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
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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
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INVESTOR INFORMATION
Quick Facts
Preferred shares outstanding
Securities exchange and symbols
Toronto Stock Exchange: CSE.PR.A
3,000,000
CONTACT INFORMATION
Address:
155 Wellington Street West, Suite 2930
Toronto, ON M5V 3H1
www.capstoneinfrastructure.com
Email: info@capstoneinfra.com
Contacts:
Andrew Kennedy
Chief Financial Officer
Tel: 416-649-1300
Email: akennedy@capstoneinfra.com
CAPSTONE INFRASTRUCTURE CORPORATION
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