2015 ANNUAL
REPORT
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Financial
Highlights
($000s, except for per share amounts)
Revenue
Net income (loss)
Earnings (loss) per share (1)
Basic
Diluted
Adjusted EBITDA (2)
AFFO (2)
AFFO per share
Cash dividends per share
Common
Preferred
Total assets
Total long-term liabilities
As at and for the year ended December 31
2015
344,983
26,192
(0.038)
(0.038)
115,301
11,233
0.116
0.300
1.250
2,522,089
1,493,836
2014
441,578
33,547
0.057
0.057
160,359
56,412
0.584
0.300
1.250
2,299,980
1,428,293
2013
389,503
67,210
0.462
0.425
128,421
39,934
0.493
0.300
1.250
2,026,324
1,220,107
(1) Earnings per share uses the net income available to common shareholders. Refer to note 21 in the accompanying consolidated financial statements.
(2) Non-GAAP performance measures are defined on page 6.
INSIDE THIS SECTION
Financial highlights
Legal notice
Introduction
Basis of presentation
Changes in the business
Subsequent events
Additional GAAP and Non-GAAP performance
measures definitions
Results of operations
Financial position review
1
2
3
3
3
5
5
8
18
Derivative financial instruments
Foreign exchange
Risks and uncertainties
Environmental, health and safety regulation
Related party transactions
Summary of quarterly results
Fourth quarter 2015 highlights
Accounting policies and internal controls
25
26
26
29
30
31
31
32
CAPSTONE INFRASTRUCTURE CORPORATION
Page 1
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
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 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 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, accordingly, should not be read as guarantees of future performance or results. The forward-looking statements 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, 2015 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 contained herein include or relate to the following: that the
business and economic conditions affecting the Corporation’s operations will continue substantially in their current state, including, with respect to industry conditions, general
levels of economic activity, regulations, weather, taxes and interest rates; that the preferred shares will remain outstanding and that dividends will continue to be paid on the
preferred shares after completion of the plan of arrangement (the “Arrangement”) and that the listing of the preferred shares will not be affected by the Arrangement; that
the meeting of securityholders will occur on March 10, 2016; that the Arrangement will be completed in the second quarter of 2016; 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 for the Corporation’s power infrastructure facilities, or Värmevärden; that there will be no material changes in rate orders or rate structures
for Bristol Water ; 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 relate; market prices for electricity in Ontario and
the amount of hours Cardinal is dispatched; the price Whitecourt will receive 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 the facility;
the re-contracting of the Power Purchase Agreement ("PPA") for Sechelt; 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 the Competition and Market Authority's ("CMA") final determination,
including, among others: real and inflationary changes in Bristol Water’s revenue, Bristol Water’s expenses changing 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, actual results may differ from those
suggested by the forward-looking statements for various reasons, including: risks related to the Corporation’s securities (dividends on common shares and preferred shares
are not guaranteed; volatile market price for the Corporation’s securities; shareholder dilution; and convertible debentures credit risk, subordination and absence of covenant
protection); risks related to the Corporation and its businesses (availability of debt and equity financing; default under credit agreements and debt instruments; geographic
concentration; foreign currency exchange 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); risks
related to Bristol Water (Ofwat price determinations; failure to deliver capital investment programs; economic conditions; operational performance; failure to deliver water
leakage target; SIM and the serviceability assessment; pension plan obligations; regulatory environment; competition; seasonality and climate change; and labour relations); and
risks related to completion of the Arrangement. For a comprehensive description of these risk factors, please refer to the “Risk Factors” section of the Corporation’s Annual
Information Form dated March 24, 2015, as supplemented by disclosure of risk factors contained in any subsequent annual information form, material change reports (except
confidential material change reports), business acquisition reports, interim financial statements, interim management's discussion and analysis 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). There can
be no assurance that the Arrangement will occur. The proposed Arrangement is subject to various regulatory approvals, including approvals under the Competition Act (Canada)
and Investment Canada Act, and the fulfillment of certain conditions, and there can be no assurance that any such approvals will be obtained and/or any such conditions will
be met. The proposed Arrangement could be modified, restructured or terminated.
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. The forward-looking statements 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.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 2
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, 2015 and 2014.
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, 2015 and 2014. Additional information about the Corporation, including its Annual Information Form
("AIF") for the year ended December 31, 2014, 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 3, 2016, 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, 2014
Dec 31, 2015
CHANGES IN THE BUSINESS
Swedish Krona (SEK)
UK Pound Sterling (£)
Average
0.1605
0.1516
Spot
0.1483
0.1638
Average
1.8192
1.9540
Spot
1.8071
2.0407
In 2015, Capstone entered commercial operations for two wind development projects, signed Whitecourt's fuel supply and price support agreement
with Millar Western, completed several financing changes within the power segment and added financial flexibility by increasing the corporate credit
facility, as well as completing an arrangement with a subsidiary of One West Holdings Ltd. ("Concord"). In addition, Capstone responded to the
Ontario Electricity Financial Corporation's ("OEFC") appeal of a favourable Ontario Superior Court ruling and finalized Bristol Water's regulatory
determination and review.
Saint-Philémon and Goulais Achieved Commercial Operations
The Saint-Philémon and Goulais wind development projects achieved commercial operations on budget in January and May of 2015, respectively.
Approvals have been secured for five more projects, three of which began construction in 2015 and are expected to be commissioned in 2016. The
remaining two Ontario projects are expected to start construction in 2016.
Whitecourt's New Fuel Supply Agreement
On March 2, 2015, Millar Western and Whitecourt completed an agreement that secures a long-term fuel supply for the facility for an initial term of
15 years, which is extendable to 20 years. The new agreement, which has a commencement date of January 1, 2015, also includes price support and
revenue sharing mechanisms that reduce the merchant risk of operating in Alberta's power market.
Financing Changes - Term Conversions, Amherstburg Refinancing and Corporate Facility Expansion
Term conversions at Skyway 8, Saint-Philémon and Goulais
On February 17, 2015, the Skyway 8 construction facility converted to a three-year term facility, which has regular principal and interest payments
fully amortizing over 20 years and bears interest at a fixed, annual rate of 4.80%.
On August 4, 2015, the Saint-Philémon construction facility converted to a term facility maturing on May 31, 2034, which has regular principal and
interest payments fully amortizing over the remaining term and bears interest at a fixed, annual rate of 5.49%.
On October 9, 2015, the Goulais construction facility converted to a term facility maturing on September 30, 2034, which has regular principal and
interest payments fully amortizing over the remaining term and bears interest at a fixed, annual rate of 5.16%.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 3
Amherstburg Solar Park
On July 9, 2015, Capstone reached financial close on an approximately $95,000 refinancing of Amherstburg Solar Park's ("Amherstburg") project
debt, which is non-recourse to Capstone. The proceeds were used to repay Amherstburg's outstanding principal, swap break fees and closing costs.
The new project debt fully amortizes over the remainder of the facility's power purchase agreement, which expires in 2031, and bears interest at a
fixed, annual rate of 3.49%.
Corporate Facility Expansion
On October 6, 2015, Capstone and its existing lenders increased the capacity of its corporate credit facility by $35,000 to increase the total facility
to $125,000. The expanded portion of the corporate credit facility matured in January 2016 and the remaining $90,000 was extended by one year,
to mature November 2018.
Wind Works
Arrangement with Concord
On November 16, 2015, a subsidiary of Capstone, issued an unsecured convertible debenture to a subsidiary of Concord. The debenture allows
Concord to eventually acquire a 50% interest in the Ganaraska, Grey Highlands ZEP, Snowy Ridge and Settlers Landing wind development projects
("Wind Works"). As at December 31, 2015, Capstone and Concord have collectively contributed $47,375 in equity, which in combination with debt
proceeds, will be used to construct the Wind Works projects.
Capstone continues to consolidate its investment in the Wind Works projects based on retaining control until the debenture is converted. As at
December 31, 2015, Capstone holds a 75% ownership interest and the original developer holds the remaining 25%, until the projects' respective
commercial operations dates ("COD"). At COD, Capstone will acquire the remaining 25%, totalling to a 100% ownership interest. Capstone expects
to retain control, based on ownership interest up until the automatic conversion of Concord's convertible debenture, at which point Capstone
expects to share control with Concord.
Grey Highlands ZEP and Ganaraska Financing
On December 11, 2015, Capstone, through its subsidiary that controls the Grey Highlands ZEP and Ganaraska wind projects ("GHG"), entered into a
credit agreement that provides up to $82,000 for the construction of the projects. The construction term of the facility matures no later than June
30, 2016 with a variable interest rate based on the Canadian Dollar Offered Rate ("CDOR") plus 1.625%. Upon maturity, the facility will convert to a
term loan, which matures no later than June 30, 2021 with a 5 year variable, annual interest rate of CDOR plus 1.625% (which increases to CDOR
plus 1.875% commencing on the day following the third anniversary of the term conversion date). GHG has entered into swap contracts to convert
its floating interest rate obligations under the credit agreement to a fixed rate. The effective fixed interest rate on the loan is 2.59% from inception
to June 30, 2016, stepping up to 3.08% to June 30, 2021. Interest during construction is capitalized to projects under development. As at December
31, 2015, GHG had made $30,234 in draws under the credit agreement. The loan is non-recourse to Capstone.
Claim Against OEFC
On March 12, 2015, the Ontario Superior Court of Justice determined that the OEFC did not properly calculate the price paid and payable for
electricity produced under its Power Purchase Agreements ("PPA") with Capstone and other power producers in Ontario. On April 10, 2015, the
OEFC served a Notice of Appeal in respect of the March 12, 2015 decision. The appeal was heard on December 14 and 15, 2015.
Capstone estimates that the Court's decision, if upheld, would result in a net receipt of approximately $25,000 representing retroactive adjustments
for revenue claimed from the OEFC and interest. Further, since February 2015, the future price paid for electricity at Capstone's Wawatay and
Dryden hydro facilities is calculated in accordance with the March 12, 2015 judgment, resulting in higher power rates.
Capstone does not recognize contingent assets such as this claim until it is virtually certain the asset is recoverable.
Bristol Water's Regulatory Determination and Review
Capstone owns 50% of Bristol Water, a regulated water utility in the UK. In December 2014, Ofwat, the economic regulator for the UK water sector,
issued a disappointing final determination for the forthcoming five-year regulatory period, known as AMP6. In March 2015, Ofwat referred an appeal
from Bristol Water to the Competition and Markets Authority ("CMA"), the body responsible for arbitrating regulatory references and appeals, for a
water price determination. On October 6, 2015, the CMA published its final determination for Bristol Water’s AMP6 business plan, which runs until
March 31, 2020. Overall, the CMA’s price determination enables Bristol Water to deliver an acceptable level of service to its customers and protect
the integrity of the water system.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 4
As a result of receiving the CMA's final determination, management determined that an impairment assessment trigger for goodwill associated with
the Utilities - Water segment resulted, and therefore, performed an impairment test. Management calculated the recoverable amount based on fair
value less cost of disposal method and concluded that no impairment charge was required. This method was based on a discounted cash flow model
and incorporated assumptions that market participants would use in estimating fair value. The discounted cash flow model incorporates
management's best estimates of future cash flows, a post-tax discount rate and terminal value. Management cautions that a change in key
assumptions on which the recoverable amount is based may cause the carrying amount of the Utilities - Water segment to exceed its recoverable
amount, resulting in an impairment to goodwill.
SUBSEQUENT EVENTS
Arrangement Agreement for the Acquisition of Capstone by iCON Infrastructure
On January 20, 2016, Capstone announced a definitive agreement (the "Arrangement Agreement") with Irving Infrastructure Corp., a subsidiary of
iCON Infrastructure Partners III, L.P., a fund advised by London, UK-based iCON Infrastructure LLP, that provides for the acquisition of all issued and
outstanding common shares of Capstone and Class B exchangeable units of Capstone's subsidiary MPT LTC Holding LP for $4.90 cash per share or
unit, as applicable. The acquisition will be completed by way of a plan of arrangement under the British Columbia Business Corporations Act. The
total equity value of the transaction is approximately $480 million.
As previously announced by Capstone on November 23, 2015, the Corporation had retained RBC Capital Markets and TD Securities Inc. to assist
management and the Board of Directors in reviewing and considering various alternatives involving the Corporation. Following this comprehensive
review, Capstone entered into the Arrangement Agreement, which was unanimously approved by the Board of Directors of Capstone.
Both financial advisors to Capstone have provided fairness opinions that, as at January 20, 2016, subject to certain assumptions, qualifications and
limitations, the consideration to be received by the common shareholders and convertible debenture holders of Capstone pursuant to the
Arrangement Agreement is fair, from a financial point of view, to Capstone's common shareholders and convertible debenture holders, respectively.
The Board of Directors and executive officers of Capstone have entered into customary voting support agreements in favour of the transaction.
The Board of Directors of Capstone unanimously recommends that common shareholders, holders of Class B exchangeable units, and holders of
convertible debentures vote in favour of the resolution approving the Arrangement at the special meeting of shareholders, Class B exchangeable unit
holders and debenture holders to be called to approve the transaction.
Transaction Details
The completion of the transaction is subject to court approval and the approval of Capstone's securityholders. The transaction is also subject to
customary closing conditions, including receipt of all regulatory approvals, including under the Competition Act (Canada) and the Investment Canada
Act. The transaction is not subject to any financing condition. The Arrangement Agreement also provides for customary Board of Directors support
and non-solicitation covenants. Under the Arrangement, it is proposed that Capstone's 6.50% convertible debentures due December 31, 2016 and
Capstone Power Corp.'s 6.75% convertible debentures due December 31, 2017 will be settled in accordance with the agreements, subject to
individual securityholder votes.
Capstone's previously announced fourth quarter 2015 dividend was paid to common and preferred shareholders on January 29, 2016, but no further
dividends will be declared to common shareholders in anticipation of the consummation of the transaction. Quarterly dividends are expected to be
declared to preferred shareholders on a continuing basis and those shares will continue to be listed and trade on the Toronto Stock Exchange
following closing of the Arrangement.
Capstone will hold a meeting of securityholders to consider the resolution approving the Arrangement on March 10, 2016, and if approved, is
expected to complete the transaction in the second quarter of 2016 following receipt of regulatory approvals.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 5
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,
contractual settlements included in other gain and (losses) and dividends or distributions received from equity accounted investments. 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 7.
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:
• Adjusted EBITDA
generated from
businesses with
significant non-
controlling interests
• Distributions received from businesses
with significant non-controlling interests
• Scheduled repayments of principal on
loans receivable from equity accounted
investments
• 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
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 6
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
Contractual settlements in other gains and (losses)
Equity accounted (income) loss
Distributions from equity accounted investments
Net pension interest income
NCI portion of Adjusted EBITDA
Adjusted EBITDA (1)
Cash flow from operating activities (2)
Cash flow from operating activities of businesses with NCI
Distributions paid to Capstone from businesses with NCI
Distributions from equity accounted investments
Foreign exchange (gains) losses on loans receivable from Värmevärden
Power and corporate working capital changes
Loans receivable principal repayments
Power maintenance capital expenditures
Power and corporate scheduled principal repayments
Dividends on redeemable preferred shares
AFFO
For the year ended
Dec 31, 2015
Dec 31, 2014
162,227
—
(3,720)
10,385
3,774
816
5,853
(3,062)
(60,972)
115,301
116,900
(103,934)
7,249
5,853
(193)
10,231
1,442
(3,518)
(19,047)
(3,750)
11,233
177,433
30,592
4,673
7,669
(3,762)
1,127
7,354
(2,132)
(62,595)
160,359
155,718
(99,093)
9,572
7,354
759
5,185
1,220
(3,868)
(16,685)
(3,750)
56,412
(1) See page 11 for a reconciliation of Adjusted EBITDA to net income.
(2) Cash flow from operating activities for the period ended December 31, 2015 include $13,046 of one-time costs to terminate the Amherstburg interest
rate swap.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 7
RESULTS OF OPERATIONS
Overview
Capstone's Adjusted EBITDA and AFFO were both lower than in 2014.
Adjusted EBITDA performance primarily reflected:
•
Lower results from the power segment primarily attributable to the economics of Cardinal's new contract, which became effective on January
1, 2015. In addition, Capstone's operating wind facilities generally experienced poor wind conditions resulting in lower revenue. These declines
were partially offset by contributions from Skyway 8, Saint-Philémon and Goulais, which commenced operations in August 2014, January 2015,
and May 2015 respectively;
•
•
Lower results from Bristol Water, reflecting Ofwat's AMP6 regulatory determination, which decreased annual regulated water tariffs as of April
1, 2015. This was partially offset by positive foreign currency translation; and
Lower corporate expenses, primarily due to lower integration-related administrative expenses in 2015. This was partially offset by non-
recurring project development costs to pursue business development opportunities and perform the strategic review.
In addition to the factors affecting Adjusted EBITDA, Capstone's AFFO was affected by:
•
•
Lower dividends from Bristol Water and Värmevärden; and
Partially offset by the initial distributions received from Saint-Philémon and Goulais in 2015.
Revenue
Expenses
Interest income
Contractual settlements in other gains and (losses)
Distributions from equity accounted investments
Less: 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, 2015
Dec 31, 2014
344,983
441,578
(183,074)
(226,450)
4,737
3,774
5,853
(60,972)
115,301
(61,298)
7,249
1,442
4,234
(3,762)
7,354
(62,595)
160,359
(62,667)
9,572
1,220
(24,120)
(25,071)
(3,750)
(1,026)
(3,518)
(19,047)
11,233
0.116
259.9%
0.300
(3,750)
(2,698)
(3,868)
(16,685)
56,412
0.584
51.4%
0.300
Revenue decreased by $96,595, or 22%, mainly due to $85,352 less power segment revenue, primarily because of $89,321 due to the economics
of Cardinal's new contract, partially offset by contributions from wind, largely reflecting the new development projects reaching commercial
operations. The power segment revenue decrease also reflected $12,971 less revenue at Whitecourt due to lower power rates and less production
from wind (excluding the new facilities). At Bristol Water, revenue decreased by $11,243, primarily due to lower regulated water tariffs, partially
offset by favourable foreign currency translation.
Expenses decreased by $43,376, or 19%, because:
• Operating expenses decreased by $46,481, or 22%, primarily due to lower power segment expenses of $50,474, reflecting substantially lower
Cardinal production costs. This decrease was partially offset by $3,994 of higher expenses at Bristol Water, primarily due to $8,857 of higher
currency translation and $4,885 of one-time costs, which include costs of restructuring and for the CMA process. These increases were partially
offset by savings of $9,748 reflecting cost containment efforts and lower maintenance and bad debt expenses.
•
•
Administrative expenses decreased by $1,484, or 11%, primarily reflecting an $846 HST recovery and a decrease in professional fees
attributable to the integration of ReD in 2014. These decreases were partially offset by higher staff costs mainly due to increases in the long-
term incentive compensation in response to a higher share price at the end of 2015.
Project development costs increased by $4,589, or 172%, of which $3,252 related to corporate and $1,337 related to the power segment.
The increase primarily reflects higher professional fees at corporate due to acquisition analysis, due diligence, as well as the review of
alternatives, which culminated in the January 20, 2016 announcement with iCON.
Interest income increased by $503, or 12%, primarily due to higher interest from the power segment, from higher interest of $726 from the loan
receivable related to the Goulais wind facility. This is partially offset by lower cash balances at the other power facilities producing lower interest
income.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 8
Contractual settlements in other gains and (losses) relate to cash settlements included in other gains and losses under IFRS in the consolidated
statement of income. The current amount is comprised of a $4,035 receipt relating to the new Whitecourt fuel supply agreement, partially offset by
a $261 payment under Cardinal's gas purchase agreement.
Distributions from equity accounted investments were $1,501, or 20%, lower in 2015 due to lower distributions of $1,110 from Värmevärden
and $391 from the Glen Dhu wind facility ("Glen Dhu").
Distributions from businesses with NCI were $2,323, or 24%, lower in 2015 mainly due to a $6,079 decrease in dividends from Bristol Water,
partially offset by initial distributions of $2,393 from Saint-Philémon and $1,489 from Goulais.
Interest paid decreased by $951, or 4%, primarily attributable to $1,584 at Amherstburg as a result of the refinancing in 2015 and $1,098 of lower
interest on amortizing debt balances at Erie Shores, the hydro facilities, SkyGen and Glace Bay. These decreases were partially offset by a $977
increase at the Skyway 8 facility, since drawing on the debt in May 2014 and a $755 increase on the corporate credit facility due to a higher balance.
Interest paid by Bristol Water, Amherst, Saint-Philémon and Goulais 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, 2015.
Income taxes paid were $1,672, or 62%, lower in 2015 , primarily due to refunds of prior year taxes paid of $668 and lower corporate minimum
taxes of $567. In addition, taxes paid were lower due to $342 of non-recurring CRCE penalties paid in 2014.
Maintenance capital expenditures decreased by $350, or 9%, primarily due to $1,396 of higher 2014 expenditures at the hydro facilities and at
Erie Shores, partially offset by $1,046 of higher capital improvements in 2015 at Cardinal, SkyGen and Whitecourt.
Scheduled debt principal repayments increased by $2,362, or 14%, primarily due to a $1,750 increase on the amortizing debt of Amherstburg, the
hydro facilities and Erie Shores, as well as $517 from Skyway 8, since drawing on the debt in May 2014.
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, Amherst, Saint-Philémon and Goulais, 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:
Accounting treatment
Control
Significant influence
Ownership
Power (1)
Utilities - water
Utilities - district heating
Wholly owned
Partially owned
Minority interest
Cardinal (gas cogeneration), Erie Shores, SkyGen, Glace Bay, and
Confederation Power (wind facilities)(2), Whitecourt (biomass
facility), Amherstburg (solar park) and the hydro facilities.
Amherst, Saint-Philémon
and Goulais (wind facility)
Glen Dhu and Fitzpatrick
(wind facilities)
Bristol Water
Värmevärden
(1) The power segment includes investments in several wind development projects in addition to the operating businesses disclosed above.
(2) The Confederation Power wind facilities were sold on May 19, 2015; accordingly, the results of operations are only reflected up to that date.
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
Dec 31, 2015 Dec 31, 2014
$
Power
Utilities – water
Utilities – district heating
72,130
51,961
6,166
59,414
7,435
106,674
(34,544)
%
(32)%
(13)%
(17)%
14%
Dec 31, 2015 Dec 31, 2014
$
29,195
66,234
(37,039)
1,992
6,166
8,071
7,435
(6,079)
(1,269)
%
(56)%
(75)%
(17)%
(26,120)
(25,328)
(792)
3%
(7,453)
(1,269)
(1,792)
(14,956)
(13,164)
115,301
160,359
(45,058)
(28)%
11,233
56,412
(45,179)
(80)%
Corporate
Total
CAPSTONE INFRASTRUCTURE CORPORATION
Page 9
Power
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2014:
Change
Explanations
(32,672) Lower Adjusted EBITDA at Cardinal under the new non-utility generator ("NUG") contract.
8,753 Adjusted EBITDA contribution from new wind facilities, Skyway 8, Saint-Philémon and Goulais, that reached their respective COD
of August 2014, and January and May of 2015.
(7,296) Lower revenue from the hydro, wind (excluding new facilities) and solar facilities due to lower production attributable to poor
resources.
(1,974) Lower revenue from Whitecourt due to lower power rates, net of contractual settlements, under the fuel supply agreement.
(1,355) Various other changes.
(34,544) Change in Adjusted EBITDA.
(6,084) Change in Adjusted EBITDA attributable to non-controlling interests.
3,882 Initial distributions post COD in 2015 from Saint-Philémon ($2,393) and Goulais ($1,489).
(1,493) Skyway 8 debt service costs post COD.
1,200 Various other changes.
(37,039) Change in AFFO.
Utilities – water
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2014:
Change
Explanations
(13,561) Lower revenue due to decrease in regulated water tariffs.
4,400 Impact of foreign exchange on Adjusted EBITDA.
3,709 Reduced maintenance and lower staff costs.
(2,443) Higher operating expenses related to non-recurring costs for restructuring, preparing submissions to the 2014 price review and
the CMA process.
442 Various other changes.
(7,453) Change in Adjusted EBITDA.
(6,520) Lower dividends received.
441 Impact of foreign exchange on dividends received from Bristol Water.
(6,079) Change in AFFO.
Utilities – district heating
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2014:
Change
Explanations
(1,110) Lower distributions received.
(159) Impact of foreign exchange on Adjusted EBITDA and AFFO.
(1,269) Change in Adjusted EBITDA and AFFO.
Corporate
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2014:
Change
Explanations
(1,724) Professional fees for the strategic review incurred in 2015.
(1,317) Higher long-term incentive plan expense due to a higher share price at the end of 2015.
846 Higher HST recovery in 2015 primarily related to prior year claims.
403 Various other changes.
(1,792) Change in Adjusted EBITDA.
1,235 Lower minimum tax and refunds of prior year taxes paid.
(235) Various other changes.
(792) Change in AFFO.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 10
Net income (loss)
Net income (loss) for each business segment was:
Net income (loss)
Power (1)
Utilities – water
Utilities – district heating
Corporate
Total
For the year ended
Dec 31, 2015
Dec 31, 2014
(7,727)
49,341
5,703
(21,125)
26,192
3,280
48,665
(3,278)
(15,120)
33,547
(1)
Power is net of impairment charges of $30,592 for the year-ended December 31, 2014.
Capstone’s net income (loss) comprises cash measures included in Adjusted EBITDA and non-cash measures required by IFRS. The major reconciling
items were:
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
Contractual settlements in other gains and (losses)
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, 2015
Dec 31, 2014
115,301
160,359
(6,669)
60,972
—
(10,385)
(3,774)
3,720
(8,481)
62,595
(30,592)
(7,669)
3,762
(4,673)
(57,941)
(54,145)
3,062
(83,981)
5,887
26,192
2,132
(79,766)
(9,975)
33,547
Other gains and (losses) were $2,716 higher than in 2014. Other gains and (losses) include non-cash items required by IFRS. The loss includes
$7,477 of losses on capital assets replaced as part of Cardinal's conversion to a cycling facility and $2,538 primarily from the termination of the
Amherstburg interest rate swap, as part of refinancing the project debt.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 11
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 Québec. Results from these facilities were:
For the year ended December 31, 2015
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Contractual settlements (3)
Distributions from equity accounted investments
Less: NCI
Adjusted EBITDA
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
Gas
66.5
10.1%
85.6%
Wind (1) Biomass (1)
554.4
183.1
28.1%
96.5%
86.4%
95.5%
Hydro
142.1
45.4%
98.9%
Solar Development (2)
38.1
21.7%
97.7%
n/a
n/a
n/a
Total
984.2
n.m.f
n.m.f
22,854
57,599
7,453
14,059
15,991
—
117,956
(13,849)
(10,747)
(10,549)
(4,052)
(1,318)
(3,931)
(44,446)
70
(261)
—
—
1,167
—
2,426
(8,932)
79
4,035
—
—
17
—
—
—
17
—
—
—
—
—
—
2
1,350
3,774
2,426
(8,930)
8,814
41,513
1,018
10,024
14,690
(3,929)
72,130
—
—
—
—
(670)
—
(9,296)
5,257
—
—
—
1,359
—
—
—
—
—
—
(8,525)
(1,298)
(9,563)
—
(4,485)
(4,639)
(652)
(898)
—
—
(4,705)
(4,779)
(41)
(9,337)
—
—
—
—
—
5,257
1,359
(17,649)
(3,518)
(19,047)
AFFO
8,144
18,088
1,725
(64)
5,272
(3,970)
29,195
For the year ended December 31, 2014
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Contractual settlements (3)
Distributions from equity accounted investments
Less: NCI
Adjusted EBITDA
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
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
(67,257)
(8,883)
(10,123)
(3,618)
(1,109)
(2,594)
(93,584)
328
(3,762)
—
—
420
—
2,817
(3,269)
222
—
—
—
21
—
—
—
28
—
—
—
—
—
—
1,019
(3,762)
2,817
145
(3,124)
41,484
37,692
4,420
10,538
14,989
(2,449)
106,674
—
—
—
—
—
—
(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
17,025
5,170
(31)
4,704
(2,118)
66,234
(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) Contractual settlements are included in other gains and (losses) on the consolidated statement of income.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 12
The following charts show the composition of Adjusted EBITDA and AFFO for the the power segment’s operating businesses:
Adjusted EBITDA
YTD 2015
Adjusted EBITDA
YTD 2014
AFFO
YTD 2015
AFFO
YTD 2014
Legend
Gas
Wind
Biomass
Hydro
Solar
Revenue decreased by $85,352, or 42%, primarily due to Cardinal where revenue was $89,321 lower due to the economics of the new NUG
contract whereby Cardinal began operating as a cycling facility in 2015 versus operating as a baseload facility in 2014. In addition, revenue was
$12,971 lower because of lower power rates at Whitecourt and lower production from wind (excluding the new facilities). In 2015, Whitecourt's
revenue was $6,868 lower because its PPA expired and merchant power prices in 2015 were lower than 2014 PPA rates. These decreases were
partially offset by $17,015 of contributions from new wind facilities, comprising production from Skyway 8, Saint-Philémon and Goulais, which
reached commercial operations in August 2014, January 2015 and May 2015, respectively.
Expenses decreased by $49,138, or 53%, primarily due to $53,408 of lower operating expenses at Cardinal reflecting lower gas and gas
transportation costs due to lower production under the new NUG contract. In addition, expenses at wind (excluding the new facilities) were $795
lower primarily because Confederation Power was sold in May 2015. These decreases were partially offset by higher expenses of $2,795
attributable to the new wind facilities and $1,337 to develop wind projects.
Interest income increased by $331, or 32%, primarily due to interest of $726 received from the Batchewana First Nation of Ojibways ("BFN") loan
receivable related to the Goulais wind facility. This was partially offset by lower interest of $258 and $143 at Cardinal and Whitecourt, respectively,
due to lower average cash balances in 2015.
Contractual settlements in other gains and (losses) related to cash settlements included in other gains and losses under IFRS, in the consolidated
statement of income. In 2015, the amount comprises a $4,035 receipt from Millar Western under Whitecourt's new fuel supply agreement, partially
offset by a $261 payment to Husky under Cardinal's gas purchase agreement.
Distributions from equity accounted investments decreased by $391, or 14%, due to receipts from Capstone's 49% interest in the Glen Dhu wind
facility.
Non-controlling interests related to the Adjusted EBITDA attributed to Capstone's partners for the Amherst, Saint-Philémon and Goulais wind
projects.
Distributions from businesses with NCI increased by $3,756, or 250%, primarily due to initial distributions of $2,393 from Saint-Philémon and
$1,489 from Goulais, paid on conversion of the credit facilities, partially offset by lower accrued management fees at Saint-Philémon in 2015.
Interest paid decreased by $1,706, or 9%, primarily due to lower payments of $1,584 at Amherstburg as a result of the refinancing completed in the
third quarter of 2015 and lower payments of $1,098 on amortizing debt balances at Erie Shores, the hydro facilities, SkyGen and Glace Bay. These
decreases were partially offset by higher payments of $977 at the Skyway 8 facility, since drawing on the debt in May 2014.
Maintenance capital expenditures decreased by $350, or 9%, primarily due to 2014 expenditures of $965 at the hydro facilities, related to the
penstock repairs, and $431 at Erie Shores, due to gearbox maintenance that did not recur in 2015. These decreases are partially offset by capital
improvements of $670 at Cardinal, $195 at SkyGen and $182 at Whitecourt.
Scheduled repayments of debt principal increased by $2,362, or 14%, primarily due to a $1,750 increase on the amortizing debt of Amherstburg,
the hydro facilities and Erie Shores, as well as $517 from Skyway 8, since drawing on the debt in May 2014.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 13
Project development
The Saint-Philémon and Goulais wind development projects reached COD consistent with their targeted dates and within their budgets. Skyway 8,
Saint-Philémon and Goulais began contributing to Capstone's operating results since their respective COD's of August 2014, and January and May of
2015.
As at December 31, 2015, Capstone's development pipeline included the rights to net 52 MW (gross 76 MW) summarized as follows:
Project
Ganaraska (1)
Grey Highlands ZEP (1)
Settlers Landing (1)
Snowy Ridge (1)
Grey Highlands Clean
Riverhurst
Expected
COD
Expected
Ownership
Interest
2016
2016
2017
2016
2016
2018
50%
50%
50%
50%
100%
100%
Net
Capacity
8.8 MW
5.0 MW
5.0 MW
5.0 MW
18.5 MW
Counterparty
Expected
PPA Expiry Status
IESO
IESO
IESO
IESO
IESO
2036
2036
2037
2036
2036
2038
Under construction (2)
COD - Feb 26, 2016
ERT (3)
Received ERT, pre-construction (4)
Under construction (5)
Interconnection assessment
10.0 MW
SaskPower
(1) Capstone expects to share control of the Wind Works projects, refer to page 3 of this MD&A "Changes in the Business" for further detail.
(2) The Environmental Review Tribunal ("ERT") dismissed the appeal of the project’s Renewable Energy Approval ("REA"), which was subsequently
appealed to the Minister of the Environment and Climate Change. Capstone is defending the appeal to the Minister, and believes the ERT
decision will be upheld.
(3) The ERT ordered that the appeal of the project’s REA is allowed in part, and that it will allow the parties to the appeal to make submissions in
relation to the appropriate remedy. Capstone is taking the necessary procedural steps to make submissions in relation to the appropriate
remedy to the ERT.
(4) The ERT dismissed the appeal of the project's REA, which was subsequently appealed to the Minister of the Environment and Climate Change.
Capstone is defending the appeal to the Minister, and believes the ERT decision will be upheld.
(5) The ERT dismissed the appeal of the project’s REA, which was subsequently appealed to the Ontario Divisional Court. Capstone is defending
the appeal, and believes the ERT decision will be upheld.
Capstone expects to fund these six development projects with a combination of equity from Capstone, along with a partner on four of the projects
and project-level debt financing, which will be non-recourse to Capstone.
Seasonality
In 2015, Cardinal's new NUG contract changed how the facility contributes to Capstone economically. Under the new contract, Cardinal earns a
portion of its revenue by supplying electricity to the Ontario grid only when profitable to do so. Cardinal is no longer a baseload facility, consequently,
historical production is not indicative of seasonal impacts upon production. The new contract is not expected to have a material seasonality impact.
Overall, the results for Capstone’s power segment fluctuate during the year because of 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
Wind - existing more than one year (2)
Wind - existing less than one year (3)
Biomass (2)
Hydro
Solar
Total
PPA Expiry
2020 - 2037
2035
2030
2017 - 2042
2031
Actual
2015
447.9
106.5
183.1
142.1
38.1
917.7
Average long-term production (GWh) (1)
Q1
145.2
20.4
49.8
31.4
7.2
Q2
106.9
22.5
45.5
56.3
12.4
Q3
76.8
25.5
50.0
29.2
12.5
Q4
146.4
38.2
48.8
41.4
5.8
254.0
243.6
194.0
280.6
Annual
475.3
106.5
194.1
158.3
37.9
972.1
(1) Average long-term production for each of the assets included is for periods greater than five years, except for businesses acquired or built within the last
five years. This means that Amherstburg, the wind facilities acquired by Capstone on October 1, 2013, and Skyway 8, Saint-Philémon and Goulais have a
shorter period than five years in calculating the average long-term production.
(2) The average long-term production excludes Capstone's equity investments (Chapais biomass facility, and the Glen Dhu and Fitzpatrick wind facilities).
(3) The average long-term production for wind - existing less than one year is composed of Saint-Philémon and Goulais, since January and May 2015,
respectively.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 14
Infrastructure – Utilities
Water
Capstone’s water utilities segment includes a 50% ownership interest in
Bristol Water, which is located in the UK.
Water supplied (megalitres)
Revenue
Operating expenses
Interest income
Adjusted EBITDA before NCI
Less: NCI
Adjusted EBITDA
Adjusted EBITDA of consolidated
businesses with NCI
Dividends from businesses with NCI
AFFO
For the year ended
Dec 31, 2015
Dec 31, 2014
83,151
227,027
82,528
238,270
(123,524)
(119,530)
500
104,003
(52,042)
51,961
145
118,885
(59,471)
59,414
(51,961)
(59,414)
1,992
1,992
8,071
8,071
Revenue decreased by $11,243, or 5%, and was $28,898, or 11%, lower
excluding foreign currency. The majority of the variance, or $30,820, was
attributable to lower water tariffs following implementation of the Ofwat
AMP6 final determination on April 1, 2015. The decrease was partially
offset by $3,699 higher revenue because tariffs during the first quarter
were higher before the new AMP.
Operating expenses increased by $3,994, or 3%, and were $4,863, or
4%, lower excluding foreign currency. The decrease was primarily
attributable to $9,748 in savings from cost containment efforts, lower
maintenance and bad debt expenses. These decreases were partially
offset by $4,885 of higher one-time costs for restructuring and the CMA
appeals process.
Interest income increased by $355, or 245%, mainly because of a rebate
received relating to capital leases from prior years.
NCI relates to the Adjusted EBITDA attributable to Capstone's partners.
Dividends paid to Capstone were $6,079, or 75%, lower than in 2014, as
Bristol Water retained funds in 2015.
Growth in Regulated Capital Value
(All data above reflects fiscal years ended March 31)
RCV (in millions of £'s)
Regulator Deemed RCV
Actual Achieved RCV
Water Leakage Versus Target
(* For the year ended December 31, 2015)
Mega Litres per day (ML/day)
Actual (Annual)
Target (Annual)
Capital expenditures
As at December 31, 2015, Bristol Water had spent $41,000 on AMP6 capital expenditures, incurred since April 1, 2015.
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.
Regulatory
Bristol Water is a regulated utility subject to supervision by Ofwat. In 2014, Ofwat, issued a disappointing final determination for the next five-year
period, known as AMP6 and in early 2015, Ofwat referred an appeal from Bristol Water to the Competition and Markets Authority ("CMA"), for a
water price determination. On October 6, 2015, the CMA published its findings for the AMP6 business plan, which overall, enables Bristol Water to
deliver an acceptable level of service to its customers and protect the integrity of the water system.
Management continues to focus on achieving regulatory output targets, including leakage of less than 50 million litres of water per day (“Ml/d”) in
2015/2016. For the regulatory year ended March 31, 2015, Bristol Water achieved leakage levels of 45.1 MI/d (for regulatory year ended March 31,
2014 - 43.7 MI/d).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 15
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 2015 was lower than
2014, primarily due to lower revenue attributed to warmer weather
conditions.
Overall, Värmevärden's cash flow to support interest and dividend
payments to shareholders remained strong.
For the year ended
Heat and Steam Production
Dec 31, 2015
Dec 31, 2014
(GWh)
2015
2014
Heat and steam production (GWh)
Equity accounted income (loss)
proportionate to Capstone
Interest income
Dividends
Adjusted EBITDA and AFFO
985
(1,504)
2,739
3,427
6,166
1,010
(2,034)
2,898
4,537
7,435
Interest income is earned on the outstanding balance of the
shareholder loan receivable from Värmevärden. Capstone received
$2,739 in interest income from Värmevärden in 2015, which was $159
lower in 2015, due to unfavourable foreign exchange translation.
Dividends received were $1,110 lower in 2015 because Värmevärden had accumulated surplus cash allowing for a higher distribution in 2014.
Equity accounted loss included in Capstone's net income was $530 lower in 2015. Capstone suspended recording equity accounted losses in
2015 in accordance with IFRS as the equity accounted investment was a negative balance for accounting purposes.
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.
Fuel Mix Breakdown by
MWh - 2015
Fuel Mix Breakdown by
MWh - 2014
Fuel Mix Breakdown by Cost
(SEK) - 2015
Fuel Mix Breakdown by Cost
(SEK) - 2014
CAPSTONE INFRASTRUCTURE CORPORATION
Page 16
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
Principal from loans receivable
Interest paid
Dividends paid on Capstone’s preferred shares
Income taxes (paid) recovery
AFFO
For the year ended
Dec 31, 2015
Dec 31, 2014
(11,782)
(3,322)
148
(13,266)
(70)
172
(14,956)
(13,164)
83
(6,471)
(3,750)
(1,026)
—
(5,716)
(3,750)
(2,698)
(26,120)
(25,328)
Administrative expenses decreased by $1,484, or 11% reflecting the net impact of higher staff costs and lower other administrative expenses as
follows:
Staff costs
Other administrative expenses
For the year ended
Dec 31, 2015
Dec 31, 2014
8,248
3,534
11,782
7,528
5,738
13,266
Staff costs increased by $720, or 10%, primarily due to higher accrued, deferred incentive compensation in response to a share price increase in
2015, offset by lower salary and short-term incentive payments.
Other administrative expenses were $2,204, or 38%, lower primarily due to $846 of HST refunds and $3,050 lower professional fees primarily
because 2014 included costs for the integration of ReD. Other administrative expenses include 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 increased by $3,252, primarily due to higher professional fee attributed to acquisition analysis, due diligence and the
strategic review, which culminated in the January 20, 2016 announcement with iCON.
Interest income is earned on corporate cash balances and was consistent with 2014.
Interest paid increased by $755, or 13%, primarily due to a higher corporate credit facility balance.
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 $1,672, or 62%, lower in 2015, primarily due to refunds of prior year taxes paid of $668 and lower corporate minimum taxes of
$567. Corporate minimum taxes were lower because Capstone paid $359 of corporate minimum tax installments in 2014, $208 of which was
recovered in 2015. In addition, taxes paid were lower due to $342 of CRCE penalties paid in 2014.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 17
FINANCIAL POSITION REVIEW
Overview
As at December 31, 2015, Capstone had a consolidated working capital deficit of $54,580 compared with a $69,694 surplus at December 31, 2014.
The decrease of $124,274 was primarily due to the power segment, where restricted cash decreased as funds were used to construct wind
development projects that generated capital assets. In addition, working capital decreased due to lower accounts receivable at Cardinal and a higher
current portion of long-term debt at SkyGen and corporate, for debt maturing in 2016.
Capstone’s 2015 debt to capitalization ratio (refer to page 19) of 71.7% was consistent with 71.2% in 2014 on a fair value basis and increased from
61.3% to 63.5% on a book value basis. On a fair value basis, increases of $100,428, or 11%, in debt and $31,843, or 9%, in equity offset each other
and kept the ratio consistent. The increase in the fair value of debt primarily relates to a $45,348 increase at Bristol Water, attributable to
appreciation of the UK pound sterling and a $27,000 increase in the amount drawn on the corporate credit facility. The increase in the fair value of
equity is mainly due to a 13% increase in share price resulting in a $43,226 increase in equity. This was partially offset by a 25% decrease in the price
of the preferred shares for a $12,780 decrease in equity.
As at December 31, 2015, Capstone and its subsidiaries complied with all debt covenants.
Liquidity
Working capital
As at
Power
Utilities – water
Corporate
Working capital
Dec 31, 2015
Dec 31, 2014
(34,929)
26,239
(45,890)
(54,580)
68,452
8,586
(7,344)
69,694
Capstone's working capital was $124,274 lower than December 31, 2014, primarily due to decreases of $103,381 for the power segment and
$38,546 for corporate, partially offset by an increase of $17,653 at Bristol Water. Bristol Water's increase primarily reflects the $12,224 increase in
cash, due to funds retained, resulting mainly from lower dividends in 2015.
The power segment working capital decreased primarily due to $40,844 less restricted cash, which was used to fund construction of Saint-
Philémon and Goulais wind development projects. In addition, Cardinal's accounts receivable decreased by $20,556 based on lower revenue under
the new NUG contract. The majority of the remaining decrease related to a $34,379 increase in the current portion of long-term debt, due to 2016
maturities of the SkyGen debt. The remaining difference was primarily attributable to higher accruals for the wind development projects compared
with 2014. The decrease in corporate working capital was mainly because of a $41,674 increase in the current portion of long-term debt, due to the
maturity of one series of convertible debentures.
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, 2015
Dec 31, 2014
43,705
25,495
5,192
74,392
(22,056)
(25,495)
26,841
36,637
13,271
8,934
58,842
(18,174)
(13,271)
27,397
Unrestricted cash represents funds available for operating activities, capital expenditures and future acquisitions. The unrestricted cash and cash
equivalents increase of $15,550 was due to increases of $12,224 at Bristol Water and $7,068 at the power segment, partially offset by $3,742 at
corporate. Cash and cash equivalents available to corporate are net of Bristol Water and power segment cash of $25,495 and $22,056 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, Goulais, Saint-Philémon, Amherst and the Wind Works development projects.
Restricted cash
Restricted cash decreased by $36,814 primarily to fund construction of Goulais and Saint-Philémon, partially offset by increases in restricted cash at
corporate and Bristol Water.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 18
Cash flow
Capstone’s consolidated cash and cash equivalents increased by $15,550 in 2015 compared with $13,074 in 2014. The components of the
increase, 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, 2015
Dec 31, 2014
116,900
155,718
(137,446)
(297,425)
64,357
(30,364)
2,103
15,550
184,528
(30,015)
268
13,074
Cash flow from operating activities generated $38,818 less cash and cash equivalents in 2015 than during 2014 primarily due to $33,666 of
lower cash flows at the power segment and $9,071 at the utilities segment. This was partially offset by an increase at corporate of $3,919. Cash
flows at the power and utilities segments decreased primarily due to the economics of the new contract at Cardinal and reduced AMP6 revenue at
Bristol Water.
Cash flow used for investing activities was $159,979 lower in 2015. In 2015, restricted cash decreased by $38,176 (2014 - $36,091 increase in
restricted cash) primarily because funds were used to construct Saint-Philémon and Goulais. In addition, investment in capital assets was $100,422
(2014 - $129,813) while $93,973 (2014 - $127,624) was invested for the construction of projects under development in the power segment.
Loans receivable decreased for repayments of $12,948 in 2015 (2014 - $10,280 advances), primarily related to the loan to BFN. Lastly, distributions
from equity accounted investments were $5,825 in 2015 (2014 - $7,430), primarily because Värmevärden distributed accumulated cash in 2014.
Cash flow from financing activities decreased by $120,171 in 2015. In 2015, debt draws were $128,534 lower primarily because no new debt
was raised to finance Bristol Water capital expenditures. In addition, contributions were $11,500 lower as no contributions were received from BFN
in 2015 and repayments of debt principal were $11,231 higher in 2015. This was partially offset by convertible debenture advances of $30,159 in
2015 and $2,994 lower dividends to non-controlling interests primarily due to lower dividends.
Dividends paid to shareholders were $349 higher in 2015 due to additional shares issued as part of the dividend reinvestment program.
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 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, 2015
Dec 31, 2014
Fair Value
Carrying Value
Fair Value
Carrying Value
464,154
413,571
117,811
—
995,536
444,457
356,292
116,869
(11,779)
905,839
435,808
368,223
91,077
—
423,365
315,447
89,393
(9,272)
895,108
818,933
393,423
520,535
361,580
516,706
1,388,959
1,426,374
1,256,688
1,335,639
71.7%
63.5%
71.2%
61.3%
(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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 19
Power
The composition of the power segment’s long-term debt was:
As at
Project debt
Wind - Operating (1)
Wind - Development (2)
Hydros
Solar (3)
Less: non-controlling interest
Capstone share of long-term debt
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
Dec 31, 2015
Dec 31, 2014
2016 - 2034
4.72 - 6.36%
343,012
321,395
2021
2.59%
2040 - 2041
4.56 - 7.00%
2030
3.49%
30,234
88,159
93,140
554,545
(90,391)
464,154
30,234
85,196
92,386
529,211
(84,754)
444,457
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
(1) Wind - operating project debt consists of Erie Shores, Amherst, SkyGen, Skyway 8 and Glace Bay for both periods. In 2015, on COD the Saint-Philémon
and Goulais project debt was transfered from wind - development.
(2) Wind - development project debt consists of the Grey Highlands ZEP and Ganaraska construction facility (2014 - Saint-Philémon and Goulais).
(3) Solar - On July 9, 2015, the Amherstburg Solar Park refinanced the project debt.
In 2015, long-term debt of the power segment increased by $17,710, primarily because of $30,234 of new debt relating to the construction facility
for the Grey Highlands ZEP and Ganaraska wind development projects, as well as an increase of $14,546 to refinance the Amherstburg solar facility,
partially offset by scheduled amortizing debt repayments of $25,758. In addition, the Skyway 8, Saint-Philémon and Goulais construction debts were
converted to term facilities. Refer to page 3, the "Changes in the Business" section of the MD&A for details.
As at December 31, 2015, approximately 98% of the power segment's long-term debt was scheduled to amortize over the lives of the facilities'
respective PPAs. 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 2015, Capstone's power segment complied with all covenants and
expects to remain in compliance in 2016.
Utilities – water
The composition of the utilities – water segment’s long-term debt was:
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, 2015
Dec 31, 2014
2017 - 2019
1.29 - 5.73%
2032 - 2041
4.00 - 6.01%
Irredeemable
3.50 - 4.25%
Irredeemable
8.75%
139,247
647,005
3,137
37,753
142,381
534,366
2,676
33,161
122,836
576,696
2,805
34,109
125,877
473,301
2,351
29,365
827,142
712,584
736,446
630,894
(413,571)
(356,292)
(368,223)
(315,447)
413,571
356,292
368,223
315,447
(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, 2015, approximately 78% of the utilities - water segment's long-term debt had maturities of greater than 10 years. The earliest
maturity is on December 7, 2017 for $40,814.
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 $81,690, which was primarily due to foreign exchange translation. As at December 31,
2015, $142,849 of undrawn credit capacity remained available for future capital expenditures.
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 2015, Bristol Water complied with all its covenants and expects to remain in compliance in 2016.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 20
Corporate
The composition of Capstone’s corporate long-term debt was:
As at
Corporate credit facility
Convertible debentures (1)
Convertible debentures (1)
Dec 31, 2015
Dec 31, 2014
Maturity
Interest Rate
Fair Value Carrying Value
Fair Value Carrying Value
2018
2016
2017
3.67%
6.50%
6.75%
47,000
42,835
27,976
47,000
42,278
27,591
117,811
116,869
20,000
42,963
28,114
91,077
20,000
41,728
27,665
89,393
(1) Refer to page 5, the "Subsequent events" section of the MD&A for details relating to arrangement agreement with iCON.
Long-term debt at corporate increased by $27,476 since 2014, primarily due to draws on the corporate credit facility. In 2015, for power
development projects, Capstone, through its existing lenders, increased the capacity of the credit facility by $35,000, bringing the total available
credit to $125,000 of which $81,648 was drawn or committed as of December 31, 2015. The expanded portion of the credit facility matured in
January 2016 and the remaining $90,000 was extended by one year, to mature November 2018.
Covenant compliance
During 2015, Capstone complied with all covenants and expects to remain in compliance in 2016.
Shareholders’ equity
Shareholders’ equity comprised:
As at
Common shares (1)
Class B exchangeable units (1)
Preferred shares (1)
Share capital
Other equity items (2)
Accumulated other comprehensive income (loss)
Deficit
Equity to Capstone shareholders
Non-controlling interests
Total shareholders’ equity
Dec 31, 2015
Dec 31, 2014
715,989
713,412
26,710
72,020
26,710
72,020
814,719
812,142
9,284
51,151
9,284
19,994
(354,619)
(324,714)
520,535
261,545
782,080
516,706
190,073
706,779
(1) Refer to page 5, the "Subsequent events" section of the MD&A for details relating to arrangement agreement with iCON.
(2) Other equity items include the equity portion of Capstone's 2016 convertible debentures.
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
Dividend reinvestment plan (DRIP)
Ending balance
The composition of fair value for shareholders’ equity was:
Year ended Dec 31, 2015
Year ended Dec 31, 2014
Shares
93,573
—
823
94,396
Amount
713,412
—
2,577
Shares
92,854
14
705
Amount
710,662
39
2,711
715,989
93,573
713,412
As at
Dec 31, 2015
Dec 31, 2014
($000s, except per share amounts)
Common shares
Class B units
Preferred shares
Market Price
per Share
Outstanding
Amount
$3.63
$3.63
$12.99
94,396
3,249
3,000
Fair
Value
342,658
11,795
38,970
393,423
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
Deficit reflects the aggregate of Capstone’s net income (loss) since formation of the Corporation less cumulative dividends paid to shareholders and
cumulative distributions paid to Class B exchangeable unitholders.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 21
Contractual Obligations
As at December 31, 2015, Capstone had outstanding contractual obligations with amounts due as follows:
Long-term debt (1)
Finance lease obligations (1)
Operating leases
Asset retirement obligations
Purchase obligations
Total contractual obligations
Within one year One year to five years
Beyond five years
155,586
714
3,668
—
81,825
241,793
524,438
3,812
15,311
—
26,566
570,127
1,578,633
—
48,680
10,104
20,144
1,657,561
Total
2,258,657
4,526
67,659
10,104
128,535
2,469,481
(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 19 of this MD&A as part of the Capital Structure section.
Finance lease obligations
•
Bristol Water has finance leases for certain equipment and vehicles.
Operating leases
The following leases have been included in the table based on known minimum operating lease commitments:
•
•
•
•
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 2042.
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's additional operating lease commitments not included in the table with no minimum operating lease commitments required were:
•
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 25 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 and operations and management agreements:
Capital commitments
• Bristol Water has commitments for capital expenditures at December 31, 2015 of which $5,785 were contracted but had not yet occurred.
• As part of Capstone's power development operations, Capstone enters various construction and purchase agreements. As at December 31,
2015, Capstone had approximately $69,679 of construction and turbine supply agreements for the Grey Highlands Clean, Wind Works and
Riverhurst projects.
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 22, Capstone has the following other commitments with no fixed minimum payments:
CAPSTONE INFRASTRUCTURE CORPORATION
Page 22
Management services agreements
Capstone has agreements with all the partially owned wind facilities and development projects, including Glen Dhu, Fitzpatrick, Amherst, Saint-
Philémon, Goulais 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
• On March 2, 2015, Whitecourt and Millar Western completed a new fuel supply agreement for wood waste which has an initial 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 an ESA with Ingredion, which matures on December 31, 2034, reflecting the binding term sheet
signed on March 26, 2014. In the event that Ingredion builds a planned 15 MW cogeneration plant, Cardinal is required to provide O&M
services, and supply steam and compressed air to Ingredion for its plant operations.
Guarantees
•
Capstone has provided limited recourse guarantees on the project debt of the various wind projects totalling $11,500 as at December 31,
2015.
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 $5,664 mainly because of distributions of $2,504 from Värmevärden and $2,424 from Glen Dhu, as well
as $736 for Capstone's share of equity accounted comprehensive losses.
Capstone's equity accounted investments were:
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”) (4)
Chapais Électrique Limitée (“Chapais”) (6)
Principal place of business
and country of incorporation
Sweden
Canada
Canada
Canada
Canada
Ownership at December 31,
2015
33.3%
49%
50%
—%
2014
33.3%
49%
50%
45%
Principal activity
District heating
Power generation
Power generation
Holding company
31.3%
31.3%
Power generation
(1) Capstone no longer records equity accounted income (losses) for Värmevärden, as the equity accounted losses and distributions exceeded the carrying
value. For 2015, Capstone has unrecognized losses of $642, relating to Värmevärden. Until cumulative unrecognized losses and dividends become
positive, Capstone will carry its investment at nil and record dividends as other gains in the statement of income. Additional information about Capstone's
investment in Värmevärden is further detailed in the results of operations on page 16 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 was wound up on September 4, 2015, and had no significant activity prior to disposal.
(4) No income has been recorded on the investment since its acquisition. Capstone does not expect to earn any future equity accounted income from this
investment.
Capital Asset Expenditure Program
Capstone incurred $211,185 of capital asset expenditures during 2015, which included $95,918 of additions to capital assets and $115,267 of
additions to projects under development. The capital asset expenditures by operating segment were:
Power
Utilities – water
For the year ended
Dec 31, 2015
Dec 31, 2014
141,447
69,738
211,185
166,745
110,590
277,335
CAPSTONE INFRASTRUCTURE CORPORATION
Page 23
In 2015, capital expenditures for the power segment mainly related to costs of $111,406 to develop the Wind Works projects, as well as
constructing the Saint-Philémon and Goulais wind projects. In addition, Cardinal invested $24,640 to prepare the plant to operate as a cycling facility.
The majority of the remaining difference related to capital expenditures of $1,127, at Erie Shores and $904 for the hydro facilities. In 2014, capital
asset expenditures in the power segment were primarily related to $150,051 to construct the Skyway 8, Saint-Philémon and Goulais wind projects
and $9,884 to begin converting the Cardinal facility.
Capital expenditures for the utilities – water segment, included both growth and maintenance activities as planned in Bristol Water’s regulatory
capital expenditure program.
Capital Asset Impairment
Consistent with the prior year, Capstone reviewed the carrying values of assets for impairment because the deficit of market capitalization to the
carrying amount of owners' equity is considered an indicator of potential impairment. In 2015, as a result of Capstone's analysis no impairment was
necessary, whereas in 2014 Capstone recognized a $30,592 impairment loss in the statement of income.
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, 2015
Dec 31, 2014
407,759
367,161
(309,201)
(288,411)
98,558
78,750
As at December 31, 2015, the defined benefit plan was in a $98,558 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 2016, Bristol Water expects to contribute $4,055 compared with its actual contribution of $4,076 in 2015.
The total defined contribution pension expense recorded in the consolidated statement of income in 2015 was $2,512. The expense comprised
$2,321 for Bristol Water and $191 for Cardinal.
Income Taxes
In 2015, the current income tax recovery was $2,738 (2014 - $3,981 expense), of which $2,665 (2014- $4,021) 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 calculated on a net basis where
there is a legal right of offset within the same tax jurisdictions.
Capstone's total deferred income tax assets of $220 (December 31, 2014 - nil) were attributable to its Canadian entities and primarily relate to non-
capital tax loss carryforwards.
Deferred income tax liabilities of $204,125 (December 31, 2014 - $192,829) represent $64,619 (December 31, 2014 - $67,157) for Capstone’s
Canadian operations and $139,506 (December 31, 2014 - $125,672) for 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 2015, Capstone’s net deferred income tax liability increased by $11,076. The net liability increased primarily due to differences between
accounting and tax depreciation taken in 2015 and the defined benefit pension plan at Bristol Water. These increases were partially offset by a lower
substantively enacted tax rate at Bristol Water from 20.0% to 18.0%.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 24
DERIVATIVE FINANCIAL INSTRUMENTS
Capstone has exposure to market, credit and liquidity risks from its use of financial instruments as described in notes 7 (Financial Instruments) and 8
(Financial Risk Management) in the consolidated financial statements as at and for the year ended December 31, 2015. 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, 2015
Dec 31, 2014
166
(6,540)
(6,374)
5,047
(17,863)
(12,816)
Net derivative contract liabilities decreased by $6,442 from December 31, 2014, mainly because several of the underlying financial instruments
matured, which is primarily reflected in the $10,475 unrealized loss on derivatives in comprehensive income. The unrealized gains on derivatives
were partially offset by contractual settlement payments of $4,035 for Whitecourt's new fuel supply agreement.
On March 2, 2015, Whitecourt entered into a new fuel supply agreement with Millar Western for 15 years, which is extendable to 20 years. The new
agreement, which commenced on January 1, 2015, includes power price support and revenue sharing mechanisms that reduce Whitecourt's
exposure to merchant price risk in Alberta. The price support and revenue sharing mechanisms are embedded derivatives that are measured at fair
value and result in an asset during periods when the forecasted merchant power price is projected to be lower than the price support and a liability
during periods when the merchant power price is forecast to be higher.
On December 11, 2015, GHG entered into swap agreements to convert its floating interest rate obligations under the credit agreement to a fixed
rate. The effective interest rate is 2.59% from inception to June 30, 2016, increasing to 3.08% to June 30, 2021.
The gains (losses) attributable to fair value changes of derivatives in the interim consolidated statements of income and comprehensive income
comprised:
Interest rate swap contracts
Cardinal gas purchase agreement
Forward gas sale and purchase contracts
Foreign currency option contracts
Whitecourt embedded derivative
Cardinal embedded derivative
Gains (losses) on derivatives in net income
Interest rate swap contracts in OCI
Gains (losses) on derivatives in comprehensive income
Year ended
Dec 31, 2015
Dec 31, 2014
(3,659)
4,364
(3,330)
(1,552)
886
169
(3,122)
553
(2,569)
(4,342)
(4,364)
3,330
205
—
4,454
(717)
(649)
(1,366)
The loss on derivatives was primarily attributable to the expiry of the interest rate swap contracts, the forward gas sale and purchase contracts and
the reduction in fair value of the foreign currency option contracts. This was partially offset by gains resulting from the expiry of Cardinal's gas
purchase agreement and embedded derivative, as well as the changes in the value of the Whitecourt embedded derivative.
The loss on interest rate swap contracts was primarily due to the Amherstburg contract, which was settled on July 9, 2015, concurrent with the project
debt refinancing, which resulted in a realized loss of $13,045. In addition, the fair value of the new GHG interest rate swap decreased by $1,121 since
inception due to lower long-term interest rates as at December 31, 2015. The fair value changes on the forward gas sale and purchase contracts and
the Cardinal gas purchase agreement were primarily due to the passage of time as these derivatives expired during 2015. The loss on foreign currency
contracts was primarily due to appreciation of the UK pound sterling and Swedish krona forward-looking rates relative to the fixed Canadian dollar
conversion rates and the passage of time.
The gain on the Whitecourt embedded derivative was primarily due to a decrease in the estimated forward Alberta power pool prices from inception
to December 31, 2015, partially offset by a reduction in the number of net payments resulting from the passage of time.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 25
FOREIGN EXCHANGE
The foreign exchange gains were primarily due to translation of Capstone’s SEK-denominated shareholder loan receivable with Värmevärden.
Capstone recorded a $3,720 foreign exchange gain in 2015 compared with a $4,673 loss in 2014. The 2015 gains primarily reflect appreciation of
the Swedish krona against the Canadian dollar, thereby increasing the carrying value of the shareholder loan by $3,527 in Canadian dollars,
compared with 2014.
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.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 26
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.
Managing Risk
The Corporation requires that risk assessments (which encompass operational, strategic, financial and legal and regulatory risks) be performed at
each business unit and at the corporate level (which takes into consideration the business unit risks that are significant to the consolidated
organization). 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.
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.
Current challenges include increasing
competition for existing infrastructure
businesses, and availability of
opportunities that produce sufficient yield.
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.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 27
Risk and Description
Impact
Monitoring and Mitigation
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.
Expense management risk is a financial
risk concerning unexpected non-
recoverable increases in operating and
administrative 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.
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.
Capstone has historically delivered all power
development projects on time and on budget.
Utilities - Water
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 28
ENVIRONMENTAL, HEALTH AND SAFETY REGULATION
Capstone's 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 2015-2016 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, in various jurisdictions and
it is difficult to predict how these changes may apply to the certain of the Facilities. In Canada however, several of the Provinces have recently
enacted, amended or proposed GHG legislation involving regimes comprised of any combination of cap and trade, emissions intensity and carbon
taxes. Ontario for example is proposing a cap and trade system to address GHG and climate change initiatives, details of which are yet to be finalized.
The Canadian government also recently reconfirmed its commitment to reduced GHG emissions at the World Climate Change Summit in Paris.
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. Furthermore, the increased emphasis within Canada on reduced GHG emissions may be beneficial to Capstone's renewable portfolio.
For example, in the fall of 2015 Alberta unveiled a Climate Change Plan involving the early retirement of coal-fired power plants and the replacement
of at least 2/3 of the electrical generation from those plants with renewable energy. The announcement of the plan was preceded by revisions to its
GHG legislation that resulted in the value of Alberta GHG offset credits traded within Alberta increasing by upwards of 33% in 2016.
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.
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,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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 29
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 2015-2016 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 2015 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
2015, Capstone earned fees of $405, primarily related to the management of Glen Dhu and Fitzpatrick. In addition, Bristol Water has a joint venture
interest in a shared billing services entity, providing meter reading, billing and debt recovery and customer contract management services to Bristol
Water and its partner, under a cost sharing arrangement. During 2015, Bristol Water incurred charges of $6,363 for management charges and
shared expenditures.
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 26 (Related Party Transactions) in
the consolidated financial statements for the year ended December 31, 2015.
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.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 30
SUMMARY OF QUARTERLY RESULTS
The following table provides a summary of the previous eight quarters of Capstone’s financial performance.
($000s, except for per share amounts)
Revenue
Net income (loss) (1)
Adjusted EBITDA
AFFO
Common dividends (2)
Preferred dividends
Earnings Per Share – Basic (3)
Earnings Per Share – Diluted (3)
AFFO per share
Dividends declared per common share
Q4
89,201
8,885
30,327
1,888
7,324
938
0.081
0.080
0.019
0.075
2015
2014
Q3
Q2
Q1
Q4
Q3
Q2
Q1
84,140
81,403
90,239
116,683
104,085
106,413
114,397
301
(9,273)
222
(7,599)
26,657
28,768
29,549
1,949
7,308
938
(0.007)
(0.007)
0.020
0.075
932
7,288
938
(0.105)
(0.105)
0.010
0.075
6,464
7,273
938
(0.008)
(0.008)
0.067
0.075
47,017
19,022
7,261
938
(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
0.126
0.075
14,437
41,691
19,873
7,220
938
0.140
0.132
0.207
0.075
(1) Net income (loss) attributable to the common shareholders of Capstone, which excludes non-controlling interests.
(2) Common dividends include amounts declared for both the common shares of the Corporation and the Class B exchangeable units.
(3) Earnings Per Share ("EPS") is calculated using net income attributable to common shareholders of Capstone. Refer to note 21 of the consolidated
financial statements for the calculation of EPS.
FOURTH QUARTER 2015 HIGHLIGHTS
Revenue
Operating expenses
Administrative expenses
Project development costs
Asset impairment charges
Equity accounted income
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
Earnings (loss) 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
Three months ended
Dec 31, 2015
Dec 31, 2014
89,201
(39,340)
(3,622)
(2,808)
—
763
1,363
844
304
1,000
47,705
(15,374)
(18,658)
(3,412)
10,261
393
10,635
11,028
21,289
8,885
12,404
21,289
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)
CAPSTONE INFRASTRUCTURE CORPORATION
Page 31
Revenue decreased by $27,482, or 24%, reflecting a $22,384 decrease at the power segment, primarily because of economics of the new NUG
contract at Cardinal and lower power rates at Whitecourt, partially offset by new contributions of $5,439 from Saint-Philémon and Goulais, which
reached COD in 2015. In addition, Bristol Water's revenue was $5,098 lower primarily due to lower regulated water tariffs during AMP6.
Expenses decreased by $9,302, or 17%.
• Operating expenses decreased by $14,087, primarily because of lower expenses at the power segment or $12,269, mainly because of lower
production at Cardinal, partially offset by new expenses of $851 from the new wind facilities, which reached COD in 2015. Lower expenses of
$1,818 at Bristol Water was mainly due to decreased maintenance and lower staff costs.
•
•
Administrative expenses increased by $2,364 primarily due to higher incentive compensation resulting from the increase in share price.
Project development costs increased by $2,421, mainly relating to costs for the strategic review.
Asset impairment charges in 2014 were on the Erie Shores and Confederation Power capital assets, and the Chapais loan receivable.
Equity accounted income (loss) decreased by $750, or 50%, composed primarily of a decreases of $422 at Värmevärden and $333 at Glen Dhu.
Other gains and (losses) increased by $3,220, or 110%, to a net gain of $304 in 2015. The variance is primarily due to a $2,204 loss in 2014
attributable to Cardinal's gas purchase agreement as well as a non-recurring unrealized loss of $1,198 on the Amherstburg interest rate swap in
2014. In addition, a $900 gain was recognized in 2015, reflecting a change required by IFRS to reflect the distributions from Värmevärden, as the equity
accounted investment was a negative balance for accounting purposes. These increases were partially offset by a $1,121 loss in 2015 on the new GHG
interest rate swaps.
Foreign exchange gain (loss) was $2,694 higher in 2015 due to the impact of the depreciation of the Swedish krona on the loan receivable.
Interest expense increased by $2,142, or 16%, primarily due to Saint-Philémon and Goulais because interest was capitalized in 2014 when the
projects were still under construction.
Income taxes in 2015 comprised a $42 recovery (2014 - $6,548) in Canada and a $10,986 recovery (2014 - $3,373 expense) for Bristol Water. In
2015, Canada's deferred income tax recovery primarily relates to the excess of accounting depreciation for capital assets and intangibles over what
was taken for tax. This was partially offset by the recognition of deferred tax assets for tax loss carry forwards. Bristol Water's tax recovery comprises
of $10,585 for deferred taxes and $401 for current taxes. Bristol Water's deferred tax recovery primarily relates to the decrease in the substantively
enacted tax rate from 20.0% to 18.0%.
ACCOUNTING POLICIES AND INTERNAL CONTROLS
Significant Changes in Accounting Standards
The consolidated financial statements have been prepared in accordance with IFRS and are consistent with policies for the year ended December
31, 2014. Refer to note 2 to the December 31, 2015 consolidated financial statements for a summary of the significant accounting policies .
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)
Impact to Capstone
IFRS 15, Revenue from Contracts with Customers [Effective: Jan 1, 2018]
Capstone's assessment of the impact of this standard is ongoing.
IFRS 9, Financial Instruments [Effective: Jan 1, 2018]
Capstone's assessment of the impact of this standard is ongoing.
IFRS 16, Leases [Effective: Jan 1, 2019]
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, 2015 for further detail about the nature of these future
accounting changes.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 32
Accounting Estimates
The consolidated financial statements require the use of estimates and judgment in reporting assets, liabilities, revenues, expenses and
contingencies. 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
• Initial fair value of net assets.
• Estimated useful lives and residual value.
• Amortization on intangible assets
• Estimated useful lives.
• Asset retirement obligations
• 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
• Forward Alberta power pool prices, volatility, credit spreads, cost and inflation
escalators and fuel supply volumes and electricity sales.
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.
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. Consistent with the prior year, Capstone uses the 2013 version of Committee of Sponsoring Organizations (COSO) internal
control framework.
The CEO and CFO have concluded that Capstone's disclosure controls and procedures were effective as at December 31, 2015 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, 2015, 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, 2015.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 33
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, 2015, 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
President and Chief Executive Officer
Michael Smerdon
Executive Vice President and Chief Financial Officer
Toronto, Canada
March 3, 2016
CAPSTONE INFRASTRUCTURE CORPORATION
Page 34
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, 2015 and December 31, 2014 and the consolidated
statements of changes in shareholders' equity, income, comprehensive income and cash flows for the years then ended , and the related
notes, which comprise a summary of significant accounting policies and other explanatory information.
Management's responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation
of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal
control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal
control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates
made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Capstone Infrastructure
Corporation and its subsidiaries as at December 31, 2015 and December 31, 2014 and their financial performance and their cash flows for
the years then ended in accordance with International Financial Reporting Standards.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Canada
March 3, 2016
CAPSTONE INFRASTRUCTURE CORPORATION
Page 35
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
Intangible assets
Retirement benefit surplus
Deferred income tax assets
Total assets
Current liabilities
Accounts payable and other liabilities
Current portion of derivative contract liabilities
Current portion of finance lease obligations
Current portion of long-term debt
Long-term liabilities
Derivative contract liabilities
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
Subsequent events
See accompanying notes to these consolidated financial statements
Notes
Dec 31, 2015 Dec 31, 2014
74,392
29,064
77,175
10,904
—
58
58,842
65,878
94,555
9,600
1,448
4,279
191,593
234,602
37,271
108
23,392
45,244
768
29,056
1,702,233
1,418,187
106,200
362,514
98,558
220
151,361
342,012
78,750
—
2,522,089
2,299,980
143,903
132,445
254
813
101,203
246,173
6,286
204,125
32,063
3,261
6,620
693
25,150
164,908
11,243
192,829
21,600
3,407
1,243,334
1,194,850
4,767
4,364
1,740,009
1,593,201
520,535
261,545
516,706
190,073
2,522,089
2,299,980
3
3
4
5
6
7a
6
7a
9
10
11
12
13
14a
15a
7a
16
17
7a
14a
15b
16
17
18
20
25
29
CAPSTONE INFRASTRUCTURE CORPORATION
Page 36
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Balance, Dec 31, 2013
809,392
9,428
17,013
(306,283)
138,613
668,163
Equity attributable to shareholders of Capstone
Notes
Share
Capital (1)
Other Equity
Items (2)
AOCI (3)
Deficit
NCI (4)
Total
Equity
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 (5)
Dividends declared to NCI
Disposal of partial interest in Chi-
Wiikwedong LP
Contributions from NCI
Balance, Dec 31, 2014
Other comprehensive income (loss)
Net income for the period
Dividends declared to common
shareholders of Capstone
Dividends declared to preferred
shareholders of Capstone (5)
Dividends declared to NCI
Net convertible debenture advances
19a
—
—
39
—
19a, d
2,711
19d
20
20d
20
—
—
—
—
—
—
—
(144)
—
—
—
—
—
2,981
11,223
14,019
24,080
28,223
33,547
9,467
—
144
(28,977)
(3,923)
—
—
—
—
—
—
—
—
—
—
—
—
39
—
(26,266)
(3,923)
(9,137)
—
(9,137)
(6,365)
—
7,894
14,604
1,529
14,604
812,142
9,284
19,994
(324,714)
190,073
706,779
—
—
19a, d
2,577
19d
20
20c
—
—
—
—
—
—
—
—
—
31,157
—
—
—
—
—
3,020
135
25,517
26,057
59,694
26,192
(29,193)
(3,867)
—
—
—
—
(6,143)
(26,616)
(3,867)
(6,143)
26,041
26,041
Balance, Dec 31, 2015
814,719
9,284
51,151
(354,619)
261,545
782,080
(1) Share capital includes common and preferred shares and Class B exchangeable units.
(2) Other equity items include the equity portion of Capstone's 2016 convertible debentures.
(3) Accumulated other comprehensive income (loss) (“AOCI”).
(4) Non-controlling interest (“NCI”). See note 20.
(5) Dividends declared to preferred shareholders of Capstone include $117 of deferred income taxes (2014 - $173).
See accompanying notes to these consolidated financial statements
CAPSTONE INFRASTRUCTURE CORPORATION
Page 37
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, 2015 Dec 31, 2014
23
23
23
10e
9a
7b
13
24
7b
10
12
14d
20
21
344,983
441,578
(164,039)
(210,520)
(11,782)
(7,253)
—
(816)
4,737
3,062
(10,385)
3,720
(13,266)
(2,664)
(30,592)
(1,127)
4,234
2,132
(7,669)
(4,673)
162,227
177,433
(57,941)
(70,895)
(13,086)
20,305
2,738
3,149
5,887
26,192
135
26,057
26,192
(0.038)
(0.038)
(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
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 2015 – $219 expense, 2014 – $120 recovery, 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 2015 – $759 recovery, 2014 – $5,611 expense, 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
For the year ended
Notes
Dec 31, 2015 Dec 31, 2014
9a
13
20
53,330
80
244
53,654
6,040
59,694
26,192
85,886
34,312
51,574
85,886
8,083
(1,438)
(866)
5,779
22,444
28,223
33,547
61,770
23,671
38,099
61,770
CAPSTONE INFRASTRUCTURE CORPORATION
Page 38
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended
Notes
Dec 31, 2015
Dec 31, 2014
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:
Investment in capital assets
Investment in projects under development
Decrease (increase) in restricted cash
Distributions from equity accounted investments
Repayments of loans receivable
Advances of loans receivable
Purchase of foreign currency forwards
Total cash flows used in investing activities
Financing activities:
Proceeds from issuance of long-term debt
Repayment of long-term debt and finance lease obligations
Dividends paid to common and preferred shareholders
Convertible debenture advances
Dividends paid to non-controlling interests
Transaction costs on debt issuance
Contributions from non-controlling interest
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
10e
9a
6
28
10b
11b
9a
20
26,192
(3,149)
83,981
—
1,115
2,934
816
(3,527)
8,538
116,900
(100,422)
(93,973)
38,176
5,825
12,948
—
—
33,547
5,994
79,766
30,592
3,907
6,687
1,127
3,914
(9,816)
155,718
(129,813)
(127,624)
(36,091)
7,430
1,220
(11,500)
(1,047)
(137,446)
(297,425)
177,023
(132,649)
(30,364)
30,159
(6,143)
(4,033)
—
33,993
2,103
15,550
58,842
74,392
305,557
(121,418)
(30,015)
—
(9,137)
(4,392)
13,918
154,513
268
13,074
45,768
58,842
58,083
2,980
51,518
4,654
CAPSTONE INFRASTRUCTURE CORPORATION
Page 39
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS
Note Description
Page
Note Description
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Corporate Information
Summary of Significant Accounting
Policies
Cash and Cash Equivalents and Restricted
Cash
Trade and Other Receivables
Other Assets
Loans Receivable
Financial Instruments
Financial Risk Management
Equity Accounted Investments
Capital Assets
Projects Under Development
Intangible Assets
Retirement Benefit Plans
Income Taxes
40
40
49
49
50
50
51
53
57
59
60
61
62
64
15
16
Accounts Payable and Other Liabilities
Finance Lease Obligations
17
Long-term Debt
18
19
20
21
22
23
24
25
26
27
28
29
Liability for Asset Retirement Obligation
Shareholders' Equity
Non-Controlling Interests
Earnings per share
Share-based Compensation
Expenses-Analysis by Nature
Other Gains and Losses
Commitments and Contingencies
Related Party Transactions
Segmented Information
Non-cash Working Capital
Subsequent Events
66
66
67
73
73
75
77
77
78
79
79
80
81
82
82
NOTE 1. CORPORATE INFORMATION
Capstone is incorporated and domiciled in Canada and principally located at 155 Wellington Street West, Suite 2930, Toronto, Ontario, M5V 3H1.
The mission of Capstone Infrastructure Corporation and its subsidiaries (together the “Corporation” or “Capstone”) is to provide investors with an
attractive total return from responsibly managed long-term investments in core infrastructure in Canada and internationally. As at December 31,
2015, 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 468 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 3, 2016.
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 7).
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 40
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")
Parc Éolien Saint-Philémon S.E.C. ("Saint-Philémon")
Chi-Wiikwedong LP ("Goulais")
Chi-Wiikwedong Holdings LP
Capstone Power Development Canada Corp.
Ganaraska and Grey Highlands ZEP wind development projects ("GHG")
Principal place of
business and
country of
incorporation
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
2015
100%
100%
100%
100%
100%
100%
100%
100%
100%
51%
51%
51%
100%
100%
75% (2)
Snowy Ridge and Settlers Landing wind development projects
Canada
75% (2)
75%
Grey Highlands Clean Energy Development LP ("Grey Highlands Clean")
Canada
75% (3)
Nil
2014
100%
100%
100%
100%
100%
100%
100%
100%
100%
51%
51%
Principal activity
Power
holding company
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
Power generation
51% (1)
Power generation
100%
100%
75%
Power generation
Development
Power generation
under construction
Power generation
under construction
Power generation
under construction
Bristol Water plc and group companies (collectively “Bristol Water”)
United Kingdom
50% (4)
50% (4)
Regulated water utility
(1) On August 14, 2014, Capstone sold a 49% interest in the Goulais wind development project.
(2) As at December 31, 2015, Ganaraska, Grey Highlands ZEP, Snowy Ridge and Settlers Landing (the "Wind Works" development projects) were 25% held
by the original developer, which will continue until the respective commercial operations dates ("COD"), at which point Capstone will acquire the
remaining interest.
(3) On April 7, 2015, Capstone acquired 75% interest in the Grey Highlands Clean wind development project.
(4) 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, or has the ability to exercise joint 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,
2015
33.3%
49%
2014
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).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 41
The Corporation's share of losses of an equity accounted investment that exceed its interest and net investment in the associate are not accounted
for unless the Corporation has incurred contractual obligations or has made payments on behalf of the associate.
Any surplus of the investment cost over the Corporation's share in the fair value of the identifiable assets, liabilities and contingent liabilities of
the equity investment on the date of acquisition is accounted for as goodwill and included in the book value of the investment accounted for
using the equity method.
Business Combinations
The acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate
of the fair values, at the date of exchange, of assets transferred, liabilities incurred or assumed, and equity instruments issued by the Corporation in
exchange for control of the acquired business. The acquired identifiable assets, liabilities and contingent liabilities that meet the conditions for
recognition under IFRS 3R, Business Combinations (“IFRS 3R”) are recognized at their fair value at the acquisition date.
Goodwill is recognized to the extent the fair value of consideration paid exceeds the fair value of the net carrying amounts of the identifiable assets
acquired and the liabilities assumed, measured in accordance with IFRS on the acquisition date.
The Corporation recognizes any non-controlling interest in the acquiree at the non-controlling interest's proportionate share of the recognized
amounts of acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred.
Foreign Currency Translation
Functional and presentation currency
Amounts included in the financial statements of each 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 at and for the year ended
Dec 31, 2014
Dec 31, 2015
Swedish Krona (SEK)
UK Pound Sterling (£)
Average
0.1605
0.1516
Spot
0.1483
0.1638
Average
1.8192
1.9540
Spot
1.8071
2.0407
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.
CAPSTONE INFRASTRUCTURE CORPORATION
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Capital Assets
Capital assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly
attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset only when
it is probable that future economic benefits associated with the item will flow to the Corporation and the cost can be measured reliably. The carrying
value of an asset is derecognized when replaced.
Major maintenance costs are capitalized in the carrying value of the assets as incurred, and depreciated over the period to the next scheduled major
maintenance. Other repairs and maintenance costs are charged to the consolidated 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
23 to 210 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 water 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 43
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 2015 and 2014, 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 44
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 are recorded at the hourly average
weighted power pool rate.
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. In addition, costs related to the 2015 strategic review have
been included with corporate project development costs.
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 22 (a) to these
consolidated financial statements. The Corporation accounts for DSUs as an expense over the vesting period of the DSUs using the fair value of the
underlying common shares, as determined by the closing price of the Corporation's publicly traded common shares on the reporting date. 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 22 (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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 45
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. Debenture conversions are excluded from the computation of diluted net income per share if their effect is anti-dilutive.
Comprehensive Income
Other comprehensive income (“OCI”) represents changes in shareholders' equity during a period arising from transactions and other events,
including unrealized gains and losses on translation of net assets of foreign operations, the equity share of OCI of equity accounted investments and
actuarial gains recognized in respect of retirement benefit obligations. OCI also includes the effective portion of the change in fair value of
designated cash flow hedges of Bristol Water less any amounts reclassified to interest and other expenses, net, in the period the underlying hedged
item is also recorded in interest 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
• Cardinal's 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 46
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. In 2015, the Corporation's derivatives include interest rate swaps, an embedded derivative in Whitecourt's fuel supply
agreement and foreign currency contracts. In addition, 2014 included an embedded derivative in Cardinal's gas purchase contract, as well as gas
forward sale and purchase 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.
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's accounting policies are consistent with those disclosed in the notes to the December 31, 2014 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:
CAPSTONE INFRASTRUCTURE CORPORATION
Page 47
Title of the New IFRS
Nature of the Impending Change to Capstone
IFRS 15, Revenue from
Contracts with
Customers
Effective: Jan 1, 2018
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 will require 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 will 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 will be 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.
IFRS 16 specifies how to recognize, measure, present and disclose leases.
The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases unless
the lease term is 12 months or less or the underlying asset has a low value. In addition, revised guidance on identifying a lease
and for separating lease and non-lease components of a contract is provided.
Lessors will continue to classify leases as operating or finance, with IFRS 16’s approach to lessor accounting substantially
unchanged from its predecessor, IAS 17.
IFRS 16, Leases
Effective: Jan 1, 2019
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
• Expected settlement date,
amount and discount rate
• Future cash flows and discount
rate
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
• Forward Alberta power power
pool prices, volatility, credit
spreads, cost and inflation
escalators and fuel supply
volumes and electricity sales
CAPSTONE INFRASTRUCTURE CORPORATION
Page 48
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 $612.
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
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.
NOTE 3. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Debt service and maintenance reserves
Construction escrow
Cash on deposit
Restricted cash
Unrestricted cash and cash equivalents
are directed (either through
voting rights or contracts)
• Determine if Capstone has
substantive or protective rights
• Determine Capstone's ability to
influence returns
Dec 31, 2015
Dec 31, 2014
23,434
2,992
2,638
29,064
74,392
18,714
47,091
73
65,878
58,842
103,456
124,720
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. Capstone has also provided letters of credit to back
other reserve requirements. Refer to note 17 for further details.
NOTE 4. TRADE AND OTHER RECEIVABLES
Power
Utilities – water
Corporate
Total trade and other receivables
Dec 31, 2015
Dec 31, 2014
19,496
57,665
14
77,175
35,542
56,823
2,190
94,555
Substantially all of the power segment accounts receivable are with government authorities. Refer to note 8 (b) and 8 (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
Income taxes recoverable
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, 2015
Dec 31, 2014
60,618
(37,043)
23,575
1,742
5,895
26,453
57,665
51,053
(28,478)
22,575
—
5,166
29,082
56,823
Dec 31, 2015
Dec 31, 2014
4,259
2,582
16,734
23,575
4,996
5,948
11,631
22,575
CAPSTONE INFRASTRUCTURE CORPORATION
Page 49
As at December 31, 2015, based on a review of collection rates, $37,043 of trade receivables in the utilities – water segment were considered
impaired and have been provided for (December 31, 2014 – $28,478).
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
2015
(28,478)
(5,870)
1,194
(3,889)
2014
(25,775)
(6,629)
4,562
(636)
(37,043)
(28,478)
Charges for impaired receivables have been included in the consolidated statement of income as part of operating expenses.
The other classes within trade and other receivables do not contain impaired assets.
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 5. OTHER ASSETS
Prepaid expenses
Inventory of spare parts and consumable supplies, net (1)
Assets held for sale (2)
Dec 31, 2015
Dec 31, 2014
6,773
4,131
—
10,904
4,826
4,074
700
9,600
Inventory as at December 31, 2015 is net of a $557 provision for obsolescence (December 31, 2014 - $366).
(1)
(2) The Confederation Power wind facilities were sold on May 19, 2015.
The cost of inventories recognized in operating expenses for the year ended December 31, 2015 was $5,979 (December 31, 2014 – $6,615).
NOTE 6. LOANS RECEIVABLE
The following table summarizes the loans receivable:
Värmevärden
Batchewana First Nation of Ojibways ("BFN")
Chapais Électrique Limitée ("Chapais")
Macquarie Long Term Care LP ("MLTCLP")
Less: current portion
Total long-term loans receivable
Maturity
Interest Rate
Dec 31, 2015
Dec 31, 2014
2021
7.944%
37,271
Settled on Dec 3, 2015
Settled on Nov 30, 2015
Settled on Sep 4, 2015
—
—
—
37,271
—
37,271
33,744
11,500
1,359
89
46,692
(1,448)
45,244
Accrued interest on the loans receivable in the amount of $24 for the year ended December 31, 2015 is included in accounts receivable
(December 31, 2014 – $379). The estimated fair values of the loans receivable as at December 31, 2015 and 2014 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, 2015
December 31, 2014
SEK
227,541
—
227,541
$
33,744
3,527
37,271
SEK
227,541
—
227,541
$
37,658
(3,914)
33,744
The shareholder loan receivable from Värmevärden bears interest at a fixed annual rate of 7.944%.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 50
NOTE 7. FINANCIAL INSTRUMENTS
(A)
Fair Value of Financial Instruments
In 2015, 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 Whitecourt fuel supply 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, 2015, 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:
•
•
•
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 continues to meet the requirements to
be accounted for as a cash flow hedge and was assessed to be highly effective as at December 31, 2015.
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 continues to meet the requirements to
be accounted for as a cash flow hedge and was assessed to be highly effective as at December 31, 2015.
GHG has swap agreements with notional amounts equal to the outstanding principal value of the debt. The first swaps apply to the term of the
construction facility, while the second applies to the period while the debt is a term loan. Under these swap agreements, Capstone will receive
Canadian Dollar Offered Rate ("CDOR") in exchange for fixed rates of 0.96% and 1.45%, respectively expiring on June 30, 2016 and 2021.
Upon maturity of the term loan, GHG has a third set of swaps with an initial notional amount of $44,698 to exchange CDOR for a fixed rate of
3.17% expiring on June 30, 2034.
Whitecourt embedded derivative
On March 2, 2015, Whitecourt entered into a new fuel supply agreement with Millar Western for 15 years, which is extendable to 20 years. The new
agreement, which has a commencement date of January 1, 2015, includes power price support and revenue sharing mechanisms that reduce
Whitecourt's exposure to merchant price risk in Alberta.
The price support and revenue sharing mechanisms are embedded derivatives that are measured at fair value and result in an asset during periods
when the projected merchant power price is forecast to be lower than the price support and a liability during periods when the merchant power
price is forecast to be higher.
On March 2, 2015, Capstone recognized an asset of $5,297 based on the fair value of the Whitecourt fuel supply agreement, which is equal to and
offsets the fair value of the embedded derivative included in Whitecourt's fuel supply agreement at inception. Capstone will amortize the inception
value to income over 15 years, representing the life of the fuel supply agreement.
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, 2015, are:
Expiry
2016 (Jan - Jun)
2016 (Jul - Dec)
2017
2018
Swedish Krona (SEK)
UK Pound Sterling (£)
Notional Amount
Conversion Rate
Notional Amount
Conversion Rate
9,100
9,000
15,000
6,500
39,600
6.5165
6.4000
6.4000
6.4000
£2,600
£2,600
nil
nil
£5,200
1.8000
1.8000
nil
nil
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.
• A discounted cash flow valuation based on a forward interest rate curve was used to determine their fair value.
Whitecourt
embedded derivative
• The determination of the fair value of the embedded derivative requires the use of option pricing models involving significant
judgment based on management's estimates and assumptions, including estimates on the forward Alberta power pool prices,
volatility, credit spreads, cost and inflation escalators and fuel supply volumes and electricity sales.
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 Whitecourt embedded derivatives, the contract has been classified as Level 3 financial
instruments.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 51
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 6 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, 2015.
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 17 for further details.
Irredeemable preferred shares for Bristol Water plc (shown as debt within these financial statements) are listed on the London Stock Exchange.
Their fair value is determined by the quoted market price.
Use level 2 inputs:
•
Fixed-rate debt is determined through the use of a discounted cash flow analysis using relevant risk-free bond rates plus an estimated margin.
The following table illustrates the classification of the Corporation's financial instruments, that have been recorded at fair value:
Cash and cash equivalents
Restricted cash
Recurring measurements:
Derivative contract assets:
Foreign currency contracts
Forward gas sale contract (1)
Less: current portion
Derivative contract liabilities:
Whitecourt embedded derivative (2)
Interest rate swap contracts - hedge
accounted
Interest rate swap contracts (3), (4)
Gas purchase agreements (1)
Cardinal embedded derivative (1)
Less: current portion
Level 1
Quoted prices in active
markets for identical assets
Level 2
Significant other
observable inputs
Level 3
Significant
unobservable inputs
74,392
29,064
—
—
—
—
—
—
—
—
—
—
—
—
—
166
—
(58)
108
—
2,271
1,121
—
—
(254)
3,138
—
—
—
—
—
—
3,148
—
—
—
—
—
3,148
Dec 31, 2015
Dec 31, 2014
74,392
29,064
58,842
65,878
166
—
(58)
108
3,148
2,271
1,121
—
—
(254)
6,286
1,717
3,330
(4,279)
768
—
2,824
10,507
4,364
168
(6,620)
11,243
(1) Expired in May 2015.
(2) Whitecourt's embedded derivative consists of a $1,796 fair value asset, fully offset by the $4,944 amortized contra-asset, set up on inception.
(3)
(4)
In July 2015, the Amherstburg interest rate swap was terminated.
In December 2015, GHG entered into three interest rate swap contracts.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 52
Fair value continuity for Level 3 inputs
Opening balance, January 1,
Day-one gain from transfer of the Cardinal gas purchase agreement included in other gains and (losses) in net
income
Change in value of the Cardinal gas purchase agreement included in other gains and (losses) in net income
Change in value of the Cardinal embedded derivative included in other gains and (losses) in net income
Change in value of the Whitecourt embedded derivative included in other gains and (losses) in net income
Settlement of Whitecourt embedded derivative during the period
Amortization of Whitecourt embedded derivative inception value 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 (1)
Financial instruments classified as held-for-trading (Refer to note 24):
Unrealized gain (loss) on foreign currency contracts
Unrealized gain (loss) on interest rate swap contracts
Unrealized gain (loss) on the Whitecourt embedded derivative
Unrealized gain (loss) on the Cardinal derivatives (2)
Realized gain (loss) on Amherstburg's interest rate swap contract
Loans and receivables (3):
Interest income from loans receivable (1)
Other liabilities:
Interest recovery (expense) on finance lease obligations (4)
Interest expense on long-term debt (5)
2015
(4,532)
—
4,364
168
—
540
(4,040)
352
(3,148)
2014
(4,622)
2,986
(7,350)
4,454
(4,532)
—
—
—
(4,532)
Dec 31, 2015
Dec 31, 2014
931
856
(1,552)
9,387
886
1,203
9,924
(13,045)
205
(4,342)
—
3,420
(717)
—
3,806
3,378
355
(58,296)
(57,941)
(46)
(54,099)
(54,145)
Interest income for 2015 of $4,737 (2014 – $4,234) includes interest income from loans receivable and cash balances.
Include the Cardinal's gas purchase agreement, gas swap, and forward gas sale and purchase agreements, and embedded derivatives.
(1)
(2)
(3) Foreign exchange gains and losses on loans receivable are also recognized in the statement of income as disclosed in note 6.
(4)
(5)
Interest recovery on finance lease obligations consists of interest expense of $258, offset by a recovery of $613.
Interest expense on the long-term debt for 2015 includes amortization of deferred financing fees of $1,759 (2014 – $1,090).
NOTE 8. FINANCIAL RISK MANAGEMENT
The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market 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 commodity price risk (containing gas purchases, electricity revenue and water treatment costs), interest rate and inflation
risk, foreign currency exchange risk 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 buys gas at spot rates to generate electricity and as such is exposed to changes in the market price. This risk is mitigated because Cardinal
offers electricity to the IESO when prices are expected to cover the cost of gas.
Electricity revenue
In 2015, both Cardinal and Whitecourt's revenues are exposed to price risk as follows:
(i) Cardinal earns a portion of its revenue by supplying electricity to the Ontario grid only when profitable to do so.
(ii) Whitecourt sells 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 53
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:
Entity
Bristol Water
Bristol Water
GHG
GHG
GHG
Maturity Date
Notional Amount
Swap Fixed Rate Stamping Fee / Margin
Effective Interest Rate
Dec 7, 2017
Dec 3, 2019
Jun 30, 2016
Jun 30, 2021
Jun 30, 2034
£10,000
£50,000
(1)
(1)
44,698
5.03%
1.50%
0.96%
1.45%
3.17%
0.71%
0.90%
1.63%
1.63%
1.63%
5.74%
2.40%
2.59%
3.08%
4.80%
(1) Notional amounts equal to the outstanding principal value of the debt during the term of the construction facility and term loan. Refer to note 17
(b)(ii) for further detail on the terms of GHG's long-term debt.
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 17 (c)(ii) for further detail on this debt.
Foreign currency exchange risk
The Corporation's exposure to foreign currency exchange risk is primarily related to the investment in Bristol Water, Värmevärden and the SEK-
denominated shareholder loan with Värmevärden. The power segment also has expenses and capital commitments exposed to foreign currency
exchange risk.
Changes in the Canadian dollar and UK pound sterling currency rates impact the carrying value of assets, liabilities and components of the
consolidated statement of income. Bristol Water has a foreign functional currency requiring movements in the UK pound sterling to be reflected by
the Corporation on consolidation.
Capstone is also exposed to foreign exchange risk from the translation of foreign monetary assets. Changes in the Canadian dollar and SEK currency
rates impact the value of the shareholder loan with Värmevärden resulting in a foreign exchange gain or loss, which is included in the consolidated
statement of income.
Capstone's power assets have expenses or capital commitments in currencies other than the Canadian 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
Independent Electricity System Operator ("IESO")
Ontario Electricity Financial Corporation ("OEFC")
Other
CAPSTONE INFRASTRUCTURE CORPORATION
Dec 31, 2015
Dec 31, 2014
5,245
1,058
13,207
19,510
16,624
9,081
12,027
37,732
Page 54
There are no accounts receivable that are past due. Since the 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
IESO
OEFC
Other
Dec 31, 2015
Dec 31, 2014
67,858
7,871
42,227
117,956
52,103
101,450
49,755
203,308
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.
As at December 31, 2015, the Corporation has debt obligations falling due with one year of $101,203. This debt includes regular scheduled
amortization on long term debt, debt that has been repaid subsequent to year end, as well as debt that comes due in 2016 some of which is planned
to be repaid as part of the iCON acquisition. The Corporation expects to refinance any remaining debt maturities or find alternate sources of
financing. The Corporation is actively in discussion with lenders.
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 15 (Accounts
payable and other liabilities), 16 (Finance lease obligations) and 17 (Long-term debt) for further detail on financial liabilities. These financial liabilities
contain a number of standard financial and other covenants.
Failure to comply with terms and covenants of the Corporation's credit agreements could result in a default, which, if not cured or waived, could
result in accelerated repayment or the suspension of dividends.
In the event of default, there can be no assurance that the Corporation could:
(i) Generate sufficient cash flow from operations or that future dividends will be available in amounts sufficient to pay outstanding indebtedness,
or to fund any other liquidity needs; or
(ii) Refinance these credit agreements or obtain additional financing on commercially reasonable terms, if at all. The credit agreements, and future
borrowings may be at variable rates of interest, which exposes the Corporation to the risk of increased interest rates.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 55
Contractual maturities
The contractual maturities of the Corporation's financial liabilities as at December 31, 2015 were as follows:
Financial Liabilities
Within one year One year to five years
Beyond five years
Accounts payable and other liabilities
143,903
Derivative financial instruments
Whitecourt embedded derivative
Interest rate swaps
Finance lease obligations
Minimum lease payments
Finance charges
Long-term debt
Principal payments
Interest payments
(E)
Sensitivity Analysis
—
—
2,666
2,666
3,341
471
3,812
—
3,148
472
3,620
—
—
—
—
254
254
714
—
714
102,273
53,313
155,586
342,347
182,091
524,438
887,404
691,229
1,578,633
Total
143,903
3,148
3,392
6,540
4,055
471
4,526
1,332,024
926,633
2,258,657
The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2015, 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, 2015 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, 2015 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 Whitecourt embedded derivatives' significant unobservable inputs:
Dec 31, 2015 Unobservable inputs Estimated input
Relationship of input to fair value
$3,148 Forward Alberta
power pool prices
From $30/MWh to $134/
MWh over the next 15 years.
A reasonably possible increase in estimated forward prices of 5% or a decrease
of 5%, would cause fair value to decrease by $4,375 and increase by $4,448,
respectively.
Changes in this estimates may have a significant impact on the fair value of the embedded derivative given the 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 56
The table summarizes the impact on fair value of changes in observable inputs:
For year ended Dec 31, 2015
Financial assets:
Cash and cash equivalents (1)
Restricted cash
Loans receivable from Värmevärden
Financial liabilities:
Finance lease obligations
Long-term debt (2)
Interest rate swap contracts, net (3)
Carrying
Amount
74,392
29,064
37,271
4,074
67,173
1,121
Interest Rate Risk
Foreign Exchange Rate Risk
(0.5)%
0.5%
(10)%
10%
(372)
(145)
—
22
336
2,982
372
145
—
(22)
(336)
(3,175)
—
—
—
—
(3,727)
3,727
—
—
—
—
—
—
(1) Cash and cash equivalents include deposits at call, which are at floating interest rates.
(2) Long-term debt excludes all fixed-rate debt totaling $1,139,050 and variable rate debt that is covered by a swap for fixed-rate debt totaling $152,441.
(3)
Interest rate swaps exclude Bristol Water's cash flow hedges of $2,270 as changes flow through OCI.
UK pound sterling and Swedish krona 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, 2015
Impact on net income before taxes
Impact on equity
NOTE 9. EQUITY ACCOUNTED INVESTMENTS
(A)
Equity Accounted Investments
As at
Värmevärden (1)
Glen Dhu (2)
Others (3)
Inflation Rate Risk (RPI)
(1)%
3,516
2,813
1%
(3,516)
(2,813)
Canadian $ to £
Foreign Exchange Rate Risk
(1)%
—
1%
—
5,161
(5,161)
Dec 31, 2015
Dec 31, 2014
Ownership % Carrying Value
Ownership %
Carrying Value
33.3%
49.0%
—
22,814
33.3%
49.0%
31.3-50.0%
578
31.3-50.0%
23,392
3,924
24,477
655
29,056
(1) Capstone no longer records equity accounted income (losses) for Värmevärden, as the equity accounted losses and distributions exceeded the carrying
value. For 2015, Capstone has unrecognized losses of $642, relating to Värmevärden. Until cumulative unrecognized losses and dividends become
positive, Capstone will carry its investment at nil and record dividends as other gains in the statement of income.
(2) 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.
(3) Others are Capstone's investment in Fitzpatrick Mountain Wind Energy Inc. ("Fitzpatrick") (2014 - Fitzpatrick, MLTCLP and Chapais).
Each equity accounted investment is subject to a shareholder or limited partnership agreement that governs distributions from these investments.
In addition, distributions must comply with the respective credit agreements. See note 6 for detail on loans receivable with Värmevärden, MLTCLP
and Chapais.
The changes in the Corporation’s total equity accounted investments for the years ended were as follows:
For the year ended
Opening Balance
Equity Accounted
Income (Loss)
Equity Share of
OCI
Distributions
Received (1)
Dec 31, 2015
Dec 31, 2014
29,056
39,051
(816)
(1,127)
80
(1,438)
(4,928)
(7,430)
Other
Ending Balance
—
—
23,392
29,056
(1) Distributions received excludes dividends of $897 from Värmevärden, which are included in the statement of income since equity accounted
losses and distributions exceeded the carrying value. The statement of cash flows includes $5,825 in investing activities, which contains the
dividends from Värmevärden, as well as the distributions received from the other equity accounted investments.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 57
(B)
The Corporation has summarized its equity accounted investments using their gross values as follows:
Summarized Information for Equity Accounted Investments
As at
Dec 31, 2015
Dec 31, 2014
Summarized Statements of Financial
Position
Värmevärden
Glen Dhu
Others
Total Värmevärden
Glen Dhu
Others
Total
Assets
Current
Non-current
Liabilities
Current
Non-current
Equity before fair value increments
on purchase and NCI
Amounts attributable to NCI
Amounts unrecognized for equity
accounting
Fair value increments, net of
amortization
Equity including unamortized fair
value increments on purchase
49,696
7,338
260
57,294
50,683
7,623
10,139
68,445
293,905
113,497
2,380
409,782
282,917
121,083
4,943
408,943
(13,431)
(7,267)
(2,494)
(23,192)
(15,298)
(7,043)
(9,971)
(32,312)
(328,190)
(93,531)
(399)
(422,120)
(300,425)
(100,021)
(27,773)
(428,219)
1,980
20,037
(253)
21,764
17,877
21,642
(22,662)
16,857
(4,851)
2,871
—
—
—
—
—
—
2,871
(4,851)
(6,093)
—
—
—
—
(6,093)
—
28,311
23,971
52,282
—
—
26,522
1,419
27,941
46,559
1,166
47,725
11,784
49,953
1,309
63,046
Capstone's interest
33.3%
49.0% 31.3-50.0%
33.3%
49.0% 31.3-50.0%
Carrying value of investment
—
22,814
583
23,397
3,924
24,477
655
29,056
For the year ended
Dec 31, 2015
Dec 31, 2014
Summarized Statements of Income
Värmevärden
Glen Dhu
Others
Total Värmevärden
Glen Dhu
89,171
19,968
282
109,421
98,736
20,720
Others
20,753
Total
140,209
Revenue
Net Income
OCI
Total comprehensive Income
Capstone's interest
Sub-total
Amortization of fair value
adjustments and other
Total
Net income to Capstone
OCI to Capstone
(6,692)
3,346
1,997
—
(4,695)
3,346
(44)
—
(44)
(3,390)
1,997
(6,109)
(4,314)
3,630
(11,037)
(13,516)
—
—
(4,314)
(1,393)
(10,423)
3,630
(11,037)
(17,830)
33.3%
49% 31.3-50.0%
33.3%
49% 31.3-50.0%
(1,563)
1,640
134
(1,429)
(881)
759
(22)
(44)
(66)
55
(3,471)
1,779
(3,464)
(5,156)
(791)
(736)
(816)
80
(736)
—
(3,471)
(805)
974
3,396
2,591
(68)
(2,565)
(1,127)
(1,438)
(2,565)
In 2015, Capstone received distributions of $2,504 (2014 - $4,612) from Värmevärden and $2,424 (2014 - $2,818) from Glen Dhu.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 58
NOTE 10. CAPITAL ASSETS
(A)
Continuity
Cost
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation
Equipment and vehicles
Property and plant
Water network
Net carrying value
Jan 1, 2015 (1)
Additions
Disposals (2)
Foreign
Exchange
Transfers (3)
Dec 31, 2015
4,075
11,832
1,102,868
555,144
61,444
1,735,363
(4,094)
(281,991)
(31,091)
1,418,187
—
83
26,097
15,640
54,098
95,918
(1,717)
(60,126)
(9,052)
25,023
—
(4,015)
(29,589)
—
—
395
1,043
72,828
81,991
8,343
104
2,228
241,063
17,076
(108,997)
4,574
11,171
1,413,267
669,851
14,888
(33,604)
164,600
151,474
2,113,751
3,784
19,633
—
(10,187)
(705)
(32,923)
(13,236)
117,736
—
—
—
(2,732)
(355,407)
(53,379)
151,474
1,702,233
(1) The Confederation Power wind facilities were sold on May 19, 2015.
(2) Disposals include $14,831 of capital asset derecognition for Cardinal assets replaced as part of the conversion to a cycling facility. The derecognition
(3)
resulted in a loss of $7,430, which is included in other gains and losses on the consolidated statement of income. Refer to note 24.
Includes transfers of $153,766 for Saint-Philémon and Goulais at the COD from projects under development, less $2,292 transferred to intangibles from
Bristol Water. Refer to notes 11 and 12, respectively.
Jan 1, 2014
Additions
Disposals
Foreign
Exchange
Transfers Impairments Dec 31, 2014
Cost
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation
Equipment and vehicles
Property and plant
Water network
Net carrying value
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)
(7,277)
(2,245)
(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)
—
—
4,075
11,832
(31,539)
1,102,868
—
—
555,144
61,444
14,826
(31,539)
1,735,363
—
—
—
—
(4,094)
1,231
(281,991)
—
(31,091)
(3,699)
19,758
14,826
(30,308)
1,418,187
(B)
Reconciliation to Cash Additions for the Cash Flow Statement
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, 2015
Dec 31, 2014
95,918
2,631
1,873
128,840
427
546
100,422
129,813
The net book value of capital assets includes $9,577 (December 31, 2014 - $7,410) of capitalized interest at Bristol Water in accordance with IAS
23, of which $1,158 was capitalized in 2015. Capstone has used 4.5% as the interest rate to determine the amount capitalized (December 31, 2014
- 4.6%).
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 59
(D)
Capital Assets Under Finance Leases
As at
Dec 31, 2015
Dec 31, 2014
(E)
Impairments
Equipment and
Vehicles
Property and
Plant Water Network
5
5
7,188
15,121
414
1,422
Total
7,607
16,548
At the end of each reporting period, Capstone reviews its capital assets and amortizing intangible assets to determine if any indicators of impairment
exist. Consistent with the prior year, as at December 31, 2015, Capstone identified the deficit of market capitalization to the carrying amount of
owners' equity as an indicator of impairment. Consequently, Capstone performed a comprehensive analysis, which confirmed that the fair value of its
assets was greater than the carrying amounts included in these consolidated financial statements. As a result, no impairments were recognized at
December 31, 2015.
Capstone's determination of fair value was based on a discounted cash flow analysis of the expected future cash flows for each cash generating unit
("CGU"). The analysis then compared the recoverable amount of each CGU with the carrying amount included in the consolidated statement of
financial position. For the purposes of this analysis, the recoverable amount was determined based on a fair value less costs to sell ("FVLCS"). The
FVLCS analysis 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.
In 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
(26,698)
(3,610)
(562)
(30,870)
278
(30,592)
(1) The total asset impairment charge contains $3,610, which relates to assets that were classified as held for sale at December 31, 2014.
NOTE 11. PROJECTS UNDER DEVELOPMENT
(A)
Continuity
As at January 1
Capitalized costs during the year (1)
Costs transferred to capital assets (2) (refer to note 10)
Costs transferred to intangibles (2) (refer to note 12)
As at December 31
2015
151,361
115,267
(153,766)
(6,662)
106,200
2014
23,983
148,495
(20,519)
(598)
151,361
(1)
Includes $1,393 of capitalized borrowing costs during the construction of Goulais using the rate of the respective long-term debt (December 31, 2014 -
$2,938 for Saint-Philémon and Goulais).
(2) Amounts were transferred on COD of Saint-Philémon and Goulais (December 31, 2014 - COD of Skyway 8).
(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, 2015
Dec 31, 2014
115,267
148,495
(21,294)
93,973
(20,871)
127,624
CAPSTONE INFRASTRUCTURE CORPORATION
Page 60
NOTE 12. INTANGIBLE ASSETS
(A)
Continuity
Assets
Computer software (1)
Electricity supply and other contracts (2)
Water rights
Licence
Goodwill
Accumulated amortization
Computer software
Electricity supply and other contracts
Water rights
Jan 1, 2015
Additions
Disposals
Foreign
Exchange
Transfers Dec 31, 2015
19,063
127,987
73,018
24,034
156,079
(8,714)
(33,545)
(15,910)
—
—
—
—
(3,994)
(6,976)
(2,116)
342,012
(13,086)
(2,816)
5,683
—
—
—
—
75
—
3,107
20,177
2,816
(4,408)
—
—
—
—
—
2,292
6,662
—
—
—
—
—
—
24,222
134,724
73,018
27,141
176,256
(14,300)
(40,521)
(18,026)
24,634
8,954
362,514
(1)
Includes transfers of $2,292 for Bristol Water from capital assets. Refer to note 10.
(2) Transfer is composed of $6,662 from PUD on the COD of Goulais. Refer to note 11.
Assets
Computer software
Electricity supply, gas purchase and other contracts
Water rights
Licence
Goodwill
Accumulated amortization
Computer software
Electricity supply and gas purchase contracts
Water rights
Provisions
Jan 1, 2014
Additions
Disposals
Foreign
Exchange
Transfers 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
—
—
591
3,828
—
(863)
—
—
4,993
598
—
—
—
—
—
—
—
19,063
127,987
73,018
24,034
156,079
—
(8,714)
(33,545)
(15,910)
4,638
5,591
342,012
Electricity supply, gas purchase and other contracts
Utilization
12,257
(10,623)
1,634
—
(12,257)
(1,630)
(1,630)
12,253
(4)
—
—
—
—
—
—
—
—
—
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.
(B)
Impairments
On October 6, 2015, the CMA published its final determination for Bristol Water’s AMP6 business plan, which runs until March 31, 2020.
Management has updated its goodwill impairment analysis for the CMA's final determination. The recoverable amount was based on the fair value
less cost of disposal method and concluded that no impairment charge was required. This method was based on a discounted cash flow model and
incorporated assumptions that market participants would use in estimating fair value. The discounted cash flow model incorporates management's
best estimates of future cash flows, a post-tax discount rate and terminal value. Management cautions that a change in key assumptions on which the
recoverable amount is based may cause the carrying amount of the utilities - water segment to exceed its recoverable amount, resulting in an
impairment to goodwill.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 61
NOTE 13. 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, 2015 was $2,512 (December 31, 2014 – $2,189).
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, 2015 was updated to December 31, 2015, 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
Asset Allocation
2015
2014
3.2%
2.2%
2.2%
2.2%
3.7%
3.7%
3.2%
2.2%
2.2%
2.2%
3.7%
3.5%
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, 2015
Dec 31, 2014
Amount
Allocation
Amount
Allocation
11,671
12,963
367,624
6,667
7,299
1,535
3%
3%
90%
2%
2%
—%
17,916
10,569
325,327
5,860
6,343
1,146
5%
3%
88%
2%
2%
—%
407,759
100%
367,161
100%
(309,201)
98,558
(288,411)
78,750
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 100% adjustment to mortality rates (this adjustment reflects Bristol
Water's membership profile) and with future improvements in line with CMI 2014 projections from 2007, subject to a minimum increase of 1.5% and
1.25% per annum, for males and females, respectively. Per the mortality assumptions used, the average life expectancy for a male pensioner currently
aged 60 is 27.7 years and for a female pensioner currently aged 60 is 29.6 years (December 31, 2014 – 28.1 male, 29.9 female).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 62
The allowance for future improvements in longevity is such that a male retiring at age 60 in 2040 (i.e. in 25 years' time) is expected to have an
average life expectancy from retirement of 30.6 years, and a female retiring at age 60 in 2040 is assumed to have an average life expectancy of
32.1 years (December 31, 2014 – 31.1 male, 32.4 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 $4,076 (£2,086) (December 31, 2014 – $4,248 (£2,335)). For normal employer contributions
after April 1, 2015 Bristol Water was required to contribute at the rates of 34% for the main sub Section and 27% 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, 2016 is $4,055
(£2,000).
Changes in Comprehensive Income
Analysis of operating expense, interest expense and amounts recognized in other comprehensive income ("OCI"):
For the year ended
Dec 31, 2015
Dec 31, 2014
Employer current service cost
Employee current 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
Changes in Financial Position
2,634
582
566
3,782
13,748
(10,686)
3,062
8,257
5,219
3,077
(11,272)
759
6,040
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
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
Ending surplus in Section
December 31, 2015
Asset
Liability
367,161
(288,411)
—
13,748
(566)
(2,634)
(10,686)
—
—
—
—
(11,272)
4,076
582
(13,178)
47,208
407,759
8,257
5,219
3,077
—
—
(582)
13,178
(36,619)
(309,201)
Total
78,750
(2,634)
3,062
(566)
8,257
5,219
3,077
(11,272)
4,076
—
—
10,589
98,558
December 31, 2014
Asset
Liability
300,606
(254,365)
—
13,463
(505)
(2,376)
(11,331)
—
—
—
—
53,053
4,248
627
(11,685)
7,354
(2,800)
(739)
—
—
(627)
11,685
(6,399)
367,161
(288,411)
2,376
627
505
3,508
13,463
(11,331)
2,132
(21,459)
(2,800)
(739)
53,053
(5,611)
22,444
Total
46,241
(2,376)
2,132
(505)
(2,800)
(739)
53,053
4,248
—
—
955
78,750
(21,459)
(21,459)
CAPSTONE INFRASTRUCTURE CORPORATION
Page 63
The actual return on the Section's assets for the year ended as at December 31, 2015 was a gain of $2,476 (£1,267) (December 31, 2014 – gain of
$66,517 (£36,564)).
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
4,490
(3,469)
9,591
(9,183)
(4,694)
3,469
(9,591)
9,183
(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.
NOTE 14. INCOME TAXES
(A)
Deferred Income Tax
As at
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liability
Dec 31, 2015
Dec 31, 2014
220
(204,125)
(203,905)
—
(192,829)
(192,829)
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
Asset retirement obligations
Other
Deferred income tax assets
Capital assets
Intangibles
Retirement benefit surplus
Other
Deferred income tax liabilities
Net deferred income tax liability
Dec 31, 2015
Dec 31, 2014
29,923
11,041
1,621
1,260
3,271
47,116
24,731
12,005
3,431
1,113
3,416
44,696
(190,744)
(179,995)
(42,338)
(17,603)
(336)
(251,021)
(203,905)
(41,452)
(15,677)
(401)
(237,525)
(192,829)
CAPSTONE INFRASTRUCTURE CORPORATION
Page 64
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
Other
Net deferred income tax liability as at December 31
(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
2015
2014
(192,829)
(182,673)
3,149
(15,604)
—
1,379
(5,994)
(8,127)
2,637
1,328
(203,905)
(192,829)
Dec 31, 2015
Dec 31, 2014
26,418
19,677
(230,323)
(212,506)
(203,905)
(192,829)
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, 2015 was $70,746 (December 31, 2014 – $48,067). These liabilities have not been
recorded as the reversal of such differences are not expected to create a tax liability.
(C)
Capstone's tax loss carry forwards and the portion recognized in deferred income tax assets were as follows:
Tax Loss Carry Forwards
Canadian – capital losses
Canadian – non-capital losses
US – non-capital losses
UK – capital losses (£2,864)
UK – advanced corporation tax (£3,922)
Expiry
No expiry
2025 – 2035
2023 – 2027
No expiry
No expiry
Recognized
Unrecognized
Dec 31, 2015
Dec 31, 2014
—
112,396
—
—
—
82,807
64,892
20,016
5,845
8,004
82,807
177,288
20,016
5,845
8,004
82,381
167,220
16,774
5,176
7,087
The Corporation also has $15,210 of unrecognized deferred tax assets, which have not been recognized as at December 31, 2015
(December 31, 2014 – $12,241).
(D)
The following table reconciles the expected income tax expense using the statutory tax rate to the expense:
Rate Reconciliation
Income (loss) before income taxes
Statutory income tax rate
Income tax expense based on statutory income tax rate
Permanent differences
Tax rate differentials
Change in unrecognized deferred tax assets
Other
Total income tax expense (recovery)
For the year ended
Dec 31, 2015
Dec 31, 2014
20,305
26.00%
5,279
(641)
(13,399)
3,714
(840)
(5,887)
43,522
25.40%
11,055
1,346
(4,168)
(269)
2,011
9,975
The statutory income tax rate of 26.00% (2014 – 25.40%) changes in response to Capstone's allocation of taxable income to different tax
jurisdictions.
(E)
Current Income Taxes
Current income taxes receivable of $1,742 are included in accounts receivable on the statement of financial position (see note 4) (2014 - $0) and
current income taxes payable of $1,397 are included in accounts payable and other liabilities on the statement of financial position (see note 15(a))
(2014 - $3,729).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 65
NOTE 15. ACCOUNTS PAYABLE AND OTHER LIABILITIES
(A)
Accounts Payable and Accrued Liabilities
Dividends payable
Income taxes payable
Other accounts payable and accrued liabilities
Income taxes payable comprised:
Canadian Renewable and Conservation Expense ("CRCE") penalties (1)
Taxes payable (recovery) on preferred share dividends
Current income taxes payable (recovery)
(1) CRCE penalties related to flow-through shares originally issued by ReD.
(B)
Deferred Revenue
Dec 31, 2015
Dec 31, 2014
7,949
1,397
134,557
143,903
7,887
3,729
120,829
132,445
Dec 31, 2015
Dec 31, 2014
1,157
250
(10)
1,397
1,154
(380)
2,955
3,729
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
NOTE 16. FINANCE LEASE OBLIGATIONS
2015
21,600
8,059
(388)
2,792
32,063
2014
15,589
5,874
(256)
393
21,600
Utilities – water: equipment leases
3.64 - 4.10%
2016 - 2020
Less: current portion
Non-current portion
4,074
(813)
3,261
4,100
(693)
3,407
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
For the year ended December 31, 2015, the Corporation repaid $534 (December 31, 2014 - $782), including interest charges of $126, net of an
interest rebate of $198 (December 31, 2014 – net interest charge of $286).
The present value of minimum lease payments grouped by period due was:
Utilities – water
714
3,812
—
(471)
Within one year
One year to five years
Beyond five years
Less: Future
Finance Charges
Total
4,055
CAPSTONE INFRASTRUCTURE CORPORATION
Page 66
NOTE 17. 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, 2015
Dec 31, 2014
Fair Value
Carrying Value
Fair Value
Carrying Value
554,545
827,142
117,811
529,211
712,584
116,869
527,666
736,446
91,077
511,501
630,894
89,393
1,499,498
1,358,664
1,355,189
1,231,788
—
(14,127)
—
(11,788)
1,499,498
1,344,537
1,355,189
1,220,000
Less: current portion of long-term debt
(92,182)
(101,203)
(35,529)
(25,150)
Long-term debt
(B)
Power
As at
Wind - Operating (1)
Wind - Development (2)
Hydros
Solar (3)
Less: deferred financing costs
Long-term debt
Less: current portion
1,407,316
1,243,334
1,319,660
1,194,850
Dec 31, 2015
Dec 31, 2014
Fair Value
Carrying Value
Fair Value
Carrying Value
343,012
321,395
30,234
88,159
93,140
554,545
—
554,545
(49,348)
505,197
30,234
85,196
92,386
529,211
(10,682)
518,529
(59,529)
459,000
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
(1) Wind - operating project debt consists of Erie Shores, Amherst, SkyGen, Skyway 8 and Glace Bay for both periods. In 2015, on COD the Saint-Philémon and
Goulais project debt was transfered from wind - development.
(2) Wind - development project debt consists of the GHG construction facility (2014 - Saint-Philémon and Goulais).
(3) Solar - On July 9, 2015, the Amherstburg Solar Park refinanced the project debt.
The respective project debt within the power segment have regular principal and interest payments over the term to maturity and are secured only
by the assets of respective project, with no recourse to the Corporation's other assets, except as noted.
In addition, the individual project debt agreements require the respective projects to maintain certain restrictive covenants including a minimum debt
service coverage ratio to allow distributions to Capstone.
As at December 31, 2015, the carrying value of the assets exceeded the total amount of project debt outstanding for each of the respective
projects.
(i)
Wind - Operating
Project debt
Erie Shores Wind Farm
Goulais (1)
Saint-Philémon (1)
Amherst
SkyGen
Skyway 8
Glace Bay
Dec 31, 2015
Dec 31, 2014
80,032
76,386
55,531
41,051
33,867
19,658
14,870
86,274
—
—
42,949
35,338
21,289
16,210
321,395
202,060
(1) For the year ended December 31, 2014, the Goulais and Saint-Philémon project debts were included in wind - development prior to COD.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 67
Erie Shores Wind Farm
Tranche A
Tranche B
Tranche C
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
5.96%
5.28%
6.15%
Apr 1, 2026
Apr 1, 2016
Apr 1, 2026
47,978
497
31,557
80,032
51,181
1,454
33,639
86,274
(1) Erie Shores project debt has a $5,000 limited recourse guarantee provided by CPC to the lenders of the Erie Shores project debt.
(2) Erie Shores is required to set aside $5,704 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.
Goulais
Term loan
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
5.16%
Sep 30, 2034
76,386
76,386
(1) Goulais is required to set aside $3,255 as restricted cash to cover the debt service and maintenance reserves.
On October 9, 2015, the Goulais construction facility converted to a term facility.
Saint-Philémon
Tranche A - Term loan
Tranche B - Construction facility
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
5.49%
May 31, 2034
Settled on June 15, 2015
55,531
—
55,531
56,102
4,433
60,535
(1) Saint-Philémon is required to set aside $1,224 as letters of credit against the borrowing capacity of the corporate credit facility to cover the debt service.
reserve. In addition, Saint-Philémon is required to set aside $1,505 as restricted cash to cover construction holdbacks with vendors.
On August 4, 2015, the Saint-Philémon construction facility converted to a term facility. In addition, on June 15, 2015 Saint-Philémon repaid $4,433
of Tranche B debt, primarily from proceeds received from Hydro-Québec.
Amherst
Term loan
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
6.20%
Apr 30, 2032
41,051
42,949
(1) Amherst's project debt has a $1,000 limited recourse guarantee provided by CPC to the lenders of the Amherst project debt.
(2) 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, 2015
Dec 31, 2014
4.22 - 5.06%
Dec 17, 2016
6.22%
5.00%
Sep 17, 2017
Feb 8, 2016
23,467
434
9,966
33,867
24,844
519
9,975
35,338
(1) SkyGen is not required to set aside any reserves for debt service or maintenance.
SkyGen's $23,467 of project debt and $9,966 promissory note payable are classified as current because both mature in 2016. Capstone plans to
refinance the SkyGen consistent with Capstone's other wind projects.
Skyway 8
Term loan
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
4.80%
Feb 16, 2018
19,658
21,289
(1) Skyway 8 project debt has a $5,000 limited recourse guarantee provided by CPC to the lenders of the Skyway 8 project debt.
(2) Skyway 8 is not required to set aside any reserves for debt service or maintenance.
On February 17, 2015, the Skyway 8 construction facility converted to a three-year term facility.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 68
Glace Bay
Term loan
Term loan
Term loan
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
5.99%
6.36%
4.72%
Mar 15, 2027
Apr 21, 2019
Oct 1, 2032
7,665
2,230
4,975
8,207
2,957
5,046
14,870
16,210
(1) Glace Bay is required to set aside $1,654 as restricted cash to cover the debt service and operating and maintenance reserves.
(ii)
Wind - Development
Project debt
GHG
Goulais (1)
Saint-Philémon (1)
Dec 31, 2015
Dec 31, 2014
30,234
—
—
30,234
—
60,535
76,386
136,921
(1)
In 2015, the Goulais and Saint-Philémon project debts were transferred to wind - operating upon reaching COD.
GHG
Construction facility
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
2.59%
Jun 30, 2021
30,234
—
(1) During construction, the facility does not require any reserves.
(2) As at December 31, 2015, GHG's had three swap contracts to convert interest to a fixed rate (See note 8(a)).
On December 11, 2015, Capstone, through its interest in the entity that controls the Grey Highlands ZEP and Ganaraska wind projects, entered into
a credit agreement that provides up to $82,000 for the construction of the projects. The construction facility matures no later than June 30, 2016
with a variable interest rate based on the CDOR plus 1.625%. Upon maturity, the facility will convert to a term loan, which matures no later than June
30, 2021 with a five-year variable annual interest rate of CDOR plus 1.625% (which increases to CDOR plus 1.875% commencing on the day
following the third anniversary of the term conversion date).
(iii)
Hydros
Senior secured bonds
Subordinated secured bonds
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
4.56%
7.00%
Jun 30, 2040
Jun 30, 2041
64,954
20,242
85,196
69,660
20,242
89,902
(1) The hydro facilities are required to set aside $9,720 as letters of credit against the borrowing capacity of the corporate credit facility and $496 as
restricted cash to cover the debt service and maintenance reserves.
(iv)
Solar
Amherstburg project debt
3.49%
Dec 31, 2030
92,386
82,618
(1) Amherstburg is required to set aside $4,350 as letters of credit against the borrowing capacity of the corporate credit facility to cover the debt
service and maintenance reserves.
On July 9, 2015, Capstone reached financial close on an approximately $95,000 refinancing of Amherstburg's project debt, which is non-recourse to
the Corporation's other assets. The proceeds were used to repay Amherstburg's outstanding principal, swap break fees and closing costs.
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
CAPSTONE INFRASTRUCTURE CORPORATION
Page 69
(C)
Utilities – water
As at
Bank loans
Term loans
Debentures
Irredeemable cumulative preferred shares
Less: deferred financing costs
Long-term debt
Less: current portion
(i)
Bank loans
Dec 31, 2015
Dec 31, 2014
Fair Value
Carrying Value
Fair Value
Carrying Value
139,247
647,005
3,137
37,753
827,142
—
827,142
—
142,381
534,366
2,676
33,161
712,584
(2,186)
710,398
—
122,836
576,696
2,805
34,109
736,446
—
736,446
—
125,877
473,301
2,351
29,365
630,894
(2,288)
628,606
—
827,142
710,398
736,446
628,606
Secured, variable interest at three month Libor plus a margin
(principal £50,000) (1)
2.40%
Nov 28, 2019
50,000
102,035
90,355
Interest Rate
Maturity
[£]
[$]
[$]
Dec 31, 2015
Dec 31, 2015
Dec 31, 2014
Secured, variable interest at three month Libor plus a margin
(principal £10,000 (2))
1.29%
Dec 7, 2017
Secured, variable interest at six month Libor plus a margin
(principal £10,000 (2), (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
9,886
9,886
—
—
20,173
17,761
20,173
17,761
—
—
—
—
142,381
125,877
(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 8(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 8(a)). The loan has a bullet repayment on maturity.
(4) As at December 31, 2015, Bristol Water had $102,035 (£50,000) undrawn on this credit facilities available (December 31, 2014 - £50,000 undrawn).
(5) As at December 31, 2015, Bristol Water had $40,814 (£20,000) undrawn on this credit facilities available (December 31, 2014 - £20,000 undrawn).
During 2015, Bristol Water's bank loans increased primarily due to foreign exchange. As at December 31, 2015, $142,849 or £70,000 of undrawn
credit capacity was available.
The bank loans are secured only by the assets of Bristol Water, with no recourse to the Corporation's other assets. In addition, these loans are fully
repayable on maturity and incur non-utilization fees on the undrawn portion of the total available credit.
(ii)
Term loans
Interest Rate
Maturity
[£]
[$]
[$]
Dec 31, 2015
Dec 31, 2015
Dec 31, 2014
Secured, principal index-linked to RPI, fixed interest at
3.635% (2) on the indexed principal (principal £126,252 (1))
Secured, fixed interest at 6.01% (2) (principal £57,500 (1))
Secured, principal index-linked to RPI, fixed interest at
2.701% on the indexed principal (principal £45,197 (1))
4.63%
6.01%
Sep 30, 2032
Sep 30, 2033
150,872
62,637
4.00%
Mar 24, 2041
48,345
307,884
127,824
98,658
534,366
272,812
113,711
86,778
473,301
(1) The principal due on maturity is different from the balance in pounds sterling due to the fair value adjustment required on acquisition.
(2) Coupons as specified in loan documentation.
The interest rate on the £126,252 indexed-linked loan is adjusted in March and September, by reference to the Retail Price Index ("RPI"), with an
eight-month lag.
The interest rate on the £45,197 indexed-linked loan is adjusted in March and September, by reference to the RPI, with a two-month lag.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 70
(iii)
Debentures
Consolidated (principal £1,405 (1))
Perpetual (principal £37 (1))
Perpetual (principal £55 (1))
Perpetual (principal £73 (1))
Dec 31, 2015
Dec 31, 2015
Dec 31, 2014
Interest Rate
Maturity
4.00%
4.25%
4.00%
3.50%
Irredeemable
Irredeemable
Irredeemable
Irredeemable
[£]
1,146
37
55
73
[$]
2,340
75
112
149
2,676
[$]
2,054
66
99
132
2,351
(1) The principal due on maturity is different from the balance in pounds sterling due to the fair value adjustment required on acquisition.
The rate of interest is fixed and payable every six months.
(iv)
Irredeemable cumulative preferred shares
Preferred shares, cumulative (principal £12,500 (1))
8.75%
Irredeemable
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2015
Dec 31, 2014
[£]
16,250
[$]
33,161
[$]
29,365
(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, 2015.
The preferred shares, which do not carry any voting rights, were issued in 1992 at £1 per share. The preferred shareholders of Bristol Water are
entitled to receive dividends at 8.75% per annum on the par value of these shares on a cumulative basis; these dividends are payable half-yearly
on 1 April and 1 October. On winding up, the preferred shareholders rank ahead of ordinary shareholders and are entitled to receive £1 per share and
any dividends accrued but unpaid in respect of their shares. In the event that dividends on the preferred shares are in arrears for six months or more,
holders of the preferred shares become entitled to vote at general meetings of members. In accordance with IAS 39 the shares are classified as
long-term debt.
(v)
Security for borrowings
The majority of Bristol Water's financial liabilities are secured. In respect of Bristol Water plc:
•
By way of first fixed charges over any of its freehold or leasehold property belonging to it now or acquired in the future (other than protected
land under the Water Industry Act 1991), its present and future goodwill, all rights and claims in relation to charged bank accounts, all book
debts all insurances, all rights, title and interest to all investments and all plant and machinery, and
•
A floating charge over the whole of its undertaking.
Prior to enforcement of the security by the lender, Bristol Water plc is entitled to exercise all its rights, and perform its obligations in relation to the
charged assets in accordance with the provisions set out in the Security Trust and Intercreditor Deed.
In respect of Bristol Water Core Holdings Ltd (the immediate parent of Bristol Water plc), as security for the obligations of Bristol Water plc:
•
A fixed charge over its shares in Bristol Water plc together with a floating charge over the whole of its undertaking.
(D)
Corporate
As at
Corporate credit facility
Convertible debentures
Less: deferred financing costs
Long-term debt
Less: current portion
Dec 31, 2015
Dec 31, 2014
Fair Value
Carrying Value
Fair Value
Carrying Value
47,000
70,811
117,811
—
117,811
(42,834)
74,977
47,000
69,869
116,869
(1,259)
115,610
(41,674)
73,936
20,000
71,077
91,077
—
91,077
—
91,077
20,000
69,393
89,393
(1,942)
87,451
—
87,451
CAPSTONE INFRASTRUCTURE CORPORATION
Page 71
(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
Remaining available credit
Interest Rate
Maturity
Dec 31, 2015
Dec 31, 2014
3.67%
Nov 12, 2018
125,000
90,000
(47,000)
(23,036)
(11,612)
43,352
(20,000)
(21,432)
(7,029)
41,539
As at December 31, 2015, Capstone had 25 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.
On October 6, 2015 Capstone and its existing lenders increased the capacity of its corporate credit facility by $35,000 to increase the total facility to
$125,000. The expanded portion of the corporate credit facility matured in January 2016 and the remaining $90,000 was extended by one year, to
mature in November 2018.
(ii)
Convertible debentures
The carrying values and changes of the liability and the equity components of the debentures were as follows:
Liability component
Amortization and accretion during the year
Deferred financing costs
Equity component
Dec 31, 2015
2016
Debentures (1)
2017
Debentures (1)
Total
Dec 31, 2014
41,728
550
42,278
(604)
41,674
9,284
50,958
27,665
(74)
27,591
—
27,591
—
27,591
69,393
476
69,869
(604)
69,265
9,284
78,549
68,807
586
69,393
(1,178)
68,215
9,284
77,499
(1) For details relating to arrangement agreement with iCON refer to note 29 (Subsequent events).
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, 2015 was $42,749 (December 31, 2014 – $42,749).
2017 Debentures
The Corporation has redeemable, extendable, 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, 2015 was $27,428 (December 31, 2014 – $27,428).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 72
(E)
Long-term Debt Covenants
For the Year ended and as at December 31, 2015, 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
59,524
—
42,749
102,273
125,070
142,849
74,428
342,347
389,783
497,621
—
Total
574,377
640,470
117,177
887,404
1,332,024
NOTE 18. 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, the operating wind and hydro power facilities, as well as the wind development projects.
The following table provides the underlying assumptions and reconciles the Corporation's total asset retirement obligation activity:
Assumptions:
Expected settlement date
Estimated settlement amount
Inflation rate
Credit adjusted discount rate
Balance, beginning of year
Adjustment for assets held for sale
Liabilities incurred
Revision of estimates
Accretion expense
Balance, end of year
NOTE 19. SHAREHOLDERS’ EQUITY
The following table summarizes the Corporation's share capital:
As at
Common shares (1)
Class B exchangeable units (1)
Preferred shares (1)
Dec 31, 2015
Dec 31, 2014
2017 – 2062
2017 – 2062
Nil – $3,324
Nil – $3,266
2.0%
2.0%
4.75% – 7.0%
5.0% – 7.0%
4,364
—
427
(268)
244
4,767
3,293
(278)
634
478
237
4,364
Dec 31, 2015
Dec 31, 2014
715,989
26,710
72,020
814,719
713,412
26,710
72,020
812,142
(1) For details relating to arrangement agreement with iCON refer to note 29 (Subsequent events).
(A)
Capstone is authorized to issue an unlimited number of common shares.
Common Shares
Continuity for the year ended
($000s and 000s shares)
Opening balance
Common shares issued (1)
Dividend reinvestment plan (2)
Ending balance
Dec 31, 2015
Dec 31, 2014
Shares
Carrying Value
Shares
Carrying Value
93,573
713,412
92,854
710,662
—
823
—
2,577
14
705
39
2,711
94,396
715,989
93,573
713,412
(1) Shares issued under the option plan in 2014.
(2) Shares issued by the Corporation under the Dividend Re-Investment Plan ("DRIP").
CAPSTONE INFRASTRUCTURE CORPORATION
Page 73
(B)
Class B Exchangeable Units
MPT LTC Holding LP had 3,249 Class B exchangeable units outstanding as at December 31, 2015 and 2014. 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, 2015 and 2014, 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 July 31, 2021 and every five
years thereafter at 25 dollars per share plus accrued and unpaid dividends.
(D)
Dividends
The dividends declared were as follows:
Common shares
Class B exchangeable units
Preferred shares (1)
For the year ended
Dec 31, 2015
Dec 31, 2014
28,218
975
29,193
3,867
28,002
975
28,977
3,923
(1)
Includes $117 of deferred income taxes for the year ended December 31, 2015 (December 31, 2014 - $173).
Capstone has included $7,324 of accrued common dividends and $625 of accrued preferred dividends as declared on November 9, 2015
(December 31, 2014 – $7,262 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 years ended December 31, 2015 and 2014.
(E)
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, 2015
Dec 31, 2014
1,358,664
1,231,788
520,535
516,706
1,879,199
1,748,494
(1) Capstone's definition excludes non-controlling interest of $261,545 (December 31, 2014 – $190,073).
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 17.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 74
NOTE 20. 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, Chi-Wiikwedong, Wind Works and Grey Highlands Clean non-controlling interests as at December 31, 2015 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.
•
• Wind Works has a debenture with a subsidiary of One West Holdings Ltd. ("Concord"), convertible into a 50% ownership interest.
•
Grey Highlands Clean is 25% owned by Natenco LLC ("Natenco"), the original developer.
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:
Owners
interests in
Bristol Water
Firelight's
interest in
Amherst
Municipal
interest in
Saint-Philémon
BFN's interest
in Chi-
Wiikwedong
Concord's
interest in Wind
Works
Natenco's
interest in Grey
Highlands Clean
123,736
11,472
3,405
—
January 1, 2014
Disposal of partial interest
in Chi-Wiikwedong LP
Contributions from
minority interests
NCI portion of net income
(loss)
NCI portion of OCI
Dividends declared
NCI portion of net income
(loss)
NCI portion of OCI
Dividends declared
Net convertible debenture
advances
As at December 31, 2014
154,017
—
—
24,333
14,019
(8,071)
24,670
25,517
(1,993)
—
—
406
—
(1,066)
10,812
572
—
(1,122)
As at December 31, 2015
202,211
10,262
—
—
—
7,894
3,104
11,500
(659)
—
—
—
—
—
5,850
19,394
(340)
—
(2,252)
—
3,258
1,163
—
(776)
—
19,781
—
—
—
—
—
—
—
—
—
—
26,041
26,041
—
—
—
—
—
—
—
(8)
—
—
—
(8)
Total
138,613
7,894
14,604
24,080
14,019
(9,137)
190,073
26,057
25,517
(6,143)
26,041
261,545
(1) As at December 31, 2015, Agbar's and ITOCHU's interests were $104,836 and $97,375, respectively (December 31, 2014 - $75,920 and $78,097,
respectively).
(B)
Summarized Information for Material Partly Owned Subsidiaries
As at
Dec 31, 2015
Dec 31, 2014
Summarized Statements
of Financial Position
Bristol
Water
Amherst
Saint-
Philémon
Chi-
Wiikwedong
Other (1)
Bristol
Water
Amherst
Saint-
Philémon
Chi-
Wiikwedong
Assets
Current
Non-current
Liabilities
Current
Non-current
Total Equity
Attributable to:
Shareholders of
Capstone
NCI
104,074
1,361,609
1,871
63,264
2,587
63,159
2,277
9,740
86,998
—
81,662
1,168,892
2,128
66,309
9,881
70,245
(77,836)
(2,272)
(3,205)
(49)
(39,681)
(78,411)
(2,338)
(10,975)
(887,499)
(39,585)
(53,012)
—
(26,747)
(782,110)
(41,700)
(54,428)
500,348
23,278
9,529
2,228
24,974
395,369
24,399
14,723
—
—
—
—
—
298,137
202,211
500,348
13,016
10,262
23,278
6,271
3,258
9,529
(17,553)
(1,059)
241,352
19,781
2,228
26,033
24,974
154,017
395,369
13,587
10,812
24,399
8,873
5,850
14,723
(19,394)
19,394
—
(1) Other consists of the summarized financial information of Grey Highlands Clean and Wind Works.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 75
For the year ended
Dec 31, 2015
Dec 31, 2014
Amherst
Saint-
Philémon
Chi-
Wiikwedong
Other (1)
Bristol
Water
Amherst
Saint-
Philémon
Summarized Statements of Income
Revenue
Net income
OCI
Bristol
Water
227,027
49,341
59,614
8,068
1,168
—
Total comprehensive income
108,955
1,168
Attributable to:
Shareholders of Capstone
NCI
58,768
50,187
596
572
108,955
1,168
6,756
6,573
—
238,270
8,249
—
(694)
—
(694)
(354)
(340)
(694)
3,003
(1,241)
—
—
3,003
(1,241)
1,840
1,163
3,003
(1,233)
(8)
(1,241)
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)
(1) Other consists of the summarized financial information of Grey Highlands Clean and Wind Works.
Distributions of $2,252 (2014 - nil) from Saint-Philémon, $1,993 (2014 - $8,071) from Bristol Water, $1,122 (2014 - $1,066) from Amherst, $776
(2014 - nil) from Chi-Wiikwedong were paid to non-controlling interests in 2015.
For the year ended
Dec 31, 2015
Dec 31, 2014
Summarized Statements of Cash Flows
Operating
Investing
Financing
Bristol
Water
91,261
(76,541)
Amherst
3,820
—
Saint-
Philémon
Chi-
Wiikwedong
Other (1)
Bristol
Water
Amherst
Saint-
Philémon
8,730
709
2,000
123
100,478
3,545
(4,930)
—
(51,218)
(115,416)
—
(63,625)
(4,600)
(4,057)
(9,504)
(776)
57,372
26,882
(3,865)
64,002
Foreign exchange
2,103
—
—
—
—
268
—
—
Net increase / (decrease) in cash and
equivalents
12,223
(237)
(65)
1,224
6,277
12,212
(320)
(4,553)
(1) Other consists of the summarized financial information of Grey Highlands Clean and Wind Works.
(C)
Convertible Debenture with Concord
On November 16, 2015, a subsidiary of CPC, issued an unsecured convertible debenture to a subsidiary of Concord. The debenture allows Concord
to eventually acquire a 50% interest in the Wind Works development projects, consisting of Ganaraska, Grey Highlands ZEP, Snowy Ridge and
Settlers Landing.
Under the terms of the debenture, both Capstone and Concord will equally fund ongoing equity requirements relating to the Wind Works
development projects. In addition, Capstone and Concord will equally share any distributions made from the projects, which are based on the
availability of cash from the projects. Distributions to Concord prior to conversion of the debenture are principal repayments. At either Capstone or
Concord's option, subject to limited conditions, the debenture is convertible into 50% of the outstanding equity of the entities holding the Wind
Works development projects.
The debenture is classified as an equity instrument in accordance with IAS 32 because there are no fixed payment obligations, including principal and
interest. The debenture is included in the non-controlling interest component within the consolidated statement of shareholders' equity because it is
attributable to Concord's interest in the Wind Works development projects.
The initial principal contribution of the debenture was $31,408. In December 2015, the value increased due to a capital contribution of $3,000 and
decreased by an accrued distribution of $8,367, reducing the face value of the debenture to $26,041 as at December 31, 2015.
(D)
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 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, which was settled in 2015. 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
CAPSTONE INFRASTRUCTURE CORPORATION
Page 76
NOTE 21. 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 and Diluted EPS (1)
(1) 2016 and 2017 convertible debentures were anti-dilutive for all periods in the table above.
NOTE 22. SHARE-BASED COMPENSATION
(A)
Deferred Share Units
For the year ended
Dec 31, 2015
Dec 31, 2014
26,192
(26,057)
(3,867)
(3,732)
97,240
(0.038)
33,547
(24,080)
(3,923)
5,544
96,534
0.057
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, 2015
Dec 31, 2014
Number of Units
Fair Value Number of Units
Fair Value
90,910
54,237
—
10,438
155,585
—
155,585
291
175
—
34
500
65
565
50,667
43,894
(9,077)
5,426
90,910
—
90,910
180
175
(37)
22
340
(49)
291
The average VWAP per DSU granted during 2015 was 3.24 dollars (2014 – 4.01 dollars). As at December 31, 2015, the carrying value of the DSUs,
based on a market price of 3.63 dollars, was $565 and is included in accounts payable and other liabilities in the consolidated statement of financial
position (December 31, 2014 – 3.20 dollars and $291). The DSU expense for 2015 was $281 and is recorded as compensation expense in the
consolidated statement of income (2014 – $139).
(B)
Long-term Incentive Plans ("LTIP")
Capstone has a Corporate LTIP and a Power Development LTIP for which Restricted Stock Units (“RSUs”) and Performance Share Units (“PSUs”) of
the Corporation were granted as follows:
Grants during the year ended
Number of units granted at a 3.17 dollar five-day VWAP on January 2
(Granted at a 3.55 dollar five-day VWAP in 2014)
Number of units granted at a 3.38 dollar five-day VWAP on March 13
(Granted at a 4.07 dollar five-day VWAP in 2014)
Number of units granted at a 3.06 dollar five-day VWAP on July 31
Dec 31, 2015
Dec 31, 2014
RSUs
PSUs
RSUs
PSUs
284,154
205,001
227,608
171,240
171,558
64,807
—
—
127,393
—
—
—
Effective January 1, 2014, Capstone amended the employee incentive plans to allow LTIP participants to voluntarily receive up to 100% of the
awards under the LTIP or short-term incentive plan ("STIP") as DSUs, instead of RSU / PSU grants or cash , respectively. 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 77
For the year ended
($000s, except unit amounts)
Outstanding at January 1
Grants during the period (1)
Payouts
Forfeitures
Dividend equivalents (2)
Unrealized gain (loss) on revaluation
Outstanding at December 31,
Dec 31, 2015
Dec 31, 2014
Notional
Number of Units
Fair Value (3)
Notional
Number of Units
Fair Value (3)
1,391,694
725,520
(528,564)
(68,560)
129,360
1,649,450
—
1,649,450
3,869
2,331
(1,127)
(193)
426
5,306
620
5,926
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
(1) On January 2, 2015, Capstone granted 58,664 RSUs to the power development team, based on milestones reached on the development projects.
Beginning July 1, 2015, the RSU component of the power development LTIP was replaced by an all-cash component. Consequently, all future
milestone payments will be settled in cash, and only 16,206 of the 2015 RSU grants remain outstanding.
(2) 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.
(3) Fair value considers the amount of the PSUs is subject to Capstone's total return over the period relative to a peer group.
As at December 31, 2015, the carrying value of the RSUs and PSUs, based on a VWAP of 3.66 dollars, was $3,806 and is included in accounts
payable and other liabilities in the consolidated statement of financial position (December 31, 2014 – 3.17 dollars and 2,355). In addition to the
RSUs granted under the Power Development LTIP, Capstone has recorded $453 in accounts payable and other liabilities for milestones achieved
but not yet vested.
The Corporate LTIP expense of $2,135 is recorded in administrative expenses in the consolidated statement of income for 2015 (2014 – $818). The
Power Development LTIP expense of $1,175 is included in project development expenses.
(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 23. EXPENSES – ANALYSIS BY NATURE
For the year ended
Dec 31, 2015
Dec 31, 2014
Operating
Admin.
Project
Development
Costs
Total
Operating
Admin.
Raw materials, chemicals
84,864
and supplies
Wages and benefits
Professional fees (1)
Maintenance
Bad debts
Fuel
Leases
Insurance
Property taxes
Utilities
Manager fees
Other
Total
36,174
9,328
8,481
5,870
5,234
1,899
2,290
2,083
1,924
1,764
4,128
164,039
—
8,248
1,580
—
—
—
395
(183)
—
—
—
—
84,864
88,183
2,169
4,726
46,591
15,634
—
—
—
—
—
—
—
—
8,481
5,870
5,234
2,294
2,107
2,083
1,924
1,764
6,228
29,865
5,579
6,848
6,629
60,232
1,831
2,360
1,439
1,011
1,653
4,890
Project
Development
Costs
—
1,169
949
—
—
—
—
—
—
—
—
—
7,528
3,234
—
—
—
464
157
—
—
—
Total
88,183
38,562
9,762
6,848
6,629
60,232
2,295
2,517
1,439
1,011
1,653
7,319
226,450
1,742
11,782
358
7,253
183,074
210,520
1,883
13,266
546
2,664
(1) Professional fees include legal, audit, tax and other advisory services.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 78
NOTE 24. OTHER GAINS AND LOSSES
Loss on disposal of capital assets (1)
Realized loss on derivative financial instruments (2)
Unrealized gain (loss) on derivative financial instruments
Adjustment for Cardinal gas payment (3)
Other
Other gains and (losses), net
For the year ended
Dec 31, 2015
Dec 31, 2014
(8,063)
(13,046)
9,924
—
800
(10,385)
(3,414)
—
(717)
(3,762)
224
(7,669)
(1) Primarily relates to $7,430 of losses on capital assets replaced as part of Cardinal's conversion to a cycling facility.
(2) Realized loss resulted from the termination of the Amherstburg interest rate swap, as part of the refinancing.
(3)
In 2014, Other gains and (losses); net, included $3,762 for the Cardinal gas payments as required by IFRS. This adjustment reconciled the amount included
in the statement of income to the $3,907 non-cash adjustment included in the statement of cash flow.
NOTE 25. 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 16 finance lease obligations, 17 long-term debt and 18 liability for asset retirement obligation as at
December 31, 2015 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
$3,668
$15,311
$48,680
Within one year One year to five years
Beyond five years
Total
$67,659
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
2042.
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, 2015 of which $5,785 were contracted for but not accrued
(December 31, 2014 – $16,026).
Development projects
As part of Capstone's power development operations, Capstone enters various construction and purchase agreements. As at December 31, 2015
Capstone had approximately $69,679 of construction and turbine supply agreements for the Grey Highlands Clean, Wind Works and Riverhurst
projects.
(D)
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 INFRASTRUCTURE CORPORATION
Page 79
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.
(E)
Management Services Agreements
Capstone has agreements with all of the partially owned wind facilities and development projects, including Glen Dhu, Fitzpatrick, Amherst, Saint-
Philémon, Goulais 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.
(F)
Wood Waste Supply Agreement
On March 2, 2015, Whitecourt and Millar Western completed a new fuel supply agreement for wood waste, which has an initial term of 15 years,
extendable to 20 years. The new agreement also includes sharing mechanisms regarding the price received for electricity sold by Whitecourt.
(G)
Energy Savings Agreement ("ESA")
In December 2014, Cardinal entered into an ESA with Ingredion, which matures on December 31, 2034, reflecting the binding term sheet signed on
March 26, 2014. In the event that Ingredion builds a planned 15 MW cogeneration plant, Cardinal is required to provide O&M services, and supply
steam and compressed air to Ingredion for its plant operations.
(H)
Guarantees
Capstone has provided limited recourse guarantees on the project debt of the various wind projects totalling $11,500 as at December 31, 2015.
(I)
Power Purchase Agreements ("PPA")
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 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.
(J)
Contingent asset
On March 12, 2015, the Ontario Superior Court of Justice determined that the OEFC did not properly calculate the price paid and payable for
electricity produced under its PPAs with Capstone and other power producers in Ontario. On April 10, 2015, the OEFC served a Notice of Appeal in
respect of the March 12, 2015 decision. The appeal was heard on December 14 and 15, 2015.
Capstone estimates that the Court's decision, if upheld, would result in a net receipt of approximately $25,000 representing retroactive adjustments
for revenue claimed from the OEFC and interest. Further, since February 2015, the future price paid for electricity at Capstone's Wawatay and
Dryden hydro facilities is calculated in accordance with the March 12, 2015 judgment, resulting in higher power rates.
Capstone does not recognize contingent assets such as this claim until it is virtually certain the asset is recoverable.
NOTE 26. 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
2015, Capstone earned management fees of $405 from Fitzpatrick and Glen Dhu (2014 - $420).
As at December 31, 2015, accounts receivable included $15 , due from Fitzpatrick (2014 - $16). Accounts payable and other liabilities included
$980, due to Glen Dhu (2014 - $984). All related party transactions were carried out at commercial terms.
In addition, Bristol Water has a joint venture interest in a shared billing services entity, providing meter reading, billing and debt recovery, and
customer contract management services to Bristol Water and its partner, under a cost sharing arrangement. In 2015, Bristol Water incurred charges
of $6,363 for management charges and shared expenditures and had $1,616 included in accounts payable and other liabilities as at December 31,
2015 (2014 - $6,000 of charges and $1,551 included in accounts payable and other liabilities).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 80
(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 22.
The following table summarizes key management compensation:
Salaries, directors' fees and short-term employee benefits (1)
Share based compensation
For the year ended
Dec 31, 2015
Dec 31, 2014
1,469
705
2,174
1,456
478
1,934
(1) The short-term incentive plan component of this balance is based on amounts paid during the period.
NOTE 27. SEGMENTED INFORMATION
Management has organized the Corporation's business into three reportable segments in order to assess performance and to allocate capital. Cash
generating units included within each reportable segment have similar economic characteristics based on the nature of the products or services they
provide, the customers they serve, the method of distributing those products or services and the prevailing 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, 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
Year ended Dec 31, 2015
Utilities
Year ended Dec 31, 2014
Utilities
Power
Water
DH Corporate
Total
Power
Water
DH Corporate
Total
Revenue
117,956
227,027
Depreciation of capital
assets
(35,822)
(34,949)
Amortization of
intangible assets
Interest income
(9,091)
(3,936)
—
—
—
—
344,983
203,308
238,270
(124)
(70,895)
(37,613)
(30,166)
(59)
(13,086)
(8,105)
(3,696)
—
—
—
—
441,578
(133)
(67,912)
(53)
(11,854)
1,350
500
2,739
148
4,737
1,019
145
2,898
172
4,234
Interest expense
(26,675)
(23,767)
Income tax recovery
(expense)
(810)
4,434
—
69
(7,499)
(57,941)
(22,572)
(24,870)
—
(6,703)
(54,145)
2,194
5,887
(783)
(13,074)
(11)
3,893
(9,975)
Net income (loss)
(7,727)
49,341
5,703
(21,125)
26,192
3,280
48,665
(3,278)
(15,120)
33,547
41,842
91,261
2,814
(19,017)
116,900
75,508
100,478
2,668
(22,936)
155,718
Cash flow from
operations
Additions to capital
assets
Additions to PUD
115,267
—
26,180
69,738
—
—
—
—
95,918
18,250
110,590
115,267
148,495
—
—
—
—
—
128,840
148,495
(1) For the year ended December 31, 2014, Capstone incurred an asset impairment charge in the power segment. Refer to note 10 (e) for detail.
As at Dec 31, 2015
Utilities
As at Dec 31, 2014
Utilities
Power
Water
DH Corporate
Total
Power
Water
DH Corporate
Total
Total assets
Total liabilities
1,010,669 1,465,683
39,795
5,942 2,522,089
998,130 1,255,890
40,610
5,350 2,299,980
649,625
965,335
—
125,049 1,740,009
636,034
860,521
—
96,646 1,593,201
CAPSTONE INFRASTRUCTURE CORPORATION
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NOTE 28. 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, 2015
Dec 31, 2014
24,449
(5,248)
(10,663)
8,538
(1,981)
(7,737)
(98)
(9,816)
NOTE 29. SUBSEQUENT EVENTS
Arrangement Agreement for the Acquisition of Capstone by iCON Infrastructure
On January 20, 2016, Capstone announced a definitive arrangement agreement with Irving Infrastructure Corp., a subsidiary of iCON Infrastructure
Partners III, L.P., a fund advised by London, UK-based iCON Infrastructure LLP, that provides for the acquisition of all issued and outstanding common
shares of Capstone and the Class B exchangeable units of Capstone's subsidiary MPT LTC Holding LP for $4.90 cash per share or unit, as applicable.
Under the arrangement agreement, it is also proposed that Capstone's 6.50% 2016 Debentures and CPC's 6.75% 2017 Debentures will be settled in
accordance with the debenture agreements, subject to individual securityholder votes. Capstone's preferred shares will continue to be listed and
trade on the Toronto Stock Exchange following closing of the arrangement.
The acquisition is subject to the approval of Capstone's common shareholders which is scheduled for March 10, 2016. The transaction is also subject
to customary closing conditions, including receipt of all regulatory approvals, including under the Competition Act (Canada) and the Investment
Canada Act. The transaction is not subject to any financing conditions.
CAPSTONE INFRASTRUCTURE CORPORATION
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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
n/a
n/a
n/a
n/a
n/a
n/a
(3)
n/a
n/a
18
12
2
n/a
n/a
n/a
28
n/a
n/a
n/a
n/a
1994
100%
156
IESO
2034
2002 - 2015
100%
143
2007 - 2012
49% - 100%
2015
2016E -
2017E
2018E
51%
50% - 100%
100%
67
12
42
10
IESO
NSPI
2026 - 2035
2020 - 2037
Hydro Québec
2035
IESO
SaskPower
2036E -
2037E
2038E
n/a
n/a
n/a
n/a
n/a
n/a
1994
100%
33.8
(2)
(2)
Millar Western
Gas Cogeneration
Cardinal
Wind
Operating
Development
Biomass
Whitecourt (1)
Hydro
Sechelt and Hluey
Lakes
Wawatay and
Dryden (3)
Solar
ON
ON
NS
PQ
ON
SK
AB
BC
ON
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
Amherstburg
ON
2011
100%
(1) Whitecourt total net capacity includes Capstone's 31.3% equity accounted interest in Chapais.
(2) 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.
(3) 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 270
million litres
Capacity
Counterparties
Mix of industrial and retail customers.
Length of
Network
300
kilometres
Approximate
Population
Served
Regulated
Employees
163,000
No
91
Mix of commercial and residential
customers.
6,680
kilometres
1.2 million
Ofwat
451
CAPSTONE INFRASTRUCTURE CORPORATION
Page 83
FINANCIAL
HIGHLIGHTS
PERFORMANCE MEASURES
Information for 2006 to 2009 is presented in Canadian GAAP and may not be comparable with information provided under
IFRS for 2010 to 2015.
Earnings Measures
($000s)
Revenue
EBITDA (1)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
344,983
441,578
389,503
357,610
215,967
158,512
148,384
153,186
122,811
89,940
162,227
177,433
185,058
163,471
32,557
37,953
52,691
15,394
54,616
21,279
Net income (loss)
26,192
33,547
67,210
45,971
(2,837)
15,901
11,259
(26,534)
Basic earnings per share
(0.038)
0.057
0.462
0.315
(0.103)
0.339
0.226
(0.531)
5,426
0.135
8,411
0.280
(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)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
116,900
155,718
135,676
114,678
50,881
29,011
38,040
50,516
29,663
21,044
115,301
160,359
128,421
120,343
55,673
55,818
61,244
67,324
61,250
34,104
11,233
56,412
39,934
35,563
34,884
34,774
42,989
50,626
72,835
33,267
AFFO per share (1)
0.116
0.584
0.493
0.473
0.541
0.693
0.861
1.013
1.806
1.107
(1) These performance measures are not defined by International Financial Reporting Standards (“IFRS”). Please see page 6 for a definition of each measure.
Capital Structure – At
Fair Value ($000s)
Long-term debt
Power (1)
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
464,154
435,808
346,244
305,497
314,196
245,911
214,107
246,960
219,162
35,000
Utilities – water (1)
413,571
368,223
313,816
259,830
353,135
—
—
—
—
Corporate
117,811
91,077
81,694
44,416
155,124
61,311
89,437
35,026
38,918
—
—
Common shares
342,658
299,432
330,560
291,955
270,348
463,217
273,161
310,066
376,275
214,231
Class B exchangeable
units
Preferred shares
11,795
10,398
11,568
13,093
12,380
26,710
19,854
15,565
30,642
32,656
38,970
51,750
45,930
58,200
52,500
—
—
—
—
—
Debt to capitalization
71.7%
71.2%
65.7%
62.7%
71.0%
38.5%
50.9%
46.4%
38.8%
12.4%
(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
94,396,092
3,000,000
42,749
27,428
3,249,390
Toronto Stock Exchange: CSE, CSE.PR.A, CSE.DB.A, CPW.DB
CAPSTONE INFRASTRUCTURE CORPORATION
Page 84
QUARTERLY TRADING INFORMATION
Common shares
High price
Low price
Closing price
Q4
3.78
2.96
3.63
2015
Q3
3.36
2.82
3.09
Q2
Q1
Q4
3.78
2.98
2.99
3.72
3.10
3.55
4.27
2.88
3.20
2014
Q3
4.54
4.00
4.15
Q2
Q1
4.54
3.97
4.25
4.22
3.55
4.02
Average daily volume
152,764
104,990
208,368
249,813
845,000
405,000
337,000
516,000
Dividend declared
Preferred shares
High price
Low price
Closing price
Average daily volume
0.075
0.075
0.075
0.075
0.075
0.075
0.075
0.075
13.21
9.50
12.99
4,913
13.25
9.50
10.25
4,487
14.20
12.65
12.91
2,732
17.16
12.89
13.20
3,969
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
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
101.55
100.00
100.20
393
102.75
101.20
101.21
278
101.51
100.25
100.75
681
102.75
101.26
102.01
345
102.50
100.26
100.42
403
102.25
101.50
102.00
243
102.99
100.61
101.01
338
102.99
100.61
102.24
99
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 85
GLOSSARY
AMP - Asset management plan, which is developed by water utilities
in the United Kingdom every five years and approved by Ofwat.
Annual long-term average production - An average production
figure based on the actual electricity production of a facility since the
start of full operations.
ML/d - Millions of litres of water per day.
MMBtu - A unit of heat equal to one million British thermal units. A
British thermal unit is the quantity of energy necessary to raise the
temperature of one pound of water by one degree Fahrenheit.
Ofwat - The UK Water Services Regulation Authority.
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
Outage - A period of time when a power generation facility does not
produce any electricity.
service, as a percentage of total hours in the period.
P3 - A partnership between the public and private sectors to deliver
Capacity - Capacity is the net amount of electricity generated by a
infrastructure projects.
generating unit as a percentage of the total possible generation over
Power Purchase Agreement (PPA) - A PPA is an agreement to
the period.
purchase electricity at a specified rate for a defined period of time.
Cogeneration - Cogeneration refers to the simultaneous production
PR 14 - Price Review 14, the regulatory review process of water
of electricity and thermal energy in the form of heat or steam from a
companies’ business plans for the next asset management plan
single fuel source, a process that results in high efficiency and an
period from 2015 to 2020.
effective use of energy.
RCV - The regulated capital value, or capital base, that is used by
Consumer Price Index (CPI) - The CPI is an indicator of inflation that
Ofwat as one component to set the prices a water utility may charge
measures the change in the cost of a fixed basket of products and
its customers in each asset management plan period.
services, including housing, electricity, food and transportation.
REC - A renewable energy credit is a certificate issued by a
Direct Customer Rate (DCR) - The Direct Customer Rate, which is
government agency to a power company that uses environmentally
set by the Ontario Electricity Financial Corporation, is calculated
friendly methods to generate electricity. The RECs can in turn be
based on a three-year average of the total market cost of electricity
sold and traded to third parties or on the open market.
to industrial customers.
RPI - The Retail Price Index is a measure of inflation in the United
Gigajoule (GJ) - One GJ is equivalent to the amount of energy
Kingdom. The rates Bristol Water may charge its customers increase
available from 26.1 m3 of natural gas.
by RPI each year.
Gigawatt hour (GWh) - A unit of electrical energy equal to 1,000
SIM - Service Incentive Mechanism, a new incentive mechanism
megawatt hours.
introduced by Ofwat to reward or penalize water companies’ service
Green metric tonne (GMT) - A unit of weight equal to 1,000
performance.
kilograms.
Hydrology - The effect of precipitation and evaporation upon the
occurrence and distribution of water in streams, lakes and on or
Total return - The total return on an investment includes income
from dividends, as well as share price appreciation or depreciation,
over a given time period.
below the land surface.
Watt - A watt is the scientific unit of electric power.
Megawatt (MW) - A megawatt is 1,000 kilowatts.
Yield - Yield refers to the amount of dividends paid per share over
Megawatt hour (MWh) - This is a measure of energy production or
the course of a year divided by the trading price of the common
consumption equal to one million watts produced or consumed in
shares.
one hour (total amount of power required to light 10,000 100-watt
light bulbs).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 86