Capstone Infrastructure Corporation

Headnote

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief applications in Multiple Jurisdictions -- National Instrument 51-102 Continuous Disclosure Obligations,s.13.1 -- Application by issuer for relief from requirement to include certain financial statements in a business acquisition report (BAR) -- Issuer indirectly acquired the business of an operating subsidiary entity through share acquisition of holding entities -- Holding entities did not have business operations or material assets or liabilities -- Issuer granted relief from requirements in NI 51-102 to include in the BAR consolidated financial statements of the acquired parent holding entity and pro forma financial statements of the issuer giving effect to the acquisition including the holding entities -- Relief subject to condition that BAR include the prescribed financial statements of the operating subsidiary entity and pro forma financial statements of the issuer giving effect to the acquisition excluding the holding entities.

Multilateral Instrument 11-102 Passport System and National Policy 11-203 Process for Exemptive Relief applications in Multiple Jurisdictions -- Exemption from requirements in subsection 4.11(4) and 4.12(1) of National Instrument 52-107 Acceptable Accounting Principles and Auditing Standards to reconcile acquisition statements to the issuer's GAAP and permit the use of ISAs without a reconciliation to Canadian GAAS -- The issuer wants relief from the requirement to include a reconciliation to Canadian GAAP in annual financial statements of the acquired business and to have those statements audited in accordance with Canadian or US GAAS -- The issuer will prepare pro forma financial statements in accordance with IFRS.

Applicable Legislative Provisions

National Instrument 51-102 Continuous Disclosure Obligations, ss. 8.4, 13.1.

October 24, 2011

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

ONTARIO

(THE "JURISDICTION")

AND

IN THE MATTER OF

THE PROCESS FOR EXEMPTIVE RELIEF

APPLICATIONS IN MULTIPLE JURISDICTIONS

AND

IN THE MATTER OF

CAPSTONE INFRASTRUCTURE CORPORATION

(THE "APPLICANT")

DECISION

1. Background

The principal regulator in the Jurisdiction has received an application from the Applicant for a decision under the securities legislation of the Jurisdiction of the principal regulator (the "Legislation") granting an exemption under the following sections:

(i) Section 13.1 of National Instrument 51-102 -- Continuous Disclosure Obligations ("NI 51-102") exempting the Applicant from the requirements of section 8.4 of NI 51-102 to include in the BAR the Agbar UK BAR Financial Statements (as such terms are defined below); (the "Requested BAR Relief");

(ii) Section 5.1 of National Instrument 52-107 -- Acceptable Accounting Principles and Auditing Standards ("NI 52-107") exempting the Applicant from the requirement under section 4.11(4) of NI 52-107 to reconcile the Bristol 2011 Annual Financial Statements into Canadian GAAP (as such terms are defined below) when filing the BAR provided that the same financial statements are prepared in accordance with IFRS (as such term is defined below) (the "Requested GAAP Reconciliation Relief"); and

(iii) Section 5.1 of NI 52-107 exempting the Applicant from section 4.12(1) of NI 52-107 from the requirement to audit the Bristol 2011 Annual Financial Statements in accordance with Canadian GAAS provided that the same financial statements are audited in accordance with ISA as issued by the IAASB (as such terms are defined below) (the "Requested GAAS Relief").

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

(a) the Ontario Securities Commission is the principal regulator for this application (the "Principal Regulator"); and

(b) the Applicant has provided notice that section 4.7(1) of Multilateral Instrument 11-102 -- Passport System (MI 11-102) is intended to be relied upon for each equivalent provision in each of British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island, Newfoundland and Labrador, Yukon Territories, Nunavut and the Northwest Territories.

2. Interpretation

Terms defined in National Instrument 14-101 -- Definitions ("NI 14-101"), National Instrument 51-102 -- Continuous Disclosure Obligations ("NI 51-102") and National Instrument 52-107 -- Acceptable Accounting Principles and Auditing Standards have the same meaning if used in this decision, unless otherwise defined.

3. Representation

This decision is based on the following facts represented by the Applicant:

Information Concerning The Applicant

3.1 The Applicant was incorporated under the Business Corporations Act (British Columbia) on May 20, 2010 as 0881592 B.C. Ltd.

3.2 The Applicant's head office is located at Brookfield Place, 181 Bay Street, Suite 3100, Toronto, Ontario, M5J 2T3 and its registered address is 595 Burrard Street, P.O. Box 49314, Suite 2600, Three Bentall Centre, Vancouver, British Columbia, V7X 1L3.

3.3 The Applicant is a reporting issuer, and is not in default of its obligations as a reporting issuer, under the security legislation of each of the provinces and territories of Canada.

3.4 The common shares, Series A Preferred shares and convertible debentures of the Applicant are listed and posted for trading on the Toronto Stock Exchange under the symbols "CSE", "CSE.PR.A" and "CSE.DB.A", respectively.

3.5 The Applicant's financial year-end is December 31.

3.6 The Applicant's audited annual financial statements as at and for the year ended December 31, 2010, its most recently completed year-end, have been prepared in accordance with Canadian generally accepted accounting principles as set out in Part V of the Handbook of the Canadian Institute of Chartered Accountants (the "CICA Handbook") ("Canadian GAAP"). The Applicant's annual and interim financial statements for periods commencing on or after January 1, 2011 have been and will be prepared in accordance with International Financial Reporting Standards ("IFRS"). The Applicant's annual financial statements as at and for the year ended December 31, 2010 were audited in accordance with Canadian Auditing Standards ("CAS") determined with reference to the CICA Handbook ("Canadian GAAS") which is equivalent to International Standards on Accounting ("ISA") as ISA was adopted as CAS effective for periods ending on or after December 14, 2010.

Information Concerning the Acquisition

3.7 On October 5, 2011 the Applicant acquired an indirect 70% interest in the business of Bristol Water plc ("Bristol") a water utility company in the United Kingdom (the "Acquisition") pursuant to a share purchase agreement dated October 5, 2011 (the "SPA") entered into by an indirect, wholly owned subsidiary of the Applicant (the "Purchaser") and Sociedad General de Aguas Barcelona SA (the "Vendor"), which held, prior to the Acquisition, an indirect 100% interest in Bristol.

3.8 The Applicant publicly announced the Acquisition pursuant to a press release on October 5, 2011.

3.9 The Applicant completed the Acquisition by acquiring from the Vendor pursuant to the SPA 70% of the issued and outstanding ordinary shares ("Agbar UK Shares") of Agbar UK Limited ("Agbar UK"), which subsequently changed its name to Bristol Water Holdings UK Limited. Prior to the completion of the Acquisition, the Vendor owned a 100% interest in Agbar UK.

3.10 Agbar UK is a holding company which indirectly owns 100% of Bristol by the way of Agbar UK's 100% ownership of Bristol Water Holdings Limited ("BWHL"). BWHL owns 100% of Bristol Water Core Holdings Limited ("BWCH" and collectively with Agbar UK and BWHL, the "Holdco Group") a company that holds all issued and outstanding shares of Bristol. As a result of the Applicant's acquisition of a 70% interest in Agbar UK, and indirectly, the Holdco Group, the Applicant indirectly owns a 70% interest in Bristol.

3.11 BWHL also owns a 50% equity ownership interest in Bristol Wessex Billing Services Limited ("BWBSL"), a 50 / 50 joint venture that provides billing, customer care and contract management services to Bristol and Wessex Water Services Limited ("Wessex"), an entity which provides waste water services in the Bristol, U.K. geographic area.

3.12 The ownership of Bristol through the Holdco Group arises as a result of Bristol being a regulated water utility in the United Kingdom and existing financing arrangements and is not reflective of the operating business that the Applicant has acquired. The Applicant completed the Acquisition by purchasing 70% of the Agbar UK Shares and, through its ownership of such Agbar UK Shares, a 70% indirect interest in the other entities in the Holdco Group and Bristol as a result of the existing structure. The Applicant also indirectly acquired a 35% beneficial interest in BWBSL through the Applicant's acquisition of the Agbar UK Shares.

Information Concerning Bristol and the Holdco Group

3.13 Effective June 27, 2011, Agbar UK transferred a number of non-regulated businesses ancillary to the regulated water utility business conducted by Bristol to affiliates of the Vendor ("Agbar UK Divestment").

3.14 Throughout the period commencing two years prior to the Acquisition and at the time of the Acquisition, Agbar UK:

(i) owned 100% of the issued and outstanding shares of BWHL;

(ii) did not have any revenues other than share of earnings of BWHL and sundry items;

(iii) other than with respect to shares of the businesses transferred pursuant to the Agbar UK Divestment, did not have any assets other than the shares of BWHL, cash and taxes recoverable;

(iv) did not have any expenses except those nominal expenses associated with general administrative matters of minimal significance;

(v) did not have any liabilities other than to related persons;

(vi) did not conduct any operations or business; and

(vii) functioned solely as a corporate holding company.

3.15 Throughout the period commencing two years prior to the Acquisition and at the time of the Acquisition, BWHL:

(i) owned 100% of the issued and outstanding shares of BWCH;

(ii) did not have any revenues other than share of earnings of BWCH and sundry items;

(iii) did not have any assets other than the shares of BWCH and BWBSL, cash and taxes recoverable;

(iv) did not have any expenses except those nominal expenses associated with general administrative matters of minimal significance;

(v) did not have any liabilities other than to related persons;

(vi) did not conduct any operations or business; and

(vii) functioned solely as a corporate holding company.

3.16 Throughout the period commencing two years prior to the Acquisition and at the time of the Acquisition, BWCH:

(i) owned 100% of the issued and outstanding shares of Bristol;

(ii) did not have any revenues other than share of earnings of Bristol and sundry items;

(iii) did not have any assets other than the shares of Bristol, cash and taxes recoverable;

(iv) did not have any expenses except those nominal expenses associated with general administrative matters of minimal significance;

(v) did not have any liabilities other than to related persons;

(vi) did not conduct any operations or business; and

(vii) functioned solely as a corporate holding company.

3.17 The Vendor provided customary representations, warranties and indemnities (subject to certain recovery limitations and thresholds) to the Purchaser in the SPA with respect to the information described in paragraphs 3.14, 3.15 and 3.16, above.

3.18 Since at least January 1, 2009, Bristol has been the operating entity that, either directly or indirectly, conducted all of the business that was acquired by the Applicant pursuant to the Acquisition.

3.19 Due to certain exemptions under the United Kingdom's generally accepted accounting principles ("UK GAAP"), no audited consolidated financial statements or consolidated interim financial statements for Agbar UK have been prepared and, accordingly, such statements are not available to the Applicant. Consolidated financial statements for BWHL and BWCH have not been prepared for at least six years and, accordingly, such statements are not available to the Applicant.

3.20 Non-consolidated financial statements for each entity in the Holdco Group have been prepared in accordance with UK GAAP. However, if reconciled to Canadian GAAP or IFRS, such accounting principles would require such statements to be prepared on a consolidated basis and such consolidated financial information is not available to the Applicant.

3.21 The Applicant has been provided with Bristol's audited annual comparative financial statements prepared in accordance with UK GAAP for the year ended March 31, 2011. The Applicant understands that Bristol only prepares interim comparative financial statements for the six-month period ended September 30 of each fiscal year in accordance with UK GAAP.

3.22 The Applicant has arranged for Bristol to prepare annual comparative financial statements for the year ended March 31, 2011 in accordance with IFRS, which statements will be audited (the "Bristol 2011 Annual Financial Statements") and interim comparative financial statements prepared in accordance with IFRS for the six-month period ended September 30, 2011 (the "Bristol Interim Financial Statements"). The Bristol 2011 Annual Financial Statements have been or will be audited by Ernst & Young (United Kingdom) in accordance with ISA issued by the International Audit and Assurance Standards Board ("IAASB").

Information Concerning BWBSL

3.23 BWBSL's only customers are Bristol and Wessex and its contractual arrangements with its customers require it to only bill its two customers for allocation of cost incurred in providing its services to them with no profit margin recognized. As a result, the financial statements for BWBSL for each of its three most recently completed financial years provided for nil net assets and nil net profit.

3.24 If Agbar UK were to prepare consolidated financial statements under IFRS, BWBSL would be accounted for on an equity basis and, in accordance with International Accounting Standard 31, the equity investment would be reflected at nil value in the consolidated balance sheet and no equity income/loss in the income statement.

3.25 The allocation of costs that BWBSL incurs in providing services to Bristol is recognized in Bristol's income statement and balance sheet as operating expenses and liabilities.

Information Concerning Disclosure in the BAR

3.26 The Acquisition constitutes a "significant acquisition" for the Applicant for the purposes of NI 51-102, and therefore the Applicant must file a business acquisition report ("BAR") pursuant to section 8.2(1) of NI 51-102 in the prescribed form no later than 75 days following the completion of the Acquisition. As the Acquisition occurred following September 30, 2011, the Applicant intends to include the Bristol 2011 Annual Financial Statements and the Bristol Interim Financial Statements in the BAR pursuant to section 8.4 of NI 51-102.

3.27 Under Part 8 of NI 51-102 the Applicant is required to include the following financial statements in the BAR:

(i) for the business acquired, the audited comparative consolidated annual financial statements for Agbar UK as at and for the year ended December 31, 2010 (the "Agbar UK Annual Consolidated Financial Statements") and unaudited comparative consolidated interim financial statements for Agbar UK as at and for the period ended September 30, 2011 (collectively with the Agbar UK Annual Consolidated Financial Statements, the "Agbar UK BAR Financial Statements"); and

(ii) for the Applicant, the following pro forma financial statements, presented separately after giving effect to the Acquisition (the "Pro Forma BAR Financial Statements"):

A. a pro forma income statement for the year ended December 31, 2010;

B. a pro forma income statement for the nine-month period ended September 30, 2011 and a pro forma balance sheet as at September 30, 2011; and

C. an earnings per share calculation based upon the income statements referred to in this paragraph 3.27(ii).

3.28 The Applicant intends to include in the BAR:

(i) the Bristol 2011 Annual Financial Statements and the Bristol Interim Financial Statements (collectively the "Bristol BAR Financial Statements"); and

(ii) the following pro forma financial statements after giving effect to the Acquisition and excluding the Holdco Group (the "Applicant's BAR Financial Statements"):

A. a pro forma IFRS income statement for the year ended December 31, 2010;

B. a pro forma IFRS income statement for the nine-month period ended September 30, 2011 and a pro forma IFRS balance sheet as at September 30, 2011 (collectively the "Applicant's September Pro Forma Financial Statements"); and

C. an earnings per share calculation based upon the income statements referred to in this paragraph 3.28(ii).

Information Concerning Different Accounting Principles

3.29 For the years beginning before January 1, 2011, the Applicant's accounting principles were Canadian GAAP. The Applicant's accounting principles for the year beginning on January 1, 2011 are IFRS and the Applicant's September Pro Forma Financial Statements will be prepared in accordance with IFRS as they relate to financial years beginning on or after January 1, 2011.

3.30 Pursuant to section 4.11(4) of NI 52-107, for financial years beginning before January 1, 2011, acquisition statements prepared using accounting principles that are different from the issuer's accounting principles must be reconciled to the issuer's accounting principles, with further disclosure required in the notes to such financial statements (the "Reconciliation Requirement"). Consequently, the Bristol 2011 Annual Financial Statements prepared under IFRS are required to be reconciled to Canadian GAAP.

3.31 The Bristol Interim Financial Statements will be prepared in accordance with IFRS but the Reconciliation Requirement does not apply as they relate to a financial year beginning on or after January 1, 2011.

Information Concerning Auditing Standards

3.32 Section 4.12(1) of NI 52-107 requires the Bristol 2011 Annual Financial Statements to be audited in accordance with Canadian GAAS, the auditing standards of the American Institute of Certified Public Accountants, as amended from time to time, or the auditing standards of the Public Company Accounting Oversight Board (United States of America), as amended from time to time (the "GAAS Requirement"). The Applicant is not entitled to the exception under section 4.12(2)(b) of NI 52-107 to include in the BAR the Bristol 2011 Annual Financial Statements audited in accordance with ISA, as the Applicant is not a "foreign issuer" within the meaning of NI 52-107.

3.33 The auditor of Bristol has represented to the Applicant that the auditor has expertise and experience in ISA.

4. Decision

The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.

The decision of the Principal Regulator under the Legislation is that the Requested BAR Relief is granted provided that the BAR includes:

(a) the Bristol BAR Financial Statements; and

(b) the Applicant's BAR Financial Statements.

The further decision of the Principal Regulator under the Legislation is that the Requested GAAP Reconciliation Relief and Requested GAAS Relief is granted.