2016 ANNUAL
MD&A and Financial Statements
MANAGEMENT’S
DISCUSSION AND ANALYSIS
Financial Highlights
Revenue (1)
Net income (loss) (2)
Adjusted EBITDA (2), (3)
AFFO (2), (3)
Total assets (4)
Total long-term liabilities (4)
As at and for the year ended December 31
2016
172,940
(15,541)
125,862
23,476
1,148,404
786,474
2015
117,956
26,192
115,301
11,233
2,522,089
1,493,836
2014
203,308
33,547
160,359
56,412
2,299,980
1,428,293
(1) Comparative figures for revenue have been adjusted to remove amounts from discontinued operations. Including discontinued operations, total revenue is
$364,255, $344,983 and $441,578 in 2016, 2015 and 2014, respectively.
(2) Results include continuing operations and discontinued operations for all periods.
(3) Non-GAAP performance measures are defined on page 6.
(4) Comparative figures include balances relating to discontinued operations.
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
6
8
14
Derivative financial instruments
Foreign exchange
Risks and uncertainties
Environmental, health and safety regulation
Related party transactions
Summary of quarterly results
Fourth quarter 2016 highlights
Accounting policies and internal controls
19
20
20
23
24
25
26
27
CAPSTONE INFRASTRUCTURE CORPORATION
Page 1
LEGAL NOTICE
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 Capstone
Infrastructure Corporation (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.
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 “Results of Operations” and
"Financial Position Review". 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, 2016 under
the headings "Changes in the Business", “Results of Operations” and "Financial Position Review", 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; that there will be
no further 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 environmental regulations for the power infrastructure facilities or Värmevärden; 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 that Cardinal is dispatched; the price that 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; and that there will be no material changes to the Swedish krona to
Canadian dollar exchange rate.
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 preferred shares are not guaranteed; volatile market price for the Corporation’s preferred shares; and 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 (market price for electricity; 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); and risks related to Värmevärden (operational performance; fuel costs and availability;
industrial and residential contracts; environmental; regulatory environment; and labour relations);.
For a comprehensive description of these risk factors, please refer to the “Risk Factors” section of the Corporation’s Annual Information
Form dated March 29, 2016, 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).
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.
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, 2016 and 2015.
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, 2016 and 2015. Additional information about the Corporation, including its Annual Information Form
("AIF") for the year ended December 31, 2015, 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 February 28, 2017, 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.
Discontinued Operations and Assets Held for Sale
On December 15, 2016, Capstone sold its 50% interest in Bristol Water resulting in the utilities - water segment being presented as a discontinued
operation. This means Capstone's consolidated statement of financial position as at December 31, 2016 does not contain balances related to Bristol
Water. In addition, the statements of income for the years ended December 31, 2016 and 2015 only include results for Bristol Water as a
discontinued operation up until December 15, 2016.
As at December 31, 2016, Capstone's plan to sell its 33.3% investment in Värmevärden results in the utilities - district heating segment meeting the
assets held for sale ("AHFS") criteria and consequently being presented as a discontinued operation. This means Capstone's consolidated statement
of financial position as at December 31, 2016 classifies balances related to Värmevärden as AHFS within the current assets and liabilities. In addition,
the statements of income for the years ended December 31, 2016 and 2015 include Värmevärden as a discontinued operation.
Foreign Currency Translation and Presentation
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
December 31, 2015
December 31, 2016 (1)
Swedish Krona (SEK)
UK Pound Sterling (£)
Average
0.1516
0.1550
Spot
0.1638
0.1478
Average
1.9540
1.8014
Spot
2.0407
1.6597
(1) Bristol Water's spot rate and average rate were as at and for the period ended December 15, 2016, the date of sale.
CHANGES IN THE BUSINESS
In 2016, Capstone's power segment was able to conclude the legal proceedings and receive payment for retroactive amounts owing from the
Ontario Electricity Financial Corporation ("OEFC"), as well as progress the wind development projects, and complete several financings. During the
year, changes to Capstone's ownership and key management allowed for significant steps to be taken towards refocusing on the core power
business, which include the decision to divest of the Corporation's utilities businesses, Bristol Water and Värmevärden. In addition, Capstone's
preferred share dividend rate was reset.
Acquisition of Capstone by iCON III
On April 29, 2016, Capstone completed the previously announced arrangement under which Irving Infrastructure Corp. ("Irving"), a subsidiary of
iCON Infrastructure Partners III, LP ("iCON III"), a fund managed by London, UK-based iCON Infrastructure LLP ("iCON"), acquired all the issued and
outstanding common shares of Capstone and all the Class B exchangeable units of Capstone's subsidiary MPT LTC Holding LP ("Class B units") for
$4.90 cash per share or unit, as applicable ("iCON III acquisition"). Pursuant to the arrangement agreement, the outstanding 2016 convertible
debentures were redeemed and the 2017 convertible debentures were converted into common shares prior to being acquired by Irving. As part of
the transaction, Capstone issued a demand interest-free promissory note to Irving for $316,225, which consisted of three multi-currency tranches:
£106,000, 712,700 SEK, and $10,370, and Capstone Power Corp. ("CPC") entered into a credit agreement for $125,000 in part to fund the
CAPSTONE INFRASTRUCTURE CORPORATION
Page 3
convertible debenture redemption. Upon completion, the common shares, Class B units, and 2016 and 2017 convertible debentures were delisted
from the Toronto Stock Exchange and ceased trading. Capstone also settled all outstanding share-based compensation.
Key Management Changes
On closing of the iCON III acquisition, four of the independent directors of Capstone resigned and were replaced by one new independent director
and three directors from iCON. In June 2016, the President and Chief Executive Officer and a director of Capstone, Michael Bernstein, left Capstone
subsequent to the iCON III acquisition. Paul Malan, the chairman of Capstone's board of directors and Senior Partner of iCON, was appointed as
interim Executive Chairman until December 31, 2016 and Michael Smerdon, Capstone's Executive Vice President and Chief Financial Officer, was
appointed to the board of Capstone. On January 1, 2017, David Eva was appointed as Chief Executive Officer and as a member of the Board of
Directors. Paul Malan stepped down as Executive Chair of Capstone, but remains as chairman of Capstone's Board of Directors.
Sale of Bristol Water
On December 15, 2016, Capstone sold its 50% ownership interest in Bristol Water to iCON III Bristol Limited, a subsidiary of Capstone's ultimate
parent, iCON III. As part of the sale, Irving converted its £106,000 tranche of the promissory note into 123,905 Class A shares of the Corporation,
which reduced the promissory note payable to Irving by $194,531. In return, Capstone distributed $192,011 to Irving as a return of capital. This
results in a $2,520 increase in Capstone's Class A shares and a loss of $2,803 on the sale.
As a result of the sale, the utilities - water segment is presented as a discontinued operation (refer to page 3 "Basis of Presentation" in this MD&A).
Värmevärden Refinancing and Expected Sale
On May 26, 2016, Värmevärden made an in-kind distribution of 1,095,000 SEK to its shareholders, representing gains recognized from a
restructuring, of which Capstone's portion was 365,000 SEK. Capstone subsequently reinvested these gains back in to Värmevärden in return for a
new shareholder loan. On June 30, 2016, Värmevärden completed a third-party financing raising 1,425,000 SEK, which was used to repay the
1,000,000 SEK senior secured bonds. The excess proceeds were used to repay the early call premium, transaction costs, as well as a portion of the
pre-existing shareholder loan. The net excess proceeds, including operating cash flows generated from the business, were used to repay
162,424 SEK to Capstone. In the third quarter, Capstone used 160,000 SEK of the refinancing proceeds to partially repay the SEK tranche of the
promissory note to Irving.
During 2016, Capstone and its co-shareholder evaluated strategic options for Värmevärden, including a potential sale. As at December 31, 2016,
management expects to sell its 33.3% ownership interest Värmevärden in 2017. As such, Capstone has classified Värmevärden's assets and liabilities
as AHFS and the results of the utilities - district heating segment are presented as a discontinued operation (refer to page 3 "Basis of Presentation" in
this MD&A).
OEFC Settlement
On March 12, 2015, the Ontario Superior Court of Justice determined that the OEFC had not properly calculated the price paid for electricity
produced under its power purchase agreements with Cardinal, Wawatay and Dryden, as well as a number of other power producers in Ontario. This
determination was upheld by the Ontario Court of Appeal in its April 19, 2016 decision. On January 19, 2017, the Supreme Court of Canada
dismissed the OEFC's application for leave to appeal the April 19, 2016 decision.
On October 21, 2016, Capstone received $23,527 in net retroactive payments from the OEFC. This was recorded in the statement of income, with
$33,288 in revenue and $2,288 in interest income. In addition, associated expenses of $12,049 were recorded in operating expenses.
Wind Development Projects Achieved Commercial Operations
In 2016, four of Capstone's Ontario wind development projects reached commercial operations ("COD") as follows:
•
February 26, 2016 - Grey Highlands ZEP, a 10 MW facility with a PPA expiring in 2036;
• May 6, 2016 - Ganaraska, an 18 MW facility with a PPA expiring in 2036;
•
September 21, 2016 - Grey Highlands Clean, an 18 MW facility with a PPA expiring in 2036; and
• October 5, 2016 - Snowy Ridge, a 10 MW facility with a PPA expiring in 2036.
In addition, on September 19, 2016, the Environmental Review Tribunal ("ERT") issued its decision accepting the Settlers Landing Ontario wind
project's modification proposal, which included removal of one turbine, reducing the project nameplate capacity from 10 MW to 8 MW and
enhancing the site restoration plan. Construction commenced in the fourth quarter of 2016 and COD is expected in 2017.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 4
Financing Changes - CPC Acquisition and Project Financings
CPC Financing
On April 29, 2016, Capstone entered into credit facilities at CPC for an aggregate amount of $125,000, consisting of an $85,000 non-revolving
facility, a $5,000 revolving facility, and a $35,000 revolving letter of credit facility ("the CPC Credit Agreement"). The proceeds drawn on the non-
revolving facility were used to repay the outstanding convertible debentures and to replace the existing corporate credit facility. The CPC Credit
Agreement matures on April 29, 2019 and bears interest at a variable rate plus an applicable margin. In addition, fixed annual minimum repayments
are required, which are paid quarterly by excess cash as determined in accordance with the CPC Credit Agreement.
This replaced the corporate credit facility capacity which was reduced concurrent with the Cardinal financing on March 18, 2016, to $60,000 and
repaid as part of the iCON III acquisition on April 29, 2016.
Project Financings
Capstone, through its subsidiaries, completed several project financings in 2016, which are non-recourse to Capstone. All of these financings
amortize over the term of the PPA's with variable interest rates which are fixed using interest rate swap contracts until the end of the PPA (refer to
page 19 "Derivative Financial Instruments" in this MD&A).
• On March 18, 2016, Cardinal gas cogeneration plant entered into a credit agreement, consisting of a term loan and a letter of credit facility;
• On March 24, 2016, the Grey Highlands Clean wind project entered into a credit agreement which funded construction of the project and was
converted to a term facility on December 23, 2016;
• On July 8, 2016, the Snowy Ridge wind project entered into a credit agreement which funded the construction of the project and was
converted to a term facility on December 23, 2016; and
• On December 2, 2016, the Settlers Landing wind project entered into a credit agreement to fund the construction of the project. The
construction term of the facility is expected to mature in the third quarter of 2017 and convert into a term facility.
In addition, on August 26, 2016, the Grey Highlands ZEP and Ganaraska ("GHG") construction facility was converted to term facility.
Preferred Shares Dividend Rate Reset
On July 4, 2016, Capstone announced to preferred shareholders the applicable fixed and floating dividend rates for its cumulative five-year rate reset
preferred shares, which is effective from July 31, 2016 to July 30, 2021. In accordance with the terms of the share agreement, all preferred shares
accrue dividends at a fixed rate of 3.271% per annum and preferred dividends are paid quarterly.
SUBSEQUENT EVENTS
Whitecourt Bioenergy Producer Program
On February 8, 2017, Whitecourt, Capstone’s biomass facility, was notified that the Government of Alberta approved its application to the Bioenergy
Producer Program (“BPP”). Whitecourt expects to receive grants of up to $4,800 for contributing to Alberta’s bioenergy production capacity over
the 18 month program, ending September 30, 2017.
Värmevärden Sale
On February, 21 2017, Capstone announced that, alongside its co-shareholder Macquarie European Infrastructure Fund 2 (“MEIF 2”), it has agreed to
sell 100% of Värmevärden. Capstone expects to receive approximately $140,000 in net proceeds for its 33.3% indirect interest in Värmevärden and
the related outstanding loans receivable. The transaction is expected to close in March 2017. The net proceeds exceed the carrying value of $13,197
by $126,803. On completion, the excess will be included as a gain on sale, net of applicable taxes and foreign exchange translation. A portion of the
proceeds from the sale will be used to eliminate the remaining outstanding balance of the promissory note to Irving.
Sechelt Creek Facility Electricity Purchase Agreement Extension
On February 28, 2017, Capstone’s electricity purchase agreement for the Sechelt Creek facility with BC Hydro was extended from its original expiry
on an interim basis. The interim arrangement, and any new or amended electricity purchase agreement that may be entered, is expected to provide a
lower price for electricity supplied than was paid under the expiring contract and would generate lower revenues than in 2016.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 5
ADDITIONAL GAAP AND NON-GAAP PERFORMANCE MEASURES DEFINITIONS
While the accompanying consolidated financial statements have been prepared in accordance with IFRS, this MD&A also contains figures that are
performance measures not defined by IFRS. These additional GAAP and non-GAAP performance measures do not have any standardized meaning
prescribed by IFRS and are, therefore, unlikely to be comparable to similar measures presented by other issuers. The Corporation believes that these
indicators are useful since they provide additional information about the Corporation’s earnings performance and cash generating capabilities and
facilitate comparison of results over different periods. The additional GAAP and non-GAAP measures used in this MD&A are defined below.
Additional GAAP Measure
Earnings before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”)
EBITDA is an additional GAAP financial measure defined as earnings (loss) before financing costs, income tax expense, depreciation and amortization.
EBITDA includes earnings (loss) related to the non-controlling interest (“NCI”), impairment charges, interest income and net pension interest. EBITDA
from discontinued operations is consistent with the definition for continuing operations. 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. Adjusted EBITDA from discontinued operations are added or subtracted as a single line consistent
with the net result following the definition for continuing operations, up to the date of Capstone's disposal. 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 available to the preferred shareholders and Capstone's common shareholder.
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
AFFO from discontinued operations are added or subtracted as a single line consistent with the net result following the definition for continuing
operations, up to the date of Capstone's disposal.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 6
Reconciliation of GAAP and Non-GAAP Performance Measures
The following tables reconcile Adjusted EBITDA and AFFO to the nearest GAAP measures, Net Income and EBITDA:
For the year ended
Net Income (loss) from continuing operations
Interest expense
Depreciation and amortization
Income tax recovery (expense)
EBITDA from continuing operations
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
NCI portion of Adjusted EBITDA
Adjusted EBITDA from continuing operations
Continuing operations cash flow from operating activities (1)
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
Power and corporate working capital changes
Loans receivable principal repayments
Power and corporate maintenance capital expenditures
Power and corporate scheduled principal repayments
Dividends on redeemable preferred shares
AFFO from continuing operations
Dec 31, 2016
Dec 31, 2015
18,830
34,476
58,802
(3,859)
108,249
(397)
(23,410)
8,142
(958)
1,886
(14,947)
78,565
50,323
5,759
7,322
1,886
—
(18,945)
—
(3,917)
(23,575)
(3,426)
15,427
(28,680)
34,174
45,096
(1,453)
49,137
(193)
11,779
3,774
(688)
2,426
(8,930)
57,305
22,922
(12,673)
5,257
2,426
(193)
10,340
1,442
(3,518)
(19,047)
(3,750)
3,206
(1) 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.
For the year ended
Net Income (loss) from discontinued operations
Interest expense
Depreciation and amortization
Income tax recovery (expense)
EBITDA from discontinued operations
Asset impairment charges
Foreign exchange (gain) loss
Other (gains) and losses, net
Net pension interest income
Equity accounted (income) loss
Distributions from equity accounted investments
NCI portion of Adjusted EBITDA
Adjusted EBITDA from discontinued operations
Discontinued operations cash flow from operating activities
Cash flow from operating activities of businesses with NCI
Distributions paid to Capstone from businesses with NCI
Distributions from equity accounted investments
Utilities working capital changes
AFFO from discontinued operations
Dec 31, 2016
Dec 31, 2015
(34,371)
24,081
33,983
(1,752)
21,941
58,000
5,333
1,000
(3,169)
—
4,167
(39,975)
47,297
70,866
(70,019)
660
4,167
2,375
8,049
54,872
23,767
38,885
(4,434)
113,090
—
(3,527)
(1,394)
(3,062)
1,504
3,427
(52,042)
57,996
93,896
(91,181)
1,992
3,427
(107)
8,027
CAPSTONE INFRASTRUCTURE CORPORATION
Page 7
RESULTS OF OPERATIONS
Overview
Capstone's Adjusted EBITDA and AFFO were both higher than in 2015.
Higher Adjusted EBITDA from continuing operations primarily reflected:
•
Higher power segment results, primarily attributable to net OEFC proceeds awarded for retroactive payments to Cardinal and the Ontario hydro
facilities. The new wind facilities added since January 1, 2015, which consist of Goulais, GHG, Grey Highlands Clean and Snowy Ridge, also
contributed to the increase. In addition, Capstone's hydro facilities generally experienced favourable hydrology conditions producing higher
revenue; partially offset by
Higher corporate expenses, relating to costs associated with the acquisition of Capstone by iCON III, including professional fees and staff costs.
•
•
Lower Adjusted EBITDA from discontinued operations consisted of:
•
Lower results from Bristol Water, reflecting lower revenues, primarily attributable to a rate decrease in AMP 6 and unfavourable foreign
currency translation, and lower expenses, mainly due to the favourable impact of a decrease the UK Pound Sterling on expenses, which was
partially offset by fees accrued for the notice of termination of the operations and maintenance ("O&M") agreement, partially offset by
Higher interest income and dividends from Värmevärden.
In addition to the factors affecting Adjusted EBITDA, Capstone's AFFO was affected by higher debt service payments at the power segment and
corporate as well as lower dividends from Bristol Water.
Revenue
Expenses
Interest income
Contractual settlements in other gains and (losses)
Distributions from equity accounted investments
Less: NCI
Adjusted EBITDA from continuing operations
Adjusted EBITDA from discontinued operations
Adjusted EBITDA
Adjusted EBITDA of discontinued operations
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 from continuing operations
AFFO from discontinued operations
AFFO
For the year ended
Dec 31, 2016
Dec 31, 2015
172,940
(92,078)
2,622
8,142
1,886
(14,947)
78,565
47,297
117,956
(59,419)
1,498
3,774
2,426
(8,930)
57,305
57,996
125,862
115,301
(47,297)
(16,304)
7,322
—
(57,996)
(9,337)
5,257
1,442
(21,891)
(24,120)
(3,426)
(1,347)
(3,917)
(3,750)
(1,026)
(3,518)
(23,575)
(19,047)
15,427
8,049
23,476
3,206
8,027
11,233
Change
54,984
(32,659)
1,124
4,368
(540)
(6,017)
21,260
(10,699)
10,561
10,699
(6,967)
2,065
(1,442)
2,229
324
(321)
(399)
(4,528)
12,221
22
12,243
Revenue increased by $54,984, or 47%, due to higher power segment revenue, primarily due to proceeds awarded of $33,288 for retroactive
revenue adjustments from the OEFC for Cardinal and the Ontario hydro facilities. New wind facilities also contributed $16,998. In addition, revenue
increased by $6,492 due to higher production because of more favourable resource conditions from the hydro facilities. These were partially offset
by $2,770 of lower revenue at Whitecourt due to lower merchant power rates in Alberta.
Expenses increased by $32,659, or 55%, because:
• Operating expenses increased by $16,432, or 41%, due to higher power segment expenses, mainly because of a one time increase in fuel
expenses of $12,049, directly related to contractual obligations from the OEFC settlement. New wind facilities also contributed $2,750 of
higher expenses. In addition, expenses increased by $1,316 for costs incurred for tower repairs at the Ferndale site, net of interim insurance
recoveries as part of Capstone's claim.
•
•
Administrative expenses increased by $8,225, or 71%, primarily due to higher non-recurring staff costs of $9,761 because of the iCON III
acquisition, including long-term incentive plan payments and employee separation costs.
Project development costs increased by $8,002, or 110%, of which $9,170 related to higher corporate development costs, partially offset by
$1,168 of lower power segment costs. The corporate development costs increased due to $10,154 of non-recurring costs related to the iCON
III acquisition, partially offset by $984 of lower acquisition due diligence costs. Power segment costs decreased by $1,168 due to the stage of
progress on the wind development projects.
Interest income increased by $1,124, or 75%, primarily due to $2,288 of interest income related to the OEFC settlement, partially offset by $998
of lower interest income because the Goulais wind facility loan receivable matured in 2015.
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 revenue sharing receipts in Whitecourt's fuel supply agreement with Millar Western and
the payments are higher in response to lower merchant power rates in Alberta.
Distributions from equity accounted investments were $540, or 22%, lower in 2016 due to lower distributions from the Glen Dhu wind facility
("Glen Dhu").
Adjusted EBITDA from discontinued operations decreased by $10,699, or 18%, primarily due to lower Bristol Water contributions of $12,053,
partially offset by higher Värmevärden contributions of $1,354, due to higher interest on the shareholder loans and higher dividends.
Bristol Water's revenue decreased by $35,712, primarily due to lower regulated water tariffs since April 1, 2015 and unfavourable foreign currency
translation. These were partially offset by lower operating expenses of $11,860 primarily due to a recovery of past service costs on closing the
defined benefit pension plan and non-recurring costs in 2015 related to the CMA process. In addition, operating expenses were lower due to
favourable foreign currency translation. These decreases in operating expenses were partially offset by $13,940 of costs to terminate the O&M
agreement with Agbar.
Distributions from businesses with NCI were $2,065, or 39%, higher in 2016 mainly due to distributions of $3,601 from the new wind facilities,
partially offset by $1,791 of lower distributions from Saint-Philémon.
Interest paid decreased by $2,229, or 9%, primarily attributable to $4,189 of lower corporate interest, resulting from the settlement of the
convertible debentures and corporate credit facility on April 29, 2016, and $1,501 of lower interest due to the Amherstburg refinancing, completed
in the third quarter of 2015. In addition, $871 of lower interest on amortizing debt for the wind facilities contributed to the decrease. These
decreases were partially offset by $2,883 of higher interest at CPC and $1,664 at Cardinal due to the new debt facilities put in place in 2016.
Interest paid by businesses with significant NCI are excluded from Capstone’s definition of AFFO and represent the primary difference between
interest expense included in consolidated net income 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, 2016.
Scheduled debt principal repayments increased by $4,528, or 24%, primarily due to payments on new debt at Cardinal and Grey Highlands Clean
which were completed in 2016, as well as higher debt amortization at Amherstburg, the hydro facilities, SkyGen and Glace Bay.
AFFO from discontinued operations increased by $22, or 0.3%, primarily due to $1,354 of higher interest and dividends from Värmevärden, offset
by $1,332 of lower distributions from Bristol Water.
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. Both of the utilities segments are presented as discontinued operations resulting from Capstone's sale of its 50% ownership
interest in Bristol Water on December 15, 2016 and Capstone's plan to sell its investment in Värmevärden in 2017.
Capstone's operating segments, including discontinued operations, by ownership interest are:
Accounting treatment
Control
Significant influence
Ownership
Power (1)
Wholly owned
Partially owned
Minority interest
Cardinal (gas cogeneration facility), Erie Shores, SkyGen, Glace Bay
and Grey Highlands Clean (wind facilities), Whitecourt (biomass
facility), Amherstburg (solar facility) and the hydro facilities.
Amherst, Saint-Philémon,
Goulais, GHG and Snowy
Ridge (wind facilities)
Glen Dhu and Fitzpatrick
(wind facilities)
Discontinued Operations:
Utilities - water (2)
Utilities - district heating (2)
Bristol Water
Värmevärden
(1) The power segment includes investments in wind development projects in addition to the operating businesses disclosed above.
(2) Capstone's ownership interests in Bristol Water and Värmevärden are presented as discontinued operations (refer to page 3 "Basis of Presentation" in this
MD&A).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 9
Performance measures
Capstone's performance measures from continuing operations are shown before several large one-time transactions in 2016 and with discontinued
operations. These one-time transactions include the net OEFC proceeds awarded for retroactive payments to Cardinal and the Ontario hydro
facilities and corporate costs relating to the iCON III acquisition.
Power
Corporate
Net Income
Adjusted EBITDA
AFFO
For the year ended
Change
For the year ended
Change
For the year ended
Change
2016
2015
$
2016
2015
$
2016
2015
$
35,395
(8,054)
43,449
110,842
72,130
38,712
54,856
29,195
25,661
(16,565)
(20,626)
4,061
(32,277)
(14,825)
(17,452)
(39,429)
(25,989)
(13,440)
Total continuing operations
18,830
(28,680)
47,510
78,565
57,305
21,260
15,427
3,206
12,221
Add: Costs relating to the iCON III
acquisition, including staff costs
Less: Net OEFC proceeds
21,639
(23,527)
—
—
21,639
21,639
(23,527)
(23,527)
—
—
21,639
21,639
(23,527)
(23,527)
—
—
21,639
(23,527)
Adjusted total continuing operations
16,942
(28,680)
45,622
76,677
57,305
19,372
13,539
3,206
10,333
Discontinued operations:
Utilities – water
(34,723)
49,341
(84,064)
39,908
51,961
(12,053)
Utilities – district heating
352
5,531
(5,179)
Total discontinued operations
(34,371)
54,872
(89,243)
Total continuing operations
18,830
(28,680)
47,510
7,389
47,297
78,565
Total
(15,541)
26,192
(41,733)
125,862
115,301
(1) See page 7 for a reconciliation of Adjusted EBITDA and AFFO to GAAP measures.
6,035
1,354
57,996
(10,699)
57,305
21,260
10,561
660
7,389
8,049
15,427
23,476
1,992
6,035
8,027
3,206
11,233
(1,332)
1,354
22
12,221
12,243
Infrastructure: Power
Capstone’s power facilities produce electricity from gas cogeneration, 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, 2016
Gas
Wind (1) Biomass (1)
Hydro (2)
Solar Development &
Corporate (3)
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Contractual settlements (4)
Distributions from equity accounted investments
Less: NCI
Adjusted EBITDA
88.6
6.8%
98.6%
689.2
196.8
181.7
30.4%
96.2%
92.6%
95.5%
57.9%
99.1%
39.2
22.3%
98.2%
n/a
n/a
n/a
54,293
76,935
4,683
20,551
16,478
—
172,940
(24,873)
(15,221)
(10,911)
(4,803)
(1,139)
(2,763)
(59,710)
2,143
—
—
—
171
—
1,886
(15,020)
6
8,142
—
—
187
—
—
—
8
—
—
—
16
—
—
73
2,531
8,142
1,886
(14,947)
31,563
48,751
1,920
15,935
15,347
(2,674)
110,842
Total
1,195.5
n.m.f
n.m.f
Adjusted EBITDA of consolidated businesses with NCI
Distributions from businesses with NCI
Interest paid
Maintenance capital expenditures
—
—
(1,664)
(946)
(16,380)
7,192
(7,654)
(2,094)
—
—
—
—
—
—
—
76
130
(16,304)
7,322
(4,270)
(3,138)
(2,883)
(19,609)
(271)
(487)
(22)
Scheduled repayment of debt principal
(2,443)
(10,601)
—
(5,207)
(5,324)
—
—
(3,820)
(23,575)
AFFO
26,510
19,214
1,649
5,971
6,863
(5,351)
54,856
(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) On August 23, 2016, BC Hydro exercised its right to terminate the existing electricity purchase agreement ("EPA") with Capstone's Sechelt hydro facility.
The current Sechelt EPA will expire on February 28, 2017 and Capstone is in discussions for a new EPA with the relevant parties.
(3) Development & Corporate consists of costs related to Capstone's power development projects, as well as interest income and CPC's debt service costs.
(4) Contractual settlements are included in other gains and (losses) on the consolidated statement of income.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 10
For the year ended December 31, 2015
Gas
Wind (1) Biomass (1)
Hydro (2)
Solar Development &
Corporate (3)
Power generated (GWh)
Capacity factor
Availability
Revenue
Expenses
Interest income
Contractual settlements (4)
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
66.5
10.1%
85.6%
554.4
183.1
142.1
28.1%
96.5%
86.4%
95.5%
45.4%
98.9%
38.1
21.7%
97.7%
n/a
n/a
n/a
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)
Total
984.2
n.m.f
n.m.f
AFFO
8,144
18,088
1,725
(64)
5,272
(3,970)
29,195
(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) On August 23, 2016, BC Hydro exercised its right to terminate the existing electricity purchase agreement ("EPA") with Capstone's Sechelt hydro facility.
The current Sechelt EPA will expire on February 28, 2017 and Capstone is in discussions for a new EPA with the relevant parties.
(3) Development & Corporate consists of costs related to Capstone's power development projects, as well as interest income and CPC's debt service costs.
(4) Contractual settlements are included in other gains and (losses) on the consolidated statement of income.
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2015:
Change
Explanations
23,527 Adjusted EBITDA contributions from OEFC proceeds awarded for retroactive payments to Cardinal and the Ontario hydro
facilities.
8,156 Adjusted EBITDA contributions from the new wind facilities, consisting of Goulais which reached COD on May 21, 2015, and the
GHG, Grey Highlands Clean and Snowy Ridge wind facilities, which reached COD in 2016.
2,891 Higher revenue from the hydro facilities (excluding the OEFC proceeds awarded) and Amherstburg due to higher production,
resulting from strong hydrology and solar resources.
2,544 Lower operating expenses at Cardinal due to lower fuel and repair expenses (excluding payments to suppliers resulting from the
OEFC proceeds awarded).
1,764 Higher revenue from the operating wind facilities (excluding new facilities) due to increased production and payments to curtail,
reflecting stronger wind resource.
(1,316) Higher operating expenses at SkyGen to repair a tower at Ferndale, net of $2,000 of interim insurance recoveries.
1,146 Various other changes.
38,712 Change in Adjusted EBITDA.
(6,967) Change in Adjusted EBITDA attributable to non-controlling interests.
(6,990) Higher debt service at Cardinal and CPC, due to the financings completed in 2016.
(1,000) Higher maintenance capital expenditures on gearboxes at Erie Shores.
3,587 Higher distributions from Goulais, GHG and Snowy Ridge, which did not distribute in the prior periods.
(1,681) Various other changes.
25,661 Change in AFFO.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 11
Project development
The Grey Highlands ZEP(1), Ganaraska(1), Grey Highlands Clean and Snowy Ridge(1) wind development projects reached COD on schedule and within
budget and began contributing to Capstone's operating results for a portion of 2016, since their respective COD's. As at December 31, 2016,
Capstone's development pipeline included the rights to net 14 MW (gross 18 MW) summarized as follows:
Project
Settlers Landing (1)
Riverhurst
Expected
COD
2017
2019
Expected
Ownership
Interest
50%
100%
Net
Capacity
4.0 MW
Counterparty
IESO
10.0 MW
SaskPower
Expected
PPA Expiry Status
2037
2039
Under construction
Interconnection agreement (2)
(1) Capstone expects to share control of these projects.
(2) As at December 31, 2016, Capstone continues to progress the previously awarded PPA and interconnection agreement with SaskPower.
Seasonality
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, solar radiation, 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.
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
Maintenance capital expenditures
AFFO
For the year ended
Dec 31, 2016 Dec 31, 2015
Change
(19,876)
(12,492)
91
(11,651)
(3,322)
148
(8,225)
(9,170)
(57)
(32,277)
(14,825)
(17,452)
—
(2,282)
(3,426)
(1,347)
(97)
83
(6,471)
(3,750)
(1,026)
—
(83)
4,189
324
(321)
(97)
(39,429)
(25,989)
(13,440)
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2015:
Change
Explanations
(10,154) Higher professional fees attributable to the iCON III acquisition.
(9,761) Higher staff costs related to the iCON III acquisition, including final long-term incentive plan payments and employee separation
costs.
1,448 Lower professional fees attributable to 2015 acquisition due diligence costs.
1,015 Various other changes.
(17,452) Change in Adjusted EBITDA.
3,095 Lower interest paid on convertible debentures following redemption on April 29, 2016.
1,094 Lower interest paid on the corporate facility following settlement on April 29, 2016.
(177) Various other changes.
(13,440) Change in AFFO.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 12
Discontinued Operations:
For detail regarding the presentation and background of the utilities segments refer to page 3, "Basis of Presentation" and page 3, "Changes in the
Business" in this MD&A.
Infrastructure: Utilities – Water
Bristol Water is a regulated water utility located in the UK and these non-GAAP results are included to December 15, 2016, when Capstone sold its
50% ownership interest.
Water supplied (megalitres)
Revenue
Operating expenses
Interest income
Adjusted EBITDA before NCI from discontinued operations
Less: NCI
Adjusted EBITDA from discontinued operations
Adjusted EBITDA of consolidated businesses with NCI
Dividends from businesses with NCI
AFFO from discontinued operations
For the year ended
Dec 31, 2016 Dec 31, 2015
80,712
191,315
83,151
227,027
(111,664)
(123,524)
232
500
79,883
104,003
(39,975)
(52,042)
39,908
51,961
(39,908)
(51,961)
660
660
1,992
1,992
Change
(2,439)
(35,712)
11,860
(268)
(24,120)
12,067
(12,053)
12,053
(1,332)
(1,332)
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2015:
Change
Explanations
(6,970) Higher operating expenses reflecting accrued termination fees for the O&M agreement.
(5,586) Lower revenue due to the decrease in regulated water tariffs.
(4,057) Impact of foreign exchange.
(1,927) Lower operating results due to the sale of Bristol Water on December 15, 2016.
3,025 Lower operating expenses for non-recurring recovery of past service costs on closing of the defined benefit pension plan in 2016.
2,905 Lower operating expenses due to 2015 non-recurring costs for restructuring and participating in the CMA process.
557 Various other changes.
(12,053) Change in Adjusted EBITDA from discontinued operations.
(1,332) Lower dividends received during 2016.
(1,332) Change in AFFO from discontinued operations.
Infrastructure: Utilities – District Heating
Värmevärden is a district heating business located in Sweden. Capstone's investment includes shareholder loans receivable and a 33.3% ownership
interest, which are presented as AHFS.
For the year ended
Dec 31, 2016 Dec 31, 2015
Change
1,011
(588)
3,810
4,167
7,389
985
(131)
2,739
3,427
6,035
26
(457)
1,071
740
1,354
Heat and steam production (GWh)
Administrative expenses
Interest income
Dividends
Adjusted EBITDA and AFFO from discontinued operations
The following table shows the significant changes in Adjusted EBITDA and AFFO from 2015:
Change
Explanations
2,316 Higher interest income attributable to the new shareholder loan.
740 Higher dividends received.
(1,245) Lower interest income on the pre-existing shareholder loan.
(457) Higher professional fees attributable to Värmevärden's refinancing.
1,354 Change in Adjusted EBITDA and AFFO from discontinued operations.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 13
FINANCIAL POSITION REVIEW
Overview
On April 29, 2016, Capstone was acquired by iCON III, refer to page 3 of "Changes in the Business" in this MD&A for details. Overall, iCON III's
investment in Capstone consists of a combination of Class A shares and a multi-currency demand promissory note, which were issued in exchange
for Class A shares of the Corporation. In addition, a new credit facility was put in place at CPC and the existing corporate credit facility was repaid.
The 2016 consolidated statement of financial position excludes balances relating to Capstone's 50% interest in Bristol Water as a result of the
December 15, 2016 sale. In addition, Värmevärden's assets and liabilities are classified as held for sale because the Corporation expects to sell its
ownership interest in 2017.
As at December 31, 2016, Capstone was in a $55,627 net current liabilities position, compared with $54,580 as at December 31, 2015. Excluding
items that Capstone does not expect to fund from current assets, the working capital surplus of $41,075 sufficiently meets foreseeable current
commitments.
As at December 31, 2016, Capstone and its subsidiaries complied with all debt covenants.
Liquidity
Working capital
As at
Power
Utilities – water (1)
Corporate
Net current assets (liabilities)
Corporate - promissory note payable (2), (4)
Corporate - 2016 convertible debentures (3), (4)
Working capital (4)
Dec 31, 2016
Dec 31, 2015
26,092
—
(81,719)
(55,627)
96,702
—
41,075
(34,929)
26,239
(45,890)
(54,580)
—
42,278
(12,302)
(1) 2015 balances include amounts relating to Bristol Water sold on December 15, 2016. Refer to page 3 "Changes in the Business" in this MD&A.
(2) The promissory note is held by Irving, the owner of the Corporation's Class A shares, and is classified as current due to the demand feature of the note.
Capstone does not expect to settle the promissory note from the current liquidity. Refer to page 16 of "Financial position review" in this MD&A.
(3) The 2016 convertible debentures were redeemed as part of the iCON III acquisition.
(4) GAAP does not define working capital. To assist in understanding liquidity it is calculated as current assets less current liabilities adjusted for items
Capstone does not expect to fund from current liquidity, including the promissory note payable in 2016 and the 2016 convertible debentures in 2015.
As at December 31, 2016, Capstone had a consolidated working capital surplus of $41,075 compared with a deficit of $12,302 at December 31,
2015. Capstone's working capital was $53,377 higher than December 31, 2015, due to increases of $61,021 for the power segment, and $18,595
for corporate, partially offset by a decrease of $26,239 due to the sale of Bristol Water on December 15, 2016.
The power segment working capital increase includes the $23,527 net increase in cash at Cardinal and the Ontario hydro facilities from the proceeds
of the OEFC litigation, and a $21,127 reduction in accounts payable, as vendors were paid while construction of the wind projects progressed. In
addition, there was higher restricted cash of $13,557 for new project debt reserves. These were offset by a $2,640 increase in the current portion of
long-term debt. The long-term debt increase primarily includes $24,675 relating to the new CPC Credit Agreement and $9,953 for new credit
facilities at Cardinal, GHG, Grey Highlands Clean and Snowy Ridge, partially offset by decreases from a $20,802 project debt extension and a $9,966
promissory note repayment at SkyGen, and scheduled repayments.
The corporate working capital increase primarily reflects the reclassification of Värmevärden's long term assets of $10,968 to current assets, as part
of assets held for sale. The remaining difference relates to ongoing distributions from the power segment.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 14
Cash and cash equivalents
As at
Power
Utilities – water (1)
Corporate (2)
Unrestricted cash and cash equivalents
Less: cash with access limitations
Power
Utilities – water
Cash and cash equivalents available to corporate
Dec 31, 2016
Dec 31, 2015
56,000
—
6,246
62,246
(56,000)
—
6,246
43,705
25,495
5,192
74,392
(22,056)
(25,495)
26,841
(1) 2015 balances include amounts relating to Bristol Water sold on December 15, 2016. Refer to page 3 "Changes in the Business" in this MD&A .
(2) 2015 balances include amounts relating to Värmevärden, which was transferred to AHFS as at December 31, 2016. Refer to page 3 "Changes in the
Business" in this MD&A.
Unrestricted cash represents funds available for operating activities, capital expenditures and future acquisitions. The unrestricted cash and cash
equivalents decrease of $12,146, consists of a $25,495 reduction due to the sale of Bristol Water, partially offset by increases of $12,295 at the
power segment and $1,054 at corporate.
Cash and cash equivalents available to corporate were net of power segment cash of $56,000, which is only periodically accessible by Capstone
through distributions. The power segment's cash and cash equivalents are accessible to Capstone through distributions under the terms of the new
CPC Credit Agreement, which allows for distributions to Capstone, subject to certain conditions. In turn, CPC receives distributions from its
subsidiary power assets, which are subject to the terms of their project-specific credit agreements.
Restricted cash
Restricted cash decreased by $1,331 because of a $12,325 reduction due to the sale of Bristol Water and $2,563 of lower corporate restricted cash.
These were partially offset by a $13,557 increase at the power segment. The power segment increase was primarily due to draws on the new
construction facilities to develop the GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing wind projects and additional funds into the
maintenance reserve for Cardinal's new debt facility, partially offset by releases of the remaining construction reserves at Goulais and Saint-Philémon.
Cash flow
Capstone’s consolidated cash and cash equivalents decreased by $12,012 in 2016 compared with an increase of $15,550 in 2015. The components
of the increase, as presented in the consolidated statement of cash flows, from both continuing and discontinued operations, are summarized as
follows:
For the year ended
Operating activities
Investing activities
Financing activities (excluding dividends to shareholders)
Dividends paid to shareholders
Exchange difference on translation of discontinued operations
Change in cash and cash equivalents
Dec 31, 2016
Dec 31, 2015
121,189
116,818
(210,235)
(137,445)
93,185
(9,887)
(6,264)
(12,012)
64,438
(30,364)
2,103
15,550
Cash flow from operating activities were $4,371 higher in 2016 and $27,401 higher, excluding discontinued operations. The increase from
continuing operations consists of $35,686 of higher cash flows from the power segment, partially offset by $8,285 of lower corporate cash flows.
The increase in cash flows at the power segment primarily reflects the net OEFC proceeds awarded for retroactive payments to Cardinal and the
Ontario hydro facilities, as well as contributions from the new wind facilities. Cash flows from corporate decreased primarily due to costs associated
with iCON III's acquisition of Capstone. Cash flows from the discontinued operations decreased primarily due to lower revenue at Bristol Water,
resulting from lower water tariffs, and unfavorable foreign currency translation.
Cash flow used in investing activities were $72,790 higher in 2016, and $119,706 higher, excluding discontinued operations. In 2016, cash used
by the continuing operations primarily included power segment funding of $120,992 for the construction of projects under development (2015 -
$93,973) and $15,536 (2015 - $24,511) to fund capital asset additions. Cash also decreased by $38,374 due to Capstone's sale of its 50%
ownership interest in Bristol Water. In addition, restricted cash increased by $10,994 in 2016 (2015- $38,806 decrease in restricted cash) primarily
due to debt draws on the construction facilities for the projects under development. The remaining significant 2015 cash flows include a $12,859
non-recurring loan settlement at Chapais and BFN.
For 2016, the significant cash flows from the discontinued operations included $49,624 (2015 - $75,911) used to fund capital asset additions at
Bristol Water and $23,432 from Värmevärden as a partial settlement of the pre-existing shareholder loan receivable.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 15
Cash flow from financing activities were $28,747 higher in 2016 and $27,438 higher, excluding discontinued operations. In 2016, cash from the
continuing operations were higher primarily because of higher proceeds from debt draws of $122,488 due to the new debt raised for CPC, Cardinal,
GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing. In addition, debt payments were $38,853 lower, primarily due to the repayment of
Amherstburg's old project debt in 2015. These increases were partially offset by $53,836 paid to settle a portion of the promissory notes issued to
Irving, $43,176 paid to redeem the 2016 convertible debentures and $35,089 lower convertible debenture advances for the GHG, Snowy Ridge and
Settlers Landing wind projects in 2016.
Dividends paid to shareholders were $20,477 lower in 2016, due to the suspension of common share dividends because of the iCON III acquisition.
Refer to page 3 of "Changes in the Business" in this MD&A.
Promissory Note Payable
On April 29, 2016, Capstone issued a $316,225 demand interest-free promissory note to Irving, the owner of the Corporation's Class A shares. Refer
to page 3, "Changes in the Business" in this MD&A for details on the iCON III acquisition. IFRS requires the promissory note to be classified as a
current liability because it is due on demand. On issuance, the promissory note consisted of three tranches: £106,000, 712,700 SEK, and $10,370
which are repayable at either the holder or borrower's option any time prior to the maturity date of December 31, 2021. On September 2, 2016,
160,000 SEK or $24,992 was repaid and on December 15, 2016, the £106,000 tranche was converted into $194,531 of Class A shares of the
Corporation, decreasing the outstanding balance of the promissory note payable to $96,702 as at December 31, 2016.
Settlement of the remaining SEK tranche can occur in cash in the source currency or by transferring the equity securities of Värmevärden at an
agreed upon fair market value. In addition, the promissory note is convertible at the holder's option into Class A shares of Capstone at fair value using
the foreign exchange rate as at April 29, 2016.
Long-term Debt
Continuity of Capstone's long-term debt for the year ended was:
Long-term debt (2)
Power (3), (4), (5), (6) and (7)
Utilities – water (1)
Corporate (5)
Deferred financing fees
Less: current portion of long-
term debt
Dec 31, 2015
Additions
Repayments
&
Redemptions
Foreign
Exchange
Disposal of
business (1)
Other
Dec 31, 2016
529,211
712,584
116,869
(14,127)
292,511
(39,262)
—
7,000
(6,916)
—
(126,804)
1,259
—
(132,379)
—
758
—
(580,205)
—
1,603
1,344,537
292,595
(164,807)
(131,621)
(578,602)
(101,203)
(11,605)
50,751
—
—
1,243,334
280,990
(114,056)
(131,621)
(578,602)
(240)
782,220
—
2,935
1,194
3,889
(112)
3,777
—
—
(16,229)
765,991
(62,169)
703,822
(1) 2015 balances include amounts relating to Bristol Water sold on December 15, 2016. Refer to page 3 " Changes in the Business" in this MD&A.
(2) Refer to page 3 "Changes in the Business" in this MD&A for details of Capstone's financing changes.
(3) Power completed financings of $85,000 for the CPC credit facilities and $70,000 of project debt at Cardinal and made draws of $137,511 for the
construction of the GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing wind development projects.
(4) Power made $29,296 of scheduled debt payments. In addition, $9,966 of SkyGen promissory notes were repaid on February 8, 2016.
(5) On April 29, 2016, Capstone redeemed or converted the 2016 and 2017 convertible debentures and settled the corporate credit facility.
(6) On August 5, 2016, SkyGen and its existing lenders extended the term loan maturity date to February 2018.
(7) The power segment has a cumulative $45,370 utilized on its letter of credit facilities.
Power
As at December 31, 2016, the power segment's long-term debt consisted of $85,000 for the CPC credit facility and $697,220 of project debt. The
current portion of long-term debt was $62,169, consisting of scheduled debt amortization. Capstone expects to repay the long-term debt from
income generated by the power assets.
The new CPC credit facilities include $85,000 drawn on the non-revolving facility and $32,161 utilized on the revolving letter of credit facility. In
addition, CPC has undrawn credit capacity of $5,000 as a source for future capital and development expenditures. The new CPC credit facilities
mature on April 29, 2019 and bear interest at a variable rate plus an applicable margin. In addition, fixed annual minimum repayments are required,
which are paid quarterly from excess cash as defined in the credit agreement.
CPC is subject to customary covenants, including specific limitations on leverage and interest coverage ratios. All of the power segment's project
debt is non-recourse to Capstone, except for $9,000 of limited recourse guarantees provided to the lenders of the various wind projects.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 16
Equity
Shareholders’ equity comprised:
As at
Common shares (1)
Class B exchangeable units (1)
Preferred shares (2)
Share capital
Other equity items
Accumulated other comprehensive income (loss) (3)
Retained earnings (Deficit) (4), (5)
Equity to Capstone shareholders
Non-controlling interests (4)
Total shareholders’ equity
Dec 31, 2016
Dec 31, 2015
40,433
—
72,020
112,453
—
—
2,800
115,253
61,417
176,670
715,989
26,710
72,020
814,719
9,284
51,151
(366,579)
508,575
273,505
782,080
(1) Refer to page 3 of "Changes in the Business" in this MD&A for details on the iCON III acquisition which closed on April 29, 2016.
(2) Capstone continues to publicly list its 3,000 Series A preferred shares on the Toronto Stock Exchange.
(3) 2015 balances include amounts relating to Bristol Water sold on December 15, 2016 (refer to page 3 "Changes in the Business" in this MD&A).
(4) Opening equity balances have been revised to reflect historical adjustments to non-controlling interests associated with Bristol Water, resulting in an
increase to non-controlling interests of $11,960 as at December 31, 2014 and December 31, 2015, and a corresponding decrease to opening retained
earnings (deficit).
(5) On April 29, 2016, the deficit balance of $389,178 was reclassified to share capital on the iCON III acquisition.
Contractual Obligations
As at December 31, 2016, Capstone had outstanding contractual obligations with amounts due as follows:
Long-term debt (1)
Promissory note payable
Operating leases
Asset retirement obligations
Purchase obligations
Total contractual obligations
Within one year One year to five years
Beyond five years
95,601
96,702
3,975
—
18,008
214,286
344,766
—
14,735
—
19,544
379,045
639,251
—
42,461
12,351
12,624
706,687
Total
1,079,618
96,702
61,171
12,351
50,176
1,300,018
(1) Long-term debt include principal and interest payments.
Long-term debt
•
Long-term debt is discussed on page 16 "Long-term Debt" in this MD&A.
Promissory note payable
•
The promissory note payable is discussed on page 16 "Promissory Note Payable" in this MD&A. The Promissory note is held by Irving, the owner
of the Corporation's Class A shares, and is classified as current due to the demand feature of the note. Capstone does not expect to settle the
promissory note from the current liquidity.
Operating leases
The following leases have been included in the table based on known minimum operating lease commitments:
•
•
•
•
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 2061.
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.
Amherstburg leases the land on which its operating facilities are located. The terms of the lease agreements extend to 2036.
The Corporation has an operating lease for the corporate office ending in 2018, with an option to extend.
Capstone's operating lease commitments 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 2033 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 17
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
•
•
As part of Capstone's power development operations, Capstone enters various construction and purchase agreements. As at December 31,
2016, Capstone had commitments of $7,153 for construction and turbine supply agreements for the Settlers Landing project.
Capstone plans to refurbish Whitecourt's steam turbine and boiler in 2017. This project is expected to cost approximately $14,000 and to
extend the life of the facility by 20 years. As at December 31, 2016, Capstone had commitments of approximately $1,260.
Operations and maintenance ("O&M") agreements
• On October 15, 2016, Capstone renegotiated its O&M agreement with SunPower Energy Systems Canada to operate and maintain
Amherstburg to internalize several O&M functions. The agreement expires October 15, 2018 with a one-year renewal option. Capstone has
the ability to terminate the agreement during the term of the contract.
• On November 30, 2016, Cardinal entered into a maintenance contract with Siemens Canada Limited covering the gas turbine at the 15 MW
cogeneration plant that Ingredion is building. The contract has a 6 year term.
•
•
Capstone has several service and maintenance agreements covering the turbines in operation on various wind facilities. 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. Regional is
paid a monthly management fee and is eligible for an annual incentive fee. The agreement expires on November 30, 2021.
Other commitments
In addition to the commitments included in the table on page 17, Capstone has the following other commitments with no fixed minimum payments:
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 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 fails to meet the performance requirements under its respective PPA, liquidated damages may apply for development facilities, or the
operating facilities' PPA may be terminated after a specified period of time.
Management services agreements
Capstone has agreements with all the partially owned wind facilities and development projects, including Glen Dhu, Fitzpatrick, Amherst, Saint-
Philémon, Goulais, GHG, Snowy Ridge and Settlers Landing. For the operating projects, these agreements are primarily for the provision of
management and administration services and are based on an agreed percentage of revenue. The development projects additionally include a
development fee for the successful completion of the projects, which pays an agreed fee per MW on completion of development.
Wood waste supply agreement
The Whitecourt and Millar Western fuel supply agreement for wood waste 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. Under the terms of the ESA, Cardinal is
required to provide O&M services in respect of the 15 MW cogeneration plant that Ingredion is building, and supply steam and compressed air to
Ingredion for the use of its manufacturing facility. Cardinal entered into a maintenance contract with Siemens Canada Limited in connection with
the operation and maintenance of the 15 MW plant in order to support Cardinal's satisfaction of the O&M terms of the ESA.
Guarantees
Capstone has provided limited recourse guarantees on the project debt of certain wind projects totalling $9,000 as at December 31, 2016.
Capstone has also provided a guarantee to the former 25% owner of the Grey Highlands Clean wind facility which provides future contractual
payments based on operational performance up to an aggregate amount of $4,614. The guarantee terminates when the final payment is made on
March 21, 2021.
There have been no other significant changes to the specified contractual obligations that are outside the ordinary course of business, aside from the
iCON III acquisition and related changes. Refer to page 3 of "Changes in the Business" in this MD&A for details. Capstone is not engaged in any off-
balance sheet financing transactions.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 18
Equity Accounted Investments
Equity accounted investments decreased by $928 mainly because of distributions of $1,886 from Glen Dhu, offset by $958 for Capstone's share of
equity accounted comprehensive income.
Capstone's significant 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")
Principal place of business
and country of incorporation
Sweden
Canada
Canada
Ownership at December 31,
2016
33.3%
49%
50%
2015
33.3%
49%
50%
Principal activity
District heating
Power generation
Power generation
(1) 2015 balance for Värmevärden was nil as a result of a cumulative excess of dividends and equity accounted losses above the carrying value. Capstone has
$3,210 of cumulative unrecognized losses. For 2016, Capstone had $3,071 of unrecognized losses and $642 in 2015. In 2016, this investment was
transferred to assets held for sale (refer to note 3b(ii)).
(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.
Capital Asset Expenditure Program
Capstone incurred $168,411 of capital asset expenditures during 2016, which included $67,864 of additions to capital assets and $100,547 of
additions to projects under development. The capital asset expenditures by operating segment were:
Power
Utilities – water
Corporate
For the year ended
Dec 31, 2016
Dec 31, 2015
114,719
53,590
102
141,447
69,738
—
168,411
211,185
In 2016, capital asset expenditures for the power segment mainly related to additions of $108,505 for the development and construction of GHG,
Grey Highlands Clean, Snowy Ridge and Settlers Landing. The majority of the remaining difference related to capital expenditures of $4,406 at Erie
Shores and Cardinal. In 2015, capital asset expenditures in the power segment of $111,406 were primarily related to developing the Saint-Philémon,
Goulais, GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing wind projects. In addition, Cardinal invested $24,640 to prepare the plant to
operate as a cycling facility.
Capital expenditures for the utilities – water segment, included both growth and maintenance activities as planned in Bristol Water’s regulatory
capital expenditure program. On December 15, 2016, Capstone sold its 50% interest in Bristol Water.
Income Taxes
In 2016, the current income tax expense was $1,658 (2015 - $74 recovery), all related to the Canadian operations. The current income taxes
primarily relate to amounts for a shortfall of Canadian renewable and conservation expenses arising from flow through shares issued by a previously
acquired business.
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 $14,750 (December 31, 2015 - $220)
were due to a temporary difference attributable to the cost base of the shares of Värmevärden.
Deferred income tax liabilities of $72,673 (December 31, 2015 - $204,125) represent for Capstone’s Canadian operations ( December 31, 2015 -
$64,399) and nil (December 31, 2015 - $139,506) for Bristol Water. Deferred income tax liabilities primarily relate to the differences between the
amortization of intangible and capital assets for tax and accounting purposes.
In 2016, Capstone’s net deferred income tax liability decreased by $145,982. The net liability decreased primarily due to derecognition of the Bristol
Water's net deferred income tax liability upon sale of Capstone's interest (refer to page 3 "Changes in the Business" in this MD&A).
DERIVATIVE FINANCIAL INSTRUMENTS
Capstone has exposure to market, credit and liquidity risks from its use of financial instruments as described in note 8 financial Instruments and note
9 financial risk management in the consolidated financial statements as at and for the year ended December 31, 2016. These notes contain further
details on the implicit risks and valuation methodology employed for Capstone’s financial instruments.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 19
To manage the certain financial risks inherent in the business, Capstone enters into derivative contracts primarily to mitigate the economic impact of
the fluctuations in interest rates, foreign exchange rates and gas commodity prices for Cardinal in 2015. The fair values of these contracts, as well as
the Whitecourt embedded derivative included in the consolidated statement of financial position, were:
As at
Derivative contract assets
Derivative contract liabilities
Net derivative contract assets (liabilities)
Dec 31, 2016
Dec 31, 2015
18,526
(3,572)
14,954
166
(6,540)
(6,374)
Net derivative contracts increased by $21,328 from December 31, 2015 to a net asset, primarily due to a gain on derivatives in net income from
continuing operations of $27,480 and the disposal of Bristol Water's $2,271 interest rate swap liability. These increases were partially offset by
contractual settlement payments of $8,142 received from Millar Western. The remaining difference relates to the settlement of the foreign currency
option contracts.
In 2016, Cardinal, GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing entered into swap agreements to convert floating interest rate
obligations under the respective credit agreements to a fixed rate. These swaps are effective for the remaining amortization periods, respectively.
The gains (losses) attributable to fair value changes of derivatives in the consolidated statements of income and comprehensive income comprised:
For the year ended
Whitecourt embedded derivative
Interest rate swap contracts
Foreign currency option contracts
Cardinal gas purchase agreement
Cardinal embedded derivative
Forward gas sale and purchase contracts
Gains (losses) on derivatives in net income from continuing operations
Interest rate swap contracts in other comprehensive income from discontinued operations
Gains (losses) on derivatives in total comprehensive income
Dec 31, 2016
Dec 31, 2015
24,964
2,401
115
—
—
—
27,480
(608)
26,872
886
(3,659)
(1,552)
4,364
169
(3,330)
(3,122)
553
(2,569)
The gain on derivatives was primarily attributable to increases in the Whitecourt embedded derivative, mainly because of significantly lower
estimated forward Alberta power pool prices since December 31, 2015. In addition, the interest rate swap contracts and settlement of the foreign
currency contracts contributed to the gains. The gains from the interest rate swaps primarily reflect higher long-term interest rates since inception.
FOREIGN EXCHANGE
Capstone recorded a $397 foreign exchange gain in 2016 compared with a $193 gain in 2015. The 2016 foreign exchange gain was primarily due to
$408 realized on the partial settlement of the SEK tranche of the promissory note held by Irving.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 20
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 interpretation 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 reports to the Audit Committee and is responsible for reviewing
management's practices to manage risks in specific areas agreed from time to time between
management and 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.
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 the
power segment and at the corporate level.
In addition to these risks, 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 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; and interim management's discussion and analysis.
Risks Related to the Corporation and its Businesses
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. Risks specific to Capstone's power segment, as well as at the corporate-level, are included. The table
excludes risks related to the utilities segments because the risks are not considered to have a material financial impact to Capstone's consolidated
results. This is because Capstone sold its interest in the Water segment in 2016 and the District heating segment accounts for its investment using
the equity method, which is carried at a nil value.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 21
Therefore changes from risks disclosed in the MD&A for the year-ended December 31, 2015 predominately reflect changes to the strategic direction
of the Corporation, since the acquisition by iCON III, to focus on the power segment.
Impact
Monitoring and Mitigation
Risk and Description
Operational Risks
Succession and human resources retention
risks concern the ability to replace senior
management and attract, retain and motivate
key staff.
PPA renewal risk concerns the ability to
recontract expiring PPA's on economically
feasible terms and failing to align with the
useful lives of the power facilities.
Inability to retain or replace key staff or
senior management could prevent or delay
Capstone from executing its business
strategy, thereby causing Capstone to fall
short of its financial forecasts.
If Capstone is unsuccessful or delayed in
recontracting its expiring PPAs, it would
cause Capstone to fall short of its financial
forecasts, as revenue short-falls could result
from operating in merchant or other
markets.
Production resources risk concerns the
dependence of power production on
adequate resources such as wind, sunlight
and water flow.
Inadequate wind, sunlight or water flow
leads to lower power production which
results in lower revenues.
Development and capital delivery risks
concern the construction of new power
generation facilities in line with the
requirements of awarded PPAs and
refurbishment of existing facilities to
maintain operations.
Delays and cost overruns in the construction
of new facilities or refurbishments 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.
Strategic Risks
Business development risk concerns the
ability to source and complete attractive
investment opportunities that support
Capstone's growth initiatives within the
power segment.
Financial Risks
Expense management risk concerns
unexpected non-recoverable increases in
operating and administrative costs.
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.
Unanticipated increases in costs could result
in lower earnings and cash flow.
Forecasting Risk concerns the accuracy of
projections for results from operations due
to error or unpredictable economic, market
and specific business factors.
Volatility of financial forecasts increases
liquidity reserve requirements to pay
expenses, reducing cash flows.
Higher taxation results in both lower income
and cash flow available.
Capstone mitigates this risk by providing competitive
compensation, as well as career and development
opportunities to its employees.
Capstone mitigates by starting negotiations with counter-
party(ies), utilizing external advisors where applicable, and
working to ensure the broader benefits of the facility are
considered in the process. In addition, company-wide
mitigation is provided by maintaining a diversified portfolio
to reduce the impact of any one facility to the overall
consolidated financial results.
Capstone maintains facilities in quality condition to
maximize availability for power generation when renewable
resources are available and strongest.
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 operation dates.
Management annually reviews and updates strategy with
the Board of Directors to determine a mandate.
Capstone actively monitors the power segment for
opportunities using internal resources and external advisers.
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 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 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.
In addition, Capstone monitors the trends and policies of
taxation authorities in the OECD jurisdictions where its
businesses operate.
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, presenting a risk at the corporate-
level.
Capstone's exposure to its interests in foreign businesses is
significantly hedged by the foreign denominated promissory
notes reducing the risk to cash flows between Canada and
the Corporation's foreign jurisdictions. In addition, this was
further reduced on December 15, 2016 when Capstone
sold its ownership interest in Bristol Water.
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.
Capstone maintains relationships with multiple financial
institutions that have the resources to provide some or all
financing requirements. In addition, most existing project
debt amortizes over the term of the PPAs to minimize
refinancing requirements and debt maturities are staggered.
Capstone endeavours to secure committed financing prior
to making offers to acquire businesses.
Taxation risk concerns 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.
Foreign currency risk concerns volatility of
the Canadian dollar against currencies from
countries where Capstone entities either
operate or make purchases. For 2016, this
primarily reflects Capstone's interest in
Värmevärden and former interest in Bristol
Water.
Financing risk concerns the ability to access
timely and cost effective debt or equity to
support the development and construction
of power facilities, business acquisitions and
replace maturing debt.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 22
Risk and Description
Impact
Monitoring and Mitigation
Legal and Regulatory Risks
Permit compliance risk concerns the ability
to operate Capstone's power businesses
within the allowances of an increasing
number of requirements.
Failure to comply with permits can impact
Capstone's power contracts, debt facilities,
and other agreements, which can lead to
lower cash flow from the existing businesses
by reducing revenue or increasing costs to
restore the ability to operate at capacity.
ENVIRONMENTAL, HEALTH AND SAFETY REGULATION
Capstone maintains its permits and licenses, works with
knowledgeable contractors and responds to adverse
findings promptly to minimize the impact.
Capstone's power facilities (collectively the “Facilities”) hold all material permits and approvals required for their construction and operation,
depending on project phase and operational status. All assets are managed to comply with health, safety and environmental ("HSE") laws in addition
to Capstone's corporate and facility-specific HSE policies.
The Facilities are subject to complex and stringent environmental, health and safety regulatory regimes, which primarily focus on:
•
•
•
Commitment to identify, eliminate, mitigate and manage health and safety issues for all workers, visitors, nearby landowners and other
personnel at each of the Facilities;
Regulatory compliance of emissions and discharges related to air, noise, water, and sewage.
Proper storage, handling, use, transportation and distribution of dangerous goods and hazardous and residual materials including the prevention
of releases of these materials to the environment;
• Management of construction and operation related permits to ensure compliance with all HSE regulations; and
Protection of the natural and built environment including environmentally sensitive features and wildlife.
•
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.
Climate Change, Greenhouse Gases and Policy Changes
Due to the emission of greenhouse gases, such as carbon dioxide ("CO2") and nitrous oxides ("NOx), some of the Facilities, particularly the Cardinal
and Whitecourt facilities, have an ongoing operational impact on the environment. All Facilities comply in all material respects with the applicable
Canadian, Swedish and European Union legislation and guidelines regarding greenhouse gases and other emissions. 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 contravention of permits and approvals.
There are a number of proposals in respect of changes to climate change legislation and guidelines (including proposed limits on greenhouse gas
emissions) in various stages of development, in various jurisdictions. The Canadian federal government ratified the Paris Accord, negotiated under
the United Nations Framework Convention on Climate Change, in the fall of 2016. Pursuant to the Paris Accord, the parties committed, in a non-
binding manner, to accelerate actions and investments needed to limit global average temperatures to below 2°C above pre-industrial levels and to
pursue efforts to limit the increase to 1.5°C.
The federal government and each of the Provinces, with the exception of Saskatchewan, jointly issued the Pan-Canadian Framework on Clean
Growth and Climate Change (“Framework”). The Framework is the blueprint by which the federal government and the provinces will attempt to
meet their previously agreed-upon target of a 30% reduction in greenhouse gas emissions from 2005 levels by 2030. Elements of the Framework
include all provincial jurisdictions being required to price carbon by 2018. However, provincial jurisdictions have the flexibility to implement a variety
of carbon regimes ranging from price-based regimes such as a carbon tax, to performance-based emissions regimes such as cap and trade. For
jurisdictions with a price-based regime, the price should at least start at $10/tonne in 2018 and rise by $10/tonne each year to $50/tonne by 2022.
The Alberta Climate Leadership Act was proclaimed in force as of January 1, 2017. It imposes a carbon levy on certain fuels, such as natural gas and
oil, imported into the Province or sold in the Province. This legislation will not have a direct effect on renewable generation including the Whitecourt
facility.
The Ontario cap-and-trade regime came into force on January 1, 2017 under the Climate Change Mitigation and Low-carbon Economy Act. Under
the regime, a participating facility, which does not include any of the Capstone Facilities, can only emit as much carbon as it has allowances for. The
total number of allowances for all participating facilities (i.e. the cap) will steadily decline each year during the first compliance period effective from
January 1, 2017 until December 31, 2020. The regime will be updated in the course of 2017 to include provisions addressing offset credits and early
reduction credits, which may allow for Capstone’s involvement as a voluntary market participant.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 23
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 greenhouse gas reporting requirements and is in compliance with these requirements.
Hydro Facilities
Capstone's hydro facilities do not produce greenhouse gases. 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 greenhouse gases, but are subject to regulations and/or approvals relating to the natural and built
environment.
Amherstburg Solar Park
The operation of Amherstburg does not generate greenhouse gases.
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
Bristol Water complied in all material respects with the applicable UK legislation and guidelines regarding greenhouse gases and other emissions.
Subsequent to Bristol Water's sale on December 15, 2016, Capstone is no longer be subject to UK legislation.
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 2016 related party transactions and balances are primarily comprised of the sale of Bristol Water and promissory note payable to Irving,
management fees paid by Capstone's equity accounted investments and compensation to key management.
Sale of Bristol Water and Promissory Note
On December 15, 2016, Capstone's 50% ownership interest in Bristol Water was sold to iCON III Bristol Limited, a related party subsidiary of
Capstone's ultimate parent entity, iCON III. Capstone's shares of CSE Water UK Limited were sold for an agreed upon amount of £115,690. The
transaction was reviewed and approved by a special committee of independent directors of the Corporation (the "Special Committee"). In the course
of its deliberations, the Special Committee retained legal counsel and engaged a valuation advisor. The valuation advisor delivered a fairness opinion
to the Special Committee to the effect that the price received by the Corporation in the transaction is fair, from a financial point of view, to the
Corporation. As a result, the GBP tranche of the promissory note payable held by Irving was converted into Class A shares of Capstone, leaving a
$96,702 balance as at December 31, 2016. In addition, no balances remain outstanding with iCON III Bristol Limited.
Management Fees Paid
Management fees earned from Capstone's equity accounted investments are reported in the consolidated statements of income as revenue. During
2016, Capstone earned fees of $406, 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. Up to its sale on December 15, 2016, Bristol Water incurred charges of $5,909 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, short-term employee benefits and termination benefits. Eligible directors and senior
management of the Corporation also received forms of stock-based compensation, prior to April 29, 2016, before the Corporation was acquired by
iCON. Key management compensation is described in note 26 related party transactions in the consolidated financial statements for the year ended
December 31, 2016.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 24
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")
Long-term incentive plan ("LTIP")
Description
Salary is a fixed component of
compensation that provides income
certainty by establishing a base level of
compensation for executives fulfilling their
roles and responsibilities.
The STIP provides the possibility of an
additional annual cash award based on
the achievement of corporate and
individual goals.
Capstone is evaluating options available to
motivate and retain executives on a long-term
basis. The pre-existing plan was settled on April
29, 2016, when Capstone's common shares
were acquired by iCON.
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.
Capstone is evaluating options.
For a comprehensive understanding of Capstone's compensation program refer to the "Compensation Discussion and Analysis" section of the
Corporation's most recently filed AIF.
SUMMARY OF QUARTERLY RESULTS
The following table provides a summary of the previous eight quarters of Capstone’s financial performance.
Revenue (1)
Net income (loss) (2), (3)
Adjusted EBITDA (3)
AFFO (3)
Preferred dividends
2016
2015
Q4
40,128
18,407
31,424
5,160
613
Q3
Q2
Q1
66,145
32,492
34,175
(9,488)
(18,170)
(4,507)
52,308
25,674
938
12,201
29,929
(9,616)
938
2,257
938
Q4
32,794
8,885
30,327
1,888
938
Q3
Q2
Q1
27,063
29,349
28,750
301
(9,273)
222
26,657
28,768
29,549
1,949
938
932
938
6,464
938
(1) Comparative figures for revenue have been adjusted to remove amounts from discontinued operations.
(2) Net income (loss) attributable to the common shareholders of Capstone, which excludes non-controlling interests.
(3) Results include continuing operations and discontinued operations for all periods.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 25
FOURTH QUARTER 2016 HIGHLIGHTS
Revenue
Operating expenses
Administrative expenses
Project development costs
Equity accounted income
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) from continuing operations
Net income (loss) from discontinued operations, net of tax
Net income (loss)
Net income (loss) attributable to:
Shareholders of Capstone
Non-controlling interest
Three months ended
Dec 31, 2016
Dec 31, 2015
40,128
(11,684)
(2,945)
(672)
747
51
11,007
(46)
36,586
(8,645)
(18,080)
(2,573)
7,288
(1,637)
14,236
12,599
19,887
1,708
21,595
18,407
3,188
21,595
32,794
(10,146)
(3,548)
(2,808)
763
363
(552)
44
16,910
(8,689)
(9,708)
(2,379)
(3,866)
(8)
50
42
(3,824)
25,113
21,289
8,885
12,404
21,289
Revenue increased by $7,334, or 22%, due to higher power segment revenue mainly from the new wind facilities.
Expenses decreased by $1,201, or 7%.
• Operating expenses increased by $1,538, due to higher power segment expenses mainly from the new wind facilities and higher expenses at
the hydro facilities related to the Sechelt re-contracting.
Administrative expenses decreased by $603 primarily due to lower staff costs.
Project development costs decreased by $2,136, mainly due to costs for the strategic review in 2015.
•
•
Other gains and (losses) increased by $11,559, or 2,094%, to a net gain of $11,007 in 2016. The increase is primarily due to gains of $7,285 on
new interest rate swaps and $3,905 on the existing GHG interest rate swap.
Depreciation of capital assets increased by $8,372, or 86.2%, due to the wind facilities.
Income taxes were a $12,599 recovery in 2016 compared with a $42 recovery in 2015 from the Canadian operations. For 2016, the income tax
expense consists of $1,637 of current income taxes and a deferred income tax recovery of $14,236. The current income taxes primarily relate to
amounts for a shortfall of Canadian renewable and conservation expenses arising from flow through shares issued by a previously acquired business.
The deferred income taxes primarily relate to differences in accounting and tax treatments for depreciation of capital assets and intangibles, as well
as the recognition of $14,750 relating to the cost base of Värmevärden's shares.
Depreciation of capital assets increased by $8,372, or 86.2%, due to higher power segment depreciation mainly from the new wind facilities.
Net income (loss) from discontinued operations decreased by $23,405, or 93%, primarily due to a deferred income tax recovery at Bristol Water
in 2015 of $10,585 due to a decrease in the substantively enacted rate at Bristol Water from 20% to 17%. In addition, lower Bristol Water EBITDA of
$7,195 was due to the sale on December 15, 2016.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 26
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, 2015. Refer to note 2 to the December 31, 2016 consolidated financial statements for a summary of 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
the following standards that Capstone continues to assess as follows:
Title of the New IFRS (1)
• IFRS 15, Revenue from Contracts with Customers [Effective: Jan 1, 2018]
• IFRS 9, Financial Instruments [Effective: Jan 1, 2018]
• IFRS 16, Leases [Effective: Jan 1, 2019]
(1) See note 2 to the consolidated financial statements for the year ended December 31, 2016 for further detail about the nature of these future
accounting changes.
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 and intangibles assets
Deferred income taxes
• 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.
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, 2016 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, 2016, 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, 2016.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 27
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, 2016, 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.
David Eva
Chief Executive Officer
Toronto, Canada
February 28, 2017
Michael Smerdon
Executive Vice President and Chief Financial Officer
CAPSTONE INFRASTRUCTURE CORPORATION
Page 28
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, 2016 and December 31, 2015 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, 2016 and December 31, 2015 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
February 28, 2017
CAPSTONE INFRASTRUCTURE CORPORATION
Page 29
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 derivative contract assets
Assets held for sale
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
Promissory note payable
Current portion of derivative contract liabilities
Current portion of finance lease obligations
Current portion of long-term debt
Liabilities held for sale
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
Notes
Dec 31, 2016 Dec 31, 2015
62,246
27,733
23,064
3,145
—
13,445
129,633
—
18,526
22,464
787,271
22,267
153,493
—
14,750
74,392
29,064
77,175
10,904
58
—
191,593
37,271
108
23,392
1,702,233
106,200
362,514
98,558
220
1,148,404
2,522,089
25,383
96,702
758
—
62,169
248
185,260
2,814
72,673
—
—
143,903
—
254
813
101,203
—
246,173
6,286
204,125
32,063
3,261
703,822
1,243,334
7,165
971,734
115,253
61,417
4,767
1,740,009
508,575
273,505
1,148,404
2,522,089
4
4
5
6
8a
3b(ii)
7
8a
10
11
12
13
14
15a
16a
8 & 20
8a
17
18
3b(ii)
8a
15a
16b
17
18
19
21
25
28
See accompanying notes to these consolidated financial statements
CAPSTONE INFRASTRUCTURE CORPORATION
Page 30
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Equity attributable to shareholders of Capstone
Notes
Share
Capital (1)
Other Equity
Items (2)
AOCI (3)
Retained
Earnings
(Deficit)
NCI (4)
Total
Equity
Balance, December 31, 2014
21
812,142
9,284
19,994
(336,674)
202,033
706,779
814,719
9,284
51,151
(366,579)
273,505
782,080
Other comprehensive income (loss)
Net income for the period
Dividends declared to common
shareholders of Capstone
Dividends declared to preferred
shareholders of Capstone (7)
Dividends declared to NCI
Net convertible debenture advances
Balance, December 31, 2015
Other comprehensive income (loss)
from January 1 - April 29, 2016 (5)
Net income (loss) from January 1 - April
29, 2016 included in retained earnings
reset (6)
Dividends declared to common
shareholders of Capstone
Dividends declared to preferred
shareholders of Capstone (7)
Redemption of Capstone's 2016
convertible debentures
Dividends declared to NCI from
January 1 - April 29, 2016
Convertible debenture advances, net (8)
Elimination of deficit
Issuance of promissory note in
exchange for common shares
Balance, April 29, 2016 (9)
Other comprehensive income (loss)
after April 29, 2016 (5)
Net income (loss) after April 29, 2016 (6)
Sale of Bristol Water (10)
Conversion of promissory note (10)
Return of capital (10)
Dividends declared to preferred
shareholders of Capstone (7)
Dividends declared to NCI after April 29,
2016
Convertible debenture advances, net (8)
—
—
20a, d
2,577
20d
21
21
21
—
—
—
—
—
20a, d
617
20d
3a
21
21
3a
3a
3b(i)
20a
20a
20d
21
21
—
—
—
—
(389,178)
(316,225)
109,933
—
—
—
194,531
(192,011)
—
—
—
Balance, December 31, 2016
112,453
—
—
—
—
—
—
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
—
—
—
—
(9,284)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(29,743)
(10,004)
(32,192)
(71,939)
—
—
—
—
—
—
—
—
21,408
(20,600)
6,501
(14,099)
—
(1,279)
9,284
—
—
—
617
(1,279)
—
—
—
(1,060)
(1,060)
3,077
3,077
389,178
—
—
—
—
—
(316,225)
249,831
381,172
(21,408)
(1,789)
(19,208)
(42,405)
—
—
—
—
—
—
—
—
6,842
(8,284)
(1,442)
— (159,268)
(159,268)
—
—
—
194,531
(192,011)
(2,253)
—
(2,253)
—
—
(2,014)
(2,014)
360
360
2,800
61,417
176,670
(1) After April 29, 2016, share capital consists of Class A shares and preferred shares. Just prior to April 29, 2016, share capital was comprised of common
shares, preferred shares and Class B exchangeable units (refer to note 3a).
(2) Other equity items include the equity portion of Capstone's 2016 convertible debentures, which was redeemed on April 29, 2016, resulting in an increase
in retained earnings.
(3) Accumulated other comprehensive income (loss) (“AOCI”).
(4) Non-controlling interest (“NCI”) (refer to note 21).
(5) Total other comprehensive loss for 2016 is $114,344, including the reclassification of foreign currency translation of $2,462 on the sale of Bristol Water.
(6) Total net loss for 2016 is $15,541, including a loss of $2,803 on the sale of Bristol Water.
(7) Dividends declared to preferred shareholders of Capstone include deferred income taxes of $31 prior to April 29, 2016 and $295 after April 29, 2016
(2015 - $117).
(8) Capital contributions, net of repayments are with One West Holdings Ltd. ("Concord"), the agreed future 50% partner on the GHG, Snowy Ridge and
Settlers Landing projects (refer to note 21).
(9) Refer to note 3a for changes related to the iCON III acquisition.
(10) Refer to note 3b for changes related to the sale of Bristol Water.
See accompanying notes to these consolidated financial statements
CAPSTONE INFRASTRUCTURE CORPORATION
Page 31
CONSOLIDATED STATEMENTS OF INCOME
Revenue
Operating expenses
Administrative expenses
Project development costs
Equity accounted income (loss)
Interest income
Other gains and (losses), net
Foreign exchange gain (loss)
Earnings before interest expense, taxes, depreciation and amortization
Interest expense
Depreciation of capital assets
Amortization of intangible assets
Earnings before income taxes
Income tax recovery (expense)
Current
Deferred
Total income tax recovery (expense)
Net income (loss) from continuing operations
Net income (loss) from discontinued operations, net of tax
Net income (loss)
Net income (loss) attributable to:
Shareholders of Capstone
Non-controlling interest
For the year ended
Notes Dec 31, 2016 Dec 31, 2015
25
23
23
23
10a
8b
24
8b
11
13
15d
3b
21
172,940
117,956
(56,947)
(19,876)
(15,255)
958
2,622
23,410
397
108,249
(34,476)
(48,878)
(9,924)
14,971
(1,658)
5,517
3,859
18,830
(34,371)
(15,541)
(13,758)
(1,783)
(15,541)
(40,515)
(11,651)
(7,253)
688
1,498
(11,779)
193
49,137
(34,174)
(35,946)
(9,150)
(30,133)
74
1,379
1,453
(28,680)
54,872
26,192
135
26,057
26,192
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended
Notes
Dec 31, 2016 Dec 31, 2015
Other comprehensive income (loss) from discontinued operations, net of tax
3b(i)
Net income (loss) from discontinued operations, net of tax
Total comprehensive income (loss) from discontinued operations, net of tax
Total comprehensive income (loss) from continuing operations
(114,344)
(34,371)
59,694
54,872
(148,715)
114,566
18,830
(129,885)
(28,680)
85,886
21
(76,702)
(53,183)
(129,885)
34,312
51,574
85,886
Total comprehensive income (loss)
Comprehensive income (loss) attributable to:
Shareholders of Capstone
Non-controlling interest
See accompanying notes to these consolidated financial statements
CAPSTONE INFRASTRUCTURE CORPORATION
Page 32
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss) from continuing operations
Deferred income tax expense (recovery)
Depreciation and amortization
Non-cash other gains and losses (net)
Amortization of deferred financing costs and non-cash financing costs
Equity accounted income
Foreign exchange loss (gain)
Change in non-cash working capital
Cash flows from continuing operations
Cash flows from discontinued operations
Total cash flows from operating activities
Investing activities:
Investment in projects under development
Cash disposed of from discontinued operations
Investment in capital assets
Decrease (increase) in restricted cash
Distributions from equity accounted investments
Repayments of loans receivable
Cash flows used in continuing operations
Cash flows used in discontinued operations
Total cash flows used in investing activities
Financing activities:
Proceeds from issuance of long-term debt
Settlement of interest rate swaps
Repayment of long-term debt
Repayment of promissory note
Redemption of debentures
Dividends paid to common and preferred shareholders
Transaction costs on debt issuance
Convertible debenture advances, net
Dividends paid to non-controlling interests
Cash flows from continuing operations
Cash flows used by discontinued operations
Total cash flows from financing activities
Exchange difference on translation of discontinued operations
Increase in cash and cash equivalents
Cash reclassified to held for sale
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental information:
For the year ended
Notes
Dec 31, 2016 Dec 31, 2015
18,830
(5,517)
58,802
(15,268)
2,321
(958)
(397)
(7,490)
50,323
70,866
(28,680)
(1,379)
45,096
2,509
2,033
(688)
—
4,031
22,922
93,896
121,189
116,818
(120,992)
(93,973)
(38,374)
(15,536)
(10,994)
1,886
—
(184,010)
(26,225)
—
(24,511)
38,806
2,426
12,948
(64,304)
(73,141)
(210,235)
(137,445)
299,511
177,023
85
(93,262)
(53,836)
(43,176)
(9,887)
(6,916)
(4,930)
(3,074)
84,515
(1,217)
83,298
(6,264)
(12,012)
(134)
74,392
62,246
—
(132,115)
—
—
(30,364)
(3,953)
30,159
(4,150)
36,600
(2,526)
34,074
2,103
15,550
—
58,842
74,392
10a
3b
12b
11b
10a
3b
3a
21
3b
3
Interest paid (Bristol Water in 2016 - $22,044, 2015 - $24,345)
Taxes paid (Bristol Water in 2016 - $1,052 recovery, 2015 - $1,954 payment)
56,518
295
58,083
2,980
See accompanying notes to these consolidated financial statements
CAPSTONE INFRASTRUCTURE CORPORATION
Page 33
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
Acquisitions, disposals and discontinued
operations
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
34
34
43
46
46
46
47
47
49
52
54
55
55
56
15
16
Income Taxes
Accounts Payable and Other Liabilities
17
Finance Lease Obligations
18
Long-term Debt
19
20
21
22
23
24
25
26
27
28
Liability for Asset Retirement Obligation
Shareholders' Equity and Promissory
Note Payable
Non-Controlling Interests
Share-based Compensation
Expenses-Analysis by Nature
Other Gains and Losses
Commitments and Contingencies
Related Party Transactions
Segmented Information
Subsequent Events
57
59
59
59
63
63
65
67
68
68
68
70
71
72
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.
Capstone Infrastructure Corporation and its subsidiaries (together the “Corporation” or “Capstone”) have refocused their mission to provide
investors with an attractive total return from responsibly managed long-term investments in power generation in North America. The Corporation's
strategy is to develop, acquire and manage a portfolio of high quality power businesses that operate in a contractually-defined environment and
generate stable cash flow. As at December 31, 2016, Capstone owns, operates and develops thermal and renewable power generation facilities in
Canada with an approximate net installed capacity of 505 MW. In addition, Capstone has a 33.3% shareholding in Värmevärden, a district heating
business in Sweden, which is treated as an asset held for sale ("AHFS").
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 February 28, 2017.
Basis of measurement
The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial instruments,
which are measured at fair value as explained in the accounting policies set out below and on a going concern basis of accounting (see note 8).
Historical cost is generally based on the fair value of the consideration given in exchange for assets.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 34
As further discussed in note 3, on December 15, 2016, Capstone sold its 50% interest in Bristol Water resulting in the utilities - water segment being
presented as a discontinued operation. This means Capstone's consolidated statement of financial position as at December 31, 2016 does not
contain balances related to Bristol Water. In addition, the statements of income for the years ended December 31, 2016 and 2015 only include
results for Bristol Water as a discontinued operation up until December 15, 2016.
As at December 31, 2016, Capstone's plan to sell its 33.3% investment in Värmevärden results in the utilities - district heating segment meeting the
AHFS criteria and consequently being presented as a discontinued operation. This means Capstone's consolidated statement of financial position as
at December 31, 2016 classifies balances related to Värmevärden as AHFS within the current assets and liabilities. In addition, the statements of
income for the years ended December 31, 2016 and 2015 include Värmevärden as a discontinued operation.
The cash flows of the segments are presented as cash provided (used) by discontinued operations for the years ended December 31, 2016 and
2015.
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.
The following table lists the significant subsidiaries of the Corporation which are accounted for on a consolidated basis:
Name of entity
Capstone Power Corp. ("CPC")
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”)
Glace Bay Lingan Wind Power Ltd. ("Glace Bay")
Sky Generation L.P. ("SkyGen"), formerly Sky Generation Inc. (1)
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 (B.C.) Corp.
Grey Highlands Clean Energy Development LP ("Grey Highlands Clean")
Ganaraska and Grey Highlands ZEP Wind Development LP ("GHG")
Snowy Ridge Wind Development LP ("SR")
Settlers Landing Wind Development LP ("SL")
Principal place of
business and
country of
incorporation
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Canada
Ownership at December 31,
2016
100%
100%
100%
100%
100%
100%
100%
100%
51%
51%
51%
2015
100%
100%
100%
100%
100%
100%
100%
100%
51%
51%
51%
100%
100%
100%
100%
75% (3)
75% (3)
75% (3)
100%
75% (2)
75%
75%
75%
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
Power
holding company
Development
Power generation
Power generation
Power generation
Power generation
under construction
Bristol Water plc and group companies (collectively “Bristol Water”)
United Kingdom
Nil (4)
50% (4)
Regulated water utility
(1) The SkyGen entity holds the Ferndale, Ravenswood, Proof Line and Skyway 8 operating wind facilities.
(2) On April 7, 2015, Capstone acquired a 75% interest in the Grey Highlands Clean wind development project. On December 9, 2016, Capstone acquired the
remaining 25% of the project.
(3) As at December 31, 2016, Ganaraska, Grey Highlands ZEP, Snowy Ridge and Settlers Landing projects were 25% held by the original developer. On
January 27, 2017, Capstone acquired the original developer's ownership interest of GHG and expects to acquire the remaining interests in Snowy Ridge
and Settlers Landing during 2017.
(4) Capstone's 50% interest in Bristol Water was sold on December 15, 2016. Capstone had control until that point 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 35
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") (1)
Glen Dhu Wind Energy Limited Partnership ("Glen Dhu")
Fitzpatrick Mountain Wind Energy Inc. ("Fitzpatrick")
Sweden
Canada
Canada
Ownership at December 31,
2016
33.3%
49%
50%
2015
33.3%
49%
50%
Principal activity
District heating
Power generation
Power generation
(1) As of December 31, 2016, the investment was classified as held for sale due to the plan to sell Capstone's investment in Värmevärden in 2017.
The consolidated financial statements include the Corporation's initial investment adjusted by its share of net income (loss) and other comprehensive
income (loss) and reduced by any dividends paid to the Corporation. The Corporation assesses at each year end whether there is any objective
evidence that its interests in associates are impaired. If impaired, the carrying value of the Corporation's share of the underlying assets of associates
is written down to its estimated recoverable amount (being the higher of fair value less cost to sell and value in use) and charged to the consolidated
statement of income (loss).
The Corporation's share of losses of an equity accounted investment that exceed its interest and net investment in the associate are not accounted
for unless the Corporation has incurred contractual obligations or has made payments on behalf of the associate.
Any surplus of the investment cost over the Corporation's share in the fair value of the identifiable assets, liabilities and contingent liabilities of the
equity investment on the date of acquisition is accounted for as goodwill and included in the book value of the investment accounted for using the
equity method.
Business Combinations
The acquisitions of businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate
of the fair values, at the date of exchange, of assets transferred, liabilities incurred or assumed, and equity instruments issued by the Corporation in
exchange for control of the acquired business. The acquired identifiable assets, liabilities and contingent liabilities that meet the conditions for
recognition under IFRS 3R, Business Combinations (“IFRS 3R”) are recognized at their fair value at the acquisition date.
Goodwill is recognized to the extent the fair value of consideration paid exceeds the fair value of the net carrying amounts of the identifiable assets
acquired and the liabilities assumed, measured in accordance with IFRS on the acquisition date.
The Corporation recognizes any non-controlling interest in the acquiree at the non-controlling interest's proportionate share of the recognized
amounts of acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred.
Foreign Currency Translation
Functional and presentation currency
Amounts included in the financial statements of each 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
December 31, 2015
December 31, 2016 (1)
Swedish Krona (SEK)
UK Pound Sterling (£)
Average
0.1516
0.1550
Spot
0.1638
0.1478
Average
1.9540
1.8014
Spot
2.0407
1.6597
(1) Bristol Water's spot rate and average rate were as at and for the period ended December 15, 2016, the date of sale.
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.
On the disposal of a foreign operation, the cumulative translation adjustments recognized in other comprehensive income is reclassified to the
statement of income when the gain or loss on disposal is recognized.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 36
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
within AHFS.
Capitalized Interest
The Corporation capitalizes interest and borrowing costs when activities that are necessary to prepare the asset for its intended use are in progress
and expenditures for the asset have been used or borrowed to fund the construction or development. Capitalization of interest and borrowing costs
ceases when the asset is ready for its intended use. Capitalized interest is included in the statement of financial position as part of capital assets and
projects under development.
Grants and Contributions
Grants are recognized at their fair value when there is reasonable assurance that the grant will be received and all attaching conditions will be
complied with. Grants and contributions related to charges to net income are netted against such expenditures as received.
Capital Assets
Capital assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditures that are directly
attributable to the acquisition of the asset. Subsequent costs are included in the asset's carrying amount or recognized as a separate asset only when
it is probable that future economic benefits associated with the item will flow to the Corporation and the cost can be measured reliably. The carrying
value of an asset is derecognized when replaced.
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
(discontinued
operations)
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
Up until the sale of Bristol Water, 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
Up until the sale of Bristol Water, 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
CAPSTONE INFRASTRUCTURE CORPORATION
Page 37
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 up until the sale of Bristol Water. 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 ("PUD")
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;
An offtake market is identified or a Power Purchase Agreement ("PPA") awarded; and
•
Adequate resources exist or are expected to be available to complete the project.
•
Upon a project becoming commercially operational, the capitalized costs, including capitalized borrowing costs, if any, are transferred to capital
assets and are amortized on a straight-line basis over the estimated useful lives of the various components.
The recovery of project development costs is dependent upon continued access to the development sites, regulatory approval, sufficient project
financing, and the successful commercialization of project sites for the profitable sale of electricity.
Intangible Assets
Identifiable intangible assets
The Corporation separately identifies acquired intangible assets, including computer software, 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
(discontinued
operations)
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
Up until the sale of Bristol Water, goodwill recorded on the statement of financial position represented 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, all goodwill and
indefinite life assets pertained to the utilities – water segment. After the sale of Bristol Water, neither of these remained.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 38
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. The financial reporting impacts of the Bristol Water defined benefit pension plan was included in
the financial statements up until the sale of Bristol Water.
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, which is included in net income (loss) from discontinued operations, net of tax.
Up until the sale of Bristol Water, the net asset or liability recognized in the consolidated statement of financial position represents the present value
of the defined benefit obligation less the fair value of the plan's assets. Actuarial gains and losses arising from experience adjustments, changes in
actuarial assumptions and amendments to pension plans are recognized in full in the period in which they occur in the consolidated statement of
comprehensive income.
Past service costs are recognized immediately to income. When a settlement or curtailment occurs the gain or loss on settlement or reversal of past
service costs included in operating expenses are recognized in the consolidated statement of income.
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.
Promissory Note Payable
The Corporation has a financial liability that consists of a demand interest-free promissory note to the owner of the Corporation's Class A shares.
This financial liability is carried at fair value through profit and loss and presented as current.
Assets Held for Sale
Assets and liabilities that meet the criteria to be classified as held for sale are reclassified to current assets and liabilities on the statement of financial
position. They are measured at the lower of carrying amount and fair value less costs to sell, and depreciation on such assets is no longer recorded.
The results of discontinued operations are presented separately in the statements of income and cash flows for the current and comparative periods.
Share Capital
Common and Class A shares are classified as equity. Incremental costs directly attributable to the issuance of shares are recognized as a reduction in
equity.
Exchangeable Securities
Up until the acquisition of Capstone by iCON III ("iCON III acquisition"), 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.
Up until the sale of Bristol Water, the irredeemable preferred shares of Bristol Water have been classified as debt in accordance with IAS 39.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 39
Dividends
Dividends on common shares, up until the iCON III acquisition, 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. In addition, capacity and availability payments to Cardinal are recognized in accordance with
the non-utility generator contract. Certain power purchase arrangements provide for an electricity rate adjustment, which is updated periodically
both for the current and prior periods. Capstone 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.
Up until the sale of Bristol Water, 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 iCON III acquisition 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
Up until the iCON III acquisition, the Corporation had a Deferred Share Unit (“DSU”) plan for eligible directors and employees of Capstone. 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
Up until the iCON III acquisition, the Corporation had a long-term incentive plan (“LTIP”) for members of senior management. The Corporation
accounts for its grants under this plan in accordance with IFRS 2 Share-Based Payments. Compensation expense is recognized over the vesting
period of the LTIP units and is adjusted for any changes in market value of the Corporation's share price.
Income Taxes
Current and deferred income taxes are recognized in the consolidated statement of income except to the extent that they relate to items recognized
directly in equity 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.
Comprehensive Income
Other comprehensive income (“OCI”) represents changes in shareholders' equity during a period arising from transactions and other events,
including the equity share of OCI of equity accounted investments, unrealized gains and losses on translation of net assets of foreign operations, and
CAPSTONE INFRASTRUCTURE CORPORATION
Page 40
actuarial gains recognized in respect of retirement benefit obligations at Bristol Water. 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
Significant Categories
Measurement
Financial assets and liabilities at fair value through profit and loss
Loans and receivables
Other liabilities
• Cash and cash equivalents
• Restricted cash
• Cardinal's gas purchase agreement
• Derivative contract assets
• Derivative contract liabilities
• Promissory note payable
• 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.
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 2016, the Corporation's derivatives include interest rate swaps, an embedded derivative in Whitecourt's fuel supply
agreement and foreign currency contracts. In addition, 2015 included movement related to 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. Up until the sale of Bristol Water, 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. Hedge accounting was only applied at Bristol Water, prior to its sale.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 41
Discontinued Operations
Entities or components of entities that have been disposed of or classified as held for sale and represent separate CGUs are presented separately as
discontinued operations. The results of discontinued operations for both the current and comparative periods are included in a separate line item in
the statement of comprehensive income which includes post-tax profit or loss of the entities and the post-tax gain or loss recognized on the disposal
or re-measurement of the entities.
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”) and discontinued operations, 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, 2015 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:
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
Critical Judgment
Capital assets, projects under development
and intangible assets – carrying values
Fair value estimates are required in the
determination of the net assets acquired in a
business combination and in the impairment
assessment for our capital assets and the
assignment of amounts to the asset
retirement obligations, as well as assessing
capitalization criteria for project development
costs.
• Estimates are based on assumptions that are sensitive to change,
• Initial fair value of net assets
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.
• Estimated useful lives and
residual value
• Expected settlement date,
amount and discount rate
• Future cash flows and discount
rate
CAPSTONE INFRASTRUCTURE CORPORATION
Page 42
Area of Significance
Deferred income taxes
Estimates in the determination of deferred
income taxes affect asset and liability
balances.
Critical Estimate
• The determination of the deferred income tax balances of the
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.
Critical Judgment
• Timing of reversal of temporary
differences
• Tax rates
• Current and future taxable
income
• Forward Alberta power pool
prices, volatility, credit spreads,
cost and inflation escalators and
fuel supply volumes and
electricity sales
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.
• No critical estimates are involved in determining control.
• Determine how relevant activities
are directed (either through
voting rights or contracts)
• Determine if Capstone has
substantive or protective rights
• Determine Capstone's ability to
influence returns
NOTE 3. ACQUISITIONS, DISPOSALS AND DISCONTINUED OPERATIONS
(A)
Acquisition of Capstone by iCON III
On April 29, 2016, Capstone completed the previously announced arrangement under which Irving Infrastructure Corp. ("Irving"), a subsidiary of
iCON Infrastructure Partners III, LP ("iCON III"), a fund managed by London, UK-based iCON Infrastructure LLP ("iCON"), acquired all the issued and
outstanding common shares of Capstone and all the Class B exchangeable units of Capstone's subsidiary MPT LTC Holding LP ("Class B units") for
$4.90 cash per share or unit, as applicable ("iCON III acquisition"). Pursuant to the arrangement agreement, the outstanding 2016 convertible
debentures were redeemed by Capstone and the 2017 convertible debentures were converted into common shares prior to being acquired by Irving.
As part of the transaction, Capstone issued a demand interest-free promissory note to Irving for $316,225 and Capstone Power Corp. ("CPC")
entered into a credit agreement for $125,000 in part to fund the 2016 convertible debenture redemption. Upon completion, the common shares,
Class B units, and 2016 and 2017 convertible debentures were delisted from the Toronto Stock Exchange and ceased trading. Capstone also settled
all outstanding share-based compensation.
Convertible debentures
In accordance with the arrangement agreement, CPC's 2017 convertible debentures were converted into 6,047 common shares per the conversion
ratio and Capstone's 2016 convertible debentures were redeemed for cash of $43,176. For both debenture series, the Corporation paid the accrued
interest owed and subsequently cancelled the debentures. On extinguishing these debentures, a net loss of $3,324 was recognized in the statement
of income and the equity component of the 2016 convertible debentures of $9,284 was released to retained earnings.
Common Shares and Class B Units
The Class B Units acquired by Irving for cash and subsequently exchanged for 3,249 common shares. All 103,828 outstanding common shares not
already held by Irving were then acquired by Irving and replaced by the same number of newly issued Class A shares without par value and the
promissory notes described below. The common shares acquired by the Corporation were then cancelled. Additionally, the deficit as at
April 29, 2016 of $389,178 was reclassified to share capital, resulting in the Class A shares being recorded at a carrying value of $37,913.
Promissory Notes
Capstone issued a demand interest-free promissory note to Irving for $316,225 in exchange for common share capital. On April 29, 2016, the
promissory note consisted of three multi-currency tranches: £106,000, 712,700 SEK, and $10,370 which could be repaid at any time prior to the
maturity date of December 31, 2021. Settlement of each tranche can occur in cash in the underlying currency or by transferring the equity securities
of Bristol Water or Värmevärden at an agreed upon fair market value. In addition, the promissory note is convertible at the holder's option into Class
A shares of Capstone at fair value using the respective foreign exchange rates as at April 29, 2016 (refer to note 20f). On April 29, 2016, Capstone
also issued a $29,628 promissory note to Irving in exchange for common share capital which was settled in cash on the same day.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 43
CPC Credit Agreement
CPC entered into credit facilities for an aggregate amount of $125,000, consisting of an $85,000 non-revolving facility, a $5,000 revolving facility,
and a $35,000 revolving letter of credit facility ("the CPC Credit Agreement"). The proceeds drawn on the non-revolving facility were used to repay
the outstanding 2016 convertible debentures and to replace the existing corporate credit facility.
Share-based Compensation
As part of the acquisition, all vesting conditions were satisfied on April 29, 2016 for Capstone's share-based compensation, including Deferred Share
Units (“DSU”), Restricted Stock Units (“RSU”) and Performance Share Units (“PSU”). The total accrued liability of $9,172 was paid to plan
participants in May 2016. The charges to administrative expenses for share-based compensation were $6,867 in 2016.
(B)
Discontinued Operations
Capstone's consolidated statements of income and cash flows for the years ended December 31, 2016 and 2015 include results for the
discontinued operations of Bristol Water and Värmevärden as follows:
For the year ended
Net income (loss) from discontinued operations, net of tax:
Bristol Water
Värmevärden
For the year ended
Operating cash flows provided by discontinued operations:
Bristol Water
Värmevärden
Investing cash flows used (provided) by discontinued operations:
Bristol Water
Värmevärden
Financing cash flows used by discontinued operations:
Bristol Water
Värmevärden
Notes
Dec 31, 2016
Dec 31, 2015
3b(i)
3b(ii)
(34,723)
352
(34,371)
49,341
5,531
54,872
Dec 31, 2016
Dec 31, 2015
70,019
847
70,866
(49,657)
23,432
(26,225)
(1,217)
—
(1,217)
91,181
2,715
93,896
(76,541)
3,400
(73,141)
(2,526)
—
(2,526)
(i)
Sale of Bristol Water to iCON III
On December 15, 2016, Capstone sold its 50% ownership interest in Bristol Water to iCON III Bristol Limited, a subsidiary of Capstone's ultimate
parent, iCON III. As part of the sale, Irving converted its £106,000 tranche of the promissory note into 123,905 Class A shares of the Corporation,
which reduced the promissory note payable to Irving by $194,531. In return, Capstone received a promissory note receivable of £115,690 or
$192,011 from iCON III Bristol Limited and then distributed the promissory note receivable to Irving as a $192,011 return of capital. This results in a
$2,520 increase in Capstone's Class A shares and a loss of $2,803 comprised of:
As at December 15, 2016
Net assets of Bristol Water at 100% (1)
Less: non-controlling interest
Net assets of Bristol Water attributable to Capstone
Less: proceeds on sale
Reclassification of foreign currency translation on sale of Bristol Water
Loss on sale of Bristol Water
$
351,620
(159,268)
192,352
(192,011)
2,462
2,803
(1) Bristol Water had $25,674 working capital, $1,039,094 non-current assets and $713,148 long-term liabilities on December 15, 2016.
The results of Bristol Water, the utilities - water segment, are disclosed in the current and prior periods as a discontinued operation, including the loss
on sale. Financial information relating to the discontinued operations for the years ended December 15, 2016 and December 31, 2015 is set out
below.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 44
Net income from discontinued operations
Net income (loss) from Bristol Water's discontinued operations for the years ended December 15, 2016 and December 31, 2015 was:
For the period ended
Revenue
Operating expenses
Goodwill impairment charges
Other expenses
Loss on sale
Earnings before income taxes
Income tax recovery (expense)
Current
Deferred
Net income (loss) from discontinued operations, net of tax
Comprehensive income from discontinued operations
Dec 15, 2016
Dec 31, 2015
191,315
(111,664)
(58,000)
(55,323)
(2,803)
(36,475)
(2,416)
4,168
(34,723)
227,027
(123,524)
—
(58,596)
—
44,907
2,664
1,770
49,341
Comprehensive income (loss) from Bristol Water's discontinued operations for the years ended December 15, 2016 and December 31, 2015 was:
For the period ended
Total comprehensive income (loss) from discontinued operations, net of tax
Net income (loss) from discontinued operations, net of tax
Total comprehensive income (loss) from discontinued operations, net of tax
(ii)
Värmevärden Assets Held for Sale
Dec 15, 2016
Dec 31, 2015
(114,344)
(34,723)
(149,067)
59,694
49,341
109,035
In 2016, Capstone and its co-shareholder evaluated strategic options for Värmevärden, including a potential sale. In the fourth quarter of 2016,
management concluded that the expected outcome is the sale of Värmevärden within one year. As such, Capstone has classified Värmevärden's
assets and liabilities as held for sale and the results of the utilities - district heating segment are presented in the current and prior periods as a
discontinued operations.
Net income from discontinued operations
The net income from Värmevärden's discontinued operations for the years ended December 31, 2016 and December 31, 2015 was:
For the year ended
Administrative expenses
Other income
Net income from discontinued operations, net of tax
Assets and liabilities held for sale
The major classes of assets and liabilities held for sale for Värmevärden are made up of the following components:
For the year ended
Cash and cash equivalents
Accounts receivable
Other assets
Loans receivable
Assets held for sale
Accounts payable and other liabilities
Liabilities held for sale
Dec 31, 2016
Dec 31, 2015
(587)
939
352
(131)
5,662
5,531
Dec 31, 2016
134
2,330
13
10,968
13,445
248
248
CAPSTONE INFRASTRUCTURE CORPORATION
Page 45
NOTE 4. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH
Debt service and maintenance reserves (1)
Construction escrow
Cash on deposit
Restricted cash
Unrestricted cash and cash equivalents (1), (2)
Dec 31, 2016
Dec 31, 2015
14,973
12,685
75
27,733
62,246
89,979
23,434
2,992
2,638
29,064
74,392
103,456
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
(2) 2015 balances include amounts relating to Värmevärden, which was transferred to assets held for sale as at December 31, 2016 (refer to note 3b(ii)).
Restricted cash is primarily cash that is held by the Corporation's subsidiaries in support of segregated bank accounts to support debt service
reserves, operating and maintenance reserves in support of specific long-term debt and/or proceeds from construction facilities used for specific
project costs. Capstone has also provided letters of credit to back other reserve requirements (refer to note 18).
NOTE 5. TRADE AND OTHER RECEIVABLES
Power
Utilities – water (1)
Corporate (2)
Dec 31, 2016
Dec 31, 2015
22,689
—
375
23,064
19,496
57,665
14
77,175
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
(2) 2015 balances include amounts relating to Värmevärden, which was transferred to assets held for sale as at December 31, 2016 (refer to note 3b(ii)).
For both periods presented, Capstone's power segment and corporate trade and other receivables did not require a provision for impairment.
Substantially all of the accounts receivable are with government authorities and none are past due. Refer to note 9b and 9c for further detail of credit
risk and economic dependence.
The provision for impairment of trade receivables associated with Bristol Water and recognized in discontinued operations for the year ended
December 15, 2016 was $4,517 (December 31, 2015 –$5,870).
NOTE 6. OTHER ASSETS
Prepaid expenses (1), (2)
Inventory of spare parts and consumable supplies, net (1), (3)
Dec 31, 2016
Dec 31, 2015
1,377
1,768
3,145
6,773
4,131
10,904
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
(2) 2015 balances include amounts relating to Värmevärden, which was transferred to assets held for sale as at December 31, 2016 (refer to note 3b(ii)).
(3) No inventory obsolescence provision is required as at December 31, 2016.
The cost of inventories recognized in operating expenses for the year ended December 31, 2016 was $361 (December 31, 2015 – $781). In
addition, the cost of inventories associated with Bristol Water and recognized in discontinued operations for the year ended December 31, 2016
was $4,430 (December 31, 2015 – $5,198).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 46
NOTE 7. LOANS RECEIVABLE
The following table summarizes the change in the loan receivable from Värmevärden during the years ended:
Opening balance
Principal repayment of pre-existing loan receivable (1)
Foreign exchange gain (loss)
Issuance of new loan receivable (2)
Contra-asset (2)
Assets held for sale (3)
Ending balance (3), (4)
December 31, 2016
December 31, 2015
SEK
227,541
(153,333)
—
74,208
365,134
(365,134)
(74,208)
—
$
37,271
(23,432)
(2,871)
10,968
57,363
(57,363)
(10,968)
SEK
227,541
—
—
227,541
—
—
—
$
33,744
—
3,527
37,271
—
—
—
—
227,541
37,271
(1) On June 30, 2016, Värmevärden repaid a portion of the pre-existing shareholder loan from the net excess proceeds on refinancing, including operating
cash flows generated from the business. The pre-existing shareholder loan bears interest at a fixed annual rate of 7.944% and matures in 2031.
(2) On May 26, 2016, Capstone received an in-kind distribution from Värmevärden and subsequently reinvested these gains in return for a new shareholder
loan. As a result of the immediate reinvestment, IFRS requires these gains to be deferred as a contra-asset against the new loan receivable. This resulted
in a nil balance on the statement of financial position and statement of income for the new loan receivable and distribution, respectively. The new
shareholder loan receivable bears interest at a fixed annual rate of 6% and matures in 2036.
(3) Accrued interest on the loans receivable in the amount of $2,330 for the year ended December 31, 2016 is included in assets held for sale (December 31,
2015 – $24 in accounts receivable).
(4) 2015 balances include amounts relating to Värmevärden, which was transferred to assets held for sale (refer to note 3b(ii)).
NOTE 8. FINANCIAL INSTRUMENTS
(A)
Fair Value of Financial Instruments
In 2016, financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, loans receivable, accounts payable and other
liabilities, promissory note payable, 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 assets and liabilities at fair value through profit and loss
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, 2016, 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.
Interest rate swaps
The Corporation has interest rate swap contracts to effectively fix the interest cost on its long-term debt with variable rates, specifically for Cardinal,
GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing. Under these swap agreements, these projects receive Canadian Dollar Offered Rate
("CDOR") in exchange for fixed rate (refer to note 9a).
Whitecourt embedded derivative
On March 2, 2015, Whitecourt entered into a fuel supply agreement with Millar Western for 15 years, which is extendable to 20 years. The
agreement, which was effective 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 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 was equal to and
offset the fair value of the embedded derivative included in Whitecourt's fuel supply agreement at inception. Capstone amortizes the inception value
to income over 15 years, representing the life of the fuel supply agreement.
Promissory note payable
On April 29, 2016, as part of the acquisition of Capstone by iCON III described in note 3a, Capstone issued a demand interest-free promissory note
to Irving. Refer to note 3a and 20f for more details.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 47
The Corporation has determined the fair values of derivative financial instruments as follows:
Interest rate swaps
• 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.
Promissory note
payable
• The promissory note's fair value fluctuates with changes in the relative currencies to the Canadian dollar.
• The promissory note has a minimum value equal to the liability's fair value converted using the respective foreign exchange
rates as at April 29, 2016, which is the value at which the note can be converted to Class A shares of Capstone.
Due to the lack of observable market quotes on the Whitecourt embedded derivatives, the contract has been classified as Level 3 financial
instruments.
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.
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, 2016.
The Corporation's long-term debt is recorded at amortized cost using the effective interest rate method. The fair value of the Corporation's long-
term debt is determined using level 2 inputs as follows:
•
Floating rate debt approximates its carrying value.
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:
Level 1
Quoted prices in active
markets for identical assets
Level 2
Significant other
observable inputs
Level 3
Significant
unobservable inputs
Dec 31, 2016
Dec 31, 2015
Cash and cash equivalents
Restricted cash
Recurring measurements:
Derivative contract assets:
Whitecourt embedded derivative (1)
Interest rate swap contracts (2)
Foreign currency contracts
Less: current portion
Promissory note payable (3)
Derivative contract liabilities:
Interest rate swap contracts (2)
Whitecourt embedded derivative (1)
Interest rate swap contracts - hedge
accounted (4)
Less: current portion
62,246
27,733
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,852
—
—
4,852
96,702
3,572
—
—
(758)
2,814
—
—
62,246
27,733
74,392
29,064
13,674
—
—
—
13,674
4,852
—
—
13,674
18,526
—
—
—
—
—
—
96,702
3,572
—
—
(758)
2,814
—
—
166
(58)
108
—
1,121
3,148
2,271
(254)
6,286
(1) Whitecourt's embedded derivative consists of a $18,265 fair value asset, offset by the $4,591 amortized contra-asset, set up on inception (2015 -
(2)
$1,796 fair value asset, fully offset by the $4,944 of contra-asset).
In 2016, Cardinal, GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing entered into interest rate swap contracts ( 2015 - GHG entered into
interest rate swap contracts).
(3) Capstone's demand interest-free promissory note to Irving is designated as fair value through profit and loss.
(4) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 48
Fair value continuity for Level 3 inputs
Opening balance, January 1,
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 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), (2)
Financial instruments classified as held-for-trading (refer to note 18):
Unrealized gain (loss) on the Whitecourt embedded derivative
Unrealized gain (loss) on interest rate swap contracts
Unrealized gain (loss) on foreign currency contracts
Unrealized gain (loss) on the Cardinal derivatives (3)
Realized gain (loss) on foreign currency contracts
Realized gain (loss) on Amherstburg's interest rate swap contract (4)
Loans and receivables (5):
Interest income from loans receivable (1), (2)
Other liabilities:
Interest expense on long-term debt (2), (6)
2016
(3,148)
—
—
(3,148)
24,612
(8,142)
352
13,674
2015
(4,532)
4,364
168
—
540
(4,040)
352
(3,148)
Dec 31, 2016
Dec 31, 2015
334
424
24,964
2,401
138
—
27,503
(23)
—
(23)
886
9,387
(1,552)
1,203
9,924
—
(13,045)
(13,045)
—
1,067
(34,476)
(34,476)
(34,174)
(34,174)
(1)
Interest income for 2016 of $2,622 (2015 – $1,498) includes interest income directly related to the OEFC proceeds awarded of $2,288 and interest
income on cash balances of $334. The loans receivable from Chapais and Batchewana First Nations were settled in 2015.
In 2015, Amherstburg's interest rate swap was settled.
(2) Certain comparative figures for the periods ended December 31, 2015 have been adjusted for discontinued operations (refer to note 3b(i)).
(3) Cardinal's gas purchase agreement, gas swap, and forward gas sale and purchase agreements, and embedded derivatives.
(4)
(5) Foreign exchange gains and losses on loans receivable are also recognized in the statement of income as disclosed in note 7.
(6)
Interest expense on the long-term debt for 2016 includes amortization of deferred financing fees and accretion on liability for asset retirement obligations
of $1,839 and $317, respectively (2015 – $1,759 and $244) .
NOTE 9. FINANCIAL RISK MANAGEMENT
The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market risk, 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 (electricity revenue), 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
In 2016, 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. Millar Western and Whitecourt's fuel supply agreement includes
sharing mechanisms regarding the price received for electricity sold by Whitecourt.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 49
The terms of the contracts are:
Entity
GHG (1)
GHG
Cardinal (1)
Cardinal
Jun 30, 2021
Jun 30, 2034
Dec 30, 2022
Jun 30, 2034
Grey Highlands Clean (1)
Sep 30, 2021
Grey Highlands Clean
Sep 30, 2034
Snowy Ridge (1)
Snowy Ridge
Settlers Landing
Settlers Landing (1)
Settlers Landing
Dec 31, 2021
Dec 31, 2034
Jun 30, 2017
Jun 30, 2022
Jun 30, 2035
Maturity Date
Notional Amount
Swap Fixed Rate Stamping Fee / Margin Effective Interest Rate
77,000
57,363
70,000
41,292
55,130
41,616
30,804
21,011
4,623
25,502
17,719
1.34% - 1.45%
1.63% - 1.88%
2.97% - 3.33%
3.04% - 3.17%
1.24%
2.77%
1.24%
2.61%
1.13%
2.07%
1.12%
1.71%
2.93%
1.88%
1.63%
1.63%
4.92% - 5.50%
2.87%
4.40%
1.63% - 1.88%
2.87% - 3.12%
1.88%
4.49%
1.63% - 1.88%
2.76% - 3.01%
1.88%
1.63%
3.95%
2.75%
1.63% - 1.88%
3.34% - 3.59%
1.88%
4.81%
(1) Notional amounts equal to the term loan commitments as defined in the credit agreements. Refer to note 18b(ii-iii) for further detail on the terms
of the long-term debt.
Foreign currency exchange risk
The Corporation's exposure to foreign currency exchange risk is primarily related to the discontinued operations, consisting of Bristol Water and
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 net income from discontinued operations in the consolidated
statement of income. Bristol Water has a foreign functional currency requiring movements until December 15, 2016 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 loans with Värmevärden resulting in changes to net income from discontinued operations, 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, promissory note payable 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")
Millar Western
Ontario Electricity Financial Corporation ("OEFC")
Nova Scotia Power Inc. ("NSPI")
Other
Dec 31, 2016
Dec 31, 2015
13,191
1,906
1,228
1,161
5,578
9,825
1,574
1,058
1,408
5,645
23,064
19,510
There are no accounts receivable that are past due. Since the IESO and OEFC are government agencies and NSPI is regulated by the provincial
government, management considers credit risk to be minimal. For Millar Western, which is not a government agency, management considers the risk
of loss to be low due to collections history and because the receivable balances are settled quarterly.
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
CAPSTONE INFRASTRUCTURE CORPORATION
Page 50
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
(D)
Liquidity Risk
Dec 31, 2016
Dec 31, 2015
99,744
40,801
32,395
80,007
7,871
30,078
172,940
117,956
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, 2016, the Corporation has debt obligations falling due within one year of $62,169. This debt includes regular scheduled
amortization on long term debt.
Compliance with debt covenants
The Corporation has financial liabilities in its power operating segments and at corporate. Refer to notes 16 accounts payable and other liabilities, 17
finance lease obligations, and 18 long-term debt for further details 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 preferred dividends.
In the event of default, there can be no assurance that the Corporation could:
(i) Generate sufficient cash flow from operations in amounts sufficient to pay outstanding indebtedness, or to fund any other liquidity needs; or
(ii) That future preferred dividends will be available; or
(iii) Refinance these credit agreements or obtain additional financing on commercially reasonable terms, if at all. The credit agreements, and future
borrowings may be at variable rates of interest, which exposes the Corporation to the risk of increased interest rates.
Contractual maturities
The contractual maturities of the Corporation's financial liabilities as at December 31, 2016 were as follows:
Financial Liabilities
Within one year One year to five years
Beyond five years
25,383
96,702
—
—
—
—
Total
25,383
96,702
Accounts payable and other liabilities
Promissory note payable (1)
Derivative financial instruments
Interest rate swaps
Long-term debt
Principal payments
Interest payments
758
1,194
1,620
3,572
62,169
33,432
95,601
242,452
102,314
344,766
476,245
163,006
639,251
780,866
298,752
1,079,618
(1) Capstone does not expect to settle the remaining promissory note from the current liquidity (refer to note 20f).
(E)
Sensitivity Analysis
The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2016, 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, 2016 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 in place at December 31, 2016 are all constant. Excluded from this
analysis are all non-financial assets and liabilities that are not classified as financial instruments under IFRS 7.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 51
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, 2016 Unobservable inputs Estimated input
Relationship of input to fair value
$13,674 Forward Alberta
power pool prices
From $21/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 $4,989 and increase by $4,102,
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.
The table summarizes the impact on fair value of changes in observable inputs:
For year ended Dec 31, 2016
Financial assets:
Cash and cash equivalents (1)
Restricted cash
Interest rate swap assets, net
Loans receivable from Värmevärden (3)
Financial liabilities:
Long-term debt (2)
Carrying
Amount
62,246
27,733
1,280
10,968
Interest Rate Risk
Foreign Exchange Rate Risk
(0.5)%
0.5%
(10)%
10%
(311)
(139)
(11,414)
—
311
139
10,727
—
—
—
—
—
—
—
(1,097)
1,097
85,000
425
(425)
—
—
(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 $464,625 and variable rate debt that is covered by a swap for fixed-rate debt totaling $232,595.
(3) Loans receivable from Värmevärden has now been classified as AHFS (refer to note 3b(ii)).
NOTE 10. EQUITY ACCOUNTED INVESTMENTS
(A)
Equity Accounted Investments
As at
Värmevärden (1)
Glen Dhu (2)
Fitzpatrick
Dec 31, 2016
Dec 31, 2015
Ownership % Carrying Value
Ownership %
Carrying Value
33.3%
49.0%
50.0%
—
21,946
518
22,464
33.3%
49.0%
50.0%
—
22,814
578
23,392
(1) 2015 balance for Värmevärden was nil as a result of a cumulative excess of dividends and equity accounted losses above the carrying value. Capstone has
$3,210 of cumulative unrecognized losses. For 2016, Capstone had $3,071 of unrecognized losses and $642 in 2015. In 2016, this investment was
transferred to assets held for sale (refer to note 3b(ii)).
(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.
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 7 for detail on loans receivable with Värmevärden.
The changes in the Corporation’s total equity accounted investments for the years ended were as follows:
For the year ended
Dec 31, 2016
Dec 31, 2015
Opening Balance
Equity Accounted
Income (Loss) (1)
Equity Share of
OCI
Distributions
Received (2)
Ending Balance
23,392
29,056
958
(816)
—
80
(1,886)
(4,928)
22,464
23,392
(1) 2015 equity accounted loss of $816 includes Värmevärden, before its cumulative dividends and equity accounted losses became greater than carrying
value.
(2) 2015 distributions received included $2,502 from Värmevärden and $2,426 from Glen Dhu.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 52
(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, 2016
Dec 31, 2015
Summarized Statements of Financial Position
Glen Dhu Fitzpatrick
Total Värmevärden (1)
Glen Dhu
Other
Total
Assets
Current
Non-current
Liabilities
Current
Non-current
9,134
106,440
197
2,202
9,331
49,696
7,338
260
57,294
108,642
293,905
113,497
2,380
409,782
(7,492)
(2,491)
(9,983)
(13,431)
(7,267)
(2,494)
(23,192)
(88,028)
(205)
(88,233)
(328,190)
(93,531)
(399)
(422,120)
Equity before fair value increments on purchase and
NCI
20,054
(297)
19,757
1,980
20,037
(253)
21,764
Amounts attributable to NCI
Amounts unrecognized for equity accounting
—
—
—
—
—
—
Fair value increments, net of amortization
24,734
1,332
26,066
Equity including unamortized fair value increments
on purchase
44,788
1,035
45,823
Capstone's interest
Carrying value of investment
49.0%
21,946
50.0%
518
(4,851)
2,871
—
—
—
—
—
—
26,522
1,419
(4,851)
2,871
27,941
46,559
1,166
47,725
33.3%
49.0% 31.3% - 50%
22,464
—
22,814
578
23,392
For the year ended
Dec 31, 2016
Dec 31, 2015
Summarized Statements of Income
Glen Dhu Fitzpatrick
Total Värmevärden (1)
Glen Dhu
Other
Total
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
20,404
270
20,674
89,171
19,968
282
109,421
3,866
—
3,866
49%
1,894
(876)
1,018
(44)
—
(44)
50%
(22)
(38)
(60)
3,822
—
3,822
1,872
(914)
958
958
—
958
(6,692)
1,997
(4,695)
3,346
—
3,346
(44)
—
(44)
(3,390)
1,997
(1,393)
33.3%
49% 31.3% - 50%
(1,563)
1,640
134
(1,429)
(881)
759
(22)
(44)
(66)
55
(791)
(736)
(816)
80
(736)
(1) 2015 balances include amounts relating to Värmevärden, which was transferred to assets held for sale (refer to note 3b(ii)).
In 2016, Capstone received distributions of $1,886 (2015 - $2,426) from Glen Dhu.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 53
NOTE 11. CAPITAL ASSETS
(A)
Continuity
Cost (1)
Land
Equipment and vehicles
Property and plant
Water network
Construction in progress
Accumulated depreciation (2)
Equipment and vehicles
Property and plant
Water network
Net carrying value
Jan 1, 2016
Additions
Disposals
Foreign
Exchange
Transfers (3)
Disposal of
business (4) Dec 31, 2016
4,574
11,171
1,413,267
669,851
14,888
2,113,751
(2,732)
(355,407)
(53,379)
1,702,233
—
327
13,782
7,437
46,318
67,864
(1,424)
(69,621)
(8,324)
(11,505)
—
—
(658)
(1,694)
—
701
(2,865)
(5,270)
1,051
5,235
(23,878)
(127,849)
191,003
(398,627)
1,067,698
(15)
—
(139,361)
13,120
(551,032)
(7,828)
(35,912)
(17,466)
—
—
(23,893)
(277,390)
168,912
(975,260)
1,073,984
—
22,225
—
1,084
55,294
23,364
—
—
—
(331)
(3,403)
64,199
38,339
(283,310)
—
(1,668)
(197,648)
168,912
(873,053)
787,271
(1) Additions to cost of $67,864 include $14,274 relating to the power and corporate segments and $53,590 relating to Bristol Water up to its sale on
December 15, 2016 (refer to note 3b(i)).
(2) Additions to accumulated depreciation of $79,369 include $48,878 relating to the power segment and $30,491 relating to Bristol Water, up to its sale on
(3)
December 15, 2016 (refer to note 3b(i)).
Includes transfers of $170,165 for GHG, Grey Highlands Clean and Snowy Ridge from projects under development upon reaching their respective
commercial operation dates ("CODs"), less $1,253 transferred to intangibles(refer to notes 12 and 13, respectively).
(4) Bristol Water was sold on December 15, 2016 (refer to note 3b(i)).
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
Additions
Disposals
Foreign
Exchange
Transfers 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
4,574
11,171
241,063
1,413,267
17,076
(108,997)
669,851
14,888
(33,604)
164,600
151,474
2,113,751
3,784
19,633
—
(705)
(32,923)
(13,236)
—
—
—
(2,732)
(355,407)
(53,379)
(10,187)
117,736
151,474
1,702,233
(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 attributable to Bristol Water
Cash additions
Dec 31, 2016
Dec 31, 2015
67,864
(95)
(2,609)
(49,624)
15,536
95,918
2,631
1,873
(75,911)
24,511
CAPSTONE INFRASTRUCTURE CORPORATION
Page 54
NOTE 12. PROJECTS UNDER DEVELOPMENT
(A)
Continuity
As at January 1
Capitalized costs during the year (1)
Costs transferred to capital assets (2) (refer to note 11)
Costs transferred to intangibles (2) (refer to note 13)
As at December 31
2016
106,200
100,547
2015
151,361
115,267
(170,165)
(153,766)
(14,315)
22,267
(6,662)
106,200
(1)
Includes $2,777 of capitalized borrowing costs during the construction of the GHG, Snowy Ridge, Settlers Landing and Grey Highlands Clean wind
development projects using the interest rate of the long-term debt (December 31, 2015 - $1,393 for Goulais).
(2) Amounts were transferred on the COD's of GHG, Grey Highlands Clean and Snowy Ridge ( December 31, 2015 - COD of Saint-Philémon and Goulais).
(B)
Reconciliation to Cash Additions for the Cash Flow Statement
For the year ended
Additions
Adjustment for change in additions to PUD included in accounts payable and accrued liabilities
Cash additions
NOTE 13. INTANGIBLE ASSETS
Dec 31, 2016
Dec 31, 2015
100,547
20,445
120,992
115,267
(21,294)
93,973
Jan 1, 2016
Additions
Disposals
Foreign
Exchange
Transfers Impairment (4)
Disposal of
business (2) Dec 31, 2016
Assets
Computer software (1), (2)
24,222
Electricity supply and other
contracts (3)
Water rights
Licence (2)
Goodwill (2), (4)
Accumulated amortization
134,724
73,018
27,141
176,256
—
—
—
—
Computer software (2)
(14,300)
(3,399)
1,387
7,493
Electricity supply and other
contracts
Water rights
(40,521)
(18,026)
(7,906)
(2,111)
Net carrying value
362,514
(13,416)
—
—
—
—
—
(1,387)
(9,178)
1,253
—
—
—
—
—
(5,067)
(31,305)
—
—
—
—
(58,000)
—
—
—
(14,653)
—
—
(22,074)
(86,951)
8,562
—
—
257
149,039
73,018
—
—
(257)
(48,427)
(20,137)
14,315
—
—
—
—
—
—
(38,057)
15,568
(58,000)
(115,116)
153,493
Includes transfers of $1,253 for Bristol Water from capital assets, prior to December 15, 2016 (refer to note 11).
(1)
(2) Bristol Water was sold on December 15, 2016 (refer to note 3b(i)).
(3) Transfer is composed of $14,315 from PUD on the COD's of GHG, Grey Highlands Clean and Snowy Ridge (refer to note 12).
(4) As at September 30, 2016, Capstone performed the annual impairment test on goodwill, which consisted of Bristol Water within the utilities - water
segment. Capstone used a fair value less costs to sell ("FVLCS") approach and determined that the recoverable amount for Capstone's interest
($198,000) was lower than the carrying amount of the CGU. The result was a pre-tax impairment charge of $58,000 recognized against the carrying
value of Bristol Water’s goodwill in discontinued operations. The FVLCS reflected market pricing information at September 30, 2016. The valuation
technique was considered a level 3 estimate per the financial instrument hierarchy.
Jan 1, 2015
Additions
Disposals
Foreign
Exchange
Transfers Dec 31, 2015
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
Net carrying value
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
CAPSTONE INFRASTRUCTURE CORPORATION
Page 55
NOTE 14. RETIREMENT BENEFIT PLANS
Defined Contribution Plans
Bristol Water and Cardinal offer defined contribution retirement plans for certain employees. The total cost recorded in the statement of income for
the year ended December 31, 2016 was $2,948 (December 31, 2015 – $2,512). Of this, $192 was recorded in operating expenses for the power
segment and $2,756 was included in net income from discontinued operations for Bristol Water up until its sale.
Defined Benefit Plan
Defined benefit pension arrangements for some of Bristol Water's employees were provided through Bristol Water's membership in the WCPS. The
financial reporting impacts of Bristol Water's defined benefit pension plan are included in comprehensive income from discontinued operations until
the sale of Bristol Water. On March 31, 2016, Bristol Water's defined benefit pension plan was curtailed and plan members ceased to earn additional
pension benefits. All eligible employees were offered membership in the defined contribution pension plan. On curtailment, Capstone recognized a
reversal of past service costs included in operating expenses of $6,050, which increased the surplus. The reversal consisted of a gain on curtailment
of the plan, partially offset by an increase in the obligation due to discretionary benefits provided to plan members.
IFRS restricts the value of a retirement benefit surplus to the present value of economic benefits available in the form of plan refunds or reductions
in future contributions. For Bristol Water, the benefit is now only available as a plan refund as no additional defined pension benefits will be earned. In
the UK, a withholding tax of 35% is applicable to a refund of a defined benefit surplus and is applied regardless of the company's tax position. This
amount has therefore been treated as an expense that arises on any future refund and, in accordance with IFRIC 14, this expense has been netted
against the gross value of the retirement benefit surplus. Accordingly, the surplus recorded on December 15, 2016 relating of Bristol Water was a
gross surplus of $78,344, reduced by a 35% withholding tax of $27,421.
Basis of Valuation
The formal actuarial valuation of Bristol Water's Section of the WCPS as at March 31, 2016 was updated to December 15, 2016, by Lane, Clark &
Peacock LLP, using assumptions in accordance with IAS 19.
Changes in Comprehensive Income
Analysis of operating expense, interest expense and amounts recognized in comprehensive income from discontinued operations:
For the period ended
Employer current service cost
Employee current service cost
Past service cost (recovery)
Section expenses
Total operating expense (recovery)
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
Tax (expense)/recovery
Actuarial gain/(loss) recognized in OCI
Dec 15, 2016
Dec 31, 2015
465
121
(6,050)
641
(4,823)
12,514
(9,345)
3,169
(52,037)
(7,288)
4,064
44,835
(13,160)
(23,586)
2,634
582
—
566
3,782
13,748
(10,686)
3,062
8,257
5,219
3,077
(11,272)
759
6,040
CAPSTONE INFRASTRUCTURE CORPORATION
Page 56
Changes in Financial Position
The following table summarizes the movement in the Bristol Water defined benefit surplus for the asset and liability components up to its sale (refer
to note 3b(i)):
For the year ended
Opening surplus in Section
Current service cost
Past service cost recovery
Net 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
Deferred tax restriction
Ending surplus in Section
Disposal of business (1)
Ending balance
(52,037)
(52,037)
December 15, 2016
Asset
Liability
407,759
(309,201)
—
—
12,514
(641)
—
—
—
44,835
1,070
121
(14,997)
(79,503)
(465)
6,050
(9,345)
—
(7,288)
4,064
—
—
(121)
14,997
60,532
(129,906)
102,485
241,252
(190,329)
(241,252)
190,329
Total
98,558
(465)
6,050
3,169
(641)
(7,288)
4,064
44,835
1,070
—
—
(18,971)
(27,421)
50,923
(50,923)
December 31, 2015
Asset
Liability
367,161
(288,411)
—
—
13,748
(566)
—
—
—
(11,272)
4,076
582
(13,178)
47,208
—
(2,634)
—
(10,686)
—
8,257
5,219
3,077
—
—
(582)
13,178
(36,619)
—
Total
78,750
(2,634)
—
3,062
(566)
8,257
5,219
3,077
(11,272)
4,076
—
—
10,589
—
407,759
(309,201)
98,558
—
—
—
—
—
—
407,759
(309,201)
98,558
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
NOTE 15. INCOME TAXES
(A)
Deferred Income Tax
As at
Deferred income tax assets
Deferred income tax liabilities (1)
Net deferred income tax liability
Dec 31, 2016
Dec 31, 2015
14,750
(72,673)
(57,923)
220
(204,125)
(203,905)
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
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
Other
Loan premium and deferred financing costs
Asset retirement obligations
Financial Instruments
Deferred income tax assets
Capital assets
Intangibles
Financial Instruments
Loan premium and deferred financing costs
Other
Retirement benefit surplus
Deferred income tax liabilities
Net deferred income tax liability
Dec 31, 2016
Dec 31, 2015
27,835
16,711
—
1,920
—
46,466
(59,752)
(39,036)
(3,985)
(1,129)
(487)
—
(104,389)
(57,923)
29,923
3,271
11,041
1,260
1,621
47,116
(190,744)
(42,338)
—
—
(336)
(17,603)
(251,021)
(203,905)
CAPSTONE INFRASTRUCTURE CORPORATION
Page 57
A continuity of the net deferred income tax liability follows:
Net deferred income tax liability as at January 1
Recorded in earnings
Net deferred income tax liability attributable to Bristol Water
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
2016
2015
(203,905)
(192,829)
5,517
139,506
959
1,379
(13,834)
1,379
(57,923)
(203,905)
Dec 31, 2016
Dec 31, 2015
59,420
26,418
(117,343)
(230,323)
(57,923)
(203,905)
(C)
Capstone's tax loss carry forwards and the portion recognized in deferred income tax assets were as follows:
Tax Loss Carry Forwards
Canadian – non-capital losses
US – non-capital losses
Canadian – capital losses
UK – capital losses (£2,864)
UK – advanced corporation tax (£3,922)
Expiry
Recognized
Unrecognized
Dec 31, 2016
Dec 31, 2015
2025 – 2036
2023 – 2027
No expiry
No expiry
No expiry
104,424
—
—
—
—
82,678
19,419
187,102
19,419
—
—
—
—
—
—
177,288
20,016
82,807
5,845
8,004
The Corporation also has $7,382 of unrecognized deferred tax assets, which have not been recognized as at December 31, 2016
(December 31, 2015 – $15,210).
(D)
The following table reconciles the expected income tax expense using the statutory tax rate to the expense
Rate Reconciliation
For the year ended
Income (loss) before income taxes (1)
Statutory income tax rate
Income tax expense based on statutory income tax rate (1)
Permanent differences (1)
Tax rate differentials (1)
Change in unrecognized deferred tax assets
Impact on attributes renounced to shareholders
Part XII.6 taxes and penalties
Other (1)
Total income tax recovery (1)
Dec 31, 2016
Dec 31, 2015
14,971
(30,133)
26.51%
3,969
1,484
344
(9,977)
1,111
241
(1,031)
(3,859)
26.00%
(7,835)
(1,031)
2,446
3,714
—
—
1,253
(1,453)
(1) Certain comparative figures for the periods ended December 31, 2015 have been adjusted for discontinued operations (refer to note 3b).
The statutory income tax rate of 26.51% (2015 – 26.00%) changes in response to Capstone's allocation of taxable income to different tax
jurisdictions.
(E)
Current Income Taxes
Current income taxes receivable included in accounts receivable on the statement of financial position were nil (2015 - $1,742) and current income
taxes payable of $2,958 are included in accounts payable and other liabilities on the statement of financial position (refer to note 16a)
(2015 - $1,397).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 58
NOTE 16. ACCOUNTS PAYABLE AND OTHER LIABILITIES
(A)
Accounts Payable and Accrued Liabilities
Dividends payable
Income taxes payable (1), (2)
Other accounts payable and accrued liabilities (1), (2)
Dec 31, 2016
Dec 31, 2015
409
2,958
22,016
25,383
7,949
1,397
134,557
143,903
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
(2) 2015 balances include amounts relating to Värmevärden, which was transferred to assets held for sale as at December 31, 2016 (refer to note 3b(ii)).
Income taxes payable
Canadian Renewable and Conservation Expense ("CRCE") penalties (1)
Taxes payable (recovery) on preferred share dividends
Current income taxes payable (recovery)
Dec 31, 2016
Dec 31, 2015
2,509
164
285
2,958
1,157
250
(10)
1,397
(1) CRCE penalties related to flow-through shares originally issued by Renewable Energy Developers Inc., which was acquired by Capstone in 2013.
(B)
Deferred Revenue
All deferred revenue related to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)). Up until the sale, deferred revenue
represented contributions received by Bristol Water in respect of assets that are not related to the water network, less amounts amortized. These
impacts are included in net income from discontinued operations.
NOTE 17. FINANCE LEASE OBLIGATIONS
Utilities – water: equipment leases (1)
3.64 - 4.10%
2016 - 2020
Less: current portion (1)
Non-current portion (1)
—
—
—
4,074
(813)
3,261
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
Up to its sale on December 15, 2016, Bristol Water repaid $809 (December 31, 2015 - $534), including interest charges of $193
(December 31, 2015 – net interest rebate of $72). These impacts are included in net income from discontinued operations.
NOTE 18. LONG-TERM DEBT
(A)
Components of Long-term Debt
As at
Power
Utilities – water (1)
Corporate (2) (3)
Balance outstanding
Less: deferred financing costs
Total long-term debt
Less: current portion of long-term debt
Dec 31, 2016
Dec 31, 2015
Fair Value
Carrying Value
Fair Value
Carrying Value
794,967
782,220
—
—
794,967
—
—
782,220
(16,229)
765,991
(62,169)
703,822
554,545
827,142
117,811
529,211
712,584
116,869
1,499,498
1,358,664
(14,127)
1,344,537
(101,203)
1,243,334
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
(2) On January 31, 2016, the corporate credit facility capacity decreased to $90,000. Concurrent with the Cardinal financing on March 18, 2016, the
capacity was further decreased to $60,000 and settled with the proceeds from debt raised by CPC on April 29, 2016.
(3) All outstanding convertible debentures were either redeemed by Capstone or converted and then cancelled on April 29, 2016 and the corporate
credit facility was repaid (refer to note 3a).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 59
(B)
Power
As at
CPC credit facility
Wind - Operating
Wind - Development
Hydros
Solar
Gas
Less: deferred financing costs
Long-term debt
Less: current portion
Dec 31, 2016
Dec 31, 2015
Fair Value
Carrying Value
Fair Value
Carrying Value
85,000
467,445
7,700
81,087
86,178
67,557
794,967
85,000
453,050
7,700
81,851
87,062
67,557
782,220
(16,229)
765,991
(62,169)
703,822
—
—
343,012
321,395
30,234
88,159
93,140
—
554,545
30,234
85,196
92,386
—
529,211
(10,682)
518,529
(59,529)
459,000
The power segment has a cumulative $45,370 utilized on its letter of credit facilities.
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.
(i)
CPC Credit Agreement
Total available credit - all facilities
Amount drawn
Non-revolving credit facility
Revolving credit facility
Letter of credit facility (1)
Remaining available credit
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
3.56%
Apr 29, 2019
125,000
85,000
—
32,161
7,839
—
—
—
—
—
(1) As at December 31, 2016, Capstone had 19 letters of credit authorized under the revolving facility.
On April 29, 2016, Capstone entered into the CPC Credit Agreement for an aggregate amount of $125,000, comprising an $85,000 non-
revolving facility, a $5,000 revolving facility, and a $35,000 revolving letter of credit facility. The CPC Credit Agreement bears interest at a
variable rate plus an applicable margin and fixed annual minimum repayments are required, which are paid quarterly by excess cash as
determined in accordance with the credit agreement. In addition, CPC is subject to customary covenants, including specific limitations on
leverage and interest coverage ratios. The collateral for the CPC credit facility is provided by a combination of a limited recourse guarantee and
postponement of debts and claims of Capstone in favour of the CPC lenders. The collateral also includes a first ranking lien against all property
of CPC and its guarantors, with few exceptions for entities with project financing, as well as equity pledges from CPC and its guarantors.
(ii)
Wind - Operating
Project debt
GHG (1)
Erie Shores
Goulais
Saint-Philémon
Grey Highlands Clean
Amherst
Snowy Ridge
SkyGen (2)
Skyway 8 (2)
Glace Bay
Dec 31, 2016
Dec 31, 2015
74,723
73,934
73,823
53,988
51,963
39,242
30,652
22,095
19,013
13,617
—
80,032
76,386
55,531
—
41,051
—
33,867
19,658
14,870
453,050
321,395
(1) For the year ended December 31, 2015, the GHG project debt was included in wind - development prior to COD.
(2) SkyGen project debt includes financing related to the Ferndale, Ravenswood, and Proof Line facilities. Skyway 8 was financed separately as it reached
COD at a later date.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 60
GHG
Term loan
Interest Rate (2)
Maturity
Dec 31, 2016
Dec 31, 2015
3.08%
Aug 26, 2021
74,723
—
(1) GHG has set aside $189 as restricted cash to cover the distribution reserve and $3,200 as letters of credit to cover the debt service reserve.
(2) As at December 31, 2016, GHG had swap contracts to convert interest to a fixed rate (See note 9a).
On August 26, 2016, the GHG construction facility converted into a term facility, which has regular principal and interest payments fully
amortizing over the remaining term and a $3,500 letter of credit facility.
Erie Shores
Tranche A
Tranche B
Tranche C
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
5.96%
5.28%
6.15%
Apr 1, 2026
Apr 1, 2016
Apr 1, 2026
44,588
—
29,346
73,934
47,978
497
31,557
80,032
(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 $5,155 as restricted cash and $550 as letters of credit against the borrowing capacity of the CPC Credit
Agreement to cover the debt service and maintenance reserves.
Goulais
Term loan
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
5.16%
Sep 30, 2034
73,823
76,386
(1) Goulais is required to set aside $3,288 as restricted cash to cover the debt service reserve.
Saint-Philémon
Tranche A - Term loan
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
5.49%
May 31, 2034
53,988
55,531
(1) Saint-Philémon is required to set aside $1,224 as letters of credit against the borrowing capacity of the CPC Credit Agreement to cover the debt
service reserve.
Grey Highlands Clean
Term loan
Interest Rate (2)
Maturity
Dec 31, 2016
Dec 31, 2015
2.87%
Dec 23, 2021
51,963
—
(1) Grey Highlands Clean is required to set aside $2,100 as letters of credit to cover the debt service reserve.
(2) As at December 31, 2016, Grey Highlands Clean had swap contracts to convert interest to a fixed rate (See note 9a).
On March 24, 2016, Capstone, through a subsidiary that controls the Grey Highlands Clean wind project, entered into a credit agreement that
provided funds for the construction of the project.
On December 23, 2016, the Grey Highlands Clean construction facility converted into a term facility which has regular principal and interest
payments fully amortizing over the remaining term and a $3,000 letter of credit facility.
Amherst
Term loan
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
6.20%
Apr 30, 2032
39,242
41,051
(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 CPC Credit Agreement to cover the debt service
and maintenance reserves.
Snowy Ridge
Term loan
Interest Rate (2)
Maturity
Dec 31, 2016
Dec 31, 2015
2.75%
Dec 23, 2021
30,652
—
(1) Snowy Ridge is required to set aside $4,181 as restricted cash to cover construction holdbacks with vendors and $1,300 as letters of credit to cover
the debt service reserve.
(2) As at December 31, 2016, Snowy Ridge had swap contracts to convert interest to a fixed rate (See note 9a).
On July 8, 2016, Capstone, through a subsidiary that controls the Snowy Ridge wind project, entered into a credit agreement that provided funds
for the construction of the project.
On December 23, 2016, the Snowy Ridge construction facility converted into a term facility which has regular principal and interest payments
fully amortizing over the remaining term and a $2,000 letter of credit facility.
SkyGen
Term loans
Term loan
Promissory note payable
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
4.22 - 5.06%
Feb 23, 2018
21,772
6.22%
5.00%
Feb 17, 2018
Feb 8, 2016
323
—
22,095
(1) On August 5, 2016, SkyGen and its existing lenders extended the term loan maturity date to February 2018.
(2) SkyGen is not required to set aside any reserves for debt service or maintenance.
(3) On February 8, 2016, SkyGen repaid $9,966 of promissory notes.
CAPSTONE INFRASTRUCTURE CORPORATION
23,467
434
9,966
33,867
Page 61
Skyway 8
Term loan
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
4.80%
Feb 16, 2018
19,013
19,658
(1) Skyway 8 project debt has a $2,500 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.
Glace Bay
Term loan
Term loan
Term loan
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
5.99%
6.36%
4.72%
Mar 15, 2027
Apr 21, 2019
Oct 1, 2032
7,211
1,537
4,869
7,665
2,230
4,975
13,617
14,870
(1) Glace Bay is required to set aside $1,646 as restricted cash to cover the debt service and operating and maintenance reserves.
(iii)
Wind - Development
Project debt
Settlers Landing
GHG (1)
Dec 31, 2016
Dec 31, 2015
7,700
—
7,700
—
30,234
30,234
(1)
In 2016, the GHG project debt was transferred to wind - operating both projects having reached COD.
Settlers Landing
Construction facility
Interest Rate (2)
Maturity
Dec 31, 2016
Dec 31, 2015
2.75%
2022
7,700
—
(1) Settlers Landing is required to set aside $2,697 as restricted cash to cover construction holdbacks with vendors.
(2) As at December 31, 2016, Settlers Landing had swap contracts to convert interest to a fixed rate (See note 9a).
On December 2, 2016, Capstone, through a subsidiary that controls the Settlers Landing wind project, entered into a credit agreement that
provides up to $30,502 for the construction of the project. The construction term of the facility is expected to mature in the third quarter of
2017 and has a variable interest rate based on CDOR plus 1.625% Upon maturity, the facility will convert to a term loan, which matures no later
than the third quarter of 2022 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).
(iv)
Hydros
Senior secured bonds
Subordinated secured bonds
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
4.56%
7.00%
Jun 30, 2040
Jun 30, 2041
61,609
20,242
81,851
64,954
20,242
85,196
(1) The hydro facilities are required to set aside $16,241 as letters of credit against the borrowing capacity of the CPC Credit Agreement and $2,599 as
restricted cash to cover the debt service and maintenance reserves.
(v)
Solar
Amherstburg project debt
3.49%
Dec 31, 2030
87,062
92,386
(1) Amherstburg is required to set aside $4,707 as letters of credit against the borrowing capacity of the CPC Credit Agreement to cover the debt
service and maintenance reserves.
Interest Rate
Maturity
Dec 31, 2016
Dec 31, 2015
(vi)
Gas
Term loan
Interest Rate (2)
Maturity
Dec 31, 2016
Dec 31, 2015
2.87%
Mar 18, 2023
67,557
—
(1) Cardinal is required to set aside $2,096 as restricted cash to cover the operating and maintenance reserves and $2,700 as letters of credit to cover
the debt service reserve.
(2) As at December 31, 2016, Cardinal had swap contracts to convert interest to a fixed rate (See note 9a).
On March 18, 2016, Capstone, through a wholly owned subsidiary, entered into an approximately $83,000 financing for the Cardinal gas
cogeneration plant, consisting of a $70,000 term loan and a $13,000 letter of credit facility. The proceeds were used to increase the financial
flexibility of Capstone by repaying the drawn portion of the corporate credit facility, as well as funding Cardinal's ongoing reserve requirements
and transaction costs for arranging the financing.
(C)
Long-term Debt Covenants
For the year ended and as at December 31, 2016, the Corporation and its subsidiaries complied with all financial and non-financial debt
covenants.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 62
(D)
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
Within one year
One year to five years
Beyond five years
62,169
242,452
476,245
Total
780,866
NOTE 19. LIABILITY FOR ASSET RETIREMENT OBLIGATION
The carrying value of these obligations is based on estimated cash flows required to settle these obligations in present day costs. The costs relate
to site restoration and decommissioning of Cardinal, 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
Liabilities incurred
Revision of estimates
Accretion expense
Balance, end of year
Dec 31, 2016
Dec 31, 2015
2017– 2062
2017 – 2062
Nil – $3,406
Nil – $3,324
2.0%
2.0%
3.25% - 6.5%
4.75% – 7.0%
4,767
441
1,640
317
7,165
4,364
427
(268)
244
4,767
NOTE 20. SHAREHOLDERS’ EQUITY AND PROMISSORY NOTE PAYABLE
The following table summarizes the Corporation's share capital:
As at
Common shares (1), (2)
Class B exchangeable units (1)
Preferred shares
Dec 31, 2016
Dec 31, 2015
40,433
—
72,020
112,453
715,989
26,710
72,020
814,719
(1) After April 29, 2016, share capital consists of Class A shares and preferred shares. Just prior to April 29, 2016, share capital was comprised of
common shares, preferred shares and Class B exchangeable units (refer to note 3a)
(2) On December 15, 2016, Capstone sold its 50% interest in Bristol Water to iCON III Bristol Limited, a subsidiary of its ultimate parent entity, iCON III.
The transaction resulted in an increase in the carrying value of Class A shares of $2,520 (refer to note 3b(i)).
(A)
Capstone is authorized to issue an unlimited number of common and Class A shares, all of which have the same rights and attributes.
Common and Class A Shares
Cancellation of common shares for issuance of promissory note (2)
(103,828)
(316,225)
Continuity for the year ended
(000s shares and $000s)
Opening balance
Dividend reinvestment plan (1)
Exchange of Class B units and conversion of debentures (2)
Issuance of Class A shares (2)
Elimination of deficit (3)
Conversion of promissory note (4)
Return of capital (4)
Ending balance
Dec 31, 2016
Dec 31, 2015
Shares
Carrying Value
Shares
Carrying Value
94,396
136
9,296
715,989
617
26,710
103,828
—
—
(389,178)
123,905
194,531
—
(192,011)
93,573
823
713,412
2,577
—
—
—
—
—
—
—
—
—
—
227,733
40,433
94,396
715,989
(1) Shares issued by the Corporation under the Dividend Re-Investment Plan ("DRIP").
(2) On April 29, 2016, the 3,249 Class B units were acquired by Irving and subsequently exchanged for the same number of common shares and the
2017 convertible debentures were also converted into 6,047 newly issued common shares. Irving acquired all 103,828 outstanding common shares
and exchanged them for the same number of Class A shares of the Corporation and two promissory notes payable from the Corporation. The
common shares acquired by the Corporation were then cancelled (refer to note 3a).
(3) On April 29, 2016 deficit as at April 29, 2016 of $389,178 was reclassified to share capital (refer to note 3a).
(4) On December 15, 2016, Irving converted the GBP tranche of the promissory note payable into 123,905 newly issued Class A shares and which
reduced the balance by $194,531. In return, Capstone received a promissory note receivable of $192,011 from iCON III Bristol Limited and then
distributed the promissory note receivable to Irving as a $192,011 return of capital (refer to note 3b(i)).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 63
(B)
Class B Exchangeable Units
MPT LTC Holding LP had 3,249 Class B exchangeable units outstanding as at December 31, 2015. These units were each exchanged into one
share of the Corporation on April 29, 2016 as part of the iCON III acquisition (refer to note 3a).
(C)
Preferred Shares
As at December 31, 2016 and 2015, 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 cumulative discretionary dividend, which resets on each 5-year anniversary; the next anniversary date is
July 31, 2021. The shares are non-voting and redeemable at the Corporation's discretion. Capstone is authorized to issue preferred shares equal
to 50% of the outstanding common shares.
On July 4, 2016, Capstone announced to preferred shareholders the applicable fixed and floating dividend rates for its cumulative five-year rate
reset preferred shares, which took effect on July 31, 2016. In accordance with the terms of the share agreement, all preferred shares accrue
dividends at a fixed rate of 3.271% per annum and preferred dividends are paid quarterly.
(D)
Dividends
No dividends were declared in 2016 in respect of the Corporation's common shareholders, nor for Class B Exchangeable Units of MPT LTC
Holding LP (a subsidiary entity of the Corporation) pursuant to the iCON III acquisition of Capstone (2015 - $29,193 of common and Class B
dividends were declared).
For the year ended
Preferred shares declared (1) , (2)
Dec 31, 2016
Dec 31, 2015
3,532
3,867
Includes $326 of deferred income taxes for the year ended December 31, 2016 (December 31, 2015 - $117).
(1)
(2) Capstone has included $409 of accrued preferred dividends as declared on November 10, 2016 (December 31, 2015 – $7,324 was accrued for
common shares and $625 for preferred shares).
(E)
Capital Management
The Corporation manages its capital, which is defined as the aggregate of long-term debt and preferred shareholders' equity, to achieve the
following objectives:
• Maintain a capital structure that provides financial flexibility to the Corporation to ensure access to debt 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 security holders.
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 receive capital contributions from its common shareholder, issue additional
shares, issue additional debt, issue debt to replace existing debt with similar or different characteristics, or adjust the amount of dividends paid to
shareholders.
The Corporation's financing and refinancing decisions are made on a specific transaction basis and depend on such things as the Corporation's
needs and economic conditions at the time of the transaction.
The Corporation is not subject to any external capital requirements and is in compliance with all debt covenants as described in note 18.
(F)
Promissory Note Payable
On April 29, 2016, as part of the acquisition of Capstone by iCON III described in note 3a, Capstone issued a demand interest-free promissory
note to Irving for $316,225 in exchange for common share capital. The promissory note is repayable at either the holder or borrower's option
any time prior to the maturity date of December 31, 2021.
Settlement of each tranche can occur in cash in the underlying currency of the note or by transferring the equity securities of Bristol Water (GBP
tranche) or Värmevärden (SEK tranche) at an agreed upon fair market value for the respective tranche. In addition, the promissory note is
convertible at the holder's option into Class A shares of Capstone at fair value using the respective foreign exchange rates as at April 29, 2016.
Capstone does not expect to settle the remaining promissory note from the current liquidity.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 64
For the year ended Dec 31, 2016
GBP Tranche
SEK Tranche
CAD Tranche
Inception balance in source currency - April 29, 2016 acquisition by iCON III
£106,000
712,700 SEK
$10,370
Foreign exchange rate on inception (1)
Opening balance in Canadian dollars
Less: Cash repayments in Canadian dollars - September 2, 2016 (2)
1.8352
194,531
0.1562
111,324
—
(24,992)
Less: Conversions to Class A shares in Canadian dollars - December 15, 2016 (3)
(194,531)
—
1.0000
10,370
—
—
Total
n/a
n/a
316,225
(24,992)
(194,531)
Closing balance
—
86,332
10,370
96,702
(1) Exchange rates used are the greater of the current period ended spot rate or the April 29, 2016 historical spot rate, as a result of the conversion
feature to Capstone's Class A shares.
(2) On September 2, 2016, Capstone repaid 160,000 SEK or $24,992 of the SEK tranche of the promissory note from proceeds of the Värmevärden
refinancing.
(3) On December 15, 2016, the GBP tranche was converted into Class A shares of Capstone as part of the sale of Bristol Water (refer to note 3b(i)).
As further described in note 8, the promissory note has been designated as fair value through profit and loss and the carrying value fluctuates for
changes in underlying exchange rates, with a minimum liability equal to the conversion value based on the respective foreign exchange rates at
April 29, 2016.
NOTE 21. NON-CONTROLLING INTERESTS
(A)
Non-controlling Interests
Non-controlling interests represent ownership interests by third parties in businesses consolidated by Capstone. Amherst, Saint-Philémon, Chi-
Wiikwedong, Grey Highlands ZEP and Ganaraska ("GHG"), Snowy Ridge ("SR") and Setters Landing ("SL") non-controlling interests as at
December 31, 2016 were:
•
•
•
•
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").
Goulais is 49% owned by BFN.
GHG, SR and SL have a debenture with a subsidiary of One West Holdings Ltd. ("Concord"), convertible into a 50% ownership interest in
the projects.
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
165,977
Firelight's
interest in
Amherst
10,812
Municipal
interest in
Saint-Philémon
BFN's interest
in Goulais
Concord's
interest in GHG,
SR & SL
January 1, 2015 (1)
NCI portion of net income
(loss) (2)
NCI portion of OCI (2)
Dividends declared (2)
Net convertible
debenture advances
24,670
25,517
(1,993)
—
As at December 31, 2015
214,171
NCI portion of net income
(loss)
NCI portion of OCI
Dividends declared
Net convertible
debenture advances
(3,503)
(51,400)
—
—
Disposal of business (2)
(159,268)
572
—
(1,122)
—
10,262
552
—
(1,240)
—
—
5,850
19,394
(340)
—
(2,252)
—
3,258
(354)
—
(569)
—
—
1,163
—
(776)
—
19,781
1,522
—
(1,265)
—
—
—
(8)
—
—
26,041
26,033
—
—
—
3,437
—
29,470
Total
202,033
26,057
25,517
(6,143)
26,041
273,505
(1,783)
(51,400)
(3,074)
3,437
(159,268)
61,417
As at December 31, 2016
—
9,574
2,335
20,038
(1) Opening equity balances have been revised to reflect historical adjustments to non-controlling interests associated with Bristol Water, resulting in an
increase to non-controlling interests of $11,960 as at December 31, 2014 and December 31, 2015, and a corresponding decrease to opening
retained earnings (deficit) attributable to shareholders’ of Capstone. This revision did not impact previously reported net income or cash flows.
(2) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 65
(B)
Summarized Information for Material Partly Owned Subsidiaries
As at
Summarized
Statements
of Financial
Position
Assets
Current
Non-
current
Liabilities
Current
Non-
current
Dec 31, 2016
Dec 31, 2015
Amherst
Saint-
Philémon
Goulais
Concord's
interest in
GHG, SR &
SL
Bristol
Water (1)
Amherst
Saint-
Philémon
Goulais
Other (2)
1,919
1,192
2,724
2,211
104,074
1,871
2,587
2,277
9,740
60,249
59,926
—
67,891
1,361,609
63,264
63,159
—
81,662
(2,681)
(1,813)
(645)
(37,612)
(51,530)
—
—
—
(77,836)
(2,272)
(3,205)
(49)
(39,681)
(887,499)
(39,585)
(53,012)
—
(26,747)
Total Equity
21,875
7,775
2,079
70,102
500,348
23,278
9,529
2,228
24,974
Attributable to:
Shareholders
of Capstone
NCI
12,301
9,574
21,875
5,440
2,335
7,775
(17,959)
20,038
2,079
40,632
29,470
70,102
286,177
214,171
500,348
13,016
10,262
23,278
6,271
3,258
9,529
(17,553)
(1,059)
19,781
2,228
26,033
24,974
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 15, 2016 (refer to note 3b(i)).
(2) Other consists of the summarized financial information of GHG, Grey Highlands Clean, SR and SL.
For the year ended
Dec 31, 2016
Summarized Statements of Income
Bristol Water (1)
Amherst Saint-Philémon
Revenue
Net income
OCI
Total comprehensive income
Attributable to:
Shareholders of Capstone
NCI
191,315
31,921
(114,344)
(82,423)
(27,520)
(54,903)
(82,423)
8,197
1,127
—
1,127
575
552
1,127
6,854
(722)
—
(722)
(368)
(354)
(722)
For the year ended
Dec 31, 2015
Summarized Statements of Income
Bristol Water (1)
Amherst
Saint-Philémon
Revenue
Net income
OCI
Total comprehensive income
Attributable to:
Shareholders of Capstone
NCI
227,027
49,341
59,614
108,955
58,768
50,187
108,955
8,068
1,168
—
1,168
596
572
1,168
6,756
(694)
—
(694)
(354)
(340)
(694)
Concord's
interest in GHG,
SR & SL
6,232
(217)
—
(217)
(217)
—
(217)
Other (2)
—
(1,241)
—
(1,241)
(1,233)
(8)
(1,241)
Goulais
11,479
3,234
—
3,234
1,712
1,522
3,234
Goulais
6,573
3,003
—
3,003
1,840
1,163
3,003
(1) Bristol Water, which was sold on December 15, 2016, is included in discontinued operations (refer to note 3b(i)).
(2) Other consists of the summarized financial information of GHG, Grey Highlands Clean, SR and SL.
Distributions of $569 (2015 - $2,252) from Saint-Philémon, nil (2015 - $1,993) from Bristol Water, $1,240 (2015 - $1,122) from Amherst,
$1,265 (2015 - $776) from Goulais were paid to non-controlling interests in 2016.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 66
For the year ended
Dec 31, 2016
Summarized Statements of Cash Flows
Bristol Water (1)
Amherst Saint-Philémon
Goulais
GHG, SR & SL
Operating
Investing
Financing
Foreign exchange
Net increase / (decrease) in cash and equivalents
70,019
(49,657)
(1,217)
(6,266)
12,879
4,124
—
(4,210)
—
(86)
1,258
1,497
(2,574)
—
181
4,398
1,455
(7,326)
—
(13,849)
(5,336)
16,611
—
(1,473)
(2,574)
For the year ended
Dec 31, 2015
Summarized Statements of Cash Flows
Bristol Water (1)
Amherst
Saint-Philémon
Operating
Investing
Financing
Foreign exchange
Net increase / (decrease) in cash and equivalents
91,261
(76,541)
(4,600)
2,103
12,223
3,820
—
(4,057)
—
(237)
8,730
709
(9,504)
—
(65)
(1) Bristol Water was sold on December 15, 2016, is included in discontinued operations (refer to note 3b(i)).
(2) Other consists of the summarized financial information of GHG, Grey Highlands Clean, SR and SL.
(C)
Convertible debentures with Concord
Goulais
2,000
—
(776)
—
1,224
Other (2)
123
(51,218)
57,372
—
6,277
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 GHG, Snowy Ridge and Settlers Landing projects. Under the terms of the debenture, both
Capstone and Concord will equally fund ongoing equity requirements relating to the these 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 GHG, Snowy Ridge and Settlers Landing 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 GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing projects. The initial
principal contribution of the debenture was $31,408. The face value decreased to $26,041 as at December 31, 2015 and increased to $29,470
as at December 31, 2016.
NOTE 22. SHARE-BASED COMPENSATION
In 2016, all former share-based compensation arrangements were settled as part of the iCON III acquisition. As at December 31, 2016, no deferred
share units ("DSUs"), restricted share units ("RSUs") or performance share unit ("PSUs") remain outstanding (refer to note 3a).
(A)
Deferred Share Units
Prior to the iCON III acquisition, eligible directors received quarterly DSUs. In addition, directors could elect to receive their quarterly director fees in
the form of DSUs. All DSUs were settled on April 29, 2016 as part of the iCON III acquisition for cash of $864. The DSU expense for 2016 of $299 is
included in wages and benefits (refer to note 23) (2015 – $281).
(B)
Long-term Incentive Plans ("LTIP")
Prior to the iCON III acquisition, Capstone had an LTIP for which RSUs and PSUs of the Corporation were granted annually to senior management. All
RSUs and PSUs were settled on April 29, 2016 as part of the iCON III acquisition for cash of $8,308. The share-based LTIP expense for 2016 of
$6,568 is included in wages and benefits (refer to note 23) (2015 – $2,135).
CAPSTONE INFRASTRUCTURE CORPORATION
Page 67
NOTE 23. EXPENSES – ANALYSIS BY NATURE
For the year ended
Dec 31, 2016
Dec 31, 2015
Total
Operating
Wages and benefits (1)
Fuel and transportation (2)
Professional fees (1), (3)
Maintenance
Leases
Insurance
Utilities
Property taxes
Manager fees
Raw materials, chemicals
and supplies (1)
Other
Total
Operating
8,594
19,131
3,036
9,910
2,313
2,448
2,356
2,231
1,751
1,261
Project
Development
Costs
1,990
—
13,031
Admin.
15,913
—
1,216
—
484
209
—
—
—
—
—
—
—
—
—
—
—
3,916
56,947
2,054
19,876
234
15,255
26,497
19,131
17,283
9,910
2,797
2,657
2,356
2,231
1,751
1,261
6,204
92,078
Project
Development
Costs
2,169
—
4,726
—
—
—
—
—
—
—
Admin.
8,248
—
1,514
—
395
(183)
—
—
—
—
Total
19,836
5,647
8,059
8,481
2,294
2,107
1,924
2,083
1,764
1,474
9,419
5,647
1,819
8,481
1,899
2,290
1,924
2,083
1,764
1,474
3,715
40,515
1,677
11,651
358
7,253
5,750
59,419
(1) Certain comparative figures for the periods ended December 31, 2015 have been adjusted for discontinued operations (refer to note 3b).
(2) Fuel and transportation expenses include $12,049 of fuel expenses resulting from OEFC settlement (refer to note 25).
(3) Professional fees include legal, audit, tax and other advisory services.
NOTE 24. OTHER GAINS AND LOSSES
Unrealized gains (losses) on derivative financial instruments
Losses on settlement of convertible debentures (1)
Losses on disposal of capital assets (2)
Realized losses on derivative financial instruments (3), (4)
Other (4)
Other gains and (losses), net
For the year ended
Dec 31, 2016
Dec 31, 2015
27,503
(3,324)
(727)
(23)
(19)
23,410
9,924
—
(8,557)
(13,046)
(100)
(11,779)
(1) Capstone's 2016 and 2017 convertible debentures were redeemed and converted as part of the iCON III acquisition (refer to note 3a).
(2) Certain comparative figures for the periods ended December 31, 2015 have been adjusted for discontinued operations (refer to note 3b).
(3) 2016 realized losses results from the settlement of Capstone's UK Pound Sterling and Swedish Krona foreign currency contracts.
(4) 2015 realized loss results from the termination of the Amherstburg interest rate swap, as part of the refinancing in 2015.
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 note 8 financial instruments, note 9 financial risk management, notes 17 finance lease obligations, 18 long-term debt, 19
liability for asset retirement obligation and 20 shareholders' equity and promissory note payable as at December 31, 2016 were as follows:
(A)
Leases
Minimum operating lease payments comprised:
Operating leases
$3,975
$14,735
$42,461
Within one year One year to five years
Beyond five years
Total
$61,171
The following leases have been included in the table based on known minimum operating lease commitments as follows:
•
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
2061.
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.
Amherstburg leases the land on which its operating facilities are located. The terms of the lease agreements extend to 2036.
The Corporation has an operating lease for the corporate office ending in 2018, with an option to extend.
•
•
•
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Capstone's operating lease commitments 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 between 2033 and 2042.
(B)
Capital Commitments
Capstone enters into capital commitments in the normal course of operations. As part of Capstone's power development operations, Capstone
enters various construction and purchase agreements. As at December 31, 2016, Capstone had commitments of $7,153 for construction and
turbine supply agreement for the Settlers Landing project.
Capstone plans to refurbish Whitecourt's steam turbine and boiler in 2017. This project is expected to cost approximately $14,000 and to extend
the life of the facility by 20 years. As at December 31, 2016, Capstone had commitments of approximately $1,260.
(C)
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 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 fails to meet the performance requirements under its
respective PPA, liquidated damages may apply for development facilities or the operating facilities' PPA may be terminated after a specified period of
time.
(D)
OEFC Settlement
On March 12, 2015, the Ontario Superior Court of Justice determined that the OEFC had not properly calculated the price paid for electricity
produced under its power purchase agreements with Cardinal, Wawatay and Dryden, as well as a number of other power producers in Ontario. This
determination was upheld by the Ontario Court of Appeal in its April 19, 2016 decision. On January 19, 2017, the Supreme Court of Canada
dismissed the OEFC's application for leave to appeal the April 19, 2016 decision relating to the $23,527 in net OEFC retroactive payments Capstone
received on October 21, 2016. This was recorded in the statement of income, with $33,288 in revenue and $2,288 in interest income. In addition,
associated expenses of $12,049 were recorded in operating expenses.
(E)
Management Services Agreements
Capstone has agreements with all the partially owned wind facilities and development projects, including Glen Dhu, Fitzpatrick, Amherst, Saint-
Philémon, Goulais, GHG, Snowy Ridge and Settlers Landing. 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. Under the terms of the ESA, Cardinal is
required to provide O&M services in respect of the 15 MW cogeneration plant that Ingredion is building, and supply steam and compressed air to
Ingredion for the use of its manufacturing facility. Cardinal entered into a maintenance contract with Siemens Canada Limited in connection with the
operation and maintenance of the 15 MW plant in order to support Cardinal's satisfaction of the O&M terms of the ESA.
(H)
Operations and Maintenance ("O&M") Agreements
On October 15, 2016, Capstone renegotiated its O&M agreement with SunPower Energy Systems Canada to operate and maintain Amherstburg to
internalize several O&M functions. The agreement expires October 15, 2018 with an automatic one-year renewal option. Capstone has the ability to
terminate the agreement during the term of the contract.
On November 30, 2016, Cardinal entered into a maintenance contract with Siemens Canada Limited covering the gas turbine at the 15 MW
cogeneration plant that Ingredion is building. The contract has a 6 year term.
Capstone has several service and maintenance agreements covering the turbines in operation on various wind facilities. The agreements provide for
scheduled and unscheduled maintenance and require annual minimum payments, subject to inflationary increases, as applicable.
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Capstone has an O&M agreement with Regional Power OPCO Inc. (“Regional”) to operate and maintain the hydro power facilities. Regional is paid a
monthly management fee and is eligible for an annual incentive fee. The original agreement expires on November 30, 2021.
(I)
Guarantees
Capstone has provided limited recourse guarantees on the project debt of certain wind projects totalling $9,000 as at December 31, 2016.
Capstone has also provided a guarantee to the former 25% owner of the Grey Highlands Clean wind facility which provides future contractual
payments based on operational performance up to an aggregate amount of $4,614. The guarantee terminates when the final payment is made on
March 21, 2021.
NOTE 26. RELATED PARTY TRANSACTIONS
(A)
Sale of Bristol Water and Promissory Note
On December 15, 2016, Capstone's 50% ownership interest in Bristol Water was sold to iCON III Bristol Limited, a related party subsidiary of
Capstone's ultimate parent entity, iCON III. Capstone's shares of CSE Water UK Limited were sold for an agreed upon amount of £115,690. The
transaction was reviewed and approved by a special committee of independent directors of the Corporation (the "Special Committee"). In the course
of its deliberations, the Special Committee retained legal counsel and engaged a valuation advisor. The valuation advisor delivered a fairness opinion
to the Special Committee to the effect that the price received by the Corporation in the transaction is fair, from a financial point of view, to the
Corporation. As a result, the GBP tranche of the promissory note payable held by Irving was converted into Class A shares of Capstone, leaving a
$96,702 balance as at December 31, 2016. In addition, no balances remain outstanding with iCON III Bristol Limited.
(B)
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
2016, Capstone earned management fees of $406 from Fitzpatrick and Glen Dhu (2015 - $405).
As at December 31, 2016, accounts receivable included $28 due from Fitzpatrick (2015 - $15). Accounts payable and other liabilities included
$1,269, due to Glen Dhu (2015 - $980). All related party transactions were carried out at commercial terms.
Up to its sale on December 15, 2016, Bristol Water had 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 2016, Bristol
Water incurred charges of $5,909 for management charges and shared expenditures.
(C)
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, short-term employee benefits and termination benefits. Eligible directors and senior
management of the Corporation also received forms of stock-based compensation, prior to April 29, 2016, before the Corporation was acquired by
iCON. As part of the acquisition, all vesting conditions on the stock-based compensation were satisfied and these were settled (refer to note 3a).
Key Management Compensation for the year ended
Salaries, directors' fees and short-term employee benefits (1)
Share-based compensation (2)
Termination benefits (3)
Dec 31, 2016
Dec 31, 2015
954
7,525
1,792
10,271
1,469
705
—
2,174
(1) The short-term incentive plan component of this balance is based on amounts paid during the period.
(2) As part of the iCON III acquisition, all vesting conditions of Capstone's share-based compensation (DSUs, RSUs and PSUs) were satisfied on April 29, 2016
(refer to note 3a).
(3) As part of the iCON III acquisition on April 29, 2016, there were changes to key management resulting in termination benefits (refer to note 3a).
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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.
Segments consist of:
Power
The Corporation’s investments in gas cogeneration, wind, hydro, biomass and solar power, as well as project development.
Discontinued operations (refer to note 3b)
Utilities – water
The regulated water services business (Bristol Water), in which the Corporation held a 50% indirect interest until December 15, 2016.
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
Revenue
Depreciation of capital assets
Amortization of intangible assets
Interest income
Interest expense
Income tax recovery (expense)
Net income (loss)
Cash flow from operations
Additions to capital assets
Additions to PUD
Revenue
Depreciation of capital assets
Amortization of intangible assets
Interest income
Interest expense
Income tax recovery (expense)
Net income (loss)
Cash flow from operations
Additions to capital assets
Additions to PUD
Year ended Dec 31, 2016
Continuing Operations
Discontinued Operations
Power
Corporate
Total
Water
DH
Total
172,940
(48,825)
(9,916)
2,531
—
172,940
(53)
(48,878)
(8)
91
(9,924)
2,622
(31,511)
(2,965)
(34,476)
(15,237)
19,096
35,395
77,532
14,172
100,547
(16,565)
(27,209)
102
—
3,859
18,830
50,323
14,274
100,547
—
—
—
—
—
—
(34,723)
70,019
53,590
—
—
—
—
—
—
—
352
847
—
—
—
—
—
—
—
—
(34,371)
70,866
53,590
—
Year ended Dec 31, 2015
Continuing Operations
Discontinued Operations
Power
Corporate
Total
Water
DH
Total
117,956
(35,822)
(9,091)
1,350
—
117,956
(124)
(35,946)
(59)
148
(9,150)
1,498
(26,675)
(7,499)
(34,174)
(1,140)
(8,054)
41,846
26,180
115,267
2,593
1,453
(20,626)
(28,680)
(18,924)
—
—
22,922
26,180
115,267
—
—
—
—
—
—
49,341
91,181
69,738
—
—
—
—
—
—
—
5,531
2,715
—
—
—
—
—
—
—
—
54,872
93,896
69,738
—
As at Dec 31, 2016
Utilities
As at Dec 31, 2015
Utilities
Power Corporate
Water
DH
Total
Power Corporate
Water
DH
Total
Total assets (1), (2)
1,112,861
22,098
Total liabilities (1), (2)
869,766
101,721
—
—
13,445
1,148,404
1,010,669
5,942
1,465,683
39,795
2,522,089
247
971,734
649,625
125,049
965,335
— 1,740,009
(1) 2015 balances include amounts relating to Bristol Water, which was sold on December 31, 2016 (refer to note 3b).
(2) The utilities – district heating segment has been presented as AHFS (refer to note 3b(ii)).
Certain comparative figures for the periods ended December 31, 2015 have been adjusted to conform with the presentation in the current year.
CAPSTONE INFRASTRUCTURE CORPORATION
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NOTE 28. SUBSEQUENT EVENTS
Whitecourt Bioenergy Producer Program
On February 8, 2017, Whitecourt, Capstone’s biomass facility, was notified that the Government of Alberta approved its application to the Bioenergy
Producer Program (“BPP”). Whitecourt expects to receive grants of up to $4,800 for contributing to Alberta’s bioenergy production capacity over
the 18 month program, ending September 30, 2017.
Värmevärden Sale
On February 21, 2017, Capstone announced that, alongside its co-shareholder Macquarie European Infrastructure Fund 2 (“MEIF 2”), it has agreed
to sell 100% of Värmevärden. Capstone expects to receive approximately $140,000 in net proceeds for its 33.3% indirect interest in Värmevärden
and the related outstanding loans receivable. The transaction is expected to close in March 2017. The net proceeds exceed the carrying value of
$13,197 by $126,803. On completion, the excess will be included as a gain on sale, net of applicable taxes and foreign exchange translation. A
portion of the proceeds from the sale will be used to eliminate the remaining outstanding balance of the promissory note to Irving.
Sechelt Creek Facility Electricity Purchase Agreement Extension
On February 28, 2017, Capstone’s electricity purchase agreement for the Sechelt Creek facility with BC Hydro was extended from its original expiry
on an interim basis. The interim arrangement, and any new or amended electricity purchase agreement that may be entered, is expected to provide a
lower price for electricity supplied than was paid under the expiring contract and would generate lower revenues than in 2016.
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INVESTOR INFORMATION
Quick Facts
Preferred shares outstanding
Securities exchange and symbols
Toronto Stock Exchange: CSE.PR.A
3,000,000
CONTACT INFORMATION
Address:
155 Wellington Street West, Suite 2930
Toronto, ON M5V 3H1
www.capstoneinfrastructure.com
Email: info@capstoneinfra.com
Contacts:
Michael Smerdon
Executive Vice President and Chief Financial Officer
Tel: 416-649-1300
Email: msmerdon@capstoneinfra.com
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