ATCO Ltd.
Annual Report 2019

Plain-text annual report

ATCO Ltd. Annual Report FOR THE YEAR ENDED DECEMBER 31, 2019 CONTENTS Message from the Chair & CEO Management’s Discussion and Analysis Consolidated Financial Statements Consolidated Annual Results Consolidated Operating Summary General Information 1 83 163 165 166 Message from the Chair & CEO Dear ATCO Share Owners, Reflecting upon the past year, I cannot help but remark upon the profound political, economic and social changes occurring around the world. We are living in unprecedented times. COVID-19 has swept the globe, prompting governments to implement measures unlike anything ever seen in peacetime. The virus is also leaving significant economic damage in its wake, putting the global economic and financial system on precarious footing, while creating immense uncertainty for our customers and communities. As we look beyond the pandemic, it is likely that we will continue to face rising trade tensions between major economies, geopolitical conflict, and cumbersome government policy. Growing political and economic disenchantment is perhaps the most common outcome of these global trends. CREATING OPPORTUNTUNITY FROM UNCERTAINTY Central to the pervasive disillusionment swirling around the world is the sense of a lack of opportunity. People need hope, and to believe that opportunities are available to make their lives better, for their families and communities. Providing hope and creating opportunity is a foundational pillar in ATCO’s success. Despite today’s uncertainty, we believe there are still many opportunities for our integrated expertise and diverse products and services to make a positive difference in the lives of our customers, the communities we serve, and global constituents at large. Not only are we uniquely positioned to equip governments, corporates and regions with the solutions they need to better their lives and those of their constituents, but we are also poised to make lasting contributions in jurisdictions around the world. Our future is based upon a holistic, long-term perspective—one that resists short- term pressures—as has been our course the past seven decades. Our objective is to create truly sustainable, intergenerational prosperity. This is the same philosophy that has enabled us to deliver premium returns and increase our annual dividend for the past 27 years. In these uncertain times, top-tier operations and a patient approach to finding strategic investments opportunities are paramount. For those reasons, we remain uncompromising in our capital investment discipline and are preserving our financial flexibility to weather economic adversity. These priorities also underpin our strategy, which is to deliver the enduring essentials required for a healthy global economy: housing, energy, logistics and transportation, water, agriculture, and real estate. We began our company by building structures for people to live and work in, and then expanded into delivering the energy required for industry and communities to thrive. Through Neltume Ports, we have an integral role in the transport of goods to global markets, and ATCO Frontec continues to provide logistics support in regions of conflict and natural disaster recovery. Championing an entrepreneurial spirit has long been our hallmark. That is why we have launched SpaceLab—a construct in which our employees from around the world can combine their creativity, subject matter expertise, and execution discipline to advance and commercialize new products and services that align with our strategy. NEW MODELS FOR PROJECT DEVELOPMENT We are also extremely proud of our groundbreaking approach to Indigenous partnerships and economic development. Over the course of the year, we reached several historic milestones and delivered world-class projects that exemplify the innovative, collaborative and customer-focused service that has long defined our method of operating. These projects serve as examples for the world for the types of innovative partnerships needed to advance our shared social and economic goals against a backdrop of global disruption. Take, for example, the completion, energization and sale of Alberta PowerLine (APL)—a true Canadian success story, and an example of how industry and Indigenous communities can work together to develop world- class energy infrastructure that benefits all constituents. APL, a partnership between Canadian Utilities and Quanta Services, was selected in 2014 by the Alberta Electric System Operator to design, build, own and operate the Fort McMurray West 500-kV Transmission Project— the longest 500-kv AC line in the country. Throughout this project, we conducted extensive landowner and community engagement, entailing more than 3,000 face-to-face meetings that produced a permit and license application with no Indigenous or NGO objections. We also implemented a comprehensive Indigenous contracting strategy for the project totalling $85 million, which helped enable us to complete this state-of-the-art transmission line ahead of schedule, on- budget and with an impeccable safety record in March 2019. In June, we announced the sale of APL, and the opportunity for Indigenous communities along the route to obtain a stake in this award-winning $1.6-billion project, providing a stable long-term investment that further enables economic and social development. With the completion of the sale in December 2019, seven Indigenous communities in Alberta: Athabasca Chipewyan First Nation, Bigstone Cree Nation, Gunn Métis Local 55, Mikisew Cree First Nation, Paul First Nation, Sawridge First Nation and Sucker Creek First Nation now have a combined 40 per cent equity ownership in this essential piece of Canadian energy infrastructure. I am deeply appreciative of the collaboration and commitment from all Indigenous communities along the line, whose centuries-old culture, histories, and knowledge helped us in shaping the route and taught us so much about the migratory paths of our wildlife. In October, we celebrated the grand opening of the ATCO Homes For Heroes Village, a community of 15 tiny homes in Calgary, Alberta for transitioning homeless veterans of the Canadian Armed Forces. The community formed by these homes features a resource centre, community gardens and memorials to Canadian soldiers who lost their lives in Afghanistan. Nearly 250 man hours were spent carefully building each home, and they were designed and constructed to the highest standards. Every unit is enhanced for energy efficiency and environmental performance, and to minimize operating costs for residents. But, above all else, they are designed as a community—a place of safety, comfort and fellowship. The Canadian military and its veterans are an institution that continues to inspire pride, perseverance and courage in all Canadians. Their service at home and abroad should be heralded and cherished by our nation’s citizens, and we were profoundly honoured play a small role in deference to their sacrifice. Another proud moment for ATCO in 2019 was the opening of our Clean Energy Innovation Hub in Jandakot, Western Australia. This industry- leading facility is a test bed for solar photovoltaics, battery storage, green hydrogen production and use, as well as hydrogen blending with our natural gas infrastructure. Supported with $1.6 million in Australian Renewable Energy Agency funding, the Hub is already providing invaluable insights into how our gas distribution network can enable customers to achieve their clean energy aspirations. THE FUTURE These are just a few examples of the collaborative models for project development we are pioneering around the world. In every instance, our achievements from 2019 are underpinned by our pursuit of Excellence. Equally, they are made possible by the people of your company—6,500 of the brightest and most determined minds from diverse cultures and an array of global industries, working as ‘One ATCO’ to achieve our shared vision: delivering inspired solutions for a better world. In no uncertain terms, they are our greatest competitive advantage and strength. I am so very proud of the people of ATCO! I believe we are uniquely positioned at the forefront of global trends, and we will focus our investments in those essential services which are universally vital to economic and social development. In closing, I would like to express my deepest appreciation to our Board of Directors. Their wisdom and guidance are at the heart of our success, and I am eminently thankful for their continued support. I am also grateful for the continued support of you, our share owners, as we enter a new decade in ATCO’s long and dynamic history—and a prosperous future for generations to come. Sincerely yours, Nancy Southern Chair & Chief Executive Officer, ATCO Ltd. P.S. In addition to our many 2019 achievements, I have watched with immense pride as the people of ATCO mobilized to help support communities devastated by the Australian bushfires. In early February 2020, we deployed 13 of our modular structures to the heritage community of Mogo in New South Wales as part of the Business Council of Australia’s terrific BizRebuild initiative. In a bid to reinvigorate Mogo’s tourism-dependent economy, our structures are now serving as a pop-up mall for businesses that lost everything in the catastrophic fires, and as an office for the local Aboriginal Land Council. We have pledged an additional $1 million contribution to BizRebuild, which is working with extraordinary efficiency to restore the jobs and small businesses that hold communities together. Individual employees from across our global enterprise have also rallied in support of their friends and colleagues in Australia, collectively raising more than $100,000 in donations to charitable organizations in Australia through our ATCO EPIC program. Our history has long been defined by the courageous response of our people in the face of crisis. Our ability to rapidly deploy our people and our products is the granite-like strength of our company around the world, and we do so because we truly care about the communities where we have the privilege to work and live: Always There. Anywhere. ATCO LTD. MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2019 This Management's Discussion and Analysis (MD&A) is meant to help readers understand key operational and financial events that influenced the results of ATCO Ltd. (ATCO, our, we, us, or the Company) during the year ended December 31, 2019. This MD&A was prepared as of February 26, 2020, and should be read with the Company's audited consolidated financial statements (2019 Consolidated Financial Statements) for the year ended December 31, 2019. Additional information, including the Company's Annual Information Form (AIF), is available on SEDAR at www.sedar.com. The Company is controlled by Sentgraf Enterprises Ltd. and its controlling share owner, the Southern family. The Company includes controlling positions in Canadian Utilities Limited (Canadian Utilities or CU) (52.2 per cent ownership), ATCO Structures & Logistics Ltd. (100 per cent ownership), and ATCO Investments Ltd. (100 per cent ownership). The Company also has a non- controlling 40 per cent equity investment in Neltume Ports S.A. (Neltume Ports). Throughout this MD&A, the Company's earnings attributable to Class I and Class II Shares and adjusted earnings are presented after non-controlling interests. Terms used throughout this MD&A are defined in the Glossary at the end of this document. TABLE OF CONTENTS ATCO: What Sets Us Apart .............................................................................................................................................. ATCO Core Vision and Values ......................................................................................................................................... ATCO Strategies ............................................................................................................................................................... Global Operations ........................................................................................................................................................... Organizational Structure ................................................................................................................................................ Company Overview and Operating Environment........................................................................................................ ATCO Scorecard ............................................................................................................................................................... Strategic Priorities for 2020 ............................................................................................................................................ Corporate Governance ................................................................................................................................................... Performance Overview ................................................................................................................................................... Global Business Unit Performance ............................................................................................................................... Structures & Logistics ................................................................................................................................................... Neltume Ports ............................................................................................................................................................... ATCO Corporate & Other .............................................................................................................................................. Canadian Utilities ......................................................................................................................................................... Electricity ................................................................................................................................................................. Pipelines & Liquids ................................................................................................................................................. Canadian Utilities Corporate & Other.................................................................................................................. Regulatory Developments .............................................................................................................................................. Sustainability, Climate Change and Energy Transition................................................................................................ Other Expenses and Income .......................................................................................................................................... Liquidity and Capital Resources..................................................................................................................................... Share Capital .................................................................................................................................................................... Quarterly Information..................................................................................................................................................... Business Risks and Risk Management .......................................................................................................................... Non-GAAP and Additional GAAP Measures.................................................................................................................. Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares ................................. Reconciliation of Funds Generated by Operations to Cash Flows from Operating Activities ................................ Reconciliation of Capital Investment to Capital Expenditures ................................................................................... Other Financial Information ........................................................................................................................................... Glossary ............................................................................................................................................................................ Appendix 1 Fourth Quarter Financial Information ...................................................................................................... Page 2 3 3 6 7 8 12 18 19 20 24 24 30 32 33 33 36 39 40 45 48 51 56 57 61 70 71 76 77 78 80 81 1 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO: WHAT SETS US APART TRACK RECORD OF DIVIDEND GROWTH We have increased our common share dividend every year for the past 27 years, a track record of which we are very proud. On January 9, 2020, we declared a first quarter dividend of 43.52 cents per share or $1.74 per share on an annualized basis. ATCO continues to grow its dividends consistent with the sustainable growth of its investments. DIVERSIFIED INFRASTRUCTURE HOLDINGS ATCO is focused on investments that put us at the forefront of global trends. We strive to deliver growth within our portfolio with a focus on select opportunities in the essential global services of: housing, logistics and transportation, agriculture, water, real estate, energy and energy infrastructure. GLOBAL GROWTH PLANS In the years ahead, ATCO will continue to grow and expand our business with a focus on disciplined capital investment in select global markets. COMMITMENT TO FINANCIAL STRENGTH Financial strength is fundamental to our current and future success. It ensures we have the financial capacity to grow our existing business and seek future opportunities that will ensure long term intergenerational prosperity. We remain committed to maintaining our strong, investment grade credit ratings. Dividend Growth Diversified Infrastructure Global Growth A Range Credit Rating ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 2 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 2 ATCO CORE VISION AND VALUES EXCELLENCE: THE HEART & MIND OF ATCO "Going far beyond the call of duty. Doing more than others expect. This is what excellence is all about. It comes from striving, maintaining the highest standards, looking after the smallest detail and going the extra mile. Excellence means caring. It means making a special effort to do more." R.D. Southern, Founder, ATCO CORE VISION Delivering inspired solutions for a better world. Always there. Anywhere. CORE VALUES It is ATCO’s Heart and Mind that drives the Company’s approach to service reliability and product quality. Our pursuit of excellence governs the way we act and make decisions. ATCO STRATEGIES ATCO is focused on investments that put us at the forefront of global trends. We strive to deliver growth within our portfolio with a focus on select opportunities in the essential global services of: housing, logistics and transportation, agriculture, water, real estate, energy and energy infrastructure. Innovation, growth and financial strength provide the foundation from which we have built our Company. Our long- term success depends on our ability to continue offering our customers premier, comprehensive and integrated solutions to meet their needs and expand into new markets. These strategic imperatives are supported by our unwavering commitment to operational excellence, our customers, our people and the communities we are privileged to serve around the world. 3 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 3 "Making life easier for our customers by offering integrated solutions around the world." INNOVATION We seek to create a work environment where employees are encouraged to take a creative and innovative approach to meeting our customers' needs. By committing to applied research and development, we are able to offer our customers unique and imaginative solutions that differentiate us from our competitors. GROWTH Long-term sustainable growth is paramount. We approach this strategy by: expanding geographically to meet the global needs of our customers; developing significant, value-creating greenfield projects; and fostering continuous improvement. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 4 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 4 We pursue the acquisition and development of complementary assets and businesses that have future growth potential and provide long-term value for share owners. FINANCIAL STRENGTH Financial strength is fundamental to our current and future success. It ensures ATCO has the financial capacity to fund existing and future capital investments through a combination of predictable cash flows from operations, cash balances on hand, credit facilities and access to capital markets. It enables ATCO to sustain our operations and to grow through economic cycles, thereby providing long-term financial benefits. We continuously review ATCO's holdings to evaluate opportunities to sell mature assets and recycle the proceeds into growing areas of the Company. The viability of such opportunities depends on the outlook of each business as well as general market conditions. This ongoing focus supports the optimal allocation of capital across ATCO. OPERATIONAL EXCELLENCE We achieve operational excellence through high service, reliability, and product quality for our customers and the communities we serve. We are uncompromising about maintaining a safe work environment for employees and contractors, promoting public safety and striving to minimize our environmental impact. We ensure the timely supply of goods and services that are critical to our customers' ability to meet their core business objectives. COMMUNITY INVOLVEMENT ATCO maintains a respectful and collaborative community approach, where meaningful partnerships and positive relationships are built with community leaders and groups that will enhance economic and social development. Community involvement creates the opportunity to develop partnerships with Indigenous and community groups that may be affected by projects and operations worldwide, and build ongoing, positive Indigenous relationships that contribute to economic and social development in their communities. We also engage with governing authorities, regulatory bodies, and landowners. We encourage partnerships throughout the organization. We encourage our employees to participate in community initiatives that will serve to benefit non-profit organizations through volunteer efforts, and the provision of products and services in-kind. FURTHER COMMENTARY REGARDING STRATEGIES AND COMMITMENTS ATCO’s financial and operational achievements in 2019 relative to the strategies outlined above are included in this MD&A, the 2019 Consolidated Financial Statements and 2019 AIF. Further commentary regarding strategies and commitments to growth, financial strength, innovation, operational excellence, and community involvement will be provided in the forthcoming 2019 Management Proxy Circular, Year in Review, and Sustainability Report. The 2019 Management Proxy Circular also contains discussion of the Company's corporate governance practices. ATCO’s website, www.atco.com, is a valuable source for the latest news of the Company’s activities. Prior years’ reports are also available on this website. 5 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 5 GLOBAL OPERATIONS We are privileged to serve more than two million customers around the world, providing integrated, forward-thinking solutions in structures, logistics, electricity, retail energy, pipelines and liquids, commercial real estate, and ports and transportation. From reliable, sustainable energy for homes and businesses to innovative temporary and permanent structures and everything in between, we build communities, energize industries and deliver customer-focused infrastructure solutions. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 6 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 6 ORGANIZATIONAL STRUCTURE (1) ATCO Investments Ltd. (ATCO Investments) includes commercial real estate investments held for sale, lease or development. (2) Regulated businesses include Natural Gas Distribution, Natural Gas Transmission, International Natural Gas Distribution, Electricity Distribution, and Electricity Transmission. (3) Canadian Utilities' 100 per cent owned subsidiary CU Inc. includes Natural Gas Distribution, Natural Gas Transmission, Electricity Distribution, and Electricity Transmission. (4) Alberta PowerLine General Partner Ltd., the general partner of Alberta PowerLine Limited Partnership (Alberta PowerLine or APL), was a partnership between Canadian Utilities Limited (80 per cent) and Quanta Services, Inc. (20 per cent). In December of 2019, Canadian Utilities, along with Quanta Services Inc. completed the previously announced sale of APL. Canadian Utilities received aggregate proceeds of $222 million for its interest in APL and will remain as the operator over its 35-year contract with the Alberta Electric System Operator. (5) Retail Energy, through ATCO Energy Ltd. (ATCOenergy), provides retail, commercial and industrial electricity and natural gas service in Alberta. (6) On September 30, 2019, Canadian Utilities announced the sale of its Canadian fossil fuel-based electricity generation portfolio for aggregate proceeds of $821 million. The sale was completed in the fourth quarter of 2019. The 2019 Consolidated Financial Statements include the accounts of ATCO Ltd., including a proportionate share of joint venture investments and its equity-accounted investment in associate company (Neltume Ports). Principal subsidiaries are Canadian Utilities, of which ATCO Ltd. owns 52.2 per cent (38.3 per cent of the Class A non-voting shares and 90.2 per cent of the Class B common shares), and ATCO Structures & Logistics Ltd., of which ATCO Ltd. owns 100 per cent of the common shares. ATCO Ltd. also owns 100 per cent of the common shares of ATCO Investments Ltd. (ATCO Investments). On December 31, 2019, ATCO purchased Canadian Utilities' 100 per cent ownership interest in ASHCOR Technologies Ltd., an Alberta-based company engaged in marketing fly ash. The 2019 Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the reporting currency is the Canadian dollar. Certain comparative figures throughout this MD&A have been reclassified to conform to the current presentation. ATCO’s website, www.atco.com, is a valuable source for the latest news of the Company’s activities. Prior years’ reports are also available on this website. 7 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 7 COMPANY OVERVIEW AND OPERATING ENVIRONMENT With approximately 6,500 employees and assets of $22 billion, ATCO is a diversified global holding corporation with investments in Structures & Logistics (workforce housing, innovative modular facilities, construction, site support services, and logistics and operations management); Energy Infrastructure (electricity transmission, distribution and generation; natural gas transmission and distribution; energy storage and industrial water solutions; and electricity and natural gas retail sales); Transportation (ports and transportation logistics); and Commercial Real Estate. The long-term success of ATCO is dependent upon our ability to grow the business by expanding into new markets and new business lines. Our steadfast commitment to our five strategic priorities of innovation, growth, financial strength, operational excellence and community involvement has allowed ATCO to endure periods of immense instability while continuing to grow. These priorities underpin our present strategy of delivering essential services for global economic prosperity through Housing, Energy, Logistics and Transportation, Water, Agriculture and Real Estate. At the heart of ATCO’s strategy is the desire to be a unified provider of essential services for our customers, allowing them to avoid the challenges of utilizing a fragmented network of providers. Our unique market position, integrated capabilities, and exceptional customer care combine to create a competitive advantage that is difficult to replicate, and one that continues to deliver value to share owners through exceptional earnings and dividend growth. ATCO achieved adjusted earnings in 2019 of $365 million or $10 million higher than 2018. Higher earnings from Structures & Logistics were mainly due to work on the LNG Canada Cedar Valley Lodge contract. Higher earnings from Neltume Ports were due to a full year of earnings contributions following ATCO's acquisition of a 40 per cent ownership interest of Neltume Ports in September 2018. STRUCTURES & LOGISTICS The Structures & Logistics Global Business Unit's activities are conducted through two complementary businesses: ATCO Structures and ATCO Frontec. Diversified by geography, product and service offerings, these businesses meet the needs of customers and communities globally. Together these businesses offer workforce and residential housing, innovative modular facilities, construction, site support services, workforce lodging services, facility operations and maintenance, defence operations services, and disaster and emergency management services. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 8 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 8 ATCO Structures BUSINESS STRATEGY ATCO Structures' strategy is to continue to grow a base of stable earnings through three main business lines: space rentals, workforce housing, and permanent modular construction. These complementary business lines, combined with our geographic diversity and prudent cost management create a leading, globally competitive business that is balanced to withstand global economic cycles. MARKET OPPORTUNITIES Our goal is to continue growing our global space rental business while streamlining our manufacturing platform to scale quickly and profitably when needed to capture workforce housing contracts. We continue to focus on customer diversification opportunities outside of the natural resource sector. Non-traditional modular markets such as public education facilities, high density urban residential housing, hotels and correctional facilities offer development opportunities. Expansion will be focused in select global markets, including Canada, Australia, Latin America and the U.S. MARKET CHALLENGES The global natural resource sector continues to face economic headwinds, with ongoing lower private sector capital investment. There is a high level of competition in the markets in which we operate both from traditional competitors and new product developers looking to enter or diversify into markets in which ATCO Structures operates. Permanent modular classroom, Victoria, Australia ATCO Frontec BUSINESS STRATEGY ATCO Frontec's strategy is to be a customer service business focused on providing workforce lodging services, facility operations and maintenance services, defence operations services, and disaster and emergency management services. MARKET OPPORTUNITIES Our focus in 2020 will be centered on expanding camp service offerings in new geographies and markets. ATCO Frontec's northern operations are also focused on growth opportunities as the Arctic experiences more global attention and government contracts continue to come up for renewal. Canadian and international contract wins in 2019 in the disaster and emergency management division present an operating platform for continued growth. MARKET CHALLENGES Continued uncertainty in the natural resource sector in Canada will limit the demand for workforce housing and the associated camp services that ATCO Frontec operates. ATCO Frontec is pursuing contracts with customers whose projects remain subject to comprehensive approval processes. Silvertip mining camp, British Columbia 9 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 9 NELTUME PORTS Neltume Ports is a port operator and developer with a diversified portfolio of multipurpose, bulk cargo and container terminals located in Chile, Uruguay, Argentina, and Brazil. Neltume Ports operates 16 port facilities and three port operation services businesses with assets that are highly diversified across both cargo types and volume mix. The business employs approximately 6,100 people and in 2019, it handled 46 million tonnes of product, including copper, forestry products, consumer goods and agricultural products. BUSINESS STRATEGY Neltume Ports' strategy is to grow its businesses through: increasing volumes at existing ports, increasing ownership in existing ports, and investing in port opportunities across the Americas. International growth opportunities allow Neltume Ports to further diversify its cargo type and customer base. Most of the ports are secured by long-term contracts or concessions and are strategically located near major resource or agriculture hubs, as well as high density areas of economic importance. The business environment is also supported by key partnerships with shipping lines and cargo owners. MARKET OPPORTUNITIES Through Neltume Ports' exposure to global trade and transportation, the business is able to capitalize on increasing demand for resources, agriculture and forestry products, as well as growing macroeconomic factors. Latin American Gross Domestic Product (GDP) growth is expected to slow its pace. Neltume Ports' positioning provides some geographic mitigation for slowing global trade and its container and bulk shipments are expected to remain stable. MARKET CHALLENGES Potential changes in macroeconomic conditions could slow the growth trajectory of the business. There is exposure to certain countries with a higher possibility of political unrest and economic volatility. Container port operations, Arica, Chile CANADIAN UTILITIES Canadian Utilities is a diversified global energy infrastructure corporation delivering service excellence and innovative business solutions in Electricity (electricity transmission, distribution, and generation); Pipelines & Liquids (natural gas transmission and distribution, energy storage, and industrial water solutions); and Retail Energy (electricity and natural gas retail sales). Electricity The Electricity Global Business Unit's activities are conducted through two regulated businesses: electricity distribution and electricity transmission, and non-regulated electricity generation and transmission. Together these businesses provide electricity distribution, transmission, generation, and related infrastructure services. BUSINESS STRATEGY Electricity's strategy is to grow its businesses through: investing in regulated electricity distribution and transmission, capitalizing on opportunities to provide long-term contracted electricity transmission services and renewable and natural gas-fired electricity generation. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 10 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 10 MARKET OPPORTUNITIES The electricity regulated businesses expect to see continued investment opportunities based on customer growth and system replacements. Expansion will be focused in select global markets, including Canada, Australia, Latin America and the U.S. Electricity targets select markets with stable regulatory environments and rule of law, excellent long-term growth potential, and strategic fit with our existing asset base and complementary skills. MARKET CHALLENGES Potential changes in macroeconomic conditions or government policy could slow the growth trajectory of these businesses. Electricity transmission towers, Alberta Pipelines & Liquids The Pipelines & Liquids Global Business Unit's activities are conducted through three regulated businesses: natural gas distribution, natural gas transmission, and international natural gas distribution, and one non-regulated business: storage & industrial water. These businesses offer complementary products and services that enable them to deliver comprehensive natural gas distribution and transmission services, energy storage, and industrial water solutions to existing and new customers. BUSINESS STRATEGY Pipelines & Liquids' strategy is to grow its businesses through investing in regulated natural gas distribution and transmission, and becoming a premier hydrocarbon liquids storage and industrial water infrastructure provider. MARKET OPPORTUNITIES The pipelines and liquids regulated businesses expect to see continued growth based on forecasted customer growth and system replacements. Expansion of pipelines in Alberta is expected to increase the need for energy storage to manage supply and demand. Expansion will be focused in select global markets, including Canada, Australia, Latin America, and the U.S. Pipelines & Liquids targets select markets with stable regulatory environments and rule of law, excellent long-term growth potential, and strategic fit with our existing asset base and complementary skills. MARKET CHALLENGES Potential changes in macroeconomic conditions or government policy could slow the growth trajectory of these businesses. Natural gas transmission control station, Drayton Valley, Alberta 11 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 11 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO SCORECARD The following scorecard outlines our performance in 2019. STRATEGIC PRIORITIES INNOVATION New and existing products and services 2019 TARGET 2019 PERFORMANCE Expand permanent modular construction into hotels, schools, affordable housing and seniors' living centres. Explore and test new products and methods of energy delivery to meet customers' future needs. • Expand number of electric vehicle charging stations in Alberta • Reduce or replace diesel consumption with more energy efficient solutions for customers in remote communities Leveraging off of its expertise in modular housing, ATCO Structures partnered with the Homes for Heroes Foundation to build a village of 15 modular tiny homes to provide housing and a robust support system for veterans who are experiencing homelessness. This project was completed on schedule in November. ATCO Structures secured multiple projects for the Government of British Columbia's (BC) supportive housing program. A 52-unit apartment complex in Vernon, BC was successfully completed in June and a 30-unit apartment building in Powell River, BC was substantially complete in December. ATCO Structures was awarded a contract for two Marriott hotels situated near Napa Valley and Oakland, California. Modular supply manufacturing was completed in the fourth quarter of 2019 for the first hotel. ATCO Structures provided classroom spaces for 6,000 students in public and private campuses, and built our first ever police station in Australia. In July, we officially opened the Clean Energy Innovation Hub in Jandakot, Western Australia. This hub uses solar renewable energy to produce hydrogen, enabling us to be part of the next energy wave with hydrogen, and repositioning the international natural gas distribution business as the energy mix evolves. Canadian Utilities continued to expand its number of electric vehicle (EV) direct current, fast charging stations. A total of 15 charging stations were installed in 2019 and additional stations are planned for 2020. In 2019, Canadian Utilities successfully constructed and energized the Fort Chipewyan phase one 600-kW solar farm, which will displace 160,000 litres of diesel annually. Also in 2019, Canadian Utilities and Indigenous Partner Three Nations Energy obtained government funding and executed contracts to build an Indigenous owned phase two 2,200-kW solar farm, with a Canadian Utilities owned energy storage and microgrid controls system. The project is on track to be energized in October 2020. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 12 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 12 STRATEGIC PRIORITIES New and existing products and services 2019 TARGET • Reduce or replace diesel consumption with more energy efficient solutions for customers in remote communities. Demonstrate continuous improvement of existing products and services. • Complete coal-to-natural gas conversion of Battle River unit 5. Launch eCommerce platform and digital strategy for ATCOenergy. Formalize the emergency management and disaster response business offering. 2019 PERFORMANCE ATCO Electric Yukon (AEY), in partnership with the Vuntut Gwitchin First Nation in Old Crow, Yukon, installed solar panels to offset diesel consumption in this fly-in only community. We helped facilitate the installation of the Nation's 940-kW solar array together with the AEY owned battery and microgrid controller. By the summer of 2020, the project will have the potential to save 190,000 litres of diesel fuel annually. This was the first Energy Purchase Agreement contract signed in the Yukon. In our natural gas and electric utility operations we have implemented remote monitoring technology, digitized stations and are in the process of implementing workforce and asset management systems, which will digitize our work processes, creating operational efficiencies and will enable enhanced data collection from our infrastructure. The conversion of coal-fired power generation to lower- emitting natural gas at the Battle River unit 5 Generating Station commenced in 2019. Conversion continued until the sale of the assets in the third quarter to Heartland Generation Ltd. Launch of the ATCOenergy eCommerce platform was achieved in 2019. ATCOenergy's digital strategy was a success in 2019 with a move to more targeted marketing through digital platforms. The digital platforms provide customer insights with respect to buying patterns, areas of interest, understanding of customer journeys and how best to adapt digital mediums to cater to customer requirements. In 2019, a division was formally established within ATCO Frontec to provide disaster and emergency management services. Building on a long history of successful disaster response operations within ATCO, a team is now in place with a mandate to expand this offering. During the course of the year, the division achieved the following: • Negotiated the delivery of a temporary office complex in the Bahamas in response to Hurricane Dorian; • • Secured emergency management consulting contracts for domestic clients; and Awarded a contract to provide workforce housing and camp support services for ECC Constructors LLC’s 1,500-person Tuscan Ridge Lodge near Chico, California. The nine-month contract has supported and will support ECC’s efforts to provide environmental remediation and debris cleanup in the Butte County region of northern California, in particular the community of Paradise, which was devastated by the “Camp Fire” wildfire in November 2018. 13 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 13 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS STRATEGIC PRIORITIES New and existing products and services GROWTH Regulated and long-term contracted capital investment 2019 TARGET Explore and test new products and methods of energy delivery to meet customers' future needs. Invest $1.2 billion across our Regulated Utilities and in long-term contracted assets. • Complete construction of Alberta PowerLine by March 2019. • Commence construction of natural gas cogeneration power plant in Mexico. Expand hydrocarbon and waste storage services. Global expansion Continue asset expansion into select global markets including Canada, Australia, South America, Mexico and the U.S. 2019 PERFORMANCE In 2019, an innovation team was formed to assist in the execution of ATCO’s transformation mandate: to create a culture and capability that is future-ready, aware, creative, competent, and agile. This team will aim to bring ATCO’s strategic vision into reality. Invested $1.2 billion across our Regulated Utilities and long- term contracted assets in 2019 as planned. In March, Alberta PowerLine, a partnership between ATCO and Quanta Services, energized the Fort McMurray West 500-kV Transmission Line three months ahead of the contract schedule target of June, 2019, on-budget and with an impeccable safety record. We began engineering and procurement activities in relation to the 26-MW La Laguna cogeneration power project in Mexico in partnership with RANMAN Energy. Total planned investment with the La Laguna project is approximately $70 million. In November, Canadian Utilities announced the expansion of our existing storage business at the ATCO Heartland Energy Centre near Fort Saskatchewan, Alberta. The expansion will involve the development of a fifth hydrocarbon storage cavern and a pipeline that will connect the facility to the existing pipeline networks in the region. In February, Neltume Ports acquired an additional 15 per cent ownership in Terminal Puerto de Arica S.A. (TPA), bringing its total ownership in TPA to 50 per cent. TPA is a container port located in northern Chile with a diversified cargo mix mainly serving Bolivian trade. In 2019, ATCO Structures increased the workforce housing fleet size by 4 per cent primarily from the execution of workforce housing rental contracts in Western Australia and the U.S. Space rental fleet size increased by 6 per cent in 2019 mainly as a result of ATCO Structures expanding its space rentals presence in the U.S., increasing the fleet size in Central Canada and expanding in Latin America. ATCO Structures expanded its space rentals presence in the U.S. through opening its first sales branch in Aurora, Colorado and moving its corporate office to Houston, Texas. In the fourth quarter of 2019, Canadian Utilities entered into a partnership with Impulso Capital, a Chilean developer, to build and operate the 18-MW Cabrero Solar project. This project, located in southern Chile, will provide clean solar energy to the Chilean electricity grid. The first 3-MW is under construction, and is expected to be operational in 2020. The remaining 15-MW is scheduled for completion in 2021. The total investment in this project is expected to be approximately $24 million. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 14 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 14 STRATEGIC PRIORITIES 2019 TARGET 2019 PERFORMANCE FINANCIAL STRENGTH Credit rating Maintain investment grade credit rating. Access to capital markets Access capital at attractive rates. OPERATIONAL EXCELLENCE Lost-time incident frequency: employees Total recordable incident frequency: employees Customer satisfaction Continue improvement in our safety performance, in addition to comparing favourably to benchmark rates such as Alberta Occupational Health and Safety, U.S. private industry, and industry best practice rates for each of our global operating units. Achieve high service for the customers and communities we serve. Results from customer satisfaction surveys should be consistent with or better than in prior years. Organizational transformation Streamline and gain operational efficiencies. • Adopt lean manufacturing processes and increase production automation for ATCO Structures' North American manufacturing facilities. • Continue to optimize ERP implementation. 15 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 15 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Maintained 'A (low)' credit rating with a stable outlook with DBRS Limited. Maintained 'A-' credit rating with a stable outlook with Standard & Poor's. We strengthened our balance sheet through the sale of the Canadian fossil fuel-based electricity generation assets and Alberta PowerLine which together generated approximately $1 billion of gross proceeds in 2019. The sale of Alberta PowerLine also removed approximately $1.4 billion of debt from Canadian Utilities' balance sheet thereby improving our financial strength. In 2019, we raised $580 million in 30-year debentures at 2.96 per cent, the lowest long-term coupon achieved in the Company’s history. Our lost-time incident frequency compares very favourably to benchmarks such as Alberta Occupational Health and Safety, U.S. private industry and industry best practice rates. ATCO achieved a 25 per cent reduction in the lost time incident rate in 2019 to 0.12 incidents/200,000 hours worked. Our total recordable incident frequency in 2019 was 2.20 incidents/200,000 hours worked which is an increase relative to 2018 results. Within the Alberta electricity and natural gas distribution businesses, more than 94 per cent of customers agreed that Canadian Utilities provides good service. Within our energy retail operations, 75 per cent of customers who interact with call centres are "very satisfied". These results compare favourably to industry averages and are consistent with previous years. The reconfiguration of our Canadian ATCO Structures manufacturing facility and updated building processes contributed to improved manufacturing performance in 2019. In 2019, we continued to optimize the cloud-based Enterprise Resource Planning (ERP) system that was implemented in 2018. Moving from a highly customized environment to one with limited customizations improved the quarterly upgrade installation time and employee productivity. Optimization examples include the development of a standardized reporting catalogue, a reduction in the month end close from 13 days to 5 days, the creation of a standardized delegation of authority matrix, and a reduction in manual journal entries by 50 per cent. STRATEGIC PRIORITIES Organizational transformation 2019 TARGET • Complete strategic review of Canadian electricity generation assets. • Complete strategic review of Alberta PowerLine ownership interest. COMMUNITY INVOLVEMENT Indigenous relations Continue to work together with Indigenous communities to contribute to economic and social development in their communities. 2019 PERFORMANCE In the fourth quarter of 2019, following a strategic review, Canadian Utilities finalized the sale of its 2,276-MW Canadian fossil fuel-based electricity generation portfolio in a series of transactions for aggregate proceeds of $821 million. Following the close of the transaction, Canadian Utilities continues to own 244-MW of electricity generation assets in Canada, Mexico and Australia. The remaining generation portfolio is 90 per cent contracted with an 8 year average contract life. In December of 2019, following a strategic review, Canadian Utilities, along with Quanta Services Inc. completed the sale of Alberta Powerline (APL), a partnership between Canadian Utilities (80 per cent) and Quanta Services Inc. (20 per cent). Canadian Utilities received aggregate proceeds of $222 million. Canadian Utilities will remain as the operator of APL over its 35-year contract with the Alberta Electric System Operator. ATCO awarded $66,000 to 53 students across Canada for the ATCO Indigenous Education Awards Program. Our Indigenous Relations team held 11 Corporate Indigenous Training sessions for 242 ATCO employees in eight locations across Alberta, Yukon and the Northwest Territories. We sponsor the University of Calgary Indigenous Relations Leadership Certificate, a four day program which helps participants gain a better understanding of the issues facing Canada’s Indigenous population today. Seven Indigenous communities in Alberta purchased 40 per cent of Alberta PowerLine, a partnership between ATCO and Quanta Services. This investment will enable the communities to become direct owners and participants in Alberta’s energy sector. We will continue to partner with Indigenous communities to establish maintenance and operational contracts over our 35-year contract as operator with the Alberta Electric System Operator. In 2019, we opened the Six Seasons Garden at our Jandakot Operations Centre in Western Australia, with the objective to strengthen our relationships with Aboriginal and Torres Strait Islander Peoples. The Garden recognizes and celebrates the Noongar people, who have lived in the south-west of Western Australia for more than 45,000 years and are one of the largest Aboriginal cultural blocks in Australia. In 2019, ATCO Mexico launched the Child Nutrition Project in partnership with the non-profit organization, Mexico Tierra de Amaranto. We are working to ensure that elementary students in the Indigenous community of Mecuilca, in the state of Veracruz, receive the nutrition they need to be successful in school. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 16 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 16 STRATEGIC PRIORITIES ATCO EPIC (Employees Participating in Communities) 2019 TARGET Continue to administer the employee-led campaign to give employees the opportunity to contribute to charitable organizations in the communities in which they work. 2019 PERFORMANCE With the combined efforts of our employees around the world, we pledged more than $2.7 million to support hundreds of community charities through our annual ATCO EPIC campaign, taking the program’s cumulative fundraising total to more than $44 million since its inception in 2006. ATCO made a gift in-kind donation of $1.5 million to the Homes for Heroes Foundation and provided our expertise in the design, build, manufacture, delivery and placement of units on ATCO-supplied pile foundations. ATCO's employees volunteered 7,731 hours of their time in the communities in which they work. 17 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 17 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS STRATEGIC PRIORITIES FOR 2020 The following table outlines our strategic priorities for 2020. 2020 PRIORITIES INNOVATION New and existing products and services GROWTH Regulated and long- term contracted capital investment Global expansion Continue to expand permanent modular construction into hotels, schools, affordable housing and seniors' living centers. Explore and test new products and methods of energy delivery to meet customers' future needs. • Continue to expand number of electric vehicle charging stations in Alberta. • Continue to reduce or replace diesel consumption with more energy efficient solutions for customers in remote communities. Demonstrate continuous improvement of existing products and services. Complete ATCO Park real estate land use amendments to improve value and future optionality. Continue to invest across our Regulated Utilities and in long-term contracted assets. Continue expansion into select global markets including: Canada, Australia, Latin America. Reposition ATCO Structures' rental fleet into growing regions and further expand space rental business in selected regions. Expand ATCO Frontec's North American business and diversify the customer base. Seek opportunities with Neltume Ports' available cash in brownfield, greenfield and M&A opportunities. Increase number of customers for international natural gas distribution in Australia. FINANCIAL STRENGTH Credit rating Maintain investment grade credit rating. Access to capital markets Access capital at attractive rates. OPERATIONAL EXCELLENCE Lost-time incident frequency: employees Compare favourably to safety benchmarks. Total recordable incident frequency: employees Customer satisfaction Achieve high service for the customers and communities we serve. Results from customer satisfaction surveys should be consistent with or better than prior years. Streamline and gain operational efficiencies. Organizational transformation • • • Improve processes and increase production automation for ATCO Structures' North American manufacturing facilities. Continue to improve global manufacturing and sourcing strategies to increase ATCO Structures' manufacturing competitive advantage. Continue to optimize enterprise resource planning, workforce and asset management, and computerized maintenance management systems. COMMUNITY INVOLVEMENT Indigenous relations Continue to work together with Indigenous communities to contribute to economic and social development in their communities. ATCO EPIC (Employees Participating in Communities) Continue to administer the employee-led campaign to give employees the opportunity to contribute to charitable organizations in the communities in which they work. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 18 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 18 CORPORATE GOVERNANCE Ensuring that our business operates in a transparent, ethical and accountable manner is at the core of creating strong and sustainable value for our share owners and in promoting the Company's well-being over the long term. We do not believe in a one-size fits all approach to governance. Our Board of Directors has designed and implemented a unique and effective system of checks and balances that recognize the need to provide autonomy to our various business units, while prudently managing our financial resources. This fit-for-purpose approach to governance has worked exceedingly well over the years, providing our Board of Directors and senior management team with the foundation to create long-term intergenerational value for our share owners. Following are some of the highlights of our model for corporate governance. For a more complete picture, please see the Governance section of the 2019 Management Proxy Circular, which will be available in March 2020. From left to right: Michael Rayfield, Denis Ellard, Robert Booth, Charles Wilson, Nancy Southern, Linda Southern-Heathcott, Roger Urwin, Susan Werth, Robert Routs Our Board of Directors The role of our Board of Directors has evolved alongside our business, providing oversight to an organization with a growing global footprint and a diverse, yet complementary suite of premier products and services. The Board strives to ensure that its corporate governance practices provide for the effective stewardship of the Company, and it regularly evaluates those practices to ensure they are in keeping with the highest standards. Key elements of our corporate governance system include the oversight and diligence provided by the Board, the lead director, the Audit & Risk Committee and our Corporate Governance - Nomination, Compensation and Succession Committee (GOCOM). Although not required by securities laws, some of our governance tools, such as the use of Designated Audit Directors (DADs), also reinforce the effectiveness and rigor of our governance model. Much like our business operations, the strength of our Board of Directors is due in no small part to the diverse nature of skills, talent and experience each member brings to Board deliberations. In 1995, ATCO was among the first public companies in Canada to introduce the concept of a lead director. Mr. Charles W. Wilson is the current lead director for ATCO, and was appointed to this position on April 1, 2003. The lead director provides the Board with the leadership necessary to ensure independent oversight of management. The lead director is an independent director and must be a member of GOCOM. Designated Audit Directors Distinctly unique to ATCO are Designated Audit Directors who are directors of either ATCO or Canadian Utilities. Each DAD is assigned to one of our Global Business Units to provide oversight based on their strengths and experience in various industry sectors. Each DAD meets quarterly with the senior leadership of their Global Business Unit or business division, and holds annual meetings with internal and external auditors. In addition, they review their respective businesses' financial statements and operating results, discuss risks with management, and report on both operating results and risks to our Audit & Risk Committee. 19 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 19 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS PERFORMANCE OVERVIEW FINANCIAL METRICS The following chart summarizes key financial metrics associated with our financial performance. ($ millions, except per share data and outstanding shares) 2019 2018 2017 Year Ended December 31 Key Financial Metrics Revenues Adjusted earnings (1) Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Electricity Pipelines & Liquids Canadian Utilities Corporate & Other Adjusted earnings ($ per share) (1) Earnings attributable to Class I and Class II Shares Earnings attributable to Class I and Class II Shares ($ per share) Total assets Long-term debt and non-recourse long-term debt Class I and Class II Share owners' equity Cash dividends declared per Class I and Class II Share (cents per share) Funds generated by operations (1) Capital investment (1) Other Financial Metrics Weighted average Class I and Class II Shares outstanding (thousands): Basic Diluted 4,706 365 4,888 4,600 355 335 37 15 (6) 221 137 (39) 3.19 513 4.49 15 4 17 228 130 (39) 3.10 328 2.87 6 — 10 210 144 (35) 2.93 219 1.92 21,703 23,344 21,786 9,436 4,000 1.62 1,927 1,324 10,798 3,755 1.51 1,897 2,518 9,973 3,527 1.31 1,813 1,821 114,370 114,394 114,352 114,746 114,788 114,822 (1) Additional information regarding these measures is provided in the Non-GAAP and Additional GAAP Measures section of this MD&A. REVENUES Revenues in 2019 were $4,706 million, $182 million lower than in 2018. Lower revenues were mainly due to the completion of construction activity at APL in the first quarter of 2019 and forgone revenue following the sale of the Canadian fossil fuel-based electricity generation portfolio in the third quarter of 2019. Lower revenues were partially offset by higher revenues in ATCO Structures due to the LNG Canada Cedar Valley Lodge contract and higher flow- through revenues in natural gas distribution for third party franchise and transmission fees, and growth in the regulated rate base. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 20 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 20 ADJUSTED EARNINGS Our adjusted earnings in 2019 were $365 million or $3.19 per share, compared to $355 million or $3.10 per share recorded in 2018. Higher earnings were recorded in Structures & Logistics, and Neltume Ports. The primary drivers of adjusted earnings results were as follows: • Structures & Logistics adjusted earnings in 2019 were $22 million higher than in 2018. The increase was mainly due to incremental earnings from the LNG Canada Cedar Valley Lodge contract. • Neltume Ports adjusted earnings in 2019 were $11 million higher than in 2018. ATCO's first full year of ownership in Neltume Ports was 2019. On September 12, 2018, ATCO invested in a 40 per cent interest in Neltume Ports. • ATCO Corporate & Other adjusted earnings in 2019 were $23 million lower than in 2018, mainly due to higher interest expense associated with the financing of ATCO's investment in Nelltume Ports and lower earnings from ATCO Investments, which completed two commercial real estate transactions in the third quarter of 2018. • Canadian Utilities adjusted earnings in 2019 were comparable to 2018. Adjusted Earnings ($ Millions) Additional detail on the financial performance of our Global Business Units is discussed in the Global Business Unit Performance section of this MD&A. EARNINGS ATTRIBUTABLE TO CLASS I AND CLASS II SHARES Earnings attributable to Class I and Class II Shares were $513 million in 2019, $185 million higher compared to 2018. Earnings attributable to Class I and Class II Shares include timing adjustments related to rate-regulated activities, unrealized gains or losses on mark-to-market forward and swap commodity contracts, one-time gains and losses, significant impairments, and items that are not in the normal course of business or a result of day-to-day operations. These items are not included in adjusted earnings. In 2019, Canadian Utilities closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation business and its ownership interest in Alberta PowerLine, resulting in ATCO recording a gain on sale of operations of $65 million (after non-controlling interests). Transaction costs recorded in previous quarters that relate to the sale of Alberta PowerLIne have been consolidated into this gain. As the gain is related to a series of one-time transactions, it is excluded from adjusted earnings. 21 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 21 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS More information on these and other items is included in the Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares section of this MD&A. ASSETS, DEBT & EQUITY Total assets of $21.7 billion in 2019 were $1.6 billion lower compared to 2018. Long-term debt and non-recourse long-term debt decreased by approximately $1.4 billion in 2019 compared to 2018. These changes were mainly due to the sale of Canadian Utilities' ownership interest in Alberta PowerLine and sale of its Canadian fossil fuel-based electricity generation business. Class I and Class II Share owners' equity increased by $245 million in 2019 compared to the prior year mainly due to 2019 earnings, partially offset by dividends paid to share owners. COMMON SHARE DIVIDENDS Dividends paid to Class I and Class II Share owners totaled $186 million in 2019. On January 9, 2020, the Board of Directors declared a first quarter dividend of 43.52 cents per share. We have increased our common share dividend each year since 1993. FUNDS GENERATED BY OPERATIONS Funds generated by operations were $1,927 million in 2019, $30 million higher than in 2018. The increase was mainly due to higher funds generated by operations in Structures & Logistics and the Alberta Utilities, partially offset by lower funds generated as a result of the sale of the Canadian fossil-fuel based electricity business in the third quarter of 2019. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 22 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 22 CAPITAL INVESTMENT Total capital investment of $1.3 billion in 2019 was $1.2 billion lower than the previous year mainly due to the completion of construction activities in Alberta PowerLine in the first quarter of 2019, the 2018 investment in Neltume Ports and the acquisition of a long-term contracted hydroelectric power station in Veracruz, Mexico. Capital spending in the Regulated Utilities accounted for $1,035 million or 78 per cent of total capital invested in 2019. The remaining $289 million or 22 per cent invested in 2019 included the completion of construction at Alberta PowerLine, global expansion of the ATCO Structures space rental fleet, planned capital maintenance in the electricity generation fleet as well as the acquisition of an increased port ownership interest by Neltume Ports. 23 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 23 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS GLOBAL BUSINESS UNIT PERFORMANCE REVENUES Structures & Logistics revenues of $245 million in the fourth quarter of 2019 were $105 million higher than the same period in 2018, mainly due to incremental revenues from ATCO Structures' LNG Canada Cedar Valley Lodge contract. Structures & Logistics revenues of $803 million in 2019 were $292 million higher than the same period in 2018. Higher revenues were mainly due to incremental revenue from the LNG Canada Cedar Valley Lodge contract, and ATCO Frontec North American camp services and maintenance contracts. Also contributing to higher ATCO Structures revenue were higher space rental activity, as well as higher trade sale and rental activity in workforce housing. ADJUSTED EARNINGS ($ millions) ATCO Structures ATCO Frontec Total Structures & Logistics Adjusted Earnings Three Months Ended December 31 Year Ended December 31 2019 2018 Change 2019 2018 Change 13 1 14 7 (2) 5 6 3 9 32 5 37 15 — 15 17 5 22 Structures & Logistics recorded adjusted earnings of $14 million in the fourth quarter of 2019 and $37 million in the full year of 2019, $9 million and $22 million higher than the same periods in 2018. The increase was mainly due to incremental earnings from ATCO Structures' LNG Cedar Valley Lodge contract and incremental ATCO Frontec earnings from North American camp services and maintenance contracts. Detailed information about the activities and financial results of the Structures & Logistics businesses is provided in the following sections. ATCO STRUCTURES ATCO Structures manufactures, sells and leases transportable workforce and residential housing and space rental products. Space rentals sells and leases mobile office trailers in various sizes and floor plans to suit our customers’ needs. Workforce housing delivers modular workforce housing worldwide, including short-term and permanent modular construction, pre-fabricated and relocatable modular buildings. ATCO Structures recorded adjusted earnings of $13 million in the fourth quarter of 2019 and $32 million in the full year of2019, $6 million and $17 million higher than the same periods in 2018. Higher adjusted earnings were mainly due to continued work on the LNG Canada Cedar Valley Lodge contract, higher space rental activity in Canada and higher workforce housing sale and rental activity in the United States and Australia. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 24 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 24 Rental Fleet Statistics The following table compares ATCO Structures' manufacturing hours and rental fleet for the fourth quarter and full year of 2019 and 2018. North America Manufacturing hours (thousands) 252 156 62% 988 487 103% Three Months Ended December 31 Year Ended December 31 2019 2018 Change 2019 2018 Change Global Space Rentals Number of units Average utilization (%) Average rental rate ($ per month) Global Workforce Housing Number of units Average utilization (%) Average rental rate ($ per month) 16,353 15,321 7% 16,353 15,321 73 605 74 548 (1%) 10% 72 568 75 519 2,866 2,774 54 36 3% 18% 2,866 2,774 48 40 1,882 1,969 (4%) 1,872 1,877 7% (3%) 9% 3% 8% — The increase in manufacturing hours in the fourth quarter and full year of 2019 was mainly due to increased LNG Canada Cedar Valley Lodge manufacturing activity and manufacturing of additional units to support the expansion of the Canadian and U.S. space rental fleet. The increase in the number of space rental units was mainly due to the strategic expansion of the space rental fleet in the United States, central Canada, British Columbia (BC), Mexico and Chile. The decrease in utilization during the fourth quarter and full year of 2019 was mainly driven by timing between the addition of new units to the fleet and deployment of units on rental contracts. The increase in the average rental rate was mainly due to the addition of new fleet assets rented out at higher rental rates combined with strong activity in the construction sector, particularly in central Canada. The increase in the number of workforce housing units was mainly due to securing a large workforce housing rental project in Western Australia partially offset by used fleet sales of non-utilized units in Canada, the U.S., and Australia. The increase in utilization was mainly due to rental projects in Western Australia, California and British Columbia. The decrease in the average rental rate was primarily due to the lower rates in Canada and Australia partially offset by higher rates in the U.S. RECENT DEVELOPMENTS Canada LNG Canada Cedar Valley Lodge Contract ATCO Structures, through its joint ventures with Bird Construction and the Haisla Nation, continues to progress on both manufacturing and site construction work for the LNG Canada Cedar Valley Lodge contract. Manufacturing commenced in the first quarter of 2019 and is planned to continue through 2020. Throughout the fourth quarter of 2019, modules were delivered and installed on site. The facility is being built to house workers involved in the construction of LNG Canada’s natural gas liquefaction and export facility in Kitimat, BC. The project is one of the largest accommodation facilities ever built in Canada. 25 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 25 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS LNG Canada Cedar Valley Lodge - Kitimat, BC Homes For Heroes During the fourth quarter of 2019, ATCO Structures completed the handover of Homes for Heroes ATCO Village, a community of 15 modular tiny homes in Calgary, Alberta to go along with a robust support system for veterans of the Canadian Armed Forces who are experiencing homelessness. ATCO Village, Homes for Heroes - Calgary, Alberta ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 26 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 26 United States Permanent Modular Construction - Marriott hotels During the fourth quarter of 2019, ATCO Structures successfully completed the manufacturing supply of Marriott branded units for the Marriott Fairfield Inn located near Oakland, California under a $7 million contract. A second $7 million manufacturing supply contract for a Marriott branded hotel in Napa Valley, California is in production and expected to be complete in the first quarter of 2020. Rendering of Marriott Fairfield - Napa Valley, California Supplementing the established workforce housing business line and growth in permanent modular construction in the United States, ATCO Structures has established a new space rentals branch in Aurora, Colorado. This permanent operation enhanced ATCO Structures' expansion in the U.S. space rentals market in 2019 and resulted in a fleet increase to 398 units at 77 per cent utilization. Tuscan Ridge In 2019, ATCO Structures was awarded a $50 million contract for the installation and rental of a 1,500-person camp for fire disaster relief in Chico, California. The contract began in March 2019 and continued until the end of January 2020. Australia ATCO Structures is working on the design, manufacture and installation of a 400-room, two story accommodation village in Karratha, Western Australia. The total contract value is $22 million with final handover expected in May 2020. In the fourth quarter of 2019, ATCO Structures began work on a $47 million contract to relocate and install an 800-room camp in Western Australia with completion planned for March 2020. 800-room camp - near Karratha, Western Australia 27 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 27 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO FRONTEC ATCO Frontec provides facility operations and maintenance services, workforce lodging and support services, defence operations services, and disaster and emergency management services. ATCO Frontec recorded adjusted earnings of $1 million in the fourth quarter of 2019, $3 million higher than the same period in 2018. Higher adjusted earnings were mainly due to incremental earnings from North American camp services and maintenance contracts which include the Tuscan Ridge contract in Chico, California, the Silvertip mining contract in northern BC, the Coastal GasLink Pipeline support services project in BC, and the Elkford Lodge TECK Coal contract in BC. ATCO Frontec recorded adjusted earnings of $5 million in 2019, $5 million higher than the same period in 2018. Higher adjusted earnings were mainly due to incremental earnings from North American camp services and maintenance contracts which includes the Tuscan Ridge contract in Chico, California and the BC Hydro Site C Two Rivers Lodge in Northern BC. RECENT DEVELOPMENTS Canada BC Hydro Site C Two Rivers Lodge In 2016, ATCO Frontec commenced an operations and maintenance contract at the BC Hydro Site C Two Rivers Lodge for up to 1,750 workers. The original operations and maintenance services contract is in place until late 2022. In May 2019, ATCO Frontec was awarded an expansion to the operations and maintenance contract at the BC Hydro Site C Two Rivers Lodge. ATCO Frontec will provide operations and maintenance services for an additional 150 new workforce housing accommodation rooms being installed by ATCO Structures. The total value of the ATCO Structures rental and ATCO Frontec expansion contracts is $15 million. BC Hydro Site C Two Rivers Lodge, Near Fort St. John, British Columbia Elkford Lodge ATCO Frontec was awarded a $10 million contract by TECK Coal Limited for camp maintenance including food services, housekeeping and janitorial services for the 500-person Elkford Lodge in British Columbia that was supplied by ATCO Structures. The contract began in May 2019 and will continue until late 2021. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 28 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 28 International NATO Headquarters Communications and Infrastructure Systems Support In November 2019, ATCO Frontec was awarded a $2 million one-year contract extension to provide NATO Support and Procurement Agency (NSPA) communication and information systems support to the NATO headquarters at the Camp Butmir near Sarajevo, Bosnia. In October 2019, ATCO Frontec won a rebid to provide NSPA around-the-clock fire protection services to NATO troops, known as Kosovo Force, at the Novo Selo Camp near Pristina, Kosovo. The five-year contract is valued at $3 million. Papa Air Base Facilities Management In May 2019, ATCO Frontec was awarded a $2 million contract extension by NSPA NATO Airlift Management Program to provide facilities maintenance, cleaning, landscaping, snow and ice clearing, and pest control at Papa Air Base in Hungary. The extension will continue until April 2021. U.S. Tuscan Ridge In April 2019, ATCO Frontec was awarded a $20 million contract for camp maintenance including food services, housekeeping and janitorial services for the 1,500-person camp supplied by ATCO Structures for fire disaster relief in Chico, California. The contract continued until the end of January, 2020. 29 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 29 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Neltume Ports, a subsidiary of Ultramar, is a port operator and developer with a diversified portfolio of 16 multipurpose, bulk cargo and container port facilities and three port operations services. The business is located primarily in Chile, with smaller operations in Uruguay, Argentina, and Brazil. ADJUSTED EARNINGS ($ millions) Neltume Ports Three Months Ended December 31 Year Ended December 31 2019 2018 Change 2019 2018 Change 4 3 1 15 4 11 Neltume Ports recorded adjusted earnings of $4 million in the fourth quarter of 2019, $1 million higher than same period in 2018 mainly due to higher container volume at the Terminal Pacifico Sur (TPS) port. Neltume Ports recorded adjusted earnings of $15 million in 2019, $11 million higher than in 2018. ATCO's first full year of ownership in Neltume Ports was 2019. On September 12, 2018, ATCO invested in a 40 per cent interest in Neltume Ports. RECENT DEVELOPMENTS TPA Ownership Interest Increase In February 2019, Neltume Ports acquired an additional 15 per cent ownership in Terminal Puerto Arica S.A. (TPA), bringing the total ownership to 50 per cent. This acquisition gave Neltume Ports operational control of TPA, strengthening its port operator role in the concession. TPA is a container port located in northern Chile with a diversified cargo mix mainly servicing Bolivian trade. ATCO paid $9 million for its equity share of this investment. TGN Contract In July 2019, Terminal Graneles del Norte (TGN), a Neltume port, was awarded an important 25-year copper concentrate loading contract. This contract aligns with our growth strategy to secure a significant share of Chilean mining related activity, triggers the development of a new copper concentrate loading terminal, and extends the existing TGN concession arrangement for another 15 years, from 2026 to 2041. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 30 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 30 New Port - AutoMobile International Terminal In January 2020, Neltume Ports entered into a 50/50 joint venture (JV) partnership with Terminal Zarate to build and operate a roll-on roll-off (RoRo) terminal in Mobile, Alabama. The JV will invest 30 per cent of the construction costs. Neltume Ports’ portion of the investment will be approximately US$9 million and will be funded with existing cash reserves. The Alabama State Port Authority will provide the remaining capital funding. The JV will operate the terminal beginning in 2021 under a 10-year concession agreement with two consecutive 10-year extensions at the JV’s election for a total of up to 30 years. The port will primarily support the import and export needs of the growing local automotive sector in the region. Neltume Ports’ partner, Terminal Zarate, a member company of Grupo Murchison, provides port operations services, integrated logistics, warehousing and other related business activities in Argentina and Uruguay. Terminal Zarate operates the largest RoRo terminal in Latin America. This investment opportunity allows Neltume Ports to grow and diversify, by both geography and product type, while partnering with an experienced and respected partner. 31 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 31 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO Corporate & Other contains ATCO Investments which is a commercial real estate business that holds investments for sale, lease or development. ATCO Corporate & Other also includes the global corporate head office in Calgary, Canada, ATCO licensing fees received, and financing expenses associated with the Neltume Ports investment. ADJUSTED EARNINGS ($ millions) 2019 2018 Change 2019 2018 Change ATCO Corporate & Other (9) 2 (11) (6) 17 (23) Three Months Ended December 31 Year Ended December 31 ATCO Corporate & Other adjusted earnings in the fourth quarter of 2019 were $11 million lower than the same period in 2018 mainly due to the timing of certain expenditures and higher interest expense associated with the financing of ATCO's investment in Neltume Ports. ATCO Corporate & Other adjusted earnings in the full year of 2019 were $23 million lower than in 2018 mainly due to higher interest expense associated with the financing of ATCO's investment in Neltume Ports and lower income from ATCO Investments, which completed two commercial real estate transactions in 2018. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 32 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 32 Canadian Utilities is a diversified global energy infrastructure corporation delivering service excellence and innovative business solutions in Electricity (electricity transmission, distribution and generation); Pipelines & Liquids (natural gas transmission and distribution, energy storage, and industrial water solutions); and Retail Energy (electricity and natural gas retail sales). ELECTRICITY REVENUES Revenues of $419 million in the fourth quarter and $2,155 million in the full year of 2019 were $218 million and $703 million lower than the same periods in 2018. Lower revenues were mainly due to reduced construction activity at Alberta Powerline, forgone revenue associated with the sale of the Canadian fossil fuel-based electricity generation portfolio in the third quarter of 2019, and the Balancing Pool's termination of the Battle River unit 5 PPA in the third quarter of 2018. Lower revenues were partially offset by higher flow through revenues in electricity transmission for the amortization of customer contributions in the fourth quarter of 2019. ADJUSTED EARNINGS ($ millions) 2019 2018 Change 2019 2018 Change Three Months Ended December 31 Year Ended December 31 Regulated Electricity Electricity Distribution Electricity Transmission Total Regulated Electricity Adjusted Earnings Non-regulated Electricity Independent Power Plants Thermal PPA Plants International Electricity Generation Alberta PowerLine Total Non-regulated Electricity Adjusted Earnings Total Electricity Adjusted Earnings 16 27 43 — — 2 1 3 46 14 22 36 6 3 1 8 18 54 2 5 7 (6) (3) 1 (7) (15) (8) 66 106 172 15 15 6 13 49 59 92 151 9 44 6 18 77 221 228 7 14 21 6 (29) — (5) (28) (7) Electricity earnings of $46 million in the fourth quarter of 2019 were $8 million lower than the same period in 2018. Lower earnings were mainly as a result of the forgone earnings from the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and lower earnings contributions from Alberta PowerLine mainly due to the completion of construction activities in the first quarter of 2019. Lower earnings were partially offset by the positive impact of the electricity transmission 2018-2019 general tariff application (GTA) decision which was received in July 2019, overall cost efficiencies and lower income taxes. Electricity earnings of $221 million in 2019 were $7 million lower than in 2018. Lower earnings were mainly due to favourable earnings realized in 2018 associated with the Balancing Pool’s termination of the Battle River unit 5 PPA and the associated availability incentive and performance payments, forgone earnings from the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019, and lower earnings contributions from Alberta PowerLine mainly due to the completion on construction activities in the first quarter of 33 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 33 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 2019. Lower earnings were partially offset by the positive impact of the electricity transmission 2018-2019 GTA decision which was received in July 2019, overall cost efficiencies and lower income taxes. REGULATED ELECTRICITY Regulated Electricity provides regulated electricity distribution, transmission and distributed generation mainly in northern and central east Alberta, the Yukon and the Northwest Territories. Electricity Distribution In the fourth quarter of 2019, electricity distribution adjusted earnings of $16 million were $2 million higher compared to the same period in 2018. Higher earnings were mainly due to cost efficiencies and lower income taxes. In 2019, electricity distribution adjusted earnings of $66 million were $7 million higher compared to 2018. Higher earnings were mainly due to the ongoing implementation of cost efficiencies, lower income taxes, and continued growth in the rate base. Electricity Transmission Electricity transmission recorded adjusted earnings of $27 million in the fourth quarter of 2019 and $106 million in the full year of 2019, $5 million and $14 million higher than the same periods in 2018. Higher adjusted earnings were mainly due to the impact of the 2018-2019 GTA decision received in July 2019 which approved higher rates for 2018 and 2019, as well as costs efficiencies and lower income taxes. NON-REGULATED ELECTRICITY Non-regulated electricity activities supply electricity from hydroelectric and natural gas generating plants in western Canada, Australia and Mexico and non-regulated electricity transmission in Alberta. Independent Power Plants Independent Power Plants recorded adjusted earnings of nil in the fourth quarter of 2019, $6 million lower than the same period in 2018. Lower earnings were mainly due to the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019. Lower earnings in the fourth quarter of 2019 were also due to earnings associated with the sale of the Barking Power assets that were recognized in the fourth quarter of 2018. Independent Power Plants recorded adjusted earnings of $15 million in 2019, $6 million higher compared to the same period in 2018. Higher earnings were mainly due to increased market prices in the first nine months of 2019 and cost efficiencies, partially offset by higher planned maintenance costs in the first nine months of 2019 and earnings associated with the sale of the Barking Power assets in the fourth quarter of 2018. Thermal PPA Plants Thermal PPA Plants recorded adjusted earnings of nil in the fourth quarter of 2019 as a result of the sale of the Canadian fossil fuel-based portfolio in the third quarter of 2019. Earnings of $15 million in 2019, were $29 million lower compared to the same period in 2018. Lower earnings were mainly due to favourable earnings realized in 2018 associated with the Balancing Pool's termination of the Battle River unit 5 PPA, and forgone earnings associated with the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019. International Electricity Generation International electricity generation supplies electricity in Australia and Mexico. In Australia, two natural gas-fired generation plants supply electricity in Australia: the Osborne plant in South Australia and the Karratha plant in Western Australia. Source Energy Co. also provides energy solutions to residential and commercial customers in Australia using a combination of grid electricity and solar energy. In Mexico, electricity is supplied from a distributed electricity generation station near San Luis Potosí and a hydroelectric generation station near Veracruz. International electricity generation adjusted earnings of $2 million in the fourth quarter of 2019 were $1 million higher compared to the same period in 2018. Higher earnings were mainly due to the earnings impact of an unplanned outage at the Osborne plant in the fourth quarter of 2018. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 34 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 34 International electricity generation adjusted earnings of $6 million in the full year 2019 were comparable to 2018. Alberta PowerLine Prior to its sale, Alberta PowerLine (APL) was a partnership between Canadian Utilities (80 per cent) and Quanta Services, Inc. (20 per cent), with a 35-year contract from the Alberta Electric System Operator (AESO) to design, build, own, and operate the 500-km, Fort McMurray West 500-kV Transmission project, running from Wabamun, near Edmonton to Fort McMurray, Alberta. APL's adjusted earnings of $1 million in the fourth quarter of 2019, were $7 million lower compared to the same period in 2018. Lower earnings were mainly due to an Early Energization Incentive recorded in fourth quarter of 2018 and the completion of construction activities in the first quarter of 2019. APL's adjusted earnings of $13 million in the full year of 2019 were $5 million lower than in 2018 mainly due to an Early Energization Incentive recorded in fourth quarter of 2018, and the completion of construction activities in the first quarter of 2019, partially offset by lower income taxes from a lower Alberta corporate income tax rate and higher service concession arrangement interest income. ELECTRICITY RECENT DEVELOPMENTS Sale of Canadian Fossil Fuel-Based Electricity Generation Business In the fourth quarter of 2019, Canadian Utilities finalized the sale of its 2,276-MW Canadian fossil fuel-based electricity generation portfolio in a series of transactions. In September, Canadian Utilities sold 10 partly- or fully-owned natural gas-fired and coal-fired electricity generation assets in Alberta and BC to Heartland Generation Ltd., an affiliate of Energy Capital Partners. In August, Canadian Utilities sold its 50 per cent ownership interest in the 580-MW Brighton Beach joint venture, located in Windsor, Ontario, to Ontario Power Generation Inc. In July, Canadian Utilities completed the sale of its 50 per cent ownership interest in the 260-MW Cory Cogeneration Station to SaskPower International. Canadian Utilities received $821 million of aggregate proceeds on the sale. Following the close of the transactions, Canadian Utilities continues to own 244-MW of electricity generation assets in Canada, Mexico and Australia that are 90 per cent contracted with a weighted average contract term of 8 years. Sale of ASHCOR Technologies On December 31, 2019, Canadian Utilities sold its 100 per cent investment in ASHCOR Technologies Ltd. (Ashcor), an Alberta-based company engaged in marketing fly ash, to ATCO for aggregate consideration of $35 million. Ashcor was previously reported in the Electricity segment in the Thermal PPA business line. Sale of Alberta PowerLine In March 2019, APL energized the Fort McMurray West 500-kV Transmission Line, three months ahead of schedule, on-budget and with an impeccable safety record. In the second quarter of 2019, Canadian Utilities and Quanta Services Inc. entered into agreements to sell APL. Canadian Utilities offered an opportunity for Indigenous communities along the electricity transmission line route to obtain up to a 40 per cent equity interest. With the completion of the sale in December 2019, seven Indigenous communities in Alberta have a combined 40 per cent equity ownership in this essential Canadian energy infrastructure project: Athabasca Chipewyan First Nation, Bigstone Cree Nation, Gunn Metis Local 55, Mikisew Cree First Nation, by way of its business arm, the Mikisew Group of Companies, Paul First Nation, Sawridge First Nation and Sucker Creek First Nation. The remaining 60 per cent of APL was acquired by a consortium including TD Asset Management Inc., for and on behalf of TD Greystone Infrastructure Fund (Global Master) L.P., and IST3 Investment Foundation acting on behalf of its investment group IST3 Infrastruktur Global. The sale transaction also included the assumption of $1.4 billion of APL debt. Canadian Utilities received aggregate proceeds of $222 million for its interest in APL and will remain as the operator of APL over its 35-year contract with the Alberta Electric System Operator. 35 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 35 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Chile Distribution-Connected Solar Generation Facility In the fourth quarter of 2019, Canadian Utilities entered into a partnership with Impulso Capital, a Chilean developer, to build and operate the 18-MW Cabrero Solar project. This project, located in southern Chile, will provide clean solar energy to the Chilean electricity grid. The first 3-MW is under construction, and is expected to be operational in 2020. The remaining 15-MW is scheduled for completion in 2021. The total investment in this project is expected to be approximately $24 million. PIPELINES & LIQUIDS PIPELINES & LIQUIDS REVENUES Pipelines & Liquids revenues of $483 million in the fourth quarter and $1,649 million in the full year of 2019 were $100 million and $179 million higher than the same periods in 2018. Higher revenues were mainly due to higher flow-through revenues in natural gas distribution for third party franchise and transmission fees, and higher revenue from growth in the regulated rate base and number of natural gas distribution customers. ADJUSTED EARNINGS ($ millions) 2019 2018 Change 2019 2018 Change Three Months Ended December 31 Year Ended December 31 Regulated Pipelines & Liquids Natural Gas Distribution Natural Gas Transmission International Natural Gas Distribution Total Regulated Pipelines & Liquids Adjusted Earnings Non-regulated Pipelines & Liquids Storage & Industrial Water Total Pipelines & Liquids Adjusted Earnings 32 9 8 49 5 54 33 10 7 50 4 54 (1) (1) 1 (1) 1 — 62 39 28 57 38 29 129 124 8 137 6 130 5 1 (1) 5 2 7 Pipelines & Liquids adjusted earnings of $54 million in the fourth quarter of 2019 were comparable to the same period in 2018. Pipelines & Liquids recorded adjusted earnings of $137 million in 2019, $7 million higher than in 2018. Higher earnings were mainly due to ongoing growth in the regulated rate base, cost efficiencies, incremental earnings from hydrocarbon storage, and lower income taxes. Detailed information about the activities and financial results of Pipelines & Liquids' businesses is provided in the following sections. REGULATED PIPELINES & LIQUIDS Natural Gas Distribution Natural gas distribution serves municipal, residential, business and industrial customers throughout Alberta and in the Lloydminster area of Saskatchewan. Natural gas distribution recorded earnings of $32 million in the fourth quarter of 2019, $1 million lower than the same period in 2018. Lower earnings were mainly due to the timing of operations and maintenance costs. Natural gas distribution recorded adjusted earnings of $62 million in 2019, $5 million higher than in 2018. Higher earnings were mainly due to cost efficiencies, ongoing growth in the rate base and customers, and lower income taxes. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 36 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 36 Natural Gas Transmission Natural gas transmission receives natural gas on its pipeline system from various gas processing plants as well as from other natural gas transmission systems and transports it to end users within the province of Alberta or to other pipeline systems, primarily for export out of the province. Natural gas transmission recorded adjusted earnings of $9 million in the fourth quarter of 2019, $1 million lower than the same period in 2018. Lower adjusted earnings were mainly due to the timing of operations and maintenance costs. Natural gas transmission recorded adjusted earnings of $39 million in 2019, $1 million higher than in 2018. Higher adjusted earnings were mainly due to continued growth in the rate base. International Natural Gas Distribution International natural gas distribution is a regulated provider of natural gas distribution services in Western Australia, serving metropolitan Perth and surrounding regions. In the fourth quarter of 2019, international natural gas distribution adjusted earnings of $8 million, were $1 million higher than the same period in 2018. Higher adjusted earnings were mainly due to rate base growth and cost efficiencies. The international natural gas distribution business recorded adjusted earnings of $28 million in 2019, $1 million lower than in 2018, mainly due to a difference between inflation rates in the first quarters of 2018 and 2019. The published inflation rate for the first quarter of 2019, when applied to the rate of return calculations, produced a reduction to the revenues and earnings in 2019. NON-REGULATED PIPELINES & LIQUIDS Storage & Industrial Water Storage & industrial water provides non-regulated natural gas storage and transmission activities, hydrocarbon storage, and industrial water services in Alberta. Storage & industrial water recorded adjusted earnings of $5 million in the fourth quarter of 2019, $1 million higher than the same period in 2018 mainly due to higher demand and pricing for natural gas storage services and cost efficiencies. Storage & industrial water recorded adjusted earnings of $8 million in 2019, $2 million higher than in 2018. Higher earnings were mainly due to cost efficiencies, incremental earnings from two additional hydrocarbon storage caverns that became operational in the second quarter of 2018, and lower income taxes. PIPELINES & LIQUIDS RECENT DEVELOPMENTS Urban Pipelines Replacement Program The Urban Pipelines Replacement (UPR) program is replacing and relocating aging, high-pressure natural gas pipelines in densely populated areas of Calgary and Edmonton to address safety, reliability and future growth. Construction is expected to be complete in 2020 and the total cost of the UPR program is estimated to be approximately $900 million. Natural gas distribution and natural gas transmission have invested $795 million in the UPR program since its inception. Mains Replacement Program Natural gas distribution has two mains replacement programs which were approved in 2011, the plastic mains replacement and the steel mains program. The plastic mains replacement includes 8,000-km of polyvinyl chloride (PVC) and early generation polyethylene (PE) pipe that are planned for replacement by 2031. Natural gas distribution has replaced 2,015-km of PVC and PE pipe since the approval of this program. The steel mains program includes 9,000-km of steel pipe that is monitored and continually evaluated for replacement based on the performance history. Natural gas distribution has replaced 327-km of steel pipe since the approval of this program. 37 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 37 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS International Natural Gas Transmission - Mexico Tula Pipeline In 2014, Canadian Utilities was awarded a 25-year Transportation Services Agreement with the Comisión Federal De Electricidad (CFE) to design, build, own and operate a 16-km natural gas pipeline near the town of Tula in the state of Hidalgo, Mexico. Canadian Utilities is involved in a number of disputes arising from landowner and communal landholder claims against the project. We continue to work with the Government of Mexico and other parties to achieve a timely resolution of these disputes. Hydrocarbon Storage In the fourth quarter of 2019, storage & industrial water secured long-term contracts for a fifth salt cavern storage facility at the ATCO Heartland Energy Centre. As well, we secured long-term contracts for the construction and operation of a pipeline connecting the new salt cavern facility to existing pipelines in the area for receipt and delivery of hydrocarbon products. Construction began in the fourth quarter of 2019, with full operation targeted for late 2021. Industrial Water In the fourth quarter of 2017, Canadian Utilities entered into a long-term commercial agreement with Inter Pipeline Ltd. to provide water services to Inter Pipeline's integrated propane dehydrogenation and polypropylene plant to be known as the Heartland Petrochemical Complex. Construction activities began in 2019 and are expected to be complete in the second quarter of 2020. Pembina-Keephills Transmission Pipeline In August 2018, natural gas transmission filed a facilities application requesting approval for the installation of the Pembina-Keephills transmission pipeline. The 59-km high-pressure natural gas pipeline supports coal-to-gas conversion of power producers in the Genesee and surrounding areas of Alberta with the capacity to deliver up to 550-TJ per day. A decision was received on August 6, 2019 approving the project as filed. Construction has commenced and the pipeline is expected to be in service by mid-2020. The estimated cost to construct this project is approximately $230 million and is included in natural gas transmission's three year capital investment plan. Pembina-Keephills transmission pipeline construction, near Wabamun Lake, Alberta ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 38 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 38 CANADIAN UTILITIES CORPORATE & OTHER Canadian Utilities' Corporate & Other segment includes Retail Energy through ATCOenergy, launched in 2016 to provide retail electricity and natural gas services in Alberta. Corporate & Other also includes the global corporate head office in Calgary, Canada, the Australia corporate head office in Perth, Australia and the Mexico corporate head office in Mexico City, Mexico. In addition, Canadian Utilities Corporate & Other includes CU Inc. and Canadian Utilities preferred share dividend and debt expenses. ADJUSTED EARNINGS ($ millions) 2019 2018 Change 2019 2018 Change Canadian Utilities Corporate & Other (8) (10) 2 (39) (39) — Three Months Ended December 31 Year Ended December 31 Including intersegment eliminations, Canadian Utilities Corporate & Other adjusted earnings in the fourth quarter of 2019 were $2 million higher compared to the same period in 2018 mainly due to timing of certain other expenses. Canadian Utilities Corporate and Other adjusted earnings for 2019 were comparable to 2018. 39 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 39 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS REGULATORY DEVELOPMENTS REGULATED BUSINESS MODELS The business operations of electricity distribution, electricity transmission, natural gas distribution and natural gas transmission are regulated mainly by the Alberta Utilities Commission (AUC). The AUC administers acts and regulations covering such matters as rates, financing and service area. Natural gas transmission and electricity transmission operate under cost of service (COS) regulation. Under this model, the regulator establishes the revenues to provide for a fair return on utility investment using mid-year calculations of the total investment less depreciation, otherwise known as mid-year rate base. Growth in mid-year rate base is a leading indicator of the business' earnings trend, depending on changes in the equity ratio of the mid-year rate base and the rate of return on common equity. Natural gas distribution and electricity distribution operate under performance based regulation (PBR). Under PBR, revenue is determined by a formula that adjusts customer rates for inflation less an estimated amount for productivity improvements. The AUC reviews the utilities' results annually to ensure the rate of return on common equity is within certain upper and lower boundaries. To do these calculations, the AUC reviews mid-year rate base. For this reason, growth in mid-year rate base can be a leading indicator of the business' earnings trend, depending on the ability of the business to maintain costs based on the formula that adjusts rates for inflation and productivity improvements. International natural gas distribution is regulated mainly by the Economic Regulation Authority (ERA) of Western Australia. International natural gas distribution operates under incentive based regulation (IBR) under which the ERA establishes the prices for a five-year period to recover a return on forecasted rate base, including income taxes, depreciation on the forecasted rate base, and forecasted operating costs based on forecasted throughput. For this reason, growth in mid-year rate base can be a leading indicator of the business' earnings trend, depending on the ability of the business to maintain costs within approved forecasts. Regulated Utilities Mid-Year Rate Base ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 40 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 40 GENERIC COST OF CAPITAL (GCOC) In August 2018, the AUC issued a decision approving a Return on Equity (ROE) of 8.5 per cent and capital structure of 37 per cent equity for the 2018, 2019 and 2020 periods for all Alberta utilities. The following table contains the ROE and deemed common equity ratios resulting from the most recent GCOC decisions and also contains the mid-year rate base for each of Canadian Utilities' Alberta-based utilities. Electricity Distribution Electricity Transmission Natural Gas Distribution Natural Gas Transmission Year 2019 2018 2017 2019 2018 2017 2019 2018 2017 2019 2018 2017 AUC Decision 2018 GCOC (4) 2018 GCOC (4) 2016 GCOC (3) 2018 GCOC (4) 2018 GCOC (4) 2016 GCOC (3) 2018 GCOC (4) 2018 GCOC (4) 2016 GCOC (3) 2018 GCOC (4) 2018 GCOC (4) 2016 GCOC (3) Rate of Return on Common Equity (%) (1) Common Equity Ratio (%) (2) 8.50 8.50 8.50 8.50 8.50 8.50 8.50 8.50 8.50 8.50 8.50 8.50 37.0 37.0 37.0 37.0 37.0 37.0 37.0 37.0 37.0 37.0 37.0 37.0 Mid-Year Rate Base ($ millions) 2,669 (5) 2,498 (6) 2,471 (7) 5,262 (8) 5,280 (6) 5,287 (7) 2,847 (5) 2,715 (6) 2,549 (7) 1,971 (9) 1,791 (6) 1,614 (7) (1) (2) (3) (4) (5) (6) (7) (8) (9) Rate of return on common equity is the rate of return on the portion of rate base considered to be financed by common equity. The common equity ratio is the portion of rate base considered to be financed by common equity. The AUC released its 2016 GCOC decision for the periods 2016 to 2017 on October 7, 2016. The AUC released its 2018 GCOC decision for the periods 2018 to 2020 on August 2, 2018. The mid-year rate base for 2019 is equal to the year over year growth in rate base reflected in the 2020 PBR Annual Rate Filings applied to the 2018 actual mid- year rate base and includes mid-year work in progress. The mid-year rate base for 2018 is based on the Rule 005 Actuals Package and includes mid-year work in progress. The mid-year rate base for 2017 is based on the Rule 005 Actuals Package and includes mid-year work in progress. The mid-year rate base for 2019 is based on the electricity transmission 2018-2019 General Tariff Application Compliance Filing and includes estimated mid-year work in progress. The mid-year rate base for 2019 is based on the natural gas transmission 2019-2020 General Rate Application Compliance Filing and includes estimated mid- year work in progress. GCOC (POST-2020) In December 2018, the AUC initiated the 2021 GCOC proceeding. The main focus of the proceeding will be to determine the rate of return for the years 2021 and 2022, as well as consideration of returning to a formula-based approach. Initial evidence was filed in January 2020 focusing on comparability to other investments, capital attractiveness and financial integrity. The AUC expects to issue a decision in 2020. PERFORMANCE BASED REGULATION In December 2016, the AUC released its decision on the second generation PBR plan framework for electricity and natural gas distribution utilities in Alberta. Under the 2018 to 2022 second generation PBR framework, utility rates continue to be adjusted by a formula that estimates inflation annually and assumes productivity improvements. In February 2018, the AUC released a regulatory decision that provided determinations for the going-in rates and incremental capital funding for the second generation of PBR. In November 2018, the AUC issued a Phase I Review and Variance decision to reassess anomaly adjustments for all Alberta distribution utilities for the purposes of establishing 2018 going-in rates. On February 14, 2019, the AUC commenced a proceeding to undertake that review. On January 30, 2020, the AUC issued a decision, which provided updated clarification on what would qualify for anomaly adjustments. Parties can now re-apply for applicable anomalies, which if approved, would re-establish 2018 going in rates. Applications are to be submitted in early 2020 with a decision from the AUC expected before the end of the year. 41 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 41 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Timeframe 2018 to 2022 PBR Second Generation Inflation Adjuster (I Factor) Inflation indices (AWE and CPI) adjusted annually Productivity Adjuster (X Factor) 0.30% O&M Treatment of Capital Costs ROE Used for Going-in Rates Efficiency Carry-over Mechanism (ECM) Reopener ROE Used for Reopener Calculation Based on the lowest annual actual O&M level during 2013-2016, adjusted for inflation, growth and productivity to 2017 dollars; inflated by I-X thereafter over the PBR term • Recovered through going-in rates inflated by I-X and a K Bar that is based on inflation adjusted average historical capital costs for the period 2013-2016. The K Bar is calculated annually and adjusted for the actual WACC • Significant capital costs that are extraordinary, not previously incurred and required by a third party recovered through a “Type I” K Factor • 8.5% • + 0.5% ROE ECM achieved from PBR First Generation added to 2018 and 2019 ECM up to 0.5% additional ROE for the years 2023 and 2024 based on certain criteria +/- 300 bps of the approved ROE for two consecutive years or +/- 500 bps of the approved ROE for any single year • 2018: 8.5% excluding impact of ECM • 2019: 8.5% excluding impact of ECM • 2020: 8.5% • 2021 and beyond: At approved ROE pending future GCOC proceeding decisions ACCESS ARRANGEMENT - INTERNATIONAL NATURAL GAS DISTRIBUTION International natural gas distribution's Access Arrangement period (AA4) was in place from July 2014 to December 2019. The following table contains the ROE and deemed common equity ratios from the current Access Arrangement. The table also contains the mid-year rate base. International Natural Gas Distribution Year 2019 2018 2017 ERA Decision 2016 AA4 (3) 2016 AA4 (3) 2016 AA4 (3) Rate of Return on Common Equity (%) (1) Common Equity Ratio (%) (2) 7.21 7.21 7.21 40.0 40.0 40.0 Mid-Year Rate Base ($ millions) 1,178 (4) 1,211 (5) 1,179 (6) (1) (2) (3) (4) (5) (6) Rate of return on common equity is the rate of return on the portion of rate base considered to be financed by common equity. The common equity ratio is the portion of rate base considered to be financed by common equity. The ERA released its AA4 Amended Final Decision on September 10, 2015. This was superseded when the ERA released its AA4 Revised Final Decision on October 25, 2016. 2019 mid- year rate base was impacted by a strengthening Canadian dollar in 2019. The 2019 mid-year rate base was calculated using a foreign exchange rate of Australian $1 to Canadian $0.91 compared to Canadian $0.96 in 2018. The mid-year rate base in Australian dollars was $1,293 in 2019 and $1,260 in 2018, which is a $33 million increase from 2018 to 2019. 2018 mid-year rate base was impacted by a strengthening Canadian dollar in 2018. The 2018 mid-Year rate base was calculated using a foreign exchange rate of Australian $1 to Canadian $0.96 compared to Canadian $0.98 in 2017. The mid-year rate base in Australian dollars was $1,260 in 2018 and $1,205 in 2017, which is a $55 million increase from 2017 to 2018. 2017 mid-year rate base was impacted by a strengthening Australian dollar in 2017. The 2017 mid-year rate base was calculated using a foreign exchange rate of Australian $1 to Canadian $0.98 compared to Canadian $0.97 in 2016. The mid-year rate base in Australian dollars was $1,205 in 2017 and $1,145 in 2016, which is a $60 million increase from 2016 to 2017. ACCESS ARRANGEMENT 5 International natural gas distribution received the final decision related to the five-year Access Arrangement 5 (AA5) application from the Economic Regulation Authority (ERA) on November 15, 2019. The ERA also published its final rate of return guidelines which outline the parameters for the weighted average cost of capital (WACC) applicable to AA5. The AA5 WACC calculation was completed using a 20-business day period of observation in September 2019 to determine the risk free rate portion of the WACC calculation prior to the final decision. The WACC also determines the regulated return on equity (ROE) for international natural gas distribution. The AA5 ROE is 5.02 per cent compared to 7.21 per cent in the previous Access Arrangement. The final decision also includes rebasing of revenues for the recovery of operating costs, ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 42 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 42 the approved capital expenditure program, and the forecast of demand and throughput. The common equity ratio for AA5 will be 45 per cent compared to 40 per cent in the previous Access Arrangement. The tariffs included in the AA5 final decision are applicable for the period January 1, 2020 to December 31, 2024. ALBERTA REGULATORY UPDATES ELECTRICITY TRANSMISSION AND DISTRIBUTION REGULATORY UPDATES ELECTRICITY DISTRIBUTION DEPRECIATION PROCEEDING In the third quarter of 2019, the AUC issued a decision on depreciation parameters that extends the overall depreciable life of the electricity distribution assets and incorporates historical retirements related to severe weather events. The AUC determined the depreciation parameters as filed are reasonable, resulting in an electricity distribution depreciation rate change and lowered depreciation expense in the third and fourth quarters of 2019. ELECTRICITY TRANSMISSION AND ELECTRICITY DISTRIBUTION RECOVERY OF 2016 REGIONAL MUNICIPALITY OF WOOD BUFFALO WILDFIRE COSTS In October 2019, the AUC issued its decisions associated with electricity transmission and electricity distribution's application for the recovery of costs related to the 2016 Regional Municipality of Wood Buffalo wildfire. Electricity transmission's applied-for cost recoveries were all substantially approved as part of the electricity transmission 2018-2019 GTA. Approximately 90 per cent of the applied-for cost recoveries were approved in electricity distribution’s application. The capital cost to replace the destroyed assets was approved as filed as were the majority of the operating and maintenance costs and recovery for lost revenues. However, the value of electricity distribution’s destroyed assets was deemed to be an extraordinary retirement and was not approved for recovery in customer rates, resulting in a reduction to 2019 adjusted earnings of $1 million. ELECTRICITY TRANSMISSION 2020-2022 GENERAL TARIFF APPLICATION (GTA) In October 2019, electricity transmission filed a GTA for its operations for 2020, 2021, and 2022. The application requests, among other things, additional revenues to recover higher depreciation costs. The application also requests, at electricity transmission’s discretion, the ability to advance an application to establish 2023 and 2024 revenue requirements by escalating the 2022 approved revenue requirement. A decision from the AUC is expected by the fourth quarter of 2020. ELECTRICITY TRANSMISSION HANNA REGION TRANSMISSION DEVELOPMENT DEFERRAL APPLICATION In February 2017, electricity transmission filed an application seeking approval of approximately $688 million of capital additions related to the Hanna Regional Transmission Development program incurred between 2012 and 2015. A decision from the AUC was received in June 2019 approving the vast majority of capital additions into rate base as prudently incurred. ELECTRICITY TRANSMISSION 2018-2019 GTA In June 2017, electricity transmission filed a GTA for its operations for 2018 and 2019. The decision was received in July 2019 approving the majority of requested capital expenditures and operating costs as filed. The impact of this decision was an increase to second quarter 2019 adjusted earnings of $9 million. ELECTRICITY TRANSMISSION 2015-2017 DIRECT ASSIGNED PROJECTS DEFERRAL APPLICATION In March 2019, electricity transmission filed an application seeking the approval of approximately $2.2 billion of capital additions from transmission projects with in-service dates between 2015-2017. The application includes $1.8 billion in capital additions from the Eastern Alberta Transmission Line. 43 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 43 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS NATURAL GAS TRANSMISSION REGULATORY UPDATES NATURAL GAS TRANSMISSION 2019-2020 GENERAL RATE APPLICATION (GRA) In July 2018, natural gas transmission filed a GRA for 2019 and 2020. The decision was received in June 2019 approving the majority of requested capital expenditures and operating costs requested as filed. The adjustments directed by the AUC in the decision had a $2 million positive impact in the second quarter 2019 adjusted earnings. PBR REGULATORY UPDATES 1ST GENERATION PERFORMANCE BASED REGULATION (PBR) RE-OPENER In June 2018, the AUC initiated a process for electricity distribution and natural gas distribution as the re-opener clause was triggered by both utilities in 2017, the final year of the 1st Generation PBR plan. The PBR re-opener thresholds are triggered if a utility's earnings are +/- 500 bps from the approved ROE in one year or +/- 300 bps from approved ROE in two consecutive years. In February 2019, the AUC issued its decision that the re-opening of the plan was not warranted, agreeing with Canadian Utilities' submission that the achievements of the utilities were not due to a flaw in the PBR plan, but rather were the result of management decisions responding to the incentives the plan created. This process is closed. COMMON MATTERS REGULATORY UPDATES INFORMATION TECHNOLOGY (IT) COMMON MATTERS In August 2014, ATCO subsidiary, Canadian Utilities sold its IT services business to Wipro Ltd. (Wipro) and signed a ten-year IT Master Services Agreement (MSA) effective January 1, 2015. Proceeds of the sale were $204 million, resulting in a one- time after-tax gain of $74 million which was recorded in earnings attributable to Class I and Class II shares. In 2014, the Company did not include this gain on sale in adjusted earnings because it was a significant one-time event. In 2015, the AUC commenced an Information Technology Common Matters (IT Common Matters) proceeding to review the recovery of information technology costs by the Alberta Utilities from January 1, 2015 going forward. In June 2019, the AUC issued its decision regarding the IT Common Matters proceeding and directed the Alberta Utilities to reduce the first-year of the Wipro MSA by 13 per cent and to apply a glide path that reduces pricing by 4.61 per cent in each of years 2 through 10. For natural gas distribution and electricity distribution, the AUC’s direction impacts the PBR 2018 going-in rates and treatment of capital costs. For the natural gas transmission and electricity transmission utilities, the AUC's direction impacts the revenue requirement dating back to 2015. The Alberta Utilities presented a considerable amount of evidence, including independent expert benchmarking and price review studies, to show that the Wipro MSA rates were at fair market value (FMV). As such, there was no cross subsidization between the sale price of Canadian Utilities' IT services business to Wipro in the 2014 transaction and the establishment of IT rates under the MSA. Despite these efforts, the AUC determined that the Alberta Utilities failed to demonstrate that the IT pricing in the MSA would result in just and reasonable rates. As a result of the AUC’s IT Common Matters decision, a $12 million reduction to the previously recorded 2014 after-tax gain on sale of $74 million was recorded in 2019. Going forward, the IT Common Matters decision is expected to further reduce the previously recorded gain. Consistent with the treatment in 2014, the $12 million reduction recognized in 2019, along with ongoing impacts associated with this decision, are not included in adjusted earnings. In July 2019, the Alberta Utilities filed a leave to appeal application with the Alberta Court of Appeal in relation to the AUC Decision on the IT Common Matters proceeding. In October 2019, the Alberta Court of Appeal denied the Alberta Utilities leave to appeal application. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 44 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 44 SUSTAINABILITY, CLIMATE CHANGE AND ENERGY TRANSITION We believe that reducing our environmental impact is integral to the pursuit of operational excellence and long-term sustainable growth. Our success depends on our ability to operate in a responsible and sustainable manner, today and in the future. SUSTAINABILITY REPORTING Our 2019 Sustainability Report, which will be published in June 2020, will focus on the material topics listed below. • Energy Stewardship: access and affordability, security and reliability, and customer satisfaction, • Environmental Stewardship: climate change and energy use, and environmental compliance, • Safety: employee health and safety, public safety, and emergency preparedness, and • Community and Indigenous relations. The Sustainability Report is based upon the internationally recognized Global Reporting Initiative (GRI) Standards. Our reporting is also guided by the Sustainability Accounting Standards Board (SASB) and the Financial Stability Board’s Task Force on Climate-related Financial Disclosures' (TCFD) recommendations. The 2018 Sustainability Report, Sustainability Framework Reference Document, and other disclosures are available on our website, at www.ATCO.com. CLIMATE CHANGE AND ENERGY TRANSITION To contribute to a lower carbon future, we continue to pursue initiatives looking at integrating lower intensity fuels, such as natural gas, hydrogen, renewables, and other clean energy solutions. We actively and constructively work with federal and provincial governments with the goal of finding the best long-term solutions. We participate in a wide number of discussions, and the following are examples of where we are focusing our efforts. Carbon Pricing / Output-Based Pricing Systems The Government of Canada imposed a carbon levy of $20 per tonne as of January 1, 2019, increasing to $30 per tonne in April 2020. By 2022, it is expected to reach $50 per tonne. In addition, the Government of Canada released the Output-Based Pricing System Regulations in June 2019. In Alberta, the Technology Innovation and Emissions Reduction (TIER) regulations meet the federal government's stringency requirements for carbon emitting pricing systems for Large Industrial Emitters and came into force on January 1, 2020. In the third quarter of 2019, Canadian Utilities announced the sale of its 2,276-MW Canadian fossil fuel-based electricity generation business in a series of transactions. These sale transactions remove coal-fired electricity generation assets from Canadian Utilities' asset portfolio and significantly reduce overall greenhouse gas emissions as of October 1, 2019. Under the National Greenhouse and Energy Reporting scheme in Australia, the safeguard mechanism applies to facilities with direct covered emissions of more than 100,000 tonnes of carbon dioxide equivalent per year. These facilities are required to keep their net emissions at or below emissions baselines set by the Clean Energy Regulator or surrender Australia Carbon Credit Units to offset their emissions and stay below their baseline. Fuel Switching / Clean Fuel Standards In June 2019, the Government of Canada released a paper on the Clean Fuel Standards Proposed Regulatory Approach. A key design element being proposed is that credits can be generated when end-users displace liquid transportation fuel with natural gas, propane or a non-carbon energy carrier such as electricity or hydrogen. The regulations will come into force for the liquid class in 2022 and the gaseous and solid classes in 2023. 45 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 45 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS In 2018, Canadian Utilities installed three electric vehicle (EV) charging stations between Calgary and Edmonton, Alberta providing end-users an opportunity to replace liquid fuel with a low-carbon emitting energy. In 2019, Canadian Utilities continued to expand its number of EV direct current, fast charging stations with 15 stations installed and 5 additional stations planned to be in service by the end of the first quarter of 2020. In Australia, with support from the Australian Renewable Energy Agency (ARENA) we are investing $3.7 million in a leading research and development facility at our Jandakot Operations Centre, called the Clean Energy Innovation Hub. The Clean Energy Innovation Hub is a test bed for hybrid energy solutions integrating natural gas, solar PV, battery storage and hydrogen production. We also continue to explore and implement opportunities for fuel switching to lower-emitting options such as reducing or replacing diesel consumption with more energy efficient solutions for customers in remote communities. EV charging station, Lethbridge, Alberta Methane Reductions We continue to monitor developments, such as provincial equivalency to the Government of Canada announcement to reduce methane emissions from the oil and gas sector by 40 to 45 per cent from 2012 levels by 2025. The federal and provincial methane regulations affect a portion of the Company’s fugitive and venting emissions from Canadian natural gas pipeline-related operations. The Company's exposure is limited because requirements to upgrade equipment in order to further reduce methane emissions are expected to be included in rate base on a go-forward basis. The Company has already implemented a number of programs to improve efficiency and reduce fugitive and venting emissions in the natural gas distribution and transmission businesses, and will comply with both sets of rules until equivalency is reached. Climate Change Resiliency We carefully manage climate-related risks, including preparing for, and responding to, extreme weather events through activities such as proactive route selection, asset hardening, regular maintenance, and insurance. The Company follows regulated engineering codes and continues to evaluate ways to create greater system reliability and resiliency. When planning for capital investment or acquiring assets we consider site specific climate and weather factors, such as flood plain mapping and extreme weather history. In electricity transmission and distribution operations, grid resiliency initiatives focus on prevention, protection, and reaction. Prevention includes minimizing operational risks and ensuring system adequacy through system planning and coordination. Protection is focused on improving grid resiliency through activities such as retrofitting and vegetation management to reduce incidents that result in outages. Wildfire Management Plans include requirements to conduct annual patrols of all power lines in forest protection areas. Finally, we look to restore services in the shortest possible timeframe through grid modernization, adequate contingency planning and dispatch. In natural gas transmission and distribution activities, the majority of the Company’s pipeline network is underground, making it less susceptible to extreme weather events. We work with regulators to increase resiliency where appropriate through asset improvement projects. We have also mapped and continue to regularly inspect pipeline water crossings. In our structures and logistics activities, we look to leverage our expertise to produce high-efficiency structures in response to evolving building codes. Our modular housing units are built in factories, which reduces our emissions and environmental impact. In addition, the availability of deployable modular housing and logistical services can be an important asset when extreme weather events occur around the world. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 46 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 46 We have streamlined our Crisis Response and Emergency Preparedness systems, and we continuously improve our ability to rapidly mobilize and effectively respond to crises globally. We incorporate learnings from responding to extreme weather events which enables us to continue to strengthen our emergency response capabilities. Climate Change Challenges and Opportunities While climate-related challenges and opportunities are integrated into our strategy and risk management processes, ATCO understands that specifically disclosing climate-related information may be useful for the investment community. In addition to the material risks described in the Business Risks and Risk Management section of this MD&A, the table below provides further information on how we address specific climate-related challenges and opportunities. We plan to continue to progress these disclosures in the future. Challenges Opportunities Category/ Driver Policy/ Regulatory Market Technology Operations in several jurisdictions subject to emissions limiting regulations Aggressive shifts in policy which do not allow for transition in an effective, affordable manner Changes in carbon policy, costs of operations, and commodity prices Changing customer behaviour Replacement of current products/services with lower- emitting options Prosumer movement may affect energy load profiles Reputational Public perception of carbon risk Physical Extreme weather events Long-term changes in temperature and weather patterns Continued fuel switching to lower-emitting options Coal-to-gas conversions present opportunity for increased demand for natural gas transmission infrastructure investment in the near to medium term Increase in demand for lower- emitting technologies A transition to lower-emitting energy systems provides opportunity to utilize expertise in: generation, integration and delivery of new energy sources including hydrogen, renewable natural gas, EV networks; and transmission and distribution infrastructure to ensure energy network reliability and security Increase in demand for trusted long-term partners to deliver lower-emitting solutions Climate change mitigation and adaptation Rapidly deployable structures and logistics services Mitigation Options/Measures Active participation in policy development, industry groups, regulatory discussions, etc. Business diversification Sale of 2,276-MW of Canadian fossil fuel-based electricity generation significantly reduces overall GHG emissions of the Company Participation in carbon markets Business diversification Internal innovation teams to evaluate new technologies Transparent reporting Climate change resiliency efforts Emergency Response and Preparedness plans and training 47 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 47 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS OTHER EXPENSES AND INCOME A financial summary of other consolidated expenses and income items for the fourth quarter and full year of 2019 and 2018 is given below. These amounts are presented in accordance with IFRS accounting standards. They have not been adjusted for the timing of revenues and expenses associated with rate-regulated activities and other items that are not in the normal course of business. ($ millions) Operating costs Service concession arrangement costs Depreciation and amortization Proceeds from termination of Power Purchase Arrangement Gain on sale of Operations Gain on sale of Barking Power assets Earnings from investment in associate company Earnings from investment in joint ventures Net finance costs Income taxes OPERATING COSTS Three Months Ended December 31 Year Ended December 31 2019 2018 Change 2019 2018 Change 663 9 172 — 21 — 4 7 115 90 623 44 158 — — 40 (35) 14 — 21 125 (125) 3 6 130 85 1 1 (15) 5 2,598 2,378 127 637 — 174 — 15 24 484 66 664 682 62 — 125 4 25 478 231 220 (537) (45) (62) 174 (125) 11 (1) 6 (165) Operating costs, which are total costs and expenses less service concession arrangement costs and depreciation and amortization, increased by $40 million in the fourth quarter of 2019 when compared to the same period in 2018. Higher operating costs were mainly due to higher materials costs in ATCO Structures from increased activity on the LNG Canada Cedar Valley Lodge contract, partially offset by lower operating expenses due to the sale of the Canadian fossil-fuel based electricity generation business in the third quarter of 2019. Operating costs increased by $220 million in 2019 when compared to 2018. Higher operating costs were mainly due to higher materials costs in ATCO Structures from increased activity on the LNG Cedar Valley Lodge contract, higher losses on mark-to-market forward and swap commodity contracts, and higher flow-through power costs in ATCOenergy. Higher expenses were partially offset by lower operating costs due to the sale of the Canadian fossil- fuel based electricity generation business in the third quarter of 2019. SERVICE CONCESSION ARRANGEMENT COSTS Service concession arrangement costs were recorded for third party construction and operation activities for APL's Fort McMurray West-500kV Project. Service concession arrangement costs in the fourth quarter and full year 2019 were $35 million and $537 million lower compared to the same periods in 2018, mainly due to the completion of construction activities in March 2019. The project was energized on March 28, 2019 and costs incurred subsequent to this date relate to operating and maintenance activities. DEPRECIATION AND AMORTIZATION Depreciation and amortization increased by $14 million in the fourth quarter of 2019 mainly due to higher depreciation costs in electricity transmission. Depreciation and amortization decreased by $45 million in 2019. Lower depreciation is mainly due to a depreciation rate change in the third quarter of 2019 extending the overall depreciable life of the electricity distribution assets, and the ceasing of depreciation of the Canadian fossil fuel-based electricity generation assets that were classified as held for sale in the second quarter of 2019 and subsequently sold in the third quarter of 2019. Lower depreciation expense was partially offset by higher depreciation costs in electricity transmission, ongoing capital investment, and the implementation of IFRS 16 in 2019. ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 48 ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 48 PROCEEDS FROM TERMINATION OF POWER PURCHASE ARRANGEMENT On September 30, 2018, the Battle River unit 5 PPA was terminated by the Balancing Pool and dispatch control was returned to Canadian Utilities. Canadian Utilities received a $62 million payment from the Balancing Pool in the third quarter of 2018. GAIN ON SALE OF OPERATIONS In the fourth quarter of 2019, Canadian Utilities completed a series of transactions on the sale of our Canadian fossil fuel-based electricity generation portfolio and ownership interest in Alberta PowerLine. These sales resulted in a gain on sale of operations of $174 million (before income tax). This gain on sale includes $10 million of transaction costs recognized in previous quarters. GAIN ON SALE OF BARKING POWER ASSETS In the fourth quarter of 2018, ATCO subsidiary Canadian Utilities sold its 100 per cent ownership interest in the Barking Power assets. In accordance with IFRS accounting standards, ATCO recorded a gain on sale of $125 million (before income tax). EARNINGS FROM INVESTMENT IN ASSOCIATE COMPANY Earnings from investment in associate company is comprised of our 40 per cent ownership interest in Neltume Ports, a leading port operator and developer in South America with operations in 16 port facilities and three port operation services businesses located in Chile, Uruguay, Argentina, and Brazil. Earnings from investment in associate company were $4 million in the fourth quarter and $15 million in the full year of 2019. Higher earnings in 2019 were mainly due to a full year of ownership following the acquisition of our 40 per cent interest of Neltume Ports in September, 2018. EARNINGS FROM INVESTMENT IN JOINT VENTURES Earnings from investment in joint ventures is mainly comprised of ownership positions in several electricity generation plants, the Strathcona Storage Limited Partnership which operates hydrocarbon storage facilities at the ATCO Heartland Energy Centre near Fort Saskatchewan, Alberta, and ATCO-Sabinco S.A which operates a Structures & Logistics business in Chile, and certain ATCO Frontec facility operations and maintenance contracts. Earnings from investment in joint ventures increased by $1 million in the fourth quarter of 2019 compared to the same period in 2018 mainly due to higher earnings from the Strathcona Storage Limited Partnership due to two additional hydrocarbon storage caverns that became operational in the second quarter of 2018. Earnings from investment in joint ventures decreased by $1 million in the full year of 2019 compared to the same period in 2018 mainly due to the impact of the new PPA at the Osborne generation plant in Australia, and lower earnings in electricity generation due to the sale of Brighton Beach in the third quarter of 2019, partially offset by higher earnings from the Strathcona Storage Limited Partnership due to two additional hydrocarbon storage caverns that became operational in the second quarter of 2018. NET FINANCE COSTS Net finance costs decreased by $15 million in the fourth quarter of 2019 when compared to the same period in 2018, mainly due to lower interest expense under service concession arrangement accounting as a result of the completion of construction of APL in the first quarter of 2019. Decreased net finance costs were also due to lower interest expenses on non-recourse long-term debt from the sale of the Canadian fossil-fuel based electricity generation business in the third quarter of 2019, and lower interest expense on long-term CU Inc. debt refinanced in the third quarter of 2019. Net finance costs increased by $6 million in 2019 when compared to the same period in 2018, mainly due to interest expense associated with the Neltume Ports investment, partially offset by lower interest expense under service concession arrangement accounting as a result of the completion of construction of APL in the first quarter of 2019. Decreased net finance costs were also due to lower interest expenses on non-recourse long-term debt from the sale of the Canadian fossil-fuel based electricity generation business in the third quarter of 2019, and lower interest expense on long-term CU Inc. debt refinanced in the third quarter of 2019. 49 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 49 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS INCOME TAXES Income taxes increased by $5 million in the fourth quarter of 2019 compared to the same period in 2018, mainly due to the sale of APL, partially offset by a decrease in earnings. Income taxes decreased by $165 million in 2019 compared to 2018 mainly due to lower corporate income tax rates enacted by the Government of Alberta in June 2019, partially offset by higher earnings before income taxes in 2019. The Government of Alberta enacted a phased decrease in the provincial corporate income tax rate from 12 per cent to 8 per cent over four years, commencing with a one per cent decrease on July 1, 2019 followed by a one per cent reduction on January 1st of each of the next three years. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 50 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 50 LIQUIDITY AND CAPITAL RESOURCES Our financial position is supported by Regulated Utility and long-term contracted operations. Our business strategies, funding of operations, and planned future growth are supported by maintaining strong investment grade credit ratings and access to capital markets at competitive rates. Primary sources of capital are cash flow from operations and the debt and preferred share capital markets. We consider it prudent to maintain enough liquidity to fund approximately one full year of cash requirements to preserve strong financial flexibility. Liquidity is generated by cash flow from operations and is supported by appropriate levels of cash and available committed credit facilities. CREDIT RATINGS Credit ratings are important to the Company's financing costs and ability to raise funds. The Company intends to maintain strong investment grade credit ratings in order to provide efficient and cost-effective access to funds required for operations and growth. The following table shows the current credit ratings assigned to ATCO Ltd., Canadian Utilities Limited, CU Inc., and ATCO Gas Australia Pty Ltd. ATCO Ltd. Issuer Canadian Utilities Limited Issuer Senior unsecured debt Commercial paper Preferred shares CU Inc. Issuer and senior unsecured debt Commercial paper Preferred shares ATCO Gas Australia Pty Ltd. (1) Issuer and senior unsecured debt DBRS A (low) A A R-1 (low) PFD-2 (high) A (high) R-1 (low) PFD-2 (high) S&P A- A- BBB+ A-1 (low) P-2 A- A-1 (low) P-2 N/A BBB+ (1) ATCO Gas Australia Pty Ltd. is a regulated provider of natural gas distribution services in Western Australia, serving metropolitan Perth and surrounding regions. On July 17, 2019, DBRS Limited (DBRS) affirmed its 'A (high)' long-term corporate credit rating and stable outlook on ATCO subsidiary CU Inc. On August 9, 2019, DBRS affirmed its 'A' long-term corporate credit rating and stable outlook on ATCO subsidiary Canadian Utilities. On August 30, 2019, DBRS affirmed its 'A (low)' long-term corporate credit rating and stable outlook on ATCO. On October 3, 2019, S&P Global Ratings (S&P) affirmed its 'A-' long-term issuer credit rating and stable outlook on ATCO Ltd. and its subsidiaries Canadian Utilities and CU Inc. On November 11, 2019, S&P affirmed its 'BBB+' long-term issuer credit rating and stable outlook on ATCO subsidiary ATCO Gas Australia Pty Ltd. 51 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 51 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS LINES OF CREDIT At December 31, 2019, ATCO and its subsidiaries had the following lines of credit. Total 2,985 18 571 3,574 Used 839 13 174 1,026 Available 2,146 5 397 2,548 ($ millions) Long-term committed Short-term committed Uncommitted Total Of the $3,574 million in total credit lines, $571 million was in the form of uncommitted credit facilities with no set maturity date. The other $3,003 million in credit lines was committed, with maturities between 2021 and 2023, and may be extended at the option of the lenders. Of the $1,026 million credit line usage, $620 million was related to ATCO Gas Australia Pty Ltd. with the majority of the remaining usage pertaining to the issuance of letters of credit. Long-term committed credit lines are used to satisfy all of ATCO Gas Australia Pty Ltd.'s term debt financing needs. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 52 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 52 CONSOLIDATED CASH FLOW At December 31, 2019, the Company's cash position was $1,140 million, an increase of $449 million compared to December 31, 2018. Major movements are outlined in the following table: ($ millions) Funds generated by operations (1) Release of restricted project funds Proceeds on sales of assets and operations Net Issue of long-term debt Net issue of short-term debt Cash used for capital investment Dividends paid to Class I and Class II Share owners Dividends paid to non-controlling interests Interest paid Other Increase in cash position Year Ended December 31 2019 2018 Change 1,927 1,897 329 903 78 (175) 726 219 814 165 30 (397) 684 (736) (340) (1,324) (2,518) 1,194 (186) (294) (498) (311) 449 (173) (214) (485) (234) 197 (13) (80) (13) (77) 252 (1) Additional information regarding this measure is provided in the Non-GAAP and Additional GAAP Measures section of this MD&A. 53 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 53 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED CASH FLOW Funds Generated by Operations Funds generated by operations were $1,927 million in 2019, $30 million higher compared to 2018. The increase was mainly due to higher earnings in Structures & Logistics and the Alberta Utilities, partially offset by lower funds generated as a result of the sale of the Canadian fossil-fuel based electricity business in the third quarter of 2019. Cash Used for Capital Investment Cash used for capital investment was $382 million in the fourth quarter of 2019, $38 million lower than the same period in 2018. Lower capital spending was mainly due to lower capital spending in electricity transmission, the completion of construction activities in Alberta PowerLine in the first quarter of 2019, and lower capital investment in ATCO Structures' rental fleet. This lower capital spending was partially offset by higher capital spending in natural gas transmission with the commencement of construction in late 2019 on the Pembina-Keephills Transmission Pipeline. Cash used for capital investment was $1,324 million in 2019, $1,194 million lower than the same period in 2018. Lower capital spending was mainly due to the completion of construction activities in Alberta PowerLine in the first quarter of 2019, the 2018 investment in a 40 per cent ownership interest in Neltume Ports in the third quarter of 2018, the acquisition of Electricidad del Golfo in the first quarter of 2018 and lower capital spending in electricity transmission in 2019. Lower capital spending was partially offset by higher capital investment in natural gas transmission due to the commencement of construction on the Pembina-Keephills Transmission Pipeline in late 2019. Capital investment in the fourth quarter and full year of 2019 and 2018 is shown in the table below. ($ millions) Electricity Electricity Distribution Electricity Transmission Electricity Generation Alberta PowerLine Total Electricity Pipelines & Liquids Natural Gas Distribution Natural Gas Transmission International Natural Gas Distribution International Natural Gas Transmission and Storage & Industrial Water Total Pipelines & Liquids CU Corporate & Other Canadian Utilities Total Structures & Logistics Neltume Ports ATCO Corporate & Other Intersegment Eliminations ATCO Total (1) (2) Three Months Ended December 31 Year Ended December 31 2019 2018 Change 2019 2018 Change 73 26 12 — 111 92 130 19 19 260 3 374 25 — 3 (20) 63 81 15 44 203 80 65 24 5 174 3 380 35 — 5 — 10 (55) (3) (44) (92) 12 65 (5) 14 86 — (6) 224 165 59 95 543 284 293 69 31 677 6 227 240 156 664 1,287 290 239 93 26 648 16 1,226 1,951 (10) 105 — (2) 9 4 (20) (20) 113 444 10 — (3) (75) (97) (569) (744) (6) 54 (24) 5 29 (10) (725) (8) (435) (6) (20) 382 420 (38) 1,324 2,518 (1,194) (1) Includes capital expenditures in joint ventures of nil and $2 million (2018 - $5 million and $20 million) for the fourth quarter and full year of 2019. (2) Includes additions to property, plant and equipment, intangibles and $2 million and $16 million (2018 - $4 million and $20 million) of interest capitalized during construction for the fourth quarter and full year of 2019. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 54 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 54 Base Shelf Prospectuses CU Inc. Debentures On June 11, 2018, CU Inc. filed a base shelf prospectus that permits it to issue up to an aggregate of $1.5 billion of debentures over the 25-month life of the prospectus. As of February 26, 2020, aggregate issuances of debentures were $965 million. Canadian Utilities Debt Securities and Preferred Shares On June 11, 2018, Canadian Utilities filed a base shelf prospectus that permits it to issue up to an aggregate of $2 billion of debt securities and preferred shares over the 25-month life of the prospectus. No debt securities or preferred shares have been issued to date under this base shelf prospectus. Dividends and Common Shares We have increased our common share dividend each year since 1993, a 27-year track record. Dividends paid to Class I and Class II Share owners totaled $47 million in the fourth quarter and $186 million in the full year of 2019. On January 9, 2020, the Board of Directors declared a first quarter dividend of 43.52 cents per share. The payment of any dividend is at the discretion of the Board of Directors and depends on our financial condition and other factors. Normal Course Issuer Bid 27 year track record of increasing common share dividends We believe that, from time to time, the market price of our Class I Shares may not fully reflect the value of our business, and that purchasing our own Class I Shares represents an attractive investment opportunity and desirable use of available funds. The purchase of Class I Shares, at appropriate prices, will also minimize any dilution resulting from the exercise of stock options. On March 8, 2019, we commenced a normal course issuer bid to purchase up to 1,014,294 outstanding Class I Shares. This bid will expire on March 7, 2020. From March 8, 2019 to December 31, 2019, 101,350 shares were purchased for $5 million. 55 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 55 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS SHARE CAPITAL ATCO's equity securities consist of Class I Shares and Class II Shares. At February 25, 2020, we had outstanding 101,468,481 Class I Shares, 13,199,647 Class II Shares, and options to purchase 691,600 Class I Shares. CLASS I NON-VOTING SHARES AND CLASS II VOTING SHARES Each Class II Share may be converted into one Class I Share at any time at the share owner’s option. If an offer to purchase all Class II Shares is made, and such offer is accepted and taken up by the owners of a majority of the Class II Shares, and, if at the same time, an offer is not made to the Class I Share owners on the same terms and conditions, then the Class I Shares will be entitled to the same voting rights as the Class II Shares. The two share classes rank equally in all other respects, except for voting rights. Of the 10,200,000 Class I Shares authorized for grant of options under our stock option plan, 2,444,450 Class I Shares were available for issuance at December 31, 2019. Options may be granted to our officers and key employees at an exercise price equal to the weighted average of the trading price of the shares on the Toronto Stock Exchange for the five trading days immediately preceding the grant date. The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of grant. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 56 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 56 QUARTERLY INFORMATION The following table shows financial information for the eight quarters ended March 31, 2018 through December 31, 2019. ($ millions, except for per share data) Q1 2019 Q2 2019 Q3 2019 Q4 2019 Revenues Earnings attributable to Class I and Class II Shares Earnings per Class I and Class II Share ($) Diluted earnings per Class I and Class II Share ($) Adjusted earnings per Class I and Class II Share ($) Adjusted earnings Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Electricity Pipelines & Liquids Canadian Utilities Corporate & Other Total adjusted earnings ($ millions, except for per share data) Revenues Earnings (loss) attributable to Class I and Class II Shares Earnings (loss) per Class I and Class II Share ($) Diluted earnings (loss) per Class I and Class II Share ($) Adjusted earnings per Class I and Class II Share ($) Adjusted earnings Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Electricity Pipelines & Liquids Canadian Utilities Corporate & Other Total adjusted earnings ADJUSTED EARNINGS 1,324 112 0.98 0.98 0.98 3 4 — 61 51 (7) 112 1,103 158 1.38 1.37 0.68 1,097 160 1.40 1.40 0.65 1,182 83 0.73 0.72 0.88 7 4 — 55 23 (11) 78 13 3 3 59 9 (13) 74 14 4 (9) 46 54 (8) 101 Q1 2018 Q2 2018 Q3 2018 Q4 2018 1,500 90 0.78 0.78 0.87 1,103 (12) (0.10) (0.10) 0.53 1,111 115 1.01 1.00 0.76 1 — 2 51 53 (8) 99 6 — (2) 53 14 (10) 61 3 1 15 70 9 (11) 87 1,174 135 1.18 1.18 0.94 5 3 2 54 54 (10) 108 Our financial results for the previous eight quarters reflect continued growth and regulatory decisions in Regulated Utility operations as well as fluctuating commodity prices in electricity generation and sales, and natural gas storage operations. Interim results will vary due to the seasonal nature of demand for electricity and natural gas, the timing of utility regulatory decisions and the cyclical demand for workforce housing and space rental products and services. 57 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 57 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS STRUCTURES & LOGISTICS In the second quarter of 2018, earnings increased compared to the prior quarters mainly due to higher used fleet sales and space rental activity in ATCO Structures, partially offset by lower workforce housing rental earnings in the U.S. In the third quarter of 2018, earnings increased compared to the third quarter of 2017 mainly due to improved margins on both used workforce housing fleet sales and space rentals in Canada and Australia, as well as increased space rental activity and asset expansions in Mexico and Chile in ATCO Structures. In the fourth quarter of 2018, earnings increased compared to the fourth quarter of 2017 mainly due to higher space rentals activity, higher trade sale activity particularly in permanent modular construction in Canada and Australia, and higher occupancy at the BC Hydro Site C workforce housing camp. In the first quarter of 2019, earnings increased compared to the first quarter of 2018 mainly due to higher space rental earnings, commencement of work on the LNG Canada Cedar Valley Lodge contract, and higher lodging occupancy at the BC Hydro Site C workforce housing camp. In the second, third and fourth quarters of 2019, earnings increased compared to the same periods in 2018, mainly due to incremental earnings from ATCO Structures' LNG Canada Cedar Valley Lodge contract and incremental ATCO Frontec earnings from North American camp services and maintenance contracts. NELTUME PORTS On September 12, 2018, ATCO invested in a 40 per cent interest in Neltume Ports. In the third quarter and fourth quarter of 2018, Neltume Ports earned $1 million and $3 million. In the first, second and third quarters of 2019, Neltume Ports earned $4 million, $4 million and $3 million. Neltume Ports recorded adjusted earnings of $4 million in the fourth quarter of 2019. Earnings were $1 million higher compared to the same period of 2018 mainly due to higher container volume at the TPS port. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 58 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 58 CANADIAN UTILITIES Electricity Electricity adjusted earnings are impacted by the timing of certain major regulatory decisions, and Alberta Power Pool pricing and spark spreads. In 2018, earnings were adversely impacted by performance base regulation rate rebasing under Alberta's regulated model in electricity distribution and lower electricity transmission interim rates approved by the AUC. In the first quarter of 2018, Electricity earnings were adversely impacted by realized forward sales and minor plant outage costs in the Independent Power Plants, partially offset by earnings from Alberta PowerLine due to construction activity and earnings in Thermal PPAs due to the recognition of availability incentives. In the second quarter of 2018, earnings increased compared to the second quarter of 2017 mainly due to improved market conditions for Independent Power Plants and higher recognition of availability incentives in the Thermal PPA Plants. In the third quarter of 2018, earnings increased compared to the third quarter of 2017 mainly due to the completion of performance obligations and additional availability incentive earnings which resulted from the Battle River unit 5 PPA termination, and improved market conditions for Independent Power Plants. These improved earnings were partially offset by lower earnings due to lower scheduled construction activity at Alberta PowerLine. In the fourth quarter of 2018, higher earnings compared to the fourth quarter of 2017 were mainly due to earnings from the sale of the Barking Power assets and improved conditions in the Alberta power market, as well as higher APL earnings recorded as result of an early energization incentive. In the first quarter of 2019, higher earnings were mainly due to increased Alberta power market prices, ongoing growth in the regulated rate base and cost efficiencies in electricity distribution. In the second quarter of 2019, higher earnings compared to the second quarter of 2018 were mainly due to the impact of the electricity transmission 2018-2019 GTA decision, continued growth in the regulated rate base, cost efficiencies, and lower income taxes. Electricity earnings in the third and fourth quarters of 2019 were lower compared to the third and fourth quarters of 2018, mainly due to the forgone earnings from the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and lower earnings contributions from Alberta PowerLine as a result of the completion of construction activities in the first quarter of 2019. Lower earnings were partially offset by the positive impact of the electricity transmission 2018-2019 general tariff application decision which was received in the second quarter of 2019, overall cost efficiencies and lower income taxes. Pipelines & Liquids Pipelines & Liquids' adjusted earnings are impacted by the timing of certain major regulatory decisions, seasonality, and demand for hydrocarbon and natural gas storage and water services. In 2018, earnings were adversely impacted by performance base regulation rate rebasing under Alberta's regulated model in natural gas distribution. In the first quarter of 2018, earnings were positively impacted by higher seasonal demand and growth in rate base across the pipelines & liquids' regulated businesses. 59 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 59 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS In the second and third quarters of 2018, lower earnings compared to the same periods in 2017 were mainly due to lower seasonal demand and the impact of rate rebasing under Alberta's regulated model in natural gas distribution, partially offset by growth in rate base across our Regulated Pipelines & Liquids businesses. In the fourth quarter of 2018, higher earnings compared to the fourth quarter of 2017 were mainly due to growth in rate base, the timing of regulatory decisions and higher seasonal demand. In the first quarter of 2019, lower earnings compared to the first quarter of 2018 were mainly due to inflation rate adjustments applied to the rate of return calculations in international natural gas distribution, partially offset by ongoing growth in the regulated rate base and cost efficiencies in natural gas distribution. In the second quarter of 2019, higher earnings compared to the second quarter of 2018 were mainly due to ongoing growth in the regulated rate base and the impact of the natural gas transmission 2019-2020 general rate application GRA decision, earnings growth in the hydrocarbon storage business, cost efficiencies, and lower income taxes. In the third and fourth quarters of 2019, adjusted earnings were comparable to the same periods in 2018. EARNINGS ATTRIBUTABLE TO CLASS I AND CLASS II SHARES Earnings attributable to Class I and Class II Shares includes timing adjustments related to rate-regulated activities and unrealized gains or losses on mark-to-market forward commodity contracts. They also include one-time gains and losses, significant impairments, restructuring charges and other items that are not in the normal course of business or a result of day-to-day operations recorded at various times over the past eight quarters. These items are excluded from adjusted earnings and are highlighted below: In the second quarter of 2018, restructuring and other costs not in the normal course of business of $39 million after-tax were recorded. These costs mainly relate to staff reductions and associated severance costs, as well as costs related to decisions to discontinue certain projects that no longer represent long-term strategic value to the Company. In the third quarter of 2018, the Battle River unit 5 PPA was terminated by the Balancing Pool and dispatch control was returned to Canadian Utilities. Canadian Utilities received a payment from the Balancing Pool and also recorded additional coal-related costs and Asset Retirement Obligations associated with the Battle River generating facility. This one-time receipt and costs in the net amount of $19 million were excluded from adjusted earnings. In the fourth quarter of 2018, Canadian Utilities sold its 100 per cent ownership interest in Barking Power assets. A gain in the amount of $46 million was excluded from adjusted earnings. In the second, third and fourth quarters of 2019, Canadian Utilities closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation portfolio and Alberta PowerLine resulting in a gain on sale of operations of $65 million. As these transactions are one-time in nature, they are excluded from adjusted earnings. • • • ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 60 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 60 BUSINESS RISKS AND RISK MANAGEMENT The Board of Directors (Board) is responsible for understanding the principal risks of the businesses in which the Company is engaged. The Board also must achieve a prudent balance between risks incurred and the potential return to share owners. It must confirm controls are in place that effectively monitor and manage those risks for the Company's long-term viability. The Board has an Audit & Risk Committee, which reviews significant risks associated with future performance and growth. This committee is responsible for confirming that management has procedures in place to mitigate identified risks. We have an established enterprise risk management process that allows us to identify and evaluate our risks by both severity of impact and probability of occurrence. Materiality thresholds are reviewed annually by the Audit & Risk Committee. Non-financial risks that may have an impact on the safety of our employees, customers or the general public and reputation risks are also evaluated. The following table outlines our current significant risks and associated mitigations. Business Risk: Capital Investment Businesses Impacted: • All businesses Description and Context Associated Strategies: • Growth Risk Management Approach • Financial Strength The Company is subject to the normal risks The Company attempts to reduce the risks of project delays and cost associated with major capital projects, increases by careful planning, diligent procurement practices and entering including cancellations, delays and cost into fixed price contracts when possible. increases. International natural gas distribution's planned capital investment is approved by the regulator. Planned capital investments for the Alberta Utilities are based on the following significant assumptions: projects identified by the AESO will proceed as currently scheduled; the remaining planned capital investments are required to maintain safe and reliable service and meet planned growth in the Alberta Utilities’ service areas; regulatory approval for capital projects can be obtained in a timely manner; and access to capital market financings can be maintained. The Company believes these assumptions are reasonable. 61 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 61 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Climate Change Businesses Impacted: • All businesses Description and Context Policy risks Associated Strategies: • Operational Excellence • Innovation Risk Management Approach Policy risks ATCO has operations in several jurisdictions The sale of the Canadian fossil fuel-based electricity generation portfolio subject to emission regulations, including significantly reduced overall GHG emissions and removed coal-fired carbon pricing, output-based performance electricity generation assets from our asset portfolio as of October 1, 2019. The Company’s exposure is limited for the Regulated Utilities because GHG emission charges are generally recovered in rates. In addition, future requirements, such as upgrading equipment to further reduce methane emissions, are expected to be included in rate base on a go-forward basis. ATCO Structures is further mitigating risk through the diversification of customers, geography, and end use of products, including the pursuit of three main business lines: space rentals, workforce housing, and permanent modular construction. standards, and other emission management policies. For example, in Alberta the output- base Technology Innovation and Emissions Reduction (TIER) Regulations replaced the federal output-based pricing system as of January 1, 2020. ATCO Structures' rental fleet has historically played an important role in servicing large industry such as the oil and gas industry. Provincial and federal climate policies that adversely impact the economic viability of these operations present an under-utilized asset risk to rental fleet assets in the short to medium term. Physical Risks Physical risks associated with climate change may include an increase in extreme weather events such as heavy rainfall, floods, wildfires, extreme winds and ice storms, or changing weather patterns that cause ongoing impacts to seasonal temperatures. Electricity transmission, distribution and pipeline assets above ground or on water crossings are Physical Risks The Company continues to carefully manage physical risks, including preparing for, and responding to, extreme weather events through activities such as proactive route selection, asset hardening, regular maintenance, and insurance. The Company follows regulated engineering codes, continues to evaluate ways to create greater system reliability and resiliency and, where appropriate, submits regulatory applications for capital expenditures aimed at creating greater system reliability and resiliency within the code. exposed to extreme weather events. Prevention activities include Wildfire Management Plans and vegetation management at electricity transmission and distribution operations. The majority of the Company's natural gas pipeline network is in the ground, making it less susceptible to extreme weather events. The Company maintains in-depth emergency response measures for extreme weather events. When planning for capital investment or acquiring assets we consider site specific climate and weather factors, such as flood plain mapping and extreme weather history. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 62 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 62 Business Risk: Credit Risk Businesses Impacted: • All businesses Description and Context Associated Strategies: • Financial Strength Risk Management Approach For cash and cash equivalents and accounts Cash and cash equivalents credit risk is reduced by investing in receivable and contract assets, credit risk instruments issued by credit-worthy financial institutions and in federal represents the carrying amount on the government issued short-term instruments. consolidated balance sheet. Derivative, finance lease receivable and receivable under service concession arrangement credit risk arises from the possibility that a counterparty to a contract fails to perform according to the terms and conditions of that contract. The maximum exposure to credit risk is the carrying value of loans and receivables and derivative financial instruments. The Company minimizes other credit risks by dealing with credit-worthy counterparties, following established credit-approval policies, and requiring credit security, such as letters of credit. Geographically, a significant portion of loans and receivables are from the Company’s operations in Alberta, followed by operations in Australia and Mexico. The largest credit risk concentration is from the Alberta Utilities, which are able to recover an estimate for doubtful accounts through approved customer rates and to request recovery through customer rates for any material losses from the retailers beyond the retailer security mandated by provincial regulations. The second largest concentration of credit risk is within the Structures & Logistics business. The counterparties' financial quality is monitored regularly to ensure appropriate mitigation of credit risk. Business Risk: Cybersecurity Businesses Impacted: • All businesses Description and Context Associated Strategies: • Operational Excellence • Innovation Risk Management Approach The Company’s reliance on technology, which ATCO has an enterprise wide cybersecurity program covering all supports its information and industrial control technology assets. The cybersecurity program includes employee systems, is subject to potential cyber-attacks awareness, layered access controls, continuous monitoring, network threat including unauthorized access of confidential detection, and coordinated incident response through a centralized information and outage of critical Security Operations Centre. The Company’s cybersecurity management is infrastructure. consolidated under a common, centralized organization structure to increase effectiveness and compliance across the entire enterprise. 63 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 63 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Energy Commodity Price Businesses Impacted: Associated Strategies: • Retail Energy • Non-regulated • Financial Strength Pipelines & Liquids Description and Context Risk Management Approach Retail Energy's earnings are affected by short- In conducting its business, the Company may use various instruments, term price volatility. including forward contracts, swaps, and options to manage the risks arising Storage & industrial water's natural gas storage facility in Carbon, Alberta, is also exposed to storage price differentials. from fluctuations in commodity prices. The Company enters into natural gas purchase contracts and forward power sales contracts as the hedging instrument to manage the exposure to electricity and natural gas market price movements. Under IFRS accounting, entering into hedging instruments may result in mark-to-market adjustments that are recorded as unrealized gains or losses on the income statement. Realized gains or losses are recognized in adjusted earnings and IFRS earnings when the commodity contracts are settled. In addition, Retail Energy monitors forward curves in order to ensure it is not promoting product offerings that are unfavourable to the Company. Effective September 30, 2019, the Company announced the sale of its Canadian fossil fuel-based electricity generation portfolio. Following the close of the transaction, Canadian Utilities owns 244-MW of electricity generation assets in Canada, Mexico and Australia that are 90 per cent contracted with a weighted average contract length of 8 years. Business Risk: Financing Businesses Impacted: • All businesses Description and Context Associated Strategies: • Financial Strength Risk Management Approach The Company’s financing risk relates to the To address this risk, the Company manages its capital structure to maintain price volatility and availability of external strong credit ratings which allow continued ease of access to the capital financing to fund the capital expenditure markets. The Company also considers it prudent to maintain sufficient program and refinance existing debt liquidity to fund approximately one full year of cash requirements to maturities. Financing risk is directly influenced preserve strong financial flexibility. This liquidity is generated by cash flows by market factors. As financial market from operations and supported by appropriate levels of cash and available conditions change, these risk factors can affect committed credit facilities. the availability of capital and also the relevant financing costs. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 64 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 64 Business Risk: Foreign Currency Exchange Businesses Impacted: • All businesses Associated Strategies: • Financial Strength Description and Context Risk Management Approach The Company’s earnings from, and carrying In conducting its business, the Company may use various instruments, values of, its foreign operations are exposed to including forward contracts, swaps, and options, to manage the risks fluctuations in exchange rates. The Company arising from fluctuations in exchange rates. All such instruments are used is also exposed to transactional foreign only to manage risk and not for trading purposes. This foreign exchange exchange risk through transactions impact is partially offset by foreign denominated financing and by hedging denominated in a foreign currency. activities. The Company manages this risk through its policy of matching revenues and expenses in the same currency. When matching is not possible, the Company may utilize foreign currency forward contracts to manage the risk. Business Risk: Interest Rate Businesses Impacted: • All businesses Description and Context Associated Strategies: • Financial Strength Risk Management Approach The interest rate risk faced by the Company is In conducting its business, the Company may use various instruments, largely a result of its long-term debt at variable including forward contracts, swaps, and options to manage the risks rates as well as cash and cash equivalents. The arising from fluctuations in interest rates. All such instruments are used Company also has exposure to interest rate only to manage risk and not for trading purposes. The Company has movements that occur beyond the term of converted certain variable rate long-term debt and to fixed rate debt maturity of the fixed-rate investments. through interest rate swap agreements. At December 31, 2019, the Company had fixed interest rates, either directly or through interest rate swap agreements, on 98 per cent (2018 - 98 per cent) of total long-term debt. Consequently, the exposure to fluctuations in future cash flows, with respect to debt, from changes in market interest rates was limited. The Company’s cash and cash equivalents include fixed rate instruments with maturities of generally 90 days or less that are reinvested as they mature. 65 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 65 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Natural Gas Supply Businesses Impacted: Associated Strategies: • Non-regulated Pipelines & Liquids • Financial Strength Description and Context Risk Management Approach An Alberta natural gas transportation To reduce the impact to natural gas storage operations, Canadian Utilities provider's curtailment protocol in structures its natural gas storage portfolio around the natural gas 2017 contributed to ongoing low natural gas transportation provider’s planned maintenance schedules to minimize the prices in Alberta. While the protocol was impact of natural gas supply curtailments. changed in the later part of 2019, it still presents operational risk for natural gas storage facilities in the downstream market; all storage in Alberta is under interruptible transport. Further natural gas transportation maintenance is scheduled for multiple years into the future, which may result in transportation constraints. Business Risk: Natural Resource Sector Business Cycles Businesses Impacted: • Structures & Logistics • Neltume Ports Description and Context Associated Strategies: • Growth • Financial Strength Risk Management Approach • Operational Excellence Demand for Structures & Logistics’ products ATCO Structures' cost structure is weighted to variable costs which and services, and the services provided by provides flexibility in moderating costs when project activity slows. The Neltume Ports are directly related to capital Structures & Logistics business is not a capital intensive business so spending cycles and levels of development market entry and exit costs are relatively low. A base of more stable activity in various industries, primarily in the earnings and cash flows exists within the space rentals business and the natural resources sector. Several key factors facility operations & maintenance service contracts that provide support influence customers’ decision-making on when ATCO Structures' natural resource sector customers are going whether or not to purchase products and through commodity cycle downturns. Neltume Ports has a diversified services offered by the Company and/or to operational portfolio linked to a mix of economic activity in Chile, Uruguay, utilize the services provided by Neltume Ports. Argentina, and Brazil. These factors include expected commodity prices, global economic and political conditions, and access to debt financing and equity capital. Any adverse impact on these key decision factors for a prolonged period could affect demand for the Company’s products and services. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 66 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 66 Business Risk: Pipeline Integrity Businesses Impacted: • Pipelines & Liquids Description and Context Associated Strategies: • Operational Excellence • Community Involvement Risk Management Approach Pipelines & Liquids has significant pipeline Programs are in place to monitor the integrity of the pipeline infrastructure. Although the probability of a infrastructure and replace pipelines as required to address safety, pipeline rupture is very low, the consequences reliability, and future growth. These programs include natural gas of a failure can be severe. distribution and natural gas transmission's Urban Pipeline Replacement and Integrity programs, and natural gas distribution and international natural gas distribution's Mains Replacement programs. The Company also carries property and liability insurance. Business Risk: Political Businesses Impacted: • All businesses Associated Strategies: • Growth • Financial Strength • Operational Excellence Description and Context Risk Management Approach Operations are exposed to a risk of change in Participation in policy consultations with governments and engagement of the business environment due to political stakeholder groups ensures ongoing communication and that the impacts change. Legislative changes may impact the and costs of proposed policy changes are identified and understood. financial performance of operations. This Where appropriate, the Company works with its peers and industry could negatively impact earnings, return on associations to develop common positions and strategies. Geographic equity and assets, and credit metrics. diversification of assets by region and by country reduces the impact of political and legislative changes. 67 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 67 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Regulated Operations Businesses Impacted: Associated Strategies: • Regulated • Regulated Electricity • Growth • Operational Excellence Pipelines & Liquids • Financial Strength Description and Context Risk Management Approach The Regulated Utilities are subject to the The Regulated Utilities file forecasts in the rate-setting process to recover normal risks faced by regulated companies. the costs of providing services and earn a fair rate of return. The These risks include the regulator's approval of determination of a fair rate of return on the common equity component customer rates that permit a reasonable of rate base is determined in a generic cost of capital proceeding in opportunity to recover service costs on a Alberta and an Access Arrangement proceeding in Australia. The timely basis, including a fair return on rate Regulated Utilities continuously monitor various regulatory decisions and base. These risks also include the regulator's cases to assess how they might impact the Company's regulatory potential disallowance of costs incurred. applications for the recovery of prudent costs. The Regulated Utilities are Electricity distribution and natural gas proactive in demonstrating prudence and continuously look for ways to distribution operate under performance lower operating costs while maintaining service levels. based regulation (PBR). Under PBR, utility revenues are formula driven, which raises the uncertainty of cost recovery. In Australia, the ERA assesses appropriate returns, prudent levels of operating costs, capital expenditure and expected throughput on the network through an Access Arrangement proceeding. Business Risk: Technological Transformation and Disruption Businesses Impacted: • All businesses Associated Strategies: • Growth • Operational Excellence • Financial Strength • Innovation Description and Context Risk Management Approach The introduction and rapid, widespread The strategic plans of each Business Unit incorporate and address the adoption of transformative technology could evolution of their business into areas of transformative technology. lead to disruption of ATCO's existing business Achievement of technological currency and implementation of innovative models and new competitive market initiatives have been adopted as key strategies for the Company and dynamics. Failure to effectively identify and annual key performance indicators in these areas are monitored to ensure manage disruptive technology and / or changing consumer attitudes and preferences continuing evolution. The business constantly seeks opportunities to minimize costs by monitoring trends occurring in other jurisdictions that may result in disruptions to the business and may be ahead of the technological curve. an inability to achieve strategic and financial objectives. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 68 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 68 Business Risk: Liquidity Businesses Impacted: • All businesses Description and Context Associated Strategies: • Financial Strength Risk Management Approach Liquidity risk is the risk that the Company will Cash flows from operations provides a substantial portion of the Company’s not be able to meet its financial obligations. cash requirements. Additional cash requirements are met with the use of existing cash balances and externally through bank borrowings and the issuance of long-term debt, non-recourse long-term debt and preferred shares. Commercial paper borrowings and short-term bank loans under available credit lines are used to provide flexibility in the timing and amounts of long-term financing. The Company does not invest any of its cash balances in asset-backed securities. At December 31, 2019, the Company’s cash position was $1,140 million and there were available committed and uncommitted lines of credit of approximately $2.5 billion which can be utilized for general corporate purposes. Liquidity Risk includes contractual financial obligations which the Company will meet with cash flow from operations, existing cash balances and external financing, if necessary. These contractual obligations for the next five years and thereafter are shown below. ($ millions) 2020 2021 2022 2023 2024 2025 and thereafter Financial Liabilities Accounts payable and accrued liabilities Long-term debt: Principal Interest expense (1) Derivatives (2) Commitments Purchase obligations: Operating and maintenance agreements Capital expenditures Other Total 675 200 412 11 1,298 343 128 12 483 1,781 — — — — — 557 394 8 959 327 370 1 698 511 352 1 864 322 327 325 — — 322 1,281 — — 327 1,025 — — 325 1,189 123 337 — 460 287 — — 287 747 7,767 6,687 — 14,454 24 — — 24 14,478 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2019. Interest payments on debt that has been hedged have been estimated using hedged rates. (2) Payments on outstanding derivatives have been estimated using exchange rates and commodity prices in effect at December 31, 2019. 69 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 69 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS NON-GAAP AND ADDITIONAL GAAP MEASURES Adjusted earnings are defined as earnings attributable to Class I and Class II Shares after adjusting for the timing of revenues and expenses associated with rate-regulated activities and unrealized gains or losses on mark-to-market forward and swap commodity contracts. Adjusted earnings also exclude one-time gains and losses, significant impairments, and items that are not in the normal course of business or a result of day-to-day operations. Adjusted earnings present earnings from rate-regulated activities on the same basis as was used prior to adopting IFRS - that basis being the U.S. accounting principles for rate-regulated activities. Management’s view is that adjusted earnings allow for a more effective analysis of operating performance and trends. A reconciliation of adjusted earnings to earnings attributable to Class I and Class II Shares is presented in this MD&A. Adjusted earnings is an additional GAAP measure presented in Note 4 of the 2019 Consolidated Financial Statements. Adjusted earnings per Class I and Class II Share is calculated by dividing adjusted earnings by the weighted average number of shares outstanding for the period. Funds generated by operations is defined as cash flow from operations before changes in non-cash working capital and change in receivable under service concession arrangement. In management’s opinion, funds generated by operations is a significant performance indicator of the Company’s ability to generate cash during a period to fund capital expenditures. Funds generated by operations does not have any standardized meaning under IFRS and might not be comparable to similar measures presented by other companies. A reconciliation of funds generated by operations to cash flows from operating activities is presented in this MD&A. Capital investment is defined as cash used for capital expenditures, business combinations, service concession arrangements, and cash used in the Company's proportional share of capital expenditures in joint ventures, and cash used for equity investment in associate companies. In management's opinion, capital investment reflects the Company's total cash investment in assets. Capital expenditures includes additions to property, plant and equipment and intangibles as well as interest capitalized during construction. A reconciliation of capital investments to capital expenditures is presented in this MD&A. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 70 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 70 RECONCILIATION OF ADJUSTED EARNINGS TO EARNINGS ATTRIBUTABLE TO CLASS I AND CLASS II SHARES Adjusted earnings are earnings attributable to Class I and Class II Shares after adjusting for the timing of revenues and expenses associated with rate-regulated activities and unrealized gains or losses on mark-to-market forward and swap commodity contracts. Adjusted earnings also exclude one-time gains and losses, significant impairments, and items that are not in the normal course of business or a result of day-to-day operations. Adjusted earnings are a key measure of segment earnings that management uses to assess segment performance and allocate resources. It is management’s view that adjusted earnings allow a better assessment of the economics of rate regulation in Canada and Australia than IFRS earnings. ($ millions) 2019 2018 Revenues Adjusted earnings (loss) Loss on sale of operations Sale of Barking Power assets Unrealized gains (losses) on mark-to-market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Other Earnings (loss) attributable to Class I and Class II Shares Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Three Months Ended December 31 ATCO Consolidated Electricity Pipelines & Liquids CUL Corporate & Other Consolidated 245 140 14 5 — — — — — — — — — — — — 14 5 — — 4 3 — — — — — — — — — — — — 4 3 8 (1) (9) 2 — — — — — — 2 — — — 1 — 419 637 46 54 (7) — — 46 — 1 (3) 7 (1) — — — (6) 2 35 108 483 383 54 54 — — — — 3 — (2) (28) (2) — (6) — 47 26 27 15 (8) (10) — — — — (1) — (1) 1 — — (1) — (11) (9) 929 1,035 92 98 (7) — — 46 2 1 (6) (20) (3) — (7) — 71 125 1,182 1,174 101 108 (7) — — 46 2 1 (4) (20) (3) — (6) — 83 135 71 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 71 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS ($ millions) 2019 2018 Revenues Adjusted earnings (loss) Gain on sale of operations Restructuring and other costs Proceeds from termination of PPA Sale of Barking Power Assets Unrealized (losses) gains on mark-to-market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Other Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Electricity Pipelines & Liquids CUL Corporate & Other Consolidated Year Ended December 31 ATCO Consolidated 803 511 37 15 — — — (9) — — — — — — — — — — — — — — 15 4 — — — — — — — — — — — — — — — (2) — (6) 17 — — — 3 — — — — — — 2 — — — 1 — 2,155 2,858 221 228 65 — — 1,649 1,470 137 130 — — — (19) (11) — 19 — 46 (7) 16 64 (28) (6) — — — 337 262 — — — — 3 — 33 (43) (6) — (6) — 161 76 101 49 (39) (39) — — — (3) — — — — 7 — (1) 2 — — (1) — (34) (40) 3,905 4,377 4,706 4,888 319 319 65 — — 365 355 65 — — (33) (39) — 19 — 46 3 16 96 (69) (12) — (7) — 464 298 — 19 — 46 3 16 98 (69) (12) — (6) — 513 328 Earnings (loss) attributable to Class I and Class II Shares 37 6 15 4 (3) 20 GAIN ON SALE OF OPERATIONS In 2019, Canadian Utilities closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation portfolio and ownership interest in Alberta PowerLine. These sales resulted in an aggregate gain of $125 million (after-tax), ($65 million to ATCO after non-controlling interests). Transaction costs recorded in previous quarters that relate to the sale of Alberta PowerLine have been consolidated into this gain. As this gain is related to a series of one-time transactions, it is excluded from adjusted earnings. RESTRUCTURING AND OTHER COSTS In the second quarter of 2018, restructuring and other costs not in the normal course of business of $39 million were recorded. These costs mainly related to staff reductions and associated severance costs, as well as costs related to decisions to discontinue certain projects that no longer represent long-term strategic value to the Company. PROCEEDS FROM TERMINATION OF PPA On September 30, 2018, the Battle River unit 5 PPA was terminated by the Balancing Pool and dispatch control was returned to Canadian Utilities. ATCO subsidiary Canadian Utilities received a $62 million payment ($24 million to ATCO after-tax and non-controlling interests) from the Balancing Pool. The payment has been recorded as proceeds from termination of PPA in the statement of earnings in 2018. Additional Battle River generating facility coal-related ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 72 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 72 costs and Asset Retirement Obligations of $5 million (after-tax) were also recorded. These one-time receipts and costs in the net amount of $19 million were excluded from adjusted earnings. SALE OF BARKING POWER ASSETS In the fourth quarter of 2018, ATCO subsidiary Canadian Utilities sold its 100 per cent ownership interest in Barking Power assets. An after-tax gain in the amount of $46 million was excluded from adjusted earnings. UNREALIZED GAINS (LOSSES) ON MARK-TO-MARKET FORWARD AND SWAP COMMODITY CONTRACTS Prior to the sale of the Canadian fossil fuel based electricity generation portfolio, the Company entered into forward contracts in order to optimize available merchant capacity and manage exposure to electricity market price movements for its Independent Power and Thermal Plants not governed by a Power Purchase Arrangement. The forward contracts were measured at fair value. Unrealized gains and losses due to changes in the fair value of the forward contracts were recognized in the Electricity operating segment earnings where hedge accounting was not applied. In addition, the Company’s retail electricity and natural gas business in Alberta enters into fixed-price swap commodity contracts to manage exposure to electricity and natural gas prices and volumes. Prior to the sale of operations, these contracts were accounted for as normal purchase agreements as they were with an affiliate company and the own use exemption was applied. Starting September 30, 2019, these contracts are measured at fair value. Unrealized gains and losses due to changes in the fair value of the fixed-price swap commodity contracts are recognized in the Corporate & Other segment earnings. The CODM believes that removal of the unrealized gains or losses on mark-to-market forward and swap commodity contracts provides a better representation of operating results for the Company's operations. Realized gains or losses are recognized in adjusted earnings when the commodity contracts are settled. RATE-REGULATED ACTIVITIES ATCO Electric and its subsidiaries, ATCO Electric Yukon, Northland Utilities (NWT) and Northland Utilities (Yellowknife), as well as natural gas distribution, natural gas transmission and international natural gas distribution are collectively referred to as Utilities. There is currently no specific guidance under IFRS for rate-regulated entities that the Company is eligible to adopt. In the absence of this guidance, the Utilities do not recognize assets and liabilities from rate-regulated activities as may be directed by regulatory decisions. Instead, the Utilities recognize revenues in earnings when amounts are billed to customers, consistent with the regulator-approved rate design. Operating costs and expenses are recorded when incurred. Costs incurred in constructing an asset that meet the asset recognition criteria are included in the related property, plant and equipment or intangible asset. The Company uses standards issued by the Financial Accounting Standards Board (FASB) in the United States as another source of generally accepted accounting principles to account for rate-regulated activities in its internal reporting provided to the CODM. The CODM believes that earnings presented in accordance with the FASB standards are a better representation of the operating results of the Company’s rate-regulated activities. Therefore, the Company presents adjusted earnings as part of its segmented disclosures on this basis. Rate-regulated accounting (RRA) standards impact the timing of how certain revenues and expenses are recognized when compared to non-rate regulated activities, to appropriately reflect the economic impact of a regulator's decisions on revenues. 73 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 73 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS Rate-regulated accounting differs from IFRS in the following ways: Timing Adjustment Items RRA Treatment IFRS Treatment Additional revenues billed in current period Future removal and site restoration costs, and impact of colder temperatures. Revenues to be billed in future periods Deferred income taxes, impact of warmer temperatures, and impact of inflation on rate base. Regulatory decisions received Regulatory decisions received which relate to current and prior periods. Settlement of regulatory decisions and other items Settlement of amounts receivable or payable to customers and other items. The Company defers the recognition of cash received in advance of future expenditures. The Company recognizes revenues associated with recoverable costs in advance of future billings to customers. The Company recognizes revenues when amounts are billed to customers and costs when they are incurred. The Company recognizes costs when they are incurred, but does not recognize their recovery until customer rates are changed and amounts are collected through future billings. The Company recognizes the earnings from a regulatory decision pertaining to current and prior periods when the decision is received. The Company does not recognize earnings from a regulatory decision when it is received as regulatory assets and liabilities are not recorded under IFRS. The Company recognizes the amount receivable or payable to customers as a reduction in its regulatory assets and liabilities when collected or refunded through future billings. The Company recognizes earnings when customer rates are changed and amounts are recovered or refunded to customers through future billings. The significant timing adjustments as a result of the differences between rate-regulated accounting and IFRS are as follows: ($ millions) Additional revenues billed in current period Future removal and site restoration costs (1) Impact of colder temperatures (2) Revenues to be billed in future periods Deferred income taxes (3) Deferred income taxes due to decrease in provincial corporate income tax (4) Impact of warmer temperatures (2) Impact of inflation on rate base (5) Regulatory decisions received (see below) Settlement of regulatory decisions and other items (6) Three Months Ended December 31 Year Ended December 31 2019 2018 Change 2019 2018 Change 5 (1) 8 — (3) (1) 34 7 39 6 (13) (14) — (3) (8) — (3) — — (2) 2 5 (4) 1 — 3 6 2 8 (54) (55) 106 — (7) 3 9 98 — — (8) — (51) (69) (20) 16 (5) 1 1 106 — 1 3 60 167 (1) Removal and site restoration costs are billed to customers over the estimated useful life of the related assets based on forecast costs to be incurred in future periods. (2) Natural gas distribution customer rates are based on a forecast of normal temperatures. Fluctuations in temperatures may result in more or less (3) (4) revenue being recovered from customers than forecast. Revenues above or below the normal in the current period are refunded to or recovered from customers in future periods. Income taxes are billed to customers when paid by the Company. In the second quarter of 2019, the Government of Alberta enacted a phased decrease in the provincial corporate income tax rate from 12 per cent to 8 per cent. This decrease is being phased in increments from July 1, 2019 to January 1, 2022. As a result of this change, the Alberta Utilities decreased deferred income taxes and increased earnings in 2019 by $106 million. ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 74 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 74 (5) (6) The inflation-indexed portion of the international natural gas distribution rate base is billed to customers through the recovery of depreciation in subsequent periods based on the actual rate of inflation. Under rate-regulated accounting, revenue is recognized in the current period for the inflation component of rate base when it is earned. Differences between the amounts earned and the amounts billed to customers are deferred and recognized in revenues over the service life of the related assets. In 2018, electricity transmission recorded a decrease in earnings of $20 million mainly related to a refund of deferral account balances relating to 2013 and 2014. Natural gas distribution also recorded a reduction in earnings of $31 million related to a refund of previously over-collected transmission costs. Regulatory Decisions Received Under rate-regulated accounting, the Company recognizes earnings from a regulatory decision pertaining to current and prior periods when the decision is received. A description of the significant regulatory decisions recognized in adjusted earnings in 2019 is provided below. 1. Decision Information Technology (IT) Common Matters 2. ATCO Electric Transmission General Tariff Application (GTA) Amount Description 12 In August 2014, the Company sold its IT services business to Wipro Ltd. (Wipro) and signed a ten-year IT Master Services Agreement (MSA) effective January 1, 2015. In 2015, the Alberta Utilities Commission (AUC) commenced an Information Technology Common Matters proceeding to review the recovery of IT costs by the Alberta Utilities from January 1, 2015 going forward. On June 5, 2019, the AUC issued its decision regarding the IT Common Matters proceeding and directed the Alberta Utilities to reduce the first-year of the Wipro MSA by 13 per cent and to apply a glide path that reduces pricing by 4.61 per cent in each of years 2 through 10. The reduction in adjusted earnings resulting from the decision for the period January 1, 2015 to December 31, 2019 was $12 million. Of this amount, $8 million relates to the period January 1, 2015 to June 30, 2019 and was recorded in the second quarter of 2019. The remaining $4 million was recorded in the second half of 2019. (9) In June 2017, ATCO Electric Transmission filed a GTA for its operations for 2018 and 2019. The decision was received in July 2019 approving the majority of capital expenditures and operating costs requested. The increase in adjusted earnings resulting from the decision was $9 million, of which $5 million relates to 2018. IT COMMON MATTERS DECISION As described in the IT Common Matters decision above, in August 2014, the Company sold its IT services business to Wipro Ltd. (Wipro) and signed a ten-year IT Master Services Agreement (MSA) effective January 1, 2015. Proceeds of the sale were $204 million, resulting in a one-time after-tax and NCI gain of $74 million. In 2014, the Company did not include this gain on sale in adjusted earnings because it was a significant one-time event. In June 2019, the AUC issued its decision regarding the IT Common Matters proceeding which is described in the regulatory decisions received section above. In the proceeding, the Company presented a considerable amount of evidence, including expert benchmarking and price review studies, to support that the Wipro MSA rates were at fair market value. As such, there was no cross subsidization between the sale price of the Company's IT services business to Wipro in the 2014 transaction and the establishment of IT rates under the MSA. Despite these efforts the AUC found that the Alberta Utilities failed to demonstrate that the IT pricing in the MSA would result in just and reasonable rates. Consistent with the treatment in 2014, the $12 million reduction recognized in 2019, along with future impacts associated with this decision, will be excluded from adjusted earnings. OTHER For the year ended December 31, 2019, the Company has recognized costs of $6 million after tax and NCI relating to a number of disputes related to the Tula Pipeline project. The Company continues to work with the involved parties to achieve a resolution of these disputes. As these costs relate to a significant non-recurring event, they are excluded from adjusted earnings. 75 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 75 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS RECONCILIATION OF FUNDS GENERATED BY OPERATIONS TO CASH FLOWS FROM OPERATING ACTIVITIES Funds generated by operations is defined as cash flow from operations before changes in non-cash working capital and change in receivable under service concession arrangement. In management’s opinion, funds generated by operations is a significant performance indicator of the Company’s ability to generate cash during a period to fund capital expenditures. Funds generated by operations does not have any standardized meaning under IFRS and might not be comparable to similar measures presented by other companies. ($ millions) 2019 2018 Funds generated by operations Changes in non-cash working capital Change in receivable under service concession arrangement Cash flows from operating activities Three Months Ended December 31 Year Ended December 31 469 490 2 (21) (28) (93) 443 376 1,927 1,897 (205) (95) (180) (803) 1,542 999 ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 76 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 76 RECONCILIATION OF CAPITAL INVESTMENT TO CAPITAL EXPENDITURES Capital investment is defined as cash used for capital expenditures, business combinations, service concession arrangements, and cash used in the Company's proportional share of capital expenditures in joint ventures, and cash used for equity investment in associate companies. In management's opinion, capital investment reflects the Company's total cash investment in assets. Capital expenditures includes additions to property, plant and equipment and intangibles as well as interest capitalized during construction. A reconciliation of capital investments to capital expenditures is presented in this MD&A. ($ millions) 2019 2018 Capital Investment Capital expenditure in joint ventures Business combinations (1) Service concession arrangement Capital Expenditures ($ millions) 2019 2018 Capital Investment Equity investment in associate company Capital expenditure in joint ventures Business combinations (1) Service concession arrangement Capital Expenditures Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Three Months Ended December 31 ATCO Consolidated Electricity Pipelines & Liquids CUL Corporate & Other Consolidated 25 35 — (1) — (24) — — 25 10 — — — — — — — — — — (17) 5 — — — — — — (17) 5 111 203 (1) (3) — — — (44) 110 156 260 174 1 (1) — — — — 261 173 3 3 — — — — — — 3 3 374 380 — (4) — — — (44) 374 332 382 420 — (5) — (24) — (44) 382 347 Year Ended December 31 Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited ATCO Consolidated Electricity Pipelines & Liquids CUL Corporate & Other Consolidated 105 113 — — — (1) — (24) — — 105 88 9 444 (9) (444) — — — — — — — — (16) 10 543 1,287 677 648 — — — — — — — — (16) 10 — — (2) (14) — (112) (95) (664) 446 497 — — — (5) — — — — 677 643 6 16 — — — — — — — — 6 16 1,226 1,951 — — (2) (19) 1,324 2,518 (9) (444) (2) (20) — — (112) (95) (664) 1,129 1,156 (136) (95) (664) 1,218 1,254 (1) Business combinations includes Canadian Utilities' first quarter 2018 acquisition of Electricidad de Golfo, a long-term contracted, 35-MW hydroelectric power station in the state of Veracruz, Mexico. This also includes an acquisition for 70 per cent ownership interest in ATCO Espaciomovil, a modular manufacturing business in Mexico. 77 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 77 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS OTHER FINANCIAL INFORMATION OFF BALANCE SHEET ARRANGEMENTS ATCO does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition, including, without limitation, the Company's liquidity and capital resources. CONTINGENCIES The Company is party to a number of disputes and lawsuits in the normal course of business. The Company believes the ultimate liability arising from these matters will have no material impact on its consolidated financial statements. SIGNIFICANT ACCOUNTING ESTIMATES The Company’s significant accounting estimates are described in Note 26 of the 2019 Consolidated Financial Statements, which are prepared in accordance with IFRS. Management makes judgments and estimates that could significantly affect how policies are applied, amounts in the consolidated financial statements are reported, and contingent assets and liabilities are disclosed. Most often these judgments and estimates concern matters that are inherently complex and uncertain. Judgments and estimates are reviewed on an ongoing basis; changes to accounting estimates are recognized prospectively. ACCOUNTING CHANGES On January 1, 2019, the Company adopted the new accounting standard, IFRS 16 Leases, which replaces IAS 17 Leases and related interpretations. This standard introduces a new approach to lease accounting that requires a lessee to recognize right-of-use assets and lease liabilities for the rights and obligations created by leases. It brings most leases on-balance sheet for lessees, eliminating the distinction between operating and finance leases. Lessor accounting under the new standard retains similar classifications to the previous guidance. The Company adopted the standard using the modified retrospective approach which does not require restatement of prior period financial information, as it recognizes the cumulative impact on the opening balance sheet and applies the standard prospectively. Accordingly, the comparative information in the 2019 Consolidated Financial Statements is not restated. On adoption of the new standard on January 1, 2019, the Company recognized $107 million of right-of-use assets and $107 million of lease liabilities. The right-of-use assets and lease liabilities relate to leases for land and buildings. From January 1, 2019, the Company recognizes depreciation expense on right-of-use assets and interest expense on lease liabilities with lease payments recorded as a reduction of the lease liability. Prior to the adoption of IFRS 16, lease payments were recorded as expenses in the statement of earnings. The adoption of IFRS 16 has not had a significant impact on earnings. Further information on the adoption of IFRS 16, right-of-use assets and lease liabilities are provided in Notes 3 and 20 of the 2019 Consolidated Financial Statements. In June 2019, the IFRS Interpretations Committee, acting on a request for interpretation, concluded that a pipeline sub- surface arrangement is, or contains, a lease under IFRS 16. A pipeline sub-surface arrangement is an agreement with a landowner to lay an underground pipeline in exchange for consideration. It contains a lease because the underground space is physically distinct from the landowner’s land, and the owner of the pipeline has exclusive use of the underground space. The Company has assessed the impact of the interpretation on its pipeline sub-surface arrangements. Based on the analysis performed, the impact on the 2019 Consolidated Financial Statements is not significant. There are no other new or amended standards issued, but not yet effective, that the Company anticipates will have a material effect on the 2019 Consolidated Financial Statements once adopted. DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2019, management evaluated the effectiveness of the Company’s disclosure controls and procedures as required by the Canadian Securities Administrators. This evaluation was performed under the supervision of, and with the participation of, the Chief Executive Officer (CEO) and the Chief Financial Officer (CFO). ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 78 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 78 Disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in documents filed with securities regulatory authorities is recorded, processed, summarized and reported on a timely basis. The controls also seek to assure this information is accumulated and communicated to management, including the CEO and the CFO, as appropriate, to allow timely decisions on required disclosure. Management, including the CEO and the CFO, does not expect the Company's disclosure controls and procedures will prevent or detect all errors. The inherent limitations in all control systems are that they can provide only reasonable, not absolute, assurance that all control issues and instances of error, if any, within the Company have been detected. Based on this evaluation, the CEO and the CFO have concluded that the Company’s disclosure controls and procedures were effective at December 31, 2019. INTERNAL CONTROL OVER FINANCIAL REPORTING As of December 31, 2019, management evaluated the effectiveness of the Company’s internal control over financial reporting as required by the Canadian Securities Administrators. This evaluation was performed under the supervision of, and with the participation of, the CEO and the CFO. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting can provide only reasonable assurance regarding the reliability of financial statement preparation and may not prevent or detect all misstatements. Based on this evaluation, the CEO and the CFO have concluded that the Company’s internal control over financial reporting was effective at December 31, 2019. There was no change in the Company’s internal control over financial reporting that occurred during the period beginning on January 1, 2019, and ended on December 31, 2019, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. FORWARD-LOOKING INFORMATION Certain statements contained in this MD&A constitute forward-looking information. Forward-looking information is often, but not always, identified by the use of words such as “anticipate”, “plan”, “estimate”, “expect”, “may”, “will”, “intend”, “should”, and similar expressions. Forward-looking information involves known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information. The Company believes that the expectations reflected in the forward-looking information are reasonable, but no assurance can be given that these expectations will prove to be correct and such forward-looking information should not be unduly relied upon. The Company’s actual results could differ materially from those anticipated in any forward-looking information contained in this MD&A as a result of regulatory decisions, competitive factors in the industries in which the Company operates, prevailing economic conditions, and other factors, many of which are beyond the control of the Company. Any forward-looking information contained in this MD&A represents the Company’s expectations as of the date hereof, and is subject to change after such date. The Company disclaims any intention or obligation to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required by applicable securities legislation. ADDITIONAL INFORMATION ATCO has published its 2019 Consolidated Financial Statements and its MD&A for the year ended December 31, 2019. Copies of these documents may be obtained upon request from Investor Relations at 3rd Floor, West Building, 5302 Forand Street S.W., Calgary, Alberta, T3E 8B4, telephone 403-292-7500, fax 403-292-7532 or email investorrelations@atco.com. 79 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 79 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS GLOSSARY AESO means the Alberta Electric System Operator. Alberta Power Pool means the market for electricity in Alberta operated by AESO. Alberta Utilities means Electricity Distribution (ATCO Electric Distribution), Electricity Transmission (ATCO Electric Transmission), Natural Gas Distribution (ATCO Gas) and Natural Gas Transmission (ATCO Pipelines). AUC means the Alberta Utilities Commission. Availability is a measure of time, expressed as a percentage of continuous operation, that a generating unit is capable of producing electricity, regardless of whether the unit is actually generating electricity. Average weekly earnings (AWE) is an indicator of short-term employee earnings growth. Class I Shares means Class I Non-Voting Shares of the Company. Class II Shares means Class II Voting Shares of the Company. CODM means Chief Operating Decision Maker, and is comprised of the Chair & Chief Executive Officer, and the other members of the Executive Committee. Company means ATCO Ltd. and, unless the context otherwise requires, includes its subsidiaries and joint arrangements. Consumer price index (CPI) measures the average change in prices over time that consumers pay for a basket of goods and services. Earnings means Adjusted Earnings as defined in the Non-GAAP and Additional GAAP Measures section of this MD&A. GAAP means Canadian generally accepted accounting principles. GHG means greenhouse gas. Gigajoule (GJ) is a unit of energy equal to approximately 948.2 thousand British thermal units. IFRS means International Financial Reporting Standards. K Bar means the AUC allowance for capital additions under performance based regulation. Kilowatt (kW) is a measure of electric power equal to 1,000 watts. LNG means liquefied natural gas. Megawatt (MW) is a measure of electric power equal to 1,000,000 watts. Megawatt hour (MWh) is a measure of electricity consumption equal to the use of 1,000,000 watts of electricity over a one-hour period. NCI means non controlling interest PBR means Performance Based Regulation. PPA means Power Purchase Arrangements. Regulated Utilities means Electricity Distribution (ATCO Electric Distribution), Electricity Transmission (ATCO Electric Transmission), Natural Gas Distribution (ATCO Gas), Natural Gas Transmission (ATCO Pipelines) and International Natural Gas Distribution (ATCO Gas Australia). ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 80 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 80 APPENDIX 1 FOURTH QUARTER FINANCIAL INFORMATION Financial information for the three months ended December 31, 2019 and 2018 is shown below. CONSOLIDATED STATEMENT OF EARNINGS Three Months Ended December 31 2019 1,182 2018 1,174 (139) (49) (66) (28) (51) (9) (151) (172) (68) (17) (94) (844) 21 — 4 7 370 9 (124) (115) 255 (90) 165 83 82 165 $0.73 $0.72 (155) (44) (66) (60) (52) (44) (79) (158) (50) (43) (74) (825) — 125 3 6 483 4 (134) (130) 353 (85) 268 135 133 268 $1.18 $1.18 (millions of Canadian Dollars except per share data) Revenues Costs and expenses Salaries, wages and benefits Energy transmission and transportation Plant and equipment maintenance Fuel costs Purchased power Service concession arrangement costs Materials and consumables Depreciation and amortization Franchise fees Property and other taxes Other Gain on Sale of Operations Gain on sale of Barking Power assets Earnings from investment in associate company Earnings from investment in joint ventures Operating profit Interest income Interest expense Net finance costs Earnings before income taxes Income taxes Earnings for the period Earnings attributable to: Class I and Class II Shares Non-controlling interests Earnings per Class I and Class II Share Diluted earnings per Class I and Class II Share 81 — ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS 81 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED STATEMENT OF CASH FLOWS (millions of Canadian Dollars) Operating activities Earnings for the period Adjustments to reconcile earnings to cash flows from operating activities Changes in non-cash working capital Change in receivable under service concession arrangement Cash flows from operating activities Investing activities Additions to property, plant and equipment Proceeds on disposal of property, plant and equipment Proceeds on sale of Barking Power assets Additions to intangibles Acquisition, net of cash acquired Investment in equity interest in associate company Proceeds on sales of operations, net of cash disposed Changes in non-cash working capital Other Cash flows used in investing activities Financing activities Net repayment of short-term debt Issue of long-term debt Repayment of long-term debt Release of restricted project funds Repayment of non-recourse long-term debt Repayment of lease liabilities Net purchase of Class I Shares Dividends paid to Class I and Class II Share owners Dividends paid to non-controlling interests Interest paid Other Cash flows (used in) from financing activities Increase in cash position Foreign currency translation Beginning of period End of period Three Months Ended December 31 2019 2018 165 304 2 (28) 443 (353) 3 — (27) (5) — 222 30 3 (127) — 13 (10) 146 (7) (5) (5) (47) (73) (143) (1) (132) 184 (35) 991 1,140 268 222 (21) (93) 376 (275) 2 219 (68) (24) (7) — 32 (4) (125) (225) 662 (71) 81 (5) — (5) (43) (54) (138) 17 219 470 8 213 691 ATCO LTD. 2019 MANAGEMENT’S DISCUSSION & ANALYSIS — 82 ATCO LTD. 2019 MANAGEMENT'S DISCUSSION & ANALYSIS 82 ATCO LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2019 83 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS TABLE OF CONTENTS Management's Responsibility for Financial Reporting ............................................................................................................ Independent Auditor’s Report ....................................................................................................................................................... Consolidated Statements of Earnings .......................................................................................................................................... Consolidated Statements of Comprehensive Income .............................................................................................................. Consolidated Balance Sheets ......................................................................................................................................................... Consolidated Statements of Changes in Equity ......................................................................................................................... Consolidated Statements of Cash Flows ..................................................................................................................................... Notes to Consolidated Financial Statements General Information 1. 2. 3. The Company and its Operations ..................................................................................................................................... Basis of Presentation ......................................................................................................................................................... Change in Accounting Policy ............................................................................................................................................. Information on Financial Performance Page 2 85 3 86 6 89 90 7 91 8 92 9 93 10 94 94 95 11 11 12 Segmented Information .................................................................................................................................................... Revenues ............................................................................................................................................................................. 4. 5. 6. Other Costs and Expenses ................................................................................................................................................ Interest Expense ................................................................................................................................................................. 7. 8. 9. Income Taxes ...................................................................................................................................................................... Earnings per Share ............................................................................................................................................................. Information on Financial Position Inventories .......................................................................................................................................................................... 10. 11. Property, Plant and Equipment ......................................................................................................................................... Intangibles ........................................................................................................................................................................... 12. 13. Goodwill ............................................................................................................................................................................... 14. Receivable under Service Concession Arrangement ...................................................................................................... 15. Short-Term Debt ................................................................................................................................................................. 16. Long-Term Debt .................................................................................................................................................................. 17. Non-Recourse Long-Term Debt ........................................................................................................................................ 18. Retirement Benefits ........................................................................................................................................................... 19. Balances from Contracts with Customers ....................................................................................................................... 20. Leases .................................................................................................................................................................................. 21. Class I Non-Voting and Class II Voting Shares ................................................................................................................. 97 14 21 23 23 23 26 104 106 106 106 109 109 110 111 112 112 113 113 115 115 120 121 124 26 27 28 29 29 30 30 32 32 37 38 41 Information on Cash Flow 22. Cash Flow Information ....................................................................................................................................................... 125 42 Risk 23. Financial Instruments ........................................................................................................................................................ 24. Risk Management ............................................................................................................................................................... 25. Capital Disclosures ............................................................................................................................................................. 26. Significant Judgments, Estimates and Assumptions ....................................................................................................... Group Structure 27. Business Combinations ..................................................................................................................................................... Investment in Equity Interest in Associate Company ..................................................................................................... 28. 29. Subsidiaries ......................................................................................................................................................................... Joint Arrangements ............................................................................................................................................................ 30. 31. Non-Controlling Interests .................................................................................................................................................. Other Information 32. Share-Based Compensation Plans ................................................................................................................................... 33. Contingencies ..................................................................................................................................................................... 34. Commitments ..................................................................................................................................................................... 35. Related Party Transactions ................................................................................................................................................ 36. Accounting Policies ............................................................................................................................................................. 127 130 134 44 47 51 52 135 137 142 144 145 146 54 59 61 62 63 148 150 151 151 151 65 67 68 68 68 1 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 84 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING Management is responsible for preparing the consolidated financial statements in accordance with International Financial Reporting Standards, which include amounts based on estimates and judgments. Management is also responsible for the preparation of the Management's Discussion and Analysis and other financial information contained in the Company's Annual Report, and ensures that it is consistent with the consolidated financial statements. Management has established internal accounting and financial reporting control systems, which are subject to periodic review by the Company’s internal auditors, to meet its responsibility for reliable and accurate reporting. Integral to these control systems are a code of ethics and management policies that provide guidance and direction to employees, as well as a system of corporate governance that provides oversight to the Company’s operating, reporting and risk management activities. The consolidated financial statements are approved by the Board of Directors on the recommendation of the Audit & Risk Committee. The Audit & Risk Committee is comprised entirely of independent Directors. The Audit & Risk Committee meets regularly with management and the independent auditors to review significant accounting and financial reporting matters, to assure that management is carrying out its responsibilities and to review and approve the consolidated financial statements. PricewaterhouseCoopers LLP, our independent auditors, are engaged to perform an audit of the consolidated financial statements and expresses a professional opinion on the results. The Independent Auditor's Report to the Share Owners appears on the following page. PricewaterhouseCoopers LLP have full and independent access to the Audit & Risk Committee and management to discuss their audit and related matters. [Original signed by N.C. Southern] Chair & Chief Executive Officer [Original signed by D.A. DeChamplain] Executive Vice President & Chief Financial Officer 85 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 2 INDEPENDENT AUDITOR'S REPORT To the Share Owners of ATCO Ltd. OUR OPINION In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of ATCO Ltd. and its subsidiaries (together, the Company) as at December 31, 2019 and December 31, 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS). What we have audited The Company's consolidated financial statements comprise: • • • • • • the consolidated statements of earnings for the years ended December 31, 2019 and December 31, 2018; the consolidated statements of comprehensive income for the years ended December 31, 2019 and December 31, 2018; the consolidated balance sheets as at December 31, 2019 and December 31, 2018; the consolidated statements of changes in equity for the years ended December 31, 2019 and December 31, 2018; the consolidated statements of cash flows for the years ended December 31, 2019 and December 31, 2018; and the notes to the consolidated financial statements, which include a summary of significant accounting policies. BASIS FOR OPINION We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in accordance with these requirements. OTHER INFORMATION Management is responsible for the other information. The other information comprises the Management's Discussion and Analysis, which we obtained prior to the date of this auditor's report and the information, other than the consolidated financial statements and our auditor's report thereon, included in the annual report, which is expected to be made available to us after that date. Our opinion on the consolidated financial statements does not cover the other information and we do not and will not express an opinion or any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. 3 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 86 If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial statements and our auditor's report thereon, included in the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. RESPONSIBILITIES OF MANAGEMENT AND THOSE CHARGED WITH GOVERNANCE FOR THE CONSOLIDATED FINANCIAL STATEMENTS Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. AUDITOR'S RESPONSIBILITIES FOR THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • • • • • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. 87 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 4 • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. The engagement partner on the audit resulting in this independent auditor’s report is Shannon Ryhorchuk. [Original signed by “PricewaterhouseCoopers LLP”] PricewaterhouseCoopers LLP Chartered Professional Accountants Calgary, Alberta February 26, 2020 5 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 88 CONSOLIDATED STATEMENTS OF EARNINGS (millions of Canadian Dollars except per share data) Note 2019 2018 Year Ended December 31 Revenues Costs and expenses Salaries, wages and benefits Energy transmission and transportation Plant and equipment maintenance Fuel costs Purchased power Service concession arrangement costs Materials and consumables Depreciation and amortization Franchise fees Property and other taxes Other Proceeds from termination of Power Purchase Arrangement Gain on sale of operations Gain on sale of Barking Power assets Earnings from investment in associate company Earnings from investment in joint ventures Operating profit Interest income Interest expense Net finance costs Earnings before income taxes Income tax expense Earnings for the year Earnings attributable to: Class I and Class II Shares Non-controlling interests Earnings per Class I and Class II Share Diluted earnings per Class I and Class II Share See accompanying Notes to Consolidated Financial Statements. 5 4,706 4,888 (538) (203) (272) (199) (207) (127) (480) (637) (239) (154) (306) (3,362) — 174 — 15 24 1,557 27 (511) (484) 1,073 (66) 1,007 513 494 1,007 $4.49 $4.47 (599) (179) (238) (221) (175) (664) (270) (682) (208) (185) (303) (3,724) 62 — 125 4 25 1,380 29 (507) (478) 902 (231) 671 328 343 671 $2.87 $2.86 11,12,20 6 4 27 11 28 30 7 8 31 9 9 89 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 6 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (millions of Canadian Dollars) Earnings for the year Year Ended December 31 2019 1,007 2018 671 Other comprehensive (loss) income, net of income taxes Items that will not be reclassified to earnings: Re-measurement of retirement benefits (1) 18 (44) Items that are or may be reclassified subsequently to earnings: Cash flow hedges (2) Cash flow hedges reclassified to earnings (3) Cash flow hedges reclassified to earnings as a result of sale of operations (4) Foreign currency translation adjustment (5) Foreign currency translation adjustment reclassified to earnings (5) Share of other comprehensive loss in associate company (5) Share of other comprehensive loss of joint ventures (5) 27 11 28 30 Other comprehensive (loss) income Comprehensive income for the year Comprehensive income attributable to: Class I and Class II Shares Non-controlling interests (1) Net of income taxes of $14 million for the year ended December 31, 2019 (2018 - $2 million). (2) Net of income taxes of $1 million for the year ended December 31, 2019 (2018 - nil). (3) Net of income taxes of $(3) million for the year ended December 31, 2019 (2018 - $(3) million) (4) Net of income taxes of $(2) million for the year ended December 31, 2019 (2018 - nil). (5) Net of income taxes of nil. See accompanying Notes to Consolidated Financial Statements. (2) 8 9 (83) — (2) — (70) (114) 893 431 462 893 (5) (4) 9 — 34 15 — (2) 52 47 718 368 350 718 7 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 90 CONSOLIDATED BALANCE SHEETS (millions of Canadian Dollars) ASSETS Current assets Cash and cash equivalents Accounts receivable and contract assets Finance lease receivables Inventories Restricted project funds Receivable under service concession arrangement Prepaid expenses and other current assets Non-current assets Property, plant and equipment Intangibles Right-of-use assets Goodwill Investment in joint ventures Investment in associate company Finance lease receivables Deferred income tax assets Receivable under service concession arrangement Other assets Total assets LIABILITIES Current liabilities Accounts payable and accrued liabilities Lease liabilities Other current liabilities Short-term debt Long-term debt Non-recourse long-term debt Non-current liabilities Deferred income tax liabilities Retirement benefit obligations Customer contributions Lease liabilities Other liabilities Long-term debt Non-recourse long-term debt Total liabilities EQUITY Class I and Class II Share owners' equity Class I and Class II shares Contributed surplus Retained earnings Accumulated other comprehensive (loss) income Non-controlling interests Total equity Total liabilities and equity Note 2019 2018 December 31 22 19 20 10 14 11 12 3,20 13 30 28 20 8 14 3,20 15 16 17 8 18 19 3,20 16 17 21 31 1,140 731 9 64 — — 93 2,037 17,857 662 96 82 187 468 170 83 — 61 21,703 675 15 47 — 173 — 910 1,319 429 1,720 84 120 9,263 — 13,845 173 12 3,832 (17) 4,000 3,858 7,858 21,703 691 745 15 66 339 67 174 2,097 17,865 672 — 82 240 491 380 85 1,329 103 23,344 921 — 144 175 488 20 1,748 1,399 384 1,798 — 283 8,909 1,381 15,902 169 11 3,535 40 3,755 3,687 7,442 23,344 See accompanying Notes to Consolidated Financial Statements. [Original signed by N.C. Southern] DIRECTOR [Original signed by R.J. Urwin] DIRECTOR 91 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 8 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (millions of Canadian Dollars) (millions of Canadian Dollars) December 31, 2017 December 31, 2017 Earnings for the year Earnings for the year Other comprehensive income Other comprehensive income Losses on retirement benefits transferred to retained earnings Losses on retirement benefits transferred to retained earnings Shares issued, purchased and cancelled Dividends Dividends Shares issued, purchased and cancelled Share-based compensation Changes in ownership interest in subsidiary company (1) Other Share-based compensation Changes in ownership interest in subsidiary company (1) Other December 31, 2018 Earnings for the year December 31, 2018 Other comprehensive loss Earnings for the year Other comprehensive loss Losses on retirement benefits transferred to retained earnings Losses on retirement benefits transferred to Shares issued, purchased and cancelled retained earnings Dividends Shares issued, purchased and cancelled Share-based compensation Class I and Class II Shares Class I and Class II Shares 167 Contributed Surplus Contributed Surplus 10 167 — 10 — — — — — — — — 2 — — — — 2 — 169 — 169 — — — — — 1 — 3 — 1 — — — — — — — — 1 — — 1 — — 11 — — 11 — — — — — — — — 1 Note Note 18 18 21,31 21,31 21,31 21,31 32 32 18 21,31 18 21,31 21,31 32 Retained Earnings Retained Earnings 3,352 3,352 328 328 — — (3) (3) (4) (173) (4) 3 (173) 32 3 — 32 3,535 — 513 3,535 — 513 (25) — (5) (25) (186) (5) — Accumulated Other Accumulated Comprehensive Other Income Comprehensive Income (2) (2) — — 39 39 3 3 — — — — — — — — — 40 — — 40 (82) — (82) 25 — 25 — — — Non- Controlling Non- Interests Controlling Interests 3,576 3,576 343 343 8 8 — 63 — (277) 63 1 (277) (32) 1 5 (32) 3,687 5 494 3,687 (32) 494 (32) — — — 3 (294) Total Total 3,527 3,527 328 328 39 39 — (4) — (173) (4) 6 (173) 32 6 — 32 3,755 — 513 3,755 (82) 513 (82) — (4) (4) 4 (186) Total Equity Total Equity 7,103 7,103 671 671 47 47 — 59 — (450) 59 7 (450) — 5 7,442 7 — 5 1,007 7,442 (114) 1,007 (114) — (4) (4) 7 (480) (186) — (294) — (480) — Dividends Share-based compensation December 31, 2019 173 3 (1) The changes in ownership interest in subsidiary company are due to Canadian Utilities Limited's dividend reinvestment program and share-based compensation plans. Effective January 10, 2019, Canadian 4,000 4 12 1 3,858 (17) 32 3 — — — — — 7,858 7 (186) 3,832 21,31 December 31, 2019 Utilities Limited suspended its dividend reinvestment program. 173 12 3,832 (17) 4,000 3,858 7,858 (1) The changes in ownership interest in subsidiary company are due to Canadian Utilities Limited's dividend reinvestment program and share-based compensation plans. Effective January 10, 2019, Canadian See accompanying Notes to Consolidated Financial Statements. Utilities Limited suspended its dividend reinvestment program. See accompanying Notes to Consolidated Financial Statements. 9 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 9 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 92 CONSOLIDATED STATEMENTS OF CASH FLOWS (millions of Canadian Dollars) Operating activities Earnings for the year Adjustments to reconcile earnings to cash flows from operating activities Changes in non-cash working capital Change in receivable under service concession arrangement Cash flows from operating activities Investing activities Additions to property, plant and equipment Proceeds on disposal of property, plant and equipment Proceeds on sale of Barking Power assets Additions to intangibles Acquisition, net of cash acquired Investment in equity interest in associate company Proceeds on sale of operations, net of cash disposed Investment in joint ventures Changes in non-cash working capital Other Cash flows used in investing activities Financing activities Net (repayment) issue of short-term debt Issue of long-term debt Repayment of long-term debt Release of restricted project funds Repayment of non-recourse long-term debt Repayment of lease liabilities Issue of shares by subsidiary companies Net purchase of Class I Shares Dividends paid to Class I and Class II Share owners Dividends paid to non-controlling interests Interest paid Other Cash flows (used in) from financing activities Increase in cash position (1) Foreign currency translation Beginning of year End of year Year Ended December 31 Note 2019 2018 22 22 11 27 28 27 22 15,22 16,22 16,22 17,22 20 21 31 22 1,007 920 (205) (180) 1,542 (1,128) 4 — (74) (5) (9) 903 — 7 13 (289) (175) 632 (554) 329 (32) (19) 3 (2) (186) (294) (498) 14 (782) 471 (22) 691 1,140 671 1,226 (95) (803) 999 (1,121) 5 219 (113) (94) (455) — (6) (67) (12) (1,644) 165 1,660 (846) 726 (16) — 1 (2) (173) (214) (485) 21 837 192 5 494 691 (1) Cash position includes $79 million which is not available for general use by the Company (2018 - $64 million). See accompanying Notes to Consolidated Financial Statements. 93 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2019 (Tabular amounts in millions of Canadian Dollars, except as otherwise noted) 1. THE COMPANY AND ITS OPERATIONS ATCO Ltd. was incorporated under the laws of the province of Alberta and is listed on the Toronto Stock Exchange. Its head office and registered office is at 4th Floor, West Building, 5302 Forand Street SW, Calgary, Alberta T3E 8B4. ATCO Ltd. is controlled by Sentgraf Enterprises Ltd. and its controlling share owner, the Southern family. ATCO Ltd. is engaged in the following global business activities: • Structures & Logistics (workforce housing, innovative modular facilities, construction, site support services, and logistics and operations management); • Canadian Utilities Limited, including: • • Electricity (electricity transmission, distribution and generation); Pipelines & Liquids (natural gas transmission and distribution, energy storage, and industrial water solutions); • Retail Energy (electricity and natural gas retail sales) (included in Corporate & Other segment); and • Neltume Ports (ports and transportation logistics) (see Note 28). The consolidated financial statements include the accounts of ATCO Ltd. and its subsidiaries (see Note 29). The statements also include the accounts of a proportionate share of the Company's investments in joint operations, its equity-accounted investments in joint ventures (see Note 30) and its equity-accounted investment in associate company (see Note 28). In these financial statements, "the Company" means ATCO Ltd., its subsidiaries, joint arrangements and the associate company. 2. BASIS OF PRESENTATION STATEMENT OF COMPLIANCE The consolidated financial statements are prepared according to International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and interpretations of the IFRS Interpretations Committee (IFRIC). The Board of Directors (Board) authorized these consolidated financial statements for issue on February 26, 2020. BASIS OF MEASUREMENT The consolidated financial statements are prepared on a historic cost basis, except for derivative financial instruments, retirement benefit obligations and cash-settled share-based compensation liabilities which are carried at remeasured amounts or fair value. The Company's significant accounting policies are described in Note 36. Certain comparative figures have been reclassified to conform to the current presentation. FUNCTIONAL AND PRESENTATION CURRENCY The consolidated financial statements are presented in Canadian dollars. Each entity within the Company determines its own functional currency based on the primary economic environment in which it operates. 11 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 94 USE OF JUDGMENTS AND ESTIMATES Management makes judgments and estimates that could significantly affect how policies are applied, amounts in the consolidated financial statements are reported, and contingent assets and liabilities are disclosed. Most often these judgments and estimates concern matters that are inherently complex and uncertain. Judgments and estimates are reviewed on an on-going basis; changes to accounting estimates are recognized prospectively. The significant judgments, estimates and assumptions are described in Note 26. 3. CHANGE IN ACCOUNTING POLICY LEASES The Company adopted IFRS 16 Leases on January 1, 2019, which introduces a new approach to lease accounting. The Company adopted the standard using the modified retrospective approach, which does not require restatement of prior year financial information, as it recognizes the cumulative impact on the opening balance sheet and applies the standard prospectively. Accordingly, the comparative information in these consolidated financial statements has not been restated. At the inception of a contract, the Company assesses whether the contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. This policy is applied to contracts in existence at January 1, 2019, and is applied to contracts entered into, or modified, on or after January 1, 2019. Practical expedients Effective January 1, 2019, the IFRS 16 transition date, the Company elected to use the following practical expedients under the modified retrospective transition approach: • • • • Leases with lease terms of less than twelve months (short-term leases) and leases of low-value assets (less than $5,000 U.S. dollars) (low-value leases) that have been identified at transition, were not recognized in the consolidated balance sheet; Right-of-use assets on transition were measured at the amount equal to the lease liabilities at transition, adjusted by the amount of any prepaid or accrued lease payments; For certain leases having associated initial direct costs, the Company, at initial measurement on transition, excluded these directs costs from the measurement of the right-of-use assets; and Any provision for onerous lease contracts previously recognized at the date of adoption of IFRS 16, has been applied to the associated right-of-use asset recognized upon transition. The Company's consolidated financial statements were not impacted by the adoption of IFRS 16 Leases in relation to lessor accounting. Lessors will continue with the dual classification model for recognized leases with the resultant accounting remaining unchanged from IAS 17 Leases. Sub-surface Rights In June 2019, the IFRS Interpretations Committee, acting on a request for interpretation, concluded that a pipeline sub-surface arrangement is, or contains, a lease under IFRS 16. A pipeline sub-surface arrangement is an agreement with a landowner to lay an underground pipeline in exchange for consideration. It contains a lease because the underground space is physically distinct from the landowner’s land, and the owner of the pipeline has exclusive use of the underground space. The Company has assessed the impact of the interpretation on its pipeline sub-surface arrangements. Based on the analysis performed, the impact on the consolidated financial statements is not significant. 95 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 12 IMPACT OF CHANGES IN ACCOUNTING POLICY Impact of adoption of IFRS 16 on consolidated financial statements On January 1, 2019, the Company recognized $107 million of right-of-use assets and $107 million of lease liabilities. The Company applied its weighted average incremental borrowing rate at January 1, 2019, 3.00 per cent, to determine the amount of lease liabilities. The effect of the adjustment to the amounts recognized in the Company's consolidated balance sheet at January 1, 2019 is shown below. (millions of Canadian Dollars) ASSETS Non-current assets Right-of-use assets Total assets LIABILITIES Current liabilities Lease liabilities Non-current liabilities Lease liabilities Total liabilities EQUITY Class I and Class II Share owners' equity Class I and Class II Shares Contributed surplus Retained earnings Accumulated other comprehensive income Non-controlling interests Total equity Total liabilities and equity December 31, 2018, as previously reported Note IFRS 16 re- measurement adjustments on January 1, 2019 20 20 20 — 23,344 — — 15,902 169 11 3,535 40 3,755 3,687 7,442 23,344 107 107 18 89 107 — — — — — — — 107 Restated 107 23,451 18 89 16,009 169 11 3,535 40 3,755 3,687 7,442 23,451 The reconciliation of differences between the operating lease commitments disclosed at December 31, 2018 (when applying IAS 17 Leases), discounted using the weighted average incremental borrowing rate at January 1, 2019, and the lease liabilities recognized upon adoption of IFRS 16 Leases, is shown below. Operating lease commitments at December 31, 2018, as previously reported Adjustment to reflect discounting of the operating lease commitments at December 31, 2018, using the weighted average incremental borrowing rate Lease liabilities at January 1, 2019, before exemptions and other adjustments Exemptions applied upon recognition of lease liabilities: Short-term leases Recognition of the lease term extension option (1) Lease liabilities recognized at January 1, 2019 (1) Recognition of the lease term extension option relates to leases where the extension option is reasonably certain to be exercised. 101 (10) 91 (2) 18 107 13 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 96 4. SEGMENTED INFORMATION The Company’s operating segments are reported in a manner consistent with the internal reporting provided to the Chief Operating Decision Maker (CODM). The CODM is comprised of the Chair and Chief Executive Officer, and the other members of the Executive Committee. The accounting policies applied by the segments are the same as those applied by the Company, except for those used in the calculation of adjusted earnings. Intersegment transactions are measured at the exchange amount, as agreed to by the related parties. Management has determined that the operating subsidiaries in the reportable segments below share similar economic characteristics, as such, they have been aggregated. SEGMENT DESCRIPTIONS AND PRINCIPAL OPERATING ACTIVITIES Structures & Logistics Electricity Canadian Utilities Limited Pipelines & Liquids The Structures & Logistics segment includes ATCO Structures & Logistics. This company offers workforce housing, modular facilities, site support services and logistics and operations management. The Electricity segment includes ATCO Electric, ATCO Power (2010) (in 2019, the Company sold its Canadian fossil fuel-based electricity generation portfolio, see Note 27), Alberta PowerLine (before sale of operations, see Note 27), and ATCO Power Australia. Together these businesses provide electricity generation, transmission, distribution and related infrastructure solutions in Alberta, Ontario, the Yukon, the Northwest Territories, Australia and Mexico. The Pipelines & Liquids segment includes ATCO Gas, ATCO Pipelines, ATCO Gas Australia, and ATCO Energy Solutions. These businesses provide integrated natural gas transmission, distribution and storage, industrial water solutions and related infrastructure development throughout Alberta, the Lloydminster area of Saskatchewan, Western Australia and Mexico. Corporate & Other Canadian Utilities Limited Corporate & Other includes intersegment eliminations and ATCO Energy, a retail electricity and natural gas business in Alberta. Neltume Ports Corporate & Other The Neltume Ports segment includes the equity interest in Neltume Ports S.A., a leading port operator and developer in South America. Neltume Ports operates sixteen port facilities and three port operation services businesses located in Chile, Uruguay, Argentina and Brazil (see Note 28). ATCO Corporate & Other includes commercial real estate owned by the Company and intersegment eliminations. 97 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 14 Results by operating segment for the year ended December 31 are shown below. 2019 2018 Revenues - external Revenues - intersegment Revenues Operating expenses (1) Depreciation and amortization Proceeds from termination of Power Purchase Arrangement Gain on sale of operations (Note 27) Gain on sale of Barking Power assets (Note 11) Earnings from investment in associate company Earnings from investment in joint ventures Net finance costs Earnings (loss) before income taxes Income tax (expense) recovery Earnings (loss) for the year Adjusted earnings (loss) for the year Total assets Capital expenditures (2) Structures Neltume Corporate Canadian Utilities Limited & Logistics Ports & Other Electricity Pipelines & Liquids Corporate & Other Consolidated ATCO Consolidated 801 511 2 — 803 511 (702) (464) (45) (37) — — — — — — — — 3 1 (7) (3) 52 8 (15) (2) 37 6 37 15 987 790 105 88 — — — — — — — — — — — — — — — — 15 4 — — — — 15 4 — — 15 4 15 4 466 491 — — — — (2) — (2) — 22 37 (10) (7) — — — — — — — — — — (15) (6) (5) 24 2 (4) (3) 20 (6) 17 206 244 (16) 10 2,146 2,841 9 17 2,155 2,858 (1,030) (1,671) (317) (386) 1,588 1,415 61 55 1,649 1,470 (924) (860) (258) (254) — 62 174 — — 125 — — 9 15 (310) (322) 681 681 (30) (176) 651 505 221 228 11,411 13,494 446 497 — — — — — — — — 12 9 (156) (156) 323 209 (12) (59) 311 150 137 130 8,195 7,842 677 643 171 121 (70) (72) 101 49 (91) (84) (7) 2 — — — — — — — — — — 4 9 7 (24) (11) 10 (4) (14) (39) (39) 438 483 6 16 3,905 4,377 — — 3,905 4,377 (2,045) (2,615) (582) (638) — 62 174 — — 4,706 4,888 — — 4,706 4,888 (2,725) (3,042) (637) (682) — 62 174 — — 125 125 — — 21 24 (462) (469) 1,011 866 (53) (225) 958 641 319 319 20,044 21,819 1,129 1,156 15 4 24 25 (484) (478) 1,073 902 (66) (231) 1,007 671 365 355 21,703 23,344 1,218 1,254 (1) Includes total costs and expenses, excluding depreciation and amortization expense. (2) Includes additions to property, plant and equipment and intangibles and $16 million of interest capitalized during construction for the year ended December 31, 2019 (2018 - $20 million). 15 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 98 GEOGRAPHIC SEGMENTS Financial information by geographic area is summarized below. Revenues - external Canada Australia Other Total Non-current assets Canada Australia South America Other Total 2019 4,180 364 162 4,706 Property, Plant and Equipment 2019 16,247 1,288 2018 16,283 1,323 — — 322 17,857 259 17,865 Intangible Assets Other Assets (1) 2019 635 14 — 13 662 2018 640 18 — 14 672 2019 229 54 492 6 781 2018 267 31 518 11 827 2019 17,111 1,356 492 341 19,300 2018 4,414 379 95 4,888 Total 2018 17,190 1,372 518 284 19,364 (1) Other assets exclude financial instruments, deferred income tax assets and goodwill. ADJUSTED EARNINGS Adjusted earnings are earnings attributable to Class I and II Shares after adjusting for: • • • • • the timing of revenues and expenses for rate-regulated activities; one-time gains and losses; unrealized gains and losses on mark-to-market forward and swap commodity contracts; significant impairments; and items that are not in the normal course of business or a result of day-to-day operations. Adjusted earnings are a key measure of segment earnings used by the CODM to assess segment performance and allocate resources. Other accounts in the consolidated financial statements have not been adjusted as they are not used by the CODM for those purposes. 99 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 16 The reconciliation of adjusted earnings and earnings for the year ended December 31 is shown below. 2019 2018 Structures Neltume Corporate Canadian Utilities Limited & Logistics Ports & Other Electricity Pipelines & Liquids Corporate & Other Consolidated ATCO Consolidated Adjusted earnings (loss) Gain on sale of operations (Note 27) Restructuring and other costs 37 15 — — — (9) 15 4 — — — — (6) 17 — — — 3 221 228 65 — — 137 130 — — — (19) (11) Proceeds from termination of Power Purchase Arrangement — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2 — — — 1 — 37 6 15 4 (3) 20 Sale of Barking Power assets (Note 11) Unrealized (losses) gains on mark-to- market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Other Earnings (loss) attributable to Class I and Class II Shares Earnings attributable to non-controlling interests Earnings for the year Gain on sale of operations — 19 — 46 (7) 16 64 (28) (6) — — — 337 262 — — — — 3 — 33 (43) (6) — (6) — 161 76 (39) (39) — — — (3) — — — — 7 — (1) 2 — — (1) — (34) (40) 319 319 65 — — (33) — 19 — 46 3 16 96 (69) (12) — (7) — 464 298 365 355 65 — — (39) — 19 — 46 3 16 98 (69) (12) — (6) — 513 328 494 343 1,007 671 In 2019, the Company closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation portfolio and Alberta PowerLine (see Note 27). These sales resulted in an aggregate gain of $174 million ($65 million after-tax and non-controlling interests (NCI)). As the sale of operations is not in the normal course of business, the related gain on sale of operations has been excluded from adjusted earnings. Restructuring and other costs In 2018, restructuring and other costs not in the normal course of business of $39 million after-tax and NCI were recorded. These costs mainly related to staff reductions and associated severance costs, as well as costs related to decisions to discontinue certain projects that no longer represented long-term strategic value to the Company. 17 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 100 Proceeds from termination of Power Purchase Arrangement Effective September 30, 2018, the Battle River unit 5 Power Purchase Arrangement (PPA) was terminated by the Balancing Pool and dispatch control was returned to Canadian Utilities Limited. Canadian Utilities Limited received a $62 million payment ($24 million after-tax and NCI) from the Balancing Pool and recorded this amount as proceeds from termination of Power Purchase Arrangement in the statement of earnings for the year ended December 31, 2018. Battle River generating facility coal-related costs and Asset Retirement Obligations of $12 million ($5 million after-tax and NCI) were recorded. Due to the termination of the Battle River unit 5 PPA, the related cash generating unit was tested for impairment, and no impairment loss was required to be recorded. These one-time receipts and costs in the net amount of $19 million after-tax and NCI were excluded from adjusted earnings. Sale of Barking Power assets In December 2018, Canadian Utilities Limited sold its 100 per cent ownership interests in Thames Power Services Limited and Barking Power Limited. The Company recorded a gain on sale of the Barking Power assets of $125 million before tax and NCI (see Note 11) ($53 million after tax and NCI). Of the $53 million after-tax and NCI gain, $46 million was excluded from Adjusted Earnings. Unrealized gains and losses on mark-to-market forward and swap commodity contracts Prior to the sale of Canadian fossil fuel-based electricity generation portfolio (see Note 27), the Company entered into forward contracts in order to optimize available merchant capacity and manage exposure to electricity market price movements for its Independent Power and Thermal Plants not governed by a Power Purchase Arrangement. The forward contracts were measured at fair value. Unrealized gains and losses due to changes in the fair value of the forward contracts were recognized in the earnings of the Electricity operating segment where hedge accounting was not applied. In addition, the Company’s retail electricity and natural gas business in Alberta enters into fixed-price swap commodity contracts to manage exposure to electricity and natural gas prices and volumes. Prior to the sale of the Canadian fossil fuel-based electricity generation portfolio (see Note 27), these contracts were accounted for as normal purchase agreements as they were with an affiliate company and the own use exemption was applied. Starting September 30, 2019, these contracts are measured at fair value because the contracts are with a third party and the own use exemption no longer applies. Unrealized gains and losses due to changes in the fair value of the fixed-price swap commodity contracts are recognized in the earnings of the Corporate & Other segment. The CODM believes that removal of the unrealized gains or losses on mark-to-market forward and swap commodity contracts provides a better representation of operating results for the Company's operations. Realized gains or losses are recognized in adjusted earnings when the commodity contracts are settled. Rate-regulated activities ATCO Electric and its subsidiaries, ATCO Electric Yukon, Northland Utilities (NWT) and Northland Utilities (Yellowknife), as well as ATCO Gas, ATCO Pipelines and ATCO Gas Australia are collectively referred to as Utilities. There is currently no specific guidance under IFRS for rate-regulated entities that the Company is eligible to adopt. In the absence of this guidance, the Utilities do not recognize assets and liabilities from rate-regulated activities as may be directed by regulatory decisions. Instead, the Utilities recognize revenues in earnings when amounts are billed to customers, consistent with the regulator-approved rate design. Operating costs and expenses are recorded when incurred. Costs incurred in constructing an asset that meet the asset recognition criteria are included in the related property, plant and equipment or intangible asset. The Company uses standards issued by the Financial Accounting Standards Board (FASB) in the United States as another source of generally accepted accounting principles to account for rate-regulated activities in its internal reporting provided to the CODM. The CODM believes that earnings presented in accordance with the FASB standards are a better representation of the operating results of the Company’s rate-regulated activities. Therefore, the Company presents adjusted earnings as part of its segmented disclosures on this basis. Rate-regulated accounting (RRA) standards impact the timing of how certain revenues and expenses are recognized when compared to non-rate regulated activities, to appropriately reflect the economic impact of a regulator's decisions on revenues. 101 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 18 Rate-regulated accounting differs from IFRS in the following ways: Timing Adjustment Items RRA Treatment IFRS Treatment 1. Additional revenues billed in current period Future removal and site restoration costs, and impact of colder temperatures. The Company defers the recognition of cash received in advance of future expenditures. The Company recognizes revenues when amounts are billed to customers and costs when they are incurred. 2. Revenues to be billed in future periods Deferred income taxes, impact of warmer temperatures, and impact of inflation on rate base. The Company recognizes revenues associated with recoverable costs in advance of future billings to customers. The Company recognizes costs when they are incurred, but does not recognize their recovery until customer rates are changed and amounts are collected through future billings. 3. Regulatory decisions received Regulatory decisions received which relate to current and prior periods. 4. Settlement of regulatory decisions and other items Settlement of amounts receivable or payable to customers and other items. The Company recognizes the earnings from a regulatory decision pertaining to current and prior periods when the decision is received. The Company does not recognize earnings from a regulatory decision when it is received as regulatory assets and liabilities are not recorded under IFRS. The Company recognizes the amount receivable or payable to customers as a reduction in its regulatory assets and liabilities when collected or refunded through future billings. The Company recognizes earnings when customer rates are changed and amounts are recovered or refunded to customers through future billings. For the year ended December 31, the significant timing adjustments as a result of the differences between rate- regulated accounting and IFRS are as follows: Additional revenues billed in current period Future removal and site restoration costs (1) Impact of colder temperatures (2) Revenues to be billed in future periods Deferred income taxes (3) Deferred income taxes due to decrease in provincial corporate income tax (4) Impact of warmer temperatures (2) Impact of inflation on rate base (5) Regulatory decisions received (see below) Settlement of regulatory decisions and other items (6) 2019 2018 34 7 (54) 106 — (7) 3 9 98 39 6 (55) — — (8) — (51) (69) (1) (2) (3) (4) (5) Removal and site restoration costs are billed to customers over the estimated useful life of the related assets based on forecast costs to be incurred in future periods. ATCO Gas' customer rates are based on a forecast of normal temperatures. Fluctuations in temperatures may result in more or less revenue being recovered from customers than forecast. Revenues above or below the normal in the current period are refunded to or recovered from customers in future periods. Income taxes are billed to customers when paid by the Company. In the second quarter of 2019, the Government of Alberta enacted a phased decrease in the provincial corporate income tax rate from 12 per cent to 8 per cent. This decrease is being phased in increments from July 1, 2019 to January 1, 2022 (see Note 8). As a result of this change, the Alberta Utilities decreased deferred income taxes and increased earnings in 2019 by $106 million. The inflation-indexed portion of ATCO Gas Australia's rate base is billed to customers through the recovery of depreciation in subsequent periods based on the actual rate of inflation. Under rate-regulated accounting, revenue is recognized in the current period for the inflation component of rate base when it is earned. Differences between the amounts earned and the amounts billed to customers are deferred and recognized in revenues over the service life of the related assets. (6) In 2018, ATCO Electric Transmission recorded a decrease in earnings of $20 million mainly related to a refund of deferral account balances relating to 2013 and 2014. ATCO Gas also recorded a reduction in earnings of $31 million related to a refund of previously over-collected transmission costs. 19 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 102 Regulatory decisions received Under rate-regulated accounting, the Company recognizes earnings from a regulatory decision pertaining to current and prior periods when the decision is received. A description of the significant regulatory decisions recognized in adjusted earnings in 2019 is provided below. 1. Decision Information Technology (IT) Common Matters Amount Description 12 In August 2014, the Company sold its IT services business to Wipro Ltd. (Wipro) and signed a ten-year IT Master Services Agreement (MSA) effective January 1, 2015. In 2015, the Alberta Utilities Commission (AUC) commenced an Information Technology Common Matters proceeding to review the recovery of IT costs by the Alberta Utilities from January 1, 2015 going forward. On June 5, 2019, the AUC issued its decision regarding the IT Common Matters proceeding and directed the Alberta Utilities to reduce the first-year of the Wipro MSA by 13 per cent and to apply a glide path that reduces pricing by 4.61 per cent in each of years 2 through 10. The reduction in adjusted earnings resulting from the decision for the period January 1, 2015 to December 31, 2019 was $12 million. Of this amount, $8 million relates to the period January 1, 2015 to June 30, 2019 and was recorded in the second quarter of 2019. The remaining $4 million was recorded in the second half of 2019. 2. ATCO Electric Transmission General Tariff Application (GTA) (9) In June 2017, ATCO Electric Transmission filed a GTA for its operations for 2018 and 2019. The decision was received in July 2019 approving the majority of capital expenditures and operating costs requested. The increase in adjusted earnings resulting from the decision was $9 million, of which $5 million relates to 2018. IT Common Matters decision As described in the IT Common Matters decision above, in August 2014, the Company sold its IT services business to Wipro Ltd. (Wipro) and signed a ten-year IT Master Services Agreement (MSA) effective January 1, 2015. Proceeds of the sale were $204 million, resulting in a one-time after-tax and NCI gain of $74 million. In 2014, the Company did not include this gain on sale in adjusted earnings because it was a significant one-time event. In June 2019, the AUC issued its decision regarding the IT Common Matters proceeding which is described in the regulatory decisions received section above. In the proceeding, the Company presented a considerable amount of evidence, including expert benchmarking and price review studies, to support that the Wipro MSA rates were at fair market value. As such, there was no cross subsidization between the sale price of the Company's IT services business to Wipro in the 2014 transaction and the establishment of IT rates under the MSA. Despite these efforts the AUC found that the Alberta Utilities failed to demonstrate that the IT pricing in the MSA would result in just and reasonable rates. Consistent with the treatment in 2014, the $12 million reduction recognized in 2019, along with future impacts associated with this decision, will be excluded from adjusted earnings. Other For the year ended December 31, 2019, the Company has recognized costs of $6 million after tax and NCI relating to a number of disputes related to the Tula Pipeline project. The Company continues to work with the involved parties to achieve a resolution of these disputes. As these costs relate to a significant non-recurring event, they are excluded from adjusted earnings. 103 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 20 5. REVENUES The Company disaggregates revenues based on the revenue streams and by regulated and non-regulated business operations. The disaggregation of revenues by revenue streams by each operating segment for the year ended December 31 are shown below: 2019 2018 Revenue Streams Sale of Goods Electricity generation and delivery Commodity sales Modular structures - goods Total sale of goods Rendering of Services Distribution services Transmission services Modular structures - services Logistics and facility operations and maintenance services Lodging and support Customer contributions Franchise fees Retail electricity and natural gas services Storage and industrial water Total rendering of services Lease income Finance lease Operating lease Total lease income Service concession arrangement Other Total Structures & Logistics Electricity Pipelines & Liquids Corporate & Other (1) Total — — — — 188 171 188 171 — — — — 310 99 105 94 89 62 — — — — — — — — 504 255 1 — 108 83 109 83 — — — 2 801 511 412 526 18 19 — — 430 545 589 567 674 622 — — — — — — 47 47 32 25 — — — — 1,342 1,261 21 35 65 172 86 207 232 803 56 25 2,146 2,841 — — 18 13 — — 18 13 988 905 278 245 — — — — — — 19 18 207 183 — — 23 47 1,515 1,398 — — — — — — — — 55 4 1,588 1,415 — — — — — — — — — — — — — — — — — — — — — — 162 114 — — 162 114 — — — — — — — — 9 7 412 526 36 32 188 171 636 729 1,577 1,472 952 867 310 99 105 94 89 62 66 65 239 208 162 114 23 47 3,523 3,028 22 35 173 255 195 290 232 803 120 38 171 121 4,706 4,888 (1) Includes revenues from the Corporate & Other in Canadian Utilities Limited and ATCO Ltd. 21 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 104 Disaggregation of revenues by rate-regulated and non-rate-regulated business operations for the year ended December 31 is shown below: 2019 2018 Rate-regulated business operations Rate-regulated Electricity Electricity Distribution Electricity Transmission Rate-regulated Pipelines & liquids Natural Gas Distribution Natural Gas Transmission International Natural Gas Distribution Total rate-regulated business operations Non-rate-regulated business operations Non-rate-regulated Electricity Independent Power Plants Thermal PPA Plants International Power Generation Service concession arrangement Non-rate-regulated Pipelines & liquids Storage and Industrial Water Other non-rate-regulated business operations Modular Structures Lodging and Support Logistics and Facility Operations and Maintenance Services Retail Electricity and Natural Gas Services Other Total non-rate-regulated business operations Total Remaining performance obligations 662 712 1,374 1,072 295 152 1,519 2,893 208 262 40 232 742 23 23 606 89 106 162 85 1,048 1,813 4,706 624 640 1,264 935 252 168 1,355 2,619 318 418 33 803 1,572 47 47 353 62 94 114 27 650 2,269 4,888 The Company is party to performance obligations, which have a duration of more than one year, are not subject to the Right-to-Invoice practical expedient, and do not include variable consideration which is constrained (remaining performance obligations). At December 31, 2019, the most significant remaining performance obligations are as follows: (i) the Company's 35-year service agreement to operate Fort McMurray 500 kV Transmission project (see Note 14) that amounts to $0.8 billion. The Company expects that approximately 2 per cent of the amount will be recognized as revenue during the year ending December 31, 2020, subject to satisfaction of related performance obligations; (ii) provision of storage and industrial water services over the life of a contract that in aggregate approximates $0.3 billion. The Company expects that approximately 5 per cent of the amount will be recognized as revenue during the year ending December 31, 2020; and (iii) manufacturing of transportable workforce housing and space rental products under the terms of fixed price contracts that in aggregate approximates $0.2 billion. The Company expects that approximately 69 per cent will be recognized as revenue during the year ending December 31, 2020. 105 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 22 6. OTHER COSTS AND EXPENSES Other costs and expenses include rent, gains and losses on derivative financial instruments, goods and services such as professional fees, contractor costs, technology related expenses, advertising, and other general and administrative expenses. 7. INTEREST EXPENSE Interest expense primarily arises from interest on long-term debentures. The components of interest expense are summarized below. Long-term debt Non-recourse long-term debt Retirement benefits net interest expense Amortization of deferred financing charges Short-term debt Interest expense on lease liabilities (Note 20) Other Less: interest capitalized (Notes 11,12) 2019 427 57 18 5 6 3 11 527 (16) 511 2018 420 60 14 5 11 — 17 527 (20) 507 Borrowing costs capitalized to property, plant and equipment during 2019 were calculated by applying a weighted average interest rate of 4.54 per cent (2018 - 4.70 per cent) to expenditures on qualifying assets. 8. INCOME TAXES IMPACT OF CHANGE IN INCOME TAX RATE In May 2019, the Alberta government passed Bill 3, the Job Creation Tax Cut, which will reduce the Alberta provincial corporate tax rate from 12 per cent to 8 per cent in a phased approach between July 1, 2019 and January 1, 2022. As a result of this change the Company made an adjustment in 2019 to income taxes of $211 million. Of this amount, $1 million relates to current income taxes and $210 million relates to deferred income taxes. As the tax rate change came into effect on July 1, 2019, the combined federal and Alberta statutory Canadian income tax rate for 2019 is 26.5 per cent. Prior to the change, the combined federal and Alberta statutory Canadian income tax rate for 2019 was 27.0 per cent. 23 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 106 INCOME TAX EXPENSE The components of income tax expense for the year ended December 31 are summarized below. Current income tax expense Canada Australia United States Mexico Change in income taxes resulting from decrease in provincial corporate tax rate Adjustment in respect of prior years Deferred income tax expense Reversal of temporary differences Change in income taxes resulting from decrease in provincial corporate tax rate Adjustment in respect of prior years The reconciliation of statutory and effective income tax expense is as follows: 2019 2018 80 (5) (2) 2 (1) 3 77 203 (210) (4) (11) 66 902 244 85 (6) (1) — (2) 76 154 — 1 155 231 2018 % 27.0 Earnings before income taxes Income taxes, at statutory rates Change in income taxes resulting from decrease in provincial corporate tax rate Statutory and deferred tax rate variance Equity earnings Unrecognized deferred income tax assets Non-taxable gains Tax cost of preferred share financings International financing Foreign tax rate variance Other 1,073 284 2019 % 26.5 (211) (19.7) — — (8) (7) 6 (2) 2 — — 2 66 (0.8) (0.7) 0.6 (0.2) 0.2 — — 0.2 6.1 (4) 4 (8) 2 (5) 2 (4) 231 (0.4) 0.4 (0.9) 0.2 (0.5) 0.2 (0.4) 25.6 INCOME TAX ASSETS AND LIABILITIES Income tax assets and liabilities in the consolidated balance sheet at December 31 are summarized below. Balance Sheet Presentation 2019 2018 Income tax assets Current Deferred Income tax liabilities Current Deferred Prepaid expenses and other current assets Deferred income tax assets Other current liabilities Deferred income tax liabilities 33 83 116 12 1,319 1,331 56 85 141 51 1,399 1,450 107 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 24 DEFERRED INCOME TAXES The changes in deferred income tax assets are as follows: Movements December 31, 2017 (Charge) credit to earnings Foreign exchange adjustment Other December 31, 2018 (Charge) credit to earnings Credit to other comprehensive income Change in income taxes resulting from decrease in provincial corporate tax rate Business combinations Foreign exchange adjustment Other December 31, 2019 Property, Plant and Equipment Intangibles Reserves Tax Loss Carry Forwards and Tax Credits Retirement Benefit Obligations Other Total 32 (39) 1 — (6) (10) — 1 7 (1) — (9) (2) (5) — — (7) 3 — 1 1 — — (2) 42 (4) — — 38 1 — (2) (33) — — 4 14 36 — — 50 23 — (4) — — — 69 1 7 — — 8 2 15 — (7) — — 18 — (2) — 4 2 3 — (1) — — (1) 3 87 (7) 1 4 85 22 15 (5) (32) (1) (1) 83 The Company expects approximately $7 million of its deferred income tax assets to reverse within the next twelve months. The changes in deferred income tax liabilities are as follows: Intangibles Reserves Tax Loss Carry Forwards and Tax Credits Retirement Benefit Obligations Other Total Movements December 31, 2017 Charge (credit) to earnings Charge (credit) to other comprehensive income Business combinations Other December 31, 2018 Charge (credit) to earnings Charge (credit) to other comprehensive income Change in income taxes resulting from decrease in provincial corporate tax rate Business combinations Foreign exchange adjustment Other December 31, 2019 Property, Plant and Equipment 1,397 142 — (4) 5 1,540 223 104 7 — 10 — 121 (4) — — (220) (109) (4) — 1,430 (18) (2) — — 97 (61) 11 2 — — (48) (22) 4 6 46 — — (98) (8) — (2) — (108) 15 — 6 4 — — (134) (1) 33 1,241 (3) 148 (2) — — — 2 (1) — 6 4 (137) 8 31 1,399 221 1 1 — 5 15 (14) — — (4) (215) (14) — (89) (4) 2 16 1,319 2 (14) (83) (127) The Company does not expect any of its deferred income tax liabilities to reverse within the next twelve months. At December 31, 2019, the Company had $550 million of non-capital tax losses and credits which expire between 2025 and 2039 and $89 million of tax losses which do not expire. The Company recognized deferred income tax assets of $152 million for losses and credits that expire. The Company had $167 million of aggregate temporary differences for investments in subsidiaries, branches and joint ventures for which deferred income tax liabilities were not recognized (2018 - $119 million). 25 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 108 9. EARNINGS PER SHARE Earnings per Class I Non-Voting (Class I) and Class II Voting (Class II) Share are calculated by dividing the earnings attributable to Class I and Class II Shares by the weighted average shares outstanding. Diluted earnings per share are calculated using the treasury stock method, which reflects the potential exercise of stock options and vesting of shares under the Company's mid-term incentive plan (MTIP) on the weighted average Class I and Class II Shares outstanding. The earnings and average number of shares used to calculate earnings per share for the year ended December 31 are as follows: Average shares Weighted average shares outstanding Effect of dilutive stock options Effect of dilutive MTIP Weighted average dilutive shares outstanding Earnings for earnings per share calculation Earnings for the year Non-controlling interests Earnings attributable to Class I and Class II Shares Earnings and diluted earnings per Class I and Class II Share Earnings per Class I and Class II Share Diluted earnings per Class I and Class II Share 10. INVENTORIES Inventories at December 31 are comprised of: Natural gas and fuel in storage Raw materials and consumables Work-in-progress Finished goods 2019 2018 114,369,909 114,393,769 47,937 327,978 51,104 343,186 114,745,824 114,788,059 1,007 (494) 513 $4.49 $4.47 2019 21 29 10 4 64 671 (343) 328 $2.87 $2.86 2018 13 34 15 4 66 For the year ended December 31, 2019, inventories recognized as an expense were $341 million (2018 - $224 million). Inventories with a carrying value of $10 million were pledged as security for liabilities at December 31, 2019 (2018 - $18 million). 109 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 26 11. PROPERTY, PLANT AND EQUIPMENT A reconciliation of the changes in the carrying amount of property, plant and equipment is as follows: Utility Transmission & Distribution Electricity Generation Land and Buildings Construction Work-in- Progress Other Total Cost December 31, 2017 Additions Transfers Retirements and disposals (1) Business acquisitions (Note 27) Changes to asset retirement costs Foreign exchange rate adjustment 18,465 1,869 67 879 (72) — — (24) 13 1 (35) 87 7 8 999 17 106 (114) — — (1) December 31, 2018 19,315 1,950 1,007 Additions Transfers Retirements and disposals Sale of operations (1) Foreign exchange rate adjustment 53 874 (87) — (72) December 31, 2019 20,083 11 10 (27) (1,801) (1) 142 Accumulated depreciation December 31, 2017 Depreciation Retirements and disposals Foreign exchange rate adjustment December 31, 2018 Depreciation Retirements and disposals Sale of operations (1) Foreign exchange rate adjustment December 31, 2019 Net book value December 31, 2018 December 31, 2019 4,016 1,305 444 (72) (4) 57 (30) 6 4,384 1,338 434 (86) — (12) 4,720 14,931 15,363 32 (18) (1,335) — 17 612 125 4 13 (15) (13) — 996 184 27 (10) — 201 25 (15) — 1 212 806 784 705 964 (1,011) (1) — — 13 670 1,095 (971) (15) (21) (10) 748 76 — — 7 83 — — — (4) 79 587 669 1,604 100 25 (75) 21 — 8 1,683 40 74 (55) (21) (24) 23,642 1,161 — (297) 108 7 4 24,625 1,203 — (199) (1,856) (107) 1,697 23,666 718 86 (51) 1 754 92 (41) (13) (11) 781 929 916 6,299 614 (163) 10 6,760 583 (160) (1,348) (26) 5,809 17,865 17,857 (1) In the second quarter of 2019, as a result of the announced sale of the Canadian fossil fuel-based electricity generation portfolio, property, plant and equipment with a net book value of $508 million was reclassified as held for sale. The sale of operations transactions closed in the second half of 2019 (Note 27). The additions to property, plant and equipment included $15 million of interest capitalized during construction for the year ended December 31, 2019 (2018 - $20 million). Property, plant and equipment with a carrying value of $274 million were pledged as security for liabilities at December 31, 2019 (2018 - $602 million). SALE OF BARKING POWER ASSETS In December 2018, Canadian Utilities Limited, a subsidiary of the Company, sold its 100 per cent ownership interests in Thames Power Services Limited (TPSL) and Barking Power Limited (BPL). BPL was an entity that held land assets in the United Kingdom. As these entities had no significant ongoing operations, the sale was accounted for as a sale of assets, net of attributed liabilities (Barking Power assets), whereby land was the major asset disposed of. 27 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 110 The total proceeds received on sale of TPSL and BPL were $219 million. The Company recorded a gain on sale of Barking Power assets of $125 million ($52 million after tax and NCI). The reconciliation of gain on sale of Barking Power assets is shown below: Sale of Barking Power assets proceeds Cost of sale of Barking Power assets, net of liabilities (1) Reversal of unused amounts of related asset retirement obligation included in other liabilities Loss on reclassification of the cumulative foreign currency translation adjustment Costs of disposal Gain on sale of Barking Power assets (1) Includes $101 million of cost of land sold in the United Kingdom, as part of sale of Barking Power assets. 219 (90) 16 (15) (5) 125 12. INTANGIBLES Intangible assets consist mainly of computer software not directly attributable to the operation of property, plant and equipment and land rights. Goodwill is also an intangible asset. A reconciliation of the changes in the carrying amount of intangible assets is as follows: Computer Software Land Rights Other Total Cost December 31, 2017 Additions Business acquisitions (Note 27) Retirements December 31, 2018 Additions Sale of operations (1) Retirements Foreign exchange rate adjustment December 31, 2019 Accumulated amortization December 31, 2017 Amortization Retirements December 31, 2018 Amortization Sale of operations (1) Retirements Foreign exchange rate adjustment December 31, 2019 Net book value December 31, 2018 December 31, 2019 662 71 — (3) 730 55 (25) (122) (1) 637 397 51 (3) 445 51 (15) (117) (1) 363 285 274 346 25 — — 371 18 — — — 389 43 5 — 48 5 — — — 53 323 336 26 1 46 — 73 — (10) (2) — 61 7 2 — 9 2 (2) — — 9 64 52 1,034 97 46 (3) 1,174 73 (35) (124) (1) 1,087 447 58 (3) 502 58 (17) (117) (1) 425 672 662 (1) In the second quarter of 2019, as a result of the announced sale of the Canadian fossil fuel-based electricity generation intangible assets with a net book value of $18 million were reclassified as held for sale. The sale of operations transactions closed in the second half of 2019 (Note 27). The additions to intangibles included $1 million of interest capitalized during construction for the year ended December 31, 2019 (2018 - $2 million). 111 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 28 13. GOODWILL The carrying value of goodwill for the Electricity, Pipelines & Liquids and Structures & Logistics segments is shown below. Electricity Pipelines & Liquids Structures & Logistics Carrying value 2019 2018 47 33 2 82 47 33 2 82 On February 20, 2018, Canadian Utilities Limited acquired a 100 per cent ownership interest in Electricidad del Golfo resulting in an increase of $9 million to goodwill for the Electricity operating segment (see Note 27). On December 19, 2018, ATCO Structures & Logistics purchased a 70 per cent interest in a modular building manufacturer in Mexico, which will now operate under the name ATCO Espaciomovil, resulting in an increase of $2 million to goodwill for the Structures & Logistics operating segment (see Note 27). The recoverable amount was measured based on each segment’s fair value less costs of disposal, which was calculated using publicly available enterprise values and price-to-earnings multiples of comparable, actively traded companies. Each segment’s fair value less costs of disposal was compared to its carrying value and was sufficient to support the carrying value of allocated goodwill. The Company used an average enterprise value-to-earnings before interest, taxes, depreciation, and amortization of 11.8 and 13.6 (2018 - 10.6 and 13.9) and price-to-earnings value of 19.6 and 16.3 (2018 - 23.9 and 25.3) for the Electricity and Pipelines & Liquids segments, respectively, to calculate fair value less costs of disposal. The fair value measurements are categorized in Level 3 of the fair value hierarchy. 14. RECEIVABLE UNDER SERVICE CONCESSION ARRANGEMENT In December 2014, Alberta PowerLine (APL), a partnership between Canadian Utilities Limited, a subsidiary of the Company, and Quanta Services Inc., was awarded a 35-year contract by the Alberta Electric System Operator (AESO) to design, build, own, and operate the Fort McMurray 500 kV Transmission project (Transmission Project). The Transmission Project was accounted for as a service concession arrangement as the AESO controls the output of the transmission facilities as a part of the greater Alberta network and the ownership of the transmission facilities will transfer to the AESO at the end of the service agreement. Under a service concession arrangement, the Company does not recognize the transmission facilities as property, plant and equipment, instead, a financial asset representing amounts due from the AESO has been recognized as a long-term receivable in the consolidated balance sheet. Revenues and costs relating to the design, planning and construction phases of the Transmission Project were recognized based on percentage of completion and revenues and costs relating to the operating phase are recognized as the service is rendered. Construction commenced in 2017 and the Transmission Project went into service on March 29, 2019. In October 2017, APL issued non-recourse long-term debt to fund the Transmission Project activities (see Note 17). On June 24, 2019, Canadian Utilities Limited announced that it had entered into agreements to sell its entire ownership interest in APL. At that time, Canadian Utilities Limited classified the assets and liabilities of the APL disposal group, including the receivable under service concession arrangement, as assets held for sale. The transaction closed on December 18, 2019 (see Note 27). Revenues, service concession arrangement costs and operating profit for the year ended December 31, 2019, are $232 million, $127 million and $105 million, respectively (2018 - $803 million, $664 million and $139 million). 29 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 112 15. SHORT-TERM DEBT At December 31, 2019, the Company had no commercial paper outstanding (2018 - $175 million of commercial paper outstanding at a weighted average effective interest rate of 2.25 per cent, matured in January 2019). The commercial paper is supported by the Company's long-term committed credit facilities. 16. LONG-TERM DEBT Long-term debt outstanding at December 31 is as follows: CU Inc. debentures - unsecured (1) CU Inc. other long-term obligation, due June 2021 - unsecured (2) Canadian Utilities Limited debentures - unsecured, 3.122% due November 2022 Effective Interest Rate 4.616% (2018 - 4.838%) 3.95% (2018 - 3.95%) 2019 8,090 6 2018 7,990 5 3.187% 200 200 ATCO Power Australia credit facility, payable in Australian dollars, at BBSY Rates, due February 2020, secured by a pledge of project assets and contracts, $63 million AUD (2018 - $69 million AUD) (3) ATCO Gas Australia revolving credit facility, payable in Australian dollars, at BBSY rates, due July 2021, $275 million AUD (2018 - $275 million AUD) (3) ATCO Gas Australia revolving credit facility, payable in Australian dollars, at BBSY rates, due July 2023, $405 million AUD (2018 - $400 million AUD) (3) Electricidad del Golfo credit facility, payable in Mexican pesos, at Mexican Interbank rates, due March 2023, $570 million MXP (2018 - $570 million MXP) ATCO Investments Ltd. mortgage, at BA rates, payable in Canadian dollars, due March 2028 Floating (4) Floating (4) Floating (4) Floating (4) Floating (4) ATCO Ltd. extendible revolving credit facility, at BA rates, due August 2021 (3) Floatings ATCO Ltd. fixed-to-floating rate subordinated notes, due November 2078 ATCO Structures & Logistics credit facility, at BA rates, due November 2020 (3) Floatings 5.50% (5) Less: deferred financing charges Less: amounts due within one year BBSY - Bank Bill Swap Benchmark Rate BA - Bankers’ Acceptance 58 250 369 39 95 138 200 40 66 264 385 39 98 150 200 48 (49) 9,436 (173) 9,263 (48) 9,397 (488) 8,909 (1) Interest rate is the average effective interest rate weighted by principal amounts outstanding. (2) During 2019, the expiry date of the CU Inc. other long-term obligation was extended from December 2020 to June 2021. (3) During 2019, the above interest rates had additional margin fees at a weighted average rate of 0.99 per cent (2018 - 1.16 per cent). The margin fees are subject to escalation. (4) Floating interest rates have been partially or completely hedged with interest rate swaps (see Note 23). (5) The rate of 5.50 per cent is fixed for the period from November 1, 2018 to October 31, 2028. Starting November 1, 2028, on every interest reset date (February 1, May 1, August 1, November 1) of each year until November 1, 2048, the interest rate will be reset to the three month BA plus 2.92 per cent. Starting November 1, 2048, on every interest reset date of each year until November 1, 2078, the interest rate will be reset to BA rate plus 3.67 per cent. DEBENTURE ISSUANCES On September 5, 2019, CU Inc. issued $580 million of 2.963 per cent debentures maturing on September 7, 2049 (2018 - $385 million of 3.95 per cent debentures maturing on November 23, 2048). CU Inc. repaid $180 million of 5.432 per cent debentures on January 23, 2019 and $300 million of 6.8 per cent debentures on August 13, 2019. 113 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 30 OTHER LONG TERM DEBT ISSUANCES AND REPAYMENTS ATCO Gas Australia re-financing In July 2018, as part of a re-financing, the Company's subsidiary, ATCO Gas Australia Limited Partnership, repaid in full the outstanding balance of its two credit facilities in the amount of $658 million ($677 million Australian dollars). ATCO Gas Australia then entered into a new syndicated loan facility, consisting of two tranches. The first tranche is a $275 million Australian dollars revolving credit facility, maturing in July 2021, at the Australia bank bill swap benchmark rate (BBSY) plus an applicable margin. This tranche was fully drawn at December 31, 2019. The second tranche is a $450 million Australian dollars revolving credit facility, maturing in July 2023, at BBSY rates plus a margin. $369 million ($405 million Australian dollars) was borrowed under this tranche at December 31, 2019. The floating BBSY interest rates are hedged to December 31, 2024 with an interest rate swap agreement which fixes the interest rate at 0.9708% (see Note 23). Electricidad del Golfo credit facility On February 20, 2018, the Company assumed $42 million of long-term debt on acquisition of Electricidad del Golfo (EGO) (see Note 27). On March 20, 2018, the Company issued additional long-term debt of $40 million under a fixed- term credit facility, at Mexican interbank rates maturing in March 2023, that was used to fund the retirement of EGO's long-term debt with its Mexican counterparty. To mitigate the variable interest rate risk, the Company entered into interest rate swap agreements to fix the interest rate at 8.77 per cent for the fixed-term facility (see Note 23). The long-term debt assumed on acquisition of EGO was repaid on April 2, 2018. ATCO Investments Ltd. mortgage In February 2018, the Company entered into a $100 million mortgage agreement, at BA rates maturing in March 2028. To mitigate the variable interest rate risk, the Company entered into interest swap agreements to fix the interest rate at 4.12 per cent for the mortgage agreement (see Note 23). ATCO Ltd. extendible revolving credit facility As part of the financing for the Neltume Ports investment (see Note 28), in August 2018, ATCO Ltd. entered into a $150 million long-term revolving credit facility at BA rates, maturing in August 2021. In 2019, the Company repaid $12 million of the credit facility. ATCO Ltd. fixed-to-floating rate subordinated notes On November 1, 2018, ATCO Ltd. issued $200 million of fixed-to-floating rate subordinated notes due November 1, 2078. The notes are subject to optional redemption by ATCO Ltd., whereby on or after November 1, 2028, ATCO Ltd. may redeem the notes in whole at any time or in part on an interest payment date. The notes are subject to automatic conversion, without the consent of the holders of the notes, into preferred shares, that will carry the right to receive cumulative preferential cash dividends at the same rate as the interest rate that would have accrued on the notes. The automatic conversion into preferred shares occurs under limited circumstances whereby ATCO Ltd. or a third party initiates proceedings under the Bankruptcy and Insolvency Act (Canada). The fair value of the automatic conversion feature was deemed to be nominal at inception. PLEDGED ASSETS The ATCO Power Australia credit facility is guaranteed by Canadian Utilities Limited and is secured by a mortgage on certain assets of the Karratha Power Plant and an assignment of certain contracts and agreements. The Karratha Power Plant is accounted for as a finance lease receivable. The ATCO Investments Limited mortgage is secured by certain of the Company's real estate holdings. The ATCO Structures & Logistics credit facility is secured by a general assignment of ATCO Structures & Logistics’ present and future property, assets, undertakings and equity interests in certain of its restricted subsidiaries and joint ventures. At December 31, 2019, the book value of assets pledged to maintain the Company's long-term credit facilities was $709 million at (2018 - $789 million). 31 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 114 17. NON-RECOURSE LONG-TERM DEBT Non-recourse long-term debt outstanding at December 31 was comprised of project financing received by ATCO Power and Alberta PowerLine, and is as follows: Project Financing ATCO Power: Joffre notes, at fixed rate of 8.590%, due to 2020 Scotford notes, at fixed rate of 7.930%, due to 2022 Muskeg River notes, at fixed rate of 7.560%, due to 2022 Cory: Notes, at fixed rate of 7.586%, due to 2025 Notes, at fixed rate of 7.601%, due to 2026 Alberta PowerLine: Series A Bonds, at fixed rate of 4.065%, due to 2053 Series B Bonds, at fixed rate of 4.065%, due to 2054 Series C Bonds, at fixed rate of 3.351%, due to 2032 Series D Bonds, at fixed rate of 3.340%, due to 2032 Less: deferred financing charges Less: amounts due within one year SALE OF OPERATIONS Effective Interest Rate 2019 2018 8.950% 8.240% 7.840% 7.870% 7.890% 4.277% 4.274% 3.690% 3.679% — — — — — — — — — — — — — 9 12 9 20 19 549 548 144 144 (53) 1,401 (20) 1,381 Following the announcement of agreements to sell the Canadian fossil fuel-based electricity generation portfolio and Alberta PowerLine, the Company included $1,394 million of non-recourse long-term debt in liabilities of the disposal groups classified as held for sale at June 30, 2019. Subsequently, the Company assumed $18 million of ATCO Power's non-recourse long-term debt previously classified in liabilities of the disposal group, and repaid this balance in September 2019. The Company also made scheduled payments of $5 million on the Alberta PowerLine non-recourse long-term debt. The remaining $1,371 million of non-recourse long-term debt was included in net assets of the operations sold (Note 27). The Company's total repayment towards non-recourse long-term debt during the year ended December 31, 2019, was $32 million. 18. RETIREMENT BENEFITS The Company maintains registered defined benefit and defined contribution pension plans for most of its employees. It also provides other post-employment benefits (OPEB), principally health, dental and life insurance, for retirees and their dependents. The defined benefit pension plans provide for pensions based on employees’ length of service and final average earnings. As of 1997, new employees of Canadian Utilities Limited and its subsidiaries, and, as of 2005, new employees of ATCO Structures & Logistics, automatically participate in the defined contribution pension plans. The Company also maintains non-registered, non-funded defined benefit pension plans for certain officers and key employees. The majority of benefit payments are made from trustee-administered funds; however, there are a number of unfunded plans where the Company makes the benefit payments. Plan assets held in trusts are governed by provincial and federal legislation and regulations, as is the relationship between the Company and the trustee. The Pension Committees of the Boards of Directors of Canadian Utilities Limited and ATCO Structures & Logistics are responsible for governance of the funded plans and policy decisions related to benefit design, liability management, and funding and investment, including selection of investment managers and investment options for the plans. 115 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 32 BENEFIT PLAN ASSETS, OBLIGATIONS AND FUNDED STATUS The changes in Company's pension and OPEB plan assets and obligations are as follows: Market value of plan assets Beginning of year Interest income Employee contributions Employer contributions Benefit payments Return on plan assets, excluding amounts included in interest income End of year Accrued benefit obligations Beginning of year Current service cost Interest cost Employee contributions Benefit payments from plan assets Benefit payments by employer Curtailment gain (1) Actuarial losses (gains) Past service credit (2) End of year (3) Funded status Net retirement benefit obligations Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2019 2018 2,667 95 1 21 (127) 246 2,903 — — — — — — — 2,775 95 1 21 (119) (106) 2,667 — — — — — — — 2,933 118 3,024 119 19 108 1 (127) (8) (10) 297 (6) 3,207 304 2 5 — — (5) (2) 7 — 125 125 24 105 1 (119) (7) — (95) — 2,933 266 3 4 — — (4) — (4) — 118 118 (1) In 2019, as a result of a reduction of plan members due to the sale of the Canadian fossil fuel-based electricity generation portfolio (see Note 27), the Company recorded a curtailment gain of $12 million. This gain is included in salaries, wages and benefits expense in the consolidated statements of earnings. (2) In 2019, as a result of amendments to the non-registered, non-funded defined benefit pension plans, the Company recognized $6 million of past service credit. The past service credit is included in salaries, wages and benefits expense in the consolidated statements of earnings. (3) The non-registered, non-funded defined benefit pension plans accrued benefit obligations increased to $166 million at December 31, 2019 due to a decrease in the liability discount rate and experience adjustments (2018 - decreased to $156 million due to an increase in the liability discount rate and experience adjustments). 33 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 116 BENEFIT PLAN COST The components of benefit plan cost are as follows: Current service cost Interest cost Interest income Curtailment gain Past service credit Defined benefit plans cost Defined contribution plans cost Total cost Less: capitalized Net cost recognized Pension Benefit Plans 19 108 (95) (10) (6) 16 29 45 20 25 2019 OPEB Plans 2 5 — (2) — 5 — 5 3 2 Pension Benefit Plans 24 105 (95) — — 34 30 64 27 37 2018 OPEB Plans 3 4 — — — 7 — 7 3 4 RE-MEASUREMENT OF RETIREMENT BENEFITS Re-measurements of the pension and OPEB plans are as follows: Gains (losses) on plan assets from: Return on plan assets, excluding amounts included in net interest expense (Losses) gains on plan obligations from: Changes in financial assumptions Experience adjustments (Losses) gains recognized in other comprehensive income (1) 2019 2018 Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 246 (297) — (297) (51) — (7) — (7) (7) (106) 74 21 95 (11) — 3 1 4 4 (1) Losses net of income taxes were $44 million for the year ended December 31, 2019 (2018 - $5 million). 117 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 34 PLAN ASSETS The market values of the Company’s defined benefit pension plan assets at December 31 are as follows: Quoted Un-quoted Total Quoted Un-quoted Total 2018 % Plan asset mix Equity securities Public Canada United States International Private Fixed income securities Government bonds Corporate bonds and debentures Securitizations Mortgages Real estate Land and building (1) Real estate funds Cash and other assets Cash Short-term notes and money market funds Accrued interest and dividends receivable 2019 % 20 137 202 153 — 492 1,056 718 40 — 71 1,814 8 — — — 12 48 10 6 329 228 10 573 1,141 672 118 122 2,053 30 203 233 16 25 3 44 2,903 1 100 70 2,376 6 329 228 — 563 1,141 672 118 4 1,935 — — — 16 25 3 44 2,542 — — — 10 10 — — — 118 118 30 203 233 — — — — 361 — — — 11 11 — — — 54 54 31 195 226 — — — — 291 19 70 8 137 202 153 11 503 1,056 718 40 54 1,868 31 195 226 12 48 10 70 2,667 3 100 (1) The land and building are leased by the Company. At December 31, 2018, plan assets included holdings of Class A shares of Canadian Utilities Limited and Class I Non- Voting Shares of the Company, with the market values of $5 million and $6 million, respectively. In 2019, these holdings were sold. FUNDING In 2018, an actuarial valuation for funding purposes as of December 31, 2017 was completed for the registered defined benefit pension plans. The estimated contribution for 2020 is $19 million. The next actuarial valuation for funding purposes must be completed as of December 31, 2020. 35 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 118 WEIGHTED AVERAGE ASSUMPTIONS The significant assumptions used to determine the benefit plan cost and accrued benefit obligation are as follows: Benefit plan cost Discount rate for the year (1) Average compensation increase for the year Accrued benefit obligations Discount rate at December 31 Long-term inflation rate Health care cost trend rate: Drug costs (2) Other medical costs Dental costs Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2019 2018 3.80% 2.50% 3.10% 2.00% n/a n/a n/a 3.80% n/a 3.10% n/a 5.17% 4.00% 4.00% 3.60% 2.50% 3.80% 2.00% n/a n/a n/a 3.60% n/a 3.80% n/a 5.30% 4.50% 4.00% (1) The discount rate assumption for the year was 3.80 per cent up to September 30, 2019, at which time there was a plan curtailment due to the sale of the Canadian fossil fuel-based electricity generation portfolio (see Note 27). The discount rate assumption for the period from October 1, 2019 to December 31, 2019, was 3.00 per cent. (2) The Company uses a graded drug cost trend rate, which assumes a 5.17 per cent rate per annum, grading down to 4.00 per cent in and after 2040. The weighted average duration of the defined benefit obligation is 13.2 years. RISKS The Company is exposed to a number of risks related to its defined benefit pension plans and OPEB plans. The most significant risks are described below. Investment risk The Company makes investment decisions for its funded plans using an asset-liability matching framework. Within this framework, the Company’s objective over time is to increase the proportion of plan assets in fixed income securities with maturities that match the expected benefit payments as they fall due. However, due to the long-term nature of the benefit obligations, the strength of the Company, and the belief that a diversified portfolio offers an appropriate risk-return profile, the Company continues to invest in equity securities, global fixed income and Canadian real estate in addition to Canadian fixed income. The Company has not changed the processes used to manage its risks from previous periods. Interest rate risk A decrease in long-term interest rates will increase accrued benefit obligations, which will be partially offset by an increase in the value of the plans’ bond holdings. Other things remaining the same, a further decrease in long-term interest rates will cause the funded status to deteriorate, while increases in interest rates will result in gains. Compensation risk The present value of the accrued benefit obligations is calculated using the estimated future compensation of plan participants. Should future compensation be higher than estimated, benefit obligations will increase. Inflation risk Accrued benefit obligations are linked to inflation, and higher inflation will lead to increased obligations. For the defined benefit pension plans, inflation risk is mitigated because the indexing of benefit payments is capped at an annual increase of 3.0 per cent. The majority of plan assets are also affected by inflation. As inflation rises, long-term interest rates will likely rise, pushing up bond yields and reducing the value of existing fixed rate bonds. The relationship between equities and inflation is not as clear, but generally speaking, high inflation has a negative impact on equity valuations. Overall, rising inflation will likely reduce a plan surplus or increase a deficit. Life expectancy Should pensioners live longer than assumed, benefit obligations and liabilities will be larger than expected. 119 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 36 SENSITIVITIES The 2019 sensitivities of key assumptions used in measuring the Company's pension and OPEB plans are as follows: Assumption Discount rate Future compensation rate Long-term inflation rate (1) Health care cost trend rate Life expectancy Accrued Benefit Obligation Net Benefit Plan Cost Per cent Change Increase in Assumption Decrease in Assumption Increase in Assumption Decrease in Assumption 1% 1% 1% 1% 10% (359) 11 416 10 75 443 (12) (344) (8) (84) 5 — 11 — 2 (7) — (9) — (2) (1) The long-term inflation rate for pension plans reflects the fact that pension plan benefit payments have historically been indexed annually to increases in the Canadian Consumer Price Index to a maximum increase of 3.0 per cent per annum. The above sensitivities have been calculated independently of each other. Actual experience may result in changes in a number of assumptions simultaneously. 19. BALANCES FROM CONTRACTS WITH CUSTOMERS Balances from contracts with customers are comprised of accounts receivable and contract assets and customer contributions: ACCOUNTS RECEIVABLE AND CONTRACT ASSETS At December 31, accounts receivable and contract assets are as follows: Trade accounts receivable and contract assets Other accounts receivable The significant changes in trade accounts receivable and contract assets are as follows: December 31, 2017 Revenue from satisfied performance obligations Customer billings and other items not included in revenue Business acquisitions (Note 27) Reversal of credit loss allowance, net Payments received Foreign exchange rate adjustment December 31, 2018 Revenue from satisfied performance obligations Customer billings and other items not included in revenue Sale of operations (1) Payments received Foreign exchange rate adjustment and other December 31, 2019 2019 700 31 731 2018 719 26 745 695 3,684 422 6 2 (4,093) 3 719 4,132 545 (72) (4,621) (3) 700 (1) In the second quarter of 2019, as a result of the announced sale of the Canadian fossil fuel-based electricity generation portfolio and the ownership interest in Alberta PowerLine, trade accounts receivable and contract assets of $72 million were reclassified as assets held for sale. The sale of operations transactions closed in the second half of 2019 (Note 27). CUSTOMER CONTRIBUTIONS Certain additions to property, plant and equipment, mainly in the utilities, are made with the assistance of non- refundable cash contributions from customers. These contributions are made when the estimated revenue is less than the cost of providing service or where the customer needs special equipment. Since these contributions will 37 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 120 provide customers with on-going access to the supply of natural gas or electricity, they represent deferred revenues and are recognized in revenues over the life of the related asset. Changes in customer contributions balance are summarized below. December 31, 2017 Receipt of customer contributions Derecognition on termination of Power Purchase Arrangement Amortization December 31, 2018 Receipt of customer contributions Sale of operations (1) Amortization December 31, 2019 Note 4 1,808 90 (35) (65) 1,798 85 (97) (66) 1,720 (1) In the second quarter of 2019, as a result of the announced sales of the Canadian fossil fuel-based electricity generation portfolio, customer contributions of $97 million were reclassified as liabilities held for sale. The sale of operations transactions closed in the second half of 2019 (Note 27). 20. LEASES THE COMPANY AS LESSEE Right-of-use assets The Company's right-of-use assets mainly relate to the lease of land and buildings. Cost January 1, 2019, on adoption of IFRS 16 Additions Foreign exchange rate adjustment December 31, 2019 Accumulated depreciation January 1, 2019, on adoption of IFRS 16 Depreciation December 31, 2019 Net book value January 1, 2019, on adoption of IFRS 16 December 31, 2019 2019 Land and Buildings Note 3 3 3 107 9 (2) 114 — 18 18 107 96 121 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 38 Lease liabilities The Company has recognized lease liabilities in relation to the arrangements to lease land and buildings. The reconciliation of movements in lease liabilities is as follows: January 1, 2019, on adoption of IFRS 16 Additions Interest expense Lease payments Foreign exchange rate adjustment Less: amounts due within one year December 31, 2019 Note 3 7 The maturity analysis of the undiscounted contractual balances of the lease liabilities is as follows: In one year or less In more than one year, but not more than five years In more than five years The amounts expensed in the consolidated statements of earnings for the year ended December 31, 2019, in relation to short-term leases and low-value leases are as follows: Short-term leases Low-value leases 2019 107 9 3 (19) (1) 99 (15) 84 18 62 36 116 8 6 14 During the year ended December 31, 2019, no expenses were incurred in relation to low-value leases or leases with variable payments. THE COMPANY AS LESSOR The Company is party to certain arrangements that convey the right to use electricity generation and non-regulated electricity transmission assets. These arrangements are classified as finance leases, with the Company as the lessor. As at December 31, 2019, the Company's operating leases include rentals of modular structures. As at December 31, 2018, the Company's operating leases also included certain assets under power purchase agreements (PPA) that were classified as operating leases because the Company had retained substantially all the risks and rewards of ownership. The assets under PPA were sold as part of the Canadian fossil fuel-based electricity generation portfolio (Note 27). 39 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 122 Finance leases The total net investment in finance leases is shown below. Finance lease income is recognized in revenues. Net investment in finance leases Finance lease - gross investment Unearned finance income Unguaranteed residual value Current portion Non-current portion Gross receivables from finance leases In one year or less In more than one year, but not more than five years In more than five years Net investment in finance leases In one year or less In more than one year, but not more than five years In more than five years 2019 2018 331 (152) 683 (291) — 179 9 170 179 26 105 200 331 9 44 126 179 3 395 15 380 395 52 209 422 683 15 87 293 395 During the year ended December 31, 2019, $2 million of contingent rent was recognized as income from these finance leases (2018 - $21 million). Sale of operations Following the announcement of agreements to sell the Canadian fossil fuel-based electricity generation portfolio (see Note 27), the Company included $218 million of finance lease receivables in assets of the disposal groups classified as held for sale at June 30, 2019. Subsequently, $214 million of finance lease receivables was included in net assets of the operations sold. Operating leases The aggregate future minimum lease payments receivable under non-cancellable operating leases are: Minimum lease payments receivable In one year or less In more than one year, but not more than five years In more than five years 2019 2018 45 26 — 71 114 116 2 232 During the year ended December 31, 2019 and 2018, no contingent rent was recognized as income from these operating leases. 123 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 40 21. CLASS I NON-VOTING AND CLASS II VOTING SHARES A reconciliation of the number and dollar amount of outstanding Class I and Class II Shares at December 31, 2019 is shown below. AUTHORIZED AND ISSUED Authorized: Issued and outstanding: December 31, 2017 Purchased and cancelled Stock options exercised Converted: Class II to Class I December 31, 2018 Purchased and cancelled Stock options exercised Converted: Class II to Class I December 31, 2019 Class I Non-Voting Shares 300,000,000 Amount Shares 50,000,000 Class II Voting Amount Shares 350,000,000 Total Amount 101,328,273 (116,800) 117,200 100,208 101,428,881 (101,350) 107,950 28,300 101,463,781 179 13,331,455 — 3 — 182 — 3 — 185 — — (100,208) 13,231,247 — — (28,300) 13,202,947 2 — — — 2 — — 2 114,659,728 181 (116,800) 117,200 — 114,660,128 (101,350) 107,950 — — 3 — 184 — 3 — 114,666,728 187 Class I and Class II Shares have no par value. MID-TERM INCENTIVE PLAN The Company's MTIP trust is considered a special purpose entity which is consolidated in these financial statements. The Class I Shares, while held in trust, are accounted for as a reduction of share capital. The consolidated Class I and Class II Shares outstanding at December 31 is shown below. Shares issued and outstanding Shares held in trust for the mid-term incentive plan Shares outstanding, net of shares held in trust DIVIDENDS 2019 2018 Shares Amount Shares Amount 114,666,728 (321,948) 114,344,780 187 (14) 173 114,660,128 (342,212) 114,317,916 184 (15) 169 The Company declared and paid cash dividends of $1.6192 per Class I and Class II Share during 2019 (2018 - $1.5064). The Company’s policy is to pay dividends quarterly on its Class I and Class II Shares. The payment and amount of any quarterly dividend is at the discretion of the Board and depends on the financial condition of the Company and other factors. On January 9, 2020, the Company declared a first quarter dividend of $0.4352 per Class I and Class II Share. SHARE OWNER RIGHTS Each Class II Share may be converted into one Class I Share at any time at the share owner’s option. If an offer to purchase all Class II Shares is made, and such offer is accepted and taken up by the owners of a majority of the Class II Shares, and if, at the same time, an offer is not made to the Class I Share owners on the same terms and conditions, then the Class I Shares will be entitled to the same voting rights as the Class II Shares. The two share classes rank equally in all other respects, except for voting rights. 41 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 124 NORMAL COURSE ISSUER BID On March 8, 2019, ATCO Ltd. began a normal course issuer bid to purchase up to 1,014,294 outstanding Class I Shares. The bid expires on March 7, 2020. The prior year normal course issuer bid to purchase up to 2,026,725 outstanding Class I Shares began on March 8, 2018 and expired on March 7, 2019. During the year ended December 31, 2019, 101,350 shares were purchased for $5 million, resulting in no impact to share capital and a decrease to retained earnings of $5 million (2018 - 116,800 shares were purchased for $4 million, resulting in no impact to share capital and a decrease to retained earnings of $4 million). 22. CASH FLOW INFORMATION ADJUSTMENTS TO RECONCILE EARNINGS TO CASH FLOWS FROM OPERATING ACTIVITIES Adjustments to reconcile earnings to cash flows from operating activities for the year ended December 31 are summarized below. Depreciation and amortization Gain on sale of operations Gain on sale of Barking Power assets Earnings from investment in associate company Dividends received from associate company Note 27 11 Dividends and distributions received from investment in joint ventures, net of earnings Income tax expense Unearned availability incentives Unrealized gains on mark-to-market forward and swap commodity contracts Contributions by customers for extensions to plant Amortization of customer contributions Derecognition of customer contributions on termination of Power Purchase Arrangement 4 Net finance costs Income taxes paid Other 2019 637 (174) — (15) 12 1 66 7 (7) 85 (66) — 484 (94) (16) 920 2018 682 — (125) (4) — 5 231 — (42) 90 (65) (35) 478 (55) 66 1,226 125 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 42 (55) 6 (149) 140 (37) (95) — (2) 1 (66) (67) Total 9,983 963 (11) 42 (9) 5 CHANGES IN NON-CASH WORKING CAPITAL The changes in non-cash working capital are summarized below. 2019 2018 Operating activities Accounts receivable and contract assets Inventories Prepaid expenses and other current assets Accounts payable and accrued liabilities Provisions and other current liabilities Investing activities Accounts receivable and contract assets Inventories Prepaid expenses Accounts payable and accrued liabilities 64 (5) (37) (202) (25) (205) 7 4 2 (6) 7 DEBT RECONCILIATION The reconciliation of the changes in debt for the year ended December 31 is shown below. Short-term debt Long-term debt Non-recourse debt Liabilities from financing activities December 31, 2017 Net issue (repayment) of debt Foreign currency translation Assumption of debt on acquisition of EGO (Note 27) Debt issue costs Amortization of deferred financing charges December 31, 2018 Net (repayment) issue of debt Foreign currency translation Sale of operations (Note 27) Debt issue costs Amortization of deferred financing charges December 31, 2019 10 165 — — — — 175 (175) — — — — — 8,557 814 (11) 42 (9) 4 1,416 (16) — — — 1 9,397 1,401 10,973 78 (38) — (4) 3 9,436 (32) — (129) (38) (1,371) (1,371) — 2 — (4) 5 9,436 See Note 20 for the reconciliation of the changes in lease liability for the year ended December 31, 2019. CASH POSITION Cash position in the consolidated statements of cash flows at December 31 is comprised of: Cash Restricted cash (1) Cash and cash equivalents 2019 1,061 79 1,140 2018 627 64 691 (1) Cash balances which are restricted under the terms of joint arrangement agreements are considered not available for general use by the Company. 43 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 126 23. FINANCIAL INSTRUMENTS FAIR VALUE MEASUREMENT Financial instruments are measured at amortized cost or fair value. Fair value represents the estimated amounts at which financial instruments could be exchanged between knowledgeable and willing parties in an arm’s length transaction. Determining fair value requires management judgment. The valuation methods used to determine the fair value of each financial instrument and its associated level in the fair value hierarchy is described below. Financial Instruments Fair Value Method Measured at Amortized Cost Cash and cash equivalents, accounts receivable and contract assets, restricted project funds, accounts payable and accrued liabilities and short-term debt. Assumed to approximate carrying value due to their short-term nature. Finance lease receivables and receivable under service concession arrangement. Determined using a risk-adjusted interest rate to discount future cash receipts (Level 2). Long-term debt and non-recourse long-term debt. Determined using quoted market prices for the same or Measured at Fair Value Interest rate swaps Foreign currency contracts Commodity contracts similar issues. Where the market prices are not available, fair values are estimated using discounted cash flow analysis based on the Company’s current borrowing rate for similar borrowing arrangements (Level 2). Determined using interest rate yield curves at period-end (Level 2). Determined using quoted forward exchange rates at period-end (Level 2). Determined using observable period-end forward curves and quoted spot market prices with inputs validated by publicly available market providers (Level 2). Determined using statistical techniques to derive period-end forward curves using unobservable inputs or extrapolation from spot prices in certain commodity contracts (Level 3). FINANCIAL INSTRUMENTS MEASURED AT AMORTIZED COST At December 31, the fair values of the Company’s financial instruments measured at amortized cost are as follows: Recurring Measurements Financial Assets Finance lease receivables Receivable under service concession arrangement Financial Liabilities Long-term debt Non-recourse long-term debt Carrying Value 179 — 2019 Fair Value 227 — 9,436 11,098 — — Carrying Value 395 1,396 9,397 1,401 2018 Fair Value 487 1,396 10,042 1,474 127 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 44 FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE The Company's derivative instruments are measured at fair value. At December 31, 2019, the following derivative instruments were outstanding: • • • interest rate swaps for the purpose of limiting interest rate risk on the variable future cash flows of long-term debt; foreign currency forward contracts for the purpose of limiting exposure to exchange rate fluctuations relating to expenditures denominated in U.S. dollars, Australian dollars and Mexican pesos; and natural gas and forward power sale and purchase contracts for the purpose of limiting exposure to electricity and natural gas market price movements. The balance sheet classification and fair values of the Company’s derivative financial instruments are as follows: Recurring Measurements Rate Swaps Commodities Commodities Interest Foreign Currency Forward Contracts Total Fair Value of Derivatives Subject to Hedge Accounting Not Subject to Hedge Accounting December 31, 2019 Financial Assets Prepaid expenses and other current assets Other assets Financial Liabilities Other current liabilities (1) (2) Other liabilities (1) (2) December 31, 2018 Financial Assets Prepaid expenses and other current assets Other assets Financial Liabilities Other current liabilities (1) (2) Other liabilities (1) (2) — 5 1 5 1 1 — 4 20 21 11 10 2 2 15 8 — — — — — 4 34 27 — — 2 — 2 — 4 — 20 26 14 15 5 7 53 39 (1) (2) At December 31, 2019, financial liabilities include $7 million of Level 3 derivative financial instruments (2018 - nil). At December 31, 2018, the Company paid $18 million of cash collateral to third parties on commodity forward positions related to future periods. The contracts held with these third parties had an enforceable master netting arrangement, which allowed the right to offset. In 2019, these contracts were disposed by the Company as part of the sale of the Canadian fossil fuel-based electricity generation portfolio (Note 27). During the year ended December 31, 2019, losses before income taxes of $3 million were recognized in other comprehensive income (OCI) (2018 - losses of $4 million) and losses before income taxes of $22 million were reclassified to the statement of earnings (2018 - losses of $11 million), of which $11 million were reclassified on sale of the Canadian fossil fuel-based electricity generation portfolio (Note 27). Hedge ineffectiveness of $19 million was recognized in the statement of earnings during 2019 (2018 - $1 million). Over the next 12 months, the Company estimates that losses before income taxes of less than $1 million will be reclassified from accumulated other comprehensive income (AOCI) to earnings. 45 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 128 Notional and maturity summary The notional value and maturity dates of the Company's derivative instruments outstanding are as follows: Subject to Hedge Accounting Not Subject to Hedge Accounting Notional value and maturity Interest Rate Swaps Natural Gas (1) Power (2) Natural Gas (1) Power (2) December 31, 2019 Purchases (3) Sales (3) Currency Canadian dollars Australian dollars Mexican pesos U.S. dollars Maturity December 31, 2018 Purchases (3) Sales (3) Currency Canadian dollars Australian dollars Mexican pesos U.S. dollars British pounds Maturity — 19,680,771 2,627,765 — — 20,456,673 2,215,145 7,000,000 96 743 570 — — — — — — — — — — — — — 2020-2028 2020-2024 2020-2024 2020-2021 — — — — — — — — 12,545,000 — 58,518,200 3,254,650 — 100 744 570 — — — — — — — — 1,193,640 7,740,700 7,574,926 — — — — — — — — — — — — — — — Foreign Currency Forward Contracts — — — — 100 46 2020 — — — — 140 46 74 2019-2028 2019-2021 2019-2020 2019-2022 2019-2021 2019 (1) Notional amounts for the natural gas purchase contracts are the maximum volumes that can be purchased over the terms of the contracts. (2) Notional amounts for the forward power sale and purchase contracts are the commodity volumes committed in the contracts. (3) Volumes for natural gas and power derivatives are in GJ and MWh, respectively. OFFSETTING FINANCIAL ASSETS AND LIABILITIES Netting arrangements and similar agreements provide counterparties the legal right to set-off liabilities against assets received. The following financial assets and financial liabilities are subject to offsetting at December 31: 2019 Financial Assets Accounts receivable and contract assets 59 (37) 22 Effects of Offsetting on the Balance Sheet Gross Amount Gross Amount Offset Net Amount Recognized 2018 Financial Assets Derivative assets (1) Accounts receivable and contract assets Financial Liabilities Derivative liabilities (1) 8 222 103 — (77) (18) 8 145 85 (1) The Company enters into derivative transactions based on master agreements in which there is a set-off provision under certain circumstances, such as default. The agreements do not meet the criteria for offsetting in the consolidated balance sheet since the Company does not presently have a legally enforceable right to set-off. This right is enforceable only if certain credit events occur in the future. 129 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 46 24. RISK MANAGEMENT FINANCIAL RISKS The Company is exposed to a variety of risks associated with the use of financial instruments: market risk, credit risk and liquidity risk. The Company may use various derivative financial instruments to manage its exposure in these areas. All such instruments are used to manage risk and are not for trading purposes. The Company’s Board is responsible for understanding the principal risks of the Company’s business, achieving a proper balance between risks incurred and the potential return to share owners, and confirming there are controls in place to effectively monitor and manage those risks with a view to the long-term viability of the Company. The Board established the Audit & Risk Committee to review significant risks associated with future performance, growth and lost opportunities identified by management that could materially affect the Company’s ability to achieve its strategic or operational targets. This committee is responsible for confirming that management has procedures in place to mitigate identified risks. The source of risk exposure and how each is managed is outlined below. MARKET RISK Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in interest rates. The Company’s interest-bearing assets and liabilities include cash and cash equivalents, bank indebtedness, short-term debt and long-term debt. The interest rate risk faced by the Company is primarily due to its cash and cash equivalents and floating rate long-term debt. Cash and cash equivalents include fixed rate instruments with maturities of generally 90 days or less that are reinvested as they mature. The Company is exposed to interest rate movements after these investments mature. The Company's risk management policy is to hedge all material interest rate risk exposures related to long-term financings when the risk is incurred, unless commercial arrangements or mechanisms are in place to offset such interest rate risk. The Company has fixed interest rates, either directly or through interest rate swap agreements, on 98 per cent (2018 - 98 per cent) of total long-term debt. Consequently, the exposure to fluctuations in market interest rates is limited. A 25 basis point increase or decrease in interest rates would increase or decrease earnings by less than $1 million. This analysis has been determined based on the exposure to interest rates for financial instruments outstanding at December 31, 2019. Foreign exchange risk Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in foreign exchange rates. The Company operates internationally and is exposed to foreign exchange risk from financial instruments denominated in currencies other than the functional currency of an operation and on its net investments in foreign subsidiaries. The majority of this currency risk arises from exposure to the U.S. dollar and Australian dollar. The Company offsets foreign exchange volatility in part by entering into foreign currency derivative contracts and by financing with foreign-denominated debt. The Company's risk management policy is to hedge all material transactions with foreign exchange risks arising from the sale or purchase of goods and services where revenue or the costs to be incurred are denominated in a currency other than the functional currency of the transacting company. A 10 per cent increase or decrease in foreign exchange rates would each increase or decrease OCI by the following: U.S. dollar Australian dollar OCI 42 38 The sensitivity analysis is based on management’s assessment that an average 10 per cent increase or decrease in this currency relative to the Canadian dollar is a reasonable potential change over the next year. This analysis has been determined based on the exposure to foreign exchange for financial instruments outstanding at December 31, 2019. 47 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 130 The sensitivity analysis excludes translation risk associated with the translation of subsidiaries that have a different functional currency than the functional currency of the Company. Energy commodity price risk Energy commodity price risk is the risk that the fair value or future cash flows of natural gas and electricity sales and purchases will fluctuate due to changes in market prices. Fluctuations in market prices result from changes in supply and customer demand, fuel costs, market conditions, weather, regulatory policies, and other factors. The Company’s retail energy and natural gas storage businesses are exposed to commodity price movements, particularly to the market price of natural gas and electricity. Anticipated price risks are calculated based on the Company’s customer demand requirements and supply requirements to natural gas and electricity. These are consistently observed and analyzed to ensure that operational and commercial strategic policies to mitigate pricing risk are met. The Company manages its price risk as part of its strategy by entering into hedging contracts, including short-term and long-term fixed price sale and purchase contracts. Management actively monitors its derivative transactions in accordance with its risk management policy. This policy sets out pre-defined risks and financial parameters so that price fluctuations do not materially affect the margins the Company ultimately receives. The Company is also exposed to seasonal natural gas price spreads in its natural gas storage operations. Management mitigates this risk by entering into short-term and long-term firm capacity arrangements, where appropriate. The Company’s natural gas and electricity contracts associated with financial derivatives are significantly influenced by the variability of forward spot prices. A 10 per cent increase or decrease in the forward price of natural gas or electricity would each increase or decrease earnings and OCI by $1 million and $1 million, respectively. This analysis assumes that changes in the forward price of natural gas and electricity affects the mark-to-market adjustment of the purchase and sale contracts. CREDIT RISK Credit risk is the risk of financial loss due to a counterparty's inability to discharge their contractual obligations to the Company. The Company is exposed to credit risk on its cash and cash equivalents, accounts receivable and contract assets, finance lease receivable and derivative instrument assets. The exposure to credit risk represents the total carrying amount of these financial instruments in the consolidated balance sheet. The Company manages its credit risk on cash and cash equivalents by investing in instruments issued by credit- worthy financial institutions and in short-term instruments issued by the federal government. Accounts receivable and contract assets and finance lease receivable credit risk is reduced by transacting with credit-worthy customers in accordance with the established credit approval policies, diversified customer base and through collateral arrangements such as letters of credit, corporate guarantees and cash deposits. The utilities are also able to recover an estimate for their credit loss allowances through approved customer rates and to request recovery through customer rates for any losses from retailers beyond the retailer security mandated by provincial regulations. Derivative credit risk arises from the possibility that a counterparty to a contract fails to perform according to its terms and conditions. This risk is mitigated by dealing with large, credit-worthy counterparties and continuous monitoring of the counterparty risk exposure. The Company has in certain instances entered into master netting agreements with its derivative counterparties, which provides a right to offset for certain exposures between the parties. The Company does not have a concentration of credit risk with any counterparty, except for finance lease receivables, which by its nature is with a single counterparty. Depending on the nature of accounts receivable and contract assets, the Company estimates credit losses based on the expected credit loss rates for respective credit ratings. At December 31, the summary of the expected credit loss 131 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 48 rates for respective credit ratings is as follows: December 31, 2019 December 31, 2018 High (AA to AAA) Medium (BBB to A) Low (BB and below) 0%-0.02% 0.06%-0.16% 0.53%-3.41% 0%-0.03% 0.05%-0.26% 0.36%-1.05% At December 31, 2019, the Company had less than $150 million of accounts receivable and contract assets classified as Low (BB and below) (2018 - less than $200 million). Where the Company believes there is a high probability of a customer default, additional credit allowances are recorded. The reconciliation of changes in the Company's credit loss allowance is as follows: December 31, 2017 Reversal of credit loss allowance December 31, 2018 Reversal of credit loss allowance Accounts receivable and contract assets written off as uncollectible December 31, 2019 The aging analysis of the trade receivables that are past due but not impaired at December 31 is as follows: Up to 30 days 31 to 60 days 61 to 90 days Over 90 days 2019 640 25 10 25 700 11 (2) 9 (4) 4 9 2018 615 62 12 30 719 At December 31, 2019, the Company held $246 million in letters of credit for certain counterparty receivables (2018 - $246 million). The Company did not take possession of any collateral it holds as security in 2019 or 2018. The Company has also entered into guarantee arrangements with Centrica plc. relating to the retail energy supply functions performed by Direct Energy (see Note 33). LIQUIDITY RISK Liquidity risk is the risk that the Company will not be able to meet its financial obligations associated with its financial liabilities that are settled in cash or another financial asset. Liquidity risk arises from the Company's general funding needs and in the management of its assets, liabilities and capital structure. The Company considers it prudent to maintain sufficient liquidity to fund approximately one full year of cash requirements to preserve strong financial flexibility. Cash flow from operations provides a substantial portion of the Company’s cash requirements. Additional cash requirements are met with the use of existing cash balances, bank borrowings and issuance of long-term debt and preferred shares. Commercial paper borrowings and short-term bank loans are also used under available credit lines to provide flexibility in the timing and amounts of long-term financing. Lines of credit At December 31, the Company has the following lines of credit that enable it to obtain financing for general business purposes: Long-term committed Short-term committed Uncommitted Total 2,985 18 571 3,574 Used 839 13 174 1,026 2019 Available 2,146 5 397 2,548 Total 3,036 — 571 3,607 Used 1,114 — 342 1,456 2018 Available 1,922 — 229 2,151 49 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 132 Long-term committed credit facilities have maturities greater than one year. Uncommitted credit facilities have no set maturity and the lender can demand repayment at any time. Lines of credit utilized at December 31 are comprised of: Short-term debt (Note 15) Long-term debt Letters of credit Commercial paper 2019 — 797 229 1,026 2018 175 846 435 1,456 The Company is authorized to issue $1.2 billion of commercial paper against its long-term committed credit facilities. Maturity analysis of financial obligations The table below analyzes the remaining contractual maturities at December 31, 2019 of the Company's financial liabilities based on the contractual undiscounted cash flows. Accounts payable and accrued liabilities Long-term debt: Principal Interest expense (1) Derivatives (2) 2020 675 200 412 11 1,298 2021 2022 2023 2024 2025 and thereafter — — — — — 557 394 8 959 327 370 1 698 511 352 1 864 123 337 — 460 7,767 6,687 — 14,454 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2019. Interest payments on debt that has been hedged have been estimated using hedged rates. (2) Payments on outstanding derivatives have been estimated using exchange rates and commodity prices in effect at December 31, 2019. 133 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 50 25. CAPITAL DISCLOSURES The Company’s objectives when managing capital are to: 1. Safeguard the Company’s ability to continue as a going concern so it can continue to provide returns to share owners and benefits for other stakeholders. 2. Maintain strong investment-grade credit ratings in order to provide efficient and cost-effective access to funds required for operations and growth. 3. Remain within the capital structure approved by the AUC for the Utilities. The Company considers both its regulated and non-regulated operations, as well as changes in economic conditions and risks impacting its operations, in managing its capital structure. The Company may adjust the dividends paid to share owners, issue or purchase Class I and Class II Shares, issue or redeem preferred shares, and issue or repay short-term debt, long-term debt and non-recourse long-term debt. Financing decisions are based on assessments by management in line with the Company’s objectives, with a goal of managing the financial risk to the Company as a whole. While the Alberta based Utilities have as their objective to be capitalized according to the AUC-approved capital structure, the Company as a whole is not restricted in the same manner. The Company sets its capital structure relative to risk and to meet financial and operational objectives, while factoring in the decisions of the regulator. The Company also manages capital to comply with the customary covenants on its debt. A common financial covenant for the Company’s debentures and credit facilities is that total debt divided by total capitalization must be less than 75 per cent. The Company defines total debt as the sum of bank indebtedness, short-term debt, long-term debt and non-recourse long-term debt (including their respective current portions). It defines total capitalization as the sum of Class I and Class II Shares, contributed surplus, retained earnings, AOCI, NCI and total debt. Management maintains the debt capitalization ratio well below 75 per cent to sustain access to cost-effective financing. Debt capitalization does not have standardized meaning under IFRS and might not be comparable to similar measures presented by other companies. Also, the definitions of total debt and total capitalization vary slightly in the Company’s debt-related agreements. The Company’s capitalization at December 31 is as follows: Short-term debt Long-term debt Non-recourse long-term debt Total debt Class I and Class II Shares Contributed surplus Retained earnings Accumulated other comprehensive (loss) income Non-controlling interests Total equity Total capitalization Debt capitalization 2019 — 9,436 — 9,436 173 12 3,832 (17) 3,858 7,858 2018 175 9,397 1,401 10,973 169 11 3,535 40 3,687 7,442 17,294 18,415 55% 60% For the year ended December 31, 2019, the Company complied with externally imposed requirements on its capital, including covenants related to debentures and credit facilities. The Company will continue to assess its capital structure and objectives in light of any future decisions received from the AUC. 51 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 134 26. SIGNIFICANT JUDGMENTS, ESTIMATES AND ASSUMPTIONS Significant judgments, estimates and assumptions made by the Company are outlined below. SIGNIFICANT ACCOUNTING JUDGMENTS Revenue related items The Company makes judgments with respect to: determining whether the promised goods and services are considered distinct performance obligations by considering the relationship of such promised goods and services; allocating the transaction price for each distinct performance obligation identified through stand-alone selling price; evaluating when a customer obtains control of the goods or services promised; and evaluating whether the Company acts as principal or agent on certain flow-through charges to customers. Impairment of financial assets The impairment loss allowance for financial assets is based on assumptions about risk of default and expected loss rates. The Company makes judgments in making these assumptions and selecting the inputs to the impairment calculation, based on the Company's past history, existing market conditions as well as forward looking estimates at the end of each reporting period. Associates Judgment is required when assessing the classification of an investment as an associate. When making this assessment, the Company considers the structure of the investment, the legal form of any separate vehicles, the contractual terms of the investment, and other facts and circumstances. Joint arrangements Judgment is required when assessing the classification of a joint arrangement as a joint operation or a joint venture. When making this assessment, the Company considers the structure of the arrangements, the legal form of any separate vehicles, the contractual terms of the arrangements, and other facts and circumstances. Service concession arrangements Judgment is required when assessing whether contracts with government entities fall within the scope of IFRIC 12 Service Concession Arrangements. Judgment also needs to be exercised when determining the classification to be applied to the service concession asset, allocation of consideration between revenue generating activities, classification of costs incurred and the effective interest rate to be applied to the service concession asset. Impairment of long-lived assets Indicators of impairment are considered when evaluating whether or not an asset is impaired. Factors which could indicate an impairment exists include: significant underperformance relative to historical or projected operating results, significant changes in the way in which an asset is used or in the Company’s overall business strategy, significant negative industry or economic trends, or adverse decisions by regulators. Events indicating an impairment may be clearly identifiable or based on an accumulation of individually insignificant events over a period of time. Measurement uncertainty is increased where the Company is not the operator of a facility. The Company continually monitors its operating facilities and the markets and business environment in which it operates. Judgments and assessments about conditions and events are made order to conclude whether a possible impairment exists. Property, plant and equipment and intangibles The Company makes judgments to: assess the nature of the costs to be capitalized and the time period over which they are capitalized in the purchase or construction of an asset; evaluate the appropriate level of componentization where an asset is made up of individual components for which different depreciation and amortization methods and useful lives are appropriate; distinguish major overhauls to be capitalized from repair and maintenance activities to be expensed; and determine the useful lives over which assets are depreciated and amortized. Leases The Company evaluates contract terms and conditions to determine whether they contain or are leases. Where a lease exists, the Company determines whether substantially all of the significant risks and rewards of ownership are 135 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 52 transferred to the customer, in which case it is accounted for as a finance lease, or remain with the Company, in which case it is accounted for as an operating lease. In the situation where the implicit interest rate in the lease is not readily determined, the Company uses judgment to estimate the incremental borrowing rate for discounting the lease payments. The Company's incremental borrowing rate generally reflects the interest rate that the Company would have to pay to borrow a similar amount at a similar term and with a similar security. The Company estimates the lease term by considering the facts and circumstances that create an economic incentive to exercise an extension or termination option. Certain qualitative and quantitative assumptions are used when evaluating these incentives. Income taxes The Company makes judgments with respect to changes in tax legislation, regulations and interpretations thereof. Judgment is also applied to estimating probable outcomes, when temporary differences will reverse, and whether tax assets are realizable. When tax legislation is subject to interpretation, management periodically evaluates positions taken in tax filings and records provisions where appropriate. The provisions are management’s best estimates of the expenditures required to settle the present obligations at the balance sheet date, using a probability weighting of possible outcomes. Disposal groups and assets classified as held for sale In 2019, the Company made judgments with regards to classification of assets and liabilities of certain businesses as assets and liabilities held for sale and their operations as discontinued operations (see Note 27). The Company used significant judgment in evaluating whether the sales were considered highly probable and considered the progress of negotiations towards the significant terms of the sales. As a result, the Company classified the disposal groups as assets and liabilities held for sale. The Company also used significant judgment in evaluating whether a disposal group represented a major line of business or geographical area of operations to be classified as discontinued operations, including considerations as to whether a disposal group was significant in relation to a reportable segment. The Company concluded that the disposal groups should not have been classified as discontinued operations since they were not considered a separate major line of business or geographical area of operations. SIGNIFICANT ACCOUNTING ESTIMATES AND ASSUMPTIONS Revenue recognition An estimate of usage not yet billed is included in revenues from the regulated distribution of natural gas and electricity. The estimate is derived from unbilled gas and electricity distribution services supplied to customers and is from the date of the last meter reading and uses historical consumption patterns. Management applies judgment to the measure and value of the estimated consumption. Impairment of financial assets The impairment loss allowance for financial assets are based on assumptions about risk of default and expected loss rates. For details regarding significant assumptions and key inputs used to calculate impairment loss allowance, see Note 24. Service concession arrangements Contracts falling under IFRIC 12 Service Concession Arrangements require the use of estimates over the term of the arrangement, including estimates of the services performed to date as a proportion of the total services to be performed. Any change in the long-term estimates could result in significant variation in the amounts recognized under service concession arrangements. Useful lives of property, plant and equipment and intangibles Useful lives are estimated based on current facts and past experience taking into account the anticipated physical life of the asset, existing long-term sales agreements and contracts, current and forecast demand, and the potential for technological obsolescence. 53 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 136 Impairment of long-lived assets The Company continually monitors its long-lived assets and the markets and business environment in which it operates for indications of asset impairment. Where necessary, the Company estimates the recoverable amount for the cash generating unit (CGU) to determine if an impairment loss is to be recognized. These estimates are based on assumptions, such as the price for which the assets in the CGU could be obtained or future cash flows that will be produced by the CGU, discounted at an appropriate rate. Subsequent changes to these estimates or assumptions could significantly impact the carrying value of the assets in the CGU. Leases Useful lives of right-of-use assets are based on current facts and past experience taking into account the anticipated physical life of the asset, existing long-term sales agreements and contracts, current and forecast demand, and the potential for technological obsolescence. Retirement benefits The Company consults with qualified actuaries when setting the assumptions used to estimate retirement benefit obligations and the cost of providing retirement benefits during the period. These assumptions reflect management’s best estimates of the long-term inflation rate, projected salary increases, retirement age, discount rate, health care costs trend rates, life expectancy and termination rates. The discount rate is determined by reference to market yields on high quality corporate bonds. Since the discount rate is based on current yields, it is only a proxy for future yields. Key assumptions used to determine the retirement benefit cost and obligation are shown in Note 18. Income taxes Management periodically evaluates positions taken in tax filings where tax legislation is subject to interpretation, and records provisions where appropriate. The provisions are management’s best estimates of the expenditures required to settle the present obligations at the balance sheet date measured using a probability weighting of possible outcomes. 27. BUSINESS COMBINATIONS SALE OF OPERATIONS In 2019, proceeds on sale of operations, net of cash disposed, and gain on sale of operations are summarized as follows: (millions of Canadian Dollars) Proceeds on sale of operations: Cash consideration received in 2019 Cash and cash equivalents disposed Proceeds on sale of operations received in 2019, net of cash and cash equivalents disposed Cash consideration received in 2020 on final closing adjustments Total proceeds on sale of operations, received and receivable, net of cash and cash equivalents disposed Gain (loss) on sale of operations before income taxes Gain (loss) on sale of operations after income taxes and NCI Sale of the Canadian fossil fuel-based electricity generation portfolio Sale of Alberta PowerLine operations 770 (89) 681 13 694 175 78 222 — 222 — 222 (1) (13) Total 992 (89) 903 13 916 174 65 137 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 54 Sale of the Canadian fossil fuel-based electricity generation portfolio On May 27, 2019, the Company announced that it had entered into agreements to sell its Canadian fossil fuel-based electricity generation portfolio (Electricity generation disposal group). An agreement with Heartland Generation Ltd., an affiliate of Energy Capital Partners, closed on September 30, 2019, and included the sale of 10 partly or fully owned natural gas-fired and coal-fired electricity generation assets located in Alberta and British Columbia. In two other separate transactions, the Company entered into agreements to sell its 50 per cent ownership interest in the Cory Cogeneration Station to SaskPower International and its 50 per cent ownership interest in Brighton Beach Power to Ontario Power Generation. This portfolio of transactions all closed in the third quarter of 2019 and resulted in gross proceeds of $821 million. An additional $13 million was received in January 2020 for settlement of customary post-closing purchase price adjustments. Prior to the sale, the Company had classified the assets and liabilities of the Electricity generation disposal group as assets held for sale. These assets and liabilities were reported in the Electricity operating segment. The below summary illustrates major classes of assets and liabilities of the Electricity generation disposal group at June 30, 2019, when the assets and liabilities were classified as held for sale, and the major classes of assets and liabilities included in sale of operations. (millions of Canadian Dollars) ASSETS Current assets Cash and cash equivalents Accounts receivable and contract assets Finance lease receivables Prepaid expenses and other current assets Non-current assets Property, plant and equipment Intangibles Investment in joint ventures Finance lease receivables Deferred income tax assets Other assets Assets of the disposal group LIABILITIES Current liabilities Accounts payable, accrued liabilities and other current liabilities Non-recourse long-term debt (1) Non-current liabilities Deferred income tax liabilities Customer contributions Other liabilities Non-recourse long-term debt (1) Liabilities of the disposal group Net assets of the disposal group Assets and liabilities of the disposal group classified as held for sale at June 30, 2019 Assets and liabilities of the disposal group prior to sale of operations Assets and liabilities of disposal group sold 141 68 11 40 260 508 18 35 207 12 23 1,063 110 15 125 23 97 163 45 453 89 77 12 18 196 535 17 35 202 32 49 1,066 159 10 169 33 96 187 32 517 1,066 517 549 (1) As part of the negotiation process with Heartland Generation Ltd., the Company assumed $18 million of non-recourse long-term debt previously classified in liabilities of the disposal group. This amount was repaid in September 2019 (see Note 17). 55 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 138 The gain on sale of the Canadian fossil fuel-based electricity generation portfolio is shown below. (millions of Canadian Dollars) Aggregate consideration as per share purchase agreement Debt adjustments (1) Working capital and other purchase price adjustments made in 2019 Cash consideration received in 2019 Cash consideration received in 2020 on final closing adjustments Cash consideration received and receivable Carrying value of net assets sold and other items Carrying value of net assets sold Transaction costs (2) Write-down of natural gas inventory (3) Other directly attributable costs Gain on sale before income taxes Income tax expense Gain on sale after income taxes Non-controlling interests Gain on sale after income taxes and non-controlling interests 821 (109) 58 770 13 783 (549) (29) (19) (11) (608) 175 (25) 150 (72) 78 (1) Debt adjustments include $37 million of non-recourse long-term debt of Cory Cogeneration Station assumed by SaskPower International, $67 million of non-recourse long-term debt of Brighton Beach Power assumed by Ontario Power Generation and $5 million of non-recourse debt assumed by Heartland Generation Ltd. (2) (3) Transaction costs relate to success fees, legal costs and other advisory costs directly attributable to the sale of operations. Prior to the sale of the Electricity generation disposal group, certain natural gas inventory in the electricity generation business was valued at cost in the balance sheet as the value was supported by electricity generation operations. As a result of the sale of this business, the natural gas inventory, which was retained by the Company, was revalued to the lesser of cost or net realizable value as the cost will no longer be supported by electricity generation’s revenues. This resulted in a write-down of $19 million. Sale of Alberta PowerLine operations On June 24, 2019, the Company announced that it had entered into agreements to sell its entire 80 per cent ownership interest in Alberta PowerLine (APL disposal group), a partnership between the Company and Quanta Services Inc. The transaction closed on December 18, 2019 for gross proceeds of $222 million and the assumption of $1.4 billion of debt, excluding deferred financing charges. Prior to the sale, the Company had classified the assets and liabilities of the APL disposal group as assets held for sale. These assets and liabilities were reported in the Electricity operating segment. The below summary illustrates major classes of assets and liabilities of the APL disposal group at June 30, 2019, when the assets and liabilities were classified as held for sale, and the major classes of assets and liabilities included in sale of operations. 139 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 56 (millions of Canadian Dollars) ASSETS Current assets Accounts receivable and contract assets Restricted project funds Receivable under service concession arrangement Non-current assets Receivable under service concession arrangement Other assets Assets of the disposal group LIABILITIES Current liabilities Accounts payable, accrued liabilities and other current liabilities Non-recourse long-term debt Non-current liabilities Deferred income tax liabilities Other liabilities (1) Non-recourse long-term debt Liabilities of the disposal group Net assets of disposal group classified as held for sale (1) Represents the Canadian Utilities Limited 20 per cent non-controlling ownership interest classified as other liabilities. The loss on sale of Alberta PowerLine is shown below. (millions of Canadian Dollars) Aggregate consideration as per share purchase agreement Carrying value of net assets sold and other items Carrying value of net assets sold Transaction costs (1) Loss on sale before income taxes Income tax expense Loss on sale after income taxes Non-controlling interests Loss on sale after income taxes and non-controlling interests (1) Transaction costs relate to success fees, legal costs and other advisory costs directly attributable to the sale of operations. Assets and liabilities of the disposal group classified as held for sale at June 30, 2019 Assets and liabilities of the disposal group prior to sale of operations Assets and liabilities of disposal group sold 4 235 109 348 1,425 — 1,773 146 15 161 51 60 1,319 1,591 182 7 83 106 196 1,470 18 1,684 25 20 45 56 62 1,309 1,472 212 1,684 1,472 212 222 (212) (11) (223) (1) (24) (25) 12 (13) 57 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 140 BUSINESS ACQUISITIONS Acquisition of electricity generation business in Mexico On February 20, 2018, Canadian Utilities Limited acquired a 100 per cent ownership interest in Electricidad del Golfo (EGO). EGO owns a long-term contracted, 35 megawatt hydroelectric power station based in Veracruz, Mexico. The acquisition is reported in the Electricity operating segment. The aggregate consideration paid for EGO was $112 million, which is comprised of $70 million cash paid, net of cash acquired, and the assumption of EGO's long-term debt of $42 million. There is no contingent consideration with this acquisition. The fair values of the identifiable assets acquired and liabilities assumed were as follows: Cash and cash equivalents Accounts receivable and contract assets Prepaid expenses and other current assets Property, plant & equipment Intangible assets Goodwill Accounts payable and accrued liabilities Deferred income tax liabilities Deferred revenues Long-term debt Total identifiable net assets acquired 9 2 2 88 34 9 (3) (19) (1) (42) 79 The fair value of the acquired accounts receivable approximated the carrying value due to their short-term nature. None of the accounts receivable acquired were impaired and the full contractual amount was collected. From the date of acquisition, revenues of $14 million, and earnings attributable to Class I and Class II shares of $2 million, were included in the consolidated statements of earnings for the year ended December 31, 2018, as a result of the acquisition. Transaction costs of $2 million for incremental legal and advisory services fees were expensed during the year ended December 31, 2018 and included in other costs and expenses in the consolidated statements of earnings. The Company's pro-forma consolidated revenues and earnings attributable to Class I and Class II shares for the year ended December 31, 2018, would have been $4,890 million and $328 million, respectively, if the acquisition had occurred on January 1, 2018. These pro-forma adjustments reflect adjustments for depreciation and amortization assuming the fair values attributed in the purchase price allocation occurred on January 1, 2018. These pro-forma results may not necessarily be indicative of actual results had the acquisition occurred on January 1, 2018. Acquisition of modular manufacturing operations in Mexico Effective December 19, 2018, through a series of purchase transactions, the Company obtained a 70 per cent interest in a modular building manufacturer in Mexico, which will operate under the name ATCO Espaciomovil. The business combination is reported in the Structures & Logistics operating segment. As part of the transaction, the seller was granted a 30 per cent minority interest in ATCO Espaciomovil. Of this 30 per cent interest, 15 per cent is contingent consideration, subject to the subsidiary achieving certain pre-determined financial performance targets during the year ending December 31, 2019. If the subsidiary fails to meet the performance targets, up to 15 per cent of the interest will revert back to the Company. Management is currently in the process of determining if the performance targets have been met. The purchase consideration is comprised of $29 million cash and $5 million in contingent consideration. The fair value of the contingent consideration was estimated by calculating the present value of probability-adjusted future discounted cash flows, and was recorded in other liabilities. At December 31, 2019, $29 million of the purchase consideration was paid. Of this amount, $24 million was paid in 2018, and $5 million in 2019. 141 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 58 The fair values of the identifiable assets acquired and liabilities assumed were as follows: Accounts receivable and contract assets Inventory Property, plant and equipment Intangibles Deferred income tax liabilities Net identifiable assets acquired Non-controlling interests Goodwill Total identifiable net assets acquired 4 3 20 12 (2) 37 (5) 2 34 The fair value of the acquired accounts receivable and contract assets approximated the carrying value due to their short-term nature. None of the accounts receivable and contract assets acquired were impaired and the full contractual amount is expected to be collected. Transaction costs of $1 million for incremental legal and advisory services fees were expensed during the year ended December 31, 2018, and included in other costs and expenses in the consolidated statements of earnings. ATCO Espaciomovil contributed revenues and earnings attributable to Class I and Class II shares of less than $1 million for the period from December 19, 2018, to December 31, 2018. The Company's pro-forma consolidated revenues and earnings attributable to Class I and Class II shares for the year ended December 31, 2018, would have been $4,913 million and $333 million if the acquisition had occurred on January 1, 2018. These pro-forma adjustments reflect adjustments for depreciation and amortization assuming the fair values attributed in the purchase price allocation occurred on January 1, 2018. These pro-forma results may not necessarily be indicative of actual results had the acquisition occurred on January 1, 2018. 28. INVESTMENT IN EQUITY INTEREST IN ASSOCIATE COMPANY On September 12, 2018, the Company invested in a 40 per cent interest in Neltume Ports S.A. (Neltume Ports), a leading port operator and developer in South America, for aggregate consideration of $471 million (equivalent of $357 million U.S. dollars). Neltume Ports, a subsidiary of Ultramar, operates sixteen port facilities and three port operation services businesses located in Chile, Uruguay, Argentina and Brazil. The aggregate consideration for the equity interest in Neltume Ports of $471 million is comprised of cash paid for the subscription of shares of $444 million, contingent consideration of $15 million and transaction costs of $12 million. At December 31, 2019, $465 million of the aggregate consideration has been paid. The fair value of contingent consideration of $15 million includes $9 million of additional cash contribution relating to an acquisition of an asset by Neltume Ports, and $6 million of additional contribution relating to the achievement of financial performance targets over three years from 2019 to 2021. In February 2019, Neltume Ports completed its asset acquisition and the Company paid the additional cash contribution of $9 million. The Company funded its investment in Neltume Ports with a combination of cash on-hand and the issue of short- term and long-term committed credit facilities. The short-term financing was refinanced in November 2018 with the issuance of $200 million fixed-to-floating rates subordinated notes. See Note 16 for details on the issue of long-term debt. The Company has significant influence over Neltume Ports due to its 40 per cent interest and other provisions in the shareholders agreement. As such, the Company accounts for its investment using the equity method of accounting, whereby the initial investment of $471 million shall be adjusted for the Company's share of Neltume Ports' earnings, other comprehensive income, dividends received from Neltume Ports, and foreign exchange. The equity interest in Neltume Ports is reported as a separate operating segment (see Note 4). 59 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 142 At the date of investment, the fair value of the identifiable net assets of Neltume Ports is provided below: Cash and cash equivalents Accounts receivable and contract assets Other net assets Property, plant & equipment Intangible assets Investment in associates Goodwill Accounts payable and accrued liabilities Deferred income tax liabilities Long-term debt Total identifiable net assets acquired 159 52 44 90 105 151 84 (84) (15) (115) 471 The summarized financial information for Neltume Ports is provided below. This includes the balance sheets and selected information from the statements of earnings and comprehensive income. December 31 2019 December 31 2018 Balance sheet Cash and cash equivalents Other current assets Current assets Non-current assets Total assets Financial liabilities (1) Other current liabilities Current liabilities Financial liabilities (1) Other non-current liabilities Non-current liabilities Total liabilities Net assets ATCO's share of net assets (1) Financial liabilities are comprised mainly of long-term debt. Selected information from the statement of earnings and comprehensive income Revenues Depreciation and amortization Interest income Interest expense Income taxes Earnings Other comprehensive (loss) income ATCO's share of earnings ATCO's share of other comprehensive (loss) income (1) (2) Year ended December 31, 2019. For the period from September 12, 2018 to December 31, 2018. 322 78 400 1,186 1,586 (48) (57) (105) (215) (95) (310) (415) 1,171 468 340 84 424 1,252 1,676 (56) (78) (134) (210) (105) (315) (449) 1,227 491 2019 (1) 2018 (2) 328 (62) 8 (14) (2) 37 (6) 15 (2) 116 (14) 3 (5) (2) 10 3 4 — 143 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 60 A reconciliation of the carrying amount of the investment in associate company is as follows: Balance at the beginning of the period ATCO's share of net earnings ATCO's share of other comprehensive loss Dividends received Foreign exchange Carrying amount of the investment 29. SUBSIDIARIES Year ended December 31, 2019 491 15 (2) (12) (24) 468 Period from September 12, 2018, to December 31, 2018 471 4 — — 16 491 Principal operating subsidiaries are listed below. Subsidiaries are wholly owned, unless otherwise indicated. Principal Operating Subsidiaries Principal Place of Business Principal Activity Subsidiaries at December 31, 2019 and December 31, 2018 ATCO Structures & Logistics Canada Inversiones ATCO Chile Limitada Chile Canadian Utilities Limited (1) ATCO Energy Solutions Canada Canada Electricidad del Golfo ATCO Gas Australia ATCO Power Australia ATCO Energy ATCO Power (2010) (2) CU Inc. ATCO Electric ATCO Gas ATCO Pipelines Mexico Australia Australia Canada Canada Canada Canada Canada Canada Workforce housing, modular facilities, construction, site support services and logistics and operations management. Holds 40% investment in associate, Neltume Ports S.A. Holding company Develops, owns and operates non-regulated energy and water- related infrastructure Electricity generation and related infrastructure services Natural gas distribution Electricity generation Electricity and natural gas retailer Electricity generation and related infrastructure services Holding company Electricity transmission, distribution and related infrastructure development Natural gas distribution and related infrastructure development Natural gas transmission and related infrastructure development Subsidiaries at December 31, 2018, and sold during the year ended December 31, 2019 (see Note 27) ATCO Power Canada (3) Alberta PowerLine (4) Electricity generation and related infrastructure services Design, build, own, and operate transmission infrastructure Canada Canada (1) At December 31, 2019, ATCO Ltd. has an ownership interest of 52.2 per cent (2018 - 52.2 per cent). (2) Following the sale of the Canadian fossil fuel-based electricity generation portfolio (see Note 27), ATCO Power (2010) holds the remaining Canadian electricity generation and related infrastructure assets. (3) Included the Canadian fossil fuel-based electricity generation portfolio sold in 2019 (see Note 27). (4) Prior to the sale of operations on December 19, 2019, Canadian Utilities Limited had an ownership interest of 80 per cent. 61 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 144 30. JOINT ARRANGEMENTS JOINT OPERATIONS In 2019, the Company disposed of its significant joint operations as part of the sale of the Canadian fossil fuel-based electricity generation portfolio (see Note 27). Prior to the sale, the significant joint operations, all of which were included in the Electricity segment, were as follows. Significant Joint Operations Sheerness Generating Plant Joffre Cogeneration Plant Cory Cogeneration Plant Muskeg River Cogeneration Plant JOINT VENTURES Operating Jurisdiction Canada Canada Canada Canada Ownership % Principal Activity 50 40 50 70 Electricity generation Electricity generation Electricity generation Electricity generation In 2019, the Company disposed of its 50 per cent ownership in Brighton Beach Plant joint venture as part of the sale of the Canadian fossil fuel-based electricity generation portfolio (see Note 27). Prior to the sale, Brighton Beach Plant was included in the Electricity segment. The following joint ventures are considered the most significant; however, they are not individually material to the operations of the Company. Significant Joint Ventures Osborne Cogeneration Plant Segment Electricity Operating Jurisdiction Australia Strathcona Storage Limited Partnership Pipelines & Liquids Canada Sabinco Soluciones Modulares S.A. Structures & Logistics Chile Ownership % Principal Activity 50 60 50 Electricity generation Hydrocarbon storage Modular structures Aggregate information for the Company’s interest in joint ventures is shown below. Earnings for the year Other comprehensive loss Comprehensive income for the year Dividends received Aggregate carrying amount of interests in joint ventures Investment in joint ventures 2019 24 — 24 25 187 2018 25 (2) 23 30 240 In 2019, the Company did not make any contributions to joint ventures (2018 - $6 million to the Strathcona Storage Limited Partnership). Commitments The joint ventures have contractual obligations in the normal course of business. The Company’s total share of these unrecognized commitments, based on the contractual undiscounted cash flows, was $45 million at December 31, 2019 (2018 - $122 million). Restrictions The Company requires approval from its joint venture partners before any dividends or distributions can be paid. 145 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 62 31. NON-CONTROLLING INTERESTS Non-controlling interests at December 31 are as follows: NCI in Canadian Utilities Limited NCI in ATCO Espaciomovil S.A.P.I. de C.V., 70 per cent owned subsidiary of ATCO Structures & Logistics (Note 27) NCI in CANADIAN UTILITIES LIMITED Non-controlling interests in Canadian Utilities Limited at December 31 are as follows: Class A non-voting shares and Class B common shares Total ownership interest held Proportion of voting rights held Proportion of non-voting rights held 2019 3,853 5 3,858 2019 % 47.8 9.8 61.8 2018 3,682 5 3,687 2018 % 47.8 10.1 61.7 The summarized consolidated financial information for Canadian Utilities Limited, before inter-company eliminations, is provided below. Consolidated Statements of Comprehensive Income 2019 2018 Revenues Earnings for the year Total comprehensive income Attributable to NCI: Earnings for the year Total comprehensive income Consolidated Balance Sheets Current assets Non-current assets Current liabilities Non-current liabilities Net assets Attributable to NCI Consolidated Statements of Cash Flows Cash flows from operating activities Cash flows used in investing activities Cash flows (used in) from financing activities Increase in cash position Dividends paid to NCI Class A and Class B share owners Equity preferred shares 3,905 958 892 494 462 1,714 18,330 (739) (12,384) 6,921 3,853 1,358 (172) (788) 398 220 74 294 4,377 641 657 343 350 1,856 19,963 (1,645) (13,612) 6,562 3,682 870 (1,065) 367 172 140 74 214 CANADIAN UTILITIES LIMITED DIVIDEND REINVESTMENT PLAN In 2019 and 2018, Canadian Utilities Limited had a dividend reinvestment program (DRIP) that allowed eligible Class A non-voting and Class B common share owners of Canadian Utilities Limited to reinvest all or a portion of their dividends in additional Class A non-voting shares. 63 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 146 Effective January 10, 2019, Canadian Utilities Limited suspended its dividend reinvestment program. No Class A non- voting shares were issued under the DRIP during the year ended December 31, 2019. During the year ended December 31, 2018, non-controlling interests acquired 2,000,420 Class A non-voting shares of Canadian Utilities Limited, using re-invested dividends of $63 million. The shares were priced at an average of $31.37 per share. EQUITY PREFERRED SHARES Equity preferred shares held by non-controlling interests at December 31 are shown below. CU Inc. Equity Preferred Shares Cumulative Redeemable Preferred Shares, at 2.243% to 4.60% Canadian Utilities Limited Equity Preferred Shares Cumulative Redeemable Second Preferred Shares, at 3.403% to 5.25% Perpetual Cumulative Second Preferred Shares, at 4.60% Issuance costs Rights and privileges 2019 190 1,400 110 (30) 1,670 2018 190 1,400 110 (30) 1,670 Preferred shares Redemption Amount (1) Quarterly Dividend (2) Reset Premium (3) Date Redeemable/ Convertible Convertible To Cumulative Redeemable Preferred Shares 25.00 25.00 Series 1 Series 4 0.2875 0.1401875 Cumulative Redeemable Second Preferred Shares 0.2126875 0.30625 0.30625 0.28125 0.28125 0.328125 0.28125 Series Y Series AA Series BB Series CC Series DD Series EE Series FF 25.00 25.00 25.00 25.00 25.00 25.00 25.00 Does not reset Currently redeemable Not convertible Series 5 (5) June 1, 2021 (4) 1.36% 2.40% Does not reset Does not reset Does not reset Does not reset Does not reset June 1, 2022 (4) Series Z (5) September 1, 2017 (6) Not convertible September 1, 2017 (6) Not convertible June 1, 2018 (6) Not convertible September 1, 2018 (6) Not convertible September 1, 2020 (6) Not convertible Series GG (5) 3.69% December 1, 2020 (4) Perpetual Cumulative Second Preferred Shares Series V 25.00 0.2875 No premium Currently redeemable Not convertible (1) (2) Plus accrued and unpaid dividends. Cumulative, payable quarterly as and when declared by the Board. (3) Dividend rate will reset on the date redeemable/convertible and every five years thereafter at a rate equal to the Government of Canada yield plus the reset premium noted. (4) (5) (6) Redeemable by the Company or convertible by the holder on the date noted and every five years thereafter. If converted, holders will be entitled to receive quarterly floating rate dividends equal to the Government of Canada Treasury Bill yield plus the reset premium noted. Holders have the option to convert back to the original preferred shares series on subsequent redemption dates. Subject to a redemption premium of 4 per cent per share. The redemption premium declines by 1 per cent in each succeeding twelve month period from the redeemable date. 147 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 64 32. SHARE-BASED COMPENSATION PLANS PLAN FEATURES Share based forms of compensation are granted at the discretion of the Corporate Governance – Nomination, Compensation and Succession Committee. Plan features are described below. Form of compensation Eligibility Stock options (1) Officers and key employees Share appreciation rights (1) Directors, officers and key employees Mid-term incentive plan Officers and key employees Vesting Period 20% per year over 5 years 20% per year over 5 years 2-3 years (2) Term Settlement 10 years Class I Non-Voting Shares (3) 10 years Cash 2-3 years Class I Non-Voting Shares (4) (1) Exercise price is equal to the weighted average of the trading price of the shares on the Toronto Stock Exchange for the five trading days immediately preceding the date of grant. (2) Based on achieving certain performance criteria. (3) (4) Issued from Treasury. Purchased on the secondary market. STOCK OPTION PLAN Information about the options outstanding and exercisable at December 31 is summarized below. Options authorized for grant Options available for issuance Outstanding options, beginning of year Granted Exercised Forfeited Outstanding options, end of year Options exercisable, end of year Options Range of Exercise Prices $28.32 $35.12 - $38.93 $40.38 - $44.97 $45.40 - $49.51 $50.33 - $51.97 $28.32 - $51.97 2019 Weighted Average Exercise Price $41.31 49.51 29.04 45.92 $44.40 $43.21 Options 10,200,000 2,444,450 705,500 106,000 (107,950) (10,550) 693,000 397,850 Options 10,200,000 2,539,900 730,050 110,750 (117,200) (18,100) 705,500 422,700 2018 Weighted Average Exercise Price $38.42 42.06 23.40 45.60 $41.31 $39.17 Number Outstanding 34,000 135,200 176,650 270,750 76,400 693,000 Weighted Average Remaining Contractual Life 1.2 4.5 6.1 7.7 4.4 6.0 Outstanding Weighted Average Exercise Price $28.32 37.30 43.26 48.60 51.89 Exercisable Weighted Average Exercise Price $28.32 36.80 44.34 47.70 51.93 Number Exercisable 34,000 103,600 92,650 93,900 73,700 $44.40 397,850 $43.21 Compensation expense related to stock options was less than $1 million in each of 2019 and 2018, with a corresponding increase to contributed surplus. 65 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 148 SHARE APPRECIATION RIGHTS Information about the stock appreciation rights (SARs) outstanding and exercisable at December 31 is summarized below. Outstanding SARs, beginning of year Granted Exercised Forfeited Outstanding SARs, end of year SARs exercisable, end of year SARs Range of Exercise Prices $28.32 $35.12 - $38.93 $40.38 - $44.97 $45.40 - $49.51 $50.33 - $51.97 $28.32 - $51.97 2019 Weighted Average Exercise Price $41.76 49.51 29.04 47.51 $44.56 $43.21 SARs 787,500 127,000 (107,950) (31,550) 775,000 397,850 2018 Weighted Average Exercise Price $41.57 42.01 24.38 44.94 $41.76 $39.17 SARs 703,050 140,750 (13,200) (43,100) 787,500 422,700 Number Outstanding 34,000 142,200 201,650 318,750 78,400 775,000 Weighted Average Remaining Contractual Life 1.2 4.6 6.4 7.8 4.5 6.2 Outstanding Exercisable Weighted Average Exercise Price $28.32 37.38 43.14 48.61 51.86 Number Exercisable 34,000 103,600 92,650 93,900 73,700 Weighted Average Exercise Price $28.32 36.80 44.34 47.70 51.93 $44.56 397,850 $43.21 In 2019, compensation expense related to SARs was an expense of $3 million (2018 - credit of $2 million). The total carrying value of liabilities arising from SARs at December 31, 2019 was $3 million (2018 - $2 million). The total intrinsic value of all vested SARs at December 31, 2019 is $3 million (2018 - $2 million). STOCK OPTION AND SARS WEIGHTED AVERAGE ASSUMPTIONS The Company uses the Black-Scholes option pricing model to estimate the weighted average fair value of the stock options and SARs granted. The following weighted average assumptions were used: Class I share price Risk-free interest rate Share price volatility (1) Estimated annual Class I share dividend Options $49.51 1.47% 18.88% 3.25% 2019 SARs $49.51 1.47% 18.85% 3.25% Options $42.03 1.96% 16.12% 3.58% 2018 SARs $41.98 1.96% 12.38% 3.59% Expected holding period prior to exercise 7.1 years 5.9 years 7.2 years 5.9 years (1) The share price volatility is based on historical data and reflects the assumption that historical volatility over a period similar to the life of the option or SAR is indicative of future trends, which may not necessarily be indicative of exercise patterns that may occur. 149 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 66 MID-TERM INCENTIVE PLAN Information about the MTIPs outstanding at December 31 is summarized below. Outstanding MTIPs, beginning of year Granted Vested Forfeited Change in unallocated shares (1) Outstanding MTIPs, end of year 2019 Weighted Average Grant Date Fair Value $44.34 44.46 42.62 41.77 — $45.00 MTIPs 342,212 108,650 (28,770) (48,558) (51,586) 321,948 MTIPs 329,504 131,450 (70,573) (74,575) 26,406 342,212 (1) Unallocated shares are Class I Shares held by the trustee which have not been awarded to officers or key employees. MTIPs Range of Prices $40.38 - $44.38 $45.40 - $49.60 $50.33 - $50.75 Unallocated shares $40.38 - $50.75 Number Outstanding 217,100 74,500 24,550 5,798 321,948 Weighted Average Remaining Contractual Life 1.9 0.3 0.4 — 1.4 2018 Weighted Average Grant Date Fair Value $46.36 41.45 46.09 45.67 — $44.34 Outstanding Weighted Average Grant Date Fair Value $42.85 49.39 50.68 — $45.00 Compensation expense related to MTIP grants was an expense of $2 million for 2019 with a corresponding increase to contributed surplus (2018 - expense of $3 million with a corresponding increase to contributed surplus). The Company, through a trustee, purchased 10,000 shares during 2019 to be distributed to employees on vesting of the awards (2018 - 76,500 shares). 33. CONTINGENCIES Measurement inaccuracies occur from time to time on electricity and gas metering facilities. The measurement adjustments relating to the Canadian utilities are settled between the parties according to the Electricity and Gas Inspections Act (Canada) and related regulations. The AUC may disallow recovery of a measurement adjustment if it finds that controls and timely follow-up are inadequate. The measurement adjustments relating to ATCO Gas Australia are reconciled by the market operator and settled between the parties. Recovery of the costs is via a predetermined allowance contained in the current Access Arrangement. The Company is party to a number of other disputes and lawsuits in the normal course of business. The Company believes that the ultimate liability arising from these matters will have no material impact on the consolidated financial statements. In 2004, ATCO Gas and ATCO Electric transferred their retail energy supply businesses to Direct Energy. The legal obligations of ATCO Gas and ATCO Electric for the retail functions transferred to Direct Energy, which include the supply of natural gas and electricity to customers as well as billing and customer care, remain if Direct Energy fails to perform. In certain circumstances, the functions will revert to ATCO Gas and/or ATCO Electric, with no refund of the transfer proceeds to Direct Energy. Centrica plc., Direct Energy’s parent company, provided a $300 million guarantee, supported by a $235 million letter of credit for Direct Energy’s obligations to ATCO Gas and ATCO Electric under the transaction agreements. However, there can be no assurance that the coverage under these agreements will be adequate to defray all costs that could arise if the obligations are not met. 67 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 150 34. COMMITMENTS In addition to commitments disclosed elsewhere in these financial statements, the Company has entered into a number of operating and maintenance agreements and agreements to purchase capital assets. Approximate future undiscounted payments under these agreements are as follows: Purchase obligations: Operating and maintenance agreements Capital expenditures Other 35. RELATED PARTY TRANSACTIONS 2020 2021 2022 2023 2024 2025 and thereafter 343 128 12 483 322 — — 322 327 — — 327 325 — — 325 287 — — 287 24 — — 24 In transactions with the Company’s joint ventures, the Company recognized revenues of $6 million relating to management fees and other charges (2018 - $6 million). In transactions with the Company’s group pension plans, the Company paid occupancy costs of $8 million relating to property owned by the pension plans (2018 - $8 million). The Company received less than $1 million (2018 - less than $1 million) in electricity and gas sales revenue and incurred $3 million in advertising, promotion and other expenses from entities related through common control (2018 - $3 million). KEY MANAGEMENT COMPENSATION Information on management compensation is shown below. Salaries and short-term employee benefits Retirement benefits Share-based compensation 2019 11 2 8 21 2018 11 2 2 15 Key management personnel comprise members of executive management and the Board, a total of 19 individuals (2018 - 20 individuals). 36. ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Subsidiaries are consolidated from the date control is obtained until the date control ends. Control exists where the Company has power over the investee, exposure or rights to variable returns from the investee and the ability to use its power over the investee to affect returns. All intra-group balances and transactions are eliminated on consolidation. Interests in subsidiaries owned by other parties are included in NCI. NCI in subsidiaries are identified separately from equity attributable to Class I and Class II owners of the Company. Earnings and each component of OCI are attributed to the Class I and Class II owners of the Company and to NCI, even if this results in the NCI having a deficit balance. Earnings attributable to the Class I and Class II owners are determined after adjusting for dividends on equity preferred shares held by NCI. Changes in the Company’s ownership interests that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the Company’s interest and the NCI are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the NCI are adjusted and the fair value of the consideration paid or received is recognized directly in equity and attributed to the Class I and Class II owners of the Company. 151 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 68 ASSOCIATES Associates are those entities over which the Company has significant influence, but not control or joint control, over the financial and operating policies. This is generally the case where the group holds between 20% and 50% of the voting rights. Associates are equity accounted. Under this method, the Company’s interests in associates are initially recognized at cost. The interests are subsequently adjusted to recognize the Company’s share of post-acquisition profits or losses, movements in OCI and dividends or distributions received. The Company’s interests in associates are tested for recoverability when events or circumstances indicate a possible impairment. An impairment loss is recognized in earnings when the carrying value of the Company’s interest in an individual associate is higher than its recoverable amount. The recoverable amount is the higher of fair value less disposal costs and value in use. An impairment loss may be reversed if there is objective evidence that a change in the estimated recoverable amount of the investment is warranted. JOINT ARRANGEMENTS A joint arrangement can be classified as either a joint operation or joint venture and represents the contractually agreed sharing of control by two or more parties. A joint operation is an arrangement in which the Company has the rights and obligations to the corresponding assets and liabilities of the arrangement, whereas a joint venture is an arrangement in which the Company has the rights to the net assets of the arrangement. Joint operations are proportionately consolidated by including the Company’s share of assets, liabilities, revenues, expenses and OCI in the respective consolidated accounts. Joint ventures are equity accounted. Under this method, the Company’s interests in joint ventures are initially recognized at cost. The interests are subsequently adjusted to recognize the Company’s share of post-acquisition profits or losses, movements in OCI and dividends or distributions received. The Company’s interests in joint ventures are tested for recoverability when events or circumstances indicate a possible impairment. An impairment loss is recognized in earnings when the carrying value of the Company’s interest in an individual joint venture is higher than its recoverable amount. The recoverable amount is the higher of fair value less disposal costs and value in use. An impairment loss may be reversed if there is objective evidence that a change in the estimated recoverable amount of the investment is warranted. BUSINESS COMBINATIONS Business combinations are accounted for using the acquisition method. Assets acquired and liabilities assumed are measured at their fair value at the acquisition date. Acquisition costs are expensed in the period incurred. SERVICE CONCESSION ARRANGEMENTS Service concession arrangements are contracts between the Company and government entities and can involve the design, build, finance, operation and maintenance of public infrastructure in which the government entity controls: (i) the services provided by the Company; and (ii) a significant residual interest in the infrastructure. Service concession arrangements are classified as either a financial asset or an intangible asset, or both. A financial asset is recognized when the Company has an unconditional right to receive a specified amount of cash or other financial asset over the life of the arrangement. The financial asset is measured at the fair value of consideration received or receivable upon initial recognition. When the Company delivers more than one category of activity in a service concession arrangement, the consideration received or receivable is allocated by reference to the relative fair value of the activity, when amounts are separately identifiable. The Company recognizes an intangible asset when it has a right to charge for usage of the public infrastructure. The intangible asset is measured at fair value upon initial recognition. Subsequent to initial recognition, both the financial and intangible assets are measured at cost less accumulated amortization and impairment losses, if any. 69 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 152 REVENUE RECOGNITION Revenue is allocated to the respective performance obligations based on relative transaction prices, and is recognized as goods and services are delivered to the customer. Revenue is measured as the amount of consideration expected to be received in exchange for the goods transferred or services delivered. The amount of revenue recognized reflects the time value of money where a significant financing component has been identified. Contract modifications are accounted for prospectively or as a cumulative catch-up adjustment depending on the nature of the change. Where the amount of goods and services delivered to the customer corresponds directly to the amount invoiced, the Company recognizes revenue equal to what it has the right to invoice. Where the Company arranges for another party to provide a specified good or service (that is, it does not control the specified good or service provided by another party before that good or service is transferred to the customer), only revenues net of payments to the other party for the goods or services provided are recognized. Non-cash considerations received from the Company’s customers are included in the amount of revenue recognized and measured at fair value. Costs incurred directly to obtain or fulfill a contract are capitalized and amortized to expense over the life of the contract. Electricity generation and delivery Revenue from independent power plant (IPP) contracts providing generation capacity to customers is recognized over the contract term and is measured based on fixed or variable capacity payments. Revenue from operating and maintaining the plant is recognized as the Company incurs costs to service the plant. Electricity and natural gas transmission Revenue from electricity and natural gas transmission services is recognized when service is provided to customers and is measured in proportion to the amount it has the right to invoice under the contract. Customer contributions for extensions to plant are recognized as revenue over the life of the related asset. Electricity and natural gas distribution Revenue from distribution of electricity and natural gas is recognized when the services are provided to the customer based on metered consumption, which is adjusted periodically to reflect differences between estimated and actual consumption. Distribution of regulated and non-regulated electricity and natural gas is based on tariff- approved rates established by the Alberta Electric System Operator and Natural Gas Exchange and rates stipulated in the contracts, respectively. The Company recognizes revenue in an amount that corresponds directly with the services delivered and the amount invoiced. Customer contributions for extensions to plant are recognized as revenue over the life of the related asset. Gas storage and transportation Revenue from hydrocarbon storage and transportation is recognized as the service is rendered to customers based on the length of the required service and contracted schedule of injections and withdrawals from the storage facilities. Modular structures and related services Revenue on manufactured modular structures is recognized upon delivery to or acceptance by the customer. Revenue from certain long-term contracts that relate to highly customized modular structures is recognized over time based on the costs incurred. Lease revenue Power purchase arrangements (PPA) for the generation of electricity are accounted for as operating leases, finance leases or executory contracts, depending on the terms of the PPAs. Operating lease PPAs are subject to incentives and penalties relating to the generating unit’s availability. Incentives are paid to the Company by the PPA counterparties for availability in excess of predetermined targets, whereas penalties are paid by the Company to the PPA counterparties when the availability targets are not achieved. The 153 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 70 Company recognizes operating lease income on a declining rate base method, in accordance with the lease contract. Accumulated incentives in excess of accumulated penalties are deferred and operating lease income is recognized over the remaining term of the PPA. Conversely, any shortfall is expensed in the year the shortfall occurs. Certain PPAs are classified as finance leases. Finance lease income is included in revenues. Non-lease components of the PPAs are accounted for based on the applicable performance obligations. Service concession arrangement Revenue on design and construction of the Fort McMurray 500 kV Transmission project (Project) was recognized based on the stage of completion of the related services. Revenue on operating and maintenance of the Project are recognized as related costs are incurred using the applicable markup. Franchise fees Municipal governments charge franchise fees to the utilities in Canada for the exclusive right to provide service in their community. These costs are charged to customers through rates approved by the regulator. Franchise fees do not represent a separate performance obligation to a customer and are recovered through utility transmission and distribution prices. The recovery is part of the provision of continuous electricity and natural gas transmission and distribution service performance obligation. Franchise fees invoiced to customers are recognized as revenues. SHORT-TERM EMPLOYEE BENEFITS Short-term employee benefits are recognized as an expense in salaries, wages and benefits as employees render service. These benefits include wages, salaries, social security contributions, short-term compensated absences, incentives and non-monetary benefits, such as medical care. Costs for employee services incurred in constructing an asset that meet the asset recognition criteria are included in the related property, plant and equipment or intangible asset. Termination benefits are recognized as an expense in salaries, wages and benefits at the earlier of when the Company can no longer withdraw the offer of those benefits and when the Company recognizes costs for a restructuring that includes the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. INCOME TAXES Income taxes are the sum of current and deferred taxes. Income tax is recognized in earnings, except to the extent it relates to items recorded in OCI or in equity. Current tax is calculated on taxable earnings using rates enacted or substantively enacted at the balance sheet date in the jurisdictions in which the Company operates. The liability method is used to determine deferred income tax on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax is calculated using the enacted or substantively enacted tax rates that are expected to apply in the period when the liability is settled or the asset is realized. If expected tax rates change, deferred income taxes are adjusted to the new rates. Deferred income tax assets and liabilities are not recognized if the temporary differences arise from the initial recognition of goodwill or of other assets and liabilities in a transaction, other than a business combination, that does not affect accounting or taxable earnings. The tax effect of temporary differences from investments in subsidiaries and joint arrangements are not accounted for where the Company is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized only when it is probable that future taxable earnings will be available against which the temporary differences can be applied. Current income tax assets and liabilities are offset where the Company has the legally enforceable right to offset and the Company intends to either settle on a net basis or realize the asset and settle the liability simultaneously. 71 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 154 Deferred income tax assets and liabilities are offset where the Company has a legally enforceable right to set off tax assets and liabilities, and when the deferred income tax assets and liabilities relate to income taxes levied by the same tax authority. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash at bank, bankers’ acceptances, certificates of deposit issued or guaranteed by credit worthy financial institutions and federal government issued short-term investments with maturities generally of 90 days or less at purchase. INVENTORIES Inventories are valued at the lower of cost or net realizable value. The cost of inventories that are interchangeable is assigned using the weighted average cost method. For inventories that are not interchangeable, cost is assigned using specific identification of their individual costs. Net realizable value is the estimated selling price in the ordinary course of business, less variable selling expenses. The cost of inventories is comprised of all purchase, conversion and other costs to bring inventories to their present condition and location. Purchase costs consist of the purchase price, import duties, non-recoverable taxes, transport, handling and other costs directly attributable to the purchase of finished goods, materials or services. Conversion costs include direct material and labour costs and a systematic allocation of fixed and variable overheads incurred in converting materials into finished goods. The standard cost method is used to approximate cost in the Company’s Structures & Logistics manufacturing operations. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost less accumulated depreciation and any recognized impairment losses. Cost includes expenditures that are directly attributable to the purchase or construction of the asset, such as materials, labour, borrowing costs incurred during construction, contracted services and asset retirement costs. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset only when it is probable that future economic benefits will flow to the Company and the cost can be measured reliably. Major overhaul costs are capitalized and depreciated on a straight-line basis over the period to the next major overhaul, which varies from three to eight years. The cost of repair and maintenance activities performed every two years or less which do not enhance or extend the useful life of the asset are expensed when incurred. Borrowing costs attributable to a construction period of substantial duration are added to the cost of the asset. The effective interest method is used to calculate capitalized interest using specified rates for specific borrowings and a weighted average rate for general borrowings. Interest capitalization starts when borrowing costs and expenditures are incurred at the onset of construction and ends when construction is substantially complete. The Company allocates the amount initially recognized in property, plant and equipment to its significant components and depreciates each component separately. Assets are depreciated mainly on a straight-line basis over their estimated useful lives. No depreciation is provided on land and construction work-in-progress. The carrying amount of a replaced asset is derecognized when the cost of replacing the asset is capitalized. When an asset is derecognized, any resulting gain or loss is recorded in earnings. 155 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 72 Depreciation periods for the principal categories of property, plant and equipment are shown in the table below. Utility transmission and distribution: Electricity transmission equipment Electricity distribution equipment Gas transmission equipment Gas distribution plant and equipment Power generation plant and equipment: Gas-fired Hydroelectric Buildings Other: Rental assets Other plant, equipment and machinery Useful Life Average Useful Life Average Depreciation Rate 2 to 65 years 10 to 103 years 4 to 58 years 3 to 120 years 7 years 43 to 50 years 10 to 73 years 12 to 17 years 1 to 74 years 52 years 51 years 41 years 40 years 7 years 56 years 36 years 19 years 18 years 1.9% 2.0% 2.5% 2.5% 13.1% 1.8% 2.8% 5.2% 5.6% Depreciation methods and the estimated residual values and useful lives of assets are reviewed on an annual basis. Any changes in these accounting estimates are recorded prospectively. INTANGIBLES Intangible assets are recorded at cost less accumulated amortization and any recognized impairment losses. The Company amortizes intangible assets on a straight-line basis over their useful lives. Useful life is not longer than 10 years for computer software and between 74 and 98 years for land rights based on the contractual life of the underlying agreements. Software work-in-progress is not amortized as the software is not available for use. Amortization methods and useful lives of assets are reviewed annually. Any changes in these accounting estimates are recorded prospectively. IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLES Property, plant and equipment and intangible assets with finite lives are tested for recoverability when events or circumstances indicate a possible impairment. Impairment is assessed at the CGU level, which is the smallest identifiable group of assets that generates independent cash inflows. An impairment loss is recognized in earnings when the CGU’s carrying value is higher than its recoverable amount. The recoverable amount is the greater of the CGU’s fair value less disposal costs and its value in use. An impairment loss may be reversed in whole or in part if there is objective evidence that a change in the estimated recoverable amount is warranted. A reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. GOODWILL Goodwill is not amortized. The carrying value of goodwill is tested for impairment annually or more frequently if there is an indicator of impairment. Impairment is tested at the operating segment level. If the carrying value of the segment to which goodwill has been assigned exceeds its recoverable amount, then any excess of the carrying value of a segment's goodwill over its recoverable amount is expensed and is not subsequently reversed. LEASES The Company as a lessee At the inception of a contract, the Company assesses whether the contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A right-of-use asset representing the right to use the underlying asset with a corresponding lease liability is recognized when the leased asset becomes available for use by the Company. 73 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 156 The right-of-use asset is recognized at cost and is depreciated on a straight-line basis over the shorter of the estimated useful life of the asset and the lease term on a straight-line basis. The cost of the right-of-use asset is based on the following: • • • • the amount of initial recognition of related lease liability; adjusted by any lease payments made on or before inception of the lease; increased by any initial direct costs incurred; and decreased by lease incentives received and any costs to dismantle the leased asset. The lease term includes consideration of an option to extend or to terminate if the Company is reasonably certain to exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability. Lease liabilities are initially recognized at the present value of the lease payments. The lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company uses its incremental borrowing rate as the discount rate. Subsequent to recognition, lease liabilities are measured at amortized cost using the effective interest rate method. Lease liabilities are remeasured when there is a change in future lease payments arising mainly from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, renewal or termination option. The payments related to short-term leases and low-value leases are recognized as other expenses over the lease term in the consolidated statements of earnings. Prior to January 1, 2019, assets subject to operating leases were included in property, plant and equipment and were depreciated. Income from operating leases was recognized in earnings on a straight-line basis over the lease term. When the Company had purchased goods or services as a lessee, and the lease was an operating lease, rental payments were expensed on a straight-line basis over the life of the lease. For both finance and operating leases, contingent rents were recognized in earnings in the period in which they were incurred. Contingent rent was that portion of lease payments that was not fixed in amount but varied based on a future factor, such as the amount of use or production. The Company as a lessor A finance lease exists when the terms of the lease transfer substantially all the risks and rewards incidental to ownership of the leased asset to the lessee. Amounts due from lessees under finance leases are recorded as finance lease receivables. They are initially recognized at amounts equal to the present value of the minimum lease payments receivable. Payments that are part of the leasing arrangement are divided between a reduction in the finance lease receivable and finance lease income. Finance lease income is recognized so as to produce a constant rate of return on the Company’s investment in the lease and is included in revenues. ASSETS AND LIABILITIES OF DISPOSAL GROUPS CLASSIFIED AS HELD FOR SALE Assets and liabilities of disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction. They are measured at the lower of their carrying value and fair value less costs to sell, except for deferred tax assets, assets arising from employee benefits and financial assets and liabilities that are carried at fair value. Assets held for sale are not depreciated or amortized while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognized. 157 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 74 PROVISIONS The Company recognizes provisions when: (i) there is a current legal or constructive obligation as a result of a past event; (ii) a probable outflow of economic benefits will be required to settle the obligation; and (iii) a reliable estimate of the obligation can be made. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. If discounting is used, the increase in the provision due to the passage of time is recognized in interest expense. CONTINGENCIES A contingent liability is a possible obligation, and a contingent asset is a possible asset, that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the Company. A contingent liability may also be a present obligation that arises from past events that is not recognized because it is not probable that an outflow of economic resources will be required to settle the obligation or the amount of the obligation cannot be measured reliably. Neither contingent liabilities nor assets are recognized in the consolidated financial statements. However, a contingent liability is disclosed, unless the possibility of an outflow of resources is remote. A contingent asset is only disclosed where an inflow of economic benefits is probable. Management evaluates the likelihood of contingent events based on the probability of exposure to potential loss. Actual results could differ from these estimates. ASSET RETIREMENT OBLIGATIONS Asset retirement obligations (AROs) are legal and constructive obligations connected with the retirement of tangible long-lived assets. These obligations are measured at management’s best estimate of the expenditure required to settle the obligation and are discounted to present value when the effect is material. Cash flows for AROs are adjusted to take risks and uncertainties into account and are discounted using a pre-tax, risk-free discount rate. Initially, an ARO is recorded in provisions, included in other liabilities, with a corresponding increase to property, plant and equipment. Subsequently, the carrying amount of the provision is accreted over the estimated time period until the obligation is to be settled; the accretion expense is recognized as interest expense. The asset is depreciated over its estimated useful life. Revaluations of the ARO at each reporting period take into account changes in estimated future cash flows and the discount rate. FINANCIAL INSTRUMENTS The Company classifies financial assets when they are first recognized as amortized cost or fair value through profit or loss. Classification is determined based on the Company’s business model for managing financial assets and the contractual cash flow characteristics of the financial assets. Financial assets are measured at amortized cost if the financial asset is: (i) held for the purpose of collecting contractual cash flows, and (ii) the contractual cash flows of the financial asset solely represent payments of principle and interest. All other financial assets are classified as fair value through profit or loss. Financial liabilities are classified as amortized cost or fair value through profit or loss. Amortized cost Financial instruments classified as amortized cost are initially measured at fair value and subsequently measured at their amortized cost using the effective interest method. Fair value through profit or loss Financial instruments classified as fair value through profit or loss are initially measured at fair value with subsequent changes in fair value recognized in earnings. 75 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 158 Transaction costs Transaction costs directly attributable to the purchase or issue of financial assets or financial liabilities that are not classified as fair value through profit or loss are added to the fair value of such assets or liabilities when initially recognized. Transaction costs for long-term debt are amortized over the life of the respective financial liability using the effective interest method. The Company’s long-term debt, non-recourse long-term debt and equity preferred shares are presented net of their respective transaction costs. Offsetting financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheet: (i) if there is a legally enforceable right to offset the recognized amounts, and (ii) if the Company intends either to settle on a net basis or to realize the assets and settle the liabilities simultaneously. Derecognition of financial instruments Financial assets are derecognized: (i) when the right to receive cash flows from the financial assets has expired or been transferred, and (ii) the Company has transferred substantially all the risks and rewards of ownership. Financial liabilities are derecognized when the obligation is discharged, cancelled, or expired. Fair value hierarchy The Company uses quoted market prices when available to estimate fair value. Models incorporating observable market data, along with transaction specific factors, are also used to estimate fair value. Financial assets and liabilities are classified in the fair value hierarchy according to the lowest level of input that is significant to the fair value measurement. Management’s judgment as to the significance of a particular input may affect placement within the fair value hierarchy levels. The hierarchy is as follows: • • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). The Company applies settlement date accounting to the purchases and sales of financial assets. Settlement date accounting means recognizing an asset on the day it is received by the Company and recognizing the disposal of an asset on the day it is delivered by the Company. Any gain or loss on disposal is also recognized on that day. IMPAIRMENT OF FINANCIAL INSTRUMENTS At each reporting date, the Company assesses whether there is evidence that a financial asset or group of financial assets is impaired. If such evidence exists, an impairment loss is recognized in earnings. Impairment losses on financial assets carried at amortized cost are calculated as the difference between the amortized cost and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. Impairment losses on financial assets carried at amortized cost may be reversed in whole or in part if there is evidence that a change in the estimated recoverable amount is warranted. The revised recoverable amount cannot exceed the carrying amount that would have been determined had no impairment charge been recognized in previous periods. The Company applies the expected credit loss allowance matrix based on historical credit loss experience, aging of financial assets, default probabilities, forward-looking information specific to the counterparty, and industry-specific economic outlooks. For accounts receivable and contract assets and finance lease receivables, the Company estimates credit loss allowances at initial recognition and throughout the life of the receivable. For receivable under service concession 159 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 76 arrangement, the Company estimates credit loss allowances from possible default events within the twelve months after the balance sheet date. DERIVATIVE FINANCIAL INSTRUMENTS Contracts settled net in cash or in another financial asset are classified as derivatives, unless they meet the Company’s own use requirements. All derivative financial instruments are measured at fair value. The gain or loss that results from changes in fair value of the derivative is recognized in earnings immediately, unless the derivative is designated and effective as a hedging instrument, in which case the timing of recognition in earnings depends on the hedging relationship. Where the Company elects to apply hedge accounting, the Company documents the relationship between the derivative and the hedged item at inception of the hedge, based on the Company’s risk management policies. A qualitative assessment of the effectiveness of the hedging relationship is performed at each reporting period if both the critical terms of the hedging relationship and the economic relationship between the hedged item and hedging instrument continue to remain the same or similar. If the mismatch in terms is significant, a quantitative assessment may be required. Ineffectiveness, if any, is measured at the end of each reporting period. If the risk management hedge ratio used to form the economic relationship of the hedged item and hedging instrument changes, rebalancing of the hedging relationship is required. Under this circumstance, an adjustment to the quantities of the hedged item or hedging instrument would be allowed to realign the hedging relationship in accordance with the appropriate risk management hedge ratio. The Company can only discontinue hedge accounting prospectively if there is no longer an economic relationship between the hedged item and hedging instrument, the risk management objective changes, the derivative no longer is designated as a hedging instrument, or the underlying hedged item is derecognized. Cash flow hedges The Company enters into interest rate swaps, foreign currency forward contracts and natural gas and forward power purchase and sale contracts to offset the risk of volatility in the variable cash flows arising from a recognized asset or liability, a highly probable forecast transaction or a firm commitment in a foreign currency transaction. The effective portion of changes in fair value of the derivative is recognized in OCI, whereas the ineffective portion is recognized in earnings immediately. Sources of hedge ineffectiveness can occur as a result of credit risk, change in hedge ratio, changes in the timing of payment, and forecast adjustments leading to over-hedging. The cumulative gain or loss in AOCI is transferred to earnings when the hedged item affects earnings. If a forecast transaction results in the recognition of a non-financial asset or liability, the amount in AOCI is added to the initial cost of the non-financial asset or liability. If the Company discontinues hedge accounting, the cumulative gain or loss in AOCI is transferred to earnings at the same time as the hedged item affects earnings. The amount in AOCI is immediately transferred to earnings if the hedged item is derecognized or it is probable that a forecast transaction will not occur in the originally specified time frame. RETIREMENT BENEFITS The Company accrues for its obligations under defined benefit pension and OPEB plans. Pension plan assets at the balance sheet date are reported at fair value. Accrued benefit obligations at the balance sheet date are determined using a discount rate that reflects market interest rates. The rates are equivalent to those on high quality corporate bonds that match the timing and amount of expected benefit payments. The cost for defined benefit plans includes net interest expense. This expense is calculated by applying the discount rate to the net defined benefit asset or liability at the beginning of the year plus projected contributions and benefit payments during the year. Gains and losses resulting from experience adjustments and changes in assumptions used to measure the accrued benefit obligations are recognized in OCI in the period in which they occur. Those gains and losses are then transferred directly to retained earnings. Employer contributions to the defined contribution pension plans are expensed as employees render service. 77 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 160 For defined benefit pension plans and OPEB plans, service cost is recognized as an expense in salaries, wages and benefits, and net interest expense is recognized in interest expense. The cost of defined contribution pension plans is recognized as an expense in salaries, wages and benefits. Past service costs are recognized immediately in earnings in the period of a plan amendment or curtailment. The change in the present value of the defined benefit pension plans resulting from a curtailment is accounted for as a past service cost. When retirement benefit costs for employee services are incurred in constructing an asset and meet asset recognition criteria, they are included in the related property, plant and equipment or intangible asset. SHARE-BASED COMPENSATION PLANS The Company expenses stock options granted by ATCO Ltd. and its subsidiary, Canadian Utilities Limited. The Company determines the fair value of the options on the date of grant. The fair value is recognized over the vesting period of the options granted by applying graded vesting, adjusted for estimated forfeitures. The fair value of the ATCO Ltd. options is recorded in salaries, wages and benefits expense and contributed surplus. Contributed surplus is reduced as the ATCO Ltd. options are exercised, and the amount initially recorded in contributed surplus is credited to Class I and Class II Share capital. The fair value of the Canadian Utilities Limited options is recorded in salaries, wages and benefits expense and non-controlling interests. SARs are cash-settled and are measured at fair value. The fair value is recognized over the vesting period of the SARs granted by applying graded vesting, adjusted for estimated forfeitures. The fair value of SARs is recorded in salaries, wages and benefits expense and accounts payable and accrued liabilities and other non-current liabilities. The liabilities are re-measured at each reporting period. The MTIP awards are equity-settled with shares purchased on the secondary market. They are measured at fair value based on the purchase price of the Company’s Class I Shares at the date of grant. The awards are held by a trust until the shares are vested, at which time they are transferred to the employee. The fair value of the MTIP awards is recognized in salaries, wages and benefits expense over the vesting period, with a corresponding charge to contributed surplus. RELATED PARTY TRANSACTIONS Transactions with related parties in the normal course of business are measured at the exchange amount. Transfers of assets or business combinations between entities under common control are measured at the carrying amount. FOREIGN CURRENCY TRANSLATION Foreign currency transactions Transactions denominated in foreign currencies are translated at the exchange rate at the date of the transaction. Monetary assets and liabilities and non-monetary assets and liabilities measured at fair value denominated in a foreign currency are adjusted to reflect the exchange rate at the balance sheet date. Gains or losses on translation of these monetary and non-monetary items are recognized in earnings. Non-monetary items not measured at fair value are not retranslated after they are first recognized. Foreign operations The assets and liabilities of subsidiaries whose functional currencies are other than Canadian dollars are translated into Canadian dollars at the exchange rate at the balance sheet date. Revenues and expenses are translated at the average monthly exchange rates during the period, which approximates the foreign exchange rates on the dates of the transactions. Gains or losses on translation are included in OCI. If the Company disposes of its entire interest in a foreign operation, or loses control, joint control, or significant influence over a foreign operation, the accumulated foreign currency translation gains or losses related to the foreign operation are recognized in earnings. 161 — ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS 78 The exchange rates for the major currencies used in the preparation of the consolidated financial statements were as follows: U.S. dollar Australian dollar Exchange Rates as at December 31 Average Exchange Rates for Year Ended December 31 2019 1.2963 0.9112 2018 1.3644 0.9613 2019 1.3281 0.9227 2018 1.2957 0.9687 ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED At December 31, 2019, there are no new or amended standards and interpretations that need to be adopted in future periods and will have a significant impact on the Company. 79 ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS ATCO LTD. 2019 CONSOLIDATED FINANCIAL STATEMENTS — 162 CONSOLIDATED ANNUAL RESULTS (1) YEAR ENDED DECEMBER 31, 2019 (Millions of Canadian dollars, except as indicated) 2019 2018 2017 2016 2015 EARNINGS STATEMENT Revenues Earnings attributable to Class I and Class II shares Adjusted earnings (3) Structures & Logistics Canadian Utilities Limited - Electricity - Pipelines & Liquids - Corporate & Other Neltume Ports Corporate & Other Adjusted earnings (2) BALANCE SHEET Cash (3) Total assets Capitalization Bank indebtedness Short-term debt Long-term debt Non-recourse long-term debt Non-controlling interests Share owners' equity Capitalization CASH FLOW STATEMENT Funds generated by operations (4) Capital investments (4) Structures & Logistics Canadian Utilities Limited - Electricity - Pipelines & Liquids - Corporate & Other Neltume Ports Corporate & Other and eliminations Capital investments PER SHARE DATA Earnings per share ($) Adjusted earnings per share ($) Dividends paid per share ($) Equity per share ($) Class I non-voting closing share price ($) Class II Voting closing share price ($) 4,706 513 37 221 137 (39) 15 (6) 365 1,140 21,703 — 9,436 — 3,858 4,000 17,294 4,888 4,600 4,045 4,131 328 219 340 154 15 228 130 (39) 4 17 355 6 210 144 (35) — 10 335 43 213 136 (35) — 3 360 27 171 101 (15) — 9 293 691 494 601 799 23,344 21,786 19,724 19,055 — 175 9,397 1,401 3,687 3,755 18,415 7 10 8,557 1,416 3,576 3,527 17,093 5 55 8,220 98 3,653 3,546 15,577 1 — 7,943 112 3,537 3,356 14,949 1,927 1,897 1,813 1,912 1,589 105 113 543 677 6 9 (16) 1,324 4.49 3.19 1.62 34.88 49.77 49.55 1,287 648 16 444 10 2,518 2.87 3.10 1.51 32.75 38.61 38.55 37 918 782 3 — 81 1,821 1.92 2.93 1.31 30.76 45.00 44.90 97 647 790 5 — 70 1,609 2.97 3.15 1.14 30.93 44.66 44.78 61 935 875 9 — 39 1,919 1.34 2.55 0.99 29.18 35.70 35.50 Full disclosure of all financial information is available on the SEDAR website - www.sedar.com. (1) (2) Financial results have been prepared in accordance with International Financial Reporting Standards (IFRS). Adjusted earnings are earnings attributable to Class I & Class II shares after adjusting for the timing of revenues and expenses associated with rate-regulated activities and unrealized gains or losses on mark-to- market forward and swap commodity contracts. Adjusted earnings also exclude one-time gains and losses, significant impairments and items that are not in the normal course of business or a result of day-to-day 163 — ATCO LTD. 2019 CONSOLIDATED ANNUAL RESULTS operations. Descriptions of the adjustments are provided in Note 4 of the 2019 Consolidated Financial Statements. (3) Cash is defined as cash and cash equivalents less current bank indebtedness. (4) Funds generated by operations is defined as cash flow from operations before changes in non-cash working capital and change in receivable under service concession arrangement. Capital investments is defined as cash used for capital expenditures, business combinations, service concession arrangements, and cash used in the Company's proportional share of capital expenditures in joint ventures. These measures are not defined by IFRS and may not be comparable to similar measures used by other companies. ATCO LTD. 2019 CONSOLIDATED ANNUAL RESULTS — 164 CONSOLIDATED OPERATING SUMMARY YEAR ENDED DECEMBER 31, 2019 (Millions of Canadian dollars, except as indicated) Structures & Logistics Capital investments (1) Workforce housing lease fleet (units in thousands) Workforce housing lease fleet utilization (%) Space rental lease fleet (units in thousands) Space rental lease fleet utilization (%) Neltume Port products handling (millions of tonnes) Electricity Electricity distribution and transmission operations Capital investments (1) Power lines (thousands of kilometres) Electricity distributed (millions of kilowatt hours) Average annual use per residential customer (kWh) Customers at year-end (thousands) Electricity generation operations Capital investments (1) Generating capacity (megawatts) Generating capacity owned (megawatts) Pipelines & Liquids Natural gas distribution operations Capital investments (1) Pipelines (thousands of kilometres) Maximum daily demand (terajoules) Natural gas distributed (petajoules) Average annual use per residential customer (gigajoules) for ATCO Gas Average annual use per residential customer (gigajoules) for ATCO Gas Australia Customers at year-end (thousands) Natural gas transmission operations Capital investments (1) Pipelines (thousands of kilometres) Energy storage & industrial water operations Capital investments (1) Seasonal natural gas storage capacity (petajoules) Salt cavern storage capacity (thousands of m3) Industrial water infrastructure intake capacity (thousands of m3/day) 2019 2018 2017 2016 2015 105 113 3 48 16 72 46 389 75 12,664 7,227 260 59 344 244 353 55 2,304 311 112 13 2,003 295 9 29 52 400 85 3 40 15 75 44 467 75 12,928 7,398 258 156 3,922 2,517 383 55 2,292 304 111 14 1,978 248 9 12 52 400 85 37 4 37 13 70 97 5 38 14 64 61 3 51 13 68 — — — 438 75 11,961 7,325 256 24 3,887 2,482 464 55 2,381 287 116 14 1,952 303 9 10 52 200 85 470 76 11,659 7,198 256 108 3,870 2,473 426 55 2,097 263 116 15 1,924 282 9 26 52 200 85 826 75 11,832 7,476 256 85 3,857 2,462 411 54 2,216 264 117 14 1,893 363 9 101 52 — 60 (1) Capital investments is defined as cash used for capital expenditures, business combinations, service concession arrangements, and cash used in the Company's proportional share of capital expenditures in joint ventures. This measure is not defined by IFRS and may not be comparable to similar measures used by other companies. (2) On September 12, 2018, ATCO invested in a 40 per cent interest in Neltume Ports, a leading port operator and developer in South America. Neltume Ports, a subsidiary of Ultramar, is a port operator and developer with a diversified portfolio of 16 multipurpose bulk cargo and container port facilities and three port operation services. The business is located primarily in Chile, with smaller operations in Uruguay, Argentina, and Brazil. The port product handling volume for 2018 represents an annual amount. The volume of products handled includes copper, forestry products, consumer goods and agricultural products. 165 — ATCO LTD. 2019 CONSOLIDATED OPERATING SUMMARY GENERAL INFORMATION INCORPORATION ATCO Ltd. was incorporated under the laws of the province of Alberta on August 31, 1962. AUDITORS PricewaterhouseCoopers LLP Calgary, AB LEGAL COUNSEL Bennett Jones LLP Calgary, AB STOCK EXCHANGE LISTINGS Class I Non-Voting Shares Symbol ACO.X Class II Voting Shares Symbol ACO.Y Listing: The Toronto Stock Exchange INVESTOR RELATIONS Email: investorrelations@ATCO.com Telephone: 403 292 7500 Fax: 403 292 7532 Mailing Address: Investor Relations c/o ATCO 3rd floor, West Building 5302 Forand St SW Calgary, AB Canada T3E 8B4 REGISTRAR & TRANSFER AGENT Class I Non-Voting and Class II Voting Shares AST Trust Company (Canada) Calgary/Montreal/Toronto/Vancouver Telephone: 8:00 a.m. to 6:30 p.m. ET Monday–Friday Toll-Free in North America: 1 800 387 0825 Outside of North America: 1 416 682 3860 Fax in North America: 1 888 249 6189 Fax Outside of North America: 1 514 985 8843 Email: inquiries@astfinancial.com www.astfinancial.com Mailing Address: AST Trust Company (Canada) P.O. Box 700 Station B Montreal, QC Canada H3B 3K3 Printed in Canada ATCO LTD. 2019 GENERAL INFORMATION — 166 P r i n t e d i n C a n a d a 5302 FORAND ST SW CALGARY AB CANADA T3E 8B4 403 292 7500 ATCO.COM 

Continue reading text version or see original annual report in PDF format above