Capstone Infrastructure Corporation — Management Reports 2023

Mar 9, 2023

MANAGEMENT'S DISCUSSION AND ANALYSIS

FINANCIAL HIGHLIGHTS

	As at and for the year ended December 31,
	2022	2021	2020
Revenue	255,022	222,567	181,503
EBITDA	186,125	156,678	118,571
Net income (loss) (1)	25,108	9,110	(1,390)
Preferred dividends	2,776	2,533	2,452
Total assets	1,550,435	1,369,491	1,240,260
Total long-term liabilities	977,502	857,100	750,557

(1) Net income (loss) attributable to the common shareholders of Capstone, which excludes non-controlling interests.

INSIDE THIS SECTION

Financial highlights	1	Financial position review	8
Legal notice	2	Derivative financial instruments	12
Introduction	3	Risks and uncertainties	12
Basis of presentation	3	Environmental, health and safety regulation	15
Additional GAAP performance measures	3	Related party transactions	16
Changes in the business	3	Summary of quarterly results	17
Subsequent events	5	Fourth quarter highlights	18
Results of operations	6	Accounting policies and internal controls	18

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, 2022 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, inflation, 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 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; market prices for electricity in Ontario and the amount of hours that the Cardinal Facility is dispatched; the price that the Claresholm Solar Facility will receive for its electricity production considering the market price for electricity in Alberta; 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; 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; foreign exchange fluctuations; 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; the COVID-19 pandemic; environmental; insurance coverage; climate change; cybersecurity and reliance on information technology; regulatory environment; environmental attributes; US jurisdiction; US tax incentives and availability of tax equity financing).

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, 2022, 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.

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, 2022 and 2021.

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, 2022 and 2021. Additional information about the Corporation, including its Annual Information Form ("AIF") for the year ended December 31, 2021, 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 9, 2023, 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

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 may not 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"), equity accounted investments, interest income, other gains and losses (net), and foreign exchange gains and losses. 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 2022, Capstone continued to execute on its strategic objectives, advancing its development projects and successfully managing financing activities providing funding for continued growth, despite evolving global events.

Project Development Activities

Capstone successfully advanced its development projects achieving commercial operations ("COD") at Michichi subsequent to the year-end, and continues to pursue projects at various stages of development, and to build a development pipeline across several jurisdictions. The following table lists the significant development projects:

Name of project	Status	Gross MW	Jurisdiction	Technology
Michichi	COD March 3, 2023	25	Alberta	Solar
Kneehill	Construction	25	Alberta	Solar
Buffalo Atlee	Construction	61	Alberta	Wind
Wild Rose 2	Development	192	Alberta	Wind
Early-stage development projects	Development	>800	Canada	Wind/Solar
MW capacity in Canada		>1,103
Early-stage development projects	Development	>1,000	United States	Wind/Solar/Storage

MW capacity in the United States ("US") >1,000

Capstone expects to fund these projects from a combination of sources including equity from existing corporate liquidity, government funding, and third party project financing.

Wild Rose 2 and Buffalo Atlee

Capstone's Wild Rose 2 project entered two offtake agreements in 2022, effectively contracting over 95% of the facility's capacity. These consist of an agreement with Pembina Pipeline Corporation for the offtake of 105MW of renewable energy and associated renewable energy attributes over 15 years, and a 78MW agreement with the City of Edmonton to supply renewable attributes over 20 years.

On June 10, 2022, Capstone's Buffalo Atlee 1-3 projects terminated their Renewable Electricity Support Agreements with the Alberta Electric System Operator ("AESO") in accordance with the termination and release agreements that were entered into between the projects and the AESO.

Further, Wild Rose 2 and Buffalo Atlee projects executed turbine supply agreements with Siemens Gamesa Renewable Energy Inc. for the procurement of 51 turbines, as well as executed engineering, procurement and construction contracts.

Equity accounted investments

On June 7, 2022, a Capstone subsidiary entered into an agreement with a subsidiary of Eurowind Energy A/S ("Eurowind") for the purpose of jointly developing renewable energy projects in the US. Capstone and Eurowind have equal interests in these projects. Capstone's consolidated financial statements include its 50% interest as an equity accounted investment adjusted by the share of net income (loss) and contributions made subsequent to Capstone's initial contribution on June 7, 2022.

SLGR reorganization

On July 14, 2022, the Ganaraska and Grey Highlands ZEP ("GHG"), Snowy Ridge ("SR"), and Settlers Landing ("SLS") wind projects were reorganized. As part of the reorganization, Capstone purchased 1% of the conversion option held by a subsidiary of One West Holdings Ltd. ("Concord") and then the assets and liabilities of these wind projects were transferred into SLGR Wind LP ("SLGR"). Concord then exercised its right to convert its debenture into a 49% equity interest in the projects, resulting in Capstone and Concord having 51% and 49% ownership of SLGR, respectively. The projects remain consolidated in the consolidated financial statements of Capstone.

Genalta Power Inc. ("Genalta")

On November 17, 2022, Capstone Power Corp. purchased all of the remaining shares of Genalta not owned by Capstone by way of a plan of arrangement, resulting in the consolidation of Genalta in the consolidated financial statements of Capstone.

Sechelt Creek Facility EPA

On October 30, 2022, Capstone entered into an extension to the Sechelt Creek hydro facility Electricity Purchase Agreement ("EPA") with BC Hydro until January 31, 2023. Following this, on February 1, 2023, Capstone entered into a new 20 year EPA for the Sechelt Creek facility with BC Hydro, subject to BCUC approval.

Financing Activities

Capstone successfully executed several project-level financings and refinancings to primarily facilitate growth and take advantage of market conditions. Furthermore, corporate liquidity improved on receiving Class A common shareholder contributions and expanding the Capstone Power Corp. ("CPC") credit facilities.

Claresholm term conversion

On March 24, 2022, the Claresholm construction facility was converted to a term loan, amortizing over 20 years. The term loan is comprised of two tranches, a floating interest rate tranche which matures on March 24, 2026 and a fixed interest rate tranche which matures on July 9, 2032. To mitigate the interest rate risk from the bank lenders, Claresholm has swap contracts to convert the floating interest rate obligations to a fixed rate.

Riverhurst financing

On April 27, 2022, Riverhurst entered into a credit agreement which provided $47,000 of variable rate project debt, which has swap contracts to convert the obligations to a fixed rate, amortizing over 20 years.

SLGR refinancing

Concurrent with the reorganization described above, SLGR executed a refinancing which provided $119,000 of variable rate project debt and swap contracts to convert the variable rate obligations to a fixed rate. The debt amortizes over the remaining term of the projects' power purchase agreements of approximately 14 years. The proceeds of the SLGR financing were used in part to fully repay the existing project debt at GHG, SR, and SLS.

Michichi and Kneehill financing

On December 22, 2022, Michichi and Kneehill entered into a credit agreement which provided $41,500 of variable rate debt for the construction of the solar facilities. To mitigate the interest rate risk, a swap contract was executed to convert the floating interest rate obligations to a fixed rate.

Class A shareholder funding

Capstone's Class A common shareholder contributed $80,000 in cash in 2022. In addition, Capstone has outstanding letters of credit of $40,679 which are supported by the common shareholder under a financing and reimbursement agreement. Under the terms of the agreement, Capstone would reimburse the common shareholder for any payments made on their behalf related to the letters of credit.

CPC credit facilities

In 2022, CPC increased the capacity on its revolving credit facility to $220,000 and extended the maturity to December 15, 2024.

SUBSEQUENT EVENTS

Buffalo Atlee financing

On January 27, 2023, Buffalo Atlee entered into a credit agreement which provided up to $50,000 of variable rate debt for the construction of the wind facilities. To mitigate the interest rate risk, a swap contract was executed to convert the floating interest rate obligations to a fixed rate.

US LC facility extension

On February 28, 2023, the US LC facility was increased to $39,955, and now expires on December 23, 2024.

RESULTS OF OPERATIONS

Overview

In 2022, Capstone's EBITDA and net income were higher than in 2021. Higher EBITDA reflects:

• Higher revenue due to additional market runs at Cardinal, generally higher wind and hydro production from better resource, and higher Alberta Power Pool prices and emissions offset credit sales at Whitecourt and Claresholm as well as the addition of Riverhurst, which achieved COD in 2021;
• Higher other income from unrealized fair value changes on interest rate swaps, which rose in value due to higher long-term interest rates; partially offset by:
• Higher expenses due to higher fuel costs at Cardinal from additional market runs, higher expenses at Claresholm since 2021 COD and increased project development costs.

	For the year ended
	Dec 31, 2022	Dec 31, 2021	Change
Revenue	255,022	222,567	32,455
Expenses	(86,891)	(68,806)	(18,085)
Other income and expenses	17,994	2,917	15,077
EBITDA	186,125	156,678	29,447
Interest expense	(46,261)	(42,695)	(3,566)
Depreciation and amortization	(96,282)	(93,901)	(2,381)
Income tax recovery (expense)	(12,234)	(3,611)	(8,623)
Net income (loss)	31,348	16,471	14,877

The remaining significant changes in net income were:

• Higher depreciation and amortization and interest expense due to Claresholm and Riverhurst having achieved COD; and
• Higher income tax expense in 2022 is primarily attributable to the difference in 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.

Results by Segment

Capstone's MD&A discusses the results of the power segment, as well as the corporate activities. The power segment consists of operating and development activities. The operating facilities produce electricity from wind, solar, biomass, natural gas, and hydrological resources, and are located in Ontario, Alberta, Nova Scotia, Québec, British Columbia, and Saskatchewan.

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 and at market rates to the Alberta Power Pool.

Revenue	For the year ended
	Dec 31, 2022	Dec 31, 2021	Change
Wind	131,420	119,821	11,599
Solar (1)	41,233	38,688	2,545
Biomass (1)	34,871	27,666	7,205
Gas	33,933	24,796	9,137
Hydro	13,565	11,596	1,969
Total Revenue	255,022	222,567	32,455

(1) Solar and Biomass include revenue from the generation and sale of electricity at market rates and the sale of emissions offset credits.

Power generated (GWh)	For the year ended
	Dec 31, 2022	Dec 31, 2021	Change
Wind	1,143.0	1,058.9	84.1
Solar	287.9	226.8	61.1
Biomass	185.6	191.4	(5.8)
Gas	90.2	51.5	38.7
Hydro	156.6	140.2	16.4
Total Power	1,863.3	1,668.8	194.5

Capstone's power segment earns revenue from:

• The wind facilities, in Ontario, Nova Scotia, Québec and Saskatchewan, by selling electricity in accordance with their PPAs. On a megawatt ("MW") weighted-average-basis, there are 10 years remaining on the current PPAs.
• The solar facilities, consisting of Amherstburg in Ontario, selling its electricity under a long-term PPA expiring in 2031, and Claresholm in Alberta, which sells its electricity and the associated emissions offset credits under various contracts, including a PPA expiring in 2029, into the Alberta Power Pool, and to third parties.
• Whitecourt, a biomass facility in Alberta, by selling electricity at market rates to the Alberta Power Pool. Whitecourt also earns a portion of its revenue from the sale of emissions offset credits. These are supplemented or offset by a revenue sharing agreement with Whitecourt's fuel supplier, Millar Western Forest Products Ltd. ("Millar Western"), where contractual settlements are included in other gains and losses in the consolidated statement of income.
• Cardinal, a natural gas peaking facility 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.
• The hydro facilities, in Ontario and British Columbia, by selling electricity under long-term PPAs. On a MW weightedaverage-basis, there are 20 years remaining on the current PPAs, with the earliest expiry in 2040.

The following table shows the significant changes in revenue from 2021:

Change Explanations

• 9,707 Higher revenue from wind (excluding Riverhurst) and hydro facilities, due to higher production from resources.
• 9,137 Higher revenue at Cardinal due to additional market runs.
• 7,205 Higher revenue at Whitecourt due to higher prices and higher emissions offset credit sales, offsetting lower production.
• 3,861 Revenue from adding Riverhurst which reached COD on December 10, 2021.
• 2,627 Higher revenue from Claresholm due to higher Alberta Power Pool prices and higher emissions offset credit sales in 2022.
• (82) Various other changes.
• 32,455 Change in revenue.

Seasonality

Overall, the results for Capstone's power segment fluctuate during the year because of seasonal factors that affect quarterly production of each facility. These factors include scheduled maintenance and environmental factors such as water flows, solar irradiation, wind speeds and air density, ambient temperature and humidity, which affect the amount of electricity generated. In aggregate, these factors have historically resulted in higher electricity production during the first and fourth quarters.

Expenses

Expenses consist of expenditures within the power segment relating to operating expenses and costs to develop new projects, as well as corporate business development and administrative expenses.

Expenses	For the year ended
	Dec 31, 2022	Dec 31, 2021	Change
Wind	(26,208)	(24,198)	(2,010)
Solar	(8,460)	(4,168)	(4,292)
Biomass	(11,707)	(11,328)	(379)
Gas	(20,005)	(12,401)	(7,604)
Hydro	(4,332)	(4,271)	(61)
Power operating expenses	(70,712)	(56,366)	(14,346)
Project development costs	(6,709)	(3,944)	(2,765)
Administrative expenses	(9,470)	(8,496)	(974)
Total Expenses	(86,891)	(68,806)	(18,085)

Expenses for the operation and maintenance ("O&M") of the power facilities mainly consist of wages and benefits and payments to third party providers. Capstone's wind facilities are operated by Capstone's in-house operations and maintenance teams, except for Glen Dhu, Goulais, SkyGen, Saint-Philémon, Glace Bay, and Riverhurst, which are maintained under service agreements, typically with the original equipment manufacturers. The hydro facilities are operated and maintained under an O&M agreement. In addition, Cardinal, Whitecourt, Claresholm, and Amherstburg rely on the internal capabilities and experience of Capstone's staff. Other significant costs include fuel, transportation, insurance, utilities, land leases, raw materials, chemicals, supplies, and property taxes.

Project development costs consist of direct staff costs in 2022, professional fees, and other costs to pursue greenfield opportunities, as well as costs to explore and execute transactions in both periods. 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 2021:

Change Explanations

• (7,604) Higher expenses at Cardinal due to additional market runs in 2022.
• (4,763) Higher operating expenses at Claresholm which reached COD on April 19, 2021.
• (2,765) Higher project development costs associated with early-stage development in 2022.
• (701) Higher operating expenses at Riverhurst which reached COD on December 10, 2021.
• (379) Higher expenses at Whitecourt due to higher fuel costs.
• (1,873) Various other changes.

(18,085) Change in expenses.

FINANCIAL POSITION REVIEW

Overview

As at December 31, 2022, Capstone's working capital surplus was $88,979, compared with a deficit of $76,445 as at December 31, 2021, mainly resulting from refinancing the near-term debt maturities.

Capstone has adequate financial flexibility to meet liquidity needs and support further growth, including $124,897 of unrestricted cash and cash equivalents and corporate credit capacity of $148,707 available.

Capstone and its subsidiaries continue to comply with all debt covenants.

Liquidity

Working capital

As at	Dec 31, 2022	Dec 31, 2021
Power	88,638	(75,778)
Corporate	341	(667)
Working capital (equals current assets, less current liabilities)	88,979	(76,445)

Capstone's working capital was $165,424 higher than December 31, 2021 because of increases of $164,416 and $1,008 from power and corporate, respectively. The increase at power largely reflects the refinancing efforts at SLGR ($90,674), offset by 2023 debt maturities at SkyGen and Skyway 8 ($25,353), reducing the current portion of long-term debt by $61,611. It also includes higher cash and restricted cash of $57,350, higher accounts receivable of $16,989 from revenue and government funding, as well as an increase in the current portion of loans receivable of $14,921, and derivative contract assets of $11,018.

Cash and cash equivalents

As at	Dec 31, 2022	Dec 31, 2021
Power	123,108	56,494
Corporate	1,789	882
Unrestricted cash and cash equivalents	124,897	57,376

These funds are available for operating activities, capital expenditures, and future acquisitions. The $67,521 increase consists of an increase of $66,614 at power and a increase of $907 at corporate. Higher cash at power mainly reflects a $43,000 increase in Kneehill and Michichi from government funding and debt proceeds partly offset by expenses to build the projects, a $17,200 increase at CPC from an accumulation of asset distributions, and a $2,200 increase at Buffalo Atlee from government funding offset by expenses to construct the project.

Cash at the power segment is comprised of $33,602 at CPC and $89,506 at the projects, which is only periodically accessible by corporate through distributions. The power segment's cash and cash equivalents are accessible through distributions under the terms of the CPC credit 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.

In addition to these funds, the CPC revolving credit facility has available capacity of $147,658 as at December 31, 2022.

Cash flow

Capstone's consolidated cash and cash equivalents increased by $67,521 in 2022 compared with a decrease of $13,785 in 2021. The components of the change in cash, as presented in the consolidated statement of cash flows, are summarized as follows:

For the year ended	Dec 31, 2022	Dec 31, 2021
Operating activities	117,457	119,284
Investing activities	(231,656)	(225,058)
Financing activities (excluding dividends to shareholders)	184,569	94,522
Dividends paid to shareholders	(2,849)	(2,533)
Change in cash and cash equivalents	67,521	(13,785)

Cash flow from operating activities was $1,827 lower in 2022 comprised of a $1,630 decrease from the power segment and a $197 decrease from the corporate segment. The power segment had higher contributions from the operating businesses, more than offset by changes in working capital and higher transaction costs on debt.

Cash flow used in investing activities was comparatively $6,598 higher in 2022, as 2021 included $228,624 to purchase SWNS and build Claresholm and Riverhurst. In 2022, $203,401 was used for projects under development ("PUD"), primarily to develop Wild Rose 2, and construct Buffalo Atlee, Michichi, and Kneehill, and $35,694 was used for capital assets, for both additions, including refurbishments on the Dryden hydro facility dams, as well as for settlement of 2021 payables, mainly at Claresholm and Riverhurst.

Cash flow from financing activities was $89,731 higher in 2022, in which Capstone received $80,000 cash from Class A common shareholder capital contributions and $71,270 in government funding, offset by $50,453 lower net debt proceeds and $15,150 of advances on loans receivable. The net debt proceeds in 2022 include $119,000 from refinancing SLGR, less $97,203 to repay prior project debts, plus $47,000 from financing Riverhurst, $41,500 from financing Michichi and Kneehill, and net draws of $7,000 on the CPC revolving credit facility. The remaining change reflects various scheduled repayments of project debt. In 2021, the net debt proceeds consisted of $88,600 of SWNS project debt, $41,500 of draws on the Claresholm facility, and a net draw of $7,500 on the CPC revolving credit facility, partly offset by $30,515 to refinance SkyGen and Skyway8, and scheduled repayments.

Long-term Debt

Continuity of Capstone's long-term debt for the year ended was:

	Dec 31, 2021	Additions	Repayments	Other	Dec 31, 2022
Long-term debt (1), (2) and (3)	881,949	275,560	(221,353)	—	936,156
Deferred financing fees (4)	(16,297)	(8,487)	—	4,047	(20,737)
	865,652	267,073	(221,353)	4,047	915,419
Less: current portion of long-term debt	(149,473)	—	—	61,611	(87,862)
	716,179	267,073	(221,353)	65,658	827,557

(1) The power segment has drawn $87,315 for letters of credit, as well as $40,679 which are supported by Capstone's common shareholder.

(2) Additions of $275,560 consist of SLGR project financing of $119,000, CPC revolving credit facility draws of $68,000, Riverhurst project financing of $47,000, and Michichi and Kneehill project financing of $41,500. See the "Changes in the Business" section in this MD&A for detail.

(3) Repayments of $221,353 include $61,000 on the CPC revolving credit facility, and refinancing of the GHG, SR and SLS credit facilities of $97,203, as well as scheduled repayments on the various project debt facilities.

(4) Additions consist of deferred transaction costs on the project financing of Riverhurst, SLGR, Michichi and Kneehill, the Claresholm term conversion, and CPC credit facility extension. See the "Changes in the Business" section in this MD&A for detail.

As at December 31, 2022, Capstone's long-term debt consisted of $900,656 of project debt and $35,500 for the CPC credit facilities. The current portion of long-term debt was $87,862, consisting of scheduled debt amortization and upcoming 2023 maturities of Skygen and Skyway 8 of $10,882 and $14,471, respectively. Capstone expects to repay the scheduled amortization from income generated by the power assets and is evaluating readily available options to refinance or extend the project debt maturing in the next twelve months.

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. In 2022, CPC increased the capacity on its revolving credit facility, which is now $220,000 and matures December 15, 2024.

Equity

Shareholders' equity comprised:

As at	Dec 31, 2022	Dec 31, 2021
Common shares (1)	142,270	62,270
Preferred shares (2)	72,020	72,020
Share capital	214,290	134,290
Accumulated other comprehensive income (loss)	—	5
Retained earnings	95,984	73,742
Equity attributable to Capstone shareholders	310,274	208,037
Non-controlling interests	119,040	96,129
Total shareholders' equity	429,314	304,166

(1) $80,000 of cash capital contributions from Class A common shareholder in 2022.

(2) Capstone has 3,000 publicly listed Series A preferred shares on the Toronto Stock Exchange.

Contractual Obligations

As at December 31, 2022, Capstone had outstanding contractual obligations with amounts due as follows:

	Within one year	One year to five years	Beyond five years	Total
Long-term debt (1)	125,176	522,641	579,044	1,226,861
Operating leases	5,975	23,097	76,493	105,565
Asset retirement obligations	400	—	18,701	19,101
Purchase obligations	418,796	46,568	264,110	729,474
Total contractual obligations	550,347	592,306	938,348	2,081,001

(1) Long-term debt includes principal and interest payments.

Long-term debt

• Long-term debt is discussed in the "Long-term Debt" section of 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 to use, or the 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 extended as far as 2061.
• Cardinal leases the site on which it is located from Ingredion. Under the lease, Cardinal pays monthly rent. The lease extends through 2034 and expires concurrently with the Energy Savings Agreement between Ingredion and Cardinal.
• Capstone's operating solar facilities have entered into agreements to use land in connection with their operation with terms extending as far as 2060.
• The Corporation has an operating lease for the corporate office expiring in 2023.

Capstone's operating lease commitments with no minimum commitments required are:

• 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 2025 and 2042.

Asset retirement obligations

Commitments associated with asset retirement obligations for Capstone's power facilities are projected to occur principally over the next 25 years.

Purchase obligations

Capstone enters into contractual commitments in the normal course of business, either directly or through its subsidiaries. These contracts include capital commitments and operations and maintenance ("O&M") agreements:

Capital commitments

• During 2022, Capstone entered into various purchase obligations, including payments to original developers, for the operation and development of the Buffalo Atlee and Wild Rose 2 wind development projects, as well as the Michichi and Kneehill solar development projects. The capital commitments related to these projects made up 90% of Capstone's purchase commitments at December 31, 2022.

O&M agreements

• Cardinal has a maintenance contract with Siemens Energy Canada Limited covering the gas turbine at Ingredion's 15MW facility.
• 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.

Other commitments

In addition to the commitments included in the table above, 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. For certain solar and wind projects in development, commitments include availability and product targets subsequent to achieving COD.

Management services agreements

Capstone has management services agreements with all the partially owned wind and solar facilities and development projects, including Amherst, Buffalo Atlee, Claresholm, Goulais, Kneehill, Michichi, Saint-Philémon, and SLGR. 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.

Wood waste supply agreement

The Whitecourt and Millar Western fuel supply agreement for wood waste includes sharing mechanisms regarding the price received for electricity and emissions offset credits sold by Whitecourt.

Energy savings agreement ("ESA")

Cardinal has an ESA with Ingredion which matures in 2034. Under the terms of the ESA, Cardinal is required to provide O&M services in respect of Ingredion's 15MW 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 15MW plant in order to support Cardinal's satisfaction of the O&M terms of the ESA.

Guarantees

Capstone has provided certain guarantees relating to the government funding received, as well as limited recourse guarantees on the project debt of certain wind and solar projects totaling $24,888 as at December 31, 2022.

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 power facilities are not expected to incur material contingent liabilities upon the retirement of assets.

Capital Expenditure Program

Capstone's power segment invested $146,447 in capital expenditures during 2022. This consisted of $208,140 of capitalized PUD, less $79,189 of government funding, plus $17,496 of capital asset additions.

Amounts capitalized to PUD in 2022 were primarily for costs to advance the Wild Rose 2 wind project ($56,102), the Buffalo Atlee wind project ($33,767), and the Michichi and Kneehill solar projects ($30,603). Amounts relating to the US development projects jointly owned with Eurowind were transferred from PUD to equity accounted investments during the year.

The government funding relates to the Michichi, Kneehill and Buffalo Atlee projects which have agreements with the government of Canada, and are eligible for funding for a portion of the capital expenditures, subject to certain conditions.

Income Taxes

In 2022, the current income tax recovery of $731 (2021 - expense of $80) primarily relates to the partial reversal of Canadian Renewable and Conservation Expense (CRCE) reserve as the claim periods expire.

Deferred income tax assets and liabilities are recognized on Capstone's consolidated statement of financial position based on temporary differences between the accounting and tax bases of existing assets and liabilities. Deferred income tax assets and liabilities are calculated on a net basis where there is a legally enforceable right of offset within the same tax jurisdictions.

Capstone's net deferred income tax liability increased by $5,523 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. Capstone's total deferred income tax assets of $6,328 (2021 - $176) primarily relate to unused tax losses carried forward, including recognized losses on acquisition. Deferred income tax liabilities of $98,135 (2021 - $86,460) primarily relate to the differences between amortization of intangible and capital assets for tax and accounting purposes and nondeductible fair value adjustments on financial instruments.

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, 2022. 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 or foreign exchange rates. The fair values of these contracts, as well as the Whitecourt embedded derivative included in the consolidated statement of financial position, were:

As at	Dec 31, 2022	Dec 31, 2021
Derivative contract assets	39,727	15,138
Derivative contract liabilities	(4,220)	(8,179)
Net derivative contract assets	35,507	6,959

Net derivative contract assets increased by $28,548 from December 31, 2021, due to gains of $19,365 in the statement of income and contractual settlements of $9,190 paid to Millar Western, slightly offset by losses of $7 on foreign exchange contracts included in other comprehensive income ("OCI").

Fair value changes of derivatives in the consolidated statements of income comprised:

For the year ended	Dec 31, 2022	Dec 31, 2021
Whitecourt embedded derivative	(18,992)	(13,884)
Interest rate swap contracts (1)	38,357	17,002
Gain (losses) on derivatives in net income	19,365	3,118
Foreign currency contracts in OCI	(7)	7
Gain (losses) on derivatives in comprehensive income	19,358	3,125

(1) The interest rate swap contracts include a contingent contract in anticipation of financing the Wild Rose 2 project.

The gain on derivatives includes gains from the interest rate swap contracts, resulting from generally higher interest rates during the swap periods since December 31, 2021, partially offset by a decrease in the Whitecourt embedded derivative, resulting from higher forecasted Alberta Power Pool prices and losses on foreign exchange contracts.

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.

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.

				Likelihood of Risk Occurrence
				Somewhat		Almost
		Rare	Unlikely	Likely	Likely	Certain
gnificant	1
nor	$\overline{2}$
derate	3
jor	$\overline{4}$
astrophic	5

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.

Additionally, in February 2022, Russia commenced a military invasion of Ukraine. While the direct impact of the conflict is currently in eastern Europe, the potential global impact of these actions is unclear and may have the effect of heightening the Corporation's risk factors, including with respect to foreign exchange fluctuations, supply chain matters, completion of development projects (including because of commodity price or other market inflationary factors), and cybersecurity. While it is

not currently possible to estimate the length and severity of these events, the Corporation's existing operations have not been materially impacted.

The Corporation continues to monitor developments and develop mitigation measures to manage impacts on its businesses and development projects. Risks specific to Capstone's power segment, as well as at the corporate-level, are included.

Risk and Description	Impact	Monitoring and Mitigation
Operational Risks
Development and capital expenditurerisks concern the construction of newCanadian or US power generationfacilities in line with the requirements ofawarded PPAs and regulatoryrequirements and planned maintenancecapital expenditures required on existingfacilities to maintain operations.	Delays and cost overruns in theconstruction of new facilities, failure tomeet regulatory standards or inperforming planned maintenance orrefurbishments could lead to lower cashflows, and where PPA requirements arenot met, cancellation of the PPA resultingin lost revenue and impairment of anycapitalized costs for the facility.	Capstone has professional project managementprocesses and uses experienced contractors andadvisors. Capstone contracts include a combination ofincentives, liquidated damages, or fixed-pricing to alignsuppliers interests to project results.
Production risk concerns thedependence of power production onadequate resources such as wind,sunlight and water flow as well as fuelsupply and the availability of each of thesites.	Low availability, inadequate wind, sunlight,water flow, wood waste, or gas leads tolower power production which results inlower revenues.	Capstone maintains facilities in quality condition tomaximize availability for power generation whenrenewable resources are available and strongest.Capstone also seeks to diversify its portfolio ofbusinesses to mitigate the dependency on a singleresource or geography.
PPA renewal risk concerns the ability torecontract expiring PPAs on economicallyfeasible terms and failing to align with theuseful lives of the power facilities.	If Capstone is unsuccessful or delayed inrecontracting its expiring PPAs, it wouldcause Capstone to fall short of its financialforecasts, as revenue short-falls couldresult from operating in merchant or othermarkets.	Capstone mitigates by starting negotiations withcounterparty(ies) well before contract expiry,considering impacts of other stakeholders and workingto ensure the broader benefits of the facility areconsidered in the process. In addition, company-widemitigation is provided by maintaining a diversifiedportfolio to reduce the impact of any one facility to theoverall consolidated financial results.
Information technology and datasecurity risk concerns the ability todevelop, maintain and manage complexinformation technology systems which areused to operate and monitor its facilitiesand other business systems.	Cyber attacks or unauthorized access toinformation technology systems may leadto production disruptions and systemfailures that, amongst other things, mayresult in lower production and revenues.	Capstone follows a recognized IT framework whichincludes security and recovery plans.In addition, certain sites are compliant with NorthAmerican Electric Reliability Corporation standards.
Succession and human resourcesretention risks concern the ability toreplace senior management and attract,retain and motivate key staff.	Inability to retain or replace key staff orsenior management could prevent ordelay Capstone from executing itsbusiness strategy, thereby causingCapstone to fall short of its financialforecasts.	Capstone maintains a succession plan and providescareer and development opportunities to its employees.
Strategic Risks
Competition risk concerns the ability tosource and complete attractive investmentopportunities that support Capstone'sgrowth initiatives within the powersegment.	Inability to source and execute attractivegrowth opportunities may lead to lowerlong-term cash flow as businessesoperating under finite term contractsexperience uncertainty about their longerterm cash flow potential.	Management periodically reviews and updates strategyaccording to market conditions and developments.
Financial Risks
Expense management risk concernsunexpected non-recoverable increases inoperating and administrative costs.	Unanticipated increases in costs couldresult in lower earnings and cash flow.	Capstone monitors costs against budgets andconsiders asset lifecycle costs in decision making.
Forecasting risk concerns the accuracyof projections for results from operationsdue to error or unpredictable economic,market and specific business factors.	Volatility of financial forecasts increasesliquidity reserve requirements to payexpenses, reducing cash flows.	Capstone targets businesses which have inherentlypredictable financial results from operations.Capstone maintains adequate levels of liquidity tomanage during periods of uncertainty.
Taxation risk concerns higher incomeand other taxes attributable to adverselegislation changes, both in the US anddomestic, including tax rate increases, orinterpretations by tax authorities on audit.	Higher taxation results in both lowerincome and cash flow available.	Capstone minimizes exposures to adverse tax rulingsby choosing structures that adhere to taxationregulations, are commonly used in practice andwherever practical supported by opinions of externaladvisers.In addition, Capstone monitors the trends and policiesof taxation authorities in the jurisdictions where itsbusinesses operate.
Foreign exchange fluctuations riskconcerns volatility of the Canadian dollarrelative to foreign currencies.	Volatility in exchange rates couldnegatively impact cash flows, value ofinvestments and operating results, whichare denominated in Canadian dollars.	Capstone minimizes exposure to foreign exchangefluctuations through hedging instruments whereeconomically feasible.

Risk and Description	Impact	Monitoring and Mitigation
Financing risk concerns the ability toaccess timely and cost effective debt orequity to support the development andconstruction of power facilities, businessacquisitions and replace maturing debt.	Inability to access cost-effective debt orequity could result in higher interest costs,lower cash flow or liquidity difficulties.For an acquisition, this could also preventCapstone from realizing a growthopportunity.	Capstone maintains relationships with multiple financialinstitutions that have the resources to provide some orall financing requirements. In addition, most existingproject debt amortizes over the term of the PPAs tominimize refinancing requirements and debt maturitiesare staggered.
Legal and Regulatory Risks
Contract and permit compliance riskconcerns the ability to operate Capstone'spower businesses within the allowancesof an increasing number of requirements.	Failure to comply with contracts andpermits can impact Capstone's powercontracts, debt facilities, and otheragreements, which can lead to lower cashflow from the existing businesses byreducing revenue or increasing costs torestore the ability to operate at capacity.	Capstone maintains its contracts, permits and licenses,works with knowledgeable contractors, engagesindustry associations and regulatory bodies andresponds to adverse findings promptly to minimize theimpact.

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 preindustrial levels and to pursue efforts to limit the increase to 1.5°C.

In late 2016, Canada and the majority of its provinces agreed to the Pan-Canadian Framework on Clean Growth and Climate Change ("Framework"). Pursuant to the Framework, provincial jurisdictions have the flexibility to implement a variety of carbon regimes ranging from price-based regimes involving a carbon tax, to performance-based emissions regimes involving emissions intensity and cap and trade. 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. Pursuant to the GGPPA, the minimum price for carbon was $50/tonne in 2022 and is $65/tonne in 2023. As set out in Schedule 4 of the GGPPA, the carbon price will increase by $15/tonne per year over the next seven years, resulting in a carbon price of $170/tonne in 2030.

Saskatchewan, Ontario and Alberta all launched constitutional challenges to the GGPPA. On March 25, 2021, the Supreme Court of Canada ("SCC") rendered its decision on the constitutional challenges. The SCC upheld Canada's ability to implement minimum pricing standards for greenhouse gas emissions as a national backstop under the GGPPA in the event that a provincial carbon pricing program does not meet the GGPPA's stringency requirements. The Corporation continues to monitor the federal government's assessment of alternative carbon pricing systems for compliance with the GGPPA, while anticipating more carbon pricing consistency in provinces which do not have programs that meet the GGPPA's equivalency test.

In Alberta, under the Technology Innovation and Emissions Reduction ("TIER") Regulation, regulated facilities that emit 100,000 tonnes or more of greenhouse gases per year must meet provincial greenhouse gas emissions thresholds. If they cannot do so through operational improvements, they can purchase emission offsets from qualified offset facilities, purchase emission performance credits from other large emitters, or contribute to the Alberta TIER fund. To ensure consistency with the provisions of the GGPPA, the Alberta government has announced the TIER fund price will increase in a manner consistent with the GGPPA for the years 2023 to 2030. In 2023, the price of the Alberta TIER fund will increase to $65/tonne. Capstone's operating Albertabased wind and solar development projects are all eligible to produce valid emission offsets under TIER, including Claresholm and Whitecourt, which produced emission offsets in the current year.

In 2018, Ontario revoked its cap and trade program, therefore subjecting it to the provisions of the GGPPA. In 2019, Ontario introduced an Emissions Performance Standards ("EPS") program which applies to greenhouse gas emissions from large industrial emitters. On September 20, 2020, the federal government accepted Ontario's EPS program as an alternative to the federal backstop. In October 2021 the Ontario government made regulatory amendments to support the transition from the federal system to the Ontario EPS effective January 1, 2022. Although Ontario previously indicated it intended to develop an offset trading program, in December of 2022 it confirmed nothing would be developed in the short term. It is currently unclear if and when Ontario will develop an offset trading system as part of its EPS.

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 its levels of permitted emissions. 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 and Solar Facilities

Capstone's wind and solar facilities do not generate greenhouse gases.

Further Information

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 2022 related party transactions and balances are 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 North America Inc. ("iCON NA"), a subsidiary of iCON, under a shared service arrangement, are reported in the consolidated statements of income as an administrative expense recovery. During 2022, Capstone earned fees of $192 from iCON NA (2021 - $235).

Contributions and Credit Support from iCON

Capstone's Class A common shareholder contributed $80,000 in cash in 2022.

On September 12, 2022, the Class A common shareholder provided letters of credit issued to the benefit of Capstone under a financing and reimbursement agreement. Capstone reimburses the common shareholder for payments made on its behalf, including fees and draws on the letters of credit. For the year ended December 31, 2022, Capstone reimbursed normal course fees of $116. As at December 31, 2022, the balance of outstanding letters of credit is $40,679 to support various development projects.

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 26 related party transactions in the consolidated financial statements for the year ended December 31, 2022.

Linking Management Compensation to Performance

Compensation plays an important role in achieving short- and long-term business objectives that ultimately drive the Corporation's business success in alignment with long-term shareholder goals. The objectives of the Corporation's compensation program are to:

• Attract and retain highly qualified employees with a history of proven success;
• Align the interests of employees with shareholders' interests and with the execution of the Corporation's business strategy;
• Establish performance goals that, if met, are expected to improve long-term shareholder value; and
• Tie compensation to those goals and provide meaningful rewards for achieving them.

Corporate performance targets are set each year to provide management with an incentive to exceed annual budgeted financial results and other business performance measures and are therefore aligned with shareholder interests.

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")	Share appreciation rights ("SAR") plan
Description	Salary is a fixed component ofcompensation that provides incomecertainty by establishing a base level ofcompensation for executives fulfillingtheir roles and responsibilities.	The STIP provides the possibility of anadditional annual cash award based onthe achievement of corporate andindividual goals.	Capstone has a share appreciation rights("SAR") plan, which is tied to long-termgrowth to motivate and retain executives ona long-term basis. The awards will be paidin cash after meeting certain vestingconditions.
Purpose	To attract and retain qualifiedexecutives.	To motivate, attract and retain qualifiedexecutives.	To reward long-term performance and aligninterests of executives with securityholders.
Link toperformance	No direct link.	A significant portion of this award isbased on actual business performanceagainst Capstone's internalperformance measures.	The SAR is directly linked to the long-termincrease in the Corporation's value upon asale transaction.

For a comprehensive understanding of Capstone's compensation program refer to the "Compensation Discussion and Analysis" section of the Corporation's most recently filed AIF.

SUMMARY OF QUARTERLY RESULTS

The following table provides a summary of the previous eight quarters of Capstone's financial performance.

	2022			2021
	Q4	Q3	Q2	Q1	Q4	Q3	Q2	Q1
Revenue	76,261	59,624	59,937	59,200	64,120	47,788	56,480	54,179
EBITDA	42,956	33,604	46,367	63,198	38,674	29,799	34,334	53,871
Net income (loss) (1)	2,193	(2,281)	5,854	19,342	2,559	(5,262)	(3,175)	14,988
Preferred dividends	694	694	694	694	694	613	613	613

(1) Net income (loss) attributable to the common shareholders of Capstone, which excludes non-controlling interests.

FOURTH QUARTER HIGHLIGHTS

	Three months ended
	Dec 31, 2022	Dec 31, 2021
Revenue	76,261	64,120
Operating expenses	(17,971)	(16,931)
Administrative expenses	(2,936)	(3,156)
Project development costs	(1,945)	(625)
Equity accounted income (loss)	(328)	—
Interest income	1,308	292
Other gains and (losses), net	(10,789)	(4,912)
Foreign exchange gain and (losses)	(644)	(114)
Earnings before interest, taxes, depreciation and amortization	42,956	38,674
Interest expense	(12,573)	(11,401)
Depreciation of capital assets	(20,663)	(20,250)
Amortization of intangible assets	(3,494)	(3,423)
Earnings (loss) before income taxes	6,226	3,600
Income tax recovery (expense)
Current	822	(214)
Deferred	(3,176)	(280)
Total income tax recovery (expense)	(2,354)	(494)
Net income (loss)	3,872	3,106
Net income (loss) attributable to:
Shareholders of Capstone	2,193	2,559
Non-controlling interest	1,679	547
	3,872	3,106

In the fourth quarter of 2022, Capstone's EBITDA and net income were higher than in 2021. Higher quarterly net income reflects:

• Higher revenue due to added market runs at Cardinal, the addition of Riverhurst, which achieved COD December 10, 2021, higher overall wind production from better resource, and higher Alberta Power Pool prices and emissions offset credit sales at Whitecourt and Claresholm; and
• Higher interest income due to increasing interest rates and higher average cash balances; partially offset by
• Higher project development costs;
• Higher interest expense and depreciation due by adding Riverhurst;
• The addition of equity accounted investments on June 7, 2022; and
• Lower deferred income tax expense is primarily attributable to non-deductible fair value adjustments on financial instruments as well as utilization of tax losses.

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, 2021. Refer to note 2 of the December 31, 2022 consolidated financial statements for a summary of significant accounting policies.

Future Accounting Changes

The International Accounting Standards Board ("IASB") has not issued any significant accounting changes that impact the Corporation. Capstone is evaluating the impact of the narrow-scope amendments to IAS 1 on the Corporation. The amendments clarify how liabilities are classified based on the conditions with which an entity must comply within twelve months after the reporting period, and are effective for annual reporting periods beginning on or after January 1, 2024.

Capstone continues to monitor changes to IFRS and has implemented applicable IASB changes to standards, new interpretations and annual improvements.

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 (1)
	Capital assets, projects under development and intangible assets:
•	Purchase price allocations	•	Initial fair value of net assets.
•	Depreciation on capital assets	•	Estimated useful lives and residual value.
•	Amortization on intangible assets	•	Estimated useful lives.
•	Asset retirement obligations	•	Expected settlement date, amount and discount rate.
•	Impairment assessments of capital assets, projects underdevelopment and intangible assets	•	Future cash flows and discount rate.
	Deferred income taxes	•	Timing of reversal of temporary differences, tax rates and current and future taxableincome.
Financial instruments and fair value measurements		••	Forward Alberta Power Pool prices, volatility, credit spreads and production projections.Future cash flows and discount rate.

(1) The COVID-19 outbreak and the 2022 Russian invasion of Ukraine have not changed Capstone's method of calculation for its critical estimates and judgments. 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, 2022 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, 2022, 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, 2022.