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2023 Report2019 ANNUAL Management's Discussion & Analysis and Financial Statements MANAGEMENT’S DISCUSSION AND ANALYSIS FINANCIAL HIGHLIGHTS Revenue EBITDA Net income (loss) (1), (2) Preferred dividends Total assets Total long-term liabilities As at and for the year ended December 31, 2019 185,338 121,048 1,717 2,452 1,105,645 770,660 2018 183,629 122,676 2,304 2,452 2017 154,163 110,055 117,383 2,452 1,131,928 806,887 1,201,910 833,882 (1) Net income (loss) attributable to the common shareholders includes discontinued operations for applicable periods, but excludes non-controlling interests. (2) Net income for 2017 includes a $128,087 gain on the sale of Värmevärden. INSIDE THIS SECTION Financial highlights Legal notice Introduction Basis of presentation Additional GAAP performance measures Changes in the business Results of operations Financial position review 1 2 3 3 3 3 4 6 Derivative financial instruments Risks and uncertainties Environmental, health and safety regulation Related party transactions Summary of quarterly results Fourth quarter highlights Accounting policies and internal controls 10 10 13 14 15 16 16 CAPSTONE INFRASTRUCTURE CORPORATION Page 1 LEGAL NOTICE This document is not an offer or invitation for the subscription or purchase of or a recommendation of securities. It does not take into account the investment objectives, financial situation and particular needs of any investors. Before making an investment in Capstone Infrastructure Corporation (the "Corporation"), an investor or prospective investor should consider whether such an investment is appropriate to their particular investment needs, objectives and financial circumstances and consult an investment adviser if necessary. Caution Regarding Forward-Looking Statements Certain of the statements contained within this document are forward-looking and reflect management’s expectations regarding the future growth, results of operations, performance and business of the Corporation based on information currently available to the Corporation. Forward- looking statements are provided for the purpose of presenting information about management’s current expectations and plans relating to the future and readers are cautioned that such statements may not be appropriate for other purposes. These statements use forward-looking words, such as “anticipate”, “continue”, “could”, “expect”, “may”, “will”, “intend”, “estimate”, “plan”, “believe” or other similar words, and include, among other things, statements found in “Results of Operations” and "Financial Position Review". These statements are subject to known and unknown risks and uncertainties that may cause actual results or events to differ materially from those expressed or implied by such statements and, accordingly, should not be read as guarantees of future performance or results. The forward-looking statements within this document are based on information currently available and what the Corporation currently believes are reasonable assumptions, including the material assumptions set out in the management’s discussion and analysis of the results of operations and the financial condition of the Corporation (“MD&A”) for the year ended December 31, 2019 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 and solar 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 and solar 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 22, 2019, as supplemented by disclosure of risk factors contained in any subsequent annual information form, material change reports (except confidential material change reports), business acquisition reports, interim financial statements, interim management's discussion and analysis and information circulars filed by the Corporation with the securities commissions or similar authorities in Canada (which are available under the Corporation’s SEDAR profile at www.sedar.com). The assumptions, risks and uncertainties described above are not exhaustive and other events and risk factors could cause actual results to differ materially from the results and events discussed in the forward-looking statements. The forward-looking statements within this document reflect current expectations of the Corporation as at the date of this document and speak only as at the date of this document. Except as may be required by applicable law, the Corporation does not undertake any obligation to publicly update or revise any forward-looking statements. CAPSTONE INFRASTRUCTURE CORPORATION Page 2 INTRODUCTION Management’s discussion and analysis ("MD&A") summarizes Capstone Infrastructure Corporation's (the "Corporation" or "Capstone") consolidated financial position, operating results and cash flows as at and for the years ended December 31, 2019 and 2018. 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, 2019 and 2018. Additional information about the Corporation, including its Annual Information Form ("AIF") for the year ended December 31, 2018, 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 4, 2020, 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. 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 2019, Capstone executed on its strategic growth objectives with two asset acquisitions, consisting of the addition of a 132MW solar development project and a 10MW operating wind farm. In addition, Capstone's financing activities added further flexibility for growth, despite an event of default which was triggered by the Senvion insolvency and then waived during the year, as described below. Furthermore, Capstone made progress on the near-term recontractings of the hydro facilities, as well as project development. Asset Acquisitions Claresholm Solar Project ("Claresholm") On November 19, 2019, Capstone acquired a 51% interest in the 132MW Claresholm solar development project, through a series of transactions. The remaining 49% interest is indirectly held by Denmark-based Obton A/S (“Obton”). The project was acquired for $15,951, which includes the reimbursement of certain pre-construction expenses, transaction costs, and consideration that becomes payable over time and is recorded in accounts payable and other liabilities due to the expected timing of payment. Earlier in 2019, the project secured regulatory approvals from the Alberta Utilities Commission and executed a 74MW power purchase agreement ("PPA") with TC Energy Corporation. Subsequent to December 31, 2019, Claresholm executed material project contracts for the development of the facility with an aggregate commitment of $67,600. Additional capital expenditures are expected to be funded by a combination of project financing and equity contributions from the partners. Capstone's equity contributions are expected to be funded from existing liquidity and the available capacity in the CPC revolving credit facility. Construction is scheduled to begin in the spring of 2020. Watford Wind Facility ("Watford") On February 1, 2019, Capstone acquired the Watford assets from Zephyr Farms Limited for $13,960, paid for from existing liquidity. The 10MW wind facility operates in the municipality of Brooke-Alvinston in Ontario under a PPA that expires in 2032. Financing Activities Cardinal Refinancing On April 1, 2019, the Cardinal term loan was refinanced with its existing lender, increasing its term loan by $20,200 and extending the term by 3 years to April 1, 2026, while locking in lower interest rates. Capstone entered into additional swap contracts to convert the floating interest rate obligations to a fixed rate. The proceeds were used to repay $19,500 towards the term portion of the CPC credit facility, reducing the balance to $25,500. CAPSTONE INFRASTRUCTURE CORPORATION Page 3 CPC Refinancing On May 15, 2019, the remaining $25,500 of the CPC term credit facility was converted into the revolving credit facility. Capstone also amended certain terms to create further financial flexibility and extended the maturity date of the CPC revolving credit facility. On May 23, 2019, the remaining $25,500 drawn on the CPC revolving credit facility was repaid. As at December 31, 2019, the revolving credit facility capacity was $120,500, of which $45,864 supports letters of credit for the operating facilities. Senvion Insolvency On April 9, 2019, Capstone received notice from Senvion GmbH ("Senvion") with regards to Senvion's initiation of insolvency proceedings. Among other things, Senvion provides operations and maintenance services and warranty obligations for Capstone's Grey Highlands Clean, Grey Highlands ZEP and Ganaraska ("GHG"), Snowy Ridge, and Settlers Landing wind facilities. The facilities, which have $157,503 of debt principal outstanding in the statement of financial position as at December 31, 2019, were serviced by Senvion until February 2020, and subsequently serviced by a combination of a third party provider and Capstone's internalized service function without interruption to service. As a result of the insolvency notice, Capstone was not in compliance with certain covenants under its respective project debt agreements and in turn a cross-default under the CPC credit facilities was triggered. On May 15, 2019, all of Capstone's project and corporate lenders waived the respective events of default in connection with the insolvency. Hydro Facilities' Recontracting In 2019 and year-to-date in 2020, Capstone executed several power contracts or amendments for the hydro facilities as follows: Project Ownership Interest Net Capacity Sechelt Creek Hydro Facility Dryden Hydro Power Facility Hluey Lakes Hydro Facility (1) 100% 100% 100% 16 MW Counterparty BC Hydro Contract Expiry Oct 2022 Status Executed, subject to BCUC approval 3.2 MW Independent Electricity System Operator ("IESO") Oct 2040 Executed 3 MW BC Hydro Jul 2020 Executed, subject to BCUC approval (1) Currently in negotiations for renewal beyond contract expiry. Project Development Capstone continues to pursue projects at all stages of development and is actively progressing a number of projects. As at December 31, 2019, Capstone's development pipeline included the rights to 190MW gross across the projects, including: • • • the Claresholm solar project, a 132MW facility located in Alberta, which are being developed with its partner, Obton; the Buffalo Atlee wind projects 1, 2 and 3, in aggregate 48MW of facilities located in Alberta (collectively the "Buffalo Atlee" wind development projects), which are being developed with its partner, Sawridge First Nation ("Sawridge"); and the Riverhurst wind project, a 10MW facility located in Saskatchewan. RESULTS OF OPERATIONS Overview In 2019, Capstone's EBITDA was lower while net income was higher than 2018. Lower EBITDA reflects: • Higher other income and expenses include higher unrealized losses from financial instruments than in 2018 due to forecast changes in interest rates and the Whitecourt embedded derivative and lower interest income due a one-time settlement of a loan receivable in 2018; partially offset by • Lower expenses, primarily due to reductions in operating expense from the adoption of IFRS 16 and fewer market runs at Cardinal, as well as lower project development costs and administrative savings; and • Higher revenue from strong resources at the existing wind facilities and the acquisition of Watford. In addition, Whitecourt revenue was higher due to better average power pool prices, partially offset by fewer market runs in 2019 at Cardinal. Revenue Expenses Other income and expenses EBITDA Interest expense Depreciation and amortization Income tax recovery (expense) Net income CAPSTONE INFRASTRUCTURE CORPORATION For the year ended Dec 31, 2019 185,338 Dec 31, 2018 183,629 Change 1,709 (56,776) (7,514) 121,048 (37,679) (81,260) 2,117 4,226 (60,838) (115) 122,676 (38,797) (77,967) (2,015) 3,897 4,062 (7,399) (1,628) 1,118 (3,293) 4,132 329 Page 4 The remaining material changes in net income was: • Higher depreciation and amortization from the adoption of IFRS 16 and the acquisition of Watford; and • Shift from income tax expense to a recovery in 2019 reflects lower future rates, reducing deferred taxes. 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. Revenue Capstone's revenue is mainly driven by the generation and sale of electricity through long-term power contracts. Revenue Wind Gas Biomass Solar Hydro Total Revenue Power generated (GWh) Wind Gas Biomass Solar Hydro Total Power For the year ended Dec 31, 2019 118,086 22,494 15,778 14,916 14,064 Dec 31, 2018 113,566 25,269 15,402 15,059 14,333 185,338 183,629 For the year ended Dec 31, 2019 1,049.3 34.4 199.5 35.5 162.4 Dec 31, 2018 1,012.5 78.9 191.8 35.8 164.5 1,481.1 1,483.5 Change 4,520 (2,775) 376 (143) (269) 1,709 Change 36.8 (44.5) 7.7 (0.3) (2.1) (2.4) 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 12 years remaining on the current PPAs. • 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 12 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 2018: Change Explanations 3,301 Higher revenue from the operating wind facilities due to higher production, reflecting relative weather conditions. 1,221 Higher revenue at Watford due to the acquisition on February 1, 2019. 669 Higher revenue from Whitecourt due to higher Alberta Power Pool prices. (2,775) Lower revenue from Cardinal due to fewer market runs in 2019. (707) Various other changes. 1,709 Change in revenue. CAPSTONE INFRASTRUCTURE CORPORATION Page 5 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. Expenses Expenses consist of expenditures within the power segment relating to operating expenses and costs to develop new projects, as well as corporate administrative expenses. Expenses Wind Gas Biomass Hydro Solar Power operating expenses Project development costs Administrative expenses Total Expenses For the year ended Dec 31, 2019 (21,319) Dec 31, 2018 (22,185) Change 866 (11,748) (10,922) (3,742) (714) (48,445) (1,535) (6,796) (56,776) (13,666) (9,343) (4,151) (1,043) (50,388) (2,921) (7,529) (60,838) 1,918 (1,579) 409 329 1,943 1,386 733 4,062 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 and Watford wind facilities, which share 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 are comprised 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 2018: Change Explanations 2,699 Lower expenses due to the adoption of IFRS 16. Fixed portion of lease payments are no longer expensed as operating leases, but treated as capital leases. Refer to note 2 "Summary of Significant Accounting Policies". 1,651 Lower operating expenses from Cardinal due to fewer runs in 2019. 1,303 Lower project development costs due to costs associated with early stage development in 2018. (1,089) Higher operating expenses at Watford due to the acquisition on February 1, 2019. (502) Various other changes. 4,062 Change in expenses. FINANCIAL POSITION REVIEW Overview As at December 31, 2019, Capstone's working capital was $53,124, compared with $60,870 as at December 31, 2018. The decrease was primarily due to Capstone refinancing the Cardinal term loan and amending the CPC credit facility. The net proceeds from the Cardinal refinancing of $19,500 were used to repay a portion of the CPC term facility. The remaining term facility of $25,500 was converted into the revolving credit facility, and then repaid from funds from operations. These financing activities increase Capstone's financial flexibility and lower borrowing costs, further positioning the Corporation for growth. In late 2019, Capstone invested in the Claresholm solar development project. Capstone's equity contributions to the project are expected to be funded from existing liquidity and the available capacity in the CPC revolving credit facility. Capstone and its subsidiaries continue to comply with all debt covenants, except as described on page 3 "Changes in the Business" of the MD&A. CAPSTONE INFRASTRUCTURE CORPORATION Page 6 Liquidity Working capital As at Power Corporate Working capital (equals current assets, less current liabilities) Dec 31, 2019 49,468 Dec 31, 2018 57,306 3,656 53,124 3,564 60,870 Capstone's working capital was $7,746 lower than December 31, 2018 due to a decrease of $7,838 in power, partially offset by an increase of $92 at corporate. The power segment decrease reflects lower cash of $6,203, as well as higher accounts payable and accruals of $4,789 largely reflecting new payables for Claresholm. These decreases were partially offset by repayments of the CPC credit facility, reducing the current portion of long-term debt by $4,062. Cash and cash equivalents As at Power Corporate Unrestricted cash and cash equivalents Dec 31, 2019 64,371 Dec 31, 2018 70,574 4,885 69,256 5,767 76,341 These funds are available for operating activities, capital expenditures and future acquisitions. The $7,085 decrease consists of decreases of $6,203 and $882 at power and corporate, respectively. Lower cash at the power segment reflects the repayment of the remaining balance of $25,500 on the CPC revolving credit facility, as well as the acquisition of Watford for $13,960, partially offset by accumulation of asset distributions. The decrease at corporate reflects paying current period administrative expenses. In addition to these funds, the CPC revolving credit facility has an available capacity of $74,636 as at December 31, 2019. Cash at the power segment is comprised of $47,344 at the projects and $17,027 at CPC, which is only periodically accessible by corporate through distributions. This includes $19,668 for the development projects which will be used to fund project requirements. The power segment's cash and cash equivalents are accessible through distributions under the terms of the CPC credit facility, 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 decreased by $7,085 in 2019 compared with an increase of $12,258 in 2018. The components of the change in cash, as presented in the consolidated statement of cash flows, are summarized as follows: For the year ended Operating activities Investing activities Financing activities (excluding dividends to shareholders) Dividends paid to shareholders Change in cash and cash equivalents Dec 31, 2019 94,452 (29,227) (69,858) (2,452) (7,085) Dec 31, 2018 93,098 (5,508) (72,880) (2,452) 12,258 Cash flow from operating activities was $1,354 higher in 2019. The increase is attributable to changes in working capital and largely consistent contributions from the operating facilities, aside from the addition of Watford and changes in market conditions affecting both Whitecourt and Cardinal versus 2018. Cash flow used in investing activities was $23,719 higher in 2019, primarily due to $20,242 higher cash used for funding capital assets additions, mainly the purchase of Watford and $2,359 higher cash used for investment in projects under development. Cash flow used in financing activities was $3,022 lower in 2019, driven by $13,808 lower debt repayments and $8,000 cash contributions from partners, partially offset by $17,046 of lower debt proceeds. Lower debt repayments were primarily due to $37,246 for SkyGen and Skyway 8 project debts, which were refinanced in 2018, partially offset by $25,500 of repayment of the CPC credit facilities in 2019. In addition, lower debt proceeds reflect $20,200 of proceeds from the 2019 Cardinal refinancing, whereas 2018 primarily consisted of the Skygen and Skyway 8 refinancing. CAPSTONE INFRASTRUCTURE CORPORATION Page 7 Long-term Debt Continuity of Capstone's long-term debt for the year ended was: Long-term debt (1), (2) and (3) Deferred financing fees Less: current portion of long-term debt Dec 31, 2018 Additions Repayments Other Dec 31, 2019 768,565 (13,871) 754,694 (49,355) 705,339 20,200 (926) 19,274 — 19,274 (89,469) — (89,469) 5,000 (84,469) — 2,514 2,514 (938) 1,576 699,296 (12,283) 687,013 (45,293) 641,720 (1) The power segment has a cumulative $60,173 utilized on its letter of credit facilities. (2) During the year ended December 31, 2019, the Cardinal term loan and CPC credit facilities were amended as described on page 3 "Changes in the Business" of the MD&A. The additions relate to the Cardinal refinancing and the repayments are a combination of payments on the CPC credit facilities from the Cardinal refinancing proceeds and cash on hand, as well as scheduled repayments of the project debt. (3) During the year ended December 31, 2019, the lenders to the Grey Highlands Clean, GHG, Snowy Ridge, and Settlers Landing wind facilities' agreed to waive contracted increases in the credit spread, thereby reducing future interest payable from these projects. As at December 31, 2019, Capstone's long-term debt consisted entirely of project debt. The current portion of long-term debt of $45,293 reflects scheduled debt amortization. Capstone expects to repay the scheduled amortization from income generated by the power assets. As at December 31, 2019, the CPC revolving credit facility capacity was $120,500, of which $45,864 supports letters of credit for the operating facilities, leaving $74,636 of available capacity. 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 (2) Total shareholders’ equity Dec 31, 2019 62,270 Dec 31, 2018 62,270 72,020 134,290 71,113 205,403 59,247 264,650 72,020 134,290 71,842 206,132 50,086 256,218 (1) Capstone has 3,000 publicly listed Series A preferred shares on the Toronto Stock Exchange. (2) On November 19, 2019, Capstone acquired 51% of the Claresholm solar project; the remaining 49% is held by Obton. Refer to page 3 "Changes in the Business" in this MD&A. Contractual Obligations As at December 31, 2019, Capstone had outstanding contractual obligations with amounts due as follows: Long-term debt (1) Operating leases Asset retirement obligations Purchase obligations Total contractual obligations Within one year One year to five years 310,531 18,597 74,953 4,723 — 15,566 95,242 — 25,839 354,967 Beyond five years 551,709 35,948 15,618 5,252 608,527 Total 937,193 59,268 15,618 46,657 1,058,736 (1) Long-term debt includes principal and interest payments. Long-term debt • 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 8 • Cardinal leases the site on which it is located from Ingredion. Under the lease, Cardinal pays monthly rent. The lease extends through 2034 and expires concurrently with the Energy Savings Agreement between Ingredion and Cardinal. • • Amherstburg leases the land on which its operating facilities are located. The terms of the lease agreements extend to 2036. The Corporation has an operating lease for the corporate office ending in 2023. Capstone's operating lease commitments with no minimum operating lease commitments required are: • Capstone has agreements with the Provinces of Ontario and British Columbia for the lease of certain lands and water rights necessary for the operation of its hydro power facilities. The payments under these agreements vary based on actual power production. The terms of the lease agreements extend to 2020 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 facility's PPA may be terminated after a specified period of time. Management services agreements Capstone has agreements with all the partially owned wind and solar facilities and development projects, including Claresholm, Buffalo Atlee, 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. Additionally, some of the development projects include a development fee for the successful completion of the projects, which pays an agreed flat fee or 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, 2019. 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 Expenditure Program Capstone's power segment incurred $38,438 of capital expenditures during 2019, which included $23,230 of additions to capital assets and $15,208 of additions to projects under development ("PUD"). Capital asset expenditures primarily reflect costs to acquire Watford for $13,960, where as PUD consists of costs to develop and construct the wind and solar development projects, which consist of Claresholm, Buffalo Atlee, and Riverhurst. Income Taxes In 2019, the current income tax expense was $967 (2018 - $270), reflecting higher taxable income. Capstone's total deferred income tax asset of $112 primarily relates to unused tax losses carried forward (2018 - $125). Deferred income tax liabilities of $85,878 (2018 - $89,962) primarily relate to the differences between the amortization of intangible and capital assets for tax and accounting purposes. Capstone’s net deferred income tax liability decreased by $4,071 primarily due to the difference between accounting and tax amortization claimed during the year and non-deductible fair value adjustments on financial instruments partially offset by the utilization of tax losses. DERIVATIVE FINANCIAL INSTRUMENTS Capstone has exposure to market, credit and liquidity risks from its use of financial instruments as described in note 8 financial instruments and note 9 financial risk management in the consolidated financial statements as at and for the year ended December 31, 2019. 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, 2019 6,459 (5,773) 686 Dec 31, 2018 13,851 (2,144) 11,707 Net derivative contracts assets decreased by $11,021 from December 31, 2018, due to losses of $8,865, and contractual settlement payments of $2,156 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, 2019 (1,909) (6,956) (8,865) Dec 31, 2018 (3,489) (1,585) (5,074) The loss on derivatives were primarily attributable to losses from the interest rate swap contracts, mainly because of lower forecast long-term interest rates since December 31, 2018. In addition, the Whitecourt embedded derivative asset decreased primarily due to higher forecast Alberta Power Pool prices since December 31, 2018. RISKS AND UNCERTAINTIES Introduction Risk is an inevitable aspect of operating any business. Decisions that balance risk exposure with intended financial rewards within risk tolerances are the responsibility of the Corporation's management under the supervision of the Board of Directors. When a risk exposure exceeds the Corporation's risk tolerance, the Corporation will, to the extent possible, take steps to eliminate, avoid, reduce or transfer such risk. The Corporation recognizes the importance and benefits of timely identification, assessment and management of risks that may impact the Corporation's ability to achieve its strategic and financial objectives. In this respect, the Corporation is committed to prudent risk management practices within the context of an enterprise risk management ("ERM") framework. The Corporation maintains a registry of risks that is reviewed by management and the Board of Directors at least quarterly. The Corporation also undertakes an annual comprehensive review of its ERM framework and practices to continuously improve its risk management practices. What follows is a description of the Corporation's key risk governance and risk processes to support achievement of strategic and financial performance objectives. CAPSTONE INFRASTRUCTURE CORPORATION Page 10 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 Page 11 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. 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 maintains a succession plan and provides career and development opportunities to its employees. Management periodically reviews and updates strategy according to market conditions and developments. Unanticipated increases in costs could result in lower earnings and cash flow. Capstone monitors costs against budgets and considers asset lifecycle costs in decision making. 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 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. Saskatchewan, Ontario and Alberta have all launched constitutional challenges to the GGPPA. The Saskatchewan and Ontario Courts of Appeal have both rendered decisions upholding the validity of the GGPPA, and the Alberta Court of Appeal has ruled that the legislation is unconstitutional. The expectation is that the issue will be appealed to the Supreme Court of Canada. In the interim, all or parts of the GGPPA continue to apply as a backstop to those Provinces without adequate provincial greenhouse gas emissions regimes. Until a final court decision that applies throughout Canada is rendered, it is unclear what effect, if any, the GGPPA will have on Capstone’s operations. Capstone continues to monitor potential implications of this issue on its business. In Alberta, under the Technology Innovation and Emissions Reduction ("TIER") Regulation (previously the Carbon Competitiveness and Incentive Regulation or 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 CAPSTONE INFRASTRUCTURE CORPORATION Page 13 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 TIER. In 2018, Ontario revoked its cap and trade program. Ontario has not yet implemented a comprehensive replacement greenhouse gas regime and, therefore, the provisions of the GGPPA apply to Ontario. Although, in 2019, Ontario implemented its own Emissions Performance Standards regime by introducing a new regulation, the Greenhouse Gas Emissions Performance Standards regulation, and making amendments to the existing Greenhouse Gas, Quantification, Reporting and Verification regulation. The regime applies to greenhouse gas emissions from large industrial emitters. However, while the registration requirement of the new Ontario regime is in effect, the reporting and compliance requirements will only apply in the year the federal government removes Ontario from the equivalent component of the federal regime under the GGPPA. It is unclear if and when this may happen. As such, for now, large industrial emitters in Ontario must still comply with the GGPPA. 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. Solar Facilities The operation of Capstone's solar facilities do 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 2019 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 2019, Capstone earned fees of $240 from iCON Canada (2018 - $232). Compensation of Key Management Key management includes the Corporation's directors, Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Compensation awarded to key management consisted of salaries, directors' fees, short-term employee benefits and long-term incentive plans. Key management compensation is described in note 25 related party transactions in the consolidated financial statements for the year ended December 31, 2019. 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 14 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. 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. Capstone has a share appreciation rights ("SAR") plan, and had a discretionary LTIP (paid out in 2019), both of which are 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. Link to performance No direct link. A significant portion of this award is based on actual business performance against Capstone's internal performance measures. The SAR is directly linked to the long-term increase in the Corporation's value upon a sale transaction. The discretionary LTIP was not directly linked to performance. 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) Preferred dividends 2019 2018 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 51,424 36,346 3,496 613 37,707 26,060 (3,920) 613 45,729 27,845 2,064 613 50,478 30,797 77 613 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 (1) Net income (loss) attributable to the common shareholders of Capstone, which excludes non-controlling interests. CAPSTONE INFRASTRUCTURE CORPORATION Page 15 FOURTH QUARTER HIGHLIGHTS Revenue Operating expenses Administrative expenses Project development costs Interest income Other gains and (losses), net Foreign exchange gain 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, 2019 51,424 Dec 31, 2018 49,991 (13,666) (2,131) (688) 386 1,021 — 36,346 (9,316) (17,635) (2,839) 6,556 (125) (2,127) (2,252) 4,304 3,496 808 4,304 (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) In the fourth quarter of 2019, Capstone's EBITDA and net income were higher than in 2018. Higher quarterly EBITDA reflects: • Higher revenue from strong resources at the existing wind facilities and the acquisition of Watford. In addition, Whitecourt revenue was higher due to better average power pool prices; and • Higher other gains compared with a loss in 2018. The unrealized gains reflect changes in the interest rate swaps due to shifts in the long-term forecasts, partially offset by a loss on the Whitecourt embedded derivative. In addition to the EBITDA factors, the remaining material changes in net income were: • Higher depreciation and amortization due to the impact of IFRS 16 and acquisition of Watford. • Higher income tax expense as a result of higher taxable income due to lower tax loss utilization in 2019. 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, 2018, except for the adoption of IFRS 16, Leases, effective January 1, 2019. Refer to note 2 to the December 31, 2019 consolidated financial statements for a description of the standard and the impact of the adoption. The adoption of these accounting standards did not change any comparative figures presented in the consolidated financial statements. Future Accounting Changes The International Accounting Standards Board ("IASB") has not issued any significant accounting changes that impact the Corporation since the standards described in the most recent annual financial statements for the year ended December 31, 2018. The International Accounting Standards Board ("IASB") issued narrow-scope amendments to IFRS 3, particularly the definition of a business. The amendments are effective for annual reporting periods beginning on or after January 1, 2020 and are to be applied prospectively. Capstone will apply the updated IFRS 3 to applicable transactions. Capstone continues to monitor changes to IFRS and has implemented applicable IASB changes to standards, new interpretations and annual improvements. CAPSTONE INFRASTRUCTURE CORPORATION Page 16 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 intangible assets Deferred income taxes • Timing of reversal of temporary differences, tax rates and current and future taxable income. Financial instruments and fair value measurements Accounting for investments in non-wholly owned subsidiaries • Forward Alberta Power Pool prices, volatility, credit spreads, cost and inflation escalators and fuel supply volumes, 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; 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, 2019 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, 2019, 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, 2019. 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, 2019, 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 pages. David Eva Chief Executive Officer Toronto, Canada March 4, 2020 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, 2019 and 2018, 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, 2019 and 2018; 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 and will not express an opinion or any form of assurance conclusion thereon. 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 on the other information that we obtained prior to the date of this auditor’s report, 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 Toronto, Ontario March 4, 2020 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 Loan receivable 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 lease liabilities Current portion of long-term debt Long-term liabilities Derivative contract liabilities Deferred income tax liabilities Lease liabilities Long-term debt Liability for asset retirement obligation Total liabilities Equity attributable to shareholders' of Capstone Non-controlling interest Total liabilities and shareholders’ equity Commitments and contingencies See accompanying notes to these consolidated financial statements Notes Dec 31, 2019 Dec 31, 2018 4 4 5 6 8 7 8 10 11 12 13 14 15 16 8 13 15 16 17 19 24 69,256 24,577 23,837 4,391 1,398 76,341 23,132 25,477 2,747 1,996 123,459 129,693 702 5,061 815,955 16,803 143,553 112 — 11,855 833,799 1,595 154,861 125 1,105,645 1,131,928 24,005 1,037 45,293 70,335 5,773 85,878 27,440 641,720 9,849 840,995 205,403 59,247 1,105,645 19,468 — 49,355 68,823 2,144 89,962 — 705,339 9,442 875,710 206,132 50,086 1,131,928 CAPSTONE INFRASTRUCTURE CORPORATION Page 21 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY Balance, December 31, 2017 Net income for the period Dividends declared to preferred shareholders of Capstone (2) Dividends declared to NCI Convertible debenture repayments (3) Balance, December 31, 2018 Net income for the period Dividends declared to preferred shareholders of Capstone (2) Dividends declared to NCI Convertible debenture repayments (3) Contributions from NCI (4) Balance, December 31, 2019 Equity attributable to shareholders of Capstone Share Capital 134,290 — — — — 134,290 — — — — — 134,290 Retained Earnings (Deficit) 72,024 2,304 (2,486) — — 71,842 1,717 (2,446) — — — 71,113 Notes 18 19 19 18 19 19 19 NCI (1) 55,249 1,593 — (3,793) (2,963) 50,086 2,509 — (4,073) (2,608) 13,333 59,247 Total Equity 261,563 3,897 (2,486) (3,793) (2,963) 256,218 4,226 (2,446) (4,073) (2,608) 13,333 264,650 (1) Non-controlling interest ("NCI"). (2) Dividends declared to preferred shareholders of Capstone include current and deferred income taxes recovery of $6 (2018 - expense of $34). (3) 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. Includes contributions from Sawridge First Nation to Buffalo Atlee and from Obton to Claresholm (refer to note 3). (4) See accompanying notes to these consolidated financial statements CAPSTONE INFRASTRUCTURE CORPORATION Page 22 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Revenue Operating expenses Administrative expenses Project development costs Interest income Other gains and (losses), net Foreign exchange gain (loss) Earnings before interest expense, taxes, depreciation and amortization Interest expense Depreciation of capital assets Amortization of intangible assets Earnings before income taxes Income tax recovery (expense) Current Deferred Total income tax recovery (expense) Net income 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, 2019 Dec 31, 2018 21 22 22 22 8 23 8 10 12 13 19 185,338 (48,445) (6,796) (1,535) 1,924 (9,437) (1) 183,629 (50,388) (7,529) (2,921) 5,139 (5,258) 4 121,048 122,676 (37,679) (69,952) (11,308) 2,109 (967) 3,084 2,117 4,226 1,717 2,509 4,226 (38,797) (66,785) (11,182) 5,912 (270) (1,745) (2,015) 3,897 2,304 1,593 3,897 CAPSTONE INFRASTRUCTURE CORPORATION Page 23 CONSOLIDATED STATEMENTS OF CASH FLOWS Operating activities: Net income Deferred income tax expense (recovery) Depreciation and amortization Non-cash other gains and losses (net) Amortization of deferred financing costs and non-cash financing costs Foreign exchange loss (gain) Change in non-cash working capital Total cash flows from operating activities Investing activities: Investment in capital assets Investment in projects under development Increase in restricted cash 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 Lease principal payments Transaction costs on debt refinancing Proceeds from issuance of long-term debt Partner contribution Total cash flows used in financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental information: Interest paid Taxes paid See accompanying notes to these consolidated financial statements For the year ended Notes Dec 31, 2019 Dec 31, 2018 13 10 11 19 19 16 19 4,226 (3,084) 81,260 11,593 2,997 1 (2,541) 94,452 (24,630) (3,152) (1,445) (29,227) (89,469) (4,073) (2,608) (2,452) (982) (926) 20,200 8,000 (72,310) (7,085) 76,341 69,256 3,897 1,745 77,967 7,697 2,712 (4) (916) 93,098 (4,021) (793) (694) (5,508) (103,277) (3,793) (2,963) (2,452) — (93) 37,246 — (75,332) 12,258 64,083 76,341 34,656 2,103 36,293 973 CAPSTONE INFRASTRUCTURE CORPORATION Page 24 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 Cash and Cash Equivalents and Restricted Cash Accounts Receivable Other Assets Loan Receivable Financial Instruments Financial Risk Management Capital Assets Projects Under Development Intangible Assets Income Taxes 25 25 32 33 33 33 33 33 35 38 39 39 40 14 15 16 17 18 19 20 21 22 23 24 25 26 Accounts Payable and Other Liabilities Lease 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 41 41 42 45 45 46 48 49 49 49 49 51 51 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 power society, protect the environment, contribute to communities, and create value for its shareholders. As at December 31, 2019, Capstone owns and operates an approximate net installed capacity of 541 megawatts across 24 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 4, 2020. 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 9). Historical cost is generally based on the fair value of the consideration given in exchange for assets. Consolidation These consolidated financial statements are primarily made up of the assets, liabilities and results of operations of the Corporation's subsidiaries. Subsidiaries are all entities over which Capstone has control. Capstone controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. CAPSTONE INFRASTRUCTURE CORPORATION Page 25 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") Watford Wind LP ("Watford") Riverhurst Wind Farm LP ("Riverhurst") Buffalo Atlee 1 Wind LP, Buffalo Atlee 2 Wind LP, Buffalo Atlee 3 Wind LP (collectively, "Buffalo Atlee") Claresholm Solar LP ("Claresholm") Principal place of business and country of incorporation Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Canada Ownership at December 31, 2019 100% 100% 100% 100% 100% 100% 100% 100% 51% 51% 51% 100% 100% 100% 100% 100% 100% 100% 100% 100% 75% 2018 100% 100% 100% 100% 100% 100% 100% 100% 51% 51% 51% 100% 100% 100% 100% 100% 100% 100% Nil 100% 100% 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 Power generation Development Development Canada 51% Nil Development (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. 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. 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 3, Business Combinations ("IFRS 3") are recognized at their fair value at the acquisition date. The Corporation recognizes any non-controlling interest in the acquiree at the non-controlling interest's proportionate share of the recognized amounts of acquiree's identifiable net assets. Acquisition-related costs are expensed as incurred. CAPSTONE INFRASTRUCTURE CORPORATION Page 26 Foreign Currency Translation 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. Loan Receivable The Corporation has an interest-bearing financial asset that consists of a loan receivable, carried at amortized cost. Capitalized Interest The Corporation capitalizes interest and borrowing costs when activities that are necessary to prepare the asset for its intended use are in progress, and expenditures for the asset have been used or borrowed to fund the construction or development. Capitalization of interest and borrowing costs ceases when the asset is ready for its intended use. Capitalized interest is included in the statement of financial position as part of capital assets and projects under development. Grants and Contributions Grants are recognized at their fair value when there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. Grants and contributions related to charges to net income are netted against such expenditures as received. 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. Right-of-use ("ROU") assets are measured at cost comprising of the amount of the initial measurement of the lease liability, any lease payments made at or before the commencement date and any initial direct costs. 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 ROU assets Power 3 to 5 years 15 to 30 years 5 years 15 to 30 years 40 years 5 to 40 years Leased Assets Assets financed by leasing agreements that transfer substantially all the risks and rewards of ownership of an asset to the lessee are capitalized and depreciated over the shorter of their estimated useful lives and the lease term. The corresponding liability is recorded as borrowings. The capital element of the lease rental is deducted from the obligation to the lessor as paid. The interest element of lease rentals and the depreciation of the relevant assets are charged to the consolidated statement of income. Operating lease rental payments are charged to the consolidated statement of income on a straight-line basis as incurred over the term of the lease. CAPSTONE INFRASTRUCTURE CORPORATION Page 27 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 costs are measurable and it is probable the benefits will flow to Capstone. Development cost capitalization criteria are met at one of the following stages depending on the type of clearly identified project: • The technical feasibility has been established or interconnection permit secured; • Management has indicated its intention to construct, operate and maintain the project or land option(s) established; • • 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. Lease Liabilities Lease liabilities are measured at the net present value of fixed payments, variable lease payments that are based on an index or a rate, amounts expected to be payable by the lessee under residual value guarantees, the exercise price of a purchase option if the lessee is virtually certain to exercise that option, and payments of penalties for terminating the lease, if the lease term reflects the lessee exercising that option. These lease payments are discounted using Capstone’s incremental borrowing rate where the rate implicit in the lease is not readily determinable. CAPSTONE INFRASTRUCTURE CORPORATION Page 28 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 weighted average 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 29 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 • Loans 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 2019, 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. 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 CAPSTONE INFRASTRUCTURE CORPORATION Page 30 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 IFRS 16, Leases, effective January 1, 2019. The adoption of this accounting standard did not change any comparative figures presented in the interim consolidated financial statements and instead resulted in the recognition of lease liabilities and equal ROU assets on transition. IFRS 16 replaces IAS 17 and was applied using the modified retrospective approach on a prospective basis. Capstone elected the following practical expedients: 1) Use of a single discount rate for leases with similar characteristics; 2) Accounting for leases with remaining terms of less than twelve months as short-term leases; 3) Accounting for payments as expenses for low dollar value assets; and 4) Use of hindsight in determining term where options to extend or terminate exist. Impact to previously reported results Capital assets (2) (refer to note 10) Current portion of lease liabilities Lease liabilities (refer to note 15) As reported as at December 31, 2018 Adjustments (1) As at January 1, 2019 862,000 (945) (27,256) 28,201 (945) (27,256) 833,799 — — (1) Discounted at Capstone's incremental borrowing rate of 5.75%. (2) ROU assets, included within capital assets, are depreciated over the shorter of the asset's useful life and the lease term. The ROU assets are $27,802 as at December 31, 2019. Reconciliation of total lease liabilities from operating lease commitments Operating land lease commitments disclosed as at December 31, 2018 (1) Add adjustment due to different treatment of extension or termination options Less adjustment due to variable lease payments Less adjustment due to present valuing lease payments Opening current and non-current lease liabilities as at January 1, 2019 (1) Lease payments are incurred over the term of the PPA. January 1, 2019 59,787 14,236 (25,677) (20,145) 28,201 Assets and liabilities arising from a lease are initially measured on a present value basis, using a single discount rate for a portfolio of leases with reasonably similar characteristics. Ongoing impact of change in accounting standard In 2019, the accounting policy change increased EBITDA within the power segment by approximately $2,700. The increase reflects treating the fixed portion of lease payments as ROU asset depreciation, liability principal payments and interest expense, none of which are included in EBITDA. The fixed portion of lease payments were previously expensed, which reduced EBITDA. The variable portion of lease payments will remain in operating expenses in the statement of income. After adoption, new leases will be recognized as ROU assets along with the corresponding liabilities at the date of which the leased assets is available for use by the Company. Future Accounting Changes The International Accounting Standards Board ("IASB") has not issued any significant accounting standard changes that impact the Corporation. The International Accounting Standards Board ("IASB") issued narrow-scope amendments to IFRS 3, particularly the definition of a business. The amendments are effective for annual reporting periods beginning on or after January 1, 2020 and are to be applied prospectively. Capstone will apply the updated IFRS 3 to applicable transactions. Capstone continues to monitor changes to IFRS and has implemented applicable IASB changes to standards, new interpretations and annual improvements. 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 Page 31 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 (A) Watford Wind Facility On February 1, 2019, Capstone acquired the Watford assets from Zephyr Farms Limited for $13,960, paid for from existing liquidity. The 10MW wind facility operates in the municipality of Brooke-Alvinston in Ontario under a PPA that expires in 2032. This asset acquisition is included in the capital asset additions in note 10. Claresholm Solar Project (B) On November 19, 2019, Capstone acquired a 51% interest in the 132MW Claresholm solar development project, through a series of transactions. The remaining 49% interest is indirectly held by Denmark-based Obton A/S (“Obton”). The project was acquired for $15,951, which includes $4,820 of acquired cash, the reimbursement of certain pre-construction expenses, transaction costs, and consideration that becomes payable over time and is recorded in accounts payable and other liabilities due to the expected timing of payment. Earlier in 2019, the project secured regulatory approvals from the Alberta Utilities Commission and executed a 74MW power purchase agreement with TC Energy Corporation. Subsequent to December 31, 2019, Claresholm executed material project contracts for the development of the facility with an aggregate commitment of $67,600. Additional capital expenditures are expected to be funded by a combination of project financing and equity contributions from the partners. Capstone's equity contributions are expected to be funded from existing liquidity and the available capacity in the CPC revolving credit facility. Construction is scheduled to begin in the spring of 2020. The accounting for Claresholm is treated as an asset acquisition in compliance with IFRS 3. In addition, Capstone will consolidate Claresholm as defined in IFRS 10, and Obton's interest will be treated as NCI. CAPSTONE INFRASTRUCTURE CORPORATION Page 32 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, 2019 15,625 Dec 31, 2018 12,889 8,875 77 24,577 69,256 93,833 10,168 75 23,132 76,341 99,473 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 16). NOTE 5. ACCOUNTS RECEIVABLE Power Corporate Dec 31, 2019 23,776 Dec 31, 2018 25,357 61 23,837 120 25,477 For both periods presented, accounts receivable did not require a provision for impairment. Substantially all of the accounts receivable are with government authorities and none are past due. Refer to note 9b and 9c for further detail of credit risk and economic dependence. NOTE 6. OTHER ASSETS Prepaid expenses Inventory of spare parts and consumable supplies, net (1) Other Dec 31, 2019 2,291 Dec 31, 2018 906 1,600 500 4,391 1,841 — 2,747 (1) No inventory obsolescence provision is required as at December 31, 2019 (2018 - Nil). The cost of inventories recognized in operating expenses for the year ended December 31, 2019 was $620 (2018 - $807). NOTE 7. LOAN RECEIVABLE Opening balance Issuance of loan receivable (1) Dec 31, 2019 — 702 702 Dec 31, 2018 — — — (1) Capstone has provided Sawridge First Nation ("Sawridge"), its 25% partner on the Buffalo Atlee wind development projects with a loan for their pro rata share of project costs. The loan receivable bears a fixed interest rate of 9%. Interest and principal are to be repaid from the project's excess cash flows and can be repaid at any time, with a final maturity date 30 years from the COD. The estimated fair value of the loan receivable as at December 31, 2019 approximates the carrying value. NOTE 8. FINANCIAL INSTRUMENTS In 2019, 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, 2019, 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. Loans receivable The Corporation's loans receivable are subsequently measured at amortized cost using the effective interest rate method. The fair value of the Corporation's loans receivable may differ from the carrying value due to changes in interest rates and the underlying risk associated with the debtor. It is determined using a discounted cash flow analysis. CAPSTONE INFRASTRUCTURE CORPORATION Page 33 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, 2019. 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. • 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 9a). Whitecourt embedded derivative On March 2, 2015, Whitecourt entered into a fuel supply agreement with Millar Western for 15 years, which is extendable to 20 years. The agreement, which was effective on January 1, 2015, includes power price support and revenue sharing mechanisms that reduce Whitecourt's exposure to merchant price risk in Alberta. The price support and revenue sharing mechanisms are embedded derivatives that are measured at fair value and result in an asset during periods when the projected merchant power price is forecast to be lower than the price support and a liability during periods when the merchant power price is forecast to be higher. On March 2, 2015, Capstone recognized an asset of $5,297 based on the fair value of the Whitecourt fuel supply agreement, which was equal to and offset the fair value of the embedded derivative included in Whitecourt's fuel supply agreement at inception. Capstone amortizes the inception value to income over 15 years, representing the life of the fuel supply agreement. 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. 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, 2019 Dec 31, 2018 Recurring measurements: Derivative contract assets: Whitecourt embedded derivative (1) Interest rate swap contracts Less: current portion Derivative contract liabilities: Interest rate swap contracts — — — — — — — 3,045 (1,398) 1,647 5,773 5,773 3,414 — — 3,414 — — 3,414 3,045 (1,398) 5,061 5,773 5,773 7,478 6,373 (1,996) 11,855 2,144 2,144 (1) Whitecourt's embedded derivative consists of a $6,945 fair value asset and $3,531 amortized contra-asset, set up on inception (2018 - $11,362 fair value asset, offset by the $3,884 of contra-asset). CAPSTONE INFRASTRUCTURE CORPORATION Page 34 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) Financial instruments classified as FVTPL (refer to note 23): 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) 2019 7,478 (2,262) (2,156) 354 3,414 2018 13,406 (3,841) (2,439) 352 7,478 Dec 31, 2019 Dec 31, 2018 1,924 1,265 (1,909) (6,956) (8,865) (37,679) (37,679) (3,489) (1,585) (5,074) (38,797) (38,797) (1) (2) Interest income for 2019 of $1,924 mainly reflects interest income on cash balances (2018 - $1,265). Interest income for 2018 of $5,139 also included the final payment of $3,348 for full repayment of the Chapais loan and other interest payments from Chapais of $526. Interest expense on the long-term debt for 2019 of $37,679 includes amortization of deferred financing fees, accretion on liability for asset retirement obligations and interest expense on lease liabilities of $2,514, $478 and $1,716, respectively (2018 - $2,276, $436 and nil). NOTE 9. FINANCIAL RISK MANAGEMENT The Corporation's normal operating, investing and financing activities expose it to a variety of financial risks, including market risk, credit risk, economic dependence and liquidity risk. The Corporation's overall risk management process is designed to identify, manage and mitigate business risk, which includes, among others, financial risk. (A) Market Risk Market risk is the risk or uncertainty arising from possible price movements and their impact on the future performance of the business. The Corporation is exposed to commodity price risk (electricity revenue), interest rate and inflation risk, foreign currency exchange risk and other indices that could adversely affect the value of the Corporation's financial assets, liabilities or expected future cash flows. Commodity price risk In 2019, 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 Alberta Power Pool. Millar Western and Whitecourt's fuel supply agreement includes sharing mechanisms regarding the price received for electricity sold by Whitecourt. Interest rate and inflation risk Interest rate risk arises as changes in market interest rates affect the Corporation's future payments on debt obligations. The Corporation is exposed to interest rate risk on its floating rate debt. Currently, the Corporation has interest rate swap contracts to mitigate some of the risks associated with its long-term debt. CAPSTONE INFRASTRUCTURE CORPORATION Page 35 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 Notional Amount Swap Fixed Rate Credit Margin Effective Interest Rate 2.97% - 3.08% 1.34% - 1.45% 64,053 1.63% 57,363 77,176 66,080 46,360 41,616 26,601 21,011 22,883 17,719 3.04% - 3.17% 1.24% - 2.00% 2.44% - 2.82% 1.24% 2.61% 1.13% 2.07% 1.71% 2.93% 1.63% 1.25% 1.25% 1.63% 1.63% 1.63% 1.63% 1.63% 1.63% 4.67% - 4.80% 2.49% - 3.25% 3.69% - 4.07% 2.87% 4.24% 2.76% 3.70% 3.34% 4.56% Foreign currency exchange risk 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") Government of Alberta Ontario Electricity Financial Corporation ("OEFC") Natural Resources Canada Inc. ("NRC") Other Dec 31, 2019 11,550 Dec 31, 2018 12,642 3,728 2,210 1,350 1,143 3,856 3,904 731 1,597 3,074 3,529 23,837 25,477 There are no accounts receivable that are past due. Since the Government of Alberta is a provincial government, 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 36 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 Hydro Quebec OEFC Other Dec 31, 2019 121,908 Dec 31, 2018 119,522 32,595 8,382 7,986 14,467 185,338 32,845 7,795 7,521 15,946 183,629 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 16 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, 2019 were as follows: Financial Liabilities Within one year One year to five years Beyond five years Accounts payable and other liabilities Lease liabilities (1) Derivative financial instruments Interest rate swaps Long-term debt Principal payments Interest payments 24,005 1,037 — 45,293 29,660 74,953 — 4,509 2,415 210,187 100,344 310,531 — 22,931 3,358 443,811 107,898 551,709 Total 24,005 28,477 5,773 699,291 237,902 937,193 (1) IFRS 16 was adopted on January 1, 2019. Refer to note 2 for details. Sensitivity Analysis (E) The sensitivity analysis provided below discloses the effect on net income for the year ended December 31, 2019, 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, 2019 balances and on the basis that the balances, the ratio of fixed to floating rates of debt and derivatives, and the energy contracts that are financial instruments in place at December 31, 2019 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 CAPSTONE INFRASTRUCTURE CORPORATION Page 37 the change in the market variable and the change in fair value or cash flows may not be linear. In addition, the effect of a change in a particular market variable on fair values or cash flows is calculated without considering interrelationships between the various market rates, hedging strategies employed by the Corporation or other mitigating actions that would be taken by the Corporation. The table summarizes the impact on fair value of changes in the Whitecourt embedded derivatives' significant unobservable inputs: Dec 31, 2019 Unobservable inputs Estimated input Relationship of input to fair value $3,414 Forward Alberta Power Pool prices From $39/MWh to $101/ MWh over the next 10 years. A reasonably possible increase in estimated forward prices of 5% or a decrease of 5%, would cause fair value to decrease by $2,931 and increase by $3,037, 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, 2019 Financial assets: Interest rate swap assets, net Carrying Amount Interest Rate Risk (0.5)% 0.5% (2,728) (8,957) 8,509 (1) No financial liabilities included as all long-term debt is fixed-rate debt or variable rate debt that is covered by a swap for fixed-rate debt. The outstanding balance on the CPC term credit facility was nil. NOTE 10. CAPITAL ASSETS (A) Continuity Cost Land ROU assets (1) Equipment and vehicles Property and plant (2) Accumulated depreciation ROU assets (1) Equipment and vehicles Property and plant Net carrying value Jan 1, 2019 Additions Disposals Transfers Dec 31, 2019 1,084 28,201 11,012 1,220,899 1,261,196 — (7,473) (391,723) (399,196) 862,000 — 1,259 1,023 22,207 24,489 (1,658) (423) (67,871) (69,952) (45,463) — — — (3,370) (3,370) — — 2,787 2,787 (583) — — — — — — — — — — 1,084 29,460 12,035 1,239,736 1,282,315 (1,658) (7,896) (456,807) (466,361) 815,955 IFRS 16 was adopted on January 1, 2019. Refer to note 2 for details. (1) (2) On February 1, 2019, Capstone acquired the Watford assets. Refer to note 3 for details. Jan 1, 2018 Additions Disposals Transfers (ref. to note 12) Dec 31, 2018 Cost Land Equipment and vehicles Property and plant Accumulated depreciation Equipment and vehicles Property and plant Net carrying value CAPSTONE INFRASTRUCTURE CORPORATION 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 Page 38 (B) Reconciliation to Cash Additions for the Cash Flow Statement For the year ended Additions (1) Adjustment for non-cash ROU asset additions Adjustment for change in capital asset additions included in accounts payable and accrued liabilities Cash additions (1) Additions include the acquisition of the Watford assets. NOTE 11. PROJECTS UNDER DEVELOPMENT (A) Continuity Dec 31, 2019 24,489 (1,259) 1,400 24,630 Dec 31, 2018 3,535 — 486 4,021 As at January 1 Asset acquisition (1) Capitalized costs during the year (2) As at December 31 (3) (1) On November 19, 2019, Capstone acquired 51% of the Claresholm solar project; the remaining 49% is held by Obton. Refer to note 3 for details. (2) There were no capitalized borrowing costs in 2019 and 2018. (3) As at December 31, 2019, the balance contains amounts for the Claresholm solar, Buffalo Atlee and Riverhurst wind development projects. 11,131 16,803 4,077 2019 1,595 2018 730 — 865 1,595 (B) Reconciliation to Cash Additions for the Cash Flow Statement For the year ended Additions Adjustment for change in additions to PUD included in accounts payable and accrued liabilities Cash additions NOTE 12. INTANGIBLE ASSETS Dec 31, 2019 4,077 (925) 3,152 Dec 31, 2018 865 (72) 793 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 CAPSTONE INFRASTRUCTURE CORPORATION Jan 1, 2019 Additions Disposals Transfers Dec 31, 2019 264 171,407 73,018 244,689 (259) (65,193) (24,376) (89,828) 154,861 — — — — (3) (9,189) (2,116) (11,308) (11,308) — — — — — — — — — — — — — — — — — — 264 171,407 73,018 244,689 (262) (74,382) (26,492) (101,136) 143,553 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 Page 39 NOTE 13. INCOME TAXES (A) Deferred Income Tax As at Deferred income tax assets Deferred income tax liabilities Net deferred income tax liability Dec 31, 2019 112 Dec 31, 2018 125 (85,878) (85,766) (89,962) (89,837) 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 A continuity of the net deferred income tax liability follows: Net deferred income tax liability as at January 1 Business acquisition Recorded in earnings Other Dec 31, 2019 21,707 Dec 31, 2018 23,435 3,342 2,561 27,610 (74,032) (36,536) (185) (2,120) (503) (113,376) (85,766) 2019 (89,837) — 3,084 987 3,464 2,543 29,442 (72,720) (40,807) (3,119) (2,137) (496) (119,279) (89,837) 2018 (89,243) 203 (1,745) 948 Net deferred income tax liability as at December 31 (85,766) (89,837) (B) Timing of Deferred Income Tax Reversal The timing of deferred income tax reversal is summarized as follows: As at Within 12 months After more than 12 months Net deferred income tax liability Dec 31, 2019 Dec 31, 2018 (3,682) (82,084) (85,766) 40,542 (130,379) (89,837) 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 – 2039 2023 – 2027 No expiry Recognized Unrecognized 61,644 82,438 Dec 31, 2019 144,082 Dec 31, 2018 151,883 — — 19,730 282 19,730 282 19,730 — The Corporation also has $2,045 of unrecognized deferred tax assets, which have not been recognized as at December 31, 2019 (2018 - $2,080). CAPSTONE INFRASTRUCTURE CORPORATION Page 40 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 Other Total income tax expense (recovery) Dec 31, 2019 Dec 31, 2018 2,109 26.70% 563 180 (2,903) 206 (163) (2,117) 5,912 26.65% 1,576 203 266 55 (85) 2,015 (1) Income (loss) before income taxes excludes discontinued operations. The statutory income tax rate of 26.70% (2018 - 26.65%) changes in response to Capstone's allocation of taxable income to different tax jurisdictions. Current Income Taxes (E) Current income taxes payable of $1,898 are included in accounts payable and other liabilities on the statement of financial position (refer to note 14) (2018 - $2,150). NOTE 14. ACCOUNTS PAYABLE AND OTHER LIABILITIES Dividends payable Income taxes payable Other accounts payable and accrued liabilities Income taxes payable Canadian Renewable and Conservation Expense ("CRCE") penalties (1) Taxes payable on preferred share dividends Current income taxes payable (1) CRCE penalties related to flow-through shares originally issued by Renewable Energy Developers Inc., which was acquired by Capstone in 2013. NOTE 15. LEASE LIABILITIES As at January 1(1) Additions Interest expense Lease payments Lease liabilities Less: current portion As at December 31 (1) IFRS 16 was adopted on January 1, 2019. Refer to note 2 for details. 2019 28,201 1,259 1,716 (2,699) 28,477 (1,037) 27,440 Dec 31, 2019 409 Dec 31, 2018 409 1,898 21,698 24,005 2,150 16,909 19,468 Dec 31, 2019 1,663 Dec 31, 2018 1,708 164 71 1,898 138 304 2,150 2018 — — — — — — — CAPSTONE INFRASTRUCTURE CORPORATION Page 41 NOTE 16. LONG-TERM DEBT (A) Power As at CPC credit facilities Project debt Wind - Operating Solar Hydros Gas Power Less: deferred financing costs Long-term debt Less: current portion Dec 31, 2019 Dec 31, 2018 Fair Value — Carrying Value — Fair Value 45,000 Carrying Value 45,000 497,931 68,044 78,897 77,176 722,048 479,784 70,441 71,895 77,176 699,296 (12,283) 687,013 (45,293) 641,720 520,080 511,927 73,772 75,045 60,728 774,625 76,093 74,817 60,728 768,565 (13,871) 754,694 (49,355) 705,339 Capstone has a cumulative $60,173 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) Letter of credit facility (3) Remaining available credit Interest Rate (1) Maturity Dec 31, 2019 120,500 Dec 31, 2018 140,000 3.92% Dec 15, 2023 — 45,864 74,636 45,000 36,859 58,141 (1) The effective rate was 3.92% in 2019 (2018 - 3.74%) based on a variable rate plus an applicable margin. (2) On May 15, 2019, the remaining CPC term credit facility was converted into the revolving credit facility. (3) As at December 31, 2019, Capstone had 20 letters of credit authorized under the revolving credit facility. As at December 31, 2019, the revolving credit facility capacity was $120,500, of which $45,864 supports letters of credit for the operating facilities. The CPC credit facility matures on December 15, 2023 and bears interest at a variable rate plus an applicable margin. On April 5, 2019, $19,500 of the CPC term credit facility was repaid with proceeds from the Cardinal refinancing described below. On May 15, 2019, the remaining $25,500 of the CPC term credit facility was converted into the revolving credit facility. Capstone also amended certain terms to create further financial flexibility and extended the maturity date of the CPC revolving credit facility. On May 23, 2019, the remaining $25,500 drawn on the CPC revolving credit facility was repaid. 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 42 (ii) Wind - Operating Project debt Glen Dhu Goulais GHG Erie Shores Saint-Philémon Grey Highlands Clean Amherst Snowy Ridge Settlers Landing Skyway 8 (1) SkyGen (1) Glace Bay Dec 31, 2019 76,884 Dec 31, 2018 83,220 65,433 63,311 54,944 48,506 44,465 32,756 26,469 23,258 16,979 16,803 9,976 68,354 66,934 61,655 50,469 46,827 34,948 27,877 24,347 17,658 18,597 11,041 479,784 511,927 (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) Glen Dhu is required to set aside $5,310 as letters of credit to fund its debt service reserve. Interest Rate 5.33% Maturity Dec 31, 2030 Dec 31, 2019 76,884 Dec 31, 2018 83,220 Goulais Term loan Interest Rate 5.16% Maturity Sep 30, 2034 Dec 31, 2019 65,433 Dec 31, 2018 68,354 (1) Goulais is required to set aside $3,462 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, 2019 63,311 Dec 31, 2018 66,934 (1) GHG has $3,200 as letters of credit to cover the debt service reserve. (2) As at December 31, 2019, GHG had swap contracts to convert interest to a fixed rate (See note 9a). During the year, the lenders agreed to waive contracted increases in the credit margin. Erie Shores (3) Tranche A Tranche C Interest Rate 5.96% 6.15% Maturity Apr 1, 2026 Apr 1, 2026 Dec 31, 2019 33,104 Dec 31, 2018 37,159 21,840 54,944 24,496 61,655 (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 $5,365 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, 2019 48,506 Dec 31, 2018 50,469 (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, 2019 44,465 Dec 31, 2018 46,827 (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, 2019, Grey Highlands Clean had swap contracts to convert interest to a fixed rate (See note 9a). During the year, the lenders agreed to waive contracted increases in the credit margin. Amherst Term loan Interest Rate 6.20% Maturity Apr 30, 2032 Dec 31, 2019 32,756 Dec 31, 2018 34,948 (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 43 Snowy Ridge Term loan Interest Rate (2) 2.75% Maturity Dec 23, 2021 Dec 31, 2019 26,469 Dec 31, 2018 27,877 (1) Snowy Ridge is required to set aside $2,930 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, 2019, Snowy Ridge had swap contracts to convert interest to a fixed rate (See note 9a). During the year, the lenders agreed to waive contracted increases in the credit margin. Settlers Landing Term loan Interest Rate (2) 3.34% Maturity Aug 31, 2022 Dec 31, 2019 23,258 Dec 31, 2018 24,347 (1) Settlers Landing is required to set aside $2,060 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, 2019, Settlers Landing had swap contracts to convert interest to a fixed rate (See note 9a). During the year, the lenders agreed to waive contracted increases in the credit margin. Skyway 8 Term loan Interest Rate 4.90% Maturity Jul 17, 2021 Dec 31, 2019 16,979 Dec 31, 2018 17,658 (1) Skyway 8 is required to set aside $766 as letters of credit to cover the debt service reserve. SkyGen Term loans Interest Rate 4.90% Maturity Jul 17, 2021 Dec 31, 2019 16,803 Dec 31, 2018 18,597 (1) SkyGen is required to set aside $1,334 as letters of credit to cover the debt service reserve. 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, 2019 5,588 Dec 31, 2018 6,145 — 4,388 9,976 230 4,666 11,041 (1) Glace Bay is required to set aside $2,537 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, 2019 70,441 Dec 31, 2018 76,093 (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, 2019 53,109 Dec 31, 2018 55,493 18,786 71,895 19,324 74,817 (1) The hydro facilities are required to set aside $17,074 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) 2.69% Maturity Apr 1, 2026 Dec 31, 2019 77,176 Dec 31, 2018 60,728 (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, 2019, Cardinal had swap contracts to convert interest to a fixed rate and Capstone entered into additional swap contracts matching the principal increase and term extension to convert the floating interest rate obligations to a fixed rate. The effective fixed rate for the duration of the term loan ranges from 2.49% to 4.32% (See note 9a). On April 1, 2019, the Cardinal term loan was refinanced with its existing lender, increasing its term loan by $20,200 and extending the term by 3 years to April 1, 2026, while locking in lower interest rates. Capstone entered into additional swap contracts to convert the floating interest rate obligations to a fixed rate. The proceeds were used to repay $19,500 towards the term portion of the CPC credit facility, reducing the balance to $25,500. In accordance with IFRS 9, the refinancing of the existing term loan was recognized as a debt modification, as the instruments were not substantially different. This resulted in the capitalization of $652 of related transaction costs on the full term loan. Long-term Debt Covenants (B) For the year ended and as at December 31, 2019, the Corporation and its subsidiaries complied with all financial and non- financial debt covenants, except as described below. CAPSTONE INFRASTRUCTURE CORPORATION Page 44 On April 9, 2019, Capstone received notice from Senvion GmbH ("Senvion") with regards to Senvion's initiation of insolvency proceedings. Among other things, Senvion provides operations and maintenance services and warranty obligations for Capstone's Grey Highlands Clean, GHG, Snowy Ridge, and Settlers Landing wind facilities. The facilities, which have $157,503 of debt principal outstanding in the statement of financial position as at December 31, 2019, were serviced by Senvion until February 2020, and subsequently serviced by a combination of a third party provider and Capstone's internalized service function without interruption to service. As a result of the insolvency notice, Capstone was not in compliance with certain covenants under its respective project debt agreements and in turn a cross-default under the CPC credit facilities was triggered. On May 15, 2019, all of Capstone's project and corporate lenders waived the respective events of default in connection with the insolvency. 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 210,187 45,293 Beyond five years 443,811 Total 699,291 NOTE 17. 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 (1) Inflation rate Credit adjusted discount rate Balance, beginning of year Asset acquisition Revision of estimates Accretion expense Balance, end of year (1) PPAs expiring in 2020 are expected to be renegotiated and extended. NOTE 18. SHAREHOLDERS’ EQUITY The following table summarizes the Corporation's share capital: As at Common and Class A shares Preferred shares Dec 31, 2019 Dec 31, 2018 2020– 2078 2020– 2078 2.0% 2.0% 4.75% - 5.75% 4.75% - 5.75% 9,442 173 (244) 478 9,849 10,161 — (1,155) 436 9,442 Dec 31, 2019 62,270 Dec 31, 2018 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. As at December 31, 2019 and 2018, there were 304,609 common and class A shares issued and outstanding, with a carrying value of $62,270. Preferred Shares (B) Capstone is authorized to issue preferred shares equal to 50% of the outstanding common shares. As at December 31, 2019 and 2018, 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 45 Dividends (C) No dividends were declared in 2019 or 2018 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 12, 2019 (2018 - $409). Includes $6 of deferred income taxes recovery for the year ended December 31, 2019 (2018 - $34 expense). Dec 31, 2019 2,446 Dec 31, 2018 2,486 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, except as noted in note 16. Non-controlling Interests NOTE 19. NON-CONTROLLING INTERESTS (A) Non-controlling interests represent ownership interests by third parties in businesses consolidated by Capstone. Capstone's entities with non-controlling interests and Capstone's partners as at December 31, 2019 were: • GHG, Snowy Ridge ("SR") and Settlers Landing ("SLS") have a debenture with a subsidiary of One West Holdings Ltd. ("Concord"), convertible into a 50% ownership interest in the projects. • Goulais is 49% owned by Batchewana First Nation ("BFN"). • Claresholm is 49% owned by Obton A/S ("Obton"). • • • Amherst is 49% owned by Firelight Infrastructure Partners LP ("Firelight"). Buffalo Atlee is 25% owned by Sawridge First Nation ("Sawridge"). Saint-Philémon is 48.9% owned by Municipalité Régionale de Comté de Bellechasse and 0.1% owned by Municipalité de Saint-Philémon. 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, 2018 NCI portion of net income Dividends declared Convertible debenture repayments As at December 31, 2018 NCI portion of net income Dividends declared Convertible debenture repayments Contributions from NCI As at December 31, 2019 Concord's interest in GHG, SR & SLS 25,549 BFN's interest in Goulais (1) 18,825 Obton's interest in Claresholm (2) — — — (2,963) 22,586 — — (2,608) — 19,978 118 (1,265) — 17,678 1,253 (1,265) — — 17,666 — — — — — — — 12,631 12,631 Firelight's interest in Amherst 9,379 1,313 (1,764) — 8,928 754 (1,274) — — 8,408 Sawridge's interest in Buffalo Atlee — Municipal interest in Saint- Philémon 1,496 — — — — — — — 702 702 162 (764) — 894 502 (1,534) — — (138) (1) Net income is allocated based on pro-rata share of distributions. (2) Includes $4,631 in development assets contributed on the acquisition date and $8,000 of subsequent cash contributions. CAPSTONE INFRASTRUCTURE CORPORATION Total 55,249 1,593 (3,793) (2,963) 50,086 2,509 (4,073) (2,608) 13,333 59,247 Page 46 (B) Summarized Information for Material Partly Owned Subsidiaries As at December 31, 2019 Summarized Statements of Financial Position Assets GHG, SR & SLS Goulais Claresholm Amherst Buffalo Atlee Current Non-current Liabilities Current Non-current Total equity Attributable to: Shareholders of Capstone NCI 365 68,704 (7) — 69,062 49,084 19,978 69,062 1,744 878 (146) (440) 2,036 (15,630) 17,666 2,036 19,756 13,338 (7,316) — 25,778 13,147 12,631 25,778 1,866 51,549 (2,681) (31,233) 19,501 11,093 8,408 19,501 79 2,158 (79) — 2,158 1,456 702 2,158 As at Summarized Statements of Financial Position Assets GHG, SR & SLS Goulais Claresholm Amherst Buffalo Atlee December 31, 2018 Current Non-current Liabilities Current Non-current Total equity Attributable to: Shareholders of Capstone NCI 405 68,704 — — 69,109 46,523 22,586 69,109 1,831 1,248 (193) — 2,886 (14,792) 17,678 2,886 — — — — — — — — 2,113 54,537 (2,588) (33,499) 20,563 11,635 8,928 20,563 4 774 (922) — (144) (144) — (144) For the year ended Summarized Statements of Income Revenue GHG, SR & SLS 5,216 Total net income and comprehensive income 5,213 Attributable to: Shareholders of Capstone NCI For the year ended Summarized Statements of Income Revenue 5,213 — 5,213 GHG, SR & SLS 5,925 Total net income and comprehensive income 5,928 Attributable to: Shareholders of Capstone NCI 5,928 — 5,928 December 31, 2019 Goulais Claresholm Amherst Buffalo Atlee 2,843 415 (838) 1,253 415 — — — — — 8,391 1,539 785 754 1,539 — — — — — December 31, 2018 Goulais Claresholm Amherst Buffalo Atlee 2,810 366 248 118 366 — — — — — 9,130 2,679 1,366 1,313 2,679 — (543) (543) — (543) CAPSTONE INFRASTRUCTURE CORPORATION Saint- Philémon 1,502 51,431 (2,277) (47,536) 3,120 3,258 (138) 3,120 Saint- Philémon 1,953 53,419 (2,276) (48,000) 5,096 4,202 894 5,096 Saint- Philémon 8,382 1,025 523 502 1,025 Saint- Philémon 7,795 330 168 162 330 Page 47 For the year ended December 31, 2019 Summarized Statements of Cash Flows Operating Investing Financing GHG, SR & SLS 5,175 — (5,216) Goulais Claresholm Amherst Buffalo Atlee 3,158 — (3,350) — (1,394) 21,062 5,203 (36) (4,673) — (1,339) 1,339 Net increase / (decrease) in cash and equivalents (41) (192) 19,668 494 — For the year ended December 31, 2018 Summarized Statements of Cash Flows Operating Investing Financing Net increase / (decrease) in cash and equivalents GHG, SR & SLS 5,928 — (5,925) 3 Goulais Claresholm Amherst Buffalo Atlee 1,369 — (3,750) (2,381) — — — — 5,533 (105) (5,752) (324) — (618) 618 — Saint- Philémon 4,236 2 (4,963) (725) Saint- Philémon 3,347 (46) (3,912) (611) 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 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 $22,586 as at December 31, 2018 and $19,978 as at December 31, 2019. Share Appreciation Rights Plan NOTE 20. 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 2019, there were 10,280,552 units outstanding, 2,779,554 were granted during the year, and there were 13,060,106 units outstanding as at December 31, 2019. 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 accrued based on passage of time, until the vesting date of December 31, 2019 at which point $402 was paid, leaving a remaining balance of nil. The LTIP expense included in wages and benefits was $159 in 2019 (2018 - $139). CAPSTONE INFRASTRUCTURE CORPORATION Page 48 NOTE 21. REVENUE BY NATURE Capstone's power segment generates revenue through long-term power contracts which vary in nature as disaggregated below. The corporate activities do not generate revenue. Wind Gas (1) Biomass Solar Hydro Total Revenue For the year ended Dec 31, 2019 118,086 Dec 31, 2018 113,566 22,494 15,778 14,916 14,064 25,269 15,402 15,059 14,333 185,338 183,629 (1) Gas revenue consists of fixed payments for providing capacity and availability based on Cardinal's PPA and other contracts; the remaining revenue is variable based on production. As at December 31, 2019, Capstone has trade receivable balances of $23,314 (2018 - $25,156). NOTE 22. EXPENSES BY NATURE For the year ended Dec 31, 2019 Dec 31, 2018 Operating Admin. Maintenance & supplies Wages and benefits Property expenses (1) Fuel and transportation Professional fees (2) Power facility administration Insurance Other Total 17,903 10,143 6,838 5,723 1,448 2,629 2,250 1,511 48,445 — 4,961 519 — 383 — 112 821 6,796 Project Development Costs — — 96 — 1,237 — — 202 17,903 15,104 7,453 5,723 3,068 2,629 2,362 2,534 17,700 9,928 8,948 6,939 95 2,787 2,182 1,809 1,535 56,776 50,388 Project Development Costs — — 98 — 2,653 — — 170 Total 17,700 15,238 9,536 6,939 3,112 2,787 2,302 3,224 2,921 60,838 — 5,310 490 — 364 — 120 1,245 7,529 Total Operating Admin. (1) Property expenses include leases, utilities, and property taxes. (2) Professional fees include legal, audit, tax and other advisory services. NOTE 23. OTHER GAINS AND LOSSES Unrealized losses on derivative financial instruments (1) Losses on disposal of capital assets Other Other gains and (losses), net For the year ended Dec 31, 2019 (8,865) (572) — (9,437) Dec 31, 2018 (5,074) (437) 253 (5,258) (1) The unrealized losses relate to losses on interest rate swap contracts due to lower long-term interest rates and the Whitecourt embedded derivative, primarily due to changes in the estimated forward Alberta Power Pool prices. NOTE 24. COMMITMENTS AND CONTINGENCIES The Corporation, either directly or indirectly through its subsidiaries, has entered into various contracts and commitments in addition to the commitments described in note 8 financial instruments, note 9 financial risk management, notes 16 long-term debt, 17 liability for asset retirement obligation and 18 shareholders' equity as at December 31, 2019 were as follows: Leases (A) Minimum operating lease payments comprised: Operating leases Within one year One year to five years 18,597 4,723 Beyond five years 35,948 Total 59,268 CAPSTONE INFRASTRUCTURE CORPORATION Page 49 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 2020 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 facility's PPA may be terminated after a specified period of time. (D) Management Services Agreements Capstone has agreements with all the partially owned wind and solar facilities and development projects, including Claresholm, Buffalo Atlee, 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. Additionally, some of the development projects include a development fee for the successful completion of the projects, which pays an agreed flat fee or fee per MW on completion of development. (E) Wood Waste Supply Agreement The Whitecourt and Millar Western fuel supply agreement for wood waste includes sharing mechanisms regarding the price received for electricity sold by Whitecourt. Operations and Maintenance ("O&M") Agreements (F) Cardinal has a maintenance contract with Siemens Canada Limited covering the gas turbine at 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, 2019. 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. CAPSTONE INFRASTRUCTURE CORPORATION Page 50 Transactions with iCON Infrastructure LLP and subsidiaries ("iCON") NOTE 25. 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 2019, Capstone earned fees of $240 from iCON Canada (2018 - $232). As at December 31, 2019, accounts receivable included $60 due from iCON Canada. Compensation of Key Management (B) Key management includes the Corporation's directors, Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). Compensation awarded to key management consisted of salaries, directors' fees, short-term employee benefits and long-term incentive plan payments. Key Management Compensation for the year ended Salaries, directors' fees and short-term employee benefits (1) Long-term incentive plan Dec 31, 2019 1,119 Dec 31, 2018 1,173 207 1,326 — 1,173 (1) The short-term incentive plan component of is based on amounts paid during the year. NOTE 26. SEGMENTED INFORMATION The Corporation’s business has one reportable segment containing the power operations in order to assess performance and allocate capital, as well as the remaining corporate activities. The power operations and corporate activities are all located in Canada. Management evaluates performance primarily on revenue, expenses and EBITDA. 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. For the year ended Dec 31, 2019 Dec 31, 2018 Revenue Expenses EBITDA Interest expense Income tax recovery (expense) Net income (loss) Additions to capital assets, net (1) Additions to PUD (2) Power Corporate Total Power Corporate Total 185,338 (48,367) 128,453 (37,679) (974) 8,854 24,489 15,208 — (8,409) (7,405) — 3,091 (4,628) — — 185,338 (56,776) 121,048 (37,679) 2,117 4,226 24,489 15,208 183,629 (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 (1) Capital asset additions for the year exclude the adoption of IFRS 16 ($28,201) and include the acquisition of the Watford assets ($13,960). (2) PUD additions for the year include the Claresholm solar project. Refer to note 3 for details. CAPSTONE INFRASTRUCTURE CORPORATION Page 51 INVESTOR INFORMATION Quick Facts Preferred shares outstanding Securities exchange and symbols Toronto Stock Exchange: CSE.PR.A 3,000,000 CONTACT INFORMATION Address: 155 Wellington Street West, Suite 2930 Toronto, ON M5V 3H1 www.capstoneinfrastructure.com Email: info@capstoneinfra.com Contacts: Andrew Kennedy Chief Financial Officer Tel: 416-649-1300 Email: akennedy@capstoneinfra.com CAPSTONE INFRASTRUCTURE CORPORATION Page 52
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