more concerned with losing money than with total variability of return. If risk is defined as the probability of loss, it appears more logical to measure risk as the probability of achieving a return which is below the expected return. The traditional CAPM provides downward-biased estimates of cost of capital to the extent that these skewness effects are significant. As shown by Kraus and Litzenberger (1976), expected return depends on both on a stock's systematic risk (beta) and the systematic skewness. Empirical studies by Kraus and Litzenberger (1976), Friend, Westerfield, and Granito (1978), and Morin (1981) found that, in addition to beta, DWT v Page 104 of 241

360 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 5 of 15 skewness of returns has a significant negative relationship with security returns. This result is consistent with the skewness version of the CAPM developed by Rubinstein (1973) and Kraus and Litzenberger (1976). This is particularly relevant for public utilities whose future profitability is constrained by the regulatory process on the upside and relatively unconstrained on the downside in the face of socio-political realities of public utility regulation. The process of regulation, by restricting the upward potential for returns and responding sluggishly on the downward side, may impart some asymmetry to the distribution of returns, and is more likely to result in utilities earning less, rather than more, than their cost of capital. The traditional CAPM provides downward-biased estimates of cost of capital to the extent that these skewness effects are significant. As far as hedging potential is concerned, investors are exposed to another kind of risk, namely, the risk of unfavorable shifts in the investment opportunity set. Merton (1973) shows that investors will hold portfolios consisting of three funds: the risk-free asset, the market portfolio, and a portfolio whose returns are perfectly negatively correlated with the riskless asset so as to hedge against unforeseen changes in the future risk-free rate. The higher the degree of protection offered by an asset against unforeseen changes in interest rates, the lower the required return, and conversely. Merton argues that low beta assets, like utility stocks, offer little protection against changes in interest rates, and require higher returns than suggested by the standard CAPM. Another explanation for the CAPM's inability to fully explain the process determining security returns involves the use of an inadequate or incomplete market index. Empirical studies to validate the CAPM invariably rely on some stock market index as a proxy for the true market portfolio. The exclusion of several asset categories from the definition of market index mis-specifies the CAPM and biases the results found using only stock market data. Kolbe and Read (1983) illustrate the biases in beta estimates which result from applying the CAPM to public utilities. Unfortunately, no comprehensive and easily accessible data exist for several classes of assets, such as mortgages and business investments, so that the exact relation between return and stock betas predicted by the CAPM does not exist. This suggests that the empirical relationship between returns and stock betas is best estimated empirically (ECAPM) rather than by DWT v Page 105 of 241

361 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 6 of 15 relying on theoretical and elegant CAPM models expanded to include missing assets effects. In any event, stock betas may be highly correlated with the true beta measured with the true market index. Yet another explanation for the CAPM's inability to fully explain the observed risk-return tradeoff involves the possibility of constraints on investor borrowing that run counter to the assumptions of the CAPM. In response to this inadequacy, several versions of the CAPM have been developed by researchers. One of these versions is the so-called zero-beta, or two-factor, CAPM which provides for a risk-free return in a market where borrowing and lending rates are divergent. If borrowing rates and lending rates differ, or there is no risk-free borrowing or lending, or there is risk-free lending but no risk-free borrowing, then the CAPM has the following form: K = R Z + β(r m - R F ) The model, christened the zero-beta model, is analogous to the standard CAPM, but with the return on a minimum risk portfolio which is unrelated to market returns, R Z, replacing the risk-free rate, R F. The model has been empirically tested by Black, Jensen, and Scholes (1972), who found a flatter than predicted CAPM, consistent with the model and other researchers' findings. The zero-beta CAPM cannot be literally employed in cost of capital projections, since the zero-beta portfolio is a statistical construct difficult to replicate. DWT v Page 106 of 241

362 Empirical Evidence Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 7 of 15 A summary of the empirical evidence on the magnitude of alpha is provided in the table below. Empirical Evidence on the Alpha Factor Author Range of alpha Period relied Black (1993) -3.6% to 3.6% Black, Jensen and Scholes (1972) -9.61% to 12.24% Fama and McBeth (1972) 4.08% to 9.36% Fama and French (1992) 10.08% to 13.56% Litzenberger and Ramaswamy (1979) 5.32% to 8.17% Litzenberger, Ramaswamy and Sosin (1980) 1.63% to 5.04% Pettengill, Sundaram and Mathur (1995) 4.6% Morin (1994) 2.0% Harris, Marston, Mishra, and O Brien (2003) 2.0% Given the observed magnitude of alpha, the empirical evidence indicates that the risk-return relationship is flatter than that predicted by the CAPM. Typical of the empirical evidence is the findings cited in Morin (1989) over the period indicating that the observed expected return on a security is related to its risk by the following equation: K = β DWT v Page 107 of 241

363 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 8 of 15 Given that the risk-free rate over the estimation period was approximately 6 percent, this relationship implies that the intercept of the risk-return relationship is higher than the 6 percent risk-free rate, contrary to the CAPM's prediction. Given that the average return on an average risk stock exceeded the risk-free rate by about 8.0 percent in that period, that is, the market risk premium (R M - R F ) = 8 percent, the intercept of the observed relationship between return and beta exceeds the risk-free rate by about 2 percent, suggesting an alpha factor of 2 percent. Most of the empirical studies cited in the above table utilize raw betas rather than Value Line adjusted betas because the latter were not available over most of the time periods covered in these studies. A study of the relationship between return and adjusted beta is reported on Table 6-7 in Ibbotson Associates Valuation Yearbook If we exclude the portfolio of very small cap stocks from the relationship due to significant size effects, the relationship between the arithmetic mean return and beta for the remaining portfolios is flatter than predicted and the intercept slightly higher than predicted by the CAPM, as shown on the graph below. It is noteworthy that the Ibbotson study relies on adjusted betas as stated on page 95 of the aforementioned study. 25 CAPM vs ECAPM Return vs Risk 2002 NYSE Stocks 20 Return Observed Fitted CAPM Beta DWT v Page 108 of 241

364 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 9 of 15 Another study by Morin in May 2002 provides empirical support for the ECAPM. All the stocks covered in the Value Line Investment Survey for Windows for which betas and returns data were available were retained for analysis. There were nearly 2000 such stocks. The expected return was measured as the total shareholder return ( TSR ) reported by Value Line over the past ten years. The Value Line adjusted beta was also retrieved from the same data base. The nearly 2000 companies for which all data were available were ranked in ascending order of beta, from lowest to highest. In order to palliate measurement error, the nearly 2000 securities were grouped into ten portfolios of approximately 180 securities for each portfolio. The average returns and betas for each portfolio were as follows: Portfolio # Beta Return It is clear from portfolio the graph below that the portfolio observed relationship portfolio portfolio between DCF returns portfolio and Value Line portfolio portfolio adjusted betas is flatter portfolio than that predicted by portfolio portfolio the plain vanilla CAPM. The observed intercept is higher than the prevailing risk-free rate of 5.7 percent while the slope is less than equal to the market risk premium of 7.7 percent predicted by the plain vanilla CAPM for that period. DWT v Page 109 of 241

365 25 Return vs Risk 2002 NYSE Stocks Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 10 of 15 Return Observed Fitted CAPM Beta In an article published in Financial Management, Harris, Marston, Mishra, and O Brien ( HMMO ) estimate ex ante expected returns for S&P 500 companies over the period HMMO measure the expected rate of return (cost of equity) of each dividend-paying stock in the S&P 500 for each month from January 1983 to August 1998 by using the constant growth DCF model. They then investigate the relation between the risk premium (expected return over the 20-year U.S. Treasury Bond yield) estimates for each month to equity betas as of that same month (5-year raw betas). The table below, drawn from HMMO Table 4, displays the average estimate prospective risk premium (Column 2) by industry and the corresponding beta estimate for that industry, both in raw form (Column 3) and adjusted form (Column 4). The latter were calculated with the traditional Value Line Merrill Lynch Bloomberg adjustment methodology by giving 1/3 weight of to a beta estimate of 1.00 and 2/3 weight to the raw beta estimate. Table A-1 Risk Premium and Beta Estimates by Industry Raw Adjusted Industry DCF Risk Premium Industry Beta Industry Beta (1) (2) (3) (4) 1 Aero Harris, R. S., Marston, F. C., Mishra, D. R., and O Brien, T. J., Ex Ante Cost of Equity Estimates of S&P 500 Firms: The Choice Between Global and Domestic CAPM, Financial Management, Autumn 2003, pp DWT v Page 110 of 241

366 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 11 of 15 2 Autos Banks Beer BldMat Books Boxes BusSv Chems Chips Clths Cnstr Comps Drugs ElcEq Energy Fin Food Fun Gold Hlth Hsld Insur LabEq Mach Meals MedEq Pap PerSv Retail Rubber Ships Stee Telc Toys Trans Txtls Util Whlsl MEAN 7.19 The observed statistical relationship between expected return and adjusted beta is shown in the graph below along with the CAPM prediction: DWT v Page 111 of 241

367 DCF Risk Premium vs Beta Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 12 of 15 DCF Risk Premium Beta Observed CAPM If the plain vanilla version of the CAPM is correct, then the intercept of the graph should be zero, recalling that the vertical axis represents returns in excess of the risk-free rate. Instead, the observed intercept is approximately 2 percent, that is approximately equal to 25 percent of the expected market risk premium of 7.2 percent shown at the bottom of Column 2 over the period, as predicted by the ECAPM. The same is true for the slope of the graph. If the plain vanilla version of the CAPM is correct, then the slope of the relationship should equal the market risk premium of 7.2 percent. Instead, the observed slope of close to 5 percent is approximately equal to 75 percent of the expected market risk premium of 7.2 percent, as predicted by the ECAPM. In short, the HMMO empirical findings are quite consistent with the predictions of the ECAPM. Practical Implementation of the ECAPM The empirical evidence reviewed above suggests that the expected return on a security is related to its risk by the following relationship: K = R F + + (MRP- ) (5) or, alternatively by the following equivalent relationship: DWT v Page 112 of 241

368 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 13 of 15 K = R F + a MRP + (1-a) β MRP (6) The empirical findings support values of from approximately 2 percent to 7 percent. If one is using the short-term U.S. Treasury Bills yield as a proxy for the risk-free rate, and given that utility stocks have lower than average betas, an alpha in the lower range of the empirical findings, 2 percent - 3 percent is reasonable, albeit conservative. Using the long-term U.S. Treasury yield as a proxy for the risk-free rate, a lower alpha adjustment is indicated. This is because the use of the long-term U.S. Treasury yield as a proxy for the risk-free rate partially incorporates the desired effect of using the ECAPM 2. An alpha in the range of 1 percent - 2 percent is therefore reasonable. To illustrate, consider a utility with a beta of The risk-free rate is 5 percent, the MRP is 7 percent, and the alpha factor is 2 percent. The cost of capital is determined as follows: K = R F + + (MRP- ) K = 5% + 2% (7% - 2%) = 11% A practical alternative is to rely on the second variation of the ECAPM: K = R F + a MRP + (1-a) β MRP With an alpha of 2 percent, a MRP in the 6 percent - 8 percent range, the a coefficient is 0.25, and the ECAPM becomes 3 : 2 The Security Market Line (SML) using the long-term risk-free rate has a higher intercept and a flatter slope than the SML using the short-term risk-free rate 3 Recall that alpha equals a times MRP, that is, alpha = a MRP, and therefore a = alpha/mrp. If alpha is 2 percent, then a = 0.25 DWT v Page 113 of 241

369 K = R F Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 14 of MRP β MRP Returning to the numerical example, the utility s cost of capital is: K = 5% x 7% x 0.80 x 7% = 11% For reasonable values of beta and the MRP, both renditions of the ECAPM produce results that are virtually identical 4. 4 In the Morin (1994) study, the value of a was actually derived by systematically varying the constant "a" in equation 6 from 0 to 1 in steps of 0.05 and choosing that value of 'a' that minimized the mean square error between the observed relationship between return and beta: K = β The value of a that best explained the observed relationship was DWT v Page 114 of 241

370 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 15 of 15 REFERENCES Black, Fischer, "Beta and Return," The Journal of Portfolio Management, Fall 1993, Black, Fischer, Michael C. Jensen and Myron Scholes, "The Capital Asset Pricing Model: Some Empirical Tests, from Jensen, M. (ed.) Studies in the Theory of Capital Markets, Praeger, New York, 1972, Breenan, M. (1973) Taxes, Market Valuation, and Corporate Financial Policy, National Tax Journal, 23, Fama, Eugene F. and James D. MacBeth, "Risk, Returns and Equilibrium: Empirical Tests," Journal of Political Economy, September 1972, pp Fama, Eugene F. and Kenneth R. French, "The Cross-Section of Expected Stock Returns," Journal of Finance, Vol. 47, June 1992, pp Friend, I., Westerfield, R., and Granito, M. (1978) New Evidence on the Capital Asset Pricing Model, Journal of Finance, 23, Harris, R. S., Marston, F. C., Mishra, D. R., and O Brien, T. J., Ex Ante Cost of Equity Estimates of S&P 500 Firms: The Choice Between Global and Domestic CAPM, Financial Management, Autumn 2003, pp Kraus, A. and Litzenberger, R.H. (1976) Skewness Preference and the Valuation of Risk Assets, Journal of Finance, 31, Litzenberger, R. H. and Ramaswamy, K. "The Effect of Personal Taxes and Dividends on Capital Asset Prices: Theory and Empirical Evidence." Journal of Financial Economics, June 1979, Litzenberger, R. H., Ramaswamy, K. and Sosin, H. (1980) "On the CAPM Approach to the Estimation of a Public Utility s Cost of Equity Capital, Journal of Finance, 35, May 1980, Merton, R.C. (1973) An Intertemporal Capital Asset Pricing Model, Econometrica, 41, Morin, R.A. (1981) "Intertemporal Market-Line Theory: An Empirical Test," Financial Review, Proceedings of the Eastern Finance Association, Morin, R.A. (1989) Arizona Corporation Commission, Rebuttal Testimony of Dr. Ra. Morin on behalf of US West Communications, Appendix B, DWT v Page 115 of 241

371 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2A Page 16 of 15 Pettengill, Glenn N., Sridhar Sundaram and Ike Mathur, "The Conditional Relation between Beta and Returns," Journal of Financial and Quantitative Analysis, Vol. 30, No. 1, March 1995, pp Rubinstein, M.E. (1973) A Mean-Variance Synthesis of Corporate Financial Theory, Journal of Financial Economics, March 1973, DWT v Page 116 of 241

372 Exhibit 2 - Chapter 2 Attachment 2-2B Page 117 of 241

373 ATTACHMENT 2-2B FLOTATION COST ALLOWANCE Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 1 of 9 To obtain the final cost of equity financing from the investors' expected rate of return, it is necessary to make allowance for underpricing, which is the sum of market pressure, costs of flotation, and underwriting fees associated with new issues. Allowance for market pressure should be made because large blocks of new stock may cause significant pressure on market prices even in stable markets. Allowance must also be made for company costs of flotation (including such items as printing, legal and accounting expenses) and for underwriting fees. 1. MAGNITUDE OF FLOTATION COSTS According to empirical studies, underwriting costs and expenses average at least 4% of gross proceeds for utility stock offerings in the U.S. (See Logue & Jarrow: "Negotiations vs. Competitive Bidding in the Sale of Securities by Public Utilities", Financial Management, Fall 1978.) A study of 641 common stock issues by 95 electric utilities identified a flotation cost allowance of 5.0%. (See Borum & Malley: "Total Flotation Cost for Electric Company Equity Issues", Public Utilities Fortnightly, Feb. 20, 1986.) Empirical studies suggest an allowance of 1% for market pressure in U.S. studies. Logue and Jarrow found that the absolute magnitude of the relative price decline due to market pressure was less than 1.5%. Bowyer and Yawitz examined 278 public utility stock issues and found an average market pressure of 0.72%. (See Bowyer & Yawitz, "The Effect of New Equity Issues on Utility Stock Prices", Public Utilities Fortnightly, May 22, 1980.) Eckbo & Masulis ("Rights vs. Underwritten Stock Offerings: An Empirical Analysis", University of British Columbia, Working Paper No. 1208, Sept., 1987) found an average flotation cost of 4.175% for utility common stock offerings. Moreover, flotation costs increased progressively for smaller size issues. They also found that the relative price decline due to market pressure in the days surrounding the announcement amounted to slightly more than 1.5%. In a classic and monumental study published in the prestigious Journal of Financial Economics by a prominent scholar, a market DWT v Page 118 of 241

374 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 2 of 9 pressure effect of 3.14% for industrial stock issues and 0.75% for utility common stock issues was found (see Smith, C.W., "Investment Banking and the Capital Acquisition Process," Journal of Financial Economics 15, 1986). Other studies of market pressure are reported in Logue ("On the Pricing of Unseasoned Equity Offerings, Journal of Financial and Quantitative Analysis, Jan. 1973), Pettway ("The Effects of New Equity Sales Upon Utility Share Prices," Public Utilities Fortnightly, May ), and Reilly and Hatfield ("Investor Experience with New Stock Issues," Financial Analysts' Journal, Sept.- Oct. 1969). In the Pettway study, the market pressure effect for a sample of 368 public utility equity sales was in the range of 2% to 3%. Adding the direct and indirect effects of utility common stock issues, the indicated total flotation cost allowance is above 5.0%, corroborating the results of earlier studies. As shown in the table below, a comprehensive empirical study by Lee, Lochhead, Ritter, and Zhao, The Costs of Raising Capital, Journal of Financial Research, Vol. XIX, NO. 1, Spring 1996, shows average direct flotation costs for equity offerings of 3.5% - 5% for stock issues between $60 and $500 million. Allowing for market pressure costs raises the flotation cost allowance to well above 5%. DWT v Page 119 of 241

375 FLOTATION COSTS: RAISING EXTERNAL CAPITAL (Percent of Total Capital Raised) Amount Raised Average Flotation Average Flotation in $ Millions Cost: Common Stock Cost: New Debt $ % 4.39% and Up Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 3 of 9 Note: Flotation costs for IPOs are about 17 percent of the value of common stock issued if the amount raised is less than $10 million and about 6 percent if more than $500 million is raised. Flotation costs are somewhat lower for utilities than others. Source: Lee, Inmoo, Scott Lochhead, Jay Ritter, and Quanshui Zhao, The Costs of Raising Capital, The Journal of Financial Research, Spring As far as Canadian studies are concerned, Shutt, T. and Williams, H. Going to Market: The Cost of IPOs in Canada and the United States, The Conference Board of Canada, June 2000, report a 5.8% weighted average cost for a sample of Toronto Stock Exchange issues. Kooli, M. and Suret, J.M., How Cost Effective are Canadian IP Markets? Canadian Investment Review 16, no. 4, Winter 2003, found flotation costs of 7.3% for equity issues of $100 million or more. These results are for IPOs only and would presumably be lower for seasoned equity issues. Therefore, based on empirical studies, total flotation costs including market pressure amount to approximately 5% of gross proceeds. I have therefore assumed a 5% gross total flotation cost allowance in my cost of capital analyses. DWT v Page 120 of 241

376 2. APPLICATION OF THE FLOTATION COST ADJUSTMENT Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 4 of 9 The section below shows: 1) why it is necessary to apply an allowance of 5% to the dividend yield component of equity cost by dividing that yield by 0.95 (100% - 5%) to obtain the fair return on equity capital, and 2) why the flotation adjustment is permanently required to avoid confiscation even if no further stock issues are contemplated. Flotation costs are only recovered if the rate of return is applied to total equity, including retained earnings, in all future years. Flotation costs are just as real as costs incurred to build utility plant. Fair regulatory treatment absolutely must permit the recovery of these costs. An analogy with bond issues is useful to understand the treatment of flotation costs in the case of common stocks. In the case of a bond issue, flotation costs are not expensed but are rather amortized over the life of the bond, and the annual amortization charge is embedded in the cost of service. This is analogous to the process of depreciation, which allows the recovery of funds invested in utility plant. The recovery of bond flotation expense continues year after year, irrespective of whether the company issues new debt capital in the future, until recovery is complete. In the case of common stock that has no finite life, flotation costs are not amortized. Therefore, the recovery of flotation cost requires an upward adjustment to the allowed return on equity. Roger A. Morin, Regulatory Finance, Public Utilities Reports Inc., Arlington, Va., 1994, provides numerical illustrations that show that even if a utility does not contemplate any additional common stock issues, a flotation cost adjustment is still permanently required. Examples there also demonstrate that the allowance applies to retained earnings as well as to the original capital. From the standard DCF model, the investor's required return on equity capital is expressed as: K = D 1 /P o + g If P o is regarded as the proceeds per share actually received by the company from which dividends and earnings will be generated, that is, P o equals B o, the book value per share, then the company's required return is: r = D 1 /B o + g DWT v Page 121 of 241

377 follows: Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 5 of 9 Denoting the percentage flotation costs 'f', proceeds per share B o are related to market price P o as P - fp = B o P(1 - f) = B o Substituting the latter equation into the above expression for return on equity, we obtain: r = D 1 /P(1-f) + g that is, the utility's required return adjusted for underpricing. For flotation costs of 5%, dividing the expected dividend yield by 0.95 will produce the adjusted cost of equity capital. For a dividend yield of 6% for example, the magnitude of the adjustment is 32 basis points:.06/.95 = In deriving DCF estimates of fair return on equity, it is therefore necessary to apply a conservative after-tax allowance of 5% to the dividend yield component of equity cost. Even if no further stock issues are contemplated, the flotation adjustment is still permanently required to keep shareholders whole. Flotation costs are only recovered if the rate of return is applied to total equity, including retained earnings, in all future years, even if no future financing is contemplated. This is demonstrated by the numerical example contained in pages 7-9 of this Appendix. Moreover, even if the stock price, hence the DCF estimate of equity return, fully reflected the lack of permanent allowance, the company always nets less than the market price. Only the net proceeds from an equity issue are used to add to the rate base on which the investor earns. A permanent allowance for flotation costs must be authorized in order to insure that in each year the investor earns the required return on the total amount of capital actually supplied. The example shown on pages 7-9 shows the flotation cost adjustment process using illustrative, yet realistic, market data. The assumptions used in the computation are shown on page 7. The stock is selling in the market for $25, investors expect the firm to pay a dividend of $2.25 that will grow at a rate of 5% thereafter. The traditional DCF cost of equity is thus k = D/P + g = 2.25/ = 14%. The firm sells one share stock, incurring a flotation cost of 5%. The traditional DCF cost of equity adjusted for flotation cost is thus ROE = D/P(1-f) + g =.09/ = 14.47%. DWT v Page 122 of 241

378 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 6 of 9 The initial book value (rate base) is the net proceeds from the stock issue, which are $23.75, that is, the market price less the 5% flotation costs. The example demonstrates that only if the company is allowed to earn 14.47% on rate base will investors earn their cost of equity of 14%. On page 8, Column 1 shows the initial common stock account, Column 2 the cumulative retained earnings balance, starting at zero, and steadily increasing from the retention of earnings. Total equity in Column 3 is the sum of common stock capital and retained earnings. The stock price in Column 4 is obtained from the seminal DCF formula: D 1 /(k - g). Earnings per share in Column 6 are simply the allowed return of 14.47% times the total common equity base. Dividends start at $2.25 and grow at 5% thereafter, which they must do if investors are to earn a 14% return. The dividend payout ratio remains constant, as per the assumption of the DCF model. All quantities, stock price, book value, earnings, and dividends grow at a 5% rate, as shown at the bottom of the relevant columns. Only if the company is allowed to earn 14.47% on equity do investors earn 14%. For example, if the company is allowed only 14%, the stock price drops from $26.25 to $26.13 in the second year, inflicting a loss on shareholders. This is shown on page 9. The growth rate drops from 5% to 4.53%. Thus, investors only earn 9% % = 13.53% on their investment. It is noteworthy that the adjustment is always required each and every year, whether or not new stock issues are sold in the future, and that the allowed return on equity must be earned on total equity, including retained earnings, for investors to earn the cost of equity. DWT v Page 123 of 241

379 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 7 of 9 ASSUMPTIONS: ISSUE PRICE = $25.00 FLOTATION COST = 5.00% DIVIDEND YIELD = 9.00% GROWTH = 5.00% EQUITY RETURN = 14.00% (D/P + g) ALLOWED RETURN ON EQUITY = 14.47% (D/P(1-f) + g) DWT v Page 124 of 241

380 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 8 of 9 MARKET / COMMON RETAINED TOTAL STOCK BOOK STOCK EARNINGS EQUITY PRICE RATIO EPS DPS PAYOUT Yr (1) (2) (3) (4) (5) (6) (7) (8) $23.75 $0.000 $ $ $3.438 $ % 2 $23.75 $1.188 $ $ $3.609 $ % 3 $23.75 $2.434 $ $ $3.790 $ % 4 $23.75 $3.744 $ $ $3.979 $ % 5 $23.75 $5.118 $ $ $4.178 $ % 6 $23.75 $6.562 $ $ $4.387 $ % 7 $23.75 $8.077 $ $ $4.607 $ % 8 $23.75 $9.669 $ $ $4.837 $ % 9 $23.75 $ $ $ $5.079 $ % 10 $23.75 $ $ $ $5.333 $ % 5.00% 5.00% 5.00% 5.00% DWT v Page 125 of 241

381 Liberty Utilities (CalPeco Electric) LLC Exhibit 2, Chapter 2 Attachment 2-2B Page 9 of 9 MARKET/ COMMON RETAINED TOTAL STOCK BOOK STOCK EARNINGS EQUITY PRICE RATIO EPS DPS PAYOUT Yr (1) (2) (3) (4) (5) (6) (7) (8) $23.75 $0.000 $ $ $3.325 $ % 2 $23.75 $1.075 $ $ $3.476 $ % 3 $23.75 $2.199 $ $ $3.633 $ % 4 $23.75 $3.373 $ $ $3.797 $ % 5 $23.75 $4.601 $ $ $3.969 $ % 6 $23.75 $5.884 $ $ $4.149 $ % 7 $23.75 $7.225 $ $ $4.337 $ % 8 $23.75 $8.627 $ $ $4.533 $ % 9 $23.75 $ $ $ $4.738 $ % 10 $23.75 $ $ $ $4.952 $ % 4.53% 4.53% 4.53% 4.53% DWT v Page 126 of 241

382 Exhibit 3 Electric Distribution Programs Page 127 of 241

383 Chapter 1 Vegetation Management Page 128 of 241

384 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Jessica Drummond. I am the Vegetation and Regulatory Compliance Manager of Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ). My business address is 933 Eloise Avenue, South Lake Tahoe, CA Q: Does Exhibit 4, JD, entitled Witness Statement of Qualifications: Jessica Drummond accurately summarize your background, education, and experience? A: Yes, it does. 3. Q: What is the purpose of your direct testimony? A: The purpose of my direct testimony is to explain the elements that comprise the estimated budget necessary for Liberty Utilities to perform its ongoing and required vegetation management activities. 4. Q: Provide an overview of the key components and strategies which form the foundation of Liberty Utilities proposal to continue its vegetation management practices within its service territory. A: Liberty Utilities intends to continue proactively responding to the requirements of General Order 95, Public Resources Codes 4293, and Public Resources Code Furthermore, Liberty Utilities is committed to enhancing fire safety and electrical system reliability in our communities. Liberty Utilities, like other electric utilities, recognizes and DWT v Exhibit Page 129 of 241

385 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) appreciates that the provision of safe and reliable service is of paramount importance to our customers, our employees, our communities, and our regulatory agencies. Given that our service territory is mountainous, densely-forested, and includes remote and other relatively inaccessible areas, a proactive and cost-effective vegetation management program is particularly crucial to Liberty Utilities being able to provide the requisite safe and reliable service. Our reliance on approximately 650 miles of overhead highvoltage distribution lines to provide service further reinforces the need that Liberty Utilities make vegetation management a top priority. The direct connection between effective vegetation management and the ability of a utility to provide safe and reliable service particularly a utility whose service territory is mountainous and densely-forested has been reinforced by California s experience with destructive forest fires over the last several years. By making vegetation management a top priority, Liberty Utilities is also responding to the heightened focus on fire safety during the recent years of drought conditions affecting the State. 5. Q: Describe the budget you are sponsoring for the vegetation management programs Liberty Utilities is intending to perform during the forecast period. A: Liberty Utilities is proposing a vegetation management budget of approximately $2.523 million annually for each of years 2016, 2017, and This amount represents an increase of approximately $23,000 annually as compared to the $2.5 million annual amount the Commission authorized in D for the each of years 2013, 2014, and DWT v Exhibit Page 130 of 241

386 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) Q: Explain Liberty Utilities development of its funding request for the vegetation management program. A: Liberty Utilities developed a budget for vegetation management functions it will perform during using historical levels of expenditures and accounting for the ongoing drought conditions in California. We calculated the total number of circuit line miles on which Liberty Utilities performed vegetation management activities during 2012, 2013, and 2014 and then we quantified the costs incurred during this period and corresponding to the work we performed. 7. Q: Describe Liberty Utilities development of its funding request for scheduled tree trimming inside the utility rights-of-way ( ROWs ). A: To develop a forecast of the costs we would incur to perform required and scheduled tree trimming inside the utility ROWs during , we first made extrapolations based on historic spending levels and our estimates of annual cost increases for this work. For the remaining circuits that still require the upgraded vegetation management similar to work conducted over the last three years, we estimate that a similar budget for line mile of circuit will continue to be necessary. However, given our success in accomplishing the objectives of the upgraded vegetation management program that began in 2012, we estimate that we can successfully manage vegetation along circuits within the utility ROWs that have already benefitted from our upgraded vegetation management program at a slightly reduced cost. DWT v Exhibit Page 131 of 241

387 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) Q: The upgraded vegetation management program also included work and additional budget items other than tree trimming inside the utility ROWs. Describe how you projected budget for these activities. A: The vast majority of the activities and budget items associated with the upgraded vegetation management program will continue at spending levels similar to those incurred during the historic period. They are not subject to future reductions in the same manner as the tree trimming that occurs inside the utility ROWs. For example and as will be described below, by its very nature, off-cycle tree management does not benefit from routine and scheduled management along the same topography associated with tree trimming inside the utility ROWs. Thus, we assumed for purposes of forecasting that the requirements for off-cycle tree work will occur in a similar ratio as occurred during the historic period, and applied this historic ratio of the costs we incurred to perform off-cycle tree management activities. Thus to estimate future costs, we first calculated the average of the expenses incurred in 2012, 2013, and 2014 and then increased this amount by our estimate of anticipated annual cost increases. DWT v Exhibit Page 132 of 241

388 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) Q: You have explained Liberty Utilities development of its recommended funding for vegetation management activities to be conducted on trees located inside of utility ROWs. Please describe Liberty Utilities development of its funding request for scheduled vegetation management activities in areas outside of its ROWs. A: Continuing to assess and mitigate these possible hazards originating outside of Liberty Utilities ROWs are not only required, but are also important considerations in implementing Liberty Utilities commitment to mitigate fire risk and maintain overall public safety in the communities we serve. General Order 95, Rule 35 and Public Resources Code 4293 obligate Liberty Utilities to perform certain vegetation management activities on trees outside of its utility ROWs. Liberty Utilities developed its vegetation management plan to incorporate and comply with the requirements of these regulations on a systematic schedule. In particular, General Order 95, Rule 35 directs: When a supply or communication company has knowledge, obtained either through normal operating practices or notification to the company, that dead, rotten or diseased trees or dead, rotten or diseased portions of otherwise healthy trees overhang or lean toward and may fall into a span of supply or communication lines, said trees or portions thereof should be removed. Similarly, Public Resources Code 4293 requires that: Dead trees, old decadent or rotten trees, trees weakened by decay or disease and trees or portions thereof that are leaning toward the line which may contact the line from the side or may fall on the line shall be felled, cut, or trimmed so as to remove such hazard. DWT v Exhibit Page 133 of 241

389 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) Liberty Utilities service territory, especially those portions located within the Lake Tahoe Basin, contains many large, mature conifer trees. Many of these trees contain defects or may acquire diseases that would make them likely to fail from outside the ROWs and impact Liberty Utilities facilities. Moreover, due to the continuing drought conditions, Liberty Utilities believes that it will continue to encounter dead or dying trees outside the ROWs during its scheduled maintenance and that they will pose a significant enough risk to our distribution lines as to require removal at similar rates as experienced in the historical period. However, Liberty Utilities does believe that scheduled vegetation management outside the ROWs other than tree removals will be largely eliminated due to the upgraded vegetation management program that was conducted during the historical period. We have accordingly adjusted the forecasted expenses for scheduled work conducted outside the ROWs in recognition of that projection. 10. Q: Please describe Liberty Utilities development of its funding request for off-cycle tree work. A: As I have explained, Liberty Utilities performs regular vegetation management activities on a systematic schedule. However and particularly given its mountainous terrain, Liberty Utilities must respond to additional vegetation management exigencies to timely remedy tree-related issues that are identified outside of our regularly- DWT v Exhibit Page 134 of 241

390 Liberty Utilities (CalPeco Electric) LLC General Rate Case Pre-filed Direct Testimony Exhibit 3 - Electric Distribution Programs Chapter 1 Vegetation Management (Jessica Drummond) planned inspection and maintenance activities. In many instances, the unplanned work is necessary to respond to dead or dying trees. Importantly, once Liberty Utilities receives notice of any such vegetation related hazards, Liberty Utilities needs to timely respond and conduct the required remediation. Thus, and particularly given the continuing drought conditions, Liberty Utilities believes that it will be required to perform off-cycle tree work at rates at least at the same level as we experienced during the historical period II. CONCLUSION 1. Q: Does this conclude your direct testimony? A. Yes, it does. DWT v Exhibit Page 135 of 241

391 Chapter 2 Catastrophic Event Memorandum Account Page 136 of 241

392 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) I. INTRODUCTION AND SUMMARY 1. Q: Please state your name, occupation, and business address. A: My name is Kendrick E. Wittman. My primary work location address is 6891 North Lake Boulevard Suite 122, Tahoe Vista, California and my business address is 933 Eloise Avenue, South Lake Tahoe, California I am employed by Liberty Utilities (CalPeco Electric) LLC ( Liberty Utilities ), as the Manager of Rates and Regulatory Affairs. 2. Q: Does Exhibit 4, KEW, entitled Witness Statement of Qualifications: Kendrick E. Wittman accurately summarize your background, education, and experience? A: Yes, it does. 3. Q: What is the purpose of this chapter of your direct testimony? A: In this chapter, I am sponsoring Liberty Utilities request to recover the amounts recorded in its Catastrophic Event Memorandum Account ( CEMA ). Liberty Utilities requests recovery of the CEMA balancing account, of $2.10 million operations and maintenance related expenditures that Liberty Utilities incurred during 2014 and the first two months of 2015 in accordance with the CEMA program. As will be explained, in addition to this $2.10 million Liberty Utilities recorded in the CEMA, it also incurred during 2014 an additional amount of $3.273 million of capital expenditures under the auspices of the CEMA program. Liberty Utilities recorded the CEMArelated capital expenditures in the applicable plant in service accounts and is thus requesting rate DWT v Exhibit Page 137 of 241

393 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) recovery for these costs as part of its request in my testimony in Exhibit 1, Chapter 6 on Rate Base for rate recovery of its investment as reflected in its rate base and independent of the CEMA II. CATASTROPHIC EVENT MEMORANDUM ACCOUNT 1. Q: Please describe the purpose of the CEMA. A: The California Public Utilities Commission ( Commission ) established the CEMA mechanism to enable utilities to be able to incur the expenditures necessary to respond to catastrophic events and without the need to delay the expenditure and first obtain authority to recover through rates the incremental expenditures necessary to respond to the event. The Office of Ratepayer Advocates ( ORA ) has described a catastrophic event in the context of the CEMA mechanism as events which are: [O]f significant magnitude that were unforeseen at the time of a regular General Rate Case and impact utility customer service. 1 Liberty Utilities tariff accordingly defines a catastrophic event as a disaster or 16 state of emergency as declared by the appropriate federal or state authorities. 2 The CEMA serves as the ratemaking vehicle through which the utility can record and eventually seek to recover through rates expenditures which it is making to respond to a disaster or emergency, but for which it has not yet been authorized rate recovery. 1 The Office of Ratepayer Advocates, Catastrophic Events, available at 2 See Liberty Utilities Tariff, Preliminary Statement 13A, Catastrophic Event Memorandum Account (CEMA), Sheet No 39. DWT v Exhibit Page 138 of 241

394 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Q: Explain the background of Liberty Utilities invoking the CEMA procedures in A: In a letter dated February 18, 2014, Denise Tyrell, then Acting Director of the Commission Safety and Enforcement Division ( SED ) direct[ed] Liberty Utilities (CalPeco Electric) LLC (U 933-E) ( Liberty Utilities ) to take all practicable measures necessary to 6 reduce the likelihood of fires started by [its] facilities ( SED Directive ). 3 The SED Directive was in response to the proclamation Governor Edmund G. Brown issued on January 17, 2014 of a State of Emergency ( Emergency Proclamation ). The Emergency Proclamation acknowledged and proposed measures to respond to the risks and dangers associated with the prolonged drought that the State, including the service territory of Liberty Utilities, had been experiencing and continues to suffer through the present. The SED Directive explains that the Emergency Proclamation similarly directed state officials to take all necessary actions to prepare for conditions that could result from the drought. Consistent with the SED Directive and the Emergency Proclamation, Liberty Utilities decided not to defer implementation of certain corrective actions associated with various regulatory requirements related to vegetation management. It accordingly accelerated the implementation of certain existing programs and initiated additional proactive measures to prevent and/or minimize the consequences of fires which may be caused by and/or associated with utility assets. 3 The SED Directive is attached as Attachment 3-2A. DWT v Exhibit Page 139 of 241

395 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Q: Please describe the procedure for Liberty Utilities to activate its CEMA. A: Liberty Utilities CEMA tariff 4 directs Liberty Utilities to inform the Commission by letter to the Executive Director within 30 days after a catastrophic event that Liberty Utilities has started accruing costs in the CEMA. The letter must specify the date, time and location of the catastrophic event, what service areas are affected, the impact on Liberty Utilities facilities, and provide an estimate of the extraordinary costs expected to be incurred. Accordingly, on March 24, 2014, in accordance with the procedures set forth in Section 13.A of its Preliminary Statement and described above, Liberty Utilities sent a letter to then-executive Director Clanon and Energy Division Director Randolph providing notice that it would begin accruing costs in its CEMA as of 12:01 a.m. on March 25, 2014 in response to the Emergency Proclamation and the SED Directive ( CEMA Activation Letter ) Q: Describe the communications Liberty Utilities had with SED and/or the Energy Division regarding its activation of the CEMA mechanism in response to the SED Directive and Emergency Proclamation. A: In the CEMA Activation Letter, Liberty Utilities specifically requested that SED and/or the Energy Division advise Liberty Utilities if either disagreed with Liberty 4 Liberty Utilities Tariff, Preliminary Statement 13A, Catastrophic Event Memorandum Account (CEMA), Sheet No The CEMA Activation letter is attached as Attachment 3-2B. DWT v Exhibit Page 140 of 241

396 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Utilities stated intent to (i) incur incremental expenses to respond to the drought; and (ii) record these incremental expenses in the CEMA Q: Describe the reports that Liberty Utilities provided the Commission associated with the expenditures it recorded in the CEMA. A: As required by the SED Directive, Liberty Utilities provided the SED with a quarterly summary of certain of the activities it performed in response to the SED Directive. Liberty Utilities described its inspection-related activities, its tree trimming and removal related activities, and its pole clearing activities among other items. SED did not request any additional information from Liberty Utilities and did not notify Liberty Utilities of any concerns about Liberty Utilities level of activity and associated expenditures. 6. Q: Identify the category of costs the CEMA Tariff authorizes Liberty Utilities to record in its CEMA. A: The CEMA Tariff authorizes Liberty Utilities to record the costs associated with a catastrophic event incurred to: 1) Restore utility service to Liberty Utilities customers; 2) Repair, replace, or restore facilities damaged; and 3) Comply with governmental agency orders CEMA Activation Letter, at 3. DWT v Exhibit Page 141 of 241

397 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Q: Please describe the operations and maintenance costs Liberty Utilities identified it would be performing in the CEMA Activation Letter. A: In the CEMA Activation Letter, Liberty Utilities provided notice that it would increase fire inspections in fire threat areas and would reprioritize corrective action items, including advancing the date to perform certain, and deciding to perform additional, maintenance and repair work associated with General Order 95 compliance. In the CEMA Activation Letter, Liberty Utilities also forecasted that the identified incremental fire prevention measures for the remainder of calendar year 2014 would require incremental Operations and Maintenance ( O&M ) expenditures of $1.259 million Q: Describe the expenditures that Liberty Utilities has recorded as costs in its CEMA account as of the present date. A: As of the date of this testimony, Liberty Utilities has recorded O&M expenses in the CEMA balancing account of $2.10 million. Of this total, Liberty Utilities incurred approximately $210,000 in 2015 and the remainder in See CEMA Activation Letter at 2. DWT v Exhibit Page 142 of 241

398 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Q: Explain the reasons for the difference between the CEMA O&M expense cost estimate Liberty Utilities set forth in the CEMA Activation Letter and the actual O&M expenditures Liberty Utilities incurred in responding to the Emergency Proclamation and SED Directive. A: Liberty Utilities based its $1.259 million CEMA O&M expense estimate on the assumption that a moderate amount of repair work would be required for its facilities to conduct the fire threat inspections in response to the drought. However, upon embarking on its inspection, our staff identified the immediate need for more vast and significant maintenance repairs for many of our facilities. For example, the facility inspections revealed a relatively large population of dead-end insulators associated with a specific manufacturer and of a type known to have a high failure rate. The failure of these dead-end insulators posed an undue risk for fire ignition. The immediate need to replace these insulators was therefore additive to the scope of work Liberty Utilities initially estimated. Another reason for Liberty Utilities actual expenditures exceeding the amount forecasted in the CEMA Activation Letter is that our original cost estimates assumed that work tasks could be accomplished solely with internal Liberty Utilities employees. However, our employees were needed to perform other essential construction and maintenance work during the summer and fall of Due to the urgent need to proceed immediately with the tasks identified to respond to risks and dangers associated with the drought, Liberty Utilities decided DWT v Exhibit Page 143 of 241

399 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) to complete a large portion of the CEMA work utilizing contract resources and thus incurred costs at levels higher than forecast by the CEMA Activation Letter. 10. Q: Please describe the reasonableness of the costs that Liberty Utilities recorded in the CEMA for expenses it incurred and after issuance of the CEMA Activation Letter. A: In authorizing the CEMA mechanism, 8 the Commission intended the memorandum account mechanism to be available to enable utilities to react immediately, including the incurrence of the costs necessary to comply with the orders of State officials and governmental agencies, in the immediate wake of catastrophic events and other emergencies and not defer incurring expenses until approved in the next general rate case. As such, the CEMA mechanism is intended to encompass utility expenditures incurred for the purpose of proactively preventing the deleterious consequences, including an anticipated catastrophic event, resulting from and exacerbated by the conditions associated with an officially declared State of Emergency. Thus, it is reasonable, appropriate and fully consistent with the Commission s safety and reliability objectives for Liberty Utilities to have recorded the incremental O&M expenses it incurred in response to the SED Directive in its CEMA and to incur the capital expenditures that it is requesting to include in rate base Resolution E-3238 (July 24, 1991). DWT v Exhibit Page 144 of 241

400 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) Q: Explain the reasons for the difference between the CEMA capital cost estimate Liberty Utilities set forth in the CEMA Activation Letter and the actual capital expenditures Liberty Utilities incurred in responding to the Emergency Proclamation and SED Directive. A: When Liberty Utilities submitted the CEMA Activation Letter, it intended to focus its efforts on the replacement of deteriorating service conductors and open-wire secondary replacements. While this work was performed, Liberty Utilities also accelerated the re-construction of one of its poorest performing distribution circuits -- the Farad #201 Line. The Farad #201 Line had a history of pole failures, conductor breakage, and even fire starts, and is located in rough terrain that would exacerbate the severity of a fire should one occur. Prior to the issuance of the SED Directive, Liberty Utilities had already planned a phased re-construction approach for this circuit as a means to improve reliability and reduce hazard risk and had already secured the necessary permits for the entire re-construction. However, prior to the issuance of the SED Directive, Liberty Utilities was intending to phase the work over several years. Given the SED Directive, Liberty Utilities accelerated the re-build of this line in 2014 as a means to reduce fire danger. The Farad #201 circuit re-construction cost $2.65 million; the remainder of Liberty Utilities capital investments for replacement of deteriorating service conductors and open-wire secondary replacements amounted to $0.62 million. As DWT v Exhibit Page 145 of 241

401 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) explained earlier, Liberty Utilities did not record these capital costs in the CEMA, but rather recorded them in the appropriate plant in service accounts for normal cost recovery. 12. Q: Liberty Utilities is separately requesting just over $2.5 million to incur in each of 2016, 2017 and 2018 for expenses related to vegetation management activities. Please explain the relationship between the O&M expenditures Liberty Utilities incurred under the CEMA program and the expenses it is seeking the authority to incur on vegetation management activities during the period. A: The scope of work between (1) the CEMA vegetation management-related work described in this Chapter, and (2) the future vegetation management work described by Ms. Drummond in her testimony, Exhibit 3, Chapter 1 (Vegetation Management), across Liberty Utilities service territory in its vegetation management plan, are distinct. Liberty Utilities recorded costs in the CEMA associated with additional vegetation management work completed pursuant to the SED Directive in 2014 and the first two months of This additional vegetation management work included additional vegetation-related inspections on circuits where a heightened risk of catastrophic fires could occur, additional tree trimming contract staff to timely respond to and conduct any required remediation as identified during these additional inspections, and additional staffing of a fire prevention technician equipped with fire suppression equipment to monitor and manage fire risk issues on vegetation operations taking place in rural or forested environments. DWT v Exhibit Page 146 of 241

402 Liberty Utilities (CalPeco Electric) LLC General Rate Case Prefiled Direct Testimony Exhibit 3 Electric Distribution Programs Chapter 2 Catastrophic Event Memorandum Account (Kendrick E. Wittman) 1 2 III. RATEMAKING PROPOSALS 1. Q: Please explain the ratemaking proposals Liberty Utilities is making to recover the expenditures it incurred in responding to the SED Directive and the Emergency Proclamation. A: As stated above, as of March 31, 2015 Liberty Utilities has recorded $2.10 million of incremental O&M expenses it incurred during the period April 24, 2014 through February 27, 2015 in responding the SED Directive and the Emergency Proclamation. It requests that it be allowed to recover these costs through rates by amortizing this balance over three years commencing January 1, Liberty Utilities proposes this three year amortization period on the bases that it corresponds to the three year period which is the subject of this proceeding and that it minimizes the rate impact in any individual year. With respect to the capital expenditures that Liberty Utilities incurred in responding to the SED Directive and the Emergency Proclamation, Liberty Utilities proposes that it be authorized rate recovery for these incremental expenditures as additions to plant in service and in the manner proposed in my testimony in Exhibit 1, Chapter 6 (Rate Base) IV. CONCLUSION 1. Q: Does this conclude your direct testimony? A: Yes, it does. DWT v Exhibit Page 147 of 241

403 Exhibit 3 - Chapter 2 Attachment 3-2A Page 148 of 241

404 Page 149 of 241

405 Page 150 of 241

406 Exhibit 3 - Chapter 2 Attachment 3-2B Page 151 of 241

407 Via and US Mail March 24, 2014 Mr. Paul Clanon Executive Director California Public Utilities Commission 505 Van Ness Avenue San Francisco, CA Mr. Edward Randolph Director, Energy Division California Public Utilities Commission 505 Van Ness Avenue San Francisco, CA Dear Mr. Clanon and Mr. Randolph: In a letter dated February 18, 2014, Denise Tyrell, Acting Director of the Commission Safety and Enforcement Division ( SED ) direct[ed] Liberty Utilities (CalPeco Electric) LLC (U 933-E) ( Liberty Utilities ) to take all practicable measures necessary to reduce the likelihood of fires started by [its] facilities ( SED Directive ). The SED Directive was in response to the proclamation Governor Edmund G. Brown issued on January 17, 2014 of a State of Emergency ( Emergency Proclamation ) resulting from the sustained drought that the State, including the service territory of Liberty Utilities, has endured. The SED Directive explains that the Emergency Proclamation similarly directed state officials to take all necessary actions to prepare for conditions that could result from the drought. Liberty Utilities shares the Governor and SED s imperative that California s utilities shall take all reasonable steps to prevent and mitigate against the terrible consequences that California s drought now threatens, including increased fires in both urban and rural areas. 1 Accordingly, Liberty Utilities will not defer corrective actions associated with various regulatory requirements related to vegetation management. Rather it intends to accelerate the implementation of certain existing programs and to initiate additional proactive measures to minimize or prevent fires which may be caused by utility assets. Accordingly, in response to the SED Directive, Liberty Utilities currently anticipates incurring an additional $2.566 million in 2014 over and above previously approved General Rate Case ( GRC ) levels. These incremental expenditures will respond directly to the SED Directive and will implement a variety of fire prevention measures throughout its service territory and across all of its facilities and assets. 1 SED Directive quoting Emergency Proclamation at 1. 1 Page 152 of 241

408 Liberty Utilities shall incur these incremental expenditures, consistent with the SED Directive, and among other purposes, to increase fire inspections in fire threat areas and to reprioritize corrective action items, including advanced/additional maintenance and repair work associated with General Order 95 compliance. The identified incremental fire prevention measures for the remainder of calendar year 2014 include both capital projects, totaling $1.307 million, operations & maintenance expenses, totaling $1.259 million. These incremental costs are in addition to the vegetation management-related capital and operations & maintenance expenses the Commission authorized Liberty Utilities in Decision to incur during Accordingly, and pursuant to the procedures set forth in Section 13.A of Liberty Utilities Preliminary Statement, Liberty Utilities hereby provides notice that it will begin accruing costs in its Catastrophic Event Memorandum Account ( CEMA ) 2 as of 12:01 a.m. on March 25, The costs to be recorded will be incurred in response to the Emergency Proclamation and the SED Directive that Liberty Utilities immediately take all practicable measures necessary to reduce the likelihood of fires started by [its] facilities. In authorizing the CEMA mechanism, the Commission clearly intended the memorandum account mechanism to be available to enable utilities to react immediately, including the incurrence of the costs necessary to comply with the orders of state officials and governmental agencies, in the immediate wake of catastrophic events and other emergencies and not defer incurring expenses until approved in the next general rate case. As such, the CEMA mechanism is intended to encompass utility expenditures incurred for the purpose of proactively preventing the deleterious consequences, including an anticipated catastrophic event, resulting from and exacerbated by the conditions associated with an officially declared state of emergency. Thus, it is appropriate and fully consistent with the Commission s safety and reliability objectives for Liberty Utilities to record the costs it will incur to respond to the SED Directive in its CEMA. Liberty Utilities is fully aware CEMA offers it only the opportunity to record in a memorandum account the incremental costs associated with the proactive measures it will take to prevent and mitigate the consequences of a fire which prolonged drought conditions could precipitate and that there is no assurance that the Commission will authorize it to recover any of the costs it records in the CEMA. 3 After official conclusion of the State of Emergency, Liberty Utilities will request approval of the costs recorded in 2 The Commission authorized each Public Utilities Code Section 216 public utility to create a CEMA in Resolution No. E-3238, issued July 24, See Resolution No. E-3238 at 2. 2 Page 153 of 241

409 the CEMA either in a separate application, as part of its next general rate case application, or in some other rate setting request. 4 Liberty Utilities will record the incremental fire-prevention expenses it is incurring in response to the SED Directive in the CEMA at the end of each month. It shall also record capital costs and expenses separately. 5 Liberty Utilities will not include in the CEMA any vegetation management expenses for activities it had already intended to implement during calendar year Additionally, Liberty Utilities will comply with the additional reporting protocols the SED Directive mandates. As such, Liberty Utilities will be severely prejudiced if SED, the Energy Division or any other portion of the Commission believes that Liberty Utilities should be either (i) not incurring incremental expenses to comply with the SED Directive; and/or (ii) not recording such incremental expenses in the CEMA. Liberty Utilities would accordingly respectfully request that SED and/or the Energy Division advise Liberty Utilities it if disagrees with Liberty Utilities stated intent to (i) incur incremental expenses; and (ii) record these incremental expenses in the CEMA. As set forth above, Liberty Utilities intends to commence to incur incremental expenses immediately in response to the SED Directive, to record these incremental costs in its CEMA, and in the manner proscribed in Section 13 of its Preliminary Statement to seek recovery for the amounts recorded in the CEMA. Liberty Utilities maintains its commitment to providing safe and reliable energy. Please contact me directly at or ken.wittman@libertyutilities.com if you need any additional information. Best Regards, Ken Wittman, Manager of Rates and Regulatory Affairs Liberty Utilities (CalPeco Electric) LLC 933 Eloise Avenue South Lake Tahoe, CA See Liberty Utilities Preliminary Statement, Section 13.A.iv. 5 See Liberty Utilities Preliminary Statement, Section 13.A.ii.5. 3 Page 154 of 241