2018 ANNUAL
MD&A and Financial Statements
MANAGEMENT’S
DISCUSSION AND ANALYSIS
FINANCIAL HIGHLIGHTS
Revenue (1), (2)
EBITDA (1), (2)
Net income (loss) (3), (4)
Preferred dividends
Total assets
Total long-term liabilities
As at and for the year ended December 31,
2018
183,629
122,676
2,304
2,452
1,131,928
806,887
2017
154,163
110,055
117,383
2,452
2016
172,940
108,249
(13,758)
3,427
1,201,910
833,882
1,147,017
785,087
(1) Comparative figures for 2016 have been adjusted to remove amounts from discontinued operations. Without the adjustment, revenue and EBITDA were
$364,255 and $130,190, respectively.
(2) Revenue for 2016 includes proceeds awarded of $33,288 for Cardinal and the Ontario hydro facilities. In addition, EBITDA for 2016 includes $2,288 of interest
income and $12,049 of associated operating expenses, which is a net impact of $23,527 in EBITDA.
(3) Net income (loss) attributable to the common shareholders includes discontinued operations for applicable periods, but excludes non-controlling interests.
(4) 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.
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
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2
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4
6
Derivative financial instruments
Risks and uncertainties
Environmental, health and safety regulation
Related party transactions
Summary of quarterly results
Fourth quarter 2018 highlights
Accounting policies and internal controls
CAPSTONE INFRASTRUCTURE CORPORATION
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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, 2018 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 further 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 Ganaraska, Grey Highlands ZEP, Snowy Ridge and
Settlers Landing wind facilities are exercised; market prices for electricity in Ontario and the amount of hours that the Cardinal Facility is
dispatched; and the price that the Whitecourt Biomass Facility will receive for its electricity production considering the market price for electricity
in Alberta, and the Whitecourt Biomass Facility’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; 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 (power purchase agreements;
operational performance; market price for electricity; contract performance and reliance on suppliers; completion of the Corporation’s wind
development projects; 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 21, 2018, 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
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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, 2018
and 2017.
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, 2018 and 2017. Additional information about the Corporation,
including its Annual Information Form ("AIF") for the year ended December 31, 2017, quarterly financial reports 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 7, 2019, 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
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 and cash flows for the year ended December 31, 2017.
Business Acquisition
On December 31, 2017, Capstone acquired the remaining interests in the Glen Dhu and Fitzpatrick wind facilities, resulting in the
consolidation of these entities' balances and results with Capstone's other subsidiaries subsequent to December 31, 2017.
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. Capstone used a rate of
0.1484 to translate amounts in Swedish Krona relating to the disposal of its interest in Värmevärden. Since the disposal
Capstone holds limited amounts of foreign currency.
ADDITIONAL GAAP PERFORMANCE MEASURES DEFINITIONS
While the accompanying consolidated financial statements have been prepared in accordance with IFRS, this MD&A also
contains EBITDA, a performance measure not defined by IFRS. EBITDA is an additional GAAP performance measure and does
not have a 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. EBITDA is defined as earnings
(loss) before financing costs, income tax expense, depreciation and amortization. EBITDA includes earnings (loss) related to the
non-controlling interest ("NCI"), interest income, and other gains and losses (net). 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 IN THE BUSINESS
In 2018, Capstone was successful in executing a new long-term Electricity Purchase Agreement ("EPA") for the Sechelt Creek
facility, in its application to Alberta's extended Bioenergy Producer Program ("BPP") at Whitecourt and in securing Renewable
Electricity Support Agreements ("RESA") for the Buffalo Atlee wind development projects.
Sechelt Creek Facility EPA
On February 1, 2018, the Sechelt Creek facility executed a new long-term EPA with BC Hydro, subject to regulatory approval.
The new EPA extends to March 1, 2058 at a price lower than the original EPA, which expired on February 28, 2017.
Whitecourt Bioenergy Producer Program
On June 7, 2018, the Government of Alberta approved Whitecourt's application to the BPP. Whitecourt expects to receive grant
funding of up to $9,172 for contributing to Alberta’s bioenergy production capacity over the two and a half year program, which
ends in March 2020. As at December 31, 2018, Capstone produced enough power to be eligible for $3,553 of BPP grant funding
for the year, of which $2,821 was received and the remainder is accrued for in revenue.
Project Development
Capstone continues to pursue projects at all stages of development and is actively progressing a number of projects.
On December 17, 2018, Capstone and its partner Sawridge First Nation ("Sawridge") announced that their Buffalo Atlee wind
development projects located near Jenner, Alberta (combined 48 MW gross) were selected by the Alberta Electricity System
CAPSTONE INFRASTRUCTURE CORPORATION
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Operator in a competitive bidding process for the second round of the Renewable Electricity Program. Capstone and Sawridge
were awarded and executed three RESA for their Buffalo Atlee 1, 2 and 3 projects (collectively the "Buffalo Atlee" projects).
In addition, Capstone's contracted development pipeline also includes the Riverhurst wind project, a 10 MW facility located in
Saskatchewan, which is expected to reach commercial operation ("COD") in 2020.
SUBSEQUENT EVENTS
Watford Wind Facility Acquisition
On February 1, 2019, Capstone acquired the assets of the Watford Wind Facility from Zephyr Farms Limited. The 10MW
operating wind facility is located near the municipality of Brooke-Alvinston in Ontario and operates under a power purchase
agreement ("PPA") that expires in 2032. Funding for the asset purchase came from existing cash.
RESULTS OF OPERATIONS
Overview
In 2018, Capstone's EBITDA and net income from continuing operations were higher than in 2017. Higher EBITDA from
Capstone's continuing operations reflects:
• Higher power segment results, primarily due to Glen Dhu and Fitzpatrick, which were equity accounted investments prior to
the acquisition of the remaining ownership interests on December 31, 2017. In addition, higher revenue from Whitecourt,
due to higher power rates and production, and Cardinal, due to higher market revenues; and
• Higher interest income from the settlement of a formerly impaired loan receivable; partially offset by
• Declines in the Whitecourt embedded derivative and government grants, which were earned for fewer months than in 2017.
Revenue
Expenses
Other income and expenses
EBITDA
Interest expense
Depreciation and amortization
Income tax recovery (expense)
Net income (loss) from continuing operations
Net income from discontinued operations
Net income
For the year ended
Dec 31, 2018
183,629
Dec 31, 2017
154,163
(60,838)
(115)
122,676
(38,797)
(77,967)
(2,015)
3,897
—
3,897
(53,098)
8,990
110,055
(36,668)
(66,787)
(17,541)
(10,941)
129,317
118,376
Change
29,466
(7,740)
(9,105)
12,621
(2,129)
(11,180)
15,526
14,838
(129,317)
(114,479)
The remaining material changes in net income from Capstone's continuing operations were:
• Higher interest expense, depreciation and amortization, primarily due to Glen Dhu and Fitzpatrick;
•
•
Lower income tax expense, primarily attributable to the sale of Värmevärden in 2017; and
Lower net income from discontinued operations, primarily reflecting the 2017 gain on sale of Värmevärden.
Results by Segment
Capstone’s MD&A discusses the results of the Canadian power segment, as well as the corporate activities. The power segment
consists of operating and development activities. The operating facilities produce electricity from natural gas, wind, biomass,
hydro and solar resources, and are located in Ontario, Nova Scotia, Alberta, British Columbia and Québec.
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.
The utilities - district heating segment is presented as a discontinued operation resulting from Capstone's sale of the investment
in 2017.
CAPSTONE INFRASTRUCTURE CORPORATION
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Revenue
Capstone's revenue is mainly driven by the generation and sale of electricity through long-term power contracts.
Revenue
Wind (1)
Gas
Hydro
Solar
Biomass
Total Revenue
For the year ended
Dec 31, 2018
113,566
25,269
14,333
15,059
15,402
Dec 31, 2017
93,512
Change
20,054
21,160
15,104
15,747
8,640
4,109
(771)
(688)
6,762
183,629
154,163
29,466
(1) Wind revenue for 2017 excludes the results of the Glen Dhu and Fitzpatrick wind facilities, which were equity accounted.
Power generated (GWh)
For the year ended
Wind (1)
Gas
Hydro
Solar
Biomass
Total Power
Dec 31, 2018
1,012.5
78.9
164.5
35.8
191.8
Dec 31, 2017
827.4
Change
185.1
37.4
176.4
36.7
142.5
41.5
(11.9)
(0.9)
49.3
263.1
1,483.5
1,220.4
(1) Wind production for 2017 excludes the Glen Dhu and Fitzpatrick wind facilities.
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 PPAs with government agencies or regulated credit-worthy counterparties. On a megawatt ("MW")
weighted-average-basis, the wind facilities have 14 years remaining on the current PPAs, with the earliest expiry in 2020.
• Cardinal, a natural gas peaking facility located in Ontario, 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 15MW facility.
•
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 28 years remaining on the current PPAs. The Amherstburg Solar Park PPA expires in 2031.
• Whitecourt, a biomass facility located in Alberta, by selling electricity at market rates to the Alberta Power Pool. Whitecourt
also earns a portion of its revenue from government grants and the sale of renewable energy credits. These are
supplemented or offset by a revenue sharing agreement with Whitecourt's fuel supplier, Millar Western, where contractual
settlements are included in other gains and losses in the consolidated statement of income.
The following table shows the significant changes in revenue from 2017:
Change Explanations
21,485 Higher revenue from Glen Dhu and Fitzpatrick, which were equity accounted investments until December 31, 2017.
6,581 Higher revenue from Whitecourt due to higher Alberta Power Pool prices as well as higher production because of the plant
refurbishment in 2017.
3,908 Higher revenue from Cardinal due to more runs as well as higher revenue to operate Ingredion's 15 MW facility, which
commenced operations on November 24, 2017.
1,155 Higher revenue from Settlers Landing, which reached COD on April 5, 2017.
(2,574) Lower revenue from the operating wind facilities (excluding Glen Dhu and Fitzpatrick) due to lower production, reflecting lower
wind resources in 2018.
(1,247) Lower revenue from Whitecourt due to fewer months of BPP funding earned in 2018.
158 Various other changes.
29,466 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
irradiation, wind speeds and air 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.
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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 (1)
Gas
Hydro
Solar
Biomass
Power operating expenses
Power
Corporate
Project development costs
Administrative expenses
Total Expenses
For the year ended
Dec 31, 2018
(22,185)
Dec 31, 2017
(16,277)
(13,666)
(4,151)
(1,043)
(9,343)
(50,388)
(1,602)
(1,319)
(2,921)
(7,529)
(60,838)
(11,487)
(4,258)
(961)
(9,307)
(42,290)
(1,557)
(533)
(2,090)
(8,718)
(53,098)
Change
(5,908)
(2,179)
107
(82)
(36)
(8,098)
(45)
(786)
(831)
1,189
(7,740)
(1) Wind expenses for 2017 excludes the results of the Glen Dhu and Fitzpatrick wind facilities, which were equity accounted.
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 staff 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 staff. 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 other costs to pursue greenfield opportunities, as well as costs to
explore and execute transactions. Administrative expenses comprise of staff costs, professional fees for legal, audit and tax, as
well as certain office administration and premises costs.
The following table shows the significant changes in expenses from 2017:
Change Explanations
(4,561) Higher operating expenses from Glen Dhu, which was an equity accounted investment until December 31, 2017.
(2,808) Higher operating expenses at Cardinal due to more runs as well as costs to operate Ingredion's 15 MW facility, which
commenced operations on November 24, 2017.
(1,125) Higher operating expenses at SkyGen due to insurance recoveries in 2017.
1,228 Lower staff costs within administrative expenses related to employee separation costs in 2017.
(474) Various other changes.
(7,740) Change in expenses.
FINANCIAL POSITION REVIEW
Overview
As at December 31, 2018, Capstone's working capital was $60,870, compared with $10,372 as at December 31, 2017. During
the year, the SkyGen and Skyway 8 project debt was refinanced, reducing the current portion of long-term debt by $36,253. In
addition, Capstone repaid $20,915 on the CPC credit facilities and reduced the letters of credit by $9,047, increasing the
available capacity on the CPC credit facilities to $58,141.
Capstone and its subsidiaries continue to comply with all debt covenants.
Liquidity
Working capital
As at
Power
Corporate
Working capital (equals current assets, less current liabilities)
Dec 31, 2018
57,306
Dec 31, 2017
2,409
3,564
60,870
7,963
10,372
Capstone's working capital was $50,498 higher than December 31, 2017 due to an increase of $54,897 for the power segment,
partially offset by a $4,399 decrease at corporate. The power segment increase primarily reflects a decrease in the current
portion of long term debt due to a $36,253 refinancing at SkyGen and Skyway 8. In addition, there was higher cash of $16,748,
higher restricted cash $694, and lower accruals of $3,226 due to payments made upon completing the Whitecourt refurbishment.
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The remaining difference mainly reflects the use of other assets. The corporate decrease primarily reflects lower cash due to
contributions for the Whitecourt refurbishment and, to a lesser extent, the timing of receipts and payments.
Cash and cash equivalents
As at
Power
Corporate
Unrestricted cash and cash equivalents
Dec 31, 2018
70,574
Dec 31, 2017
53,826
5,767
76,341
10,257
64,083
These funds are available for operating activities, capital expenditures and future acquisitions. The $12,258 increase consists of
a $16,748 increase from the power segment, partially offset by a $4,490 decrease at corporate. Higher cash at the power
segment reflects accumulation of asset distributions, partially offset by the repayment of $20,915 on the CPC credit facilities. The
decrease at corporate reflects contributions to Whitecourt to pay for the refurbishment and settling year-end liabilities. In addition
to these funds, the CPC revolving credit facility has an available capacity of $58,141, as at December 31, 2018.
Cash at the power segment of $70,574 is only periodically accessible by corporate through distributions. The power segment's
cash and cash equivalents are accessible through distributions under the terms of the CPC credit facilities, which allows 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.
Cash flow
Capstone’s consolidated cash and cash equivalents increased by $12,258 in 2018 compared with an increase of $1,837 in 2017.
The components of the change in cash, 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
Change in cash and cash equivalents
Dec 31, 2018
93,098
(5,508)
(72,880)
(2,452)
12,258
Dec 31, 2017
73,125
(23,040)
(45,796)
(2,452)
1,837
Cash flow from operating activities was $19,973 higher in 2018, and $21,345 higher excluding discontinued operations. The
increase from continuing operations consists of $24,458 of higher power segment cash flows, partially offset by $3,113 of lower
corporate cash flows. The increase in power segment cash flows reflects higher revenue from Glen Dhu and Fitzpatrick, which
were equity accounted investments in 2017, higher market revenues in response to higher demand at Cardinal, and higher
revenue at Whitecourt due to higher prices and production. In addition, there was higher interest income from the settlement of a
formerly impaired loan receivable. The decrease in corporate cash flows is primarily attributable to changes in current liabilities.
Cash flows from discontinued operations consisted of the Värmevärden results prior to its sale in March 2017.
Cash flow used in investing activities was $17,532 lower in 2018 primarily due to $17,443 of lower cash as there was no
construction at Settlers Landing in 2018, as well as $12,004 of lower capital asset additions related to payments for the
Whitecourt refurbishment. This was partially offset by a lower release of restricted cash of $5,989, which resulted from a change
to cash funding certain hydro facilities reserves and the release of construction reserves at GHG, Grey Highlands Clean, Snowy
Ridge and Settlers Landing in 2017. In addition, the acquisition of the remaining 51% ownership interest in Glen Dhu and
Fitzpatrick contributed lower cash of $3,574 as well as lower dividends from equity accounted investments of $2,352 in 2018.
Cash flow used in financing activities was $27,084 higher in 2018, and $115,114 lower excluding discontinued operations.
Cash used in the continuing operations were lower primarily due to a $131,968 return of capital to Irving Infrastructure Corp.
("Irving") and a $10,370 cash repayment of the Irving promissory note in 2017, as well as lower debt payments of $17,855 as a
result of the corporate debt refinancing completed in December 2017. These were partially offset by lower proceeds from debt
draws of $46,471 due to the refinancing at SkyGen and Skyway 8 in 2018, compared to the corporate debt refinancing in 2017.
Cash flows from discontinued operations in 2017 consisted of $142,198 of proceeds received on the sale of Värmevärden.
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Long-term Debt
Continuity of Capstone's long-term debt for the year ended was:
Long-term debt (1), (2)
Deferred financing fees
Less: current portion of long-term debt (3), (4)
Dec 31, 2017
Additions
Repayments
Other
Dec 31, 2018
833,690
(15,148)
818,542
(86,208)
732,334
37,246
(93)
37,153
—
37,153
(103,277)
—
(103,277)
5,000
(98,277)
906
1,370
2,276
31,853
34,129
768,565
(13,871)
754,694
(49,355)
705,339
(1) Repayments of $103,277 include a $15,915 repayment for the CPC revolving credit facility, as well as scheduled repayments.
(2) The power segment has a cumulative $51,168 utilized on its letter of credit facilities.
(3) Repayments are for the CPC term credit facility.
(4) Other reflects a $36,253 decrease in the current portion due to debt refinancing at SkyGen and Skyway 8.
As at December 31, 2018, Capstone's long-term debt consisted of $45,000 for the CPC credit facilities and $723,565 of project
debt. The current portion of long-term debt was $49,355, consisting of scheduled debt amortization. Capstone expects to repay
the scheduled amortization from income generated by the power assets. On July 17, 2018, the SkyGen and Skyway 8 project
debts were refinanced. The new debt matures in 2021 and amortizes over the same period as the prior debt, carrying a fixed
interest rate of 4.90%.
CPC is subject to customary covenants, including specific limitations on leverage and interest coverage ratios. All of the power
segment's project debt is non-recourse to Capstone, except for certain limited recourse guarantees provided to the lenders of the
various facilities.
Equity
Shareholders’ equity comprised:
As at
Common shares
Preferred shares (1)
Share capital
Retained earnings
Equity attributable to Capstone shareholders
Non-controlling interests
Total shareholders’ equity
Dec 31, 2018
62,270
Dec 31, 2017
62,270
72,020
134,290
71,842
206,132
50,086
256,218
72,020
134,290
72,024
206,314
55,249
261,563
(1) Capstone has 3,000 publicly listed Series A preferred shares on the Toronto Stock Exchange.
Contractual Obligations
As at December 31, 2018, Capstone had outstanding contractual obligations with amounts due as follows:
Long-term debt (1)
Operating leases
Asset retirement obligations
Purchase obligations
Total contractual obligations
99,444
(1) Long-term debt includes principal and interest payments.
Long-term debt
Within one year One year to five years
353,489
18,271
80,777
4,503
—
14,164
Beyond five years
602,333
37,013
15,318
5,590
Total
1,036,599
59,787
15,318
48,858
660,254
1,160,562
—
29,104
400,864
•
Long-term debt is discussed on page 8 "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 facilities. 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 8
•
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:
O&M agreements
• Cardinal has a maintenance contract with Siemens Canada Limited covering the gas turbine at Ingredion's 15 MW facility.
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 8, 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.
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. 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 Ingredion's 15 MW facility, 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 $6,000 as at
December 31, 2018. 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 a maximum amount of $4,614.
The guarantee terminates when the final payment is made, on or prior to March 21, 2021.
There have been no other significant changes to the specified contractual obligations that are outside the ordinary course of
business. Capstone is not engaged in any off-balance sheet financing transactions. Due to the nature of their operations, the
Facilities are not expected to incur material contingent liabilities upon the retirement of assets.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 9
Capital Asset Expenditure Program
Capstone incurred $4,400 of capital asset expenditures during 2018, which included $3,535 of additions to capital assets and
$865 of additions to projects under development. Capstone's capital expenditures were:
Power
Corporate
For the year ended
Dec 31, 2018
4,400
Dec 31, 2017
32,305
—
4,400
45
32,350
Income Taxes
In 2018, the current income tax expense was $270 (2017 - $371), which primarily relates to current tax on interest income from
the settlement of loans receivable.
Capstone's total deferred income tax asset of $125 primarily relates to unused tax losses carried forward (2017 - nil). Deferred
income tax liabilities of $89,962 (2017 - $89,243) primarily relate to the differences between the amortization of intangible and
capital assets for tax and accounting purposes.
In 2018, Capstone’s net deferred income tax liability increased by $594 primarily due to the utilization of tax losses, partially
offset by the differences between accounting and tax amortization claimed during the year.
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, 2018. 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. 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, 2018
13,851
(2,144)
11,707
Dec 31, 2017
21,364
(2,144)
19,220
Net derivative contracts assets decreased by $7,513 from December 31, 2017, due to losses of $5,074, and contractual
settlement payments of $2,439 received from Millar Western.
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
Gains (losses) on derivatives
Dec 31, 2018
(3,489)
(1,585)
(5,074)
Dec 31, 2017
5,396
4,534
9,930
The loss on derivatives were primarily attributable to a lower embedded derivative asset at Whitecourt due to the introduction of
Emission Performance Credits ("EPCs"). In addition, losses from the interest rate swap contracts were primarily attributable to
lower long-term interest rates since December 31, 2017.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 10
What follows is a description of the Corporation's key risk governance and risk processes to support achievement of strategic
and financial performance objectives.
Risk Management Principles and Governance
The Corporation's ERM framework is based on five core principles which establish the culture and tone that guide risk
management decisions. Risk management is everyone's responsibility, about decision-making, embedded within existing
management routines, about people and culture, and specific to each business unit. The Corporation's 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.
CAPSTONE INFRASTRUCTURE CORPORATION
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Risk and Description
Operational Risks
PPA renewal risk concerns the ability to
recontract expiring PPAs on economically
feasible terms and failing to align with the
useful lives of the power facilities.
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.
Succession and human resources
retention risks concern the ability to
replace senior management and attract,
retain and motivate key staff.
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.
Forecasting risk concerns the accuracy
of projections for results from operations
due to error or unpredictable economic,
market and specific business factors.
Taxation risk concerns higher income
and other taxes attributable to adverse
legislation changes, including tax rate
increases, or interpretations by tax
authorities on audit.
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.
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.
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.
Inability to source and execute attractive
growth opportunities may lead to lower
long-term cash flow as businesses
operating under finite term contracts
experience uncertainty about their longer
term cash flow potential.
Unanticipated increases in costs could
result in lower earnings and cash flow.
Volatility of financial forecasts increases
liquidity reserve requirements to pay
expenses, reducing cash flows.
Higher taxation results in both lower
income and cash flow available.
Capstone mitigates 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 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.
Capstone mitigates this risk by having a detailed
succession plan and providing related career and
development opportunities to its employees.
Management periodically reviews and updates strategy
according to market conditions and developments.
Capstone attempts to mitigate this risk by monitoring
costs versus budgets and controlling discretionary
spending.
Capstone targets businesses which have inherently
predictable financial results from operations.
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 12
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 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 robust and stringent environmental, health and safety regulatory regimes, which 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.
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,
specifically the Cardinal and Whitecourt facilities, have an ongoing operational impact on the environment. All Facilities comply in
all material respects with the applicable Canadian and provincial legislation and guidelines regarding greenhouse gases and
other emissions. Capstone monitors 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. 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.
In late 2016, Canada and its provinces, other than Saskatchewan and Manitoba, agreed to the Pan-Canadian Framework on
Clean Growth and Climate Change ("Framework"). Manitoba subsequently signed onto the Framework, whereas Ontario and
Alberta have since pulled out of it. The Framework is the blueprint by which the federal government and the provinces will
attempt to meet Canada’s commitment under the Paris Accord. 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 enacted the Greenhouse Gas Pollution
Pricing Act ("GGPPA"), which introduces a carbon pricing regime to those provinces that fail to implement adequate provincial
measures.
In Alberta, under the Carbon Competitiveness and Incentive Regulation ("CCIR"), regulated facilities that emit 100,000 tonnes of
greenhouse gases per annum or more must meet greenhouse gas emissions thresholds. If they cannot do so through
operational improvements, they can purchase emissions offsets from qualified offset facilities. Once operating, Capstone's
Alberta-based wind development projects are all eligible to produce valid offsets under the CCIR. 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.
On July 3, 2018, Ontario announced the revocation of its previously enacted cap and trade program. Ontario has not yet
implemented a replacement greenhouse gas regime. Therefore, the provisions of the GGPPA may apply to Ontario. As indicated
CAPSTONE INFRASTRUCTURE CORPORATION
Page 13
above, Ontario has initiated judicial proceedings to challenge the constitutionality of the GGPPA and is in the process of
developing and implementing an alternative provincial regime.
Saskatchewan and Ontario have subsequently launched constitutional challenges to the GGPPA, the results of which could
significantly impact how greenhouse gas emissions are regulated in Canada. Capstone continues to monitor potential
implications of this issue on its business.
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 Facilities
Capstone's wind facilities 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 2018 related party transactions and balances are primarily comprised of transactions with iCON Infrastructure LLP
and subsidiaries ("iCON") and compensation to key management.
Shared Service Arrangement with iCON
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 2018,
Capstone earned fees of $232 from iCON Canada (2017 - $174).
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 24 related party
transactions in the consolidated financial statements for the year ended December 31, 2018.
Linking Management Compensation to Performance
Compensation plays an important role in achieving short- and long-term business objectives that ultimately drive the
Corporation’s business success in alignment with long-term shareholder goals. The objectives of the Corporation's compensation
program are to:
•
•
•
•
Attract and retain highly qualified employees with a history of proven success;
Align the interests of employees with shareholders’ interests and with the execution of the Corporation’s business strategy;
Establish performance goals that, if met, are expected to improve long-term shareholder value; and
Tie compensation to those goals and provide meaningful rewards for achieving them.
Corporate performance targets are set each year to provide management with an incentive to exceed annual budgeted financial
results and other business performance measures and are therefore aligned with shareholder interests.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 14
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.
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
Corporation'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
EBITDA
Net income (loss) (1), (2)
Preferred dividends
2018
2017
Q4
Q3
Q2
Q1
Q4
Q3
Q2
49,991
29,018
(668)
613
39,951
31,262
272
613
44,817
31,061
1,386
613
48,870
31,335
1,314
613
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
(1) Net income (loss) attributable to the common shareholders includes discontinued operations for applicable periods, but excludes non-controlling interests.
(2) Net income includes a gain on the sale of Värmevärden of $128,087 in Q1 2017.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 15
FOURTH QUARTER 2018 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)
Net income (loss) attributable to:
Shareholders of Capstone
Non-controlling interest
Three months ended
Dec 31, 2018
49,991
Dec 31, 2017
41,561
(12,122)
(2,239)
(1,019)
—
408
(6,015)
14
29,018
(9,990)
(16,627)
(2,684)
(283)
208
(418)
(210)
(493)
(668)
175
(493)
(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
1,287
799
2,086
In the fourth quarter of 2018, Capstone's EBITDA was higher and net income was lower than in 2017. Higher quarterly EBITDA
reflects:
• Higher revenue, primarily due to Glen Dhu and Fitzpatrick, which were equity accounted investments prior to the acquisition
of the remaining ownership interests on December 31, 2017. In addition, higher revenue from Whitecourt, due to higher
power rates, and Cardinal, due to higher market revenues in response to higher demand; partially offset by
• Decrease in the fair value of the Whitecourt embedded derivative relates to the introduction of EPCs.
In addition to the EBITDA factors and the impacts on interest expense, depreciation and amortization from the acquisition of Glen
Dhu and Fitzpatrick, the remaining material change in net income was:
•
Lower income tax recovery, primarily attributable to the sale of Värmevärden in 2017.
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, 2017.
Capstone has adopted the new and revised standards, along with consequential amendments, effective January 1, 2018, none
of which had an impact on measurement in 2018. These changes include:
•
•
IFRS 9, Financial Instruments
IFRS 15, Revenue from Contracts with Customers
Refer to note 2 to the December 31, 2018 consolidated financial statements for a summary of significant accounting policies, and
detail of the nature of these changes to disclosure in the consolidated financial statements.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 16
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. The significant upcoming changes to IFRS are:
Title of the New IFRS (1)
• IFRS 16, Leases [Effective: Jan 1, 2019]
(1) Refer to note 2 to the consolidated financial statements for the year ended December 31, 2018 for further detail about the nature of this future accounting
change.
Accounting Estimates
The consolidated financial statements require the use of estimates and judgment in reporting assets, liabilities, revenues,
expenses and contingencies.
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, electricity sales, and EPC generation.
• 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.
The CEO and CFO have concluded that Capstone's disclosure controls and procedures were effective as at December 31, 2018
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, 2018, 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, 2018.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 17
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, 2018,
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 7, 2019
Andrew Kennedy
Chief Financial Officer
CAPSTONE INFRASTRUCTURE CORPORATION
Page 18
Independent auditor’s report
To the Shareholders of Capstone Infrastructure Corporation
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects,
the financial position of Capstone Infrastructure Corporation and its subsidiaries (together, the Company)
as at December 31, 2018 and 2017, and its financial performance and its cash flows for the years then
ended in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board (IFRS).
What we have audited
The Company’s consolidated financial statements comprise:
the consolidated statements of financial position as at December 31, 2018 and 2017;
the consolidated statements of changes in shareholders’ equity for the years then ended;
the consolidated statements of income and comprehensive income for the years then ended;
the consolidated statements of cash flows for the years then ended; and
the notes to the consolidated financial statements, which include a summary of significant accounting
policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit
of the consolidated financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Company in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical
responsibilities in accordance with these requirements.
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis.
Our opinion on the consolidated financial statements does not cover the other information and we do not
express any form of assurance conclusion thereon.
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.
In connection with our audit of the consolidated financial statements, our responsibility is to read the
other information identified above and, in doing so, consider whether the other information is materially
inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or
otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other
information, we are required to report that fact. We have nothing to report in this regard.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial
statements in accordance with IFRS, 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.
In preparing the consolidated financial statements, management is responsible for assessing the
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going
concern and using the going concern basis of accounting unless management either intends to liquidate
the Company or to cease operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Company’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as
a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s
report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee
that an audit conducted in accordance with Canadian generally accepted auditing standards will always
detect a material misstatement when it exists. Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise
professional judgment and maintain professional skepticism throughout the audit. We also:
Identify and assess the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error, design and perform audit procedures responsive to those risks, and
obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of
not detecting a material misstatement resulting from fraud is higher than for one resulting from
error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the
override of internal control.
Obtain an understanding of internal control relevant to the audit 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 Company’s internal control.
Evaluate the appropriateness of accounting policies used and the reasonableness of accounting
estimates and related disclosures made by management.
Conclude on the appropriateness of management’s use of the going concern basis of accounting and,
based on the audit evidence obtained, whether a material uncertainty exists related to events or
conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If
we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s
report to the related disclosures in the consolidated financial statements or, if such disclosures are
inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to
the date of our auditor’s report. However, future events or conditions may cause the Company to
cease to continue as a going concern.
Evaluate the overall presentation, structure and content of the consolidated financial statements,
including the disclosures, and whether the consolidated financial statements represent the underlying
transactions and events in a manner that achieves fair presentation.
Obtain sufficient appropriate audit evidence regarding the financial information of the entities or
business activities within the Company to express an opinion on the consolidated financial
statements. We are responsible for the direction, supervision and performance of the group audit. We
remain solely responsible for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope
and timing of the audit and significant audit findings, including any significant deficiencies in internal
control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant
ethical requirements regarding independence, and to communicate with them all relationships and other
matters that may reasonably be thought to bear on our independence, and where applicable, related
safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Ross Sinclair.
Chartered Professional Accountants, Licensed Public Accountants
Toronto, Ontario
March 7, 2019
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
Non-current assets
Derivative contract assets
Capital assets
Projects under development
Intangible assets
Deferred income tax assets
Total assets
Current liabilities
Accounts payable and other liabilities
Current portion of long-term debt
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
Subsequent events
See accompanying notes to these consolidated financial statements
Notes
Dec 31, 2018
Dec 31, 2017
76,341
23,132
25,477
2,747
1,996
64,083
22,438
24,408
4,778
1,130
129,693
116,837
11,855
833,799
1,595
154,861
125
1,131,928
20,234
896,377
730
167,732
—
1,201,910
19,468
49,355
68,823
2,144
89,962
705,339
9,442
875,710
206,132
50,086
20,257
86,208
106,465
2,144
89,243
732,334
10,161
940,347
206,314
55,249
1,131,928
1,201,910
4
4
5
6
7
7
10
11
12
13
14
15
7
13
15
16
18
23
26
CAPSTONE INFRASTRUCTURE CORPORATION
Page 22
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Balance, December 31, 2016
Net income for the period
Conversion of promissory note (2)
Return of capital (2)
Business acquisition (3)
Dividends declared to preferred shareholders of Capstone (4)
Dividends declared to NCI
Convertible debenture repayments (5)
Balance, December 31, 2017
Net income for the period
Dividends declared to preferred shareholders of Capstone (4)
Dividends declared to NCI
Convertible debenture repayments (5)
Balance, December 31, 2018
Equity attributable to
shareholders of Capstone
Share
Capital
112,453
—
86,332
(86,332)
21,837
—
—
—
134,290
—
—
—
—
134,290
Retained
Earnings
(Deficit)
2,800
117,383
—
(45,636)
—
(2,523)
—
—
72,024
2,304
(2,486)
—
—
71,842
Notes
17
17
3
17
18
18
17
18
18
NCI (1)
61,417
993
—
—
—
—
(3,240)
(3,921)
55,249
1,593
—
(3,793)
(2,963)
50,086
Total Equity
176,670
118,376
86,332
(131,968)
21,837
(2,523)
(3,240)
(3,921)
261,563
3,897
(2,486)
(3,793)
(2,963)
256,218
(1) Non-controlling interest ("NCI").
(2) Refer to note 3 for changes related to the sale of Värmevärden.
(3) Refer to note 3 for changes related to the acquisition of remaining interests of the Glen Dhu and Fitzpatrick wind facilities.
(4) Dividends declared to preferred shareholders of Capstone include current and deferred income taxes of $34 (2017 - $71).
(5) Repayments are to the holder of the convertible debenture related to the GHG Wind Development LP, SR Wind Development LP and SLS Wind Development
LP wind facilities. The convertible debenture provides the holder the option to convert its debt into a 50% equity interest in these projects.
See accompanying notes to these consolidated financial statements
CAPSTONE INFRASTRUCTURE CORPORATION
Page 23
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Revenue
Operating expenses
Administrative expenses
Project development costs
Equity accounted income
Interest income
Other gains and (losses), net
Foreign exchange gain
Earnings before interest expense, taxes, depreciation and amortization
Interest expense
Depreciation of capital assets
Amortization of intangible assets
Earnings before income taxes
Income tax expense
Current
Deferred
Total income tax expense
Net income (loss) and total comprehensive income (loss) from continuing operations
Net income and total comprehensive income from discontinued operations, net of tax
Net income and total comprehensive income
Attributable to:
Shareholders of Capstone
Non-controlling interest
See accompanying notes to these consolidated financial statements
For the year ended
Notes
Dec 31, 2018
Dec 31, 2017
20
21
21
21
9
7
22
7
10
12
13
3
18
183,629
(50,388)
(7,529)
(2,921)
—
5,139
(5,258)
4
122,676
(38,797)
(66,785)
(11,182)
5,912
(270)
(1,745)
(2,015)
3,897
—
3,897
2,304
1,593
3,897
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
CAPSTONE INFRASTRUCTURE CORPORATION
Page 24
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities:
Net income (loss) from continuing operations
Deferred income tax expense
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 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 capital assets
Investment in projects under development
Decrease (increase) in restricted cash
Cash acquired from acquisition of equity accounted investment
Distributions from equity accounted investments
Total cash flows used in investing activities
Financing activities:
Repayment of long-term debt
Dividends paid to non-controlling interests
Convertible debenture repayments
Dividends paid to preferred shareholders
Transaction costs on debt issuance
Proceeds from issuance of long-term debt
Return of capital to Irving
Repayment of promissory note
Cash flows used in continuing operations
Cash flows from discontinued operations
Total cash flows used in financing activities
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplemental information:
Interest paid
Taxes paid
See accompanying notes to these consolidated financial statements
For the year ended
Notes
Dec 31, 2018
Dec 31, 2017
9
3
10
11
3
9
18
18
3
3
3
3,897
1,745
77,967
7,697
2,712
—
(4)
(916)
93,098
—
93,098
(4,021)
(793)
(694)
—
—
(5,508)
(103,277)
(3,793)
(2,963)
(2,452)
(93)
37,246
—
—
(75,332)
—
(75,332)
12,258
64,083
76,341
(10,941)
17,170
66,787
(773)
2,581
(935)
(18)
(2,118)
71,753
1,372
73,125
(16,025)
(18,236)
5,295
3,574
2,352
(23,040)
(121,132)
(3,240)
(3,921)
(2,452)
(1,080)
83,717
(131,968)
(10,370)
(190,446)
142,198
(48,248)
1,837
62,246
64,083
36,293
973
34,077
1,882
CAPSTONE INFRASTRUCTURE CORPORATION
Page 25
NOTES TO THE
CONSOLIDATED FINANCIAL
STATEMENTS
Note Description
Page
Note Description
Page
1
2
3
4
5
6
7
8
9
10
11
12
13
Corporate Information
Summary of Significant Accounting Policies
Acquisitions, Disposals and Discontinued
Operations
Cash and Cash Equivalents and Restricted Cash
Accounts Receivable
Other Assets
Financial Instruments
Financial Risk Management
Equity Accounted Investments
Capital Assets
Projects Under Development
Intangible Assets
Income Taxes
26
26
33
34
34
35
35
36
39
40
40
41
41
14
15
16
17
18
19
20
21
22
23
24
25
26
Accounts Payable and Other Liabilities
Long-term Debt
Liability for Asset Retirement Obligation
Shareholders' Equity
Non-Controlling Interests
Share-based Compensation
Revenue by Nature
Expenses by Nature
Other Gains and Losses
Commitments and Contingencies
Related Party Transactions
Segmented Information
Subsequent Events
42
43
46
46
47
49
49
49
50
50
51
51
52
NOTE 1. CORPORATE INFORMATION
Capstone is incorporated and domiciled in Canada and located at 155 Wellington Street West, Suite 2930, Toronto, Ontario,
M5V 3H1. All of Capstone's Class A common shares are owned by 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"), who is the
ultimate parent. 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,
2018, Capstone owns and operates an approximate net installed capacity of 531 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 7, 2019.
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 and cash flows for the year ended
December 31, 2017.
Basis of measurement
The consolidated financial statements have been prepared under the historical cost basis, except for the revaluation of certain
financial instruments, which are measured at fair value as explained in the accounting policies set out below and on a going
concern basis of accounting (see note 8). Historical cost is generally based on the fair value of the consideration given in
exchange for assets.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 26
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
Grey Highlands Clean Energy Development LP ("Grey Highlands Clean")
GHG Wind Development LP ("GHG") (2)
SR Wind Development LP ("Snowy Ridge") (2)
SLS Wind Development LP ("Settlers Landing") (2)
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
Ownership at
December 31,
2018
100%
100%
100%
100%
100%
100%
100%
100%
51%
51%
51%
100%
100%
100%
100%
100%
100%
100%
2017
100%
100%
100%
100%
100%
100%
100%
100%
51%
51%
51%
100%
100%
100%
100%
100%
100% (3)
100% (3)
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
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) GHG, Snowy Ridge and Settlers Landing have convertible debentures outstanding which provide the holder the option to convert its debt into a 50% equity
interest in these projects.
(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 3.
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 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,
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 27
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. Capstone used a rate of
0.1484 to translate amounts in Swedish Krona relating to the disposal of its interest in Värmevärden. Since the disposal,
Capstone holds a limited amount of foreign currency.
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).
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.
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
CAPSTONE INFRASTRUCTURE CORPORATION
Power
3 to 5 years
15 to 30 years
5 years
15 to 30 years
40 years
Page 28
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 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
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 29
Asset Retirement Obligations
The Corporation recognizes a provision for the future retirement obligations associated with its operating plants. These
obligations are initially measured at the present value, which is the discounted future cost of the liability. A reassessment of the
expected costs associated with these liabilities is performed annually with changes in the estimates of timing or amount of cash
flows added or deducted from the cost of the related asset. The liability grows until the date of expected settlement of the
retirement obligations.
Share Capital
Common 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 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 Recognition
Revenue from Contracts with Customers
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.
The customer invoices and provides payments on a systematic basis based on fixed billing cycles. There are no significant
financing components inherent in Capstone’s contracts with customers. Capstone does not make significant judgments that
affect the determination of the amount and timing of revenue from contracts with customers.
Other Revenue and Income Recognition
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.
Expense Recognition
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
and acquisition-related business development expenses incurred at both the power segment and 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 its share appreciation rights ("SAR") plan in accordance with IFRS 2 Share-Based
Payments.
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
CAPSTONE INFRASTRUCTURE CORPORATION
Page 30
extent that it is probable that the asset can be recovered. Deferred income tax assets and liabilities are presented as non-
current.
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.
Classification and Measurement
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 fair value through profit and loss ("FVTPL") 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:
IFRS 9 Classification
Amortized cost (asset)
Significant Categories
• Cash and cash equivalents
• Restricted cash
• Accounts receivable
Measurement
• At amortized cost using the effective interest method
Financial assets and liabilities at fair
value through profit and loss
• Derivative contract assets
• Derivative contract liabilities
• At fair value with changes in fair value recognized in the
consolidated statement of income
Other liabilities
• Accounts payable and other liabilities
• Long-term debt
• At amortized cost using the effective interest method
The classification of financial assets depends on Capstone’s business objectives for managing the assets and whether
contractual terms of the cash flows are considered solely payments of principal and interest. For assets measured at FVTPL,
gains and losses will be recorded in the statement of income as incurred.
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 2018, 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.
Impairment of Financial Assets
For financial assets measured at amortized cost. Capstone applies the simplified expected credit loss ("ECL") approach as
permitted by IFRS 9. ECLs are estimated based on historical information, third-party accreditations such as credit ratings, and
forward looking information regarding historical customer default rates. Capstone does not expect this to affect any
measurement of financial assets and liabilities as its customer base is predominantly government entities.
If impairment exists on the financial asset, the Corporation recognizes an impairment loss in the consolidated statement of
income. The loss is measured as the difference between the carrying and the present value of the expected future cash flows.
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.
Impairment of cash and cash equivalents and restricted cash are evaluated by reference to the credit quality of the underlying
financial institution.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 31
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"), interest income,
and other gains and losses (net). 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 has adopted the following new IFRS standards effective January 1, 2018. These changes were required due to
changes in IFRS and are summarized as follows:
IFRS 9, Financial Instruments, replaces IAS 39, Financial Instruments: Recognition and Measurement as the recognition,
classification and measurement of financial assets and liabilities; derecognition of financial instruments; impairment of financial
assets and if elected, hedge accounting. IFRS 9 also significantly amends other standards dealing with financial instruments
such as IFRS 7, Financial Instruments: Disclosures.
Derivative contract assets and liabilities remain measured at fair value through profit and loss. All other financial assets and
liabilities are measured at amortized cost. The adoption of IFRS 9 did not require any changes to existing recognition,
classification, measurement and disclosure of Capstone's financial assets and liabilities.
There were no changes to the classification of Capstone’s financial liabilities. The new asset classifications, as well the concept
of ECLs are within the financial instruments policy note.
IFRS 15, Revenue from Contracts with Customers, replaces IAS 11, Construction Contracts and IAS 18, Revenue and
outlines a single comprehensive model to account for revenue arising from contracts with customers. 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. The standard provides a principles-based five-step model to be applied to all contracts with
customers. The adoption of IFRS 15 did not require any changes to Capstone's revenue recognition approach and did not result
in any measurement adjustments. Additional disclosure requirements are included in note 20.
The adoption of both these accounting standards did not change any comparative figures presented in the interim consolidated
financial statements.
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.
The significant upcoming changes to IFRS are:
Title of the New IFRS Nature of the Impending Change to Capstone
IFRS 16, Leases
Effective: Jan 1, 2019
IFRS 16 specifies how to recognize, measure, present and disclose leases. This standard may be
applied retrospectively or using a cumulative catch-up approach. The cumulative catch-up approach
does not require restatement of prior period financial information and instead requires the recognition
of liabilities and an equal Right-of-use ("ROU") assets on transition, and applies the standard
prospectively. The Corporation uses the cumulative catch-up approach.
On adoption, the Corporation will recognize lease liabilities at the present value of the remaining
lease payments, discounted at the incremental borrowing rate of the Corporation. This will equal the
ROU assets with no impact to retained earnings. The following practical expedients were permitted
under IFRS 16, which the Corporation has elected:
• use of a single discount rate for leases with similar characteristics;
• accounting for leases with remaining terms of less than twelve months as short-term leases;
• accounting for payments as expenses for low dollar value assets; and
• use of hindsight in determining term where options to extend or terminate exist.
Status of Adoption
Capstone expects the adoption
of IFRS 16 to expand lease
disclosure, create new ROU
assets and corresponding lease
liabilities on the statement of
financial position, as well as
increase EBITDA. On adoption,
the long-term assets and
liabilities and EBITDA are
expected to increase by
approximately $30,000 and
$2,600, respectively.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
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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.
• Management's valuation techniques include comparisons with similar
instruments where market observable prices exist, discounted cash
flow analysis, option pricing models and other valuation techniques
commonly used by market participants.
• For embedded derivatives, fair values are determined from valuation
techniques using non-observable market data or transaction
processes.
A number of factors such as bid-offer spread, credit profile and model
uncertainty are taken into account, as appropriate.
• No critical estimates are involved in determining control.
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.
differences
• Tax rates
• Current and future taxable income
• Forward Alberta power pool prices,
volatility, credit spreads, cost and
inflation escalators and fuel supply
volumes and electricity sales, and
Emissions Performance Credits
("EPC") generation.
• Determine how relevant activities
are directed (either through voting
rights or contracts)
• Determine if Capstone has
substantive or protective rights
• Determine Capstone's ability to
influence returns
NOTE 3. ACQUISITIONS, DISPOSALS AND DISCONTINUED OPERATIONS
(A) Discontinued Operations - 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, for its 33.3% indirect interest in Värmevärden
and the related outstanding loans receivable.
On March 31, 2017, Irving Infrastructure Corp. ("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.
For the year ended December 31, 2017, Capstone's consolidated statements of income and cash flows for the year ended
December 31, 2017 include results for the discontinued operations of Värmevärden. Net income from discontinued operations,
net of tax was $129,317. Operating cash flows provided by discontinued operations were $1,372, and financing cash flows
provided by discontinued operations were $142,198, consisting of net proceeds on sale.
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.
Net income from discontinued operations
The net income from Värmevärden's discontinued operations for the year ended December 31, 2017 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Dec 31, 2017
(238)
128,087
1,468
129,317
Page 33
(B) 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 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.
Beginning 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 9.
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 preliminary and final allocation of the purchase price were allocated to net assets acquired as follows:
Recognized amounts of identifiable assets acquired and liabilities assumed
Notes
Working capital (1)
Other assets
Capital assets
Intangible assets – electricity supply and other contracts
Less: net financial liabilities (net of $3,941 cash acquired, after adjustment)
Other liabilities
Deferred income tax liability
Total identifiable net assets acquired
Consideration in the form of equity contribution
Previously held equity accounted investments (2)
17
9
Original Fair
Value
Dec 31, 2017
3,448
1,763
118,235
21,496
(85,311)
(1,687)
(15,060)
42,884
21,837
21,047
42,884
Adjustment
—
—
(570)
—
367
—
203
—
—
—
—
Revised Fair
Value
Dec 31, 2018
3,448
1,763
117,665
21,496
(84,944)
(1,687)
(14,857)
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, 2018
12,889
Dec 31, 2017
12,452
10,168
75
23,132
76,341
99,473
9,911
75
22,438
64,083
86,521
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. ACCOUNTS RECEIVABLE
Power
Corporate
Dec 31, 2018
25,357
Dec 31, 2017
24,360
120
25,477
48
24,408
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 34
NOTE 6. OTHER ASSETS
Prepaid expenses
Inventory of spare parts and consumable supplies, net (1)
Dec 31, 2018
906
Dec 31, 2017
2,697
1,841
2,747
2,081
4,778
(1) No inventory obsolescence provision is required as at December 31, 2018.
The cost of inventories recognized in operating expenses for the year ended December 31, 2018 was $807 (2017 - $480).
NOTE 7. FINANCIAL INSTRUMENTS
In 2018, financial instruments consist of amortized cost assets, other liabilities and financial assets and liabilities at fair value
through profit and loss.
Amortized Cost (Asset)
Cash and cash
equivalents, restricted
cash
The Corporation's cash and cash equivalents and restricted cash balances are invested in financial instruments of highly rated
financial institutions and government securities with original maturities of 90 days or less. As at December 31, 2018, 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.
Accounts receivable
The Corporation's accounts receivable, which consist of trade receivables, are recorded initially at fair value.
Other Liabilities
Accounts payable and
other liabilities
The Corporation's accounts payable and other liabilities are short-term liabilities with carrying values that approximate their fair values
as at December 31, 2018.
Long-term debt
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.
Financial assets and liabilities at fair value through profit and loss
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, electricity sales and EPC generation.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 35
The following table illustrates the classification of the Corporation's financial instruments, that have been recorded at fair value:
Level 1
Quoted prices in active
markets for identical
assets
Level 2
Significant other
observable inputs
Level 3
Significant
unobservable
inputs
Dec 31, 2018
Dec 31, 2017
Recurring measurements:
Derivative contract assets:
Whitecourt embedded derivative (1)
Interest rate swap contracts
Less: current portion
Derivative contract liabilities:
Interest rate swap contracts
—
—
—
—
—
—
—
6,373
(1,996)
4,377
2,144
2,144
7,478
—
—
7,478
—
—
7,478
6,373
(1,996)
11,855
13,406
7,958
(1,130)
20,234
2,144
2,144
2,144
2,144
(1) Whitecourt's embedded derivative consists of a $11,362 fair value asset and $3,884 amortized contra-asset, set up on inception (2017 - $17,643 fair value
asset, offset by the $4,237 of contra-asset).
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,
Income and Expenses From Financial Instruments
Financial instruments designated as amortized cost:
Interest income on cash and cash equivalents, restricted cash (1), (2)
Financial instruments classified as FVTPL (refer to note 22):
Unrealized gain (loss) on the Whitecourt embedded derivative
Unrealized gain (loss) on interest rate swap contracts
Other liabilities:
Interest expense on long-term debt (2)
2018
13,406
(3,841)
(2,439)
352
7,478
2017
13,674
5,044
(5,664)
352
13,406
Dec 31, 2018
Dec 31, 2017
1,265
(3,489)
(1,585)
(5,074)
653
5,396
4,534
9,930
(38,797)
(38,797)
(36,668)
(36,668)
(1)
(2)
Interest income for 2018 of $5,139 includes the final payment of $3,348 for full repayment of the Chapais loans and investments, which were previously written
down to nil, interest income on cash balances of $1,265 (2017 - $653) and other interest payments from Chapais of $526 (2017 - $947).
Interest expense on the long-term debt for 2018 of $38,797 includes amortization of deferred financing fees and accretion on liability for asset retirement
obligations of$2,276 and $436, respectively (2017 - $2,121 and $334).
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 2018, 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 36
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%
1.63% - 1.88%
1.34% - 1.45%
67,657
57,363
60,728
41,292
48,823
41,616
28,016
21,011
24,077
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 and
government incentive programs by counterparty:
As at
Independent Electricity System Operator ("IESO")
Nova Scotia Power Inc. ("NSPI")
Natural Resources Canada Inc. ("NRC")
Ontario Electricity Financial Corporation ("OEFC")
Other
Dec 31, 2018
12,642
Dec 31, 2017
13,759
3,904
3,074
1,597
4,260
25,477
4,118
1,177
1,711
3,643
24,408
There are no accounts receivable that are past due. Since the IESO, OEFC, and NRC are government agencies and NSPI is
regulated by the provincial government, management considers credit risk to be minimal.
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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 37
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, 2018
119,522
Dec 31, 2017
112,160
32,845
7,521
23,741
12,451
8,855
20,697
183,629
154,163
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, 2018 were as follows:
Financial Liabilities
Within one year One year to five years
Beyond five years
Accounts payable and other liabilities
19,468
Derivative financial instruments
Interest rate swaps
Long-term debt
Principal payments
Interest payments
—
49,355
31,422
80,777
—
1,079
247,003
106,486
353,489
—
1,065
472,207
130,126
602,333
Total
19,468
2,144
768,565
268,034
1,036,599
Sensitivity Analysis
(E)
The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2018, 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.
The sensitivity analysis has been prepared based on December 31, 2018 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,
2018 are all constant. Excluded from this analysis are all non-financial assets and liabilities that are not classified as financial
instruments under IFRS 9.
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, as 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 38
The table summarizes the impact on fair value of changes in the Whitecourt embedded derivatives' significant unobservable
inputs:
Dec 31, 2018 Unobservable inputs Estimated input
Relationship of input to fair value
$7,478 Forward Alberta power
pool prices
From $34/MWh to $84/
MWh over the next 11
years.
A reasonably possible increase in estimated forward prices of 5% or a
decrease of 5%, would cause fair value to decrease by $3,025 and
increase by $3,394, 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, 2018
Financial assets:
Interest rate swap assets, net
Carrying
Amount
Interest Rate Risk
(0.5)%
0.5%
4,229
(8,709)
8,251
Financial liabilities:
Long-term debt (1)
(1) Long-term debt excludes all fixed-rate debt totaling $496,852 and variable rate debt that is covered by a swap for fixed-rate debt totaling $226,713.
45,000
225
(225)
NOTE 9. EQUITY ACCOUNTED INVESTMENTS
Beginning December 31, 2017, Capstone no longer follows the equity accounting method for any of its investments. This is a
result of the March 3, 2017 sale of Capstone's interest in Värmevärden and the December 31, 2017 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 consolidates the 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 year ended were as follows:
For the year ended
Dec 31, 2017
(1) Distributions received were from Glen Dhu.
Opening
Balance
Equity Accounted
Income (Loss)
22,464
935
Distributions
Received (1)
(2,352)
Acquisition of
remaining
interests
(21,047)
Ending
Balance
—
The Corporation has summarized its equity accounted investments using their gross values as follows:
For the year ended
Summarized Statements of Income
Revenue
Net income and total comprehensive income
Capstone's interest (refer to note 3)
Subtotal
Amortization of fair value adjustments and other
Total
Net income to Capstone
Glen Dhu
21,214
3,874
49%
1,898
(876)
1,022
Dec 31, 2017
Fitzpatrick
237
(91)
50%
(46)
(41)
(87)
Total
21,451
3,783
1,852
(917)
935
935
CAPSTONE INFRASTRUCTURE CORPORATION
Page 39
NOTE 10. CAPITAL ASSETS
(A)
Continuity
Cost
Land
Equipment and vehicles
Property and plant
Accumulated depreciation
Equipment and vehicles
Property and plant
Net carrying value
Cost
Land
Equipment and vehicles
Property and plant
Accumulated depreciation
Equipment and vehicles
Property and plant
Net carrying value
Jan 1, 2018
Additions
Disposals
Transfers
(ref. to note 12)
Business
Acquisition
Dec 31, 2018
1,084
10,877
1,220,000
1,231,961
(7,181)
(328,403)
(335,584)
896,377
—
179
3,356
3,535
(330)
(66,455)
(66,785)
(63,250)
—
(44)
(3,884)
(3,928)
38
3,135
3,173
(755)
—
—
1,427
1,427
—
—
—
1,427
—
—
—
—
—
—
—
—
1,084
11,012
1,220,899
1,232,995
(7,473)
(391,723)
(399,196)
833,799
Jan 1, 2017
Additions
Disposals
Transfers
(ref. to note 11)
Business
Acquisition
Dec 31, 2017
1,051
10,542
1,062,391
1,073,984
(6,126)
(280,587)
(286,713)
787,271
—
364
17,603
17,967
(1,084)
(55,878)
(56,962)
(38,995)
—
(29)
(11,829)
(11,858)
29
8,062
8,091
(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)
(335,584)
896,377
(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
Cash additions
Dec 31, 2018
3,535
486
4,021
Dec 31, 2017
17,967
(1,942)
16,025
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) There were no capitalized borrowing costs in 2018 (2017 - includes $123 of capitalized borrowing costs during the construction of the Settlers Landing).
(2)
(3) PUD balance as at December 31, 2018 relates to the Riverhurst and Buffalo Atlee 1, 2 and 3 (collectively "Buffalo Atlee") wind development projects. In
December 2018, Capstone and its 25% partner Sawridge First Nation ("Sawridge") confirmed that the Buffalo Atlee wind development projects executed
Renewable Electricity Support Agreements in Alberta.
In 2017, amounts were transferred on the COD of Settlers Landing.
—
1,595
—
2018
730
865
2017
22,267
14,383
(33,633)
(2,287)
730
(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, 2018
865
(72)
793
Dec 31, 2017
14,383
3,853
18,236
CAPSTONE INFRASTRUCTURE CORPORATION
Page 40
NOTE 12. INTANGIBLE ASSETS
Assets
Computer software
Electricity supply and other contracts
Water rights
Accumulated amortization
Computer software
Electricity supply and other contracts
Water rights
Net carrying value
Assets
Computer software
Electricity supply and other contracts
Water rights
Accumulated amortization
Computer software
Electricity supply and other contracts
Water rights
Net carrying value
NOTE 13. INCOME TAXES
(A)
Deferred Income Tax
As at
Deferred income tax assets
Deferred income tax liabilities
Net deferred income tax liability
Jan 1, 2018
Additions
Disposals
Transfers
(ref. to note 10)
Dec 31, 2018
257
173,103
73,018
246,378
(257)
(56,130)
(22,259)
(78,646)
167,732
7
—
—
7
(2)
(9,063)
(2,117)
(11,182)
(11,175)
—
(269)
—
(269)
—
—
—
—
(269)
—
(1,427)
—
(1,427)
—
—
—
—
(1,427)
264
171,407
73,018
244,689
(259)
(65,193)
(24,376)
(89,828)
154,861
Jan 1, 2017
Additions
Transfers
(ref. to note 11)
Business
Acquisition
Dec 31, 2017
257
149,039
73,018
222,314
(257)
(48,427)
(20,137)
(68,821)
153,493
—
281
—
281
—
(7,703)
(2,122)
(9,825)
(9,544)
—
2,287
—
2,287
—
—
—
—
2,287
—
21,496
—
21,496
—
—
—
—
21,496
257
173,103
73,018
246,378
(257)
(56,130)
(22,259)
(78,646)
167,732
Dec 31, 2018
125
Dec 31, 2017
—
(89,962)
(89,837)
(89,243)
(89,243)
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, 2018
23,435
Dec 31, 2017
27,375
3,464
2,543
29,442
(72,720)
(40,807)
(3,119)
(2,137)
(496)
(119,279)
(89,837)
420
2,294
30,089
(75,349)
(36,853)
(5,011)
(1,600)
(519)
(119,332)
(89,243)
Page 41
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
Other
Net deferred income tax liability as at December 31
(1) Refer to note 3.
Timing of Deferred Income Tax Reversal
(B)
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
2018
(89,243)
203
(1,745)
948
(89,837)
2017
(57,923)
(15,060)
(17,170)
910
(89,243)
Dec 31, 2018
Dec 31, 2017
40,542
(130,379)
(89,837)
46,488
(135,731)
(89,243)
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
63,973
87,910
Dec 31, 2018
151,883
Dec 31, 2017
169,340
—
—
19,730
—
19,730
—
18,143
908
The Corporation also has $2,080 of unrecognized deferred tax assets, which have not been recognized as at December 31,
2018 (2017 - $1,699).
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
Other
Total income tax expense (recovery)
Dec 31, 2018
Dec 31, 2017
5,912
26.65%
1,576
203
266
55
—
(85)
2,015
6,600
26.50%
1,749
861
(38)
(4,628)
20,901
(1,304)
17,541
(1)
Income (loss) before income taxes excludes discontinued operations.
The statutory income tax rate of 26.65% (2017 - 26.50%) changes in response to Capstone's allocation of taxable income to
different tax jurisdictions.
Current Income Taxes
(E)
Current income taxes payable of $2,150 are included in accounts payable and other liabilities on the statement of financial
position (refer to note 14) (2017 - $2,439).
NOTE 14. ACCOUNTS PAYABLE AND OTHER LIABILITIES
Dividends payable
Income taxes payable
Other accounts payable and accrued liabilities
Dec 31, 2018
409
2,150
Dec 31, 2017
409
2,439
16,909
19,468
17,409
20,257
CAPSTONE INFRASTRUCTURE CORPORATION
Page 42
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, 2018
1,708
Dec 31, 2017
2,274
138
304
2,150
24
141
2,439
(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
CPC credit facilities
Wind - Operating
Solar
Hydros
Gas
Less: deferred financing costs
Long-term debt
Less: current portion
Dec 31, 2018
Dec 31, 2017
Fair Value
Carrying
Value
Fair Value
45,000
520,080
73,772
75,045
60,728
774,625
65,915
551,782
78,772
77,092
64,259
837,820
45,000
511,927
76,093
74,817
60,728
768,565
(13,871)
754,694
(49,355)
705,339
Carrying
Value
65,915
544,382
81,632
77,502
64,259
833,690
(15,148)
818,542
(86,208)
732,334
Capstone has a cumulative $51,168 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 (2)
Revolving credit facility (3)
Letter of credit facility (4)
Remaining available credit
Interest Rate (1)
Maturity
Dec 31, 2018
140,000
Dec 31, 2017
145,000
3.74%
Dec 15, 2021
45,000
—
36,859
58,141
50,000
15,915
27,812
51,273
(1) The effective rate was 3.74% in 2018 based on a variable rate plus an applicable margin.
(2)
(3)
(4) As at December 31, 2018, Capstone had 21 letters of credit authorized under the revolving facility.
In Q2 2018, CPC repaid $5,000 of its term credit facility.
In Q1 2018, CPC repaid $15,915 of its revolving credit facility under the CPC Credit Facilities, increasing the revolving credit facility capacity.
The 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 CPC Credit Facilities have a rolling
one-year extension option, subject to lender approval.
Under the 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 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 43
(ii)
Wind - Operating
Project debt
Glen Dhu
Goulais
GHG
Erie Shores
Saint-Philémon
Grey Highlands Clean
Amherst
Snowy Ridge
Settlers Landing
SkyGen (1)
Skyway 8 (1)
Glace Bay
Dec 31, 2018
83,220
Dec 31, 2017
88,885
68,354
66,934
61,655
50,469
46,827
34,948
27,877
24,347
18,597
17,658
11,041
72,169
70,647
67,977
52,952
49,320
37,223
29,083
25,160
20,360
18,337
12,269
511,927
544,382
(1) 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
(1)
In 2018, Glen Dhu replaced its standby loan facility with a $5,310 letter of credit to fund its debt service reserve requirement. There were no draws on the
standby loan facility during the year prior to the cancellation of the standby loan facility.
Interest Rate
5.33%
Maturity
Dec 31, 2030
Dec 31, 2018
83,220
Dec 31, 2017
88,885
Goulais
Term loan
Interest Rate
5.16%
Maturity
Sep 30, 2034
Dec 31, 2018
68,354
Dec 31, 2017
72,169
(1) Goulais is required to set aside $3,392 as restricted cash to cover the debt service reserve.
(2) Goulais is required to set aside $1,000 as letters of credit to cover the operating and maintenance reserves.
GHG
Term loan
Interest Rate (2)
3.08%
Maturity
Aug 26, 2021
Dec 31, 2018
66,934
Dec 31, 2017
70,647
(1) GHG has $3,200 as letters of credit to cover the debt service reserve.
(2) As at December 31, 2018, GHG had swap contracts to convert interest to a fixed rate (See note 8a).
Erie Shores (3)
Tranche A
Tranche C
Interest Rate
5.96%
6.15%
Maturity
Apr 1, 2026
Apr 1, 2026
Dec 31, 2018
37,159
Dec 31, 2017
40,982
24,496
61,655
26,995
67,977
(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 $5,269 as restricted cash and $550 as letters of credit against the borrowing capacity of the 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, 2018
50,469
Dec 31, 2017
52,952
(1) Saint-Philémon is required to set aside $1,224 as letters of credit against the borrowing capacity of the CPC revolving credit facility to cover the debt service
reserve.
Grey Highlands Clean
Term loan
Interest Rate (2)
2.87%
Maturity
Dec 23, 2021
Dec 31, 2018
46,827
Dec 31, 2017
49,320
(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, 2018, 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, 2018
34,948
Dec 31, 2017
37,223
(1) Amherst's project debt has a $1,000 limited recourse guarantee provided by CPC to the lenders of the Amherst project debt.
(2) Amherst is required to set aside $1,102 as letters of credit against the borrowing capacity of the CPC revolving credit facility to cover the debt service and
maintenance reserves.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 44
Snowy Ridge
Term loan
Interest Rate (2)
2.75%
Maturity
Dec 23, 2021
Dec 31, 2018
27,877
Dec 31, 2017
29,083
(1) Snowy Ridge is required to set aside $3,443 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, 2018, 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, 2018
24,347
Dec 31, 2017
25,160
(1) Settlers Landing is required to set aside $2,023 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, 2018, Settlers Landing had swap contracts to convert interest to a fixed rate (See note 8a).
SkyGen
Term loans
Interest Rate
4.90%
Maturity (2)
Jul 17, 2021
Dec 31, 2018
18,597
Dec 31, 2017
20,360
(1) SkyGen is required to set aside $1,334 as letters of credit to cover the debt service reserve.
(2) On July 17, 2018, the SkyGen project debt was refinanced, decreasing the current portion by $18,565. The new debt matures in 2021 and amortizes over the
same period as the prior debt, carrying a fixed interest rate of 4.90%.
Skyway 8
Term loan
Interest Rate
4.90%
Maturity (2)
Jul 17, 2021
Dec 31, 2018
17,658
Dec 31, 2017
18,337
(1) Skyway 8 is required to set aside $766 as letters of credit to cover the debt service reserve.
(2) On July 17, 2018, the Skyway 8 project debt was refinanced, decreasing the current portion by $17,658. The new debt matures in 2021 and amortizes over the
same period as the prior debt, carrying a fixed interest rate of 4.90%.
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, 2018
6,145
Dec 31, 2017
6,685
230
4,666
11,041
799
4,785
12,269
(1) Glace Bay is required to set aside $2,501 as restricted cash to cover the debt service and operating and maintenance reserves.
(iii)
Solar
Amherstburg project debt
Interest Rate
3.49%
Maturity
Dec 31, 2030
Dec 31, 2018
76,093
Dec 31, 2017
81,632
(1) Amherstburg is required to set aside $4,527 as letters of credit against the borrowing capacity of the CPC revolving credit facility to cover the debt service and
maintenance reserves.
(iv)
Hydros
Senior secured bonds
Subordinated secured bonds
Interest Rate
4.56%
7.00%
Maturity
Jun 30, 2040
Jun 30, 2041
Dec 31, 2018
55,493
Dec 31, 2017
57,693
19,324
74,817
19,809
77,502
(1) The hydro facilities are required to set aside $10,102 as letters of credit against the borrowing capacity of the CPC revolving credit facility to cover the debt
service and maintenance reserves.
(v)
Gas
Term loan
Interest Rate (2)
2.87%
Maturity
Mar 18, 2023
Dec 31, 2018
60,728
Dec 31, 2017
64,259
(1) Cardinal is required to set aside $1,558 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, 2018, 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, 2018, 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
247,003
49,355
Beyond five years
472,207
CAPSTONE INFRASTRUCTURE CORPORATION
Total
768,565
Page 45
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
Revision of estimates
Liabilities incurred
Accretion expense
Balance, end of year
NOTE 17. SHAREHOLDERS’ EQUITY
The following table summarizes the Corporation's share capital:
As at
Common and Class A shares
Preferred shares
Dec 31, 2018
Dec 31, 2017
2020– 2078
2020– 2062
2.0%
2.0%
4.75% - 5.75% 3.5% - 5.75%
10,161
—
(1,155)
—
436
9,442
7,165
1,598
1,009
55
334
10,161
Dec 31, 2018
62,270
Dec 31, 2017
62,270
72,020
134,290
72,020
134,290
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.
Continuity for the year ended
(000s shares and $000s)
Opening balance
Issuance of Class A shares (1)
Return of capital (1)
Business acquisition (2)
Ending balance
Dec 31, 2018
Dec 31, 2017
Shares Carrying Value
62,270
304,609
Shares Carrying Value
40,433
227,733
—
—
—
304,609
—
—
—
62,270
76,876
—
—
304,609
86,332
(86,332)
21,837
62,270
(1) 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 3 for details.
(2) Refer to note 3 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, 2018
and 2017, 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 2018 or 2017 in respect of the Corporation's common shareholders.
For the year ended
Preferred shares declared (1), (2)
(1)
(2) Capstone has included $409 of accrued preferred dividends as declared on November 14, 2018 (2017 - $409).
Includes $34 of deferred income taxes for the year ended December 31, 2018 (2017 - $71).
Dec 31, 2018
2,486
Dec 31, 2017
2,523
CAPSTONE INFRASTRUCTURE CORPORATION
Page 46
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.
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, GHG, Snowy Ridge ("SR"), Settlers Landing ("SL"), and Buffalo Atlee non-controlling interests as at
December 31, 2018 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 Batchewana First Nation ("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.
•
Buffalo Atlee is 25% owned by Sawridge First Nation ("Sawridge").
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:
January 1, 2017
NCI portion of net income
Dividends declared
Net convertible debenture repayments
As at December 31, 2017
NCI portion of net income
Dividends declared
Net convertible debenture repayments
As at December 31, 2018
(1) Net income is allocated based on pro-rata share of distributions.
Firelight's
interest in
Amherst
Municipal
interest in
Saint-
Philémon
9,574
736
(931)
—
9,379
1,313
(1,764)
—
8,928
2,335
196
(1,035)
—
1,496
162
(764)
—
894
BFN's
interest in
Goulais (1)
20,038
61
(1,274)
—
18,825
118
(1,265)
—
17,678
Concord's
interest in
GHG, SR & SL
29,470
—
—
(3,921)
25,549
—
—
(2,963)
22,586
Total
61,417
993
(3,240)
(3,921)
55,249
1,593
(3,793)
(2,963)
50,086
CAPSTONE INFRASTRUCTURE CORPORATION
Page 47
(B)
Summarized Information for Material Partly Owned Subsidiaries
As at
December 31, 2018
December 31, 2017
Summarized Statements of Financial
Position
Amherst
Philémon Goulais
Saint-
GHG, SR &
SL
Amherst
Saint-
Philémon
Goulais
GHG, SR &
SL
Assets
Current
Non-current
Liabilities
Current
Non-current
Total equity
Attributable to:
Shareholders of Capstone
NCI
For the year ended
2,113
54,537
1,953
53,419
1,831
1,248
(2,588)
(33,499)
20,563
(2,276)
(48,000)
5,096
(193)
—
2,886
11,635
8,928
20,563
4,202
(14,792)
894
5,096
17,678
2,886
December 31, 2018
Saint-
Summarized Statements of Income
Amherst
Philémon Goulais
405
68,704
—
—
69,109
46,523
22,586
69,109
2,503
57,532
2,766
56,711
4,225
2,054
(2,768)
(35,785)
21,482
(3,410)
(49,871)
6,196
(2,494)
—
3,785
12,103
9,379
21,482
4,700
1,496
6,196
(15,040)
18,825
3,785
December 31, 2017
969
68,704
—
—
69,673
44,115
25,549
69,664
GHG, SR &
SL
Amherst
Saint-
Philémon
Goulais
GHG, SR &
SL
Revenue
9,130
7,795
2,810
5,925
8,662
7,934
2,677
7,418
Total net income and comprehensive
income
Attributable to:
Shareholders of Capstone
NCI
2,679
330
366
5,928
1,508
401
118
7,408
1,366
1,313
2,679
168
162
330
248
118
366
5,928
—
5,928
772
736
1,508
205
196
401
57
61
118
7,408
—
7,408
For the year ended
Summarized Statements of Cash
Flows
December 31, 2018
Saint-
Amherst
Philémon Goulais
GHG, SR &
SL
Amherst
Saint-
Philémon
Goulais
GHG, SR &
SL
December 31, 2017
Operating
Investing
Financing
5,533
(105)
(5,752)
3,347
1,369
(46)
—
5,928
—
3,440
—
(3,912)
(3,750)
(5,925)
(3,804)
4,618
(36)
(3,017)
6,025
—
(4,210)
7,421
(1,807)
(7,418)
Net increase / (decrease) in cash and
equivalents
(324)
(611)
(2,381)
3
(364)
1,565
1,815
(1,804)
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
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 $25,549 as at December 31, 2017 and $22,586 as at December 31, 2018.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 48
Share Appreciation Rights Plan
NOTE 19. SHARE-BASED COMPENSATION
(A)
On April 1, 2017, a SAR plan was approved by the board. The SAR plan allows up to 15,230,458 SAR units, or 5% of the
number of shares issued, to be granted. At the beginning of 2018, there were 9,899,791 units outstanding, 380,761 were granted
during the year, and there were 10,280,552 units outstanding as at December 31, 2018. 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 $139 in 2018 (2017 - $104).
NOTE 20. REVENUE BY NATURE
Capstone's power segment revenue is generated through long-term power contracts which vary in nature as disaggregated
below. The corporate activities do not generate revenue.
Wind (1)
Gas (2)
Biomass (3)
Solar
Hydro
Total Revenue
For the year ended
Dec 31, 2018
113,566
Dec 31, 2017
93,512
25,269
15,402
15,059
14,333
21,160
8,640
15,747
15,104
183,629
154,163
(1) Wind revenue for 2017 excludes the results of Glen Dhu and Fitzpatrick wind facilities, which were equity accounted.
(2) Gas revenue at Cardinal consists of fixed payments for providing capacity and availability based on its PPA and other contracts; the remaining revenue is
variable based on production.
(3) Biomass revenue includes $3,553 of grant funding eligibility for Whitecourt for the year (2017 - $4,800).
As at December 31, 2018, Capstone has trade receivable balances of $25,156 (2017 - $23,723).
NOTE 21. EXPENSES BY NATURE
For the year ended
Dec 31, 2018
Dec 31, 2017
Operating
Admin.
Maintenance & supplies
16,987
Wages and benefits
Property expenses (1)
Fuel and transportation
Professional fees (2)
Power facility administration
Insurance
Other
Total
9,918
8,948
6,939
95
2,797
2,182
2,522
50,388
—
5,310
490
—
364
—
120
1,245
7,529
Project
Development
Costs
—
—
98
—
2,653
—
—
170
16,987
15,228
9,536
6,939
3,112
2,797
2,302
3,937
9,442
9,301
7,996
5,581
2,492
2,366
2,430
2,682
2,921
60,838
42,290
Project
Development
Costs
—
562
—
—
1,250
—
—
278
Total
9,442
15,650
8,493
5,581
4,795
2,366
2,559
4,212
2,090
53,098
—
5,787
497
—
1,053
—
129
1,252
8,718
Total Operating
Admin.
(1) Property expenses include leases, utilities, and property taxes.
(2) Professional fees include legal, audit, tax and other advisory services.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 49
NOTE 22. OTHER GAINS AND LOSSES
Unrealized gains (losses) on derivative financial instruments (1)
Losses on disposal of capital assets (2)
Other
Other gains and (losses), net
For the year ended
Dec 31, 2018
(5,074)
(437)
253
(5,258)
Dec 31, 2017
9,930
(3,507)
14
6,437
(1) Unrealized losses on derivative financial instruments were attributable to a decrease in the Whitecourt embedded derivative asset primarily due to the
introduction of EPCs and decreases in assets related to the interest rate swap contracts due to lower long-term interest rates since December 31, 2017.
(2) Losses in 2017 primarily relate to capital assets replaced as part of Whitecourt's refurbishment.
NOTE 23. 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 as at December 31, 2018 were as follows:
Leases
(A)
Minimum operating lease payments comprised:
Operating leases
Within one year One year to five years
18,271
4,503
Beyond five years
37,013
Total
59,787
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 facilities. 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'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.
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. 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.
CAPSTONE INFRASTRUCTURE CORPORATION
Page 50
Operations and Maintenance ("O&M") Agreements
(F)
Cardinal has a maintenance contract with Siemens Canada Limited covering the gas turbine at Ingredion's 15 MW facility. 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, 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 $6,000 as at
December 31, 2018. 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.
Transactions with iCON Infrastructure LLP and subsidiaries ("iCON")
NOTE 24. RELATED PARTY TRANSACTIONS
(A)
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 2018,
Capstone earned fees of $232 from iCON Canada (2017 - $174). As at December 31, 2018, accounts receivable included $124
due from iCON Canada. Refer to note 3 for a series of equity transactions with iCON.
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 paid.
Key Management Compensation for the year ended
Salaries, directors' fees and short-term employee benefits
Termination benefits
Dec 31, 2018
1,173
Dec 31, 2017
1,295
—
1,173
1,140
2,435
NOTE 25. 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. In 2017, there was one other reporting segment which was sold on 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 3)
Utilities – district heating (“DH”)
The district heating business (Värmevärden), in which the Corporation holds a 33.3% indirect interest until March 3, 2017.
Geographical
Location
Canada
Sweden
CAPSTONE INFRASTRUCTURE CORPORATION
Page 51
For the year ended
Dec 31, 2018
Dec 31, 2017
Revenue (1)
Expenses
EBITDA
Interest expense
Income tax recovery (expense)
Net income (loss)
Additions to capital assets, net
Additions to PUD
Continuing Operations
Continuing Operations
Power
Corporate
Total
Power
Corporate
Total
Discontinued
Operations (2)
Total
183,629
(51,990)
130,790
(38,797)
(4,165)
9,974
3,535
865
—
(8,848)
(8,114)
—
2,150
(6,077)
—
—
183,629
(60,838)
122,676
(38,797)
(2,015)
3,897
3,535
865
154,163
(44,322)
118,567
(36,668)
(4,027)
11,147
17,967
14,383
—
(8,776)
(8,512)
—
(13,514)
(22,088)
—
—
154,163
(53,098)
110,055
(36,668)
(17,541)
(10,941)
17,967
14,383
—
—
—
—
—
129,317
—
—
154,163
(53,098)
110,055
(36,668)
(17,541)
118,376
17,967
14,383
(1) Power revenue includes $3,553 of grant funding eligibility for Whitecourt for the year (2017 - $4,800).
(2) Relates to the utilities - DH segment.
NOTE 26. SUBSEQUENT EVENTS
Watford Wind Facility Acquisition
On February 1, 2019, Capstone acquired the assets of the Watford Wind Facility from Zephyr Farms Limited. The 10MW
operating wind facility is located near the municipality of Brooke-Alvinston in Ontario and operates under a PPA that expires in
2032. Funding for the asset purchase came from existing cash.
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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