Capstone Infrastructure Corporation
Annual Report 2017

Plain-text annual report

2017 ANNUAL MD&A and Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS As at and for the year ended December 31, Revenue (1), (2) EBITDA (1), (2) Net income (loss) (3). (4), (5) Preferred dividends Total assets (6) Total long-term liabilities (6) (1) Comparative figures have been adjusted to remove amounts from discontinued operations. Total revenue and EBITDA including discontinued operations for 1,147,017 785,087 (13,758) 3,427 117,383 2,452 1,201,910 110,055 108,249 833,882 2,522,089 1,493,836 49,137 3,752 135 2017 154,163 2016 172,940 2015 117,956 2016 are $364,255 and $130,190, respectively, and for 2015 are $344,983 and $162,227, respectively. (2) Revenue includes proceeds awarded of $33,288 for retroactive adjustments from the Ontario Electricity Financial Corporation ("OEFC") for Cardinal and the Ontario hydro facilities in 2016. In addition, EBITDA for 2016 includes $2,288 of interest income and $12,049 of associated operating expenses, which is a net $23,527 in EBITDA. (3) Net income (loss) attributable to the common shareholders, which excludes non-controlling interests. (4) Results include continuing operations and discontinued operations for all periods. (5) Net income for 2017 includes a $128,087 gain on the sale of Värmevärden and 2016 includes a $2,803 loss on the sale of Bristol Water. (6) The total assets and long-term liabilities for 2015 include balances relating to discontinued operations. INSIDE THIS SECTION Financial highlights Legal notice Introduction Basis of presentation Additional GAAP performance measures Changes in the business Results of operations Financial position review 1 2 3 3 3 4 5 8 Derivative financial instruments Risks and uncertainties Environmental, health and safety regulation Related party transactions Summary of quarterly results Fourth quarter 2017 highlights Accounting policies and internal controls 13 13 16 17 18 19 19 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 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, 2017 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 material delays in the Corporation’s wind development projects achieving commercial operation; that the Corporation’s power 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 facilities; that there will be no material changes in environmental regulations for the power facilities; 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; that the conversion rights pursuant to the convertible debenture issued in connection with the Grey Highlands ZEP, Ganaraska, Snowy Ridge and Settlers Landing wind facilities are exercised; market prices for electricity in Ontario and the amount of hours that Cardinal is dispatched; and the price that Whitecourt will receive for its electricity production considering the market price for electricity in Alberta, and Whitecourt’s agreement with Millar Western, which includes sharing mechanisms regarding the price received for electricity sold by the facility. 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 (controlling shareholder, dividends on common shares and preferred shares are not guaranteed; and volatile market price for the Corporation’s securities); 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); and risks related to the Corporation’s power 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). For a comprehensive description of these risk factors, please refer to the “Risk Factors” section of the Corporation’s Annual Information Form dated March 24, 2017, 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, 2017 and 2016. 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, 2017 and 2016. Additional information about the Corporation, including its Annual Information Form ("AIF") for the year ended December 31, 2016, quarterly financial reports of Capstone and other public filings of the Corporation are available under the Corporation’s profile on the Canadian Securities Administrators’ System for Electronic Document Analysis and Retrieval (“SEDAR”) website at www.sedar.com. This MD&A is dated March 6, 2018, 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 March 3, 2017, Capstone sold its 33.3% indirect interest in Värmevärden, resulting in the utilities - district heating segment being presented as a discontinued operation in the statements of income for the years ended December 31, 2017 and 2016. As at December 31, 2016, Capstone accounted for its investment in Värmevärden as assets held for sale ("AHFS") on the consolidated statement of financial position within the current assets and liabilities. On December 15, 2016, Capstone sold its 50% interest in Bristol Water, resulting in the utilities - water segment being presented as a discontinued operation in the statements of income for the year ended December 31, 2016. 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: Swedish Krona (SEK) UK Pound Sterling (£) As at and for the year ended December 31, 2016 (1) December 31, 2017 (2) (1) Bristol Water's spot rate and average rate were as at and for the period ended December 15, 2016, the date of sale. (2) Refer to page 4 of "Changes in the Business" in this MD&A for details on the sale of Värmevärden. Capstone continues to have minimal SEK-denominated Average 0.1550 Average 1.8014 Spot 0.1478 Spot 1.6597 0.1530 0.1528 N/A N/A balances following the sale, which are expected to cease in 2018. Results of Operations The results of operations in this MD&A are discussed using GAAP performance measures such as revenue and expenses, and Earnings Before Interest Expense, Taxes, Depreciation and Amortization ("EBITDA"), an additional GAAP performance measure, which is not defined by IFRS. These performance measures are in place of the non-GAAP performance measures Adjusted EBITDA and AFFO discussed in the MD&A for the year ended December 31, 2016. The Corporation believes that the GAAP and additional GAAP performance measures are more useful for Capstone's common and preferred shareholders to assess operating results. ADDITIONAL GAAP PERFORMANCE MEASURES DEFINITIONS While the accompanying consolidated financial statements have been prepared in accordance with IFRS, this MD&A also contains a performance measure not defined by IFRS. The additional GAAP performance measure does not have any standardized meaning prescribed by IFRS and is, therefore, unlikely to be comparable to similar measures presented by other issuers. The Corporation believes that this indicator is useful since it provides additional information about the Corporation’s earnings performance and facilitates comparison of results over different periods. The additional GAAP measure used in this MD&A is defined below. 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, and interest income. 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 age, technology, and management’s estimate of their useful life. EBITDA is presented on the consolidated statement of income. CAPSTONE INFRASTRUCTURE CORPORATION Page 3 CHANGES IN THE BUSINESS In 2017, Capstone made a strategic shift to focus the business as a North American independent power producer. This included changes to management and the Board of Directors, as well as selling its 33.3% indirect interest in Värmevärden. In addition, progress was made on the following initiatives: • Acquired the remaining interests in the Glen Dhu and Fitzpatrick wind facilities; • Refinanced the CPC Credit Facilities; • Received funding under Alberta's Bioenergy Producer Program (“BPP”) and refurbished the facility at Whitecourt; • • Signed a new Electricity Purchase Agreement ("EPA") for the Sechelt Creek facility with BC Hydro; and Achieved commercial operation ("COD") at Settlers Landing and took over operations of Ingredion's 15 MW facility at Cardinal. Changes to Management and Board of Directors In 2017, David Eva and Andrew Kennedy were appointed as Chief Executive Officer and Chief Financial Officer, respectively, and were also appointed as members of the Board of Directors. Michael Smerdon, Capstone's outgoing Chief Financial Officer, remains on Capstone's Board of Directors. In addition, Paul Smith, who was previously the non-executive chairman of Capstone Power Corp. ("CPC"), was appointed as a member of Capstone's Board of Directors and was appointed chair of the board on August 11, 2017. Paul Malan, Capstone's outgoing chair, remains on the Board of Directors. On September 13, 2017, Enis Moran resigned from the Board of Directors. Sale of Värmevärden On March 3, 2017, Capstone and its co-shareholder Macquarie European Infrastructure Fund 2 (“MEIF 2”) sold 100% of Värmevärden. Capstone received proceeds of $142,198, net of transaction costs of $2,378, for its 33.3% indirect interest in Värmevärden and the related outstanding loans receivable. Following the sale, on March 31, 2017, Capstone satisfied the remaining promissory note due to Irving Infrastructure Corp. ("Irving"). Capstone then distributed $131,968 to Irving as a return of capital, which included reductions of $45,636 to retained earnings and $86,332 to the Class A shares. The impact of these transactions did not change the carrying value of the Class A shares. As a result of the sale, the utilities - district heating segment, including the gain on sale of $128,087, is presented as a discontinued operation (refer to page 3 "Basis of Presentation" in this MD&A). Business Acquisition - Glen Dhu and Fitzpatrick Wind Facilities In December 2017, through a series of transactions, Capstone acquired the remaining (approximately 50%) ownership interests in the Glen Dhu and Fitzpatrick wind facilities for $21,837, bringing Capstone's ownership interest to 100%. The acquisition of the remaining interest was initially completed by a subsidiary of iCON Infrastructure Partners III, LP ("iCON III"), who then contributed the acquired assets to Capstone on December 31, 2017 in return for an additional capital contribution, recorded as an increase in shareholders' equity. These facilities continue to be managed by a subsidiary of Capstone and have existing power purchase agreements. CPC Refinancing On December 15, 2017, Capstone refinanced the corporate acquisition debt in place since the iCON III acquisition. The new CPC credit facilities provide $145,000 of total capacity, consisting of a $50,000 term facility and a $95,000 revolving facility ("the CPC Credit Facilities"). The proceeds drawn on the facilities were used to repay the former CPC credit facilities. The new CPC Credit Facilities mature on December 15, 2021 and bear interest at a variable rate plus an applicable margin. Whitecourt Plant Refurbishment On December 3, 2017, Whitecourt, Capstone’s biomass facility, successfully completed a $16,799 major refurbishment of the steam turbine and boiler. Whitecourt Bioenergy Producer Program On February 8, 2017, Whitecourt was notified that the Government of Alberta approved its application to the BPP. Whitecourt expects to receive grant funding of up to $4,800 for contributing to Alberta’s bioenergy production capacity over two program periods, the second of which ended September 30, 2017. For the year ended December 31, 2017, Capstone had produced enough eligible power to receive the full grant funding, of which $4,664 was received in 2017. Sechelt Creek Facility EPA and shíshálh Nation Facility Agreement Effective March 1, 2018, Capstone signed a new 40 year EPA for the Sechelt Creek facility with BC Hydro, subject to regulatory approval. The EPA is at a price lower than the original EPA, which expired on February 28, 2017. Revenue was earned in 2017 under an interim extension agreement. In addition, on March 1, 2017, Capstone signed a facility agreement with the shíshálh Nation, which will result in minority equity ownership by the shíshálh Nation and profit sharing for the project. CAPSTONE INFRASTRUCTURE CORPORATION Page 4 Ingredion Plant Achieved Commercial Operation On November 24, 2017, Ingredion Canada Corporation (“Ingredion”) completed the construction of its 15 MW plant, to supply steam and electricity required for its corn wet milling plant. Cardinal will now receive a fixed amount (subject to escalation) to provide operational and maintenance services to Ingredion’s plant. Settlers Landing Achieved Commercial Operation and Project Financing Term Conversion On April 5, 2017, Capstone achieved COD on the Settlers Landing wind development project, an 8 MW facility located in Ontario with a power purchase agreement ("PPA") expiring in 2037. This was followed by the conversion of the construction term credit facility on August 31, 2017 to a five-year term facility which is non-recourse to Capstone. Project Development As at December 31, 2017, Capstone's development pipeline includes the Riverhurst wind development project, a 10 MW facility located in Saskatchewan with an expected COD in 2020. Capstone executed a 20-year PPA and interconnection agreement dated March 22, 2017 for this project with the Saskatchewan Power Corporation ("SaskPower"). RESULTS OF OPERATIONS Overview In 2017, Capstone's EBITDA was higher and net income from continuing operations was lower than in 2016. Higher EBITDA from Capstone's continuing operations reflects: • Lower corporate expenses from costs associated with the 2016 acquisition of Capstone by iCON III, including professional fees and staff separation costs; • Higher power segment results, primarily due to new wind facilities added since January 1, 2016, consisting of Ganaraska and Grey Highlands ZEP (collectively, "GHG"), Grey Highlands Clean, Snowy Ridge and Settlers Landing; and • Contributions from Whitecourt relating to the new government grant; partially offset by • • The OEFC net proceeds awarded for retroactive payments to Cardinal and the Ontario hydro facilities in 2016; and An increase in the fair value of the embedded derivative in 2016, which generally increases as forecasted Alberta power pool prices fall. Revenue Expenses Other income and expenses EBITDA Interest expense Depreciation and amortization Income tax recovery (expense) Net income (loss) from continuing operations Net income (loss) from discontinued operations Net income (loss) The remaining material changes in net income were: For the year ended Dec 31, 2017 154,163 Dec 31, 2016 172,940 (53,098) 8,990 110,055 (36,668) (66,787) (17,541) (10,941) 129,317 118,376 (92,078) 27,387 108,249 (34,476) (58,802) 3,859 18,830 (34,371) (15,541) Change (18,777) 38,980 (18,397) 1,806 (2,192) (7,985) (21,400) (29,771) 163,688 133,917 • Higher depreciation and amortization, primarily due to new wind facilities added since January 1, 2016, consisting of GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing; • Higher income tax expense, primarily attributable to the sale of Värmevärden in 2017. This includes current taxes payable from the gain and the release of the deferred income tax asset for Capstone's tax basis in Värmevärden; and • Higher net income from discontinued operations, primarily reflecting the 2017 gain on sale of Värmevärden and net losses at Bristol Water in 2016. Results by Segment Capstone’s MD&A discusses the results of the power segment in Canada, as well as corporate activities. The power segment facilities produce electricity from natural gas, wind, biomass, hydro and solar resources, and are located in Ontario, Nova Scotia, Alberta, British Columbia and Québec. The segment also includes power development activities. Corporate activities primarily comprise growth initiatives, capital structure expenses not specifically attributed to the facilities and costs to manage, oversee and report on the facilities. Both of the utilities segments are presented as discontinued operations resulting from Capstone's sale of these investments. Refer to page 3 "Basis of Presentation" in this MD&A. CAPSTONE INFRASTRUCTURE CORPORATION Page 5 Capstone's operating segments by ownership interest are: Accounting treatment at December 31, 2017 Ownership Power (1), (2) Cardinal (natural gas peaking facility), Erie Shores, SkyGen, Glace Bay, Glen Dhu, Fitzpatrick and Grey Highlands Clean (wind facilities), Whitecourt (biomass facility), Amherstburg (solar facility) and the hydro facilities. Amherst, Saint-Philémon, Goulais, GHG, Snowy Ridge and Settlers Landing (wind facilities) Wholly owned Partially owned Control (1) The power segment includes investments in wind development projects in addition to the operating businesses disclosed above. (2) On December 31, 2017, Capstone acquired the remaining 51% interest in Glen Dhu wind facility and the remaining 50% interest in Fitzpatrick wind facility, increasing Capstone’s interests in both to 100%. Results for the periods up to the acquisition are included in equity accounted income in the statement of income. Refer to page 4 of "Changes in Business" in this MD&A. Revenue Capstone's revenue is mainly driven by the generation and sale of electricity through long-term power contracts. Revenue Wind Gas (1) Hydro (1), (2) Solar Biomass (3) Total Revenue For the year ended Dec 31, 2017 93,512 Dec 31, 2016 76,935 21,160 15,104 15,747 8,640 54,293 20,551 16,478 4,683 154,163 172,940 Change 16,577 (33,133) (5,447) (731) 3,957 (18,777) (1) Revenue includes proceeds awarded of $33,288 for retroactive adjustments from the OEFC for Cardinal and the Ontario hydro facilities in 2016. (2) The original Sechelt EPA expired on February 28, 2017 and a new one was signed effective March 1, 2018. Revenue was earned in 2017 under an interim extension agreement at a price lower than the original EPA. (3) For the year ended December 31, 2017, Whitecourt produced enough eligible power to receive $4,800 of grant funding, which was included in power revenue. Power generated (GWh) Wind (1) Gas Hydro Solar Biomass (2) Total Power For the year ended Dec 31, 2017 827.4 Dec 31, 2016 689.2 37.4 176.4 36.7 142.5 88.6 181.7 39.2 196.8 1,220.4 1,195.5 Change 138.2 (51.2) (5.3) (2.5) (54.3) 24.9 (1) Production reflects 100% ownership but excludes the Glen Dhu and Fitzpatrick wind facilities, whose remaining 51% and 50% ownership interests, respectively, were acquired on December 31, 2017. (2) On August 17, 2017, Whitecourt began a temporary shutdown to progress its refurbishment project. Production was lower because the facility did not operate for 108 days in the third and fourth quarter of 2017. Whitecourt resumed operations on December 3, 2017. Capstone's power segment earns revenue from: • The wind facilities, which are located in Ontario, Nova Scotia and Québec, by producing and selling electricity in accordance with their PPA's with government agencies or regulated credit-worthy counterparties. On a megawatt ("MW") weighted-average-basis, the wind facilities have 15 years remaining on the current PPAs, with the earliest expiry in 2020. • Cardinal, a natural gas peaking facility, from fixed payments for providing capacity and availability to the IESO with a 2034 power contract expiry and by supplying electricity to the Ontario grid when it is profitable to do so. In addition, Cardinal receives a fixed amount (subject to escalation) to provide operational and maintenance services to Ingredion’s plant. • Amherstburg Solar Park, a solar facility located in Ontario, and the four hydro facilities located in Ontario and British Columbia, by generating and selling electricity under long-term PPAs. On a MW weighted-average-basis, the hydro facilities have 19 years remaining on the current PPAs, excluding the Sechelt Creek facility PPA, or 29 years remaining including the executed Sechelt PPA. The Amherstburg Solar Park PPA expires in 2031. • Whitecourt, a biomass facility, by selling electricity at market rates to the Alberta Power Pool. This is supplemented by a revenue sharing agreement with its fuel supplier, Millar Western. In addition, Whitecourt earns a portion of its revenue from government grants and the sale of renewable energy credits. CAPSTONE INFRASTRUCTURE CORPORATION Page 6 The following table shows the significant changes in revenue from 2016: Change Explanations (33,288) Lower revenue due to OEFC proceeds awarded for retroactive revenue adjustments to Cardinal and the Ontario hydro facilities in 2016. (2,640) Lower revenue due to fewer runs at Cardinal. (2,437) Lower revenue from the Sechelt hydro facility due to lower rates. (1,455) Lower revenue from Whitecourt due to lower production from the temporary shutdown during the refurbishment. 14,534 Higher revenue from the new wind facilities, consisting of GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing, which reached COD after January 1, 2016. 4,800 Higher revenue at Whitecourt attributable to the BPP. 1,830 Higher revenue from the operating wind facilities (excluding new facilities) due to increased production, reflecting higher wind resource. (121) Various other changes. (18,777) Change in revenue. 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. Expenses Expenses consist of expenditures within the power segment relating to operating expenses and costs to develop new projects, as well as corporate business development and administrative expenses. Expenses Wind Gas (1) Hydro Solar Biomass Power operating expenses Power Corporate Project development costs (2) Administrative expenses (2) Total Expenses For the year ended Dec 31, 2017 (16,277) Dec 31, 2016 (15,221) (11,487) (4,258) (961) (9,307) (42,290) (1,557) (533) (2,090) (8,718) (53,098) (24,873) (4,803) (1,139) (10,911) (56,947) (2,763) (12,492) (15,255) (19,876) (92,078) Change (1,056) 13,386 545 178 1,604 14,657 1,206 11,959 13,165 11,158 38,980 (1) Operating expenses include a one-time increase in fuel expenses of $12,049 related to the OEFC retroactive adjustments in 2016. (2) Project development costs and administrative expenses include one-time professional fees and staff costs of $23,309 in 2016 related to the iCON III acquisition. Expenses for the operation and maintenance ("O&M") of the power facilities mainly consist of wages and benefits and payments to third party providers. The hydro facilities are operated and maintained under an O&M agreement. Capstone's wind facilities are operated by Capstone's workforce and maintained under service agreements, typically with the original equipment manufacturers, except for the Erie Shores wind facility, which has an internalized service function. In addition, Cardinal, Whitecourt and Amherstburg rely on the internal capabilities and experience of Capstone's workforce. The remaining significant costs include fuel, transportation, insurance, utilities, land leases, raw materials, chemicals, supplies and property taxes. Project development costs consist of professional fees and directly attributable staff costs to pursue greenfield and other development projects, as well as costs to explore and execute potential transactions. Administrative expenses include staff costs, professional fees for legal, audit and tax, as well as certain office administration and premises costs. CAPSTONE INFRASTRUCTURE CORPORATION Page 7 The following table shows the significant changes in expenses from 2016: Change Explanations 12,049 Lower operating expenses due to a one-time increase in fuel expenses related to retroactive adjustments from the OEFC in 2016. 11,878 Lower professional fees within corporate project development costs attributable to the iCON III acquisition in 2016. 11,431 Lower staff costs within administrative expenses and project development costs related to the iCON III acquisition in 2016, including short-term and long-term incentive plan payments and employee separation costs. 2,327 Lower operating expenses at SkyGen due to repairs to a tower at Ferndale in 2016, net of insurance recoveries. 1,604 Lower operating expenses at Whitecourt primarily due to the temporary shutdown during the refurbishment. 1,296 Lower operating expenses due to fewer runs at Cardinal. (2,371) Higher operating expenses from the new wind facilities, consisting of Grey Highlands Clean, Snowy Ridge and Settlers Landing, which reached COD after January 1, 2016. 766 Various other changes. 38,980 Change in expenses. FINANCIAL POSITION REVIEW Overview The December 31, 2017 consolidated statement of financial position includes balances related to the consolidation of Glen Dhu and Fitzpatrick on December 31, 2017, and excludes balances relating to Capstone's 33.3% indirect interest in Värmevärden as a result of the sale on March 3, 2017 and the remaining tranches of the Irving promissory note payable, which were converted or repaid on March 31, 2017. In addition, Capstone refinanced the corporate credit facilities in place since the iCON III acquisition, providing greater flexibility and lower cost. These transactions have improved Capstone's net current assets to $10,372 compared with a net current liability of $55,627 as at December 31, 2016. As at December 31, 2017, Capstone and its subsidiaries complied with all debt covenants. Liquidity Working capital As at Power Corporate Net current assets (liabilities) Corporate - promissory note payable (1) Working capital (2) (1) Dec 31, 2017 2,409 Dec 31, 2016 26,092 7,963 10,372 — 10,372 (81,719) (55,627) 96,702 41,075 In 2016, the promissory note was held by Irving, the owner of the Corporation's Class A shares, and was classified as current due to the demand feature of the note. The promissory note was converted or repaid on March 31, 2017. (2) GAAP does not define working capital. To assist in understanding liquidity it is calculated as current assets less current liabilities adjusted for items Capstone did not expect to fund from current liquidity, including the promissory note payable in 2016. Capstone's working capital was $30,703 lower than as at December 31, 2016 due to decreases of $23,683 and $7,020 in power and corporate, respectively. The power segment reduction reflects an increase of $24,039 in the current portion of long-term debt primarily attributable to: • • • $36,286 of debt maturing in August 2018 at SkyGen and Skyway 8; and $6,569 of new debt as a result of consolidating Glen Dhu subsequent to acquisition; partially offset by $19,675 lower payments under the new CPC Credit Facilities. The new CPC Credit Facilities' minimum annual principal repayment of $5,000 is included in the current portion of long-term debt. As at December 31, 2017, Capstone's new revolving facility had $51,273 of available capacity. The corporate working capital decrease primarily reflects funding provided for the Whitecourt refurbishment of $14,047 and the sale of $13,197 of current assets attributable to Värmevärden, net of taxes payable on the sale. These were partially offset by $23,340 received from the Cardinal and the Ontario hydro facilities OEFC proceeds. Cash and cash equivalents As at Power Corporate Unrestricted cash and cash equivalents CAPSTONE INFRASTRUCTURE CORPORATION Dec 31, 2017 53,826 Dec 31, 2016 56,000 10,257 64,083 6,246 62,246 Page 8 Unrestricted cash represents funds available for operating activities, capital expenditures and future acquisitions. The unrestricted cash and cash equivalents increase of $1,837 consists of a $4,011 increase at corporate, partially offset by a decrease of $2,174 at the power segment. The increase at corporate reflects the $23,340 distribution of OEFC proceeds from Cardinal and the Ontario hydro facilities to corporate, partially offset by funding for the Whitecourt refurbishment of $14,047. The related decrease at the power segment from the distribution was partially offset by higher cash balances due to seasonality of production and funds for Whitecourt's capital expenditures. Cash and cash equivalents at the power segment of $53,826 is only periodically accessible to corporate through distributions under the terms of the CPC Credit Facilities, which allow for distributions, 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 $5,295 primarily due to lower cash reserve requirements at the hydro facilities, which are now funded through letters of credit, and the release of construction reserves at Grey Highlands Clean, Snowy Ridge and Settlers Landing. Cash flow Capstone’s consolidated cash and cash equivalents increased by $1,837 in 2017 compared with a decrease of $12,012 in 2016. 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, 2017 73,125 (23,040) (45,796) (2,452) — 1,837 Dec 31, 2016 121,189 (210,235) 93,185 (9,887) (6,264) (12,012) Cash flow from operating activities was $48,064 lower in 2017 but $21,430 higher, excluding discontinued operations. The increase from continuing operations consists of $22,411 of higher corporate cash flows partially offset by $981 of lower power segment cash flows. Cash flows from corporate increased in 2017 primarily because of non-recurring costs in 2016, relating to the iCON III acquisition. The decrease in power segment cash flows primarily reflects the net OEFC proceeds awarded for retroactive payments to Cardinal and the Ontario hydro facilities in 2016 partially offset by higher revenue from the new wind facilities and the grants received from the BPP at Whitecourt in 2017. Cash flows from discontinued operations decreased primarily due to the sale of Bristol Water in December 2016. Cash flow used in investing activities was $187,195 lower in 2017 and $160,970 lower, excluding discontinued operations. In 2017, cash used by the continuing operations primarily included power segment funding of $18,236 (2016 - $120,992) for the construction of projects under development and $16,025 (2016 - $15,536) to fund capital asset additions. These uses were partially offset by a decrease in restricted cash of $5,295 in 2017 (2016 - $10,994 increase in restricted cash) primarily because the hydro facilities cash reserves were replaced with letters of credit and the release of construction reserves at GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing. In addition, the acquisition of the remaining 51% ownership interest in Glen Dhu contributed cash of $3,574. Cash flows used in discontinued operations in 2016 primarily consist of $49,624 used to fund capital asset additions at Bristol Water, partially offset by a $23,432 settlement of the Värmevärden shareholder loan. Cash flow from financing activities changed by $138,981 in 2017 and $282,396, excluding discontinued operations, to a use of funds. In 2017, cash used in the continuing operations was higher primarily due to lower proceeds from debt draws of $215,794 due to debt raised for CPC, Cardinal, GHG, Grey Highlands Clean and Snowy Ridge in 2016. In addition, $131,968 of cash was used as a return of capital to Irving and debt payments were $27,870 higher as a result of the corporate debt refinancing completed in December 2017. These uses were partially offset by lower one-time repayments of $43,466 on the Irving promissory note as well as $43,176 in 2016 to redeem the convertible debentures. Cash flows from discontinued operations in 2017 consist of $142,198 of proceeds received from the sale of Värmevärden. Dividends paid to shareholders were $7,435 lower in 2017 due to the suspension of common share dividends after the iCON III acquisition and lower fixed dividend rates for the preferred shares, which took effect on July 31, 2016. CAPSTONE INFRASTRUCTURE CORPORATION Page 9 Long-term Debt Continuity of Capstone's long-term debt for the year ended was: Long-term debt (1), (2), (3), (4), (5) Deferred financing fees Less: current portion of long-term debt Dec 31, 2016 Additions Repayments Other Dec 31, 2017 782,220 (16,229) 765,991 (62,169) 703,822 83,717 (1,167) 82,550 — 82,550 (121,132) — (121,132) 13,071 (108,061) 88,885 2,248 91,133 (37,110) 54,023 833,690 (15,148) 818,542 (86,208) 732,334 (1) Additions of $83,717 include $65,915 related to the new CPC Credit Facilities and $17,802 for the Settlers Landing wind development project construction term facility. The facility converted to a five-year term facility on August 31, 2017. (2) Repayments of $121,132 include a $64,683 repayment of the former CPC credit facility on December 15, 2017, as well as scheduled repayments. (3) Other additions of $88,885 relate to the acquisition of the remaining interest in Glen Dhu, which is consolidated as at December 31, 2017. (4) Capstone's power facilities have a cumulative $42,121 utilized on its letter of credit facilities. (5) On February 6, 2018, SkyGen, Skyway8 and their existing lenders extended the term loan maturity dates to August 2018. As at December 31, 2017, Capstone's long-term debt consisted of $65,915 for the new CPC Credit Facilities and $767,775 of project debt within the power segment. The current portion of long-term debt was $86,208, consisting of scheduled debt amortization, including commitments under the new CPC Credit Facilities of $5,000, as well as the upcoming project debt maturities for SkyGen and Skyway 8 of $20,360 and $18,337, respectively. Capstone expects to repay the scheduled amortization from income generated by the power assets and extended the maturing project debt for the SkyGen and Skyway 8 wind facilities to August 2018. Capstone is evaluating options to refinance this project debt. On December 15, 2017, Capstone refinanced the corporate acquisition debt in place since the iCON III acquisition. The new CPC Credit Facilities provide $145,000 of total capacity, consisting of a $50,000 term facility and a $95,000 revolving facility. The proceeds drawn on the facilities were used to repay the former CPC credit facilities. As at December 31, 2017, Capstone has drawn $50,000 of the term facility and utilized $43,727 of the revolving facility. The new CPC Credit Facilities mature on December 15, 2021 and bear interest at a variable rate plus an applicable margin. CPC and its project financed subsidiaries are 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 $6,160 of limited recourse guarantees provided to the lenders of the various wind projects. Equity Shareholders’ equity comprise As at Common shares Preferred shares (1) Share capital Retained earnings Equity attributable to Capstone shareholders Non-controlling interests Total shareholders’ equity Dec 31, 2017 62,270 Dec 31, 2016 40,433 72,020 134,290 72,024 206,314 55,249 261,563 72,020 112,453 2,800 115,253 61,417 176,670 (1) Capstone has 3,000 publicly listed Series A preferred shares on the Toronto Stock Exchange. 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, as part of the iCON III acquisition. On issuance, the promissory note consisted of three tranches: £106,000, 712,700 SEK, and $10,370 which were classified as a current liability and were due on demand. On September 2, 2016, 160,000 SEK, or $24,992, was repaid and on December 15, 2016, the £106,000 tranche was converted into Class A shares of the Corporation. On March 31, 2017, Irving converted the remaining SEK tranche of the promissory note into Class A shares of the Corporation and the Canadian denominated tranche of the promissory note was repaid. As a result, no promissory note payable to Irving remains as at December 31, 2017. CAPSTONE INFRASTRUCTURE CORPORATION Page 10 Contractual Obligations As at December 31, 2017, Capstone had outstanding contractual obligations with amounts due as follows: Long-term debt (1) Operating leases Asset retirement obligations Purchase obligations Total contractual obligations Within one year One year to five years 341,972 19,134 118,029 4,668 Beyond five years 670,018 49,235 — 13,468 136,165 — 33,721 394,827 14,982 51,697 785,932 Total 1,130,019 73,037 14,982 98,886 1,316,924 (1) Long-term debt includes principal and interest payments. Long-term debt • Long-term debt is discussed on page 10 "Long-term Debt" in this MD&A. 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. 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 2023. Capstone's operating lease commitments with no minimum operating lease commitments required are: • 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 facilities are projected to occur principally over the next 25 years. Purchase obligations Capstone enters into contractual commitments in the normal course of business, either directly or through its subsidiaries. These contracts include capital commitments and operations and maintenance ("O&M") agreements: Capital commitments • During 2017, Whitecourt entered into several contracts as part of its refurbishment of the steam turbine and boiler. The project is expected to extend the life of the facility by 20 years. As at December 31, 2017, Whitecourt's remaining contractual commitments have been recorded in its accrued liabilities. O&M agreements • Cardinal has a maintenance contract with Siemens Canada Limited covering the gas turbine at the 15 MW Ingredion plant. The contract expires on November 24, 2023. • 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 11, 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 power facilities, Capstone is not obligated to deliver electricity; however, in certain circumstances, if a facility fails to meet the performance requirements, the operating facilities' PPA may be terminated after a specified period of time. CAPSTONE INFRASTRUCTURE CORPORATION Page 11 Management services agreements Capstone has agreements with all the partially owned wind facilities and development projects, including Amherst, Saint- Philémon, Goulais, GHG, Snowy Ridge and Settlers Landing (Glen Dhu and Fitzpatrick were included up until the acquisition of the remaining ownership interests on December 31, 2017). 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") Cardinal has 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 plant that was completed in 2017, 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 $6,160 as at December 31, 2017. 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. Refer to page 4 of "Changes in the Business" in this MD&A for details. Capstone is not engaged in any off-balance sheet financing transactions. Equity Accounted Investments Equity accounted investments decreased by $22,464 primarily due to the acquisition of the remaining interests in Glen Dhu and Fitzpatrick wind facilities on December 31, 2017. In addition, Capstone sold its interest in Värmevärden on March 3, 2017. As at December 31, 2017, Capstone no longer follows the equity accounting method for any of its investments. Refer to page 4 of "Changes in the Business" in this MD&A for details. Capital Asset Expenditure Program Capstone incurred $32,350 of capital asset expenditures during 2017, which included $17,967 of additions to capital assets and $14,383 of additions to projects under development. Capstone's capital expenditures were: Power Corporate Utilities – water For the year ended Dec 31, 2017 32,305 Dec 31, 2016 114,719 45 — 32,350 102 53,590 168,411 Capital expenditures primarily reflect costs to develop and construct the wind development projects and costs to refurbish Whitecourt's steam turbine and boiler. In 2017, $15,187 was capitalized primarily for the Settlers Landing wind facility versus $108,505 related to developing and constructing the Ganaraska, Grey Highlands ZEP, Grey Highlands Clean, Snowy Ridge and Settlers Landing development projects in 2016. In 2017, Whitecourt invested $16,799 to refurbish its steam turbine and boiler. The refurbishment began on August 17, 2017 and operations successfully resumed on December 3, 2017. Capital expenditures for the utilities – water segment in 2016 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 2017, the current income tax expense was $371 (2016 - $1,658), which primarily includes corporate minimum taxes and capital gains taxes payable on the sale of Värmevärden. Capstone's total deferred income tax assets were fully realized on the sale of Värmevärden (2016 - $14,750). Deferred income tax liabilities of $89,243 (2016 - $72,673) primarily relate to the differences between the amortization of intangible and capital assets for tax and accounting purposes. In 2017, Capstone’s net deferred income tax liability increased by $31,320 primarily due to the the sale of Värmevärden and the addition of $15,060 assumed on the consolidation of Glen Dhu and Fitzpatrick (refer to page 4 "Changes in the Business" in this MD&A). CAPSTONE INFRASTRUCTURE CORPORATION Page 12 DERIVATIVE FINANCIAL INSTRUMENTS Capstone has exposure to market, credit and liquidity risks from its use of financial instruments as described in note 7 financial instruments and note 8 financial risk management in the consolidated financial statements as at and for the year ended December 31, 2017. These notes contain further details on the implicit risks and valuation methodology employed for Capstone’s financial instruments. To manage the certain financial risks inherent in the business, Capstone enters into derivative contracts primarily to mitigate the economic impact of the fluctuations in interest rates and foreign exchange rates. 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, 2017 21,364 (2,144) 19,220 Dec 31, 2016 18,526 (3,572) 14,954 Net derivative contracts assets increased by $4,266 from December 31, 2016, primarily due to gains of $9,930, partially offset by contractual settlement payments of $5,664 received from Millar Western. 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 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, 2017 5,396 Dec 31, 2016 24,964 4,534 — 9,930 — 9,930 2,401 115 27,480 (608) 26,872 The gain on derivatives was primarily attributable to an increase in the Whitecourt embedded derivative asset because of lower estimated forward Alberta power pool prices since December 31, 2016. In addition, the gains from the interest rate swap contracts primarily reflect higher long-term interest rates since December 31, 2016. 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 13 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 for the power facilities 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 which were sold in 2016 and 2017. Therefore changes from risks disclosed in the MD&A for the year-ended December 31, 2016 predominately reflect changes to the strategic direction of the Corporation, as a refocused pure-play independent power producer. CAPSTONE INFRASTRUCTURE CORPORATION Page 14 Risk and Description Operational Risks 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. Succession and human resources retention risks concern the ability to replace senior management and attract, retain and motivate key staff. Production risk concerns the dependence of power production on adequate resources such as wind, sunlight and water flow as well as fuel supply and the availability of each of the sites. Development and capital expenditure risks concern the construction of new power generation facilities in line with the requirements of awarded PPAs and planned maintenance capital expenditures required on existing facilities to maintain operations. Information technology and data security risk concerns the ability to develop, maintain and manage complex information technology systems which are used to operate and monitor its facilities and other business systems. Strategic Risks Competition 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. Impact Monitoring and Mitigation 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. 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. Low availability, inadequate wind, sunlight, water flow, wood waste or gas leads to lower power production which results in lower revenues. Delays and cost overruns in the construction of new facilities or in performing planned maintenance 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. Cyber attacks or unauthorized access to information technology systems may lead to production disruptions and system failures that, amongst other things, may result in lower production and revenues. Capstone mitigates by starting negotiations with counter-party(ies) well before contract expiry, considering impacts of other stakeholders 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 mitigates this risk by providing competitive compensation, as well as career and development opportunities to its employees. 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 project results. Capstone follows a recognized IT framework which includes security and recovery plans. In addition, certain sites are compliant with North American Electric Reliability Corporation standards. Inability to source and execute attractive growth opportunities may lead to lower long-term cash flow as businesses operating under finite term contracts experience uncertainty about their longer term cash flow potential. Management periodically 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. Unanticipated increases in costs could result in lower earnings and cash flow. Capstone attempts to mitigate this risk by monitoring costs versus budgets, controlling discretionary spending and entering long-term service contracts. 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. Taxation risk concerns higher income and other taxes attributable to adverse legislation changes, including tax rate increases, or interpretations by tax authorities on audit. Higher taxation results in both lower income and cash flow available. 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 jurisdictions where its businesses operate. CAPSTONE INFRASTRUCTURE CORPORATION Page 15 Risk and Description Impact Monitoring and Mitigation 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. 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. Legal and Regulatory Risks Contract and 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 contracts and 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. Capstone endeavours to secure committed financing prior to making offers to acquire businesses. Capstone maintains its contracts, permits and licenses, works with knowledgeable contractors and responds to adverse findings promptly to minimize the impact. ENVIRONMENTAL, HEALTH AND SAFETY REGULATION Capstone's power facilities (collectively the “Facilities”) hold all material permits and approvals required for their operation and maintenance. 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 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 implementing 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 and Manitoba, 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. As a regulatory backstop, the federal government has also proposed the Greenhouse Gas Pollution Pricing Act, which would introduce a carbon pricing regime to those provinces that failed to implement adequate provincial measures. 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 16 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 and second compliance periods effective until December 31, 2030. The regime was updated in 2017 to link Ontario's program to the joint Quebec-California program. Effective January 1, 2018, allowances and credits from all jurisdictions are completely fungible. The new Ontario Offset Credits regulation, also effective January 1, 2018, will allow for the creation of offset credits for use in the regime. Ontario is continuing to develop a voluntary offset program, 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. 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. 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 2017 related party transactions and balances are primarily comprised of transactions with iCON Infrastructure LLP and subsidiaries ("iCON") and compensation to key management. Transactions with iCON Equity Transactions Refer to page 4 of "Changes in the Business" in this MD&A for a series of equity transactions, including the repayment of the promissory note and contribution of the remaining interests in the Glen Dhu and Fitzpatrick wind facilities from an iCON III subsidiary. Shared Service Arrangement Fees earned from iCON Infrastructure Canada Inc. ("iCON Canada"), a subsidiary of iCON, under a shared service arrangement, are reported in the consolidated statements of income as an administrative expense recovery. During 2017, Capstone earned fees of $174 from iCON Canada. Compensation of Key Management Key management includes the Corporation's directors, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) during the year. Compensation awarded to key management consisted of salaries, directors' fees, short-term employee benefits, long-term incentive plans, and termination benefits. Key management compensation is described in note 23 related party transactions in the consolidated financial statements for the year ended December 31, 2017. 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; CAPSTONE INFRASTRUCTURE CORPORATION Page 17 • • 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. Purpose To attract and retain qualified executives. To motivate, attract and retain qualified executives. Link to performance No direct link. A significant portion of this award is based on actual business performance against Capstone's internal performance measures, Adjusted EBITDA and AFFO. Capstone has a discretionary LTIP and share appreciation rights ("SAR") plan tied to long-term growth to motivate and retain executives on a long-term basis. The awards are paid in cash after meeting certain vesting conditions. To reward long-term performance and align interests of executives with security holders. The discretionary LTIP is not directly linked to performance. The SAR is directly linked to the long-term increase in the Company's value upon a sale transaction. 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), (2) EBITDA (1), (2), (3) Net income (loss) (4), (5), (6) Preferred dividends 2017 2016 Q4 Q3 Q2 41,561 28,529 1,287 613 29,089 22,221 (2,125) 613 40,380 30,176 3,285 613 Q1 43,133 29,129 114,936 613 Q4 Q3 Q2 Q1 40,128 36,622 18,407 613 66,145 54,608 32,492 8,180 34,175 8,839 (9,488) (18,170) (4,507) 938 938 938 (1) Comparative figures for revenue and EBITDA have been adjusted to remove amounts from discontinued operations. (2) Revenue for Q3 2016 includes proceeds awarded of $33,288 for retroactive adjustments from the OEFC for Cardinal and the Ontario hydro facilities. In addition, EBITDA for Q3 2016 includes $2,288 of interest income and $12,049 of associated operating expenses, which is a net $23,527 in EBTIDA. (3) EBITDA for Q1 and Q2 2016 includes $3,992 and $7,659, respectively, in expenses related to one-time costs associated with the iCON III acquisition. (4) Net income (loss) attributable to the common shareholders of Capstone, which excludes non-controlling interests. (5) Results include continuing operations and discontinued operations for all periods. (6) Net income includes a gain on the sale of Värmevärden of $128,087 in Q1 2017 and a loss on the sale of Bristol Water of $2,803 in Q4 2016. CAPSTONE INFRASTRUCTURE CORPORATION Page 18 FOURTH QUARTER 2017 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, 2017 41,561 Dec 31, 2016 40,128 (10,486) (2,074) (383) 825 1,182 (2,095) (1) 28,529 (9,900) (15,888) (2,488) 253 1,263 570 1,833 2,086 — 2,086 1,287 799 2,086 (11,684) (2,945) (672) 747 51 11,007 (11) 36,621 (8,645) (18,080) (2,573) 7,323 (1,637) 14,236 12,599 19,922 1,673 21,595 18,407 3,188 21,595 In the fourth quarter of 2017, Capstone's EBITDA and net income were both lower than in 2016. Lower quarterly EBITDA from Capstone's continuing operations reflects: • • An decrease in the fair value of the Whitecourt embedded derivative, which generally decreases as forecasted Alberta power pool prices rise; and Lower expenses primarily due to lower staff costs; partially offset by • Higher power segment results, primarily due to the Settlers Landing wind facility that achieved COD in 2017; and • Higher interest income received from Chapais Électrique Limitée. The remaining material change in net income was: • Lower income tax recovery, primarily attributable to the recognition of a deferred tax asset on the cost base of Värmevärden's shares in 2016. 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, 2016. Refer to note 2 to the December 31, 2017 consolidated financial statements for a summary of significant accounting policies. Future Accounting Changes The International Accounting Standards Board (“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. Capstone continues to monitor changes to IFRS and has implemented applicable IASB changes to standards, new interpretations and annual improvements, none of which had an impact in 2017. The significant upcoming changes to IFRS are: CAPSTONE INFRASTRUCTURE CORPORATION Page 19 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) Refer to note 2 to the consolidated financial statements for the year ended December 31, 2017 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. On January 1, 2017, Capstone adjusted the remaining useful life of a few of the wind facilities to better reflect their estimated future economic benefit. The changes in estimated useful lives are accounted for prospectively. The following accounting estimates included in the preparation of the consolidated financial statements are based on significant estimates and judgments, which are summarized as follows: Area of Significance Critical Estimates and Judgments Capital assets, projects under development and intangible assets: • Purchase price allocations • Depreciation on capital assets • Amortization on intangible assets • Asset retirement obligations • Initial fair value of net assets. • Estimated useful lives and residual value. • Estimated useful lives. • Expected settlement date, amount and discount rate. • Impairment assessments of capital assets, projects under • Future cash flows and discount rate. development 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 Accounting for investments in non-wholly owned subsidiaries and fuel supply volumes and electricity sales. • 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 the presence and function 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. During 2017, Capstone updated its internal controls and testing for changes in its operations, including the acquisition of the remaining interests in the Glen Dhu and Fitzpatrick wind facilities. The CEO and CFO have concluded that Capstone's disclosure controls and procedures were effective as at December 31, 2017 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, 2017, 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, 2017. CAPSTONE INFRASTRUCTURE CORPORATION Page 20 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, 2017, 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 March 6, 2018 Andrew Kennedy Chief Financial Officer CAPSTONE INFRASTRUCTURE CORPORATION Page 21 March 6, 2018 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, 2017 and December 31, 2016 and the consolidated statements of income (loss) and comprehensive income (loss), changes in shareholders’ equity 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, 2017 and December 31, 2016 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 PricewaterhouseCoopers LLP PwC Tower, 18 York Street, Suite 2600, Toronto, Ontario, Canada M5J 0B2 T: +1 416 863 1133, F: +1 416 365 8215 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 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 Derivative contract assets Equity accounted investments Capital assets Projects under development Intangible assets 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 long-term debt Liabilities held for sale Long-term liabilities Derivative contract liabilities Deferred income tax liabilities Long-term debt Liability for asset retirement obligation Total liabilities Equity attributable to shareholders' of Capstone Non-controlling interest Total liabilities and shareholders’ equity Commitments and contingencies See accompanying notes to these consolidated financial statements Notes Dec 31, 2017 Dec 31, 2016 4 4 5 6 7a 3b(ii) 7a 9 10 11 12 13a 14 17 7a 15 3b(ii) 7a 13a 15 16 18 22 64,083 22,438 24,408 4,778 1,130 — 116,837 20,234 — 896,377 730 167,732 — 1,201,910 20,257 — — 86,208 — 106,465 2,144 89,243 732,334 10,161 940,347 206,314 55,249 62,246 27,733 23,064 3,145 — 13,445 129,633 17,139 22,464 787,271 22,267 153,493 14,750 1,147,017 25,383 96,702 758 62,169 248 185,260 1,427 72,673 703,822 7,165 970,347 115,253 61,417 1,201,910 1,147,017 CAPSTONE INFRASTRUCTURE CORPORATION Page 23 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Balance, December 31, 2015 (1) Other comprehensive income (loss) from January 1 - April 29, 2016 (6) Net income (loss) from January 1 - April 29, 2016 included in retained earnings reset (7) Dividends declared to common shareholders of Capstone Dividends declared to preferred shareholders of Capstone (8) Redemption of Capstone's 2016 convertible debentures Dividends declared to NCI from January 1 - April 29, 2016 Convertible debenture advances, net (9) Elimination of deficit Issuance of promissory note in exchange for common shares Balance, April 29, 2016 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 (8) Dividends declared to NCI after April 29, 2016 Convertible debenture advances, net (9) Balance, December 31, 2016 Net income for the period Conversion of promissory note (10) Return of capital (10) Business acquisition (11) Dividends declared to preferred shareholders of Capstone (8) Dividends declared to NCI Convertible debenture advances (repayments), net (9) Balance, December 31, 2017 Equity attributable to shareholders of Capstone Notes 18 Share Capital (2) 814,719 Other Equity Items (3) 9,284 Retained Earnings (Deficit) (366,579) AOCI (4) 51,151 NCI (5) 273,505 Total Equity 782,080 — — 617 — — — — (389,178) (316,225) 109,933 — — — 194,531 (192,011) — — — 112,453 — 86,332 (86,332) 21,837 — — — 134,290 — — — — (9,284) — — — — — — — — — — — — — — — — — — — — — — 17a 17c 3a 18 18 3a 3a 3b(i) 17a 17a 17c 18 18 17a 17a 3c 17c 18 18 (29,743) (10,004) (32,192) (71,939) — — — — — — — — 21,408 (20,600) 6,501 (14,099) — (1,279) 9,284 — — 389,178 — — — (1,060) 3,077 — 617 (1,279) — (1,060) 3,077 — — — — (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) — 2,800 117,383 — (45,636) — (2,523) — — 72,024 — (2,014) 360 61,417 993 (2,253) (2,014) 360 176,670 118,376 86,332 — — (131,968) 21,837 — — (3,240) (3,921) 55,249 (2,523) (3,240) (3,921) 261,563 (1) The equity balance as at December 31, 2015 has 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 and a corresponding decrease to opening retained earnings (deficit). (2) 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). (3) Other equity items include the equity portion of Capstone's 2016 convertible debentures, which was redeemed on April 29, 2016. (4) Accumulated other comprehensive income (loss) (“AOCI”). (5) Non-controlling interest (“NCI”). (6) Total other comprehensive loss for the year ended December 31, 2016 is $114,344. (7) Total net loss for the year ended December 31, 2016 is $15,541. (8) Dividends declared to preferred shareholders of Capstone include deferred income taxes of $71 (2016 - $31 prior to April 29, 2016 and $295 after April 29, 2016). (9) Capital contributions, net of repayments are with One West Holdings Ltd. ("Concord"), the holder of the convertible debenture related to the Ganaraska and Grey Highlands ZEP ("GHG"), Snowy Ridge and Settlers Landing projects. The convertible debenture provides Concord the option to become a 50% partner in these projects. (10) Refer to note 3b for changes related to the sale of Bristol Water and Värmevärden. (11) Refer to note 3c for changes related to the acquisition of remaining interests of wind facilities. See accompanying notes to these consolidated financial statements CAPSTONE INFRASTRUCTURE CORPORATION Page 24 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 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Other 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 Total comprehensive income (loss) from continuing operations Total comprehensive income (loss) Comprehensive income (loss) attributable to: Shareholders of Capstone Non-controlling interest See accompanying notes to these consolidated financial statements For the year ended Notes Dec 31, 2017 Dec 31, 2016 20 20 20 9a 7b 21 7b 10 12 13d 3b 18 154,163 (42,290) (8,718) (2,090) 935 1,600 6,437 18 110,055 (36,668) (56,962) (9,825) 6,600 (371) (17,170) (17,541) (10,941) 129,317 118,376 117,383 993 118,376 172,940 (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) For the year ended Notes Dec 31, 2017 Dec 31, 2016 3b(i) 3b 18 — 129,317 129,317 (10,941) 118,376 117,383 993 (114,344) (34,371) (148,715) 18,830 (129,885) (76,702) (53,183) 118,376 (129,885) CAPSTONE INFRASTRUCTURE CORPORATION Page 25 CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended Notes Dec 31, 2017 Dec 31, 2016 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 Investment in capital assets Decrease (increase) in restricted cash Cash acquired from acquisition of equity accounted investment Distributions from equity accounted investments Cash disposed of from discontinued operations Cash flows used in continuing operations Cash flows used in discontinued operations Total cash flows used in investing activities Financing activities: Return of capital to Irving Repayment of long-term debt Repayment of promissory note Convertible debenture advances (repayments), net Dividends paid to non-controlling interests Dividends paid to common and preferred shareholders Transaction costs on debt issuance Proceeds from issuance of long-term debt Redemption of debentures Settlement of interest rate swaps Cash flows from (used in) continuing operations Cash flows from (used in) discontinued operations Total cash flows from (used in) 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: Interest paid (Bristol Water in 2016 - $22,044) Taxes paid (recovery) (Bristol Water recovery in 2016 - $1,052) See accompanying notes to these consolidated financial statements 9a 3b 11b 10b 3c 9a 3b 3b 3b 18a 18a 3b (10,941) 17,170 66,787 (773) 2,581 (935) (18) (2,118) 71,753 1,372 73,125 (18,236) (16,025) 5,295 3,574 2,352 — (23,040) — (23,040) (131,968) (121,132) (10,370) (3,921) (3,240) (2,452) (1,080) 83,717 — — (190,446) 142,198 (48,248) — 1,837 — 62,246 64,083 34,077 1,882 18,830 (5,517) 58,802 (15,268) 2,321 (958) (397) (7,490) 50,323 70,866 121,189 (120,992) (15,536) (10,994) — 1,886 (38,374) (184,010) (26,225) (210,235) — (93,262) (53,836) (4,930) (3,074) (9,887) (6,916) 299,511 (43,176) 85 84,515 (1,217) 83,298 (6,264) (12,012) (134) 74,392 62,246 56,309 295 CAPSTONE INFRASTRUCTURE CORPORATION Page 26 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note Description Page Note Description Page 1 2 3 4 5 6 7 8 9 10 11 12 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 Financial Instruments Financial Risk Management Equity Accounted Investments Capital Assets Projects Under Development Intangible Assets 27 27 35 37 37 37 37 40 42 43 44 45 13 14 15 16 17 18 19 20 21 22 23 24 Income Taxes Accounts Payable and Other Liabilities Long-term Debt Liability for Asset Retirement Obligation Shareholders' Equity and Promissory Note Payable Non-Controlling Interests Share-based Compensation Expenses by Nature Other Gains and Losses Commitments and Contingencies Related Party Transactions Segmented Information 45 47 47 50 50 52 54 55 55 55 56 57 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”) mission is to provide investors with an attractive total return from responsibly managed long-term investments in power generation in North America. Capstone's strategy is to develop, acquire and manage a portfolio of high quality power assets. As at December 31, 2017, Capstone owns and operates an approximate net installed capacity of 541 megawatts across 23 facilities in Canada, including wind, hydro, solar, biomass, and natural gas power plants. All amounts are in Canadian thousands of dollars or thousands of share amounts unless otherwise indicated. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are used in the preparation of these consolidated financial statements. Basis of Preparation Statement of compliance The consolidated financial statements of Capstone have been prepared in accordance with International Financial Reporting Standards ("IFRS"). The consolidated financial statements were authorized for issue by the Board of Directors on March 6, 2018. Discontinued Operations and Assets Held for Sale As further discussed in note 3, on March 3, 2017, Capstone sold its interest in Värmevärden, resulting in the utilities - district heating segment being presented as a discontinued operation in the statements of income for the years ended December 31, 2017 and 2016. As at December 31, 2016, Capstone accounted for its investment in Värmevärden as assets held for sale ("AHFS") on the consolidated statement of financial position within the current assets and liabilities. On December 15, 2016, Capstone sold its 50% interest in Bristol Water, resulting in the utilities - water segment being presented as a discontinued operation in the statements of income for the year ended December 31, 2016. The cash flows of these segments are presented as cash provided (used) by discontinued operations for the years ended December 31, 2017 and 2016. Basis of measurement The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain financial instruments, which are measured at fair value as explained in the accounting policies set out below and on a going CAPSTONE INFRASTRUCTURE CORPORATION Page 27 concern basis of accounting (see note 8). Historical cost is generally based on the fair value of the consideration given in exchange for assets. Consolidation These consolidated financial statements are primarily made up of the assets, liabilities and results of operations of the Corporation's subsidiaries. Subsidiaries are all entities over which Capstone has control. Capstone controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. 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") Glen Dhu Wind Energy LP ("Glen Dhu") Fitzpatrick Mountain Wind Energy Inc. ("Fitzpatrick") 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 Canada Canada Ownership at December 31, 2017 100% 100% 100% 100% 100% 100% 100% 100% 51% 51% 51% 100% 100% 100% 100% (2) 100% (2) 100% (2) 100% (3) 100% (3) 2016 100% 100% 100% 100% 100% 100% 100% 100% 51% 51% 51% 100% 100% 100% 75% 75% 75% 49% 50% 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 Power generation Power generation (1) The SkyGen entity holds the Ferndale, Ravenswood, Proof Line and Skyway 8 operating wind facilities. (2) As at December 31, 2016, Ganaraska, Grey Highlands ZEP, Snowy Ridge and Settlers Landing projects were 25% held by the original developer. Capstone acquired the original developer's ownership interest of GHG, SR and SL during 2017. Refer to the Statement of Changes in Shareholders' Equity for details. (3) On December 31, 2017, Capstone acquired the remaining 51% interest in Glen Dhu and the remaining 50% interest in Fitzpatrick, increasing Capstone’s interests in both wind facilities to 100%. Results for the periods up to the acquisition are included in equity accounted income in the statement of income. Refer to note 3c. The Corporation accounts for its controlled investments using the consolidation method of accounting from the date control is obtained and deconsolidates from the date that control ceases. All intercompany balances and transactions have been eliminated on consolidation. Non-controlling interests represent equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Their share of net income and comprehensive income is recognized directly in equity. Changes in the Corporation's interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions. Equity Accounted Investments Companies in which the Corporation has the ability to exercise significant influence, but not control, or has the ability to exercise joint control over financial and operating policy decisions are accounted for using the equity method. Significant influence is presumed to exist when the Corporation holds between 20% and 50% of the voting power of another entity. Capstone's investments in Värmevärden AB ("Värmevärden") and the Glen Dhu and Fitzpatrick wind facilities were accounted for on an equity accounting basis in 2016 and for portions of 2017, prior to the respective sale transaction of Värmevärden and consolidation of the wind facilities. 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, CAPSTONE INFRASTRUCTURE CORPORATION Page 28 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. 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, 2016 (1) December 31, 2017 (2) Swedish Krona (SEK) UK Pound Sterling (£) Average 0.1550 0.1528 Spot 0.1478 0.1530 Average 1.8014 N/A Spot 1.6597 N/A (1) Bristol Water's spot rate and average rate were as at and for the period ended December 15, 2016, the date of sale. (2) Refer to note 3 for details on the sale of Värmevärden. Capstone continues to have minimal SEK-denominated balances following the sale, which are expected to cease in 2018. 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. 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. 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 their useful lives. 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 29 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 Property and plant: Operational structures Operational properties Power 3 to 5 years 15 to 30 years 5 years 15 to 30 years 40 years Leased Assets Assets financed by leasing agreements that transfer substantially all the risks and rewards of ownership of an asset to the lessee are capitalized and depreciated over the shorter of their estimated useful lives and the lease term. The corresponding liability is recorded as borrowings. The capital element of the lease rental is deducted from the obligation to the lessor as paid. The interest element of lease rentals and the depreciation of the relevant assets are charged to the consolidated statement of income. Operating lease rental payments are charged to the consolidated statement of income on a straight-line basis as incurred over the term of the lease. 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 licenses, 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(1) Water rights (1) Generally amortized over the contract term. Power 3 to 7 years 15 to 25 years 10 to 35 years The expected useful lives of intangible assets are reviewed on an annual basis and adjusted prospectively. 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 CAPSTONE INFRASTRUCTURE CORPORATION Page 30 expected future cash flows of the relevant assets or Cash Generating Unit ("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, for potential reversals when events or circumstances warrant such consideration. 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 defined contribution pension plans through its subsidiaries. Costs of defined contribution pension plans are charged to the consolidated statement of income in the period in which they fall due. 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. 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. 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. 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. Interest income is earned with the passage of time and is recorded on an accrual basis. Costs related to the purchases of fuel are recorded upon delivery. All other costs are recorded as incurred. Project development costs are recorded as incurred. These costs include the activities to pursue and develop greenfield projects in the power segment and acquisition-related business development expenses incurred at corporate. Interest expense is incurred with the passage of time and is recorded on an accrual basis. Long-term Incentive Plans The Corporation accounts for grants under share-based long-term incentive plans ("LTIP") and share appreciation rights ("SAR") plans in accordance with IFRS 2 Share-Based Payments. CAPSTONE INFRASTRUCTURE CORPORATION Page 31 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 actuarial gains recognized in respect of retirement benefit obligations, as applicable. Accumulated other comprehensive income (“AOCI”) is included as a component in the consolidated statement of shareholders' equity. Financial Instruments Financial assets and financial liabilities are recognized on the consolidated statement of financial position when the Corporation becomes a party to the contractual provisions of the financial instrument. Financial instruments are required to be measured at fair value on initial recognition plus transaction costs in the case of financial instruments measured at amortized cost. Transaction costs that are directly attributable to the acquisition or issue of financial instruments classified as held-for-trading are expensed as incurred. Measurement in subsequent periods depends on the classification of the financial instrument. The Corporation has designated each of its significant categories of financial instruments outstanding as follows: Classification Financial assets and liabilities at fair value through profit and loss Significant Categories • Cash and cash equivalents • Restricted cash • Derivative contract assets • Derivative contract liabilities Measurement • At fair value with changes in fair value recognized in the consolidated statement of income Loans and receivables • Accounts receivable • At amortized cost using the effective Other liabilities • Accounts payable and other liabilities • Loans payable • Finance lease obligations • Long-term debt 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 2017, the Corporation's derivatives include interest rate swaps and an embedded derivative in Whitecourt's fuel supply agreement. Changes in the fair values of derivative financial instruments are reported in the consolidated statement of income. 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 32 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. 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”), impairment charges, and interest income. 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 age, technology, 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, 2016 consolidated financial statements. On January 1, 2017, Capstone adjusted the remaining useful life of a few of the wind facilities to better reflect their estimated future economic benefit. The changes in estimated useful lives are accounted for prospectively and resulted in an additional depreciation expense of $6,100 in the statement of comprehensive income in 2017 and a similar result is expected each year going forward. Future Accounting Changes The International Accounting Standards Board (“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. Capstone continues to monitor changes to IFRS and has implemented applicable IASB changes to standards, new interpretations and annual improvements, none of which had an impact in 2017. The significant upcoming changes to IFRS are: Title of the New IFRS Nature of the Impending Change to Capstone Status of Adoption 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. Capstone has reviewed its revenue streams and underlying contracts with customers to determine the impact that the adoption of IFRS 15 will have on its financial statements. Capstone will adopt IFRS 15 using a modified retrospective approach and does not anticipate that there will be any significant recognition or measurement impact subsequent to adoption. Capstone continues to evaluate the impact that the adoption will have on disclosure in the consolidated financial statements. CAPSTONE INFRASTRUCTURE CORPORATION Page 33 Title of the New IFRS Nature of the Impending Change to Capstone Status of Adoption 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. Capstone has reviewed its financial instruments to determine the impact that the adoption of IFRS 9 will have on its financial statements. Capstone does not anticipate that there will be any changes to the classification or the carrying values of the Company’s financial instruments as a result of the adoption. Capstone does not currently apply hedge accounting to its risk management contracts and does not intend to apply hedge accounting to any of its existing risk management contracts on adoption of IFRS 9. Capstone continues to evaluate the impact that the adoption will have on disclosure in the consolidated financial statements. IFRS 16, Leases IFRS 16 specifies how to recognize, measure, present and disclose leases. Effective: Jan 1, 2019 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. Capstone has reviewed its contracts for leases to determine the impact that the adoption of IFRS 16 will have on its financial statements. Capstone will adopt IFRS 16 prospectively using the cumulative catch-up approach and expects there will be an equal lease asset and liability recognized on transition. Capstone continues to evaluate the measurement and disclosure impacts the adoption will have in the consolidated financial statements. 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 Capital assets, projects under development and intangible assets – carrying values • Estimates are based on assumptions that are sensitive to change, which may have a significant impact on the valuations performed. 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. • 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. Critical Judgment • Initial fair value of net assets • Estimated useful lives and residual value • Expected settlement date, amount and discount rate • Future cash flows and discount rate Deferred income taxes • The determination of the deferred income tax balances of the • Timing of reversal of temporary Estimates in the determination of deferred income taxes affect asset and liability balances. Corporation requires management to make estimates of the reversal of existing temporary differences between the accounting and tax bases of assets and liabilities in future periods. differences • Tax rates • Current and future taxable income Financial instrument fair value measurements When observable prices are not available, fair values are determined by using valuation techniques that refer to observable market data. This is specifically related to Capstone's financial instruments. 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. • 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. • Forward Alberta power pool prices, volatility, credit spreads, cost and inflation escalators and fuel supply volumes and electricity sales • 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. • 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 CAPSTONE INFRASTRUCTURE CORPORATION Page 34 NOTE 3. ACQUISITIONS, DISPOSALS AND DISCONTINUED OPERATIONS (A) Acquisition of Capstone by iCON III On April 29, 2016, Capstone completed the 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"). As part of the transaction, Capstone issued Class A common shares and a demand interest-free promissory note to Irving which consisted of three multi-currency tranches: £106,000, 712,700 SEK, and $10,370. In addition, Capstone Power Corp. ("CPC") entered into a credit agreement for $125,000. 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. (B) Discontinued Operations Capstone's consolidated statements of income and cash flows for the years ended December 31, 2017 and 2016 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 (1) Värmevärden Notes Dec 31, 2017 Dec 31, 2016 3b(i) 3b(ii) — 129,317 129,317 (34,723) 352 (34,371) (1) Includes an impairment charge of $58,000 recognized against the carrying value of Bristol Water’s goodwill in 2016. For the year ended Operating cash flows provided by discontinued operations: Bristol Water Värmevärden Investing cash flows used by discontinued operations: Bristol Water Värmevärden Financing cash flows provided by discontinued operations: Bristol Water Värmevärden (1) Dec 31, 2017 Dec 31, 2016 — 1,372 1,372 — — — — 142,198 142,198 70,019 847 70,866 (49,657) 23,432 (26,225) (1,217) — (1,217) (1) Financing cash flows provided by discontinued operations include net proceeds on sale of $142,198. (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 resulted in a $2,520 increase in Capstone's Class A shares and a loss of $2,803 in the year ended December 31, 2016. 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 presented as a discontinued operation in the prior period. CAPSTONE INFRASTRUCTURE CORPORATION Page 35 Financial information relating to the discontinued operations for the year ended December 31, 2016 is set out below. Net income and comprehensive loss from discontinued operations Net income and comprehensive loss from Bristol Water's discontinued operations for the year ended December 31, 2016 were: For the year ended Revenue Operating expenses Other expenses (1) Earnings before income taxes Total income tax recovery (expense) Net income from discontinued operations, net of tax Other comprehensive loss from discontinued operations, net of tax Total comprehensive loss from discontinued operations, net of tax Dec 31, 2016 191,315 (111,664) (116,126) (36,475) 1,752 (34,723) (114,344) (149,067) (1) Includes an impairment charge of $58,000 recognized against the carrying value of Bristol Water’s goodwill in 2016. Sale of Värmevärden (ii) On March 3, 2017, Capstone and its co-shareholder Macquarie European Infrastructure Fund 2 (“MEIF 2”) sold 100% of Värmevärden. Capstone received proceeds of $142,198, net of transaction costs, for its 33.3% indirect interest in Värmevärden and the related outstanding loans receivable. On March 31, 2017, Irving converted its 552,700 SEK tranche of the promissory note into 76,876 Class A shares of the Corporation, with a carrying value of $86,332, and the $10,370 Canadian denominated tranche of the promissory note was repaid. As a result, no promissory note payable to Irving remains. Capstone then distributed $131,968 to Irving as a return of capital, which included a $45,636 reduction to retained earnings and $86,332 to the Class A shares. The impact of these transactions did not change the carrying value of the Class A shares. As at March 3, 2017 Net proceeds on sale (1) Carrying value of assets held for sale (2) Gain on sale of Värmevärden $ 142,198 (14,111) 128,087 (1) Proceeds are net of transaction costs of $2,378. (2) Värmevärden had $3,025 working capital and $11,086 loans receivable on March 3, 2017. The results of the utilities - district heating segment, including the gain on sale, are presented as a discontinued operation. Financial information relating to the years ended December 31, 2017 and December 31, 2016 is set out below. Net income from discontinued operations The net income from Värmevärden's discontinued operations for the year ended December 31, 2017 and 2016 was: For the year ended Administrative expenses Gain on sale (1) Other income (loss) Net income (loss) from discontinued operations, net of tax (1) Gain on sale is net of foreign exchange impact of $119. Dec 31, 2017 (238) 128,087 1,468 129,317 Dec 31, 2016 (587) — 939 352 (C) Business Acquisition - Glen Dhu and Fitzpatrick Wind Facilities In December 2017, through a series of transactions, Capstone acquired the remaining (approximately 50%) ownership interests in the Glen Dhu and Fitzpatrick wind facilities for $21,837, bringing Capstone's ownership interest to 100%. The acquisition of the remaining interest was initially completed by a subsidiary of iCON Infrastructure Partners III, LP ("iCON III"), who then contributed the acquired assets to Capstone on December 31, 2017 in return for an additional capital contribution, recorded as an increase in shareholders' equity. As at December 31, 2017, the balances in Capstone's consolidated statement of financial position include amounts from Glen Dhu and Fitzpatrick; prior to this transaction these investments were equity accounted. Refer to note 9b. The transaction was accounted for as a step acquisition using the acquisition method of accounting. Under this method, total assets and liabilities are initially recognized at their fair values on the date of acquisition and the equity accounted investment is derecognized. Transaction costs on acquisition of $225 were expensed in the consolidated statement of income as part of project development costs. The allocation of the purchase price is preliminary and may be revised up to 12 months after the acquisition date. CAPSTONE INFRASTRUCTURE CORPORATION Page 36 Recognized amounts of identifiable assets acquired and liabilities assumed at December 31, 2017 Working capital (1) Other assets Capital assets Intangible assets – electricity supply and other contracts Less: net financial liabilities (net of $3,574 cash acquired) Other liabilities Deferred income tax liability Total identifiable net assets acquired Consideration in the form of equity contribution Previously held equity accounted investments (2) Notes Fair value 3,448 10 12 17 9 1,763 118,235 21,496 (85,311) (1,687) (15,060) 42,884 21,837 21,047 42,884 (1) Working capital includes $2,948 of accounts receivable, no allowance for doubtful debts are recorded. (2) As at the date of acquisition, the book value of the equity accounted investment approximated the fair value of Capstone's interest in the acquiree. No gain or loss was recognized on the transaction. NOTE 4. CASH AND CASH EQUIVALENTS AND RESTRICTED CASH Debt service and maintenance reserves Construction escrow Cash on deposit Restricted cash Unrestricted cash and cash equivalents Dec 31, 2017 12,452 Dec 31, 2016 14,973 9,911 75 22,438 64,083 86,521 12,685 75 27,733 62,246 89,979 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 15). NOTE 5. TRADE AND OTHER RECEIVABLES Power Corporate Dec 31, 2017 24,360 Dec 31, 2016 22,689 48 24,408 375 23,064 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 8b and 8c for further detail of credit risk and economic dependence. NOTE 6. OTHER ASSETS Prepaid expenses Inventory of spare parts and consumable supplies, net (1) Dec 31, 2017 2,697 Dec 31, 2016 1,377 2,081 4,778 1,768 3,145 (1) No inventory obsolescence provision is required as at December 31, 2017. The cost of inventories recognized in operating expenses for the year ended December 31, 2017 was $480 (2016 - $361). NOTE 7. FINANCIAL INSTRUMENTS (A) Fair Value of Financial Instruments In 2017, financial instruments consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and other liabilities, 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 37 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, 2017, 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 8a). 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. 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. 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, are recorded initially at fair value. 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, 2017. 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 38 The following table illustrates the classification of the Corporation's financial instruments, that have been recorded at fair value: Cash and cash equivalents Restricted cash Recurring measurements: Derivative contract assets: Whitecourt embedded derivative (1) Interest rate swap contracts Less: current portion Promissory note payable (2) Derivative contract liabilities: Interest rate swap contracts Less: current portion Level 1 Quoted prices in active markets for identical assets 64,083 22,438 — — — — — — — — Level 2 Significant other observable inputs — — — 7,958 (1,130) 6,828 — 2,144 — 2,144 Level 3 Significant unobservable inputs — — 13,406 — — 13,406 — — — — Dec 31, 2017 Dec 31, 2016 64,083 22,438 13,406 7,958 (1,130) 20,234 62,246 27,733 13,674 3,465 — 17,139 — 96,702 2,144 — 2,144 2,185 (758) 1,427 (1) Whitecourt's embedded derivative consists of a $17,643 fair value asset, offset by the $4,237 amortized contra-asset, set up on inception (2016 - $18,265 fair value asset, offset by the $4,591 of contra-asset). (2) Capstone's demand interest-free promissory note to Irving was designated as fair value through profit and loss until settlement in 2017. Certain comparative figures for the periods ended December 31, 2016 have been adjusted to conform with the presentation in the current year. Fair value continuity for Level 3 inputs Opening balance, January 1, 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 21): Unrealized gain (loss) on the Whitecourt embedded derivative Unrealized gain (loss) on interest rate swap contracts Unrealized gain (loss) on foreign currency contracts Realized gain (loss) on foreign currency contracts Other liabilities: Interest expense on long-term debt (3) 2017 13,674 5,044 (5,664) 352 13,406 2016 (3,148) 24,612 (8,142) 352 13,674 Dec 31, 2017 Dec 31, 2016 653 5,396 4,534 — 9,930 — — 334 24,964 2,401 138 27,503 (23) (23) (36,668) (36,668) (34,476) (34,476) (1) (2) (3) Interest income for 2017 of $1,600 includes a payment from Chapais Électrique Limitée of $947 and interest income on cash balances of $653. Interest income for 2016 of $2,622 includes interest income directly related to the Ontario Electricity Financial Corporation ("OEFC") proceeds awarded of $2,288 and interest income on cash balances of $334. Interest expense on the long-term debt for 2017 includes amortization of deferred financing fees and accretion on liability for asset retirement obligations of $2,121 and $334 respectively (2016 - $1,839 and $317). CAPSTONE INFRASTRUCTURE CORPORATION Page 39 NOTE 8. FINANCIAL RISK MANAGEMENT The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market risk, credit risk, economic dependence and liquidity risk. The Corporation's overall risk management process is designed to identify, manage and mitigate business risk, which includes, among others, financial risk. (A) Market Risk Market risk is the risk or uncertainty arising from possible price movements and their impact on the future performance of the business. The Corporation is exposed to commodity price risk (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 2017, 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. The terms of the contracts are: Entity GHG GHG Cardinal Cardinal Grey Highlands Clean Grey Highlands Clean Snowy Ridge Snowy Ridge Settlers Landing Settlers Landing Maturity Date Jun 30, 2021 Jun 30, 2034 Dec 30, 2022 Jun 30, 2034 Sep 30, 2021 Sep 30, 2034 Dec 31, 2021 Dec 31, 2034 Jun 30, 2022 Jun 30, 2035 Foreign currency exchange risk Notional Amount Swap Fixed Rate Stamping Fee / Margin Effective Interest Rate 2.97% - 3.33% 1.34% - 1.45% 1.63% - 1.88% 71,347 57,363 64,259 41,292 51,422 41,616 29,227 21,011 24,862 17,719 3.04% - 3.17% 1.24% 2.77% 1.24% 2.61% 1.13% 2.07% 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% 3.95% 1.63% - 1.88% 3.34% - 3.59% 1.88% 4.81% 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. Credit Risk (B) 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 receivable and derivative contracts. The Corporation deposits its cash with reputable financial institutions and limits the exposure by counterparty; management therefore believes the risk of loss to be remote. Credit risk concentration with respect to power trade receivables is limited due to the Corporation's customer base being predominantly government authorities. The table below summarizes power trade receivables from the sale of electricity by counterparty: As at Independent Electricity System Operator ("IESO") Nova Scotia Power Inc. ("NSPI") OEFC Millar Western Other CAPSTONE INFRASTRUCTURE CORPORATION Dec 31, 2017 13,759 Dec 31, 2016 13,191 4,118 1,711 708 4,112 24,408 1,161 1,228 1,906 5,578 23,064 Page 40 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 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. Economic Dependence (C) 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 NSPI OEFC Other Dec 31, 2017 112,160 Dec 31, 2016 99,744 12,451 8,855 20,697 12,280 40,801 20,115 154,163 172,940 Liquidity Risk (D) Liquidity risk is the risk that the Corporation may have insufficient cash or other resources to meet obligations as they come due. Compliance with debt covenants The Corporation has financial liabilities in its power operating segments and at corporate. Refer to notes 14 accounts payable and other liabilities and 15 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) Pay future preferred dividends; 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, 2017 were as follows: Financial Liabilities Within one year One year to five years Beyond five years Accounts payable and other liabilities 20,257 Derivative financial instruments Interest rate swaps Long-term debt Principal payments Interest payments — 86,208 31,821 118,029 — 434 231,084 110,888 341,972 — 1,710 516,398 153,620 670,018 Total 20,257 2,144 833,690 296,329 1,130,019 Sensitivity Analysis (E) The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2017, 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 changes in market variables used in the sensitivity analysis were determined based on implied volatilities, where available, or historical data. CAPSTONE INFRASTRUCTURE CORPORATION Page 41 The sensitivity analysis has been prepared based on December 31, 2017 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, 2017 are all constant. Excluded from this analysis are all non-financial assets and liabilities that are not classified as financial instruments under IFRS 7. The sensitivity analysis provided is hypothetical and should be used with caution because the impacts provided are not necessarily indicative of the actual impacts that would be experienced since the Corporation's actual exposure to market rates is constantly changing as the Corporation's portfolio of commodity, debt, foreign currency and equity contracts changes. Changes in fair values or cash flows based on a variation in a market variable cannot be extrapolated because the relationship between the change in the market variable and the change in fair value or cash flows may not be linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering interrelationships between the various market rates, hedging strategies employed by the Corporation or other mitigating actions that would be taken by the Corporation. The table summarizes the impact on fair value of changes in the Whitecourt embedded derivatives' significant unobservable inputs: Dec 31, 2017 Unobservable inputs Estimated input Relationship of input to fair value $13,406 Forward Alberta power pool prices From $36/MWh to $96/ MWh over the next 12 years. A reasonably possible increase in estimated forward prices of 5% or a decrease of 5%, would cause fair value to decrease by $4,445 and increase by $4,558, respectively. Changes in these 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 the year ended Dec 31, 2017 Financial assets: Cash and cash equivalents (1) Restricted cash Interest rate swap assets, net Carrying Amount Interest Rate Risk (0.5)% 0.5% 64,083 22,438 5,814 (320) (112) (9,768) 320 112 9,225 (330) Financial liabilities: Long-term debt (2) (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 $529,306 and variable rate debt that is covered by a swap for fixed-rate debt totaling $238,469. 65,915 330 Equity Accounted Investments NOTE 9. EQUITY ACCOUNTED INVESTMENTS (A) As at December 31, 2017, Capstone no longer follows the equity accounting method for any of its investments. This is a result of the March 3 sale of Capstone's interest in Värmevärden and the December 31 acquisition of the remaining interests in the Glen Dhu and Fitzpatrick wind facilities. As a result, the statement of financial position no longer holds an interest in Värmevärden and Capstone now fully consolidates the wholly owned wind facilities. In addition, Capstone's income statement includes equity accounting for the periods up to the disposal or acquisition of the respective investments. Refer to note 3 for details of both transactions. The changes in the Corporation’s total equity accounted investments for the years ended were as follows: For the year ended Dec 31, 2017 Dec 31, 2016 (1) Distributions received were from Glen Dhu. Opening Balance Equity Accounted Income (Loss) 22,464 23,392 935 958 Distributions Received (1) (2,352) (1,886) Acquisition of remaining interests (21,047) — Ending Balance — 22,464 CAPSTONE INFRASTRUCTURE CORPORATION Page 42 Summarized Information for Equity Accounted Investments (B) The Corporation has summarized its equity accounted investments using their gross values as follows: As at Summarized Statements of Financial Position Assets Dec 31, 2017 Glen Dhu Fitzpatrick Total Glen Dhu Dec 31, 2016 Fitzpatrick Current Non-current Liabilities Current Non-current Equity before fair value increments on purchase and NCI Fair value increments, net of amortization Equity including unamortized fair value increments on purchase Capstone's interest Carrying value of investment For the year ended Summarized Statements of Income Revenue Net income Total comprehensive income Capstone's interest (refer to note 3c) Subtotal Amortization of fair value adjustments and other Total Net income to Capstone NOTE 10. CAPITAL ASSETS (A) Continuity — — — — — — — — — — — — — — 100% — 100% — Glen Dhu 21,214 3,874 3,874 49% 1,898 (876) 1,022 Dec 31, 2017 Fitzpatrick 237 (91) (91) 50% (46) (41) (87) — — — — — — — — Total 21,451 3,783 3,783 1,852 (917) 935 935 9,134 106,440 (7,492) (88,028) 20,054 24,734 44,788 49% 21,946 Glen Dhu 20,404 3,866 3,866 49% 1,894 (876) 1,018 197 2,202 (2,491) (205) (297) 1,332 1,035 50% 518 Dec 31, 2016 Fitzpatrick 270 (44) (44) 50% (22) (38) (60) Total 9,331 108,642 (9,983) (88,233) 19,757 26,066 45,823 22,464 Total 20,674 3,822 3,822 1,872 (914) 958 958 Cost (1) Land Equipment and vehicles Property and plant Accumulated depreciation Equipment and vehicles Property and plant Net carrying value Jan 1, 2017 Additions Disposals Transfers (2) Business Acquisition (3) Dec 31, 2017 1,051 10,542 1,062,391 1,073,984 (6,126) (280,587) 787,271 — 364 17,603 17,967 (1,084) (55,878) (38,995) — (29) (11,829) (11,858) 29 8,062 (3,767) — — 33,633 33,633 — — 33,633 33 — 118,202 118,235 — — 118,235 1,084 10,877 1,220,000 1,231,961 (7,181) (328,403) 896,377 (1) Additions to cost of $17,967 include $16,799 related to the Whitecourt refurbishment. Disposals include capital assets replaced as part of Whitecourt's refurbishment, which resulted in a loss of $3,235 in other gains and losses on the consolidated statement of income. Refer to note 21. (2) Transfer of $33,633 for Settlers Landing from projects under development upon reaching commercial operation ("CODs"). (3) Refer to note 3c. CAPSTONE INFRASTRUCTURE CORPORATION Page 43 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, 2016 Additions Disposals Foreign Exchange Transfers Disposal of Business Dec 31, 2016 4,574 16,527 1,407,911 669,851 14,888 2,113,751 (5,035) (353,104) (53,379) 1,702,233 — 814 13,295 7,437 46,318 67,864 (2,173) (68,872) (8,324) (11,505) — (536) (23,342) (15) — (23,893) 329 21,896 — (1,668) (658) (1,694) (127,849) (139,361) (7,828) (277,390) 1,084 55,294 23,364 (197,648) — 701 191,003 13,120 (35,912) 168,912 — — — 168,912 (2,865) (5,270) (398,627) (551,032) (17,466) (975,260) (331) 64,199 38,339 (873,053) 1,051 10,542 1,062,391 — — 1,073,984 (6,126) (280,587) — 787,271 Certain comparative figures for the periods ended December 31, 2016 have been adjusted to conform with the presentation in the current year. (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 NOTE 11. PROJECTS UNDER DEVELOPMENT (A) Continuity As at January 1 Capitalized costs during the year (1) Costs transferred to capital assets (2) (refer to note 10) Costs transferred to intangibles (2) (refer to note 12) As at December 31 (3) (1) Includes $123 of capitalized borrowing costs during the construction of the Settlers Landing wind development projects using the interest rate of the long-term debt (2016 - $2,777 during the construction of GHG, Grey Highlands Clean, Snowy Ridge and Settlers Landing projects). (2) Amounts were transferred on the COD of Settlers Landing (2016 - COD of GHG, Grey Highlands Clean and Snowy Ridge). (3) PUD balance as at December 31, 2017 relates to the Riverhurst wind development project. (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 Dec 31, 2017 14,383 Dec 31, 2016 100,547 3,853 18,236 20,445 120,992 CAPSTONE INFRASTRUCTURE CORPORATION Page 44 Dec 31, 2017 17,967 (1,942) — — 16,025 Dec 31, 2016 67,864 (95) (2,609) (49,624) 15,536 2017 22,267 14,383 (33,633) (2,287) 730 2016 106,200 100,547 (170,165) (14,315) 22,267 NOTE 12. INTANGIBLE ASSETS Assets Computer software Electricity supply and other contracts(1) Water rights Accumulated amortization Computer software Electricity supply and other contracts Water rights Net carrying value Jan 1, 2017 Additions Transfers Business Acquisition(2) Dec 31, 2017 257 149,039 73,018 (257) (48,427) (20,137) 153,493 — 281 — — (7,703) (2,122) (9,544) — 2,287 — — — — 2,287 — 21,496 — — — — 21,496 257 173,103 73,018 (257) (56,130) (22,259) 167,732 (1) Transfer is composed of $2,287 from PUD on the COD of Settlers Landing (refer to note 11). (2) Refer to note 3c. Jan 1, 2016 Additions Disposals Foreign Exchange Transfers Impairment Disposal of Business Dec 31, 2016 (1,387) (9,178) 1,253 — — — — — — (5,067) (31,305) — — — — — (38,057) 14,315 — — — — — — 15,568 (14,300) (3,399) 1,387 7,493 Assets Computer software Electricity supply and other contracts Water rights Licence Goodwill Accumulated amortization Computer software Electricity supply and other contracts Water rights 24,222 134,724 73,018 27,141 176,256 — — — — — (40,521) (18,026) (7,906) (2,111) Net carrying value 362,514 (13,416) NOTE 13. INCOME TAXES (A) Deferred Income Tax As at Deferred income tax assets Deferred income tax liabilities Net deferred income tax liability — — — — (58,000) — — — (58,000) (14,653) 257 — — (22,074) (86,951) 149,039 73,018 — — 8,562 (257) — — (115,116) (48,427) (20,137) 153,493 Dec 31, 2017 — Dec 31, 2016 14,750 (89,243) (89,243) (72,673) (57,923) 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 Asset retirement obligations Deferred income tax assets Capital assets Intangibles Financial instruments Loan premium and deferred financing costs Other Deferred income tax liabilities Net deferred income tax liability CAPSTONE INFRASTRUCTURE CORPORATION Dec 31, 2017 27,375 Dec 31, 2016 27,835 420 2,294 30,089 (75,349) (36,853) (5,011) (1,600) (519) (119,332) (89,243) 16,711 1,920 46,466 (59,752) (39,036) (3,985) (1,129) (487) (104,389) (57,923) Page 45 A continuity of the net deferred income tax liability follows: Net deferred income tax liability as at January 1 Business acquisition (1) Recorded in earnings Liability derecognized on disposal of Bristol Water Other Net deferred income tax liability as at December 31 (1) Refer to note 3c. (B) Timing of Deferred Income Tax Reversal The timing of deferred income tax reversal is summarized as follows: As at Within 12 months After more than 12 months Net deferred income tax liability 2017 (57,923) (15,060) (17,170) — 910 (89,243) 2016 (203,905) — 5,517 139,506 959 (57,923) Dec 31, 2017 Dec 31, 2016 46,488 (135,731) (89,243) 59,420 (117,343) (57,923) Tax Loss Carry Forwards (C) Capstone's tax loss carry forwards and the portion recognized in deferred income tax assets were as follows: Canadian – non-capital losses US – non-capital losses Canadian – capital losses Expiry 2025 – 2037 2023 – 2027 No expiry Recognized Unrecognized 66,302 103,038 Dec 31, 2017 169,340 Dec 31, 2016 187,102 — — 18,143 908 18,143 908 19,419 — The Corporation also has $1,699 of unrecognized deferred tax assets, which have not been recognized as at December 31, 2017 (2016 - $1,947). Rate Reconciliation (D) The following table reconciles the expected income tax expense using the statutory tax rate to the expense: For the year ended Income (loss) before income taxes (1) Statutory income tax rate Income tax expense based on statutory income tax rate Permanent differences Tax rate differentials Change in unrecognized deferred tax assets Impact of sale of Värmevärden Impact on attributes renounced to shareholders Part XII.6 taxes and penalties Other Total income tax expense (recovery) Dec 31, 2017 Dec 31, 2016 6,600 26.50% 1,749 861 (38) (4,628) 20,901 — — (1,304) 17,541 14,971 26.51% 3,969 1,484 344 (9,977) — 1,111 241 (1,031) (3,859) (1) Income (loss) before income taxes excludes discontinued operations. The statutory income tax rate of 26.50% (2016 - 26.51%) changes in response to Capstone's allocation of taxable income to different tax jurisdictions. Current Income Taxes (E) Current income taxes payable of $2,439 are included in accounts payable and other liabilities on the statement of financial position (refer to note 14) (2016 - $2,958). CAPSTONE INFRASTRUCTURE CORPORATION Page 46 NOTE 14. ACCOUNTS PAYABLE AND OTHER LIABILITIES Dividends payable Income taxes payable Other accounts payable and accrued liabilities 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, 2017 409 Dec 31, 2016 409 2,439 17,409 20,257 2,958 22,016 25,383 Dec 31, 2017 2,274 Dec 31, 2016 2,509 24 141 2,439 164 285 2,958 (1) CRCE penalties related to flow-through shares originally issued by Renewable Energy Developers Inc., which was acquired by Capstone in 2013. NOTE 15. LONG-TERM DEBT (A) Power As at Dec 31, 2017 Dec 31, 2016 CPC credit facilities Wind - Operating Wind - Development (1) Hydros Solar Gas Less: deferred financing costs Long-term debt Less: current portion Fair Value 65,915 551,782 — 77,092 78,772 64,259 837,820 Fair Value 85,000 467,445 7,700 81,087 86,178 67,557 794,967 Carrying Value 65,915 544,382 — 77,502 81,632 64,259 833,690 (15,148) 818,542 (86,208) 732,334 Carrying Value 85,000 453,050 7,700 81,851 87,062 67,557 782,220 (16,229) 765,991 (62,169) 703,822 (1) In 2017, the Settlers Landing project debt was transferred to wind - operating as the project had reached COD. Capstone has a cumulative $42,121 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 Facilities Total available credit - all facilities Amount drawn Term credit facility Revolving credit facility (2) Letter of credit facility (3) Remaining available credit Interest Rate (1) Maturity Dec 31, 2017 145,000 Dec 31, 2016 125,000 3.61% Dec 15, 2021 50,000 15,915 27,812 51,273 85,000 — 32,161 7,839 (1) The effective rate was 3.61% on December 15, 2017 based on a variable rate plus an applicable margin. (2) (3) As at December 31, 2017, Capstone had 15 letters of credit authorized under the revolving facility. In Q1 2018, CPC repaid $15,915 of its revolving credit facility under the new CPC Credit Facilities, increasing the revolving credit facility capacity. On December 15, 2017, Capstone refinanced the corporate bridge credit facilities in place since the iCON III acquisition, increasing the total debt capacity to $145,000, consisting of a $50,000 term facility and a $95,000 revolving credit facility ("the CPC Credit Facilities"). The proceeds drawn on the new facilities were used to repay the the former CPC credit facilities and cover the financing fees. The new CPC Credit Facilities mature on December 15, 2021, bear interest at a variable rate plus an applicable margin and have a minimum annual principal repayment of $5,000 on the term facility. Subsequent to 2021, the new CPC Credit Facilities have a rolling one-year extension option, subject to lender approval. CAPSTONE INFRASTRUCTURE CORPORATION Page 47 Under the new CPC Credit Facilities, CPC is subject to customary covenants, including specific limitations on leverage and interest coverage ratios, and a minimum cash flow profile. The collateral for the new CPC Credit Facilities is provided by Capstone, CPC, and its material subsidiaries. CPC and its material subsidiary guarantors (with the exception of certain subsidiaries, including previously encumbered project financed subsidiaries) provided demand debentures granting a first ranking security interest in all present and future property and a floating charge over real property and first ranking securities pledge agreements (subject to certain permitted liens). Capstone provided a limited recourse guarantee, a securities pledge agreement, and an assignment of indebtedness owed to Capstone by CPC. In 2016, the former CPC credit facilities' aggregate capacity was $125,000, comprising an $85,000 non-revolving facility, a $5,000 revolving facility, and a $35,000 revolving letter of credit facility. Prior to the refinancing of this credit facility, CPC repaid $20,317 of the principal, in accordance with the credit agreement. (ii) Wind - Operating Project debt Glen Dhu (1) GHG Goulais Erie Shores Saint-Philémon Grey Highlands Clean Amherst Snowy Ridge Settlers Landing SkyGen (2) Skyway 8 (2) Glace Bay Dec 31, 2017 88,885 70,647 72,169 67,977 52,952 49,320 37,223 29,083 25,160 20,360 18,337 12,269 Dec 31, 2016 — 74,723 73,823 73,934 53,988 51,963 39,242 30,652 — 22,095 19,013 13,617 544,382 453,050 (1) Glen Dhu project debt relates to the acquisition of the remaining interest of the wind facility, which is consolidated as at December 31, 2017. Refer to note 3c. (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. Glen Dhu Term loan (2) (1) Glen Dhu has a standby loan facility to fund its debt service reserve requirement. There were no draws on the standby loan facility during the year. (2) Glen Dhu's term loan balance represents its fair value upon acquisition. Refer to note 3c for more details. Interest Rate 5.33% Dec 31, 2017 88,885 Maturity Dec 31, 2030 Dec 31, 2016 — GHG Term loan Interest Rate (2) 3.08% Maturity Aug 26, 2021 Dec 31, 2017 70,647 Dec 31, 2016 74,723 (1) GHG has $3,200 as letters of credit to cover the debt service reserve. (2) As at December 31, 2017, GHG had swap contracts to convert interest to a fixed rate (See note 8a). Goulais Term loan Interest Rate 5.16% Maturity Sep 30, 2034 Dec 31, 2017 72,169 Dec 31, 2016 73,823 (1) Goulais is required to set aside $3,327 as restricted cash to cover the debt service reserve. Erie Shores (3) Tranche A Tranche C Interest Rate 5.96% 6.15% Maturity Apr 1, 2026 Apr 1, 2026 Dec 31, 2017 40,982 Dec 31, 2016 44,588 26,995 67,977 29,346 73,934 (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 $5,193 as restricted cash and $550 as letters of credit against the borrowing capacity of the new CPC revolving credit facility to cover the debt service and maintenance reserves. (3) Tranche B matured on April 1, 2016. Saint-Philémon Term loan Interest Rate 5.49% Maturity May 31, 2034 Dec 31, 2017 52,952 Dec 31, 2016 53,988 (1) Saint-Philémon is required to set aside $1,224 as letters of credit against the borrowing capacity of the new CPC revolving credit facility to cover the debt service reserve. CAPSTONE INFRASTRUCTURE CORPORATION Page 48 Grey Highlands Clean Term loan Interest Rate (2) 2.87% Maturity Dec 23, 2021 Dec 31, 2017 49,320 Dec 31, 2016 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, 2017, Grey Highlands Clean had swap contracts to convert interest to a fixed rate (See note 8a). Amherst Term loan Interest Rate 6.20% Maturity Apr 30, 2032 Dec 31, 2017 37,223 Dec 31, 2016 39,242 (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 new CPC revolving credit facility to cover the debt service and maintenance reserves. Snowy Ridge Term loan Interest Rate (2) 2.75% Maturity Dec 23, 2021 Dec 31, 2017 29,083 Dec 31, 2016 30,652 (1) Snowy Ridge is required to set aside $3,386 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, 2017, Snowy Ridge had swap contracts to convert interest to a fixed rate (See note 8a). Settlers Landing Term loan Interest Rate (2) 3.34% Maturity Aug 31, 2022 Dec 31, 2017 25,160 Dec 31, 2016 — (1) Settlers Landing is required to set aside $1,996 as restricted cash to cover construction holdbacks with vendors and $1,100 as letters of credit to cover the debt service reserve. (2) As at December 31, 2017, Settlers Landing had swap contracts to convert interest to a fixed rate (See note 8a). On August 31, 2017, the Settlers Landing construction facility converted into a five-year term facility which has regular principal and interest payments fully amortizing over the remaining term and a $1,100 letter of credit facility. SkyGen Term loans Term loan Interest Rate 4.22 - 5.06% 6.22% Maturity (2) Feb 23, 2018 Feb 17, 2018 Dec 31, 2017 20,143 Dec 31, 2016 21,772 217 20,360 323 22,095 (1) SkyGen is not required to set aside any reserves for debt service or maintenance. (2) On February 6, 2018, SkyGen and its existing lenders extended the term loan maturity dates to August 2018. Skyway 8 Term loan Interest Rate 4.80% Maturity (2) Feb 16, 2018 Dec 31, 2017 18,337 Dec 31, 2016 19,013 (1) Skyway 8 is not required to set aside any reserves for debt service or maintenance. (2) On February 6, 2018, Skyway8 and its existing lenders extended the term loan maturity dates to August 2018. Glace Bay Term loan Term loan Term loan Interest Rate 5.99% 6.36% 4.72% Maturity Mar 15, 2027 Apr 21, 2019 Oct 1, 2032 Dec 31, 2017 6,685 Dec 31, 2016 7,211 799 4,785 12,269 1,537 4,869 13,617 (1) Glace Bay is required to set aside $1,893 as restricted cash to cover the debt service and operating and maintenance reserves. (iii) Hydros Senior secured bonds Subordinated secured bonds Interest Rate 4.56% 7.00% Maturity Jun 30, 2040 Jun 30, 2041 Dec 31, 2017 57,693 Dec 31, 2016 61,609 19,809 77,502 20,242 81,851 (1) The hydro facilities are required to set aside $17,273 as letters of credit against the borrowing capacity of the new CPC revolving credit facility to cover the debt service and maintenance reserves. (iv) Solar Amherstburg project debt Interest Rate 3.49% Maturity Dec 31, 2030 Dec 31, 2017 81,632 Dec 31, 2016 87,062 (1) Amherstburg is required to set aside $4,527 as letters of credit against the borrowing capacity of the new CPC revolving credit facility to cover the debt service and maintenance reserves. CAPSTONE INFRASTRUCTURE CORPORATION Page 49 (v) Gas Term loan Interest Rate (2) 2.87% Maturity Mar 18, 2023 Dec 31, 2017 64,259 Dec 31, 2016 67,557 (1) Cardinal is required to set aside $2,000 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, 2017, Cardinal had swap contracts to convert interest to a fixed rate (See note 8a). Long-term Debt Covenants (B) For the year ended and as at December 31, 2017, the Corporation and its subsidiaries complied with all financial and non- financial debt covenants. Long-term Debt Repayments (C) 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 231,084 86,208 Beyond five years 516,398 Total 833,690 NOTE 16. 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 and the operating wind and hydro power facilities. The following table provides the underlying assumptions and reconciles the Corporation's total asset retirement obligation activity: Assumptions: Expected settlement date Inflation rate Credit adjusted discount rate Balance, beginning of year Business acquisition (1) Revision of estimates Liabilities incurred Accretion expense Balance, end of year (1) Refer to note 3c. Dec 31, 2017 Dec 31, 2016 2020– 2062 2017– 2062 2.0% 2.0% 3.5% - 5.75% 3.25% - 6.5% 7,165 1,598 1,009 55 334 10,161 4,767 — 1,640 441 317 7,165 NOTE 17. SHAREHOLDERS’ EQUITY AND PROMISSORY NOTE PAYABLE The following table summarizes the Corporation's share capital: As at Common shares Preferred shares Dec 31, 2017 62,270 Dec 31, 2016 40,433 72,020 134,290 72,020 112,453 Common and Class A Shares (A) Capstone is authorized to issue an unlimited number of common and Class A shares, all of which have the same rights and attributes. CAPSTONE INFRASTRUCTURE CORPORATION Page 50 Continuity for the year ended (000s shares and $000s) Opening balance Dividend reinvestment plan Exchange of Class B units and conversion of debentures (1) Cancellation of common shares for issuance of promissory note (1) Issuance of Class A shares (1), (2) Elimination of deficit (3) Conversion of promissory note (4) Return of capital (2), (4) Business acquisition (5) Ending balance Dec 31, 2017 Dec 31, 2016 Shares Carrying Value 40,433 227,733 Shares Carrying Value 715,989 94,396 — — — 76,876 — — — — 304,609 — — — 86,332 — — (86,332) 21,837 62,270 136 9,296 (103,828) 103,828 — 123,905 — — 227,733 617 26,710 (316,225) — (389,178) 194,531 (192,011) — 40,433 (1) 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). (2) On March 31, 2017, Irving converted the remaining SEK tranche of the promissory note payable into 76,876 newly issued Class A shares, which increased share capital by $86,332. Additionally, Capstone distributed $86,332 to Irving as a return of capital which impacted share capital. The transaction did not change the value of Capstone's Class A shares. Refer to note 3b(ii) for details. (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)). (5) Refer to note 3c for changes related to the acquisition of remaining interests of wind facilities. Preferred Shares (B) Capstone is authorized to issue preferred shares equal to 50% of the outstanding common shares. As at December 31, 2017 and 2016, 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. 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. Dividends (C) No dividends were declared in 2017 or 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) after the iCON III acquisition of Capstone. For the year ended Preferred shares declared (1), (2) (1) (2) Capstone has included $409 of accrued preferred dividends as declared on November 8, 2017 (2016 - $409). Includes $71 of deferred income taxes for the year ended December 31, 2017 (2016 - $326). Dec 31, 2017 2,523 Dec 31, 2016 3,532 Capital Management (D) 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 15. CAPSTONE INFRASTRUCTURE CORPORATION Page 51 Promissory Note Payable (E) On April 29, 2016, as part of the iCON III acquisition described in note 3a, Capstone issued a demand interest-free promissory note to Irving for $316,225 in exchange for common share capital, which was reduced to $96,702 as at December 31, 2016. On March 31, 2017, Irving converted its remaining 552,700 SEK tranche of the promissory note into 76,876 Class A shares of Capstone at fair value using the foreign exchange rate as at April 29, 2016 and the $10,370 Canadian denominated tranche of the promissory note was repaid using proceeds from the sale of Värmevärden. Refer to note 3b(ii) for details. Non-controlling Interests NOTE 18. NON-CONTROLLING INTERESTS (A) 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 Settlers Landing ("SL") non- controlling interests as at December 31, 2017 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 (1) 214,171 (3,503) (51,400) — — (159,268) — — — — — Firelight's interest in Amherst Municipal interest in Saint- Philémon BFN's interest in Goulais Concord's interest in GHG, SR & SL 10,262 552 — (1,240) — — 9,574 736 (931) — 9,379 3,258 (354) — (569) — — 2,335 196 (1,035) — 1,496 19,781 1,522 — (1,265) — — 20,038 61 (1,274) — 18,825 26,033 — — — 3,437 — 29,470 — — (3,921) 25,549 Total 273,505 (1,783) (51,400) (3,074) 3,437 (159,268) 61,417 993 (3,240) (3,921) 55,249 January 1, 2016 NCI portion of net income (loss) NCI portion of OCI Dividends declared Net convertible debenture advances Disposal of business As at December 31, 2016 NCI portion of net income (loss) Dividends declared Net convertible debenture repayments As at December 31, 2017 (1) Refer to note 3b(i). CAPSTONE INFRASTRUCTURE CORPORATION Page 52 (B) Summarized Information for Material Partly Owned Subsidiaries As at Summarized Statements of Financial Position Assets Current Non-current Liabilities Current Non-current Total equity Attributable to: Shareholders of Capstone NCI Dec 31, 2017 Dec 31, 2016 Amherst Saint- Philémon Goulais GHG, SR & SL Amherst Saint- Philémon Goulais GHG, SR & SL 2,503 57,532 (2,768) (35,785) 21,482 12,103 9,379 21,482 2,766 56,711 (3,410) (49,871) 6,196 4,225 2,054 (2,494) — 3,785 4,700 1,496 6,196 (15,040) 18,825 3,785 969 68,704 — — 69,673 44,115 25,549 69,664 1,919 60,249 (2,681) (37,612) 21,875 12,301 9,574 21,875 1,192 59,926 (1,813) (51,530) 7,775 2,724 2,861 (645) — 4,940 5,440 2,335 7,775 (15,098) 20,038 4,940 2,211 67,891 — — 70,102 40,632 29,470 70,102 For the year ended Summarized Statements of Income Revenue Net income Total comprehensive income Attributable to: Shareholders of Capstone NCI For the year ended Summarized Statements of Income Revenue Net income OCI Total comprehensive income Attributable to: Shareholders of Capstone NCI (1) Refer to note 3b(i). For the year ended Summarized Statements of Cash Flows Operating Investing Financing Net increase / (decrease) in cash and equivalents Bristol Water (1) 191,315 31,921 (114,344) (82,423) (27,520) (54,903) (82,423) Dec 31, 2017 Saint- Philémon 7,934 401 401 205 196 401 Dec 31, 2016 Saint- Philémon 6,993 (722) — (722) (368) (354) (722) Goulais GHG, SR & SL 2,677 118 118 57 61 118 7,418 7,408 7,408 7,408 — 7,408 Goulais GHG, SR & SL 3,019 312 — 312 (1,210) 1,522 312 566 501 — 501 501 — 501 Amherst 8,662 1,508 1,508 772 736 1,508 Amherst 8,408 1,127 — 1,127 575 552 1,127 Dec 31, 2017 Amherst 3,440 — (3,804) (364) Saint- Philémon 4,618 (36) (3,017) 1,565 Goulais GHG, SR & SL 6,025 — (4,210) 1,815 7,421 (1,807) (7,418) (1,804) CAPSTONE INFRASTRUCTURE CORPORATION Page 53 For the year ended Summarized Statements of Cash Flows Operating Investing Financing Foreign exchange Net increase / (decrease) in cash and equivalents (1) Refer to note 3b(i). Bristol Water (1) 70,019 (49,657) (1,217) (6,266) 12,879 Amherst 4,124 — (4,210) — (86) Dec 31, 2016 Saint- Philémon 1,258 1,497 (2,574) — 181 Goulais GHG, SR & SL 4,398 1,455 (7,326) — (1,473) (13,849) (5,336) 16,611 — (2,574) Certain comparative figures for the periods ended December 31, 2016 have been adjusted to conform with the presentation in the current year. Convertible debentures with Concord (C) 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, Snowy Ridge and Settlers Landing projects. The initial principal contribution of the debenture was $31,408. The face value decreased to $29,470 as at December 31, 2016 and $25,549 as at December 31, 2017. Share Appreciation Rights Plan NOTE 19. SHARE-BASED COMPENSATION (A) On April 1, 2017, a new SAR plan was approved by the board. The SAR plan allows up to 15,230,457 SAR units, or 5% of the number of shares issued, to be granted, of which 9,899,791 were granted on inception and outstanding as at December 31, 2017. A SAR unit entitles the holder to the appreciation in value of one unit over a period of time. The SAR units have a maximum life of 13 years and vest upon a sale transaction, defined as more than 50% of the equity securities of Capstone being sold to a third party. The sale price will determine the ultimate fair value of the SAR units on the vesting date. The SAR units will be settled in cash for individuals who meet the vesting conditions on the vesting date. No liability has been recorded as a sale transaction is not currently probable. Long-term Incentive Plans (B) On April 1, 2017, Capstone awarded a discretionary cash-based LTIP to members of senior management. The LTIP accrues based on passage of time, until the vesting date of December 31, 2019. Employees who depart prior to the vesting date will forfeit their LTIP. The LTIP expense included in wages and benefits was $104 in 2017. Prior to the iCON III acquisition, Capstone had an LTIP for which restricted share units ("RSUs") and performance share units ("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. The share-based LTIP expense is included in wages and benefits (refer to notes 20 and 23) (2016 - $6,568). CAPSTONE INFRASTRUCTURE CORPORATION Page 54 NOTE 20. EXPENSES BY NATURE For the year ended Dec 31, 2017 Dec 31, 2016 Operating Admin. Wages and benefits Property expenses (1) Maintenance & supplies Professional fees (2) Fuel and transportation (3) Insurance Power facility administration Other Total 9,301 7,996 9,442 2,492 5,581 2,430 2,366 2,682 42,290 5,787 497 — 1,053 — 129 — 1,252 8,718 Project Development Costs 562 — — 1,250 — — — 278 2,090 Total Operating 15,650 8,493 9,442 4,795 5,581 2,559 2,366 4,212 8,593 7,393 10,817 3,580 19,131 2,448 2,384 2,601 53,098 56,947 Admin. 15,913 484 — 1,216 — 209 — 2,054 19,876 Project Development Costs 1,990 — — 13,031 — — — 234 Total 26,496 7,877 10,817 17,827 19,131 2,657 2,384 4,889 15,255 92,078 (1) Property expenses include leases, utilities, and property taxes. (2) Professional fees include legal, audit, tax and other advisory services. (3) Fuel and transportation expenses for the year ended December 31, 2016 include $12,049 of fuel expenses related to the OEFC retroactive adjustments in 2016. Certain comparative figures for the periods ended December 31, 2016 have been adjusted to conform with the presentation in the current year. NOTE 21. OTHER GAINS AND LOSSES Unrealized gains (losses) on derivative financial instruments (1) Losses on disposal of capital assets (2) Losses on settlement of convertible debentures (3) Realized losses on derivative financial instruments Other Other gains and (losses), net For the year ended Dec 31, 2017 9,930 (3,507) — — 14 6,437 Dec 31, 2016 27,503 (727) (3,324) (23) (19) 23,410 (1) Unrealized gains on derivative financial instruments were attributable to an increase in the Whitecourt embedded derivative asset because of lower estimated forward Alberta power pool prices since December 31, 2016 and increases in assets related to the interest rate swap contracts due to higher long-term interest rates since December 31, 2016. (2) Primarily relates to $3,235 of losses on capital assets replaced as part of Whitecourt's refurbishment. (3) On April 29, 2016, Capstone's 2016 and 2017 convertible debentures were redeemed and converted as part of the iCON III acquisition. Refer to note 3a. NOTE 22. 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 7 financial instruments, note 8 financial risk management, notes 15 long-term debt, 16 liability for asset retirement obligation and 17 shareholders' equity and promissory note payable as at December 31, 2017 were as follows: Leases (A) Minimum operating lease payments comprised: Operating leases Within one year One year to five years $19,134 $4,668 Beyond five years $49,235 Total $73,037 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 Corporation ("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 2023. CAPSTONE INFRASTRUCTURE CORPORATION Page 55 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. Capital Commitments (B) 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. During 2017, Whitecourt entered into several contracts as part of its refurbishment of the steam turbine and boiler. The project is expected to extend the life of the facility by 20 years. As at December 31, 2017, Whitecourt's remaining contractual commitments have been recorded in its accrued liabilities. Power Purchase Agreements (C) 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 power facilities, Capstone is not obligated to deliver electricity; however, in certain circumstances, if a facility fails to meet the performance requirements, the operating facilities' PPA may be terminated after a specified period of time. (D) Management Services Agreements Capstone has agreements with all the partially owned wind facilities and development projects, including Amherst, Saint- Philémon, Goulais, GHG, Snowy Ridge and Settlers Landing (Glen Dhu and Fitzpatrick were included up until the acquisition of the remaining ownership interests on December 31, 2017). 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. (E) 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. Operations and Maintenance ("O&M") Agreements (F) Cardinal has a maintenance contract with Siemens Canada Limited covering the gas turbine at the 15 MW Ingredion plant. The contract expires on November 24, 2023. 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 original agreement expires on November 30, 2021. Energy Savings Agreement ("ESA") (G) Cardinal has 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 plant that was completed in 2017, 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 (H) Capstone has provided limited recourse guarantees on the project debt of certain wind projects totalling $6,160 as at December 31, 2017. Capstone has also provided a guarantee to the former 25% owner of the Grey Highlands Clean wind facility which provides future contractual payments subsequent to 2019 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 23. RELATED PARTY TRANSACTIONS (A) Equity Transactions Transactions with iCON Refer to note 3 for a series of equity transactions, including the repayment of the promissory note and contribution of the remaining interests in the Glen Dhu and Fitzpatrick wind facilities from an iCON III subsidiary. CAPSTONE INFRASTRUCTURE CORPORATION Page 56 Shared Service Arrangement Fees earned from iCON Infrastructure Canada Inc. ("iCON Canada"), a subsidiary of iCON, under a shared service arrangement, are reported in the consolidated statements of income as an administrative expense recovery. During 2017, Capstone earned fees of $174 from iCON Canada. As at December 31, 2017, accounts receivable included $50 due from iCON Canada. Compensation of Key Management (B) Key management includes the Corporation's directors, Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) during the year. Compensation awarded to key management consisted of salaries, directors' fees, short-term employee benefits, long-term incentive plans, and termination benefits. Eligible directors and senior management of the Corporation also received forms of stock-based compensation, prior to the April 29, 2016 acquisition by iCON III. 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) Long-term incentive plans (2) Termination benefits (3) Dec 31, 2017 1,295 Dec 31, 2016 954 — 1,140 2,435 7,525 1,792 10,271 (1) The short-term incentive plan component of this balance is based on amounts paid during the period. (2) The long-term incentive plan is based on amounts paid during the year. December 31, 2016 compensation includes Capstone's share-based compensation (DSUs, RSUs and PSUs) which were satisfied on April 29, 2016 as part of the iCON III acquisition (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). NOTE 24. SEGMENTED INFORMATION The Corporation’s business has one reportable segment, which contains the power operations in order to assess performance and allocate capital, as well as the remaining corporate activities. Management evaluates performance primarily on revenue, expenses and EBITDA. Previously, there were two other reporting segments which were sold on December 15, 2016 and March 3, 2017, and thus presented as discontinued operations. Cash generating units within the power 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. Segments consist of: Power The Corporation’s investments in natural gas, 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 For the year ended Dec 31, 2017 Dec 31, 2016 Continuing Operations Power Corporate Total Discontinued Operations (2) Total Continuing Operations Power Corporate Total Discontinued Operations (3) Total Revenue (1) Expenses EBITDA 154,163 — 154,163 — 154,163 172,940 — 172,940 (44,322) (8,776) (53,098) — (53,098) (60,097) (31,981) (92,078) 118,567 (8,512) 110,055 — 110,055 140,884 (32,635) 108,249 Interest expense (36,668) — (36,668) Income tax recovery (expense) (4,027) (13,514) (17,541) — — Net income (loss) Additions to capital assets, net Additions to PUD 11,147 17,967 14,383 (22,088) (10,941) 129,317 118,376 — — 17,967 14,383 — — (36,668) (31,511) (2,965) (34,476) (17,541) (15,237) 19,096 17,967 35,395 14,172 (16,565) 102 3,859 18,830 14,274 — 172,940 — (92,078) — 108,249 — — (34,476) 3,859 (34,371) (15,541) 53,590 67,864 14,383 100,547 — 100,547 — 100,547 (1) For the year ended December 31, 2017, Whitecourt produced enough eligible power to receive $4,800 of grant funding, which was included in power revenue. (2) Relates to the utilities - DH segment. (3) Relates the the utilities - DH and water segments. The net loss includes $34,723 from the utilities - water segment, including a goodwill impairment charge of $58,000. Additions to capital assets relate entirely to the utilities - water segment. Certain comparative figures for the periods ended December 31, 2016 have been adjusted to conform with the presentation in the current year. CAPSTONE INFRASTRUCTURE CORPORATION Page 57 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: Andrew Kennedy Chief Financial Officer Tel: 416-649-1300 Email: akennedy@capstoneinfra.com CAPSTONE INFRASTRUCTURE CORPORATION Page 58 

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