## CAPITAL POWER CORPORATION 

Notes to the Consolidated Financial Statements 

(Tabular amounts in millions of Canadian dollars, except share and per share amounts) 

## 1. Reporting entity: 

Capital Power Corporation (the Company or Capital Power) builds, owns and operates power plants and manages its related electricity and natural gas portfolios by undertaking trading and marketing activities. 

The registered and head office of the Company is located at 10423 101 Street, Edmonton, Alberta, Canada, T5H 0E9. The common shares of the Company are traded on the Toronto Stock Exchange under the symbol “CPX”. 

## 2. Significant accounting policies: 

## (a) Basis of presentation: 

These consolidated financial statements have been prepared by management in accordance with International Financial Reporting Standards (IFRS). 

These consolidated financial statements have been prepared under the historical cost basis, except for the Company’s derivative instruments, defined benefit pension assets and cash-settled share-based payments, which are stated at fair value. 

These consolidated financial statements were approved and authorized for issue by the Board of Directors on March 1, 2013. 

## (b) Basis of consolidation: 

These consolidated financial statements include the accounts of Capital Power and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases to exist. The Company has an approximate 70.7% interest in Capital Power L.P. (CPLP) (December 31, 2011 - 60.6%). Based on an assessment of the relationship between Capital Power and CPLP, Capital Power controls CPLP and therefore CPLP is treated as a subsidiary of Capital Power. EPCOR Utilities Inc. (EPCOR) holds 28.441 million (December 31, 2011 - 38.216 million) exchangeable limited partnership units of CPLP (exchangeable for common shares of Capital Power on a one-for-one basis) which represents approximately 29.3% of CPLP (December 31, 2011 - 39.4%). Each exchangeable limited partnership unit is accompanied by a special voting share in the capital of Capital Power which entitles the holder to a vote at Capital Power shareholder meetings, subject to the restriction that such special voting shares must at all times represent not more than 49% of the votes attached to all Capital Power common shares and special voting shares, taken together. The special voting shares also entitle EPCOR, voting separately as a class, to nominate and elect a maximum of four directors of Capital Power of the current twelve directors on Capital Power's board of directors. Although EPCOR, through its ownership of the special voting shares described above, is the largest single shareholder, its representation on the board of directors does not represent a controlling vote. Since a subsidiary of Capital Power is the general partner of CPLP, Capital Power has control over CPLP and, on that basis, the operations of CPLP are consolidated by Capital Power for financial statement purposes. 

Non-controlling interests in subsidiaries are identified separately from equity attributable to shareholders’ of the Company. The non-controlling interests may be initially measured either at fair value or at the non-controlling interests’ proportionate share of the fair value of the acquired business’ identifiable net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition plus the non-controlling interest’s share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance. 

All significant intercompany balances and transactions have been eliminated on consolidation. 

The financial statements of the subsidiaries are prepared for the same reporting period as Capital Power, using consistent accounting policies. 

