BUILDING 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.
.
.
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&
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D
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:
I
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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