Dear Fellow Shareholders,

Fiscal 2012 was a busy year for Capstone during which we tackled various challenges and positioned the company for its next phase of growth.

We strengthened our financial position, welcomed a new international partner and launched a power development subsidiary to help source growth opportunities that will increase the value of our company. We also established a new dividend that is intended to provide stable income for shareholders with the potential for capital appreciation as we realize our vision to be Canada’s pre-eminent diversified infrastructure company.

As we pursue that vision, the Board of Directors is committed to ensuring that Capstone is managed and governed — and continues to grow — in a prudent way. We take our role as stewards of your investment very seriously.


The Board’s mandate includes working with management to establish Capstone’s strategy and objectives, approving significant decisions that affect Capstone and its results, monitoring the company’s financial performance and risk management practices, setting the dividend policy and overseeing Capstone’s stakeholder relationships and reporting obligations.

A few highlights of our approach to governance include:

Audit, Governance and Compensation Committees that must be entirely composed of independent directors (as defined by applicable securities laws);


Governance policies and procedures that apply equally to the individual businesses in Capstone’s portfolio, which ensures consistency and reliability in reporting and risk management;


A Code of Ethics that encourages and promotes a culture of ethical business conduct and must be followed by all directors, executive officers and employees of Capstone;


An annual evaluation of the effectiveness of the Board and individual directors to ensure the Board is fulfilling its oversight role in the most effective manner; and


A majority voting policy, which requires director nominees to be elected by a majority of shareholder votes.

Our governance practices constantly evolve in step with the business and regulatory environments in which Capstone operates and we regularly seek opportunities to strengthen our governance framework. In 2012, for example, the company reviewed, refined and strengthened its enterprise risk management practices and implemented an internal audit function. Our governance and risk management processes support achievement of our strategic performance objectives.

Resolving the question of Cardinal’s future remains a key strategic objective — one that we are working tirelessly to accomplish. At the same time, we are keenly focused on further diversifying our portfolio and increasing its size, scope and long-term value for shareholders. I am optimistic about our company’s future for four compelling reasons.

First, Capstone has a history of meticulous asset management, continues to achieve stable, and in some cases, improving, operational performance and has significantly strengthened its financial position, all of which are pillars vital to the long-term stability of our company, and, accordingly, our dividend.

Second, we have augmented our skill set with proven power development personnel who bring a wealth of capabilities to Capstone and broaden our business development reach. This new initiative puts us in an excellent position to build a pipeline of accretive projects in the years to come.

Third, backed by our strong balance sheet, we expect to be able to access the capital we need to finance investments that meet our strategic and financial return criteria.

And fourth, massive investment and private sector participation is required in Canada and internationally to maintain and build the core infrastructure that is critical to elevating quality of life and economic prosperity. Our company is ready to participate in these opportunities with a leadership team that is knowledgeable, enjoys strong relationships at home and abroad, and has attained a competitive advantage through decades of combined investment and management experience across power generation and transmission businesses, utilities, transportation and toll roads, and public-private partnerships.

Our senior management team is also highly motivated and aligned with shareholders’ interests. A significant proportion of management’s short-term incentive compensation is bound to financial performance metrics while compensation under the long-term incentive plan is directly tied to both the performance of our shares and the total return we deliver to shareholders, consisting of share price performance and dividend yield, relative to a group of comparable peers. This structure promotes responsible decision-making that maximizes long-term value.

I would like to thank my fellow directors for their diligence in guiding Capstone through 2012. I would especially like to recognize Derek Brown, who resigned from the Board in February 2013, for his nine years of distinguished service to Capstone. In addition to being one of our longest-serving directors, Derek made significant contributions to our company during his tenure. We were very fortunate to benefit from Derek’s counsel and guidance and we wish him the very best in his future endeavours.

Finally, I must thank our shareholders for their continuing support and confidence in Capstone and the Board of Directors. I also extend my appreciation to our employees at all levels of the organization for their dedication to pursuing excellence. Together, we are working to deliver a superior total return to our shareholders.












At all times, a majority of directors must be independent directors (as defined under applicable securities regulations). A director is independent when he or she does not have a direct or indirect material relationship with Capstone or its subsidiaries.



Integrity and Professionalism

We seek out directors who have demonstrated integrity and high ethical standards, a proven record of sound business judgment and who are committed to representing the long-term interests of Capstone’s shareholders.




We seek to build a Board on a diversity of backgrounds, skills and experience and annually review the competencies, skills and personal qualities of each director to maintain the composition of the Board in a way that bolsters the overall stewardship of the company.




Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (Adjusted EBITDA)
EBITDA is net income (loss), including that net income (loss) related to the non-controlling interest and interest income excluding interest expense, income taxes, depreciation and amortization. EBITDA represents Capstone’s continuing capacity to generate income from operations before taking into account management’s financing decisions and costs of consuming tangible capital assets and intangible assets, which vary according to their vintage, technological currency, and management’s estimate of their useful life.

Adjusted EBITDA is calculated as revenue less operating and administrative expenses plus interest income and dividends or distributions received from equity accounted investments. Amounts attributed to any non-controlling interest are deducted. Adjusted EBITDA for the investment in Bristol Water is included at Capstone’s proportionate ownership interest. Adjusted EBITDA is reconciled to EBITDA by removing equity accounted income, other gains and losses (net), foreign exchange gains and losses, and adding in dividends or distributions from equity accounted investments.

Adjusted Funds from Operations (AFFO)
Capstone’s definition of AFFO measures cash generated by its infrastructure business investments that is available for dividends and general corporate purposes. For wholly owned businesses, AFFO is equal to Adjusted EBITDA less interest paid, repayment of principal on debt, income, taxes paid and maintenance capital expenditures. For businesses that are not wholly owned, the cash generated by the business is only available to Capstone through periodic dividends. For these businesses, AFFO is equal to distributions received. Also deducted are corporate expenses and dividends on preferred shares.

Asset management plan, which is developed by water utilities in the United Kingdom every five years and approved by Ofwat.

Annual long-term average production
An average production figure based on the actual electricity production of a facility since the start of full operations.

Availability is the number of hours that a generating unit is able to provide service at full output, whether or not it is actually in service, as a percentage of total hours in the period.
Base load facility
A base load facility produces electricity at an essentially constant rate and runs continuously.
Capacity is the net amount of electricity generated by a generating unit as a percentage of the total possible generation over the period.

Cogeneration refers to the simultaneous production of electricity and thermal energy in the form of heat or steam from a single fuel source, a process that results in high efficiency and an effective use of energy.

Consumer Price Index (CPI)
The CPI is an indicator of inflation that measures the change in the cost of a fixed basket of products and services, including housing, electricity, food and transportation.

A period during which a power facility continues to operate but at less than capacity.
Direct Customer Rate (DCR)
The Direct Customer Rate, which is set by the Ontario Electricity Financial Corporation, is calculated based on a three-year average of the total market cost of electricity to industrial customers.
Gigajoule (GJ)
One GJ is equivalent to the amount of energy available from 26.1 m3 of natural gas.

Gigawatt hour (GWh)
A unit of electrical energy equal to 1,000 megawatt hours.

Green metric tonne (GMT)
A unit of weight equal to 1,000 kilograms.
The effect of precipitation and evaporation upon the occurrence and distribution of water in streams, lakes and on or below the land surface.
K Factor
The regulated annual rate by which each licenced water company can increase its charges annually on top of inflation.

Kilowatt (kW)
This commercial unit of electrical power refers to 1,000 watts of electrical power. This is the total amount of power needed to light 10 light bulbs of 100 watts each.

Thousands of pounds of steam.
Megawatt (MW)
A megawatt is 1,000 kilowatts.

Megawatt hour (MWh)
This is a measure of energy production or consumption equal to one million watts produced or consumed in one hour (total amount of power required to light 10,000 100-watt light bulbs).

Millions of litres of water per day.

A unit of heat equal to one million British thermal units. A British thermal unit is the quantity of energy necessary to raise the temperature of one pound of water by one degree Fahrenheit.
The UK Water Services Regulation Authority.

A period of time when a power generation facility does not produce any electricity.
Payout ratio
Payout ratio measures the proportion of AFFO that is paid as dividends to common shareholders. The payout ratio is calculated as dividends declared divided by AFFO.

Peaking facility
A peaking power facility is reserved for operation during the hours of highest daily, weekly or seasonal loads.

Power Purchase Agreement (PPA)
A PPA is an agreement to purchase electricity at a specified rate for a defined period of time.

Public-Private Partnership (P3)
A partnership between the public and private sectors to deliver infrastructure projects.
The regulated capital value, or capital base, that is used by Ofwat to set the prices a water utility may charge its customers in each asset management plan period.

A renewable energy credit is a certificate issued by a government agency to a power company that uses environmentally-friendly methods to generate electricity. The RECs can in turn be sold and traded to third parties or on the open market.

The Retail Price Index is a measure of inflation in the United Kingdom. The rates Bristol Water may charge its customers increase by RPI each year.
Service Incentive Mechanism, a new incentive mechanism introduced by Ofwat to reward or penalize water companies’ service performance.

Solar photovoltaic (PV) power
The generation of electricity directly from sunlight.
Total return
The total return on an investment includes income from dividends, as well as share price appreciation or depreciation, over a given time period.
A watt is the scientific unit of electric power.
Yield refers to the amount of dividends paid per share over the course of a year divided by the trading price of the common shares.

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