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## CAPITAL POWER CORPORATION 

Notes to the Consolidated Financial Statements (Tabular amounts in millions of Canadian dollars, except share and per share amounts) 

10. Impairment testing, continued: 

## North East U.S. CGU 

In conjunction with the Company’s long-term forecasting activities, the Company reduced its expected future operating margins for its North East U.S. CGU which includes the Bridgeport, Tiverton and Rumford power generation plants. The reductions to the expected operating margins were largely a result of weakening spark spreads in the New England power market. Spark spreads represent the difference between spot market fuel and power prices and impact the profitability of the Company’s North East U.S. plants which sell power into the spot market. 

Based upon the above indicator of impairment, the Company tested its North East U.S. CGU for impairment and as a result, recorded $74 million of pre-tax impairments during 2012 within the U.S. geographic area. 

## Southport CGU 

The estimated recoverable amount of the Southport CGU exceeded its carrying amount and as such no impairment was required. 

## Key assumptions used in calculating recoverable amounts 

The recoverable amounts of the North East U.S. and Southport CGUs were based on the respective CGU’s fair value less costs to sell, calculated using a discounted cash flow method. The calculation of the recoverable amounts for each CGU is sensitive to several key assumptions as described below. 

Discount rates and growth rates 

The after-tax discount rates used ranged within the respective CGUs and reflect the market weighted average cost of capital (WACC) using a capital asset pricing model approach, giving consideration to the risks specific to each CGU. The method and assumptions used to calculate the WACC rate are consistent with the Company’s past experience and with previous valuations performed by the Company. 

The Company has projected cash flows for a period of ten years and used a growth rate to extrapolate the cash flow projections beyond the ten year period through to the end of the useful lives of each CGU. The growth rate reflects past experience and is consistent with industry practice. 

The discount and growth rates used by the Company in the calculation of the recoverable amounts for each CGU were as follows: 

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Future electricity and natural gas prices and other fuel costs 

The Company’s cash flow projections include estimates of future electricity and natural gas prices and other fuel costs. These estimates incorporate past experience and the Company’s current view of future pricing. Consideration is given to externally available information related to future pricing of electricity, natural gas and fuel inputs when developing certain pricing assumptions and such external information is used to validate the Company’s current view of future pricing. These external sources of information include market information from the independent system operators in the respective regions and information from third party advisory and research firms serving the industry. 

Connecticut Electric Generation Tax 

As at the impairment testing date and as at December 31, 2012, the Connecticut Electric Generation Tax (CEG Tax) was effective through the second quarter of 2013 and the Company’s calculations of the recoverable amount for the North East U.S. CGU assumed that this tax would no longer apply after that time. Subsequent to December 31, 2012, it was proposed that the CEG tax be extended through 2015. Based on the sensitivity analysis prepared by the Company at the time of testing, such an extension of the CEG Tax would not have changed the impairment recorded on the North East U.S. CGU. 

