MESSAGE from the chairman

 

Dear Fellow Shareholders:

Capstone Infrastructure Corporation enters its second decade in 2015 as a resilient company, more experienced for the diversified assets it built over its first ten years, and stronger for the hurdles it has cleared along the way. In the year ahead, we will build on our successes and reinforce our foundation to position Capstone for continued achievement in the next decade and beyond.

Our theme for this year’s annual report is “Essential,” reflecting the fundamental importance to society of continuous investments in core infrastructure and highlighting the first-rate facilities held in Capstone’s portfolio. Essential also relates to the values we embrace and the choices we make in setting the course for the firm.

During 2014, Capstone demonstrated the benefits of the strategic direction taken in 2012 to establish a power development arm. That division executed on new infrastructure projects with the commissioning of the Skyway 8 wind farm and made swift progress on two others, including the Saint-Philémon facility in Quebec, which achieved commercial operations in January of this year.

We also looked after our existing line of high-quality assets to ensure they continue to deliver value for shareholders. We reached an agreement that will extend the life of the Cardinal gas power plant for another 20 years, negotiated a 15-year fuel supply agreement for Whitecourt, and invested in maintenance and performance optimization across our power and utilities businesses.

Bristol Water provides one of life’s most essential services: clean, safe and reliable drinking water for more than 1.2 million people. The regulatory environment can present near-term challenges, as we saw in 2014, yet this utility carries perpetual value and a steady organic growth profile. Capstone’s management team is hard at work to resolve the current issues facing Bristol Water, with the full support of the Board of Directors.

The Board has specific responsibilities in the stewardship of Capstone and takes an active approach to governance, highlights of which include:

• Six of the seven members of the Board are independent, as defined by applicable securities laws.
• The Audit and Corporate Governance & Compensation committees of the Board are entirely composed of independent directors.
  
• A written Code of Business Conduct and Ethics applies to all Directors, officers, employees, and contractors, promoting a culture of integrity and ensuring the company adheres to rigorous, consistent standards in reporting and risk management.
• Annual evaluations of the Board and individual directors are conducted to ensure the oversight role is fulfilled in the most effective manner.
• A majority voting policy is in place, requiring the director nominees to be elected by a majority of shareholder votes.
• Share ownership guidelines require that directors and executive officers achieve specific percentages of annual salaries and cash retainers by  owning common shares, deferred share units or restricted shares; thereby aligning their interests with all other shareholders.
• Long- and short-term incentive plans link management’s compensation to financial metrics and the total return delivered to shareholders.

The Board also oversees continuous improvements to Capstone’s governance structure. In 2014, the company proposed an advance notice policy, which was voted on at the Annual General Meeting. The proposal was approved by a majority of shareholders, thereby ensuring that all Capstone investors will receive adequate notice and information of director nominations, while also enabling shareholders to register an informed vote with a reasonable time to consider those nominees.

Another of the Board’s key responsibilities is to monitor the company’s financial performance and set the dividend policy. Capstone has forecast a payout ratio in 2015 that is higher than the company’s targeted ratio of between 70% and 80%, driven in part by Cardinal’s transition from operating as a base load generator to a dispatchable facility, as well as the lead time until the pipeline of development projects reaches commercial operations. The Board is confident that Capstone has the liquidity, resources and flexibility to support the current dividend.

Another of the Board’s key responsibilities is to monitor the company’s financial performance and set the dividend policy. Capstone has forecast a payout ratio in 2015 that is higher than the company’s long-term targeted ratio of between 70% and 80%, driven in part by Cardinal’s transition from operating as a base load generator to a dispatchable facility, as well as the lead time until the pipeline of development projects reaches commercial operations. The Board is confident that Capstone has the liquidity, resources and flexibility to support the current dividend.

Capstone has a comprehensive set of priorities for 2015 to advance the company’s vision to be a Canadian leader in owning and operating diversified infrastructure businesses that benefit the communities we serve, the people we employ and our investors.

First, we will work with Bristol Water and our consultants in the United Kingdom to secure a regulatory outcome that better serves the needs of Bristol Water, its shareholders and most importantly, its customers.

Second, we will capitalize on the momentum in our power development unit by continuing the organic growth of our wind power portfolio. We will also look for occasions to develop other power projects, particularly with respect to Ontario’s Large Renewable Procurement, under which Capstone is a Qualified Applicant.

Third, we will be judicious in our evaluation of potential acquisitions, seeking accretive opportunities in our existing power and utilities pillars, and continuing our investigation of new platforms, particularly public-private partnerships.

And fourth, we will look beyond the immediate horizon and keep our focus on the enduring possibilities that infrastructure investing affords Capstone. The pressing need to build, upgrade and replace the vital power plants, utilities, hospitals and roads that support our society and the global economy remains strong – and is only becoming more urgent. Capstone’s seasoned management team is well poised to meet this demand through its knowledge of the sector, relationships in the industry, experience with all aspects of managing a range of infrastructure assets, and a passion for delivering results for the company, its people, the communities it serves and its shareholders.

We believe in the extraordinary potential for Capstone in 2015 and beyond, as long as we remain steadfast in our comprehensive approach to decision-making in the best long-term interests of the company and its shareholders. This careful planning can be seen in the solid assets the company has assembled during its first decade, creating a strong balance sheet that allows the company to thrive in a variety of market conditions.

On behalf of the Board of Directors and everyone at Capstone, thank you for your investment and your loyal support of the company.

Sincerely,

James Sardo
Chairman of the Board of Directors