VALUE
EVERY
DAY
Annual Report 2012
Infrastructure is the backbone of the economy and society,
from the electricity that lights or heats our homes to the water
we drink to the roads we travel.
By investing in essential infrastructure businesses, including
power generation, district heating and a regulated water
utility, Capstone offers shareholders unique access to the
infrastructure asset class and the steady income and potential
for capital growth it typically provides.
Every day, we’re working to create value for shareholders by:
▶ Actively managing our businesses;
▶ Delivering strong financial performance; and
▶ Uncovering the best opportunities to grow
and diversify our portfolio.
At the same time, the businesses we invest in are helping to
sustain, shape and strengthen communities, local economies
and quality of life in the regions they serve in Canada, the
United Kingdom and Europe.
Our businesses deliver safe drinking water to 1.2 million people,
generate enough clean electricity to power about 190,000
households, and distribute heat to more than 4,000 supply points
to warm homes and businesses. Read more about the value we
deliver every day at capstoneinfrastructure.com/ar2012.
FINANCIAL
HIGHLIGHTS
Capstone’s mission is to build and responsibly manage a high quality portfolio of
infrastructure businesses in Canada and internationally in order to deliver a superior
total return to shareholders by providing reliable income and capital appreciation.
Since 2004, we have significantly diversified our investments, increased revenue
and grown cash flow.
HISTORICAL REVENUE (in millions of dollars) (2)
ADJUSTED EBITDA (in millions of dollars) (1)(2)
400000
357.6
26.1%
CAGR in revenue
since 2004.
350000
28.4%
300000
216.0
250000
CAGR in Adjusted
EBITDA since 2004.(1)
120.7
153.2
148.4
158.5
122.8
90.2
89.9
55.8
200000
150000
100000
50000
0
61.2
67.3
61.2
55.8 55.7
34.1
27.9
16.3
04
05
06
07
08
09
10
11
12
04
05
06
07
08
09
10
11
12
(1) Excludes internalization costs.
(2) Figures presented for 2004 to 2009 reflect Canadian Generally Accepted Accounting Principles (“GAAP”).
ADJUSTED EBITDA IN 2012 BY GEOGRAPHY (3)
ADJUSTED EBITDA IN 2012 BY BUSINESS (3)
p 57% Canada
p 4% Sweden
p 39% United Kingdom
p 17% Gas Cogeneration Power
p 13% Wind Power
p 6% Biomass Power
p 8% Hydro Power
p 13% Solar Power
p 4% District Heating
p 39% Water Utility
(3) Chart illustrates contribution for the businesses and excludes the development and corporate components.
MESSAGE TO
SHAREHOLDERS
Capstone has strong fundamentals, including a diversified
and high quality portfolio, a solid balance sheet, an
experienced and motivated team, and broader scope
to pursue growth initiatives.
Dear Fellow Shareholders,
Capstone had a solid year in 2012. We delivered
portfolio following the expiry of Cardinal’s power
purchase agreement at the end of 2014. We
Adjusted EBITDA of $120.7 million, which was
have also gained the flexibility to retain more cash
slightly ahead of our expectations and reflected
to reinvest in new businesses that will improve
strong operational performance across our
the value, quality and cash-generating potential
businesses. We also took important steps to lower
of our portfolio.
our risk profile and position our company for a
bright future.
We set five priorities for ourselves at the start of
Preserving and enhancing the value of
our businesses
We continuously work to maximize the operating
2012 and successfully delivered on four of them.
performance of our businesses, which includes
Priorities Addressed
De-risking our balance sheet
We refinanced or repaid nearly $200 million
preventive maintenance, detailed planning for capital
expenditures that boost their value, and finding
ways to increase cash flow. In 2012, initiatives
included selling renewable energy credits (RECs)
of debt set to mature in 2012 through a variety
at the Whitecourt biomass facility, which generated
of initiatives, including the recapitalization of
additional revenue. At Bristol Water, we worked
Värmevärden and our hydro power facilities,
closely with management to execute the company’s
the sale of a 20% interest in Bristol Water to
ITOCHU Corporation at an attractive premium,
capital investment program, which is aimed at
improving and expanding its network of reservoirs,
and the establishment of a new corporate credit
treatment facilities, water mains and pipes. This
facility. As a result, we eliminated significant
capital program will drive growth in Bristol Water’s
risk from our balance sheet and renewed our
regulated capital value, and, accordingly, value for
flexibility for growth.
Capstone and our shareholders. And at Värmevärden,
Establishing a new dividend
In June, we established a new dividend level
of $0.30 per common share on an annualized
we saw improvements in plant availability and
greater use of lower-cost fuels, which are key
performance drivers for this business.
basis. Our new dividend reflects our view on
I am also pleased to report that our businesses
the long-term cash flow profile of our current
continued to have strong safety records in 2012,
which is one of Capstone’s key objectives and
central to our success.
2
CAPSTONE INFRASTRUCTURE CORPORATION
“ WE CONTINUALLY
WORK TO MAXIMIZE THE
OPERATING PERFORMANCE
OF OUR BUSINESSES.”
Continuing to build our platform for growth
and diversification
In December, we established a new, complementary
Our Challenges
We were not successful in 2012 in achieving a new
power purchase agreement for Cardinal with the
development capability with the formation of
Ontario Power Authority (OPA). While we made
Capstone Power Development, a subsidiary
steady progress in our discussions with the OPA
focused on developing, acquiring and repowering
and various government ministries, and continued
clean electricity generation projects in North
to broaden stakeholder support for a new
America with an emphasis on Western Canada
contract, we have not yet agreed on an outcome
and the United States. By getting more involved
that recognizes Cardinal’s value and its industrial,
in early-stage development projects, we have
economic, social and community importance.
the potential to deliver greater returns to our
Negotiations are continuing and we remain confident
shareholders and to create a new pipeline of
that Cardinal delivers significant value to Ontario
growth opportunities for Capstone.
and to ratepayers – today, tomorrow and for
years to come.
Our portfolio is
increasingly diversified
by asset category,
fuel source and
geographic location.
See how Capstone
has evolved at: www.
capstoneinfrastructure.
com/About/AtaGlance.aspx
Our Strengths
Active Management
We actively manage our operations
to maximize their long-term value
by working closely with our asset-
level personnel to drive continuous
improvement, direct capital management
initiatives and establish strategic plans.
Disciplined Approach
Capstone is extremely disciplined
in its approach to selecting growth
opportunities to pursue because we
are focused on enhancing returns for
shareholders. For example, we realized
an approximately 10% premium on
the sale of a minority, non-controlling
stake in Bristol Water, proving our
ability to make smart acquisitions.
Exceptional Capabilities
Collectively, our team has decades
of experience in financing and
managing infrastructure businesses
with strong relationships across the
sector in Canada and internationally.
2012 ANNUAL REPORT
3
Our Values
As we manage and grow our portfolio, it is a priority that we foster a positive culture that is respectful of our many
stakeholders. We are guided by the following values:
Integrity
In all we do, we act honestly, ethically
and fairly, abiding by both the spirit and
letter of our commitments as well as
our Code of Business Conduct. We are
accountable for our decisions and seek
to communicate with transparency.
Commitment
We are committed to managing
Capstone in the best interests
of our shareholders, which includes
acting as a good corporate citizen
in the communities where our
businesses operate.
Fulfillment for our People
We foster a professional, safe work
environment where our people
have the tools and resources to
excel and be successful and where
they are recognized for their service
and contributions.
Teamwork
As a team, we work cooperatively and
constructively to build Capstone’s
business and share a focus on
achieving optimal performance.
Highest Standards
We strive for excellence, innovation
and creativity in the management
and growth of our businesses.
Strive for Profitability
We seek to manage and grow our
businesses profitably so that we can
deliver an attractive total return to
our shareholders.
While we are pleased with the operational and
Our strategy to unearth new infrastructure
financial performance we achieved in 2012, we
know that the uncertainty related to Cardinal’s
investment opportunities includes:
▶ Concentrating our business development
future is concerning for shareholders. Securing
efforts primarily on Canada, the United States,
a new contract for Cardinal remains our top
the United Kingdom and Western Europe
priority for 2013.
Our Opportunities
Capstone has strong fundamentals, including
a diversified and high quality portfolio, a solid
in alignment with our focus on investing
only in countries that are members of the
Organization for Economic Cooperation and
Development (OECD) and feature stable fiscal
and political environments;
balance sheet, an experienced and motivated team,
▶ Pursuing regulated or contractually defined
and broader scope to pursue growth initiatives.
In particular, our investment in Bristol Water has
essentially changed Capstone’s risk profile by
offering perpetual, growing cash flow and the
potential for significant organic growth.
Our investment in Bristol Water has also
allied us with two multinational partners, Agbar
and ITOCHU, while at Värmevärden we have
invested alongside a private infrastructure fund
managed by Macquarie Group Limited. These
associations prove our ability to forge partnerships
across borders and to cultivate relationships
that can help to stimulate deal flow and access
to unique opportunities.
core infrastructure businesses, which typically
generate stable cash flow throughout the
economic cycle. This category includes
power generation, electricity distribution
and transmission, utilities, transportation
and public-private partnerships;
▶ Seeking a blend of operating infrastructure
businesses and development opportunities
that offer an appropriate risk-adjusted rate
of return; and
▶ Focusing on wholly-owned businesses
while remaining open to collaborating with
like-minded partners, an approach that has
been successful for us.
4
CAPSTONE INFRASTRUCTURE CORPORATION
“ SECURING A NEW CONTRACT
FOR CARDINAL REMAINS OUR
TOP PRIORITY FOR 2013.”
We are pursuing this strategy at a time of great
▶ A significantly strengthened balance sheet
global demand for new infrastructure spending
and a long-term dividend payout ratio target
fuelled by fiscal austerity, large and growing
of approximately 70% to 80%, which together
government deficits, and demographic trends.
provide a solid foundation to support our
Global infrastructure requirements for transport,
company’s continuing growth.
energy, water and communications between
▶ And a top-notch team with more than six
2013 and 2030 are estimated at more than
decades of combined expertise in infrastructure
US$57 trillion. The private sector has a vital role in
asset and investment management, which
improving and building the new, more sustainable
represents a tremendous competitive advantage
infrastructure that is required to unleash renewed
for Capstone.
economic growth and an improved quality of life in
Canada and internationally: better roads, greener
power generation facilities; higher quality and
modern water systems, and more efficient public
transportation. Capstone is poised to participate
in this sizable opportunity.
Creating Value
With our focus on quality, low-risk infrastructure
businesses that provide essential services, Capstone
offers shareholders access to a unique and growing
asset class that has historically exhibited low
In closing, I would like to thank our directors
for their support and guidance in 2012 and our
employees for their commitment to excellence
in executing our strategy. The deep relationships
nurtured by our employees with partners,
customers, suppliers, landowners and local
communities help us to operate thoughtfully,
responsibly and safely, and enhance our competitive
position. Our people are paramount to Capstone’s
success and we are grateful for their dedication.
We have the experience and drive to successfully
volatility relative to the broader equity market.
deliver on our strategy. We are confident in our
In 2013, we are focused on returning to historical
levels of business development activity and on
creating value for shareholders, imperatives that
are supported by:
▶ An exceptionally high quality infrastructure
portfolio of contractually defined, income-
producing power facilities as well as utilities
that deliver long-term, inflation-linked cash flow.
ability to create value for you, our shareholders,
and we thank you for your continuing support.
Sincerely,
MICHAEL BERNSTEIN
President and Chief Executive Officer
Our Business Code of
Conduct outlines our
commitment to respecting
our stakeholders and
to communicating
with transparency.
Read it online at: www.
capstoneinfrastructure.
com/About/Governance.aspx
2012 ANNUAL REPORT
5
MESSAGE FROM
THE CHAIRMAN
Our governance practices constantly evolve in step
with the business and regulatory environments in which
Capstone operates.
Dear Fellow Shareholders,
Fiscal 2012 was a busy year for Capstone during
▶ Governance policies and procedures that apply
equally to the individual businesses in Capstone’s
which we tackled various challenges and positioned
portfolio, which ensures consistency and
the company for its next phase of growth.
reliability in reporting and risk management;
We strengthened our financial position, welcomed
a new international partner and launched a power
development subsidiary to help source growth
opportunities that will increase the value of
our company. We also established a new dividend
that is intended to provide stable income for
shareholders with the potential for capital
appreciation as we realize our vision to be Canada’s
pre-eminent diversified infrastructure company.
▶ A Code of Ethics that encourages and promotes
a culture of ethical business conduct and must
be followed by all directors, executive officers
and employees of Capstone;
▶ An annual evaluation of the effectiveness of the
Board and individual directors to ensure the
Board is fulfilling its oversight role in the most
effective manner; and
▶ A majority voting policy, which requires
director nominees to be elected by a majority
As we pursue that vision, the Board of Directors is
of shareholder votes.
committed to ensuring that Capstone is managed
and governed — and continues to grow — in a
prudent way. We take our role as stewards of
your investment very seriously.
Our governance practices constantly evolve
in step with the business and regulatory
environments in which Capstone operates and
we regularly seek opportunities to strengthen
The Board’s mandate includes working with
our governance framework. In 2012, for
management to establish Capstone’s strategy
and objectives, approving significant decisions
example, the company reviewed, refined and
strengthened its enterprise risk management
that affect Capstone and its results, monitoring
practices and implemented an internal audit
the company’s financial performance and risk
function. Our governance and risk management
management practices, setting the dividend
processes support achievement of our strategic
policy and overseeing Capstone’s stakeholder
performance objectives.
relationships and reporting obligations.
A few highlights of our approach to
governance include:
▶ Audit, Governance and Compensation
Resolving the question of Cardinal’s future
remains a key strategic objective — one that
we are working tirelessly to accomplish. At the
same time, we are keenly focused on further
Committees that must be entirely composed
diversifying our portfolio and increasing its size,
of independent directors (as defined by
scope and long-term value for shareholders. I am
applicable securities laws);
optimistic about our company’s future for four
compelling reasons.
6
CAPSTONE INFRASTRUCTURE CORPORATION
Key Principles
Independence
At all times, a majority of directors
must be independent directors (as
defined under applicable securities
regulations). A director is independent
when he or she does not have a direct
or indirect material relationship with
Capstone or its subsidiaries.
Integrity and Professionalism
We seek out directors who have
demonstrated integrity and high
ethical standards, a proven record
of sound business judgment and
who committed to representing the
long-term interests of Capstone’s
shareholders.
Performance
We seek to build a Board on a diversity
of backgrounds, skills and experience
and annually review the competencies,
skills and personal qualities of each
director to maintain the composition
of the Board in a way that bolsters the
overall stewardship of the company.
First, Capstone has a history of meticulous
performance metrics while compensation under
asset management, continues to achieve stable,
the long-term incentive plan is directly tied to
and in some cases, improving, operational
both the performance of our shares and to the
performance and has significantly strengthened
total return we deliver to shareholders, consisting
its financial position, all of which are pillars vital
of share price performance and dividend yield,
to the long-term stability of our company, and,
relative to a group of comparable peers. This
accordingly, our dividend.
structure promotes responsible decision-making
Second, we have augmented our skill set with
that maximizes long-term value.
proven power development personnel who bring
I would like to thank my fellow directors for
a wealth of capabilities to Capstone and broaden
their diligence in guiding Capstone through
our business development reach. This new
2012. I would especially like to recognize Derek
initiative puts us in an excellent position to build a
Brown, who resigned from the Board in February
pipeline of accretive projects in the years to come.
2013, for his nine years of distinguished service
Third, backed by our strong balance sheet, we
expect to be able to access the capital we need
to finance investments that meet our strategic
and financial return criteria.
to Capstone. In addition to being one of our
longest-serving directors, Derek made significant
contributions to our company during his tenure.
We were very fortunate to benefit from Derek’s
counsel and guidance and we wish him the very
And fourth, massive investment and private
best in his future endeavours.
sector participation is required in Canada and
internationally to maintain and build the core
infrastructure that is critical to elevating quality
of life and economic prosperity. Our company is
ready to participate in these opportunities with
a leadership team that is knowledgeable, enjoys
strong relationships at home and abroad, and has
attained a competitive advantage through decades
of combined investment and management
experience across power generation and
transmission businesses, utilities, transportation
and toll roads, and public-private partnerships.
Our senior management team is also highly
motivated and aligned with shareholders’ interests.
A significant proportion of management’s short-
term incentive compensation is bound to financial
Finally, I must thank our shareholders for their
continuing support and confidence in Capstone
and the Board of Directors. I also extend my
appreciation to our employees at all levels of
the organization for their dedication to pursuing
excellence. Together, we are working to deliver a
superior total return to our shareholders.
Sincerely,
V. JAMES SARDO
Chairman of the Board of Directors
Shareholders can
access information
about management
compensation and
governance practices
on our website.
Please visit: www.
capstoneinfrastructure.
com/About/
Governance.aspx
2012 ANNUAL REPORT
7
STRATEGIC
OVERVIEW
Capstone’s core competencies give us the capability to deliver on our mission.
These strengths include our record of operational excellence and discipline in
how we screen, pursue and execute on growth opportunities as well as strong
leadership and financial flexibility. As a result, Capstone is well positioned to
capitalize on opportunities currently emerging in the growing infrastructure sector.
STRATEGIC OVERVIEW
STRATEGIC
OVERVIEW
PERFORMANCE OVERVIEW
Capstone's Business
Capstone's mission is to build and responsibly manage a high quality portfolio of infrastructure businesses in Canada and internationally in order to
deliver a superior total return to our shareholders by providing reliable income and capital appreciation. Our vision is to be the pre-eminent diversified
infrastructure company in Canada.
Infrastructure businesses provide services that meet critical, long-term community needs, such as power generation, electricity transmission, roads
and transportation networks, and water systems. These businesses typically benefit from some form of barrier to entry, stable and growing demand,
and other competitive advantages that provide stability in cash flow.
Our power infrastructure platform includes gas cogeneration, wind, hydro, biomass and solar power generation facilities in Canada, totalling
approximately 370 megawatts of installed capacity. These facilities have power purchase agreements with creditworthy customers. Our objectives
for the power platform are to maximize production and to maintain or improve the quality of each facility while efficiently managing costs.
Our utilities platform includes a 50% equity interest in Bristol Water, a regulated business in the United Kingdom that earns a return on its regulated
capital value (“RCV”), or asset base. Bristol Water is the sole water supplier in the Bristol region, serving a population of 1.2 million people. Our
objectives for Bristol Water are to provide safe, reliable drinking water that is cost-effective for customers, to operate efficiently and in compliance
with all regulatory and environmental requirements, and to invest capital to grow its RCV.
We also hold a 33.3% equity interest in Värmevärden, a district heating business in Sweden that serves residential customers, which includes multi-
residential complexes and municipal users, and also has long-term contracts with industrial customers. Our objectives for Värmevärden are to
manage fuel costs by using more cost-effective fuels, maintain strong customer relationships, and ensure high plant availability and operational
efficiency.
We expect to continue to build upon these two platforms and to further diversify our portfolio by geographic region and infrastructure category,
which could include power distribution and transmission; transportation, such as roads; and public private-partnerships.
Availability (%)
AVAILABILITY (%)
Facility
Facility
Cardinal
Cardinal
Erie Shores
Erie Shores
Hydro power facilities
Hydro Power Facilities
Whitecourt
Five-Year
Average
Five-Year
Average
2012
2012
95.0%
97.9%
98.5%
95.9%
95.0
97.9
98.5
95.9
97.4
96.7%
96.7%
98.0%
91.3%
96.7
96.7
98.0
91.3
96.5
Whitecourt
Amherstburg (1)
Amherstburg (1)
(1) Amherstburg commenced operations in June 2011.
97.4%
96.5%
Percentage of 2012 Power Revenue by Counterparty
PERCENTAGE OF 2012 POWER REVENUE BY COUNTERPARTY
p 63.5% Ontario Electricity
Financial Corporation
p 20.6% Ontario Power Authority
p 7.8% TransAlta
p 5.1% BC Hydro
p 3.0% Other
(1) Amherstburg commenced operations in June 2011.
Duration of Cash Flow
DURATION OF CASH FLOW
Contractual/Regulated Terms
Cardinal
Whitecourt
Chapais
Sechelt
Dryden
Hluey Lakes
Erie Shores
Amherstburg
Wawatay
Bristol
Värmevärden
CAPSTONE INFRASTRUCTURE CORPORATION
2010
2015
2020
2025
2030
2035
2040
2045
2050
10 CAPSTONE INFRASTRUCTURE CORPORATION
(Perpetual)
(Perpetual)
Page 10
STRATEGY
Accomplishing Our Vision
In support of its long-term vision, Capstone's decision making is guided by the following imperatives:
STRATEGY
Maximize and sustain the long-term value of our existing businesses
Accomplishing Our Vision
Each of our assets undergoes an annual strategic planning exercise to assess progress against goals and to determine how we can further improve
In support of its long-term vision, Capstone's decision making is guided by the following imperatives:
the efficiency, quality and performance of our operations. We work closely with the management teams at each asset to optimize operating and
financial performance, which includes applying strong risk management principles and procedures to safeguard Capstone's performance. In addition,
Maximize and sustain the long-term value of our existing businesses
each business follows a comprehensive, planned maintenance and capital expenditure program, which contributes significantly to long-term value.
Each of our assets undergoes an annual strategic planning exercise to assess progress against goals and to determine how we can further improve
Deliver strong financial performance
the efficiency, quality and performance of our operations. We work closely with the management teams at each asset to optimize operating and
financial performance, which includes applying strong risk management principles and procedures to safeguard Capstone's performance. In addition,
Our infrastructure businesses provide essential services for which there is consistent demand throughout the economic cycle. They also operate
each business follows a comprehensive, planned maintenance and capital expenditure program, which contributes significantly to long-term value.
within contractual frameworks or environments where they benefit from high barriers to entry. Combined, these attributes result in an inherently
stable foundation and, accordingly, relatively predictable operating cash flow. We seek to maximize our businesses' cash flow by employing a long-
Deliver strong financial performance
term approach to strategic planing and capital expenditures and by focusing on identifying new efficiencies and opportunities for enhancements
Our infrastructure businesses provide essential services for which there is consistent demand throughout the economic cycle. They also operate
capable of driving revenue growth.
within contractual frameworks or environments where they benefit from high barriers to entry. Combined, these attributes result in an inherently
Achieve prudent growth
stable foundation and, accordingly, relatively predictable operating cash flow. We seek to maximize our businesses' cash flow by employing a long-
term approach to strategic planing and capital expenditures and by focusing on identifying new efficiencies and opportunities for enhancements
Capstone's strategy includes:
capable of driving revenue growth.
(cid:127)
Achieve prudent growth
Concentrating our business development efforts primarily on Canada, the United States, the United Kingdom and western Europe in alignment
with our focus on investing only in countries that are members of the Organization for Economic Cooperation and Development (OECD) and
feature stable fiscal and political environments;
Capstone's strategy includes:
(cid:127)
(cid:127)
(cid:127)
Pursuing regulated or contractually defined core infrastructure businesses, which typically generate stable cash flow throughout the economic
cycle. This category includes power generation, electricity distribution and transmission, utilities, transportation and public-private partnerships;
Concentrating our business development efforts primarily on Canada, the United States, the United Kingdom and western Europe in alignment
with our focus on investing only in countries that are members of the Organization for Economic Cooperation and Development (OECD) and
Seeking a blend of operating infrastructure businesses and development opportunities that offer an appropriate risk-adjusted rate
feature stable fiscal and political environments;
of return; and
Pursuing regulated or contractually defined core infrastructure businesses, which typically generate stable cash flow throughout the economic
Focusing on wholly-owned businesses while remaining open to collaborating with like-minded partners, an approach that has historically been
cycle. This category includes power generation, electricity distribution and transmission, utilities, transportation and public-private partnerships;
successful for us.
Seeking a blend of operating infrastructure businesses and development opportunities that offer an appropriate risk-adjusted rate
of return; and
(cid:127)
Capstone's strategy is reviewed annually by its Board of Directors.
(cid:127)
(cid:127)
Core Infrastructure Categories
(cid:127)
CORE INFRASTRUCTURE CATEGORIES
Focusing on wholly-owned businesses while remaining open to collaborating with like-minded partners, an approach that has historically been
successful for us.
Capstone's strategy is reviewed annually by its Board of Directors.
Highly regulated
Less regulated
Core Infrastructure Categories
Strong competitive advantage
More competitive environment
P3s
REGULATED ASSETS
USER-PAY ASSETS
COMPETITIVE ASSETS
Target Assets for CSE
▶ Courts
▶ Hospitals
▶ Schools
▶ Police & Other
Government Facilities
▶ Transmission &
Distribution Assets
▶ Water & Sewerage
▶ Contracted Power
▶ Road
▶ Rail
▶ Airports
▶ Ports
Minimizing financial risk
with user-pay dimension
▶ District Heating: favourable utility-like characteristics
▶ Merchant Power
▶ Energy Trading
We continually monitor, analyze and seek to minimize the risks within our capital structure with a view to maintaining an optimal financing mix that
aligns with the cash flows, risk profile and duration of our businesses and that generates value for shareholders. We seek to manage our capital
Increasing Risk
structure so that it remains flexible and offers room for expansion. In 2012, we refinanced or repaid approximately $200 million coming due under
Minimizing financial risk
various credit facilities, thereby significantly strengthening our balance sheet.
We continually monitor, analyze and seek to minimize the risks within our capital structure with a view to maintaining an optimal financing mix that
aligns with the cash flows, risk profile and duration of our businesses and that generates value for shareholders. We seek to manage our capital
structure so that it remains flexible and offers room for expansion. In 2012, we refinanced or repaid approximately $200 million coming due under
various credit facilities, thereby significantly strengthening our balance sheet.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 11
11
CAPSTONE INFRASTRUCTURE CORPORATION
Page 11
STRATEGIC OVERVIEW
MARKET FUNDAMENTALS
Effective infrastructure supports economic growth and ensures a high quality of life. Globally, infrastructure investment requirements are significant
and growing, driven by underinvestment as well as major factors of change such as global economic growth, technological progress, climate change,
urbanization and growing congestion. There is a significant gap between the infrastructure investments required for the future and the capacity of
the public sector to meet those requirements from traditional sources.
Significant infrastructure investment is required in Canada and internationally
In a 2013 report, the McKinsey Global Institute estimated that US$57 trillion in infrastructure investment is required between 2013 and 2030 simply
to keep up with projected growth in global gross domestic product ("GDP"), including investments for transport (road, rail, ports and airports), power,
water and telecommunications. It is estimated that approximately $400 billion will be required by 2020 to plug Canada's infrastructure deficit: its
physical foundation of public buildings, roads, bridges, sewers, electrical grids, water purification plants and other critical infrastructure.
Strong demand for power infrastructure investment
According to the International Energy Agency, the global power generation, distribution and transmission infrastructure sector requires US$17 trillion
in existing and new capacity by 2035. The Canadian Electricity Association estimates that the Canadian electricity sector is expected to invest about
$294 billion between 2010 and 2030 to maintain existing generation, transmission and distribution infrastructure, meet market growth and
accommodate a changing generation mix. In addition, the renewable energy sector is expected to continue to experience growth in North America
reflecting government policy imperatives with respect to carbon reduction, climate change management and job creation.
Growing need for investment in water infrastructure
Aging infrastructure and years of underinvestment, growing demand and a variety of environmental pressures, including scarcity and climate change,
are creating a growing need for investment in the modernization and improvement of water treatment and delivery and wastewater infrastructure
systems throughout the OECD. The Federation of Canadian Municipalities estimates that Canada's water infrastructure deficit is approximately
$31 billion with the amount of new investment required projected to be an additional $57 billion. The U.S. Environmental Protection Agency
estimates water infrastructure investment needs in the United States over the next 20 years at more than US$500 billion.
Growing public support for private sector investment in infrastructure
Throughout much of the OECD, constrained government budgets and aging core infrastructure are expected to result in opportunities for additional
private sector investment in infrastructure, including potential asset privatizations. In Canada, private sector investment in infrastructure is well
established, with 185 public-private partnership (“P3”) projects at various stages currently underway, mostly involving hospitals, health care,
courthouses, and transportation. The market for P3s is expected to continue to grow in Canada with water and waste water, energy and transit
demanding more investment. A study conducted by the Canadian Council for Public-Private Partnerships in late 2011 showed that 70% of Canadians
believe the private sector should work with governments to deliver critical infrastructure.
Combined, these market drivers contribute to the potential for increasing private sector participation in infrastructure renewal and expansion in
Canada and the other OECD markets we target. Several attributes position Capstone to capitalize on these emerging opportunities,
including our:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Significant expertise in infrastructure investment and management across core infrastructure categories in Canada and internationally, which
equips us to offer tangible, proven knowledge and experience to governments and prospective partners;
New power development capability, which complements our existing skill set and will enable us to participate in earlier-stage greenfield or
brownfield opportunities;
Strong relationships within the infrastructure industry and with multinational partners, which enhance our ability to forge new partnerships
across borders and to stimulate deal flow and access to unique opportunities; and
Flexibility in how we work with prospective investment partners, which is a competitive advantage that has enabled us to effectively navigate
less conventional, more complex opportunities such as our investment in Bristol Water. We acquired a controlling interest in Bristol Water, and
a foothold in an attractive infrastructure category, while preserving a role for our new partner in the business.
By investing in regulated or contractually defined core infrastructure businesses, Capstone strives to offer shareholders reliable income
and capital appreciation.
12 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 12
KEY PERFORMANCE DRIVERS
Across our businesses, we are focused on a number of performance drivers that support the quality, stability and long-term cash flow profile of our
portfolio, and, accordingly, our ability to deliver value to shareholders.
Power
The major factors that drive the results of our power infrastructure segment are:
Maintaining consistently high availability
Availability is the number of hours that a generating unit is capable of generating electricity, whether or not it is actually generating electricity, as a
percentage of total hours in the period. Our power businesses are characterized by high availability, which reflects the quality of plant operations and
underpins the reliability of Capstone's cash flow. In 2012, our facilities achieved availability in line with or slightly ahead of their historical five-year
average availability.
Entering into PPAs with creditworthy counterparties
Counterparty Credit Ratings
Our power businesses have a sustainable competitive advantage
Counterparty
Credit Rating
through PPAs that provide price certainty for 98.7% of the power
generated by our facilities, contributing to the overall predictability of
Capstone's revenue. The remaining 1.3% of power, which represents
approximately 4 MW of net capacity at Whitecourt, is sold at the
Alberta Power Pool spot price. The weighted average PPA term
remaining is approximately 7.3 years.
Conducting preventive maintenance and continually
improving operations
Each facility has an established maintenance program with an
emphasis on routine and preventive maintenance, which helps to
ensure the plants' continuing consistent availability, capacity and
long life.
In addition, we seek to improve the capacity and efficiency of each
facility through the implementation of technological and operational
enhancements. Initiatives in 2012 included completing a gear box oil
exchange program at Erie Shores that is expected to reduce the
number of oil changes required over the life of the facility, thereby
lowering costs.
OEFC
OPA
TransAlta
BC Hydro
AA (low)/Stable – DBRS
A (high)/Stable – DBRS
BBB/Stable – DBRS
AA (high)/Stable – DBRS
Improving Operations at Erie Shores
In 2012, Erie Shores made operational enhancements that are
expected to result in lower costs over the long term.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 13
13
STRATEGIC OVERVIEW
Utilities
The major factors that drive the results of our utilities segment are:
Water
Stable regulatory regime
The regulatory framework for water utilities in the United Kingdom enables Bristol Water to recover operating costs and earn a reasonable return on
the capital it invests, resulting in highly visible and stable cash flows. As an incentive-based regime, the regulatory structure allows for significant
outperformance through achievement of operational excellence and cost efficiencies.
Advancing capital investment program
In the current regulatory period, which runs from April 2010 to March 2015 ("AMP5"), Bristol Water will complete an approximately $441 million
(£276 million) capital investment program. This program will enable Bristol Water to maintain and improve its infrastructure and operations, to
continue to meet water quality requirements and to support growth arising from an increasing population and expanded business activity in the
region. This significant capital program will drive growth in Bristol Water's regulated capital value, which over time will increase the cash flow we
receive from this investment and its overall value for Capstone's shareholders.
Achieving of regulatory targets
Bristol Water is subject to a number of regulatory performance targets, including targets for serviceability, both above ground and below ground,
security of supply, leakage and water efficiency. Failing to meet these targets could result in a fine or reduced revenue allowance at the next price
setting review in 2014. Management is focused on achieving the following key regulatory outputs :
Key Regulatory Output
AMP5 Objective
Actual Performance (1)
Reduce amount of water that leaks from the
network's pipes and mains
Save water
Reduce water leakage to 49 million litres of water
per day ("Ml/d") with a 2013 target of less than
50 Ml/d
Achieve a base service water efficiency target
of 4.0 Ml/d
Strong performance on regulator's security
of supply index, which measures reliability of
water supply
Achieve a 100% grade
Achieved water leakage of 43 Ml/day due
to a mild winter with fewer pipe bursts
1.22 Ml/d
100%
Stable serviceability
Maintain stable serviceability
Achieved stable serviceability
Exceptional customer service as measured
by regulator's Service Incentive Mechanism
("SIM")
Deliver top-quartile performance as measured
through customer satisfaction surveys and
quantitative data
Bristol Water ranked second out of 21
companies
(1)
In the regulatory year ended March 31, 2012.
District heating
Managing fuel costs
Fuel costs are the largest expense for Värmevärden, accounting for approximately 37% of revenue. As a result, efficient management of fuel costs is a
key driver of financial stability. Värmevärden's long-term contracts with industrial users include price escalators linked to a combination of inflation
and fuel price increases. Contracts with residential users allow for rates to be set annually, which provides the business with flexibility to manage fuel
price increases.
Maintaining strong customer relationships
Värmevärden's industrial customers provide approximately 25% of EBITDA. In addition, Värmevärden relies on its industrial partners for low-cost
waste heat, which is a cost effective fuel source. Renewing existing customer contracts and securing new customers is important to Värmevärden's
overall performance. The balance of Värmevärden's customers are categorized as residential, which includes multi-residential complexes as well as
municipal users. Contracts with residential customers typically automatically renew annually but may be terminated with appropriate notice, which
provides a strong incentive for Värmevärden to deliver highly reliable and quality service to its customers.
Increasing the availability and capacity of baseload production
Ensuring high plant availability and capacity helps to maximize revenue potential while minimizing the use of more expensive peak fuel.
14 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 14
CAPABILITY TO DELIVER RESULTS
Capstone's core competencies give us the capability to deliver on our mission. They include:
Record of operational excellence
We seek to ensure a stable portfolio by owning and managing a mix of relatively low-risk businesses. At each of our businesses, we work with the
managerial team or our investment partners to improve productivity, manage costs and enhance long-term operations. Across our power facilities,
for example, in 2012 we achieved an average availability of 95.8%, which was consistent with 2011. Our consistently strong availability is the product
of effective, ongoing maintenance programs and the overall high quality of each facility.
Proven ability to execute on growth opportunities
Capstone has proven its ability to successfully pursue growth opportunities and to integrate new businesses into its portfolio, with the 2010
acquisitions of Amherstburg Solar Park and the 2011 acquisitions of our interests in Värmevärden and Bristol Water. We subsequently sold a portion
of our investment in Bristol Water in May 2012.
Also in 2012, we established Capstone Power Development, a wholly owned subsidiary focused on sourcing, cultivating and pursuing power
development opportunities in western Canada and the United States. This new capability will enable us to participate in earlier-stage opportunities
and supports our objective of enhancing returns to shareholders.
Disciplined approach to pursuing growth
We bring a highly disciplined approach to selecting which growth opportunities we pursue and maintain a focus on high quality, low risk businesses
that will enhance value for shareholders. Our discipline in selecting growth opportunities is evidenced by the attractive premium we achieved on the
sale of a minority, non-controlling interest in Bristol Water just months after our initial acquisition.
Strong leadership
Capstone's corporate management team comprises executives with decades of combined expertise in managing and financing infrastructure
businesses. Our newest employees with Capstone Power Development also bring decades of experience in successfully developing and delivering
power projects in Canada and the United States. Our Board of Directors comprises seasoned executives with a broad mix of skills in finance,
operations, strategy, government and corporate governance. In addition, employees throughout our organization are dedicated to operational
excellence and continuous improvement.
Financial strength and flexibility
A key focus for us in 2012 was to refinance approximately $200 million in debt coming due during the year under various credit facilities. Through a
variety of financing initiatives, we have successfully reduced our total leverage, lowered our refinancing risk and have limited exposure to movements
in interest rates. Our debt to capitalization ratio at year end was 62.7%, which is conservative relative to the low risk profile and long life
of our businesses.
We also seek to maintain a flexible capital structure that enables us to capitalize on growth opportunities when they arise. We are focused on:
(cid:127)
Ensuring an appropriate capital structure at the corporate and subsidiary level that aligns with the cash flow profile and duration of
our businesses;
(cid:127) Maintaining sufficient liquidity to meet short- and medium-term operating needs; and
(cid:127)
Building and maintaining strong relationships with investors and lenders.
As a result, we believe we have access to the resources we need to support growth.
In addition, we expect our dividend policy to result in a long-term payout ratio of 70% to 80% of Adjusted Funds from Operations, which will allow us
to retain cash that can be reinvested in new growth opportunities.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 15
15
CONTENTS
Financial Highlights
Legal Notice
Introduction
Basis of Presentation
Changes in the Business
Non-GAAP and Additional GAAP
Performance Measure Definitions
17
18
19
19
19
20
Results of Operations
Financial Position Review
Derivative Financial Instruments
Foreign Exchange
Risks and Uncertainties
Environmental, Health and
Safety Regulation
22
32
39
39
40
47
48
Related Party Transactions
49
Summary of Quarterly Results
Fourth Quarter 2012 Highlights
50
Accounting Policies and Internal Control 51
16 CAPSTONE INFRASTRUCTURE CORPORATION
MANAGEMENT’S
DISCUSSION AND
ANALYSIS
Our infrastructure businesses provide essential services for which there is
consistent demand throughout the economic cycle. They also operate within
contractual frameworks or environments where they benefit from high barriers
to entry. Combined, these attributes result in an inherently stable foundation
and, accordingly, relatively predictable operating cash flow.
Financial Highlights
Revenue
Net income (loss)
Earnings (loss) per share
Basic and diluted
AFFO per share
Cash dividends per share
Common
Preferred
Total assets
Total long-term liabilities
Total liabilities
As at and for the year ended December 31
2012
357,610
43,724
0.298
0.473
0.450
1.250
1,652,539
1,013,729
1,142,081
2011
215,967
(3,263)
(0.108)
0.541
0.660
0.421
1,697,744
928,797
1,249,774
2010
158,512
15,901
0.339
0.693
0.660
n/a
804,134
414,480
540,039
2012 ANNUAL REPORT
17
LEGAL NOTICE
Caution Regarding Forward-Looking Statements
Certain of the statements contained within this document are forward-looking and reflect management's expectations regarding the future growth, results of operations,
performance and business of Capstone Infrastructure Corporation (the “Corporation”) based on information currently available to the Corporation. Forward-looking
statements and financial outlook are provided for the purpose of presenting information about management's current expectations and plans relating to the future and
readers are cautioned that such statements may not be appropriate for other purposes. These statements and financial outlook use forward-looking words, such as
“anticipate”, “continue”, “could”, “expect”, “may”, “will”, “estimate”, “plan”, “believe” or other similar words, and include, among other things, statements found in “Strategic
Overview” and “Results of Operations”. These statements and financial outlook are subject to known and unknown risks and uncertainties that may cause actual results or
events to differ materially from those expressed or implied by such statements and financial outlook and, accordingly, should not be read as guarantees of future
performance or results. The forward-looking statements and financial outlook within this document are based on information currently available and what the Corporation
currently believes are reasonable assumptions, including the material assumptions set out in the management's discussion and analysis of the results of operations and the
financial condition of the Corporation (“MD&A”) for the year ended December 31, 2012 under the heading “Results of Operations”, as updated in subsequently filed MD&A
of the Corporation (such documents are available under the Corporation's profile on www.sedar.com).
Other material factors or assumptions that were applied in formulating the forward-looking statements and financial outlook contained herein include or relate to the
following: that the business and economic conditions affecting the Corporation's operations will continue substantially in their current state, including, with respect to
industry conditions, general levels of economic activity, regulations, weather, taxes and interest rates; that the power infrastructure facilities will experience normal wind,
hydrological and solar irradiation conditions, and ambient temperature and humidity levels; an effective TCPL gas transportation toll of approximately $1.76 per gigajoule in
2013; that there will be no material change in the level of gas mitigation revenue historically earned by the Cardinal facility; that there will be no material changes to the
Corporation's facilities, equipment or contractual arrangements, no material changes in the legislative, regulatory and operating framework for the Corporation's businesses,
no delays in obtaining required approvals, no material changes in rate orders or rate structures for the power infrastructure facilities, Värmevärden or Bristol Water, no
material changes in environmental regulations for the power infrastructure facilities, Värmevärden or Bristol Water and no significant event occurring outside the ordinary
course of business; that the amendments to the regulations governing the mechanism for calculating the Global Adjustment (which affects the calculation of the DCR
escalator under the PPA for the Cardinal facility and price escalators under the hydro power facilities located in Ontario) will continue in force; that there will be no material
change to the accounting treatment for Bristol Water's business under International Financial Reporting Standards, particularly with respect to accounting for maintenance
capital expenditures; that there will be no material change to the amount and timing of capital expenditures by Bristol Water; that there will be no material changes to the
Swedish Krona to Canadian dollar and UK pound sterling to Canadian dollar exchange rates; and that Bristol Water will operate and perform in a manner consistent with the
regulatory assumptions underlying AMP5, including, among others: real and inflationary increases in Bristol Water's revenue, Bristol Water's expenses increasing in line with
inflation, and capital investment, leakage, customer service standards and asset serviceability targets being achieved.
Although the Corporation believes that it has a reasonable basis for the expectations reflected in these forward-looking statements and financial outlook, actual results may
differ from those suggested by the forward-looking statements for various reasons, including: risks related to the Corporation's securities (dividends on common shares and
preferred shares are not guaranteed; volatile market price for the Corporation's securities; shareholder dilution; and convertible debentures credit risk, subordination and
absence of covenant protection); risks related to the Corporation and its businesses (availability of debt and equity financing; default under credit agreements and debt
instruments; geographic concentration; foreign currency exchange; acquisitions and development; environmental, health and safety; changes in legislation and administrative
policy; and reliance on key personnel); risks related to the Power Infrastructure Facilities (power purchase agreements; operational performance; fuel costs and supply;
contract performance; land tenure and related rights; environmental; regulatory environment); risks related to Bristol Water (Ofwat price determinations; failure to deliver
capital investment programs; economic conditions; operational performance; failure to deliver water leakage target; SIM and the serviceability assessment; pension plan
obligations; regulatory environment; competition; seasonality and climate change; and labour relations); and risks related to Värmevärden (operational performance; fuel
costs and availability; industrial and residential contracts; environmental; regulatory environment; and labour relations).
The assumptions, risks and uncertainties described above are not exhaustive and other events and risk factors could cause actual results to differ materially from the results
and events discussed in the forward-looking statements and financial outlook. The forward-looking statements and financial outlook within this document reflect current
expectations of the Corporation as at the date of this document and speak only as at the date of this document. Except as may be required by applicable law, the
Corporation does not undertake any obligation to publicly update or revise any forward-looking statements and financial outlook.
This document is not an offer or invitation for the subscription or purchase of or a recommendation of securities. It does not take into account the investment objectives,
financial situation and particular needs of any investors. Before making an investment in the Corporation, an investor or prospective investor should consider whether such
an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary.
18 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 18
MANAGEMENT’S DISCUSSION AND ANALYSIS INTRODUCTION
Management’s discussion and analysis (“MD&A”) summarizes Capstone Infrastructure Corporation's (the "Corporation" or "Capstone") consolidated
financial position, operating results and cash flows as at and for the years ended December 31, 2012 and 2011.
This MD&A should be read in conjunction with the accompanying audited consolidated financial statements of the Corporation and notes thereto as
at and for the years ended December 31, 2012 and 2011. Additional information about the Corporation, including its Annual Information Form
("AIF") for the year ended December 31, 2011, quarterly financial reports of Capstone and other public filings of the Corporation will be available
under the Corporation’s profile on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”) website
at www.sedar.com.
The information contained in this MD&A reflects all material events up to March 7, 2013, the date on which this MD&A was approved by the
Corporation’s Board of Directors.
BASIS OF PRESENTATION
Financial information in this MD&A is prepared in accordance with International Financial Reporting Standards (“IFRS”) and amounts are in Canadian
thousands of dollars or thousands of share amounts unless otherwise indicated.
Amounts included in the consolidated financial statements of each entity in the Corporation are measured using the currency of the primary
economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in Canadian dollars
(“presentation currency”), which is Capstone’s functional currency. The exchange rates used in the translation to the presentation currency are:
As at and for the year ended
Dec 31, 2011
Dec 31, 2012
Swedish krona (SEK)
Pound sterling (£)
Average
0.1525 (1)
0.1476
Spot
0.1479
0.1528
Average
1.6076 (2)
1.5840
Spot
1.5799
1.6178
(1) Nine-month period from acquisition on March 31, 2011 to December 31, 2011.
(2) Period from acquisition on October 5, 2011 to December 31, 2011.
CHANGES IN THE BUSINESS
In 2012, Capstone addressed maturing debt and positioned the company for future growth. At the end of 2011, Capstone had $197,375 of debt
maturing in 2012, excluding amounts at Bristol Water. Capstone repaid or refinanced this amount through the initiatives described below. In addition,
the Corporation implemented a new dividend policy in June 2012 reflecting the expected cash flow profile of the company post-2014, which
includes the impact of lower cash flow from Cardinal following expiry of its current power purchase agreement.
Värmevärden Recapitalization
In March 2012, Värmevärden, the district heating business, issued approximately $150,000 (1,000,000 SEK) of senior secured bonds to institutional
investors. Värmevärden repaid a portion of the shareholder loans from the bond proceeds. Capstone received $49,400 as partial repayment of its
shareholder loan and accrued interest which is its pro rata share resulting from Capstone's one-third interest in Värmevärden. Capstone used these
proceeds to repay a portion of its senior debt facility. As a result of the recapitalization, Capstone continues to own a one-third interest in
Värmevärden, however its total investment in Värmevärden was reduced to $52,028, comprising $34,336 in loans receivable and $17,692 in equity
accounted investment.
Partial Sale of Interest in Bristol Water
On May 10, 2012, Capstone sold to I-Environment Investments Ltd, a subsidiary of ITOCHU Corporation, a 20% indirect interest in Bristol Water plc.
I-Environment Investments Ltd acquired a 2/7ths ownership interest in CSE Water UK Limited, which indirectly owns a 70% interest in Bristol Water
plc. Capstone received $68,952 of net proceeds from the sale and used the funds to repay the remaining $28,975 on the senior debt facility and
$39,000 on the CPC-Cardinal credit facility, retaining cash of $977.
Capstone retains a 50% indirect interest in Bristol Water and continues to consolidate based on retention of control. In accordance with IFRS,
Capstone recorded the transaction as a transfer of equity to non-controlling interest holders. The excess net proceeds of $15,694 over the value of
equity transferred to the non-controlling interest and $850 of taxes were recorded directly to retained earnings.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 19
19
Financing of Hydro Facilities
On June 6, 2012, MPT Hydro LP, an indirect wholly-owned subsidiary of Capstone, which owns the Dryden, Hluey Lakes, Sechelt and Wawatay hydro
facilities (the “hydro facilities”), completed a $100,621 debt offering to recapitalize the hydro facilities. The debt offering comprised $80,379 of
senior secured bonds and $20,242 of subordinated secured bonds.
Proceeds from the offering were used to repay the $27,239 balance of levelization debt at the Wawatay hydro facility and to pay $1,785 of
transaction costs, which were capitalized. In addition, Capstone cash funded $3,846 for debt service and maintenance reserve accounts in
accordance with the bond indenture and used $67,700 of net proceeds to repay a portion of the CPC-Cardinal credit facility. The remaining balance
of $12,300 was subsequently refinanced in September 2012, as part of the new credit facility.
New Dividend Policy
On June 1, 2012, the Board of Directors of the Corporation established a new policy with respect to the timing and amount of its dividend,
commencing with the month ended June 2012. Under the new dividend policy, the Corporation intends to pay a quarterly dividend of $0.075 per
common share, or $0.30 per common share on an annualized basis. Among other things, the Corporation's dividend policy reflects management's
view on current Ontario power market and fiscal dynamics and its expectation for the cash flow the Cardinal facility will generate following the expiry
of its current power purchase arrangement at the end of 2014.
The Corporation’s dividend policy is determined by the Board of Directors of the Corporation and is based on the Corporation’s cash flows, financial
requirements, the satisfaction of solvency tests imposed under corporate law for the declaration of dividends and other relevant factors. With the
implementation of the new dividend policy, the Corporation expects to retain additional cash that can be reinvested in new growth opportunities.
NON-GAAP AND ADDITIONAL GAAP PERFORMANCE MEASURE DEFINITIONS
While the accompanying consolidated financial statements have been prepared in accordance with IFRS, this MD&A also contains figures that are
performance measures not defined by IFRS. These non-GAAP and additional GAAP performance measures do not have any standardized meaning
prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other issuers. The Corporation believes that these
indicators are useful since they provide additional information about the Corporation’s earnings performance and cash generating capabilities and
facilitate comparison of results over different periods. The non-GAAP and additional GAAP measures used in this MD&A are defined below.
Earnings before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”)
EBITDA is net income (loss), including that net income (loss) related to the non-controlling interest (“NCI”) and interest income excluding interest
expense, income taxes, depreciation and amortization. EBITDA represents Capstone’s continuing capacity to generate income from operations
before taking into account management’s financing decisions and costs of consuming tangible capital assets and intangible assets, which vary
according to their vintage, technological currency, and management’s estimate of their useful life. EBITDA is presented on the consolidated
statement of income.
Adjusted EBITDA
Adjusted EBITDA is calculated as revenue less operating and administrative expenses plus interest income and dividends or distributions received
from equity accounted investments. Amounts attributed to any non-controlling interest are deducted. Adjusted EBITDA for the investment in Bristol
Water is included at Capstone’s proportionate ownership interest. For the period from October 5, 2011 to May 10, 2012, Capstone held a 70%
ownership interest. This ownership interest was reduced to 50% upon the partial sale of Bristol Water on May 10, 2012. Adjusted EBITDA is
reconciled to EBITDA by removing equity accounted income, other gains and losses (net), foreign exchange gains and losses, and adding in dividends
or distributions from equity accounted investments.
Adjusted Funds from Operations (“AFFO”)
Capstone’s definition of AFFO measures cash generated by its infrastructure business investments that is available for dividends and general
corporate purposes. For wholly owned businesses, AFFO is equal to Adjusted EBITDA less interest paid, repayment of principal on debt, income,
taxes paid and maintenance capital expenditures. For businesses that are not wholly owned, the cash generated by the business is only available to
Capstone through periodic dividends. For these businesses, AFFO is equal to distributions received. Also deducted are corporate expenses and
dividends on preferred shares.
20 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 20
MANAGEMENT’S DISCUSSION AND ANALYSIS AFFO is calculated from Adjusted EBITDA by:
Deducting:
(cid:127)
Adjusted EBITDA generated from businesses with significant non-controlling interests
Adding:
(cid:127)
(cid:127)
Dividends received from businesses with significant non-controlling interests
Scheduled repayments of principal on loans receivable from equity accounted investments
Deducting items for businesses without significant non-controlling interests:
(cid:127)
(cid:127)
(cid:127)
Interest paid
Income taxes paid
Dividends paid on the preferred shares included in shareholders’ equity
(cid:127) Maintenance capital expenditure payments
(cid:127)
Scheduled repayments of principal on debt, net of changes to the levelization liability up to repayment on June 6, 2012
Payout Ratio
Payout ratio measures the proportion of AFFO that is paid as dividends to common shareholders. The payout ratio is calculated as dividends declared
divided by AFFO.
Reconciliation of Non-GAAP Performance Measures
The following table reconciles Adjusted EBITDA and AFFO to the nearest GAAP measures:
EBITDA
Foreign exchange (gain) loss
Other (gains) and losses, net
Equity accounted (income) loss
Distributions from equity accounted investments
Non-controlling interest ("NCI") portion of Adjusted EBITDA
Adjusted EBITDA
Cash flow from operating activities
Bristol Water cash flow from operating activities
Bristol Water dividends paid to Capstone
Värmevärden dividends paid to Capstone
Foreign exchange (gain) loss on loans receivable from Värmevärden
Chapais loans receivable principal repayments
Power maintenance capital expenditures
Power and corporate scheduled principal repayments
Power and corporate working capital changes
Dividends on redeemable preferred shares
AFFO
For the year ended
Dec 31, 2012
Dec 31, 2011
161,091
(1,620)
(1,294)
(2,294)
2,001
(37,227)
120,657
114,678
(76,474)
8,091
2,001
(415)
984
(5,398)
(12,581)
8,427
(3,750)
35,563
32,066
3,274
21,742
5,276
—
(6,685)
55,673
50,881
(22,192)
3,971
—
33
884
(4,129)
(4,688)
(8,287)
(1,264)
15,209
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 21
21
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Overview
Overview
Capstone's Adjusted EBITDA and AFFO in 2012 were both higher than in 2011 as reflected in the following table.
Capstone's Adjusted EBITDA and AFFO in 2012 were both higher than in 2011 as reflected in the following table.
Revenue
Revenue
Expenses
Expenses
Interest income
Interest income
Distributions from equity accounted investments
Distributions from equity accounted investments
Less: non-controlling interest (“NCI”)
Less: non-controlling interest (“NCI”)
Adjusted EBITDA
Adjusted EBITDA
Adjusted EBITDA of consolidated businesses with NCI
Adjusted EBITDA of consolidated businesses with NCI
Dividends from businesses with non-controlling interests
Dividends from businesses with non-controlling interests
Principal from loans receivable
Principal from loans receivable
Interest paid
Interest paid
Dividends paid on Capstone’s preferred shares
Dividends paid on Capstone’s preferred shares
Income taxes (paid) recovery
Income taxes (paid) recovery
Maintenance capital expenditures
Maintenance capital expenditures
Scheduled repayment of debt principal
Scheduled repayment of debt principal
AFFO
AFFO
Internalization costs
Internalization costs
AFFO before internalization costs
AFFO before internalization costs
Before internalization costs
Before internalization costs
AFFO per share
AFFO per share
Payout ratio (1)
Payout ratio (1)
Dividends declared per share
Dividends declared per share
For the year ended
For the year ended
Dec 31, 2012
Dec 31, 2012
357,610
357,610
(206,613)
(206,613)
4,886
4,886
2,001
2,001
(37,227)
(37,227)
120,657
120,657
(48,516)
(48,516)
8,091
8,091
984
984
(23,312)
(23,312)
(3,750)
(3,750)
(612)
(612)
(5,398)
(5,398)
(12,581)
(12,581)
35,563
35,563
—
—
35,563
35,563
Dec 31, 2011
Dec 31, 2011
215,967
215,967
(160,052)
(160,052)
6,443
6,443
—
—
(6,685)
(6,685)
55,673
55,673
(15,597)
(15,597)
3,971
3,971
884
884
(19,641)
(19,641)
(1,264)
(1,264)
—
—
(4,129)
(4,129)
(4,688)
(4,688)
15,209
15,209
19,675
19,675
34,884
34,884
0.473
0.473
94.9%
94.9%
0.450
0.450
0.541
0.541
120.5%
120.5%
0.660
0.660
(1) Capstone's payout ratio for the year ended December 31, 2012 would have been 63.4% if the new dividend policy of $0.30/share had been effective for all of 2012.
(1) Capstone's payout ratio for the year ended December 31, 2012 would have been 63.4% if the new dividend policy of $0.30/share had been effective for all of 2012.
Revenue increased by $141,643, or 65.6%, primarily due to full year contributions from businesses acquired or commencing operations during
Revenue increased by $141,643, or 65.6%, primarily due to full year contributions from businesses acquired or commencing operations during
2011. Bristol Water and Amherstburg contributed $132,797 and $8,582 representing nine and six months, respectively, of additional revenue.
2011. Bristol Water and Amherstburg contributed $132,797 and $8,582 representing nine and six months, respectively, of additional revenue.
Expenses increased by $46,561, or 29.1%, including internalization costs, and $66,236, or 47.2%, excluding these costs.
Expenses increased by $46,561, or 29.1%, including internalization costs, and $66,236, or 47.2%, excluding these costs.
(cid:127) Operating expenses increased by $73,092 or 59.9%, primarily due to a full year of Bristol Water, which added $68,486 during the first nine
(cid:127) Operating expenses increased by $73,092 or 59.9%, primarily due to a full year of Bristol Water, which added $68,486 during the first nine
months of 2012.
months of 2012.
Administrative expenses increased by $1,068, or 10.7%, from 2011, excluding internalization costs, primarily due to the inclusion of a full year
Administrative expenses increased by $1,068, or 10.7%, from 2011, excluding internalization costs, primarily due to the inclusion of a full year
of corporate costs such as rent, IT, and staff compensation. Prior to April 15, 2011, such costs were covered by the management fee paid to
of corporate costs such as rent, IT, and staff compensation. Prior to April 15, 2011, such costs were covered by the management fee paid to
Macquarie Group Limited ("MGL").
Macquarie Group Limited ("MGL").
Project development costs decreased by $7,924, or 95.6%, as Capstone had less business acquisition activity in 2012 as management focused
Project development costs decreased by $7,924, or 95.6%, as Capstone had less business acquisition activity in 2012 as management focused
on financing and asset management initiatives.
on financing and asset management initiatives.
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Interest income decreased by $1,557, or 24.2%, primarily due to Värmevärden repaying $48,100 of the shareholder loan balance from the proceeds
Interest income decreased by $1,557, or 24.2%, primarily due to Värmevärden repaying $48,100 of the shareholder loan balance from the proceeds
of the bond issuance. The reduction in interest income was partially offset by the receipt of an additional quarter of interest from Värmevärden for
of the bond issuance. The reduction in interest income was partially offset by the receipt of an additional quarter of interest from Värmevärden for
the first quarter of 2012 compared with the prior year as the business was acquired on March 31, 2011. The remaining difference was attributable
the first quarter of 2012 compared with the prior year as the business was acquired on March 31, 2011. The remaining difference was attributable
to interest income variances on cash balances at Bristol Water and corporate.
to interest income variances on cash balances at Bristol Water and corporate.
Distributions from equity accounted investments increased by $2,001, or 100%, as Värmevärden began paying dividends to Capstone in 2012.
Distributions from equity accounted investments increased by $2,001, or 100%, as Värmevärden began paying dividends to Capstone in 2012.
The new dividends offset the lower interest income received from Värmevärden.
The new dividends offset the lower interest income received from Värmevärden.
Interest paid increased by $3,671, or 18.7%, primarily due to additional interest costs at Amherstburg since commencement of operations in June
Interest paid increased by $3,671, or 18.7%, primarily due to additional interest costs at Amherstburg since commencement of operations in June
2011, new long-term debt at the hydro power facilities beginning in June 2012, and interest on the corporate senior debt facility up until May 2012
2011, new long-term debt at the hydro power facilities beginning in June 2012, and interest on the corporate senior debt facility up until May 2012
when it was repaid. Interest paid by Bristol Water is excluded from Capstone’s definition of AFFO and is the primary difference between interest
when it was repaid. Interest paid by Bristol Water is excluded from Capstone’s definition of AFFO and is the primary difference between interest
expense included in consolidated net income (loss) and interest paid in AFFO. The remaining difference between interest expense and interest paid
expense included in consolidated net income (loss) and interest paid in AFFO. The remaining difference between interest expense and interest paid
was attributable to amortization of financing costs and timing differences between accrual and payment basis.
was attributable to amortization of financing costs and timing differences between accrual and payment basis.
Scheduled debt repayments increased by $7,893, or 168%, primarily due to higher debt service payments at Amherstburg during the first full year
Scheduled debt repayments increased by $7,893, or 168%, primarily due to higher debt service payments at Amherstburg during the first full year
of operations, along with new debt for the hydro facilities and a full year of debt amortization in 2012 on tranche C of the Erie Shores project debt.
of operations, along with new debt for the hydro facilities and a full year of debt amortization in 2012 on tranche C of the Erie Shores project debt.
Maintenance capital expenditures increased by $1,269, or 30.7%, primarily due to Cardinal's scheduled hot gas path inspection, which occurs every
Maintenance capital expenditures increased by $1,269, or 30.7%, primarily due to Cardinal's scheduled hot gas path inspection, which occurs every
three years.
three years.
22 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 22
Page 22
MANAGEMENT’S DISCUSSION AND ANALYSIS Results by Segment
Capstone’s results are segmented into power facilities across Canada, a water utility in Europe and a district heating utility in Europe. All remaining
results relate to corporate activities. The power segment includes gas cogeneration, hydro, wind, biomass and solar power, as well as project
development. In 2011, Capstone made investments in the utilities segment through the acquisition of an interest in Bristol Water, a regulated water
utility in the United Kingdom, and the acquisition of a 33.3% interest in Värmevärden, a district heating business in Sweden. The financial results of
Bristol Water are consolidated with Capstone’s other businesses before deducting the portion of Adjusted EBITDA attributable to non-controlling
interests. Capstone’s non-controlling interest in Värmevärden provides interest income and dividends.
Non-GAAP performance measures
Non-GAAP performance measures results for each business segment were as follows:
Adjusted EBITDA
For the year ended
AFFO
For the year ended
Dec 31, 2012 Dec 31, 2011
Change
Dec 31, 2012 Dec 31, 2011
Change
Power
Utilities – water
Utilities – district heating
Corporate (1)
Total
78,178
48,516
5,357
72,677
15,597
5,024
(11,394)
(17,950)
5,501
Power
43,859
50,048
(6,189)
32,919
Utilities – water
333
6,556
Utilities – district heating
Corporate (1)
8,091
5,357
3,971
5,024
(21,744)
(24,159)
35,563
34,884
4,120
333
2,415
679
120,657
75,348
45,309
Total
(1) Excludes internalization costs of $19,675 for 2011.
Power
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2011:
Change
Explanations
8,210 Amherstburg contributed an additional six months of Adjusted EBITDA in 2012.
(1,561) Cardinal's hot gas path inspection required more days of maintenance than the combustion inspection completed in 2011, which
resulted in lower revenue and lower operating expenses.
(1,079) Higher fuel transportation costs at Cardinal as TransCanada Pipelines ("TCPL") tolls increased from $1.64 per GJ to $2.24 per GJ
in March 2011.
843 Whitecourt's sales of additional renewable energy credits ("RECs") produced higher revenue.
(912) Various other changes.
5,501 Change in Adjusted EBITDA.
(5,604) Amherstburg had an additional six months of debt servicing costs in 2012.
(4,462) The hydro facilities and Erie Shores had additional debt servicing costs. The increase was due to the recapitalization of the hydro
facilities in June 2012 and the refinancing of Erie Shores in April 2011.
(959) Cardinal's hot gas path inspection resulted in higher maintenance capital expenditures than in 2011.
(665) Various other changes.
(6,189) Change in AFFO.
Utilities – water
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2011:
Change
Explanations
38,372 Bristol Water contributed nine months of additional Adjusted EBITDA in 2012.
(4,340) Sale of Bristol Water interest to ITOCHU resulted in less Adjusted EBITDA from Bristol Water in the fourth quarter of 2012.
(1,113) Various other changes.
32,919 Change in Adjusted EBITDA.
(32,919) Remove Bristol Water Adjusted EBITDA changes.
4,868 Higher AFFO from a full year of dividends from Bristol Water, which was acquired in October 2011.
(1,135) Lower dividend to Capstone due to a reduced ownership interest after the sale of a partial interest in Bristol Water.
387 Various other changes.
4,120 Change in AFFO.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 23
23
Utilities – district heating
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2011:
Change
Explanations
(3,020) Lower interest income due to repayments of the shareholder loan from proceeds of the refinancing.
2,001 Higher dividends received in 2012.
1,352 Additional quarter of interest income for the first quarter in 2012 because the business was acquired at the end of the first
quarter of 2011.
333 Change in Adjusted EBITDA and AFFO.
Corporate
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2011, excluding internalization costs:
Change
Explanations
7,947 Lower business development expenses were incurred in 2012 as Capstone focused on various refinancing and asset management
initiatives. In addition, Capstone initiated development capabilities within the power segment. In 2011, Capstone incurred one-
time costs for the acquisition of Bristol Water and Värmevärden.
(2,623) Inclusion of a full year of staffing costs since internalization April 15, 2011.
1,232 Various other changes.
6,556 Change in Adjusted EBITDA.
(3,098) Preferred share dividends and related taxes were higher in 2012 as the preferred shares were issued on June 30, 2011.
(1,043) Debt interest was higher in 2012 which was primarily due to the senior debt facility established for the Bristol Water acquisition,
which was outstanding from October 2011 to May 2012.
2,415 Change in AFFO.
Net income (loss)
Net income (loss) for each business segment was as follows:
Net Income (loss)
Power
Utilities – water
Utilities – district heating
Corporate
Total
For the year ended
Dec 31, 2012
Dec 31, 2011
19,788
38,805
7,936
27,757
5,002
(3,541)
(22,805)
(32,481)
43,724
(3,263)
Capstone’s net income (loss) comprises cash measures included in Adjusted EBITDA and non-cash measures required by IFRS. The major items are
summarized below:
Adjusted EBITDA
Adjustment of Värmevärden distributions to equity accounted income
NCI portion of Adjusted EBITDA
Other gains and (losses), net
Foreign exchange gain (loss)
Interest expense
Depreciation and amortization
Income tax recovery (expense)
Net Income (loss)
(1)
Includes internalization costs of $19,675 for 2011.
For the year ended
Dec 31, 2012
Dec 31, 2011
120,657
55,673 (1)
293
37,227
1,294
1,620
(49,707)
(57,552)
(10,108)
43,724
(5,276)
6,685
(21,742)
(3,274)
(31,668)
(39,419)
35,758
(3,263)
24 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 24
MANAGEMENT’S DISCUSSION AND ANALYSIS Infrastructure – Power
Capstone’s power facilities produce electricity from gas cogeneration, wind, biomass, hydro and solar and are located in Ontario, Alberta, British
Columbia and Quebec. Results from these facilities were:
4.8%
Percentage of total installed wind capacity in
Ontario currently represented by Erie Shores.
11%
Percentage increase in Adjusted EBITDA at
Whitecourt primarily due to $843 in additional
revenue from the sale of renewable
energy credits.
4,000
Approximate number of households capable of
being powered by Amherstburg's green
electricity each year.
For the year ended December 31, 2012
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Adjusted EBITDA
Gas
1,231.9
92.9%
95.0%
110,926
(84,088)
64
Wind
233.4
26.8%
97.9%
22,876
(4,265)
54
26,902
18,665
Principal from loans receivable
Interest paid
Income taxes (paid) recovery
—
(672)
—
Maintenance capital expenditures
(2,576)
Scheduled repayment of debt
principal
AFFO
For the year ended December 31, 2011
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Adjusted EBITDA
(250)
23,404
Gas
1,256.1
95.0%
97.6%
114,311
(84,185)
87
—
(6,065)
—
(536)
(5,231)
6,833
Wind
236.7
27.2%
96.9%
23,093
(3,409)
7
30,213
19,691
Principal from loans receivable
—
—
Interest paid
(1,027)
(6,315)
Income taxes (paid) recovery
Maintenance capital expenditures
Scheduled repayment of debt
principal
AFFO
—
(1,749)
—
27,437
—
(347)
(4,129)
8,900
Biomass(1)
197.0
95.3%
95.9%
15,202
(8,890)
588
6,900
984
(5)
—
Biomass(1)
202.4
95.9%
96.6%
14,217
(8,559)
547
6,205
884
(14)
—
(969)
—
6,106
Solar
Development
Hydro
157.0
50.1%
98.5%
13,826
(3,289)
22
39.5
22.5%
97.4%
16,388
(1,246)
33
10,559
15,175
—
—
(3,778)
(6,804)
—
(1,130)
(1,156)
—
—
(128)
6,621
(3,265)
2,360
(3,707)
4,664
Solar
Development
Hydro
161.6
51.4%
98.8%
13,497
(3,326)
—
10,171
—
17.6
19.9%
95.6%
7,289
(1,038)
146
6,397
—
(3,966)
(3,374)
—
(1,064)
974
6,115
—
—
(1,533)
1,490
n/a
n/a
n/a
—
(23)
—
(23)
n/a
n/a
n/a
—
—
(23)
n/a
n/a
n/a
—
—
—
—
—
—
—
—
—
—
Total
1,858.8
n.m.f
n.m.f
179,218
(101,801)
761
78,178
984
(17,324)
—
(5,398)
(12,581)
43,859
Total
1,874.4
n.m.f
n.m.f
172,407
(100,517)
787
72,677
884
(14,696)
—
(4,129)
(4,688)
50,048
(1)
Includes receipts from interest and loan receivable on Capstone’s 31.3% equity interest in the Chapais facility. Statistics for power generated,
capacity factors and availability do not include the Chapais facility.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 25
25
The following charts show the composition of the power segment’s Adjusted EBITDA and AFFO for the years ended December 31, 2012 and 2011:
ADJUSTED EBITDA 2012
ADJUSTED EBITDA 2011
2012
2011
Adjusted EBITDA
AFFO 2012
2012
AFFO
AFFO 2011
2011
The following charts show the composition of the power segment’s Adjusted EBITDA and AFFO for the years ended December 31, 2012 and 2011:
Adjusted EBITDA
AFFO
2012
2011
2012
2011
p 34% Gas
p 24% Wind
p 9% Biomass
p 14% Hydro
p 19% Solar
Revenue was $6,811, or 4.0%, higher compared with 2011, primarily due to the inclusion of $8,582 from an additional six months of operations at
p 55% Gas
p 18% Wind
p 12% Biomass
p 12% Hydro
p 3% Solar
p 53% Gas
p 16% Wind
p 15% Biomass
p 5% Hydro
p 11% Solar
p 42% Gas
p 27% Wind
p 8% Biomass
p 14% Hydro
p 9% Solar
Amherstburg. In addition, Whitecourt increased revenue by $985 over 2011, primarily due to the increased sale of renewable energy credits. Lower
revenue of $3,385 at Cardinal partially offset these gains.
The $3,385, or 3.0%, decrease at Cardinal was primarily attributable to lower power generation, which decreased electricity sales by $1,318, and a
Revenue was $6,811, or 4.0%, higher compared with 2011, primarily due to the inclusion of $8,582 from an additional six months of operations at
$2,151 decline in gas sales as Cardinal had previously entered into gas swaps at higher prices, with the last one expiring in 2011. Cardinal’s power
Amherstburg. In addition, Whitecourt increased revenue by $985 over 2011, primarily due to the increased sale of renewable energy credits. Lower
generation was lower by 24.2 GWh, or 1.9%, reflecting the impact of the scheduled hot gas path inspection in the second quarter, which occurs
revenue of $3,385 at Cardinal partially offset these gains.
every three years and requires more time than other annual outages. In addition, power production was reduced as a result of higher ambient
The $3,385, or 3.0%, decrease at Cardinal was primarily attributable to lower power generation, which decreased electricity sales by $1,318, and a
temperatures in 2012.
$2,151 decline in gas sales as Cardinal had previously entered into gas swaps at higher prices, with the last one expiring in 2011. Cardinal’s power
Expenses increased by $1,284, or 1.3%, over 2011. Excluding Amherstburg, the increase was primarily attributable to repairs and maintenance
generation was lower by 24.2 GWh, or 1.9%, reflecting the impact of the scheduled hot gas path inspection in the second quarter, which occurs
expenditures at Erie Shores and Whitecourt, which contributed a combined increase of $1,187. The remaining expenses at Cardinal and hydro
every three years and requires more time than other annual outages. In addition, power production was reduced as a result of higher ambient
facilities were consistent with 2011. In December 2012, Capstone established a power development subsidiary focused on developing and acquiring
temperatures in 2012.
renewable and clean electricity generation projects in western Canada and the United States.
Expenses increased by $1,284, or 1.3%, over 2011. Excluding Amherstburg, the increase was primarily attributable to repairs and maintenance
Interest paid was $2,628, or 17.9%, higher than in 2011, primarily due to Amherstburg, which paid $3,430 more in interest in 2012. Higher interest
expenditures at Erie Shores and Whitecourt, which contributed a combined increase of $1,187. The remaining expenses at Cardinal and hydro
paid during 2012 was partially offset by $355 less interest on the CPC-Cardinal credit facility, which had a lower average balance in 2012, and a
facilities were consistent with 2011. In December 2012, Capstone established a power development subsidiary focused on developing and acquiring
$250 decline at Erie Shores due to a lower debt balance following scheduled debt repayment.
renewable and clean electricity generation projects in western Canada and the United States.
Maintenance capital expenditures increased by $1,269 over 2011, primarily due to the hot gas path inspection at Cardinal.
Interest paid was $2,628, or 17.9%, higher than in 2011, primarily due to Amherstburg, which paid $3,430 more in interest in 2012. Higher interest
A $2,174 increase in debt payments at Amherstburg, reflecting a full year of repayments compared with six months in 2011;
paid during 2012 was partially offset by $355 less interest on the CPC-Cardinal credit facility, which had a lower average balance in 2012, and a
Scheduled repayments of debt principal were $7,893, or 168%, higher than in 2011. The increase was primarily due to:
$250 decline at Erie Shores due to a lower debt balance following scheduled debt repayment.
(cid:127)
Maintenance capital expenditures increased by $1,269 over 2011, primarily due to the hot gas path inspection at Cardinal.
(cid:127)
Scheduled repayments of debt principal were $7,893, or 168%, higher than in 2011. The increase was primarily due to:
(cid:127)
(cid:127)
An increase of $1,102 in debt repayments at Erie Shores as the Tranche C debt became fully amortizing in the second quarter of 2011.
A $2,174 increase in debt payments at Amherstburg, reflecting a full year of repayments compared with six months in 2011;
Hydro debt repayments of $4,239 beginning in June 2012; and
(cid:127)
(cid:127)
Hydro debt repayments of $4,239 beginning in June 2012; and
An increase of $1,102 in debt repayments at Erie Shores as the Tranche C debt became fully amortizing in the second quarter of 2011.
26 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 26
Page 26
MANAGEMENT’S DISCUSSION AND ANALYSIS Seasonality
Results for Capstone’s power segment fluctuate during the year due to seasonal factors that affect quarterly production at each facility. These
factors include scheduled maintenance, seasonal electricity demands and environmental factors such as water flows, sunlight, wind speeds and
density, ambient temperature and humidity, which affect the amount of electricity generated. In aggregate, these factors have historically resulted in
higher electricity production during the first and fourth quarters as shown in the following table:
Type
Gas
Wind
Biomass
Hydro
Solar
Total
Facility
Cardinal
Erie Shores
Whitecourt
PPA Expiry
2014
2026
2014
Various
2017 – 2042
Amherstburg
2031
Actual
2012
1,231.9
233.4
197.0
157.0
39.5
Average long-term production (GWh) (1)
Q1
342.9
76.3
50.3
32.2
6.8
Q2
278.1
52.5
45.3
57.1
13.7
Q3
303.5
34.0
50.1
29.0
12.5
Q4
333.3
76.9
49.3
40.9
5.9
Annual
1,257.8
239.7
195.0
159.2
38.9
1,858.8
508.5
446.7
429.1
506.3
1,890.6
(1) Average long-term production is from March 2005 to December 31, 2012, except for Erie Shores, which is from June 2006, and Amherstburg,
which is from July 2011.
Outlook
In 2013, Capstone expects slightly higher revenue from higher power production, which will be partially offset by increased development costs.
Capstone’s power facilities are expected to perform consistently with long-term average production, subject to variations in wind, water flows,
ambient temperatures and sunlight.
Capstone expects Cardinal's production to return to its long-term average and that the facility will incur lower average fuel transportation costs
due to:
(cid:127)
(cid:127)
Higher power generation reflecting less maintenance time planned in 2013; and
A lower average effective gas transportation rate in 2013 of $1.76 per GJ compared with $2.24 per GJ in 2012, based on the expected
outcome from the National Energy Board.
Capstone's new power development subsidiary is expected to increase costs within the power segment related to the pursuit and development of
new business opportunities.
Overall, Capstone expects the net impact of these factors to result in a slightly higher Adjusted EBITDA for the power segment in 2013
compared with 2012.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 27
27
Infrastructure – Utilities
Water
Capstone’s water utilities segment includes a 50% investment in Bristol
Water, which is located in the United Kingdom. Capstone initially acquired
a 70% interest on October 5, 2011, prior to which no results were
reported in Capstone’s comparative figures. On May 10, 2012, Capstone
sold a 20% indirect interest in Bristol Water to a subsidiary of ITOCHU
Corporation while retaining the remaining 50%.
Water supplied (megalitres)
Revenue
Operating expenses
Interest income
Less: non-controlling interest(1)
Adjusted EBITDA
Adjusted EBITDA of consolidated businesses with non-controlling interests
Dividends from businesses with non-controlling interests
AFFO
(1) Starting from May 10, 2012, the non-controlling interest increased to 50% from 30%.
(2) 2011 only includes three months of activity from the date of acquisition.
For the year ended (2)
Dec 31, 2012
Dec 31, 2011
81,245
178,392
(93,400)
751
(37,227)
48,516
(48,516)
8,091
8,091
19,700
43,560
(21,569)
291
(6,685)
15,597
(15,597)
3,971
3,971
Revenue was $134,832, or 310%, higher compared with 2011, due to receiving a full year of contribution in 2012 versus one quarter in 2011.
Bristol Water derived over 97% of its revenue during the year from the sale of water, consistent with 2011.
Operating expenses increased by $71,831, or 333%, primarily due to a full year of inclusion in Capstone's result. Approximately $77,455 of
operating expenses related to raw materials, consumables, bad debts and other charges less recoveries. Labour costs to maintain the network and
deliver water services to retail and commercial customers represented $15,945. Additionally, increases in the capital expansion program contributed
to the higher proportion of operating expenses to revenue compared with 2011.
Non-controlling interest was increased on May 10, 2012 to reflect the partial sale of Bristol Water. Capstone’s Adjusted EBITDA is reduced for
Agbar’s 30% interest over the entire period and ITOCHU’s 20% interest beginning May 10, 2012.
Capital expenditures
The approved and planned capital expenditures for the current asset management plan ("AMP5") period, which concludes in March 2015, is
approximately $441,000, or £276,000 (base price of £261,000 adjusted for inflation for new regulatory fiscal year). As at December 31, 2012, the
cumulative capital expenditure incurred for AMP5 was $224,000, which was $50,000 less than planned. The shortfall was primarily the result of
delays at the start of AMP5 as commencement of expenditures was dependent on a Competition Commission ruling. Bristol Water expects its
expenditures over the remainder of AMP5 to achieve the cumulative approved capital expenditure. Bristol Water made $140,555 in capital
expenditures in 2012 as detailed on page 37 of this MD&A.
Seasonality
Bristol Water experiences little seasonal variation in demand, resulting in stable revenues throughout the year. Operating expenses vary during the
year depending on the availability of water from Bristol Water’s various sources and the quantity of water requiring treatment as a result of dry
weather and pipe bursts, which are more common in periods when freezing and thawing occur.
CAPSTONE INFRASTRUCTURE CORPORATION
28 CAPSTONE INFRASTRUCTURE CORPORATION
Page 28
MANAGEMENT’S DISCUSSION AND ANALYSIS Regulatory
Bristol Water is a regulated business subject to supervision by the Water
Services Regulation Authority (“Ofwat”).
Bristol Water completed the second year of AMP5 as at March 31, 2012.
Management has started planning for the company's regulatory
submission for Price Review 14 ("PR14"), during which Ofwat will
approve Bristol Water's capital program and set the prices Bristol Water
may charge customers in the five-year AMP6 period commencing in April
2015. Bristol Water has agreed to Ofwat's proposed licence changes,
which were devised as part of the introduction of competition within the
retail business for non-household customers. This change affects less
than 3% of Bristol Water's business.
400
375
350
325
300
275
250
225
200
175
150
’
)
s
£
f
o
s
n
o
i
l
l
i
m
n
i
(
V
C
R
GROWTH IN REGULATED CAPITAL VALUE
Growth in Regulated Capital Value
p Actual Achieved RCV
p Regulator Deemed RCV
2006
2007
2008 2009
2010
2011
2012 2013E(1)
Management continues to focus on achieving key regulatory output
(1) Expected position as at March 31, 2013.
targets, including leakage of less than 50 million litres of water per day
(“Ml/d”) in 2012/2013, and is striving for a top quartile ranking in Ofwat’s
Service Incentive Mechanism (“SIM”) customer service measure. Strong
performance on the SIM, which is measured through customer
satisfaction surveys and quantitative data related to complaints, can result
in an increased revenue allowance for Bristol Water in the next
regulatory period.
For the regulatory year ended March 31, 2012, Bristol Water achieved
leakage levels of 43 MI/d due to a mild winter, and had a SIM score of 85,
which ranked second overall in the industry. For the nine months ended
December 31, 2012 of the current regulatory year, which is a seasonally
low period for pipe bursts, Bristol Water had leakage levels of 40 MI/d
and is currently ranked eight based on year-to-date SIM survey scores.
Outlook
(1) Expected position as at March 31, 2013
Water Leakage Versus Target
WATER LEAKAGE VERSUS TARGET
p Actual Annual
p Target Annual
60.0
50.0
40.0
30.0
20.0
10.0
0
)
y
a
d
/
L
M
(
y
a
d
r
e
p
s
e
r
t
i
L
a
g
e
M
2006
2007
2008 2009
2010
2011 2012(1)
(1) For the year ended December 31, 2012
(1) For the year ended December 31, 2012.
In 2013, Capstone's results will reflect a 50% interest in Bristol Water for the full year following the partial sale of Capstone's previous 70% interest
in May 2012.
Bristol Water is expected to continue its strong operational performance, which will generate cash flow for dividends and for reinvestment in the
capital expenditure program. Bristol Water expects to:
(cid:127)
(cid:127)
(cid:127)
Achieve increased revenue due to an approximately 6.9% rise in the regulated water tariff from April 1 2013;
Complete capital expenditures of approximately $115,000 (£72,000). Capstone expects between 5% and 6% growth in Ofwat's deemed
regulated capital value ("RCV") in 2013, which is expected to lead to future revenue growth; and
Incur additional expenses in preparation for the coming price review.
Bristol Water's capital program is aimed at improving and expanding Bristol Water's network of reservoirs, treatment facilities, water mains and
pipes in order to continue providing high quality water to customers, reducing the amount of water lost to leakage, and positioning Bristol Water to
effectively serve a growing population.
Overall, Capstone expects the net impact of these factors, primarily the reduction in ownership interest, to result in lower Adjusted
EBITDA for the utilities-water segment in 2013 compared with 2012.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 29
2012 ANNUAL REPORT
29
Infrastructure – Utilities
Infrastructure – Utilities
District heating
District heating
Capstone’s district heating utilities segment includes a 33.3% interest in
Capstone’s district heating utilities segment includes a 33.3% interest in
Värmevärden, located in Sweden, which was acquired on
Värmevärden, located in Sweden, which was acquired on
March 31, 2011.
March 31, 2011.
During 2012, Värmevärden focused on maintaining strong customer
During 2012, Värmevärden focused on maintaining strong customer
relationships, managing fuel costs and recapitalizing its business, which
relationships, managing fuel costs and recapitalizing its business, which
led to a portion of the shareholder loans being repaid.
led to a portion of the shareholder loans being repaid.
During the year, Värmevärden successfully renewed contracts with industrial customers. In addition, Värmevärden adjusted prices for 2013 for the
During the year, Värmevärden successfully renewed contracts with industrial customers. In addition, Värmevärden adjusted prices for 2013 for the
majority of residential customers with increases in excess of inflation. Management has also enhanced plant availability, thereby minimizing the use
majority of residential customers with increases in excess of inflation. Management has also enhanced plant availability, thereby minimizing the use
of more expensive fuel.
of more expensive fuel.
Heat and steam production (GWh)
Heat and steam production (GWh)
Equity accounted income (loss)
Equity accounted income (loss)
Interest income
Interest income
Dividends
Dividends
Adjusted EBITDA and AFFO
Adjusted EBITDA and AFFO
(1) 2011 only includes nine months of activity from the date of acquisition.
(1) 2011 only includes nine months of activity from the date of acquisition.
Interest income
Interest income
Interest is earned on the outstanding balance of the shareholder loan
Interest is earned on the outstanding balance of the shareholder loan
receivable from Värmevärden. Värmevärden used the bond issuance
receivable from Värmevärden. Värmevärden used the bond issuance
proceeds in early 2012 to reduce the shareholder loan by $48,100 and
proceeds in early 2012 to reduce the shareholder loan by $48,100 and
pay accrued interest, resulting in lower interest income for Capstone for
pay accrued interest, resulting in lower interest income for Capstone for
the remainder of the year. For further details, refer to the changes in the
the remainder of the year. For further details, refer to the changes in the
business section on page 19 of this MD&A. In 2012, Capstone received
business section on page 19 of this MD&A. In 2012, Capstone received
$3,356 in interest income from Värmevärden.
$3,356 in interest income from Värmevärden.
Dividends
Dividends
In 2012, Värmevärden paid Capstone a $983 dividend in June and a
In 2012, Värmevärden paid Capstone a $983 dividend in June and a
$1,018 dividend in December. No dividends were paid to Capstone in
$1,018 dividend in December. No dividends were paid to Capstone in
2011, the year of acquisition.
2011, the year of acquisition.
Equity accounted income
Equity accounted income
Värmevärden contributed $2,315 of equity accounted income in 2012
Värmevärden contributed $2,315 of equity accounted income in 2012
versus a loss of $5,270 for 2011. The loss in 2011, primarily reflected
versus a loss of $5,270 for 2011. The loss in 2011, primarily reflected
$2,414 of acquisition costs. Additionally, Capstone did not benefit from
$2,414 of acquisition costs. Additionally, Capstone did not benefit from
the seasonally high first quarter, as this was prior to acquisition.
the seasonally high first quarter, as this was prior to acquisition.
Seasonality
Seasonality
Heat production is typically highest during the first quarter of the year,
Heat production is typically highest during the first quarter of the year,
which represents the coldest months of the year. The first and fourth
which represents the coldest months of the year. The first and fourth
quarters combined have historically accounted for approximately 65% of
quarters combined have historically accounted for approximately 65% of
Värmevärden’s annual revenue.
Värmevärden’s annual revenue.
Outlook
Outlook
In 2013, Värmevärden’s performance is expected to continue to support
In 2013, Värmevärden’s performance is expected to continue to support
fixed interest payments on Capstone’s loan receivable and dividends on
fixed interest payments on Capstone’s loan receivable and dividends on
Capstone’s equity investment.
Capstone’s equity investment.
Interest income from shareholder loans receivable is expected to be lower
Interest income from shareholder loans receivable is expected to be lower
due to a reduction in the receivable balance in the second quarter of 2012.
due to a reduction in the receivable balance in the second quarter of 2012.
As a result, Capstone expects lower Adjusted EBITDA from the district
As a result, Capstone expects lower Adjusted EBITDA from the district
heating segment compared with 2012.
heating segment compared with 2012.
30 CAPSTONE INFRASTRUCTURE CORPORATION
For the year ended (1)
For the year ended (1)
Dec 31, 2012
Dec 31, 2012
1,078
1,078
2,315
2,315
3,356
3,356
2,001
2,001
5,357
5,357
Dec 31, 2011
Dec 31, 2011
712
712
(5,270)
(5,270)
5,024
5,024
—
—
5,024
5,024
HEAT AND STEAM PRODUCTION
Heat and Steam Production
Heat and Steam Production
p 2011
p 2012
* Heat production for Värmevärden before March 31, 2011 is not included in Capstone's results.
* Heat production for Värmevärden before March 31, 2011 is not included in Capstone's results.
Fuel Mix Breakdown by MWh
Fuel Mix Breakdown by MWh
JUN
MAR
NOV
OCT
MAY
AUG
APR
JAN
FEB
SEP
JUL
DEC
200
150
h
W
G
100
50
0
Heat production for Värmevärden before March 31, 2011 is not included
in Capstone’s result.
FUEL MIX BREAKDOWN
BY MWh – 2012
FUEL MIX BREAKDOWN
BY COST (SEK) – 2012
Fuel Mix Breakdown by Cost (SEK)
Fuel Mix Breakdown by Cost (SEK)
p 4% Electricity
p 6% Fossil Fuel
p 77% Bio and Waste Fuel
p 13% Industrial Heat
p 17% Electricity
p 13% Fossil Fuel
p 59% Bio and Waste Fuel
p 11% Industrial Heat
CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 30
Page 30
MANAGEMENT’S DISCUSSION AND ANALYSIS Corporate
Corporate activities primarily comprise growth initiatives, capital structure expenses not specifically attributed to the businesses, and costs to
manage, oversee and report on the businesses.
Administrative expenses
Project development costs
Interest income
Adjusted EBITDA
Interest paid
Dividends paid on Capstone’s preferred shares
Income taxes (paid) recovery
AFFO
Internalization costs
AFFO before internalization costs
Administrative expenses
Internalization expenses and manager fees
Staff costs
Other administrative expenses
For the year ended
Dec 31, 2012
Dec 31, 2011
(11,070)
(342)
18
(11,394)
(5,988)
(3,750)
(612)
(21,744)
—
(21,744)
(29,677)
(8,289)
341
(37,625)
(4,945)
(1,264)
—
(43,834)
19,675
(24,159)
For the year ended
Dec 31, 2012
Dec 31, 2011
—
6,749
4,321
11,070
21,500
4,126
4,051
29,677
Staff costs reflect amounts paid or accrued for corporate employees beginning April 15, 2011, following the internalization of management. Staff
costs were $2,623, or 63.6%, higher than in 2011, primarily reflecting three and a half additional months in 2012. Internalization expenses
represented amounts paid for professional fees and other administrative costs along with the termination fee for the management contracts with
MGL. Accordingly, Capstone did not incur any internalization expenses or fees to MGL in 2012.
Other administrative expenses were $270, or 6.7%, higher compared with 2011, primarily due to office administration and premises costs required
post internalization. Other administrative expenses include audit fees, investor relations costs, office administration and premises costs and
professional fees other than for business development.
Project development costs within corporate relate to business acquisition activities. For 2012. these costs were $7,947, or 95.9%, lower compared
with 2011. This variance reflected lower business acquisition activity as the corporate focus was on completing various refinancing and asset
management initiatives in 2012. In 2011, Capstone closed the acquisition of Bristol Water and Värmevärden, which incurred closing costs that did
not recur in 2012.
Interest income is primarily earned on surplus cash balances. Interest income was $323, or 94.7%, lower than in 2011 reflecting lower average cash
balances in 2012.
Interest paid was $1,043, or 21.1%, higher compared with 2011 due to higher balances on the CPC-Cardinal credit facility and the senior debt
facility following the acquisition of Bristol Water. The debt to acquire Bristol Water was repaid in the second quarter of 2012. In addition, the average
balance on the convertible debentures was lower in 2012 due to conversions during 2011 reducing the balance outstanding leading to less interest
paid on the convertible debentures.
Preferred share dividends paid and taxes paid
On June 30, 2011, Capstone issued preferred shares that pay $938 of dividends quarterly at a fixed rate of 5.0% per year. Taxes paid relate to
preferred share dividends and are available to offset future tax of the Corporation.
Outlook
In 2013, Capstone expects business development and marketing efforts to return to a more normal level, while maintaining staffing levels
Capstone's staff costs are expected to increase due to the accrual of an additional year of grants under the long-term incentive plan.
Overall, Capstone expects these variables to result in higher corporate expenses compared with 2012.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 31
31
FINANCIAL POSITION REVIEW
Overview
As at December 31, 2012, Capstone had a consolidated working capital surplus of $30,821 compared with a deficit of $86,694 at December 31,
2011. The improvement of $117,515 primarily reflected debt repayments and refinancing activity during the year. The total comprises $10,123 and
$31,041 surpluses for the utilities – water and power segments, respectively, and a deficit of $10,343 at corporate.
Unrestricted cash and equivalents totaled $49,599 on a consolidated basis with the utilities – water and power segments contributing $25,315 and
$20,941, respectively.
During 2012, Capstone’s debt to capitalization ratio (refer to page 33) improved from 71.0% to 62.7% on a fair value basis and from 65.7% to 57.6%
on a book value basis. On a fair value basis, the decline was primarily due to a $212,712 decrease in the fair value of debt. This variance was largely
attributable to a $110,708 reduction in corporate debt following the repayment of debt incurred to acquire Bristol Water and a $93,305 reduction
of the utilities – water segment debt arising from Capstone's reduced ownership interest in Bristol Water, which lowered its proportionate share of
the company's debt. As at December 31, 2012, Capstone and its subsidiaries were in compliance with all debt covenants.
Liquidity
Working capital
As at
Power
Utilities – water
Corporate
Working capital
Dec 31, 2012
Dec 31, 2011
31,041
10,123
(64,566)
91,864
(10,343)
(113,992)
30,821
(86,694)
The working capital surplus of $30,821 increased by $117,515 from December 31, 2011. The improvement at the power segment primarily
reflected refinanced debt, which was classified as long term at the end of 2012. For corporate, the reduction was due to repayments during the year.
This was partially offset by a $81,741 working capital decrease in the utilities – water segment as available cash was used to fund the capital asset
expansion program.
Cash and cash equivalents
As at
Power
Utilities – water
Corporate
Unrestricted cash and cash equivalents
Less: cash with access limitations
Power
Utilities – water (1)
Cash and cash equivalents available to Capstone
Dec 31, 2012
Dec 31, 2011
20,941
25,315
3,343
49,599
(8,386)
(25,315)
15,898
13,972
35,434
8,181
57,587
(10,135)
(35,434)
12,018
(1) Cash and cash equivalents is in addition to $6,471 short-term deposits at December 31, 2012 (December 31, 2011 – $82,202). The decrease
in short-term deposits was a result of funds used for capital projects.
Unrestricted cash represents funds available for operating activities, capital expenditures and future acquisitions. The $7,988 decrease in cash from
December 31, 2011 was primarily attributable to the timing of cash required to fund Bristol Water's capital asset expansion program.
Cash and cash equivalents available to Capstone are funds available for general purposes, including payment of dividends to shareholders. Bristol
Water’s $25,315 of cash and cash equivalents as at December 31, 2012 are primarily earmarked for capital expenditure projects for the company’s
five-year asset management plan approved by the regulator. In addition, Bristol Water obtained $111,083 of credit availability during the third
quarter to fund the long-term cash requirements of the capital projects. For the power segment, $8,386 is only periodically accessible to Capstone
through distributions under the terms of the credit agreements for the hydro facilities, Erie Shores and Amherstburg.
Restricted cash increased by $4,282 from December 31, 2011 to $19,229 at December 31, 2012. The increase was mainly attributable to new debt
service and maintenance reserve accounts required by the credit agreement for the hydro facilities. Restricted cash represents reserve accounts of
$10,331 and $8,898 at the power segment and Bristol Water, respectively.
32 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 32
MANAGEMENT’S DISCUSSION AND ANALYSIS Cash flow
Capstone’s consolidated cash and cash equivalents decreased by $7,988 in 2012 compared with a decrease of $70,826 in 2011. Details of the
decrease are presented in the consolidated statement of cash flows and are summarized as follows:
For the year ended
Operating activities
Investing activities
Financing activities (excluding dividends to shareholders)
Dividends paid to shareholders
Effect of exchange rate changes on cash and cash equivalents
Change in cash and cash equivalents
Dec 31, 2012
Dec 31, 2011
114,678
(4,949)
(92,503)
(26,131)
917
(7,988)
50,881
(401,344)
322,782
(42,051)
(1,094)
(70,826)
Cash flow from operating activities generated $63,797 more cash than in 2011, primarily because Bristol Water contributed $54,282. Capstone’s
power segment generated $10,596 less cash flow in 2012, primarily due to lower operating income and working capital requirements, partially
offset by the commencement of operations at Amherstburg. In addition, corporate operating activities were $21,779 higher in 2012, resulting mainly
from internalization costs occurring only in 2011.
Cash flow from investing activities was $396,395 higher in 2012 than in 2011, primarily due to the significant investments in Värmevärden, Bristol
Water and Amherstburg occurring in 2011 in addition to the recapitalization of Värmevärden in 2012. The changes in investing activities are
summarized as follows:
Värmevärden
(cid:127)
Capstone invested $109,146 in 2011, comprising shareholder loans and equity investment, for a one-third interest in Värmevärden.
(cid:127)
In 2012, Värmevärden repaid $48,943 of the shareholder loans from the bond issue proceeds at Sefyr Värme.
Bristol Water
(cid:127)
Capstone invested $173,989 ($213,476 purchase price less $39,487 of cash at Bristol Water on acquisition) in 2011.
(cid:127)
During 2012, Bristol Water used $72,010 of short-term investments to fund capital expenditures.
Amherstburg
(cid:127)
Capstone invested $94,635 in 2011 to complete construction of Amherstburg.
Cash flow from financing activities was $415,285 lower in 2012 than in the prior year primarily because Capstone repaid $253,311 of debt in
2012 while adding $100,621 of long-term debt for the hydro facilities. This was partially offset by the receipt of $70,274 from ITOCHU for a 20%
interest in Bristol Water before transaction costs of $1,322. In 2011, Capstone added $172,328 of long-term debt to finance the Bristol Water
investment and to fund the construction of Amherstburg along with raising $72,020 of preferred shares and $71,625 of common shares, net of
costs. The remaining difference was due to reduction of principal on debt and common shares issued in 2011 to MGL related to the
internalization transaction.
Capital Structure
Capstone considers shareholders’ equity and long-term debt (proportionately attributable to Capstone’s shareholders), both the current and non-
current portions, to be the basis of its capital structure. Capstone measures its capitalization ratio based on the fair values of long-term debt and
shareholders’ equity. Capstone’s capitalization ratio using fair values and carrying values was as follows:
As at
Long-term debt
Power
Utilities – water (1)
Corporate
Deferred financing fees
Equity
Shareholders’ equity (2)
Total capitalization
Debt to capitalization
Dec 31, 2012
Dec 31, 2011
Fair Value
Carrying Value
Fair Value
Carrying Value
305,497
259,830
44,416
—
297,792
236,768
40,631
(7,328)
314,196
353,135
155,124
—
609,743
567,863
822,455
308,513
336,237
152,613
(6,421)
790,942
363,248
972,991
418,848
986,711
335,228
413,520
1,157,683
1,204,462
62.7%
57.6%
71.0%
65.7%
(1) Only 50% of the long-term debt at Bristol Water has been included in the calculation to reflect the impact of the non-controlling interest
(December 31, 2011 – 70%).
(2) The carrying value of shareholders’ equity does not include the amount attributed to the non-controlling interest.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 33
33
Power
The composition of the power segment’s long-term debt was:
As at
Dec 31, 2012
Dec 31, 2011
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
CPC-Cardinal credit facility
2014
4.53%
Erie Shores project debt
2016 & 2026
5.28 – 6.15%
Amherstburg Solar Park project debt
Hydro facilities senior secured bonds
Hydro facilities subordinated secured bonds
Wawatay facility’s levelization liability
2016
2040
2041
Settled
7.32%
4.56%
7.00%
6.87%
12,050
106,538
90,560
76,347
20,002
—
12,050
97,703
90,560
77,237
20,242
—
305,497
297,792
85,000
108,616
94,267
—
—
85,000
102,933
94,267
—
—
26,313
314,196
26,313
308,513
On September 17, 2012, Capstone repaid $12,300 of the old CPC-Cardinal credit facility and entered into an amended and restated facility in the
aggregate amount of $27,300, comprising a $12,300 term loan and a $15,000 revolving facility. The facility has covenants that include limits on the
consolidated debt-to-capitalization ratio and require CPC and certain subsidiaries to maintain a minimum EBITDA.
The $10,721 decrease in the carrying value of power segment’s long-term debt is summarized in the following table:
Dec 31, 2011 Unscheduled Repayments(1)
Scheduled Repayments(2)
Debt Proceeds(3)
308,513
(99,672)
(12,331)
100,621
Other(4)
661
Dec 31, 2012
297,792
(1) Unscheduled debt repayments included $72,700 to settle the power portion of CPC-Cardinal credit facility along with the $27,239 to settle the
Wawatay facility’s levelization liability. Additionally, a $267 receivable with the OEFC as at June 30, 2012 partially offsets the Wawatay facility’s
levelization liability repayment.
(2) Scheduled repayments are regular repayments under the credit agreements.
(3) Debt proceeds include the issue of senior and subordinated secured bonds for the hydro facilities, net of deferred financing costs.
(4) Other includes $688 of accrued interest partially offset by a reduction in the Wawatay facility’s levelization liability of $27.
Covenant compliance
All of the power segment’s long-term debt is subject to financial covenant requirements. The Erie Shores project debt, hydro facilities senior secured
and subordinated secured bonds, and Amherstburg project debt are individually required to maintain minimum debt service coverage ratios to allow
for distributions to the Corporation. During 2012, Capstone's power segment complied with all covenants.
Utilities – water
The composition of the utilities – water segment’s long-term debt was as follows:
As at
Bank loans
Term loans
Debentures
Cumulative preferred shares
Consolidated long-term debt
Less: non-controlling interest
Capstone share of long-term debt
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
Dec 31, 2012
Dec 31, 2011
2017
1.18%- 5.73%
2032 – 2041
5.77 – 6.79%(1)
Irredeemable
3.50 – 4.25%
Irredeemable
8.75%
31,540
457,563
2,346
28,211
31,430
413,746
2,072
26,289
55,625
420,242
2,125
26,487
54,213
398,445
2,008
25,673
519,660
473,537
504,479
480,339
(259,830)
(236,769)
(151,344)
(144,102)
259,830
236,768
353,135
336,237
(1) The interest rate on certain term loans includes an index-linked component to RPI, which was 3.9% after April 1, 2012 (for January 1 to
March 31, 2012 – 5%).
Long-term debt for the utilities – water segment was used to fund current and ongoing capital expenditures to improve Bristol Water’s network.
During the third quarter, Bristol Water repaid a $23,699 bank loan from cash on hand and entered into bank loans of $31,738 and $79,345, maturing
August 17, 2015 and 2017, respectively. The new loans are earmarked for long-term cash requirements related to the capital expansion. As at
December 31, 2012, Bristol Water has not drawn on these loans. The preferred shares are classified as long-term debt on the basis that they are
irredeemable. All Bristol Water debt is non-recourse to Capstone.
Covenant compliance
The principal debt agreements require Bristol Water to comply with covenants relating to the minimum levels of interest coverage and net debt in
relation to regulatory capital value. During 2012, Bristol Water complied with all its covenants.
34 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 34
MANAGEMENT’S DISCUSSION AND ANALYSIS Corporate
The composition of Capstone’s corporate long-term debt was as follows:
As at
Senior debt facility
CPC-Cardinal credit facility
Convertible debentures
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
Dec 31, 2012
Dec 31, 2011
Settled
2014
2016
6.73%
4.53%
6.50%
—
—
44,416
44,416
—
—
40,631
40,631
78,375
34,000
42,749
78,375
34,000
40,238
155,124
152,613
Long-term debt decreased by $111,982 in the first year of 2012. Capstone repaid the full $78,375 of the senior debt facility and $34,000 of the
CPC-Cardinal credit facility using funds received from the Värmevärden recapitalization, sale proceeds from the Bristol Water partial sale and
financing proceeds from the hydro facilities.
Covenant compliance
During 2012, Capstone complied with all covenants.
Shareholders’ equity
Shareholders’ equity comprised:
As at
Common shares
Class B exchangeable units
Preferred shares
Equity portion of convertible debentures
Accumulated other comprehensive income (loss)
Retained earnings (deficit)
Equity to Capstone shareholders
Non-controlling interests
Total shareholders’ equity
Dec 31, 2012
Dec 31, 2011
632,474
626,861
26,710
72,020
26,710
72,020
731,204
725,591
9,284
(809)
9,284
(6,729)
(320,831)
(314,626)
418,848
91,610
510,458
413,520
34,450
447,970
Capstone is authorized to issue an unlimited number of common shares as well as a limited number of preferred shares equal to 50% of the
outstanding common shares. The increase in common shares outstanding was as follows:
($000s and 000s of shares)
Opening balance
Shares issued(1)
Dividend reinvestment plan (DRIP)
Conversion of convertible debentures
Ending balance
Year ended Dec 31, 2012
Year ended Dec 31, 2011
Shares
70,957
—
1,488
—
72,445
Amount
626,861
(89)
5,702
—
632,474
Shares
56,352
12,856
253
1,496
70,957
Amount
536,278
77,526
1,238
11,819
626,861
(1) During 2012, additional transaction costs of $89 were included in share capital in relation to the November 10, 2011 common share offering.
The composition of fair value for shareholders’ equity was as follows:
As at
Dec 31, 2012
Dec 31, 2011
($000s, except per share amounts)
Common shares
Class B units
Preferred shares
Market Price
per Share
Outstanding
Amount
$4.03
$4.03
$19.40
72,445
3,249
3,000
Fair
Value
291,955
13,093
58,200
363,248
Market Price
per Share
Outstanding
Amount
$3.81
$3.81
$17.50
70,957
3,249
3,000
Fair
Value
270,348
12,380
52,500
335,228
Retained earnings (deficit) reflects the aggregate of Capstone’s net income (loss) since formation of the Corporation less cumulative dividends paid
to shareholders and cumulative distributions paid to Class B exchangeable unitholders.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 35
35
Contractual Obligations
As at December 31, 2012, Capstone's outstanding contractual obligations are due in the following periods:
Long-term debt
Finance lease obligations
Operating leases
Asset retirement obligations
Purchase obligations
Total contractual obligations
Long-term debt
Within one year One year to five years
Beyond five years
14,977
3,528
939
—
67,393
86,837
180,087
619,014
2,689
3,765
—
107,453
293,994
2,572
8,443
5,657
7,189
642,875
Total
814,078
8,789
13,147
5,657
182,035
1,023,706
Long-term debt is discussed as a part of the Capital Structure section on page 33 of this MD&A.
Leases
Cardinal leases the site on which it is located from Ingredion Canada Incorporated ("Ingredion"), formerly Casco Inc. Under the lease, Cardinal pays
nominal rent. The lease extends to 2016 and expires concurrently with the energy savings agreement between Ingredion and Cardinal.
A subsidiary of Capstone has lease agreements with the Provinces of Ontario and British Columbia with respect to certain lands, lands under water
and water rights necessary for the operation of its hydro power facilities. The payments with respect to these agreements vary based on actual
power production. The terms of the lease agreements extend between 2023 and 2042.
Amherstburg leases the land on which its operating facilities are located. The terms of the lease agreements extend to 2032.
Erie Shores has lease and easement agreements with local landowners, municipalities and other parties with respect to certain lands for the
operation of the wind farm. The payments above a minimum level with respect to these agreements vary based on actual power production. The
terms of the lease agreements extend to 2025, with a 20-year renewal option.
The Corporation has an operating lease for premises, which has a term to 2018 with an option to extend to 2023. Capstone also has finance leases
for certain equipment and vehicles.
Asset retirement obligations
Commitments associated with our asset retirement obligations are expected to occur principally over the next 30 years for our power
infrastructure facilities.
Purchase obligations
Capstone enters into contractual commitments in the normal course of business. These contracts include energy
savings agreements, wood waste supply agreements, natural gas purchase contracts, operations and maintenance agreements, capital
commitments and guarantees.
Energy savings agreement
Under the terms of an energy savings agreement between Cardinal and Ingredion, Cardinal is required to sell up to 723 million pounds of steam per
year to Ingredion for its manufacturing operations. The energy savings agreement matures on December 31, 2014 but may be extended by up to
two years at Cardinal's option.
Wood waste supply agreement
Whitecourt has a long-term agreement with Millar Western to ensure an adequate supply of wood waste. The agreement expires in June 2016.
Gas purchase contract
Cardinal has a long-term purchase agreement for natural gas that expires on May 1, 2015. The minimum purchase commitment for natural gas under
the agreement is 9,289,104 MMBtu per year through to expiration in 2015, which is equivalent to 80% of the contract maximum.
Operations and management agreements
Capstone has an O&M agreement with Regional Power OPCO Inc. (“Regional”) to operate and maintain the hydro power facilities, expiring on
November 15, 2016 with an automatic renewal term. Regional is paid a monthly management fee and is eligible for an annual incentive fee.
Capstone has an O&M agreement with SunPower Energy Systems Canada Corporation to operate and maintain Amherstburg, expiring on June 30,
2031. Capstone has the ability to terminate the agreement during the term of the contract.
Capstone has an O&M agreement with Agbar to provide management support to Bristol Water, with an initial five-year term, which automatically
extends indefinitely. Capstone has the ability to terminate the contract.
36 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 36
MANAGEMENT’S DISCUSSION AND ANALYSIS Capital commitments
Bristol Water has commitments for capital expenditures at December 31, 2012 of which $33,300 were contracted for but not accrued.
Guarantees
Capstone also provides three guarantees relating to Clean Power Income Fund's legacy obligations. As at December 31, 2012, no claims had been
made on these guarantees.
There have been no other significant changes to the specified contractual obligations that are outside the ordinary course of business. Capstone is
not engaged in any off-balance sheet financing transactions.
Equity Accounted Investments
See discussion in the results of operations on page 30 of this MD&A for a detailed discussion on Capstone’s equity accounted investment
in Värmevärden.
For Capstone’s equity interest in Chapais, no income has been recorded on the investment since its acquisition in 2007. Capstone does not expect to
earn any future equity accounted income from this investment. Additionally, Capstone’s investment in MLTCLP had no significant activity during the
year ended December 31, 2012.
Capital Expenditure Program
Capstone incurred $146,073 in capital expenditures during the year. Below is the breakdown of the investment by operating segment:
Power
Utilities – water
Corporate
For the year ended
Dec 31, 2012
Dec 31, 2011
5,432
140,555
86
87,451
22,962
638
146,073
111,051
Capital expenditures for the power segment in 2012 were in the normal course of operations and primarily related to the Cardinal, Whitecourt, Erie
Shores and the hydro facilities as they completed scheduled outages in the second and third quarters of 2012. In 2011, the capital expenditures
primarily related to the construction of the Amherstburg facility. For the utilities – water segment, expenditures included both growth and
maintenance initiatives as outlined in Bristol Water’s regulatory capital expenditures program. In aggregate, Bristol Water’s capital expenditure
program spans the five-year AMP5 period. Overall, Bristol Water’s expenditures to date are behind the five-year plan but are expected to catch up
before the end of AMP5 in March 2015.
Retirement Benefit Plans
Bristol Water has a defined benefit plan and there are defined contribution plans for the employees of Bristol Water and Cardinal.
Bristol Water's defined benefit plan is for current and former employees. The defined benefit plan is closed to new employees, who are allowed to
join Bristol Water's defined contribution plan.
As at
Fair value of assets
Present value of defined benefit obligation
Dec 31, 2012
Dec 31, 2011
271,650
267,114
(234,075)
(207,010)
37,575
60,104
As at December 31, 2012, the defined benefit plan was in a $37,575 surplus position for accounting purposes. The surplus is subject to a number of
critical accounting estimates which can materially impact the balances. The fair values included in the surplus are calculated with the assistance of an
actuary and assumptions used are considered to be reasonable by management.
For 2013, Bristol Water expects to make employer contributions of $3,348 compared with actual contributions of $3,725 for the year ended
December 31, 2012. The expense is incurred entirely at Bristol Water.
The total defined contribution pension expense recorded in the consolidated statement of income for the year ended December 31, 2012 was
$1,319. The expense comprised $1,135 for Bristol Water and $184 for Cardinal.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 37
37
Income Taxes
Current income tax recovery was $239 for 2012. This was primarily attributable to Bristol Water resolving prior year tax recoveries.
Deferred income tax assets and liabilities are recognized on Capstone’s consolidated statement of financial position based on temporary differences
between the accounting and tax bases of existing assets and liabilities.
As at
Deferred income tax assets
Deferred income tax liabilities
Dec 31, 2012
Dec 31, 2011
28,719
(181,176)
(152,457)
32,897
(178,201)
(145,304)
The following table summarizes Capstone's tax loss carry forwards recognized and unrecognized as part of the deferred income tax assets:
Canadian – capital losses
Canadian – non-capital losses
US – non-capital losses
UK – capital losses
UK – advanced corporation tax
Recognized
Unrecognized
—
13,572
—
—
—
84,610
59,908
14,385
4,633
6,345
Total
84,610
73,480
14,385
4,633
6,345
13,572
169,881
183,453
Capstone’s total deferred income tax assets include $14,517 ($16,924 at December 31, 2011) attributable to the Canadian entities and $14,202
($15,973 at December 31, 2011) for Bristol Water. Deferred income tax assets primarily relate to financial instruments fair value adjustments and
differences in the amortization of deferred financing costs for tax and accounting purposes.
Deferred income tax liabilities of $64,704 ($60,286 at December 31, 2011) were attributable to Capstone’s Canadian entities while $116,472
($117,915 at December 31, 2011) was attributable to Bristol Water. Deferred income tax liabilities primarily relate to the defined benefit pension
plan and differences in the amortization of intangible and capital assets for tax and accounting purposes.
Capstone’s net deferred income tax liability increased by $7,153 in 2012. The increase was primarily attributable to the difference between
accounting and tax depreciation. In addition, a substantively enacted tax rate reduction in the United Kingdom from 25% to 24% effective March 1,
2012, with an additional rate reduction from 24% to 23%, effective July 1, 2012, resulted in a recovery of $7,021. The decrease in the deferred
income tax liability not attributable to the deferred income tax expense relates to amounts recorded to other comprehensive income.
The income tax recovery of $35,945 for the year ended December 31, 2011 was primarily attributable to Capstone’s conversion to a corporation. As
a trust in 2010, IFRS required Capstone to use an “undistributed” tax rate to determine deferred taxes. Upon conversion to a corporation, Capstone
recognized the recovery from changing tax rates from 46%, the trust rate, to 25%, the general corporate rate.
38 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 38
MANAGEMENT’S DISCUSSION AND ANALYSIS DERIVATIVE FINANCIAL INSTRUMENTS
Capstone has exposure to market, credit and liquidity risks from its use of financial instruments as described in notes 9 (Financial Instruments) and
10 (Financial Risk Management) in the consolidated financial statements for the year ended December 31, 2012. These notes contain further details
on the implicit risks and valuation methodology employed for Capstone’s financial instruments.
To manage the risks inherent in the business, Capstone enters into derivative contracts to mitigate the economic impact of the fluctuations in
interest rates and foreign exchange rates. The fair values of these contracts, as reported in Capstone’s consolidated statements of financial
position, were:
As at
Derivative contract assets
Derivative contract liabilities
Net derivative contract liabilities
Dec 31, 2012
Dec 31, 2011
2,021
(30,651)
(28,630)
3,144
(34,143)
(30,999)
The composition of derivative contracts in 2012 is consistent with 2011, aside from the expiry of the gas swap and certain interest rate swaps during
2012. The $2,369 decrease in the net derivative contract liabilities is included in the $2,605 gain as a part of other gains and losses in the
consolidated statement of income for the year ended December 31, 2012. The unrealized gain (loss) on derivatives on the consolidated statements
of income and comprehensive income comprised:
Interest rate swap contracts
Gas swap contracts
Foreign currency option contracts
Embedded derivative
Unrealized gain (losses) on derivatives in net income
Interest rate swap contracts in OCI
Unrealized gain (losses) on derivatives in comprehensive income
Year ended
Dec 31, 2012
Dec 31, 2011
(100)
—
(975)
3,680
2,605
(642)
1,963
(8,128)
(1,918)
(644)
(11,052)
(21,742)
(60)
(21,802)
Gains on derivatives for the year ended December 31, 2012 were primarily attributable to the change in value of the embedded derivative at
Cardinal, partially offset by losses on the foreign currency contracts.
The embedded derivative gain was primarily due to a decrease in the forecasted Direct Customer Rate ("DCR") and the passage of time. The liability
portion of the embedded derivative is calculated by discounting Capstone's expected cash flows from Cardinal's fuel supply agreement. Cardinal may
swap gas mitigation payments at DCR for a fixed rate, which means that declines in forecasted DCR reduce the fair value of the liability. Additionally,
as time passes, fewer net payments are included in the calculation and the liability declines.
The loss on foreign currency contracts was due to the net depreciation of the Swedish krona and UK pound sterling forward-looking rates relative to
the fixed Canadian dollar conversion rate.
FOREIGN EXCHANGE
The foreign exchange gains (losses) were primarily due to translation of Capstone’s SEK-denominated shareholder loan receivable with Värmevärden.
Capstone recorded a $1,620 foreign exchange gain in 2012 compared with a $3,274 loss in 2011. In 2012, the Swedish krona appreciated against
the Canadian dollar thereby increasing the carrying value of the loans in Canadian dollars, compared with a deprecation in 2011. The 2012 gain was
also mitigated by the repayment of more than half of the shareholder loan, reducing the impact of Swedish krona appreciation.
Capstone hedges the interest payments from Värmevärden, but not the outstanding loan receivable.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 39
39
RISKS AND UNCERTAINTIES
Introduction
Risk is an inevitable aspect of operating a business. Decisions that balance risk exposure with intended financial rewards within risk tolerances are the
responsibility of the Corporation's management under the supervision of the Board of Directors. When a risk exposure exceeds the Corporation's risk
tolerance, the Corporation will take steps to eliminate, avoid, reduce or transfer such risk.
The Corporation recognizes the importance and benefits of timely identification, assessment and management of risks that may impact the
Corporation's ability to achieve its strategic objectives. In this respect, the Corporation is committed to prudent risk management practices within the
context of an enterprise risk management (“ERM”) framework. The Corporation undertakes an annual comprehensive review of its ERM framework
and, in 2012, engaged external advisors to further refine and strengthen its risk management practices and implement an outsourced internal audit
function.
What follows is a description of the Corporation's key risk governance and risk processes to support achievement of strategic performance
objectives.
Risk Management Principles and Governance
The Corporation's ERM framework is based on five core principles which establish the culture and tone that guide risk management decisions:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Risk management is everyone's responsibility
Risk management is about decision making
Risk management is embedded within existing management routines
Risk management is about people and culture
Risk management is specific to each business unit
The Corporation's implementation of the ERM framework includes the following hierarchy of responsibilities:
(cid:127) Board of Directors and Audit Committee have overall governance responsibility for
overseeing management's implementation of the risk management policy.
(cid:127) Internal Audit is responsible for reviewing management's practices to manage risk
and reporting to the Audit Committee.
(cid:127) Senior Management is responsible for ensuring the implementation of the ERM
framework to all applicable activities and reporting to the Audit Committee.
(cid:127) Business Units are responsible for ensuring the application of a risk management
framework to identify, monitor and report risk.
(cid:127) Risk Owners are responsible for the identification and day-to-day management and
oversight of risks in their assigned area.
Risk Management Processes
Board of
Directors
and Audit
Committee
Internal Audit
Senior Management
Business Units
Risk Owners
The Corporation's framework relies on the following six key ERM processes to integrate risk management activities with strategic and operational
planning, decision-making and day-to-day oversight of business activities.
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Risk identification is the process of identifying and categorizing risks that could impact the Corporation's objectives.
Risk assessment is the process of determining the likelihood and impact of the risk. The Corporation uses a five point rating scale for
likelihood and impact.
Risk prioritization is the process of ranking risks as high, medium or low based on the net risk rating as described in the diagram below.
Risk management responses are measures taken to optimize the Corporation's net risk exposure within overall tolerance to achieve the
desired risk reward balance.
(cid:127) Monitoring and reporting are the processes of assessing the effectiveness of risk management responses.
(cid:127)
Training and support ensure that personnel tasked with risk management responsibilities have sufficient knowledge and experience to
complete their risk management obligations.
The Corporation's risk management approach is comprehensive and proactive. It
combines the experience and specialized knowledge of individual business segments
and the corporate oversight functions as well as various analytic tools and
methodologies, including a risk matrix (see chart to the right), to assist the Corporation
in regularly assessing and updating the net exposure (including mitigants) of each
known material risk facing the Corporation in the following four risk categories:
operational, strategic, financial and legal and regulatory. The Corporation's assessment
Catastrophic
Major
Moderate
Minor
Insignificant
5
4
3
2
1
k
s
i
R
f
o
t
c
a
p
m
I
process results in prioritization of risks.
40 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Likelihood of Risk Occurrence
Rare
Unlikely Somewhat
Likely
5
4
Likely
3
Almost
Certain
2
1
Page 40
MANAGEMENT’S DISCUSSION AND ANALYSIS
Managing Risk
The Corporation requires that risk assessments (which encompass operational, strategic, financial and legal and regulatory risks) be performed at
each business unit and at the corporate level (which takes into consideration the business unit risks that are significant to the consolidated
organization). The Corporation has identified and defined the following four broad risk categories:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Risks related to the Corporation on a consolidated basis include: risks related to the variability of dividends on the Corporation's common
shares; risks related to the availability of debt and equity financing; risks arising from default under credit agreements and debt instruments;;
risks related to geographic concentration; foreign currency exchange risk; risks related to acquisitions; risks related to derivatives; risks related to
environmental, health and safety matters; risk of adverse changes in legislation and administrative policy; risks related to insurance; and risks
arising from the reliance on key personnel;
Risks related to the power infrastructure facilities include: operational performance risk; risks related to expiry of Power Purchase Agreements;
risk related to fuel costs and supply; contract counterparty performance risk; risk related to land tenure and related rights; environmental risks;
and risks related to the regulatory environment;
Risks related to Bristol Water include: risks related to Ofwat price determinations; the risk of failure to deliver capital investment programs; the
risk of failure to deliver water leakage target; risks related to Ofwat's service incentive mechanism and the serviceability assessment; risks
related to economic conditions; risks related to pension plan obligations; risks related to the regulatory environment; operational performance
risk; risk of competition; risks related to seasonality and climate change; and risks related to labour relations; and
Risks related to Värmevärden include: general risks inherent in the district heating sector; risks related to fuel costs and availability; risks related
to industrial and residential contracts; environmental risks; risks related to the regulatory environment; and risks related to labour relations.
In addition to the risks described in this “Managing Risk” section, there are numerous other risk factors, many of which are beyond the Corporation's
control and the effects of which can be difficult to predict, that could be material to investors or cause our results to differ significantly from our
plans, objectives and estimates. For a more comprehensive list and description of the risks affecting the Corporation, its power infrastructure
facilities, Bristol Water and Värmevärden, please refer to the “Risk Factor” section of the Corporation's most recently filed Annual Information Form,
as supplemented by risk factors contained in any of the following documents filed by the Corporation with securities commissions or similar
authorities in Canada after the date of this annual MD&A, which are available on SEDAR at www.sedar.com: material change reports; business
acquisition reports; interim financial statements; interim management's discussion and analysis; and information circulars.
Risks Related to the Corporation's Securities
Dividends on Common Shares and Preferred Shares are not Guaranteed
Although the Board of Directors of the Corporation has adopted a policy of paying a quarterly dividend on its common shares, and holders of
preferred shares are entitled to receive annual fixed, cumulative, preferential dividends of $1.25 per share, payable quarterly, the declaration of
common and preferred share dividends is at the discretion of the Board of Directors and may vary in the future based upon numerous factors.
Volatile Market Price for the Corporation's Securities
A publicly-traded company will not necessarily trade at values determined by reference to the underlying value of its business or its results of
operations or financial performance. The prices at which the Corporation's securities will trade cannot be predicted. The market price for the
Corporation's securities may be subject to significant fluctuations in response to numerous factors, many of which are beyond the
Corporation's control.
Shareholder Dilution
The Corporation's constating documents permit the issuance of an unlimited number of common shares and a limited number of preferred shares
issuable in series on such terms as the Directors determine without the approval of shareholders, who have no pre-emptive rights in connection with
such issuances. In addition, the Corporation is required to issue common shares upon the conversion of its outstanding convertible debentures in
accordance with their terms and the Corporation may, in certain circumstances, issue common shares to redeem or pay outstanding principal or
interest amounts under the convertible debentures or issue common shares under the DRIP. Accordingly, holders of common shares
may suffer dilution.
Convertible Debentures Credit Risk, Subordination and Absence of Covenant Protection
The likelihood that holders of the Corporation's convertible debentures will receive payments of interest and principal owing to them depends on the
cash flows of the Corporation. In addition, the convertible debentures are unsecured obligations of the Corporation and are subordinate in right of
payment to all the Corporation's existing and future senior indebtedness. The convertible debentures do not contain any covenants restricting future
leveraged transactions involving the Corporation.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 41
41
Risks Related to the Corporation and its Businesses
Availability of Debt and Equity Financing
There can be no assurance that debt or equity financing will be available or, together with internally-generated funds, will be sufficient to meet or
satisfy the Corporation's objectives or requirements or be available on acceptable terms. In particular, Bristol Water is expected to continue to
require access to the capital markets in connection with its capital investment program so the inability to raise debt or equity financing could have a
material adverse effect on its business. The inability of the Corporation to access sufficient capital on acceptable terms could have a material adverse
effect on the Corporation's ability to meet its other objectives or requirements.
Default under Credit Agreements and Debt Instruments
The Corporation and various of its subsidiaries and investees, as applicable, are parties to various credit agreements and debt instruments. A failure
to comply with the obligations under the applicable credit agreement or debt instrument could result in a default, which, if not cured or waived, could
result in the termination of distributions generated by the applicable entity and permit acceleration of the relevant indebtedness. Further, if the
indebtedness under any of the credit agreements or debt instruments were to be accelerated, there could be no assurance that the assets of the
applicable borrower, or the applicable guarantors, would be sufficient to repay that indebtedness in full. A portion of the cash flow of each applicable
subsidiary or investee is devoted to servicing its debt and there can be no assurance that such entity will continue to generate sufficient cash flows
from operations to meet the required interest and principal payments on its credit facility or debt instruments. If such an entity were unable to meet
such interest or principal payments, it could be required to seek renegotiation of such payments or obtain additional equity, debt or other financing.
Although many of the credit agreements related to the power infrastructure facilities are fully amortizing, there can also be no assurance that the
Corporation, its subsidiaries or its investees could refinance these credit agreements or debt instruments or obtain additional financing on
commercially reasonable terms, if at all. Borrowings under certain credit agreements and debt instruments may be at variable rates of interest, which,
in the absence of effective hedges, expose the Corporation to the risk of increased interest rates. This factor may increase the sensitivity of the
Corporation's cash flows to interest rate variations.
Geographic Concentration
Approximately 53.0% of the Corporation's Adjusted EBITDA is derived from those power infrastructure facilities that are located in Ontario. In
addition, Bristol Water's operations are all located in the Bristol area of the UK and Värmevärden's heat production facilities and distribution
networks are all located in certain municipalities in Sweden. Accordingly, the Corporation, its subsidiaries and investees, as applicable, are subject to
risks associated with if any of Ontario, Bristol, UK or the applicable municipalities in Sweden were to experience adverse changes in local or regional
economic conditions or adverse changes to the regulatory environment in Ontario, Bristol, UK or certain municipalities in Sweden, as applicable.
Foreign Currency Exchange
Through its investments in Bristol Water and Värmevärden, the Corporation is exposed to foreign currency exchange risk through exchange rate
movements as the revenue generated by and the assets of Bristol Water and Värmevärden are denominated in UK pound sterling and Swedish krona,
respectively. The Corporation's foreign currency exchange hedging strategy focus on reducing foreign currency exchange risk primarily in relation to
expected future dividends from and interest paid by Bristol Water and Värmevärden, as applicable. However, the Corporation could be exposed to
losses by undertaking hedging activities.
Acquisitions and Development
The Corporation's strategy includes growth through identifying suitable acquisition and development opportunities, pursuing such opportunities,
consummating acquisitions, constructing development projects and effectively integrating and operating (or contracting for the operation of) such
businesses. The Corporation competes for acquisitions and development opportunities and so there is a risk that the Corporation may not be
successful in acquiring or developing such opportunities. Further, if the Corporation is unable to identify, pursue, integrate or manage acquisition or
development projects, this could have an adverse impact upon its strategy. As well, in pursuing development opportunities, the Corporation may be
required to make material capital expenditures with no guarantee that the development project will achieve commercial operation.
Environmental, Health and Safety
The power infrastructure facilities, Bristol Water and Värmevärden are each subject to a complex and stringent environmental, health and safety
regulatory regime. As such, the operation of these businesses carries an inherent risk of environmental, health and safety liabilities (including
potential civil actions, compliance or remediation orders, fines and other penalties) and may result in the applicable business being involved from time
to time in administrative and judicial proceedings related to such matters. Changes in regulations, or more aggressive enforcement of existing
regulations, could lead to material increases in unanticipated liabilities or expenditures for investigation, assessment, remediation or prevention,
capital expenditures, restrictions or delays in the business' activities, the extent of which cannot be predicted. To mitigate the risk of administrative
sanctions and to minimize safety risks to employees and contractors, the Corporation works continuously with all employees and contractors to
42 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 42
MANAGEMENT’S DISCUSSION AND ANALYSIS ensure the development and implementation of a progressive, proactive safety culture within all operations. The Corporation has safety committees
operating within each operating unit to ensure existing safety programs are continuously improved.
Changes in Legislation and Administrative Policy
There can be no assurance that certain laws applicable to the Corporation, its subsidiaries and its investees, including tax laws, will not be changed in
a manner which could adversely affect the value of the Corporation. In addition, there can be no assurance that the administrative policies and
assessing practices of the Canada Revenue Agency will not be changed in a manner which adversely affects the holders of the
Corporation's securities.
Reliance on Key Personnel
The Corporation's success depends heavily on its ability to attract, retain and motivate key employees, including its senior management, individuals
with operational experience in industries related to the power infrastructure facilities and the management of Bristol Water and Värmevärden. If the
Corporation loses the services of any of these key personnel and cannot replace them in a timely manner, its business and prospects may be
adversely affected.
Risks Related to the Power Infrastructure Facilities
Power Purchase Agreements
Most of the electricity that is generated by the power infrastructure facilities is sold to large utilities or creditworthy customers under fixed-term
PPAs. In particular, the first automatic one-year renewal following the initial 20-year term of the Cardinal PPA ends on December 31, 2014. As PPAs
expire or are terminated, there can be no assurance that the applicable facility will be able to renegotiate or enter into a power supply contract on
terms that are commercially reasonable, if at all, and it is possible that the price received for power under subsequent arrangements may be reduced
significantly. It is also possible that subsequent PPAs may not be available at prices that permit the operation of a facility on a profitable basis. With
respect to the Cardinal facility, which contributed approximately 22.3% of the Corporation's Adjusted EBITDA and approximately 65.8% of its AFFO
in 2012, the Corporation expects that the price that the OPA will be willing to pay for electricity under any new PPA for the Cardinal facility will be
less than the price paid under its current PPA. In addition, excess power currently generated by certain of the facilities may be sold in the open
market and, upon expiry or termination of its PPA, a facility may choose to sell all of the power it produces on the open market. In such
circumstances, the price received for power sold will depend on market conditions at the time and there can be no assurance that the market price
received for the electricity so offered will exceed the facility's marginal cost of operation.
Operational Performance
The operational performance of Erie Shores, the hydro power facilities and Amherstburg Solar Park are dependent upon wind speed and density,
water flows and the availability and constancy of solar insolation, respectively. The weather-related risk at the hydro power facilities is partially offset
by their geographic diversification in the three different watersheds. All of the power infrastructure facilities are subject to risks related to premature
wear or failure, defects in design, material or workmanship and longer than anticipated down times for maintenance and repair, including grid outages
and curtailment. These risks are partially mitigated by the proven nature of the technologies employed at each facility, regular maintenance and the
design of each facility. While much of the technology utilized at the power infrastructure facilities has a history of reliable performance at similar
facilities throughout Canada, some of the components of Amherstburg Solar Park have not previously been used in operations in Canada for
extended periods of time. The Corporation has attempted to mitigate some of these risks by obtaining manufacturers' warranties and a weather-
adjusted performance guarantee and having all operations and maintenance services required for the facility provided by SunPower Corporation,
which built the facility.
Fuel Costs and Supply
The supply of natural gas required by the Cardinal facility is contracted under a gas purchase agreement, which expires on May 1, 2015. The
Whitecourt facility has a contract with a substantial forest products company to supply a majority of its wood waste fuel requirements. Upon the
expiry of each of these supply agreements, the Corporation will have to renegotiate the agreement or enter into a new supply agreement or buy fuel
in the open market, where available. There can be no assurance that such agreements will be able to be renegotiated, or new supply agreements be
entered into, on terms that are similar to the existing agreements, if at all. Furthermore, there can be no assurance as to the supply or price of natural
gas or wood waste available on the open market or at the time of the expiry of the supply agreements. Accordingly, there is the risk that, at the time
of the expiry of a particular supply agreement, the price of natural gas or wood waste, as applicable, available to the relevant facility may be in excess
of the price available under the current supply arrangements or such fuel may not be available in the quantities required. Furthermore, each of these
facilities is also dependent on the supply of fuel to it. There is the risk that there could be an interruption in the supply of fuel (as a result of
transportation or otherwise) or increases in fuel transportation costs. In particular, the natural gas used at the Cardinal facility is transported to the
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
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43
facility through a number of pipelines, including the TCPL Canadian Mainline pipeline. The tolls on the TCPL Canadian Mainline pipeline are regulated
by the National Energy Board and have increased significantly in the past few years.
Contract Performance
To a large extent, the Corporation's cash flows are dependent upon the parties to the various material supply, purchase and operations and
management agreements relating to the power infrastructure facilities fulfilling their contractual obligations, As such, there is the risk of the inability
or failure by any such party to meet its contractual commitments.
Land Tenure and Related Rights
The power infrastructure facilities have various land tenure and resource access rights upon which they depend for their operations. There can be no
assurance that these rights will not be challenged, and, if challenged, whether such challenge will be successful. Furthermore, there can be no
assurance that such rights will be able to be renegotiated or extended on commercially reasonable terms, if at all. At such time as any of these rights
are successfully challenged or expire and cannot be renewed or renegotiated upon acceptable terms, the affected power infrastructure facility will
likely be unable to continue to operate. In addition, in these circumstances, there can be no assurance that the Corporation or its subsidiaries will
have the necessary financial resources or will be able to obtain the necessary financial resources to fund or cause to be funded any required
restoration and remediation works.
Environmental
The primary environmental risks associated with the operation of the Cardinal facility and the Whitecourt facility include potential air quality and
emissions issues, soil and water contamination resulting from oil spills, issues around the storage and handling of chemicals used in normal operations
and, in the case of the Whitecourt facility, storage of wood waste fuel on site. The Corporation has procedures in place to prevent and minimize any
impact of the foregoing, which procedures meet generally acceptable industry practices. The primary environmental risks associated with the
operation of the hydro power facilities include possible dam failure which results in upstream or downstream flooding, and equipment failure which
results in oil or other lubricants being spilled into the waterway. In addition, the operation of a hydro power facility may cause the water in the
associated waterway to flow faster, or slower, which could result in water flow issues which could impact fish population, water quality and potential
increases in soil erosion around a dam facility. In order to monitor and mitigate these risks, the Corporation completes facility inspections and ensures
each of its facilities are in compliance with the appropriate regulatory requirements. The primary environmental risks associated with the operation of
the Erie Shores Wind Farm include potential harm to the local migratory bird population, harm to the local bat population as well as concerns over
sound levels and visual “harm” to the scenic environment around the facility. In order to monitor and mitigate these risks, the Corporation completes
facility inspections and ensures its facilities are in compliance with the appropriate regulatory requirements. However, in the event of sound
complaints or impacts, the Corporation could be subject to claims, costs and/or enforcement actions.
Regulatory Environment
The Corporation's power infrastructure facilities are highly regulated and must abide by the relevant market rules as administered by the system
operators in each local jurisdiction. The performance of these facilities depends in part on a favourable regulatory climate and on the ability to obtain,
maintain, comply with or renew all material licences, permits or government approvals. While these facilities are currently compliant with all material
regulatory requirements, the Corporation could incur significant expense to achieve or maintain compliance with any new laws, rules or regulations
that are introduced or with any modifications to their necessary licences, permits or government approvals. If the Corporation is unable to comply
with applicable regulations and standards, or material licences, permits or government approvals, it could become subject to claims, costs or
enforcement actions.
Risks Related to Bristol Water
Ofwat Price Determinations
The price determinations periodically made by Ofwat limit the prices Bristol Water can charge its customers. The conditions of Bristol Water's
Instrument of Appointment, including any condition relating to the prices Bristol Water can charge its customers, can be modified by Ofwat either
with Bristol Water's agreement or, following reference to the UK Competition Commission, on public interest grounds. Implicit within the most recent
price limits set by Ofwat) are assumptions concerning Bristol Water's future operating expenditures and the achievement of operating cost savings. If
these efficiencies are not achieved, this may be reflected in less favourable outcomes in future profitability and cash flows or in Ofwat's future price
determinations. During 2013, Ofwat obtained the consent of all UK water companies (including Bristol Water) to certain amendments to their
Instruments of Appointment which will enable Ofwat to set different price limits for different parts of each water company's business. While these
changes do not impact the RPI+/-K formula for price controls on a water company's “wholesale” activities, there is no certainty that Ofwat will retain
in future price reviews the RPI+/-K form of price control for “retail” activities related to the provision of goods or services directly to
non-domestic customers.
44 CAPSTONE INFRASTRUCTURE CORPORATION
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MANAGEMENT’S DISCUSSION AND ANALYSIS Failure to Deliver Capital Investment Programs
Bristol Water is expected to continue to be required to undertake significant capital expenditures in its business, particularly in relation to new and
replacement plant and equipment for water distribution networks and treatment facilities. There can be no assurance that operating cash flows will
not decline or that external debt financing and other sources of capital will be available or at similar cost to that assumed by Ofwat in order to meet
future capital expenditure requirements. Delivery of capital investment programs could also be affected by a number of factors and may affect
Bristol Water's ability to meet regulatory and other environmental performance standards, which may result in sanctions being imposed against
Bristol Water. In addition, the failure by Bristol Water to successfully complete its capital investment programs could adversely impact future
calculations of Bristol Water's RCV, which could adversely impact Ofwat's determination of future price limits for Bristol Water.
Economic Conditions
Bristol Water's RCV is adjusted annually for inflation so, if RPI decreases, the RCV would be adjusted downward to reflect this decrease. Further,
generally unfavourable economic conditions may also adversely influence Ofwat's determination of future price limits. Given the significant
investments Bristol Water is set to undertake over the remainder of AMP5, it faces risks arising from any adverse changes in RPI.
Operational Performance
Bristol Water controls and operates a large water network and maintains the associated assets with the objective of providing high quality drinking
water on a continuous basis. However, its facilities are subject to risks related to premature wear or failure, defects in design, material or
workmanship, longer than anticipated down times for maintenance and repair, energy shortages, malicious intervention, failure by a supplier, pollution
or contamination, human error, unavailability of access to critical sites or key staff, labour disputes, pollution or contamination and other events.
These risks are partially mitigated by the proven nature of the technologies employed at each facility, regular maintenance and the design of each
facility. Management also has limited control over future energy or chemical costs, abstraction charges, levels of customer bad debt or taxes. In
particular, since 2000, domestic customers cannot be disconnected from their water supply for failure to pay their bill, although. an allowance for bad
debts is included when Ofwat sets price limits, which partially mitigates the risk of such bad debts.
Failure to Deliver Water Leakage Target
Bristol Water is required to meet an annual target for water leakage. If Bristol Water fails to achieve the leakage target by a significant margin in any
one year or by a small margin over a number of years, Ofwat may impose various sanctions, including a reduced revenue allowance at the next review
of price limits. In addition, if performance were to decline, Bristol Water may incur additional operating or capital expenditure to restore performance.
SIM and the Serviceability Assessment
For the 2010-2015 period, Ofwat introduced the service incentive mechanism (the “SIM”,) which compares water companies' performance in terms
of the quality of service that is delivered to customers. The SIM comprises both a quantitative measure of complaints and unwanted contacts, and a
qualitative measure, based on survey evidence, that looks at how satisfied customers are with the quality of service that they receive. Depending
upon Bristol Water's relative performance under the SIM, it could receive a reduced or increased revenue allowance when price limits are next reset
in 2014. In addition, Bristol Water is required to maintain the serviceability of its water assets, ensuring they continue to deliver a level of service and
performance at least as good as in the past. Where serviceability falls below required reference levels of performance, Ofwat may impose a reduced
revenue allowance at the next price review. In addition, if performance were to decline, Bristol Water may incur additional operating or capital
expenditure to restore performance.
Pension Plan Obligations
Bristol Water operates both defined benefit and defined contribution pension arrangements. Since 2002, all new employees have been offered
membership only in the defined contribution pension plan. Estimates of the amount and timing of future funding for Bristol Water's defined benefit
plan are based on various actuarial assumptions and other factors, which may require Bristol Water to make additional contributions to its pension
plan which may not be recoverable under the regulatory price determination process.
Regulatory Environment
Bristol Water is subject to and must ensure its compliance with various laws and regulations of the UK and the EU. Failure to comply with these laws
and regulations could expose Bristol Water to regulatory and other proceedings and, in the most extreme case, lead to revocation of Bristol Water's
Instrument of Appointment or the appointment of an administrator to manage the affairs, business and property of the company. Furthermore, the
impact of future changes in laws or regulations or the introduction of new laws or regulations that affect the business cannot always be predicted
and, from time to time, interpretation of existing laws or regulations may also change or the approach to their enforcement may
become more rigorous.
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Competition
Recently, legislation has been proposed in the UK that could eventually expand the competitive market allowing retail competition for all non-
household customers as an initial step in opening markets to competition. Ofwat and the UK Environment Agency are also considering the
introduction of reforms to the regulation of water abstraction licences that would allow the trading of licences. Ofwat is also examining the scope for
upstream competition in treated water supply and has recently commenced consultations on future price limits. Ofwat has taken steps to introduce
competition into the water supply market through inset appointments and the water supply licensing regime. One inset appointment is pending and
further inset appointments may be made in the future, resulting in increased competition. In addition, Ofwat or the UK government may take steps
that lead to other changes in the structure of the water industry with potentially adverse consequences to Bristol Water.
Seasonality and Climate Change
Although there is little seasonal variation in demand, the proportion of water used from each type of Bristol Water's sources of water varies on a daily
and seasonal basis according to the availability of water, the relative costs and other operational constraints, and the quantity of treated water
supplies fluctuates owing to a variety of seasonal factors, such as dry weather and burst pipes due to freeze/thaw cycles affecting the ground during
winter months. In addition, climate or weather pattern changes may adversely affect the availability of water resources or the demand by customers.
As with other UK water companies, Bristol Water is dependent upon suitable weather conditions supplying raw water as inflow for its abstraction
points and it has a drought contingency plan in place should there be a lack of such rainfall.
Labour Relations
Approximately 33% of Bristol Water's employees are represented by unions. While Bristol Water has traditionally maintained positive labour
relations, there can be no assurance that it will not, either in connection with a renegotiation process or otherwise, experience strikes, labour
stoppages or any other type of conflict with unions or employees in the future.
Risks Related to Värmevärden
Operational Performance
Värmevärden controls and operates several district heating networks and maintains the associated assets with the objective of providing heat to its
customers on a continuous basis. However, its facilities are subject to risks related to premature wear or failure, defects in design, material or
workmanship, longer than anticipated down times for maintenance and repair, energy shortages, malicious intervention, failure by a supplier, pollution
or contamination, human error, unavailability of access to critical sites or key staff, labour disputes, pollution or contamination and other events.
These risks are partially mitigated by the proven nature of the technologies employed at each facility, regular maintenance and the design of each
facility. In addition, Värmevärden's revenue and costs are also affected by the demand for heat, which varies with weather conditions. Unusually cold
weather may result in Värmevärden's marginal cost of production exceeding its marginal revenue. Warmer weather may also lead to a decrease in
demand for heat which could result in lower revenue.
Fuel Costs and Availability
Värmevärden purchases most of its fuel on a rolling basis and is therefore exposed to market price fluctuations. Although Värmevärden has the ability
to pass on fuel price increases on an annual basis to its customers, this ability is limited in the short term. Additionally, price increases may make
alternative heating technologies, such as pellet boilers and geothermal pumps, more competitive with the district heating service provided by
Värmevärden. Further, Värmevärden could be materially and negatively affected if the supply of fuel, particularly biomass which comprises a majority
of its fuel mixture, is interrupted or if there is an increase in the costs to transport the fuel to the district heating facilities. There can be no assurance
as to the supply or price of fuel (or alternative fuel sources) available on the open market. As a result, Värmevärden is subject to the risk of significant
increases in fuel costs or unavailability of fuel.
Industrial and Residential Contracts
Värmevärden has entered into a number of contracts with large industrial consumers for the supply of heat and/or steam which account for a
material amount of Värmevärden's total revenue. Värmevärden is subject to counterparty credit risk and risk of reduction in demand from such
industrial customers. Certain of the contracts also include termination and/or buyback options. Värmevärden enjoys a relatively stable base of
residential customers as a result of the large majority of the Swedish population residing in multi-unit residential buildings, the majority of which
derive their heat from district heating operations. However, residential customers are able to cancel their contracts with Värmevärden at any time
upon short notice. As its industrial and residential contracts expire, there is a risk that Värmevärden may not be able to renegotiate or enter into new
contracts or do so on commercially reasonable terms which, in some cases, could adversely impact upon the business, operating results and financial
condition of Värmevärden and could, in turn, adversely affect the Corporation's cash flows and the likelihood that holders of securities of the
Corporation will receive payments, whether of interest or dividends or upon redemption or maturity, as applicable.
46 CAPSTONE INFRASTRUCTURE CORPORATION
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MANAGEMENT’S DISCUSSION AND ANALYSIS Environmental
The primary environmental risks associated with Värmevärden operations include potential air quality and emissions issues, soil contamination
resulting from oil spills, issues around the storage and handling of chemicals used in normal operations and the storage of fuel on site. Värmevärden's
procedures, in place to prevent and minimize any impact of the foregoing, meet generally acceptable industry practices.
Regulatory Environment
Värmevärden is subject to regulation under legislation governing the district heating industry as well as under consumer protection and other
legislation and regulations of general application. Värmevärden's business is presently not subject to price regulation or third-party access (“TPA”)
regulations. However, there is the risk that price regulation or TPA could occur in the future. Värmevärden's operations, including its heat production
and distribution activities, require numerous licences and permits from various governmental authorities and such operations are subject to laws and
regulations governing production, taxes, labour standards, occupation health, waste disposal, toxic substances, land use, environmental protection,
project safety and other matters. Värmevärden may experience increased costs and delays in the production and distribution of district heating as a
result of complying with applicable laws, regulations, licences and permits. While Värmevärden is currently compliant with all material regulations and
standards, Värmevärden could incur significant expenses to achieve or maintain compliance with any new laws or regulations that are introduced. If
Värmevärden is unable to comply with applicable regulations and standards, it could become subject to claims, costs and enforcement actions.
Labour Relations
Approximately 80% of Värmevärden's employees are represented by unions. While Värmevärden has traditionally maintained positive labour
relations, there can be no assurance that it will not in the future, whether in connection with a renegotiation process or otherwise, experience strikes,
labour stoppages or any other type of conflict with unions or employees. Such risks may be partially mitigated by Swedish legislation that prohibits
labour disruptions in the provision of essential services, such as district heating.
ENVIRONMENTAL, HEALTH AND SAFETY REGULATION
Capstone's Canadian power facilities and the water distribution and district heating businesses, respectively, operated by Bristol Water and
Värmevärden (collectively the “Facilities”) hold all material permits and approvals required for their operations and are managed to comply with
environmental, health and safety laws.
The Facilities are subject to complex and stringent environmental, health and safety regulatory regimes, which primarily focus on:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
(cid:127)
air emissions;
taking of water, and discharges into water;
the storage, handling, use, transportation and distribution of dangerous goods and hazardous materials;
the prevention of releases of hazardous materials into the environment;
the prevention, presence and remediation of hazardous materials in soil and ground water, both on and off site;
workers' health and safety; and
sound regulation.
Due to the nature of their operations, the Facilities are not subject to any material contingent environment liabilities or environmental remediation
costs upon the retirement of assets.
Greenhouse Gases and other Air Pollutants
Certain of the Facilities have an impact on the environment, particularly the Cardinal and Whitecourt facilities, which both emit greenhouse gases
("GHGs"), such as carbon dioxide ("CO2") and nitrous oxides ("NOx"). All Facilities comply in all material respects, with the applicable Canadian, UK,
Swedish and European Union legislation and guidelines regarding GHGs and other emissions. There are a number of draft proposals in respect of
changes to such legislation and guidelines (including proposed limits on GHG emissions) – in various stages of development. However, it is difficult to
predict how these changes may apply to the Facilities.
Capstone mitigates the potential impact of future changes to environmental legislation and guidelines by remaining diligent in the operation of the
Facilities, including stringent policies and procedures to prevent the improper discharge of emissions or other pollutants. Capstone's environmental
footprint is also mitigated by the renewable profile of its wind, hydro, biomass and solar power facilities, which could generate GHG offset credits,
where eligible.
Cardinal
There is currently no limit on the amount of CO2 that the Cardinal facility may emit, although the facility is required to report its CO2 emissions under
various federal and provincial regulations. Environmental regulations in Ontario also provide for, among other things, the reporting, allocation and
retirement of NOx emissions. Under this system, applicable facilities receive a maximum yearly emission compliance limit, which may be achieved by
controlling or reducing source emissions, or by trading NOx allowances. For 2012, Cardinal received 1,094 tonnes of NOx allowances based on actual
generation in 2010. Cardinal expects to retire 375 tonnes of NOx allowances for 2012, leaving a cumulative allowance balance of 7,678 tonnes. NOx
emissions from Cardinal's generating equipment are lower than the levels mandated by legislation.
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2012 ANNUAL REPORT
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47
Whitecourt
The Whitecourt Facility uses biomass combustion technology to convert the energy content in wood waste into electricity. Biomass is generally
considered to be "carbon-neutral" as the amount of CO2 arising from combustion is equal to what would be emitted if the biomass were to
decompose naturally. As a result, electricity generated from biomass is regarded as an environmentally-friendly form of power generation. The
Whitecourt facility is subject to limits governing the emissions of carbon monoxide, NOx and particulates in accordance with the facility's
Environmental Approval. Average annual emission levels at the Whitecourt facility are below the levels of permitted emissions for the facility. The
Whitecourt Facility is also subject to certain federal and provincial GHG reporting requirements and is in compliance with these requirements.
Hydro Facilities
Capstone's hydro facilities do not produce GHGs. However, their operations are governed by water management plans, which specify the hydrological
conditions during which production may occur.
Erie Shores Wind Farm
Erie Shores does not produce GHGs, but is subject to regulations and/or approvals relating to birds, mammals, other animals, and to sound.
Amherstburg Solar Park
The operation of the Amherstburg does not generate GHGs and the primary environmental regulation relates to potential sound emissions issues.
Värmevärden
In 2007, the European Union adopted a long-term climate change target, commonly referred to as 20-20-20. The goal of the target is for member
states (including Sweden) to reduce energy use by 20%, reduce CO2 emissions by 20%, and increase their proportion of renewable energy by 20%,
all by 2020. The government of Sweden has subscribed to the 20-20-20 targets and has made biomass-fired and waste-fired heating facilities an
important component in its overall plan to meet its CO2 reduction commitments.
Bristol Water
Energy use in water treatment and other activities carried out by Bristol Water results in indirect emissions of GHGs. Bristol Water is subject to the
UK Climate Change Levy, although the forecast cost for 2012-2013 is an immaterial amount due to credits arising from Bristol Water's purchase of
green energy. Bristol Water is also subject to the CRC Energy Efficiency Scheme, a mandatory UK carbon emissions reduction plan for significant
consumers of energy; costs for 2012-2013 are projected to be an immaterial amount.
Further information regarding Environmental, Safety and Health Regulations matters is contained in the Corporation's Annual Information Form
(which is available under the Corporation's profile on www.sedar.com).
RELATED PARTY TRANSACTIONS
Capstone's related party transactions in 2012 comprise compensation to key management, which commenced after the internalization of
management on April 15, 2011.
In 2011, Capstone terminated its management and administration agreements with MGL, which established the related party relationship between
Capstone and MGL. The 2011 transactions with MGL and MPML are described in note 26 (Related Party Transactions) in the consolidated financial
statements for the year ended December 31, 2012.
Compensation of Key Management
Key management includes the Corporation's directors, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Compensation awarded
to key management consisted of salaries, directors' fees and short-term employee benefits, which include fees paid to directors. Eligible directors
and senior management of the Corporation also receive forms of stock-based compensation. Key management compensation is described in note 26
(Related Party Transactions) in the consolidated financial statements for the year ended December 31, 2012.
Prior to April 15, 2011, the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of Capstone and other employees were employed by
MGL. Accordingly, employee compensation disclosure only includes executive compensation since the internalization of management.
48 CAPSTONE INFRASTRUCTURE CORPORATION
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MANAGEMENT’S DISCUSSION AND ANALYSIS Linking Management Compensation to Performance
Compensation plays an important role in achieving short- and long-term business objectives that ultimately drive the Corporation’s business success
in alignment with long-term shareholder goals. The objectives of the Corporation’s compensation program are to:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
attract and retain highly qualified employees with a history of proven success;
align the interests of employees with shareholders’ interests and with the execution of the Corporation’s business strategy;
establish performance goals that, if met, are expected to improve long-term shareholder value; and
tie compensation to those goals and provide meaningful rewards for achieving them.
Financial performance targets are set each year to provide management with an incentivize to improve upon yearly budgeted financial results and are
therefore aligned with shareholder interests.
The following table summarizes the link between the Corporation's executive and senior officer forms of compensation and performance:
Salary
Short-term incentive plan ("STIP")
Long-term incentive plan ("LTIP")
Description
Salary is a fixed component of
compensation that provides income
certainty by establishing a base level of
compensation for executives fulfilling their
roles and responsibilities.
The STIP provides the possibility of an
additional annual cash award based on the
achievement of corporate and individual
goals.
Purpose
To attract and retain qualified executives.
To motivate, attract and retain qualified
executives.
Link to
performance
No direct link.
A significant portion of this award is based
on actual business performance against
Capstone's non-GAAP performance
measures, Adjusted EBITDA and AFFO.
The LTIP provides the possibility of an
additional award linked to the Corporation's
common shares. This award is paid in cash
or common shares purchased on the open
market after meeting certain vesting
conditions.
To reward long-term performance and align
interests of executives with security
holders.
A significant portion of this award is directly
linked to the performance of the
Corporation's shares over the vesting
period, as well as the total shareholder
return relative to a comparator group.
For a comprehensive understanding of Capstone's compensation program please refer to the "Compensation Discussion and Analysis" section of the
Corporation's most recently filed information circular.
SUMMARY OF QUARTERLY RESULTS
The following table provides a summary of the previous eight quarters of Capstone’s financial performance.
2012
2011
($000s, except for per share amounts)
Q4
Q3
Q2
Revenue
Net income (loss)(4)
Adjusted EBITDA
AFFO
Common dividends(5)
Preferred dividends
Earnings Per Share – Basic
94,654
12,612
31,139
13,560
5,579
938
0.144
Earnings Per Share – Diluted
0.139 (6)
AFFO per share
Dividends declared per common share
0.179
0.075
84,951
85,849
5,553
(4,568)
24,618
27,605
3,381
5,655
938
0.061
0.061
0.045
0.075
3,707
10,231
938
(0.073)
(0.073)
0.049
0.135
Q1
92,156
13,381
37,295
14,915
12,299
938
0.167
31,120
9,722
11,569
1,264
(0.086)
0.161 (6)
(0.086)
0.200
0.165
0.136
0.165
13,253
(6,569)
5,891
(13,888)
10,225
10,217
—
(0.190)
(0.190)
0.096
0.165
—
(0.492)
(0.492)
(0.225)
0.165
Q4 (1)
Q3
Q2 (2, 3)
91,663
40,361
37,028
(4,891)
(11,783)
(30,370)
Q1
46,915
41,332
17,869
13,484
10,015
—
0.685
0.625 (6)
0.223
0.165
(1) AFFO and AFFO per share have been adjusted to conform to the Corporation’s revised definition of AFFO; refer to page 20 of this MD&A.
(2) Net loss, Adjusted EBITDA, AFFO, Earnings Per Share, and AFFO per share were significantly impacted by $18,611 of internalization costs
incurred during the second quarter.
(3) Net loss has been adjusted by $2,409 for acquisition costs on Capstone’s investment in Värmevärden.
(4) Net income (loss) attributable to the shareholders of Capstone.
(5) Common dividends include amounts declared for both the common shares of the Corporation and the Class B exchangeable units.
(6) Convertible debentures were dilutive during the period.
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FOURTH QUARTER 2012 HIGHLIGHTS
Revenue
Operating expenses
Administrative expenses
Project development costs
Equity accounted income (loss)
Interest income
Other gains and (losses), net
Foreign exchange gain (loss)
Earnings before, interest, taxes, depreciation and amortization
Interest expense
Depreciation of capital assets
Amortization of intangible assets
Income (loss) before income taxes
Income tax recovery (expense)
Current
Deferred
Total income tax recovery (expense)
Net income
Net income attributable to:
Shareholders of Capstone
Non-controlling interest
Three months ended
Dec 31, 2012
Dec 31, 2011
94,654
(51,533)
(3,037)
(279)
3,596
893
(378)
676
44,592
(11,184)
(12,194)
(2,582)
18,632
1,237
(3,533)
(2,296)
16,336
12,612
3,724
16,336
91,663
(48,598)
(3,074)
(4,309)
320
2,123
(7,918)
(2,735)
27,472
(15,377)
(11,912)
(2,478)
(2,295)
(179)
32
(147)
(2,442)
(4,891)
2,449
(2,442)
Capstone's EBITDA was $17,120, or 62.3%, higher compared with the fourth quarter of 2011.
Revenue was $2,991, or 3.3%, higher compared with 2011, primarily due to increases of $2,035 from Bristol Water and $956 from the power
segment. Bristol Water's revenue increased primarily due to regulated increases in the water tariff charged to customers, which adjusts annually on
April 1. The power segment increase was primarily due to increased power generation of 9.9 GwH, or 34.3%, at the hydro facilities, contributing
$1,373. In addition, Cardinal contributed $773 due to higher power rates and increased production. Lower power generation at Erie Shores partially
offset revenues by $1,165 due to poor wind conditions.
Expenses were $1,132, or 2.0%, lower compared with 2011.
(cid:127) Operating expenses increased $2,935, primarily related to Bristol Water. Bristol Water's operating expenses increased primarily due to $1,080
of increased repairs and maintenance expenditures coinciding with the capital program, $670 of higher consultancy fees for the capital program
and $350 of higher bad debts, as a result of collection experience.
(cid:127)
(cid:127)
Administrative expenses were consistent with the fourth quarter of 2011.
Project development costs declined by $4,030 as Capstone incurred costs in 2011 for the acquisition of Bristol Water.
Equity accounted income (loss) was $3,276, or 1,024%, higher than in 2011, due to higher earnings reported by Värmevärden.
Interest income was $1,230, or 57.9%, lower than in 2011, due to lower interest on the loan receivable with Värmevärden as a result of the partial
repayment in the first quarter of 2011.
Other losses were $7,540, or 95%, lower compared with 2011. The change was primarily attributable to $7,931 greater reduction in the 2011 fair
value of Capstone's financial instruments, primarily for interest rate swap contracts which expired in 2011.
Foreign exchange gain (loss) in 2012 was $3,411 favourable to 2011. The favourable change was attributable to the loan receivable with
Värmevärden in Sweden. During the fourth quarter of 2012, the Swedish krona appreciated marginally against the Canadian dollar.
Interest expense was $4,193, or 27.3%, higher in 2011, due to additional interest on the senior debt facility used to acquire Bristol Water in 2011.
The senior debt facility was repaid in the second quarter of 2012.
Income tax provision was a net expense in both years. The current portion income tax provision was a $1,237 recovery in 2012 due to Bristol
Water which achieved recoveries from prior year tax return refilings. The deferred portion of the income tax provision was an expense in 2012
primarily attributable to fair value adjustment and the difference between accounting and income tax depreciation for financial instruments.
50 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 50
MANAGEMENT’S DISCUSSION AND ANALYSIS ACCOUNTING POLICIES AND INTERNAL CONTROL
Significant Changes in Accounting Standards
The consolidated financial statements have been prepared in accordance with IFRS.
Future Accounting Changes
A number of new standards, amendments to standards and interpretations are effective for annual periods beginning after January 1, 2013 and
2015, and have not been applied in preparing these consolidated financial statements. Those which may be relevant to Capstone are set out below.
Capstone does not plan to adopt these standards early.
Title of the New IFRS (1)
IFRS 9, Jan 1, 2015
Financial Instruments
IFRS 10, 11 and 12, Jan 1, 2013
Consolidated Financial Statements, Joint
Arrangements and Disclosure of Interests in
Other Entities
IFRS 13, Jan 1, 2013
Fair Value Measurement
IAS 19, Jan 1, 2013
Employee Benefits
Impact to Capstone
Capstone's assessment of the impact of this standard is ongoing.
Capstone will adopt IFRS 10, 11 and 12 for the annual period beginning on January 1, 2013.
Implementation of these standards will have no material impact on Capstone's consolidated financial
statements, but will increase disclosure of interests in other entities.
Capstone will adopt IFRS 13 prospectively beginning on January 1, 2013. Implementation of this standard
will have no material impact on Capstone's consolidated financial statements.
Capstone will adopt the amendment to IAS 19 retrospectively as a change in accounting policy for the
annual period beginning on January 1, 2013. Implementation of this amendment is limited to Bristol
Water which has a defined benefit pension plan. The impact on Capstone's consolidated financial
statements is:
i) The expected return on plan assets must be calculated using the same discount rate as the pension
obligation, which will affect interest expense and net income, and is then offset in
comprehensive income.
ii) Certain costs will be required to be recognized as period costs and will be reclassified from net
interest in the statement of income to current service costs which are included in
operating expenses.
IAS 27, Jan 1, 2013
Separate Financial Statements
Capstone will adopt the amendment to IAS 27 for the annual period beginning on January 1, 2013.
Implementation will have no material impact on Capstone's consolidated financial statements.
IAS 28, Jan 1, 2013
Investments in Associates and Joint Ventures
Capstone will adopt the amendment to IAS 28 for the annual period beginning on January 1, 2013.
Implementation will have no material impact on Capstone's consolidated financial statements.
(1) See the note 2 to the consolidated financial statement for the year ended December 31, 2012 for further detail about the nature of these future
accounting changes.
Accounting Estimates
The consolidated financial statements are prepared in accordance with IFRS, which require the use of estimates and judgment in reporting assets,
liabilities, revenues, expenses and contingencies.
The following accounting estimates included in the preparation of the consolidated financial statements are based on significant estimates and
judgments, which are summarized as follows:
Area of significant estimate
Assumptions and judgements
(cid:127) Purchase price allocations
(cid:127) Initial fair value of net assets
(cid:127) Depreciation on capital assets
(cid:127) Estimated useful lives and residual value
(cid:127) Amortization on intangible assets
(cid:127) Estimated useful lives
(cid:127) Asset retirement obligations
(cid:127) Expected settlement date, amount and discount rate
(cid:127) Impairment of trade receivables
(cid:127) Probability of failing to recover amounts when they fall into arrears
(cid:127) Derivative financial instruments
(cid:127) Interest rate, natural gas price, and direct consumer rate
(cid:127) Retirement benefits
(cid:127) Income taxes
(cid:127) Future cash flows and discount rate
(cid:127) Timing of reversal of temporary differences, tax rates and current and future taxable income
(cid:127) Impairment assessments of capital, assets,
(cid:127) Future cash flows and discount rate
intangibles and goodwill
Management’s estimates are based on historical experience, current trends and various other assumptions that are believed to be reasonable under
the circumstances. Actual results could materially differ from those estimates.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 51
51
Internal Controls over Financial Reporting and Disclosure Controls and Procedures
Capstone's CEO and CFO are required by the various provincial securities regulators to certify annually that they have designed, or caused to be
designed, Capstone's disclosure controls and procedures, as defined in the Canadian Securities Administrators' National Instrument 52-109 (“NI
52-109”), and that they have evaluated the effectiveness of these controls and procedures in the applicable period. Disclosure controls are those
controls and other procedures that are designed to provide reasonable assurance that the relevant information that Capstone is required to disclose
is recorded, processed and reported within the timeframes specified by such securities regulators.
Capstone's management, under the supervision of and with the participation of the CEO and CFO, has designed internal controls over financial
reporting, as defined in NI 52-109. The purpose of internal controls over financial reporting is to provide reasonable assurance regarding the
reliability of Capstone's financial reporting, in accordance with IFRS, focusing in particular on controls over information contained in the audited
annual and unaudited interim consolidated financial statements. The internal controls are not expected to prevent and detect all misstatements due
to error or fraud.
During 2012, Capstone continued to improve internal control over financial reporting by adding a third-party internal audit function to objectively
evaluate and advise management and the Board of Directors.
The CEO and CFO have concluded that Capstone's disclosure controls and procedures were effective as at December 31, 2012 to ensure that
information required to be disclosed in reports that Capstone files or submits under Canadian securities legislation is recorded, processed,
summarized and reported within applicable time periods.
As at December 31, 2012, Capstone's management had assessed the effectiveness of Capstone's internal control over financial reporting using the
criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control – Integrated Framework.
Based on this assessment, management has determined that Capstone's internal control over financial reporting was effective as at
December 31, 2012.
52 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 52
MANAGEMENT’S DISCUSSION AND ANALYSIS MANAGEMENT’S
MANAGEMENT’S
RESPONSIBILITY FOR
RESPONSIBILITY FOR
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The consolidated financial statements are the responsibility of Capstone Infrastructure Corporation and have been approved by the
Corporation's Board of Directors. These consolidated financial statements have been prepared by management in accordance with
International Financial Reporting Standards and include amounts that are based on estimates and judgments. Financial information
contained elsewhere in this annual report is consistent with the consolidated financial statements. Capstone Infrastructure Corporation
maintains a system of internal controls that are designed to provide reasonable assurance that the financial records are reliable and accurate
and form a proper basis for the preparation of consolidated financial statements.
The Board of Directors of Capstone Infrastructure Corporation appointed an Audit Committee which is composed entirely of independent
Directors. The Audit Committee reviews the consolidated financial statements with management and the external auditors before the
consolidated financial statements are submitted to the Board of Directors for approval. The independent auditor, PricewaterhouseCoopers
LLP, has examined the consolidated financial statements in accordance with Canadian generally accepted auditing standards. The
independent auditor's responsibility is to express an opinion on the consolidated financial statements. The following report of
PricewaterhouseCoopers LLP outlines the scope of its examination and its opinion on the consolidated financial statements.
Michael Bernstein
MICHAEL BERNSTEIN
President and Chief Executive Officer
Michael Smerdon
MICHAEL SMERDON
Executive Vice President and Chief Financial Officer
Toronto, Canada
March 7, 2013
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
53
Page 53
INDEPENDENT
INDEPENDENT
AUDITOR'S REPORT
AUDITOR’S REPORT
To the Shareholders of Capstone Infrastructure Corporation
We have audited the accompanying consolidated financial statements of Capstone Infrastructure Corporation and its subsidiaries, which
comprise the consolidated statements of financial position as at December 31, 2012 and 2011 and the consolidated statements of income,
comprehensive income, changes in shareholders' equity and cash flows for the years then ended, and the related notes, which comprise a
summary of significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, 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.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits 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 consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity's preparation and fair presentation of the consolidated 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 consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Capstone Infrastructure
Corporation and its subsidiaries as at December 31, 2012 and 2011 and their financial performance and their cash flows for the years then
ended in accordance with International Financial Reporting Standards.
Chartered Accountants, Licenced Public Accountants
Toronto, Canada
March 7, 2013
CAPSTONE INFRASTRUCTURE CORPORATION
54 CAPSTONE INFRASTRUCTURE CORPORATION
Page 54
CONSOLIDATED
CONSOLIDATED
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at
Current assets
Cash and cash equivalents
Restricted cash
Short-term deposits
Accounts receivable
Other assets
Current portion of loans receivable
Current portion of derivative contract assets
Non-current assets
Loans receivable
Derivative contract assets
Equity accounted investments
Capital assets
Intangible assets
Retirement benefit surplus
Deferred income tax assets
Total assets
Current liabilities
Accounts payable and other liabilities
Current portion of derivative contract liabilities
Current portion of finance lease obligations
Current portion of long-term debt
Long-term liabilities
Derivative contract liabilities
Electricity supply and gas purchase contracts
Deferred income tax liabilities
Deferred revenue
Finance lease obligations
Long-term debt
Liability for asset retirement obligation
Total liabilities
Equity attributable to shareholders of Capstone
Non-controlling interest
Total liabilities and shareholders’ equity
Commitments and contingencies
See accompanying notes to these consolidated financial statements
Notes
Dec 31, 2012 Dec 31, 2011
4
4
5
6
7
8
9a
8
9a
11
12
13
14
15a
16a
9a
17
18
9a
13
15a
16b
17
18
19
20e
25
49,599
19,229
6,471
75,386
7,218
1,096
174
159,173
37,909
1,847
16,990
1,086,407
283,919
37,575
28,719
57,587
14,947
82,202
70,854
7,448
984
261
234,283
85,824
2,883
15,993
977,456
288,304
60,104
32,897
1,652,539
1,697,744
106,767
3,106
3,502
14,977
128,352
27,545
3,260
181,176
6,298
3,699
789,655
2,096
81,734
3,088
5,256
230,899
320,977
31,055
4,894
178,201
1,363
6,727
704,145
2,412
1,142,081
1,249,774
418,848
91,610
413,520
34,450
1,652,539
1,697,744
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
55
Page 55
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Equity attributable to shareholders of Capstone
Notes
Share
Capital (1)
Convertible
Debentures
AOCI (2)
Balance, Dec 31, 2010
Common shares issued
Preferred shares issued
20a
20c
536,278
77,526
72,020
—
—
—
Reclassification of debt instruments to
equity on conversion to a corporation
Debenture conversions, net of costs
20a
Other comprehensive income (loss)
Non-controlling interest in net assets
acquired of Bristol Water
3
26,710
11,819
11,554
(2,270)
Net income for the period
Dividends declared to common
shareholders of Capstone
Dividends declared to preferred
shareholders of Capstone
Dividends declared by Bristol Water
Balance, Dec 31, 2011
Common shares issued (4)
Other comprehensive income (loss)
Net income for the period
Dividends declared to common
shareholders of Capstone
Dividends declared to preferred
shareholders of Capstone (5)
Dividends declared by Bristol Water
—
—
—
—
—
—
—
—
(89)
—
—
20a,d
1,238
20d
20a
20d
20a,d
5,702
Retained
Earnings
(272,183)
—
—
—
—
NCI (3)
—
—
—
—
—
—
—
—
—
—
—
(6,729)
6,559
1,866
—
—
—
—
—
—
(5,712)
31,810
2,449
(42,026)
(1,264)
—
—
—
(1,675)
Total
Equity
264,095
77,526
72,020
38,264
9,549
1,696
31,810
(3,263)
(40,788)
(1,264)
(1,675)
—
—
—
—
—
—
—
—
—
—
(89)
5,171
(10,538)
(5,933)
(11,300)
26,978
16,746
43,724
(33,764)
(4,575)
—
—
—
(5,312)
51,659
91,610
(28,062)
(4,575)
(5,312)
68,102
510,458
—
—
—
—
—
—
—
—
—
725,591
9,284
(6,729)
(314,626)
34,450
447,970
Partial sale of interest in Bristol Water
3
749
15,694
Balance, Dec 31, 2012
731,204
9,284
(809)
(320,831)
(1) Share capital includes common and preferred shares and Class B exchangeable units.
(2) Accumulated other comprehensive income (loss) (“AOCI”).
(3) Non-controlling interest (“NCI”).
(4) During 2012, additional transaction costs of $89 were included in relation to the common share offering on November 10, 2011.
(5) Dividends declared to preferred shareholders of Capstone include $200 of deferred income taxes.
See accompanying notes to these consolidated financial statements
56 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 56
CONSOLIDATED STATEMENTS OF INCOME
($000s, except per share amounts)
Revenue
Operating expenses
Administrative expenses
Project development costs
Equity accounted income (loss)
Interest income
Other gains and (losses), net
Foreign exchange gain (loss)
Earnings before interest expense, taxes, depreciation and amortization
Interest expense
Depreciation of capital assets
Amortization of intangible assets
Earnings before income taxes
Income tax recovery (expense)
Current
Deferred
Total income tax recovery (expense)
Net income (loss)
Net income (loss) attributable to:
Shareholders of Capstone
Non-controlling interest
Earnings per share
Basic and diluted
For the year ended
Notes
Dec 31, 2012 Dec 31, 2011
23
23
23
11a
9b
24
9b
12
13
15d
357,610
215,967
(195,178)
(122,086)
(11,070)
(29,677)
(365)
2,294
4,886
1,294
1,620
161,091
(49,707)
(47,432)
(10,120)
53,832
239
(10,347)
(10,108)
43,724
26,978
16,746
43,724
(8,289)
(5,276)
6,443
(21,742)
(3,274)
32,066
(31,668)
(31,006)
(8,413)
(39,021)
(187)
35,945
35,758
(3,263)
(5,712)
2,449
(3,263)
21
0.298
(0.108)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Cumulative differences on translation of foreign operations
Other comprehensive income (loss) on equity accounted investments
Losses on financial instruments designated as cash flow hedges
(net of tax in 2012 – $13, 2011 – $20)
Actuarial gains (losses) recognized in respect of retirement benefit obligations
(net of tax in 2012 – $6,826, 2011 – $3,123, respectively)
Other comprehensive income (loss)
Net income (loss)
Total comprehensive income (loss)
Comprehensive income (loss) attributable to:
Shareholders of Capstone
Non-controlling interest
See accompanying notes to these consolidated financial statements
Notes
11a
14
For the year ended
Dec 31, 2012 Dec 31, 2011
6,478
702
(6,890)
(724)
(642)
(60)
(17,838)
(11,300)
43,724
32,424
21,611
10,813
32,424
9,370
1,696
(3,263)
(1,567)
(5,882)
4,315
(1,567)
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 57
57
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income
Deferred income tax expense (recovery)
Depreciation and amortization
Other gains and losses (net)
Amortization of deferred financing costs and non-cash financing costs
Equity accounted (income) loss
Unrealized foreign exchange (gain) loss
Change in non-cash working capital
Total cash flows from operating activities
Investing activities:
Change in restricted cash and short-term deposits
Receipt of loans receivable
Return of capital from equity accounted investments
Proceeds from sale (purchase) of foreign currency contracts
Investment in capital assets and computer software
Business acquisitions (net of cash acquired of $39,487)
Loan to equity accounted investments
Investment in equity accounted investments
Total cash flows used in investing activities
Financing activities:
Proceeds from issuance of long-term debt
Proceeds from partial sale of Bristol Water
Repayment of long-term debt and finance lease obligations
Dividends paid to common and preferred shareholders
Dividends paid to non-controlling interests
Transaction costs on debt issuance
Proceeds from issuance of common and preferred shares, net of costs
Proceeds from loans payable
Total cash flows from (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Decrease in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental information:
Interest paid
Taxes paid (recovery)
See accompanying notes to these consolidated financial statements
For the year ended
Notes
Dec 31, 2012
Dec 31, 2011
24
11a
28
11a
12
8
11a
3
43,724
10,347
57,552
(1,294)
12,812
(2,294)
(1,206)
(4,963)
114,678
72,010
48,943
2,001
38
(127,941)
—
—
—
(3,263)
(35,945)
39,419
21,742
7,599
5,276
3,241
12,812
50,881
3,324
884
—
(2,468)
(122,385)
(173,989)
(84,828)
(21,882)
(4,949)
(401,344)
100,621
68,952
(253,311)
(26,131)
(5,312)
(3,364)
(89)
—
(118,634)
917
(7,988)
57,587
49,599
249,200
—
(76,872)
(42,051)
(1,675)
(3,512)
150,175
5,466
280,731
(1,094)
(70,826)
128,413
57,587
40,670
929
20,128
(538)
58 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 58
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS
Note Description
Page
Note Description
Page
1
2
3
4
5
6
Corporate Information
Summary of Significant Accounting
Policies
Acquisition and Disposition
Cash and Cash Equivalents and Restricted
Cash
Short-Term Deposits
Trade and Other Receivables
59
59
68
69
69
69
16
17
18
19
20
21
Accounts Payable and Other Liabilities
Finance Lease Obligations
Long-term Debt
Liability for Asset Retirement
Shareholders' Equity
Earnings Per Share
9
8
7
70
22
10
Other Assets
Loans Receivable
Financial Instruments
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS
Commitments and Contingencies
Equity Accounted Investments
Expenses – Analysis by Nature
Financial Risk Management
Related Party Transactions
Non-Cash Working Capital
Share-based Compensation
Segmented Information
Other Gains and Losses
Capital Assets
Intangibles
12
13
11
26
27
28
24
23
25
77
74
77
71
79
70
14
Retirement Benefit Plans
79
29
Comparative Figures
83
83
84
89
89
91
91
92
92
92
94
95
95
95
15
Income Taxes
82
NOTE 1. CORPORATE INFORMATION
Capstone is incorporated and domiciled in Canada and principally located at 155 Wellington Street West, Suite 2930, Toronto, Ontario, M5V 3H1.
The mission of Capstone Infrastructure Corporation and its subsidiaries (together the “Corporation” or “Capstone”) is to build and responsibly
manage a high quality portfolio of infrastructure businesses in Canada and internationally in order to deliver a superior total return to our
shareholders by providing reliable income and capital appreciation. Capstone’s portfolio includes investments in gas cogeneration, wind, hydro,
biomass and solar power generating facilities, representing approximately 370 MW of installed capacity, a 33.3% interest in a district heating business
in Sweden, and a 50% interest in a regulated water utility in the United Kingdom.
All amounts are in Canadian thousands of dollars or thousands of share amounts unless otherwise indicated.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are used in the preparation of these consolidated financial statements.
Basis of Preparation
Statement of compliance
The consolidated financial statements of Capstone have been prepared in accordance with International Financial Reporting Standards ("IFRS").
The consolidated financial statements were authorized for issue by the Board of Directors on March 7, 2013.
Basis of measurement
The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial instruments,
which are measured at fair value as explained in the accounting policies set out below and on a going concern basis of accounting (see note 10).
Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Consolidation
These audited consolidated financial statements are primarily made up of the assets, liabilities and results of operations of the following entities:
Capstone Power Corp. ("CPC"), Cardinal Power of Canada, L.P. (“Cardinal”), Erie Shores Wind Farm Limited Partnership ("Erie Shores"),
CAPSTONE INFRASTRUCTURE CORPORATION
Page 59
CONTENTS
Corporate Information
Summary of Significant
Accounting Policies
Acquisition and Disposition
Cash and Cash Equivalents
and Restricted Cash
Short-Term Deposits
Trade and Other Receivables
Other Assets
Loans Receivable
Financial Instruments
59
59
68
69
69
69
70
70
71
Financial Risk Management
Equity Accounted Investments
Capital Assets
Intangibles
Retirement Benefit Plans
Income Taxes
Accounts Payable and
Other Liabilities
Finance Lease Obligations
Long-Term Debt
Liability for Asset Retirement
74
77
77
79
79
82
83
83
84
89
Shareholders’ Equity
Earnings Per Share
Share-Based Compensation
Expenses - Analysis by Nature
Other Gains and Losses
Commitments and Contingencies
Related Party Transactions
Segmented Information
Non-Cash Working Capital
Comparative Figures
89
91
91
92
92
92
94
95
95
95
2012 ANNUAL REPORT
59
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MPT Hydro L.P. ("Hydro"), Whitecourt Power Limited Partnership (Whitecourt), Helios Solar A-1 Partnership (“Amherstburg Solar Park”) and MPT
Utilities Corp. all of which are 100% owned subsidiaries controlled by the Corporation. In addition, Capstone includes its controlling interest in Bristol
Water plc and group companies (collectively “Bristol Water”), acquired on October 5, 2011. On May 10, 2012 Capstone sold a portion of its 70%
indirect interest in Bristol Water and retains a 50% indirect interest in Bristol Water and continues to consolidate based on retention of control.
The Corporation accounts for its controlled investments using the consolidation method of accounting from the date control is obtained and
deconsolidates from the date that control ceases. All intercompany balances and transactions have been eliminated on consolidation.
Non-controlling interests represent equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable to
non-controlling interests is presented as a component of equity. Their share of net income and comprehensive income is recognized directly in
equity. Changes in the Corporation's interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.
The Corporation, through its wholly-owned subsidiaries, uses the equity method to account for its interests in Macquarie Long Term Care L.P.
(“MLTCLP”), Chapais Électrique Limitée (“Chapais”) for all reporting periods and for its interest in Värmevärden AB (“Värmevärden”) from March 31,
2011, the date of acquisition.
Business Combinations
The acquisitions of businesses are accounted for using the purchase method. The consideration for each acquisition is measured at the aggregate of
the fair values, at the date of exchange, of assets transferred, liabilities incurred or assumed, and equity instruments issued by the Corporation in
exchange for control of the acquired business. The acquired business identifiable assets, liabilities and contingent liabilities that meet the conditions
for recognition under IFRS 3R, Business Combinations (“IFRS 3R”) are recognized at their fair value at the acquisition date.
To the extent the fair value of consideration paid exceeds the fair value of the net identifiable tangible and intangible assets, goodwill is recognized.
The Corporation recognizes any non-controlling interest in the acquiree at the non-controlling interest's proportionate share of the recognized
amounts of acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred.
Foreign Currency Translation
Functional and presentation currency
Amounts included in the financial statements of each consolidated entity in the Corporation are measured using the currency of the primary
economic environment in which the entity operates (“functional currency”). The consolidated financial statements are presented in Canadian dollars
(“presentation currency”), which is Capstone's functional currency. The exchange rates used in the translation to the presentation currency
are as follows:
As at and for the year ended
Dec 31, 2011
Dec 31, 2012
Swedish krona (SEK)
Pound sterling (£)
Average
0.1525 (1)
0.1476
Spot
0.1479
0.1528
Average
1.6076 (2)
1.5840
Spot
1.5799
1.6178
(1) Nine-month period from acquisition on March 31, 2011 to December 31, 2011.
(2) Period from acquisition on October 5, 2011 to December 31, 2011.
The financial statements of entities that have a functional currency different from that of the Corporation are translated into Canadian dollars as
follows: assets and liabilities – at closing rate at the date of the statement of financial position, and income and expenses – at the average rate of the
period (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting changes are recognized
in other comprehensive income as cumulative translation adjustments.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign
exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at exchange rates of monetary
assets and liabilities denominated in currencies other than an entity's functional currency are recognized in the consolidated statement of income in
“foreign exchange gain (loss)”.
Cash and Cash Equivalents and Short-Term Deposits
Cash and cash equivalents are composed of highly liquid investments with original maturities of 90 days or less at the date of acquisition and are
recorded at fair value.
Deposits with original maturities of greater than 90 days are classified as short-term deposits on the consolidated statement of financial position.
60 CAPSTONE INFRASTRUCTURE CORPORATION
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Inventories
Inventories are valued at the lower of purchase cost (calculated on a first in first out basis) and net realizable value.
Loans Receivable
The Corporation has interest-bearing financial assets that consist of a series of loans receivable from Chapais and Värmevärden. These financial
assets are carried at amortized cost.
Equity Accounted Investments
The Corporation has significant influence, but not control, over its investments in MLTCLP, Chapais for all reporting periods, and Värmevärden from
March 31, 2011. The equity method is used to account for these investments. Under the equity method, the cost of the investment is adjusted by the
Corporation's share of net income (loss) and other comprehensive income (loss) and reduced by any dividends paid to the Corporation. The
Corporation assesses at each year end whether there is any objective evidence that its interests in associates are impaired. If impaired, the carrying
value of the Corporation's share of the underlying assets of associates is written down to its estimated recoverable amount (being the higher of fair
value less cost to sell and value in use) and charged to the consolidated statement of income (loss).
Capitalized Costs
Capitalized costs related to an asset under development include all eligible expenditures incurred in connection with the development and
construction of the asset until it is available for its intended use. The expenditures consist of directly attributable costs related to the asset. The
Corporation capitalizes interest and borrowing costs when activities that are necessary to prepare the asset for its intended use are in progress and
expenditures for the asset have been used or borrowed to fund the construction or development. Capitalization of interest and borrowing costs
ceases when the asset is ready for its intended use.
Grants and Contributions
Grants are recognized at their fair value when there is reasonable assurance that the grant will be received and all attaching conditions will be
complied with. Grants and contributions related to charges in the income statement are netted against such expenditures as received.
Capital Assets
Capital assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly
attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset only when
it is probable that future economic benefits associated with the item will flow to the Corporation and the cost can be measured reliably. The carrying
value of an asset is derecognized when replaced.
Major maintenance costs are capitalized in the carrying value of the assets as incurred, and depreciated over the period to the next scheduled major
maintenance. Other repairs and maintenance costs are charged to the statement of income during the period incurred.
Gains or losses on disposals are determined by comparing the proceeds of sale with the carrying amount and are recognized within the
income statement.
The Corporation allocates the amount initially recognized in respect of an item of capital assets to its significant parts and depreciates separately
each such part. Residual values, method of amortization and useful lives of the assets are reviewed annually and adjusted if appropriate. The major
categories of capital assets are depreciated using the straight-line method as follows:
Equipment and vehicles:
Computer hardware, communications, meters and telemetry equipment
Vehicles and mobile plant
Property and plant:
Operational properties and structures
Treatment, pumping and general plant
Infrastructure assets (water network)
Power
Utilities – water
3 to 25 years
3 to 15 years
3 to 15 years
5 to 7 years
20 to 40 years
15 to 100 years
n/a
n/a
20 to 24 years
70 to 213 years
Infrastructure assets comprise the integrated network of impounding and pumped raw water storage reservoirs and water mains and associated
underground pipework. For accounting purposes, the water system is segmented into components representing categories of asset classes with
similar characteristics and asset lives. Expenditure on such assets relating to increases in capacity, enhancements or planned maintenance of the
network is treated as an addition to fixed assets and is included at cost. The cost of infrastructure assets is their purchase cost together with
incidental expenses of acquisition and directly attributable labour costs which are incremental to the Corporation.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
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61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Leased Assets
Assets financed by leasing agreements that transfer substantially all the risks and rewards of ownership of an asset to the lessee are capitalized and
depreciated over the shorter of their estimated useful lives and the lease term. The corresponding liability is recorded as borrowings. The capital
element of the lease rental is deducted from the obligation to the lessor as paid. The interest element of lease rentals and the depreciation of the
relevant assets are charged to the income statement.
Operating lease rental payments are charged to the income statement on a straight-line basis as incurred over the term of the lease.
Transfers of Assets from Customers
Where an item of property, plant and equipment that must be used to connect customers to the network is received from a customer, or where cash
is received from a customer for the acquisition or construction of such an item, that asset is recorded and measured on initial recognition at its fair
value in accordance with IFRIC 18. The period over which the credit is recognized depends upon the nature of the service provided by the
Corporation as determined by the agreement with the customer. If the agreement does not specify a period, the revenue is treated as deferred
income and recognized over a period no longer than the useful life of the transferred asset used to provide the ongoing service.
Intangible Assets
Identifiable intangible assets
The Corporation separately identifies acquired intangible assets including computer software and system developments, electricity supply contracts,
gas purchase contracts, water rights and licences and records each at their fair value at the date of acquisition. The initial fair value is amortized over
their estimated useful lives using the straight-line method as follows:
Computer software
Electricity supply and gas purchase contracts
Water rights
Licences
Power
Utilities – water
3 to 7 years
3 to 7 years
8 to 20 years
10 to 35 years
n/a
n/a
n/a
Indefinite life
The expected useful lives of intangible assets are reviewed on an annual basis and adjusted prospectively.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the Corporation's share of the identifiable net assets of the
acquired subsidiary at the date of acquisition. Goodwill is carried at cost less accumulated impairment losses. Impairment losses are recognized in
“other gains and (losses), net”. Goodwill is allocated to each cash-generating unit (“CGU”) or group of CGUs that are expected to benefit from the
related business combination. Gains and losses on disposal of an entity include the carrying amount of goodwill relating to the entity sold.
Impairment of Non-financial Assets
The capital assets and intangible assets with finite lives are tested for impairment when events or changes in circumstances indicate that the carrying
value may not be recoverable. For the purpose of measuring recoverable amounts, assets are grouped at the lowest levels for which there are
separately identifiable cash inflows. The recoverable amount is the higher of an asset's fair value less costs to sell the assets and the value in use
(being the present value of the expected future cash flows of the relevant assets or CGU). An impairment loss is recognized for the amount by which
the asset's carrying value exceeds its recoverable amount. The Corporation evaluates impairment losses, other than goodwill impairment, for
potential reversals when events or circumstances warrant such consideration.
Goodwill and intangible assets with indefinite lives are reviewed for impairment annually or at any time when an indicator of impairment exists.
Management monitors goodwill and intangible assets with indefinite lives for internal purposes based on its CGUs. For 2012, all such assets were
included in the utilities – water segment.
Provisions
Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of past events, it is more likely than not that
an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured using
management's best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present
value where the effect is material. The Corporation performs evaluations to identify onerous contracts and, where applicable, records provisions for
such contracts.
Retirement Benefit Plans
The Corporation operates both defined contribution and defined benefit pension plans, through its subsidiaries. The employees of Bristol Water and
Cardinal participate in a defined contribution plan. The defined benefit plan is provided through Bristol Water's membership in the Water Companies'
Pension Scheme (“WCPS”) via a separate section.
62 CAPSTONE INFRASTRUCTURE CORPORATION
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Costs of defined contribution pension plans are charged to the income statement in the period in which they fall due. Administration costs of defined
contribution plans are borne by Bristol Water and Cardinal.
Defined benefit plan liabilities are measured by an independent actuary using the projected unit credit method and discounted at the current rate of
return on high quality corporate bonds of equivalent term and currency to the liability. The increase in the present value of the liabilities of Bristol
Water's defined benefit pension plan expected to arise from employee service in the period is charged to operating profit. The expected return on
the plan's assets and the increase during the period in the present value of the plan's liabilities, arising from the passage of time, is included in other
finance income or cost.
The net asset or liability recognized in the balance sheet represents the present value of the defined benefit obligation less the fair value of the plan's
assets. Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and amendments to pension plans are
recognized in full in the period in which they occur in the consolidated statement of comprehensive income.
Past service costs are charged to the income statement on a straight-line basis over the vesting period or immediately if the benefits have vested.
When a settlement or a curtailment occurs the change in the present value of the plan liabilities and the fair value of the plan assets reflects the gain
or loss which is recognized in the income statement. Losses are measured at the date that Bristol Water becomes demonstrably committed to the
transaction and gains when all parties whose consent is required are irrevocably committed to the transaction.
Asset Retirement Obligations
The Corporation recognizes a provision for the future retirement obligations associated with its operating plants. These obligations are initially
measured at fair value, which is the discounted future cost of the liability. A reassessment of the expected costs associated with these liabilities is
performed annually with changes in the estimates of timing or amount of cash flows added or deducted from the cost of the related asset. The
liability accretes until the date of expected settlement of the retirement obligations.
Share Capital
Common shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a reduction in equity.
Exchangeable Securities
The Class B exchangeable units issued by MPT LTC Holding LP meet the criteria to be presented as equity, as set out in IAS 32.
Preferred Shares
The Corporation classifies its series A preferred shares as equity for reporting purposes given that the preferred shares may be converted into a fixed
number of the Corporation's own equity instruments and there is no settlement required at a future date. Incremental costs directly attributable to
the issuance of shares are recognized as a reduction in equity.
The irredeemable preferred shares of Bristol Water have been classified as debt in accordance with IAS 39.
Dividends
Dividends on common and series A preferred shares are recognized in the Corporation's consolidated financial statements in the period in which the
dividends are approved by the Board of Directors of the Corporation.
Revenue and Expense Recognition
Revenue derived from the sale of electricity and steam is recognized upon delivery to the customer and priced in accordance with the provisions of
the applicable electricity and steam sales agreements. Certain power purchase arrangements (“PPAs”) provide for an electricity rate adjustment,
which is updated periodically both for the current and prior periods. The Corporation accounts for such adjustments when a reliable estimate of the
adjustment can be determined. Revenue derived from Whitecourt electricity sales to the Alberta power pool in excess of the volume as stipulated in
the PPA is recorded at the hourly power pool rate. Cardinal has a profit-sharing arrangement with Husky Energy Marketing Inc. (“Husky Marketing”)
to sell excess gas not used in its operations in the market. Net proceeds from gas mitigation are recognized as revenue when delivery has taken place.
Capstone follows Accounting for Government Grants and disclosure of Government Assistance (IAS 20) with respect to certain power contracts with
provincial jurisdictions.
Revenue from the sale of water is recognized upon delivery to the customer and priced in accordance with regulatory pricing. Revenue from metered
supplies is based upon actual volumes of water invoiced plus estimated volumes of water not invoiced but delivered to customers during the year.
Costs related to the purchases of fuel are recorded upon delivery. All other costs are recorded as incurred.
Project development costs are recorded as incurred. These costs include the activities to pursue and develop greenfield projects in the power
segment and acquisition related business development expenses incurred at corporate.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 63
63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Deferred Share Unit Plan
The Corporation has a Deferred Share Unit (“DSU”) plan for eligible directors of Capstone as described in note 22 (a) to these consolidated financial
statements. The Corporation accounts for DSUs as an expense over the vesting period of the DSUs using the fair value of the underlying common
shares, as determined by the closing price of the Corporation's publicly traded common shares on the reporting date.
Long-term Incentive Plan
The Corporation has a long-term incentive plan (“LTIP”) for members of senior management as described in note 22 (b). The Corporation accounts
for its grants under this plan in accordance with IFRS 2 Share-Based Payments. Compensation expense is measured at the grant date at fair value
and recognized over the service period, based on the vesting period applicable and is adjusted for any changes in market value of the Corporation's
share price.
Income Taxes
Current and deferred income taxes are recognized in the consolidated statement of income except to the extent that they relate to items recognized
directly in equity, in which case, the income tax is also recognized directly in equity.
Current income tax is the amount recoverable or expensed based on the current year's taxable income using tax rates enacted, or substantively
enacted, at the reporting period, and any adjustments to income tax payable or recoveries in respect of previous years.
The Corporation follows the liability method of accounting for deferred income tax whereby deferred income tax is recognized in respect of
temporary differences arising between the tax bases of assets and liabilities and their carrying values in the consolidated financial statements.
Deferred income tax is determined using income tax rates and laws that have been enacted or substantively enacted as at the date of the
consolidated statement of financial position and are expected to apply when the deferred income tax asset or liability is settled. Deferred income tax
assets are recognized to the extent that it is probable that the asset can be recovered. Deferred income tax assets and liabilities are
presented as non-current.
Basic and Diluted Earnings per Share
Basic earnings per share is calculated by dividing the net income attributable to the shareholders' of Capstone, less dividends declared to preferred
shareholders by the weighted average number of common shares and Class B exchangeable units of MPT LTC Holding LP.
Diluted earnings per share is computed in a similar manner as the basic earnings per share but reflects any dilutive effect from the conversion of
debentures into shares. Debenture conversions are excluded from the computation of diluted net income per share if their effect is anti-dilutive.
Comprehensive Income
Other comprehensive income (“OCI”) represents changes in shareholders' equity during a period arising from transactions and other events including
unrealized gains and losses on translation of net assets of foreign operations, the equity share of OCI of equity accounted investments and actuarial
gains recognized in respect of retirement benefit obligations. OCI also includes the effective portion of the change in fair value of designated cash
flow hedges of Bristol Water less any amounts reclassified to interest and other expenses, net, in the period the underlying hedged item is also
recorded in interest and other expenses, net. Accumulated other comprehensive income (“AOCI”) is included as a component in the consolidated
statement of shareholders' equity.
Financial Instruments
Financial assets and financial liabilities are recognized on the consolidated statement of financial position when the Corporation becomes a party to
the contractual provisions of the financial instrument. Financial instruments are required to be measured at fair value on initial recognition.
Measurement in subsequent periods depends on the classification of the financial instrument. The Corporation has designated each of its significant
categories of financial instruments outstanding as follows:
Classification
Significant Categories
Measurement
Financial assets and liabilities at fair value through profit and loss
Loans and receivables
Other liabilities
(cid:127) Cash and cash equivalents
(cid:127) Restricted cash
(cid:127) Short-term deposits
(cid:127) Derivative contract assets
(cid:127) Derivative contract liabilities
(cid:127) Accounts receivable
(cid:127) Loans receivable
(cid:127) Accounts payable and other liabilities
(cid:127) Loans payable
(cid:127) Finance lease obligations
(cid:127) Long-term debt
(cid:127) At fair value with changes in fair value
recognized in the consolidated
statement of income
(cid:127) At amortized cost using the effective
interest method
(cid:127) At amortized cost using the effective
interest method
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Transaction costs relating to financial instruments classified as loans and receivables and other liabilities are deferred and amortized over the
expected life of the instrument using the effective interest method. Transaction costs that are directly attributable to the acquisition or issue of
financial instruments classified as held-for-trading are expensed as incurred.
The Corporation determines the fair value of its financial instruments based on the following hierarchy:
(cid:127)
(cid:127)
(cid:127)
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2 – Inputs other than quoted prices that are observable for the asset or liability either directly or indirectly; and
Level 3 – Inputs that are not based on observable market data.
Derivative Financial Instruments
The Corporation's derivatives are carried at fair value and are reported as assets when they have a positive fair value and as liabilities when they have
a negative fair value. For the year ended December 31, 2012, the Corporation's derivatives include interest rate swaps and
foreign currency contracts.
Changes in the fair values of derivative financial instruments are reported in the consolidated statement of income for the year ended December 31,
2012, except for cash flow hedges that meet the conditions for hedge accounting. The portion of the gain or loss on the hedging instruments which
are determined to be an effective hedge are recognized directly in other comprehensive income, and the ineffective portion in the income statement.
Gains or losses recognized in other comprehensive income are subsequently recognized in the consolidated statement of income in the same period
in which the hedged underlying transaction or firm commitment is recognized in the statement of income.
In order to qualify for hedge accounting, the Corporation is required to document in advance the relationship between the item being hedged and
the hedging instrument. The Corporation is also required to document and demonstrate an assessment of the relationship between the hedged item
and the hedging instrument, which shows that the hedge will be highly effective on an ongoing basis. This effectiveness testing is re-performed at
the end of each reporting period to ensure that the hedge remains highly effective.
Derivatives embedded in other financial instruments or contracts are separated from their host contracts and accounted for at fair value when their
economic characteristics and risks are not closely related to those of the host contract. The Corporation has determined that Cardinal's gas purchase
contract contains embedded derivatives requiring separation and measurement at fair value. The features requiring separation include mitigation
options and indexing features (see note 9).
Impairment of Financial Assets
At each reporting date, the Corporation assesses whether there is objective evidence that a financial asset is impaired. If such evidence exists, the
Corporation recognizes an impairment loss on financial assets carried at amortized cost. The loss is the difference between the amortized cost of the
loan or receivable and the present value of the estimated future cash flows, discounted by using the instrument's original effective interest rate. The
carrying value of the asset is reduced by the loss either directly or indirectly through the use of an allowance account. Impairment losses on financial
assets carried at amortized cost are reversed in subsequent periods if the amount of the loss decreases and the decrease can be related objectively
to an event occurring after the impairment was recognized.
Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief
operating decision-maker is responsible for allocating resources and assessing performance of the operating segments and has been identified as the
chief executive officer of Capstone.
Earnings before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”)
EBITDA is calculated from the Corporation's earnings excluding interest expense, income taxes, depreciation and amortization. EBITDA includes the
Corporation's interest income which is derived from shareholder loans with equity accounted investments, cash and cash equivalents, restricted cash
and short-term deposits. EBITDA represents Capstone's continuing capacity to generate income from operations before taking into account
management's financing decisions and costs of consuming tangible capital assets and intangible assets, which vary according to their vintage,
technological currency, and management's estimate of their useful life. EBITDA is presented on the consolidated statement of income.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 65
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future Accounting Changes
In 2012, the IASB issued the following standards which have not yet been adopted by the Corporation:
Title of the New IFRS
Nature of the Impending Change to Capstone
Impact to Capstone
IFRS 9, Jan 1, 2015
Replaces IAS 39 which addresses the classification
Capstone's assessment of the impact of this standard is ongoing.
Financial Instruments
and measurement of financial assets. As well as the
measurement methodology for debt and
equity instruments.
IFRS 10, 11 and 12,
Establishes disclosure requirements for interests in
Capstone will adopt IFRS 10, 11 and 12 for the annual period
Jan 1, 2013
other entities.
Consolidated Financial
Statements, Joint
Arrangements and Disclosure
of Interests in Other Entities
beginning on January 1, 2013. Implementation of these
standards will have no material impact on Capstone's
consolidated financial statements, but will increase disclosure of
interests in other entities.
IFRS 13, Jan 1, 2013
A comprehensive standard for fair value
Capstone will adopt IFRS 13 prospectively beginning on
Fair Value Measurement
measurement and disclosure across all IFRS.
January 1, 2013. Implementation of this standard will have no
material impact on Capstone's consolidated financial statements.
IAS 19, Jan 1, 2013
Employee Benefits
Standard has been amended for the recognition and
Capstone will adopt the amendment to IAS 19 retrospectively as
measurement of defined benefit pension expense and
a change in accounting policy for the annual period beginning on
termination benefits and to enhance the disclosure of
January 1, 2013. Implementation of this amendment is limited to
all employee benefits.
Bristol Water which has a defined benefit pension plan. The
The amended standard requires immediate
recognition of actuarial gains and losses in other
comprehensive income as they arise, without
subsequent recycling to net income. This is consistent
with Capstone's current accounting policy.
Various other amendments have been made to
recognition, measurement, classification and
expanded disclosures.
impact on Capstone's consolidated financial statements is:
i) The expected return on plan assets must be calculated
using the same discount rate as the pension obligation,
which will affect interest expense and net income, and is
then offset in comprehensive income.
ii) Certain costs will be required to be recognized as period
costs and will be reclassified from net interest in the
statement of income to current service costs which are
included in operating expenses.
IAS 27, Jan 1, 2013
Amendments are to be consistent with changes to
Capstone will adopt the amendment to IAS 27 for the annual
Separate Financial Statements
IFRS 10 to 13.
period beginning on January 1, 2013. Implementation will have
no material impact on Capstone's consolidated financial
statements.
IAS 28, Jan 1, 2013
Amendments are to be consistency with changes to
Capstone will adopt the amendment to IAS 28 for the annual
Investments in Associates and
Joint Ventures
IFRS 10 to 13.
period beginning on January 1, 2013. Implementation will have
no material impact on Capstone's consolidated financial
statements.
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Critical Accounting Estimates and Judgments
The Corporation makes estimates and assumptions concerning the future that will, by definition, seldom equal actual results. The following are the
estimates and judgments applied by management that most significantly affect the Corporation's financial statements. These estimates and
judgments have a risk of causing a material adjustment to the carrying values of financial assets and financial liabilities within the next financial year.
Area of Significance
Critical Estimate
Critical Judgment
Financial instrument fair value
measurements
When observable prices are not available,
fair values are determined by using
valuation techniques that refer to
observable market data. This is
specifically related to Capstone's
financial instruments.
(cid:127) Management's valuation techniques include comparisons with similar
(cid:127) Interest rate
instruments where market observable prices exist, discounted cash flow
analysis, option pricing models and other valuation techniques commonly
used by market participants.
(cid:127) Natural gas rate
(cid:127) Direct customer rate
(cid:127) For embedded derivatives, fair values are determined from valuation
techniques using non-observable market data or transaction processes.
A number of factors such as bid-offer spread, credit profile and model
uncertainty are taken into account, as appropriate.
Accounts receivable
(cid:127) The probability of failing to recover accounts receivable is determined by
(cid:127) Probability of a failure to
The allowance for doubtful accounts for
Bristol Water is calculated based on an
assessment of expected cash flows.
Collective impairment losses on
receivables with similar credit risk are
calculated using a statistical model.
Capital and intangible assets – Carrying
values
Fair value estimates are required in the
determination of the net assets acquired
in a business combination and in the
impairment assessment for our capital
assets and the assignment of amounts to
the asset retirement obligations.
considering past experience, adjusted for changes in external factors. The
accuracy of the impairment calculation would therefore be affected by
unexpected changes to the economic situation, and to changes in customer
behavior. To the extent that the failure to recover debts in arrears alters by
5%, the provision for impairment would increase or decrease by $809.
recover accounts
receivable when they fall
into arrears
(cid:127) Estimates are based on assumptions that are sensitive to change, which
(cid:127) Initial fair value of net
may have a significant impact on the valuations performed.
assets
(cid:127) Impairment reviews of the carrying value of capital and other long-lived
(cid:127) Estimated useful lives and
assets along with the asset retirement obligations require management to
estimate fair value based on future cash flows, discount rates and
business performance.
residual value
(cid:127) Estimated future cash
flows
(cid:127) Expected settlement date
and amount
(cid:127) Discount rate
Retirement benefits
(cid:127) Assumptions include the discount rate, which is used to calculate the
(cid:127) Future cash flows and
The present value of defined benefit
pension obligations is dependent on
actuarial calculations, which include a
number of assumptions.
present value of the estimated future cash outflows that will be required to
meet the pension obligations. In determining the discount rate to use, the
Corporation considers market yields of high quality corporate bonds,
denominated in UK pounds sterling, that have times to maturity
approximating the terms of the pension liability.
discount rate
Deferred income taxes
(cid:127) The determination of the deferred income tax balances of the Corporation
(cid:127) Timing of reversal of
Estimates in the determination of
deferred income taxes affect asset and
liability balances.
requires management to make estimates of the reversal of existing
temporary differences between the accounting and tax bases of assets and
liabilities in future periods.
temporary differences
(cid:127) Tax rates
(cid:127) Current and future taxable
income
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 67
67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. ACQUISITION AND DISPOSITION
Acquisition of Bristol Water
On October 5, 2011, Capstone acquired a 70% indirect interest in Bristol Water, a regulated water utility in the United Kingdom, from Suez
Environnement through its subsidiary, Agbar (Sociedad General de Aguas de Barcelona), for $213,476. Transaction costs on acquisition of $5,997
were expensed in the consolidated statement of income as part of administrative expenses for the year ended December 31, 2011.
The acquisition was accounted for using the purchase method of accounting. IFRS requires that Capstone recognize the identifiable assets acquired
and liabilities assumed at their fair values. Goodwill is then recognized for the excess of the consideration paid over the net of the identifiable assets
acquired and liabilities assumed measured at their fair values. Goodwill represents Capstone’s ability to achieve financial and operational
outperformance. On acquisition, the non-controlling interest has only been calculated on the fair value of the net identifiable assets.
The preliminary allocation of total consideration was allocated to net assets acquired and adjusted to the final allocation as follows:
As at October 5, 2011
Working capital
Tangible assets
Intangible assets – licence
Intangible assets – goodwill
Incremental deferred income tax asset on acquisition
Less: net financial liabilities (net of cash received £24,324, $39,487)
Other
Incremental deferred income tax liability on acquisition
Non-controlling interest
Total cash consideration
The amount allocated to goodwill is not deductible for income tax purposes.
Partial Sale of Interest in Bristol Water
Original
Adjustment
804
506,792
21,591
139,255
15,285
(375,310)
(51,392)
(11,739)
(31,810)
213,476
849
—
—
953
—
—
—
(1,802)
—
—
Revised
1,653
506,792
21,591
140,208
15,285
(375,310)
(51,392)
(13,541)
(31,810)
213,476
On May 10, 2012, Capstone sold to I-Environment Investments Ltd, a subsidiary of ITOCHU Corporation, a 20% indirect interest in Bristol Water plc.
I-Environment Investments Ltd acquired a 2/7ths ownership interest in CSE Water UK Limited, which indirectly owns a 70% interest in Bristol Water
plc. Capstone received $68,952 of net proceeds on sale and used the funds to repay the remaining $28,975 on the senior debt facility and $39,000
on the CPC-Cardinal credit facility, retaining cash of $ 977.
Following this sale, Capstone retained a 50% beneficial interest in Bristol Water and continues to consolidate based on retention of control. Capstone
recorded the transaction as a transfer of equity to non-controlling interest holders as follows:
As at May 10, 2012
Proceeds on sale (£43,500)
Transaction costs
Net proceeds on sale
Taxes payable for gain on sale
Adjustment to total equity
Non-controlling interest adjustment
Retained earnings adjustment
$
70,274
(1,322)
68,952
(850)
68,102
(52,408)
15,694
In addition, the portion of cumulative differences on translation related to Bristol Water has been adjusted to the non-controlling interest acquired by
ITOCHU Corporation as follow:
Non-controlling interest adjustment for partial sale of interest in Bristol Water
Transfer of cumulative differences on translation of foreign operations
Non-controlling interest adjustment, net
AOCI
—
749
749
NCI
52,408
(749)
51,659
68 CAPSTONE INFRASTRUCTURE CORPORATION
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NOTE 4. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Bristol Water debt service reserve – one year of Artesian loans
Erie Shores debt service reserve – six months
Hydro facilities debt service and maintenance reserves
Debt service and maintenance reserves
Cash on deposit
Construction holdbacks
Restricted cash
Unrestricted cash and cash equivalents
NOTE 5. SHORT-TERM DEPOSITS
Short-term cash deposits
Dec 31, 2012
Dec 31, 2011
8,898
5,662
4,484
8,689
5,648
—
19,044
14,337
73
112
19,229
49,599
68,828
572
38
14,947
57,587
72,534
Dec 31, 2012
Dec 31, 2011
6,471
82,202
The effective interest rate on short-term cash deposits was 0.45% and these deposits have an average maturity date of 54 days for the year ended
December 31, 2012 (December 31, 2011 – 1.1% and 164 days).
NOTE 6. TRADE AND OTHER RECEIVABLES
Power
Utilities – water
Corporate
Total trade and other receivables
Dec 31, 2012
Dec 31, 2011
31,618
43,480
288
75,386
30,485
39,252
1,117
70,854
Substantially all of the accounts receivable for the power segment are with government authorities. Refer to note 10 (b) and 10 (c) for further detail
of credit risk and economic dependence.
The utilities – water segment accounts receivable are composed of:
Trade receivables
Less: provision for impairment of receivables
Net trade receivables
Other receivables
Accrued income
The aging of net trade receivables at Bristol Water was:
Past due 0-30 days
Past due 31-120 days
Past due more than 120 days
Dec 31, 2012
Dec 31, 2011
39,181
(21,907)
17,274
6,044
20,162
43,480
39,105
(21,438)
17,667
3,674
17,911
39,252
Dec 31, 2012
Dec 31, 2011
3,255
4,744
9,275
17,274
6,424
1,660
9,583
17,667
As at December 31, 2012, based on a review of collection rates $21,907 of trade receivables in the utilities – water segment were considered
impaired and have been provided for (December 31, 2011 – $21,438).
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 69
69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The increase in the provision for impairment of trade receivables at Bristol Water comprised:
As at January 1
As at business acquisition
Charge to statement of income
Amounts written off during the year as uncollectable
Net foreign exchange difference
As at December 31
2012
(21,438)
—
(6,181)
6,225
(513)
2011
—
(21,262)
(1,206)
447
583
(21,907)
(21,438)
Charges for impaired receivables have been included in the consolidated statement of income as part of operating expenses.
The other classes within trade and other receivables do not contain impaired assets.
Bristol Water has created an IAS 39 portfolio provision, but cannot identify which receivables are specifically impaired. Bristol Water policy is to
consider a receivables impairment to be allocated on a collective basis and only impaired for the purposes of IFRS 7 disclosures when the loss can be
specifically identified with the receivable.
Bristol Water is required to continue providing residential customers with water regardless of payment.
NOTE 7. OTHER ASSETS
Prepaid expenses
Inventory of spare parts and consumable supplies
Dec 31, 2012
Dec 31, 2011
3,665
3,553
7,218
4,140
3,308
7,448
The cost of inventories recognized in operating expenses for the year ended December 31, 2012 was $1,232 (December 31, 2011 – $1,289).
NOTE 8. LOANS RECEIVABLE
The following table summarizes the loans receivable from Värmevärden and Chapais:
Värmevärden
Chapais:
Tranche A (original principal $ 9,391)
Tranche B (original principal $ 3,624)
Tranche C (original principal $ 2,558)
Less: current portion
Total long-term loans receivable
Maturity
Interest Rate
Dec 31, 2012
Dec 31, 2011
2021
7.944%
34,768
81,587
2015
2019
2016
10.8%
4.9%
—%
3,675
562
—
39,005
(1,096)
37,909
4,659
562
—
86,808
(984)
85,824
Accrued interest on the loans receivable in the amount of $63 for the year ended December 31, 2012 is included in accounts receivable
(December 31, 2011 – $42).
The estimated fair value of the loans receivable as at December 31, 2012 and 2011 approximates their carrying values.
70 CAPSTONE INFRASTRUCTURE CORPORATION
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The following table summarizes the change in the loan receivable from Värmevärden during the years ended:
For the year ended
Opening balance
Balance on origination as at March 31, 2011
Principal repayment
Unrealized foreign exchange gain (loss)
Ending balance
Dec 31, 2012
Dec 31, 2011
SEK
551,808
—
$
81,587
SEK
—
—
551,808
(324,267)
(47,959)
227,541
1,140
34,768
—
—
551,808
$
—
84,828
—
(3,241)
81,587
During the first quarter of 2012, Värmevärden’s parent company, Sefyr Värme AB, in which Capstone holds a 33.3% indirect investment, completed
an approximately $150,000 (1,000,000 SEK) offering of senior secured bonds to select institutional investors. The bonds have a five-year term, are
non-amortizing and carry a coupon of 7.0%.
Proceeds from the bond issuance were distributed to the owners of Sefyr Värme AB, with Capstone receiving approximately $49,400, which was
used to repay a portion of the senior credit facility. The distribution of $49,400 was comprised of a $48,100 shareholder loan repayment and a
payment of $1,300 of accrued interest. Refer to note 18 (Long-term debt).
In March 2012, the shareholder loan receivable from Värmevärden was amended. The annual interest rate is 7.944%, effective January 1, 2012
(2011 – 7.965%).
Expected repayments of the Chapais loan receivable for the next five years and thereafter were as follows:
Year
2013
2014
2015
2016
2017
Thereafter
Total
Amount
1,096
1,220
1,359
—
—
562
4,237
NOTE 9. FINANCIAL INSTRUMENTS
(A)
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, restricted cash, short-term deposits, accounts receivable, loans receivable, accounts
payable and other liabilities, loans payable, finance lease obligations, long-term debt, interest rate swap contracts and foreign currency contracts. The
Corporation also has embedded derivatives on one of its commodity contracts.
Financial instruments designated as held-for-trading
The Corporation invests its cash and cash equivalents and restricted cash balances in financial instruments of highly rated financial institutions and
government securities with original maturities of 90 days or less. Short-term deposits have original maturities of greater than 90 days.
As at December 31, 2012, the carrying values of cash and cash equivalents, restricted cash and short-term deposits are considered to be
approximately at their fair value due to their short-term nature, which is consistent with the prior year.
Derivative financial instruments and hedging instruments
Gas swap
In 2011, the Corporation held a gas swap contract that effectively fixed the price for a portion of the revenue derived from the sales of excess gas.
The contract mitigated exposure to natural gas price fluctuations for sales of excess natural gas in 2011. The Corporation no longer holds any gas
swap contracts due to the current market conditions for gas.
Interest rate swap
The Corporation has several interest rate swap contracts to effectively fix the interest cost on its long-term debt with variable rates, summarized in
the following list:
(cid:127)
(cid:127)
CPC-Cardinal facility swap had a notional amount of $85,000 which expired in June 2012.
Erie Shores project debt had a residual interest rate swap contract on a notional amount of $20,000 originally entered into to mitigate the
refinancing risk associated with the Erie Shores Tranche C project debt which was refinanced on April 1, 2011.
The Corporation pays a fixed rate of 5.63% for a period of five years from December 1, 2011 to December 1, 2016. In return, the Corporation
receives a floating rate equal to the then current three-month BA rate.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 71
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(cid:127)
Amherstburg project debt swap has a notional amount of $90,560.
The Corporation pays a fixed rate of 4.1925% in return for a floating rate equal to 1.2943%.
(cid:127)
Bristol Water has a swap with a notional amount of £10,000 for a bank loan drawn in October 2008 by Bristol Water.
The swap exchanges LIBOR rates on a six monthly basis for a fixed rate of 5.025% and expires December 7, 2017. The swap meets the
requirement to be accounted for as a cash flow hedge as it was assessed to be highly effective as at December 31, 2012.
Embedded derivative
The Corporation has determined that its gas purchase contract contains embedded derivative features, which include mitigation options and
electricity indexing features requiring separation and measurement at fair value.
Foreign currency contracts
The Corporation has foreign currency contracts to mitigate the currency risk for interest payments on the shareholder loan with Värmevärden in SEK
and dividends from Bristol Water in pounds sterling. The options to sell 65,800 SEK (December 31, 2011 - 65,800 SEK) to Canadian dollars expiring
in January 2016 are at a fixed exchange rate of 6.5165 SEK. The options to sell £14,900 (December 31, 2011 - £14,900) to Canadian dollars
expiring May 2015 are at a fixed exchange rate of £1.623.
The Corporation has determined the fair value of derivative financial instruments as follows:
Gas swap
(cid:127) The gas swap contracts' fair value fluctuates with changes in market interest rates and prices for natural gas.
(cid:127) A discounted cash flow analysis based on the forward gas price and the interest rate curve was used to determine their fair
value.
Interest rate swap
(cid:127) The interest rate swap contracts' fair value fluctuates with changes in market interest rates.
Interest rate swap
(Cash flow hedges)
(cid:127) A discounted cash flow analysis based on a forward interest rate curve was used to determine their fair value.
(cid:127) The market price of comparable instruments at the balance sheet date is used to determine the fair value of cash flow
hedges at Bristol Water.
Embedded derivative
(cid:127) The determination of the fair value of the Corporation's embedded derivatives requires the use of option pricing models
involving significant judgment based on management's estimates and assumptions.
Foreign currency
contracts
(cid:127) The foreign currency contracts fair value fluctuates with changes in the relative currencies to the Canadian dollar.
(cid:127) A Black-Scholes model, based on the current spot price, discount rate, volatility in the underlying currency and time to
maturity, is used to determine fair value.
Loans and receivables
The Corporation's accounts receivable, which consist of trade and accrued interest receivable, are recorded at fair value.
The Corporation's loans receivable are measured at amortized cost using the effective interest method.
The fair value of the Corporation's loans receivable may differ from the carrying value due to changes in interest rates and the underlying risk
associated with the debtor. It is determined using a discounted cash flow analysis. See note 8 for further details.
Other liabilities
The Corporation's accounts payable and accrued liabilities and loans payable are short-term liabilities with carrying values that approximate their fair
values as at December 31, 2012.
The Corporation's long-term debt and finance lease obligations are recorded at amortized cost using the effective interest rate method. The carrying
amount of indexed linked borrowings increases annually in line with the retail price index (“RPI”) with accretion being charged to income statements
as interest expense.
The fair value of the Corporation's long-term debt is determined as follows:
(cid:127)
(cid:127)
(cid:127)
(cid:127)
Floating rate debt and loans payable approximate their carrying value.
Fixed-rate debt is determined through the use of a discounted cash flow analysis using relevant risk-free bond rates plus an estimated margin.
Convertible debentures is determined by multiplying the current market debenture price as per the Toronto Stock Exchange by the number of
convertible shares outstanding as at year end. See note 18 for further details.
Irredeemable preferred shares for Bristol Water plc (shown as debt within these financial statements) are listed on the London Stock Exchange.
Their fair value is determined by the quoted market price.
The carrying value of the Corporation's finance leases approximates fair value.
72 CAPSTONE INFRASTRUCTURE CORPORATION
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The following table illustrates the classification of the Corporation's financial instruments that have been recorded at fair value as at
December 31, 2012, within the fair value hierarchy:
Cash and cash equivalents
Restricted cash
Short-term deposits
Derivative contract assets:
Foreign currency contracts
Interest rate swap contracts
Embedded derivative asset
Less: Current portion
Derivative contract liabilities:
Interest rate swap contracts
Interest rate swap contracts for hedging
Embedded derivative liability
Less: Current portion
Level 1
49,599
19,229
6,471
—
—
—
—
—
—
—
—
—
—
Level 2
Level 3
Dec 31, 2012
Dec 31, 2011
—
—
—
849
—
—
(174)
675
15,337
3,156
—
(3,106)
15,387
—
—
—
—
—
1,172
—
1,172
—
—
12,158
—
12,158
49,599
19,229
6,471
849
—
1,172
(174)
1,847
15,337
3,156
12,158
(3,106)
27,545
57,587
14,947
82,202
1,820
—
1,324
(261)
2,883
15,237
2,916
15,990
(3,088)
31,055
The fair value for the interest rate swap contracts, classified as Level 2, was derived using a discounted cash flow model that considers various
observable inputs, including time to maturity, forward interest rates and credit spreads or was with reference to the market price of
comparable instruments.
Due to the lack of observable market quotes on the Corporation's embedded derivatives, their fair values, classified as Level 3, were derived using
valuation models that rely on a combination of observable and unobservable inputs, including interest rates, forward gas prices and volatility, foreign
exchange curves, credit spreads, estimates on gas volumes and sales, fixed and variable gas transportation costs and a forecasted Direct Customer
Rate (“DCR”) curve based on historical averages. Changes in one or a combination of these estimates may have a significant impact on the fair value
of the embedded derivatives given the volume of gas and length of contract involved. As new information becomes available, management may
choose to revise these estimates where there is an absence of reliable observable market data.
(B)
Income and Expenses From Financial Instruments
Financial instruments designated as held-for-trading:
Interest income on cash and cash equivalents, restricted cash and short-term deposits (1)
962
872
Dec 31, 2012
Dec 31, 2011
Financial instruments classified as held-for-trading:
Unrealized loss on foreign currency contracts
Unrealized loss on gas swap contracts
Unrealized loss on interest rate swap contracts
Unrealized loss on embedded derivative asset
Unrealized gain (loss) on embedded derivative liability
Loans and receivables(1):
Interest income from loans receivable (2)
Other liabilities:
Interest expense on finance lease obligations
Interest expense on pension obligation (net expected return on assets)
Interest expense on long-term debt with maturities under 12 months
Interest expense on long-term debt(3)
(975)
—
(100)
(1,075)
(152)
3,832
3,680
(644)
(1,918)
(8,128)
(10,690)
(3,963)
(7,089)
(11,052)
3,924
5,571
226
(538)
(4,978)
(44,417)
(49,707)
(108)
(75)
(9,826)
(21,659)
(31,668)
(1) Foreign exchange gains and losses on loans receivable are also recognized in the statement of income as disclosed in note 8.
Interest income for 2012 of $4,886 (2011 – $6,443) includes interest income from loans receivable and cash balances.
(2)
Interest expense on the long-term debt for 2012 includes amortization of deferred financing fees of $1,965 (2011 – $3,485).
(3)
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 73
73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Market Risk
Market Risk
NOTE 10. FINANCIAL RISK MANAGEMENT
NOTE 10. FINANCIAL RISK MANAGEMENT
The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market risk (including
The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market risk (including
commodity price risk, interest rate and inflation risk, and foreign currency risk), credit risk, economic dependence and liquidity risk. The Corporation's
commodity price risk, interest rate and inflation risk, and foreign currency risk), credit risk, economic dependence and liquidity risk. The Corporation's
overall risk management process is designed to identify, manage and mitigate business risk, which includes, among others, financial risk.
overall risk management process is designed to identify, manage and mitigate business risk, which includes, among others, financial risk.
(A)
(A)
Market risk is the risk or uncertainty arising from possible price movements and their impact on the future performance of the business. The
Market risk is the risk or uncertainty arising from possible price movements and their impact on the future performance of the business. The
Corporation is exposed to gas and power prices (commodity price risk), interest rates, foreign currency exchange rates and other indices that could
Corporation is exposed to gas and power prices (commodity price risk), interest rates, foreign currency exchange rates and other indices that could
adversely affect the value of the Corporation's financial assets, liabilities or expected future cash flows.
adversely affect the value of the Corporation's financial assets, liabilities or expected future cash flows.
Commodity price risk
Commodity price risk
Cardinal's gas purchase agreement mitigates Cardinal's risk to exposure to changes in the market price of gas. This agreement expires on May 1,
Cardinal's gas purchase agreement mitigates Cardinal's risk to exposure to changes in the market price of gas. This agreement expires on May 1,
2015. Upon expiry of the agreement, Cardinal may choose to renegotiate the agreement or enter into a new agreement, and may not be able to do
2015. Upon expiry of the agreement, Cardinal may choose to renegotiate the agreement or enter into a new agreement, and may not be able to do
so on terms that are similar to the existing agreement, if at all, or buy gas at spot rates.
so on terms that are similar to the existing agreement, if at all, or buy gas at spot rates.
The majority of the electricity that is generated at the power facilities is sold to large utilities or creditworthy customers under fixed long-term PPAs
The majority of the electricity that is generated at the power facilities is sold to large utilities or creditworthy customers under fixed long-term PPAs
providing a specified rate for a defined period of time. The excess power capacity of Whitecourt may be sold in the open market exposing certain
providing a specified rate for a defined period of time. The excess power capacity of Whitecourt may be sold in the open market exposing certain
assets to fluctuations in energy prices.
assets to fluctuations in energy prices.
In 2011, Cardinal used gas swap agreements to mitigate the effect of gas price fluctuations on the net proceeds that Cardinal receives for the sale of
In 2011, Cardinal used gas swap agreements to mitigate the effect of gas price fluctuations on the net proceeds that Cardinal receives for the sale of
natural gas in excess of the plant's requirements. These contracts were not renewed in 2012 given the outlook for gas prices.
natural gas in excess of the plant's requirements. These contracts were not renewed in 2012 given the outlook for gas prices.
Bristol Water is exposed to risk in prices for materials and services used in its treatment processes, including for chemicals and electricity. Risk is
Bristol Water is exposed to risk in prices for materials and services used in its treatment processes, including for chemicals and electricity. Risk is
minimized through actively monitoring the market and by the use of fixed price supply contracts extending over more than one year where
minimized through actively monitoring the market and by the use of fixed price supply contracts extending over more than one year where
considered appropriate.
considered appropriate.
Interest rate and inflation risk
Interest rate and inflation risk
Interest rate risk arises as changes in market interest rates affect the Corporation's future payments on debt obligations. The Corporation is exposed
Interest rate risk arises as changes in market interest rates affect the Corporation's future payments on debt obligations. The Corporation is exposed
to interest rate risk on its floating rate debt and levelization amounts. Currently, the Corporation has interest rate swap contracts to mitigate some of
to interest rate risk on its floating rate debt and levelization amounts. Currently, the Corporation has interest rate swap contracts to mitigate some of
the risks associated with its long-term debt.
the risks associated with its long-term debt.
The terms of the contracts are as follows:
The terms of the contracts are as follows:
Counterparty
Counterparty
Erie Shores project debt
Erie Shores project debt
Amherstburg debt swap
Amherstburg debt swap
Bristol Water
Bristol Water
Maturity Date
Maturity Date
December 1, 2016
December 1, 2016
June 30, 2028
June 30, 2028
December 7, 2017
December 7, 2017
Notional
Amount Swap Fixed Rate
Notional
Amount Swap Fixed Rate
5.63%
20,000
5.63%
20,000
4.19%
90,560
4.19%
90,560
5.025%
£10,000
5.025%
£10,000
Stamping Fee
Stamping Fee
—
—
3.13%
3.13%
—
—
Effective
Interest Rate
Effective
Interest Rate
5.63%
5.63%
7.32%
7.32%
5.025%
5.025%
The interest rate swap contracts at Bristol Water have been designated for hedge accounting. No other derivative contracts above have been
The interest rate swap contracts at Bristol Water have been designated for hedge accounting. No other derivative contracts above have been
designated for hedge accounting.
designated for hedge accounting.
Inflation risk arises as changes to inflation rates cause future cash flows from financial instruments to fluctuate. The index linked long-term debt at
Inflation risk arises as changes to inflation rates cause future cash flows from financial instruments to fluctuate. The index linked long-term debt at
Bristol Water is subject to inflation risk. Inflation risk is mitigated by the indexation to RPI included in the determination of Bristol Water's regulated
Bristol Water is subject to inflation risk. Inflation risk is mitigated by the indexation to RPI included in the determination of Bristol Water's regulated
revenue. Refer to note 18 (c)(ii) for further detail on this debt.
revenue. Refer to note 18 (c)(ii) for further detail on this debt.
Foreign currency exchange risk
Foreign currency exchange risk
The Corporation's exposure to foreign currency exchange risk is primarily related to the investment in Bristol Water and the SEK denominated
The Corporation's exposure to foreign currency exchange risk is primarily related to the investment in Bristol Water and the SEK denominated
shareholder loan with Värmevärden.
shareholder loan with Värmevärden.
Changes in the Canadian dollar and pound sterling currency rates impact the carrying value of assets, liabilities and components of the consolidated
Changes in the Canadian dollar and pound sterling currency rates impact the carrying value of assets, liabilities and components of the consolidated
statement of income. Bristol Water has a foreign functional currency requiring movements in the pound sterling to be reflected by the Corporation
statement of income. Bristol Water has a foreign functional currency requiring movements in the pound sterling to be reflected by the Corporation
on consolidation.
on consolidation.
Capstone is also exposed to foreign exchange risk from the translation of foreign monetary assets. Changes in the Canadian dollar and SEK currency
Capstone is also exposed to foreign exchange risk from the translation of foreign monetary assets. Changes in the Canadian dollar and SEK currency
rates impact the value of the shareholder loan with Värmevärden resulting in a foreign exchange gain or loss which is included in the consolidated
rates impact the value of the shareholder loan with Värmevärden resulting in a foreign exchange gain or loss which is included in the consolidated
statement of income.
statement of income.
(B)
(B)
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to honour a financial obligation.
Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to honour a financial obligation.
Financial instruments that potentially subject the Corporation to concentrations of credit risk consist of cash and cash equivalents, restricted cash,
Financial instruments that potentially subject the Corporation to concentrations of credit risk consist of cash and cash equivalents, restricted cash,
short-term deposits, accounts and loans receivable and derivative contracts.
short-term deposits, accounts and loans receivable and derivative contracts.
Credit Risk
Credit Risk
74 CAPSTONE INFRASTRUCTURE CORPORATION
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The Corporation deposits its cash and holds its short-term investments with highly rated financial institutions, with a credit rating of R1 or higher, and
therefore management believes the risk of loss to be remote.
Credit risk concentration with respect to power trade receivables is limited due to the Corporation's customer base being predominantly government
authorities. As at December 31, 2012, the maximum exposure with respect to receivables from the OEFC and OPA was $23,948 or 31.8% and
$3,975 or 5.3%, respectively (2011 – $22,558 or 31.8% and $4,184 or 5.9%, respectively) and there are no accounts receivable that are past due.
Since the OEFC and OPA are government agencies, management considers credit risk to be minimized.
Bristol Water is required to supply water to all customers in its licenced area. Consequently, for residential customers Bristol Water is not able to
disconnect services in the event of non-payment. For commercial customers, Bristol Water has the right of disconnection in the event of non-
payment. For all customers, Bristol Water has implemented policies and procedures to assess the risk of non-payment, recoup debts and establish
appropriate provisions.
The Corporation's derivative agreements expose Capstone to losses under certain circumstances, such as the counterparty defaulting on its
obligations under the swap agreements or if the swap agreements provide an imperfect hedge. Counterparties to the Corporation's derivative
contracts are major financial institutions that have been accorded investment grade ratings. Consequently, management believes there to be minimal
credit risk associated with its derivative contracts.
(C)
Economic Dependence
Economic dependence arises when an enterprise relies on a significant volume of business with another party that cannot be easily transferred at
similar terms and conditions or is abnormal relative to expectations of similar entities.
For the power segment, during 2012, approximately 31.8% and 10.3% (2011 – 53.0% and 13.0%) of the Corporation's revenue was derived from
the sale of electricity to the OEFC and OPA, respectively.
For the utilities – water segment, no economic dependence exists. Bristol Water has a large number of customers and there is no significant loss on
trade receivables that has not been provided for. Revenue is derived from water supply and related activities in the United Kingdom.
(D)
Liquidity Risk
Liquidity risk is the risk that the Corporation may have insufficient cash or other resources to meet obligations as they come due.
Compliance with debt covenants
The Corporation has financial liabilities in the power and utilities – water operating segments, as well as at corporate. Refer to notes 16 (Accounts
payable and other liabilities), 17 (Finance lease obligations) and 18 (Long-term debt) for further detail on financial liabilities. These financial liabilities
contain a number of standard financial and other covenants.
Failure to comply with terms and covenants of the Corporation's credit agreements could result in a default, which, if not cured or waived, could
result in accelerated repayment or the suspension of dividends.
In the event of default, there can be no assurance that the Corporation could:
(i) Generate sufficient cash flow from operations or that future dividends will be available in amounts sufficient to pay outstanding indebtedness,
or to fund any other liquidity needs; or
(ii) Refinance these credit agreements or obtain additional financing on commercially reasonable terms, if at all. The credit agreements, and future
borrowings may be, at variable rates of interest, which exposes the Corporation to the risk of increased interest rates.
Contractual maturities
The contractual maturities of the Corporation's financial liabilities as at December 31, 2012 were as follows:
Financial Liabilities
Within one year One year to five years
Beyond five years
Accounts payable and accrued liabilities
106,767
—
—
—
6,772
6,772
2,572
Total
106,767
12,158
18,493
30,651
8,789
—
3,106
3,106
3,528
12,158
8,615
20,773
2,689
14,977
212,443
522,273
749,693
Derivative financial instruments
Embedded derivatives
Interest rate swaps
Finance lease obligations
Long-term debt
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 75
75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(E)
Sensitivity Analysis
The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2012, assuming that a reasonably
possible change in the relevant risk variable has occurred during the year and has been applied to the risk exposures in existence at that date to show
the effects of reasonably possible changes. The reasonably possible changes in market variables used in the sensitivity analysis were determined
based on implied volatilities, where available, or historical data.
The sensitivity analysis has been prepared based on December 31, 2012 balances and on the basis that the balances, the ratio of fixed to floating
rates of debt and derivatives, the proportion of energy contracts that are financial instruments and the proportion of financial instruments in foreign
currencies in place at December 31, 2012 are all constant. Excluded from this analysis are all non-financial assets and liabilities that are not classified
as financial instruments under IFRS 7.
The sensitivity analysis provided is hypothetical and should be used with caution as the impacts provided are not necessarily indicative of the actual
impacts that would be experienced because the Corporation's actual exposure to market rates is constantly changing as the Corporation's portfolio
of commodity, debt, foreign currency and equity contracts changes. Changes in fair values or cash flows based on a variation in a market variable
cannot be extrapolated because the relationship between the change in the market variable and the change in fair value or cash flows may not be
linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering interrelationships
between the various market rates, hedging strategies employed by the Corporation or other mitigating actions that would be taken
by the Corporation.
For year ended Dec 31, 2012
Financial assets:
Embedded derivative asset
Financial liabilities:
Embedded derivative liability
For year ended Dec 31, 2012
Financial assets:
Cash and cash equivalents (1)
Restricted cash
Short-term deposits
Loans receivable (2)
SEK – foreign exchange contracts
Financial liabilities:
Finance lease obligations
Long-term debt (3)
Interest rate swap contracts, net (4)
Carrying
Amount
Natural Gas Price Risk
(10)%
10%
(1)%
DCR Risk
1%
1,172
(266)
366
38
(30)
12,158
—
—
1,659
(1,675)
Carrying
Amount
49,599
19,229
6,471
34,768
250
7,201
52,495
15,337
Interest Rate Risk
Canadian $ to SEK
Foreign Exchange Rate Risk
(0.5)%
0.5%
(10)%
10%
(248)
(96)
(32)
—
—
81
262
3,932
248
96
32
—
—
(81)
(262)
(3,932)
—
—
—
(3,477)
(353)
—
—
—
—
—
—
3,477
177
—
—
—
(1) Cash and cash equivalents include deposits at call, which are at floating interest rates.
(2) Loans receivable exclude loans related to Chapais of $4,237.
(3) Long-term debt excludes all fixed-rate debt totaling $668,905 and variable rate debt that is covered by a swap instrument for fixed-rate debt
totaling $90,560.
Interest rate swaps exclude Bristol Water's cash flow hedge of $3,156 as changes flow through OCI.
(4)
Pound sterling foreign exchange contracts have been excluded from this analysis as the change is considered insignificant with respect to currency
fluctuation on consolidation.
Bristol Water's sensitivity to changes in inflation and foreign exchange on its long-term debt were as follows:
For year ended Dec 31, 2012
Impact on net income before taxes
Impact on equity
Inflation Rate Risk (RPI)
(1)%
2,610
2,054
1%
(2,610)
(2,054)
Canadian $ to £
Foreign Exchange Rate Risk
(1)%
—
1%
—
3,702
(3,702)
76 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 76
NOTE 11. EQUITY ACCOUNTED INVESTMENTS
(A)
Equity Accounted Investments
As at
Macquarie Long Term Care L.P. (“MLTCLP”)
Värmevärden
Chapais
Dec 31, 2012
Dec 31, 2011
Ownership % Carrying Value
Ownership %
Carrying Value
45.0%
33.3%
31.3%
87
16,903
—
16,990
45.0%
33.3%
31.3%
106
15,887
—
15,993
See note 8 for detail on loans receivable with Värmevärden and Chapais.
The changes in the Corporation’s total equity accounted investments for the years ended were as follows:
For the year ended
Dec 31, 2012
Dec 31, 2011
Opening
Balance
Acquisition, Plus Costs,
Less Return of Capital
Equity Accounted
Income (Loss)
Equity Share
of OCI
Distributions
Received
15,993
54,789
—
21,882
2,294
(5,276)
702
(724)
(2,001)
(54,666) (1)
Other
2
(12)
Ending
Balance
16,990
15,993
(1) 2011 were apart of a non-cash distribution.
(B)
The Corporation has summarized the information of its equity accounted investments at their gross values as follows:
Summarized Information for Equity Accounted Investments
As at
MLTCLP
Värmevärden (1)
Chapais
Dec 31, 2012
Dec 31, 2011
Assets
212
391,208
26,744
Liabilities
—
336,586
42,285
Assets
227
383,367
27,963
Liabilities
—
332,344
45,757
For the year ended
Dec 31, 2012
Dec 31, 2011
Revenue
—
97,182
19,390
116,572
Income
(15)
6,947
2,252
9,184
Capstone's
Income
(21)
2,315
—
2,294
Revenue
—
65,875
18,730
84,605
Income
(46)
(15,776)
2,933
(12,889)
Capstone's
Income
(6)
(5,270)
—
(5,276)
MLTCLP
Värmevärden (1)
Chapais
(1)
Includes purchase accounting adjustments.
NOTE 12. CAPITAL ASSETS
(A)
Continuity
Cost
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation
Equipment and vehicles
Property and plant
Water network
Net carrying value
Jan 1, 2012
Additions
Disposals
Foreign Exchange
Transfers
Dec 31, 2012
2,707
8,389
790,178
271,485
35,750
1,108,509
(3,568)
(126,465)
(1,020)
977,456
—
1,001
4,517
59,571
80,984
146,073
(1,847)
(40,516)
(5,069)
98,641
—
(637)
(4,729)
—
—
59
534
9,906
9,542
1,162
(5,366)
21,203
608
2,978
—
(1,780)
(353)
(4,413)
(1,809)
14,628
—
6,363
51,854
5,932
(66,687)
(2,538)
—
—
—
2,766
15,650
851,726
346,530
51,209
1,267,881
(5,160)
(168,416)
(7,898)
(2,538)
1,086,407
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 77
77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Jan 1, 2011
Business
Acquisition
Additions
Disposals
Foreign
Exchange
Transfers
Dec 31, 2011
Cost
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation
Equipment and vehicles
Property and plant
Water network
235
4,375
469,665
—
34,535
508,810
(3,000)
(97,187)
—
2,540
3,617
202,218
270,931
23,512
502,818
—
—
—
Net carrying value
408,623
502,818
(B)
Reconciliation to Cash Additions
Year ended
Additions
—
344
2,454
7,963
100,290
111,051
(576)
(29,378)
(1,052)
80,045
—
—
—
—
—
—
—
—
—
—
(68)
(102)
(5,485)
(7,409)
(859)
—
155
121,326
—
(121,728)
2,707
8,389
790,178
271,485
35,750
(13,923)
(247)
1,108,509
8
100
32
—
—
—
(3,568)
(126,465)
(1,020)
(13,783)
(247)
977,456
Adjustment for change in capital amounts included in accounts payable and accrued liabilities
Net foreign exchange difference
Cash additions
(C)
Construction in Progress
Dec 31, 2012
Dec 31, 2011
146,073
(18,919)
787
127,941
111,051
10,298
1,036
122,385
The net book value of property, plant and equipment includes $2,292 (£1,417) of capitalized borrowing costs at Bristol Water in accordance with
IAS 23. Capstone has used 5.8% as the interest rate to determine the amount of borrowing costs capitalized.
Amounts were transferred from construction in progress to the appropriate asset class as the asset became available for use at which time
amortization over the asset useful life began. Until such time, assets within construction in progress were not amortized.
(D)
Capital Assets Under Finance Leases
As at
Dec 31, 2012
Dec 31, 2011
(E)
Impairments
Land
Equipment and
Vehicles
Property and
Plant Water Network
—
—
4
29
16,924
18,242
1,315
1,820
Total
18,243
20,091
At the end of each reporting period, Capstone reviews its capital assets and amortizing intangible assets to determine if any indicators of impairment
exist. As at December 31, 2012, Capstone identified the deficit of market capitalization to the carrying amount of owners' equity as an indicator of
impairment. Consequently, Capstone performed a comprehensive analysis, which confirmed that the fair value of its assets was greater than the
carrying amounts included in these financial statements. As a result, no impairments were recognized at December 31, 2012.
Capstone's determination of fair value was based on a discounted cash flow analysis of the expected future cash flows for each cash generating unit
("CGU"). The analysis then compared the recoverable amount of each CGU with the carrying amount included in the consolidated statement of
financial position. For the purposes of this analysis, the recoverable amount was based on the present value of cash flows, which relies on
management's current best estimate of the underlying cash flows and discount rate.
CAPSTONE INFRASTRUCTURE CORPORATION
78 CAPSTONE INFRASTRUCTURE CORPORATION
Page 78
NOTE 13. INTANGIBLES
Assets
Computer software
Electricity supply and gas purchase contracts
Water rights
Licence
Goodwill
Accumulated amortization
Computer software
Electricity supply and gas purchase contracts
Water rights
Provisions
Electricity supply and gas purchase contracts
Utilization
Assets
Computer software
Electricity supply and gas purchase contracts
Water rights
Licence
Goodwill
Accumulated amortization
Computer software
Electricity supply and gas purchase contracts
Water rights
Provisions
Electricity supply and gas purchase contracts
Utilization
Jan 1, 2012
Additions
Foreign Exchange
Transfers
Dec 31, 2012
4,220
108,048
73,018
21,012
135,512
(550)
(43,395)
(9,561)
288,304
12,257
(7,363)
4,894
28
—
—
—
—
(2,060)
(7,572)
(2,122)
(11,726)
—
(1,634)
(1,634)
758
—
—
504
4,200
(659)
—
—
4,803
—
—
—
2,538
—
—
—
—
—
—
—
2,538
—
—
—
7,544
108,048
73,018
21,516
139,712
(3,269)
(50,967)
(11,683)
283,919
12,257
(8,997)
3,260
Jan 1, 2011
Business
Acquisition
Additions
Foreign
Exchange
Transfers
Dec 31, 2011
56
3,973
108,048
73,018
—
—
—
—
21,591
139,255
(77)
(35,954)
(7,445)
—
—
—
137,646
164,819
12,257
(5,733)
6,524
—
—
—
60
—
—
—
—
(486)
(7,441)
(2,116)
(9,983)
—
(1,630)
(1,630)
(116)
247
—
—
(579)
(3,743)
13
—
—
—
—
—
—
—
—
—
(4,425)
247
—
—
—
—
—
—
4,220
108,048
73,018
21,012
135,512
(550)
(43,395)
(9,561)
288,304
12,257
(7,363)
4,894
On the acquisition of Bristol Water, Capstone recognized an indefinite life intangible asset for the value of the licence to operate the water network
granted by the regulator (“Ofwat”). The licence is related to the exclusive right to operate and invest in the water network within the licenced
geographic area. Ofwat grants a perpetual licence with a 25-year notice.
Goodwill is attributed to the utilities – water reporting segment which forms a CGU. The calculation of goodwill for Bristol Water is described in
Note 3.
NOTE 14. RETIREMENT BENEFIT PLANS
Defined Contribution Plan
Bristol Water and Cardinal operate defined contribution retirement plans for certain employees. The total cost recorded in the statement of income
for the year ended December 31, 2012 was $1,319 (December 31, 2011 – $431).
Defined Benefit Plan
Defined benefit pension arrangements for Bristol Water's employees are provided through Bristol Water's membership in the WCPS, which provides
defined benefits based on final pensionable pay. Bristol Water's membership in the WCPS is through a separate section (the “Section”) of the plan.
The assets of the Section are held separately from those of Bristol Water and are invested by discretionary fund managers appointed by the trustees
of the plan. The Section has been closed to new entrants and all new eligible employees are offered membership in the defined contribution pension
plan.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 79
79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In addition to providing benefits to employees and ex-employees of Bristol Water plc, the Section provides benefits to former Bristol Water plc
employees who transferred to Bristol Wessex Billing Services Ltd. The majority of the Section assets and liabilities relate to Bristol Water plc
employees and ex-employees.
Basis of Valuation
The formal actuarial valuation of Bristol Water's Section of the WCPS as at March 31, 2011 was updated to December 31, 2012, by Lane, Clark &
Peacock LLP, using the following significant assumptions in accordance with IAS19:
Assumptions
Inflation – Retail Price Index
Inflation – Consumer Price Index
Pension increases uncapped
Pension increases capped at 5%
Salary increases
Discount rate
2012
2011
3.1%
2.6%
2.6%
2.6%
4.1%
4.3%
3.2%
2.5%
2.5%
2.5%
4.2%
4.7%
Asset Distribution and Expected Return
The following table sets out the key assumptions used for the valuation of Bristol Water's Section of the WCPS. The table also sets out as at the
accounting date the fair value of the assets, a breakdown of the assets into the main asset classes, the present value of the Section liabilities, and the
resulting surplus.
As at
Equities
Diversified growth funds
Bonds
Emerging markets multi-asset funds
High yield bonds
Other
Market value of assets
Present value of liabilities
Surplus
Amount
22,788
8,526
229,192
5,366
5,216
562
271,650
(234,075)
37,575
Dec 31, 2012
Expected Long-
term Rate of
Return
Current
Allocation
7.0%
6.3%
3.0%
7.1%
5.8%
3.0%
3.6%
8%
3%
85%
2%
2%
—%
Dec 31, 2011
Expected Long-
term Rate of
Return
7.5%
6.8%
3.5%
—
—
3.5%
4.2%
Current
Allocation
12%
4%
84%
—%
—%
—%
100%
Amount
32,260
10,574
223,362
—
—
918
100%
267,114
(207,010)
60,104
The overall expected rate of return on assets of 3.6% per annum was derived by taking the weighted average of the long term expected rate of
return on each of the above asset classes (December 31, 2011 – 4.2%).
Demographic Assumptions
The mortality assumptions have been drawn from actuarial table PNA00 with a 110% adjustment to mortality rates and with future improvements in
line with “medium cohort” projections from 2000, subject to a minimum increase of 1.0% per annum. Per the mortality assumptions used the
average life expectancy for a male pensioner currently aged 60 is 26.9 years and for a female pensioner currently aged 60 is 29.2 years (December
31, 2011 – 26.5 male, 29.1 female).
The allowance made for future improvements in longevity is such that a male member retiring at age 60 in 2036 (i.e. in 25 years' time) is assumed to
have an increased average life expectancy from retirement of 28.9 years, and for a female retiring at age 60 in 2036 is assumed to have increased to
30.8 years (December 31, 2011 – 29.1 male, 31.5 female).
Sensitivity
The assets and liabilities of the Section are subject to volatility as the assets are linked to government bonds and equity markets and the liabilities are
linked to yields on AA-rated bonds.
As an indication of sensitivity to changes in assumptions for the year ended December 31, 2012, all other things being equal:
(cid:127)
an increase in the discount rate of 0.1% would lead to a reduction in the value placed on the liabilities of the Section of approximately $3,721
(£2,300) (December 31, 2011 – $3,213 (£2,000)); and
(cid:127)
a 5% rise in the value of the Section's return seeking assets portfolio would increase the surplus (before the consideration of any balance sheet
limitation that might apply) by approximately $2,103 (£1,300) (December 31, 2011 – $2,124 (£1,322)).
80 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 80
Contributions
Contributions paid in the year to the Section were $4,400 (£2,778) (December 31, 2011 – $659 (£410)). For normal employer contributions after
April 1, 2012 Bristol Water was required to contribute at the rates of 29% for the main sub Section and 17% for the alternative benefits sub Section
of the relevant payroll costs. Prior to April 1, 2012, Bristol Water contributed 21% and 10%, respectively.
The estimated amount of the total employer contribution expected to be paid to the Section for the year ending December 31, 2013 is $3,348
(£2,070) (December 31, 2012 – $3,729 (£2,320)).
Changes in Comprehensive Income
Analysis of operating expense, interest expense and amounts recognized in other comprehensive income:
Current service cost
Total operating expense
Expected return on Section assets
Interest expense on pension obligation
Interest expense
Gain/(loss) on pension Section assets
Experience gains/(losses) arising on Section liabilities
Gain/(loss) due to changes in assumptions
Actuarial gain/(loss) recognized in Statement of Comprehensive Income (“SCI”)
For the year ended
Dec 31, 2012
Dec 31, 2011
2,626
2,626
(9,056)
9,594
538
(5,685)
(1,830)
(17,149)
(24,664)
654
654
(2,455)
2,530
75
19,182
—
(6,689)
12,493
The cumulative actuarial gains and losses recognized in the SCI as at December 31, 2012 was a gain of $12,171 (£7,799) (2011 – gain of $12,493
(£7,772)).
Changes in Financial Position
The following table summarizes the movement in Section pre-tax financial position and defined benefit obligation:
For the year ended
December 31, 2012
Asset
Liability
267,114
(207,010)
Total
60,104
December 31, 2011
Asset
—
Liability
—
Total
—
Opening Surplus in Section
Movement in year:
Business acquisition
Current service cost: employee
Current service cost: employer
Aggregate contributions: employees
Aggregate contributions: employer
Benefits paid
Charge to interest expense
Actuarial gain/(loss) recognized in SCI
Foreign exchange
Ending surplus in Section
—
—
—
675
3,725
(9,604)
9,056
(5,685)
6,369
—
(633)
(1,993)
—
—
9,604
(9,594)
(18,979)
(5,470)
271,650
(234,075)
—
254,164
(204,951)
49,213
(633)
(1,993)
675
3,725
—
(538)
(24,664)
899
37,575
—
—
186
473
(2,190)
2,455
19,182
(7,156)
(177)
(477)
—
—
2,190
(2,530)
(6,689)
5,624
267,114
(207,010)
(177)
(477)
186
473
—
(75)
12,493
(1,532)
60,104
The actual return on the Section's assets for the year ended as at December 31, 2012 was a gain of $3,371 (£2,128) (2011 – gain of $21,634
(£13,460)).
For the year ended
Asset
Liability
Dec 31, 2012
Dec 31, 2011
Actuarial
Adjustments
As a % of
Balance
Actuarial
Adjustments
As a % of
Balance
(5,685)
(18,979)
(24,664)
2%
8%
66%
19,182
(6,689)
12,493
7%
3%
21%
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 81
81
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES
(A)
The changes in the deferred income tax assets and liabilities are as follows:
Deferred Income Tax Continuity
As at
Non-capital loss carry-forwards
Levelization amounts
Financial instruments
Asset retirement obligations
Capital and Intangible assets
Loan premium and deferred financing costs
Other
Deferred income tax assets
Capital assets
Intangible assets
Equity investment in Chapais
Loan premium and deferred financing costs
Pension surplus
Convertible debentures
Financial instruments
Deferred income tax liabilities
Net, deferred income tax liability
Dec 31, 2011
Recorded in
Earnings
Recognized
in OCI
(excluding
foreign
exchange)
Foreign
Exchange
Recorded in
OCI (1)
1,523
4,760
8,460
601
1,162
15,701
690
32,897
125,888
36,113
301
93
15,129
677
—
178,201
145,304
1,908
(1,644)
(928)
(73)
(1,162)
(2,731)
(549)
(5,179)
8,723
(3,746)
(301)
254
189
(123)
172
5,168
10,347
—
—
13
—
—
—
—
13
—
—
—
—
(6,828)
—
—
(6,828)
(6,841)
—
—
17
—
—
316
50
383
Other
Dec 31, 2012
—
—
—
—
—
—
605 (2)
605
3,431
3,116
7,562
528
—
13,286
796
28,719
2,611
1,802 (3)
139,024
—
—
—
222
—
—
2,833
2,450
—
—
—
—
—
—
1,802
1,197
32,367
—
347
8,712
554
172
181,176
152,457
(1) Cumulative differences on translation of foreign operations.
(2) Recorded $805 to current income taxes payable, partially offset by $200 recorded in equity, with respect to the taxes on the dividends of the
preferred shares. See note 20 (d).
(3) Recorded as purchase equation adjustment through working capital and goodwill. See note 3.
(B)
The timing of deferred income tax recovery is summarized as follows:
Timing of Deferred Income Tax Recovery
As at
Within 12 months
After more than 12 months
Net, deferred tax liability
Dec 31, 2012
Dec 31, 2011
17,983
(170,440)
(152,457)
12,596
(157,900)
(145,304)
The aggregate amount of temporary differences associated with investments in subsidiaries and equity-accounted investees, for which deferred tax
liabilities have not been recognized, as at December 31, 2012 was $12,612 (December 31, 2011 – nil). These liabilities have not been recorded as
the reversal of such differences are not expected to create a tax liability.
(C)
Capstone's tax loss carry-forwards, and the portion recognized in deferred income tax assets were as follows:
Tax Loss Carry-forwards
Canadian – capital losses
Canadian – non-capital losses
US – non-capital losses
UK – capital losses (£2,864)
UK – advanced corporation tax (£3,922)
Expiry
No expiry
2025 – 2032
2023 – 2027
No expiry
No expiry
Recognized
Unrecognized
Dec 31, 2012
Dec 31, 2011
—
13,572
—
—
—
84,610
59,908
14,385
4,633
6,345
84,610
73,480
14,385
4,633
6,345
70,557
38,052
17,942
4,681
6,196
The Corporation additionally has $14,659 of unused tax credits, which have not been recognized as a tax asset as at December 31, 2012
(December 31, 2011 – $5,587).
82 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 82
(D)
The following table reconciles the expected income tax expense using the statutory tax rate to the expense:
Rate Reconciliation
Income (loss) before income taxes
Statutory income tax rate
Income tax expense based on statutory income tax rate
Permanent differences
Tax rate differentials
Change in tax status
Unrecognized losses arising in the year
Other
Total income tax recovery
For the year ended
Dec 31, 2012
Dec 31, 2011
53,832
25.47%
13,711
(1,461)
(7,076)
—
4,075
859
(39,021)
28.17%
(10,992)
4,950
764
(34,808)
5,186
(858)
10,108
(35,758)
The weighted average applicable tax rate was 25.47% (2011 – 28.17%). The decrease in the weighted average rate is attributed to a change in the
Federal and Ontario rates.
NOTE 16. ACCOUNTS PAYABLE AND OTHER LIABILITIES
(A) Current Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities
Dividends payable
(B) Deferred Revenue
Dec 31, 2012
Dec 31, 2011
100,465
6,302
106,767
77,233
4,501
81,734
Deferred revenue represents grants and contributions received by the utilities – water segment in respect of assets that are not related to the water
network less amounts amortized to the statement of income:
As at January 1
Contributions received
Amortized to statement of income
Net foreign exchange difference
As at December 31
NOTE 17. FINANCE LEASE OBLIGATIONS
2012
1,363
4,856
(55)
134
6,298
2011
—
1,396
—
(33)
1,363
Power: equipment lease
Utilities – water: equipment leases
Less: current portion
Non-current portion
Interest Rate
Maturity
Dec 31, 2012
Dec 31, 2011
7%
2012
3.71 – 4.23%
2012 – 2020
—
7,201
7,201
(3,502)
3,699
129
11,854
11,983
(5,256)
6,727
For the year ended December 31, 2012, the Corporation repaid $5,172 (December 31, 2011 - $133) on finance leases, including interest of $221
(December 31, 2011 – $108).
The minimum lease payments in the next five years and thereafter are reconciled to the finance lease obligation as follow:
Utilities – water
Within one
year
One year to
five years
Beyond five
years
Less: future
finance
charges
3,528
2,689
2,572
(1,588)
Total
7,201
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 83
83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. LONG-TERM DEBT
(A)
Components of Long-term Debt
As at
Power
Utilities – water
Corporate
Less: deferred financing costs
Long-term debt
Less: current portion
(B)
Power
As at
CPC-Cardinal credit facility
Erie Shores project debt
Amherstburg Solar Park project debt
Hydro facilities senior secured and subordinated bonds
Wawatay facility’s levelization liability
Less: deferred financing costs
Long-term debt
Less: current portion
Dec 31, 2012
Dec 31, 2011
Fair Value
Carrying Value
Fair Value
Carrying Value
305,497
519,660
44,416
869,573
—
869,573
(21,258)
848,315
297,792
473,537
40,631
811,960
(7,328)
804,632
(14,977)
789,655
314,196
504,479
155,124
973,799
—
973,799
308,513
480,339
152,613
941,465
(6,421)
935,044
(235,209)
(230,899)
738,590
704,145
Dec 31, 2012
Dec 31, 2011
Fair Value
Carrying Value
Fair Value
Carrying Value
12,050
106,538
90,560
96,349
—
305,497
—
305,497
(21,258)
284,239
12,050
97,703
90,560
97,479
—
297,792
(5,080)
292,712
(14,977)
277,735
85,000
108,616
94,267
—
26,313
314,196
—
314,196
(99,136)
215,060
85,000
102,933
94,267
—
26,313
308,513
(3,248)
305,265
(94,826)
210,439
(i)
CPC-Cardinal credit facility
The CPC-Cardinal credit facility is composed of a term facility and revolving facility as follows:
Interest Rate
Maturity
Dec 31, 2012
Dec 31, 2011
Total available credit
Term facility
Revolving facility
Amounts drawn – Term facility
Cardinal – Power portion
CPC – Power portion
CPC – Corporate portion
Letters of credit for the benefit of Erie Shores
Letter of credit for the benefit of Amherstburg
Letter of credit for the benefit of Hydros
Letter of credit for the benefit of Capstone Power Corp
Guarantee for Erie Shores project debt
Remaining available credit
12,050
15,000
27,050
4.53%
Jun 30, 2014
(12,050)
—
—
(2,533)
(5,330)
(250)
(397)
—
6,490
125,625
40,625
166,250
(17,000)
(68,000)
(34,000)
(2,533)
(5,330)
—
—
(5,000)
34,387
As at December 31, 2012, Capstone had six letters of credit authorized under the revolving facility (December 31, 2011 – four under the
revolving facility).
Capstone's $5,000 guarantee of Erie Shores project debt is authorized against the new CPC-Cardinal revolving facility and does not reduce the remaining
available credit. The terms of the old CPC-Cardinal credit facility required the available credit to be reduced for this guarantee.
84 CAPSTONE INFRASTRUCTURE CORPORATION
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Page 84
During 2012, Capstone repaid $106,700 of the CPC-Cardinal credit facility. Capstone repaid $39,000 with proceeds from the partial sale of Bristol
Water (refer to note 3 Acquisition and Disposal) and $67,700 with proceeds from the financing of the hydro power facility. On September 17, 2012,
Capstone refinanced the CPC-Cardinal credit facility in the aggregate amount of up to $27,300, comprised of a $12,300 term loan used to repay the
outstanding balance and a $15,000 revolving facility.
Advances under the credit facility are made in the form of a series of bankers' acceptances ("BAs") and prime rate loans. Interest paid on BAs is based
on the then current BA rate plus an applicable margin (“stamping fee”). The weighted average contractual rate of interest at December 31, 2012 is
included in the preceding table and the maturity date of the facility was June 30, 2014. The collateral for the facility is provided by a first ranking security
interest covering the assets of CPC, Cardinal and certain direct subsidiaries, collectively the “restricted group”. The restricted group is subject to certain
financial and non-financial covenants including limits on the interest coverage ratio and the ratio of consolidated total debt to consolidated EBITDA.
Collateral for the CPC-Cardinal credit facility is provided by a first ranking priority security interest covering the assets of CPC, Cardinal and certain
direct subsidiaries, collectively the “restricted group”. As at December 31, 2012, the carrying value of the assets of the restricted group exceeded total
amounts drawn on the facility.
The CPC-Cardinal credit facility had various interest rate swap contracts to convert the floating rate obligations to a fixed rate obligation, which all
expired during 2012 (see note 10(a)).
(ii)
Erie Shores Wind Farm
The Corporation has a non-recourse amortizing project debt for Erie Shores through three tranches:
Tranche A
Tranche B
Tranche C
Interest Rate
Maturity
Dec 31, 2012
Dec 31, 2011
5.96%
5.28%
6.15%
Apr 1, 2026
Apr 1, 2016
Apr 1, 2026
57,041
3,223
37,439
97,703
59,721
4,040
39,172
102,933
On April 1, 2011, Capstone completed the refinancing of Tranche C of Erie Shores' non-recourse, project financing loan. Under the refinancing, the Erie
Shores' Tranche C loan was replaced with a fully amortizing term loan in the amount of $40,000, with a fixed rate of interest at 6.145% which matures
on April 1, 2026. Transaction costs of $889 were deferred.
Under the agreement, six months of principal and interest payments must be held in a debt service reserve account. As a result, $5,662 was included
in restricted cash on the consolidated statement of financial position (December 31, 2011 – $5,648).
The Erie Shores project debt was secured only by the Erie Shores assets, with no recourse to the Corporation's other assets. As at December 31, 2012,
the carrying value of the assets of Erie Shores exceeded the total amount of project debt outstanding.
As at December 31, 2012, the Erie Shores project debt had an interest rate swap contract to convert the Erie Shores obligation to a fixed rate (see
note 10(a)).
(iii)
Amherstburg Solar Park project debt
The Amherstburg Solar Park has non-recourse project debt composed as follows:
Project debt
Interest Rate
Maturity
Dec 31, 2012
Dec 31, 2011
7.32%
Jun 30, 2016
90,560
94,267
In July 2011, the outstanding balance of the construction facility was converted to a term facility, which requires regular principal and interest payments,
over 17 years, with a five-year maturity.
The Amherstburg Solar Park project debt was secured only by the assets of the Amherstburg Solar Park, with no recourse to the Corporation's other
assets. As at December 31, 2012, the carrying value of the assets of the Amherstburg Solar Park exceeded the total amount of project debt outstanding.
As at December 31, 2012, the Amherstburg Solar Park project debt had an interest rate swap contract to mitigate interest rate risk (see note 10(a)).
(iv)
Hydro facilities senior secured and subordinated secured bonds
The Corporation has non-recourse amortizing bonds for the hydro facilities summarized in the following table:
As at
Senior secured bonds
Subordinated secured bonds
Interest Rate
Maturity
Dec 31, 2012
Dec 31, 2011
4.56%
7.00%
Jun 30, 2040
Jun 30, 2041
77,237
20,242
97,479
—
—
—
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 85
85
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On June 6, 2012, MPT Hydro LP completed a $100,621 debt offering to recapitalize the Dryden, Hluey Lakes, Sechelt and Wawatay facilities (the
“hydro facilities”). The debt offering comprising $80,379 of senior secured bonds and $20,242 of subordinated secured bonds. The senior secured and
subordinated secured bonds are fully amortizing over their respective terms.
The bonds are secured by the hydro facilities alone and are non-recourse to the Corporation’s other businesses. As at December 31, 2012, the carrying
value of the assets of the hydro facilities exceeded the total amount of bonds outstanding.
Proceeds of the bond offerings were first used to repay the $27,239 balance of the levelization debt at the Wawatay hydro facility, along with $1,785
of transaction costs, which were capitalized to the debt. In addition, Capstone cash funded $3,846 to the debt service and maintenance reserve accounts
in accordance with the bond indenture which is presented as restricted cash. The remaining $67,700 of net proceeds was used to repay a portion of
the CPC-Cardinal credit facility.
(v)
Levelization amounts
The carrying value of the levelization amounts was as follows:
As at
Principal
Accrued Interest
Interest Rate
Maturity
Dec 31, 2012
Dec 31, 2011
6.87%
Settled
—
—
—
13,902
12,411
26,313
The levelization liability related to payments received from the OEFC in excess of the revenue recorded using the base rates set out under the PPA for
the Wawatay hydro power facility. This liability was settled on June 6, 2012, with the proceeds from the hydro facilities bond offering.
The interest on the levelization liability was accrued at the prescribed variable rate of 6.87% per annum (December 31, 2011 – 6.87%).
(C)
Utilities – water
As at
Bank loans
Term loans
Debentures
Irredeemable cumulative preferred shares
Less: deferred financing costs
Long-term debt
Less: current portion
(i)
Bank loans
As at
Dec 31, 2012
Dec 31, 2011
Fair Value
Carrying Value
Fair Value
Carrying Value
31,540
457,563
2,346
28,211
519,660
—
31,430
413,746
2,072
26,289
473,537
—
519,660
473,537
—
—
519,660
473,537
55,625
420,242
2,125
26,487
504,479
—
504,479
(23,698)
480,781
54,213
398,445
2,008
25,673
480,339
—
480,339
(23,698)
456,641
Interest Rate
Maturity
Dec 31, 2012
[£]
Dec 31, 2012
[$]
Dec 31, 2011
[$]
Secured, variable interest at one month Libor plus a margin
(principal £10,000(1))
1.18%
Dec 17, 2017
Secured, variable interest at six month Libor plus a margin
(principal £10,000(1 and 2))
Secured, variable interest at one month Libor plus a margin
(principal £30,000)
Secured, variable interest at one month Libor plus a margin
(principal £20,000)
5.73%
Dec 17, 2017
1.04%
May 31, 2013
1.79%
Aug 17, 2015
Secured, variable interest at one month Libor plus a margin
(principal £50,000)
2.04%
Aug 17, 2017
Secured, variable interest at one month Libor plus a margin
(principal £15,000)
1.52%
Settled
9,714
9,714
15,715
15,257
15,715
15,257
—
—
—
—
—
—
—
—
31,430
—
—
—
23,699
54,213
(1) The principal due on maturity is different from the balance as at December 31, 2012 in pounds sterling due to the fair value adjustment required
on acquisition and deferred financing costs.
(2) The variable rate bank loan is fixed by an interest rate swap exchanging six month LIBOR for a fixed rate of 5.025%. The fixing dates of the swap
match those of the loan (see note 10(a)). The loan has a bullet repayment on maturity.
The bank loans are fully repayable on maturity and incur non-utilization fees on the undrawn portion of the total available credit.
86 CAPSTONE INFRASTRUCTURE CORPORATION
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Page 86
(ii)
Term loans
As at
Interest Rate
Maturity
Dec 31, 2012
[£]
Dec 31, 2012
[$]
Dec 31, 2011
[$]
Secured, principal index-linked to RPI, fixed interest at
3.635%(2) on the indexed principal (principal £118,664(1))
Secured, fixed interest at 6.01%(2) (principal £57,500(1))
Secured, principal index-linked to RPI, fixed interest at
2.701% on the indexed principal (principal £42,588(1))
6.79%
6.01%
Sep 30, 2032
Sep 30, 2033
146,781
63,265
5.77%
Mar 24, 2041
45,700
237,462
102,350
73,934
413,746
227,752
100,388
70,305
398,445
(1) The principal due on maturity is different from the balance as at December 31, 2012 in pounds sterling due to the fair value adjustment made to
the long-term debt on acquisition and deferred financing costs.
(2) Coupons as specified in loan documentation.
The interest rate on the £118,664 indexed linked loan is adjusted in March and September, by reference to the Retail Price Index ("RPI"), with an eight
month lag.
The interest rate on the £42,588 indexed linked loan is adjusted in March and September, by reference to the RPI, with a two month lag.
(iii)
Debentures
As at
Consolidated (principal £1,405(1))
Perpetual (principal £37(1))
Perpetual (principal £55(1))
Perpetual (principal £73(1))
Interest Rate
Maturity
Dec 31, 2012
[£]
Dec 31, 2012
[$]
Dec 31, 2011
[$]
4.00%
4.25%
4.00%
3.50%
Irredeemable
Irredeemable
Irredeemable
irredeemable
1,116
37
55
73
1,806
59
89
118
2,072
1,748
58
87
115
2,008
(1) The principal due on maturity is different from the balance as at December 31, 2012 in pounds sterling as due to the fair value adjustment made
to the long-term debt on acquisition.
The rate of interest is fixed and payable every six months.
(iv)
Irredeemable cumulative preferred shares
As at
Interest Rate
Maturity
Dec 31, 2012
[£]
Dec 31, 2012
[$]
Dec 31, 2011
[$]
Preferred shares, cumulative (principal £12,500(1))
8.75%
irredeemable
16,250
26,289
25,673
(1) The principal due on maturity is different from the balance as at December 31, 2012 in pounds sterling due to the fair value adjustment made to
the long-term debt on acquisition.
Bristol Water is authorized to issue 14,000 irredeemable cumulative preferred shares at a value of £1 each, 12,500 have been issued and are fully
paid for as at December 31, 2012.
The preferred shares, which do not carry any voting rights, were issued in 1992 at £1 per share. The preferred shareholders of Bristol Water are
entitled to receive dividends at 8.75% per annum on the par value of these shares on a cumulative basis; these dividends are payable half-yearly
on 1 April and 1 October. On winding up, the preferred shareholders rank ahead of ordinary shareholders and are entitled to receive £1 per share and
any dividends accrued but unpaid in respect of their shares. In the event that dividends on the preferred shares are in arrears for six months or more,
holders of the preferred shares become entitled to vote at general meetings of members. In accordance with IAS 39 the shares are classified as long-
term debt.
(v)
Security for borrowings
The majority of Bristol Water's financial liabilities are secured. In respect of Bristol Water plc:
(cid:127)
By way of first fixed charges over any of its freehold or leasehold property belonging to it now or acquired in the future (other than protected
land under the Water Industry Act 1991), its present and future goodwill, all rights and claims in relation to charged bank accounts, all book
debts all insurances, all rights, title and interest to all investments and all plant and machinery, and
(cid:127)
A floating charge over the whole of its undertaking.
Prior to enforcement of the security by the lender, Bristol Water plc is entitled to exercise all its rights, and perform its obligations in relation to the
charged assets in accordance with the provisions set out in the Security Trust and Intercreditor Deed.
In respect of Bristol Water Core Holdings Ltd (the immediate parent of Bristol Water plc), as security for the obligations of Bristol Water plc:
(cid:127)
A fixed charge over its shares in Bristol Water plc together with a floating charge over the whole of its undertaking.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 87
87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(D)
Corporate
As at
Senior debt facility
CPC-Cardinal credit facility
Convertible debentures
Less: deferred financing costs
Long-term debt
Less: current portion
(i)
Senior debt facility
The senior debt facility is composed as follows:
As at
Senior debt facility
Dec 31, 2012
Dec 31, 2011
Fair Value
Carrying Value
Fair Value
Carrying Value
—
—
44,416
44,416
—
44,416
—
44,416
—
—
40,631
40,631
(2,248)
38,383
78,375
34,000
42,749
155,124
—
155,124
78,375
34,000
40,238
152,613
(3,173)
149,440
—
(112,375)
(112,375)
38,383
42,749
37,065
Interest Rate
6.73%
Maturity
Settled
Dec 31, 2012
Dec 31, 2011
—
78,375
The Corporation settled the remaining balance during 2012, with $49,400 from the proceeds of the Värmevärden bond issue (refer to note 8 Loan
Receivable) and $28,975 with proceeds from the partial sale of Bristol Water.
(ii)
Convertible debentures
The carrying values of the liability and the equity components of the debentures were as follows:
As at
Liability component
Conversion to shares, net of costs (1)
Amortization and accretion
Deferred financing costs
Convertible debentures – conversion option
Equity component (2)
Conversion to shares (1), net of costs
Dec 31, 2012
Dec 31, 2011
40,238
—
393
40,631
(2,248)
38,383
—
38,383
9,284
—
9,284
47,667
49,067
(9,547)
718
40,238
(2,710)
37,528
—
37,528
11,554
(2,270)
9,284
46,812
(1) No conversions occurred during the year ended December 31, 2012 (note 20) (December 31, 2011 – $11,819). Conversion transfer the carrying
amount in debt and equity to share capital, net of transaction costs incurred in connection with the issuance of the convertible debentures.
(2) On January 1, 2011, the amount was classified as equity and no longer re-measured to fair value.
The Corporation has unsecured subordinated convertible debentures (“2016 Debentures”) that are due on December 31, 2016. The Corporation
originally issued $57,500 gross incurring transaction costs of $2,880. The 2016 Debentures bear an interest rate of 6.50% per annum payable semi-
annually in arrears on June 30 and December 31 of each year. The 2016 Debentures are convertible into shares of the Corporation at the option of
the holder at a conversion price of 7.00 dollars per share. The face value of the debentures as of December 30, 2012 was $42,749 (December 31,
2011 – $42,749).
(E)
Long-term Debt Covenants
For the year ended and as at December 31, 2012, the Corporation and its subsidiaries were in compliance with all financial and non-financial debt
covenants.
88 CAPSTONE INFRASTRUCTURE CORPORATION
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Page 88
(F)
Long-term Debt Repayments
The following table summarizes total principal payments required under each of the Corporation's facilities in the next five years and thereafter:
Year of Repayment
Power
Utilities – water
Corporate
Within one year
One year to five
years
Beyond five
years
14,977
137,338
—
—
32,356
42,749
145,477
376,796
—
14,977
212,443
522,273
Total
297,792
409,152
42,749
749,693
NOTE 19. LIABILITY FOR ASSET RETIREMENT
The carrying value of these obligations is based on estimated cash flows required to settle these obligations in present day costs. The costs
relate to site restoration and decommissioning of Cardinal, Erie Shores and the hydro power facilities.
The following table provides the underlying assumptions and reconciles the Corporation's total asset retirement obligation activity for the years
ended December 31:
Assumptions:
Expected settlement date
Estimated settlement amount
Inflation rate
Credit-adjusted risk-free rate
Balance, beginning of year
Revision of estimates
Accretion expense
Balance, end of year
NOTE 20. SHAREHOLDERS’ EQUITY
The share capital of the Corporation was as follows:
As at
Common shares
Class B exchangeable units
Preferred shares
(A)
Capstone is authorized to issue an unlimited number of common shares.
Common Shares
Dec 31, 2012
Dec 31, 2011
2014 – 2062
2014 – 2042
Nil – $2,965
Nil – $2,965
2.0%
2.0% – 2.1%
8.0% – 12.5%
8.0% – 9.5%
2,412
(533)
217
2,096
3,167
(962)
207
2,412
Dec 31, 2012
Dec 31, 2011
632,474
26,710
72,020
731,204
626,861
26,710
72,020
725,591
Continuity for the year ended
($000s and 000s shares)
Opening balance
Common shares issued (1) to (3)
Dividend reinvestment plan (4)
Conversion of convertible debentures, net of cost (5)
Ending balance
Dec 31, 2012
Dec 31, 2011
Shares
Carrying Value
Shares
Carrying Value
70,957
626,861
—
1,488
—
(89)
5,702
—
72,445
632,474
56,352
12,856
253
1,496
70,957
536,278
77,526
1,238
11,819
626,861
(1) On December 22, 2010, the Corporation closed a private placement financing (the “Offering”) of 9,079 units at a price of 7.60 dollars per
unit for gross proceeds of approximately $69,000 before issue costs of $3,751. The net proceeds of the Offering were used by the
Corporation for acquisitions and for general purposes. During 2011, $102 of the private placement transaction costs were included in share
capital.
(2) On April 15, 2011, the Corporation issued 856 common shares subscribed to by MGL as part of the management internalization at 8.18
dollars per share for gross proceeds of approximately $7,000.
(3) On November 10, 2011, the Corporation issued 12,000 common shares for gross proceeds of $75,000 before issues costs of $4,526.
Additional transaction costs of $89 were included in share capital in 2012 in relation to this common share offering.
(4) Shares issued by the Corporation under the Dividend Re-Investment Plan (DRIP).
(5) No convertible debentures were converted to shares of the Corporation during 2012 (note 18(d)(ii)) (December 31, 2011 – $11,819).
Amounts transferred from debt and equity are net of original issuance transaction costs.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 89
89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(B)
Class B Exchangeable Units
MPT LTC Holding LP had 3,249 Class B exchangeable units outstanding as at December 31, 2012 and 2011. Each unit is exchangeable into one
share of the Corporation. The Class B exchangeable units are eligible to receive distributions under the same terms and conditions as shares of
the Corporation.
The holders of the Class B exchangeable units are not permitted to acquire any additional shares of the Corporation (other than pursuant to the
exchange of the Class B exchangeable units or pursuant to a distribution reinvestment plan) without the consent of the Corporation until
October 18, 2020. Each Class B exchangeable unit will convert into a share of the Corporation on October 18, 2020 unless converted earlier at
the option of the Class B exchangeable unitholders. The Class B exchangeable unitholders are not permitted to sell more than 5% of their
aggregate outstanding shares in any four-month period and are not eligible to vote with any shares they receive on exchange of their Class B
exchangeable units until they together hold 1% or less of the aggregate outstanding shares.
(C)
Preferred Shares
Capstone is authorized to issue preferred shares equal to 50% of the outstanding common shares. As at December 31, 2012 and 2011, there
were 3,000 series A preferred shares issued and outstanding, with a carrying value of $72,020.
The series A preferred shares have a 5% cumulative discretionary dividend which resets on each 5-year anniversary, the next anniversary date is
July 31, 2016. The shares are non-voting and redeemable at the Corporation's discretion. Subsequent to the initial 5-year fixed rate period, the
issuer will determine the annual dividend for the next 5-year period based on the 5-year Government of Canada Bond Yield plus 2.71%. After
September 30, 2016, the series A preferred shares are convertible on a one for one basis to series B cumulative, floating rate first preferred
shares at the holders option. The series B preferred shares are redeemable at the Corporation's discretion after June 20, 2021 and every 5 years
thereafter at 25 dollars per share plus accrued and unpaid dividends.
(D)
Dividends
Dividends to common shareholders and distributions to Class B exchangeable unitholders were paid on a monthly basis up to June 1, 2012,
when Capstone's Board of Directors established a new dividend policy to pay dividends on a quarterly basis. The series A preferred shares are
also paid on a quarterly basis. The dividends declared were as follows:
Common shares
Class B exchangeable units
Preferred shares (includes $200 of deferred income taxes)
For the year ended
Dec 31, 2012
Dec 31, 2011
32,302
1,462
33,764
4,575
39,882
2,144
42,026
1,264
Capstone has included $5,677 of accrued common dividends and $625 of accrued preferred dividends based on the declaration on November
13, 2012, which were paid to shareholders on January 31, 2013 (December 31, 2011 – $4,501 was accrued for common shares).
Capstone paid $0.450 per common share and $1.250 per preferred share during the year ended December 31, 2012 (December 31, 2011 –
$0.660 per common share and $0.421 per preferred share).
(E)
The Corporation defines its capital as its long-term debt and shareholders' equity as follows:
Capital Management
As at
Long-term debt
Shareholders' equity (1)
Total capitalization
Dec 31, 2012
Dec 31, 2011
811,960
418,848
941,465
413,520
1,230,808
1,354,985
(1) Capstone does not include the non-controlling interest of $91,610 in shareholders equity (December 31, 2011 – $34,450).
The Corporation manages its capital to achieve the following objectives:
(i) maintain a capital structure that provides financial flexibility to the Corporation to ensure access to either debt or equity capital on
commercially reasonable terms, without exceeding its debt capacity;
(ii) maintain financial flexibility in order to preserve its ability to meet financial obligations, including debt servicing payments and distribution
payments; and
(iii) deploy capital to provide an appropriate investment return to its shareholders.
The Corporation's financial strategy is designed to maintain a capital structure consistent with the objectives stated above and to respond to
changes in economic conditions. In doing so, the Corporation may issue additional shares, issue additional debt, issue debt to replace existing
debt with similar or different characteristics, or adjust the amount of dividends paid to shareholders.
90 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 90
The Corporation's financing and refinancing decisions are made on a specific transaction basis and depend on such things as the Corporation's
The Corporation's financing and refinancing decisions are made on a specific transaction basis and depend on such things as the Corporation's
needs and economic conditions at the time of the transaction.
needs and economic conditions at the time of the transaction.
The Corporation is not subject to any external capital requirements and is in compliance with all debt covenants as described in note 18.
The Corporation is not subject to any external capital requirements and is in compliance with all debt covenants as described in note 18.
NOTE 21. EARNINGS PER SHARE (“EPS”)
NOTE 21. EARNINGS PER SHARE (“EPS”)
For the year ended
For the year ended
Net income (loss)
Net income (loss)
Non-controlling interest
Non-controlling interest
Dividends declared on preferred shares
Dividends declared on preferred shares
Net income (loss) available to common shareholders
Net income (loss) available to common shareholders
Weighted average number of common shares (including Class B exchangeable units) outstanding
Weighted average number of common shares (including Class B exchangeable units) outstanding
Basic and Diluted EPS
Basic and Diluted EPS
The convertible debentures are anti-dilutive for the years ended December 31, 2012 and 2011.
The convertible debentures are anti-dilutive for the years ended December 31, 2012 and 2011.
NOTE 22. SHARE-BASED COMPENSATION
NOTE 22. SHARE-BASED COMPENSATION
(A)
(A)
The Deferred Share Units ("DSUs") are granted to eligible directors on the first day of each quarter at the five-day volume weighted average price
The Deferred Share Units ("DSUs") are granted to eligible directors on the first day of each quarter at the five-day volume weighted average price
(“VWAP”) prior to the grant date. Grants vest immediately upon the last trading day of each quarter. In addition, directors may elect to receive their
(“VWAP”) prior to the grant date. Grants vest immediately upon the last trading day of each quarter. In addition, directors may elect to receive their
quarterly director fees in the form of DSUs, which vest at the time of granting. Dividend equivalents are granted as of each payment date for
quarterly director fees in the form of DSUs, which vest at the time of granting. Dividend equivalents are granted as of each payment date for
dividends on shares in accordance with Capstone's dividend policy on common shares. DSUs do not have an exercise price and can only be settled in
dividends on shares in accordance with Capstone's dividend policy on common shares. DSUs do not have an exercise price and can only be settled in
cash at the time a director ceases to be a board member.
cash at the time a director ceases to be a board member.
Deferred Share Units
Deferred Share Units
Dec 31, 2012
Dec 31, 2012
43,724
43,724
(16,746)
(16,746)
(4,575)
(4,575)
22,403
22,403
75,116
75,116
0.298
0.298
Dec 31, 2011
Dec 31, 2011
(3,263)
(3,263)
(2,449)
(2,449)
(1,264)
(1,264)
(6,976)
(6,976)
64,465
64,465
(0.108)
(0.108)
For the year ended
For the year ended
($000s, except unit amounts)
($000s, except unit amounts)
Outstanding at January 1
Outstanding at January 1
Fixed quarterly grants during the period
Fixed quarterly grants during the period
Dividend equivalents
Dividend equivalents
Unrealized gain (loss) on revaluation
Unrealized gain (loss) on revaluation
Outstanding at December 31
Outstanding at December 31
Dec 31, 2012
Dec 31, 2012
Number of Units
Number of Units
8,407
8,407
20,102
20,102
1,689
1,689
30,198
30,198
—
—
30,198
30,198
Dec 31, 2011
Dec 31, 2011
Fair Value Number of Units
Fair Value Number of Units
—
—
7,896
7,896
511
511
8,407
8,407
—
—
8,407
8,407
32
32
75
75
7
7
114
114
8
8
122
122
Fair Value
Fair Value
—
—
60
60
3
3
63
63
(31)
(31)
32
32
Long-term Incentive Plan
Long-term Incentive Plan
The average VWAP per DSU granted during 2012 was 4.10 dollars (2011 – 7.60 dollars). As at December 31 2012, the carrying value of the DSUs,
The average VWAP per DSU granted during 2012 was 4.10 dollars (2011 – 7.60 dollars). As at December 31 2012, the carrying value of the DSUs,
based on a market price of 4.03 dollars, was $122 and is included in accounts payable and other liabilities in the consolidated statement of financial
based on a market price of 4.03 dollars, was $122 and is included in accounts payable and other liabilities in the consolidated statement of financial
position (December 31, 2011 – 3.81 dollars and $32). The resulting DSU expense for 2012 was $90 and is recorded as compensation expense in the
position (December 31, 2011 – 3.81 dollars and $32). The resulting DSU expense for 2012 was $90 and is recorded as compensation expense in the
consolidated statement of income (2011 – $32).
consolidated statement of income (2011 – $32).
(B)
(B)
During 2012, Capstone granted to the senior management of the Corporation 253,959 Restricted Stock Units (“RSUs”) and 141,431 Performance
During 2012, Capstone granted to the senior management of the Corporation 253,959 Restricted Stock Units (“RSUs”) and 141,431 Performance
Share Units (“PSUs”). The five-day VWAP per RSU and PSU granted January 3, 2012 was 3.78 dollars and 4.23 dollars per RSU granted March 23,
Share Units (“PSUs”). The five-ay VWAP per RSU and PSU granted January 3, 2012 was 3.78 dollars and 4.23 dollars per RSU granted March 23,
2012 and all RSUs and PSUs granted vest on December 31, 2014. In 2011, 67,058 RSUs and 67,058 PSUs were granted and they vest on
2012 and all RSUs and PSUs granted vest on December 31, 2014. In 2011, 67,058 RSUs and 67,058 PSUs were granted and they vest on
December 31, 2013.
December 31, 2013.
Dividend equivalents are granted as of each record date for dividends on shares in accordance with Capstone's dividend policy on common shares.
Dividend equivalents are granted as of each record date for dividends on shares in accordance with Capstone's dividend policy on common shares.
RSUs and PSUs do not have an exercise price and can be settled in shares or cash at the Board's discretion. Additionally, the valuation also takes into
RSUs and PSUs do not have an exercise price and can be settled in shares or cash at the Board's discretion. Additionally, the valuation also takes into
consideration that the amount of the PSUs is subject to Capstone's total return over the period relative to a peer group.
consideration that the amount of the PSUs is subject to Capstone's total return over the period relative to a peer group.
For the year ended
For the year ended
($000s, except unit amounts)
($000s, except unit amounts)
Outstanding at January 1
Outstanding at January 1
Grants during the period
Grants during the period
Dividend equivalents
Dividend equivalents
Unrealized loss on revaluation
Unrealized loss on revaluation
Outstanding at December 31
Outstanding at December 31
Dec 31, 2012
Dec 31, 2012
Notional
number of Units
Notional
number of Units
141,892
141,892
395,390
395,390
50,878
50,878
588,160
588,160
—
—
588,160
588,160
Fair Value
Fair Value
541
541
1,546
1,546
205
205
2,292
2,292
(81)
(81)
2,211
2,211
Dec 31, 2011
Dec 31, 2011
Notional
number of Units
Notional
number of Units
—
—
134,116
134,116
7,776
7,776
141,892
141,892
—
—
141,892
141,892
Fair Value
Fair Value
—
—
1,062
1,062
45
45
1,107
1,107
(566)
(566)
541
541
2012 ANNUAL REPORT
91
CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 91
Page 91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The average VWAP per RSU and PSU granted on during 2012 was 4.01 dollars (2011 – 7.87 dollars). As at December 31, 2012, the carrying value
of the RSUs and PSUs, based on a market price of 4.03 dollars, was $836 and is included in accounts payable and other liabilities in the consolidated
statement of financial position (December 31, 2011 – 3.81 dollars and $115). The RSU and PSU compensation expense of $721 is recorded as
compensation expense in the consolidated statement of income for 2012 (2011 – $115).
(C)
Employee Share Purchase Plan
All Canadian employees of Capstone are entitled to participate in the employee share purchase plan where employees can direct up to 15% of their
salary to purchase Capstone shares. The Corporation will match 50% of the employee's contribution to maximum of $3 per year, except for
employees included in the LTIP program, who are ineligible for matching. Shares acquired as a matching contribution (including any dividends on
those shares) vest after one year of match.
NOTE 23. EXPENSES – ANALYSIS BY NATURE
For the year ended
Dec 31, 2012
Dec 31, 2011
Operating
Admin.
Project
Development
Costs
Total
Operating
Admin.
Project
Development
Costs
Fuel
Raw materials, chemicals
and supplies
Wages and benefits
Maintenance
Insurance
Manager fees
Professional fees for legal,
audit, tax and other
advisory
Leases
Property taxes
Internalization
Other
Total
77,678
57,663
41,148
4,370
1,654
1,914
2,470
1,334
1,125
—
5,822
195,178
—
—
6,749
—
—
—
—
—
20
—
—
—
1,780
345
—
—
—
2,541
11,070
—
—
—
—
77,678
77,838
57,663
47,917
4,370
1,654
1,914
4,595
1,334
1,125
—
8,363
16,438
11,911
5,053
1,610
1,806
894
1,114
1,383
—
4,039
—
—
4,126
—
—
1,825
—
—
—
—
—
—
2,195
8,289
—
—
19,675
1,856
29,677
—
—
—
—
Total
77,838
16,438
16,037
5,053
1,610
3,631
11,378
1,114
1,383
19,675
5,895
365
206,613
122,086
8,289
160,052
NOTE 24. OTHER GAINS AND LOSSES
Unrealized gain (loss) on derivative financial instruments
Loss on disposal of capital assets
Other net gains and (losses)
NOTE 25. COMMITMENTS AND CONTINGENCIES
For the year ended
Dec 31, 2012
Dec 31, 2011
2,605
(1,311)
1,294
(21,742)
—
(21,742)
The Corporation, either directly or indirectly through its subsidiaries, has entered into various contracts and commitments as at December 31, 2012
as described below:
(A)
Swap Contracts
The Corporation has various swap contracts for gas and interest, which have been further disclosed in notes 9 and 10.
(B)
Leases
The following table summarizes the minimum operating lease payments:
Operating leases
Within one year One year to five years
Beyond five years
939
3,765
8,443
Total
13,147
92 CAPSTONE INFRASTRUCTURE CORPORATION
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Page 92
Cardinal leases the site on which it is located from Ingredion Canada Incorporated ("Ingredion"), formerly Casco Inc. Under the lease, Cardinal pays
nominal rent. The lease extends to 2016 and expires concurrently with the energy savings agreement between Ingredion and Cardinal.
A subsidiary of Capstone has lease agreements with the Provinces of Ontario and British Columbia with respect to certain lands, lands under water
and water rights necessary for the operation of its hydro facilities. The payments with respect to these agreements vary based on actual power
production. The terms of the lease agreements extend between 2023 and 2042.
Amherstburg leases the land on which its operating facilities are located. The terms of the lease agreements extend to 2031.
Erie Shores has lease and easement agreements with local landowners, municipalities and other parties with respect to certain lands for the
operation of the wind farm. The payments above a minimum level with respect to these agreements vary based on actual power production. The
terms of the lease agreements extend to 2025, with a 20-year renewal option.
During 2011, the Corporation entered an operating lease for premises which has a term to 2018 with an option to extend to 2023.
(C)
Energy Savings Agreement
Under the terms of an energy savings agreement between Cardinal and Ingredion, Cardinal is required to sell up to 723 million pounds of steam per
year to Ingredion for its plant operations. The energy savings agreement matures on December 31, 2014, but may be extended by up to two years at
the option of Cardinal.
(D)
Wood Waste Supply Agreement
Whitecourt has a long-term agreement with Millar Western Industries Ltd. and Millar Western Pulp Ltd. (collectively, “Millar Western”) to ensure an
adequate supply of wood waste. The agreement expires in 2016.
(E)
Gas Purchase Contract
Cardinal has a long-term purchase agreement for natural gas that expires on May 1, 2015. The minimum purchase commitment for natural gas under
the agreement is 9,289,104 MMBtu per year through to expiration in 2015, which is equivalent to 80% of the contract maximum.
(F)
Operations and Management Agreement
A subsidiary of Capstone has an operations and management agreement with Regional Power OPCO Inc. (“Regional”) to operate and maintain the
hydro power facilities, expiring on November 15, 2016 with an automatic renewal term. Regional is paid a monthly management fee and is eligible for
an annual incentive fee.
A subsidiary of Capstone has an O&M agreement with SunPower Energy Systems Canada Corporation to operate and maintain the Amherstburg
Solar Park, expiring on June 30, 2031. Capstone has the ability to terminate the agreement during the term of the contract.
A subsidiary of Capstone has an O&M agreement with Agbar to provide management support to Bristol Water, with an initial five-year term, which
automatically extends indefinitely. Capstone has the ability to terminate the contract.
(G)
Capital Commitments
Bristol Water had commitments for capital expenditures at December 31, 2012 of which $33,300 were contracted for but not accrued
(December 31, 2011 – $29,396).
(H)
Guarantees
From the date of Clean Power Income Fund's investment in the landfill gas business on October 31, 2002, it provided three guarantees. Two of these
guarantees were in favour of a municipality, guaranteeing obligations under the relevant PPAs with the municipality. The other guarantee was in
favour of a lessor of one of the sites upon which one of the landfill gas facilities projects operated, guaranteeing certain obligations under the
relevant lease. The municipality and the lessor both have policies of not relieving guarantors from their guarantees for periods in which they were
invested in the underlying projects. Capstone has received indemnification from Fortistar Renewable Group LLC (“Fortistar”), the purchaser of the
landfill gas business, for the period commencing from the sale to Fortistar on September 15, 2006. As at December 31, 2012, no claims had been
made on these guarantees.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 93
93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 26. RELATED PARTY TRANSACTIONS
In the second quarter of 2011, the management and administration agreements that established the related party relationship with Macquarie
Power Management Ltd. (“MPML” or “the Manager”), a subsidiary of MGL, were terminated. As such, after April 15, 2011 all transactions with
MGL and its subsidiaries were not considered to be related. All amounts included in 2011 are related to the period before April 15, 2011.
All related party transactions were carried out under normal arm's length commercial terms.
(A)
Transactions with MGL
Included in the table below are the related party transactions with MPML:
Management fees (1)
Administrative fees (2)
Cost reimbursement
For the year ended
Dec 31, 2012
Dec 31, 2011
—
—
—
—
13,821
1,053
1,881
16,755
(1)
Includes $13,101 paid to MGL to terminate the management and administration agreements and $220 as reimbursement for staff
vacation pay.
(2)
Includes $1,016 paid to MGL to terminate the administrative agreement.
In addition to the above amounts, in March 2011, due diligence and legal fees of $1,313 (8,334 SEK) were reimbursed to a subsidiary of MGL with
respect to the acquisition of Värmevärden in Sweden. This cost has been expensed in the consolidated statement of income as at December 31,
2011 as part of equity accounted income as it was incurred by Värmevärden.
In March 2011, $646 became payable to MEIF II for the reimbursement of due diligence costs with respect to the acquisition of Värmevärden in
Sweden. These costs have been accrued in accounts payable and other liabilities and capitalized to equity accounted investments as at
December 31, 2011.
In March 2011, a financial advisory fee of $500 was payable to a subsidiary of MGL with respect to the refinancing of Tranche C of the Erie Shores
project debt. These costs have been paid and capitalized to the long-term debt as at December 31, 2011.
On April 15, 2011, upon the internalization of management, Capstone and its subsidiaries paid MGL $14,117 as consideration for terminating all
management and administration agreements and $220 as reimbursement for vacation payments to staff who joined Capstone. MGL immediately
used $7,000 of the money it received to subscribe for Capstone common shares.
(B)
Compensation of Key Management
Key management includes the Corporation's directors, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). Compensation
awarded to key management consisted of salaries, directors fees and short-term employee benefits, which include fees paid to directors. Eligible
directors and senior management of the Corporation also receive forms of stock-based compensation as described in note 22.
The following table summarizes key management compensation:
Salaries, directors' fees and short-term employee benefits (1)
Share based compensation
For the year ended
Dec 31, 2012
Dec 31, 2011
1,272
573
1,845
2,973
102
3,075
(1) The short-term incentive plan component of this balance in based on amounts paid during the period.
Prior to April 15, 2011, the CEO and CFO of Capstone and other employees were employed by the Manager. Accordingly, no employee
compensation prior to April 15, 2011 was included directly in these consolidated financial statements.
94 CAPSTONE INFRASTRUCTURE CORPORATION
CAPSTONE INFRASTRUCTURE CORPORATION
Page 94
NOTE 27. SEGMENTED INFORMATION
The Corporation has three reportable segments based on how management has organized the business to assess performance and for operating
and capital allocation. Cash generating units included within each reportable segment have similar economic characteristics based on the nature of
the products or services, type of customers, method of distributing their products or services and regulatory environment. Management evaluates
the performance of these segments primarily on revenue and cash flows from operations.
Infrastructure segments consist of:
Power
The Corporation’s investments in gas cogeneration, wind, hydro, biomass power and solar power assets.
Utilities – water
Geographical Location
Canada
United Kingdom
The regulated water services business (Bristol Water), in which the Corporation holds a 50% indirect interest
(70% October 5, 2011 – May 10, 2012)
Utilities – district heating (“DH”)
Sweden
The district heating business (Värmevärden), in which the Corporation holds a 33.3% indirect interest.
Year ended Dec 31, 2012
Utilities
Year ended Dec 31, 2011
Utilities
Power
Water
DH Corporate
Total
Power
Water
DH Corporate
Total
Revenue
179,218
178,392
Depreciation of capital
assets
(26,753)
(20,297)
—
357,610
172,407
43,560
(382)
(47,432)
(26,428)
(4,611)
Amortization of
intangible assets
Interest income
(8,031)
(2,028)
(61)
(10,120)
(7,882)
761
751
3,356
18
4,886
787
(440)
291
—
—
—
Interest expense
(18,450)
(22,007)
Income tax recovery
(expense)
(6,589)
(2,654)
—
—
(9,250)
(49,707)
(20,534)
(6,417)
(865)
(10,108)
41,073
(2,665)
—
—
—
5,024
—
—
—
215,967
33
(31,006)
(91)
341
(8,413)
6,443
(4,717)
(31,668)
(2,650)
35,758
Net income (loss)
19,788
38,805
7,936
(22,805)
43,724
27,757
5,002
(3,541)
(32,481)
(3,263)
Cash flow from
operations
Additions to capital
assets
56,173
76,474
3,356
(21,325)
114,678
66,769
22,192
5,024
(43,104)
50,881
5,432
140,555
—
86
146,073
87,451
22,962
—
638
111,051
As at Dec 31, 2012
Utilities
As at Dec 31, 2011
Utilities
Power
Water
DH Corporate
Total
Power
Water
DH Corporate
Total
Total assets
Total liabilities
634,403
946,510
51,923
19,703 1,652,539
656,871
913,811
97,458
29,604 1,697,744
309,004
682,740
2,245
148,092 1,142,081
287,780
663,454
—
298,540 1,249,774
NOTE 28. NON-CASH WORKING CAPITAL
The change in non-cash working capital was composed of the following:
Accounts receivable
Other assets
Accounts payable and other liabilities
NOTE 29. COMPARATIVE FIGURES
Certain comparative figures have been reclassified to conform to the current period’s presentation.
For the year ended
Dec 31, 2012
Dec 31, 2011
(3,603)
1,188
(2,548)
(4,963)
(20,014)
864
31,962
12,812
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 95
95
SUPPLEMENTARY
INFORMATION
ORGANIZATIONAL STRUCTURE
CSE
Capstone Power Corp.
MPT Utilities Corp.
100%
Capstone
31.3%
Chapais
Power
Development
100%
Erie Shores
Wind Farm
100%
Hydro
100%
Whitecourt
100%
Cardinal
100%
Amherstburg
33.3%
Värmevärden
Solar Park
50%
Bristol
Water
PORTFOLIO
Hydro
– Sechelt
– Wawatay
– Dryden
– Hluey Lakes
Biomass
– Whitecourt
– Chapais
Solar
– Amherstburg
Solar Park
Wind
– Erie Shores
Wind Farm
Gas Cogeneration
– Cardinal
96 CAPSTONE INFRASTRUCTURE CORPORATION
Water Utility
– Bristol Water
District Energy
– Värmevärden
Power
Business
Year Built
Ownership
Interest
1994
2006
1994
2011
1997
1992
2000
Various
1995
100%
100%
100%
100%
100%
100%
100%
100%
31.3%
Cardinal
Erie Shores(1)
Whitecourt
Amherstburg
Sechelt
Wawatay
Hluey Lakes
Dryden(2)
Chapais(3)
Utilities
Net
Capacity
(MW)
156
99
25
20
16
14
3
3
28
PPA
Counterparty
PPA
Expiry
Fuel Supply
Counterparty
OEFC
OPA
TransAlta
OPA
BC Hydro
OEFC
BC Hydro
OEFC
Hydro-Québec
2014
2026
2014
2031
2017
2042
2020
2020
2015
Husky
n/a
Millar Western
n/a
n/a
n/a
n/a
n/a
Barrette/Chantiers/
Société en
commandite Scierie
Opitciwan
Fuel
Supply
Expiry
2015
n/a
2016
n/a
n/a
n/a
n/a
n/a
2015
Employees
18
10
34
n/a
n/a
n/a
n/a
n/a
n/a
Business
Ownership
Interest
Värmevärden
33.3%
Capacity
Counterparties
Heat
production
capacity of
786 MWth
Mix of industrial and retail
customers, with industrial
counterparties representing
approximately one-third of
revenue
Approximate
Population
Served
Regulated
Employees
163,000
No
89
Length of
Network
317
kilometres
Bristol Water
50%
Average
daily supply
of 278
million litres
Domestic or residential customers
represent 75% of revenue with
non-domestic customers
representing the balance
6,670
kilometres
1.16 million
528
UK Water
Services
Regulation
Authority
(1) One 1.5 MW turbine is owned by a landowner.
(2) The Dryden facility is composed of three facilities, built in 1922 (Wainwright), 1928 (Eagle) and 1938 (McKenzie). These facilities were
refurbished in 1986.
(3) CSE’s investment in Chapais consists of a 31.3% interest in one of two classes of preferred shares, a 24.8% interest in Tranche A and B debt, and a 50%
interest in Tranche C debt.
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
Page 97
97
FINANCIAL
FINANCIAL
HIGHLIGHTS
HIGHLIGHTS
PERFORMANCE MEASURES
PERFORMANCE MEASURES
Information for 2004 to 2009 is presented in Canadian GAAP and may not be comparable with information provided under
IFRS for 2010 to 2012.
Earnings Measures ($000s)
2012
2011
2010
2009
2008
2007
2006
2005
2004
Revenue
357,610
215,967
158,512
148,384
153,186
122,811
89,940
90,235
55,848
Net income (loss)
43,724
(3,263)
15,901
11,259
(26,534)
Basic earnings per share
0.298
(0.108)
0.339
0.226
(0.531)
5,426
0.135
8,411
0.280
8,372
0.364
7,236
0.342
Cash Flow Measures ($000s)
2012
2011
2010
2009
2008
2007
2006
2005
2004
Cash flows from operating
activities
Adjusted EBITDA (1)
Adjusted funds from operations
(“AFFO”) (1)
AFFO per share (1)
114,678
50,881
29,011
38,040
50,516
29,663
21,044
20,230
14,729
120,657
55,673
55,818
61,244
67,324
61,250
34,104
27,912
16,304
35,563
34,884
34,774
42,989
50,626
72,835
33,267
27,708
15,821
0.473
0.541
0.693
0.861
1.013
1.806
1.107
1.191
0.747
(1) These performance measures are not defined by International Financial Reporting Standards (“IFRS”). Please see page 20 for a
definition of each measure.
Capital Structure – At
Fair Value ($000s)
Long-term debt –
power
Long-term debt –
utilities – water (1)
Long-term debt –
corporate
2012
2011
2010
2009
2008
2007
2006
2005
2004
305,497
314,196
245,911
214,107
246,960
219,162
35,000
35,000
35,000
259,830
353,135
—
—
—
—
44,416
155,124
61,311
89,437
35,026
38,918
—
—
—
—
—
—
Common shares
291,955
270,348
463,217
273,161
310,066
376,275
214,231
235,382
188,680
Class B exchangeable
units
Preferred shares
13,093
58,200
12,380
52,500
26,710
19,854
15,565
30,642
32,656
33,501
—
—
—
—
—
—
—
—
Debt to capitalization
62.7%
71.0%
38.5%
50.9%
46.4%
38.8%
12.4%
11.5%
15.6%
(1) Calculated as 50% proportionate share based on ownership interest (December 31, 2011 – 70%).
INVESTOR INFORMATION
INVESTOR INFORMATION
Quick Facts
Common shares outstanding
Preferred shares outstanding
Convertible debentures outstanding
Class B exchangeable units
Securities exchange and symbols
98 CAPSTONE INFRASTRUCTURE CORPORATION
72,445,509
3,000,000
42,749
3,249,390
Toronto Stock Exchange: CSE, CSE.PR.A, CSE.DB.A
CAPSTONE INFRASTRUCTURE CORPORATION
Page 98
QUARTERLY TRADING INFORMATION
QUARTERLY TRADING INFORMATION
Common shares
High share price
(intraday)
Low share price
(intraday)
Closing share price
Average daily
trading volume
Q4
4.49
3.91
4.03
2012
Q3
4.69
4.01
4.43
Q2
Q1
Q4
4.15
3.72
4.01
4.35
3.82
4.15
6.60
3.26
3.81
2011
Q3
7.85
6.12
6.33
Q2
Q1
8.29
7.60
7.82
8.80
7.50
7.94
206,000
186,000
272,000
410,675
678,233
154,499
126,407
125,861
Dividend declared
0.075
0.075
0.135
0.165
0.165
0.165
0.165
0.165
Preferred shares
High share price
(intraday)
Low share price
(intraday)
Closing share price
Average daily
trading volume
Dividend declared
Convertible
debentures
High share price
(intraday)
Low share price
(intraday)
Closing debenture
price
Average daily
trading volume
20.67
21.50
19.24
18.84
21.14
24.20
24.75
18.65
19.40
2,971
0.3125
18.40
20.80
2,070
0.3125
16.66
19.00
3,054
0.3125
17.00
17.60
4,385
0.3125
15.83
17.50
9,583
0.4212
18.76
20.10
24.00
24.19
8,136
13,150
—
—
—
—
—
—
—
104.50
107.20
108.49
104.49
102.00
112.00
117.40
123.00
102.50
102.02
99.51
99.50
90.25
99.05
110.00
108.50
103.90
104.15
103.00
101.50
100.00
103.00
112.90
114.00
300
200
492
933
3,074
5,687
837
1,960
CAPSTONE INFRASTRUCTURE CORPORATION
2012 ANNUAL REPORT
99
Page 99
CORPORATE
INFORMATION
MANAGEMENT
Michael Bernstein
President and Chief Executive Officer
Michael Smerdon
Executive Vice President and Chief Financial Officer
Stu Miller
Executive Vice President, General Counsel and Secretary
Jack Bittan
Senior Vice President, Business Development
Rob Roberti
Senior Vice President, Power Generation
Jens Ehlers
Senior Vice President, Finance
Sarah Borg-Olivier
Senior Vice President, Communications
Michael Chapin
Senior Vice President
BOARD OF DIRECTORS
V. James Sardo
Chairman of the Board
Patrick J. Lavelle
Goran Mornhed
Jerry Patava
François R. Roy
HEAD OFFICE
155 Wellington Street West
RBC Centre
Suite 2930
Toronto, Ontario M5V 3H1
Tel: 416-649-1300
Fax: 416-649-1335
100 CAPSTONE INFRASTRUCTURE CORPORATION
INVESTOR INFORMATION
Stock Exchange and Symbols
Toronto Stock Exchange
Common shares: CSE
Preferred shares: CSE.PR.A
Convertible debentures: CSE.DB.A
Transfer Agent
Computershare Investor Services Inc.
100 University Avenue, 9th Floor
Toronto, Ontario M5J 2Y1
North America toll-free: 1-800-564-6253
International: 1-514-982-7555
Website: www.computershare.com/investorcentrecanada
AUDITORS
PricewaterhouseCoopers LLP
Toronto, Ontario
INVESTOR RELATIONS CONTACT
Sarah Borg-Olivier
Senior Vice President, Communications
Tel: 416-649-1325
Toll-free: 1-855-649-1300
Email: info@capstoneinfrastructure.com
ANNUAL GENERAL MEETING
OF SHAREHOLDERS
Tuesday, June 18, 2013
10 a.m. EDT
TMX Broadcast Centre Gallery
130 King Street West
Toronto, Ontario
Visit our website at www.capstoneinfrastructure.com for
information about Capstone’s business and to access investor
materials, including annual and quarterly financial reports,
recent news and investor presentations, including a webcast
of the annual general meeting.
.
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Readers are advised that this annual report may contain forward-looking information and a financial outlook as described on page 18 of this document.
This document contains statistical data, market research and industry forecasts that were obtained from government and industry publications
and reports or are based on estimates derived from same and management’s knowledge of, and experience in, the markets in which the
Corporation operates. Market and industry data is subject to variations and cannot be verified due to limits on the availability and reliability
of data inputs and other limitations and uncertainties inherent in any statistical survey. While management believes this data to be reliable,
the Corporation has not independently verified the accuracy or completeness of any of the data from third party sources or ascertained the
underlying assumptions relied upon by such sources. Accordingly, the accuracy, currency and completeness of this information cannot be
guaranteed. Actual outcomes may vary materially from those forecast in such publications or reports, and the prospect for material variation
can be expected to increase as the length of the forecast period increases.
This document is not an offer or invitation for the subscription or purchase of or a recommendation of securities. It does not take into account
the investment objectives, financial situation and particular needs of any investors. Before making an investment in the Corporation, an investor
or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial
circumstances and consult an investment adviser if necessary.
2012 ANNUAL REPORT
101
WHY INVEST IN
INFRASTRUCTURE?
u ESSENTIAL SERVICE
Core infrastructure businesses provide an essential service, which translates
into steady, long-term cash flow for investors that is largely resistant to
economic or market fluctuations.
u STRATEGIC COMPETITIVE ADVANTAGE
Capstone’s core infrastructure businesses are physical, long-life assets that are
regulated or contractually defined, which creates a competitive advantage that
cannot easily be replicated.
u PREDICTABLE, GROWING CASH FLOW
Capstone’s infrastructure portfolio generates reliable cash flow that is largely
linked to measures of economic growth such as inflation.
u ATTRACTIVE RISK-ADJUSTED RETURN
Infrastructure represents a distinct asset class that has historically exhibited
a low correlation to other asset classes, making it an excellent portfolio
diversification tool.
VISIT US ONLINE:
www.capstoneinfrastructure.com
8
CAPSTONE INFRASTRUCTURE CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS