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## TO OUR SHAREHOLDERS 

## MESSAGE FROM THE PRESIDENT ANDCEO 

Throughout 2012, we remained focused on executing our strategy – a strategy that remains unchanged and designed to create value throughout the business cycle. Capital Power’s corporate strengths continue to be the pillars that support our strategy and vision to be one of North America’s most respected, reliable and competitive power producers. 

## MARKET FOCUS 

We continue to be focused on our geographic footprint and target markets in North America. In our home market of Alberta, an energy only market, power prices are determined by supply and demand. The near-term outlook for power prices softened in the past year when an arbitration decision ordered TransAlta to restore their Sundance 1 and 2 units back to service. The addition of 560 megawatts (MWs) of supply from these two units expected in the fall of 2013 has reduced the forward view of Alberta power prices for the next few years. However, the excess supply of generation in the medium term is partially offset by the fact that Alberta remains one of the fastest growing economies and power markets in North America. With increasing demand for electricity and the retirement of older coal facilities, these strong market fundamentals will lead to higher power prices and new build opportunities over time, making it an attractive market to invest in. 

For this reason, we announced major expansion plans late last year with two significant projects. First, we entered into a joint venture agreement with ENMAX Energy (ENMAX) for the construction and ownership of the Shepard Energy Centre, an 800 MW combined cycle natural gas power plant located in Calgary. Construction of the Shepard facility is more than 50% completed and is expected to begin commercial operations in early 2015. As part of the agreement, Capital Power has a 20-year tolling agreement with ENMAX, where we will receive fixed capacity payments for our portion of power output from the facility, with associated operations and maintenance costs flowing through to 

ENMAX. For the first three years, 75% of our generation from the Shepard facility will be contracted, which will drop to 50% for the balance of the 20 years. Overall, it is an excellent arrangement for Capital Power – it’s a terrific asset in our home market and with the tolling agreement with ENMAX for a large portion of our output, it allows us to reposition our Alberta portfolio and signifi cantly reduce our business risk by increasing our overall contracted position. 

Second, we announced the Capital Power Energy Centre, a proposed facility with up to 900 MWs of generation capacity that will utilize General Electric’s latest gas turbine technology. This facility would be operational in the 2017-20 timeframe when additional generation in the province will be required to meet growing demand and replace generation from the retirement of coal-fired units. Capital Power will strengthen its position as one of the dominant power producers in Alberta when these two large, efficient natural gas facilities are added to the fl eet. 

## MODERN FLEET AND TECHNOLOGY FOCUS 

During 2012, we completed the sale of our two remaining small hydro assets in British Columbia as the last step in sharpening our operational focus on four fuel types: natural gas, coal, wind and solar. We continued to demonstrate our construction expertise with the completion of the Quality Wind and Halkirk Wind projects on time and under budget. The two wind facilities added 292 MWs to our fleet, which has now grown to more than 3,600 MWs of owned generation – almost double the generation capacity compared to three years ago. 

Our power generation fleet of 16 facilities continues to be both modern and relatively young with an average MW-weighted facility age of only 12 years. The age of our fleet helps keep plant availability high and reduces the risk of unplanned outages. With the future additions of the two Ontario wind facilities (Port Dover and Nanticoke and K2 Wind) and our 50% ownership of the Shepard Energy Centre, the fl eet continues to operate with the latest technologies in power generation. 

Capital Power has a history in utilizing leading technology in Alberta. We introduced super-critical coal technology to Alberta and North America, LMS100 peaking technology to Alberta and Canada, and when the Shepard facility begins commercial operations in 2015, it will be the most effi cient combined cycle facility in Canada and will eventually be surpassed by the expected effi ciency at the Capital Power Energy Centre when it is completed later in the decade. Capital Power does and will continue to own the best fl eet of generation assets in one of the most attractive power markets in North America. It gives us the best peaking responsiveness, the best coal reliability, the lowest environmental impact and lowest cost, and the most competitive natural gas combined cycle facility in Alberta. 

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