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2023 ReportBUILDING FOR TOMORROW Annual Report 2013 Infrastructure is the backbone of our economy and society, from the electricity that lights or heats our homes to the water we drink and the roads we travel. By investing in core infrastructure businesses that deliver essential services throughout the economic cycle, Capstone off ers investors unique access to the infrastructure asset class and the steady, long-term income and potential for capital growth it typically provides. This year’s annual report takes a look at the steps we have taken to build the quality, stability and value of our infrastructure portfolio while creating new platforms to drive growth. Our vision is to be a Canadian leader in owning and operating diversifi ed infrastructure businesses that benefi t the communities we serve, the people we employ, and our investors. Learn how we’re building your company for today, tomorrow and beyond. Our businesses deliver safe drinking water to more than 1.1 million people, generate enough electricity to power about 220,000 households, and distribute heat to more than 4,000 supply points to warm homes and businesses. FINANCIAL HIGHLIGHTS Capstone’s mission is to provide investors with an attractive total return from responsibly managed long-term investments in core infrastructure in Canada and internationally. Since inception, we have signifi cantly diversifi ed our portfolio, increased revenue and enhanced cash fl ow while lowering our risk profi le and creating a stable platform for continuing growth. HISTORICAL REVENUE (in millions of dollars) (2) ADJUSTED EBITDA (in millions of dollars) (1) (2) 18.6% CAGR in revenue since 2004. 389.5 357.6 20.2% CAGR in Adjusted EBITDA since 2004.(1) 128.4 120.3 216.0 153.2 148.4 158.5 122.8 90.2 89.9 55.8 67.3 61.2 61.2 55.8 55.7 34.1 27.9 16.3 04 05 06 07 08 09 10 11 12 13 04 05 06 07 08 09 10 11 12 13 ADJUSTED EBITDA IN 2013 BY GEOGRAPHY (3) ADJUSTED EBITDA IN 2013 BY BUSINESS (3) pp 63% Canada pp 4% Sweden pp 33% United Kingdom pp 23% Gas Cogeneration Power pp 18% Wind Power pp 4% Biomass Power pp 8% Hydro Power pp 10% Solar Power pp 4% District Heating pp 33% Water Utility (1) Excludes internalization costs. (2) Information from 2004 to 2009 is presented in Canadian GAAP and may not be comparable with information provided under IFRS for 2010 to 2013. (3) Chart illustrates contribution for the businesses and excludes the development and corporate components. OUR PLATFORMS Capstone’s strategy is to develop, acquire and manage a portfolio of high quality utilities, power and transportation infrastructure businesses and public-private partnerships in countries that are members of the Organization for Economic Cooperation and Development (OECD). Capstone focuses primarily on North America, the United Kingdom, and Northern and Western Europe, with Australia and New Zealand also being regions of interest. Current Platforms Utilities Regulated or contractual businesses that provide essential community infrastructure. Includes a 50% interest in Bristol Water, a growing, regulated Power Power generation facilities with a clean energy profi le and long-term power purchase agreements, and a pipeline of wind power projects. water utility in the United Kingdom, and a 33% interest in Includes operating gas-fi red, wind, biomass, hydro and solar power Värmevärden, an established district heating business in Sweden. generation facilities and a pipeline of contracted wind power Future investments could include electricity transmission or projects in Canada. Capstone will continue to seek traditional and distribution, or gas utilities. There are currently fewer near-term renewable power investment opportunities. In Canada, the market opportunities in this segment in Canada, shifting Capstone’s is slowing following several years of signifi cant activity. Other emphasis to potential investments in the United States, the markets of interest for operating and development-stage projects United Kingdom, and Northern and Western Europe. include the United States, the United Kingdom and Australia. 282 M Litres of water supplied daily by Bristol Water 300 KM Length of Värmevärden’s distribution network 26% Growth in Bristol Water’s regulated capital value, or rate base, 439 MW Net installed capacity 79 MW Expected net capacity of wind development projects 70 Employees directly engaged in the operation and over the regulatory period from 2010 to 2015 development of our power portfolio UTILITIES OPERATING POWER DEVELOPMENT PROJECTS Regulated Water Utility UK • Bristol Water District Heating SE • Värmevärden 2 CAPSTONE INFRASTRUCTURE CORPORATION Wind ON • Erie Shores • 3 other facilities NS • Glace Bay • Amherst • Glen Dhu • 4 other facilities Solar ON • Amherstburg Biomass AB • Whitecourt QC • Chapais Gas Cogeneration ON • Cardinal Hydro BC • Sechelt • Hluey Lakes ON • Wawatay • Dryden Wind ON • Skyway 8 • Goulais • 4 other projects PQ • Saint-Philémon SK • Riverhurst CANADA SWEDEN UNITED KINGDOM Targeted New Platforms Public-Private Partnerships P3s, a partnership between the private sector and federal, regional or local governments, are an innovative approach to infrastructure development and service delivery, including for transportation, bridges and government buildings such as courthouses or schools. Opportunities for Capstone exist mostly in P3 markets in jurisdictions where the P3 model is well established, such as Canada, the United Kingdom, Western Europe and Australia. In addition, the P3 market is continuing to grow in the United States. For taxpayers, P3s typically deliver higher long-term infrastructure quality and value for money. For investors, P3s with a strong project rationale off er predictable, government-backed cash fl ow with limited volatility. Transportation The transportation segment of the infrastructure market, which includes roads, rails and public transportation, off ers considerable potential for investment. Over the next four decades, it is estimated that global passenger and freight travel will double over 2010 levels, refl ecting increasing urbanization and requiring signifi cant infrastructure renewal and expansion. In most jurisdictions, more innovative funding and fi nancing approaches are required given government fi scal constraints and competing demands on limited budget resources. Any of Capstone’s targeted geographic regions off er various transportation opportunities. $520 M Size of capital investment program being completed at Bristol Water between 2010 and 2015, which will increase the utility’s regulated capital value. 95 MW Net megawatts of installed wind capacity gained through acquisition of Renewable Energy Developers Inc. 17 Number of consecutive years at Cardinal without a lost-time injury. OPERATING POWER DEVELOPMENT PROJECTS UTILITIES Wind Power Biomass Power Hydro Power Gas Cogeneration Solar Power Water Infrastructure District Heating Our portfolio is increasingly diversifi ed by asset category, fuel source and geographic location. See how Capstone has evolved at: capstoneinfrastructure.com/ About/OurStory.aspx 2013 ANNUAL REPORT 3 MESSAGE TO SHAREHOLDERS Our portfolio today features a lower risk profi le and higher growth potential than it did a few years ago. We expect our portfolio’s value to increase as our new wind power projects move into commercial operations and as Bristol Water’s regulated capital value grows. Dear Fellow Shareholders: In 2013, Capstone delivered strong fi nancial performance. We also advanced our strategy to transform our business, projects reach commercial operations, delivering accretive growth and value for shareholders. Two of our new development projects started construction in November 2013 with a third lower our risk profi le and build for tomorrow. expected to get underway in 2014. We achieved Adjusted EBITDA of $128.4 million, at the higher We maximized performance by enhancing the cash fl ow end of our range of expectations, refl ecting strong operations potential of our businesses across our businesses as well as three months of contribution We constantly challenge ourselves to fi nd new ways to enhance from the operating wind power facilities we added to our the effi ciency and quality of our operations. These initiatives portfolio in October 2013. We also realized two of the three priorities we set for ourselves in 2013 while making signifi cant progress on the third. Our Priorities We executed our growth strategy by acquiring Renewable Energy Developers Inc. (ReD) The acquisition of ReD, a proven wind power developer, expands our complement of operating wind power facilities to a total of 194 net megawatts in Ontario and Nova Scotia, and establishes a new foothold in the wind power development arena. With a contracted development pipeline totalling an expected net 79 megawatts, we are now cultivating a higher return niche within our portfolio that will begin to contribute new cash fl ow to Capstone starting in 2014 and beyond as our development include predictive and preventive maintenance, detailed planning for capital expenditures that boost value, and the deployment of innovative tools to generate additional cash fl ow from our businesses. In 2013, these tools included the sale of renewable energy credits by Whitecourt, which contributed approximately $1 million in revenue, and the installation of WindBOOST at Erie Shores, a software tool that we expect to increase the facility’s annual production by about 1% to 3%. At Bristol Water, we continued to work closely with management to execute the company’s approximately C$520 million capital expenditure program for the current regulatory period that began in April 2010 and concludes in March 2015. This program, which is aimed at improving and expanding the company’s network of reservoirs, treatment facilities, water mains and pipes, will drive growth in Bristol Water’s regulated capital value, and accordingly, value for Capstone and our shareholders. Our Corporate Objectives Grow Create shareholder value by adding infrastructure businesses that increase scale, expand future opportunities and potentially off er synergies. Engage Provide a work environment that attracts and retains skilled employees. 4 CAPSTONE INFRASTRUCTURE CORPORATION “ WE ARE WORKING TO PROVIDE OUR SHAREHOLDERS WITH AN ATTRACTIVE TOTAL RETURN ON THEIR INVESTMENT.” Michael Bernstein, President and Chief Executive Offi cer We made steady progress toward achieving a new available to us. Over the past three years, we have deliberately PPA for Cardinal but did not cross the fi nish line re-focused our portfolio to reduce risk, extend our cash fl ow profi le We were unsuccessful in fi nalizing a new power purchase and establish a solid platform for the future. In particular, our agreement (PPA) for Cardinal in 2013, although steady progress investments in Bristol Water and Värmevärden have fundamentally was made. We anticipate securing a new 20-year PPA for the changed Capstone’s risk profi le by off ering perpetual, increasing facility, and are working to bring the process to a conclusion in cash fl ow and the potential for considerable organic growth. advance of the December 31, 2014 expiry of Cardinal’s current And the establishment of a new power development platform PPA. In the meantime, we are doing what we can to ready the positions us to deliver greater returns to our shareholders. plant and team for the work that lies ahead to convert the facility and prepare it for dispatchable operations. Cardinal is an exceptionally high quality facility that delivers signifi cant value to Ontario and to ratepayers — today, tomorrow and for years to come. Building for Tomorrow As a shareholder myself, I recognize that the lack of clarity surrounding Cardinal’s future has been frustrating for our investors. Understandably, concern about this facility has overshadowed the overall high quality of our portfolio and aff ected our share price detrimentally. Yet the journey we began in 2009 to broaden Capstone’s scope, diversify our portfolio and build for tomorrow has eff ectively transformed our business and multiplied the opportunities Combined, I believe these initiatives represent an infl ection point for our company. Ten years after our debut as an income fund, and through years of transition and some challenge, Capstone today is poised to be a Canadian leader in owning and operating diversifi ed infrastructure businesses that benefi t the communities we serve, the people we employ, and our investors. As a result of the investment decisions made over the past few years, our portfolio in 2014 has greater growth potential than it did as recently as a few years ago, is signifi cantly more diversifi ed than the single asset we started with in 2004, and will increase in value as our new wind projects move into commercial operations and as Bristol Water’s regulated capital value grows. Perform Sustain Improve performance by entering infrastructure segments that diversify Capstone’s portfolio. Operate infrastructure businesses in a responsible and sustainable manner. Deliver Maximize Capstone shareholders’ risk-adjusted return. 2013 ANNUAL REPORT 5 Our Values Integrity In all we do, we act honestly, ethically and fairly, abiding by both the spirit and letter of our commitments and by our Code of Conduct and Ethics. We are accountable for our decisions and seek to communicate with transparency. Strive for Profi tability We are committed to managing and growing our businesses profi tably, which supports an attractive total return for our investors. Our Strategy Capstone’s mission is to provide investors with an attractive We plan to remain active on the growth front in 2014, with a particular focus on the utilities and P3s segments. And while total return from responsibly managed long-term investments we focus on wholly-owned businesses, we remain open to in core infrastructure in Canada and internationally. Our strategy collaborating or co-investing with like-minded partners, to accomplish this mission includes: an approach that has been successful for us at Bristol Water Growing value through acquisitions that increase our scale, and Värmevärden. diversify our portfolio and expand future opportunities Pursuing organic growth initiatives Our strategy is to develop, acquire and manage a portfolio of high quality power, utilities and transportation infrastructure Bristol Water is a regulated business with a secure competitive position in a stable country and an attractive growth profi le businesses and public-private partnerships (P3s). Geographically, that we expect to be a signifi cant driver of value for Capstone’s we are focusing our business development eff orts primarily on shareholders in the years ahead. In the current regulatory North America, the United Kingdom, and Western and Northern period, which runs from 2010 to 2015, Bristol Water’s real Europe, with Australia and New Zealand remaining markets regulated rate base will grow by approximately 26% compared of interest. All are member countries of the Organization for with an industry average of approximately 8%. We currently Economic Cooperation and Development where there is relative anticipate similar growth in the next regulatory period, which political, legal, regulatory and economic stability and where we spans from April 2015 to March 2020, subject to regulatory can eff ectively manage risks. When pursuing new investment opportunities, we are mindful approval of the draft business plan Bristol Water submitted to the Water Services Regulation Authority (Ofwat) in December 2013. of the quality of future cash fl ow streams and risks. We carefully At Värmevärden, we are exploring the potential for the business screen each investment opportunity to ensure long-term accretion to complete tack-on acquisitions and to increase its footprint in to cash fl ow and a strong strategic fi t. Our goal is to realize a the fragmented Swedish district heating market. total return in the range of 10% on the investments we make. We seek to invest in: Increasing our power development footprint Our power development arm, Capstone Power Development, is ▶ A combination of lower risk opportunities where cash fl ow is focused on developing, acquiring and re-powering clean electricity contractually defi ned such as operating power facilities or P3s; generation projects in North America, targeting markets where ▶ Utility-like opportunities that off er the potential for predictable cash fl ow and steady growth; and ▶ Higher return investments such as our new power there is a defi ned need for new capacity and energy supply. These early or later-stage opportunities off er the prospect of substantially higher investment returns than operating assets development projects or user-pay forms of infrastructure while also broadening our pipeline and creating a quality such as toll roads. destination for capital. We are also focused on advancing our new pipeline of wind projects on time and budget. These projects, currently slated to enter commercial operations between 2014 and 2016, will extend our weighted average PPA term remaining and strengthen our long-term cash fl ow profi le. 6 CAPSTONE INFRASTRUCTURE CORPORATION Commitment We are committed to managing Capstone Infrastructure in the best interests of our investors, which includes acting as a responsible corporate citizen in the communities where our businesses operate. Fulfi llment 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 Infrastructure and share a focus on achieving optimal performance. Highest Standards We strive for excellence, innovation and creativity in the management and growth of our business and seek to eff ectively manage and mitigate risk. Responsibly operating our businesses with concern I am optimistic about the tomorrow we are building for this for all stakeholders company, and expect our strategy to deliver long-term income Our overall approach to managing our businesses is embedded and capital appreciation to shareholders in the years ahead. in our commitment to corporate responsibility and the principles of honesty, transparency and respect. Across our businesses, workplace safety is a priority for all employees and contractors. Environmental and social consciousness is also an integral element of our business strategy and fundamental to sustained operating performance. Capstone is pursuing its strategy at a time of great global demand for new infrastructure spending fuelled by fi scal austerity, large and growing government defi cits, and demographic trends. Global infrastructure requirements over the next 20 years are, in a word, staggering. With trillions of dollars needed, the private sector has a vital role to play in improving and building Ensuring the safe and reliable operation of our businesses the new, more sustainable infrastructure that is required to is a complex and demanding task. Through hard work and unleash renewed economic growth and improved quality of life commitment, our businesses have earned strong safety and in Canada and internationally. For our shareholders, an investment environmental records. In 2014, we will continue to focus in Capstone aff ords access to the infrastructure asset class on ensuring the safety of our employees and the communities and the ability to benefi t from its investment merits, such as where we operate while protecting the environment. consistent demand, steady infl ation-linked cash fl ow and a long, Our Outlook We are looking forward to a productive, successful year in 2014. We expect annual Adjusted EBITDA to be $140 million to $150 million, which refl ects our expectation of continuing predictable life. I would like to thank our Board of Directors for their continuing guidance and counsel and our employees for their excellent work and commitment to Capstone. stable performance from our power assets, some growth from Finally, I would like to thank our shareholders for their investment our utilities businesses, and a full year of contribution from the operating wind facilities we acquired from ReD1. in Capstone and continuing support. We are committed to delivering results that reward your trust, and look forward to Our team worked exceptionally hard in 2013. While the outcome of our eff orts has not yet been fully refl ected in our share price, our reporting our progress to you over 2014. portfolio is sound operationally and our businesses are running Sincerely, well. Moreover, our strategy of portfolio diversifi cation has shifted the mix and cash fl ow characteristics of the businesses we own, creating a much stronger foundation for our company. 1 See page 20 for a description of various other material factors or assumptions President and Chief Executive Offi cer underlying our outlook. MICHAEL BERNSTEIN 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 2013 ANNUAL REPORT 7 MESSAGE FROM THE CHAIRMAN Capstone’s vision is to be a Canadian leader in owning and operating diversifi ed infrastructure businesses that benefi t the communities we serve, the people we employ and our investors. Dear Fellow Shareholders: This year, we mark the occasion of Capstone Infrastructure Building today for tomorrow — the underlying theme of this report — is the foundation of our approach to managing and Corporation’s 10-year anniversary. From our initial public off ering in 2004 with about $230 million in total assets and one power facility, Capstone today has nearly $2 billion in total assets and a diversifi ed portfolio including power infrastructure and utilities businesses in Canada and internationally. governing Capstone. It permeates the decisions we make across our businesses. It’s why Bristol Water is executing the largest capital expenditure program in its history, to improve its network of pipes and expand its operations while driving signifi cant growth in rate base, and accordingly, value for shareholders. It’s why we carefully plan for and invest in maintenance at our We now have approximately 100 employees across Canada power facilities. It informs our company’s strategic direction with about another 600 at our businesses in the United Kingdom and investment focus, including the quality and risk profi le of and Sweden, and relationships and partnerships that span the businesses we seek to acquire in the utilities, power, transportation globe, including corporations, infrastructure developers and and public-private partnership infrastructure segments. And it fund managers, investors, fi nanciers, municipalities and First speaks to the community impact of investing in infrastructure: Nations communities. economic growth and a better quality of life. We have also strengthened our company for shareholders by With the solid foundation laid over the past 10 years, Capstone’s investing in long-life utilities businesses — Bristol Water and vision is to be a Canadian leader in owning and operating diversifi ed Värmevärden — that feature perpetual cash fl ow and an attractive infrastructure businesses that benefi t the communities we serve, organic growth profi le. Indeed, Bristol Water has been in the people we employ, and our investors. operation for 168 years, refl ecting the essential nature and longevity of water utilities. The Board of Directors supports this vision in a number of ways, including working with management to establish Capstone’s We have broadened our power footprint beyond the Cardinal gas strategy and objectives, approving signifi cant decisions that aff ect cogeneration plant to include wind, hydro, biomass and solar power Capstone and its results, monitoring the company’s fi nancial generation. In addition, we now have a development arm engaged performance and risk management practices, setting the dividend in building wind power development projects and sourcing growth policy and overseeing Capstone’s stakeholder relationships and opportunities in the power arena in Canada and the United States. reporting obligations. This new capability puts us in an excellent position to build and develop a pipeline of accretive power projects in the years to come. Key Governance Principles Independence At all times, a majority of directors must be independent directors (as defi ned 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. 8 CAPSTONE INFRASTRUCTURE CORPORATION “ BUILDING TODAY FOR TOMORROW IS THE FOUNDATION OF OUR APPROACH TO MANAGING AND GOVERNING CAPSTONE.” V. James Sardo, Chairman of the Board of Directors A few highlights of our approach to governance include: Indeed, the development, improvement and delivery of core ▶ Audit and Corporate Governance and Compensation committees composed entirely of independent directors (as defi ned by applicable securities laws); ▶ Governance policies and procedures that apply equally to the individual businesses in Capstone’s portfolio, ensuring consistency and reliability in reporting and risk management; ▶ A Code of Business Conduct and Ethics that encourages and promotes a culture of ethical business conduct and must be followed by all directors, executive offi cers, employees and contractors of Capstone; ▶ An annual evaluation of the eff ectiveness of the Board and individual directors to ensure the Board is fulfi lling its oversight role in the most eff ective manner; and ▶ A majority voting policy, which requires director nominees infrastructure services in Canada and internationally is a critical task requiring a long-term focus and commitment. Canada’s infrastructure defi cit alone — the investment needed in roads, transportation, electricity, water and other essential services — is estimated to be as high as $570 billion. The magnitude of this defi cit is echoed globally in OECD countries. Private sector involvement will increasingly be required to maintain, rejuvenate and build the critical, essential infrastructure upon which economic growth and quality of life depends. As a result, I am confi dent there are tremendous opportunities for Capstone to grow and diversify its portfolio while delivering increasing value for shareholders. And we are fortunate to have talented, disciplined employees at all levels of the organization who are ready to take on new challenges and who are motivated to succeed. to be elected by a majority of shareholder votes. Simply, we are building Capstone to stand the test of time: for In 2014, Capstone is poised to build on its successes. We have a strong fi nancial foundation, a growing portfolio of quality businesses, and a seasoned management team with more than 100 years today, tomorrow, the next 10 years, and decades beyond. As we execute our strategy, we are committed to serving shareholders’ interests with integrity, discipline and transparency. of combined experience in acquiring, fi nancing, developing The people of Capstone and I deeply appreciate the investment you and managing diverse infrastructure businesses in Canada and have made in our company and thank you for your continuing support. internationally. This team has a deeply personal interest in Capstone’s success. A signifi cant proportion of management’s short- and long-term incentive compensation is bound to fi nancial performance metrics as well as to share price performance and the total return we deliver to shareholders. This structure promotes prudent decision-making that maximizes long-term shareholder value. Sincerely, V. JAMES SARDO Chairman of the Board of Directors Integrity and Professionalism We seek out directors who have demonstrated integrity and high ethical standards, a proven record of sound business judgment and who are committed to representing the long-term interests of Capstone’s shareholders. Performance We seek to build a Board with 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. 2013 ANNUAL REPORT 9 STRATEGIC OVERVIEW Our strategy is to develop, acquire and manage a portfolio of high quality core infrastructure businesses in the power, utilities, public-private partnership and transportation segments in countries that are members of the Organization for Economic Cooperation and Development. STRATEGIC OVERVIEW OVERVIEW Vision, Mission and Strategy In December 2013, Capstone updated its corporate vision and mission statements following an analysis of its goals, opportunities, strengths, values and stakeholder audiences. Capstone's vision is to be a Canadian leader in owning and operating diversified infrastructure businesses that benefit the communities we serve, the people we employ, and our investors. Our mission is to provide investors with an attractive total return from responsibly managed long-term investments in core infrastructure in Canada and internationally. Infrastructure businesses provide services that meet critical, long-term community needs, such as power generation, electricity transmission, water systems, and roads and transportation networks. 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. Over the long term, Capstone’s growth strategy to is to develop, acquire and manage a portfolio of high quality core infrastructure businesses in the power, utilities, public-private partnership (“P3”) and transportation segments in countries that are members of the Organization for Economic Cooperation and Development (“OECD”) with the aim of providing an attractive, risk-adjusted return to investors. We focus on wholly-owned businesses while remaining open to collaborating with like-minded partners, an approach that has historically been successful for us with investments such as Bristol Water and Värmevärden. Specifically, we seek to invest in: • • • A combination of lower risk opportunities where cash flow is contractually defined such as operating power facilities and P3s; Utility-like opportunities that offer the potential for predictable cash flow and steady growth; and Higher return investments such as power development projects or user-pay forms of infrastructure such as toll roads. CORPORATE OBJECTIVES Corporate Objective Strategic Approach Maximize Capstone shareholders’ risk-adjusted return • Build a portfolio of high quality infrastructure businesses that are regulated or operate within a contractually-defined framework, which typically feature a lower risk profile, provide stable dividends and offer the potential for growth and capital appreciation. • Increase Capstone’s cash flow to fund growth and support growing dividends over time. • Improve economies of scale, thereby minimizing costs. Improve performance by entering infrastructure segments that diversify Capstone’s portfolio mix Create shareholder value by adding infrastructure businesses that increase scale, expand future opportunities and potentially offer synergies • Creating a diversified portfolio across four infrastructure pillars: power, utilities, public-private partnerships and transportation. • Manage Capstone’s mix of infrastructure businesses to reduce the company’s risk profile and achieve better returns. • Achieve scale by reducing the average cost of managing Capstone’s businesses and adding new capabilities. • Expand the scope and size of growth opportunities available to Capstone by building the scale of the company’s portfolio. • Seek to capture synergies across our business through the transfer of skills or sharing of activities. Operate infrastructure businesses in a responsible and sustainable manner • Partner with the communities in which Capstone operates to provide socially-responsible services with due consideration to the environment, health and safety. • Apply a long-term philosophy to the maintenance and operation of Capstone’s businesses. • Manage business risks to reduce likelihood and impact of adverse events. Provide a work environment that attracts and retains skilled employees • Offer competitive overall compensation. • Foster an enjoyable culture that promotes collaboration, learning and growth. • Create career development opportunities to enhance expertise and engage employees. 12 CAPSTONE INFRASTRUCTURE CORPORATION OUR PLATFORMS AND PERFORMANCE DRIVERS Power Figure 2: Consistently High Availability Our power platform includes gas cogeneration, wind, hydro, biomass and solar power generation facilities in Canada, totalling approximately 439 net megawatts of installed capacity. We are also developing a pipeline of wind power projects totalling an expected 79 net megawatts of capacity. The operating facilities and development projects have power purchase agreements with creditworthy customers. See Figure 1. The key performance drivers for the power platform in 2014 are to: • • • • Achieve consistently high availability to help maximize production. See Figure 2. Maintain or improve the quality of each facility by focusing on routine and preventive maintenance and implementing technological and operational enhancements. See Figure 3. Efficiently manage operating costs at each facility. Complete the Skyway 8 and Saint-Philémon wind power development projects on time and on budget and advance the balance of the project pipeline. • Operate facilities safely with a goal of zero lost-time injuries. Figure 1: Counterparty Credit Ratings Counterparty Ontario Electricity Financial Corporation ("OEFC") Credit Rating AA (low)/Stable – DBRS Ontario Power Authority ("OPA") A (high)/Stable – DBRS Nova Scotia Power Incorporated ("NSPI") TransAlta BC Hydro Utilities A (low)/Stable - DBRS BBB/Stable – DBRS AA (high)/Stable – DBRS Facility Cardinal Wind power facilities (1) Hydro power facilities Whitecourt Amherstburg (2) 2013 98.2% 97.2% 99.1% 96.1% 99.6% Five-Year Average 96.9% 97.2% 98.5% 92.9% n/a (1) Includes Erie Shores and the operating wind power facilities acquired from ReD on October 1, 2013. (2) Amherstburg commenced operations in June 2011. Figure 3: Enhancing Cash Flow at Erie Shores In 2013, Erie Shores installed WindBOOST, a turbine control system that helps to increase annual energy output, thereby increasing revenue. Capstone’s utilities platform currently includes interests in a regulated water utility and a district heating business. Water We hold 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 more than 1.1 million people. Bristol Water is currently executing a significant capital program aimed at maintaining and improving Bristol Water’s infrastructure and operations while continuing to meet water quality requirements and support growth arising from an increasing population and expanded business activity in the region. This program will drive growth in Bristol Water’s RCV, which over time will increase the cash flow we receive from this investment and its overall value for Capstone’s shareholders. The key performance drivers for Bristol Water in 2014 are to: • • Provide safe, reliable drinking water that is cost-effective for customers. Operate in compliance with all regulatory and environmental requirements. See Figure 3. • Operate efficiently to manage costs. • Execute the company’s approximately $520 million regulator-approved capital expenditure program for the current regulatory period, resulting in RCV growth. In addition, a key focus for 2014 is working with Bristol Water's management to bring the Price Review 14 (“PR14”) process to a satisfactory regulatory conclusion. The PR14 outcome will establish the company’s business plan for the next five-year regulatory period (“AMP6”). 2013 ANNUAL REPORT 13 STRATEGIC OVERVIEW Figure 3: Key Regulatory Outputs Key Regulatory Output AMP5 Objective Reduce amount of water that leaks from the network's pipes and mains Reduce water leakage to 49 million litres of water per day ("Ml/d") with a 2014 target of less than 49Ml/d Actual Performance (1) Achieved water leakage of 42 Ml/day Save water Achieve a base service water efficiency target of 4.0 Ml/d over the regulatory period Cumulative 3.77 Ml/d since the start of the AMP5 period in 2010 Strong performance on regulator's security of supply index, which measures reliability of water supply Achieve a 100% grade 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 4th out of 19 companies in the industry (1) In the regulatory year ended March 31, 2013. District Heating We hold a 33.3% equity interest in Värmevärden, a district heating business in Sweden operating in 10 communities that serves residential customers, which includes multi-residential complexes and municipal users, and also has long-term contracts with industrial customers. Our key performance drivers for Värmevärden in 2014 are to: • • • Manage fuel costs, Värmevärden’s largest operating expense, by using cost-effective fuels. Maintain strong customer relationships by providing highly reliable, quality service to customers, thereby increasing potential for contract renewals and the signing of new customers. Ensure high plant availability and operational efficiency, which helps to maximize revenue potential while minimizing the use of more expensive peak fuel. Targeted Platforms Public-Private Partnerships A P3 is a partnership between the public and private sectors, built on the expertise of each partner, which best meets clearly defined public infrastructure needs through an optimal allocation of resources, risks and rewards, resulting in higher long-term infrastructure quality and value for taxpayers. There are a variety of P3 models available for delivery of public infrastructure, ranging from designing, building and financing an asset to designing, building, financing, maintaining and operating an asset. P3 models are used to deliver a variety of large-scale infrastructure, from roads to energy or government buildings such as schools and hospitals. For investors, P3s with a strong project rationale offer predictable, government-backed cash flow with limited volatility. Transportation Transportation infrastructure includes toll roads, railways, public transportation systems, ports and airports, all of which are required to support passenger and freight travel. Over the next four decades, the International Energy Agency estimates global passenger and freight travel will double over 2010 levels, requiring new infrastructure to be built at significant cost. In addition, many cities require significant investments to modernize and expand their transit systems to deal with increasing gridlock. A 2013 study by the CD Howe Institute estimated that traffic and transit gridlock costs the Greater Toronto Area up to $11 billion each year. More innovative funding and financing approaches will be required in many jurisdictions given government fiscal constraints and competing demands on limited budget resources. 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. It is 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.(1) Reaching this level of investment will require a 60% increase in the level of infrastructure investment globally from current expenditures, and may still be insufficient to address major infrastructure deficiencies.(1) In Capstone’s targeted jurisdictions, 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. (1) "Infrastructure Productivity: How to save $1 trillion a year," McKinsey Global Institute, January 2013. " 14 CAPSTONE INFRASTRUCTURE CORPORATION Canada In Canada, it is estimated that the infrastructure deficit --- for public buildings, roads, bridges, sewers, electrical grids, water purification plants and other critical infrastructure --- ranges up to approximately $570 billion.(1) There is significant private investment in infrastructure in Canada and P3s are a well-established model for infrastructure delivery in several provinces, notably Ontario, British Columbia, Alberta and Quebec, and at the federal level. In Canada, Capstone continues to explore opportunities in the power sector, including operating facilities and development-stage projects, and believes the public-private partnership segment offers potential opportunities. In the electricity sector, it is estimated that about $294 billion will need to be invested between 2010 and 2030 to maintain existing generation, transmission and distribution infrastructure, meet market growth and accommodate a changing generation mix.(2) In addition, the renewable energy sector is expected to continue to experience activity in Canada, although at a slower pace than in recent years, reflecting government policy imperatives with respect to carbon reduction, climate change management and job creation. Canada enjoys an increasingly centralized and coordinated P3 market. There are currently 206 P3 projects across the country, primarily at the provincial or federal level, either in operation or in development representing an estimated cumulative investment of approximately $63.5 billion.3) Canada’s P3 pipeline is increasingly diverse, featuring a growing number of urban transit projects and offering the potential for more water/wastewater projects as municipalities must meet more stringent federal government compliance standards. Across Canada, the infrastructure spending of municipalities is comparable to that of the provinces yet the number and total value of P3 projects delivered by municipalities lags in comparison, creating the potential for increased adoption of the P3 model. Capstone is primarily targeting P3 opportunities in transportation, such as roads and public transit, bridges and tunnels; water and wastewater; and government buildings such as schools or hospitals. Capstone emphasizes market P3 opportunities where the project is operational or near to completion, thereby offering greater cash flow predictability with a low risk profile. United States In the United States, infrastructure spending as a percentage of GDP has shrunk to about 2.4% from its peak of more than 3% during the 1960s.(4) In 2013, the condition of America’s infrastructure --- including water, transportation, public facilities, and energy --- was assigned an overall grade of D+ by the America Society for Civil Engineers, which measures infrastructure conditions and needs according to eight criteria, including capacity, condition, funding, future need, operation and maintenance, public safety, resilience and innovation. Since 1998, grades have averaged only Ds due to delayed maintenance and underinvestment across most categories.(5) In the United States, Capstone is primarily targeting opportunities in the power sector, both operating and development-stage projects, and utilities. The U.S. also has significant, unmet transportation infrastructure needs. While slow economic growth and a declining manufacturing sector have dampened current demand for power in the United States, the electrical grid is aging and requires significant investment by utilities to reduce power failures and interruptions and to meet evolving government policy imperatives with respect to carbon reduction and climate change management. These two factors are expected to support continuing opportunities in renewable power generation as well as the building of new baseload generation capacity, primarily gas-fired, to replace power facilities reaching the end of their useful lives and to meet future demand growth. The water sector also offers investment opportunities. 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. In addition, the P3 market in the U.S. is expected to continue to grow, with the strengthening of project pipelines in states that were early adopters of the P3 model, with more public authorities turning to the P3 method of procurement, and with increasing acceptance of P3s by the U.S. construction industry. (1) "The Foundations of a Competitive Canada: The Need for Strategic Infrastructure Investment,” Canadian Chamber of Commerce, December ” 2013. (2) “Canada’s Electricity Infrastructure: Building a Case for Investment,” Canadian Electricity Association, April 2011. (3) Canadian Council for Public-Private Partnerships, 2013. (4) “Infrastructure 2013: Global Priorities, Global Insights,” Ernst & Young, 2013. (5) “2013 Report Card for America’s Infrastructure,” American Society of Civil Engineers, 2013. ” 2013 ANNUAL REPORT 15 STRATEGIC OVERVIEW United Kingdom and Europe In 2012-2013, the UK’s global competitiveness ranking for “quality of overall infrastructure” was 24 th --- equal to the US and below all other G7 economies except Italy, pointing to the country’s significant infrastructure deficit.(1) In Europe, the public funding of infrastructure is at historically low levels for many governments despite increasing infrastructure investment requirements.(2) The European Commission estimates that funding needs for infrastructure development in the EU, covering transport, energy, and information and communication networks, could total up to €2 trillion by 2020.(3) Capstone believes there are potential opportunities in operating and development-stage power projects, utilities and P3s in the UK, and Western and Northern Europe. Overall, infrastructure investment opportunities are increasing in these markets as governments seek funding solutions to meet investment needs and due to the maturity of the public-private partnership market, particularly in the United Kingdom. There is also likely to be a shift to divestment of infrastructure assets, in part by private infrastructure funds as they approach the end of their fund terms. The UK and Europe, similar to other OECD countries, are challenged to balance security, stability and affordability in energy supply while complying with stringent carbon reduction requirements, with major new investment in energy and utilities infrastructure required. In addition, the UK and EU have set requirements for renewable energy to comprise 15% and 20%, respectively, of electricity generation capacity by 2020. Furthermore, many European countries are in acute need of upgrades and improvements to their roads and transportation infrastructure, reflecting aging infrastructure and years of underinvestment. At the same time, public debt burdens have increased since the global financial crisis, creating the potential for the sale of public infrastructure assets. There is also the potential for the sale of non-core infrastructure assets by corporations and utilities as they seek to reduce debt and reposition. Australia In Australia, Capstone is primarily interested in P3 opportunities. Australia was a pioneer of the P3 model and features an active project pipeline and increasing market opportunities since the global financial crisis. (1) “Global Competitiveness Report 2012-2013,” World Economic Forum, 2013. (2) “Private Infrastructure Finance and Investment in Europe,” European Investment Bank, February 2013. (3) “Top 10 Investor Questions for 2013: Global Public Private Partnership Infrastructure Investment,” Standard & Poor’s, 2012. ” ” ” 16 CAPSTONE INFRASTRUCTURE CORPORATION CAPSTONE'S STRENGTHS AND ABILITY TO DELIVER RESULTS Capstone is positioned to capitalize on emerging opportunities and trends in the global infrastructure market. A number of strengths enable us to deliver on our mission. They include: Asset Management and Leadership We have 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. Our corporate management team comprises executives with decades of combined expertise in managing and financing infrastructure businesses. Our employees with Capstone Power Development also bring decades of experience in successfully developing and delivering power projects in Canada and the United States. In addition, our Board of Directors comprises seasoned executives with a broad mix of skills in finance, operations, strategy, government and corporate governance. Access to Opportunities We have strong relationships within the infrastructure industry and with multinational partners, including, among others, Agbar and ITOCHU, our partners in Bristol Water, and the Macquarie group, our partner in Värmevärden, which enhance our ability to forge new partnerships across borders and to stimulate deal flow and access to unique opportunities. Capstone has proven its ability to successfully pursue growth opportunities internationally and to integrate new businesses into its portfolio with the acquisitions of the Amherstburg Solar Park (2010), our interests in Bristol Water and Värmevärden (2011), and ReD (2013). Professionalism We bring a highly disciplined approach to managing our portfolio and to evaluating the growth opportunities we pursue, maintaining a focus on high quality, low risk businesses that will enhance value for shareholders while strengthening Capstone's reputation. We are committed to operational excellence, working closely with our managerial teams or investment partners to improve productivity, manage costs and enhance long-term operations, and to ensuring a safe work environment for our employees and contractors. In addition, we are committed to professionalism and transparency in our governance practices and financial reporting, which was recognized in 2013 by the Chartered Professional Accountants of Canada with an Award of Excellence in Corporate Reporting. Agility We anticipate, plan for and have an ability to adapt to changes in our business and the competitive landscape in order to capitalize on and respond quickly to value-building opportunities, reflecting the strength of our team and coordinated internal processes. Analysis Each of our businesses undergoes a comprehensive annual strategic and business planning exercise to assess progress against goals and to determine how we can further improve the efficiency, quality and performance of our operations. We likewise apply this discipline to the evaluation of growth opportunities, including completing a thorough financial analysis, and applying strong due diligence practices and risk management principles and procedures, which helps to safeguard Capstone’s performance. Capital Management 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 also seek to maintain a flexible capital structure that enables us to capitalize on growth opportunities when they arise. We are focused on: • • • Ensuring an appropriate capital structure at the corporate and subsidiary level that aligns with the cash flow profile and duration of our businesses; Maintaining sufficient liquidity to meet short- and medium-term operating needs; and 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. 2013 ANNUAL REPORT 17 Contents Financial Highlights Legal Notice Introduction Basis of Presentation Changes in the Business Non-GAAP and Additional GAAP Performance Measure Defi nitions Results of Operations Financial Position Review 19 20 21 21 21 22 24 35 42 42 43 Derivative Financial Instruments Foreign Exchange Risks and Uncertainties Environmental, Health and 45 Safety Regulation 47 Related Party Transactions 47 Summary of Quarterly Results Fourth Quarter 2013 Highlights 48 Accounting Policies and Internal Controls 49 MANAGEMENT’S DISCUSSION AND ANALYSIS In 2013, Capstone achieved Adjusted EBITDA of $128.4 million, which was at the high end of our forecasted range and refl ected strong operations across our businesses as well as three months of contribution from our new wind power facilities. Financial Highlights Revenue Net income (loss)(1) Earnings (loss) per share(1) Basic 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 2013 389,503 67,210 0.462 0.425 0.493 0.300 1.250 2012 357,610 45,971 0.315 0.315 0.473 0.450 1.250 2011 215,967 (2,837) (0.102) (0.103) 0.541 0.660 0.421 2,025,724 1,219,507 1,357,561 1,626,858 988,048 1,116,400 1,668,229 899,282 1,220,259 (1) Net income (loss) and earnings (loss) per share have been restated for changes required by IFRS to implement IAS 19 – Employee Benefi ts. This change, which became eff ective, retroactively, January 1, 2013, is described in note 2 of the consolidated fi nancial statements for the year ended December 31, 2013. 2013 ANNUAL REPORT 19 MANAGEMENT’S DISCUSSION AND ANALYSIS 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-lookingstatements and financial outlook are provided for the purpose of presenting information about management’scurrent 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 the "Message to Shareholders", "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, 2013 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 potential 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 there will be no material delays in the Corporation’s power infrastructure development projects achieving commercial operation; that the Corporation’s 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 $1.65 per gigajoule in 2014; 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 material delays in obtaining required approvals and no material changes in rate orders or rate structures for the Corporation’s 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 PPAsfor 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 and financial outlook 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 rates; acquisitions and development (including risks related to the integration of the business operated by Renewable Energy Developers Inc.; 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; and 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). For a comprehensivedescription of these risk factors, please referto the “Risk Factors” section of the Corporation’s annual information form dated March 21, 2013, as supplemented by disclosure of risk factors contained in any subsequent annual information form, material change reports (except confidential material changes reports), business acquisition reports, interim financial statements, interim MD&A and information circulars filed by the Corporation with the securities commissions or similar authorities in Canada (which are available under the Corporation’s profile on profile on www.sedar.com). 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. 20 CAPSTONE INFRASTRUCTURE CORPORATION 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, 2013 and 2012. 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, 2013 and 2012. Additional information about the Corporation, including its Annual Information Form ("AIF") for the year ended December 31, 2012, 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 6, 2014, 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, 2012 Dec 31, 2013 CHANGES IN THE BUSINESS Acquisition of ReD Swedish Krona (SEK) UK Pound Sterling (£) Average 0.1476 0.1581 Spot 0.1528 0.1655 Average 1.5840 1.6113 Spot 1.6178 1.7627 On October 1, 2013, Capstone acquired 100% of the issued and outstanding shares of Renewable Energy Developers Inc. ("ReD") by issuing common shares of Capstone, pursuant to a plan of arrangement (the “Arrangement”). At closing, each ReD shareholder received 0.26 of a Capstone common share ("Capstone Share") and $0.001 in cash in exchange for each share of ReD. Capstone issued 19,699 common shares to acquire ReD, resulting in a total of 92,719 common shares outstanding as at October 1, 2013. In addition, each outstanding option to purchase ReD Shares (“ReD Option”) was exchanged for an option to acquire Capstone Shares (“Replacement Option”). A Replacement Option entitles the holder thereof to purchase 0.26026 of a Capstone Share for each ReD Option being replaced. The obligations of ReD with respect to its outstanding common share purchase warrants have been assumed by Capstone in accordance with the terms of the warrant indenture whereby each warrant is now exercisable to receive 0.26 of a Capstone Share and $0.001 in cash. Also pursuant to the Arrangement, on October 1, 2013, the 6.75% convertible unsecured subordinated debentures of ReD due December 31, 2017 (the “ReD Debentures”) became convertible into Capstone Shares and cash pursuant to the terms of the debenture indenture, while remaining outstanding obligations of ReD. The Corporation has agreed to provide credit support for the ReD Debentures (TSX: CPW.DB) and ReD has agreed to provide credit support for the obligations of Capstone under its 6.50% convertible unsecured subordinated debentures (TSX: CSE.DB.A) due December 31, 2016. Capstone has consolidated the assets, liabilities and attributable net income of ReD from October 1, 2013. With the addition of ReD, Capstone is a larger infrastructure company with power generation facilities across Canada totaling approximately net 439 MW of installed capacity, an attractive pipeline of contracted development opportunities in Canada representing an expected net 79 MW of capacity, and international investments in regulated water and district heating businesses. 2013 ANNUAL REPORT 21 MANAGEMENT’S DISCUSSION AND ANALYSIS 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”), interest income and net pension interest 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 and project development costs plus interest income and dividends or distributions received from equity accounted investments. Amounts attributed to any non-controlling interest are deducted. Adjusted EBITDA for investments in subsidiaries with non-controlling interests are included at Capstone’s proportionate ownership interest. The reconciliation of Adjusted EBITDA to EBITDA is provided below. Adjusted Funds from Operations (“AFFO”) Capstone’s definition of AFFO measures cash generated by its infrastructure businesses 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. AFFO is calculated from Adjusted EBITDA by: Deducting: • Adjusted EBITDA generated from businesses with significant non-controlling interests Adding: • • 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: • Interest paid • • Income taxes paid Dividends paid on the preferred shares included in shareholders’ equity • Maintenance capital expenditure payments • 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 cash generated that is declared as dividends to common shareholders. The payout ratio is calculated as dividends declared divided by AFFO. 22 CAPSTONE INFRASTRUCTURE CORPORATION 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 Net pension interest income Non-controlling interest ("NCI") portion of Adjusted EBITDA Adjusted EBITDA Cash flow from operating activities Cash flow from operating activities from businesses with non-controlling interests Distributions paid to Capstone from businesses with non-controlling interests Distributions from equity accounted investments Foreign exchange 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, 2013 Dec 31, 2012 185,058 163,471 (2,924) (9,789) 2,638 3,982 (1,817) (48,727) 128,421 135,676 (87,655) 8,111 3,982 (34) 1,096 (4,387) (14,886) 1,781 (3,750) 39,934 (1,620) (1,294) (2,294) 2,001 (2,934) (36,987) 120,343 114,678 (76,474) 8,091 2,001 (415) 984 (5,398) (12,581) 8,427 (3,750) 35,563 2013 ANNUAL REPORT 23 MANAGEMENT’S DISCUSSION AND ANALYSIS RESULTS OF OPERATIONS Overview Capstone's Adjusted EBITDA and AFFO were both higher than in 2012. Adjusted EBITDA performance primarily reflected the following: • • • • • Bristol Water's revenue increased due to higher regulated water tariffs. This was partially offset by higher non-controlling interest due to the reduction in ownership interest in May 2012; The Cardinal gas cogeneration facility's ("Cardinal") revenue increased due to higher power rates and more production in 2013 due to fewer outage hours; The ReD wind facilities added $4,352 of Adjusted EBITDA since acquisition on October 1, 2013; Erie Shores Wind Farm ("Erie Shores") revenue increased due to higher power generation as a result of more favourable wind conditions, including contributions from the WindBOOST, a wind turbine control system installed in 2013; and Corporate project development costs increased due to the acquisition of ReD. Project development costs for power were also higher in 2013 due to the activities of our new development subsidiary launched in December 2012. In addition, Capstone's AFFO was affected by: • • • Corporate taxes paid increased due to payment of the final 2012 tax installment on preferred dividends in the first quarter of 2013; Debt service costs increased primarily due to higher project debt following the ReD acquisition. In addition, the interest payments were higher for the hydro facilities as the debt was outstanding for a full year in 2013 compared with six months in 2012; and Cardinal's maintenance capital expenditures decreased in 2013 following the hot gas path inspection, required every three years, completed in 2012. Revenue Expenses Interest income Distributions from equity accounted investments Less: non-controlling interest (“NCI”) Adjusted EBITDA Adjusted EBITDA of consolidated businesses with NCI Distributions from businesses with NCI Principal from loans receivable Interest paid Dividends paid on Capstone’s preferred shares Income taxes (paid) recovery Maintenance capital expenditures Scheduled repayment of debt principal AFFO AFFO per share Payout ratio Dividends declared per share For the year ended Dec 31, 2013 Dec 31, 2012 389,503 357,610 (220,433) (207,167) 4,096 3,982 (48,727) 128,421 (48,693) 8,111 1,096 4,886 2,001 (36,987) 120,343 (48,202) 8,091 984 (23,444) (23,312) (3,750) (2,534) (4,387) (14,886) 39,934 0.493 60.9% 0.300 (3,750) (612) (5,398) (12,581) 35,563 0.473 94.9% 0.450 Revenue increased by $31,893, or 8.9%, primarily due to Bristol Water where higher regulated water tariffs and water consumption increased revenue by $17,183. In the power segment, ReD represented $5,714 of the increase while higher electricity generation at Cardinal and Erie Shores contributed $9,060. Expenses increased by $13,266, or 6.4%, as follows: • Operating expenses increased by s $8,802, or 4.5%, primarily due to Bristol Water where higher repairs and maintenance activities, and inflationary increases for energy, consumables, wages and salaries, were the major factors. In the power segment, ReD contributed $1,475 while Cardinal increased by $580 primarily due to higher fuel expenses as more fuel was required for production, partially offset by lower gas transportation costs. • • Project development costs increased by Capstone's power development costs increased by $1,146, which includes $829 related to Capstone's power development subsidiary, while $317 was for costs on the wind projects under construction. $5,165, or 1,415%, primarily due to $4,278 of costs for the acquisition of ReD. In addition, s Administrative expenses decreased by s $701, or 6.3%, due to lower staff costs, offset partially by higher professional fees. e Interest income decreased by $790, or 16.2%, primarily due to $495 and $476 related to Värmevärden and Bristol Water, respectively. The Värmevärden decrease reflected a reduction in the interest rate and lower outstanding shareholder loans in 2013, following the 2012 recapitalization. The Bristol Water decrease was attributable to a lower average cash balance in 2013 due to the funding of the capital expenditure program. 24 CAPSTONE INFRASTRUCTURE CORPORATION Distributions from equity accounted investments were s $1,981, or 99%, higher in 2013 due to the receipt of $878 from the ReD businesses and $1,103 of higher dividends provided by Värmevärden. Interest paid increased by $132, reflecting $938 of higher interest for the power segment, which was offset by lower interest paid at corporate attributable to refinancing activity in 2012. Interest paid by Bristol Water and the Amherst wind facility ("Amherst") 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 was attributable to the amortization of financing costs and timing differences between accrual and payment basis. Scheduled debt repayments increased by s $2,305, or 18.3%, which included $659 of payments for the ReD facilities. The remainder of the variance was primarily due to higher payments in the power segment mostly related to $1,000 of additional payments under the CPC-Cardinal credit facility. Maintenance capital expenditures decreased by s $1,011, or 18.7%, primarily due to fewer scheduled outages at Cardinal. A hot gas path inspection, which occurs every three years, was completed in 2012. Results by Segment Capstone’s results are segmented into power in Canada and utilities in Europe. All remaining results relate to corporate activities. The power segment includes gas cogeneration, hydro, wind, biomass and solar power, as well as power development activities. The utilities segments include Capstone's 50% interest in Bristol Water, a regulated water utility in the United Kingdom, and a 33.3% interest in Värmevärden, a district heating business in Sweden. The financial results of Capstone's businesses with non-controlling interest, such as 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 and other equity accounted investments provide interest income, dividends and management service fees, when applicable. Non-GAAP performance measures Non-GAAP performance measure results for each business segment were as follows: Adjusted EBITDA For the year ended AFFO For the year ended Dec 31, 2013 Dec 31, 2012 Change Dec 31, 2013 Dec 31, 2012 Change Power Utilities – water Utilities – district heating 89,130 47,877 5,965 78,178 48,202 5,357 10,952 Power 53,439 43,859 (325) Utilities – water 608 Utilities – district heating 6,547 5,965 8,091 5,357 9,580 (1,544) 608 Corporate Total (14,551) (11,394) (3,157) Corporate (26,017) (21,744) (4,273) 128,421 120,343 8,078 Total 39,934 35,563 4,371 Power The following table shows the significant changes in Adjusted EBITDA and AFFO from 2012: Change Explanations 4,173 ReD operating wind facilities contributed additional Adjusted EBITDA since acquisition on October 1, 2013. 3,862 Impact of Cardinal scheduled maintenance outages for hot gas path inspection in the second quarter of 2012 and the combustion inspection in the third quarter of 2013. 2,748 Impact of TransCanada Pipeline ("TCPL") rate decrease on Cardinal gas transportation charges. (2,478) Higher expenses at Cardinal primarily due to fuel supplier and other fuel transportation rate increases. 2,044 Higher revenue at Cardinal due to a PPA rate increase. 1,733 Impact of variations in wind, hydrology and sunlight on revenue. (829) Higher costs due to the power development subsidiary launched in December 2012. (301) Various other changes. 10,952 Change in Adjusted EBITDA. (1,399) Higher debt service payments primarily for the hydro power facilities since bond issue in June 2012. (592) Debt service on the ReD businesses and adjustment for Amherst to reflect distributions since October 1, 2013. 666 Higher maintenance capital expenditures in 2012 due to Cardinal's hot gas path inspection. (47) Various other changes. 9,580 Change in AFFO. 2013 ANNUAL REPORT 25 MANAGEMENT’S DISCUSSION AND ANALYSIS Utilities – water The following table shows the significant changes in Adjusted EBITDA and AFFO from 2012: Change Explanations (6,135) Impact of sale of 20% interest in Bristol Water on May 10, 2012. 4,985 Business performance increase primarily due to higher revenue as a result of annual increase in regulated water tariffs, offset by higher operating expenses. 825 Impact of foreign exchange on Adjusted EBITDA. (325) Change in Adjusted EBITDA. (1,391) Impact of sale of 20% interest in Bristol Water on May 10, 2012. (158) Dividend reduction due to payment of higher operational and management fees for outperformance. 5 Impact of foreign exchange on AFFO. (1,544) Change in AFFO. Utilities – district heating The following table shows the significant changes in Adjusted EBITDA and AFFO from 2012: Change Explanations 1,052 Higher dividend due to distribution of surplus cash attributable to prior years' performance. (728) Lower interest income following the March 2012 partial repayment of the shareholder loan from Värmevärden refinancing proceeds. 284 Impact of foreign exchange. 608 Change in Adjusted EBITDA and AFFO. Corporate The following table shows the significant changes in Adjusted EBITDA and AFFO from 2012: Change Explanations (4,019) Higher project development costs primarily due to acquisition costs for ReD. 701 Lower administrative expenses primarily due to lower staff costs. 161 Higher interest income due to higher average cash balances. (3,157) Change in Adjusted EBITDA. (1,922) Higher taxes paid primarily due to the final payment of 2012 taxes for the preferred share dividends. 806 Lower interest paid on debt primarily due to second quarter 2012 repayment of the senior debt facility and the corporate component of the CPC-Cardinal debt facility. (4,273) 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 26 CAPSTONE INFRASTRUCTURE CORPORATION For the year ended Dec 31, 2013 Dec 31, 2012 35,009 51,477 2,850 19,788 41,052 7,936 (22,126) (22,805) 67,210 45,971 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 from distributions from equity accounted investments to equity accounted income NCI portion of Adjusted EBITDA Other gains and (losses), net Foreign exchange gain (loss) Interest expense Net pension interest income Depreciation and amortization Income tax recovery (expense) Net Income (loss) For the year ended Dec 31, 2013 Dec 31, 2012 128,421 120,343 (6,620) 48,727 9,789 2,924 293 36,987 1,294 1,620 (47,471) (49,168) 1,817 (62,167) (8,210) 67,210 2,934 (57,552) (10,780) 45,971 2013 ANNUAL REPORT 27 MANAGEMENT’S DISCUSSION AND ANALYSIS Infrastructure – Power Capstone’s power facilities produce electricity from gas cogeneration and wind, biomass, hydro and solar resources and are located in Ontario, Nova Scotia, Alberta, British Columbia and Quebec. Results from these facilities were: 95 17 4,000 Net megawatts of operating wind facilities acquired from ReD on October 1, 2013. Number of consecutive years without a lost- time injury at Cardinal. Approximate number of households capable of being powered by Amherstburg's green electricity each year. For the year ended December 31, 2013 Power generated (GWh) 1,287.5 469.3 198.4 Gas Wind (1) Biomass (1) Capacity factor Availability Revenue Expenses Interest income Distributions from equity accounted investments Less: non-controlling interest (“NCI”) 97.9% 98.2% 118,005 (84,668) 105 — — 29.2% 97.2% 30,571 (5,482) 116 878 (784) 95.8% 96.1% 15,385 (9,636) 474 — — Hydro 168.7 53.9% 99.1% 14,373 (3,533) 48 — — Solar Development Adjusted EBITDA 33,442 25,299 6,223 10,888 14,447 (1,169) 89,130 36.6 20.9% 99.6% 15,594 (1,185) 38 — — — — (3,880) 4,056 39.5 22.5% 97.4% 16,388 (1,246) 33 — — — — — — (4,846) (6,511) — (576) (3,550) 1,916 Hydro 157.0 50.1% 98.5% 13,826 (3,289) 22 10,559 15,175 — — (3,778) (6,804) — (1,156) (3,265) 2,360 — — (3,707) 4,664 n/a n/a n/a Total 2,160.5 n.m.f n.m.f — 193,928 (1,169) (105,673) — — — 781 878 (784) — — — — — — — (816) 1,564 1,096 (18,262) — (4,387) (14,886) (1,169) 53,439 n/a n/a n/a Total 1,858.8 n.m.f n.m.f — 179,218 (23) (101,801) — (23) — — — — — 761 78,178 984 (17,324) — (5,398) (12,581) (23) 43,859 Solar Development Adjusted EBITDA of consolidated businesses with NCI Distributions from businesses with NCI Principal from loans receivable Interest paid Income taxes (paid) recovery Maintenance capital expenditures Scheduled repayment of debt principal AFFO For the year ended December 31, 2012 — — — (475) — (1,910) (1,250) 29,807 (816) 1,564 — (6,430) — (983) (6,206) 12,428 — — 1,096 — — (918) — 6,401 Power generated (GWh) 1,231.9 233.4 197.0 Gas Wind (1) Biomass (1) Capacity factor Availability Revenue Expenses Interest income Adjusted EBITDA Principal from loans receivable Interest paid Income taxes (paid) recovery Maintenance capital expenditures Scheduled repayment of debt principal AFFO 92.9% 95.0% 110,926 (84,088) 64 26.8% 97.9% 22,876 (4,265) 54 26,902 18,665 — (672) — (2,576) (250) 23,404 — (6,065) — (536) (5,231) 6,833 95.3% 95.9% 15,202 (8,890) 588 6,900 984 (5) — (1,130) (128) 6,621 (1) For equity accounted investments, Adjusted EBITDA only reflects management fees earned and interest income. Distributions paid to Capstone and any principal received on outstanding loans receivable are included in AFFO for equity accounted investments. The statistics for power generated, capacity factors and availability exclude those of Capstone's equity accounted investments. 28 CAPSTONE INFRASTRUCTURE CORPORATION The following charts show the composition of the power segment’s Adjusted EBITDA and AFFO for the years ended December 31, 2013 and 2012: ADJUSTED EBITDA 2013 ADJUSTED EBITDA 2012 AFFO 2013 AFFO 2012 pp 37% Gas pp 28% Wind pp 7% Biomass pp 12% Hydro pp 16% Solar pp 34% Gas pp 24% Wind pp 9% Biomass pp 14% Hydro pp 19% Solar pp 54% Gas pp 23% Wind pp 12% Biomass pp 4% Hydro pp 7% Solar pp 53% Gas pp 16% Wind pp 15% Biomass pp 5% Hydro pp 11% Solar Revenue increased by $14,710, or 8.2%, while total power production increased by 301.7 GWh, or 16.2%. Higher revenue was primarily attributable to higher power generation and power rates at Cardinal and to the contribution from the wind power facilities. The facilities acquired from ReD on October 1, 2013 added $5,714 of revenue while Erie Shores benefited from more favourable wind conditions in 2013, adding $1,981 of revenue. All other facilities had higher revenue in 2013, except Amherstburg Solar Park ("Amherstburg"), which experienced less sunlight than in 2012. Expenses increased by $3,872, or 3.8%, with ReD's wind facilities contributing $1,475 and project development costs increasing by $1,146 for salaries and overhead of Capstone's power development subsidiary, which was launched in December 2012. In addition, Cardinal's operating expenses increased by $580 due to more fuel being consumed as a result of higher production, partially offset by lower fuel transportation costs due to a decline in TCPL rates. Distributions from equity accounted investments increased s $878, primarily due to receipts from Capstone's 49% indirect ownership interest in the Glen Dhu wind facility. Non-controlling interests and distributions from businesses with NCI increased by I $786 and $1,565, respectively, due to Capstone's partner's share of the Adjusted EBITDA in Amherst and distributions received from Amherst. Interest paid increased by $938, or 5.4%, primarily due to $1,068 for the hydro power facilities' debt, which was established in June 2012, followed by $681 of additional interest paid by ReD's wind facilities. This was partially offset by $609 less interest paid on the debt of Amherstburg and Erie Shores as a result of amortization. Maintenance capital expenditures decreased by s $1,011, primarily due to Cardinal's 2012 hot gas path inspection, which occurs every three years. Scheduled repayments of debt principal increased by $2,305, or 18.3%, primarily due to $1,000 higher payments for the CPC-Cardinal credit facility. In addition, debt repayments increased by $659 for debt on the ReD wind facilities. 2013 ANNUAL REPORT 29 MANAGEMENT’S DISCUSSION AND ANALYSIS Project development With the acquisition of ReD on October 1, 2013, Capstone gained the rights to net 79 MW from nine wind development projects. Seven of these projects are being developed in Ontario under power purchase agreements ("PPAs") awarded by the Ontario Power Authority ("OPA"), one project in Quebec with a PPA awarded by Hydro-Québec and one project in Saskatchewan with a PPA awarded by SaskPower. Three of the projects are characterized as near-term, with construction commencing on two of these projects in the fourth quarter of 2013. Capstone currently expects all of the near-term projects to be completed on time and without material cost over-runs. The remaining six development-stage projects are expected to be completed over the mid-term. All projects not yet under construction are at various stages and require certain regulatory approvals and permits to proceed with construction and meet the expected commercial operations dates ("COD"). A summary of Capstone's near-term projects is as follows: Project Goulais Saint-Philémon Skyway 8 Expected COD Ownership Interest Net Capacity Counterparty PPA Expiry Status 2015 Q4 2014 Q3 2014 51% 51% 100% 12.75 MW 12.24 MW 9.48 MW OPA 20 years from COD Pre-construction Hydro-Québec 20 years from COD Under construction OPA 20 years from COD Under construction Capstone expects to fund these development projects with a combination of equity and project-level debt financing. Capstone's equity contributions will be funded from existing cash and available credit in combination with equity partners, including First Nations and municipalities. The project debt financing for the near-term projects, which is expected to be established between the first and fourth quarters of 2014, is expected to be specific to each project, non-recourse to Capstone and on comparable terms to typical wind power projects. The mid-term projects have expected CODs from 2015 to 2016. Seasonality Results for Capstone’s power segment fluctuate during the year due to seasonal factors that affect quarterly production of each facility. These factors include scheduled maintenance 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 (2) Biomass (2) Hydro Solar Total PPA Expiry 2014 2020 - 2037 2014 2017 - 2042 2031 Actual 2013 1,287.5 469.3 198.4 168.7 36.6 Average long-term production (GWh) (1) Q1 343.4 140.6 50.2 31.5 6.4 Q2 281.4 105.6 45.5 57.2 13.1 Q3 302.3 75.4 50.3 30.4 12.4 Q4 334.1 135.9 49.3 41.0 5.9 Annual 1,261.2 457.5 195.3 160.1 37.8 2,160.5 572.1 502.8 470.8 566.2 2,111.9 (1) Average long-term production is from March 2005 toDecember 31, 2013, except for Erie Shores, which is from June 2006, and Amherstburg, which is from July 2011 and the ReD wind facilities, which are from January 2013. (2) The average long-term production excludes the production of Capstone's equity investments (the Chapais biomass facility and the Glen Dhu and Fitzpatrick wind facilities). In addition, the PPAs for Cardinal, and the Wawatay and Dryden hydro facilities provide for higher prices to be paid for electricity delivered during winter months than electricity delivered during summer months. Outlook (1) In 2014, production and revenue are expected to increase based on a full year of ownership of the ReD facilities. This will be offset by higher project development costs as construction of the wind power projects progresses. All power facilities are expected to perform consistently with their long-term average production, subject to variations in wind, water flows, ambient temperatures and sunlight. In addition, we expect two of Capstone's development projects to contribute after COD. For Cardinal, transportation costs will be lower, reflecting a full year of the reduced TCPL rate. Finally, we expect lower maintenance capital expenditures than in 2013. Overall, Capstone expects the net impact of these factors to result in higher Adjusted EBITDA for the power segment in 2014 compared with 2013. (1) See page 20 for a description of various other material factors or assumptions underlying our outlook. 30 CAPSTONE INFRASTRUCTURE CORPORATION Infrastructure – Utilities Water Capstone’s water utilities segment includes a 50% ownership interest in Bristol Water, which is located in the United Kingdom. Capstone acquired a 70% interest in October 2011 from Suez Environnement through its subsidiary, Agbar (Sociedad General de Aguas de Barcelona) and subsequently sold a 20% indirect interest in Bristol Water to a subsidiary of ITOCHU Corporation in May 2012. Water supplied (megalitres) Revenue Operating expenses Interest income Adjusted EBITDA before non-controlling interest Less: non-controlling interest (1) Adjusted EBITDA Adjusted EBITDA of consolidated businesses with non-controlling interests Dividends from businesses with non-controlling interests AFFO For the year ended Dec 31, 2013 Dec 31, 2012 82,125 195,575 (100,030) 275 95,820 (47,943) 47,877 (47,877) 6,547 6,547 81,245 178,392 (93,954) 751 85,189 (36,987) 48,202 (48,202) 8,091 8,091 (1) Starting from May 10, 2012, the non-controlling interest increased to 50% from 30%. Revenue increased by $17,183, or 9.6%, primarily due to a 6.9% annual increase in water tariffs, which occurred on April 1, 2013, along with higher water consumption. Foreign exchange contributed $3,059. Operating expenses increased by $6,076, or 6.5%, mostly due to higher repairs and maintenance activities, as well as inflationary increases for energy, consumables, wages and salaries. Foreign exchange contributed $1,611. e Interest income decreased by $ 476, or 63.4%, due to lower average cash and short-term investment balances as cash was used to fund the capital expenditure program. Non-controlling interest increased on May 10, 2012 following the partial sale of Capstone's interest in Bristol Water to ITOCHU. Capstone’s t Adjusted EBITDA is reduced for Agbar’s 30% interest over the entire period and ITOCHU’s 20% interest beginning May 10, 2012. Dividends paid to Capstone by Bristol Water decreased by $1,544, or 19.1%, mainly due to the reduction in Capstone's ownership interest on 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 $520,000, or £294,000 (base price of £261,000 adjusted for inflation for new regulatory fiscal year). As at December 31, 2013, the cumulative capital expenditure incurred during AMP5 was $394,000, which was $20,000 lower than the original plan agreed with the Water Services Regulation Authority ("Ofwat"). Bristol Water's focus on meeting the AMP5 capital target has reduced the shortfall by 60% as cumulative capital expenditures for regulatory purposes increased by$167,000 during 2013. The shortfall was primarily the result of delays at the start of AMP5 due to the Competition Commission review process. Capstone expects its expenditures over AMP5 to achieve the regulator-approved capital expenditure. Seasonality Bristol Water experiences little seasonal variation in demand, resulting in stable revenue throughout the year. Operating expenses fluctuate depending on the availability of water from various sources, 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 leading to higher repairs and maintenance. 2013 ANNUAL REPORT 31 MANAGEMENT’S DISCUSSION AND ANALYSIS Regulatory Bristol Water is a regulated business subject to supervision by the industry regulator, Ofwat. The company submitted its five-year business plan for the 2014 price review ("PR14") in early December. In 2014, Ofwat will respond to Bristol Water's submission and approve the pricing Bristol Water is permitted to apply to customers’ charges in the five-year AMP6 period commencing in April 2015. Management continues to focus on achieving key regulatory output targets, including leakage of less than 50 million litres of water per day (“Ml/d”) in 2013/2014, and is targeting a top quartile ranking in Ofwat’s Service Incentive Mechanism (“SIM”) customer service measure. Strong performance on the SIM, which is measured through customer satisfaction surveys and quantitative data related to complaints, can result in an increased revenue allowance for Bristol Water in the next regulatory period. For the regulatory year ended March 31, 2013, Bristol Water achieved leakage levels of 42 MI/d, and had a SIM score of 86, which ranked fourth overall out of 19 companies in the industry. For the nine months ended December 31, 2013 of the current regulatory year, which excludes the seasonally high period for pipe bursts, Bristol Water had leakage levels of 40 MI/d and was ranked 12th after the first three SIM survey scores. GROWTH IN REGULATED CAPITAL VALUE Growth in Regulated Capital Value pp Actual Achieved RCV pp Regulator Deemed RCV 425 400 375 350 325 300 275 250 225 200 175 150 ’ ) s £ f o s n o i l l i m n i ( V C R 2006 2007 2008 2009 2010 2011 2012 2013 2014 Note: All data above refl ects fi scal years ended as at March 31, 2014 represents the estimated values at March 31, 2014. Note: All data above reflects fiscal years ended as at March 31. 2014 represents the estimated values at March 31, 2014. WATER LEAKAGE VERSUS TARGET Water Leakage Versus Target pp Actual (Annual) pp Target (Annual) 60 50 40 30 20 10 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 2013 Outlook (1) Bristol Water is expected to continue its strong operational performance, which will generate cash flow for dividends and reinvestment in the capital expenditure program. In 2014, Capstone expects Bristol Water's financial results to reflect: • • • Revenue growth from a 6.4% approximate increase in the regulated water tariff commencing April 1 2014; Operating costs to grow between 4% and 5% primarily from inflation and price increases, thereby partially offsetting revenue growth; and Regulated capital value ("RCV") nominal growth between 5% and 6% as Bristol Water delivers its capital expenditures of approximately $123,000 (£70,000). Growth in RCV leads to future revenue growth as the system expands. In 2014, expenditures on capital projects will begin to taper off in the second half of the year as Bristol Water approaches its AMP5 approved expenditures. Bristol Water's capital program is aimed at improving and expanding Bristol Water's network of reservoirs, treatment facilities, water mains and pipes in order to continue providing high quality water to customers, reducing the amount of water lost to leakage, and positioning Bristol Water to effectively serve a growing population. Bristol Water will continue its work on PR14 to gain Ofwat approval for a business plan that includes future pricing for services and capital expenditure plans for AMP6. Overall, Capstone expects these factors to contribute to higher Adjusted EBITDA for the utilities-water segment in 2014 compared with 2013. (1) See page 20 for a description of various other material factors or assumptions underlying our outlook. 32 CAPSTONE INFRASTRUCTURE CORPORATION Infrastructure – Utilities District heating Capstone’s district heating utilities segment comprises a 33.3% interest in Värmevärden, located in Sweden. Capstone's investment includes loans receivable and equity. In 2012, the business completed a bond offering, resulting in repayment of a portion of the loans due to shareholders. Värmevärden's overall financial performance in 2013 was below 2012, primarily due to the use of alternative, more expensive heat production systems during periods when primary systems required maintenance. Overall, Värmevärden's cash flow to support interest and dividend payments to shareholders remained strong. HEAT AND STEAM PRODUCTION Heat and Steam Production pp 2012 pp 2013 Heat and steam production (GWh) Equity accounted income (loss) proportionate to Capstone Interest income Dividends Adjusted EBITDA and AFFO Interest income For the year ended Dec 31, 2013 Dec 31, 2012 1,091 (2,950) 2,861 3,104 5,965 1,078 2,315 3,356 2,001 5,357 200 150 h W G 100 50 0 JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC During the first four months of 2012, Värmevärden used the bond issuance proceeds to reduce Capstone's shareholder loan from$81,587 to $33,628. As a result, in 2013, Capstone received $495 less interest income. Dividends Capstone received $1,103 higher dividends from Värmevärden in 2013. The increase was primarily due to distribution of surplus cash attributable to prior years' performance. Equity accounted income (Loss) Equity accounted income (loss) included in Capstone's net income was $5,265 lower than in 2012, mostly due to a decrease in enacted tax rates that resulted in a deferred tax recovery. In addition, during 2013, more expensive heat production systems were used in periods when primary systems required maintenance. Seasonality Heat production is typically highest during the first quarter, which coincides with the coldest months of the year. The first and fourth quarters combined have historically accounted for approximately 65% of Värmevärden’s annual revenue. Outlook (1) Interest income from the shareholder loan is expected to be consistent with 2013 while dividends are expected to be higher in 2014, resulting in higher Adjusted EBITDA from the district heating segment compared with 2013. (1) See page 20 for a description of various other material factors or assumptions underlying our outlook. FUEL MIX BREAKDOWN BY MWH 2013 FUEL MIX BREAKDOWN BY MWH 2012 FUEL MIX BREAKDOWN BY COST (SEK) 2013 FUEL MIX BREAKDOWN BY COST (SEK) 2012 pp 14% Industrial Heat pp 5% Electricity pp 5% Fossil Fuel pp 76% Bio and Waste Fuel pp 13% Industrial Heat pp 4% Electricity pp 6% Fossil Fuel pp 77% Bio and Waste Fuel pp 11% Industrial Heat pp 18% Electricity pp 16% Fossil Fuel pp 56% Bio and Waste Fuel pp 11% Industrial Heat pp 17% Electricity pp 13% Fossil Fuel pp 59% Bio and Waste Fuel 2013 ANNUAL REPORT 33 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 Administrative expenses Staff costs Other administrative expenses For the year ended Dec 31, 2013 Dec 31, 2012 (10,369) (4,361) 179 (11,070) (342) 18 (14,551) (11,394) (5,182) (3,750) (2,534) (5,988) (3,750) (612) (26,017) (21,744) For the year ended Dec 31, 2013 Dec 31, 2012 6,133 4,236 10,369 6,749 4,321 11,070 Staff costs decreased by $616, or 9.1%, primarily due to the CEO's deferral of short-term incentive plan ("STIP") amounts, which were taken as a grant under the long-term incentive plan ("LTIP"). The LTIP grant is recognized in net income over the period up to vesting, whereas STIP payments are accrued in the year earned. This decrease was partially offset by higher LTIP expense for new grants since January 2013 and the addition of corporate staff who joined following the ReD acquisition on October 1, 2013. Other administrative expenses increased by $85, or 2.0%, primarily including expenses for audit fees, investor relations costs, office administration and premises costs and professional fees other than for business development. Other administrative expenses also include costs assumed by Capstone following the ReD acquisition on October 1, 2013. Project development costs increased by s $4,019, primarily due to $4,278 in costs related to the acquisition of ReD. Interest income increased by e $161, or 894%, primarily due to higher average cash balances in 2013. Interest paid decreased by $806, or 13.5%, primarily due to a $112,375 reduction in corporate debt during the first six months of 2012. The debt was repaid from the proceeds of the Värmevärden recapitalization, new debt on the hydro power facilities and sale of a 20% interest in Bristol Water in the first six months of 2012. This interest decrease was partially offset by $1,146 of interest paid on the new ReD Debentures. Preferred share dividends paid and taxes paid Dividends on Capstone's preferred shares are paid quarterly equivalent to a fixed rate of 5.0% per year. Taxes paid relate to the preferred share dividends and are available to offset future income taxes of the Corporation. Taxes paid in 2013 were $1,922, or 314%, higher than in 2012. The increase primarily reflected $1,100 paid in the first quarter of 2013 for the final installment for 2012 taxes on the preferred share dividends. The remaining difference is attributable to all installments for 2013 being made in the year. Outlook (1) In 2014, Capstone expects financial results for corporate to reflect: • • • • Lower corporate project development expenses than in 2013 when ReD was acquired; Higher staffing costs as the corporate team expanded following the ReD acquisition; and Higher professional fees than in 2013 due to ongoing transition and integration for the ReD acquisition. Higher interest paid due to assumption of the ReD convertible debentures and refinancing of credit facility previously in the power segment. Overall, Capstone expects these factors to result in slightly higher corporate expenses compared with 2013. (1) See page 20 for a description of various other material factors or assumptions underlying our outlook. 34 CAPSTONE INFRASTRUCTURE CORPORATION FINANCIAL POSITION REVIEW Overview As at December 31, 2013, Capstone had a consolidated working capital surplus of $37,375 compared with $30,821 at December 31, 2012. The surplus improvement of $6,554 reflected a $1,770 increase from the businesses acquired with ReD, $1,242 for the other power businesses and $12,732 at corporate. These increases were offset by a $9,190 decline at utilities - water. Unrestricted cash and cash equivalents totaled $45,768 on a consolidated basis at December 31, 2013 compared with $49,599 at December 31, 2012. The increase reflected $11,192 for the businesses acquired with ReD and a $2,844 increase at corporate offset by decreases of $16,185 and $1,682 in the utilities - water and other power businesses, respectively. During 2013, Capstone’s debt to capitalization ratio (refer to page 36) increased from 62.7% to 65.7% on a fair value basis and decreased from 57.6% to 57.3% on a book value basis. The increase in Bristol Water's debt to fund ongoing capital expenditures and foreign exchange translation increased the ratio on both a fair value and a book value basis. The year-over-year decline in Capstone's share price also contributed to the ratio's increase. This was offset by the ReD acquisition for which the ratio of debt assumed to equity issued was lower than Capstone's ratio prior to acquisition. As at December 31, 2013, Capstone and its subsidiaries complied with all debt covenants. Liquidity Working capital As at Power Utilities – water Corporate Working capital Dec 31, 2013 Dec 31, 2012 31,638 933 4,804 37,375 31,041 10,123 (10,343) 30,821 The power segment working capital as at December 31, 2013 was $646 higher for the ReD businesses acquired. For the remaining power facilities, working capital changes from December 31, 2012 were primarily attributable to timing of cash distributions to corporate, higher revenue receivables and restricted cash increases in accordance with credit facility requirements. The utilities - water segment working capital reduction primarily reflected cash reduction to fund the capital expenditure program. The lower working capital balance at Bristol Water reflected a conscious effort to ensure more efficient management of surplus working capital. In addition to cash, Bristol Water has $70,508 of credit availability for liquidity and to fund the longer term capital projects. The increase in corporate working capital was primarily attributable to an accumulation of cash following the dividend change and stable distributions from Capstone's businesses. Cash and cash equivalents As at Power Utilities – water Corporate Unrestricted cash and cash equivalents Less: cash with access limitations Power Utilities – water Cash and cash equivalents available to Capstone Dec 31, 2013 Dec 31, 2012 28,991 9,130 7,647 45,768 (18,096) (9,130) 18,542 20,941 25,315 3,343 49,599 (8,386) (25,315) 15,898 Unrestricted cash represents funds available for operating activities, capital expenditures and future acquisitions. The decrease of $3,831 in cash from December 31, 2012 was primarily attributable to a $16,185 reduction in Bristol Water cash to fund the expenditure program. This was partially offset by the addition of $11,192 in cash from the businesses acquired with ReD, which is reflected in the power segment and corporate. Cash and cash equivalents available to Capstone represent funds available for general purposes, including payment of dividends to shareholders. For the power segment, $18,096 of cash is only periodically accessible to Capstone through distributions under the terms of the credit agreements for the hydro power facilities, Erie Shores, Amherstburg and ReD's operating wind facilities, including Glace Bay, the SkyGen facilities, and Amherst. 2013 ANNUAL REPORT 35 MANAGEMENT’S DISCUSSION AND ANALYSIS Restricted cash The restricted cash increase of $10,318 was due to $7,864 for debt service and maintenance reserve accounts of Glace Bay and ReD. Restricted cash represents reserve accounts of $13,609 and $9,695 at the power segment and Bristol Water, respectively, and corporate cash of $6,243 required to support letters of credit. Cash flow Capstone’s consolidated cash and cash equivalents decreased by $3,831 in 2013 compared with a decrease of $7,988 in 2012. The components of the decrease, as presented in the consolidated statement of cash flows, 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, 2013 Dec 31, 2012 135,676 (129,257) 14,705 (25,446) 491 (3,831) 114,678 (4,949) (92,503) (26,131) 917 (7,988) Cash flow from operating activities generated s $20,998 more cash and cash equivalents than in 2012. Operating cash flow increased by $20,306 and $9,937 at the power and utilities - water segments, respectively. This was partially offset by decreases of operating cash flow of $8,625 and $620 for corporate and Värmevärden, respectively. The power segment increase was primarily attributable to revenue increases as well as $7,437 of cash flow from ReD's operating facilities since acquisition on October 1, 2013. Cash flow from the utilities - water segment increased primarily in response to higher revenue. Cash flow used for investing activities increased by s $124,308 primarily because Bristol Water used $69,639 in cash to fund the capital expenditure program. This included a $9,006 reduction in accounts payable related to capital expenditures. In addition, the 2012 use of cash was net of $47,964 of proceeds received from the Värmevärden recapitalization. Cash flow from (used by) financing activities was a use of funds in 2012 and a source of funds in 2013. During the year, Bristol Water increased its debt by $70,896 to fund the capital expenditure program. This was partially offset by a $22,558 reduction of Bristol Water's revolving bank loan using surplus cash and $6,972 use of cash for the redemption of ReD debentures. In 2012, cash flow used by financing activities included corporate and power refinancing activities, which resulted in a net reduction of debt of $135,066. These uses of funds were offset by $68,952 from the partial sale of Bristol Water. In addition, scheduled debt repayments were $18,351 in 2013 and $17,624 in 2012. Dividends paid to shareholders were $685 lower than in 2013 primarily due to reduction of Capstone's common share dividend since the second quarter of 2012. This was partially offset by higher dividends for the increase in shares for the acquisition of ReD on October 1, 2013. 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 (1) Utilities – water (1) Corporate Deferred financing fees Equity Shareholders’ equity (2) Total capitalization Debt to capitalization Dec 31, 2013 Dec 31, 2012 Fair Value Carrying Value Fair Value Carrying Value 346,244 313,816 81,694 — 349,807 288,017 80,107 (7,446) 305,497 259,830 44,416 — 297,792 237,324 40,631 (7,884) 741,754 710,485 609,743 567,863 388,058 529,550 1,129,812 1,240,035 363,248 972,991 418,848 986,711 65.7% 57.3% 62.7% 57.6% (1) Only Capstone's proportionate interest in the long-term debt has been included in the calculation. (2) The carrying value of shareholders’ equity does not include the amount attributed to the non-controlling interest. 36 CAPSTONE INFRASTRUCTURE CORPORATION Power The composition of the power segment’s long-term debt was: As at Dec 31, 2013 Dec 31, 2012 Maturity Interest Rate Fair Value Carrying Value Fair Value Carrying Value CPC-Cardinal credit facility Repaid 4.53% Erie Shores project debt Glace Bay project debt Sky Gen project debt Amherst project debt Amherstburg project debt Hydro facilities' senior secured bonds Hydro facilities' subordinated secured bonds Less: non-controlling interest Capstone share of long-term debt 2016 & 2026 5.28 – 6.15% 2019 - 2032 4.72 - 6.36% 2016 - 2017 4.22 - 6.22% 2032 2016 2040 2041 4.72% 7.32% 4.56% 7.00% — 96,613 17,104 37,137 44,491 86,680 67,559 18,461 368,045 (21,801) 346,244 — 92,156 17,243 36,965 44,770 86,680 73,688 20,242 371,744 (21,937) 349,807 12,050 106,538 — — — 90,560 76,347 20,002 12,050 97,703 — — — 90,560 77,237 20,242 305,497 297,792 — — 305,497 297,792 During 2013, long-term debt in the power segment increased by $52,015 primarily due to $77,041 of debt assumed from the acquisition of ReD. The increase was partially offset by $12,976 of scheduled debt repayments at Erie Shores, Amherstburg and the hydro facilities, as well as a $12,050 repayment of the CPC-Cardinal credit facility, as the Corporation entered into a new corporate credit facility. As at December 31, 2013, approximately 96.7% of the power segment's long-term debt was scheduled to amortize over the lives of the facilities' respective PPAs. All of the debt in the power segment is non-recourse to Capstone, except for a $5,000 limited recourse guarantee provided to the lenders of Erie Shores project debt by CPC, a $1,000 limited recourse guarantee provided by ReD to the lenders of the Amherst project and a $500 guarantee provided by ReD to lenders of the Fitzpatrick wind facility. Covenant compliance All of the power segment’s long-term debt is subject to financial covenant requirements. Each debt agreement individually requires the respective business to maintain minimum debt service coverage ratios to allow for distributions to the Corporation. During 2013, 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, 2013 Dec 31, 2012 2015-2017 1.23%- 5.73% 2032 – 2041 5.70 – 6.74%(1) Irredeemable 3.50 – 4.25% Irredeemable 8.75% 87,056 505,322 2,424 32,830 87,329 457,786 2,275 28,644 31,540 457,563 2,346 28,211 31,430 414,857 2,072 26,289 627,632 576,034 519,660 474,648 (313,816) (288,017) (259,830) (237,324) 313,816 288,017 259,830 237,324 (1) Certain of the terms loans are index-linked debt. The effective interest rate disclosed in the table is the sum of the real interest rates on the debt (2.701-3.635%) plus the Retail Price Index ("RPI"). Bristol Water pays interest on these loans based on the real interest rate, and the principal amount of the loan is indexed to RPI. Long-term debt for the utilities – water segment is used to fund current and ongoing capital expenditures to improve Bristol Water’s network. The increase in long-term debt is related to draws for cash requirements related to the capital expansion. As at December 31, 2013, approximately 80.2% of the utilities - water segments long-term debt had maturities of greater than 10 years. All of the debt in the utilities - water segment is non-recourse to Capstone. The preferred shares are classified as long-term debt on the basis that they are irredeemable. 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 2013, Bristol Water complied with all its covenants. 2013 ANNUAL REPORT 37 MANAGEMENT’S DISCUSSION AND ANALYSIS Corporate The composition of Capstone’s corporate long-term debt was as follows: As at Corporate credit facility Convertible debentures - issued December 2009 Convertible debentures - assumed on acquisition of ReD Maturity Interest Rate Fair Value Carrying Value Fair Value Carrying Value Dec 31, 2013 Dec 31, 2012 2016 2016 2017 3.52% 6.50% 6.75% 11,300 42,963 27,431 81,694 11,300 41,068 27,739 80,107 — 44,416 — 44,416 — 40,631 — 40,631 During 2013, long-term debt at corporate increased $39,476 from 2012, primarily due to the acquisition of ReD and the refinancing of the CPC-Cardinal credit facility. Upon acquiring ReD, Capstone assumed $34,500 of redeemable, extendible convertible unsecured subordinated debentures, which remain obligations of ReD. Since acquisition, $6,972 of the debentures were redeemed and $100 were converted to shares of the Corporation, both at the holders' option. Capstone provides credit support for the ReD Debentures. On November 12, 2013, the Corporation entered into a new corporate credit facility to repay the CPC-Cardinal credit facility and provide financial flexibility for general corporate purposes, including future acquisitions. The corporate credit facility was structured as a revolver with $32,500 of available credit. In January 2014, the available credit was increased by $17,500, bringing the total to $50,000 of credit of which $25,239 was drawn or committed as of December 31, 2013, of which $13,939 reflected committed letters of credit. Covenant compliance During 2013, Capstone complied with all covenants. Shareholders’ equity Shareholders’ equity comprised: As at Common shares Class B exchangeable units Preferred shares Share capital Other equity items (1) Accumulated other comprehensive income (loss) Retained earnings (deficit) Equity to Capstone shareholders Non-controlling interests Total shareholders’ equity Dec 31, 2013 Dec 31, 2012 710,662 632,474 26,710 72,020 26,710 72,020 809,392 731,204 9,428 17,013 9,284 (809) (306,283) (320,831) 529,550 138,613 668,163 418,848 91,610 510,458 (1) Other equity items include the equity portion of convertible debentures, as well as the warrant and share option reserves. 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, 2013 Year ended Dec 31, 2012 Shares 72,445 19,719 670 20 92,854 Amount 632,474 75,453 2,635 100 Shares 70,957 — 1,488 — Amount 626,861 (89) 5,702 — 710,662 72,445 632,474 (1) During 2013, Capstone issued share capital in exchange for ReD shares on acquisition, which are net of $224 of transaction costs (2012 - $89). 38 CAPSTONE INFRASTRUCTURE CORPORATION The composition of fair value for shareholders’ equity was as follows: As at Dec 31, 2013 Dec 31, 2012 ($000s, except per share amounts) Common shares Class B units Preferred shares Market Price per Share Outstanding Amount $3.56 $3.56 $15.31 92,854 3,249 3,000 Fair Value 330,560 11,568 45,930 388,058 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 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. Contractual Obligations As at December 31, 2013, Capstone had outstanding contractual obligations with amounts due as follows: Long-term debt (1)t Finance lease obligations (1) Operating leases Asset retirement obligations Purchase obligations Total contractual obligations Within one year One year to five years Beyond five years 63,839 691 2,027 — 146,720 213,277 479,569 4,005 9,542 — 39,017 532,133 934,549 925 21,066 13,112 11,161 980,813 Total 1,477,957 5,621 32,635 13,112 196,898 1,726,223 (1) Long-term debt and finance lease obligations include principal or minimum lease payments, respectively and interest payments. Long-term debt • Long-term debt is discussed on page 36 of this MD&A as a part of the Capital Structure section. Finance lease obligations • Bristol Water has finance leases for certain equipment and vehicles. Operating leases The following leases have been included in the table based on known minimum operating lease commitments as follows: • • • The Corporation has operating leases for corporate offices and power development purposes. These leases have terms ranging from 2015 to 2018, with options to extend. Amherstburg leases the land on which it is located. The terms of the lease agreement extend to 2032. Capstone's operating wind facilities and wind development projects have entered into agreements for the use, or option to use, land in connection with the operation of existing and future wind farms. Payment under these agreements is typically a minimum amount with additional payments dependent on the amount of power generated by the wind facility. The agreements can be renewed and extend as far as 2047. Capstone has additional operating lease commitments not included in the table with no minimum operating lease commitments required as follows: • • Capstone has agreements with the Provinces of Ontario and British Columbia for the lease of certain lands and water rights necessary for the operation of its hydro power facilities. The payments under these agreements vary based on actual power production. The terms of the lease agreements extend from 2023 and 2042. Cardinal leases the site on which it is located from Ingredion Canada Incorporated ("Ingredion"). Under the lease, Cardinal pays nominal rent. The lease extends to 2016 and expires concurrently with the energy savings agreement between Ingredion and Cardinal. Asset retirement obligations • Commitments associated with our asset retirement obligations for Capstone's power infrastructure facilities are projected to occur principally over the next 30 years. Purchase obligations Capstone enters into contractual commitments in the normal course of business. These contracts include capital commitments, natural gas purchase contract and operations and management agreements as follows: Capital commitments • As part of Capstone's power development operations, Capstone enters various construction and purchase agreements. As at December 31, 2013, Capstone had approximately $61,000 of construction and turbine supply agreements for the Saint-Philémon and Skyway 8 projects. • Bristol Water has commitments for capital expenditures at December 31, 2013 of which $26,172 were contracted but had not yet occurred. • Cardinal placed a purchase order for a $20,140 ($19,000 USD) rotor and exhaust cylinder to be installed during the scheduled major maintenance in 2015. The purchase order includes a termination fee that escalates with the passage of time. As at December 31, 2013, the penalty was $1,060 ($1,000 USD) and increases to $3,180 ($3,000 USD) by March 2014. Capstone's first installment payment of $2,120 was made in February 2014. 2013 ANNUAL REPORT 39 MANAGEMENT’S DISCUSSION AND ANALYSIS Natural 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 ("O&M") agreements • Capstone has an agreement with Agbar, which provides management support to Bristol Water, with an initial five-year term that automatically extends indefinitely. Capstone has the ability to terminate the contract. • 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 several turbine maintenance service agreements covering the turbines in operation on various wind farms. The agreements provide for scheduled and unscheduled maintenance and require annual minimum payments, subject to inflationary increases, as applicable. • 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. Other commitments In addition to the commitments included in the table Capstone has the following other commitments with no fixed minimum payments: Management services agreements Capstone has agreements with the all of ReD's partially owned investments, including Glen Dhu, Fitzpatrick, Amherst and various development projects. For the operating projects, these agreements are primarily for the provision of management and administration services and are based on an agreed percentage of revenue. The development projects additionally include a development fee for the successful completion of the projects, which pays an agreed fee per MW on completion of development. 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. 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. Guarantees • • Capstone has provided limited recourse guarantees on the project debt of Erie Shores, Amherst, and Fitzpatrick totaling $6,500 as at December 31, 2013. Capstone also provides three guarantees relating to Clean Power Income Fund's legacy obligations. As at December 31, 2013, 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 Equity accounted investments were $22,061 higher in 2013, primarily due to the acquisition of ReD. As part of this transaction, Capstone acquired ownership interests of Glen Dhu and Fitzpatrick, operating wind projects in Nova Scotia, and SPWC, a project development company. These new investments all share the same controlling partner. Capstone's equity accounted investments are summarized as follows: Name of entity Värmevärden AB (“Värmevärden”) (1)) Glen Dhu Wind Energy Limited Partnership ("Glen Dhu") (2)) Fitzpatrick Mountain Wind Energy Inc. ("Fitzpatrick") Macquarie Long Term Care L.P. (“MLTCLP”) (3) SPWC Development L.P. ("SPWC") (4) Chapais Électrique Limitée (“Chapais”) (4) Principal place of business and country of incorporation Sweden Canada Canada Canada Canada Canada Ownership at December 31, 2013 33.3% 49% 50% 45% 50% 2012 33.3% Nil Nil 45% Nil Principal activity District heating Power generation Power generation Holding company Development 31.3% 31.3% Power generation (1) Värmevärden is further detailed in the results of operations on page 33 of this MD&A. (2) Under the limited partnership agreement, Capstone has the option to acquire an additional 1% interest from November 2017 to November 2018 at a price based on a predetermined calculation. (3) MLTCLP had no significant activity in the year ended December 31, 2013. (4) No income has been recorded on the investment since its acquisition. Capstone does not expect to earn any future equity accounted income from this investment. 40 CAPSTONE INFRASTRUCTURE CORPORATION Capital Expenditure Program Capstone incurred $135,696 in capital expenditures during 2013, which was attributable to each operating segment as follows: Power Utilities – water Corporate For the year ended Dec 31, 2013 Dec 31, 2012 5,722 129,925 49 5,432 140,555 86 135,696 146,073 Capital expenditures for the power segment in 2013 were in the normal course of operations and primarily related to scheduled maintenance outages with the exception of a $947 investment in WindBOOST at Erie Shores. In 2012, capital expenditures in the power segment primarily related to Cardinal's hot gas path inspection. For the utilities – water segment, expenditures included both growth initiatives and maintenance activities as outlined in Bristol Water’s regulatory capital expenditure program. In aggregate, Bristol Water’s capital expenditure program spans the AMP5 five-year period. Overall, Bristol Water’s expenditures to date are $20,000 behind the five-year plan but are expected to be fully completed by the end of AMP5 in March 2015. Retirement Benefit Plans Bristol Water has a defined benefit plan for current and former employees, which is closed to new employees. This expense is incurred entirely at Bristol Water. There are also defined contribution plans for the employees of Bristol Water and Cardinal. As at Fair value of assets Present value of defined benefit obligation Dec 31, 2013 Dec 31, 2012 300,606 271,650 (254,365) (234,075) 46,241 37,575 As at December 31, 2013, the defined benefit plan was in a $46,241 surplus position for accounting purposes. The surplus is subject to a number of critical accounting estimates that can materially impact the balances, including foreign exchange translation. 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 2014, Bristol Water expects to contribute $4,374 compared with its actual contribution of $3,840 in 2013. The total defined contribution pension expense recorded in the consolidated statement of income in 2013 was $1,563. The expense comprised $1,383 for Bristol Water and $180 for Cardinal. Income Taxes Current income tax expense was $2,004 for 2013. This was primarily attributable to $1,494 for Part XII.6 taxes and reassessments on the shortfall of Canadian Renewable and Conservation Expenses ("CRCE") arising from the flow-through shares issued by ReD. 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. Deferred income tax assets and liabilities are presented on a net basis where there is a legal right of offset within the same tax jurisdictions. As at Deferred income tax assets Deferred income tax liabilities Dec 31, 2013 Dec 31, 2012 494 (182,567) (182,073) 3,038 (155,495) (152,457) Capstone’s deferred income tax assets of $494 ($3,038 at December 31, 2012) were attributable to the power segment and primarily relate to non-capital tax loss carry-forwards. The deferred income tax liabilities balance comprised $74,074 ($53,226 at December 31, 2012) for Capstone’s Canadian entities while $108,493 ($102,269 at December 31, 2012) 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. In 2013 Capstone’s net deferred income tax liability increased by $29,616 which includes $15,548 assumed on the acquisition of ReD. In addition, the net liability increased by $14,068, primarily due to differences between accounting and tax depreciation taken in 2013 and defined benefit pension plan at Bristol Water. These increases were partially offset by a $12,248 tax recovery attributable to a tax rate reduction in the United Kingdom from 23% to 20% effective April 1, 2015. 2013 ANNUAL REPORT 41 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, 2013. 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, 2013 Dec 31, 2012 1,328 (13,840) (12,512) 2,021 (30,651) (28,630) The net derivative contract liabilities were $16,118 lower than at December 31, 2012, primarily due to a $12,815 change in the fair value of the underlying instruments, followed by the settlement of $2,407 for Erie Shores' interest rate swap, reducing a liability, and purchase of $896 for foreign exchange contracts, increasing an asset. The changes in fair value of the underlying instruments are included as part of other gain and losses of $11,833 in the statement of income, both realized and unrealized portions respectively and $982 in other comprehensive income. The unrealized gain (loss) on derivatives on the consolidated statements of income and comprehensive income comprised: Interest rate swap contracts Foreign currency option contracts Embedded derivative Gains on derivatives in net income Interest rate swap contracts in OCI Gains on derivatives in comprehensive income Year ended Dec 31, 2013 Dec 31, 2012 6,764 (1,295) 6,364 11,833 982 12,815 (100) (975) 3,680 2,605 (642) 1,963 Unrealized gains on derivatives for the year ended December 31, 2013 were primarily attributable to the change in value of the interest rate swap contracts, followed by the embedded derivative at Cardinal, partially offset by losses on the foreign currency contracts. The gain on interest rate swap contracts was primarily due to a gain of $6,217 on the interest rate swap on the Amherstburg debt. The fair value increased due to an increase in long-term interest rates. 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 forward-looking rates for the Swedish krona and UK pound sterling relative to the fixed Canadian dollar conversion rate. FOREIGN EXCHANGE The foreign exchange gains were primarily due to translation of Capstone’s SEK-denominated shareholder loan receivable with Värmevärden. Capstone recorded a $2,924 foreign exchange gain in 2013 compared with a $1,620 gain in 2012. In 2013, the Swedish krona appreciated by a greater margin against the Canadian dollar thereby increasing the carrying value of the loans in Canadian dollars, compared with 2012. The 2013 gain was partially offset by the decline in the shareholder loan balance following repayment of more than half of the balance in early 2012, reducing the impact of Swedish krona appreciation. Capstone hedges the interest payments from Värmevärden, but not the outstanding loan receivable. 42 CAPSTONE INFRASTRUCTURE CORPORATION RISKS AND UNCERTAINTIES Introduction Risk is an inevitable aspect of operating any 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, to the extent possible, 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 and financial 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 maintains a registry of risks that is reviewed by management and the Board of Directors at least quarterly. The Corporation also undertakes an annual comprehensive review of its ERM framework and practices to continuously improve its risk management practices. What follows is a description of the Corporation's key risk governance and risk processes to support achievement of strategic and financial 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. Risk management is: • • • • • Everyone's responsibility; About decision making; Embedded within existing management routines; About people and culture; and Specific to each business unit. The Corporation's implementation of the ERM framework includes the following hierarchy of responsibilities: • Board of Directors and Audit Committee have overall governance responsibility for e overseeing management's implementation of the risk management policy. • Internal Audit is responsible for reviewing management's practices to manage risk t and reporting to the Audit Committee. • Senior Management is responsible for ensuring the implementation of the ERM framework to all applicable activities and reporting to the Audit Committee. t • Business Units are responsible for ensuring the application of a risk management framework to identify, monitor and report risk. • 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. • • • • • • 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 balance between risk and reward. t Monitoring and reporting are the processes of assessing the effectiveness of risk management responses. g Training and support ensure that personnel tasked with risk management responsibilities have sufficient knowledge and experience to t complete their risk management obligations. 2013 ANNUAL REPORT 43 MANAGEMENT’S DISCUSSION AND ANALYSIS The Corporation's risk management approach is comprehensive. It combines the experience and specialized knowledge of individual business segments and 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 process prioritizes risks. Catastrophic Major Moderate Minor Insignifi cant 5 4 3 2 1 k s i R f o t c a p m I Managing Risk Likelihood of Risk Occurrence Rare Unlikely Somewhat Likely 1 2 Likely 3 Almost Certain 4 5 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). Those risks that have affected the Corporation's financial statements, and risks that are reasonably likely to affect them in the future are presented in the table below, grouped according to: • • • Corporate and company-wide risks; Risks specific to Capstone's power infrastructure segment; and Risks specific to the utilities - water segment Risks related to the utilities - district heating segment, which is accounted for using the equity method, have not been included on the basis that they are not considered to have a material financial impact to Capstone's consolidated results. 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 the Corporation's results to differ significantly from its 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 and its Businesses Risk and Description Impact Monitoring and Mitigation Corporate and Company-wide k Financing risk is a financial risk concerning the ability to access timely and cost effective debt or equity to support construction of power facilities, Bristol Water's capital expenditure program, business acquisitions and replace maturing debt. Inability to access cost effective debt or equity could result in higher interest costs, lower earnings or liquidity difficulties. For an acquisition, this could also prevent Capstone from realizing a growth opportunity preventing Capstone from achieving its strategic objectives. Foreign currency risk is a financial risk k concerning volatility of the Canadian dollar against currencies from countries where Capstone entities either operate or make purchases. In the absence of mitigation, appreciation of the Canadian dollar could result in lower Canadian- dollar equivalent cash flows and earnings from foreign operations to Capstone. The fair value of businesses outside Canada may also decline if the Canadian dollar appreciates. Appreciation of the Canadian dollar could result in lower cost for acquisitions denominated in foreign currencies. Unanticipated increases in costs could result in lower earnings and cash flow. Expense management risk is a financial risk concerning unexpected non- recoverable increases in operating and administrative costs. k Expenses with near-term exposures include Cardinal's and Whitecourt's fuel supply and transportation costs. Capstone maintains relationships with multiple financial institutions that have the resources to provide some or all financing requirements. Capstone endeavours to secure committed financing prior to making offers to acquire businesses. In addition, most existing project debt amortizes over the term of the PPAs and debt maturities are staggered. To the extent practicable and economic in the circumstances, Capstone typically enters into economic hedging arrangements that minimize the impact of foreign currency volatility on cash flows between Canada and foreign jurisdictions. However, Capstone usually does not enter into arrangements to hedge financial statement earnings or carrying values of its foreign businesses. Capstone attempts to mitigate this risk by seeking high operating margin businesses that operate under long- term, fixed-price contracts and have contractual frameworks that accommodate cost escalation. 44 CAPSTONE INFRASTRUCTURE CORPORATION Risk and Description Impact Monitoring and Mitigation k Taxation risk is a financial risk concerning higher income and other taxes attributable to adverse legislation changes, including tax rate increases, or interpretations by tax authorities on audit. As a multi-national corporation, Capstone is exposed to global taxation initiatives or individual country differences from Canada. k Integration risk is an operational risk concerning the ability to incorporate an acquired business in a timely manner and to realize the projected benefits and synergies from the acquisition. Capstone is currently integrating ReD. Human resources retention risk is an operational risk concerning the ability to attract, retain and motivate key staff. k Power Power purchase agreement renewal risk is an operational risk concerning the finite term of contracts for the sale of electricity and the ability to renew the agreements on favourable terms. Capstone’s near-term PPA expiries are Cardinal in 2014, Whitecourt in 2014 and Sechelt in 2017. k Renewable resources risk is an operational risk concerning the dependence of power production on adequate resources such as wind, sunlight and water flow. Higher taxation results in both lower income and cash flow available for dividends to shareholders. Capstone monitors the trends and policies of taxation authorities in the OECD jurisdictions where its businesses operate. Capstone minimizes exposures to adverse tax rulings by choosing structures that adhere to taxation regulations, are commonly used in practice and wherever practical supported by opinions of external advisers. Failure to integrate businesses in a timely manner could lead to cost overruns or lost revenues and delay future business development initiatives. Capstone continuously improves its integration framework to promote the objectives of timeliness and cost effectiveness. Inability to retain key staff could prevent or delay Capstone from executing its business strategy, thereby causing the company to fall short of its financial forecasts. Failure to secure PPA renewals for power facilities that have remaining useful lives could result in lost revenue, unanticipated shut down costs and impairment of asset carrying values. Management is experienced in the acquisition and integration of businesses and has a track record for successfully integrating new businesses. Capstone mitigates this risk by providing competitive compensation as well as career and development opportunities. Capstone enters into discussions with PPA counterparties as early as possible to maximize the potential for renewal on favourable terms. Where renewal is not possible, Capstone pursues alternative arrangements, including pursuing bilateral arrangements and alternative revenue streams, including market pricing. For debt on facilities with PPAs, Capstone fully amortizes the debt up to the expiry of the PPA. Inadequate wind, sunlight or water flow leads to lower power production which results in lower revenues. Capstone maintains facilities in quality condition to maximize availability for power generation when renewable resources are available and strongest. k Development risk is an operational risk concerning the construction of new power generation facilities in line with the requirements of awarded PPAs. Delays and cost overruns in the construction of new facilities could lead to lower earnings and where PPA requirements are not met, cancellation of the PPA resulting in lost revenue and impairment of any capitalized costs for the facility. Utilities - Water Capital Program Delivery Risk is an operational risk concerning the ability to complete capital expenditures required by Bristol Water’s approved AMP5 business plan on a timely basis. Inability to complete projects in a timely manner would result in a lower RCV, which would reduce future revenues. In addition, shortfalls in the capital expenditure program would result in financial penalties from the regulator. k Health and Safety Risk is an operational risk concerning failure of Bristol Water’s policies and procedures to prevent an accident or water quality incident. k Price Review Risk is a regulatory risk concerning an adverse decision by Ofwat on Bristol Water's proposed business plan for AMP6. Accidents and other incidents could have harmful impacts on employees or the communities that Bristol Water serves, leading to reputational damage, penalties and remediation costs resulting in lower net income. An adverse regulatory decision for price or capital expenditure plans could result in lower revenues and earnings. Capstone also seeks to diversify its portfolio of businesses to mitigate the dependency on a single resource or geography. Capstone has professional project management processes and uses experienced contractors and advisors. Capstone contracts include a combination of incentives, liquidated damages, or fixed-pricing to align suppliers interests to achieve the commercial operations dates. Bristol Water has monitoring and professional project management processes together with appropriate construction arrangements, which include contingency and risk provisions. This is used in conjunction with overall program management to minimize the risk to achieving required delivery dates. Bristol Water minimizes its accident and incident rate by monitoring and following procedures implemented to meet the standards and legislation applicable to the water industry and companies operating in the UK. Bristol Water submits its proposal to Ofwat following dialogue with Ofwat and careful consultation of the public and consumer councils. When necessary, Bristol Water can choose to appeal to the Competition Commission. Ofwat also has a primary duty to ensure that water companies are able to finance themselves including earning a reasonable return on capital. 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. 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. 2013 ANNUAL REPORT 45 MANAGEMENT’S DISCUSSION AND ANALYSIS The Facilities are subject to complex and stringent environmental, health and safety regulatory regimes, which primarily focus on: Air emissions; Taking of water, management of water and discharges into water, including seasonality issues; The storage, handling, use, transportation and distribution of dangerous goods and hazardous and residual materials (such as chemicals); The prevention of releases of hazardous materials into the environment; The presence and remediation of hazardous materials in soil and ground water, both on and off site; • • • • • • Workers' and adjacent landowner health and safety issues; • • Sound and vibration matters; and Bird, bat and other wildlife impacts. 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 restriction on the amount of CO2O that the Cardinal facility may emit, although the facility is required to report its CO2OO 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. NOx emissions from Cardinal's generating equipment are lower than the levels mandated by legislation. 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. Wind Farms Capstone's wind farms, including Erie Shores, Glace Bay, Sky Gen, Amherst, Glen Dhu and Fitzpatrick, do not produce GHGs, but are subject to regulations and/or approvals relating to birds, mammals, other animals, and to sound. Amherstburg Solar Park The operation of Amherstburg does not generate GHGs. 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 CO2OO emissions by 20%, and increase their proportion of renewable energy to 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, which would encompass facilities such as Värmevärden, an important component of its overall plan to meet its CO2OO 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 2013-2014 is an immaterial amount due to credits arising from Bristol Water's purchase of green energy. 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). 46 CAPSTONE INFRASTRUCTURE CORPORATION RELATED PARTY TRANSACTIONS Capstone's related party transactions in 2013 primarily comprised management fees paid by Capstone's equity accounted investments and compensation to key management. Management fees earned from Capstone's equity accounted investments are reported in the consolidated statements of income as revenue. During 2013, Capstone earned fees of $115, primarily related to the management of Glen Dhu and Fitzpatrick. 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. Eligible directors and senior management of the Corporation also receive forms of stock-based compensation. Key management compensation is described in note 28 (Related Party Transactions) in the consolidated financial statements for the year ended December 31, 2013. 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: • • • • 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 incentive 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. 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. Purpose To attract and retain qualified executives. To motivate, attract and retain qualified executives. To reward long-term performance and align interests of executives with security holders. 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. 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. ($000s, except for per share amounts) Q4 Revenue Net income (loss) (1 and 3) Adjusted EBITDA AFFO Common dividends (2) Preferred dividends Earnings Per Share – Basic (3)c Earnings Per Share – Diluted (3)d AFFO per share Dividends declared per common share 110,291 10,441 37,992 13,930 7,208 938 0.099 0.096 0.145 0.075 2013 2012 Q3 91,418 8,887 26,253 3,346 5,720 938 0.104 0.102 0.044 0.075 Q2 93,539 10,015 31,834 9,014 5,709 938 0.119 0.117 0.119 0.075 Q1 94,255 12,019 32,342 13,644 5,696 938 0.145 0.141 0.180 0.075 Q4 94,654 12,909 31,074 13,560 5,579 938 0.147 0.143 0.179 0.075 Q3 84,951 5,836 24,542 3,381 5,655 938 0.065 0.065 0.045 0.075 Q2 85,849 (4,184) 27,516 3,707 10,231 938 (0.068) (0.068) 0.049 0.135 Q1 92,156 13,681 37,211 14,915 12,299 938 0.171 0.165 0.200 0.165 (1) Net income (loss) attributable to the shareholders of Capstone. (2) Common dividends include amounts declared for both the common shares of the Corporation and the Class B exchangeable units. (3) Net income (loss) and earnings (loss) per share have been restated for changes required by IFRS to implement IAS 19 - Employee Benefits. This change, which became effective, retroactively, January 1, 2013, is described in note 2 of the consolidated financial statements for the year ended December 31, 2013. 2013 ANNUAL REPORT 47 MANAGEMENT’S DISCUSSION AND ANALYSIS FOURTH QUARTER 2013 HIGHLIGHTS Revenue Operating expenses Administrative expenses Project development costs Equity accounted income (loss) Interest income Net pension 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, 2013 Dec 31, 2012 110,291 (54,885) (3,169) (2,097) 545 1,022 515 538 1,209 53,969 (13,858) (14,571) (2,878) 22,662 (1,744) (4,908) (6,652) 16,010 10,441 5,569 16,010 94,654 (51,663) (3,037) (279) 3,596 893 767 (378) 676 45,229 (11,047) (12,194) (2,582) 19,406 1,237 (3,712) (2,475) 16,931 12,909 4,022 16,931 Capstone's EBITDA increased by $8,740, or 19.3%, compared with the fourth quarter of 2012. Revenue increased by $15,637, or 16.5%, due to increases of $7,973 from the power segment and $7,664 from Bristol Water. The power segment increase reflected $5,714 from the addition of ReD, $1,981 from increased power generation at Erie Shores due to better wind conditions, and $733 of higher revenue at Cardinal due to higher power rates. Bristol Water's revenue increased primarily due to a favourable foreign exchange rate and higher regulated water tariffs charged to customers, which adjust annually on April 1. Expenses increased by $5,172, or 9.4%. • Operating expenses increased by $3,222, primarily due to Bristol Water ($1,740) and the addition of ReD ($1,475). Bristol Water's increase was primarily due to foreign exchange appreciation. • • Administrative expenses, which included s $260 in costs for ReD, were consistent with the fourth quarter of 2012. Project development costs increased by $1,818, primarily reflecting costs associated with the acquisition of ReD. In addition, Capstone's power development subsidiary, launched in December 2012, incurred $551 higher costs. Equity accounted income (loss) decreased by $ ) 3,051, or 84.8%, primarily due to Värmevärden, which had a deferred tax recovery in 2012 based on a decrease in enacted tax rates. Glen Dhu and Fitzpatrick contributed $608. e Interest income increased by $ 129, or 14.4%, due to higher average cash balances at corporate in 2013. Other gains and (losses) increased by $916, or 242%, primarily due to a gain of $1,253 on the fair value of the financial instruments, partially offset by losses on the disposal of capital assets at Bristol Water. Foreign exchange gain (loss) increased by $ ) 533 due to the impact of the appreciation of the Swedish krona on the loan receivable. e Interest expense increased by $ 2,811, or 25.4%, primarily due to $1,887 of additional interest for ReD project debt and convertible debentures, and a $699 increase at Bristol Water as debt increased to fund capital expenditures. Income tax provision was a net expense in both years. The 2013 current income tax expense of n $1,744 was primarily due to $1,494 of Part XII.6 tax and reassessments for the shortfall of CRCE attributable to the flow-through shares originally issued by ReD. The 2012 current income tax recovery of $1,237 was due to Bristol Water's refund of prior years taxes paid. The deferred income tax expense in both years was primarily due to differences between accounting and income tax depreciation. 48 CAPSTONE INFRASTRUCTURE CORPORATION ACCOUNTING POLICIES AND INTERNAL CONTROLS Significant Changes in Accounting Standards The consolidated financial statements have been prepared in accordance with IFRS. Capstone has adopted the new and revised standards, along with consequential amendments, effective January 1, 2013. These changes include: • • • • • • IFRS 10, Consolidated Financial Statements and IAS 27, Separate Financial Statements; IFRS 11, Joint Arrangements and IAS 28, Investments in Associates and Joint Ventures; IFRS 12, Disclosure of Interests in Other Entities; IFRS 13, Fair Value Measurement; IAS 1, Amendment, Presentation of Items of Other Comprehensive Income; and IAS 19, Employee Benefits. Refer to note 2 (Summary of Significant Accounting Policies) to the December 31, 2013 annual consolidated financial statements for detail of the nature and impact of these changes to Capstone financial statements. Certain comparative figures in this MD&A have been adjusted as if these accounting policies had always been applied. No adjustments were made to the periods before September 30, 2011, prior to the acquisition of Bristol Water. Future Accounting Changes The IASB has previously issued the following standard which has not yet been adopted by the Corporation: Title of the New IFRS (1) Impact to Capstone IFRS 9, Jan 1, 2015 - Financial Instruments Capstone's assessment of the impact of this standard is ongoing. (1) See note 2 to the consolidated financial statement for the year ended December 31, 2013 for further detail about the nature of these future accounting changes. Accounting Estimates The consolidated financial statements are prepared in accordance with IFRS, which requires the use of estimates and judgment in reporting assets, liabilities, revenues, expenses and contingencies. Refer to note 2 (Summary of Significant Accounting Policies) to the December 31, 2013 annual consolidated financial statements for greater detail of the areas of significance and the related critical estimates and judgments. Capstone's significant accounting estimates and judgments used in the preparation of the consolidated financial statements were: Area of Significance Critical Estimates and Judgments Capital assets, projects under development and intangible assets: • Purchase price allocations • Depreciation on capital assets • Amortization on intangible assets • Asset retirement obligations • Initial fair value of net assets. • Estimated useful lives and residual value. • Estimated useful lives. • Expected settlement date, amount and discount rate. • Impairment assessments of capital assets, projects under • Future cash flows and discount rate. development, intangibles and goodwill Retirement benefits Deferred income taxes • Future cash flows and discount rate. • Timing of reversal of temporary differences, tax rates and current and future taxable income. Financial instruments and fair value measurements • Interest rate, natural gas price, and direct consumer rate. Accounts receivable • Probability of failing to recover amounts when they fall into arrears. Accounting for investments in non-wholly owned subsidiaries • Determine how relevant activities are directed (either through voting rights or contracts); • Determine if Capstone has substantive or protective rights; and • Determine Capstone's ability to influence returns. Management’s estimates and judgements were based on historical experience, trends and various other assumptions that are believed to be reasonable under the circumstances. Actual results could materially differ from those estimates. 2013 ANNUAL REPORT 49 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 time frame 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 2013, Capstone updated its internal controls and testing for changes in its operations, including the acquisition of ReD. The CEO and CFO have concluded that Capstone's disclosure controls and procedures were effective as at December 31, 2013 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, 2013, 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, 2013. 50 CAPSTONE INFRASTRUCTURE CORPORATION MANAGEMENT’S RESPONSIBILITY FOR 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 President and Chief Executive Offi cer Toronto, Canada March 6, 2014 Michael Smerdon MICHAEL SMERDON Executive Vice President and Chief Financial Officer Executive Vice President and Chief Financial Offi cer 2013 ANNUAL REPORT 51 INDEPENDENT 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, 2013, December 31, 2012 and January 1, 2012 and the consolidated statements of changes in shareholders' equity, income, comprehensive income and cash flows for the years ended December 31, 2013 and December 31, 2012, 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, 2013, December 31, 2012 and January 1, 2012 and their financial performance and their cash flows for the years ended December 31, 2013 and December 31, 2012 in accordance with International Financial Reporting Standards. Chartered Professional Accountants, Licensed Public Accountants Toronto, Canada March 6, 2014 52 CAPSTONE INFRASTRUCTURE CORPORATION CONSOLIDATED 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 Projects under development Intangibles 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, 2013 Dec 31, 2012 Jan 1, 2012 (note 2) (note 2) 4 4 5 6 7 8 9a 8 9a 11 12 13 14 15 16a 17a 9a 18 19 9a 14 16a 17b 18 19 20 22 27 45,768 29,547 — 89,139 9,640 1,310 25 49,599 19,229 6,471 75,386 7,218 1,096 174 57,587 14,947 82,202 70,854 7,448 984 261 175,429 159,173 234,283 39,578 1,303 39,051 37,909 1,847 16,990 85,824 2,883 15,993 1,356,682 1,086,407 977,456 21,674 345,272 46,241 494 — — 283,919 288,304 37,575 3,038 60,104 3,382 2,025,724 1,626,858 1,668,229 116,852 106,767 2,219 609 18,374 138,054 11,621 1,634 3,106 3,502 14,977 128,352 27,545 3,260 81,734 3,088 5,256 230,899 320,977 31,055 4,894 182,567 155,495 148,686 15,589 3,761 6,298 3,699 1,363 6,727 1,001,042 789,655 704,145 3,293 2,096 2,412 1,357,561 1,116,400 1,220,259 529,550 138,613 2,025,724 418,848 413,520 91,610 1,626,858 34,450 1,668,229 2013 ANNUAL REPORT 53 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Balance, Dec 31, 2011 Adjustment relating to changes in accounting policy Balance, Jan 1, 2012 Common shares issued (5) Other comprehensive income (loss) Net income for the period Dividends declared to common shareholders of Capstone Dividends declared to preferred shareholders of Capstone (7) Dividends declared by Bristol Water Disposal of partial interest in Bristol Water Balance, Dec 31, 2012 Other comprehensive income (loss) Net income for the period Common shares issued (5) Other equity items issued or assumed on acquisition of ReD (6) Expense recognized through share option reserve Debenture conversions, net of costs Dividends declared to common shareholders of Capstone Dividends declared to preferred shareholders of Capstone (7) Dividends declared to NCI Contributions from NCI NCI in net assets acquired of ReD Balance, Dec 31, 2013 2 2 2 2 21f 2 2 21a 3 21a 21a,f 21f 22 22 3 Equity attributable to shareholders of Capstone Notes Share Capital (1) 725,591 Other yy Equity Items (2) AOCI (3) Retained Earnings NCI (4) Total Equity 9,284 (6,729) (314,626) 34,450 447,970 — — — — — — 725,591 9,284 (6,729) (314,626) 34,450 447,970 21a, f 5,702 (89) — — — — — — — — — — — — — — — (89) 5,171 (11,803) (6,915) (13,547) 28,243 17,728 45,971 — — — — (33,764) (4,575) — — — (5,312) 731,204 9,284 (809) (320,831) 749 15,694 — — 75,453 — — 100 2,635 — — — — — — — 85 62 (3) — — — — — 17,822 — — — — — — — — — — 51,659 91,610 12,690 25,848 — — — — — — 1,442 41,362 — — — — (24,333) (3,923) — — — (7,773) 3,405 12,833 (28,062) (4,575) (5,312) 68,102 510,458 31,954 67,210 75,453 85 62 97 (21,698) (3,923) (7,773) 3,405 12,833 809,392 9,428 17,013 (306,283) 138,613 668,163 (1) Share capital includes common and preferred shares and Class B exchangeable units. (2) Other equity items include the equity portion of convertible debentures, as well as, the warrant and share option reserves. (3) Accumulated other comprehensive income (loss) (“AOCI”). (4) Non-controlling interest (“NCI”). See note 22. (5) Shares issued are net of $224 transaction costs (2012 - $89). (6) Capstone issued 302 replacement options and 1,357 replacement warrants with a fair values of $85 and $Nil respectively at the time of ReD acquisition. (7) Dividends declared to preferred shareholders of Capstone include $173 of deferred income taxes (2012 - $200). See accompanying notes to these consolidated financial statements 54 CAPSTONE INFRASTRUCTURE CORPORATION CONSOLIDATED STATEMENTS OF INCOME ($000s, except per share amounts) Revenue Operating expenses Administrative expenses Project development costs Equity accounted income (loss) Interest income Net pension 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 Diluted For the year ended Notes Dec 31, 2013 Dec 31, 2012 25 25 25 11a 9b 15 26 9b 12 14 16d 22 23 389,503 (note 2) 357,610 (204,534) (195,732) (10,369) (11,070) (5,530) (2,638) 4,096 1,817 9,789 2,924 (365) 2,294 4,886 2,934 1,294 1,620 185,058 163,471 (47,471) (51,183) (10,984) 75,420 (2,004) (6,206) (8,210) 67,210 41,362 25,848 67,210 0.462 0.425 (49,168) (47,432) (10,120) 56,751 239 (11,019) (10,780) 45,971 28,243 17,728 45,971 0.315 0.315 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Cumulative differences on translation of foreign operations Other comprehensive income from equity accounted investments ( Gains (losses) on financial instruments designated as cash flow hedges (net of tax in 2013 – ($325), 2012 – $13, respectively) g ) Total of items that may be reclassified subsequently to net income g Actuarial gains (losses) recognized in respect of retirement benefit obligations (net of tax in 2013 – ($693), 2012 – $7,498, respectively) - will not be reclassified to net income p g g g ) ) ( 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 For the year ended Notes Dec 31, 2013 Dec 31, 2012 11a 15 22 27,397 1,183 490 29,070 2,884 31,954 67,210 99,164 60,626 38,538 99,164 (note 2) 6,478 702 (642) 6,538 (20,085) (13,547) 45,971 32,424 21,611 10,813 32,424 2013 ANNUAL REPORT 55 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: Cash acquired on business acquisition Change in restricted cash and short-term deposits Return of capital from equity accounted investments Receipt of loans receivable Investment in capital assets and computer software Investment in projects under development Proceeds from sale (purchase) of foreign currency contracts Total cash flows used in investing activities Financing activities: Proceeds from issuance of long-term debt Contributions from non controlling interest 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 Settlement of interest rate swaps Transaction costs on debt issuance Transactions costs on issuance of common shares Total cash flows 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, 2013 Dec 31, 2012 26 11a 30 3 11a 12b 13b 22 3 22 67,210 6,206 62,167 (9,789) 9,020 2,638 (2,890) 1,114 45,971 11,019 57,552 (1,294) 9,893 (2,294) (1,206) (4,963) 135,676 114,678 10,464 5,583 4,005 2,514 — 72,010 2,001 48,943 (146,279) (127,941) (4,648) (896) — 38 (129,257) (4,949) 82,196 3,405 — (58,681) (25,446) (7,773) (2,407) (1,811) (224) 100,621 — 68,952 (253,311) (26,131) (5,312) — (3,364) (89) (10,741) (118,634) 491 (3,831) 49,599 45,768 917 (7,988) 57,587 49,599 35,177 3,195 40,670 929 56 CAPSTONE INFRASTRUCTURE CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 provide investors with an attractive total return from responsibly managed long-term investments in core infrastructure in Canada and internationally. Capstone’s portfolio comprises investments in Canada’s power infrastructure, including gas cogeneration, wind, hydro, biomass and solar power generating facilities, representing approximately net 439 MW of installed capacity, and contracted wind power development projects totaling an expected net79 MW of capacity. Capstone also invests in utilities, including 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 6, 2014. 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 9). Historical cost is generally based on the fair value of the consideration given in exchange for assets. Contents Corporate Information Summary of Signifi cant 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 57 57 68 69 69 69 70 71 71 74 78 79 80 80 81 84 Financial Risk Management Equity Accounted Investments Capital Assets Projects Under Development Intangibles Retirement Benefi t Plans Income Taxes Accounts Payable and 85 Other Liabilities 85 Finance Lease Obligations Long-Term Debt 86 Liability for Asset Retirement Obligation 91 Shareholders’ Equity Non-controlling Interests Earnings Per Share (“EPS”) 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 92 94 95 96 97 97 98 99 100 100 100 2013 ANNUAL REPORT 57 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Consolidation These consolidated financial statements are primarily made up of the assets, liabilities and results of operations of the Corporation's subsidiaries, which the Corporation controls; control is presumed to exist when the Corporation holds more than 50% of the voting power of another entity. The following table lists the significant subsidiaries of the Corporation which are accounted for on a consolidated basis: Name of entity Capstone Power Corp. ("CPC") Principal place of business and country of incorporation Canada Ownership at December 31, 2013 100% 2012 100% Principal activity Power holding company Renewable Energy Developers Inc. ("ReD") Canada 100% Nil Power Cardinal Power of Canada, L.P. (“Cardinal”) Erie Shores Wind Farm Limited Partnership ("Erie Shores") MPT Hydro LP ("Hydro") Whitecourt Power Limited Partnership ("Whitecourt") Helios Solar Star A-1 Partnership (“Amherstburg”) Confederation Power Inc. ("Confed") Glace Bay Lingan Wind Power Ltd. ("Glace Bay") Sky Generation Inc. ("SkyGen") SP Amherst Wind Power LP ("Amherst") Capstone Power Development Canada Corp. Parc Éolien Saint-Philémon S.E.C. ("Saint-Philémon") SP Operating Limited Partnership ("SPOLP") SP Development Limited Partnership ("SPDLP") Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada 100% 100% 100% 100% 100% 100% 100% 100% 51% 100% 51% 100% 100% 100% 100% 100% 100% 100% Nil Nil Nil Nil holding company Power generation Power generation Power generation Power generation Power generation Power generation Power generation Power generation Power generation 100% Development Nil Nil Nil Power generation under construction Holding company Development operations Utilities holding company MPT Utilities Corp. Canada 100% 100% MPT Utilities Europe Ltd. Canada 100% 100% European utilities Bristol Water plc and group companies (collectively “Bristol Water”) United Kingdom 50% 50% (1) Regulated water utility (1) On May 10, 2012, Capstone sold a 20% interest in Bristol Water resulting in a 50% retained interest. Capstone continues to consolidate as Capstone still exercises control over Bristol Water. 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. holding company Equity Accounted Investments Companies in which the Corporation has the ability to exercise significant influence, but not control, over financial and operating policy decisions are accounted for using the equity method; significant influence is presumed to exist when the Corporation holds between 20% and 50% of the voting power of another entity. 58 CAPSTONE INFRASTRUCTURE CORPORATION The following table lists the significant associates of the Corporation, which are accounted for on an equity accounting basis: Name of entity Sefyr Värme AB and Värmevärden AB (Värmevärden) Glen Dhu Wind Energy Limited Partnership ("Glen Dhu") Fitzpatrick Mountain Wind Energy Inc. ("Fitzpatrick") Macquarie Long Term Care LP (“MLTCLP”) SPWC Development LP ("SPWC") Chapais Électrique Limitée (“Chapais”) Principal place of business and country of incorporation Sweden Canada Canada Canada Canada Canada Ownership at December 31, 2013 33.3% 49% 50% 45% 50% 2012 33.3% Nil Nil 45% Nil Principal activity District heating Power generation Power generation Holding company Development 31.3% 31.3% Power generation The consolidated financial statements include the Corporation's initial investment adjusted by its 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). The Corporation's share of losses of an equity accounted investment that exceed its interest and net investment in the associate are not accounted for unless the Corporation has incurred contractual obligations or has made payments on behalf of the associate. Any surplus of the investment cost over the Corporation's share in the fair value of the identifiable assets, liabilities and contingent liabilities of the equity investment on the date of acquisition is accounted for as goodwill and included in the book value of the investment accounted for using the equity method. Business Combinations The acquisitions of businesses are accounted for using the acquisition 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 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. Goodwill is recognized to the extent the fair value of consideration paid exceeds the fair value of the net carrying amounts of the identifiable assets acquired and the liabilities assumed, measured in accordance with IFRS on the acquisition date. 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, 2012 Dec 31, 2013 Swedish Krona (SEK) UK Pound Sterling (£) Average 0.1476 0.1581 Spot 0.1528 0.1655 Average 1.5840 1.6113 Spot 1.6178 1.7627 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)”. 2013 ANNUAL REPORT 59 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Capitalized Interest 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. Capitalized interest is included in the statement of financial position as part of capital assets and projects under development. 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 consolidated statement of income 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 consolidated statement of income. 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 equipment Property and plant: Operational properties and structures Treatment, pumping and general plant Water network Power Utilities – water 3 to 25 years 3 to 15 years 3 to 15 years 5 to 7 years 20 to 45 years 15 to 100 years n/a n/a 20 to 24 years 70 to 213 years The water network refers to an 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 capital assets and is included at cost. The cost of the water network is the purchase cost together with incidental expenses of acquisition and directly attributable labour costs which are incremental to the Corporation. 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 60 CAPSTONE INFRASTRUCTURE CORPORATION 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 consolidated statement of income. Operating lease rental payments are charged to the consolidated statement of income on a straight-line basis as incurred over the term of the lease. Transfers of Assets from Customers Where an item of capital assets, 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. Projects Under Development Capitalized costs related to an asset under development include all eligible expenditures incurred in connection with the development and construction of the power generating asset until it is available for its intended use. The Corporation capitalizes all direct project costs related to the development of the Corporation's electricity generation projects. Capitalization commences when the project is: • • • • • Clearly identified; The technical feasibility has been established; Management has indicated its intention to construct, operate and maintain the project; A future market is identified or a Power Purchase Agreement ("PPA") awarded; and Adequate resources exist or are expected to be available to complete the project. Upon a project becoming commercially operational, the capitalized costs, including capitalized borrowing costs, if any, are transferred to capital assets and are amortized on a straight-line basis over the estimated useful lives of the various components. The recovery of project development costs is dependent upon continued access to the development sites, regulatory approval, sufficient project financing, and the successful commercialization of project sites for the profitable sale of electricity. 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, gas purchase and other 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 2013 and 2012, all goodwill and indefinite life assets pertained to the utilities – water segment. 2013 ANNUAL REPORT 61 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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. Costs of defined contribution pension plans are charged to the consolidated statement of income 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 expenses. The net pension surplus is increased by applying an interest rate, equal to the discount rate used to measure the plan liabilities, to the net pension surplus. This increase is included in net pension interest income or expense. The net asset or liability recognized in the consolidated statement of financial position 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 recognized immediately to income. 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 consolidated statement of income. 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 grows 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. On October 1, 2013, Capstone assumed the obligations under ReD's previously issued flow-through common shares. These shares transfer the tax deductibility of qualifying expenditures to the holders of the shares for expenditures incurred prior to December 31, 2013 up to $12,142. Any shortfall from the $12,142 results in Part XII.6 penalty tax which is recognized as a current income tax liability included accounts payable and other liabilities on consolidated statement of financial position and a current income tax expense on the consolidated statement of income. 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. Warrants Reserve On the acquisition of ReD, Capstone issued replacement warrants to the existing warrant holders of ReD and recorded them at fair value. The warrants reserve is non-distributable and will be transferred to share capital upon the exercise of warrants at the carrying value. In addition, holders of the ReD warrants will also receive $0.001 dollars in cash upon the exercise of each warrant. On expiry, the unexercised warrants are transferred to contributed surplus. 62 CAPSTONE INFRASTRUCTURE CORPORATION Option Plan and Share Option Reserve On the acquisition of ReD, Capstone issued replacement options to the existing option holders of ReD and recorded them at fair value. The share option plan is for the former key employees, directors and service providers of ReD. Since October 1, 2013, this plan no longer grants share options. Changes in the value, based on non-market vesting conditions, are calculated using the Black-Scholes model each period end and are expensed with a corresponding adjustment to equity. When the options are exercised, the Corporation issues new shares. The proceeds received net of any directly attributable transaction costs are credited to share capital. 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 declared 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 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. Capstone recognizes management fees and development-related incentive fees in revenue received from its equity accounted investments as earned based on the terms of its respective agreements. 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. Interest income is earned with the passage of time and is recorded on an accrual basis. 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. Interest expense is incurred with the passage of time and is recorded on an accrual basis. Deferred Share Unit Plan The Corporation has a Deferred Share Unit (“DSU”) plan for eligible directors and employees of Capstone as described in note 24 (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. Changes in the Corporation's liability subsequent to the vesting date of the award and prior to the settlement date, resulting from changes in the market value of Capstone's common shares, are recorded as a charge to income in the period incurred. Long-term Incentive Plan The Corporation has a long-term incentive plan (“LTIP”) for members of senior management as described in note 24 (b). The Corporation accounts for its grants under this plan in accordance with IFRS 2 Share-Based Payments. Compensation expense is recognized over the vesting period of the LTIP units 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 assets and liabilities are determined using income tax rates that are both expected to apply when the deferred income tax asset or liability will be settled and that have been enacted or substantively enacted as at the date of the consolidated statement of financial position. 2013 ANNUAL REPORT 63 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 and the exercise of stock options and warrants. Debenture conversions and the exercise of stock options and warrants 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 expense, 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 • Cash and cash equivalents • Restricted cash • Short-term deposits • Derivative contract assets • Derivative contract liabilities • Accounts receivable • Loans receivable • Accounts payable and other liabilities • Loans payable • Finance lease obligations • Long-term debt • At fair value with changes in fair value recognized in the consolidated statement of income • At amortized cost using the effective interest method • At amortized cost using the effective interest method 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: • • • 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. Offsetting of Financial Instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or realize the assets and settle the liabilities simultaneously. Capstone has recorded no material offsetting arrangements. 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 years ended December 31, 2013 and 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, 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 consolidated statement of income. Gains or losses 64 CAPSTONE INFRASTRUCTURE CORPORATION recognized in other comprehensive income are subsequently recognized in the 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 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 financial assets which the Corporation does not adjust to fair value, are impaired. If such evidence exists, the Corporation recognizes an impairment loss in the consolidated statement of income. The loss is measured as the difference between the carrying value of the financial asset and the present value of the estimated future cash flows, discounted by using the instrument's original effective interest rate. 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. 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”), interest income and net pension interest 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. Changes to Accounting Policies Capstone has adopted the following new and revised standards, along with consequential amendments, effective January 1, 2013. These changes were required due to changes in IFRS and were made in accordance with the applicable transitional provisions and are summarized as follows. IFRS 10, 11 and 12, Consolidated Financial Statements, Joint Arrangements and Disclosure of Interests in Other Entities, establishes a common definition for control along with additional disclosure requirements. The adoption of IFRS 10, 11 and 12 did not require any changes to the existing consolidation approach for any of Capstone's subsidiaries and investees or change the accounting for investments in associates. IAS 27, Separate Financial Statements and IAS 28, Investments in Associates and Joint Ventures, are consistent with the changes to IFRS 10 and 11, respectively. IAS 27, deals with the accounting for subsidiaries, associates and joint ventures in the separate financial statements of the parent company. IAS 28, prescribes the accounting for investments in associates and sets out the requirements for use of the equity method of accounting. IFRS 13, Fair value measurement, provides a single framework for measuring fair value along with additional disclosure requirements. The measurement of fair value of an asset or liability is based on assumptions that market participants would use when pricing the asset or liability under current market conditions, including assumptions about risk. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by Capstone to measure fair value and did not result in any measurement adjustments. IAS 1, Amendment, presentation of items of other comprehensive income. This amendment required Capstone to group other comprehensive income items by those that will be reclassified subsequently to net income and those that will not be reclassified. The Company has reclassified comprehensive income items of the comparative period. These changes did not result in any adjustments to other comprehensive income or comprehensive income. IAS 19, Employee Benefits, amendments were applied retroactively and included changes affecting measurement, recognition and disclosure. The amendments only impact Bristol Water's defined benefit pension plan. The changes are summarized as follows: • • Interest on pension assets is no longer calculated based on the expected return on plan assets. IFRS now requires interest to be calculated on the net retirement benefit surplus using the discount rate based on market yields of high quality corporate bonds. Previously, interest income on plan assets was based on their long-term rate of expected return and was included in interest expense. Actual running costs, except investment management expenses, are now recognized as current service costs included in operating expenses. Previously, these expenses were deducted from the expected return on plan assets included in interest expense. 2013 ANNUAL REPORT 65 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Historical consolidated statements of financial position and the consolidated statements of cash flows were not impacted by the change in accounting policy. The following tables summarize the impact on financial statement captions: Adjustments to consolidated statement of income Dec 31, 2013 Dec 31, 2012 Net pension interest income Interest expense Operating expense Deferred income tax recovery (expense) Change to net income Net income before accounting change Net income after accounting change Net income after accounting change attributable to: Shareholders of Capstone Non-controlling interest Net income after accounting change 1,817 826 (560) (479) 1,604 65,606 67,210 41,362 25,848 67,210 2,934 539 (554) (672) 2,247 43,724 45,971 28,243 17,728 45,971 Capstone previously classified the net pension interest as part of interest expense in the statement of income. Subsequent to the amendment, Capstone has added a caption to the statement of income, labeled net pension interest income, which comprises: • • Interest cost on the defined benefit obligation; and Interest income on plan assets. Adjustments to Earnings Per Share ("EPS") Basic EPS before accounting change Change to net income attributable to the shareholders of Capstone per share Basic EPS after accounting change Diluted EPS before accounting change Change to net income attributable to the shareholders of Capstone per share Diluted EPS after accounting change Dec 31, 2013 Dec 31, 2012 0.452 0.010 0.462 0.416 0.009 0.425 0.298 0.017 0.315 0.298 0.017 0.315 Adjustments to consolidated statement of comprehensive income Dec 31, 2013 Dec 31, 2012 Decrease in other comprehensive income for actuarial gains and losses recognized in respect of retirement benefit obligations Increase in other comprehensive income for deferred income taxes Change to net income Change to comprehensive income Comprehensive income before and after accounting change Comprehensive income after accounting change attributable to: Shareholders of Capstone Non-controlling interest Comprehensive income after accounting change Future Accounting Changes (2,083) 479 1,604 — 99,164 60,626 38,538 99,164 (2,919) 672 2,247 — 32,424 21,611 10,813 32,424 The IASB has previously issued the following standard which has 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 and measurement of financial assets, Capstone's assessment of the Financial Instruments as well as the measurement methodology for debt and equity instruments. impact of this standard is ongoing. 66 CAPSTONE INFRASTRUCTURE CORPORATION 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 Capital assets, projects under development 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, as well as assessing capitalization criteria for project development costs. • Estimates are based on assumptions that are sensitive to change, which • Initial fair value of net may have a significant impact on the valuations performed. assets • Impairment reviews of the carrying value of capital and other long-lived • 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 • Estimated future cash flows • Expected settlement date and amount • Discount rate • Decision criteria for capitalization of development costs Retirement benefits • Assumptions include the discount rate, which is used to calculate the • 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 • The determination of the deferred income tax balances of the Corporation • 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 • Tax rates • Current and future taxable income 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. • Management's valuation techniques include comparisons with similar • Interest rate instruments where market observable prices exist, discounted cash flow analysis, option pricing models and other valuation techniques commonly used by market participants. • Natural gas rate • Direct customer rate • 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 • The probability of failing to recover accounts receivable is determined by • 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. Accounting for investments in non- wholly owned subsidiaries When Capstone owns a partial interest in an entity, significant judgment is required to determine the proper accounting treatment. Capstone consolidates upon evaluating its ability to control a subsidiary. 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 $528. recover accounts receivable when they fall into arrears • No critical estimates are involved in determining control. • Determine how relevant activities are directed (either through voting rights or contracts) • Determine if Capstone has substantive or protective rights • Determine Capstone's ability to influence returns 2013 ANNUAL REPORT 67 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. ACQUISITION AND DISPOSITION Acquisition of Renewable Energy Developers On October 1, 2013, Capstone acquired 100% of the issued and outstanding shares of ReD in exchange for common shares of Capstone issued pursuant to a plan of arrangement (the "Arrangement"). At closing, ReD shareholders received 0.26 of a Capstone common share ("Capstone Share") and $0.001 dollars in cash in exchange for each share of ReD. Capstone issued 19,699 common shares to acquire ReD. In addition, each outstanding option to purchase ReD shares ("ReD Option") was exchanged for an option to acquire Capstone Shares ("Replacement Option"). Each Replacement Option entitles the holder thereof to purchase 0.26026 of a Capstone Share. The obligations of ReD with respect to its outstanding common share purchase warrants have been assumed by Capstone in accordance with the terms of the warrant indenture whereby each warrant is now exercisable to receive 0.26 of a Capstone Share and $0.001 dollars in cash. Also pursuant to the Arrangement, on October 1, 2013, the 6.75% convertible unsecured subordinated debentures of ReD due December 31, 2017 (the "ReD Debentures") became convertible into Capstone Shares and a nominal amount of cash pursuant to the terms of the debenture indenture, while remaining outstanding obligations of ReD. The Corporation has agreed to provide credit support for the ReD Debentures (TSX: CPW.DB) and ReD has agreed to provide credit support for the obligations of Capstone under its 6.50% convertible unsecured subordinated debenture (TSX: CSE.DB.A) due December 31, 2016. The acquisition was accounted for using the acquisition method of accounting, which requires that Capstone recognize the identifiable assets acquired and liabilities assumed at their fair values on the date of acquisition. As at October 1, 2013, the non-controlling interest was calculated on the fair value of the net identifiable assets. Transaction costs on acquisition of $4,278 were expensed in the consolidated statement of income as part of project development costs and $192 were capitalized to equity as part of the share issuance. The allocation of the purchase price is preliminary and may be revised up to 12 months after the acquisition date. Consideration at October 1, 2013 Cash Share capital (1) Warrants and share options Total 76 75,645 85 75,806 (1) The fair value of the shares is calculated with reference to the quoted price of the shares of Capstone at the date of acquisition, October 1, 2013, which was $3.84 per share. Recognized amounts of identifiable assets acquired and liabilities assumed at October 1, 2013 Working capital (1) Capital and other assets Projects under development Intangible assets – electricity supply and other contracts Equity accounted investments Less: net financial liabilities (net of $10,464 and $8,659 for cash and restricted cash acquired, respectively) Other liabilities Deferred income tax liability Total identifiable net assets Non-controlling interest Total Fair value 437 130,029 12,683 52,041 27,599 (115,825) (2,777) (15,548) 88,639 (12,833) 75,806 (1) Working capital includes $3,286 of accounts receivable, no allowance for doubtful debts are recorded. IFRS requires disclosure as though the acquisition date for the business combination had been at the beginning of the reporting period, as of January 1, 2013. The pro forma consolidated financial information of Capstone for the year ended December 31, 2013, was as follows: Capstone (excluding ReD) ReD Revenue 383,788 21,813 405,601 Net Income (loss) 68,275 (21,069) 47,206 Since acquisition on October 1, 2013, ReD contributed revenue of $5,714 and a net loss of $1,062 to Capstone's financial results. 68 CAPSTONE INFRASTRUCTURE CORPORATION Partial Sale of Interest in Bristol Water On May 10, 2012, Capstone sold a 20% indirect interest in Bristol Water plc to I-Environment Investments Ltd, a subsidiary of ITOCHU Corporation. 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 follows: 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 NOTE 4. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH Debt service and maintenance reserves Cash on deposit in support of letters of credit Cash on deposit Construction holdbacks Restricted cash Unrestricted cash and cash equivalents AOCI — 749 749 NCI 52,408 (749) 51,659 Dec 31, 2013 Dec 31, 2012 23,231 6,243 73 — 29,547 45,768 75,315 19,044 — 73 112 19,229 49,599 68,828 Restricted cash is primarily cash that is held by the Corporation's subsidiaries in support of segregated bank accounts to support debt service reserves, and/or operating and maintenance reserves in support of specific long-term debt, as well as, various letters of credit. NOTE 5. SHORT-TERM DEPOSITS Short-term cash deposits Dec 31, 2013 Dec 31, 2012 — 6,471 For the year ended December 31, 2012, the effective interest rate on short-term cash deposits was 0.45% and these deposits had an average maturity date of 54 days. NOTE 6. TRADE AND OTHER RECEIVABLES Power Utilities – water Corporate Total trade and other receivables Dec 31, 2013 Dec 31, 2012 33,760 53,373 2,006 89,139 31,618 43,480 288 75,386 2013 ANNUAL REPORT 69 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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 revenue 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, 2013 Dec 31, 2012 46,795 (25,775) 21,020 7,464 24,889 53,373 39,181 (21,907) 17,274 6,044 20,162 43,480 Dec 31, 2013 Dec 31, 2012 4,756 5,263 11,001 21,020 3,255 4,744 9,275 17,274 As at December 31, 2013, based on a review of collection rates, $25,775 of trade receivables in the utilities – water segment were considered impaired and have been provided for (December 31, 2012 – $21,907). The increase in the provision for impairment of trade receivables at Bristol Water comprised: As at January 1 Charge to statement of income Amounts written off during the year as uncollectable Net foreign exchange difference As at December 31 2013 (21,907) (5,954) 4,212 (2,126) 2012 (21,438) (6,181) 6,225 (513) (25,775) (21,907) 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 the 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, net (1) Dec 31, 2013 Dec 31, 2012 5,855 3,785 9,640 3,665 3,553 7,218 (1) Inventory as at December 31, 2013 is net of $370 provision for obsolescence (December 31, 2012 - $383). The cost of inventories recognized in operating expenses for the year ended December 31, 2013 was $6,419 (December 31, 2012 – $5,929). 70 CAPSTONE INFRASTRUCTURE CORPORATION NOTE 8. LOANS RECEIVABLE The following table summarizes the loans receivable from Värmevärden, MLTCLPand Chapais: Värmevärden MLTCLP Chapais: Tranche A (original principal $ 9,391) Tranche B (original principal $ 3,624) Less: current portion Total long-term loans receivable Maturity Interest Rate Dec 31, 2013 Dec 31, 2012 2021 2014 2015 2019 7.9% —% 10.8% 4.9% 37,658 89 2,579 562 40,888 (1,310) 39,578 34,768 — 3,675 562 39,005 (1,096) 37,909 Accrued interest on the loans receivable in the amount of $113 for the year ended December 31, 2013 is included in accounts receivable (December 31, 2012 – $63). The estimated fair values of the loans receivable as at December 31, 2013 and 2012 approximate the carrying values. Värmevärden The following table summarizes the change in the loan receivable from Värmevärden during the years ended: For the year ended Opening balance Principal repayment Unrealized foreign exchange gain (loss) Ending balance December 31, 2013 December 31, 2012 SEK 227,541 — — 227,541 $ 34,768 — 2,890 37,658 SEK 551,808 (324,267) — 227,541 $ 81,587 (47,959) 1,140 34,768 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 r non-amortizing and have 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 19 (Long-term debt). In March 2012, the shareholder loan receivable from Värmevärden was amended including the annual interest rate which became 7.944%. Chapais Expected repayments of the Chapais loan receivable for the next five years and thereafter were as follows: Year 2014 2015 2016 2017 2018 Thereafter Total Amount 1,220 1,359 — — — 562 3,141 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, 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. 2013 ANNUAL REPORT 71 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 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, 2013, 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 Interest rate swap The Corporation has interest rate swap contracts to effectively fix the interest cost on its long-term debt with variable rates, summarized as follows: • • Amherstburg project debt swap has a notional amount of $86,680. The Corporation pays a fixed rate of 4.1925% in return for a floating rate equal to 1.275%. 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, 2013. 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 due from Värmevärden in SEK and dividends from Bristol Water in pounds sterling. Capstone's options to sell foreign currencies as at December 31, 2013, are summarized as follows: Expiry 2014 2015 2015 2016 2016 2017 2018 Swedish Krona (SEK) UK Pound Sterling (£) Notional Amount Conversion Rate Notional Amount Conversion Rate 21,400 9,800 12,000 9,000 9,100 15,000 6,500 82,800 6.5165 6.5165 6.5165 6.4000 6.5165 6.4000 6.4000 £3,500 £2,600 £1,500 £2,250 £9,850 1.6230 1.6230 1.5500 1.5500 The Corporation has determined the fair value of derivative financial instruments as follows: Interest rate swap • The fair value of the interest rate swap contracts fluctuates with changes in market interest rates. Interest rate swap (Cash flow hedges) • A discounted cash flow valuation based on a forward interest rate curve was used to determine their fair value. • The market price of comparable instruments at the statement of financial position date is used to determine the fair value of cash flow hedges at Bristol Water. Embedded derivative • 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 • The fair value of the foreign currency contracts fluctuates with changes in the relative currencies to the Canadian dollar. • 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. 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. Capstone's finance department, with the assistance of third-party experts, is responsible for performing the valuation of financial instruments, including Level 3 fair values. The valuation processes and results are reviewed and approved each reporting period. These critical estimates are discussed as part of the Audit Committee's quarterly review of the financial statements. 72 CAPSTONE INFRASTRUCTURE CORPORATION Loans and receivables The Corporation's accounts receivable, which consist of trade receivables and accrued interest on loans receivable, are recorded initially at fair value. The Corporation's loans receivable are subsequently measured at amortized cost using the effective interest rate 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, 2013. 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 the consolidated statement of income as interest expense. The fair value of the Corporation's long-term debt is determined using level 1 and level 2 inputs as follows: • Floating rate debt approximates its carrying value. Use level 1 inputs: • • Convertible debentures are valued 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 19 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. Use level 2 inputs: • Fixed-rate debt is determined through the use of a discounted cash flow analysis using relevant risk-free bond rates plus an estimated margin. The carrying value of the Corporation's finance leases approximates fair value. The following table illustrates the classification of the Corporation's financial instruments that have been recorded at fair value as at December 31, 2013, within the fair value hierarchy: Cash and cash equivalents Restricted cash Short-term deposits Recurring measurements: 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 Quoted prices in active markets for identical assets Level 2 Significant other observable inputs Level 3 Significant unobservable inputs 45,768 29,547 — — — — — — — — — — — — — — 450 — — (25) 425 6,166 2,174 — (2,219) 6,121 — — — — — 878 — 878 — — 5,500 — 5,500 No financial instruments were transferred between levels during the period. Fair value continuity for level 3 inputs Opening balance, December 31, 2012 Other gains and (losses), net included in net income Closing balance, December 31, 2013 Dec 31, 2013 Dec 31, 2012 45,768 29,547 — 49,599 19,229 6,471 450 — 878 (25) 1,303 849 — 1,172 (174) 1,847 6,166 15,337 2,174 5,500 (2,219) 11,621 3,156 12,158 (3,106) 27,545 Net, embedded derivative (10,986) 6,364 (4,622) 2013 ANNUAL REPORT 73 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (B) Income and Expenses From Financial Instruments Financial instruments designated as held-for-trading: Dec 31, 2013 Dec 31, 2012 Interest income on cash and cash equivalents, restricted cash and short-term deposits (2) 739 962 Financial instruments classified as held-for-trading: Unrealized loss on foreign currency contracts Unrealized gain (loss) on interest rate swap contracts Unrealized loss on embedded derivative asset Unrealized gain on embedded derivative liability Realized gain on derivative financial instruments Loans and receivables(1): Interest income from loans receivable (2) Other liabilities: Interest expense on finance lease obligations Interest expense on long-term debt with maturities under 12 months Interest expense on long-term debt(3)tt (1,474) 6,648 (294) 6,658 11,538 295 (975) (100) (152) 3,832 2,605 — 3,357 3,924 (46) — (47,425) (47,471) (226) (4,978) (43,964) (49,168) (1) Foreign exchange gains and losses on loans receivable are also recognized in the statement of income as disclosed in note 8. (2) (3) Interest income for 2013 of $4,096 (2012 – $4,886) includes interest income from loans receivable, short-term deposits and cash balances. Interest expense on the long-term debt for 2013 includes amortization of deferred financing fees of $2,069 (2012 – $1,965). 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 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. (A) Market Risk 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 adversely affect the value of the Corporation's financial assets, liabilities or expected future cash flows. 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, 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. 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 assets to fluctuations in energy 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 minimized through actively monitoring the market and by the use of fixed price supply contracts extending over more than one year where considered appropriate. 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 to interest rate risk on its floating rate debt. Currently, the Corporation has interest rate swap contracts to mitigate some of the risks associated with its long-term debt. The terms of the contracts are as follows: Entity Amherstburg Bristol Water Maturity Date June 30, 2028 December 7, 2017 Notional Amount 86,680 £10,000 Swap Fixed Rate Stamping Fee Effective Interest Rate 4.193% 5.025% 3.13% — 7.32% 5.025% 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. 74 CAPSTONE INFRASTRUCTURE CORPORATION 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 revenue. Refer to note 19 (c)(ii) for further detail on this debt. Foreign currency exchange risk The Corporation's exposure to foreign currency exchange risk is primarily related to the investment in Bristol Water, Värmevärden and the SEK-denominated shareholder loan with Värmevärden. The power segment also has expenses and capital commitments exposed to foreign currency exchange risk. Changes in the Canadian dollar and UK 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 UK pound sterling to be reflected by the Corporation 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 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. Capstone's power assets have expenses or capital commitments in currencies other than the Canadian dollars and expects that as new projects are built additional purchases will be made in foreign currencies. To mitigate these risks Capstone monitors the risk associated with foreign exchange rate fluctuations and, from time to time may enter into forward foreign exchange contracts or employ other hedging strategies. As at December 31, 2013, Capstone did not hold any foreign exchange contracts to hedge these purchase commitments. (B) Credit Risk 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, short-term deposits, accounts and loans receivable and derivative contracts. The Corporation deposits its cash and holds its short-term investments with reputable financial institutions and limits the exposure by counterparty, 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. The table below summarizes power trade receivables from the sale of electricity by counterparty: For the year ended Ontario Power Authority ("OPA") Ontario Electricity Financial Corporation ("OEFC") Other Dec 31, 2013 Dec 31, 2012 3,408 24,654 7,754 35,816 3,975 23,948 3,983 31,906 There are no accounts receivable that are past due. Since the OPA and OEFC are government agencies, management considers credit risk to be minimal. 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. The table below summarizes revenue from the sale of electricity by counterparty for the power segment: 2013 ANNUAL REPORT 75 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS For the year ended OPA OEFC Other Dec 31, 2013 Dec 31, 2012 37,962 122,191 33,775 193,928 36,937 113,684 28,597 179,218 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 17 (Accounts payable and other liabilities), 18 (Finance lease obligations) and 19 (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, 2013 were as follows: Financial Liabilities Within one year One year to five years Beyond five years Accounts payable and accrued liabilities 116,852 Derivative financial instruments Embedded derivatives Interest rate swaps Finance lease obligations Minimum lease payments Finance charges Long-term debt Principal payments Interest payments (E) Sensitivity Analysis — 2,219 2,219 652 39 691 18,374 45,465 63,839 — 5,500 4,263 9,763 3,423 582 4,005 338,930 140,639 479,569 — — 1,858 1,858 353 572 925 601,794 332,755 934,549 Total 116,852 5,500 8,340 13,840 4,428 1,193 5,621 959,098 518,859 1,477,957 The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2013, 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, 2013 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, 2013 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 76 CAPSTONE INFRASTRUCTURE CORPORATION 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. The table summarizes the impact on fair value of changes in the unobservable inputs: Embedded derivative Dec 31, 2013 Unobservable inputs Estimated input Relationship of input to fair value Asset 878 Natural gas price Empress gas and Dawn gas spot and forward prices. Empress spot price of 3.95 dollars and Dawn spot price of 4.87 dollars. 10% increase in gas price results in an increase in fair value of $392. DCR price OEFC rate of 7.7539 dollars. 1% increase in DCR results in a decrease in fair value of $28. Liability (5,500) DCR price OEFC rate of 7.7539 dollars. 1% increase in DCR results in a decrease in fair value of $699. (4,622) 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. The table summarizes the impact on fair value of changes in observable inputs: For year ended Dec 31, 2013 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 45,768 29,547 — 37,658 317 4,370 99,435 6,165 Interest Rate Risk Canadian $ to SEK Foreign Exchange Rate Risk (0.5)% 0.5% (10)% 10% (229) (148) — — — 22 497 2,929 229 148 — — — (22) (497) (2,929) — — — (3,766) (460) — — — — — — 3,766 213 — — — (1) Cash and cash equivalents include deposits at call, which are at floating interest rates. (2) Loans receivable exclude loans related to Chapais of $3,141. (3) Long-term debt excludes all fixed-rate debt totaling $835,724 and variable rate debt that is covered by a swap instrument for fixed-rate debt totaling $86,680. Interest rate swaps exclude Bristol Water's cash flow hedge of $2,174 as changes flow through OCI. (4) UK pound sterling foreign exchange contracts have been excluded from this analysis as the change is considered insignificant with respect to currency fluctuation on consolidation. Capstone's financial instruments are subject to changes in inflation and foreign exchange on Bristol Water's long-term debt. The following table summarizes the sensitivities as follows: For year ended Dec 31, 2013 Impact on net income before taxes Impact on equity Inflation Rate Risk (RPI) (1)% 2,934 2,259 1% (2,934) (2,259) Canadian $ to £ Foreign Exchange Rate Risk (1)% — 1% — 3,948 (3,948) 2013 ANNUAL REPORT 77 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11. EQUITY ACCOUNTED INVESTMENTS (A) Equity Accounted Investments As at Värmevärden Glen Dhu (1) Others (2) Dec 31, 2013 Dec 31, 2012 Ownership % Carrying Value Ownership % Carrying Value 33.3% 49.0% 12,009 26,323 33.3% —% 31.3-50.0% 719 31.3-45.0% 39,051 16,903 — 87 16,990 (1) Under the limited partnership agreement, Capstone has the option to acquire an additional 1% interest in Glen Dhu from November 2017 to November 2018 at a price based on a predetermined calculation. (2) Others include Capstone's investment in Fitzpatrick, MLTCLP, SPWC and Chapais. (December 31, 2012 - MLTCLP and Chapais) Each equity accounted investment is subject to a shareholder or limited partnership agreement that governs distributions from these investments. In addition, distributions must also comply with the respective debt agreements. See note 8 for detail on loans receivable with Värmevärden, MLTCLP 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, 2013 Dec 31, 2012 Opening Balance 16,990 15,993 Acquisition, Plus Costs, Less non-cash Return of Capital Equity Accounted Income (Loss) 27,521 — (2,638) 2,294 Equity Share of OCI 1,183 702 Distributions Received (4,005) (2,001) Other — 2 Ending Balance 39,051 16,990 (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 Summarized Statements of Financial Position Dec 31, 2013 Dec 31, 2012 Värmevärden Glen Dhu Others Total Värmevärden Others Total Assets Current Non-Current Liabilities Current Non-Current 63,081 331,531 7,916 130,652 8,469 27,074 79,466 68,053 489,257 323,155 7,667 19,288 — 75,720 342,443 — (15,332) (6,690) (34,405) (56,427) (19,478) (6,245) (25,723) (338,667) (108,116) (6,095) (452,878) (317,109) (36,041) (353,150) Equity before fair value increments on purchase Fair value increments, net of amortization Equity including unamortized fair value increments on purchase 40,613 23,762 (4,957) 59,418 54,621 (15,331) 39,290 (4,550) 29,959 1,587 26,996 (3,861) — (3,861) 36,063 53,721 (3,370) 86,414 50,760 (15,331) 35,429 Capstone's ownership interest 33.3% 49.0% 31.3-50.0% 33.3% 31.3-45.0% Carrying value of investment 12,009 26,323 719 39,051 16,903 87 16,990 For the year ended Dec 31, 2013 Dec 31, 2012 Summarized Statements of Income Värmevärden Glen Dhu Revenue Net Income OCI Total comprehensive Income Capstone's ownership interest Amortization of fair value adjustments 102,501 (8,850) 3,545 (5,305) 33.3% (1,767) — (1,767) Total Värmevärden 128,160 97,182 5,667 1,256 — 1,256 Others 19,992 4,069 — 4,069 49% 31.3-50.0% 615 (285) 330 (7) (11) (18) (3,525) 3,545 20 (1,159) (296) (1,455) Others 19,390 2,237 — 2,237 6,947 2,102 9,049 33.3% 31.3-45.0% 3,013 — 3,013 (17) — (17) Total 116,572 9,184 2,102 11,286 2,996 — 2,996 Capstone received distributions of $3,127 (2012 - $2,001) from Värmevärden and $878 (2012 - nil) from Glen Dhu, were received in 2013. 78 CAPSTONE INFRASTRUCTURE CORPORATION NOTE 12. CAPITAL ASSETS (A) Continuity Jan 1, 2013 Business Acquisition Additions Disposals Foreign Exchange Transfers Dec 31, 2013 Cost Land Equipment and vehicles Property and plant Water network Construction in progress Accumulated depreciation Equipment and vehicles Property and plant Water network 2,766 15,650 851,726 346,530 51,209 817 21 127,053 — — — 866 4,906 54,165 75,759 — (1,402) (4,788) — (9) 1,267,881 127,891 135,696 (6,199) Net carrying value 1,086,407 127,891 (5,160) (168,416) (7,898) — — — (2,035) (43,141) (6,007) 84,513 1,340 2,747 9 (2,103) 242 1,879 40,375 45,406 5,831 93,733 (1,422) (18,331) (7,374) 66,606 165 (1,495) 23,470 33,743 (62,515) 3,990 15,519 1,042,742 479,844 70,275 (6,632) 1,612,370 — — — (7,277) (227,141) (21,270) (6,632) 1,356,682 Jan 1, 2012 Additions Disposals Foreign Exchange Transfers Dec 31, 2012 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 2,707 8,389 790,178 271,485 35,750 1,108,509 (3,568) (126,465) (1,020) 977,456 (B) Reconciliation to Cash Additions Year ended Additions — 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 — 6,363 51,854 5,932 (66,687) 2,766 15,650 851,726 346,530 51,209 (5,366) 21,203 (2,538) 1,267,881 608 2,978 — (1,780) (353) (4,413) (1,809) 14,628 — — — (5,160) (168,416) (7,898) (2,538) 1,086,407 Dec 31, 2013 Dec 31, 2012 135,696 8,942 1,641 146,073 (18,919) 787 146,279 127,941 Adjustment for change in capital asset additions included in accounts payable and accrued liabilities Net foreign exchange difference Cash additions (C) Construction in Progress The net book value of capital assets includes $5,451 (£3,092) of capitalized interest at Bristol Water in accordance with IAS 23. Capstone has used 5.5% as the interest rate to determine the amount capitalized. As assets became available for use, their carrying values were transferred from construction in progress to the appropriate asset class at which time amortization over the asset useful life began. Carrying values within construction in progress are not amortized. (D) Capital Assets Under Finance Leases As at Dec 31, 2013 Dec 31, 2012 Land Equipment and Vehicles Property and Plant Water Network — — 5 4 16,584 16,924 1,410 1,315 Total 17,999 18,243 2013 ANNUAL REPORT 79 MANAGEMENT’S DISCUSSION AND ANALYSIS (E) Impairments 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, 2013, 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 consolidated financial statements. As a result, no impairments were recognized at December 31, 2013. 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. NOTE 13. PROJECTS UNDER DEVELOPMENT (A) Continuity As at January 1, 2013 Business acquisition Capitalized costs during the year As at December 31, 2013 As at December 31, 2013, projects under development did not include any capitalized interest costs. (B) Reconciliation to Cash Additions Year ended Additions Adjustment for change in additions to projects under development included in accounts payable and accrued liabilities 2013 — 12,683 8,991 21,674 Dec 31, 2013 8,991 (4,343) 4,648 Cash additions NOTE 14. INTANGIBLES Assets Computer software Electricity supply, gas purchase and other contracts Water rights Licence Goodwill Accumulated amortization Computer software Electricity supply and gas purchase contracts Water rights Provisions Jan 1, 2013 Business Acquisition Additions Foreign Exchange Transfers Dec 31, 2013 7,544 108,048 73,018 21,516 139,712 (3,269) (50,967) (11,683) — 52,041 — — — — — — 79 — — — — (2,831) (7,668) (2,111) 3,549 6,632 — — 1,927 12,539 (2,804) — — — — — — — — — 17,804 160,089 73,018 23,443 152,251 (8,904) (58,635) (13,794) 283,919 52,041 (12,531) 15,211 6,632 345,272 Electricity supply and gas purchase contracts Utilization 12,257 (8,997) 3,260 — — — — (1,626) (1,626) — — — — — — 12,257 (10,623) 1,634 80 CAPSTONE INFRASTRUCTURE CORPORATION Assets Computer software Electricity supply, gas purchase and other 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 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. NOTE 15. RETIREMENT BENEFIT PLANS Defined Contribution Plans 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, 2013 was $1,563 (December 31, 2012 – $1,319). 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. In addition to providing benefits to employees and former employees of Bristol Water plc, the Section provides benefits to 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 former employees. The Section funds are administered by trustees who are independent of the Company. Contributions are paid to the Section in accordance with the recommendations of an independent actuary. Basis of Valuation The formal actuarial valuation of Bristol Water's Section of the WCPS as at March 31, 2013 was updated toDecember 31, 2013, by Lane, Clark & Peacock LLP, using the following significant assumptions in accordance with IAS 19: Assumptions Inflation – Retail Price Index Inflation – Consumer Price Index Pension increases uncapped Pension increases capped at 5% Salary increases Discount rate 2013 2012 3.6% 2.6% 2.6% 2.6% 4.1% 4.4% 3.1% 2.6% 2.6% 2.6% 4.1% 4.3% 2013 ANNUAL REPORT 81 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Asset Allocation The following table summarizes the market value of assets, present value of liabilities and resulting surplus for Bristol Water's Section of the defined benefits pension plan. The assets include a breakdown by the main asset classes. 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 Dec 31, 2013 Dec 31, 2012 Amount Allocation Amount Allocation 23,784 10,141 254,566 5,410 6,076 629 8% 3% 85% 2% 2% —% 22,788 8,526 229,192 5,366 5,216 562 8% 3% 85% 2% 2% —% 300,606 100% 271,650 100% (254,365) 46,241 (234,075) 37,575 The majority of the Section assets are held within instruments with quoted market prices in an active market. Demographic Assumptions The mortality assumptions have been drawn from actuarial table S1NA with a 95% adjustment to mortality rates and with future improvements in line with CMI 2012 projections from 2003, subject to a minimum increase of 1.3% and 1.0% per annum, for males and females, respectively. Per the mortality assumptions used the average life expectancy for a male pensioner currently aged 60 is 27.4 years and for a female pensioner currently aged 60 is 29.7 years (December 31, 2012 – 26.9 male, 29.2 female). The allowance made for future improvements in longevity is such that a male member retiring at age 60 in 2038 (i.e. in 25 years' time) is assumed to have an increased average life expectancy from retirement of 29.9 years, and for a female retiring at age 60 in 2038 is assumed to have increased to 31.8 years (December 31, 2012 – 28.9 male, 30.8 female). The weighted average duration of the expected benefit payments from the Section is around 16 years. Contributions Contributions paid in the year to the Section were $3,840 (£2,383) (December 31, 2012 – $4,400 (£2,778)). 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, 2014 is $4,374 (£2,485). Changes in Comprehensive Income Analysis of operating expense, interest expense and amounts recognized in other comprehensive income: Current service cost Past service cost Section expenses Total operating expense Interest income on Section assets Interest expense on Section obligation Net pension interest income Gain/(loss) from change in financial assumptions Gain/(loss) from change in demographic assumptions Experience gains/(losses) Return on plan assets, excluding amounts included in interest income Deferred tax (expense)/recovery Actuarial gain/(loss) recognized in other comprehensive income (“OCI”) 82 CAPSTONE INFRASTRUCTURE CORPORATION For the year ended Dec 31, 2013 Dec 31, 2012 2,219 18 520 2,757 11,635 (9,818) 1,817 3,565 (2,027) 2,211 (1,558) 693 2,884 2,054 — 493 2,547 12,465 (9,531) 2,934 (15,286) (1,864) (1,831) (8,602) 7,498 (20,085) Changes in Financial Position The following table summarizes the movement in the defined benefit surplus for the asset and liability components of the Section: For the year ended Opening surplus in Section Current service cost Past service cost Pension interest Section expenses Re-measurements: Gain/(loss) from change in financial assumptions Gain/(loss) from change in demographic assumptions Experience gains/(losses) Return on plan assets, excluding amounts included in interest income Contributions by employer Contributions by employees Benefits paid Foreign exchange December 31, 2013 Asset Liability 271,650 (234,075) December 31, 2012 Asset Liability 267,114 (207,010) — — 11,635 (520) — — — (1,558) 3,840 649 (9,705) 24,615 (2,219) (18) (9,818) — (2,027) 2,211 — — (649) 9,705 (21,040) Total 37,575 (2,219) (18) 1,817 (520) (2,027) 2,211 (1,558) 3,840 — — 3,575 46,241 — — 12,465 (493) — — — (8,602) 3,726 675 (9,604) 6,369 (2,054) — (9,531) — (1,864) (1,831) — — (675) 9,604 (5,428) Total 60,104 (2,054) — 2,934 (493) (1,864) (1,831) (8,602) 3,726 — — 941 37,575 3,565 3,565 (15,286) (15,286) Ending surplus in Section 300,606 (254,365) 271,650 (234,075) The actual return on the Section's assets for the year ended as at December 31, 2013 was a gain of $10,077 (£6,184) (December 31, 2012 – gain of $3,371 (£2,128)). Risks and Sensitivity Analysis Bristol Water's defined benefit plan is exposed to a number of risks, the following table summarizes the most significant risks: Risk Impact Changes in bond yields A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the Section's bond holdings. An increase in the discount rate would lead to a reduction in the value placed on the liabilities of the Section Inflation The pension increases granted by the Section vary according to the benefit scale and period of service to which the pension relates. The majority of pensions in payment increase in line with the increases set out in government Pension Increase (Review) Orders, with some also being subject to a maximum increase of 5% per annum. The government has confirmed that in future Pension Increase Orders will be based on CPI inflation. Higher inflation would lead to higher liabilities. The majority of the Section's assets are either unaffected by or loosely correlated with inflation, meaning that an increase in inflation would also reduce the Section surplus. Asset Volatility The current investment strategy is to invest in a combination of risk-reducing assets (i.e. United Kingdom government bonds) and return-seeking assets (i.e. equities and other diversified assets), with the allocation to risk-reducing assets gradually increased so that by March 2027, 100% of the Section's assets are invested in risk-reducing assets. The plan liabilities are calculated using a discount rate set with reference to yields on United Kingdom AA- rated corporate bonds. If plan assets under-perform this yield, it will create a deficit. Life expectancy Post-retirement life expectancy contains considerable uncertainty, particularly when considering the projection of future changes in mortality rates. Increases in life expectancy will result in an increase in the Section's liabilities. Inflationary increases result in higher sensitivity to changes in life expectancy. Capstone has assessed the assumptions impacted by these risks provided the following indicative sensitivities:. Significant Assumption Discount Rate Inflation Value of return seeking asset portfolio Life expectancy Sensitivity - Impact on Retirement Benefit Surplus Change in Assumption Increase Decrease 0.1% 0.1% 25% (1) 1 year 3,701 (2,820) 11,281 (7,756) (3,878) 2,820 (11,281) 7,756 (1) This represents a 25% increase or decrease in the return on equities, diversified growth funds, emerging markets multi asset funds and high yield bonds. The sensitivities have been calculated to show the movement in the defined benefit obligation or surplus in isolation, and assuming no other changes in market conditions. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. 2013 ANNUAL REPORT 83 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 16. INCOME TAXES (A) Deferred Income Tax As at Deferred income tax assets Deferred income tax liabilities Net, deferred income tax liability Dec 31, 2013 Dec 31, 2012 494 (182,567) (182,073) 3,038 (155,495) (152,457) The net deferred income tax liability without taking into consideration the offsetting of balances within the same jurisdiction are detailed as follows: As at Non-capital loss carry-forwards Loan premium and deferred financing costs Financial Instruments Levelization amounts Asset retirement obligations Other Deferred income tax assets Capital assets Intangibles Retirement benefit surplus Other Deferred income tax liabilities Net, deferred income tax liability A continuity of the net deferred income tax liability follows: As at Net, deferred income tax liability as at January 1 Recorded in earnings Recognized in OCI Business acquisition Other Net, deferred income tax liability as at December 31 (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, 2013 Dec 31, 2012 45,520 13,076 3,319 1,505 873 824 3,431 13,286 7,562 3,116 528 625 65,117 28,548 (193,516) (44,246) (9,246) (182) (247,190) (182,073) (139,024) (32,368) (8,712) (901) (181,005) (152,457) Dec 31, 2013 Dec 31, 2012 (152,457) (6,206) (8,540) (15,548) 678 (145,304) (11,019) 5,063 — (1,197) (182,073) (152,457) Dec 31, 2013 Dec 31, 2012 4,731 17,983 (186,804) (170,440) (182,073) (152,457) 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, 2013 was $31,730 (December 31, 2012 – $12,612). 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 – 2033 2023 – 2027 No expiry No expiry Recognized Unrecognized Dec 31, 2013 Dec 31, 2012 — 171,784 — — — 84,610 70,649 15,379 5,048 6,913 84,610 242,433 15,379 5,048 6,913 84,610 73,480 14,385 4,633 6,345 The Corporation additionally has $17,544 of unused tax credits, which have not been recognized as a tax asset as at December 31, 2013 (December 31, 2012 – $14,659). 84 CAPSTONE INFRASTRUCTURE CORPORATION (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 Unrecognized losses arising in the year Impact on attributes renounced to shareholders Part XII.6 taxes and penalties Other Total income tax recovery For the year ended Dec 31, 2013 Dec 31, 2012 75,420 56,751 25.9% 25.5% 19,534 492 (14,812) 2,018 1,200 294 (516) 8,210 14,472 (1,461) (7,076) 4,075 — — 788 10,798 The statutory income tax rate of 25.9% (2012 – 25.5%) increased due to changes in Capstone's allocation of provincial taxable income. (E) Current Income Taxes Current income taxes payable of $2,581 are included in accounts payable and other liabilities on the statement of financial position (see note 17(a)). NOTE 17. ACCOUNTS PAYABLE AND OTHER LIABILITIES (A) Current Payables and Accrued Liabilities Dividends payable Income taxes payable Other accounts payable and accrued liabilities Dec 31, 2013 Dec 31, 2012 7,833 2,581 106,438 116,852 6,302 2,186 98,279 106,767 Income taxes payable primarily comprised $318 (2012 - $1,099) for Part V.1 on preferred dividends and $1,494 (2012 - Nil) for Part XII.6 for Canadian Renewable and Conservation Expense ("CRCE") CRCE penalties, as well as potential claims which may arise as a result of possible reassessments denying personal tax deductions to the investors. Part XII.6 taxes arose from the acquisition of ReD as a result of obligations to incur qualifying CRCE for previously issued flow-through shares. The remaining $769$$ are attributable to current income taxes payable (2012 - $1,087). (B) Deferred Revenue 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 18. FINANCE LEASE OBLIGATIONS 2013 6,298 7,933 (290) 1,648 15,589 2012 1,363 4,856 (55) 134 6,298 Utilities – water: equipment leases 3.61 - 4.10% 2014 – 2020 Less: current portion Non-current portion 4,370 4,370 (609) 3,761 7,201 7,201 (3,502) 3,699 Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 For the year ended December 31, 2013, the Corporation repaid $3,339 (December 31, 2012 - $5,172) on finance leases, including interest of $126 (December 31, 2012 – $221). 2013 ANNUAL REPORT 85 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS The minimum lease payments in the next five years and thereafter are reconciled to the finance lease obligation as follow: Utilities – water 691 4,005 925 (1,251) Within one year One year to five years Beyond five years Less: future finance charges Total 4,370 NOTE 19. 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 Glace Bay project debt Sky Gen project debt Amherst project debt Amherstburg project debt Hydro facilities' senior secured and subordinated bonds Less: deferred financing costs Long-term debt Less: current portion (i) CPC-Cardinal credit facility Dec 31, 2013 Dec 31, 2012 Fair Value Carrying Value Fair Value Carrying Value 368,045 627,632 81,694 371,744 576,034 80,107 1,077,371 1,027,885 — (8,469) 1,077,371 1,019,416 (26,743) (18,374) 1,050,628 1,001,042 305,497 519,660 44,416 869,573 — 869,573 (21,258) 848,315 297,792 474,648 40,631 813,071 (8,439) 804,632 (14,977) 789,655 Dec 31, 2013 Dec 31, 2012 Fair Value Carrying Value Fair Value Carrying Value — 96,613 17,104 37,137 44,491 86,680 86,020 368,045 — 368,045 (26,743) 341,302 — 92,156 17,243 36,965 44,770 86,680 93,930 371,744 (3,992) 367,752 (18,374) 349,378 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 On November 12, 2013, the Corporation repaid the CPC-Cardinal credit facility from the proceeds of the new corporate credit facility. (ii) Erie Shores Wind Farm Tranche A Tranche B Tranche C Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 5.96% 5.28% 6.15% Apr 1, 2026 Apr 1, 2016 Apr 1, 2026 54,198 2,361 35,597 92,156 57,041 3,223 37,439 97,703 The Erie Shores project debt was secured only by Erie Shores' assets, with no recourse to the Corporation's other assets, except for a $5,000 limited recourse guarantee provided by CPC to the lenders of the Erie Shores project debt. As at December 31, 2013, the carrying value of the assets of Erie Shores exceeded the total amount of project debt outstanding. Under the agreement, Erie Shores must satisfy certain restrictive covenants as to minimum debt service coverage ratios. Additionally, Erie Shores is required to set aside $5,672 as restricted cash to cover the debt service and maintenance reserves. 86 CAPSTONE INFRASTRUCTURE CORPORATION (iii) Glace Bay project debt Term loan Term loan Term loan Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 6.36% 5.99% 4.72% Apr 21, 2019 Apr 1, 2027 Oct 1, 2032 8,533 3,570 5,140 17,243 — — — — Glace Bay project debt has regular principal and interest payments, over the term to maturity and is secured only by the assets of Glace Bay, with no recourse to the Corporation's other assets. As at December 31, 2013, the carrying value of the assets of Glace Bay exceeded the total amount of project debt outstanding. Under the agreement, Glace Bay must satisfy certain restrictive covenants as to minimum debt service coverage ratios. Additionally, Glace Bay is required to set aside $1,600 as restricted cash to cover the debt service and operating and maintenance reserves. (iv) Sky Gen project debt Term loans Term loan Promissory note payable Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 4.22% to 5.06% Dec 31, 2016 6.22% 5.00% Sep 30, 2017 Feb 1, 2016 26,372 608 9,985 36,965 — — — — Sky Gen project debt has regular principal and interest payments, over the term to maturity and is secured only by the assets of Sky Gen, with no recourse to the Corporation's other assets. As at December 31, 2013, the carrying value of the assets of Sky Gen exceeded the total amount of project debt outstanding. Under the agreement, Sky Gen must satisfy certain restrictive covenants as to minimum debt service coverage ratios. (v) Amherst project debt Term loan Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 6.20% Apr 30, 2032 44,770 — Amherst's project debt has regular principal and interest payments, over the term to maturity and is secured only by the assets of Amherst, with no recourse to the Corporation's other assets, except for a $1,000 limited recourse guarantee provided by ReD to the lenders of the Amherst project debt. As at December 31, 2013, the carrying value of the assets of Amherst exceeded the total amount of project debt outstanding. Under the agreement, Amherst must satisfy certain restrictive covenants as to minimum debt service coverage ratios. Additionally, Amherst is required to set aside $1,102 as letters of credit against the borrowing capacity of the corporate credit facility to cover the debt service and maintenance reserves. (vi) Amherstburg project debt Project debt Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 7.32% Jun 30, 2016 86,680 90,560 Amherstburg's project debt has regular principal and interest payments, over 17 years, with a five-year maturity and is secured only by the assets of Amherstburg, with no recourse to the Corporation's other assets. As at December 31, 2013, the carrying value of the assets of Amherstburg exceeded the total amount of project debt outstanding. Under the agreement, Amherstburg must satisfy certain restrictive covenants as to minimum debt service coverage ratios. Additionally, Amherstburg is required to set aside $5,950 as letters of credit against the borrowing capacity of the corporate credit facility to cover the debt service and maintenance reserves. As at December 31, 2013, Amherstburg's project debt had an interest rate swap contract to mitigate interest rate risk (see note 10(a)). (vii) Hydro facilities' senior secured and subordinated secured bonds As at Senior secured bonds Subordinated secured bonds Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 4.56% 7.00% Jun 30, 2040 Jun 30, 2041 73,688 20,242 93,930 77,237 20,242 97,479 2013 ANNUAL REPORT 87 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 comprised $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, 2013, the carrying value of the assets of the hydro facilities exceeded the total amount of bonds outstanding. Under the agreement, the hydro facilities must satisfy certain restrictive covenants as to minimum debt service coverage ratios. Additionally, the hydro facilities are required to set aside $6,194 as restricted cash to cover the debt service and maintenance reserves. (C) Utilities – water As at Bank loans Term loans Debentures Irredeemable cumulative preferred shares Less: deferred financing costs Long-term debt Less: current portion (i) Bank loans Dec 31, 2013 Dec 31, 2012 Fair Value Carrying Value Fair Value Carrying Value 87,056 505,322 2,424 32,830 627,632 — 627,632 — 87,329 457,786 2,275 28,644 576,034 (2,047) 573,987 — 31,540 457,563 2,346 28,211 519,660 — 519,660 — 31,430 414,857 2,072 26,289 474,648 (1,111) 473,537 — 627,632 573,987 519,660 473,537 As at Interest Rate Maturity [£] [$] [$] Dec 31, 2013 Dec 31, 2013 Dec 31, 2012 Secured, variable interest at one month Libor plus a margin (principal £10,000(1)) Secured, variable interest at six month Libor plus a margin (principal £10,000(1 and 2)) HSBC plc (principal £26,000) The Royal Bank of Scotland plc (principal £4,000) 1.23% Dec 17, 2017 9,771 17,224 15,715 5.73% 1.93% 1.58% Dec 17, 2017 Aug 17, 2017 Aug 17, 2015 9,771 26,000 4,000 17,224 45,830 7,051 87,329 15,715 — — 31,430 (1) The principal due on maturity is different from the balance as at December 31, 2012 in pounds sterling due to the fair value adjustment required on acquisition and deferred financing costs. (2) The variable rate bank loan is fixed by an interest rate swap exchanging six month LIBOR for a fixed rate of 5.025%. The fixing dates of the swap match those of the loan (see note 10(a)). The loan has a bullet repayment on maturity. The bank loans are fully repayable on maturity and incur non-utilization fees on the undrawn portion of the total available credit. (ii) Term loans As at Interest Rate Maturity [£] [$] [$] Dec 31, 2013 Dec 31, 2013 Dec 31, 2012 Secured, principal index-linked to RPI, fixed interest at 3.635%(2) on the indexed principal (principal £118,664(1)) Secured, fixed interest at 6.01%(2)%% (principal £57,500(1)) Secured, principal index-linked to RPI, fixed interest at 2.701% on the indexed principal (principal £42,588(1)) 6.79% 6.01% Sep 30, 2032 Sep 30, 2033 149,158 63,212 5.77% Mar 24, 2041 47,337 262,921 111,424 83,441 457,786 237,462 102,730 74,665 414,857 (1) The principal due on maturity is different from the balance as at December 31, 2013 in pounds sterling due to the fair value adjustment made to the long-term debt on acquisition and deferred financing costs. (2) Coupons as specified in loan documentation. The interest rate on the £118,664 indexed-linked loan is adjusted in March and September, by reference to the Retail Price Index ("RPI"), with an eight-month lag. The interest rate on the £42,588 indexed-linked loan is adjusted in March and September, by reference to the RPI, with a two-month lag. 88 CAPSTONE INFRASTRUCTURE CORPORATION (iii) Debentures As at Consolidated (principal £1,405(1)) Perpetual (principal £37(1)) Perpetual (principal £55(1)) Perpetual (principal £73(1)) Dec 31, 2013 Dec 31, 2013 Dec 31, 2012 Interest Rate Maturity 4.00% 4.25% 4.00% 3.50% Irredeemable Irredeemable Irredeemable irredeemable [£] 1,126 37 55 73 [$] 1,985 65 97 128 2,275 [$] 1,806 59 89 118 2,072 (1) The principal due on maturity is different from the balance as at December 31, 2013 in pounds sterling as due to the fair value adjustment made to the long-term debt on acquisition. The rate of interest is fixed and payable every six months. (iv) Irredeemable cumulative preferred shares As at Interest Rate Maturity Preferred shares, cumulative (principal £12,500(1)00 ) 8.75% irredeemable Dec 31, 2013 Dec 31, 2013 Dec 31, 2012 [£] 16,250 [$] 28,644 [$] 26,289 (1) The principal due on maturity is different from the balance as at December 31, 2013 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, 2013. 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: • 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 • 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: • A fixed charge over its shares in Bristol Water plc together with a floating charge over the whole of its undertaking. (D) Corporate As at Corporate credit facility Convertible debentures Less: deferred financing costs Long-term debt Less: current portion Dec 31, 2013 Dec 31, 2012 Fair Value Carrying Value Fair Value Carrying Value 11,300 70,394 81,694 — 81,694 — 81,694 11,300 68,807 80,107 (2,430) 77,677 — 77,677 — 44,416 44,416 — 44,416 — 44,416 — 40,631 40,631 (2,248) 38,383 — 38,383 2013 ANNUAL REPORT 89 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (i) Corporate credit facility The corporate credit facility is composed as follows: Total available credit - Revolving facility Amount drawn Corporate credit facility Letters of credit for the benefit of operating power assets Letter of credit for the benefit of power development projects Letter of credit for the benefit of CPC Remaining available credit Interest Rate Maturity Dec 31, 2013 Dec 31, 2012 32,500 3.52% Nov 12, 2016 (11,300) (9,519) (4,023) (397) 7,261 — — — — — — As at December 31, 2013, Capstone had 17 letters of credit authorized under the revolving facility. On November 12, 2013, the Corporation entered into a new corporate credit facility with a three-year term maturing in November 2016, and repaid the CPC-Cardinal credit facility. The new facility is structured as a revolving facility, available for general corporate activities, including funding future acquisitions and development projects. Advances under the facility can be made by way of bankers' acceptances, prime rate loans, US dollar LIBOR or USBR loans, or letters of credit. The interest rate is determined by the underlying instrument’s base rate plus an applicable margin, based on the total leverage ratio. The applicable rate for letters of credit is equal to the applicable margin; and a commitment fee on the unused principal outstanding is determined at 25% of the applicable margin. The collateral for the facility is provided by a combination of first-charge interests of the guarantor group, largely made up of CPC, Cardinal and Whitecourt, and a pledge of the Corporation’s equity interests in the Corporation’s other, directly and indirectly held, subsidiary entities. The Corporation is subject to customary covenants, including specific limitations on the total leverage ratio, interest coverage ratio and a minimum cash flow profile. In January 2014, the available credit was increased by $17,500, bringing the total to $50,000 of credit of which $25,239 was drawn or committed as of December 31, 2013. (ii) Convertible debentures The carrying values and changes of the liability and the equity components of the debentures were as follows: As at Liability component Conversion to shares, net of costs during the year(1)rr Redemptions during the year Amortization and accretion during the year Deferred financing costs Equity component Conversion to shares, net of costs during the year (1) Redemptions during the year Dec 31, 2013 2016 Debentures 2017 Debentures Total Dec 31, 2012 40,631 — 437 41,068 (1,726) 39,342 9,284 — — 9,284 48,626 34,848 (100) (6,972) (37) 27,739 — 27,739 — — — — 27,739 75,479 (100) (6,972) 400 68,807 (1,726) 67,081 40,238 — — 393 40,631 (2,248) 38,383 9,284 9,284 — — 9,284 76,365 — — 9,284 47,667 (1) During the year ended December 31, 2013, $100 of debentures were converted to shares (see note 21) (December 31, 2012 – Nil). Conversions are transferred at the carrying amount in debt and equity to share capital, net of transaction costs incurred in connection with the issuance of the convertible debentures. 90 CAPSTONE INFRASTRUCTURE CORPORATION 2016 Debentures 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 at December 31, 2013 was $42,749 (December 31, 2012 – $42,749). 2017 Debentures As part of the acquisition of ReD, Capstone assumed redeemable, extendible, convertible unsecured subordinated debentures ("2017 Debentures") due on December 31, 2017. ReD originally issued $34,500 in gross proceeds bearing interest of 6.75% per annum payable semi-annually in arrears on June 30 and December 31 of each year. Each $1,000 principal amount of the debentures are convertible, at the option of the holder, into 200 Capstone common shares and $0.76923 in cash, subject to further adjustment in accordance with the terms of the 2017 Debentures. The terms of the 2017 Debentures also provide that they are redeemable by the Corporation in certain circumstances as well as other customary terms and conditions. During 2013, $6,972 of debentures were redeemed and $100 were converted to shares, resulting in $27,428 in principal value remaining outstanding as at December 31, 2013. (E) Long-term Debt Covenants For the year ended and as at December 31, 2013, the Corporation and its subsidiaries complied with all financial and non-financial debt covenants. (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 18,374 — — 18,374 170,202 87,251 81,477 338,930 181,350 420,444 — 601,794 Total 369,926 507,695 81,477 959,098 NOTE 20. LIABILITY FOR ASSET RETIREMENT OBLIGATION 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, as well as the wind and 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 discount rate Balance, beginning of year Business acquisition Revision of estimates Accretion expense Balance, end of year Dec 31, 2013 Dec 31, 2012 2014 – 2062 2014 – 2062 Nil – $3,205 Nil – $2,965 2.0% 2.0% 7.17% – 8.00% 8.0% – 12.5% 2,096 860 138 199 3,293 2,412 — (533) 217 2,096 2013 ANNUAL REPORT 91 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 21. SHAREHOLDERS’ EQUITY The following table summarizes the Corporation's share capital: As at Common shares Class B exchangeable units Preferred shares The Corporation's other equity items were comprised of: As at Equity portion of convertible debentures Warrant reserve Share option reserve (A) Capstone is authorized to issue an unlimited number of common shares. Common Shares Dec 31, 2013 Dec 31, 2012 710,662 26,710 72,020 809,392 632,474 26,710 72,020 731,204 Dec 31, 2013 Dec 31, 2012 9,284 — 144 9,428 9,284 — — 9,284 Continuity for the year ended ($000s and 000s shares) Opening balance Common shares issued Dividend reinvestment plan (1) Conversion of convertible debentures, net of cost (2) Ending balance Dec 31, 2013 Dec 31, 2012 Shares Carrying Value Shares Carrying Value 72,445 19,719 670 20 632,474 75,453 2,635 100 70,957 626,861 — 1,488 — (89) 5,702 — 92,854 710,662 72,445 632,474 (1) Shares issued by the Corporation under the Dividend Re-Investment Plan (DRIP). (2) Convertible debentures of $100 were converted to shares of the Corporation during 2013 (note 19(d)(ii)) (December 31, 2012 – $0). Amounts transferred from debt and equity are net of original issuance transaction costs. (B) Class B Exchangeable Units MPT LTC Holding LP had 3,249 Class B exchangeable units outstanding as at December 31, 2013 and 2012. 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, 2013 and 2012, 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. 92 CAPSTONE INFRASTRUCTURE CORPORATION (D) Warrants and Warrant Reserve On October 1, 2013, the date ReD was acquired, ReD warrant holders received 1,356,892 of replacement warrants from Capstone which have an exercise price of $5.19 dollars and expire March 6, 2014. The Corporation determined the fair value of the replacement warrants reserve on October 1, 2013 to be $Nil. Business acquisition Expiry of warrants during period Number of Warrants (1) 1,356,892 — 1,356,892 Amount — — — (1) Number of individual warrants are not in thousands. (E) Options and Share Option Reserve On October 1, 2013, the date ReD was acquired, ReD option holders received 301,811 of replacement options from Capstone. The Corporation's share option reserve at December 31, 2013 is $144. The number and weighted average exercise prices of stock options are as follows: Business acquisition Exercised during the year Expired during the year Outstanding at December 31, 2013 Exercisable at December 31, 2013 The following options were outstanding and exercisable as at December 31, 2013: Expiry date September 29, 2015 April 12, 2016 December 15, 2016 May 15, 2017 Number of Options (1) Weighted average exercise price 301,811 (19,518) (99,284) 183,009 115,657 $3.99 $2.94 $4.11 $4.04 $4.02 Options outstanding (1) Options exercisable (1) Exercise price 39,039 65,064 20,820 58,086 39,039 43,376 13,880 19,362 183,009 115,657 $3.85 $4.54 $2.81 $4.04 $4.02 (1) Number of individual options are not in thousands. The grant-date fair value of the share options is measured based on the Black-Scholes formula. Expected volatility is estimated by considering historic average share price volatility. The following assumptions were used to estimate the fair value of the options issued to grantees: Risk-free interest rate Expected annual dividend Expected life of options Expected volatility (F) Dividends The dividends declared were as follows: Common shares Class B exchangeable units Preferred shares (includes $173 of deferred income taxes) 1.2% $0.30 dollars 3 years 27% For the year ended Dec 31, 2013 Dec 31, 2012 23,358 975 24,333 3,923 32,302 1,462 33,764 4,575 Capstone has included $7,208 of accrued common dividends and $625 of accrued preferred dividends as declared on November 12, 2013 (December 31, 2012 – $5,677 was accrued for common shares and $625 for preferred shares). Capstone paid $0.300 per common share and $1.250 per preferred share during the year ended December 31, 2013 (December 31, 2012 – $0.450 per common share and $1.250 per preferred share). 2013 ANNUAL REPORT 93 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (G) The Corporation defines capital as the aggregate of long-term debt and shareholders' equity as follows: Capital Management As at Long-term debt Shareholders' equity (1) Total capitalization Dec 31, 2013 Dec 31, 2012 1,027,885 529,550 813,071 418,848 1,557,435 1,231,919 (1) Capstone's definition excludes non-controlling interest of $138,613 (December 31, 2012 – $91,610). The Corporation manages its capital to achieve the following objectives: • 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; • Maintain financial flexibility in order to preserve its ability to meet financial obligations, including debt servicing payments and distribution payments; and • 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. 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. The Corporation is not subject to any external capital requirements and is in compliance with all debt covenants as described in note 19. NOTE 22. NON-CONTROLLING INTERESTS (A) Non-controlling Interests Non-controlling interests represent ownership interests by third parties in businesses consolidated by Capstone. Bristol Water, Amherst and Saint- Philémon non-controlling interests as at December 31, 2013 were: • • • Bristol Water is 30% owned by Agbar (Sociedad General de Aguas de Barcelona) ("Agbar"), a subsidiary of Suez Environnement and is 20% owned by I-Environment Investments Ltd., a subsidiary of ITOCHU Corporation ("ITOCHU"). Amherst is 49% owned by Firelight Infrastructure Partners LP ("Firelight") Saint-Philémon is 48.9% owned by Municipalité Régionale de Comté de Bellechasse and 0.1% owned by Municipalité de Saint-Philémon (the "Municipal partners") Capstone has agreements with each partner that govern distributions from these investments. In addition, distributions must also comply with the respective debt agreements. The balances and changes in non-controlling interests is as follows: Agbar's (30%) interest in Bristol Water ITOCHU's (20%) interest in Bristol Water Firelight's (49%) interest in Amherst Municipal partners (49%) interest in Saint-Philémon As at January 1, 2012 Partial sale of interest in Bristol Water NCI portion of net income (loss) NCI portion of other comprehensive income (loss) Dividends declared As at December 31, 2012 Business acquisition Cash contributions from NCI NCI portion of net income (loss) NCI portion of other comprehensive income (loss) Dividends declared As at December 31, 2013 34,450 — 12,315 (4,266) (4,022) 38,477 — — 15,443 7,614 (3,782) 57,752 — 51,659 5,413 (2,649) (1,290) 53,133 — — 10,296 5,076 (2,521) 65,984 — — — — — — 12,833 — 109 — (1,470) 11,472 94 CAPSTONE INFRASTRUCTURE CORPORATION — — — — — — — 3,405 — — — Total 34,450 51,659 17,728 (6,915) (5,312) 91,610 12,833 3,405 25,848 12,690 (7,773) 3,405 138,613 (B) Summarized Information for Material Partly-Owned Subsidiaries As at Dec 31, 2013 Dec 31, 2012 Summarized Statements of Financial Position Bristol Water Amherst Saint-Philémon Bristol Water Assets Current Non-Current Liabilities Current Non-Current Total Equity Attributable to: Shareholders of Capstone NCI For the year ended Summarized Statements of Income Revenue Net Income OCI Total comprehensive Income Attributable to: Shareholders of Capstone NCI 78,252 1,036,245 (77,319) (704,003) 333,175 209,439 123,736 333,175 2,305 73,968 (2,294) (43,616) 30,363 18,891 11,472 30,363 4,789 2,460 (1,135) — 6,114 2,709 3,405 6,114 89,700 856,810 (79,665) (603,075) 263,770 172,160 91,610 263,770 Dec 31, 2013 Dec 31, 2012 Bristol Water Amherst Saint-Philémon Bristol Water 195,576 1,952 51,477 30,853 82,330 43,901 38,429 82,330 223 — 223 114 109 223 — — — — — — — 178,391 41,050 (14,221) 26,829 16,016 10,813 26,829 Distributions of $6,303 (2012 - $1,675) from Bristol Water and $1,470 (2012 - nil) from Amherst were paid to non-controlling interests in 2013. For the year ended Dec 31, 2013 Dec 31, 2012 Summarized Statements of Cash Flows Bristol Water Amherst Saint-Philémon Bristol Water Operating Investing Financing Foreign exchange 86,413 (134,126) 31,038 491 1,242 — (3,407) — Net increase / (decrease) in cash and equivalents (16,184) (2,165) NOTE 23. EARNINGS PER SHARE (“EPS”) Net income Non-controlling interest Dividends declared on preferred shares Net income available to common shareholders Weighted average number of common shares (including Class B exchangeable units) outstanding Basic EPS (60) (96) 4,935 — 4,779 71,921 (40,757) (42,117) — (10,953) For the year ended Dec 31, 2013 Dec 31, 2012 67,210 (25,848) (3,923) 37,439 81,033 0.462 45,971 (17,728) (4,575) 23,668 75,116 0.315 2013 ANNUAL REPORT 95 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Basic net income Effect of dilutive securities: 2016 convertible debentures (1) 2017 convertible debentures (2) Diluted Net income Basic weighted-average number of shares outstanding Effect of dilutive securities: 2016 convertible debentures (1)s 2017 convertible debentures (2) Diluted weighted average number of common shares (including Class B exchangeable units) outstanding (3)g Diluted EPS For the year ended Dec 31, 2013 Dec 31, 2012 37,439 23,668 2,056 431 39,926 — — 23,668 81,033 75,116 6,107 6,900 94,040 0.425 — — 75,116 0.315 (1) 2016 convertible debentures were anti-dilutive for the year endedDecember 31, 2012. (2) 2017 convertible debentures were assumed on October 1, 2013, and the impact on net income (loss) is included since the acquisition date. (3) Share options and warrants issued on the acquisition of ReD were anti-dilutive for the year-ended December 31, 2013. NOTE 24. SHARE-BASED COMPENSATION (A) Deferred Share Units 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 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 cash at the time a director ceases to be a board member. For the year ended ($000s, except unit amounts) Outstanding at January 1 Fixed quarterly grants during the period Redemptions in the period Dividend equivalents Unrealized gain (loss) on revaluation Outstanding at December 31 Dec 31, 2013 Dec 31, 2012 Number of Units Fair Value Number of Units Fair Value 30,198 25,106 (6,905) 2,268 50,667 — 50,667 122 99 (30) 9 200 (20) 180 8,407 20,102 — 1,689 30,198 — 30,198 32 75 — 7 114 8 122 The average VWAP per DSU granted during 2013 was 3.98 dollars (2012 – 4.10 dollars). As at December 31, 2013, the carrying value of the DSUs, based on a market price of 3.56 dollars, was $180 and is included in accounts payable and other liabilities in the consolidated statement of financial position (December 31, 2012 – 4.03 dollars and $122). The DSU expense for 2013 was $88 and is recorded as compensation expense in the consolidated statement of income (2012 – $90). (B) Long-term Incentive Plan During 2013, Capstone granted to the senior management of the Corporation 243,886 Restricted Stock Units (“RSUs”) and 133,917 Performance Share Units (“PSUs”). The five-day VWAP per RSU and PSU granted January 2, 2013 was 4.00 dollars and 4.25 dollars per RSU granted March 20, 2013 and all RSUs and PSUs granted vest on December 31, 2015. In 2012, 253,959 RSUs and 141,431 PSUs were granted and they vest on December 31, 2014. 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 consideration that the amount of the PSUs is subject to Capstone's total return over the period relative to a peer group. 96 CAPSTONE INFRASTRUCTURE CORPORATION For the year ended ($000s, except unit amounts) Outstanding at January 1 Grants during the period Dividend equivalents Unrealized loss on revaluation Outstanding at December 31 Dec 31, 2013 Dec 31, 2012 Notional number of Units Fair Value Notional number of Units Fair Value 588,160 377,803 66,391 1,032,354 — 1,032,354 2,211 1,537 268 4,016 (643) 3,373 141,892 395,390 50,878 588,160 — 588,160 541 1,546 205 2,292 (81) 2,211 The average VWAP per RSU and PSU granted on during 2013 was 4.12 dollars (2012 – 4.01 dollars). As at December 31, 2013, the carrying value of the RSUs and PSUs, based on a market price of 3.56 dollars, was $1,839 and is included in accounts payable and other liabilities in the consolidated statement of financial position (December 31, 2012 – 4.03 dollars and $836). The RSU and PSU compensation expense of $1,004 is recorded as compensation expense in the consolidated statement of income for 2013 (2012 –$721). (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. Shares acquired as a matching contribution (including any dividends on those shares) vest after one year of match. NOTE 25. EXPENSES – ANALYSIS BY NATURE For the year ended Dec 31, 2013 Dec 31, 2012 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 Bad debts Other Total 78,196 70,457 28,932 4,869 2,058 1,600 3,567 1,565 1,323 6,618 5,349 204,534 — — 6,133 — — — 1,965 382 — — 1,889 10,369 — — 831 — — — 4,178 — — — 521 5,530 78,196 77,678 70,457 35,896 4,869 2,058 1,600 9,710 1,947 1,323 6,618 7,759 72,142 24,305 4,370 1,914 1,654 2,470 1,334 1,125 4,067 4,673 220,433 195,732 — — 6,749 — — — 1,780 361 — — 2,180 11,070 NOTE 26. OTHER GAINS AND LOSSES — — 20 — — — 345 — — — — Total 77,678 72,142 31,074 4,370 1,914 1,654 4,595 1,695 1,125 4,067 6,853 365 207,167 Unrealized gain (loss) on derivative financial instruments Realized gain (loss) on derivative financial instruments Other Loss on disposal of capital assets Other net gains and (losses) For the year ended Dec 31, 2013 Dec 31, 2012 11,538 2,605 295 (70) (1,974) 9,789 — — (1,311) 1,294 2013 ANNUAL REPORT 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 27. COMMITMENTS AND CONTINGENCIES The Corporation, either directly or indirectly through its subsidiaries, has entered into various contracts and commitments in addition to the commitments described in notes 18 finance lease obligations, 19 long-term debt and 20 liability for asset retirement obligation as at December 31, 2013 are as follow: (A) Derivative Contracts The Corporation has various derivative contracts for foreign exchange 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 2,027 9,542 21,066 Within one year One year to five years Beyond five years Total 32,635 The following leases have been included in the table based on known minimum operating lease commitments as follows: • • • The Corporation has a operating leases for corporate offices and power development purposes. These leases have terms ranging from to 2015 to 2018, with options to extend. Amherstburg leases the land on which its operating facilities are located. The terms of the lease agreements extend to 2032. Capstone's operating wind facilities and wind development projects have entered into agreements for the use, or option to use, land in connection with the operation of existing and future wind farms. Payment under these agreements is typically a minimum amount with additional payments dependent on the amount of power generated by the wind facility. The agreements can be renewed and extend as far as 2047. Capstone has additional operating lease commitments not included in the table with no minimum operating lease commitments required as follows: • • Capstone has agreements with the Provinces of Ontario and British Columbia for the lease of certain lands, and water rights necessary for the operation of its hydro power facilities. The payments under these agreements vary based on actual power production. The terms of the lease agreements extend between 2023 and 2042. 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. (C) Capital Commitments Bristol Water capital expenditure program Bristol Water had commitments for capital expenditures at December 31, 2013 of which $26,172 were contracted for but not accrued (December 31, 2012 – $33,300). Cardinal turbine maintenance Cardinal placed a purchase order for a $20,140 ($19,000 USD) rotor and exhaust cylinder to be installed during the scheduled major maintenance in 2015. The purchase order includes a termination fee that escalates with the passage of time. As at December 31, 2013, the penalty was $1,060 ($1,000 USD) and increases to $3,180 ($3,000 USD) by March 2014. Capstone's first installment payment of $2,120 was made in February 2014. Development projects As part of Capstone's power development operations, Capstone enters various construction and purchase agreements. As at December 31, 2013, Capstone had approximately $61,000 of construction and turbine supply agreements for the Saint-Philémon and Skyway 8 projects. (D) Natural 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. (E) Operations and Management Agreements ("O&M") Capstone has an agreement with Agbar, which provides management support to Bristol Water, with an initial five-year term that automatically extends indefinitely. Capstone has the ability to terminate the contract. 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 several turbine maintenance service agreements covering the turbines in operation on various wind farms. The agreements provide for scheduled and unscheduled maintenance and require annual minimum payments, subject to inflationary increases, as applicable. 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. 98 CAPSTONE INFRASTRUCTURE CORPORATION (F) Management Services Agreements Capstone has agreements with all of ReD's partially owned investments, including Glen Dhu, Fitzpatrick, Amherst and various development projects. For the operating projects, these agreements are primarily for the provision of management and administration services and are based on an agreed percentage of revenue. The development projects additionally include a development fee for the successful completion of the projects, which pays an agreed fee per MW on completion of development. (G) 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. (H) 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. (I) 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, 2013, no claims had been made on these guarantees. In addition, Capstone has provided limited recourse guarantees on the project debt of Erie Shores, Amherst, and Fitzpatrick totaling $6,500 as at December 31, 2013. NOTE 28. RELATED PARTY TRANSACTIONS (A) Management and other related fees Management fees earned from Capstone's equity accounted investments are reported in the consolidated statements of income as revenue. During 2013, Capstone earned management fees of $115 (2012 - Nil). As at December 31, 2013, included in accounts receivable was $1,304, due from Fitzpatrick and included in accounts payable and other liabilities was $980, due to Glen Dhu (2012 - Nil). All related party transactions were carried out at commercial terms. (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. Eligible directors and senior management of the Corporation also receive forms of stock-based compensation as described in note 24. The following table summarizes key management compensation: Salaries, directors' fees and short-term employee benefits (1) Share based compensation (1) The short-term incentive plan component of this balance in based on amounts paid during the period. For the year ended Dec 31, 2013 Dec 31, 2012 1,494 815 2,309 1,272 573 1,845 2013 ANNUAL REPORT 99 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 29. 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, as well as project development. Utilities – water 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”) The district heating business (Värmevärden), in which the Corporation holds a 33.3% indirect interest. Geographical Location Canada United Kingdom Sweden Year ended Dec 31, 2013 Utilities Year ended Dec 31, 2012 Utilities Power Water DH Corporate Total Power Water DH Corporate Total Revenue 193,928 195,575 Depreciation of capital assets (27,486) (23,399) Amortization of intangible assets Interest income (8,116) (2,784) — — — — 389,503 179,218 178,392 (298) (51,183) (26,753) (20,297) (84) (10,984) (8,031) (2,028) — — — — 357,610 (382) (47,432) (61) (10,120) 781 275 2,861 179 4,096 761 751 3,356 18 4,886 Interest expense (19,696) (21,644) Income tax recovery (expense) (9,800) 2,133 — — (6,131) (47,471) (18,450) (21,468) (543) (8,210) (6,589) (3,326) — — (9,250) (49,168) (865) (10,780) Net income (loss) 35,009 51,477 2,850 (22,126) 67,210 19,788 41,052 7,936 (22,805) 45,971 Cash flow from operations Additions to capital assets 76,479 86,411 2,736 (29,950) 135,676 56,173 76,474 3,356 (21,325) 114,678 5,722 129,925 — 49 135,696 5,432 140,555 — 86 146,073 As at Dec 31, 2013 Utilities As at Dec 31, 2012 Utilities Power Water DH Corporate Total Power Water DH Corporate Total Total assets Total liabilities 814,198 1,114,532 49,983 47,011 2,025,724 637,441 932,307 51,923 5,187 1,626,858 459,443 781,357 1,489 115,272 1,357,561 367,141 668,537 2,245 78,477 1,116,400 NOTE 30. 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 For the year ended Dec 31, 2013 Dec 31, 2012 (5,968) (4,654) 11,736 1,114 (3,603) 1,188 (2,548) (4,963) NOTE 31. COMPARATIVE FIGURES Certain comparative figures have been reclassified to conform to the current period’s presentation. As at December 31, 2012, deferred income tax assets of $25,681 were reclassified against deferred income tax liabilities. Similarly, as at January 1, 2012, deferred income tax assets of $29,515 were reclassified. These reclassifications did not impact previously reported net income or cash flows of any period. 100 CAPSTONE INFRASTRUCTURE CORPORATION SUPPLEMENTARY INFORMATION PORTFOLIO Power Type of Facility Province Year Built Gas Cogeneration Ownership Interest Total Net Capacity (MW) PPA Counterparty PPA Expiry Fuel Supply Counterparty Fuel Supply Expiry Employees Cardinal Wind Operating Development Biomass (1) Whitecourt Hydro Sechelt and Hluey Lakes Wawatay and Dryden Solar ON ON NS ON PQ SK AB BC ON 1994 100% 156 OPA 2014 Husky 2015 2002 - 2009 100% 121 2006 - 2012 49% - 100% 2015 - 2016E 2014E 2016E 50% - 100% 51% 100% 74 57 12 10 OPA NSPI OPA Hydro Quebec SaskPower 2021 - 2032 2021 - 2037 2034 2034 2035 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a 1994 100% 32.8 TransAlta 2014 Millar Western 2016 18 10 1 n/a n/a n/a 34 n/a n/a 1997 and 2000 1992 and 1986 100% 100% 19 17 20 BC Hydro OEFC 2017 and 2020 2020 and 2042 OPA 2031 n/a n/a n/a n/a n/a Amherstburg ON 2011 100% n/a n/a (1) Biomass includes Capstone's 31.3% equity accounted interest in Chapais. Utilities Business Ownership Interest Värmevärden 33.3% Bristol Water 50% Heat production capacity of 639 MWth Average daily supply of 266 million litres Capacity Counterparties Mix of industrial and retail customers. Length of Network 317 kilometres Approximate Population Served Regulated Employees 163,000 No 89 Mix of commercial and residential customers. 6,671 kilometres 1.2 million Ofwat 547 2013 ANNUAL REPORT 101 FINANCIAL HIGHLIGHTS PERFORMANCE MEASURES Information for 2005 to 2009 is presented in Canadian GAAP and may not be comparable with information provided under IFRS for 2010 to 2013. Earnings Measures ($000s) 2013 2012 2011 2010 2009 2008 2007 2006 2005 Revenue 389,503 357,610 215,967 158,512 148,384 153,186 122,811 89,940 90,235 Net income (loss) (1) 67,210 45,971 (2,837) 15,901 11,259 (26,534) Basic earnings per share (1) 0.462 0.315 (0.103) 0.339 0.226 (0.531) 5,426 0.135 8,411 0.280 8,372 0.364 (1) Net income (loss) and earnings (loss) per share have been restated for changes required by IFRS to implement IAS 19 - Employee Benefits. This change, which became effective, retroactively, January 1, 2013, is described in note 2 of the consolidated financial statements for the year ended December 31, 2013. Cash Flow Measures ($000s) Cash flows from operating activities 2013 2012 2011 2010 2009 2008 2007 2006 2005 Adjusted EBITDA (1) 128,421 120,343 135,676 114,678 50,881 55,673 29,011 55,818 38,040 61,244 50,516 67,324 29,663 61,250 21,044 34,104 20,230 27,912 Adjusted funds from operations (“AFFO”) (1) AFFO per share (1) 39,934 35,563 34,884 34,774 42,989 50,626 72,835 33,267 27,708 0.493 0.473 0.541 0.693 0.861 1.013 1.806 1.107 1.191 (1) These performance measures are not defined by International Financial Reporting Standards (“IFRS”). Please see page 22 for a definition of each measure. p Capital Structure – At Fair Value ($000s) 2013 2012 2011 2010 2009 2008 2007 2006 2005 Long-term debt – power (1) 346,244 305,497 314,196 245,911 214,107 246,960 219,162 35,000 35,000 Long-term debt – utilities – water (1) Long-term debt – corporate Common shares 313,816 259,830 353,135 — — — — 81,694 44,416 155,124 61,311 89,437 35,026 38,918 — — — — 330,560 291,955 270,348 463,217 273,161 310,066 376,275 214,231 235,382 Class B exchangeable units 11,568 Preferred shares 45,930 13,093 58,200 12,380 52,500 26,710 19,854 15,565 30,642 32,656 33,501 — — — — — — Debt to capitalization 65.7% 62.7% 71.0% 38.5% 50.9% 46.4% 38.8% 12.4% 11.5% (1) Calculated based on proportionate share based on ownership interest of 51% for Amherst, included in long-term debt - power and 50% for Bristol Water, included in long-term debt - utilities - water (December 31, 2011 – 70% for Bristol Water). INVESTOR INFORMATION Quick Facts Common shares outstanding Preferred shares outstanding 2016 - Convertible debentures outstanding 2017 - Convertible debentures outstanding Class B exchangeable units Securities exchange and symbols 102 CAPSTONE INFRASTRUCTURE CORPORATION 92,853,970 3,000,000 42,749 27,428 3,249,390 Toronto Stock Exchange: CSE, CSE.PR.A, CSE.DB.A, CPW.DB QUARTERLY TRADING INFORMATION Common shares High price Low price Closing price Q4 3.93 3.51 3.56 2013 Q3 4.11 3.76 3.85 Q2 Q1 Q4 4.25 3.76 3.79 4.48 4.10 4.25 4.49 3.91 4.03 2012 Q3 4.69 4.01 4.43 Q2 Q1 4.15 3.72 4.01 4.35 3.82 4.15 Average daily volume 366,000 219,000 564,000 286,000 206,000 186,000 272,000 410,675 Dividend declared Preferred shares High price Low price Closing price Average daily volume Dividend declared 2016 - Convertible debentures High price Low price Closing price Average daily volume 2017 - Convertible debentures High price Low price Closing price Average daily volume 0.075 0.075 0.075 0.075 0.075 0.075 0.135 0.165 17.97 15.00 15.31 10,765 0.3125 101.50 97.51 100.50 457 103.49 100.01 100.01 378 19.10 16.64 18.30 2,838 19.15 16.25 17.08 4,416 19.50 18.53 19.00 2,746 20.67 18.65 19.40 2,971 21.50 18.40 20.80 2,070 19.24 16.66 19.00 3,054 18.84 17.00 17.60 4,385 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 0.3125 102.89 100.10 100.31 279 104.49 100.02 101.52 544 105.00 99.01 100.50 374 104.50 102.50 103.90 300 107.20 102.02 104.15 200 108.49 99.51 103.00 492 104.49 99.50 101.50 933 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Note: All high and low security price information is intraday. 2013 ANNUAL REPORT 103 CORPORATE INFORMATION MANAGEMENT Michael Bernstein President and Chief Executive Offi cer Michael Smerdon INVESTOR INFORMATION Stock Exchange and Symbols Toronto Stock Exchange Common shares: CSE Preferred shares: CSE.PR.A Executive Vice President and Chief Financial Offi cer Convertible debentures: CSE.DB.A; CPW.DB 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 BOARD OF DIRECTORS V. James Sardo1 Chairman of the Board Michael Bernstein Richard Knowles1 Goran Mornhed3 Jerry Patava1,2 François R. Roy 3,4 Janet Woodruff 3 HEAD OFFICE 155 Wellington Street West RBC Centre Suite 2930 Toronto, Ontario M5V 3H1 Tel: 416-649-1300 Fax: 416-649-1335 104 CAPSTONE INFRASTRUCTURE CORPORATION 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 AUDITOR 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@capstoneinfra.com ANNUAL GENERAL MEETING OF SHAREHOLDERS Tuesday, June 17, 2014 10 a.m. EDT Fairmont Royal York Library Room Mezzanine Level 100 Front 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 fi nancial reports, recent news and investor presentations, including a webcast of the annual general meeting. 1 Member of the Corporate Governance and Compensation Committee. 2 Chair of the Corporate Governance and Compensation Committee. 3 Member of the Audit Committee. 4 Chair of the Audit Committee. . . i i m o c b a r c w w w s n o i t a c n u m m o C & n g i s e D b a r C i : I N G S E D Readers are advised that this annual report may contain forward-looking information and a fi nancial outlook that refl ects management’s current expectations regarding Capstone’s future growth, results of operations, performance and business based on information currently available to Capstone. These forward-looking statements are subject to known and unknown risks and uncertainties that may cause actual results or events to diff er materially from those expressed or implied by such statements and, accordingly, should not be read as guarantees of future performance or results. Except as may be required by applicable law, Capstone does not undertake any obligation to publicly update or revise any forward-looking statements or fi nancial outlook. This annual report is not an off er or invitation for subscription or purchase of or a recommendation of securities. It does not take into account the investment objectives, fi nancial situation and particular needs of the investor. Before making an investment in Capstone, the investor or prospective investor should consider whether such investment is appropriate to their particular needs, objectives and fi nancial circumstances and consult an investment advisor if necessary. 2013 ANNUAL REPORT 105 INVESTMENT VALUE PROPOSITION Capstone’s commitment to delivering an attractive total return to investors is supported by the following: u High quality, diversifi ed and responsibly managed infrastructure portfolio that is delivering strong performance u Substantial investment in Bristol Water, a regulated utility with a signifi cant organic growth profi le u New clean energy development pipeline that will create additional value for shareholders u Solid balance sheet and capital structure matched to the cash fl ow profi le of our businesses u Seasoned management team with relationships across the infrastructure spectrum VISIT US ONLINE: capstoneinfrastructure.com
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