CAPSTONE INFRASTRUCTURE CORPORATION(cid:2)2014 ANNUAL REPORT
Essential
FINANCIAL HIGHLIGHTS
Capstone’s 2014 full-year fi nancial results refl ect the successful
diversifi cation of the company’s portfolio to include a range of core
infrastructure assets with complementary cash fl ow and risk dynamics.
HISTORICAL REVENUE
(in millions of dollars)(1)
19.3%
Compound Annual
Growth Rate in
Revenue since 2005.
441.6
389.5
357.6
ADJUSTED EBITDA
(in millions of dollars)(1)
21.4%
Compound Annual
Growth Rate in Adjusted
EBITDA since 2005.(1)
160.3
128.4
120.3
216.0
153.2 148.4 158.5
122.8
90.2 89.9
67.3
61.2
61.2 55.8 55.7
27.9 34.1
05
06
07
08
09
10
11
12
13
14
05
06
07
08
09
10
11
12
13
14
ADJUSTED EBITDA IN 2014 BY GEOGRAPHY (2)
ADJUSTED EBITDA IN 2014 BY BUSINESS (2)
●● 61% Canada
● 35% United Kingdom
● 4% Sweden
●● 35% Water Utility
● 22% Gas Cogeneration Power
● 21% Wind Power
● 3% Biomass Power
● 6% Hydro Power
● 9% Solar Power
●● 4% District Heating
(1) Information from 2005 to 2009 is presented in Canadian GAAP and may not be comparable with information provided under IFRS for 2010 to 2014.
(2) Chart illustrates contribution for the businesses and excludes the development and corporate components.
INSIDE THIS REPORT
1
2
4
8
10
13
Capstone is Essential
At-a-Glance
Message to Shareholders
Sustainability
Message from the Chairman
Strategic Overview
21
56
57
58
Management’s Discussion
and Analysis
Management’s Responsibility for
Financial Statements
Independent Auditor’s Report
Consolidated Financial Statements
62
Notes to the Consolidated
Financial Statements
106 Supplementary Information
107 Financial Highlights
109 Glossary
110 Corporate Information
On the cover:
Capstone’s infrastructure assets supply essential services to millions of customers, providing energy, water and heat to people and businesses in
communities in Canada and abroad.
Capstone
is Essential
Infrastructure is the essential catalyst for the development,
stability and growth of economies the world over. Whether
in emerging markets or developed nations, populations in all
societies share a need for clean water, effi cient transportation
networks, reliable power and functioning public institutions.
Capstone is built on supporting these central
elements of daily life, which have only risen in demand
since our company was founded more than a decade ago.
Our investments in core infrastructure facilities capture
the stable income characteristics and long-term growth
potential of this asset class.
Our 2014 annual report includes a review of our clean
energy portfolio across Canada, utilities in the United
Kingdom and Europe, and provides an update on the
progress we have made in developing new power projects.
We also discuss expansion progress for existing business
lines and the potential for acquiring new platforms.
Capstone’s vision remains steadfast: 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 we enter our second decade as a company, we have a
determined path to remaining essential for years to come.
AT-A-GLANCE
Essential
Assets
Capstone has steadily compiled a portfolio of high-quality power and utilities
assets that were either developed internally or carefully acquired after
thoroughly reviewing their risk profi le and long-term value to the company
and its shareholders. Capstone has a pipeline of new projects now under
development and actively evaluates potential acquisitions on an ongoing basis,
with a geographic focus on North America, Europe, New Zealand and Australia.
CANADA
●● Clean Energy
● Utilities
● Development Projects
2014 Long-term Cash Flow Horizon
Chapais (2015)
Sechelt (2017)
Dryden (2020)
Hluey Lakes (2020)
2026
Erie Shores
Whitecourt
Amherstburg
Cardinal
Nova Scotia & Ontario Wind
Wind Projects
Wawatay
Bristol Water
Värmevärden
2030
2031
2034
2020–2035
2035
SWEDEN
UNITED
KINGDOM
2042
PERPETUAL →
PERPETUAL →
2015
2020
2025
2030
2035
2040
2045
2050
2055
2060
Our portfolio is increasingly diversifi ed by asset category, fuel source and geographic location. To see how Capstone has evolved, please visit:
capstoneinfrastructure.com/About/OurStory.aspx
2
Capstone Infrastructure Corporation
Platforms Today
Clean Energy
BIOMASS
NATURAL
GAS
WIND
SOLAR
HYDRO
Utilities
BRISTOL
WATER
VÄRMEVÄRDEN
Development Projects
POWER
DEVELOPMENT
PIPELINE
Whitecourt Power
The fi rst power facility in Canada to be
certifi ed under the federal government’s
EcoLogo™ program. Uses one steam
turbine and one generator to generate
electricity from wood waste.
Cardinal Power
Cardinal is one of Ontario’s largest
cogeneration facilities, simultaneously
producing electricity and thermal energy
from natural gas, which results in a highly
effi cient use of energy.
Owned
Since 2007
2014
Performance
96.4% availability
15 year
Fuel supply agreement
(2030)
Owned
Since 2004
2014
Performance
98.5% availability
20 year
Non-utility generator
contract (2034)
Erie Shores Wind Farm
One of the largest wind power facilities in
Ontario, with 66 turbines along the north
shore of Lake Erie.
Owned
Since 2007
Nova Scotia and Ontario Wind Facilities
Established facilities and recently
completed wind farms representing more
than 100 MW of net installed capacity.
Amherstburg Solar Park
A crystalline solar photovoltaic power
facility using solar panels as well as a
tracking system engineered to follow the
sun during the day, thereby increasing daily
energy production.
Owned
Since 2013;
new facilities
commissioned
in 2014 and 2015
Owned
Since 2011
2014
Performance
97.3% availability
(total/combined
wind portfolio
performance)
20 year
Power purchase
agreement (2026)
15–20 year
Power purchase
agreements
(2020–2035)
2014
Performance
98.6% availability
20 year
Power purchase
agreement (2031)
Sechelt, Dryden, Hluey Lakes, Wawatay
Two sites in British Columbia and two in
Ontario, producing enough power to serve
about 17,000 households per year.
Owned
Since 2007
2014
Performance
96.4% availability
20–50 year
Power purchase
agreements
(2017–2042)
One of nine regulated water-only
companies in the United Kingdom,
established in 1846 and today serving
a population of 1.2 million in the city
of Bristol and surrounding region.
A district heating facility that consumes
primarily wood and organic waste to heat
water or create steam piped to about
4,000 supply points for residential and
industrial customers.
Owned
Since 2011
2014
Performance
100% Security
of Supply Index
(SOSI)
Perpetual
asset
Owned
Since 2011
2014
Performance
92.3% availability
Perpetual
asset
▶ The 10-MW Skyway 8 wind farm in Ontario
commissioned August 2014
▶ The 24-MW Saint-Philémon facility in Quebec
commissioned January 2015
Six projects working through permitting stages;
two have received Renewable Energy Approval (REA)
from the Ontario Ministry of the Environment and
Climate Change.
▶ The 25-MW Goulais site is expected to achieve
commercial operations in Q2 2015
Capstone is a Qualifi ed Applicant under the Ontario
Power Authority’s Large Renewable Procurement.
2014 Annual Report
3
MESSAGE TO SHAREHOLDERS
Infrastructure
is Essential
Dear Fellow Shareholders,
2014 was a year of several important successes, and one
From the fi nancial standpoint, 2014 was a very good year for
disappointing setback. On the one hand, we entered our second
Capstone. Adjusted EBITDA exceeded our forecast, coming in
decade as a company, posted strong fi nancial results, settled
at $160.4 million, the result of a full year of contributions from
the longstanding Cardinal contracting issue, saw the successful
wind assets we acquired in the third quarter of 2013, higher
commissioning of one wind project and made signifi cant progress
regulated tariff s and favourable foreign exchange eff ects from
on two others, ensured our facilities operated effi ciently and with
Bristol Water, and lower expenses associated with integrating
a near-perfect safety record, and supported our employees and
the acquired wind assets. We also affi rmed Capstone’s support
the communities we serve.
for the annual $0.30 per share dividend to common shareholders.
On the other hand, we received a seriously disappointing regulatory
Capstone’s foundation is a diversifi ed portfolio of high-quality
decision at Bristol Water, despite exerting considerable eff ort in
businesses, which gives us a solid footing as we plan to move
developing a business plan that combined service improvements
past the current review process at Bristol Water in the summer
with price reductions, was overwhelmingly supported by Bristol
of 2015 – and build on our considerable strengths, as we outline
Water’s customers and was vetted by a number of third-party
in this annual report.
experts. As we explain later, this regulatory result will not be
accepted without a challenge.
4
Capstone Infrastructure Corporation
“ OUR FOUNDATION
IS A DIVERSIFIED
PORTFOLIO OF HIGH-
QUALITY BUSINESSES,
WHICH GIVES US A
SOLID FOOTING.”
Michael Bernstein, President and Chief Executive Offi cer
ACHIEVEMENTS IN A MILESTONE YEAR
and the introduction of new, effi ciency-
We Secured Cardinal’s Future with a
New 20-year Contract
enhancing technologies optimizes the returns
we generate from those assets. At Erie
When we published our last annual report,
Shores, we complemented the WindBOOST
the status of the Cardinal gas plant was still
system already in place by installing Turbine
unclear once the power purchase agreement
Pitch Optimization technology. The approved
in place at the time expired on December 31,
C$546 million asset management plan at
2014. Following a complex multiyear
Bristol Water, directed toward improving and
negotiation process that began in 2009, we
expanding the system’s water mains, pumps
ultimately secured Cardinal’s future by signing
and reservoirs, will be fully executed by the
a new 20-year contract in March 2014.
Since January 1 of this year, Cardinal has
conclusion of the current fi ve-year period,
which ends on March 31, 2015. Cardinal is
operated as a dispatchable facility rather than
in the midst of a $30 million refurbishment
a base load generator, earning fi xed monthly
and life extension as part of its new function
payments that escalate annually according
as a dispatchable facility, a project that will
to a pre-defi ned formula, while supplying
wrap up in the spring of 2015 in a one-month
electricity to the Ontario grid when needed.
outage. The Whitecourt biomass facility
We Realized the Growth Potential of
Our Wind Acquisitions
Capstone’s power segment is driving organic
growth as we steadily complete the pipeline
of wind power projects we acquired in 2013.
We commissioned the Skyway 8 facility in
2014, and in January 2015 the Saint-Philémon
wind farm achieved commercial operations.
We expect the Goulais project to be
commissioned in the second quarter of 2015.
We Invested in the Long-term Performance
of Our Operating Portfolio
Responsibly managing Capstone’s facilities
through systematic and predictive
maintenance, scheduled capital projects
reached a new 15-year supply agreement with
its fuel provider, helping to ensure the ongoing
viability of this important asset in Alberta.
PRIORITIES FOR 2015
Bristol Water Regulatory Review
A pressing issue for the fi rst half of 2015 is
to secure a favourable regulatory outcome
at Bristol Water. The long-term prospects
for this utility are exceptional; however,
the immediate priority is to challenge the
fi ve-year business plan recently determined
by Ofwat, the economic regulator for water
utilities in the UK. Bristol Water’s Board of
Directors formally rejected Ofwat’s plan on
February 5, 2015 and the matter now heads
Our Key
Strengths
ESSENTIAL
DEMAND
Demand for global
infrastructure is signifi cant
and growing, a result of
decades of underinvestment
in this area, an expanding
worldwide population and the
needs of an interdependent
world economy. The private
sector is increasingly involved
with providing the funding,
construction and management
of infrastructure assets as
governments cope with
constraints on public resources.
ESSENTIAL
QUALITY
Capstone has steadily built
a portfolio of high-quality
infrastructure assets over
more than a decade. We
leverage our vast experience,
deep relationships and
technical knowledge in this
sector to identify acquisition
opportunities, develop new
facilities and responsibly manage
our portfolio for the long term.
ESSENTIAL
VALUE
We continually monitor, analyze
and seek to minimize the risks
within our capital structure with
a view to maintaining an optimal
fi nancing mix that aligns with
the cash fl ows, risk profi le
and duration of our businesses
and that generates value
for shareholders.
2014 Annual Report
5
MESSAGE TO SHAREHOLDERS
200(cid:7)MW
OUR INSTALLED NET WIND
CAPACITY SURPASSED
200 MEGAWATTS WITH
THE COMMISSIONING OF
NEW TURBINES IN 2014.
The ribbon cutting ceremony for
the new 9.5 MW Skyway 8 wind
facility in September 2014.
to the Competition and Markets Authority
We look for acquisitions that create enduring
(CMA) for review. The management teams
value for Capstone’s stakeholders. This simple
at Capstone and Bristol Water, along with
principle requires discipline to ensure that
leading consultants and industry experts, are
potential deals are accretive over the long term,
making a concerted eff ort to ensure a better
carry total returns within an acceptable range,
outcome is achieved. We discuss Bristol
refl ect an appropriate amount of risk and are
Water and the review process in greater detail
a good strategic fi t with our company. These
on page 17 of this report; until this regulatory
are the qualities that we adhere to, regardless
question is settled, the interim uncertainty
of market cycles, when determining whether
is likely to continue to weigh on Capstone’s
it serves our interests, and those of our
share price.
stakeholders, to acquire assets.
Growth Through Acquisitions
Organic Growth Initiatives
We recognize that shareholders expect
Capstone’s power development team has
Capstone to use its market position and
proven its ability to execute projects on
diversifi ed asset base to grow the company.
time and on budget. In August 2014 we
I share that view, and would like to have made
commissioned the 10-megawatt Skyway 8
more progress in expanding into new pillars
facility in Ontario, and on January 16, 2015
or acquiring more power and utilities assets
our 24-megawatt Saint-Philémon wind farm
in 2014. Although we did not consummate
in Quebec achieved commercial operations.
a transaction, we analyzed a number of
By the end of the second quarter of 2015, the
potential deals in power, utilities, public-
25-megawatt Goulais project in Northwestern
private partnerships and transportation
Ontario should be commissioned. We
throughout the year. This has led to some
have six other projects in the development
promising dialogues and new relationships,
pipeline, two of which have recently earned
which we expect to bear fruit in 2015 and
their Renewable Energy Approval, with
the years ahead.
construction on the fi rst facility slated to
begin in the third quarter of 2015.
6
Capstone Infrastructure Corporation
Crews prepare turbine blades
during the construction of the
Saint-Philémon wind facility in
November 2014.
BRISTOL WATER’S
REGULATED RATE
BASE EXPANDED BY
26% (REAL) DURING
THE 2010 TO 2015
REGULATORY PERIOD.
Bristol Water provides 240 million litres of water every day to a local population of 1.2 million.
In November 2014, Capstone was designated
our abiding commitment to operating our
That same work ethic will propel Capstone to
as a Qualifi ed Applicant under the Ontario
business based on the ethics of honesty,
achieve more in the next decade, overcoming
Power Authority’s Large Renewable
integrity, transparency and respect.
our near-term challenge and fulfi lling the
Procurement, a competitive process for
sourcing major clean energy projects in the
province. We are evaluating potential projects
in anticipation of an RFP expected in mid-2015.
OUTLOOK FOR THE COMING YEAR
Capstone’s business will evolve over the
next two years, as Cardinal operates as
a dispatchable facility, more wind power
Bristol Water is one of Capstone’s most
facilities achieve commercial operations,
signifi cant sources of organic growth, with a 26%
Bristol Water’s AMP6 business plan is
company’s potential to become a leader in
the expanding global market for essential
infrastructure. This investment sector remains
in demand for the stability of the returns it
off ers, the long duration of the assets and the
measure of infl ation protection it carries.
expansion in real regulated rate base during the
ultimately resolved, and potential acquisitions
In a year when Capstone was often tested, the
2010 to 2015 regulatory period. The regulated
are completed. In 2015, we anticipate
company had the great advantage of dedicated,
capital value growth profi le for the upcoming fi ve-
Adjusted EBITDA of between $115 million
loyal staff at the facilities and head offi ce, as
year period remains strong, though the growth
and $125 million, which refl ects the lower
well as the trusted guidance of a seasoned
in long-term value would come to the detriment
fi nancial contribution from Cardinal and
Board of Directors. I would like to thank and
of current revenue, pending CMA review.
the impact of the business plan Ofwat
acknowledge everyone for their contribution.
Renewed Focus on Sustainability
Capstone’s renewable energy portfolio
naturally fi ts the defi nition of an
environmentally sustainable business. We
recognize, however, that sustainability
also applies to how a business is run from
a governance and social perspective. We
have produced an expanded sustainability
determined for Bristol Water, which will be
in eff ect from the second through the fourth
quarters of 2015. If a benefi cial outcome
is reached following the CMA review,
adjustments will take eff ect the following year.
What will not change in 2015 is Capstone’s
support of the $0.30 per share dividend for
common shareholders.
Importantly, I would like to thank our
shareholders for investing in Capstone and for
their continued support. We appreciate your
confi dence and are committed to achieving
our goals in 2015.
Sincerely,
report this year as a companion piece to
The fi rst ten years at Capstone saw the
Capstone’s annual report, which is available
company grow from a single asset to
on our corporate website. A summary of
a diversifi ed global energy and utilities
our sustainable business practices is also
company. This transformation was the
provided in the Strategic Overview section
product of hard work from dedicated
of the annual report. These initiatives refl ect
employees at our facilities and head offi ce.
MICHAEL BERNSTEIN
President and Chief Executive Offi cer
2014 Annual Report
7
SUSTAINABILITY
An Essential
Commitment
Capstone’s Corporate Sustainability Report is
available online as a companion document to this
annual report. The following summary highlights
just some of our achievements in environmental,
social and governance areas during 2014.
ACHIEVEMENTS IN 2014
• Returned as a sponsor of the annual Sechelt
Environmental
Arts Festival, a multi-dimensional celebration
• Made measurable contributions to
of art, fi lm, comedy, theatre, music and dance
Canada’s supply of renewable energy with
in Sechelt, British Columbia.
the commissioning of the Skyway 8 wind
farm in Southgate, Ontario.
• Erie Shores Wind Farm participated
in Green Energy Doors Open Ontario,
• During the development phase of Skyway 8,
an initiative of the Ontario Sustainable
Capstone entered into an agreement with
Energy Association.
The Couchiching Conservancy to mitigate
the temporary and permanent habitat
impacts associated with the construction
of the project. Under the agreement,
Capstone secured and funded off set
grassland habitat lands, owned by
The Couchiching Conservancy.
• Commissioned the 24-MW Saint-Philémon
wind farm in January 2015, the 25-MW
Goulais facility is nearing completion, and
• Glen Dhu provided fi nancial support to
two local fi re departments: Barney’s River
Volunteer Fire Department and Merigomish
and District Volunteer Fire Department.
• Bristol Water partnered with the
Avon Wildlife Trust for “Trout & About”
and “Spawn to be Wild” program;
and its Eco-Schools program reached
6,300 students in 29 schools.
another six wind development projects are
Governance
working through the approvals process.
• The Board of Directors is Capstone’s
Social
• Silver sponsor of TREC Education’s Kids’
World of Energy Festival, which off ers
elementary school students in Toronto
hands-on workshops involving renewable
energy, conservation, electricity, art and
active participation.
highest governing body and consists of
seven Directors who are elected annually,
six of whom are independent directors.
• There are two committees of the Board:
the Audit Committee and the Corporate
Governance and Compensation Committee
(with a Nomination Subcommittee that
considers candidates for nomination for
• Sponsored the Whitecourt Junior Forest
election as Directors).
• In 2014, meetings of the Board of Directors
and Board Committees recorded 100%
attendance rates for all Directors.
Wardens, an educational organization for
young people and their families to develop
skills and education in the many diverse
aspects of our natural environment.
• Sponsored a family in need for the
Holiday Helpers program, a charity that
provides personalized holiday packages
to low income families in Toronto with
young children.
8
Capstone Infrastructure Corporation
AS PHYSICAL ASSETS
THAT PROVIDE AN
ESSENTIAL SERVICE,
CAPSTONE’S VARIOUS
BUSINESSES HAVE A
SOCIAL IMPACT THAT
WE ENDEAVOUR TO
MANAGE RESPONSIBLY.
2
3
To download Capstone’s full 2014 Sustainability Report, visit:
capstoneinfrastructure.com/About/Sustainability
5
1
4
1 Erie Shores Wind Farm
participated in Green
Energy Doors Open
Ontario, an initiative of
the Ontario Sustainable
Energy Association.
2 Värmevärden sponsored
local youth sports teams
for activities such as
soccer, hockey and cross
country skiing.
3 The Sechelt Hydro power
facility returned as a
sponsor of the Annual
Sechelt Arts Festival,
a multi-dimensional
celebration of art, fi lm,
comedy, theatre, music
and dance in Sechelt,
British Columbia.
4 Bristol Water delivered
talks to various groups as
a part of its community
engagement program.
The company’s education
offi cers have spoken
with approximately
14,000 people from local
organizations, including
rotaries, scouts, brownies
and women’s institutes.
5 Cardinal Power provided
two bursaries to graduating
high school students,
and made contributions
to local charities and
community events.
2014 Annual Report
9
MESSAGE FROM THE CHAIRMAN
Essential
Responsibility
Capstone has a comprehensive set of priorities for 2015 to advance the
company’s vision 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,
During 2014, Capstone demonstrated the
Bristol Water provides one of life’s most
Capstone Infrastructure Corporation enters
benefi ts of the strategic direction taken in
essential services: clean, safe and reliable
its second decade in 2015 as a resilient
2012 to establish a power development arm.
drinking water for more than 1.2 million
company, more experienced for the
That division executed on new infrastructure
people. The regulatory environment can
diversifi ed assets it built over its fi rst ten
projects with the commissioning of the
present near-term challenges, as we saw
years, and stronger for the hurdles it has
Skyway 8 wind farm and made swift progress
in 2014, yet this utility carries perpetual
cleared along the way. In the year ahead,
on two others, including the Saint-Philémon
value and a steady organic growth profi le.
we will build on our successes and reinforce
facility in Quebec, which achieved commercial
Capstone’s management team is hard at
our foundation to position Capstone for
operations in January of this year.
work to resolve the current issues facing
continued achievement in the next decade
and beyond.
We also looked after our existing line of
high-quality assets to ensure they continue
Board of Directors.
Bristol Water, with the full support of the
Our theme for this year’s annual report
to deliver value for shareholders. We reached
The Board has specifi c responsibilities in
is “Essential,” refl ecting the fundamental
an agreement that will extend the life of
the stewardship of Capstone and takes an
importance to society of continuous
the Cardinal gas power plant for another
active approach to governance, highlights
investments in core infrastructure and
20 years, negotiated a 15-year fuel supply
of which include:
highlighting the fi rst-rate facilities held in
agreement for Whitecourt, and invested in
Capstone’s portfolio. Essential also relates to
maintenance and performance optimization
• Six of the seven members of the Board
are independent, as defi ned by applicable
the values we embrace and the choices we
across our power and utilities businesses.
securities laws.
make in setting the course for the fi rm.
Our Key
Governance
Principles
10
Capstone Infrastructure Corporation
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.
“ IN THE YEAR AHEAD, WE WILL
BUILD ON OUR SUCCESSES AND
REINFORCE OUR FOUNDATION
TO POSITION CAPSTONE FOR
CONTINUED ACHIEVEMENT IN
THE NEXT DECADE AND BEYOND.”
James Sardo, Chairman of the Board of Directors
• The Audit and Corporate Governance &
deferred share units or restricted shares;
Another of the Board’s key responsibilities is to
Compensation committees of the Board are
thereby aligning their interests with all
monitor the company’s fi nancial performance
entirely composed of independent directors.
other shareholders.
and set the dividend policy. Capstone has
• A written Code of Business Conduct
• Long- and short-term incentive plans
and Ethics applies to all Directors,
link management’s compensation to
offi cers, employees, and contractors,
fi nancial metrics and the total return
promoting a culture of integrity and
delivered to shareholders.
forecast a payout ratio in 2015 that is higher
than the company’s long-term targeted ratio
of between 70% and 80%, driven in part
by Cardinal’s transition from operating as a
base load generator to a dispatchable facility,
ensuring the company adheres to rigorous,
consistent standards in reporting and
risk management.
• Annual evaluations of the Board and
individual directors are conducted to
ensure the oversight role is fulfi lled in
the most eff ective manner.
• A majority voting policy is in place, requiring
the director nominees to be elected by a
majority of shareholder votes.
The Board also oversees continuous
as well as the lead time until the pipeline of
improvements to Capstone’s governance
development projects reaches commercial
structure. In 2014, the company proposed
operations. The Board is confi dent that
an advance notice policy, which was voted
Capstone has the liquidity, resources and
on at the Annual General Meeting. The
fl exibility to support the current dividend.
proposal was approved by a majority of
shareholders, thereby ensuring that all
Capstone investors will receive adequate
notice and information of director
nominations, while also enabling
Capstone has a comprehensive set of
priorities for 2015 to advance the company’s
vision 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.
• Share ownership guidelines require that
shareholders to register an informed
directors and executive offi cers achieve
vote with a reasonable time to consider
specifi c percentages of annual salaries and
those nominees.
cash retainers by owning common shares,
INTEGRITY AND PROFESSIONALISM
PERFORMANCE
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.
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.
2014 Annual Report
11
MESSAGE FROM THE CHAIRMAN
“ WE BELIEVE IN THE EXTRAORDINARY
POTENTIAL FOR CAPSTONE IN 2015
AND BEYOND, AS LONG AS WE REMAIN
STEADFAST IN OUR COMPREHENSIVE
APPROACH TO DECISION-MAKING IN
THE BEST LONG-TERM INTERESTS OF
THE COMPANY AND ITS SHAREHOLDERS.”
First, we will work with Bristol Water and our
its knowledge of the sector, relationships
consultants in the United Kingdom to secure
in the industry, experience with all aspects
a regulatory outcome that better serves the
of managing a range of infrastructure assets,
needs of Bristol Water, its shareholders and
and a passion for delivering results for the
most importantly, its customers.
company, its people, the communities it
Second, we will capitalize on the momentum
serves and its shareholders.
in our power development unit by continuing
We believe in the extraordinary potential for
the organic growth of our wind power
Capstone in 2015 and beyond, as long as
portfolio. We will also look for occasions to
we remain steadfast in our comprehensive
develop other power projects, particularly
approach to decision-making in the best
with respect to Ontario’s Large Renewable
long-term interests of the company and its
Procurement, under which Capstone is a
shareholders. This careful planning can be
Qualifi ed Applicant.
seen in the solid assets the company has
Third, we will be judicious in our evaluation
of potential acquisitions, seeking accretive
opportunities in our existing power
assembled during its fi rst decade, creating a
strong balance sheet that allows the company
to thrive in a variety of market conditions.
and utilities pillars, and continuing our
On behalf of the Board of Directors
investigation of new platforms, particularly
and everyone at Capstone, thank you for
public-private partnerships.
your investment and your loyal support
And fourth, we will look beyond the
immediate horizon and keep our focus
Sincerely,
of the company.
on the enduring possibilities that
infrastructure investing aff ords Capstone.
The pressing need to build, upgrade and
replace the vital power plants, utilities,
hospitals and roads that support our society
and the global economy remains strong –
and is only becoming more urgent.
Capstone’s seasoned management team
is well poised to meet this demand through
12
Capstone Infrastructure Corporation
JAMES SARDO
Chairman of the Board of Directors
ESSENTIAL
GOVERNANCE
Strong corporate
governance is an
essential component
of Capstone
Infrastructure’s
performance.
Eff ective governance
enables prudent risk
management and
decision-making,
which contributes to
shareholder value.
Visit our website to learn
more about our Corporate
Governance policies:
capstoneinfrastructure.com/
About/Governance
STRATEGIC OVERVIEW
Our Strategy
is Essential
Overview
Capstone’s 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
Co-operation and Development (OECD).
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. The company’s
mission is to provide investors with an
attractive total return from responsibly
managed long-term investments in core
infrastructure in Canada and internationally.
INSIDE THIS SECTION
13
14
16
16
17
19
Overview
Achievement Scorecard
Platforms and Performance Drivers
– Power
– Utilities
– Growth Prospects in Infrastructure
2014 Annual Report
13
STRATEGIC OVERVIEW
Achievement Scorecard
BUSINESS FUNCTION
2014 PRIORITIES
STATUS
2015 PRIORITIES
LONG-TERM GOALS
Power Generation
• Wind
• Solar
• Hydroelectric
• Biomass
• Achieve consistently
high availability
• Maintain or
improve quality
and performance
of facilities through
predictive maintenance
• Manage operating costs
• Operate safely with
zero lost-time injuries
• Hire new manager at
Whitecourt
• Cardinal
• Secure new contract
for Cardinal
• Hire new plant manager
• Enhance existing
facility or add
supplemental boiler to
increase Whitecourt’s
capacity to process
wood waste from area
forestry operations
• Secure new contract
for Sechelt
• Achieve consistently
high availability
• Maintain or improve
quality of facilities
through predictive
maintenance
• Manage operating costs
• Operate safely with
zero lost-time injuries
• Make progress on
Sechelt contract
renewal
• Optimize profi tability
by selling power
into the system at
peak times
• Complete $30 million
transition to prepare
for cycling
• Finalize upgrade with
one-month outage in
spring of 2015
• Manage operating costs
• Availability was high
across the board
(detailed statistics in
Strategic Overview)
• Installed Turbine
Pitch Optimization
technology at Erie
Shores to maximize
output
• Facilities maintenance
conducted at hydro
sites, ensuring ongoing
reliability
• Operating costs were
broadly kept in line
with previous period
• Reached a 15-year fuel
supply agreement at
Whitecourt (signed in
March 2015)
• One lost-time injury
at Whitecourt (minor),
amounting to one day
• Hired new manager
at Whitecourt
• Signed 20-year non-utility
generator contract with
IESO, and new energy
savings agreement with
Ingredion
• Refurbishing, life
extension and major
maintenance work
commenced to prepare
plant to operate as
cycling facility
• New plant manager
hired for start in second
half of 2015
Utilities – Heating
• Värmevärden
• Manage fuel costs
• Milder weather
• Manage fuel costs
• Expand footprint in
• Maintain strong
customer relationships
• Ensure high plant
availability
enabled the use of
more cost-eff ective
fuel sources
• Successfully rolled
out new pricing
methodology
• Improved availability
in 2014 versus prior
year by 2.8%
local markets
• Maintain strong
customer relationships
• Ensure high plant
availability
14
Capstone Infrastructure Corporation
BUSINESS FUNCTION
2014 PRIORITIES
STATUS
2015 PRIORITIES
LONG-TERM GOALS
Utilities – Water
• Bristol Water
• Provide safe, reliable
drinking water for
customers
• Bring PR14 process to
satisfactory regulatory
conclusion
• Execute $546M AMP5
capex program
• Strong operational
performance and quick
response to service
disruptions
• Bristol Water Board of
Directors rejected PR14
fi nal determination and
proceeding to CMA
review
• On track to complete
the full AMP5 program
within allotted time
frame
• Provide safe, reliable
drinking water for
customers
• Secure an improved
outcome for AMP6
period through CMA
review
• Identify areas for
operational effi ciencies
• Maintain and expand
the system to keep
pace with expected
future growth of the
Bristol metropolitan
area
• Prepare for retail
competition
• Evaluate system
optimization
Power Development
• Organic growth
• Build out Skyway 8
and Saint-Philémon
wind projects
• Secure permits for
medium-term projects
Corporate
• Head offi ce
• M&A
• Maximize shareholders’
risk-adjusted return
• Increase scale by
adding to existing
pillars
• Diversify portfolio mix
with new pillars
• Operate sustainably
• Retain and attract
talent
• Skyway 8 reached
COD in August 2014,
on time and below
budget
• Saint-Philémon reached
COD under budget in
January 2015
• REAs received for
two projects in
January 2015
• Achieve commercial
operations at Goulais
wind farm
• Secure permits
for Ontario and
Saskatchewan
wind projects
• Begin construction on
projects in receipt of
REA (Grey Highlands
ZEP; Ganaraska)
• As a qualifi ed applicant
under Ontario’s
Large Renewable
Procurement, evaluate
and submit project
proposals
• Initiate thermal
and wind energy
development projects
• Work with Bristol
Water to secure
favourable outcome
from the CMA review
• Maximize shareholders’
risk-adjusted total
return
• Bring new assets into
• Maintain fi nancial
the portfolio
• Add additional
relationships and
capabilities
fl exibility
• Pursue acquisition in
targeted pillars
• Add scale by
completing accretive
acquisition in our
existing pillars
• Continued
enhancement of
sustainable practices
and reporting
• Ensure talent pool
is aligned with
Capstone’s priorities
• Uncertainty over
Bristol Water aff ected
share price; CMA
review potentially
improves outcomes
for Bristol Water
• Actively pursued
P3s with in-house
expert, developing
relationships
• Added to existing pillars
with the commissioning
of Skyway 8 and Saint-
Philémon
• Introduced enhanced
sustainability
measurement and
reporting (see
companion Capstone
Sustainability Report)
• Filled vacated positions
with experienced
professionals and
attracted talented
applicants to new roles
2014 Annual Report
15
STRATEGIC OVERVIEW
Platforms and
Performance
Drivers
Capstone marked its tenth anniversary in 2014,
a milestone that presents an occasion to review
the company’s strategy and market position as we
enter our second decade in today’s marketplace
for essential infrastructure.
POWER
Our power generation platform includes wind, hydro, gas cogeneration, biomass and solar
facilities across Canada, totalling 505 megawatts of installed capacity, of which Capstone’s net
share is 461 megawatts. We are also developing a pipeline of wind power projects totalling an
expected 85 megawatts of capacity, or 65 megawatts net to Capstone.
WE ARE DEVELOPING
A PIPELINE OF WIND POWER
PROJECTS TOTALLING AN
EXPECTED 85 MEGAWATTS OF
CAPACITY, OR 65 MEGAWATTS
NET TO CAPSTONE.
Cardinal operates under a non-utility generator agreement with the Independent Electricity
System Operator, whereby the facility is activated at peak times when power prices provide
a fi nancial incentive to do so. Whitecourt sells power into the Alberta power pool and has a
fuel supply agreement with Millar Western Forest Products Ltd. The balance of Capstone’s
operating and development projects have power purchase agreements with creditworthy
counterparties (see Figure 1).
The key performance drivers for Capstone’s power segment in 2015 are:
1
Achieve consistently high availability to help maximize revenue (see Figure 2).
2 Maintain or improve the quality of each facility by focusing on routine, predictive and major
maintenance and implementing technological and operational enhancements (see Figure 3).
3 Effi ciently manage operating costs at each facility.
4 Complete the Goulais wind power development project on time and on budget.
5
Advance the mid-term projects through permitting and approvals.
6 Start construction on projects with REA approvals.
7
Operate facilities safely with a goal of zero lost-time injuries.
In 2014, Erie Shores installed Turbine Pitch Optimization technology to maximize the amount
of energy captured by the blades, thereby enhancing revenue. TPO can potentially extract an
additional 1% to 2% performance from turbines.
FIGURE 1
CREDITWORTHY COUNTERPARTIES
FIGURE 2
CONSISTENTLY HIGH AVAILABILITY
FIGURE 3
ENHANCING CASH FLOW AT ERIE SHORES
Counterparty
Independent Electricity
System Operation (IESO)
Nova Scotia Power
Incorporated (NSPI)
Hydro Quebec
BC Hydro
Credit
Rating
A (high)/
Stable – DBRS
A (low)/
Stable – DBRS
A (high)/
Stable – DBRS
AA (high)/
Stable – DBRS
Facility
Cardinal
Wind power facilities (1)
Hydro power facilities
Whitecourt
Amherstburg (2)
2014
98.5%
97.3%
96.4%
96.4%
98.6%
Five-Year
Average
97.4%
97.4%
98.4%
95.8%
N/A
(1) Includes Erie Shores, the Skyway 8 wind farm
commissioned in August 2014, and the operating
facilities acquired in the ReD transaction in 2013.
(2) Amherstburg began operating in June 2011.
16
Capstone Infrastructure Corporation
Erie Shores has adopted WindBOOST and Turbine
Pitch Optimization technology to maximize output
from the 66 turbines on site.
UTILITIES
Capstone’s utilities platform includes interests in a district heating company and a regulated
water system.
District Heating
We hold a 33.3% equity interest in Värmevärden, a district heating business in Sweden serving
individual, multi-residential, municipal and industrial customers in 10 communities.
Our key performance drivers for 2015
1
2
3
Manage fuel costs, Värmevärden’s, largest operating expense, by using cost-eff ective fuels.
Maintain strong customer relationships by providing highly reliable, quality service to
customers, thereby increasing potential for customer contract attraction and retention.
Ensure high plant availability and operational effi ciency, which helps to maximize revenue
potential while minimizing the use of more expensive peak fuel.
Bristol Water
Capstone is the largest shareholder in Bristol Water, a regulated water utility in the United
Kingdom that provides 240 million litres of water daily to more than 1.2 million people.
Bristol Water is a high-quality, perpetual asset with a history dating back almost 170 years
and excellent prospects for sustained future growth from an increasing local population
and expanded business activity in the region.
The Water Services Regulation Authority (Ofwat) is the economic regulator with oversight
of Bristol Water and every other water and sewage treatment utility in the United Kingdom.
Every fi ve years, Ofwat approves the pricing model and business plan (known as the Asset
Management Plan, or AMP) that applies to each of these utilities, in a process called the price
review (PR). In 2014, Capstone was closely involved in the PR14 process through which the
pricing model and business plan for the fi ve-year period from April 1, 2015 to March 31, 2020,
or AMP6, were determined by Ofwat.
The PR14 process was extensive, involving more than a year of submissions, revisions,
direct negotiations, expert analysis and customer input. Capstone management worked
with Bristol Water’s team during this time and provided regular updates to stakeholders
throughout the process.
We believe the plan ultimately submitted to Ofwat:
• refl ected the priorities of customers;
• was designed to deliver the right outcomes for current and future customers and
the environment;
• ensured Bristol Water met its statutory obligations;
• represented the right balance of risk and reward between customers, investors and
other stakeholders;
• was aff ordable and soundly fi nanced.
On December 12, 2014 Ofwat delivered a fi nal determination on the business plan for AMP6
that fell short of expectations. There were several major points of diff erence between Bristol
Water’s proposed business plan and Ofwat’s fi nal determination.
WE HOLD A 33.3% EQUITY
INTEREST IN VÄRMEVÄRDEN,
WHICH SERVES INDIVIDUAL,
MULTI-RESIDENTIAL, MUNICIPAL
AND INDUSTRIAL CUSTOMERS
IN 10 COMMUNITIES.
Bristol Water is a high-quality, perpetual asset with
a history dating back almost 170 years and excellent
prospects for sustained future growth.
CAPSTONE WAS CLOSELY
INVOLVED IN THE PR14 PROCESS
THROUGH WHICH THE PRICING
MODEL AND BUSINESS PLAN FOR
THE NEXT FIVE-YEAR PERIOD
WERE DETERMINED BY OFWAT.
2014 Annual Report
17
STRATEGIC OVERVIEW
Bristol Water proposed wholesale expenditure of £500 million (£541M with
a new reservoir)
• reduced household bills by £9 to £188 (4.5%);
• had broad customer support (92%);
• invested in the system but at a lower level than current AMP;
• £41 million to start Cheddar 2 reservoir, which would spread the expense over
successive regulatory periods and potentially reduce overall costs;
Bristol Water provides 240 million litres of water
daily to more than 1.2 million people.
debt costs.
• weighted average cost of capital of 4.4% (real), including recognition of higher embedded
Ofwat set allowable total wholesale expenditure of £409 million
• average household bill falls to £164 in fi rst year, then to £152 (20%);
• allowable cost of capital (WACC) of 3.6% (real);
• no small company premium; adjusted penalties; slim maintenance capex;
• no Cheddar 2 reservoir.
Bristol Water’s Board of Directors resolved on February 5, 2015 to formally reject Ofwat’s fi nal
determination. This triggered a process whereby Ofwat was compelled to refer the AMP6
business plan to the Competition and Markets Authority (CMA), the UK agency responsible for
considering regulatory references and appeals.
The CMA will now review submissions from Ofwat and Bristol Water regarding the AMP6
business case. It should be noted that Bristol Water went through a similar process in 2010,
when the Board rejected Ofwat’s fi nal determination for the 2010 to 2015 period and the
matter was referred to the CMA’s predecessor (the Competition Commission), with the result
that a more acceptable business plan was set in place.
Pending the outcome of the CMA review, Bristol Water will operate in the meantime under the
Ofwat fi nal determination, starting April 1, 2015. It is expected that the CMA will render its fi nal
determination on the AMP6 review in August 2015. Any adjustments arising from the CMA’s
decision would come into eff ect on April 1, 2016.
Plans have been prepared to manage Bristol Water effi ciently under a range of potential
CMA outcomes. However, it remains the case that the inherent value of this water system
and its long-term growth profi le make it a compelling investment regardless of short-term
regulatory challenges.
Other Performance Measures
Aside from the CMA review, standard operations are continuing at Bristol Water.
Key performance drivers for 2015 are:
1
2
3
4
5
Provide safe, reliable drinking water that is cost-eff ective for customers.
Operate in compliance with all regulatory and environmental requirements.
Operate effi ciently to manage costs.
Complete capital expenditures under AMP5 business plan by March 31, 2015.
Operate in accordance with AMP6 fi nal determination through CMA review process.
BRISTOL WATER’S BOARD
OF DIRECTORS RESOLVED
ON FEBRUARY 5, 2015 TO
FORMALLY REJECT OFWAT’S
FINAL DETERMINATION.
Bristol Water maintains consistently high customer
service and system reliability rankings.
18
Capstone Infrastructure Corporation
GROWTH PROSPECTS IN INFRASTRUCTURE
Infrastructure off ers unique investment characteristics because of its essential role in serving
the needs of people, communities and the demands of the global economy. Governments
traditionally provided the funding for projects like roads, power plants, hospitals and utilities,
but constrained budgets have led to decades of underinvestment in this area.
Private capital has increasingly fl owed into infrastructure to fi ll the public funding gap, attracted
by the long duration, high barriers to entry, stable cash fl ows, infl ation protection and dominant
market position of these assets.
Today, the competition for infrastructure investments is intense. This has somewhat narrowed
the selection of high-quality assets, and made the patient and disciplined analysis of any
potential acquisition more critical than ever.
Power Sector
The renewable energy sector has been among the most active in the infrastructure space.
The general attractiveness of the asset class – amid climate change concerns, government
incentives and regulations, and rapidly improving technology – is one factor driving this change.
Canada saw a rapid expansion of renewable energy supply driven by public policy, though this
initial surge has now tapered off .
The other factor is the emergence of yield companies, or “yieldcos,” which enable investors
to participate in renewable energy without many of the risks associated with construction or
research and development. Wind, solar, thermal and hydro facilities are structured into yieldcos,
generating predictable cash fl ows that are passed on to shareholders as dividends. These
companies have an enormous demand for acquiring operating assets, which has often driven
valuations higher and returns lower.
Capstone is well positioned with a steady development pipeline enabling us to build out
new wind projects using our internal capabilities. We also evaluate potential acquisitions in
renewable power facilities, though in today’s frothy market, we apply a rigorous diligence
process to ensure they serve the best long-term interests of shareholders.
Utilities
Utility companies that transmit and distribute power, natural gas and water have long been
associated with providing reliable, perpetual infrastructure returns. That picture is evolving,
along with the investment opportunity utilities present.
Electricity
The transmission and distribution of electrical power is changing. The local distribution
company model, or LDC, has long been the standard delivery method, but there are inherent
ineffi ciencies to running a patchwork of small utilities to serve modern, sophisticated
economies. A report in 2014 from Ontario’s Advisory Council on Government Assets
recommended consolidation of the "excess number of small players" in Ontario’s electricity
distribution sector; other jurisdictions are contemplating similar moves.
Meanwhile, the rapid adoption of new technologies, like rooftop solar, light industrial wind
turbines and “inside the fence” on-site power plants, has disrupted the traditional dominance
of electricity utilities everywhere as customers go off the grid. Industry dislocations of this scale
often present investment potential; at this stage, we are paying close attention to the unfolding
WE EVALUATE POTENTIAL
ACQUISITIONS IN RENEWABLE
POWER FACILITIES AND APPLY
A RIGOROUS DILIGENCE
PROCESS TO ENSURE THEY
SERVE THE BEST LONG-TERM
INTERESTS OF SHAREHOLDERS.
2014 Annual Report
19
STRATEGIC OVERVIEW
opportunities and risks in this area. We expect to see more clarity over the next 18 months as
governments formalize the consolidation framework, the possible role of the private sector
becomes defi ned, and new technologies transform the business model for power distribution.
Water Utilities
Water is frequently referred to as the petroleum of the next century because of the world’s
growing population, scarcity of fresh water and climate change-induced drought. Ownership of
regulated water utilities is the most direct way to harness this trend.
As with other infrastructure assets, the US$460 billion worldwide water market has garnered
considerable attention from large institutional investors, global banks and specialist water utility
companies. There is signifi cant interest in the best assets.
Capstone’s 50% ownership of Bristol Water gives us a foothold in this coveted sector, as well
Providing safe water systems is a crucial and growing
part of infrastructure demand around the world.
as direct experience with the regulatory environment around water utilities. Our association
with water multinational Grupo Agbar (a part of Suez Environnement), one of our ownership
partners in Bristol Water, has the potential to create additional investment opportunities once
the short-term regulatory issues at Bristol are settled.
Natural Gas
The investment possibilities in natural gas involve local distribution, storage, and transportation
over long distances via pipelines. Natural gas is in wide use globally, often because it is a
cleaner fossil fuel alternative to coal or oil, which is being phased out in many markets. We have
experience with natural gas as a fuel source at Cardinal, and there is considerable potential to
invest in a utility that carries this resource.
Other Pillars
Public-private Partnerships
The Canadian P3 market is among the most established and highly regarded in the world,
as provincial and federal governments have come to understand the benefi ts of having the
private sector assume a major share of the risks of fi nancing, construction, performance and
maintenance of public infrastructure. The US and other markets are steadily increasing their
use of the P3 model.
Bidding for new P3 projects and seeing them through development and completion involves
a considerable fi nancial commitment and a degree of risk, but also carries a potential for high
return on investment. Operating P3s, which have already been built and are functioning as they
should, generally produce attractive, yet more modest, returns. For the past year, Capstone
has retained a leading P3 expert to advise on potential acquisitions that can off er predictable,
government-backed cash fl ow with limited volatility. The market remains competitive for P3
assets, and identifying a suitable project or acquisition will take time.
Transportation
Capstone’s management team has direct experience in developing and managing transport
infrastructure including roads, public transit and shipping ports. These assets, along with railways
and airports, tend to represent larger acquisitions that Capstone would likely pursue in partnership
with other parties. For the time being, expansion into this area is a lower priority for the company.
The management team at Capstone understands the importance of growing the company, with the
corresponding recognition that today’s competitive infrastructure market requires a creative approach
to sourcing accretive transactions that carry long-term positive outcomes for all stakeholders.
BIDDING FOR NEW P3 PROJECTS
AND SEEING THEM THROUGH
DEVELOPMENT AND COMPLETION
INVOLVES A CONSIDERABLE
FINANCIAL COMMITMENT AND
A DEGREE OF RISK, BUT ALSO
CARRIES A POTENTIAL FOR
HIGH RETURN ON INVESTMENT.
20 Capstone Infrastructure Corporation
Management’s
Discussion and Analysis
In 2014, Capstone achieved Adjusted EBITDA of $160.4 million, which
exceeded our forecasted range and refl ected strong operations, primarily
at Bristol Water and Cardinal, as well as growth from the wind power
assets we acquired in the fourth quarter of 2013 and the new wind facility
commissioned in 2014.
Financial
Highlights
($000s, except for per share amounts)
Revenue
Net income (loss)
Earnings (loss) per share
Basic
Diluted
Adjusted EBITDA
AFFO
AFFO (1) per share
Cash dividends per share
Common
Preferred
Total assets (2)
Total long-term liabilities (2)
(1)
AFFO is a non-GAAP measure defi ned on page 25.
As at and for the year ended December 31
2014
2013
2012
441,578
33,547
0.057
0.057
160,359
56,412
0.584
0.300
1.250
2,299,980
1,428,293
389,503
67,210
0.462
0.425
128,421
39,934
0.493
0.300
1.250
2,026,324
1,220,107
357,610
45,971
0.315
0.315
120,343
35,563
0.473
0.450
1.250
1,626,858
988,048
(2) Total assets and total long-term liabilities as at December 31, 2013 are restated for purchase equation adjustments, refer to note 3 of the consolidated fi nancial
statements for the year ended December 31, 2014 for detail.
INSIDE THIS SECTION
21
22
23
23
23
25
Financial Highlights
Legal Notice
Introduction
Basis of Presentation
Changes in the Business
Additional GAAP and Non-GAAP
Performance Measures Defi nitions
27
38
46
47
47
50
Results of Operations
Financial Position Review
Derivative Financial Instruments
Foreign Exchange
Risks and Uncertainties
Environmental, Health and
Safety Regulation
51 Related Party Transactions
52
53
54
Summary of Quarterly Results
Fourth Quarter 2014 Highlights
Accounting Policies and
Internal Controls
2014 Annual Report
21
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-looking statements
and financial outlook are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned
that such statements may not be appropriate for other purposes. These statements and financial outlook use forward-looking words, such as “anticipate”, “continue”, “could”,
“expect”, “may”, “will”, “intend”, “estimate”, “plan”, “believe” or other similar words, and include, among other things, statements found in “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, 2014 under the heading “Results of Operations”, as updated in subsequently filed MD&A of the Corporation (such
documents are available under the Corporation’s SEDAR profile at 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 wind 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; that there will be no material changes to the Corporation’s facilities, equipment or contractual arrangements; that there will be no
material changes in the legislative, regulatory and operating framework for the Corporation’s businesses; that there will be no material delays in obtaining required approvals
and no material changes in rate orders or rate structures for the Corporation’s power infrastructure facilities, or Värmevärden; that Bristol Water will implement rates prescribed
in Ofwat’s final determination while pursuing a more appropriate outcome through the Competition & Markets Authority; that there will be no material changes in environmental
regulations for the power infrastructure facilities, Värmevärden or Bristol Water; that there will be no significant event occurring outside the ordinary course of the Corporation’s
businesses; the refinancing on similar terms of the Corporation’s and its subsidiaries’ various outstanding credit facilities and debt instruments which mature during the period
in which the forward-looking statements and financial outlook relate; market prices for electricity in Ontario and the amount of hours Cardinal is dispatched; the price Whitecourt
is able to capture for its electricity production considering the market price for electricity in Alberta, the impact of renewable energy credits, and Whitecourt’s agreement with
Millar Western, which includes sharing mechanisms regarding the price received for electricity sold by Whitecourt; the re-contracting of the PPA for the Sechelt hydro power
generating station; 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 from the expected 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 and management’s assumptions of the final regulatory outcome for AMP6,
including, among others: real and inflationary changes in Bristol Water’s revenue, Bristol Water’s expenses increasing in line with inflation and efficiency measures, 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, development and integration; environmental, health and safety; changes in
legislation and administrative policy; and reliance on key personnel); risks related to the Corporation’s power infrastructure facilities (power purchase agreements; completion
of the Corporation’s wind development projects; operational performance; contract performance and reliance on suppliers; land tenure and related rights; environmental; and
regulatory environment); risks related to Värmevärden (operational performance; fuel costs and availability; industrial and residential contracts; environmental; regulatory
environment; and labour relations); and risks related to Bristol Water (Ofwat price determinations and changes to Instrument of Appointment; 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). For a comprehensive description of these risk factors, please refer to the “Risk Factors” section
of the Corporation’s annual information form dated March 26, 2014, 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 SEDAR profile at 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.
22
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, 2014 and 2013.
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, 2014 and 2013. Additional information about the Corporation, including its Annual Information Form
("AIF") for the year ended December 31, 2013, quarterly financial reports of Capstone and other public filings of the Corporation are available under
the Corporation’s profile on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”) website at
www.sedar.com.
This MD&A is dated March 4, 2015, 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, 2013
Dec 31, 2014
CHANGES IN THE BUSINESS
Swedish Krona (SEK)
UK Pound Sterling (£)
Average
0.1581
0.1605
Spot
0.1655
0.1483
Average
1.6113
1.8192
Spot
1.7627
1.8071
In 2014, Capstone accomplished several key objectives including securing Cardinal's new contract, financing and construction all of the near-term
wind power development projects and progressing the capital expenditure program for Bristol Water's current regulatory period ("AMP5"). In
addition, Capstone added financial flexibility by increasing the corporate credit facility.
Cardinal’s New Contract
On March 26, 2014, Capstone announced the signing of a new 20-year non-utility generator contract (the "Contract") with the Ontario Power
Authority ("OPA"), now the Independent Electricity System Operator ("IESO") by amalgamation, for its 156-megawatt Cardinal combined-cycle,
cogeneration natural gas-fired facility (“Cardinal”). The new Contract was effective January 1, 2015.
In 2015, Cardinal has become a dispatchable facility rather than a baseload generator, supplying electricity to the Ontario grid only when profitable to
do so. The new Contract provides Cardinal with a fixed monthly payment, escalating annually according to a pre-defined formula, intended to cover
Cardinal’s fixed operating costs and return on capital. In addition, Cardinal now earns variable market revenue from the electricity it delivers to
Ontario’s power grid and is responsible for arranging its own gas supply. The Corporation expects to invest a total of approximately $30,000 of
capital to prepare Cardinal for cycling, including purchasing a new rotor and related equipment to extend and enhance the facility’s capabilities. In
2014, Cardinal spent $9,884 of the total in preparing for conversion and plans to invest the remainder in the first half of 2015. The new Contract will
expire on December 31, 2034.
The Corporation and the OPA (now IESO) also reached a mutually beneficial agreement for Cardinal to provide additional operational flexibility to
Ontario’s electricity system for the duration of the power purchase agreement in force at the time, which expired on December 31, 2014.
In addition, Cardinal has entered into an agreement with Ingredion Canada Incorporated, which owns the corn refining facility adjacent to Cardinal, to
renew its energy savings agreement (“ESA”) for a term of 20 years. This agreement includes O&M services, which may be provided to Ingredion for a
fee, as well as a royalty payable by Cardinal to Ingredion based on variable market revenue from electricity sales. Concurrently with the ESA, Cardinal
executed a lease extension for the land on which the Cardinal facility is located.
2014 Annual Report 23
MANAGEMENT’S DISCUSSION AND ANALYSIS
Financing Changes - Skyway 8, Corporate Facility Expansion, Saint-Philémon, Goulais and Bristol Water
Skyway 8
On April 17, 2014 Capstone, through its wholly owned subsidiary Sky Generation LP ("SkyGen"), entered into a credit agreement that provided
$21,375 of financing for the construction of the Skyway 8 wind project, which is non-recourse to Capstone, except for a $5,000 parent guarantee.
On February 17, 2015, the construction facility converted to a three year term facility, which has regular principal and interest payments fully
amortizing over 20 years and bears an interest rate of 4.80%.
Corporate facility expansion
In 2014, Capstone and its existing lenders increased the capacity of its corporate credit facility by $57,500 to increase the total facility to $90,000.
The corporate credit facility has an initial term of three years, maturing in November 2016. The credit facility may be renewed by Capstone annually
for an additional year. On November 10, 2014, Capstone extended the maturity to November 2017. The increased capacity enhances the
Corporation's financial flexibility and may be used to fund Cardinal's planned upgrades and major maintenance or other corporate purposes.
Saint-Philémon
On May 16, 2014 Capstone, through its indirect partially owned subsidiary Parc Éolien Saint-Philémon S.E.C ("Saint-Philémon"), entered into a credit
agreement that provided $60,535 of cash on closing for the construction of the Saint-Philémon wind project. The construction facility is comprised
of two tranches, which mature no later than September 30, 2015. On maturity Tranche A $56,102 will convert to a term facility and Tranche B
$4,433 will be repaid primarily from proceeds received from Hydro-Québec. Tranche A will have a term of 19 ½ years bearing a fixed, annual interest
rate of 5.49% and will be fully amortizing over its remaining term. Interest during construction is capitalized to projects under development. The loan
is non-recourse to Capstone.
Goulais
On September 30, 2014 Capstone, through its indirect subsidiary Chi-Wiikwedong Holdings LP, entered into a credit agreement that provided
$76,373 of cash on closing for the construction of the Goulais wind project. The construction term of the facility matures no later than
December 31, 2015 and bears an interest rate of 5.16%. Upon maturity, the facility will convert to a loan with a term of 19 ½ years bearing a fixed,
annual interest rate of 5.16% and is fully amortizing over its remaining term. Interest during construction is capitalized to projects under
development. The loan is non-recourse to Capstone.
Bristol Water
On December 3, 2014, Bristol Water entered into a new bank loan for £50,000, or $90,355, with an existing lender and fully repaid the £50,000 drawn
under existing credit facilities, providing additional flexibility for future capital expenditures from these facilities. The new bank loan is fully repayable
on maturity, December 3, 2019 bearing a variable rate of interest and is non-recourse to Capstone. Concurrent with the new bank loan, Bristol Water
entered into an interest rate swap for the full notional amount of £50,000 to exchange the variable rate for a fixed rate of 2.40% and has elected to apply
hedge accounting under IFRS. In addition, Bristol Water increased the existing credit facility by £20,000.
Partial Sale of Interest in Goulais Wind Farm
On August 14, 2014, Capstone sold a 49% interest in Chi-Wiikwedong LP, which holds the Power Purchase Agreement ("PPA") for the Goulais
development project, to a subsidiary of Batchewana First Nation of Ojibways ("BFN"). Capstone and BFN have collectively contributed $23,500 in
equity, which in combination with debt proceeds, will be used to construct the project. BFN's $11,500 equity commitment was funded by a loan
from Capstone.
Following this sale, Capstone retained a 51% beneficial interest in Chi-Wiikwedong LP and continues to consolidate based on retention of control.
Bristol Water's Regulatory Price Determination
Capstone owns 50% of Bristol Water, a regulated water utility in the UK. In December 2014, the economic regulator for the UK water sector issued a
final determination on Bristol Water’s approved pricing model and business plan for the regulatory period spanning April 1, 2015 to March 31, 2020.
This determination fell short of Bristol Water’s proposed plan, which had undergone rigorous analysis and review by third-party experts. Bristol
Water’s Board of Directors, with the full support of Capstone, has formally rejected the regulator’s final determination. The matter will now be
referred to the Competition and Markets Authority, with a final outcome expected in August 2015. Capstone expects that an improved outcome will
result from the review process.
24
Capstone Infrastructure Corporation
ADDITIONAL GAAP AND NON-GAAP PERFORMANCE MEASURES 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 additional GAAP and non-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 additional GAAP and non-GAAP measures used in this MD&A are defined below.
Additional GAAP Measure
Earnings before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”)
EBITDA is an additional GAAP financial measure defined as earnings (loss) before financing costs, income tax expense, depreciation and amortization.
EBITDA includes earnings (loss) related to the non-controlling interest (“NCI”), impairment charges, interest income and net pension interest. EBITDA
represents Capstone’s 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.
Non-GAAP Measures
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that assists management, investors and other stakeholders in evaluating Capstone's operating
performance. Adjusted EBITDA is an indicator of results generated by the business activities, prior to how these operations are financed or taxed and
excludes capitalized expenditures and amortization.
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. Operating expenses are adjusted to actual costs by transferring the portion of
Cardinal gas payments required by IFRS to be included in other gains and losses. Adjusted EBITDA for investments in subsidiaries with non-
controlling interests is included at Capstone’s proportionate ownership interest by deducting amounts attributed to any non-controlling interest. The
reconciliation of Adjusted EBITDA to EBITDA is provided on page 26.
Adjusted Funds from Operations (“AFFO”)
AFFO is a non-GAAP financial measure that assists management, investors and other stakeholders in analyzing the cash flow available for future
growth capital investments, acquisitions and dividends to common shareholders.
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, 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 taxes paid and dividends on preferred shares.
AFFO is calculated from Adjusted EBITDA by:
Deducting:
Adding:
Deducting items for corporate and businesses without
significant non-controlling interests:
• Distributions received from businesses
with significant non-controlling interests
• Scheduled repayments of principal on
loans receivable from equity accounted
investments
• Adjusted EBITDA
generated from
businesses with
significant non-
controlling interests
Payout Ratio
• 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
Payout ratio is a non-GAAP financial measure that assists management, investors and other stakeholders in assessing the sustainability of Capstone's
dividend policy.
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.
2014 Annual Report 25
MANAGEMENT’S DISCUSSION AND ANALYSIS
Reconciliation of Non-GAAP Performance Measures
The following table reconciles Adjusted EBITDA and AFFO to the nearest GAAP measures:
EBITDA
Asset impairment charges
Foreign exchange (gain) loss
Other (gains) and losses, net (1)
Equity accounted (income) loss
Distributions from equity accounted investments
Net pension interest income
Non-controlling interest ("NCI") portion of Adjusted EBITDA
Adjusted EBITDA (2)
Cash flow from operating activities
Cash flow from operating activities of businesses with NCI
Distributions paid to Capstone from businesses with NCI
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, 2014
Dec 31, 2013
177,433
30,592
4,673
3,907
1,127
7,354
(2,132)
(62,595)
160,359
155,718
(99,093)
9,572
7,354
759
1,220
(3,868)
(16,685)
5,185
(3,750)
56,412
185,058
—
(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) Other gains and (losses), net, are adjusted by $3,762 so operating expenses reflect the actual costs by transferring the portion of Cardinal gas payments
included in other gains and losses as required by IFRS.
(2) See page 30 for a reconciliation of Adjusted EBITDA to net income.
26
Capstone Infrastructure Corporation
RESULTS OF OPERATIONS
Overview
Capstone's Adjusted EBITDA and AFFO were both higher than in 2013. Adjusted EBITDA performance primarily reflected the following:
•
•
•
Improved results for the power segment since the October 1, 2013 acquisition of Renewable Energy Developers Inc. ("ReD"), and higher
contracted power rates and lower fuel transportation costs at Cardinal;
Better results for Bristol Water, reflecting foreign currency appreciation and the annual increase in regulated water tariffs, as well as
consumption; and
Higher corporate administrative expenses, primarily ReD staffing and integration-related costs, partially offset by lower corporate project
development costs, which included diligence costs for ReD in 2013.
In addition, Capstone's AFFO was affected by:
•
•
Higher debt interest and principal payments for the power businesses added from the ReD acquisition, as well as Skyway 8 project financing;
and
Lower maintenance capital expenditures at Cardinal, primarily due to combustion inspection costs in 2013 which did not recur. This was
partially offset by higher maintenance capital expenditures at the hydro power facilities.
Revenue
Expenses (1)
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, 2014
Dec 31, 2013
441,578
389,503
(230,212)
(220,433)
4,234
7,354
(62,595)
160,359
(62,667)
9,572
1,220
4,096
3,982
(48,727)
128,421
(48,693)
8,111
1,096
(25,071)
(23,444)
(3,750)
(2,698)
(3,868)
(16,685)
56,412
0.584
51.4%
0.300
(3,750)
(2,534)
(4,387)
(14,886)
39,934
0.493
60.9%
0.300
(1) 2014 Operating expenses are adjusted by $3,762 to actual costs by transferring the portion of Cardinal gas payments included in other gains and losses
as required by IFRS.
Revenue increased by $52,075, or 13%, comprising $42,695 from Bristol Water and $9,380 from the power segment. Higher revenue at Bristol
Water was primarily due to favourable foreign currency translation and the annual increase in regulated water tariffs, as well as higher consumption.
The power segment revenue increase was primarily attributable to $15,793 from the wind power facilities acquired in 2013 and Skyway 8 which
reached COD in 2014. This was partially offset by lower revenue at Cardinal and Whitecourt.
Expenses increased by $9,779, or 4%, as follows:
• Operating expenses increased by $9,748, or 5%, primarily due to Bristol Water, which includes $12,907 of foreign exchange appreciation and
$6,593 of higher professional fees and repairs and maintenance expenses. In addition, wind power facilities expenses increased by $3,669 due
to facilities acquired in 2013 or reaching COD in 2014. This was partially offset by $13,649 primarily due to lower production and gas
transportation costs at Cardinal.
•
•
Administrative expenses increased by $2,897, or 28%, primarily reflecting integration costs and higher compensation expenses following the
acquisition of ReD.
Project development costs decreased by $2,866, or 52%, primarily due to $4,182 of diligence costs for the acquisition of ReD in 2013. This
was partially offset by $1,424 in costs to advance the near-term wind development projects.
Distributions from equity accounted investments were $3,372, or 85%, higher in 2014 due to distributions of $1,939 from the Glen Dhu wind
facility ("Glen Dhu") and $1,433 of higher dividends from Värmevärden.
Distributions from businesses with NCI were $1,461, or 18%, higher in 2014 due to a $1,524 increase in dividends from Bristol Water and
favourable foreign exchange translation. In addition, Saint-Philémon provided $180 of distributions in 2014, partially offset by $243 of lower
distributions from the Amherst wind facility ("Amherst").
2014 Annual Report 27
MANAGEMENT’S DISCUSSION AND ANALYSIS
Interest paid increased by $1,627, or 7%, mainly due to $2,359 of additional interest related to the wind power facilities acquired on October 1,
2013. In addition, corporate interest paid increased by $534 primarily due to the addition of a full year of the 2017 convertible debentures. These
increases were partially offset by lower interest paid on the project debt of the other power segment businesses due to the amortizing nature of
these liabilities.
Interest paid by Bristol Water and Amherst are excluded from Capstone’s definition of AFFO and represent 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 accrued interest to December 31, 2014.
Income taxes paid were $164, or 6%, higher in 2014 , primarily attributable to $489 paid in 2014 for corporate minimum taxes, $339 paid for
Canadian Renewable and Conservation Expense ("CRCE") shortfall penalties related to flow-through shares previously issued by ReD and $375 paid
for income taxes. These increases were partially offset by $1,039 lower tax paid on preferred share dividends in 2014.
Maintenance capital expenditures decreased by $519, or 12%, primarily related to Cardinal, which incurred lower maintenance capital expenditures
in 2014 while reconfiguring the plant as a cycling facility. Refer to page 44 of this MD&A in the "Capital Asset Expenditure Program" section for more
detail. The reduction at Cardinal was partially offset by expenditures for penstock repairs at the hydro facilities.
Scheduled debt principal repayments increased by $1,799, or 12%, primarily due to $2,054 higher payments for wind facilities acquired in 2013 or
completed in 2014. In addition, scheduled principal repayments for Erie Shores, the hydro facilities and Amherstburg Solar Park ("Amherstburg")
were $995 higher in 2014 as the debt continued to amortize. These increases were partially offset by $1,250 of lower payments, relating to the
CPC-Cardinal credit facility, which was replaced in 2013.
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 comprise
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 and Amherst, 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, distributions and management service fees, when applicable.
Capstone's operating segments by ownership interest are as follows:
Accounting treatment
Control
Ownership
Power (1)
Utilities - water
Utilities - district heating
Wholly owned
Cardinal (gas cogeneration), Erie Shores,
SkyGen, Glace Bay, and Confederation
Power (wind facilities)(2), Whitecourt
(biomass facility), Amherstburg (solar
park) and the hydro facilities.
Partially owned
Amherst
(wind facility)(2)
Bristol Water
Significant influence
Minority interest
Glen Dhu and Fitzpatrick
(wind facilities)(2)
Värmevärden
(1) The power segment includes several wind development projects in addition to the operating businesses disclosed above.
(2) Capstone's interests in SkyGen, Glace Bay, Confederation Power, Amherst, Glen Dhu and Fitzpatrick were acquired as operating wind facilities on October
1, 2013.
28 Capstone Infrastructure Corporation
Non-GAAP performance measures
Non-GAAP performance measure results for each business segment were as follows:
Adjusted EBITDA
AFFO
For the year ended
Change
For the year ended
Change
Power
Utilities – water
Utilities – district heating
Corporate
Total
Dec 31, 2014 Dec 31, 2013
$
106,674
59,414
7,435
89,130
47,877
5,965
(13,164)
(14,551)
17,544
11,537
1,470
1,387
%
20%
24%
25%
Dec 31, 2014 Dec 31, 2013
$
66,234
53,439
12,795
8,071
7,435
6,547
5,965
1,524
1,470
689
(10)%
(25,328)
(26,017)
160,359
128,421
31,938
25%
56,412
39,934
16,478
%
24%
23%
25%
(3)%
41%
Power
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2013:
Change
Explanations
11,246 Adjusted EBITDA increase for operating facilities acquired on October 1, 2013.
3,370 Lower Cardinal operating expenses due to the expiration of the gas transportation contract.
2,949 Lower Cardinal operating expenses due to decrease in gas transportation rates effective July 1, 2013.
2,202 Higher Cardinal revenue due to annual increase in power rates.
1,189 Higher Cardinal gas mitigation revenue due to increase in surplus gas as a result of lower production.
720 Higher Erie Shores and Amherstburg revenue due to favourable wind and solar resources.
(825) Higher project development costs to advance near-term wind development projects.
(976) Lower Whitecourt revenue due to lower production and power pool prices.
(871) Lower Hydro facilities revenue due to unfavourable hydrology.
(1,460) Various other changes.
17,544 Change in Adjusted EBITDA.
(2,437) Change in Adjusted EBITDA attributable to non-controlling interests.
1,726 Lower Cardinal maintenance capital expenditures primarily due to turbine combustion inspection in 2013.
1,725 Lower Cardinal debt service costs following refinancing of the CPC-Cardinal facility as a corporate facility in 2013.
(4,437) Higher interest, principal payments and maintenance capital expenditures for operating facilities acquired on October 1, 2013.
(1,475) Higher Hydros maintenance expenditures due to penstock repairs.
149 Various other changes.
12,795 Change in AFFO.
Utilities – water
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2013:
Change
Explanations
6,178 Impact of foreign exchange on Adjusted EBITDA.
5,359
Business performance increase primarily due to annual increase in regulated water tariffs, offset by higher repairs and
maintenance expenses.
11,537 Change in Adjusted EBITDA.
797 Impact of foreign exchange on dividends received from Bristol Water.
727 Increase in dividends received from Bristol Water.
1,524 Change in AFFO.
Utilities – district heating
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2013:
Change
Explanations
1,434 Additional dividend received from Värmevärden.
36 Impact of foreign exchange on interest and dividends received from Värmevärden.
1,470 Change in Adjusted EBITDA and AFFO.
2014 Annual Report 29
MANAGEMENT’S DISCUSSION AND ANALYSIS
Corporate
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2013:
Change
Explanations
4,182 Decrease in project development costs due to ReD acquisition costs in 2013.
(1,040) Higher project advisory, professional and contract fees.
(622) Higher professional fees due to the integration of ReD.
(1,133) Various other changes
1,387 Change in Adjusted EBITDA.
(705) HIgher interest paid for the 2017 Debentures.
7 Other
689 Change in AFFO.
Net income (loss)
Net income (loss) for each business segment was as follows:
Net income (loss)
Power (1)
Utilities – water
Utilities – district heating
Corporate
Total
For the year ended
Dec 31, 2014
Dec 31, 2013
3,280
48,665
(3,278)
(15,120)
33,547
34,833
51,477
2,850
(21,950)
67,210
(1)
Power is net of impairment charges of $30,592.
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
Asset impairment charges
Other gains and (losses), net (1)
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, 2014
Dec 31, 2013
160,359
128,421
(8,481)
62,595
(30,592)
(3,907)
(4,673)
(6,620)
48,727
—
9,789
2,924
(54,145)
(47,471)
2,132
(79,766)
(9,975)
33,547
1,817
(62,167)
(8,210)
67,210
(1) Other gains and (losses), net, are adjusted by $3,762 so operating expenses reflect the actual costs by transferring the portion of Cardinal gas payments included in other gains and
losses as required by IFRS.
30 Capstone Infrastructure Corporation
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:
9.5
18
160,000
Megawatts added to our power portfolio with
the commissioning of the Skyway 8 wind farm.
Number of consecutive years without a lost-
time injury at Cardinal.
Approximate number of households capable of
being powered each year from the electricity
Capstone generates.
For the year ended December 31, 2014
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses (3)
Interest income
Distributions from equity accounted investments
Less: non-controlling interest (“NCI”)
Gas
Wind (1) Biomass (1)
911.0
471.2
194.3
69.0%
98.5%
31.3%
97.3%
96.7%
96.4%
Hydro
158.3
50.7%
96.4%
Solar Development (2)
38.2
21.8%
98.6%
n/a
n/a
n/a
Total
1,773.0
n.m.f
n.m.f
112,175
46,607
14,321
14,135
16,070
—
203,308
(71,019)
(8,884)
(10,123)
(3,618)
(1,109)
(2,593)
(97,346)
328
—
—
420
2,817
(3,269)
222
—
—
21
—
—
28
—
—
—
—
1,019
2,817
145
(3,124)
Adjusted EBITDA
41,484
37,691
4,420
10,538
14,989
(2,448)
106,674
Adjusted EBITDA of consolidated businesses with NCI
Distributions from businesses with NCI
Principal from loans receivable
Interest paid
Maintenance capital expenditures
Scheduled repayment of debt principal
—
—
—
—
—
—
(3,404)
1,321
—
—
—
1,220
—
—
—
—
—
—
(8,454)
(1,535)
(8,595)
—
(470)
—
(4,678)
(1,863)
(4,028)
(6,223)
—
(4,062)
151
180
—
—
—
—
(3,253)
1,501
1,220
(19,355)
(3,868)
(16,685)
AFFO
41,484
17,024
5,170
(31)
4,704
(2,117)
66,234
For the year ended December 31, 2013
Gas
Wind (1) Biomass (1)
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Distributions from equity accounted investments
Less: non-controlling interest ("NCI")
1,287.5
311.1
198.4
97.9%
98.2%
29.9%
97.8%
95.8%
96.1%
Hydro
168.7
53.9%
99.1%
Solar Development (2)
36.6
20.9%
99.6%
n/a
n/a
n/a
Total
2,002.3
n.m.f
n.m.f
118,005
30,571
15,385
14,373
15,594
—
193,928
(84,668)
(5,482)
(9,636)
(3,533)
(1,185)
(1,169)
(105,673)
105
—
—
116
878
(784)
474
—
—
48
—
—
38
—
—
—
—
—
781
878
(784)
Adjusted EBITDA
33,442
25,299
6,223
10,888
14,447
(1,169)
89,130
Adjusted EBITDA of consolidated businesses with NCI
Distributions from businesses with NCI
Principal from loans receivable
Interest paid
Maintenance capital expenditures
Scheduled repayment of debt principal
—
—
—
(816)
1,564
—
—
—
1,096
—
—
—
—
—
—
(475)
(6,430)
—
(4,846)
(6,511)
(1,910)
(1,250)
(983)
(6,206)
(918)
(576)
—
—
(3,550)
(3,880)
—
—
—
—
—
—
(816)
1,564
1,096
(18,262)
(4,387)
(14,886)
AFFO
29,807
12,428
6,401
1,916
4,056
(1,169)
53,439
(1) For equity accounted investments, Adjusted EBITDA reflects management fees earned, interest income, as well as distributions paid to Capstone. Principal
received on outstanding loans receivable is included in AFFO. The statistics for power generated, capacity factors and availability exclude those of
Capstone's equity accounted investments.
(2) Development includes costs for Capstone's power development team, and development project costs, which are expensed during construction.
(3) 2014 operating expenses are adjusted by $3,762 to actual costs by transferring the portion of Cardinal gas payments included in other gains and losses as
required by IFRS.
2014 Annual Report 31
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following charts show the composition of the power segment’s Adjusted EBITDA and AFFO for the years ended December 31, 2014 and 2013:
ADJUSTED EBITDA 2014
ADJUSTED EBITDA 2013
AFFO 2014
AFFO 2013
●● 38% Gas
● 34% Wind
● 4% Biomass
● 10% Hydro
●● 14% Solar
●● 37% Gas
● 28% Wind
● 7% Biomass
● 12% Hydro
●● 16% Solar
●● 61% Gas
● 25% Wind
● 7% Biomass
●● 7% Solar
●● 54% Gas
● 23% Wind
● 12% Biomass
● 4% Hydro
●● 7% Solar
Revenue increased by $9,380, or 5%, primarily due to $15,793 from the wind facilities acquired in 2013; a full year of production is included in 2014
versus one quarter in 2013. Revenue also increased by $719, due to higher production from Amherstburg and Erie Shores. These increases were
partially offset by $5,830 lower revenue from Cardinal due to a production decrease and $1,064 lower revenue from Whitecourt due to lower
production and average power pool prices. The remaining variance relates to lower production at the hydro facilities.
Cardinal revenue decreased in response to the new agreement with the OPA, now the IESO, to provide additional flexibility to the electricity system
by reducing off-peak production to help Ontario's surplus baseload generation issue. Lower Cardinal revenues were partially offset by higher
contracted power rates based on annual escalators in the PPA that ended in 2014 and higher gas sales based on surplus gas as a result of lower
power production.
Expenses decreased by $8,327, or 8%, primarily due to lower Cardinal fuel costs of $7,371, because of lower production. In addition, Cardinal's fuel
transportation costs were $6,319 lower, primarily due to lower rates in 2014 and the expiration of the transportation contract in November 2014.
These variances were partially offset by $3,669 of higher operating expenses related to Capstone's larger operating wind portfolio and $1,424 of
higher development expenses to advance the near-term wind projects. The remaining variance primarily relates to higher operating expenses at
Whitecourt for professional fees.
Interest income increased by $238, or 30%, due to $272 of accrued interest on the loan to BFN and $216 of interest as a result of higher average
cash balances in 2014. This was partially offset by $250 lower interest from Chapais due to a one-time payment received in 2013 and the continued
amortization of the loan balance.
Distributions from equity accounted investments increased by $1,939, or 221%, primarily due to receipts from Capstone's 49% interest in the
Glen Dhu wind facility.
Non-controlling interests relate to the Adjusted EBITDA attributable to Capstone's partners for the Amherst wind facility, and Saint-Philémon and
Goulais wind development projects.
Distributions from businesses with NCI decreased by $63, or 4%, primarily because distributions from the Amherst wind facility decreased by
$243. This was partially offset by $180 of accrued management fees for the Saint-Philémon wind development project.
Interest paid increased by $1,093, or 6%, primarily due to $2,359 of additional interest in 2014 on the wind portfolio acquired in 2013. This was
partially offset by $791 of lower interest paid on amortizing debt at Erie Shores Wind Farm ("Erie Shores"), the hydro facilities and Amherstburg. The
remaining decrease relates to $475 of lower interest paid by Cardinal due to refinancing of the CPC-Cardinal credit facility in 2013.
Maintenance capital expenditures decreased by $519, or 12%, primarily due to Cardinal, which did not incur significant maintenance capital
expenditures in 2014 as efforts shifted to reconfiguring the facility as a cycling plant. Cardinal maintenance capital expenditures of $1,910 in 2013
reflect costs for the scheduled 2013 combustion inspection. In 2014, maintenance capital expenditures included $1,287 for repairs to the penstocks
at two hydro facilities, for which Capstone is pursuing an insurance claim. Refer to page 44 of this MD&A in the "Capital Asset Expenditure Program"
section for detail.
Scheduled repayments of debt principal increased by $1,799, or 12%, primarily due to $2,054 of additional principal payments in 2014 on the
wind portfolio acquired in 2013. In addition, principal repayments for the amortizing debt at Erie Shores, the hydro facilities and Amherstburg
increased by $995. These increases were partially offset by a $1,250 decrease related to the CPC-Cardinal credit facility, which was refinanced in
2013.
32
Capstone Infrastructure Corporation
Project development
Capstone's development pipeline as at December 31, 2014 included the rights to net 77 MW across eight wind development projects, excluding the
Skyway 8 wind facility completed in August 2014. Six of these projects are being developed in Ontario under power purchase agreements ("PPAs")
awarded by the OPA, now the IESO by amalgamation, one project is in Quebec with a PPA awarded by Hydro-Québec and one project is in
Saskatchewan with a PPA awarded by SaskPower. Two projects are characterized as near-term, with ongoing construction. Capstone expects both
of the near-term projects to be completed consistent with targeted dates and without material cost over-runs. The remaining six development-stage
projects are expected to achieve their commercial operation dates ("COD") between 2016 to 2017, assuming they receive the relevant regulatory
approvals and permits required to proceed.
A summary of Capstone's two near-term projects and the recently constructed Skyway 8 is as follows:
Project
Skyway 8
Complete
Saint-Philémon
Complete
Goulais
Q2 2015
Expected COD Ownership Interest Net Capacity Counterparty
PPA Expiry
Status
100%
51%
51%
9.48 MW
IESO
August 2034
COD - August 2014
12.24 MW
Hydro-Québec
January 2035
COD - January 2015
12.75 MW
IESO
20 years from COD Under construction
Capstone has funded these development projects with a combination of equity and project-level debt financing. The projects have been equity
funded by Capstone, through a combination of existing cash, available credit and other equity partners, including First Nations and a municipality. The
project debt financing for each near-term project is in place. Refer to page 23, the "Changes in the Business" section of the MD&A for additional
information.
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 (2)
Wind (3)
Biomass (3)
Hydro
Solar
Total
PPA Expiry
2034
2020 - 2037
2014
2017 - 2042
2031
Actual
2014
911.0
471.2
194.3
158.3
38.2
Average long-term production (GWh) (1)
Q1
341.8
140.7
50.2
31.3
6.9
Q2
272.6
90.6
45.6
57.3
12.9
Q3
290.5
75.3
50.4
29.8
12.4
Q4
321.3
140.8
49.1
41.6
5.8
Annual
1,226.2
447.4
195.3
160.0
38.0
1,773.0
570.9
479.0
458.4
558.6
2,066.9
(1) Average long-term production is from March 2005 to December 31, 2014, except for Erie Shores, which is from June 2006, and Amherstburg, which is
(2)
from July 2011; the wind facilities acquired on October 1, 2013, which is from January 2013 and Skyway 8, which is from August 14, 2014.
In 2014, production was lower due to Cardinal's agreement with the OPA, now IESO to provide additional flexibility to the electricity system by reducing
off-peak production to help manage Ontario's surplus baseload generation.
(3) 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 during summer months.
Outlook (1)
In 2015, the power segment will benefit from contributions from the near-term wind development projects as they reach COD. Skyway 8 will
contribute a full year, along with Saint-Philémon, which commenced operations in January of 2015 and Goulais, which we anticipate will reach
COD in April of 2015. Capstone expects Adjusted EBITDA for development to be similar to 2014, as costs to advance the remaining near-term
development projects, and new development projects are expected to be comparable with costs incurred in 2014.
Overall, all operating facilities are expected to perform consistently with their long-term average production, subject to variations in wind, water
flows, ambient temperatures and sunlight, with the exception of Cardinal and Whitecourt.
We anticipate a lower contribution from Cardinal, reflecting conversion to a cycling facility under its new non-utility generator contract. Whitecourt
is expected to generate lower revenue based on a lower outlook for realized power prices compared with 2014.
Overall, Capstone expects the net impact of these factors to result in lower Adjusted EBITDA for the power segment in 2015 compared
with 2014.
(1) See page 22 for a description of various other material factors or assumptions underlying our outlook.
2014 Annual Report 33
MANAGEMENT’S DISCUSSION AND ANALYSIS
Infrastructure – Utilities
Water
Capstone’s water utilities segment includes a 50% ownership interest in
Bristol Water, which is located in the United Kingdom. The remaining
ownership is 30% held by Sociedad General de Aguas de Barcelona
("Agbar"), a subsidiary of Suez Environnement, and 20% held by a
subsidiary of ITOCHU Corporation ("ITOCHU").
Water supplied (megalitres)
Revenue
Operating expenses
Interest income
Adjusted EBITDA before non-controlling interest
Less: non-controlling interest ("NCI")
Adjusted EBITDA
Adjusted EBITDA of consolidated businesses with NCI
Dividends from businesses with NCI
AFFO
For the year ended
Dec 31, 2014
Dec 31, 2013
82,528
238,270
82,125
195,575
(119,530)
(100,030)
145
118,885
(59,471)
59,414
(59,414)
8,071
8,071
275
95,820
(47,943)
47,877
(47,877)
6,547
6,547
Revenue increased by $42,695, or 22%, including foreign currency and was $17,460, or 8%, higher excluding foreign currency. After foreign
currency, the increase was primarily attributable to the annual increase in water tariffs, which took effect on April 1, 2014 and contributed $13,826.
Higher water consumption contributed an additional $1,455.
Operating expenses increased by $19,500, or 19%, including foreign currency and were $6,593, or 6%, higher excluding foreign currency. The
increase was mostly due to a $2,269 increase in professional fees primarily relating to the revised 2014 price review submission, as well as $1,974 of
higher repairs and maintenance activities.
Interest income decreased by $130, or 47%, due to a lower average cash balance.
Non-controlling interest relates to the Adjusted EBITDA attributable to Capstone's partners, Agbar and ITOCHU.
Dividends paid to Capstone by Bristol Water increased by $1,524, or 23%, mainly because of $797 related to foreign currency translation, as well as
an expected increase in the dividend of $727.
Capital expenditures
The approved and planned capital expenditures for the current Asset Management Plan ("AMP5") period, which ends on March 31, 2015, are
approximately $546,000, or £302,000 (base price of £261,000 adjusted for inflation for new regulatory fiscal year). As at December 31, 2014, the
cumulative capital expenditure incurred during AMP5 was $526,000, which was ahead of the original plan agreed with Water Services Regulation
Authority ("Ofwat") by $15,000. Bristol Water's capital expenditures for regulatory purposes were approximately $121,000 during 2014. Capstone
expects Bristol Water's cumulative capital expenditures over AMP5 to comply with the regulator-approved amount.
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 main bursts,
which are more common in periods when freezing and thawing occur leading to higher repair and maintenance costs.
34 Capstone Infrastructure Corporation
Regulatory
Bristol Water is a regulated utility subject to supervision by the industry
regulator, Ofwat.
Bristol Water originally submitted its five-year business plan for the 2014
price review ("PR14") to Ofwat in December 2013, submitted a revised
business plan in June and filed a response to Ofwat’s draft determination
on October 3, 2014. The response was based on feedback from Ofwat's
August 29 draft determination, as well as independent reviews
commissioned by Bristol Water. A final determination on the five-year
business plan governing the period from April 1, 2015 to March 31, 2020,
known as AMP6, was issued by Ofwat in December 2014. This final
determination fell short of expectations and was formally rejected by
Bristol Water’s Board of Directors on February 5, 2015. This rejection
initiated a process whereby the final determination will be referred for
review to the Competition and Markets Authority ("CMA"), the UK agency
responsible for considering regulatory references and appeals. The CMA
is expected to render its final determination in August of 2015. Any
adjustments arising from the CMA’s decision would come into effect on
April 1, 2016, with the potential for a catch-up for any lost revenue or
capital.
Management continues to focus on achieving regulatory output targets,
including leakage of less than 50 million litres of water per day (“Ml/d”) in
2014/2015. Strong performance in the Service Incentive Mechanism
(“SIM”), which is measured through customer satisfaction surveys and
quantitative data related to customer contacts, can result in an increased
revenue allowance for Bristol Water in the next regulatory period.
For the regulatory year ended March 31, 2014, Bristol Water achieved
GROWTH IN REGULATED CAPITAL VALUE
Growth in Regulated Capital Value
Actual Achieved RCV
Regular Deemed RCV
450
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
06
07
08
09
10
11
12
13
14
15E
Note: All data above refl ects fi scal years ended as at March 31.
2015 represents the estimated values at March 31, 2015.
Note: All data above reflects fiscal years ended as at March 31.
RCV in 2015 represents the estimated values at March 31, 2015.
Water Leakage Versus Target
WATER LEAKAGE VERSUS TARGET
Actual (Annual)
Target (Annual)
60
50
40
30
20
10
)
y
a
d
/
L
M
(
y
a
d
r
e
p
s
e
r
t
i
L
a
g
e
M
0
(1) For the year ended December 31, 2014
10
09
06
07
08
11
12
13
14(1)
leakage levels of 43.7 MI/d, and had a SIM score of 85.4, which ranked
(1) For the year ended December 31, 2014.
fifth overall out of 18 companies in the industry. For the nine months
ended December 31, 2014 of the current regulatory year, which excludes
the seasonally high period for pipe bursts, Bristol Water had leakage
levels of 45.5 MI/d.
Outlook (1)
After the first quarter of 2015 Bristol Water will operate under the final determination issued by Ofwat while we pursue a more appropriate
outcome through the CMA process which is expected to conclude in Q3 2015. Capstone expects Bristol Water's financial results in 2015 to reflect:
•
•
Lower revenue from a 14% (real) decrease in the regulated water tariff commencing April 1 2015; and
Slightly lower operating costs from cost containment efforts and the reduced level of preventative maintenance and network expansion
activity until the CMA process ends.
Overall, Capstone expects these factors to contribute to lower Adjusted EBITDA for the utilities-water segment in 2015 compared with
2014.
(1) See page 22 for a description of various other material factors or assumptions underlying our outlook.
2014 Annual Report 35
MANAGEMENT’S DISCUSSION AND ANALYSIS
Infrastructure – Utilities
District heating
Capstone’s district heating utilities segment consists of a 33.3% interest
in Värmevärden, located in Sweden. Capstone's investment includes
shareholder loans receivable and equity.
Värmevärden's overall financial performance in 2014 exceeded 2013,
primarily due to more moderate weather conditions, allowing the use of
more cost-effective fuel sources in the production of heat.
Overall, Värmevärden's cash flow to support interest and dividend
payments to shareholders remained strong.
For the year ended
Dec 31, 2014
Dec 31, 2013
1,010
(2,034)
2,898
4,537
7,435
1,091
(2,950)
2,861
3,104
5,965
Heat and steam production (GWh)
Equity accounted income (loss)
proportionate to Capstone
Interest income
Dividends
Adjusted EBITDA and AFFO
Interest income
Heat and Steam Production
HEAT AND STEAM PRODUCTION
2013
2014
150
h
W
G
100
50
0
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV
DEC
Interest is earned on the outstanding balance of the shareholder loan receivable from Värmevärden. Capstone received $2,898 in interest income
from Värmevärden in 2014, which was $37 higher than in 2013, due to favourable foreign exchange translation.
Dividends
Capstone received $1,433 higher dividends from Värmevärden in 2014, primarily because of a $1,513 dividend in the fourth quarter of 2014,
which was not paid in 2013.
Equity accounted income (loss)
Equity accounted losses included in Capstone's net income were $916 lower than in 2013, primarily due to lower operating expenses as a result of
more moderate weather conditions in 2014, which allows for the use of less expensive fuels in the production of heat.
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 2014 while we expect to return to normal dividends in 2015,
resulting in lower Adjusted EBITDA from the district heating segment compared with 2014.
(1) See page 22 for a description of various other material factors or assumptions underlying our outlook.
FUEL MIX BREAKDOWN
BY MWH – 2014
FUEL MIX BREAKDOWN
BY MWH – 2013
FUEL MIX BREAKDOWN
BY COST (SEK) – 2014
FUEL MIX BREAKDOWN
BY COST (SEK) – 2013
●● 4% Electricity
● 3% Fossil Fuel
● 78% Bio and Waste Fuel
● 15% Industrial Heat
●● 5% Electricity
● 5% Fossil Fuel
● 76% Bio and Waste Fuel
● 14% Industrial Heat
●● 16% Electricity
● 8% Fossil Fuel
● 64% Bio and Waste Fuel
● 13% Industrial Heat
●● 18% Electricity
● 16% Fossil Fuel
● 56% Bio and Waste Fuel
● 11%
Industrial Heat
36 Capstone Infrastructure Corporation
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
For the year ended
Dec 31, 2014
Dec 31, 2013
(13,266)
(70)
172
(10,369)
(4,361)
179
(13,164)
(14,551)
(5,716)
(3,750)
(2,698)
(5,182)
(3,750)
(2,534)
(25,328)
(26,017)
Administrative expenses increased by $2,897, or 27.9% reflecting higher staff costs and other administrative expenses as follows:
Staff costs
Other administrative expenses
For the year ended
Dec 31, 2014
Dec 31, 2013
7,528
5,738
13,266
6,133
4,236
10,369
Staff costs increased by $1,395, or 23%, primarily due to new employees who joined Capstone following the acquisition of ReD on October 1, 2013.
Other administrative expenses increased by $1,502, or 35%, primarily because of additional professional fees for the integration of ReD. Other
administrative expenses include expenses for audit fees, tax compliance and advisory, investor relations costs, office administration and premises
costs, as well as professional fees other than for business development.
Project development costs decreased by $4,291, primarily reflecting transaction costs in 2013 for ReD.
Interest income is earned on corporate cash balances and was consistent with 2013.
Interest paid increased by $534, or 10%, primarily due to $705 of additional interest in 2014 on the 2017 Debentures assumed in 2013, following
the acquisition of ReD. In 2014, Capstone paid semi-annual interest payments in June and December relating to the 2017 Debentures versus one
payment in 2013.
Preferred share dividends paid and taxes paid
Dividends paid on Capstone's preferred shares relate to a quarterly fixed-rate payment equivalent to 5.0% per year. Taxes paid primarily relate to the
preferred share dividends and are available to offset future income taxes of the Corporation.
Taxes paid were $164, or 6%, higher in 2014 , primarily attributable to $489 paid in 2014 for corporate minimum taxes, $339 for Canadian
Renewable and Conservation Expense ("CRCE") shortfall penalties related to flow-through shares previously issued by ReD and $375 paid for
income taxes. These increases were partially offset by $1,039 lower tax paid on preferred share dividends in 2014.
Outlook (1)
In 2015, Capstone expects financial results for corporate to reflect:
•
•
•
Higher corporate project development expenses than in 2014;
Higher staffing costs as headcount increased in the second half of 2014 to support business development initiatives; and
Lower professional fees than in 2014 as the one-time costs related to ReD integration are not expected to recur.
Overall, Capstone expects these factors to result in slightly higher corporate expenses compared with 2014.
(1) See page 22 for a description of various other material factors or assumptions underlying our outlook.
2014 Annual Report 37
MANAGEMENT’S DISCUSSION AND ANALYSIS
FINANCIAL POSITION REVIEW
Overview
As at December 31, 2014, Capstone had a consolidated working capital surplus of $69,694 compared with $35,666 at December 31, 2013. The
surplus increase of $34,028 reflects a $24,972 increase from the wind facilities and development projects acquired on October 1, 2013, as well as
$543 for the other power businesses, $7,653 for Bristol Water and $860 at corporate.
Unrestricted cash and cash equivalents totaled $58,842 on a consolidated basis at December 31, 2014 compared with $45,768 at December 31,
2013. The increase reflects higher cash and cash equivalents of $4,141 and $4,123 at the utilities - water and power segments, respectively. In
addition corporate cash and cash equivalents increased by $4,810. In addition, cash and cash equivalents available to corporate increased to $27,397
at December 31, 2014 and represent funds available for general purposes, including payment of dividends to shareholders.
During 2014, Capstone’s debt to capitalization ratio (refer to page 40) increased from 65.7% to 71.2% on a fair value basis and increased from
57.3% to 61.3% on a book value basis. On a fair value basis, the increase was primarily due to $153,354 of a higher debt fair value, which reflects
new proceeds, as well as declining interest rates. In addition, a 10.1% decrease in the share price lowered equity and increased the ratio. The addition
of $89,564 new debt, excluding the portion allocated to non-controlling interests ($159,621 gross) for the power segment, was to finance the
construction of the near-term development projects. Bristol Water's debt increased by $7,661 due to foreign exchange translation, and by $46,746
to provide new funds for the ongoing capital expenditure program. As at December 31, 2014, Capstone and its subsidiaries complied with all debt
covenants.
Liquidity
Working capital
As at
Power
Utilities – water
Corporate
Working capital
Dec 31, 2014
Dec 31, 2013
57,153
8,586
3,955
69,694
31,638
933
3,095
35,666
Capstone's working capital increased by $34,028, primarily due to $25,515 and $7,653 increases at the power and utilities - water segments,
respectively, as well as an increase of $860 at corporate. The consolidated increase reflects a $60,882, or 35%, increase in current assets since
2013, primarily due to higher cash and restricted cash balances, as well as higher accounts receivable. In addition, current liabilities increased by
$26,854, or 19%, since 2013, primarily because of higher accounts payable and a higher current portion of long-term debt.
The Power segment's working capital primarily increased due to $47,186 of proceeds from new long-term debt, which is included in restricted cash
and earmarked for the construction of Goulais and Saint-Philémon. This increase was partially offset by a $21,229 increase in accounts payable
related to the near-term development projects. The remaining increase was primarily due to the replacement of cash-funded debt facility reserves
with letters of credit.
Bristol Water's increase reflected increases of $4,141 in cash and $3,450 in accounts receivable. Cash increased due to higher funds generated from
operations net of higher dividends and capital expenditures. In addition, cash and accounts receivable reflected the annual increase in regulated water
tariffs in 2014.
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 corporate
Dec 31, 2014
Dec 31, 2013
33,114
13,271
12,457
58,842
(18,174)
(13,271)
27,397
28,991
9,130
7,647
45,768
(18,096)
(9,130)
18,542
The cash increase of $13,074 from 2013 reflected an increase of $4,810 at Corporate, $4,123 at the power segment and $4,141 at Bristol Water.
The Corporate increase reflected the accumulation of distributions received from Capstone's business units in excess of dividends to shareholders
and corporate expenses. The power segment increase was primarily attributable to the accumulation of cash to fund Cardinal's 2015 conversion to a
38 Capstone Infrastructure Corporation
cycling facility, including replacement of the rotor and exhaust cylinder. For Bristol Water, cash increased from higher funds generated from
operations, less dividends and capital expenditures. As at December 31, 2014, Bristol Water also had $126,497 of available credit to fund the capital
expenditure program.
Cash and cash equivalents available to corporate of $27,397 increased by $8,855 and represented funds available to corporate for general purposes,
including payment of dividends to shareholders. Available cash is net of Bristol Water and power segment cash of $13,271 and $18,174
respectively, which are only accessible to Capstone through quarterly distributions and subject to the terms of credit agreements in the case of the
hydro power facilities, Erie Shores, Amherstburg, Glace Bay, SkyGen, Skyway 8, and Amherst.
Restricted cash
Restricted cash increased by $36,331 from 2013 to $65,878 at December 31, 2014, primarily due to the addition of $47,091 restricted for the
construction of Goulais and Saint-Philémon. These were partially offset by the replacement of cash-funded reserve accounts with $5,055 of letters
of credit for the hydro facilities and $6,243 for Amherst, Glen Dhu and the wind development projects. The remaining difference mainly relates to
foreign exchange on Bristol Water's restricted cash.
Cash flow
Capstone’s consolidated cash and cash equivalents increased by $13,074 in 2014 compared with a decrease of $3,831 in 2013. 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, 2014
Dec 31, 2013
155,718
135,676
(297,425)
(129,257)
184,528
(30,015)
268
13,074
14,705
(25,446)
491
(3,831)
Cash flow from operating activities generated $20,042 more cash and cash equivalents in 2014 than during 2013. Operating cash flows for the
corporate, power and utilities segments increased by $957, $4,938 and $14,147 respectively. Corporate cash flows were higher primarily due to
lower business development expenses. Power cash flows increased due to higher revenues and lower expenses while the utilities segment's cash
flows were higher primarily due to higher revenue.
Cash flow used for investing activities was $168,168 higher in 2014. Capstone used $129,813 (2013 - $146,279) for capital asset additions in
2014 primarily for Bristol Water while additions to projects under development required $127,624 (2013 - $4,648) of cash. Capstone's restricted
cash increased by $36,331 (2013 - $10,318), primarily from debt proceeds received to fund the construction of the wind development projects.
Restricted cash decreased for debt reserve accounts that were replaced with letters of credit. Capstone also loaned $11,500 in 2014 to fund BFN's
partnership interest in the Goulais project.
Cash flow from financing activities was $169,823 higher in 2014. Capstone raised $158,213 (2013 - nil) of debt for the wind development
projects and received $13,918 (2013 - $3,405) from non-controlling interests for these projects. The power sector reduced debt by $18,375 (2013
- $13,636) through scheduled debt repayments. Bristol Water increased outstanding debt by $35,601 (2013 - $44,873) net of repayments. The
corporate credit facility increased by $8,700 (2013 - $750 decrease) net of repayments.
Dividends paid to shareholders were $4,569 higher in 2014 due to new shares issued on October 1, 2013 for the acquisition of ReD and under
Capstone's Dividend Reinvestment Plan.
2014 Annual Report 39
MANAGEMENT’S DISCUSSION AND ANALYSIS
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 (1)
Equity
Shareholders’ equity (2)
Total capitalization
Debt to capitalization
Dec 31, 2014
Dec 31, 2013
Fair Value
Carrying Value
Fair Value
Carrying Value
435,808
368,223
91,077
—
423,365
315,447
89,393
(9,272)
346,244
313,816
81,694
—
349,807
288,017
80,107
(7,445)
895,108
818,933
741,754
710,486
361,580
516,706
388,058
529,550
1,256,688
1,335,639
1,129,812
1,240,036
71.2%
61.3%
65.7%
57.3%
(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.
Power
The composition of the power segment’s long-term debt was as follows:
As at
Project debt
Wind - Operating (1)
Wind - Development (2)
Hydros
Solar
Less: non-controlling interest
Capstone share of long-term debt
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
Dec 31, 2014
Dec 31, 2013
2016 - 2032
4.72 - 6.36%
2034 - 2034
3.99 - 5.49%
2040 - 2041
4.56 - 7.00%
2016
7.32%
213,179
141,805
90,064
82,618
527,666
(91,858)
435,808
202,060
136,921
89,902
82,618
511,501
(88,136)
423,365
195,345
191,134
—
86,020
86,680
368,045
(21,801)
346,244
—
93,930
86,680
371,744
(21,937)
349,807
(1) Wind - Operating project debt includes Erie Shores, Amherst, SkyGen, Skyway 8 and Glace Bay.
(2) Wind - Development project debt includes Saint-Philémon and Goulais.
As at December 31, 2014, approximately 97.8% of the power segment's long-term debt was scheduled to amortize over the lives of the facilities'
respective PPAs.
In 2014, long-term debt of the power segment increased by $139,757 primarily because Capstone completed $158,164 of project financing for the
construction of Saint-Philémon, Skyway 8 and Goulais. Refer to page 23, the "Changes in the Business" section of the MD&A, for additional
information. The increase was partially offset by $18,407 for scheduled amortizing debt repayments.
All debt of the power segment is non-recourse to Capstone, except for limited recourse guarantees provided to the lenders of the various wind
projects totalling $11,500.
Covenant compliance
All power segment debt is subject to financial covenant requirements. Each credit agreement individually requires the respective business to maintain
minimum debt service coverage ratios to allow distributions to Corporate. During 2014, Capstone's power segment complied with all covenants and
expects to remain in compliance in 2015.
40 Capstone Infrastructure Corporation
Utilities – water
The composition of the utilities – water segment’s long-term debt was as follows:
As at
Bank loans
Term loans (1)
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, 2014
Dec 31, 2013
2017 - 2019
1.26 - 5.73%
2032 - 2041
4.10 - 6.14%
Irredeemable
3.50 - 4.25%
Irredeemable
8.75%
122,836
576,696
2,805
34,109
125,877
473,301
2,351
29,365
87,056
505,322
2,424
32,830
87,329
457,786
2,275
28,644
736,446
630,894
627,632
576,034
(368,223)
(315,447)
(313,816)
(288,017)
368,223
315,447
313,816
288,017
(1) Certain of the term 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.
As at December 31, 2014, approximately 77.5% of the utilities - water segment's long-term debt had maturities of greater than 10 years.
Long-term debt for the utilities – water segment is used to fund current and ongoing capital expenditures to improve Bristol Water’s network. The
carrying value of Bristol Water's long-term debt increased by $54,860, of which $14,457 was due to foreign exchange translation and $36,142 was
primarily due to draws on existing credit facilities. The remaining increase relates to index-linked debt.
As at December 31, 2014, Bristol Water had $126,497 of undrawn credit capacity resulting from repaying the utilized portion of $90,355 or
£50,000, with funds from a new bank loan completed in December 2014. In addition, Bristol Water increased the existing credit facility by £20,000.
The preferred shares are classified as long-term debt on the basis that they are irredeemable. All Bristol Water debt is non-recourse to Capstone.
Covenant compliance
The principal debt agreements require Bristol Water to comply with covenants relating to the minimum levels of interest coverage and net debt in
relation to regulatory capital value. During 2014, Bristol Water complied with all its covenants and expects to remain in compliance.
Corporate
The composition of Capstone’s corporate long-term debt was as follows:
As at
Corporate credit facility
Convertible debentures
Convertible debentures
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
Dec 31, 2014
Dec 31, 2013
2017
2016
2017
3.01%
6.50%
6.75%
20,000
42,963
28,114
91,077
20,000
41,728
27,665
89,393
11,300
42,963
27,431
81,694
11,300
41,068
27,739
80,107
Long-term debt at corporate increased by $9,286 since 2013, primarily due to draws on the corporate credit facility. In 2014, for power
development projects, Capstone, through its existing lenders, increased the capacity of the credit facility by $57,500, bringing the total available
credit to $90,000 of which $48,461 was drawn or committed as of December 31, 2014.
Covenant compliance
During 2014, Capstone complied with all covenants and expects to remain in compliance.
2014 Annual Report 41
MANAGEMENT’S DISCUSSION AND ANALYSIS
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)
Deficit
Equity to Capstone shareholders
Non-controlling interests
Total shareholders’ equity
Dec 31, 2014
Dec 31, 2013
713,412
710,662
26,710
72,020
26,710
72,020
812,142
809,392
9,284
19,994
9,428
17,013
(324,714)
(306,283)
516,706
190,073
706,779
529,550
138,613
668,163
(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, 2014
Year ended Dec 31, 2013
Shares
92,854
14
705
—
Amount
710,662
39
2,711
—
Shares
72,445
19,719
670
20
Amount
632,474
75,453
2,635
100
93,573
713,412
92,854
710,662
(1)
In 2013, Capstone issued share capital in exchange for ReD shares on acquisition, which are net of $224 of transaction costs.
The composition of fair value for shareholders’ equity was as follows:
As at
Dec 31, 2014
Dec 31, 2013
($000s, except per share amounts)
Common shares
Class B units
Preferred shares
Market Price
per Share
Outstanding
Amount
$3.20
$3.20
$17.25
93,573
3,249
3,000
Fair
Value
299,432
10,398
51,750
361,580
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
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, 2014, Capstone had outstanding contractual obligations with amounts due as follows:
Within one year One year to five years
Beyond five years
Long-term debt (1)
Finance lease obligations (1)
Operating leases
Asset retirement obligations
Purchase obligations
Total contractual obligations
81,068
743
2,747
—
49,033
133,591
587,792
3,363
11,608
—
27,580
630,343
1,345,737
949
31,128
9,736
20,905
Total
2,014,597
5,055
45,483
9,736
97,518
1,408,455
2,172,389
(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 40 of this MD&A as part of the Capital Structure section.
Finance lease obligations
•
Bristol Water has finance leases for certain equipment and vehicles.
42 Capstone Infrastructure Corporation
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.
Cardinal leases the site on which it is located from Ingredion Canada Incorporated ("Ingredion"). Under the lease, Cardinal pays monthly rent.
The lease extends through 2034 and expires concurrently with the energy savings agreement between Ingredion and Cardinal.
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 to 2023 and 2042.
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, either directly or through its subsidiaries. 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,
2014, Capstone had approximately $21,000 of construction and turbine supply agreements for the Saint-Philémon and Goulais projects.
• Bristol Water has commitments for capital expenditures at December 31, 2014 of which $16,026 were contracted but had not yet occurred.
• Cardinal placed a purchase order for a $22,042 ($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, 2014,
the potential penalty would be $10,775 ($9,288 USD) and increases to $11,972 ($10,320 USD) by January 2015. As at December 31, 2014
Cardinal has paid $9,362 to the vendor.
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 on page 42, Capstone has the following other commitments with no fixed minimum payments:
Management services agreements
Capstone has agreements with the all partially owned wind facilities and development projects, 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.
Wood waste supply agreement
• Whitecourt has an agreement with Millar Western to ensure an adequate supply of wood waste. The agreement expires in June 2016. Effective
March 2, 2015, Millar Western and Whitecourt completed a new fuel supply agreement, which replaces the existing agreement and has a term
of 15 years, extendable to 20 years. The new agreement also includes sharing mechanisms regarding the price received for electricity sold by
Whitecourt.
Energy savings agreement ("ESA")
•
In December 2014, Cardinal entered into a new ESA with Ingredion, which matures on December 31, 2034, reflecting the binding term sheet
signed on March 26, 2014. Under the terms of the new ESA, Cardinal is required to provide O&M services, and supply steam and compressed
air to Ingredion for its plant operations.
2014 Annual Report 43
MANAGEMENT’S DISCUSSION AND ANALYSIS
Guarantees
•
Capstone has provided limited recourse guarantees on the project debt of the various wind projects totalling $11,500 as at December 31,
2014.
Power Purchase Agreements
A significant portion of the Corporation's electricity revenue is earned through long-term PPAs. The majority of these contracts include terms and
conditions customary to the industry. For Cardinal's new Contract, the nature of commitments includes: electricity capacity; availability; and
production targets. For the remaining facilities in the power segment, Capstone is not obligated to deliver electricity; however, in certain
circumstances if a facility or development project fails to meet the performance requirements under its respective PPA, liquidated damages may
apply or the PPA may be terminated after a specified period of time.
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 decreased by $9,995 in 2014 due to distributions received of $4,612 from Värmevärden and $2,818 from Glen Dhu
and by $2,565 for Capstone's share of equity accounted losses and other comprehensive losses.
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”) (5)
Principal place of business
and country of incorporation
Sweden
Canada
Canada
Canada
Canada
Canada
Ownership at December 31,
2014
33.3%
49%
50%
45%
Nil
2013
33.3%
49%
50%
45%
50%
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 36 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.
(4) No income has been recorded on the investment since its acquisition. On December 30, 2014 Capstone sold its 50% interest in SPWC to the existing
partner.
(5) 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.
Capital Asset Expenditure Program
Capstone incurred $277,335 in capital asset expenditures during 2014, which include $128,840 of additions to capital assets and $148,495 of
additions to projects under development.
The capital asset expenditures by operating segment were as follows:
Power
Utilities – water
Corporate
For the year ended
Dec 31, 2014
Dec 31, 2013
166,745
110,590
—
14,713
129,925
49
277,335
144,687
Capital asset expenditures for the power segment primarily related to $150,051 of costs to construct Skyway 8, Saint-Philémon and Goulais,
(including interest of $2,938 capitalized during construction). In addition, Cardinal invested $9,884 to prepare the plant to operate as a cycling
facility. The majority of the remaining difference relates to growth capital expenditures and repairs of $2,367, at Erie Shores, $1,863 of repairs to
the penstocks at two of the hydro facilities, and $1,151 to advance the mid-term wind development projects. Erie Shores invested $621 of growth
capital in turbine pitch optimization software to enhance the facilities production capabilities.
In 2013, capital asset expenditures in the power segment were primarily related to the investment in WindBOOST at Erie Shores ($947) as well as
the completion of scheduled outages at Cardinal and the hydro facilities.
Capital expenditures for the utilities – water segment, included both growth and maintenance activities as planned in Bristol Water’s regulatory
capital expenditure program for AMP5. Overall, Bristol Water’s expenditures to date are $15,000 ahead of the five-year plan and are expected to be
fully completed by the end of AMP5 in March 2015.
44 Capstone Infrastructure Corporation
Capital Asset Impairment
The carrying values of assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts may
not be recoverable. The deficit of market capitalization to the carrying amount of owners' equity is such an indicator of potential impairment.
Capstone assesses its assets for impairment at the cash generating unit ("CGU") level by comparing the carrying amount of the CGUs being tested
with their recoverable amounts. The recoverable amounts are equal to the greater of the CGU's value in use or fair value less cost to sell. The
impairment assessments are based on estimates of fair value less costs to sell derived from long-term forecasts or offers to purchase assets held for
sale. During the fourth quarter of 2014, Capstone determined that pre-tax impairment charges should be made against the carrying value of capital
assets of the Erie Shores and Confederation Power wind facilities, as well as the loan receivable from Chapais as follows:
For the year ended December 31, 2014
Loans receivable
Capital assets (1)
Erie Shores
Confederation Power
Chapais
Total pre-tax impairment to the power segment
Assets retirement obligation adjustment for assets held for sale
Asset impairment charge
—
—
(562)
(562)
(26,698)
(3,610)
—
Total (2)
(26,698)
(3,610)
(562)
(30,308)
(30,870)
278
(30,592)
(1) The total asset impairment charge contains $3,610, which relates to assets that have been classified as held for sale at December 31, 2014.
Impairment charges can be reversed in future periods if the cash flows forecasted to be generated by the impacted facilities improve.
(2)
For Erie Shores, Capstone reduced the carrying value of the capital assets primarily based on a revised forecast for lower merchant power prices
during the post-PPA period, which impacts Erie Shores in years beginning after 2026. For Confederation Power, the impairment charge reflects an
offer to purchase received in December 2014 that was completed on February 12, 2015. Finally, for Chapais, Capstone expects that Tranche B of
the loan receivable will not be repaid and has accordingly impaired the carrying amount.
These non-cash charges have no impact on the Corporation's liquidity, the stability of cash flow from operations or Adjusted EBITDA and AFFO.
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, 2014
Dec 31, 2013
367,161
300,606
(288,411)
(254,365)
78,750
46,241
As at December 31, 2014, the defined benefit plan was in a $78,750 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 management considers the assumptions used to be reasonable.
For 2015, Bristol Water expects to contribute $4,255 compared with its actual contribution of $4,248 in 2014.
The total defined contribution pension expense recorded in the consolidated statement of income in 2014 was $2,189. The expense comprised
$1,998 for Bristol Water and $191 for Cardinal.
Income Taxes
In 2014, the current income tax expense was $3,981 (2013 - $2,004), of which $4,020 (2013 - $183) was for Bristol Water and the difference
represented a tax recovery in Canada.
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
Capstone's deferred income tax assets of $Nil (2013 - $494) primarily related to non-capital tax loss carry forwards.
Dec 31, 2014
Dec 31, 2013
—
(192,829)
(192,829)
494
(183,167)
(182,673)
2014 Annual Report 45
MANAGEMENT’S DISCUSSION AND ANALYSIS
Deferred income tax liabilities of $67,157 (2013 - $74,674) were attributable to Capstone’s Canadian entities while $125,672 (2013 - $108,493)
was attributable to Bristol Water. Deferred income tax liabilities primarily relate to the defined benefit pension plan and differences between the
amortization of intangible and capital assets for tax and accounting purposes.
In 2014, Capstone’s net deferred income tax liability increased by $10,156. The net liability increased primarily due to differences between
accounting and tax depreciation taken in 2014 and the defined benefit pension plan at Bristol Water.
DERIVATIVE FINANCIAL INSTRUMENTS
Capstone has exposure to market, credit and liquidity risks from its use of financial instruments as described in notes 8 (Financial Instruments) and 9
(Financial Risk Management) in the consolidated financial statements as at and for the year ended December 31, 2014. These notes contain further
details on the implicit risks and valuation methodology employed for Capstone’s financial instruments.
To manage the certain financial risks inherent in the business, Capstone enters into derivative contracts to mitigate the economic impact of the
fluctuations in interest rates, foreign exchange rates and gas commodity prices. 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, 2014
Dec 31, 2013
5,047
(17,863)
(12,816)
1,328
(13,840)
(12,512)
The net derivative contract liabilities were $304 higher than as at December 31, 2013. Derivative contract assets increased primarily due to the
purchase of foreign currency options partially offset by foreign currency changes which resulted in a net reduction to the fair values of the contracts.
Capstone acquired these options primarily to hedge the receipt of future foreign distributions and power segment purchase commitments. Derivative
contract liabilities comprise interest rate swaps and the Cardinal gas purchase agreement and embedded derivative. The increase in the liability was
primarily attributable to fair value increase of the interest rate swaps due to a decrease in interest rates since 2013.
Unrealized gains and losses due to changes to the fair value of derivative financial instruments are included in other gains and losses in the statement
of income and in other comprehensive income as follows:
Gas purchase agreement
Interest rate swap contracts
Embedded derivative
Forward gas sale contracts
Foreign currency contracts
Gains on derivatives in net income
Interest rate swap contracts in OCI
Gains on derivatives in comprehensive income
Year ended
Dec 31, 2014
Dec 31, 2013
(4,364)
(4,342)
4,454
3,330
205
(717)
(649)
(1,366)
—
6,764
6,364
—
(1,295)
11,833
982
12,815
The loss on derivatives for 2014 was primarily attributable to unrealized losses on interest rate swap contracts and fair value treatment of the gas
purchase agreement as required by IFRS. These losses were partially offset by unrealized gains on the embedded derivative and forward gas sale
contracts.
On June 4, 2014, Capstone changed its accounting treatment for the long-term gas purchase agreement from accrual accounting to fair value
accounting, as a financial instrument. The change reflects Cardinal's intent to monetize gas purchases in excess of expected production requirements
through to the expiry of the gas purchase agreement in April 2015. This comes in response to a production flexibility arrangement with the OPA,
now IESO, through to the end of the existing PPA and conversion of the plant to cycling under the new NUG agreement. While the excess volume is
minimal compared to production requirements, the sale of the excess amounts impacts Capstone's ability to use accrual accounting for these
contracts under IFRS.
The loss on the gas purchase contract is primarily attributed to falling gas prices, as Capstone pays a fixed price for quantities required under the
agreement. Similarly, the falling gas prices resulted in a gain on the forward gas sale contracts, because Capstone has a fixed sale price.
The loss on interest rate swap contracts was due to the interest rate swap on the Amherstburg debt. The fair value decreased because of a reduction
in long-term interest rates.
46 Capstone Infrastructure Corporation
The gain on the embedded derivative was primarily due to the passage of time because the embedded derivative terminates with the fuel supply
agreement in April 2015. The swap portion of the embedded derivative liability is calculated by discounting Capstone's expected cash flows from
Cardinal's fuel supply agreement; as time passes, fewer net payments are included in the calculation and the liability declines.
FOREIGN EXCHANGE
The foreign exchange losses were primarily due to translation of Capstone’s SEK-denominated shareholder loan receivable with Värmevärden.
Capstone recorded a $4,673 foreign exchange loss in 2014 compared with a $2,924 gain in 2013. The 2014 losses primarily reflect depreciation of
the Swedish krona against the Canadian dollar, thereby decreasing the carrying value of the loans by $3,914 in Canadian dollars, compared with
2013. In addition, the 2014 loss includes $455 primarily related to the purchase of turbines for the wind development projects.
Capstone hedges the interest payments from Värmevärden, but not the outstanding loan receivable.
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
setting and overseeing management's implementation of the risk management policy.
• Internal Audit is responsible for reviewing management's practices to manage risk
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.
• 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.
Board
of Directors
and Audit
Committee
Internal Audit
Senior Management
Business Units
Risk Owners
2014 Annual Report 47
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk Management Processes
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.
• Monitoring and reporting are the processes of assessing the effectiveness of risk management responses.
•
Training and support ensure that personnel tasked with risk management responsibilities have sufficient knowledge and experience to
complete their risk management obligations.
The Corporation's risk management approach is comprehensive. 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.
k
s
i
R
r
o
t
c
a
p
m
I
Insignificant
Minor
Moderate
Major
Catastrophic
1
2
3
4
5
Managing Risk
Likelihood of Risk Occurrence
Rare
Unlikely
Somewhat
Likely
1
2
3
Likely
4
Almost
Certain
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 materially affected the Corporation's financial statements, or that have a reasonable likelihood of affecting them
materially 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
Business development risk is a strategic
risk concerning the ability to source and
complete attractive investment
opportunities that support and grow the
current dividend.
Inability to source and execute attractive growth
opportunities may lead to lower long-term cash
flow as businesses operating under finite term
contracts experience uncertainty about their
longer term cash flow potential.
Current challenges include increasing
competition for existing infrastructure
businesses, and availability of
opportunities that produce sufficient yield.
Management annually reviews and updates strategy with
the Board of Directors to determine target sectors.
Capstone actively monitors target sectors for
opportunities using internal resources and external
advisers.
Capstone owns businesses with organic growth
opportunities.
48 Capstone Infrastructure Corporation
Risk and Description
Impact
Monitoring and Mitigation
Public policy risk is a regulatory risk
where government makes legislative
changes that alter investment
opportunities or alters existing regulations
that Capstone's businesses operate under.
Current challenges include government
policy towards private sector power and
public private partnerships.
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.
Current challenges include a low share
price and the outcome from the PR14
appeal process on Bristol Water's ability to
obtain future financing.
Foreign currency risk is a financial risk
concerning volatility of the Canadian dollar
against currencies from countries where
Capstone entities either operate or make
purchases.
Forecasting Risk is a financial risk
concerning the accuracy of projections for
results from operations due to error or
unpredictable economic, market and
specific business factors.
Current challenges include the outcome of
Bristol Water's PR14 process.
Expense management risk is a financial
risk concerning unexpected non-
recoverable increases in operating and
administrative costs.
Expenses with near-term exposures
include Cardinal's fuel supply and
transportation costs.
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.
Human resources retention risk is an
operational risk concerning the ability to
attract, retain and motivate key staff.
Power
Renewable resources risk is an
operational risk concerning the
dependence of power production on
adequate resources such as wind, sunlight
and water flow.
Favourable legislative changes can create new
opportunities for investment while unfavourable
changes can reduce investment opportunities or
decrease cash flow from existing businesses.
Capstone monitors and maintains an active dialogue with
policy-makers to identify opportunities and respond to
adverse legislative changes to minimize the impact on
the cash flow of Capstone's infrastructure businesses.
Inability to access cost-effective debt or equity
could result in higher interest costs, lower cash
flow or liquidity difficulties.
For an acquisition, this could also prevent
Capstone from realizing a growth opportunity
preventing Capstone from achieving its strategic
objectives.
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.
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.
Volatility of financial forecasts increases liquidity
reserve requirements to pay expenses and
dividends.
Unanticipated increases in costs could result in
lower earnings and cash flow.
Higher taxation results in both lower income and
cash flow available for dividends to shareholders.
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 targets businesses which have inherently
predictable financial results from operations and
requires periodic external review of its financial models
to track and forecast future cash flows.
Capstone maintains adequate levels of liquidity to
manage during periods of uncertainty.
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.
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.
Inability to retain key staff could prevent or delay
Capstone from executing its business strategy,
thereby causing Capstone to fall short of its
financial forecasts.
Capstone mitigates this risk by providing competitive
compensation as well as career and development
opportunities.
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.
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 cash flows and
where PPA requirements are not met, cancellation
of the PPA resulting in lost revenue and
impairment of any capitalized costs for the facility.
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.
2014 Annual Report 49
MANAGEMENT’S DISCUSSION AND ANALYSIS
Risk and Description
Utilities - Water
Price Review Risk is a regulatory risk
concerning an adverse decision by
Competition Markets Authority for Bristol
Water's appeal of Ofwat's final
determination for Bristol Water's business
plan for AMP6.
Impact
Monitoring and Mitigation
An adverse Competition Markets Authority
decision for price or capital expenditure plans
could result in lower revenues, earnings and
ultimately dividends from Bristol Water.
Bristol Water will submit its appeal of Ofwat's final
determination following careful consultation with
advisors.
The Competition Markets Authority will take into
consideration Ofwat's duty to ensure that water
companies are able to finance themselves including
earning a reasonable return on capital.
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.
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.
Bristol Water minimizes its accident and incident rate by
monitoring and following procedures, including adequate
training, to meet the standards and legislation applicable
to the water industry and companies operating in the
UK.
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 2014-2015 are projected to be an immaterial amount.
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 offsite;
•
•
•
•
•
• Workers' and adjacent landowner health and safety issues;
•
•
•
Sound and vibration matters;
Protection of legally designated habitats; and
Bird, bat and other wildlife impacts.
Due to the nature of their operations, the Facilities are not subject to any material contingent environmental 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 CO2 that the Cardinal facility may emit, although the facility is required to report its CO2 emissions
under various federal and provincial regulations. Environmental regulations in Ontario also provide for, among other things, the reporting, allocation
and retirement of NOx emissions. NOx emissions from Cardinal's generating equipment are lower than the levels mandated by legislation.
50 Capstone Infrastructure Corporation
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 it. 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 and or water licenses, which
specify the hydrological conditions during which production may occur.
Wind Farms
Capstone's wind farms, including Erie Shores, Glace Bay, SkyGen, Skyway 8, 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 CO2 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 CO2 reduction commitments.
Bristol Water
Energy use in water treatment and other activities carried out by Bristol Water result in indirect emissions of GHGs. Bristol Water is subject to the UK
Climate Change Levy, although the forecast cost for 2014-2015 is an immaterial amount.
Further information regarding Environmental, Safety and Health Regulations matters is contained in the Corporation's Annual Information Form
(which is available under the Corporation's profile on www.sedar.com).
RELATED PARTY TRANSACTIONS
Capstone's related party transactions in 2014 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
2014, Capstone earned fees of $420, 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 27 (Related Party Transactions) in
the consolidated financial statements for the year ended December 31, 2014.
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 exceed annual budgeted financial results and are
therefore aligned with shareholder interests.
2014 Annual Report
51
MANAGEMENT’S DISCUSSION AND ANALYSIS
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")(1)
Long-term incentive plan ("LTIP")(1)
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.
(1) Effective January 1, 2014 and prior to the year in which a particular STIP or LTIP award relates, the employee may voluntarily choose to have up to 100%
of such awards for that year paid or granted, respectively, in deferred share units ("DSU"). This provides more long-term alignment with shareholders.
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.
2014
2013
($000s, except for per share amounts)
Q4
Q3
Q2
Q1
Q4
Revenue
Net income (loss) (1)
Adjusted EBITDA
AFFO
Common dividends (2)
Preferred dividends
Earnings Per Share – Basic
Earnings Per Share – Diluted
AFFO per share
Dividends declared per common share
116,683
104,085
106,413
114,397
110,291
(7,599)
47,017
19,022
7,261
980
(0.089)
(0.089)
0.196
0.075
532
32,159
5,384
7,252
938
(0.005)
(0.005)
0.056
0.075
2,097
39,492
12,133
7,244
938
0.012
0.012
0.125
0.075
14,437
41,691
19,873
7,220
938
0.140
0.132
0.207
0.075
10,441
37,992
13,930
7,208
938
0.099
0.096
0.145
0.075
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
(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.
52
Capstone Infrastructure Corporation
FOURTH QUARTER 2014 HIGHLIGHTS
Revenue
Operating expenses
Administrative expenses
Project development costs
Asset impairment charges
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, 2014
Dec 31, 2013
116,683
(53,427)
(1,258)
(387)
(30,592)
1,513
1,276
303
(2,916)
(1,694)
29,501
(13,232)
(17,988)
(2,616)
(4,335)
(757)
3,932
3,175
(1,160)
(7,599)
6,439
(1,160)
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
Revenue increased by $6,392, or 6%, reflecting an $8,246 increase in revenue from Bristol Water partially offset by a $1,854 decrease for the
power segment. Bristol Water's increase was attributable to foreign exchange and higher regulated water tariffs. Lower revenue for the power
segment was due to a $3,026 decrease for Cardinal, Whitecourt and Amherstburg due to production, partially offset by a $1,172 increase due to
higher production at the operating wind and hydro facilities.
Expenses decreased by $5,079, or 8%.
• Operating expenses decreased by $1,458, primarily due to $5,938 of lower fuel and transportation costs at Cardinal, partially offset by an
increase of $4,228 at Bristol Water mainly attributable to foreign exchange appreciation.
•
•
Administrative expenses decreased by $1,911 primarily due to lower LTIP expenses resulting from the fourth quarter share price decline.
Project development costs decreased by $1,710, primarily reflecting costs associated with the acquisition of ReD in 2013.
Asset impairment charges were due on the Erie Shores and Confederation Power capital assets, and the Chapais loan receivable.
Equity accounted income (loss) increased by $968, or 178%, composed of increases of $772 at Glen Dhu and $191 at Värmevärden.
Interest income increased by $254, or 25%, due to accrued interest on the loan receivable from BFN.
Other gains and (losses) decreased by $3,454, or 642%, primarily due to $1,744 attributable to spot price being lower than the contractual price in
Cardinal's gas purchase agreement. This difference is charged to other gains and losses under IFRS. The remaining difference is due to losses on
disposal of capital assets at Cardinal and the hydro facilities.
Foreign exchange gain (loss) was $2,903 lower in 2014 due to the impact of the depreciation of the Swedish krona on the loan receivable.
Interest expense decreased by $626, or 5%, primarily due to amortization of the outstanding balance of debt for the power segment.
Income taxes in 2014 comprised a $6,548 recovery (2013 - $4,050 expense) in Canada partially offset by $3,373 (2013 - $2,602) of tax expense
for Bristol Water. In 2014, Canada includes a $7,859 deferred income tax recovery for the write down of capital assets. In 2013, Canada reflects
$1,494 of tax and penalties for the CRCE shortfall on the flow-through shares. The remainder relates to differences between depreciation of capital
assets for accounting and tax partially offset by recognition of deferred tax assets for loss carry forwards. Bristol Water's tax expense comprises
$2,334 (2013 - $2,572) for deferred taxes and $1,039 (2013 - $28) for current taxes. Bristol Water's deferred tax expense primarily relates to the
defined benefit pension plan and differences between the amortization of intangible and capital assets for tax and accounting purposes.
2014 Annual Report 53
MANAGEMENT’S DISCUSSION AND ANALYSIS
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, 2014. These changes include:
•
•
•
•
Amendments to IAS 32, Financial Instruments: Presentation - on asset and liability offsetting;
Amendments to IAS 36, Impairment of Assets- on recoverable amount disclosures;
Amendments to IAS 39, Financial Instruments: Recognition and Measurement - on novation of derivatives; and
IFRIC 21, Levies.
Other standards and amendments that became effective January 1, 2014 are not material to Capstone. Refer to note 2 (Summary of Significant
Accounting Policies) to the December 31, 2014 annual consolidated financial statements for details of the nature and impact of these changes to
Capstone financial statements.
Future Accounting Changes
The IASB has announced that a number of new standards and amendments will be effective for future reporting periods; these have not yet been
adopted by the Corporation. None of them are expected to have a significant effect on the consolidated financial statements of Capstone, except
as follows:
Title of the New IFRS (1)
IFRS 15, Revenue from Contracts with Customers
Effective: Jan 1, 2017
IFRS 9, Financial Instruments
Effective: Jan 1, 2018
Impact to Capstone
Capstone's assessment of the impact of this standard is ongoing.
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, 2014 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, 2014 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 judgments 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.
54
Capstone Infrastructure Corporation
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 2014, Capstone completed its transition from the original 1992 version of Committee of Sponsoring Organizations (COSO) internal control
framework to the updated 2013 version. Although the core definition of internal control was largely unchanged in the 2013 version of COSO the
new framework had several important changes, including:
•
•
•
•
Articulating 17 core principles supporting the five components of internal control set out in the original version of COSO;
Clarifying the role of objective setting in internal control;
Reflecting the increased relevance of technology; and
Enhancing discussion of governance concepts and consideration of anti-fraud exceptions.
The CEO and CFO have concluded that Capstone's disclosure controls and procedures were effective as at December 31, 2014 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, 2014, Capstone's management had assessed the effectiveness of Capstone's internal control over financial reporting using the
criteria set forth by COSO of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment,
management has determined that Capstone's internal control over financial reporting was effective as at December 31, 2014.
2014 Annual Report 55
Management’s Responsibility
for Financial Reporting
The consolidated financial statements and other financial information contained in this annual report have been prepared by management.
It is management's responsibility to ensure that sound judgment, appropriate accounting policies and reasonable estimates have been used
to prepare this information and that the consolidated financial statements are in accordance with International Financial Reporting
Standards.
Management is also responsible for designing, maintaining and testing a system of internal controls over the financial reporting processes.
Internal controls have been designed to provide reasonable assurance that the financial records are reliable, accurate and form a proper
basis for the preparation of the consolidated financial statements. As of December 31, 2014, management reviewed and tested the internal
controls over financial reporting and concluded that they were effective to provide reasonable assurance over the consolidated financial
statements.
The Audit Committee of the Board of Directors, consisting entirely of independent directors, is responsible for reviewing the consolidated
financial statements with management and the external auditors and reporting to the Board of Directors. The Audit Committee is
responsible for retaining the services of the independent auditor and for renewing the auditor's mandate, which is subject to Board of
Directors' review and shareholders' approval.
The independent auditor, PricewaterhouseCoopers LLP, is responsible for conducting an examination in accordance with Canadian
generally accepted auditing standards to express an opinion on whether the consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards. The report of PricewaterhouseCoopers LLP, which outlines the scope of its
examination and its opinion on the consolidated financial statements, appears on the following page.
MICHAEL BERNSTEIN
MICHAEL SMERDON
President and Chief Executive Offi cer
Executive Vice President and Chief Financial Offi cer
Toronto, Canada
March 4, 2015
56
Capstone Infrastructure Corporation
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, 2014 and December 31, 2013 and the consolidated
statements of changes in shareholders' equity, income, comprehensive income and cash flows for the years ended December 31, 2014 and
December 31, 2013, 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, 2014 and December 31, 2013 and their financial performance and their cash flows for
the years ended December 31, 2014 and December 31, 2013 in accordance with International Financial Reporting Standards.
CHARTERED PROFESSIONAL ACCOUNTANTS, LICENSED PUBLIC ACCOUNTANTS
Toronto, Canada
March 4, 2015
2014 Annual Report 57
Consolidated
Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at
Current assets
Cash and cash equivalents
Restricted cash
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
58
Capstone Infrastructure Corporation
Notes
Dec 31, 2014 Dec 31, 2013
(note 3)
58,842
65,878
94,555
9,600
1,448
4,279
45,768
29,547
87,430
9,640
1,310
25
234,602
173,720
45,244
768
29,056
39,578
1,303
39,051
1,418,187
1,356,682
151,361
342,012
78,750
—
23,983
345,272
46,241
494
2,299,980
2,026,324
132,445
6,620
693
25,150
164,908
11,243
—
192,829
21,600
3,407
1,194,850
4,364
1,593,201
516,706
190,073
116,852
2,219
609
18,374
138,054
11,621
1,634
183,167
15,589
3,761
1,001,042
3,293
1,358,161
529,550
138,613
2,299,980
2,026,324
4
4
5
6
7
8a
7
8a
10
11
12
13
14
15a
16a
8a
17
18
8a
13
15a
16b
17
18
19
21
26
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Balance, Dec 31, 2012
731,204
9,284
(809)
(320,831)
Equity attributable to shareholders of Capstone
Notes
Share
Capital (1)
Other Equity
Items (2)
AOCI (3)
Deficit
—
—
20a
75,453
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
20a
20a, f
2,635
20f
21
21
3
20a
20e
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
Other comprehensive income (loss)
Net income for the period
Common shares issued
Release of share option reserve
Dividends declared to common
shareholders of Capstone
Dividends declared to preferred
shareholders of Capstone (7)
Dividends declared to NCI
Disposal of partial interest in Chi-
Wiikwekdong LP
Contributions from NCI
Balance, Dec 31, 2014
—
—
100
—
—
—
—
—
—
39
—
—
—
—
85
62
(3)
—
—
—
—
—
17,822
—
—
—
—
—
—
—
—
—
—
NCI (4)
91,610
12,690
25,848
—
—
—
—
—
—
Total
Equity
510,458
31,954
67,210
75,453
85
62
97
(21,698)
(3,923)
(7,773)
3,405
12,833
—
—
—
(7,773)
3,405
12,833
1,442
41,362
—
—
—
—
(24,333)
(3,923)
9,467
—
144
(28,977)
(3,923)
809,392
9,428
17,013
(306,283)
138,613
668,163
2,981
11,223
14,019
24,080
28,223
33,547
—
—
—
(144)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
39
—
(26,266)
(3,923)
(9,137)
—
(9,137)
(6,365)
—
7,894
14,604
1,529
14,604
20a, f
2,711
20f
21
21
21
—
—
—
—
812,142
9,284
19,994
(324,714)
190,073
706,779
(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 21.
(5) Shares issued are net of transaction costs (2013 - $224).
(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 (2013 - $173).
See accompanying notes to these consolidated financial statements
2014 Annual Report 59
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
($000s, except per share amounts)
Revenue
Operating expenses
Administrative expenses
Project development costs
Asset impairment charges
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, 2014 Dec 31, 2013
24
24
24
11
10a
8b
14
25
8b
11
13
15d
21
22
441,578
389,503
(210,520)
(204,534)
(13,266)
(2,664)
(30,592)
(1,127)
4,234
2,132
(7,669)
(4,673)
(10,369)
(5,530)
—
(2,638)
4,096
1,817
9,789
2,924
177,433
185,058
(54,145)
(67,912)
(11,854)
43,522
(3,981)
(5,994)
(9,975)
33,547
9,467
24,080
33,547
0.057
0.057
(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
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 2014 – $120 recovery, 2013 – $325 expense, respectively)
Total of items that may be reclassified subsequently to net income
Actuarial gains (losses) recognized in respect of retirement benefit obligations
(net of tax in 2014 – $5,611 expense, 2013 – $693 recovery, respectively)
- will not be reclassified to net income
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
60 Capstone Infrastructure Corporation
For the year ended
Notes
Dec 31, 2014 Dec 31, 2013
10a
14
21
8,083
(1,438)
(866)
5,779
22,444
28,223
33,547
61,770
23,671
38,099
61,770
27,397
1,183
490
29,070
2,884
31,954
67,210
99,164
60,626
38,538
99,164
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
Notes
Dec 31, 2014
Dec 31, 2013
Operating activities:
Net income
Deferred income tax expense (recovery)
Depreciation and amortization
Asset impairment charges
Other gains and losses (net)
Amortization of deferred financing costs and non-cash financing costs
Equity accounted (income) loss
Unrealized foreign exchange (gain) loss on loan receivable
Change in non-cash working capital
Total cash flows from operating activities
Investing activities:
Distributions from equity accounted investments
Repayments of loans receivable
Investment in capital assets
Investment in projects under development
Change in restricted cash
Proceeds from loans receivable
Purchase of foreign currency contracts
Cash acquired on business acquisition
Total cash flows used in investing activities
Financing activities:
Proceeds from issuance of long-term debt
Contributions from non-controlling interest
Repayment of long-term debt and finance lease obligations
Dividends paid to common and preferred shareholders
Dividends paid to non-controlling interests
Transaction costs on debt issuance
Settlement of interest rate swaps
Transaction costs on issuance of common shares
Total cash flows from (used in) financing activities
Effect of exchange rate changes on cash and cash equivalents
Increase (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
11f
10a
7
29
10a
11b
12b
7
3
21
21
33,547
5,994
79,766
30,592
3,907
6,687
1,127
3,914
(9,816)
155,718
7,430
1,220
(129,813)
(127,624)
(36,091)
(11,500)
(1,047)
—
67,210
6,206
62,167
—
(9,789)
9,020
2,638
(2,890)
1,114
135,676
4,005
2,514
(146,279)
(4,648)
5,583
—
(896)
10,464
(297,425)
(129,257)
305,557
13,918
(121,418)
(30,015)
(9,137)
(4,392)
—
—
154,513
268
13,074
45,768
58,842
82,196
3,405
(58,681)
(25,446)
(7,773)
(1,811)
(2,407)
(224)
(10,741)
491
(3,831)
49,599
45,768
51,518
4,654
35,177
3,195
2014 Annual Report
61
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. As at December 31,
2014, Capstone has investments in utilities businesses in Europe and owns, operates and develops thermal and renewable power generation facilities
in Canada with an approximate net installed capacity of 450 MW.
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 4, 2015.
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 8).
Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Consolidation
These consolidated financial statements are primarily made up of the assets, liabilities and results of operations of the Corporation's subsidiaries.
Subsidiaries are all entities over which Capstone has control. Capstone controls an entity when it is exposed to, or has rights to, variable returns from
its involvement with the entity and has the ability to affect those returns through its power over the entity.
INSIDE THIS SECTION
62 Corporate Information
62
Summary of Signifi cant
Accounting Policies
Acquisition and Disposition
Cash and Cash Equivalents and
Restricted Cash
Trade and Other Receivables
Other Assets
Loans Receivable
Financial Instruments
Financial Risk Management
71
72
72
73
73
74
77
80
82
84
84
85
88
89
90
90
96
Equity Accounted Investments
Capital Assets
Projects Under Development
Intangibles
Retirement Benefi t Plans
Income Taxes
Accounts Payable and
Other Liabilities
Finance Lease Obligations
Long-term Debt
Liability for Asset
Retirement Obligation
Shareholders' Equity
Non-controlling Interests
97
99
100 Earnings Per Share
101 Share-based Compensation
102 Expenses – Analysis by Nature
102 Other Gains and Losses
102 Commitments and Contingencies
104 Related Party Transactions
104 Segmented Information
105 Non-cash Working Capital
62
Capstone Infrastructure Corporation
The following table lists the significant subsidiaries of the Corporation which are accounted for on a consolidated basis:
Ownership at December 31,
Name of entity
Capstone Power Corp. ("CPC")
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. ("Confederation Power")
Glace Bay Lingan Wind Power Ltd. ("Glace Bay")
Sky Generation L.P. ("SkyGen"), formerly Sky Generation Inc.
SP Amherst Wind Power LP ("Amherst")
Capstone Power Development Canada Corp.
Parc Éolien Saint-Philémon S.E.C. ("Saint-Philémon")
Chi-Wiikwedong LP ("Goulais")
Principal place of
business and
country of
incorporation
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
2014
100%
100%
100%
100%
100%
100%
100%
100%
100%
51%
100%
51%
51%
Chi-Wiikwedong Holdings LP
Canada
100%
2013
100%
100%
100%
100%
100%
100%
100%
100%
100%
51%
100%
51%
Nil (1)
Nil (1)
Principal activity
Power
holding company
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Development
Power generation
under construction
Power generation
under construction
Power generation
under construction
Bristol Water plc and group companies (collectively “Bristol Water”) (2)
United Kingdom
50%
50%
Regulated water utility
(1) On August 14, 2014, Capstone sold a 49% interest in the Goulais wind development project. Refer to note 3 for details.
(2) Capstone has control because of its ability to determine the majority of the board representation and substantive contractual rights providing the power
to influence returns.
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.
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.
The following table lists the significant associates of the Corporation, which are accounted for on an equity accounting basis:
Name of entity
Principal place of business
and country of incorporation
Sefyr Värme AB and Värmevärden AB ("Värmevärden")
Glen Dhu Wind Energy Limited Partnership ("Glen Dhu")
Sweden
Canada
Ownership at December 31,
2014
33.3%
49%
2013
33.3%
49%
Principal activity
District heating
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.
2014 Annual Report 63
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 entity that is a foreign operation 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, 2013
Dec 31, 2014
Swedish Krona (SEK)
UK Pound Sterling (£)
Average
0.1581
0.1605
Spot
0.1655
0.1483
Average
1.6113
1.8192
Spot
1.7627
1.8071
The financial statements of entities that have a functional currency different from that of the Corporation are translated into Canadian dollars as
follows: assets and liabilities – at closing rate at the date of the statement of financial position, and income and expenses – at the average rate of the
period (as this is considered a reasonable approximation of the actual rates prevailing at the transaction dates). All resulting changes are recognized
in other comprehensive income as cumulative translation adjustments.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of transactions. Foreign
exchange gains and losses resulting from the settlement of foreign currency transactions and from the translation at exchange rates of monetary
assets and liabilities denominated in currencies other than an entity's functional currency are recognized in the consolidated statement of income
in “foreign exchange gain (loss)”.
Cash and Cash Equivalents
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.
Loans Receivable
The Corporation has interest-bearing financial assets that consist of a series of loans receivable. 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 to net 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.
64 Capstone Infrastructure Corporation
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
10 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
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.
2014 Annual Report 65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets
Identifiable intangible assets
The Corporation separately identifies acquired intangible assets, including computer software, 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 15 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. 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, projects under development 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 2014 and 2013, all goodwill
and indefinite life assets pertained to the utilities – water segment.
Provisions
Provisions are recognized when the Corporation has a present legal or constructive obligation as a result of past events, it is more likely than not that
an outflow of resources will be required to settle the obligation, and the amount can be reliably estimated. Provisions are measured using
management's best estimate of the expenditure required to settle the obligation at the end of the reporting period, and are discounted to present
value where the effect is material. The Corporation performs evaluations to identify onerous contracts and, where applicable, records provisions for
such contracts.
Retirement Benefit Plans
The Corporation operates both defined contribution and defined benefit pension plans through its subsidiaries. The employees of Bristol Water and
Cardinal participate in a defined contribution plan. The defined benefit plan is provided through Bristol Water's membership in the Water Companies'
Pension Scheme (“WCPS”) via a separate section.
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 occurs the gain or loss on settlement is recognized in the consolidated
statement of income.
66 Capstone Infrastructure Corporation
Asset Retirement Obligations
The Corporation recognizes a provision for the future retirement obligations associated with its operating plants. These obligations are initially
measured at the present 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.
Exchangeable Securities
The Class B exchangeable units issued by MPT LTC Holding LP meet the criteria to be presented as equity, as set out in IAS 32.
Preferred Shares
The Corporation classifies its series A preferred shares as equity for reporting purposes given that the preferred shares may be converted into a fixed
number of the Corporation's own equity instruments and there is no settlement required at a future date. Incremental costs directly attributable to
the issuance of shares are recognized as a reduction in equity.
The irredeemable preferred shares of Bristol Water have been classified as debt in accordance with IAS 39.
Dividends
Dividends on common and series A preferred shares are recognized in the Corporation's consolidated financial statements in the period in which the
dividends are 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 received from its equity accounted investments in revenue 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 23 (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 23 (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.
2014 Annual Report 67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 or in other comprehensive income, in which case the income tax is also recognized directly in equity or in other comprehensive
income.
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.
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 plus
transaction costs in the case of financial instruments measured at amortized cost. Transaction costs that are directly attributable to the acquisition or
issue of financial instruments classified as held-for-trading are expensed as incurred. 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
Financial assets and liabilities at fair value through profit and loss
Loans and receivables
Other liabilities
Significant Categories
Measurement
• Cash and cash equivalents
• Restricted cash
• Gas purchase agreement
• 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
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.
68 Capstone Infrastructure Corporation
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, 2014 and 2013, the Corporation's derivatives include interest rate swaps, gas swap, as
well as gas forward sale and purchase contracts 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 that 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
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 8). The mitigation option expired on November 1, 2014.
Impairment of Financial Assets
At each reporting date, the Corporation assesses whether there is objective evidence that financial assets carried at amortized cost 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 an additional GAAP financial measure defined as earnings (loss) before financing costs, income tax expense, depreciation and amortization.
EBITDA includes earnings (loss) related to the non-controlling interest (“NCI”), impairment charges, interest income and net pension interest. EBITDA
represents Capstone’s 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, 2014. These changes
were required due to changes in IFRS and were made in accordance with the applicable transitional provisions; they are summarized as follows:
Amendment to IAS 32, Financial Instruments: Presentation - on asset and liability offsetting, clarifies some of the requirements for offsetting
financial assets and liabilities on the balance sheet. This amendment did not result in any measurement or disclosure changes for Capstone.
Amendment to IAS 36, Impairment of Assets - on recoverable amount disclosures, addresses the disclosure of information about the recoverable
amount of impaired assets if that amount is based on fair value less costs of disposal. Capstone's disclosure reflects this amendment.
Amendment to IAS 39, Financial Instruments: Recognition and Measurement - on novation of derivatives provides relief from discontinuing hedge
accounting when novation of a hedging instrument to a central counterparty meets specified criteria. This amendment did not result in any
measurement or disclosure changes for Capstone because no contracts were novated during the year.
IFRIC 21, Levies, is an interpretation of IAS 37, Provisions, contingent liabilities and contingent assets, which sets out criteria for the recognition of a
liability. The interpretation defines the obligating event that gives rise to the payment of a levy and when a liability should be recognized. This
interpretation did not result in any measurement or disclosure changes for Capstone.
Other standards and amendments that are effective January 1, 2014 are not material to Capstone.
2014 Annual Report 69
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Future Accounting Changes
The IASB has announced new standards and amendments that will be effective for future reporting periods that have not yet been adopted by the
Corporation. Capstone's assessment of the impact of the material standards and amendments are ongoing. The material standards are as follows:
Title of the New IFRS
Nature of the Impending Change to Capstone
IFRS 15, Revenue from
Contracts with
Customers
Effective: Jan 1, 2017
Replaces IAS 11, Construction contracts and IAS 18, Revenue. IFRS 15 recognizes revenue by applying the following steps:
Step 1: Identify the contract(s) with a customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations in the contract
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
In addition, IFRS 15 requires enhanced disclosure that will detail the nature, amount, timing and uncertainty of revenue and cash
flows arising from the entity’s contracts with customers.
IFRS 9, Financial
Instruments
Effective: Jan 1, 2018
Replaces most of the guidance in IAS 39. IFRS 9 retains the mixed measurement model and establishes three primary
measurement categories for financial assets including amortized cost, fair value through OCI and fair value through profit or loss.
In addition, there is now a new expected credit losses model that replaces the previous incurred loss impairment model.
For equity instruments, IFRS 9 now requires measurement at fair value through profit or loss with the irrevocable option at
inception to present changes in fair value in OCI.
For financial liabilities, changes now require the recognition of changes in own credit risk in OCI, for liabilities designated at fair
value, through profit or loss.
In addition, hedging requirements were relaxed by replacing the bright line effectiveness test. IFRS 9 requires companies to set
an economic relationship between the hedged item and hedging instrument (the hedged ratio), which must be the same as the
one management uses for risk management purposes. Contemporaneous documentation is still required similar to IAS 39.
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
• Estimates are based on assumptions that are sensitive to change,
which may have a significant impact on the valuations performed.
• Impairment reviews of the carrying value of capital and other long-lived
assets along with the asset retirement obligations require management
to estimate fair value based on future cash flows, discount rates and
business performance.
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.
Critical Judgment
• Initial fair value of net assets
• Estimated useful lives and
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 discount
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.
rate
Deferred income taxes
• The determination of the deferred income tax balances of the
• Timing of reversal of temporary
Estimates in the determination of
deferred income taxes affect asset and
liability balances.
Corporation 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.
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
instruments where market observable prices exist, discounted cash
flow analysis, option pricing models and other valuation techniques
commonly used by market participants.
• 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.
differences
• Tax rates
• Current and future taxable
income
• Interest rate
• Natural gas rate
• Direct customer rate
70 Capstone Infrastructure Corporation
Area of Significance
Accounts receivable
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.
Critical Estimate
• The probability of failing to recover accounts receivable is determined
by 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 behaviour. To the extent that the failure to
recover debts in arrears alters by 5%, the provision for impairment
would increase or decrease by $542.
Critical Judgment
• Probability of a failure to 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
NOTE 3. ACQUISITION AND DISPOSITION
Acquisition of Renewable Energy Developers
(A)
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 and $0.001 dollar
in cash in exchange for each share of ReD. Capstone issued 19,699 common shares to acquire ReD.
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 preliminary allocation of total consideration was allocated to net assets acquired and adjusted to the final allocation as follows:
Recognized amounts of identifiable assets acquired and liabilities assumed as at October 1, 2013
Original
Adjustment
Revised (2)
Working capital
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 consideration (1)
437
130,029
12,683
52,041
27,599
(115,825)
(2,777)
(15,548)
88,639
(12,833)
75,806
(1,709)
—
2,309
—
—
—
—
(600)
—
—
—
(1,272)
130,029
14,992
52,041
27,599
(115,825)
(2,777)
(16,148)
88,639
(12,833)
75,806
(1) Total consideration included $75,645 of share capital, $85 of warrants and share options and $76 of cash.
(2) The statement of financial position as at December 31, 2013 has been restated.
(B)
Partial Sale of Interest in Goulais Wind Farm
On August 14, 2014, Capstone sold a 49% interest in Chi-Wiikwedong LP, which holds the Goulais development project, to a subsidiary of
Batchewana First Nation of Ojibways ("BFN"). As part of the sale, Capstone funded an $11,500 loan to BFN that was then used by BFN to contribute
its share of equity to the construction of the project. Following this sale, Capstone retained a 51% interest in Chi-Wiikwedong LP and continues to
consolidate based on retention of control. Under IFRS the sale has been treated as an equity transaction, resulting in the transfer of a portion of
Capstone's deficit to non-controlling interests as follows:
Non-controlling interest adjustment for partial sale of interest in Chi-Wiikwedong LP (1)
Transaction costs
Release of deferred income taxes
(1) Represents a 49% interest in the carrying value of the power purchase agreement.
Deficit
(5,942)
(423)
—
(6,365)
NCI
5,942
—
1,952
7,894
2014 Annual Report
71
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Construction escrow
Debt service and maintenance reserves
Cash on deposit in support of letters of credit
Cash on deposit
Restricted cash
Unrestricted cash and cash equivalents
Dec 31, 2014
Dec 31, 2013
47,091
18,714
—
73
65,878
58,842
124,720
—
23,231
6,243
73
29,547
45,768
75,315
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. In 2014, Capstone credit backed various letters of credit
versus cash funding in 2013; refer to note 18 for further details.
NOTE 5. TRADE AND OTHER RECEIVABLES
Power
Utilities – water
Corporate (1)
Total trade and other receivables
Dec 31, 2014
Dec 31, 2013
35,542
56,823
2,190
94,555
33,760
53,373
297
87,430
(1) Accounts receivable as at December 31, 2013 were restated for purchase equation adjustments further described in note 3 (a).
Substantially all of the power segment accounts receivable are with government authorities. Refer to note 9 (b) and 9 (c) for further detail of credit
risk and economic dependence.
The utilities – water segment accounts receivable comprised:
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, 2014
Dec 31, 2013
51,053
(28,478)
22,575
5,166
29,082
56,823
46,795
(25,775)
21,020
7,464
24,889
53,373
Dec 31, 2014
Dec 31, 2013
4,996
5,948
11,631
22,575
4,756
5,263
11,001
21,020
As at December 31, 2014, based on a review of collection rates, $28,478 of trade receivables in the utilities – water segment were considered
impaired and have been provided for (December 31, 2013 – $25,775).
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
2014
(25,775)
(6,629)
4,562
(636)
2013
(21,907)
(5,954)
4,212
(2,126)
(28,478)
(25,775)
Charges for impaired receivables have been included in the consolidated statement of income as part of operating expenses.
72
Capstone Infrastructure Corporation
The other classes within trade and other receivables do not contain impaired assets.
In accordance with IAS 39, Bristol Water has created a general provision that cannot be specifically attributed to the receivables that are 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 6. OTHER ASSETS
Prepaid expenses
Inventory of spare parts and consumable supplies, net (1)
Assets held for sale (2)
Dec 31, 2014
Dec 31, 2013
4,826
4,074
700
9,600
5,855
3,785
—
9,640
(1)
(2)
Inventory as at December 31, 2014 is net of a $366 provision for obsolescence (December 31, 2013 - $370).
Includes amounts transferred from capital assets of $700, refer to note 11 (a) and (e), net of $278 for the corresponding asset retirement obligation,
refer to note 19.
The cost of inventories recognized in operating expenses for the year ended December 31, 2014 was $6,615 (December 31, 2013 – $6,419).
NOTE 7. LOANS RECEIVABLE
The following table summarizes the loans receivable from Värmevärden, BFN, MLTCLP and Chapais:
Värmevärden
BFN
Macquarie Long Term Care LP ("MLTCLP")
Chapais Électrique Limitée ("Chapais"):
Tranche A
Tranche B
Less: current portion
Total long-term loans receivable
Maturity
Interest Rate
Dec 31, 2014
Dec 31, 2013
2021
2034
2015
2015
n/a
7.9%
9.0%
Nil
10.8%
n/a
33,744
11,500
89
1,359
—
46,692
(1,448)
45,244
37,658
—
89
2,579
562
40,888
(1,310)
39,578
Accrued interest on the loans receivable in the amount of $379 for the year ended December 31, 2014 is included in accounts receivable
(December 31, 2013 – $113).
The estimated fair values of the loans receivable as at December 31, 2014 and 2013 approximate the carrying values.
Värmevärden
The following table summarizes the change in the loan receivable from Värmevärden during the years ended:
Opening balance
Unrealized foreign exchange gain (loss)
Ending balance
December 31, 2014
December 31, 2013
SEK
227,541
—
227,541
$
37,658
(3,914)
33,744
SEK
227,541
—
227,541
$
34,768
2,890
37,658
The shareholder loan receivable from Värmevärden bears a fixed annual interest rate of 7.944%.
BFN
On September 26, 2014, Capstone received an $11,500 promissory note from a subsidiary of the BFN to fund their equity commitment to Goulais.
The promissory note will be repaid over the 20-year term with fixed payments commencing on the commercial operation date bearing a fixed annual
interest rate of 9%. BFN has the option to repay the promissory note anytime before maturity. Refer to note 3(b) for detail.
2014 Annual Report 73
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Chapais
As at December 31, 2014, Capstone expects Tranche A of the loan for $1,359 to be repaid in 2015.
For the year ended December 31, 2014, Capstone's statement of income includes an asset impairment charge of $562 related to Tranche B of the
loan receivable, which is no longer considered collectible. Refer to note 11 (f) for more information.
NOTE 8. FINANCIAL INSTRUMENTS
(A)
Fair Value of Financial Instruments
Financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, loans receivable, accounts payable and other
liabilities, finance lease obligations, long-term debt and derivative contract assets and liabilities. In addition, the Corporation has included the
embedded derivative on its gas purchase agreement in the derivative contract assets and liabilities.
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.
As at December 31, 2014, the carrying values of cash and cash equivalents and restricted cash are considered to approximate their fair values due to
their short-term nature, which is consistent with the prior year.
Derivative contract assets and liabilities, including hedging instruments.
Interest rate swaps
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 $82,618. The Corporation pays a fixed rate of 4.193% 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-month 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, 2014.
Bristol Water has a swap with a notional amount of £50,000 for a bank loan drawn in December 2014 by Bristol Water. The swap exchanges
LIBOR rates on a three-month basis for a fixed rate of 1.504% and expires December 3, 2019. 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, 2014.
Gas swap, forward gas sales and purchases contracts
Capstone had several derivative contracts to manage its natural gas price exposures as follows:
•
•
The gas swap contracts effectively fixed the price for a portion of the revenue derived from the sales of excess gas. The contract mitigated
exposure to natural gas price fluctuations for sales of excess natural gas.
Forward gas sales and purchase contracts are required to manage Cardinal's remaining obligations and expected production requirements in
2015, taking into account the planned operating flexibility for the duration of the existing gas purchase agreement.
Gas purchase agreement
On June 4, 2014, Capstone transferred the gas purchase agreement from its previous classification, of own use, to a derivative (level 3 of the
financial instrument fair value hierarchy). The transfer reflects Cardinal's intent to monetize the gas purchases in excess of expected production
requirements. This was required to manage obligations under the gas purchase agreement upon expiry of the fuel transportation agreement in
November of 2014. Capstone has chosen to immediately recognize in net income the initial day-one gain on transfer to Level 3 .
Embedded derivative
The Corporation has determined that its gas purchase agreement contains embedded derivative features, which include mitigation options and
electricity indexing features requiring separation and measurement at fair value. The mitigation option expired on November 1, 2014.
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, 2014, are as follows:
Expiry
2015
2016
2017
2018
74
Capstone Infrastructure Corporation
Swedish Krona (SEK)
UK Pound Sterling (£)
Notional Amount
Conversion Rate
Notional Amount
Conversion Rate
21,800
9,000
9,100
15,000
6,500
61,400
6.5165
6.4000
6.5165
6.4000
6.4000
£4,800
£5,200
1.8000
1.8000
£10,000
As at December 31, 2014, Capstone has foreign exchange contracts to mitigate Cardinal's US dollar denominated purchase commitments as follows:
Expiry
2015
US dollars (USD)
Notional Amount
Conversion Rate
11,000
1.0989
The Corporation has determined the fair values of derivative financial instruments as follows:
Interest rate swap
• The interest rate swap contract's fair value fluctuates with changes in market interest rates.
Interest rate swaps
(Cash flow hedges)
Gas swap, forward
gas sale and purchase
contracts
Gas purchase
agreement
• 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.
• Fair value of the gas swap, forward gas sale and purchase contracts fluctuate with changes in market price of natural gas.
• A discounted cash flow analysis based on the forward gas price curve was used to determine their fair value.
• The gas purchase contract's fair value primarily fluctuates with changes in market gas prices and DCR price.
• A discounted cash flow analysis based on the forward gas prices curve was used to determine their fair value.
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
• 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 gas purchase agreement and embedded derivatives, the contracts have been
classified as Level 3 financial instruments.
The fair value of the gas purchase agreement was determined by using a discounted cash flow analysis that relies on observable and unobservable
inputs, including forward gas prices, foreign exchange rates, estimates on gas volume usage, fixed and variable gas transportation and a forecasted
DCR curve based on historical averages.
The fair values of the embedded derivatives were determined by using valuation models that rely on 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, 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.
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 7 for further details.
Other liabilities
The Corporation's accounts payable and accrued liabilities are short-term liabilities with carrying values that approximate their fair values as at
December 31, 2014.
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 index 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 debentures outstanding as at year end. See note 18 for further details.
Irredeemable preferred shares for Bristol Water plc (shown as debt within these financial statements) are listed on the London Stock Exchange.
Their fair value is determined by the quoted market price.
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.
2014 Annual Report 75
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The following table illustrates the classification of the Corporation's financial instruments, which are consistent for both years presented that have
been recorded at fair value as at December 31, 2014, within the fair value hierarchy:
Cash and cash equivalents
Restricted cash
Recurring measurements:
Derivative contract assets:
Foreign currency contracts
Forward gas sale contract
Embedded derivative asset
Less: current portion
Derivative contract liabilities:
Interest rate swap contract
Interest rate swap contracts for
hedging
Gas purchase agreements
Embedded derivative liability
Less: current portion
Fair value continuity for Level 3 inputs
Level 1
Quoted prices in active
markets for identical assets
Level 2
Significant other
observable inputs
Level 3
Significant
unobservable inputs
58,842
65,878
—
—
—
—
—
—
—
—
—
—
—
—
—
1,717
3,330
—
(4,279)
768
10,507
2,824
—
—
(6,620)
6,711
—
—
—
—
—
—
—
—
—
4,364
168
—
4,532
Opening balance, January 1,
Day-one gain from transfer of gas purchase agreement included in other gains and (losses) in net income
Change in value of gas purchase agreement included in other gains and (losses) in net income
Change in value of embedded derivative included in other gains and (losses) in net income
Closing balance, December 31,
(B)
Income and Expenses From Financial Instruments
Financial instruments designated as held-for-trading:
Interest income on cash and cash equivalents, restricted cash (2)
Financial instruments classified as held-for-trading (Refer to note 25):
Unrealized loss on foreign currency contracts
Unrealized gain (loss) on interest rate swap contract
Unrealized loss on gas purchase agreement, gas swap, and forward gas sale and purchase agreements
Unrealized loss on embedded derivative asset
Unrealized gain on embedded derivative liability
Realized gain on derivative financial instruments (Refer to note 25)
Loans and receivables(1):
Interest income from loans receivable (2)
Other liabilities:
Interest expense on finance lease obligations
Interest expense on long-term debt(3)
Dec 31, 2014
Dec 31, 2013
58,842
65,878
45,768
29,547
1,717
3,330
—
(4,279)
768
10,507
2,824
4,364
168
(6,620)
11,243
2014
(4,622)
2,986
(7,350)
4,454
(4,532)
450
—
878
(25)
1,303
6,166
2,174
—
5,500
(2,219)
11,621
2013
(10,986)
—
—
6,364
(4,622)
Dec 31, 2014
Dec 31, 2013
856
739
205
(4,342)
(1,033)
(878)
5,331
(717)
—
(1,474)
6,648
—
(294)
6,658
11,538
295
3,378
3,357
(46)
(54,099)
(54,145)
(46)
(47,425)
(47,471)
(1) Foreign exchange gains and losses on loans receivable are also recognized in the statement of income as disclosed in note 7.
Interest income for 2014 of $4,234 (2013 – $4,096) includes interest income from loans receivable and cash balances.
(2)
Interest expense on the long-term debt for 2014 includes amortization of deferred financing fees of $1,090 (2013 – $2,069).
(3)
76
Capstone Infrastructure Corporation
NOTE 9. FINANCIAL RISK MANAGEMENT
The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market risk (containing
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
Gas purchases
Cardinal's gas purchase agreement mitigates Cardinal's risk to exposure to changes in the market price of gas during the term of its original PPA. This
agreement expires on May 1, 2015. In 2015, Cardinal expects to buy gas at spot rates.
Electricity revenue
In 2014, the electricity generated at the majority of the power facilities was sold to creditworthy customers under long-term PPAs providing a
specified rate for a defined period of time.
In 2015, both Cardinal and Whitecourt's PPAs expired and a portion of Capstone's revenue will be exposed to price risk as follows:
(i) Cardinal will earn a portion of its revenue by supplying electricity to the Ontario grid only when profitable to do so.
(ii) Whitecourt plans to sell all electricity generated into the Power Pool of Alberta. Effective March 2, 2015, Millar Western and Whitecourt
completed a new fuel supply agreement, which replaces the existing agreement and has a term of 15 years, extendable to 20 years. The new
agreement also includes sharing mechanisms regarding the price received for electricity sold by Whitecourt.
Water treatment costs
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
Bristol Water
Maturity Date
Jun 30, 2028
Dec 7, 2017
Dec 3, 2019
Notional
Amount
$82,618
£10,000
£50,000
Swap Fixed
Rate
Stamping Fee /
Margin
Effective
Interest Rate
4.1925%
5.025%
1.5038%
3.13%
0.705%
0.9%
7.32%
5.73%
2.40%
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.
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 18 (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.
2014 Annual Report 77
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 dollar; as new projects are built, expected
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.
(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,
accounts and loans receivable and derivative contracts.
The Corporation deposits its cash with reputable financial institutions and limits the exposure by counterparty; management therefore 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:
As at
Ontario Power Authority ("OPA"), now the Independent Electricity System Operator ("IESO") by amalgamation
Ontario Electricity Financial Corporation ("OEFC")
Other
Dec 31, 2014
Dec 31, 2013
16,624
9,081
12,027
37,732
3,408
24,654
5,995
34,057
There are no accounts receivable that are past due. Since the OPA, now IESO, 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, Bristol Water is not able to disconnect services to
residential customers 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:
For the year ended
OPA, now IESO by amalgamation
OEFC
Other
Dec 31, 2014
Dec 31, 2013
52,103
101,450
49,755
203,308
37,962
122,191
33,775
193,928
For the utilities – water segment, no economic dependence exists. Bristol Water has a large number of customers and there is no significant loss on
trade receivables that has not been provided for. Revenue is derived from water supply and related activities in the United Kingdom.
(D)
Liquidity Risk
Liquidity risk is the risk that the Corporation may have insufficient cash or other resources to meet obligations as they come due.
Compliance with debt covenants
The Corporation has financial liabilities in the power and utilities – water operating segments, as well as at corporate. Refer to notes 16 (Accounts
payable and other liabilities), 17 (Finance lease obligations) and 18 (Long-term debt) for further detail on financial liabilities. These financial liabilities
contain a number of standard financial and other covenants.
78
Capstone Infrastructure Corporation
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, 2014 were as follows:
Financial Liabilities
Within one year One year to five years
Beyond five years
Accounts payable and other liabilities
132,445
Derivative financial instruments
Embedded derivatives
Gas swaps
Interest rate swaps
Finance lease obligations
Minimum lease payments
Finance charges
Long-term debt
Principal payments
Interest payments
(E)
Sensitivity Analysis
168
4,364
2,088
6,620
702
41
743
25,150
55,918
81,068
—
—
—
8,419
8,419
2,760
603
3,363
—
—
—
2,824
2,824
678
271
949
Total
132,445
168
4,364
13,331
17,863
4,140
915
5,055
418,929
168,863
587,792
719,956
625,781
1,345,737
1,164,035
850,562
2,014,597
The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2014, 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, 2014 balances and on the basis that the balances, the ratio of fixed to floating
rates of debt and derivatives, the energy contracts that are financial instruments and the proportion of financial instruments in foreign currencies in
place at December 31, 2014 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 because the impacts provided are not necessarily indicative of the
actual impacts that would be experienced since the Corporation's actual exposure to market rates is constantly changing as the Corporation's
portfolio of commodity, debt, foreign currency and equity contracts changes. Changes in fair values or cash flows based on a variation in a market
variable cannot be extrapolated because the relationship between the change in the market variable and the change in fair value or cash flows may
not be linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering
interrelationships between the various market rates, hedging strategies employed by the Corporation or other mitigating actions that would be taken
by the Corporation.
The table summarizes the impact on fair value of changes in the unobservable inputs:
Dec 31, 2014 Unobservable inputs Estimated input
Relationship of input to fair value
Embedded derivative - Liability
(168) DCR price
Gas purchase agreement
(4,364) Natural gas price
OEFC rate of 7.7539 dollars
(2013 - 7.7539 dollars).
1% increase in DCR results in a decrease in
fair value of $292
Empress forward curve of 2.885
dollars/GJ
10% increase in gas price results in an
increase in fair value of $105
(4,532)
Changes in one or a combination of these estimates may have a significant impact on the fair value of the embedded derivative and gas purchase
agreement 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.
2014 Annual Report 79
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The table summarizes the impact on fair value of changes in observable inputs:
For year ended Dec 31, 2014
Financial assets:
Cash and cash equivalents (1)
Restricted cash
Loans receivable (2)
Forward gas sale contract (3)
SEK – foreign exchange contracts (4)
USD - foreign exchange contracts (5)
Financial liabilities:
Finance lease obligations
Long-term debt (6)
Interest rate swap contracts, net (7)
Carrying
Amount
58,842
65,878
33,744
3,330
542
659
4,100
37,761
10,507
Commodity Price Risk
Interest Rate Risk Foreign Exchange Rate Risk
(10)%
10%
(0.5)%
0.5%
(10)%
10%
—
—
—
—
—
—
687
(687)
—
—
—
—
—
—
—
—
—
—
(294)
(329)
—
—
—
—
22
189
2,860
294
329
—
—
—
—
(22)
(189)
(2,860)
—
—
(3,374)
—
(369)
852
—
—
—
—
—
3,374
—
613
(553)
—
—
—
(1) Cash and cash equivalents include deposits at call, which are at floating interest rates.
(2) Loans receivable exclude loans related to BFN of $11,500 and Chapais of $1,359.
(3) Forward gas sale contracts increase when the price of natural gas decreases the fair value as Capstone receives a fixed price per MMBtu.
(4)
(5)
(6) Long-term debt excludes all fixed-rate debt totaling $1,003,293 and variable rate debt that is covered by a swap for fixed-rate debt totaling $190,734.
(7)
Increases in the Canadian dollar to SEK increase the fair value as Capstone pays a fixed exchange rate.
Increases in the Canadian dollar to USD decrease the fair value as Capstone receives a fixed exchange rate.
Interest rate swaps exclude Bristol Water's cash flow hedges of $2,824 as changes flow through OCI.
UK pound sterling foreign exchange contracts have been excluded from this analysis because 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, 2014
Impact on net income before taxes
Impact on equity
Inflation Rate Risk (RPI)
(1)%
3,081
2,434
1%
(3,081)
(2,434)
Canadian $ to £
Foreign Exchange Rate Risk
(1)%
—
1%
—
4,492
(4,492)
NOTE 10. EQUITY ACCOUNTED INVESTMENTS
(A)
Equity Accounted Investments
As at
Värmevärden
Glen Dhu (1)
Others (2), (3)
Dec 31, 2014
Dec 31, 2013
Ownership % Carrying Value
Ownership %
Carrying Value
33.3%
49.0%
3,924
24,477
33.3%
49.0%
31.3-50.0%
655
31.3-50.0%
29,056
12,009
26,323
719
39,051
(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 are Capstone's investment in Fitzpatrick Mountain Wind Energy Inc. ("Fitzpatrick"), MLTCLP and Chapais. (2013 - Fitzpatrick, MLTCLP, SPWC
Development LP ("SPWC") and Chapais).
(3) On December 30, 2014, Capstone sold its 50% interest in SPWC to the existing partner.
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 credit agreements. See note 7 for detail on loans receivable with Värmevärden,
MLTCLP and Chapais.
80 Capstone Infrastructure Corporation
The changes in the Corporation’s total equity accounted investments for the years ended were as follows:
For the year ended
Dec 31, 2014
Dec 31, 2013
Opening
Balance
39,051
16,990
Acquisition, Plus
Costs, Less non-cash
Return of Capital
Equity
Accounted
Income (Loss)
—
27,521
(1,127)
(2,638)
Equity
Share of
OCI
(1,438)
1,183
Distributions
Received
(7,430)
(4,005)
Other
—
—
Ending
Balance
29,056
39,051
(B)
The Corporation has summarized its equity accounted investments using their gross values as follows:
Summarized Information for Equity Accounted Investments
As at
Summarized Statements of
Financial Position
Assets
Current
Non-current
Liabilities
Current
Non-current
Equity before fair value
increments on purchase and NCI
Amounts attributable to NCI
Fair value increments, net of
amortization
Equity including unamortized fair
value increments on purchase
Dec 31, 2014
Dec 31, 2013
Värmevärden
Glen Dhu
Others
Total Värmevärden
Glen Dhu
Others
Total
50,683
7,623
10,139
68,445
63,081
7,916
8,469
79,466
282,917
121,083
4,943
408,943
331,531
130,652
27,074
489,257
(15,298)
(7,043)
(9,971)
(32,312)
(15,332)
(6,690)
(9,230)
(31,252)
(300,425)
(100,021)
(27,773)
(428,219)
(338,667)
(108,116)
(37,719)
(484,502)
17,877
(6,093)
21,642
(22,662)
16,857
—
—
(6,093)
40,613
(4,550)
23,762
(11,406)
52,969
—
—
(4,550)
—
28,311
23,971
52,282
—
29,959
13,024
42,983
11,784
49,953
1,309
63,046
36,063
53,721
1,618
91,402
Capstone's ownership interest
33.3%
49.0% 31.3-50.0%
33.3%
49.0% 31.3-50.0%
Carrying value of investment
3,924
24,477
655
29,056
12,009
26,323
719
39,051
Dec 31, 2014
Dec 31, 2013
Värmevärden
Glen Dhu
98,736
20,720
Others
20,753
Total Värmevärden
Glen Dhu
140,209
102,501
5,667
Others
19,992
Total
128,160
Total comprehensive Income
(10,423)
3,630
(11,037)
(17,830)
(6,109)
(4,314)
3,630
(11,037)
(13,516)
—
—
(4,314)
(8,850)
3,545
(5,305)
1,256
—
1,256
4,069
—
4,069
(3,525)
3,545
20
Capstone's ownership interest
33.3%
49% 31.3-50.0%
33.3%
49% 31.3-50.0%
Sub-total
(3,471)
1,779
(3,464)
(5,156)
(1,767)
615
1,278
126
Amortization of fair value
adjustments
Total
—
(3,471)
(805)
974
3,396
2,591
—
(68)
(2,565)
(1,767)
(285)
330
(1,296)
(18)
(1,581)
(1,455)
In 2014, Capstone received distributions of $4,612 (2013 - $3,127) from Värmevärden and $2,818 (2013 - $878) from Glen Dhu.
2014 Annual Report 81
For the year ended
Summarized Statements of
Income
Revenue
Net Income
OCI
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. CAPITAL ASSETS
(A)
Continuity
Jan 1, 2014
Additions
Disposals
Foreign
Exchange
Transfers (1), (2)
Impairments Dec 31, 2014
Cost
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation
3,990
15,519
1,042,742
479,844
70,275
—
182
18,068
59,326
51,264
—
(5,949)
(11,108)
—
—
1,612,370
128,840
(17,057)
Equipment and vehicles
(7,277)
(2,245)
Property and plant
Water network
Net carrying value
(227,141)
(58,047)
(21,270)
1,356,682
(7,620)
60,928
5,889
7,469
—
74
608
12,008
13,392
1,841
27,923
(461)
(5,503)
(2,201)
11
1,472
72,697
2,582
(61,936)
14,826
—
—
4,075
11,832
(31,539)
1,102,868
—
—
555,144
61,444
(31,539)
1,735,363
—
—
—
—
(4,094)
1,231
(281,991)
—
(31,091)
(3,699)
19,758
14,826
(30,308)
1,418,187
(1)
(2)
Includes transfers of $20,519 for Skyway 8 at the commercial operation date ("COD") from projects under development, less $4,993 transferred to
intangibles from Bristol Water. Refer to note 12 and 13, respectively.
Includes transfer of $700 to other assets for assets held for sale, net of $278 for the corresponding asset retirement obligation, refer to note 19.
Jan 1, 2013
Additions
Disposals
Foreign
Exchange
Transfers
Acquisition Dec 31, 2013
Business
Cost
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation
2,766
15,650
851,726
346,530
51,209
—
866
4,906
54,165
75,759
—
(1,402)
(4,788)
—
(9)
1,267,881
135,696
(6,199)
Equipment and vehicles
(5,160)
(2,035)
Property and plant
Water network
Net carrying value
(168,416)
(43,141)
(7,898)
1,086,407
(6,007)
84,513
1,340
2,747
9
(2,103)
(B)
Reconciliation to Cash Additions for the Cash Flow Statement
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)
817
21
3,990
15,519
127,053
1,042,742
—
—
479,844
70,275
(6,632)
127,891
1,612,370
—
—
—
—
—
—
(7,277)
(227,141)
(21,270)
(6,632)
127,891
1,356,682
For the year ended
Additions
Adjustment for change in capital asset additions included in accounts payable and accrued liabilities
Net foreign exchange difference
Cash additions
(C)
Construction in Progress
Dec 31, 2014
Dec 31, 2013
128,840
135,696
427
546
8,942
1,641
129,813
146,279
The net book value of capital assets includes $7,410 (2013 - $5,451) of capitalized interest at Bristol Water in accordance with IAS 23, of which
$1,834 was capitalized in 2014. Capstone has used 4.6% as the interest rate to determine the amount capitalized (2013 - 5.5%).
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 assets' useful life began. Carrying values within construction in progress are not amortized.
(D)
Capital Assets Under Finance Leases
As at
Dec 31, 2014
Dec 31, 2013
82 Capstone Infrastructure Corporation
Equipment and
Vehicles
Property and
Plant Water Network
5
5
15,121
16,584
1,422
1,410
Total
16,548
17,999
(E)
Assets Held for Sale
Capstone has transferred $700 of property and plant as at December 31, 2014, relating to the planned sale of the Confederation Power wind facility
to other assets. It was determined at December 31, 2014 that the sale of this facility's assets was highly probable, therefore they are recorded at the
carrying amount (post asset impairment charge) of the assets; refer to note 6.
(F)
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. The deficit of market capitalization to the carrying amount of owners' equity is such an indicator of potential impairment. Consequently,
Capstone performed a comprehensive analysis, which found that the fair value of its assets was lower than the carrying amounts included in these
consolidated financial statements for the cash generating units ("CGU") detailed below.
Capstone's determination of fair value was based on a discounted cash flow analysis of the expected future cash flows for each 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
purpose 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.
During the fourth quarter of 2014, Capstone determined that pre-tax impairment charges should be made within the power segment against the
carrying value of assets of the Erie Shores and Confederation Power wind facilities, as well as the loan receivable from Chapais as follows:
For the year ended December 31, 2014
Loans Receivable
Capital Assets (1)
Erie Shores
Confederation Power
Chapais
Total pre-tax impairment to the power segment
Assets retirement obligation adjustment for assets held for sale
Asset impairment charge
—
—
(562)
(562)
(26,698)
(3,610)
—
(30,308)
Total (2)
(26,698)
(3,610)
(562)
(30,870)
278
(30,592)
(1) The total asset impairment charge contains $3,610, which relates to assets that have been classified as held for sale at December 31, 2014.
Impairment charges can be reversed in future periods if the forecasted cash flows to be generated by the impacted facilities improve.
(2)
For Erie Shores, Capstone reduced the carrying value of the capital assets primarily based on a revised forecast for lower merchant power prices
during the post-PPA period, which impacts Erie Shores in years beginning after 2026. For Confederation Power, the impairment charges reflect an
offer to purchase received in December 2014, which was completed on February 12, 2015. Finally, for Chapais, Capstone expects that Tranche B of
the loan receivable will not be repaid and has accordingly impaired the carrying amount on the basis that the facility is expected to close when its PPA
expires at the end of 2015.
The recoverable amount of the impaired CGUs was determined based on fair value less costs to sell; the valuation techniques along with key
assumptions were:
As at December 31, 2014
Fair Value
Hierarchy
Valuation Technique and Key
Assumptions
Impact of Changes in Key Assumptions
on Fair Value
Erie Shores (1)
Level 3 Discounted cash flow
• Discount rate
(8.5% PPA, 8.75% post-PPA)
• Post-PPA merchant power rates
($37/MWh)
50 bps increase would decrease fair value by $2,100 or 3.1%.
10% decrease would decrease fair value by $1,500 or 2.3%.
• Terminal value
10% decrease would decrease fair value by $700 or 1.1%.
Confederation Power
Level 3 Offer price, less cost to sell
Not meaningful
Chapais
Level 2 Contracted cash flows
Not meaningful
(1) The recoverable amount for Erie Shores is net of $86,274 of long-term debt.
Recoverable
Amount
66,000
700
1,359
2014 Annual Report 83
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. PROJECTS UNDER DEVELOPMENT
(A)
Continuity
As at January 1
Business acquisition (refer to note 3(a))
Capitalized costs during the year
Costs transferred to capital assets (1) (refer to note 11)
Costs transferred to intangibles (1) (refer to note 13)
As at December 31 (2)
2014
23,983
—
148,495
(20,519)
(598)
151,361
2013
—
14,992
8,991
—
—
23,983
(1) Skyway 8 costs were transferred on COD.
(2)
Includes $2,938 of capitalized borrowing costs during the construction of Saint-Philémon and Goulais using the rate of the respective long-term debt
(2013 - nil).
(B)
Reconciliation to Cash Additions for the Cash Flow Statement
For the year ended
Additions
Adjustment for change in additions to projects under development included in accounts payable and accrued
liabilities
Cash additions
Dec 31, 2014
Dec 31, 2013
148,495
8,991
(20,871)
127,624
(4,343)
4,648
NOTE 13. 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
Electricity supply and gas purchase contracts
Utilization
Jan 1, 2014
Additions
Disposals (1)
Foreign
Exchange
Transfers (2) Dec 31, 2014
17,804
160,089
73,018
23,443
152,251
(8,904)
(58,635)
(13,794)
—
—
—
—
—
(3,758)
(7,610)
(2,116)
345,272
(13,484)
(4,816)
(32,700)
—
—
—
4,811
32,700
—
(5)
1,082
4,993
—
—
591
3,828
(863)
—
—
—
—
598
—
—
—
—
19,063
127,389
73,018
24,632
156,079
(8,714)
(33,545)
(15,910)
4,638
5,591
342,012
12,257
(10,623)
1,634
—
(12,257)
(1,630)
(1,630)
12,253
(4)
—
—
—
—
—
—
—
—
—
(1)
Includes $12,257 and $32,700 for the 2014 expiries of the Whitecourt and Cardinal power purchase agreements, respectively.
(2)
Includes transfers of $598 for Skyway 8 from projects under development, plus $4,993 for Bristol Water from capital assets. Refer to notes 12 and 11,
respectively.
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 segment and is assessed annually for impairment which resulted in no impairment charge as at
December 31, 2014. Capstone uses the fair value less costs to sell method, which relies on level 3 inputs as part of a discounted cash flow technique,
to determine the recoverable amount. The discounted cash flow model incorporates management's best estimates for the underlying cash flows,
discount rate and terminal value.
In December 2014, Ofwat issued a final determination for the regulatory period from April 1, 2015 to March 31, 2020. Bristol Water has formally
rejected the regulator’s final determination and the matter will undergo a binding review by the Competition and Markets Authority ("CMA"), with a
final outcome expected in August 2015. It is possible that an adverse result from the CMA process may reasonably result in changes to the
assumptions underlying the recoverable amount resulting in a material adjustment to goodwill.
84 Capstone Infrastructure Corporation
Assets
Computer software
7,544
Electricity supply, gas purchase and other contracts
108,048
Water rights
Licence
Goodwill
Accumulated amortization
Computer software
Electricity supply and gas purchase contracts
Water rights
Provisions
Jan 1, 2013
Additions
Foreign
Exchange
Transfers
Business
Acquisition
Dec 31, 2013
79
—
—
—
—
—
(2,831)
(7,668)
(2,111)
3,549
6,632
—
—
1,927
12,539
—
(2,804)
—
—
—
—
—
—
—
—
—
—
—
52,041
—
—
—
—
—
—
—
17,804
160,089
73,018
23,443
152,251
—
(8,904)
(58,635)
(13,794)
73,018
21,516
139,712
—
(3,269)
(50,967)
(11,683)
283,919
(12,531)
15,211
6,632
52,041
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
NOTE 14. RETIREMENT BENEFIT PLANS
Defined Contribution Plans
Bristol Water and Cardinal offer defined contribution retirement plans for certain employees. The total cost recorded in the statement of income for
the year ended December 31, 2014 was $2,189 (December 31, 2013 – $1,563).
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.
A surplus is recognized on the consolidated statement of financial position because a refund of any surplus assets would be available to Bristol Water
following the final benefit payment from the Section.
Basis of Valuation
The formal actuarial valuation of Bristol Water's Section of the WCPS as at March 31, 2014 was updated to December 31, 2014, 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
2014
2013
3.2%
2.2%
2.2%
2.2%
3.7%
3.5%
3.6%
2.6%
2.6%
2.6%
4.1%
4.4%
2014 Annual Report 85
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. Assets are broken down by the major 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, 2014
Dec 31, 2013
Amount
Allocation
Amount
Allocation
17,916
10,569
325,327
5,860
6,343
1,146
5%
3%
88%
2%
2%
—%
23,784
10,141
254,566
5,410
6,076
629
8%
3%
85%
2%
2%
—%
367,161
100%
300,606
100%
(288,411)
78,750
(254,365)
46,241
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 S2NA with a 95% adjustment to mortality rates and with future improvements in
line with CMI 2013 projections from 2007, subject to a minimum increase of 1.5% and 1.3% per annum, for males and females, respectively. Per the
mortality assumptions used, the average life expectancy for a male pensioner currently aged 60 is 28.1 years and for a female pensioner currently
aged 60 is 29.9 years (December 31, 2013 – 27.4 male, 29.7 female).
The allowance for future improvements in longevity is such that a male retiring at age 60 in 2039 (i.e. in 25 years' time) is expected to have an
average life expectancy from retirement of 31.1 years, and a female retiring at age 60 in 2039 is assumed to have an average life expectancy of
32.4 years (December 31, 2013 – 29.9 male, 31.8 female).
The weighted average duration of the expected benefit payments from the Section is approximately 15 years.
Contributions
Contributions paid in the year to the Section were $4,248 (£2,335) (December 31, 2013 – $3,840 (£2,383)). For normal employer contributions
after April 1, 2013 Bristol Water was required to contribute at the rates of 37% for the main sub Section and 25% for the alternative benefits sub
Section of the relevant payroll costs.
The estimated amount of the total employer contribution expected to be paid to the Section for the year ending December 31, 2015 is $4,255
(£2,300).
Changes in Comprehensive Income
Analysis of operating expense, interest expense and amounts recognized in other comprehensive income ("OCI"):
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 OCI
86 Capstone Infrastructure Corporation
For the year ended
Dec 31, 2014
Dec 31, 2013
2,376
—
505
2,881
13,463
(11,331)
2,132
(21,459)
(2,800)
(739)
53,053
(5,611)
22,444
2,219
18
520
2,757
11,635
(9,818)
1,817
3,565
(2,027)
2,211
(1,558)
693
2,884
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, 2014
Asset
Liability
300,606
(254,365)
December 31, 2013
Asset
Liability
271,650
(234,075)
—
—
13,463
(505)
—
—
—
53,053
4,248
627
(11,685)
7,354
(2,376)
—
(11,331)
—
(2,800)
(739)
—
—
(627)
11,685
(6,399)
Total
46,241
(2,376)
—
2,132
(505)
(2,800)
(739)
53,053
4,248
—
—
955
78,750
—
—
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
(21,459)
(21,459)
3,565
3,565
Ending surplus in Section
367,161
(288,411)
300,606
(254,365)
The actual return on the Section's assets for the year ended as at December 31, 2014 was a gain of $66,517 (£36,564) (December 31, 2013 – gain
of $10,077 (£6,184)).
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 reduce the surplus.
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
4,337
(3,253)
10,120
(8,855)
(4,518)
3,253
(10,120)
8,855
(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.
2014 Annual Report 87
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. INCOME TAXES
(A)
Deferred Income Tax
As at
Deferred income tax assets
Deferred income tax liabilities (1)
Net deferred income tax liability
Dec 31, 2014
Dec 31, 2013
—
(192,829)
(192,829)
494
(183,167)
(182,673)
(1) Deferred income tax liabilities were restated for the year ended December 31, 2013 related to the purchase equation, refer to note 3 (a) for more information.
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:
Net deferred income tax liability as at January 1
Recorded in earnings
Recognized in OCI
Amounts released to equity for NCI's in Goulais and Saint-Philémon
Business acquisition
Other
Dec 31, 2014
Dec 31, 2013
24,731
12,005
3,431
—
1,113
3,416
44,696
(179,995)
(41,452)
(15,677)
(401)
(237,525)
(192,829)
45,520
13,076
3,319
1,505
873
224
64,517
(193,516)
(44,246)
(9,246)
(182)
(247,190)
(182,673)
2014
2013
(182,673)
(152,457)
(5,994)
(8,127)
2,637
—
1,328
(6,206)
(8,540)
28
(15,548)
50
Net deferred income tax liability as at December 31
(192,829)
(182,673)
(B)
The timing of deferred income tax reversal is summarized as follows:
Timing of Deferred Income Tax Reversal
As at
Within 12 months
After more than 12 months
Net deferred income tax liability
Dec 31, 2014
Dec 31, 2013
19,677
4,731
(212,506)
(187,404)
(192,829)
(182,673)
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, 2014 was $48,067 (December 31, 2013 – $31,805). 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)
88 Capstone Infrastructure Corporation
Expiry
No expiry
2025 – 2034
2023 – 2027
No expiry
No expiry
Recognized
Unrecognized
Dec 31, 2014
Dec 31, 2013
—
92,984
—
—
—
82,381
74,236
16,774
5,176
7,087
82,381
167,220
16,774
5,176
7,087
84,610
242,433
15,379
5,048
6,913
The Corporation also has $12,241 of unrecognized deferred tax assets, which have not been recognized as at December 31, 2014
(December 31, 2013 – $17,544).
(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 expense
For the year ended
Dec 31, 2014
Dec 31, 2013
43,522
75,420
25.4%
25.9%
11,055
1,346
(4,168)
(269)
—
—
2,011
9,975
19,534
492
(14,812)
2,018
1,200
294
(516)
8,210
The statutory income tax rate of 25.4% (2013 – 25.9%) changes in response to Capstone's allocation of taxable income to different tax jurisdictions.
(E)
Current Income Taxes
Current income taxes payable of $3,729 are included in accounts payable and other liabilities on the statement of financial position (see note 16(a)).
NOTE 16. ACCOUNTS PAYABLE AND OTHER LIABILITIES
(A)
Accounts Payable and Accrued Liabilities
Dividends payable
Income taxes payable
Other accounts payable and accrued liabilities
Dec 31, 2014
Dec 31, 2013
7,887
3,729
120,829
132,445
7,833
2,581
106,438
116,852
Income taxes payable primarily comprised $2,729 (2013 - $379) for Bristol Water and $1,154 (2013 - $1,494) for the shortfall of Canadian
Renewable and Conservation Expense ("CRCE") penalties related to flow-through shares previously issued by ReD. This is partially offset by taxes
recoverable of $380 (2013 - payable of $318) related to preferred share dividends.
(B)
Deferred Revenue
Deferred revenue represents 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
2014
15,589
5,874
(256)
393
21,600
2013
6,298
7,933
(290)
1,648
15,589
2014 Annual Report 89
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. FINANCE LEASE OBLIGATIONS
Utilities – water: equipment leases
3.62 - 4.10%
2015 - 2020
Less: current portion
Non-current portion
4,100
(693)
3,407
4,370
(609)
3,761
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
For the year ended December 31, 2014, the Corporation repaid $782 (December 31, 2013 - $3,339) on finance leases, including interest of $286
(December 31, 2013 – $126).
The present value of minimum lease payments grouped by period due are as follows:
Utilities – water
743
3,363
949
(915)
Within one year
One year to five years
Beyond five years
Less: Future
Finance Charges
Total
4,140
NOTE 18. LONG-TERM DEBT
(A)
Components of Long-term Debt
As at
Power
Utilities – water
Corporate
Balance outstanding
Less: deferred financing costs
Total long-term debt
Dec 31, 2014
Dec 31, 2013
Fair Value
Carrying Value
Fair Value
Carrying Value
527,666
736,446
91,077
511,501
630,894
89,393
368,045
627,632
81,694
371,744
576,034
80,107
1,355,189
1,231,788
1,077,371
1,027,885
—
(11,788)
—
(8,469)
1,355,189
1,220,000
1,077,371
1,019,416
Less: current portion of long-term debt
(35,529)
(25,150)
(26,743)
(18,374)
Long-term debt
(B)
Power
As at
Wind - Operating
Wind - Development
Hydros
Solar
Less: deferred financing costs
Long-term debt
Less: current portion
(i)
Wind - Operating
Project debt
Erie Shores Wind Farm
Amherst
SkyGen
Skyway 8
Glace Bay
90 Capstone Infrastructure Corporation
1,319,660
1,194,850
1,050,628
1,001,042
Dec 31, 2014
Dec 31, 2013
Fair Value
Carrying Value
Fair Value
Carrying Value
213,179
141,805
90,064
82,618
527,666
—
527,666
(35,529)
492,137
202,060
136,921
89,902
82,618
511,501
(7,558)
503,943
(25,150)
478,793
195,345
191,134
—
86,020
86,680
368,045
—
368,045
(26,743)
341,302
—
93,930
86,680
371,744
(3,992)
367,752
(18,374)
349,378
Dec 31, 2014
Dec 31, 2013
86,274
42,949
35,338
21,289
16,210
202,060
92,156
44,770
36,965
—
17,243
191,134
Erie Shores Wind Farm
Tranche A
Tranche B
Tranche C
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
5.96%
5.28%
6.15%
Apr 1, 2026
Apr 1, 2016
Apr 1, 2026
51,181
1,454
33,639
86,274
54,198
2,361
35,597
92,156
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, 2014, the carrying value of the assets of
Erie Shores exceeded the total amount of project debt outstanding.
Under the agreement, Erie Shores must maintain certain restrictive covenants including a minimum debt service coverage ratio. Additionally, Erie
Shores is required to set aside $5,701 as restricted cash and $550 as letters of credit against the borrowing capacity of the corporate credit facility
to cover the debt service and maintenance reserves.
Amherst
Term loan
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
6.20%
Apr 30, 2032
42,949
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 CPC to the lenders of the Amherst project debt.
As at December 31, 2014, the carrying value of the assets of Amherst exceeded the total amount of project debt outstanding.
Under the agreement, Amherst must maintain certain restrictive covenants including a minimum debt service coverage ratio. 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.
SkyGen
Term loans
Term loan
Promissory note payable
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
4.22 - 5.06%
Dec 17, 2016
6.22%
5.00%
Sep 17, 2017
Feb 8, 2016
24,844
519
9,975
35,338
26,372
608
9,985
36,965
SkyGen project debt has regular principal and interest payments over the term to maturity and is secured only by the assets of SkyGen, excluding the
Skyway 8 wind project. The SkyGen project debt has no recourse to the Corporation's other assets. As at December 31, 2014, the carrying value of
the assets of SkyGen exceeded the total amount of project debt outstanding.
Under the agreement, SkyGen must maintain certain restrictive covenants including a minimum debt service coverage ratio.
Skyway 8
Construction facility
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
5.25%
Feb 16, 2018
21,289
—
On April 17, 2014 Capstone, through its wholly owned subsidiary SkyGen, entered into a credit agreement for the construction of the Skyway 8 wind
facility. The project debt is secured only by the assets of Skyway 8, with no recourse to the Corporation's other assets, except for a $5,000 limited
recourse guarantee by CPC to the lenders of the Skyway 8 project debt. As at December 31, 2014, the carrying value of the assets of Skyway 8
exceeded the total amount of project debt outstanding. Interest during construction was capitalized to projects under development and ceased upon
achieving COD.
On February 17, 2015, the construction facility converted to a term facility, which has regular principal and interest payments fully amortizing over
20 years. After conversion of the facility, the agreement requires Skyway 8 to maintain certain restrictive covenants including a minimum debt service
coverage ratio.
2014 Annual Report 91
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Glace Bay
Term loan
Term loan
Term loan
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
5.99%
6.36%
4.72%
Mar 15, 2027
Apr 21, 2019
Oct 1, 2032
8,207
2,957
5,046
8,533
3,570
5,140
16,210
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, 2014, the carrying value of the assets of Glace Bay exceeded the total amount of
project debt outstanding.
Under the agreement, Glace Bay must maintain certain restrictive covenants including a minimum debt service coverage ratio. Additionally, Glace Bay
is required to set aside $1,635 as restricted cash to cover the debt service and operating and maintenance reserves.
(ii)
Wind - Development
Project debt
Saint-Philémon
Goulais
Saint-Philémon
Tranche A - Construction facility
Tranche B - Construction facility
Dec 31, 2014
Dec 31, 2013
60,535
76,386
136,921
—
—
—
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
5.49%
3.99%
Jun 30, 2034
Conversion Date
56,102
4,433
60,535
—
—
—
On May 16, 2014 Capstone, through its indirect partially owned subsidiary Saint-Philémon, entered into a credit agreement for the construction of
the Saint-Philémon wind project. The project debt is secured only by the assets of Saint-Philémon, with no recourse to the Corporation's other
assets. Interest during construction is capitalized to projects under development.
The construction term of the facility matures no later than September 30, 2015. On maturity Tranche A will convert to a term facility and Tranche B
will be repaid primarily from proceeds received from Hydro-Québec. Tranche A of the facility will have a term of 19 ½ years bearing a fixed, annual
interest rate of 5.49% and will be fully amortizing over its remaining term.
Goulais
Construction facility
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
5.16%
Sep 30, 2034
76,386
—
On September 30, 2014 Capstone, through its indirect partially owned subsidiary Chi-Wiikwedong Holdings LP, entered into a credit agreement for
the construction of the Goulais wind project. The project debt is secured only by the assets of Goulais, with no recourse to the Corporation's other
assets. Interest during construction is capitalized to projects under development.
The construction term of the facility matures no later than December 31, 2015. Upon maturity, the facility will convert to a loan with a term of 19 ½
years, which is fully amortizing over its remaining term and bears a fixed annual interest rate of 5.16%.
(iii)
Hydros
Senior secured bonds
Subordinated secured bonds
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
4.56%
7.00%
Jun 30, 2040
Jun 30, 2041
69,660
20,242
89,902
73,688
20,242
93,930
The senior secured and subordinated secured bonds are fully amortizing over their respective terms and are secured by the hydro facilities alone and
are non-recourse to the Corporation’s other businesses. As at December 31, 2014, the carrying value of the assets of the hydro facilities exceeded
the total amount of bonds outstanding.
92
Capstone Infrastructure Corporation
Under the agreement, the hydro facilities must maintain certain restrictive covenants including a minimum debt service coverage ratio. Additionally,
the hydro facilities are required to set aside $7,100 as letters of credit against the borrowing capacity of the corporate credit facility and $966 as
restricted cash to cover the debt service and maintenance reserves.
(iv)
Solar
Amherstburg project debt
7.32%
Jun 30, 2016
82,618
86,680
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
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, 2014, the carrying value of the assets of Amherstburg
exceeded the total amount of project debt outstanding.
Under the agreement, Amherstburg must maintain certain restrictive covenants including a minimum debt service coverage ratio. Additionally,
Amherstburg is required to set aside $5,950 as letters of credit against the borrowing capacity of the corporate credit facility to cover the debt
service and maintenance reserves.
As at December 31, 2014, Amherstburg's project debt had an interest rate swap contract to mitigate interest rate risk (see note 9(a)).
(C)
Utilities – water
As at
Bank loans
Term loans
Debentures
Irredeemable cumulative preferred shares
Less: deferred financing costs
Long-term debt
Less: current portion
(i)
Bank loans
Dec 31, 2014
Dec 31, 2013
Fair Value
Carrying Value
Fair Value
Carrying Value
122,836
576,696
2,805
34,109
736,446
—
736,446
—
125,877
473,301
2,351
29,365
630,894
(2,288)
628,606
—
87,056
505,322
2,424
32,830
627,632
—
627,632
—
87,329
457,786
2,275
28,644
576,034
(2,047)
573,987
—
736,446
628,606
627,632
573,987
Secured, variable interest at three month Libor plus a margin
(principal £50,000)(1)
2.40%
Dec 3, 2019
50,000
90,355
Interest Rate
Maturity
[£]
[$]
[$]
—
Dec 31, 2014
Dec 31, 2014
Dec 31, 2013
Secured, variable interest at three month Libor plus a margin
(principal £10,000(2))
1.26%
Dec 7, 2017
Secured, variable interest at six month Libor plus a margin
(principal £10,000(2 and 3))
5.73%
Dec 7, 2017
HSBC plc, variable interest at Libor plus a margin(4)
undrawn
Aug 17, 2017
The Royal Bank of Scotland plc, variable interest at Libor
plus a margin(5)
undrawn
Dec 31, 2019
9,828
9,828
—
—
17,761
17,224
17,761
—
—
125,877
17,224
45,830
7,051
87,329
(1) The £50,000 variable rate bank loan is fixed by an interest rate swap exchanging three month LIBOR for a fixed rate of 1.5038%. The fixing dates of the
swap match those of the loan (see note 9(a)). The loan has a bullet repayment on maturity.
(2) The principal due on maturity is different from the balance in pounds sterling due to the fair value adjustment required on acquisition.
(3) The £10,000 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 9(a)). The loan has a bullet repayment on maturity.
(4) As at December 31, 2014, Bristol Water had $90,355 (£50,000) undrawn on this credit facilities available (December 31, 2013 - £26,000 drawn).
(5) As at December 31, 2014, Bristol Water had $36,142 (£20,000) undrawn on this credit facilities available (December 31, 2013 - £4,000 drawn).
During 2014, Bristol Water's bank loans increased because of £20,000 of draws from the existing HSBC plc and the Royal Bank of Scotland plc
credit facilities. The drawings under these facilities amounted to £50,000 in total by the beginning of December 2014. On December 3, 2014, Bristol
Water entered a new bank loan of £50,000 with an existing lender and repaid full amounts drawn under the credit facilities, providing additional
flexibility for future capital expenditures. As at December 31, 2014, $126,497 or £70,000 of undrawn credit capacity was available.
The bank loans are secured only by the assets of Bristol Water, with no recourse to the Corporation's other assets. In addition, these loans are fully
repayable on maturity and incur non-utilization fees on the undrawn portion of the total available credit.
2014 Annual Report 93
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(ii)
Term loans
Interest Rate
Maturity
[£]
[$]
[$]
Dec 31, 2014
Dec 31, 2014
Dec 31, 2013
Secured, principal index-linked to RPI, fixed interest at
3.635%(2) on the indexed principal (principal £124,868(1))
Secured, fixed interest at 6.01%(2) (principal £57,500(1))
Secured, principal index-linked to RPI, fixed interest at
2.701% on the indexed principal (principal £44,778(1))
6.14%
6.01%
Sep 30, 2032
Sep 30, 2033
150,967
62,925
4.10%
Mar 24, 2041
48,020
272,812
113,711
86,778
473,301
262,921
111,424
83,441
457,786
(1) The principal due on maturity is different from the balance in pounds sterling due to the fair value adjustment required on acquisition.
(2) Coupons as specified in loan documentation.
The interest rate on the £124,868 indexed-linked loan is adjusted in March and September, by reference to the Retail Price Index ("RPI"), with an
eight-month lag.
The interest rate on the £44,778 indexed-linked loan is adjusted in March and September, by reference to the RPI, with a two-month lag.
(iii)
Debentures
Consolidated (principal £1,405(1))
Perpetual (principal £37(1))
Perpetual (principal £55(1))
Perpetual (principal £73(1))
Dec 31, 2014
Dec 31, 2014
Dec 31, 2013
Interest Rate
Maturity
4.00%
4.25%
4.00%
3.50%
Irredeemable
Irredeemable
Irredeemable
Irredeemable
[£]
1,136
37
55
73
[$]
2,054
66
99
132
2,351
[$]
1,985
65
97
128
2,275
(1) The principal due on maturity is different from the balance in pounds sterling due to the fair value adjustment required on acquisition.
The rate of interest is fixed and payable every six months.
(iv)
Irredeemable cumulative preferred shares
Preferred shares, cumulative (principal £12,500(1))
8.75%
Irredeemable
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2014
Dec 31, 2013
[£]
16,250
[$]
29,365
[$]
28,644
(1) The principal due on maturity is different from the balance in pounds sterling due to the fair value adjustment required 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, 2014.
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.
94 Capstone Infrastructure Corporation
(D)
Corporate
As at
Corporate credit facility
Convertible debentures
Less: deferred financing costs
Long-term debt
Less: current portion
(i)
Corporate credit facility
The corporate credit facility is comprised:
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
Dec 31, 2014
Dec 31, 2013
Fair Value
Carrying Value
Fair Value
Carrying Value
20,000
71,077
91,077
—
91,077
—
91,077
20,000
69,393
89,393
(1,942)
87,451
—
87,451
11,300
70,394
81,694
—
81,694
—
81,694
11,300
68,807
80,107
(2,430)
77,677
—
77,677
Interest Rate
Maturity
Dec 31, 2014
Dec 31, 2013
3.01%
Nov 12, 2017
90,000
32,500
(20,000)
(21,432)
(7,029)
—
41,539
(11,300)
(9,519)
(4,023)
(397)
7,261
As at December 31, 2014, Capstone had 21 letters of credit authorized under the revolving facility.
The corporate credit 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; 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 2014, Capstone and its existing lenders increased the capacity of the facility by $57,500, bringing the total available credit to $90,000 of which
$48,461 was drawn or committed as of December 31, 2014.
(ii)
Convertible debentures
The carrying values and changes of the liability and the equity components of the debentures were as follows:
Dec 31, 2014
2016
Debentures
2017
Debentures
Total
Dec 31, 2013
Liability component
41,068
27,739
68,807
Conversion to shares, net of costs during the year(1)
Redemptions during the year
Amortization and accretion during the year
Deferred financing costs
Equity component
—
—
660
41,728
(1,178)
40,550
9,284
49,834
—
—
(74)
27,665
—
27,665
—
27,665
—
—
586
69,393
(1,178)
68,215
9,284
77,499
75,479
(100)
(6,972)
400
68,807
(1,726)
67,081
9,284
76,365
(1) During the year ended December 31, 2014, no debentures were converted to shares (see note 20) (December 31, 2013 – $100). 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.
2014 Annual Report 95
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2016 Debentures
The Corporation has unsecured subordinated convertible debentures maturing on December 31, 2016 (“2016 Debentures”). The 2016 Debentures
have a fixed, annual interest rate of 6.50% 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 2016
Debentures as at December 31, 2014 was $42,749 (December 31, 2013 – $42,749).
2017 Debentures
The Corporation has redeemable, extendible, convertible unsecured subordinated debentures maturing on December 31, 2017 ("2017
Debentures"). The 2017 Debentures have a fixed, annual interest rate of 6.75% payable semi-annually in arrears on June 30 and December 31 of
each year. Each $1,000 principal amount of the debentures is 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.The face value of the
2017 Debentures as at December 31, 2014 was $27,428 (December 31, 2013 – $27,428).
(E)
Long-term Debt Covenants
For the year ended and as at December 31, 2014, 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
25,150
—
—
25,150
202,255
126,497
90,177
418,929
282,519
437,437
—
Total
509,924
563,934
90,177
719,956
1,164,035
NOTE 19. 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
Adjustment for assets held for sale (refer to note 6 and 11(f))
Liabilities incurred
Revision of estimates
Accretion expense
Balance, end of year
96 Capstone Infrastructure Corporation
Dec 31, 2014
Dec 31, 2013
2017 – 2062
2014 – 2062
Nil – $3,266
Nil – $3,205
2.0%
2.0%
5.0% – 7.0%
7.2% – 8.0%
3,293
—
(278)
634
478
237
4,364
2,096
860
—
—
138
199
3,293
NOTE 20. 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 comprised:
As at
Equity portion of convertible debentures
Share option reserve
(A)
Capstone is authorized to issue an unlimited number of common shares.
Common Shares
Dec 31, 2014
Dec 31, 2013
713,412
26,710
72,020
812,142
710,662
26,710
72,020
809,392
Dec 31, 2014
Dec 31, 2013
9,428
(144)
9,284
9,284
144
9,428
Continuity for the year ended
($000s and 000s shares)
Opening balance
Common shares issued (1)
Dividend reinvestment plan (2)
Conversion of convertible debentures, net of cost (3)
Ending balance
Dec 31, 2014
Dec 31, 2013
Shares
Carrying Value
Shares
Carrying Value
92,854
710,662
14
705
—
39
2,711
—
72,445
19,719
670
20
632,474
75,453
2,635
100
93,573
713,412
92,854
710,662
(1) Shares issued under the option plan in 2014 (2013 - Shares issued for the acquisition of ReD).
(2) Shares issued by the Corporation under the Dividend Re-Investment Plan (DRIP).
(3) No convertible debentures were converted to shares of the Corporation during 2014 (note 18(d)(ii)) (December 31, 2013 – $100). 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, 2014 and 2013. 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, 2014 and 2013, 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 five-year fixed rate period, the
issuer will determine the annual dividend for the next five-year period based on the five-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 five
years thereafter at 25 dollars per share plus accrued and unpaid dividends.
2014 Annual Report 97
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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
expired March 6, 2014.
(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. During 2014, the
option reserve was released to deficit as the majority of the options were exercised or expired.
(F)
Dividends
The dividends declared were as follows:
Common shares
Class B exchangeable units
Preferred shares (1)
For the year ended
Dec 31, 2014
Dec 31, 2013
28,002
975
28,977
3,923
23,358
975
24,333
3,923
(1)
Includes $173 of deferred income taxes for the year ended December 31, 2014 (December 31, 2013 - $173).
Capstone has included $7,262 of accrued common dividends and $625 of accrued preferred dividends as declared on November 11, 2014
(December 31, 2013 – $7,208 was accrued for common shares and $625 for preferred shares).
Capstone paid $0.30 per common share and $1.25 per preferred share during the year ended December 31, 2014 (December 31, 2013 –
$0.30 per common share and $1.25 per preferred share).
(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, 2014
Dec 31, 2013
1,231,788
1,027,885
516,706
529,550
1,748,494
1,557,435
(1) Capstone's definition excludes non-controlling interest of $190,073 (December 31, 2013 – $138,613).
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 18.
98 Capstone Infrastructure Corporation
NOTE 21. NON-CONTROLLING INTERESTS
(A)
Non-controlling Interests
Non-controlling interests represent ownership interests by third parties in businesses consolidated by Capstone. Bristol Water, Amherst, Saint-
Philémon and Chi-Wiikwedong non-controlling interests as at December 31, 2014 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")
Chi-Wiikwedong LP is 49% owned by BFN.
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 are 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
BFN's (49%)
interest in Chi-
Wiikwedong
January 1, 2013
Business acquisition
Contributions from minority interests
NCI portion of net income (loss)
NCI portion of OCI
Dividends declared
As at December 31, 2013
Contributions from minority interests
NCI portion of net income (loss)
NCI portion of OCI
Disposal of partial interest in Chi-Wiikwedong
LP
Dividends declared
As at December 31, 2014
38,477
53,133
—
—
15,443
7,614
(3,782)
57,752
—
14,600
8,411
—
(4,843)
75,920
—
—
10,296
5,076
(2,521)
65,984
—
9,733
5,608
—
(3,228)
78,097
—
12,833
—
109
—
(1,470)
11,472
—
406
—
—
(1,066)
10,812
(B)
Summarized Information for Material Partly Owned Subsidiaries
—
—
3,405
—
—
—
3,405
3,104
(659)
—
—
—
—
—
—
—
—
—
—
11,500
—
—
7,894
—
Total
91,610
12,833
3,405
25,848
12,690
(7,773)
138,613
14,604
24,080
14,019
7,894
(9,137)
5,850
19,394
190,073
As at
Summarized Statements of
Financial Position
Dec 31, 2014
Dec 31, 2013
Bristol Water
Amherst
Saint-
Philémon
Chi-
Wiikwedong
Bristol Water
Amherst
Saint-
Philémon
Assets
Current
Non-current
Liabilities
Current
Non-current
Total Equity
Attributable to:
Shareholders of Capstone
NCI
86,998
1,168,892
2,128
66,309
9,881
70,245
(78,411)
(782,110)
395,369
241,352
154,017
395,369
(2,338)
(41,700)
24,399
13,587
10,812
24,399
(10,975)
(54,428)
14,723
8,873
5,850
14,723
—
—
—
—
—
78,252
1,036,245
(77,319)
(704,003)
333,175
(19,394)
19,394
—
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
2014 Annual Report 99
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the year ended
Dec 31, 2014
Dec 31, 2013
Summarized Statements of Income Bristol Water
Amherst
Saint-
Philémon
Chi-
Wiikwedong
Revenue
Net income
OCI
Total comprehensive income
Attributable to:
Shareholders of Capstone
NCI
238,270
8,249
—
48,665
29,661
78,326
39,974
38,352
78,326
829
—
829
423
406
829
(1,334)
—
(1,334)
(675)
(659)
(1,334)
—
—
—
—
—
—
—
Bristol Water
Amherst
195,576
1,952
51,477
30,853
82,330
43,901
38,429
82,330
223
—
223
114
109
223
Saint-
Philémon
—
—
—
—
—
—
—
Distributions of $8,071 (2013 - $6,303) from Bristol Water and $1,066 (2013 - $1,470) from Amherst were paid to non-controlling interests in
2014.
For the year ended
Dec 31, 2014
Dec 31, 2013
Summarized Statements of Cash
Flows
Bristol Water
Amherst
Saint-
Philémon
Chi-
Wiikwedong
Bristol Water
Amherst
Saint-
Philémon
Operating
Investing
Financing
Foreign exchange
Net increase / (decrease) in cash
and equivalents
100,478
(115,416)
26,882
268
3,545
—
(3,865)
—
(4,930)
(63,625)
64,002
—
12,212
(320)
(4,553)
—
—
—
—
—
86,413
(134,126)
31,038
491
1,242
—
(3,407)
—
(16,184)
(2,165)
(60)
(96)
4,935
—
4,779
NOTE 22. 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
Basic net income
Effect of dilutive securities:
2016 convertible debentures (1)
2017 convertible debentures (1), (2)
Diluted net income
Basic weighted-average number of shares outstanding
Effect of dilutive securities:
2016 convertible debentures (1)
2017 convertible debentures (1), (2)
Diluted weighted average number of common shares (including Class B exchangeable units) outstanding
Diluted EPS
For the year ended
Dec 31, 2014
Dec 31, 2013
33,547
(24,080)
(3,923)
5,544
96,534
0.057
67,210
(25,848)
(3,923)
37,439
81,033
0.462
For the year ended
Dec 31, 2014
Dec 31, 2013
5,544
37,439
—
—
5,544
2,056
431
39,926
96,534
81,033
—
—
96,534
0.057
6,107
6,900
94,040
0.425
(1) 2016 and 2017 convertible debentures were anti-dilutive for the year ended December 31, 2014.
(2) 2017 convertible debentures were assumed on October 1, 2013, and the impact on net income (loss) is included since the acquisition date.
100 Capstone Infrastructure Corporation
NOTE 23. 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, 2014
Dec 31, 2013
Number of Units
Fair Value Number of Units
Fair Value
50,667
43,894
(9,077)
5,426
90,910
—
90,910
180
175
(37)
22
340
(49)
291
30,198
25,106
(6,905)
2,268
50,667
—
50,667
122
99
(30)
9
200
(20)
180
The average VWAP per DSU granted during 2014 was 4.01 dollars (2013 – 3.98 dollars). As at December 31, 2014, the carrying value of the DSUs,
based on a market price of 3.20 dollars, was $291 and is included in accounts payable and other liabilities in the consolidated statement of financial
position (December 31, 2013 – 3.56 dollars and $180). The DSU expense for 2014 was $139 and is recorded as compensation expense in the
consolidated statement of income (2013 – $88).
(B)
Long-term Incentive Plan
During 2014, Capstone granted to the senior management of the Corporation 355,001 Restricted Stock Units (“RSUs”) and 171,240 Performance
Share Units (“PSUs”). The five-day VWAP per RSU and PSU granted January 2, 2014 was 3.55 dollars and 4.07 dollars per RSU granted March 31,
2014 and all RSUs and PSUs granted vest on December 31, 2016. In 2013, 243,886 RSUs and 133,917 PSUs were granted and they vest on
December 31, 2015.
Effective January 1, 2014, Capstone amended the employee incentive plans to allow senior management to voluntarily receive up to 100% of the
awards under the short-term incentive plan ("STIP") or LTIP as DSUs, instead of cash or RSU / PSU grants, respectively.
Under the LTIP, DSUs vest on the same terms as the original RSU or PSU award, as applicable, but must be held, at a minimum, until the date
employment ceases, following which each DSU will be redeemed for cash at the prevailing common share price.
For the year ended
($000s, except unit amounts)
Outstanding at January 1
Grants during the period
Payouts
Forfeitures
Dividend equivalents (1)
Unrealized loss on revaluation
Outstanding at December 31,
Dec 31, 2014
Dec 31, 2013
Notional
Number of Units
Fair Value (2)
Notional
Number of Units
Fair Value (2)
1,032,354
526,241
(169,844)
(88,238)
91,181
1,391,694
—
1,391,694
3,373
1,934
(302)
(353)
374
5,026
(1,157)
3,869
588,160
377,803
—
—
66,391
1,032,354
—
1,032,354
2,211
1,537
—
—
268
4,016
(643)
3,373
(1) 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.
(2) Fair value considers the amount of the PSUs is subject to Capstone's total return over the period relative to a peer group.
The average VWAP per RSU and PSU granted on during 2014 was 3.81 dollars (2013 – 4.12 dollars). As at December 31, 2014, the carrying value
of the RSUs and PSUs, based on a market price of 3.20 dollars, was $2,355 and is included in accounts payable and other liabilities in the
consolidated statement of financial position (December 31, 2013 – 3.56 dollars and $1,839). The RSU and PSU compensation expense of $818 is
recorded as compensation expense in the consolidated statement of income for 2014 (2013 – $1,004).
Capstone also has an accrued liability of $360 for the LTIP and cash incentive payments for Capstone's power development projects. The LTIP will be
awarded as future RSUs grants.
2014 Annual Report 101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(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 a maximum of $3 per year. Shares acquired
as a matching contribution (including any dividends on those shares) vest after one year of match.
NOTE 24. EXPENSES – ANALYSIS BY NATURE
For the year ended
Dec 31, 2014
Dec 31, 2013
Operating
Admin.
Project
Development
Costs
Total
Operating
Admin.
Project
Development
Costs
Raw materials, chemicals
88,183
and supplies
Fuel
Wages and benefits
Professional fees for legal,
audit, tax and other
advisory
Maintenance
Bad debts
Insurance
Leases
Manager fees
Property taxes
Other
Total
60,232
29,865
5,579
6,848
6,629
2,360
1,831
1,653
1,439
5,901
210,520
—
—
7,528
3,234
—
—
157
464
—
—
—
—
1,169
949
—
—
—
—
—
—
1,883
13,266
546
2,664
88,183
70,457
60,232
38,562
9,762
6,848
6,629
2,517
2,295
1,653
1,439
8,330
78,196
28,932
3,567
4,869
6,618
2,058
1,565
1,600
1,323
5,349
226,450
204,534
—
—
6,133
1,965
—
—
168
382
—
—
—
—
831
4,178
—
—
—
—
—
—
1,721
10,369
521
5,530
Total
70,457
78,196
35,896
9,710
4,869
6,618
2,226
1,947
1,600
1,323
7,591
220,433
NOTE 25. OTHER GAINS AND LOSSES
Unrealized gain (loss) on derivative financial instruments
Realized gain (loss) on derivative financial instruments
Adjustment for Cardinal gas payment
Other
Loss on disposal of capital assets
Other gains and (losses), net (1)
For the year ended
Dec 31, 2014
Dec 31, 2013
(717)
—
(3,762)
224
(3,414)
(7,669)
11,538
295
—
(70)
(1,974)
9,789
(1) Other gains and (losses); net, includes $3,762 for the Cardinal gas payments as required by IFRS.This adjustment reconciles the amount included in the
statement of income to the $3,907 non-cash adjustment included in the statement of cash flow.
NOTE 26. 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 17 finance lease obligations, 18 long-term debt and 19 liability for asset retirement obligation as at
December 31, 2014 were as follows:
(A)
Derivative Contracts
The Corporation has various derivative contracts for foreign exchange, gas sale and purchases and interest, which have been further disclosed in
notes 8 and 9.
(B)
Leases
Minimum operating lease payments comprised:
Operating leases
$2,747
$11,608
$31,128
Within one year One year to five years
Beyond five years
Total
$45,483
102 Capstone Infrastructure Corporation
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 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.
Cardinal leases the site on which it is located from Ingredion Canada Incorporated ("Ingredion"); under the lease, Cardinal pays monthly rent.
The lease extends through 2034 and expires concurrently with the energy savings agreement between Ingredion and Cardinal.
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.
(C)
Capital Commitments
Capstone enters into capital commitments in the normal course of operations. The following is a list of Capstone's material purchase commitments:
Bristol Water capital expenditure program
Bristol Water had commitments for capital expenditures at December 31, 2014 of which $16,026 were contracted for but not accrued
(December 31, 2013 – $26,172).
Cardinal turbine maintenance
Cardinal placed a purchase order for a $22,042 ($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, 2014, the potential penalty would
be $10,775 ($9,288 USD) and increased to $11,972 ($10,320 USD) by January 2015. As at December 31, 2014 Cardinal has paid $9,362 to the
vendor.
Development projects
As part of Capstone's power development operations, Capstone enters various construction and purchase agreements. As at December 31, 2014,
Capstone had approximately $21,000 of construction and turbine supply agreements for the Saint-Philémon and Goulais 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 ("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.
(F)
Management Services Agreements
Capstone has agreements with all of its partially owned wind facilities and development projects, 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 an agreement with Millar Western to ensure an adequate supply of wood waste. The agreement expires in June 2016. Effective
March 2, 2015, Millar Western and Whitecourt completed a new fuel supply agreement, which replaces the existing agreement and has a term of 15
years, extendable to 20 years. The new agreement also includes sharing mechanisms regarding the price received for electricity sold by Whitecourt.
2014 Annual Report 103
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(H)
Energy Savings Agreement ("ESA")
In December 2014, Cardinal entered into a new ESA with Ingredion, which matures on December 31, 2034, reflecting the binding term sheet signed
on March 26, 2014. Under the terms of the new ESA, Cardinal is required to provide O&M services, and supply steam and compressed air to
Ingredion for its plant operations.
(I)
Guarantees
Capstone has provided limited recourse guarantees on the project debt of the various wind projects totalling $11,500 as at December 31, 2014.
(J)
Power Purchase Agreements ("PPA")
A significant portion of the Corporation's electricity revenue is earned through long-term PPA's. The majority of these contracts include terms and
conditions customary to the industry. For Cardinal's new contract, the nature of the material commitments includes: electricity capacity; availability;
and production targets. For the remaining facilities in the power segment, Capstone is not obligated to deliver electricity; however, in certain
circumstances if a facility or development project fails to meet the performance requirements under its respective PPA, liquidated damages may
apply or the PPA may be terminated after a specified period of time.
NOTE 27. 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
2014, Capstone earned management fees of $420 (2013 - $115).
As at December 31, 2014, included in accounts receivable was $16 (2013 - $7), due from Fitzpatrick and included in accounts payable and other
liabilities was $984, due to Glen Dhu (2013 - $980). 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 23.
The following table summarizes key management compensation:
Salaries, directors' fees and short-term employee benefits (1)
Share based compensation
For the year ended
Dec 31, 2014
Dec 31, 2013
1,456
478
1,934
1,494
815
2,309
(1) The short-term incentive plan component of this balance is based on amounts paid during the period.
NOTE 28. 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 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.
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
104 Capstone Infrastructure Corporation
Cash flow from
operations
Additions to capital
assets
Year ended Dec 31, 2014
Utilities
Year ended Dec 31, 2013
Utilities
Power
Water
DH Corporate
Total
Power
Water
DH Corporate
Total
Revenue
203,308
238,270
Depreciation of capital
assets
(37,613)
(30,166)
Amortization of
intangible assets
Interest income
(8,105)
(3,696)
—
—
—
—
441,578
193,928
195,575
(133)
(67,912)
(27,662)
(23,399)
(53)
(11,854)
(8,158)
(2,784)
—
—
—
—
389,503
(122)
(51,183)
(42)
(10,984)
1,019
145
2,898
172
4,234
781
275
2,861
179
4,096
Interest expense
(22,572)
(24,870)
—
(6,703)
(54,145)
(21,384)
(21,644)
Income tax recovery
(expense)
(783)
(13,074)
(11)
3,893
(9,975)
(12,992)
2,133
—
16
(4,443)
(47,471)
2,633
(8,210)
Net income (loss)
3,280
48,665
(3,278)
(15,120)
33,547
29,912
51,477
2,850
(17,029)
67,210
75,636
100,478
2,898
(23,294)
155,718
70,698
86,411
2,818
(24,251)
135,676
Additions to PUD
148,495
—
18,250
110,590
—
—
—
—
128,840
148,495
5,722
8,991
129,925
—
—
—
49
—
135,696
8,991
(1) For the year ended December 31, 2014, Capstone incurred an asset impairment charge in the power segment. Refer to note 11 (f) for detail.
As at Dec 31, 2014
Utilities
As at Dec 31, 2013
Utilities
Power
Water
DH Corporate
Total
Power
Water
DH Corporate
Total
Total assets
Total liabilities
998,130 1,255,890
40,610
5,350 2,299,980
855,045 1,114,532
51,357
5,390 2,026,324
636,034
860,521
—
96,646 1,593,201
489,345
781,357
—
87,459 1,358,161
Certain comparative figures for the year ended December 31, 2013 have been adjusted to conform with the presentation in the current year.
NOTE 29. NON-CASH WORKING CAPITAL
The change in non-cash working capital comprised:
Accounts receivable
Other assets
Accounts payable and other liabilities
For the year ended
Dec 31, 2014
Dec 31, 2013
(1,981)
(7,737)
(98)
(9,816)
(5,968)
(4,654)
11,736
1,114
2014 Annual Report 105
Supplementary
Information
PORTFOLIO
Power
Type of Facility
Province
Year Built
Ownership
Interest
Total Net
Capacity
(MW)
PPA
Counterparty
PPA Expiry
Fuel Supply
Counterparty
Fuel Supply
Expiry
Employees
1994
100%
156
IESO
2034
Husky
2015
Gas Cogeneration
Cardinal (1)
Wind
Operating
Development
Biomass
Whitecourt (3)
Hydro
Sechelt and Hluey
Lakes
Wawatay and
Dryden (5)
Solar
ON
ON
NS
PQ
ON
SK
AB
BC
ON
2002 - 2014
100%
131
2006 - 2012
49% - 100%
2015 (2)
51%
2016E
50% - 100%
2017E
100%
74
12
55
10
IESO
NSPI
2026 - 2034
2020 - 2037
Hydro-Québec
IESO
2035
2036E
SaskPower
2037E
n/a
n/a
n/a
n/a
n/a
1994
100%
32.8
(4)
(4)
Millar Western
1997 and
2000
1992 and
1986
100%
100%
19
17
20
BC Hydro
OEFC
2017 and
2020
2042 and
2020
IESO
2031
n/a
n/a
n/a
18
11
2
n/a
n/a
n/a
33
n/a
n/a
n/a
n/a
n/a
n/a
n/a
(4)
n/a
n/a
Amherstburg
ON
2011
100%
n/a
n/a
(1) On March 26, 2014, Capstone announced the signing of a new 20-year non-utility generator contract with the OPA, now IESO, effective January 1,
2015 with an expiry of December 31, 2034.
(2) On January 16, 2015, Saint-Philémon commenced commercial operations.
(3) Whitecourt total net capacity includes Capstone's 31.3% equity accounted interest in Chapais.
(4) Whitecourt's PPA with TransAlta expired on December 31, 2014. Effective March 2, 2015, Millar Western and Whitecourt completed a new fuel supply
agreement, which replaces the existing agreement and has a term of 15 years, extendable to 20 years. The new agreement also includes sharing
mechanisms regarding the price received for electricity sold by Whitecourt.
(5) Year built for Wawatay and Dryden represent the date of significant refurbishments.
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
300
kilometres
Approximate
Population
Served
Regulated
Employees
163,000
No
92
Mix of commercial and residential
customers.
6,716
kilometres
1.2 million
Ofwat
514
106 Capstone Infrastructure Corporation
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 2014.
Earnings Measures
($000s)
Revenue
EBITDA (1)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
441,578
389,503
357,610
215,967
158,512
148,384
153,186
122,811
89,940
90,235
177,433
185,058
163,471
32,557
37,953
52,691
15,394
54,616
21,279
20,980
Net income (loss)
33,547
67,210
45,971
(2,837)
15,901
11,259
(26,534)
Basic earnings per share
0.057
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) EBITDA includes asset impairment charges of $30,592 in 2014 and $43,279 in 2008.
Cash Flow Measures
($000s)
Cash flows from
operating activities
Adjusted EBITDA (1)
Adjusted funds from
operations (“AFFO”) (1)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
155,718
135,676
114,678
50,881
29,011
38,040
50,516
29,663
21,044
20,230
160,359
128,421
120,343
55,673
55,818
61,244
67,324
61,250
34,104
27,912
56,412
39,934
35,563
34,884
34,774
42,989
50,626
72,835
33,267
27,708
AFFO per share (1)
0.584
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 25 for a definition of each
measure.
Capital Structure – At
Fair Value ($000s)
Long-term debt
Power (1)
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
435,808
346,244
305,497
314,196
245,911
214,107
246,960
219,162
35,000
35,000
Utilities – water (1)
368,223
313,816
259,830
353,135
—
—
—
—
Corporate
91,077
81,694
44,416
155,124
61,311
89,437
35,026
38,918
—
—
—
—
Common shares
299,432
330,560
291,955
270,348
463,217
273,161
310,066
376,275
214,231
235,382
Class B exchangeable
units
Preferred shares
10,398
11,568
13,093
12,380
26,710
19,854
15,565
30,642
32,656
33,501
51,750
45,930
58,200
52,500
—
—
—
—
—
—
Debt to capitalization
71.2%
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, 51% for Saint-Philémon, 51% for Chi-Wiikwedong,
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
93,572,576
3,000,000
42,749
27,428
3,249,390
Toronto Stock Exchange: CSE, CSE.PR.A, CSE.DB.A, CPW.DB
2014 Annual Report 107
FINANCIAL HIGHLIGHTS
QUARTERLY TRADING INFORMATION
Common shares
High price
Low price
Closing price
Q4
4.27
2.88
3.20
2014
Q3
4.54
4.00
4.15
Q2
Q1
Q4
4.54
3.97
4.25
4.22
3.55
4.02
3.93
3.51
3.56
2013
Q3
4.11
3.76
3.85
Q2
Q1
4.25
3.76
3.79
4.48
4.10
4.25
Average daily volume
845,000
405,000
337,000
516,000
366,000
219,000
564,000
286,000
0.075
0.075
0.075
0.075
0.075
0.075
0.075
0.075
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
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
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Dividend declared
Preferred shares
High price
Low price
Closing price
Average daily volume
20.20
15.26
17.25
4,735
19.90
18.50
19.83
2,094
19.35
17.10
19.06
3,294
17.49
14.90
17.48
4,016
Dividend declared
0.3125
0.3125
0.3125
0.3125
2016 - Convertible debentures
High price
Low price
Closing price
Average daily volume
2017 - Convertible debentures
High price
Low price
Closing price
Average daily volume
103.32
100.25
100.50
3,315
103.32
100.25
102.50
3,494
104.00
101.40
102.92
272
105.90
103.51
104.19
197
104.51
101.01
103.00
179
105.00
101.10
104.00
435
102.99
100.00
102.99
799
101.25
100.00
101.25
122
Note: All high and low security price information is intraday.
108 Capstone Infrastructure Corporation
Glossary
AMP
Gigawatt hour (GWh)
PR 14
Asset management plan, which is developed
A unit of electrical energy equal to
Price Review 14, the regulatory review
by water utilities in the United Kingdom every
1,000 megawatt hours.
process of water companies’ business plans
fi ve years and approved by Ofwat.
Green metric tonne (GMT)
Annual long-term average production
A unit of weight equal to 1,000 kilograms.
An average production fi gure based on the
actual electricity production of a facility since
the start of full operations.
Availability
Availability is the number of hours that
a generating unit is able to provide service
at full output, whether or not it is actually
in service, as a percentage of total hours
in the period.
Capacity
Capacity is the net amount of electricity
generated by a generating unit as a
Hydrology
The eff ect of precipitation and evaporation
upon the occurrence and distribution of
water in streams, lakes and on or below
the land surface.
Megawatt (MW)
A megawatt is 1,000 kilowatts.
Megawatt hour (MWh)
This is a measure of energy production or
consumption equal to one million watts
produced or consumed in one hour (total
for the next asset management plan period
from 2015 to 2020.
RCV
The regulated capital value, or capital base,
that is used by Ofwat as one component
to set the prices a water utility may charge
its customers in each asset management
plan period.
REC
A renewable energy credit is a certifi cate
issued by a government agency to a power
company that uses environmentally friendly
methods to generate electricity. The RECs
can in turn be sold and traded to third parties
amount of power required to light 10,000
or on the open market.
percentage of the total possible generation
100-watt light bulbs).
over the period.
Cogeneration
ML/d
Millions of litres of water per day.
Cogeneration refers to the simultaneous
production of electricity and thermal energy
MMBtu
RPI
The Retail Price Index is a measure of infl ation
in the United Kingdom. The rates Bristol
Water may charge its customers increase by
RPI each year.
in the form of heat or steam from a single
fuel source, a process that results in high
effi ciency and an eff ective use of energy.
Consumer Price Index (CPI)
The CPI is an indicator of infl ation that
A unit of heat equal to one million British
thermal units. A British thermal unit is the
SIM
quantity of energy necessary to raise the
temperature of one pound of water by one
degree Fahrenheit.
Service Incentive Mechanism, a new
incentive mechanism introduced by Ofwat
to reward or penalize water companies’
service performance.
measures the change in the cost of a fi xed
Ofwat
basket of products and services, including
housing, electricity, food and transportation.
Direct Customer Rate (DCR)
The Direct Customer Rate, which is set by
the Ontario Electricity Financial Corporation,
is calculated based on a three-year average
of the total market cost of electricity to
industrial customers.
Gigajoule (GJ)
One GJ is equivalent to the amount of energy
available from 26.1 m3 of natural gas.
The UK Water Services Regulation Authority.
Total return
Outage
A period of time when a power generation
facility does not produce any electricity.
P3
A partnership between the public and private
sectors to deliver infrastructure projects.
Power Purchase Agreement (PPA)
A PPA is an agreement to purchase
electricity at a specifi ed rate for a defi ned
period of time.
The total return on an investment includes
income from dividends, as well as share price
appreciation or depreciation, over a given
time period.
Watt
A watt is the scientifi c unit of electric power.
Yield
Yield refers to the amount of dividends paid
per share over the course of a year divided by
the trading price of the common shares.
2014 Annual Report 109
Corporate
Information
MANAGEMENT
Michael Bernstein
President and Chief Executive Offi cer
Michael Smerdon
Executive Vice President and
Chief Financial Offi cer
Stu Miller
HEAD OFFICE
155 Wellington Street West
RBC Centre
Suite 2930
Toronto, Ontario M5V 3H1
Tel: 416-649-1300
Fax: 416-649-1335
Executive Vice President, General Counsel
INVESTOR INFORMATION
and Secretary
Jack Bittan
Senior Vice President, Business Development
Rob Roberti
Senior Vice President, Power Generation
Jens Ehlers
Senior Vice President, Finance
Aaron Boles
Senior Vice President, Communications
Stock Exchange and Symbols
Toronto Stock Exchange
Common shares: CSE
Preferred shares: CSE.PR.A
Convertible debentures: CSE.DB.A; CPW.DB
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/
BOARD OF DIRECTORS
investorcentrecanada
V. James Sardo1
Chairman of the Board
Michael Bernstein
Richard Knowles1
Goran Mornhed3
Jerry Patava1,2
François R. Roy3,4
Janet Woodruff 3
AUDITOR
PricewaterhouseCoopers LLP
Toronto, Ontario
INVESTOR RELATIONS CONTACT
Aaron Boles
Senior Vice President, Communications
Tel: 416-649-1325
Toll-free: 1-855-649-1300
Email: info@capstoneinfra.com
1
2
3
4
Member of the Corporate Governance and Compensation Committee.
Chair of the Corporate Governance and Compensation Committee.
Member of the Audit Committee.
Chair of the Audit Committee.
110 Capstone Infrastructure Corporation
ANNUAL GENERAL MEETING
OF SHAREHOLDERS
Wednesday, June 17, 2015
10 a.m. EDT
Ivey Tangerine Leadership Centre
The Exchange Tower
130 King Street West, Ground Floor
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.
Connect with Capstone
on LinkedIn:
Capstone Infrastructure
Corporation
Follow us on Twitter:
@CapstoneCSE
.
i
m
o
c
b
a
r
c
w
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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.
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 Business Conduct and Ethics.
We are accountable for our decisions and seek to communicate with transparency.
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.
STRIVE FOR PROFITABILITY
We are committed to managing and growing our businesses profi tably,
which supports an attractive total return for our investors.
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 businesses and seek to eff ectively manage and mitigate risk.
FULFILMENT 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.
www.capstoneinfrastructure.com