ATCO Ltd.
Annual Report 2020

Plain-text annual report

ATCO LTD. | 2020 ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2020 Message from the Chair & CEO Management’s Discussion and Analysis Financial Statements Consolidated Annual Results Consolidated Operating Summary General Information ii 1 80 159 161 164 0 2 0 2 T R O P E R L A U N N A ATCO ANNUAL REPORT 2020 i MESSAGE FROM THE CHAIR & CEO RISING TO UNPRECEDENTED CHALLENGE Dear ATCO Share Owners, Throughout 2020, we braved political, social and economic waves that changed how we think about the fundamentals that we used to take for granted. After an extended phase of opening global markets that promised new opportunities, we felt the effect of a surge of protectionism from Europe to North America and Asia that has hindered possibilities for collaboration and innovation. Global trade and human progress are not a zero-sum game where countries must defend their own, above all others. I believe there is such a thing as the global common good, and that we can build a better reality emerging from the economic uncertainty and social disconnect we now face. So many things about 2020 were unprecedented. As the pandemic encompassed every aspect of our lives, that idea pervaded our collective consciousness. Never before had we faced this intensity— and intersection—of personal strife, societal shift and economic devastation. I often reflect on the changing landscape in which we live and work, and this last year we found ourselves adapting on the spot, in a completely foreign milieu. 2020 quickly became a story about agility. About pivoting our position, so we could continue to meet the essential needs of our communities, safely. But first and foremost, for ATCO, 2020 was about people and leadership. Leadership wasn’t just how our executive took the helm to steer your company through the storm, but the leadership of each and every one of our employees, who were constantly assessing the dynamics around them and charting a course for what needed to be done. I am so proud of the contribution of each one of our 6,200-member team, who worked so hard and so smart, often during times of immense personal stress. Through this leadership, and over time, we no longer saw the pandemic as unprecedented. We saw it as the next challenge. The evolving reality. Another step in our journey. It’s the same attitude that has driven us for seven decades to strive for a future where we provide critical products and services in a way that is better than how we did before. Better for the environment, better for our customers and communities, better for our employees—now and for generations to come. To always do better, we must be unrelenting. Unrelenting is a culture. It seeps into every aspect of our business, from making safety our first consideration to reducing our own environmental impact, from increasing operational reliability to focusing on our communities. Transitioning to lower-emitting energy is a critical priority, where we are working fiercely to make a difference. Hydrogen is one cleaner energy option that I am particularly committed to. We are building Alberta’s first hydrogen blending project, after successful outcomes at our Clean Energy Innovation Hub in Western Australia. Emissions Reduction Alberta shares our confidence and has awarded ATCO $2.8 million in funding. Once completed, it will be Canada’s largest hydrogen blending project. Research, ii ATCO ANNUAL REPORT 2020 innovation and calculated risks—with a long-term goal in mind. That’s how we change the world. But, the reality is we can’t change the world in a context that doesn’t support it. Cumbersome government policy remains a concern, and as citizens become disenchanted with the politics of the day, it is time for another kind of change. It is an ongoing exercise to peel away the layers that build up over time caused by unnecessary policy or regulation, or just habit. Responsive government that supports businesses in their desire to do better is critical for our ambitions of sustainability. We’ve shown what’s possible by rethinking and refining our approach to projects. This last year, we were bestowed the prestigious International Edison Award for our work on the Fort McMurray West 500-kilovolt Transmission Project, completed by Alberta PowerLine, our partnership with Quanta Services. The award recognizes distinguished leadership, innovation and contribution to the advancement of the electric power industry. Specifically, we led the way in developing state-of-the-art energy infrastructure and creating new models for consultation and engagement, long-term economic benefit, and reconciliation with Indigenous Peoples. This project was a success because we did what we do best: extraordinary project execution, forward-thinking collaboration, and a focus on how things should be done, not how they’ve always been done. Our vision is inextricably intertwined with the goals and needs of our customers, as we offer the essentials. Amidst the most adverse conditions, including a global pandemic, a significant flood in Fort McMurray, Alberta and a cyclone in Australia, we provided unwavering support to our customers through a range of products and services. We built and managed workforce accommodation for ambitious projects in Canada and built medical facilities in Mexico. We made inviting schools and hotels. We planned rapid response after earthquakes damaged a U.S. military base. ATCO ANNUAL REPORT 2020 iii As the pandemic strained Canada’s medical infrastructure, collaboration between businesses and government became key to supporting public health. I am immensely proud that we are able to do our part to increase Canada’s healthcare capacity by working with Weatherhaven Global Resources to provide a nimble fleet of specially designed medical facilities. And, of course, there is the crucial essential of energy: electricity, natural gas and renewables. We provide these essentials to over two million customers with a laser focus on sustainability and an eye on the future. The projects that often stand out for me are the ones where we work together with our Indigenous partners. In 2020, we completed Canada’s largest off-grid solar project, providing the remote Northern Alberta hamlet of Fort Chipewyan with clean energy and reducing local diesel use by about 800,000 litres annually. In partnership with Three Nations Energy, we showcased how we can collaborate to develop sustainable energy solutions that benefit today’s and future generations. Benefiting generations is also at the heart of our work in Puerto Rico with an exciting addition to our portfolio of global energy infrastructure in Latin America. After the devastation of Hurricane Maria, we were chosen with our partner Quanta Services to rebuild and operate the electric grid to one that is safe, reliable, sustainable and affordable. LUMA Energy, as our new company on the island is called, will advance this historic transformation over 15 years, producing enduring benefits to the people and communities of Puerto Rico. This endeavour exemplifies our disciplined approach, as we pursue opportunities for growth. Beyond the business of ATCO, I am immensely proud of the community spirit of our people. ATCO EPIC, or Employees Participating in Communities, is a long-standing employee-led program that rallies the spirit of our people all over the world, combining volunteerism, fundraising events and individual donations. With our employees working safely from home, the contribution that EPIC provides was in danger of faltering. I am so proud of our team, who re-assessed how the program could work and leveraged technology to ensure our people could contribute to their communities without leaving their desks. This new approach actually increased the number of our employees who participated, pushing us to exceed our goal from last year. This unexpected and impressive outcome is the result of ingenuity, plain and simple. 2021 is a year of hope and renewed optimism. We’ve walked together through some dark times in 2020. I would like to express my deepest appreciation to our Board of Directors, whose stewardship drives our success. I would also like to personally acknowledge the strength, support and commitment of our customers, communities and employees as we collaborated in extremely difficult circumstances to provide the most essential products and services to those who needed them most. The world will never be quite the same. I believe, it will be better. Sincerely yours, Nancy C. Southern Chair & Chief Executive Officer, ATCO Ltd. iv ATCO ANNUAL REPORT 2020 ATCO LTD. MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2020 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, 2020. This MD&A was prepared as of February 24, 2021, and should be read with the Company's audited consolidated financial statements (2020 Consolidated Financial Statements) for the year ended December 31, 2020. Additional information, including the Company's Annual Information Form (2020 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) (52.3 per cent ownership), ATCO Structures & Logistics Ltd. (100 per cent ownership), ATCO Land and Development Ltd. (100 per cent ownership), and ASHCOR Technologies Ltd. (100 per cent ownership). The Company also has a non-controlling equity investment in Neltume Ports S.A. (Neltume Ports) (40 per cent ownership). 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................................................................................................................................................................ Organizational Structure................................................................................................................................................. Company Overview and Operating Environment........................................................................................................ Performance Overview.................................................................................................................................................... ATCO Scorecard................................................................................................................................................................ Strategic Priorities for 2021............................................................................................................................................. Corporate Governance.................................................................................................................................................... Business Unit Performance............................................................................................................................................. Structures & Logistics.................................................................................................................................................... Neltume Ports................................................................................................................................................................ ATCO Corporate & Other.............................................................................................................................................. Canadian Utilities........................................................................................................................................................... Utilities ..................................................................................................................................................................... Utilities Regulatory Developments................................................................................................................... Energy Infrastructure............................................................................................................................................. Canadian Utilities Corporate & Other.................................................................................................................. 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 5 7 13 16 21 23 24 24 29 30 31 31 35 38 40 41 46 48 53 54 59 67 68 73 74 75 77 78 1 ATCO LTD. 2020 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 28 years, a track record of which we are very proud. On January 14, 2021, we declared a first quarter dividend of 44.83 cents per share or $1.79 per share on an annualized basis. ATCO continues to grow its dividends consistent with the sustainable growth of its investments. Quarterly Dividend Rate 1993 - 2021 (dollars per share) $0.4483 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 DIVERSIFIED ESSENTIAL SERVICES ATCO's investments 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: shelter, 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 in a disciplined and proactive manner. 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 sustainable long term intergenerational prosperity. We remain committed to maintaining our strong, investment grade credit ratings. Dividend Growth Diversified Essential Services Global Growth A Range Credit Rating ATCO LTD. 2020 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 "Making life easier for our customers by offering integrated solutions around the world." ATCO's investments put us at the forefront of global trends. We deliver the enduring essentials required for a healthy global economy: shelter, logistics and transportation, agriculture, water, real estate, energy, and energy infrastructure. 3 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 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. 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 Our long-term strategy is focused on sustainable growth. We approach this strategy by: expanding geographically to meet the global needs of our customers; developing significant, value-creating greenfield projects; fostering continuous improvement; and delivering reliable, cleaner, and affordable energy for our customers. 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 the bedrock of our current and future success. It ensures that we have 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 us to sustain our operations and to grow through economic cycles, thereby providing long-term financial benefits. We continuously review our 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 the Company. 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 We are committed to 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 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 Our financial and operational achievements in 2020 relative to the strategies outlined above are included in this MD&A, the 2020 Consolidated Financial Statements and 2020 AIF. Further commentary regarding strategies and commitments to growth, financial strength, innovation, operational excellence, and community involvement will be provided in the forthcoming 2020 Management Proxy Circular, Year in Review, and Sustainability Report. The 2020 Management Proxy Circular will also contain a 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 4 ORGANIZATIONAL STRUCTURE (1) ATCO Land and Development Ltd. includes commercial real estate investments held for sale, lease or development. (2) ASHCOR Technologies Ltd. (ASHCOR) is an Alberta-based company engaged in the processing and marketing of ash, a waste byproduct of electricity generation. (3) Canadian Utilities' 100 per cent owned subsidiary CU Inc. includes Electricity Distribution, Electricity Transmission, Natural Gas Distribution and Natural Gas Transmission. (4) International Electricity Operations includes Canadian Utilities' 50 per cent ownership in LUMA Energy, LLC (LUMA Energy), a company formed to transform, modernize and operate Puerto Rico's 30,000 km electricity transmission and distribution system under an Operations and Maintenance Agreement with a 15-year term after a one-year transition period which began on June 22, 2020. (5) Canadian Utilities owns 248-MW of non-regulated electricity generation assets in Australia, Mexico, Canada and Chile. (6) Retail Energy, through ATCO Energy Ltd. (ATCOenergy), provides retail electricity and natural gas service in Alberta. 5 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS In the first quarter of 2020, the Company reorganized its reporting segments. These segments are reported in a manner consistent with the internal reporting provided to the Chair & Chief Executive Officer and other members of the Executive Committee of the Company. Comparative amounts for prior periods have been restated to reflect the realigned segments. The 2020 Consolidated Financial Statements include the accounts of ATCO Ltd., including a proportionate share of joint venture (JV) investments and its equity-accounted investment in associate company (40 per cent of Neltume Ports). Principal subsidiaries are Canadian Utilities, of which ATCO Ltd. owns 52.3 per cent (38.3 per cent of the Class A non-voting shares and 90.3 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 Land and Development Ltd. and ASHCOR Technologies Ltd. The 2020 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 6 COMPANY OVERVIEW AND OPERATING ENVIRONMENT With approximately 6,200 employees and assets of $22 billion, ATCO is privileged to serve more than two million customers around the world, providing innovative, sustainable solutions in the sectors that are essential to global growth and prosperity: shelter, logistics and transportation, agriculture, water, real estate, energy, and energy infrastructure. From the delivery of efficient and reliable energy for homes, businesses and communities, to affordable temporary and permanent buildings, and transportation of products and services, we build communities, energize industries and deliver customer-focused infrastructure solutions. 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 earnings and dividend growth. Our growth strategy to diversify our mix of portfolio investments into new markets and business lines and prudently deploy capital underpins our ability to generate long-term growth and financial prosperity. 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 macroeconomic instability while continuing to grow. 7 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS STRUCTURES & LOGISTICS BUSINESS DESCRIPTION ATCO Structures & Logistics 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 Structures BUSINESS STRATEGY Our strategy generates sustainable earnings growth by creating a culture of continuous improvement and providing our customers with exceptional customer service. Our growth strategy in each geography is delivered through the expansion of our space rentals business line, which provides the infrastructure and skilled personnel to leverage our strategic offering of workforce housing and permanent modular construction capabilities, and manufacturing solutions. We aim to continue to grow our business strategically across the globe to meet the needs of our customers anywhere. MARKET OPPORTUNITIES We are expanding fleet in our existing space rental geographies and targeting new geographies while streamlining our manufacturing platform to scale quickly and profitably when needed to capture workforce housing contracts. We continue to pursue customer diversification opportunities outside of the natural resource sector. Public infrastructure spending will continue to be a source of opportunity for ATCO Structures. Non-traditional modular markets such as public education facilities, high density urban residential housing, hotels, hospitals and correctional facilities continue to offer development opportunities. We have recently expanded our operations in parts of the US and Latin America, particularly Chile and Mexico, where we see strategic value and opportunity for the future. We will continue to evaluate organic and acquisition growth opportunities. MARKET CHALLENGES The modular construction industry is significantly influenced by capital spending cycles in the natural resource and construction sectors. Slower global economic activity has resulted in delayed or redeployed funding by our existing and potential customers which may not change until current macroeconomic conditions stabilize. There is also a high level of competition in the markets in which we operate both from traditional competitors and new product developers looking to enter the market or diversify their business. ATCO Sabinco, Manufacturing Facility, Santiago, Chile BC Housing, Powell River, British Columbia ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 8 ATCO Frontec BUSINESS STRATEGY Our strategy is to enhance our competitive position through diversification of our existing workforce lodging and facility operations and maintenance service client base, expand into new geographies, and continuously refine our business practices. MARKET OPPORTUNITIES We see opportunity to expand our operations and maintenance services and workforce housing businesses in Canada and the US through our own business relationships and partnering with ATCO Structures. Opportunities for growth in our disaster and emergency management and defence operations services business will be pursued as we continue to build from our existing base of contracts. MARKET CHALLENGES Continued uncertainty in the natural resource sector in Canada may limit the demand for workforce housing and associated camp services. We are pursuing contracts with customers whose projects remain subject to comprehensive approval processes. ATCO Frontec, facility operations and maintenance, NATO Flying Training, Moose Jaw, Saskatchewan NELTUME PORTS BUSINESS DESCRIPTION ATCO has a 40 per cent interest in Neltume Ports. Neltume Ports is a port operator and developer with a diversified portfolio of multipurpose, bulk cargo and container terminals located primarily in Chile with additional operations in Uruguay, Argentina, and Brazil. Neltume Ports employs approximately 7,200 people and operates 16 port facilities and three port operation services businesses. A seventeenth port is under construction and is expected to be in service in 2021. In 2020, Neltume Ports handled 45 million tonnes of product, including copper, forestry products, consumer goods and agricultural products. BUSINESS STRATEGY Neltume Ports' strategy is focused on continuous improvement initiatives to refine operational practices throughout all facets of its business. Sustained growth will continue to be achieved by improving margins, increasing volumes and ownership at existing ports, and investing in brownfield, greenfield and acquisition opportunities throughout the Americas. Most of Neltume's existing ports are underpinned 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. 9 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS MARKET OPPORTUNITIES Through Neltume Ports' exposure to global trade and transportation, the business is able to capitalize on increasing demand for resources, particularly copper, agriculture and forestry products, as well as on other macroeconomic factors. Neltume Ports continuously reviews opportunities to increase its ownership position in ports that are jointly owned. Brownfield expansion opportunities at ports also exist. Greenfield and acquisition expansion potential will continue to be evaluated. MARKET CHALLENGES The Latin American economy may experience a slow recovery from the COVID-19 pandemic. The ports industry by nature is sensitive to changes in international trade, commodity prices and foreign exchange and therefore prolonged economic recovery could impact Neltume Ports. There is exposure to certain countries with a higher possibility of political unrest. Terminal Pacifico Sur, Valparaíso, Chile CANADIAN UTILITIES Canadian Utilities is a diversified global energy infrastructure corporation delivering service excellence and innovative business solutions in Utilities (Electricity and Natural Gas Transmission and Distribution, and International Electricity Operations); Energy Infrastructure (Electricity Generation, Energy Storage, and Industrial Water Solutions); and Retail Energy (Electricity and Natural Gas Retail Sales). Utilities BUSINESS DESCRIPTION The Utilities' business unit's activities consist of four regulated utilities (Electricity Transmission and Distribution, and Natural Gas Transmission and Distribution) in Alberta, Saskatchewan and northern regions of Canada, that have delivered reliable electricity and cleaner-burning natural gas to customers for many decades, a regulated natural gas distribution business in Western Australia, and the newly formed International Electricity Operations business in Puerto Rico, which includes Canadian Utilities' 50 per cent ownership in LUMA Energy. BUSINESS STRATEGY Our strategy is to invest in regulated electricity and natural gas distribution and transmission assets, capitalize on opportunities to provide long-term contracted electricity and natural gas transmission and distribution services, and consistently deliver reliable, affordable and cleaner energy for our customers. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 10 MARKET OPPORTUNITIES The utilities industry is changing with an increased focus on decarbonization, digitalization, decentralization, and evolving customer demand. Continuing climate change concerns, evolving regulations to encourage the advancement of new technologies, emission reduction targets, and government incentives present opportunities for utility companies. Our natural gas and electric utilities are well positioned to capitalize on these trends. Our strategic priorities remain focused on investments that provide lower emissions and cleaner energy solutions for our customers, while continuing to invest in our core business. MARKET CHALLENGES Traditional utility industry challenges include the regulator's approval of customer rates that permit a reasonable opportunity to recover service costs on a timely basis, including a fair return on invested capital. The increasing move towards decarbonization, arrival of new smart-grid technologies, renewable energy generation, decentralized generation, energy storage and digital transformation has forced the traditional utility sector to reinvent itself and adapt to remain competitive. These new challenges present new policy and technology risks that could lead to disruption of the Company's existing business models and create new competitive market dynamics. Electricity Distribution, Maintenance Work, Alberta Jasper Interconnection Project, Alberta Energy Infrastructure BUSINESS DESCRIPTION The Energy Infrastructure non-regulated businesses include: hydro, solar and natural gas electricity generation in western Canada, Australia, Mexico, and Chile, as well as non-regulated electricity transmission, natural gas storage and transmission, Natural Gas Liquids (NGL) storage, and industrial water services in Alberta. BUSINESS STRATEGY Renewable energy, particularly hydro and solar electricity generation, is the key growth platform of our energy infrastructure business. Cleaner fuels, such as hydrogen, represent another key platform for development that provides both defensive and offensive opportunities. Additionally, we continue to optimize and drive growth in our natural gas and liquids storage business. Greenfield projects will be our preferred driver of value creation as it allows more opportunity to create value by taking managed risk and leveraging our extensive experience in developing energy infrastructure projects. We will continue to evaluate smaller scale acquisition opportunities to accelerate growth. 11 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS MARKET OPPORTUNITIES In developed markets, the political and societal push to address climate change with decarbonization goals and the energy transition are driving the demand for cleaner energy, mainly supplied through renewables. Energy markets will be focused on providing firm, reliable and affordable energy supply as the share of renewables grows; this is likely to drive further investment into storage and grid balancing solutions to improve system reliability. MARKET CHALLENGES There is significant competition as financial, strategic and traditional fuel-based energy producers become increasingly interested in the renewables space. Macroeconomic conditions such as government policy, slowing global economic activity, and political uncertainty pose challenges for investment. Natural gas storage facility, Carbon, Alberta Hydroelectric power station, Veracruz, Mexico ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 12 PERFORMANCE OVERVIEW FINANCIAL METRICS The following chart summarizes key financial metrics associated with our financial performance. ($ millions, except per share data and outstanding shares) 2020 2019 2018 Year Ended December 31 Key Financial Metrics Revenues Adjusted earnings (1) Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Utilities Energy Infrastructure 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) 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): 3,944 4,706 4,888 352 57 15 — 305 15 (40) 3.08 252 2.21 365 355 37 15 (6) 301 57 (39) 3.19 513 4.49 15 4 17 275 83 (39) 3.10 328 2.87 9,619 9,436 10,798 4,052 1.74 1,804 1,069 4,000 3,755 1.62 1,927 1,324 1.51 1,897 2,518 Basic Diluted 114,396 114,370 114,394 114,713 114,746 114,788 (1) Additional information regarding these measures is provided in the Non-GAAP and Additional GAAP Measures section of this MD&A. REVENUES Revenues in 2020 were $3,944 million, $762 million lower than the same period in 2019. Lower revenues were mainly due to forgone revenue following Canadian Utilities' sale of the Canadian fossil fuel-based electricity generation business and Alberta PowerLine (APL) in 2019, and the completion of manufacturing work on ATCO Structures' LNG Canada Cedar Valley Lodge in the second quarter of 2020. Lower revenues were partially offset by higher global space rental activity in ATCO Structures. 13 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS ADJUSTED EARNINGS Our adjusted earnings in 2020 were $352 million or $3.08 per share, compared to $365 million or $3.19 per share for the same period in 2019. Lower adjusted earnings in 2020 were mainly due to Canadian Utilities' sale of the Canadian fossil fuel-based electricity generation business and 80 per cent ownership interest in APL in 2019, which together contributed $45 million in adjusted earnings in 2019. Excluding the forgone earnings impact from the sale of these businesses in 2019, adjusted earnings in 2020 were $32 million higher compared to the same period in 2019. Higher earnings were mainly due to ATCO Structures' higher workforce housing trade sale activity, and higher global space rental activity from growth in the rental fleet and higher rental rates and utilization across Canada, the US and Australia. Adjusted Earnings ($ millions) Additional detail on the financial performance of our business units is discussed in the 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 $252 million in 2020, $261 million lower compared to 2019. 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 the fourth quarter of 2020, Canadian Utilities signed a Master Services Agreement (MSA) with IBM Canada Ltd. (IBM) to provide managed information technology services. These services are currently provided by Wipro Solutions Canada Limited (Wipro) under a ten-year MSA maturing in December 2024. ATCO has recognized costs of $32 million (after-tax and non-controlling interests), which represents management’s best estimate of the costs to exit the Wipro MSA. The actual costs are expected to be finalized later in 2021. As these costs are one-time in nature, they are excluded from adjusted earnings. 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 14 COMMON SHARE DIVIDENDS Dividends paid to Class I and Class II share owners totaled $200 million in 2020. On January 14, 2021, the Board of Directors declared a first quarter dividend of 44.83 cents per share. ATCO SCORECARD FUNDS GENERATED BY OPERATIONS Funds generated by operations were $1,804 million in 2020, $123 million lower than in 2019. The decrease was mainly due to lower funds generated in Canadian Utilities' Energy Infrastructure business as a result of the sale of APL and the Canadian fossil fuel-based electricity generation business in 2019, and in the Alberta Utilities as a result of the timing of certain revenues and expenses from regulatory decisions. These amounts were partially offset by higher funds generated in ATCO Structures due to higher workforce housing trade sale activity and higher space rental activity in Canada, the US, and Australia. CAPITAL INVESTMENT Total capital investment of $1,069 million in 2020 was $255 million lower than the previous year mainly due to lower capital investment in the Regulated Utilities in 2020, the completion of construction on Alberta PowerLine in 2019, and lower capital investment in Electricity Generation due to the sale of the Canadian fossil fuel-based electricity generation business in 2019. Capital spending in Canadian Utilities' Regulated Utilities accounted for 82 per cent of total capital invested in 2020. The remaining 18 per cent invested in 2020 included capital for ATCO Structures' acquisition of an additional 50 per cent in ATCO Sabinco S.V. and expansion of its global rental fleet. 82% Capital Investment In 2020 Continue to expand permanent modular In 2020, ATCO Structures secured several projects with the Government of British Columbia’s supportive housing program. products and construction into hotels, ATCO Structures completed a $9 Million, 44-unit apartment services schools, affordable complex in Powell River, British Columbia (BC) in the first housing and seniors' living quarter. ATCO Structures completed a $9 million, 44-unit 18% centres. Regulated Utilities ATCO Structures & Other Explore and test new products and methods of energy delivery to meet customers' future needs. The following scorecard outlines our performance in 2020. 2020 TARGET 2020 PERFORMANCE STRATEGIC PRIORITIES INNOVATION New and existing apartment complex in New Westminster, BC in the third quarter. ATCO Structures has commenced work on a $14 million, 61-unit apartment complex in Surrey, BC which is expected to be completed in June 2021. ATCO Structures was awarded multiple contracts with the Victoria Department of Education to design, manufacture and install 50 permanent modular classrooms in Melbourne, Australia. ATCO Espaciomovil delivered two modular health care facilities in Tijuana and Mexico City in the third quarter to support the fight against COVID-19. Canadian Utilities is advancing a first-of-its kind hydrogen blending project in Fort Saskatchewan, Alberta. Once complete, the project will be Canada's largest hydrogen blending project. Canadian Utilities and Fortescue Metals Group Ltd. commenced research on an opportunity in Australia to refuel vehicles capable of utilizing hydrogen as the primary fuel source. Canadian Utilities completed the first 3-MW of solar generation capacity in Chile on the 9-MW El Resplandor (Cabrero Solar Project) in the second quarter of 2020. • Continue to expand the Canadian Utilities installed a total of 10 electric vehicle (EV) number of electric vehicle charging stations in Alberta in 2020. Since 2019, Canadian charging stations in Utilities has installed 25 electric vehicle fast charging stations in Alberta. Alberta. 15 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 16 ATCO SCORECARD ATCO SCORECARD The following scorecard outlines our performance in 2020. The following scorecard outlines our performance in 2020. STRATEGIC PRIORITIES STRATEGIC PRIORITIES 2020 TARGET 2020 TARGET INNOVATION INNOVATION New and New and existing existing products and products and services services Continue to expand Continue to expand permanent modular permanent modular construction into hotels, construction into hotels, schools, affordable schools, affordable housing and seniors' living housing and seniors' living centres. centres. Explore and test new products and methods of energy delivery to meet customers' future needs. Explore and test new products and methods of energy delivery to meet customers' future needs. 2020 PERFORMANCE 2020 PERFORMANCE In 2020, ATCO Structures secured several projects with the Government of British Columbia’s supportive housing program. ATCO Structures completed a $9 Million, 44-unit apartment complex in Powell River, British Columbia (BC) in the first quarter. ATCO Structures completed a $9 million, 44-unit apartment complex in New Westminster, BC in the third quarter. ATCO Structures has commenced work on a $14 million, 61-unit apartment complex in Surrey, BC which is expected to be completed in June 2021. In 2020, ATCO Structures secured several projects with the Government of British Columbia’s supportive housing program. ATCO Structures completed a $9 Million, 44-unit apartment complex in Powell River, British Columbia (BC) in the first quarter. ATCO Structures completed a $9 million, 44-unit apartment complex in New Westminster, BC in the third quarter. ATCO Structures has commenced work on a $14 million, 61-unit apartment complex in Surrey, BC which is expected to be completed in June 2021. ATCO Structures was awarded multiple contracts with the Victoria Department of Education to design, manufacture and install 50 permanent modular classrooms in Melbourne, Australia. ATCO Structures was awarded multiple contracts with the Victoria Department of Education to design, manufacture and install 50 permanent modular classrooms in Melbourne, Australia. ATCO Espaciomovil delivered two modular health care facilities in Tijuana and Mexico City in the third quarter to support the fight against COVID-19. ATCO Espaciomovil delivered two modular health care facilities in Tijuana and Mexico City in the third quarter to support the fight against COVID-19. Canadian Utilities is advancing a first-of-its kind hydrogen Canadian Utilities is advancing a first-of-its kind hydrogen blending project in Fort Saskatchewan, Alberta. Once complete, blending project in Fort Saskatchewan, Alberta. Once complete, the project will be Canada's largest hydrogen blending project. the project will be Canada's largest hydrogen blending project. Canadian Utilities and Fortescue Metals Group Ltd. commenced Canadian Utilities and Fortescue Metals Group Ltd. commenced research on an opportunity in Australia to refuel vehicles research on an opportunity in Australia to refuel vehicles capable of utilizing hydrogen as the primary fuel source. capable of utilizing hydrogen as the primary fuel source. Canadian Utilities completed the first 3-MW of solar generation capacity in Chile on the 9-MW El Resplandor (Cabrero Solar Project) in the second quarter of 2020. Canadian Utilities completed the first 3-MW of solar generation capacity in Chile on the 9-MW El Resplandor (Cabrero Solar Project) in the second quarter of 2020. • Continue to expand the • Continue to expand the number of electric vehicle number of electric vehicle charging stations in charging stations in Alberta. Alberta. Canadian Utilities installed a total of 10 electric vehicle (EV) Canadian Utilities installed a total of 10 electric vehicle (EV) charging stations in Alberta in 2020. Since 2019, Canadian charging stations in Alberta in 2020. Since 2019, Canadian Utilities has installed 25 electric vehicle fast charging stations in Utilities has installed 25 electric vehicle fast charging stations in Alberta. Alberta. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 16 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 16 STRATEGIC STRATEGIC PRIORITIES PRIORITIES New and New and existing existing products and products and services services 2020 TARGET 2020 TARGET • Continue to reduce or • Continue to reduce or replace diesel replace diesel consumption with more consumption with more energy efficient solutions energy efficient solutions for customers in remote for customers in remote communities. communities. Demonstrate continuous improvement of existing products and services. Demonstrate continuous improvement of existing products and services. 2020 PERFORMANCE Canadian Utilities installed Canada’s largest off-grid 2,800-kW solar project in partnership with three Alberta Indigenous Nations in the remote northern Alberta community of Fort Chipewyan. Diesel consumption in this community has been reduced by 25 per cent as a result. 2020 PERFORMANCE Canadian Utilities installed Canada’s largest off-grid 2,800-kW solar project in partnership with three Alberta Indigenous Nations in the remote northern Alberta community of Fort Chipewyan. Diesel consumption in this community has been reduced by 25 per cent as a result. Canadian Utilities completed and placed in-service the Canadian Utilities completed and placed in-service the $230 million Pembina-Keephills transmission pipeline. The new $230 million Pembina-Keephills transmission pipeline. The new line is a critical piece in Alberta's transition away from coal-fired line is a critical piece in Alberta's transition away from coal-fired power plants. Connecting into Capital Power's generating power plants. Connecting into Capital Power's generating stations at Genesee, this pipeline will be a part of the phase-out stations at Genesee, this pipeline will be a part of the phase-out of coal and will help reduce emissions with cleaner-burning of coal and will help reduce emissions with cleaner-burning natural gas. natural gas. Complete ATCO Park real Complete ATCO Park real estate land use estate land use amendments to improve amendments to improve value and future value and future optionality. optionality. Significant progress has been made with predevelopment work for ATCO Park. Calgary City Council approved a land use bylaw amendment which will allow ATCO to develop a variety of products including residential, hotel, industrial, retail, research and development, and office real estate. Significant progress has been made with predevelopment work for ATCO Park. Calgary City Council approved a land use bylaw amendment which will allow ATCO to develop a variety of products including residential, hotel, industrial, retail, research and development, and office real estate. GROWTH GROWTH Regulated and Regulated and long-term long-term contracted contracted capital capital investment investment Continue to invest across our Regulated Utilities and in long-term contracted assets. Continue to invest across our Regulated Utilities and in long-term contracted assets. Global expansion Global expansion Continue expansion into Continue expansion into select global markets select global markets including: Canada, including: Canada, Australia, and Latin Australia, and Latin America. America. Canadian Utilities invested $876 million in its Regulated Utilities in 2020. Canadian Utilities invested $876 million in its Regulated Utilities in 2020. Canadian Utilities announced the acquisition of the Pioneer Canadian Utilities announced the acquisition of the Pioneer Pipeline for $255 million. The 131-km natural gas pipeline Pipeline for $255 million. The 131-km natural gas pipeline located west of Edmonton, Alberta, facilitates the conversion of located west of Edmonton, Alberta, facilitates the conversion of the Sundance and Keephills coal-fired electricity generating the Sundance and Keephills coal-fired electricity generating plants to cleaner-burning natural gas. The transaction is plants to cleaner-burning natural gas. The transaction is expected to close in 2021. expected to close in 2021. ATCO Structures acquired the remaining 50 per cent interest in the ATCO Sabinco S.A. joint venture partnership in Chile. The transaction closed on December 30, 2020. ATCO Structures acquired the remaining 50 per cent interest in the ATCO Sabinco S.A. joint venture partnership in Chile. The transaction closed on December 30, 2020. In June, Canadian Utilities along with its partner, Quanta Services, Inc., announced their joint ownership interest in newly formed LUMA Energy. The company was selected by the Puerto Rico Public-Private Partnerships Authority (P3A) to transform, modernize and operate Puerto Rico's electricity transmission and distribution system over a term of 15 years after a one-year transition period. In June, Canadian Utilities along with its partner, Quanta Services, Inc., announced their joint ownership interest in newly formed LUMA Energy. The company was selected by the Puerto Rico Public-Private Partnerships Authority (P3A) to transform, modernize and operate Puerto Rico's electricity transmission and distribution system over a term of 15 years after a one-year transition period. Reposition ATCO Reposition ATCO Structures' rental fleet into Structures' rental fleet into growing regions and growing regions and further expand space further expand space rental business in selected rental business in selected regions. regions. ATCO Structures' space rental fleet increased by 2,474 units in 2020 due to strategic expansion in the United States, central Canada, British Columbia, Mexico and Chile. ATCO Structures' space rental fleet increased by 2,474 units in 2020 due to strategic expansion in the United States, central Canada, British Columbia, Mexico and Chile. ATCO Structures commenced and completed manufacturing ATCO Structures commenced and completed manufacturing and construction of two workforce camps to house and construction of two workforce camps to house approximately 1,150 persons in total to support the Trans approximately 1,150 persons in total to support the Trans Mountain Expansion project. Mountain Expansion project. 17 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 17 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS STRATEGIC STRATEGIC PRIORITIES PRIORITIES Global Global expansion expansion 2020 TARGET 2020 TARGET Expand ATCO Frontec's Expand ATCO Frontec's North American business North American business and diversify the customer and diversify the customer base. base. 2020 PERFORMANCE ATCO Frontec was awarded two workforce lodging services contracts for approximately 1,150 persons in total to support the Trans Mountain Expansion project. 2020 PERFORMANCE ATCO Frontec was awarded two workforce lodging services contracts for approximately 1,150 persons in total to support the Trans Mountain Expansion project. Seek opportunities with Seek opportunities with Neltume Ports' available Neltume Ports' available cash in brownfield, cash in brownfield, greenfield and M&A greenfield and M&A opportunities. opportunities. Neltume Ports entered into a 50/50 joint venture partnership Neltume Ports entered into a 50/50 joint venture partnership with Terminal Zarate in January 2020 to build and operate a with Terminal Zarate in January 2020 to build and operate a roll-on roll-off terminal in Mobile, Alabama. Construction of this roll-on roll-off terminal in Mobile, Alabama. Construction of this terminal is expected to be complete by the end of the first terminal is expected to be complete by the end of the first quarter and in service in the second quarter of 2021. quarter and in service in the second quarter of 2021. Increase number of Increase number of customers for customers for International Natural Gas International Natural Gas Distribution in Australia. Distribution in Australia. International Natural Gas Distribution added 10,443 new residential connections in 2020. International Natural Gas Distribution added 10,443 new residential connections in 2020. FINANCIAL STRENGTH FINANCIAL STRENGTH Credit rating Credit rating Maintain investment grade credit rating. Maintain investment grade credit rating. Access to capital markets Access to capital markets Access capital at attractive rates. Access capital at attractive rates. OPERATIONAL EXCELLENCE Lost-time incident frequency: employees OPERATIONAL EXCELLENCE Lost-time incident frequency: employees Compare favourably to safety benchmarks. Compare favourably to safety benchmarks. Total recordable incident frequency: employees Total recordable incident frequency: employees Maintained 'A (low)' long-term credit rating with a stable trend with DBRS Limited. Maintained 'A (low)' long-term credit rating with a stable trend with DBRS Limited. Maintained 'A-' long-term issuer credit rating on ATCO and Maintained 'A-' long-term issuer credit rating on ATCO and Canadian Utilities with outlooks revised from stable to negative Canadian Utilities with outlooks revised from stable to negative in the third quarter of 2020 with Standard & Poors. in the third quarter of 2020 with Standard & Poors. In 2020, CU Inc. raised $150 million in 30-year debentures at a rate of 2.609 per cent, the lowest long-term coupon achieved in the company’s history. In 2020, CU Inc. raised $150 million in 30-year debentures at a rate of 2.609 per cent, the lowest long-term coupon achieved in the company’s history. Our lost-time incident frequency compares favourably to benchmarks such as Alberta Occupational Health and Safety, US private industry, and industry best practice rates. Our lost- time incident frequency in 2020 was 0.22/200,000 hours worked. Our lost-time incident frequency compares favourably to benchmarks such as Alberta Occupational Health and Safety, US private industry, and industry best practice rates. Our lost- time incident frequency in 2020 was 0.22/200,000 hours worked. Our total recordable incident frequency in 2020 compares favourably to benchmarks such as US private industry and industry best practice rates. Our total recordable incident frequency in 2020 was 1.58 incidents/200,000 hours worked. Our total recordable incident frequency in 2020 compares favourably to benchmarks such as US private industry and industry best practice rates. Our total recordable incident frequency in 2020 was 1.58 incidents/200,000 hours worked. Customer satisfaction Customer satisfaction Achieve high service for Achieve high service for the customers and the customers and communities we serve. communities we serve. Results from customer Results from customer satisfaction surveys should satisfaction surveys should be consistent with or be consistent with or better than prior years. better than prior years. Within Electricity and Natural Gas Distribution, more than Within Electricity and Natural Gas Distribution, more than 96 per cent of customers agreed that Canadian Utilities 96 per cent of customers agreed that Canadian Utilities provides good service. Within our energy retail operations, provides good service. Within our energy retail operations, 75 per cent of customers who interact with call centres are 75 per cent of customers who interact with call centres are "very satisfied". These results compare favourably to industry "very satisfied". These results compare favourably to industry averages and are consistent with previous years. averages and are consistent with previous years. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 18 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 18 STRATEGIC PRIORITIES Organizational transformation STRATEGIC PRIORITIES Organizational transformation 2020 TARGET Streamline and gain operational efficiencies. 2020 TARGET Streamline and gain operational efficiencies. • Improve processes and increase production automation for ATCO Structures' North American manufacturing facilities. • Improve processes and increase production automation for ATCO Structures' North American manufacturing facilities. • Continue to improve • Continue to improve global manufacturing and global manufacturing and sourcing strategies to sourcing strategies to increase ATCO Structures' increase ATCO Structures' manufacturing manufacturing competitive advantage. competitive advantage. • Continue to optimize enterprise resource planning, workforce and asset management, and computerized maintenance management systems. • Continue to optimize enterprise resource planning, workforce and asset management, and computerized maintenance management systems. COMMUNITY INVOLVEMENT Indigenous relations COMMUNITY INVOLVEMENT Indigenous relations Continue to work together Continue to work together with Indigenous with Indigenous communities to contribute communities to contribute to economic and social to economic and social development in their development in their communities. communities. STRATEGIC PRIORITIES Indigenous relations 2020 TARGET 2020 PERFORMANCE Canadian Utilities was awarded a contract in July 2020 with a Montana First Nation to build a substation to support the Nation’s 5-MW solar facility currently under construction. In addition, they have been awarded a contract with the Nation to provide infrastructure mapping services for their existing natural gas system. ATCO was awarded the 2020 International Edison Award for Alberta PowerLine’s Fort McMurray West 500-kilovolt (kV) Transmission Project which created a new business model that exemplified how the electric power industry and Indigenous Peoples can work together to develop innovative energy infrastructure that benefits both customers and communities. ATCO EPIC (Employees Continue to administer the employee-led campaign to Participating give employees the With the combined efforts of our employees around the world, ATCO pledged more than $2.9 million to support hundreds of community charities through our annual ATCO EPIC campaign, in Communities) opportunity to contribute taking the program’s cumulative fundraising total to nearly to charitable organizations $47 million since its inception in 2006. in the communities in which they work. During the devastating bushfires of Australia, ATCO and its people donated over $1.1 million to help residents and to support the rebuilding of the communities impacted by the fires. ATCO provided 11,700 meals to seniors who were isolated during the pandemic. 2020 PERFORMANCE 2020 PERFORMANCE ATCO Structures completed manufacturing for the LNG Canada ATCO Structures completed manufacturing for the LNG Canada Cedar Valley Lodge project in the second quarter of 2020, Cedar Valley Lodge project in the second quarter of 2020, ahead of schedule and on budget. Improved production ahead of schedule and on budget. Improved production processes and an optimized workforce and asset management processes and an optimized workforce and asset management system in the facility provided the tools necessary for system in the facility provided the tools necessary for successful project execution. The LNG project is the largest successful project execution. The LNG project is the largest workforce camp to be built in ATCO Structures' Canadian workforce camp to be built in ATCO Structures' Canadian history. history. ATCO Structures streamlined its North American manufacturing by closing a facility located in Pocatello, Idaho in the second quarter and relocating materials and equipment to manufacturing facilities in Calgary, Alberta and Diboll, Texas. ATCO Structures streamlined its North American manufacturing by closing a facility located in Pocatello, Idaho in the second quarter and relocating materials and equipment to manufacturing facilities in Calgary, Alberta and Diboll, Texas. ATCO Structures developed and implemented a manufacturing planning, process management, and workforce visualization tool. ATCO Structures developed and implemented a manufacturing planning, process management, and workforce visualization tool. Canadian Utilities continued implementation of a Workforce and Asset Management program for its electricity and natural gas businesses to advance digitalization and data analytics. This technology will help to optimize resources, and digitize information and processes thereby providing a means to track, manage, and dispatch work to field-based employees more efficiently. The natural gas business is expected to complete implementation by 2022, followed by the electricity business in 2023. Canadian Utilities continued implementation of a Workforce and Asset Management program for its electricity and natural gas businesses to advance digitalization and data analytics. This technology will help to optimize resources, and digitize information and processes thereby providing a means to track, manage, and dispatch work to field-based employees more efficiently. The natural gas business is expected to complete implementation by 2022, followed by the electricity business in 2023. ATCO Frontec implemented a computerized maintenance ATCO Frontec implemented a computerized maintenance management platform as part of an internal process management platform as part of an internal process improvement initiative which has enhanced reporting for improvement initiative which has enhanced reporting for management and clients, provided near-real-time analytics and management and clients, provided near-real-time analytics and improved overall decision making. improved overall decision making. More than 5,000 students from 41 communities in Alberta More than 5,000 students from 41 communities in Alberta participated in the Spirit North program. This program is participated in the Spirit North program. This program is designed to help Indigenous youth develop skills that improve designed to help Indigenous youth develop skills that improve their performance in the classroom and deepen their their performance in the classroom and deepen their connection to their communities. connection to their communities. $66,000 was awarded to 49 students across Canada, including the territories, through the ATCO Indigenous Education Awards Program. $66,000 was awarded to 49 students across Canada, including the territories, through the ATCO Indigenous Education Awards Program. A total of 617 employees participated in one of the many Indigenous training courses offered in 2020 through virtual classroom and online training platforms. A total of 617 employees participated in one of the many Indigenous training courses offered in 2020 through virtual classroom and online training platforms. 19 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 19 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 20 STRATEGIC PRIORITIES Indigenous relations STRATEGIC PRIORITIES Indigenous relations 2020 TARGET 2020 TARGET ATCO EPIC (Employees Participating in Communities) ATCO EPIC (Employees Participating in Communities) Continue to administer the Continue to administer the employee-led campaign to employee-led campaign to give employees the give employees the opportunity to contribute opportunity to contribute to charitable organizations to charitable organizations in the communities in in the communities in which they work. which they work. 2020 PERFORMANCE 2020 PERFORMANCE Canadian Utilities was awarded a contract in July 2020 with a Canadian Utilities was awarded a contract in July 2020 with a Montana First Nation to build a substation to support the Montana First Nation to build a substation to support the Nation’s 5-MW solar facility currently under construction. In Nation’s 5-MW solar facility currently under construction. In addition, they have been awarded a contract with the Nation to addition, they have been awarded a contract with the Nation to provide infrastructure mapping services for their existing provide infrastructure mapping services for their existing natural gas system. natural gas system. ATCO was awarded the 2020 International Edison Award for ATCO was awarded the 2020 International Edison Award for Alberta PowerLine’s Fort McMurray West 500-kilovolt (kV) Alberta PowerLine’s Fort McMurray West 500-kilovolt (kV) Transmission Project which created a new business model that Transmission Project which created a new business model that exemplified how the electric power industry and Indigenous exemplified how the electric power industry and Indigenous Peoples can work together to develop innovative energy Peoples can work together to develop innovative energy infrastructure that benefits both customers and communities. infrastructure that benefits both customers and communities. With the combined efforts of our employees around the world, ATCO pledged more than $2.9 million to support hundreds of community charities through our annual ATCO EPIC campaign, taking the program’s cumulative fundraising total to nearly $47 million since its inception in 2006. With the combined efforts of our employees around the world, ATCO pledged more than $2.9 million to support hundreds of community charities through our annual ATCO EPIC campaign, taking the program’s cumulative fundraising total to nearly $47 million since its inception in 2006. During the devastating bushfires of Australia, ATCO and its people donated over $1.1 million to help residents and to support the rebuilding of the communities impacted by the fires. During the devastating bushfires of Australia, ATCO and its people donated over $1.1 million to help residents and to support the rebuilding of the communities impacted by the fires. ATCO provided 11,700 meals to seniors who were isolated during the pandemic. ATCO provided 11,700 meals to seniors who were isolated during the pandemic. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 20 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 20 STRATEGIC PRIORITIES FOR 2021 STRATEGIC PRIORITIES FOR 2021 The following table outlines our strategic priorities for 2021. The following table outlines our strategic priorities for 2021. INNOVATION INNOVATION New and existing New and existing products and products and services services Continue to expand ATCO Structures' permanent modular construction into hotels, schools, hospitals, affordable housing, and senior's living centres. Continue to expand ATCO Structures' permanent modular construction into hotels, schools, hospitals, affordable housing, and senior's living centres. Complete master planning and land use work on the Edmonton "North Yard" redevelopment site in ATCO Land and Development Ltd. Complete master planning and land use work on the Edmonton "North Yard" redevelopment site in ATCO Land and Development Ltd. Continue to build and enhance ASHCOR's business model for the production and marketing of ash within the North American market. Continue to build and enhance ASHCOR's business model for the production and marketing of ash within the North American market. Explore and test new products and methods of energy delivery to meet customers' future needs. Explore and test new products and methods of energy delivery to meet customers' future needs. • • • Continue to support communities and customers through the deployment of cleaner energy solutions. Continue to support communities and customers through the deployment of cleaner energy solutions. • Explore further opportunities to invest in clean fuel initiatives such as hydrogen and renewable natural gas within the Utilities and Energy Infrastructure businesses. Explore further opportunities to invest in clean fuel initiatives such as hydrogen and renewable natural gas within the Utilities and Energy Infrastructure businesses. GROWTH GROWTH Regulated and Regulated and long-term long-term contracted capital contracted capital investment investment Continue to strategically invest in Canadian Utilities' technology and the modernization of both the natural gas and electricity networks to enhance sustainability and flexibility while reducing the long term need for additional utility infrastructure, resulting in lower costs and an improved experience for customers. Continue to strategically invest in Canadian Utilities' technology and the modernization of both the natural gas and electricity networks to enhance sustainability and flexibility while reducing the long term need for additional utility infrastructure, resulting in lower costs and an improved experience for customers. Continue to advance replacement and improvement projects in Canadian Utilities to ensure that the safety and reliability of our gas and electricity systems are properly maintained and managed. Continue to advance replacement and improvement projects in Canadian Utilities to ensure that the safety and reliability of our gas and electricity systems are properly maintained and managed. Global expansion Global expansion Continue expansion into select global markets including North America, Australia and Chile: Continue expansion into select global markets including North America, Australia and Chile: • • • • • • • • Reposition ATCO Structures' rental fleet into growing regions and further expand the space rental business in the US and other select regions. Reposition ATCO Structures' rental fleet into growing regions and further expand the space rental business in the US and other select regions. • Continue to build sustainable growth in permanent modular construction and space rentals at ATCO Structures. Continue to build sustainable growth in permanent modular construction and space rentals at ATCO Structures. • Continue retrofitting idle workforce housing fleet in Canada and the US and capitalize on opportunities as they arise. Invest in Australia's workforce housing fleet. Continue retrofitting idle workforce housing fleet in Canada and the US and capitalize on opportunities as they arise. Invest in Australia's workforce housing fleet. Continue to expand upon ATCO Frontec's North American camp business. Continue to expand upon ATCO Frontec's North American camp business. • • Continue to pursue ATCO Frontec facilities and maintenance contracts with commercial and government clients, including large scale defence contracts. Continue to pursue ATCO Frontec facilities and maintenance contracts with commercial and government clients, including large scale defence contracts. • Seek opportunities with Neltume Ports' available cash in brownfield, greenfield and acquisition opportunities. Seek opportunities with Neltume Ports' available cash in brownfield, greenfield and acquisition opportunities. • Continue to build upon Canadian Utilities' existing renewables generation platform in the Energy Infrastructure business. Continue to build upon Canadian Utilities' existing renewables generation platform in the Energy Infrastructure business. 21 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 21 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS FINANCIAL STRENGTH FINANCIAL STRENGTH Credit rating Credit rating Maintain investment grade credit rating. Maintain investment grade credit rating. Access to capital markets Access to capital markets Access capital at attractive rates. Access capital at attractive rates. OPERATIONAL EXCELLENCE OPERATIONAL EXCELLENCE Lost-time incident Lost-time incident frequency: frequency: employees employees Compare favourably to safety benchmarks. Compare favourably to safety benchmarks. Total recordable incident frequency: employees Total recordable incident frequency: employees Customer satisfaction 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. Achieve high service for the customers and communities we serve. Results from customer satisfaction surveys should be consistent with or better than prior years. Organizational transformation Organizational transformation Streamline and gain operational efficiencies: Streamline and gain operational efficiencies: • • • Continue to develop a strategy for ATCO Structures' manufacturing facilities and Continue to develop a strategy for ATCO Structures' manufacturing facilities and capabilities in Canada and the US, to provide better competitive value for the business. capabilities in Canada and the US, to provide better competitive value for the business. Reduce costs in production and provide scalable capacity and improved performance Reduce costs in production and provide scalable capacity and improved performance while maintaining a low fixed cost structure through peak cycles of activity. while maintaining a low fixed cost structure through peak cycles of activity. • Continue to optimize enterprise resource planning, workforce and asset management, customer information systems and computerized maintenance management systems within Canadian Utilities. Continue to optimize enterprise resource planning, workforce and asset management, customer information systems and computerized maintenance management systems within Canadian Utilities. COMMUNITY INVOLVEMENT Indigenous relations COMMUNITY INVOLVEMENT Indigenous relations Continue to work together with Indigenous communities to contribute to economic and social development in their communities. Continue to work together with Indigenous communities to contribute to economic and social development in their communities. ATCO EPIC (Employees Participating in Communities) ATCO EPIC (Employees Participating in Communities) Continue to administer the employee-led campaign to give employees the opportunity to Continue to administer the employee-led campaign to give employees the opportunity to contribute to charitable organizations in the communities in which they work. contribute to charitable organizations in the communities in which they work. Community investment Community investment Invest in the health and safety of LUMA Energy's people and communities by opening a state-of- the-art electricity and distribution lineworkers college in Puerto Rico. Invest in the health and safety of LUMA Energy's people and communities by opening a state-of- the-art electricity and distribution lineworkers college in Puerto Rico. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 22 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 22 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 2020 Management Proxy Circular, which will be available in April 2021. 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 these 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 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 business unit, 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. 23 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS BUSINESS UNIT PERFORMANCE REVENUES Structures & Logistics revenues of $171 million in the fourth quarter of 2020 were $74 million lower than the same period in 2019 mainly due to the completion of manufacturing work on ATCO Structures' LNG Canada Cedar Valley Lodge project in the second quarter of 2020. Structures & Logistics revenues of $714 million in 2020 were $89 million lower than the same period in 2019 mainly due to the completion of the manufacturing work on ATCO Structures' LNG Canada Cedar Valley Lodge project in the second quarter of 2020, and the completion of ATCO Frontec contracts in late 2019 and early 2020. Lower revenues were partially offset by higher space rental activity in Canada, the US, and Australia. ADJUSTED EARNINGS ($ millions) ATCO Structures ATCO Frontec Total Structures & Logistics Three Months Ended December 31 Year Ended December 31 2020 2019 Change 2020 2019 Change 13 4 17 13 1 14 — 3 3 52 5 57 32 5 37 20 — 20 Structures & Logistics adjusted earnings of $17 million in the fourth quarter of 2020 were $3 million higher compared to the same period in 2019. Higher earnings were mainly due to additional ATCO Frontec client work requests at existing contract sites for COVID-19 proactive and preventative safety measures. Structures & Logistics adjusted earnings of $57 million in the full year of 2020 were $20 million higher than the same period in 2019. Higher earnings were mainly due to higher workforce housing trade sale activity and higher space rental activity in Canada, the US and Australia. Higher earnings were partially offset by lower contributions from ATCO Structures' LNG Canada Cedar Valley Lodge project with the transition from manufacturing to installation work in the second quarter of 2020. 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, 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 adjusted earnings of $13 million in the fourth quarter of 2020 were comparable to the same period in 2019. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 24 ATCO Structures recorded adjusted earnings of $52 million in 2020, $20 million higher than the same period in 2019. Higher earnings were mainly due to higher workforce housing trade sale activity and higher space rental activity in Canada, the US, and Australia. Higher earnings were partially offset by lower contributions from the LNG Canada Cedar Valley Lodge project with the transition from manufacturing to installation work in the second quarter of 2020. The following table compares ATCO Structures' manufacturing hours and rental fleet for the fourth quarter and full year of 2020 and 2019. Three Months Ended December 31 Year Ended December 31 2020 2019 Change 2020 2019 Change North America Manufacturing hours (thousands) 91 252 (64%) 718 988 (27%) Global Space Rentals Number of units (1) Average utilization (%) Average rental rate ($ per month) Global Workforce Housing Number of units (1) Average utilization (%) 18,827 16,353 15% 18,827 16,353 75 617 73 605 2% 2% 73 615 72 568 2,679 2,866 (7%) 2,679 2,866 63 54 9% 52 48 15% 1% 8% (7%) 4% Average rental rate ($ per month) 1,672 1,882 (11%) 1,554 1,872 (17%) (1) Includes the acquisition of the remaining 50 per cent interest in ATCO Structures' joint venture partnership of ATCO Sabinco S.A., completed on December 30, 2020, which resulted in an increase of 1,776 global space rental units and 18 workforce housing units. The decrease in manufacturing hours in the fourth quarter and full year of 2020 was mainly due to the completion of manufacturing on the LNG Canada Cedar Valley Lodge project in the second quarter. ATCO Structures increased its global space rental fleet size by 2,474 units year-over-year. The increase in the number of space rental units was mainly due to the continued strategic expansion of the space rental fleet in targeted geographies including the acquisition of the remaining 50 per cent interest in ATCO Structures' joint venture partnership of ATCO Sabinco S.A., completed on December 30, 2020. In addition, ATCO Structures has experienced an increase in demand for space rentals on construction sites as a result of physical distancing protocols in response to the COVID-19 pandemic. The increase in the average rental rate was mainly due to improved rates in North America and Australia, driven by increased activity in the construction sector and an enhanced product mix. The decrease in the size of the workforce housing fleet and increase in the annual utilization was mainly due to the sale of used and non-utilized fleet assets in the US and Australia. The increase in the utilization rate was also due to workforce housing fleet on rent for the Trans Mountain Expansion project in BC. The decrease in the average rental rate in 2020 was mainly due to the demobilization of a large workforce housing rental project in Chico, California in the first quarter of 2020. ATCO STRUCTURES RECENT DEVELOPMENTS Canada Cedar Valley Lodge - LNG Canada ATCO Structures, through its joint venture with Bird Construction and the Haisla Nation, continued work on the LNG Canada Cedar Valley Lodge project in 2020. 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 and is one of the largest accommodation facilities ever built in Canada. Manufacturing of the modules for the accommodation facility was completed in the second quarter of 2020 and installation activity will continue into 2021. 25 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Trans Mountain Expansion Project ATCO Structures commenced manufacturing and construction in the second quarter of 2020 on the first of two workforce housing camp rental contracts awarded in 2020. The camps will accommodate approximately 1,150 persons in total to support the construction of the Trans Mountain Expansion project. In the third quarter, ATCO Structures completed and handed over the first camp and repurposed existing fleet to supply the second camp, which was completed and handed over to the client in the fourth quarter of 2020. Rental contracts for both camps will continue through 2023. Trans Mountain Expansion Project Camp, Valemount, British Columbia BC Hydro Site C Two Rivers Lodge – Phase 2 Expansion In 2016, ATCO Structures commenced a supply and installation contract at the BC Hydro Site C Two Rivers Lodge for up to 1,750 workers. In the second quarter of 2020, ATCO Structures achieved substantial completion and project handover of the phase 2 expansion and increased the total lodge capacity to 2,194 workers. BC Housing - Government of British Columbia During 2019 and 2020, ATCO Structures secured several projects with the Government of British Columbia’s supportive housing program. The housing projects provide affordable housing to low income individuals and families across the province. In the first quarter of 2020, ATCO Structures completed a $9 million, 44-unit apartment complex in Powell River, BC. In the third quarter of 2020, ATCO Structures completed a $9 million, 44-unit apartment complex in New Westminster, BC. Site work and manufacturing commenced on an additional 61-unit apartment complex in Surrey, BC in the third quarter of 2020. The $14 million contract is expected to be handed over to BC Housing in the second quarter of 2021. Canada Emergency Wage Subsidy (CEWS) The Government of Canada introduced the Canada Emergency Wage Subsidy (CEWS) program in April 2020 to provide financial support to businesses that experienced revenue loss in 2020 attributed to the COVID-19 pandemic. ATCO Structures & Logistics qualified for this program and recognized $5 million in adjusted earnings in the fourth quarter related to costs incurred in 2020. These funds were used to retain contract employees for a longer duration due to project delays resulting from the evolving pandemic, to offset additional costs incurred to implement appropriate safety protocols, and to continue to compensate employees that could not report to work due to COVID-19 or government mandated quarantine restrictions. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 26 United States China Lake Military Rebuild - Environmental Chemical Corporation In the fourth quarter of 2020, ATCO Structures was awarded a $12 million contract for phase I of the China Lake Military Rebuild project. The project will support the rebuild and expansion of the China Lake Military Base in southern California. The military base was damaged by two major earthquakes in July 2019. The 450-person camp for phase I will remain on rent for 31 months and is expected to commence in the first quarter of 2021. Disaster and Emergency Response In 2020, ATCO Structures responded to inquiries from customers who were looking for potential solutions to the COVID-19 pandemic to assist in the prevention of the spread of the virus. In March and April 2020, ATCO Structures signed three short-term rental contracts to supply 630 beds in Nevada, Louisiana and Texas to support the fight against COVID-19. In the third quarter of 2020, ATCO Structures deployed and mobilized modular housing units with a total of 2,000 beds across Louisiana and Alabama within six days of Hurricanes Laura and Sally. In response to Hurricane Laura, ATCO Structures mobilized a 1,200-person rental camp and completed the sale of a 300-person camp. Additionally, in September, two 250-person rental camps were deployed in response to Hurricane Sally. Pocatello Idaho Manufacturing Facility In the second quarter of 2020, ATCO Structures closed its manufacturing facility located in Pocatello, Idaho, relocated materials and equipment to its manufacturing facilities in Calgary, Alberta, and Diboll, Texas, and recorded $3 million in one-time closure costs. Australia Permanent Classrooms - Victoria Department of Education In the first half of 2020, ATCO Structures was awarded multiple contracts with the Victoria Department of Education to design, manufacture and install 50 permanent modular classrooms in Melbourne, Australia. Installation work for 30 classrooms was completed in 2020 and the remaining classrooms are expected to be complete in early 2021. Permanent Classrooms - Islamic College of Melbourne During the fourth quarter of 2020, installation activity commenced for an eight-year contract with the Islamic College of Melbourne. Manufacturing at ATCO Structures' Brisbane facility in Queensland commenced in the third quarter of 2020 and installation is expected to be complete in the first quarter of 2021. Islamic College of Melbourne, Melbourne, Victoria, Australia 27 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Bay Village - Multiplex In the third quarter of 2020, ATCO Structures completed construction on the 604-person accommodation "Bay Village" for Multiplex in Karratha, Western Australia. Mexico & Central America Health Care Complexes - United Nations Office for Project Services (UNOPS) In the fourth quarter of 2020, ATCO Structures commenced work on the previously awarded $12 million contract with the United Nations Office for Project Services (UNOPS) to supply two healthcare complexes in Guatemala with 7,400 m2 of clinic space for the treatment of patients with COVID-19. The facility will be complete in 2021. Peñasquito Mine Camp - Newmont Corporation In the fourth quarter of 2020, ATCO Structures was awarded a $13 million contract with Newmont Corporation to supply a 600-person camp to house workers at the Peñasquito Mine in the state of Zacatecas, Mexico. The camp is expected to be complete in the fourth quarter of 2021. Instituto Mexicano del Seguro Social (IMSS) - Grupo Modelo In the second quarter of 2020, ATCO Structures was awarded a design, supply and installation contract for two modular hospital facilities in Mexico City and Tijuana to support the fight against COVID-19. These two facilities were installed in the third quarter of 2020. Chile ATCO Sabinco S.A. Acquisition In the fourth quarter of 2020, ATCO Structures acquired the remaining 50 per cent interest in its ATCO Sabinco S.A. joint venture partnership. With this strategic investment, ATCO Structures gained full ownership and control of its Chilean business. This acquisition included a large-scale modular manufacturing facility in Santiago, Chile, 1,776 additional space rental units at 81 per cent utilization, and capabilities to deliver workforce housing projects throughout South America. The transaction closed on December 30, 2020. ATCO FRONTEC ATCO Frontec provides facility operations and maintenance services, workforce lodging and support services, defense operations services, and disaster and emergency management services. ATCO Frontec adjusted earnings of $4 million in the fourth quarter of 2020 were $3 million higher than the same period in 2019 mainly due to additional client work requests at existing contract sites for COVID-19 proactive and preventative safety measures. ATCO Frontec adjusted earnings of $5 million in the full year of 2020 were comparable to the same period in 2019. ATCO FRONTEC RECENT DEVELOPMENTS Canada Trans Mountain Expansion Project In the second and third quarters of 2020, ATCO Frontec was awarded two workforce lodging services contracts for approximately 1,150 persons in total to support the construction of the Trans Mountain Expansion project. Work commenced for both contracts in the third and fourth quarters of 2020 and will continue through 2023. United States China Lake Military Rebuild In the fourth quarter of 2020, ATCO Frontec was awarded a 31-month workforce lodging services contract for approximately 450 persons to support the phase I rebuild of the China Lake Military Base. The contract is expected to commence in the first quarter of 2021. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 28 Neltume Ports is a port operator and developer with a diversified portfolio of 16 multi-purpose, bulk cargo and container port facilities and three port operation services. The business is located primarily in Chile with additional operations in Uruguay, Argentina, and Brazil. ADJUSTED EARNINGS ($ millions) Neltume Ports Three Months Ended December 31 Year Ended December 31 2020 2019 Change 2020 2019 Change 7 4 3 15 15 — Neltume Ports adjusted earnings of $7 million in the fourth quarter were $3 million higher than the same period in 2019. Higher earnings were mainly due to the timing of certain revenues and expenses, and higher cargo volumes and margins at select ports. Neltume Ports adjusted earnings of $15 million in the full year of 2020 were comparable to the same period in 2019. While all of Neltume Ports' terminals remained operational in 2020, Neltume experienced lower volume throughput at some terminals due to the effects of the COVID‑19 pandemic on global trade activity. These impacts were largely offset by stronger operational performance at unaffected terminals elsewhere in the portfolio. Recent Developments In January 2020, Neltume Ports entered into a 50/50 joint venture 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 construction costs. Neltume Ports' portion of the investment will be approximately US $9 million and will be funded with existing cash reserves. The Alabama State Port Authority will provide the remaining capital funding. The JV will operate the terminal beginning in 2021 under a 10-year concession agreement with two consecutive 10-year extensions at the JV's election for a total of up to 30 years. The port will primarily support the import and export needs of the growing local automotive sector in the region. Construction of this terminal is expected to be substantially complete by the end of the first quarter and in service in the second quarter of 2021. Construction Site of RoRo terminal, Mobile, Alabama 29 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO Corporate & Other contains ATCO Land and Development Ltd. which is a commercial real estate business that holds investments for sale, lease or development, as well as ASHCOR, an Alberta-based company engaged in the processing and marketing of ash, a waste byproduct of electricity generation. ATCO Corporate & Other also includes the global corporate head office in Calgary, Canada, ATCO licensing fees received, and financing expenses associated with the Neltume Ports investment. ADJUSTED EARNINGS ($ millions) 2020 2019 Change 2020 2019 Change ATCO Corporate & Other — (9) 9 — (6) 6 Three Months Ended December 31 Year Ended December 31 ATCO Corporate & Other adjusted earnings in the fourth quarter and full year of 2020 were $9 million and $6 million higher compared to the same periods in 2019. Higher earnings were mainly due to the timing of certain expenses, lower share-based compensation expenses, and earnings contributions from ASHCOR. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 30 Canadian Utilities is a diversified global energy infrastructure corporation delivering service excellence and innovative business solutions in Utilities (Electricity and Natural Gas Transmission and Distribution, and International Electricity Operations); Energy Infrastructure (Electricity Generation, Energy Storage, and Industrial Water Solutions); and Retail Energy (Electricity and Natural Gas Retail Sales). UTILITIES REVENUES Utilities revenues of $784 million and $2,932 million in the fourth quarter and full year of 2020 were $33 million and $24 million lower than the same periods in 2019. Lower revenues were mainly due to the timing of settlements related to regulatory decisions, and the transition to APL operating activities by Electricity Transmission with the completion of project management construction activities in 2019, partially offset by increased revenue from Canadian Utilities' 50 per cent joint venture ownership in LUMA Energy and growth in the regulated rate base. ADJUSTED EARNINGS ($ millions) Electricity Electricity Distribution Electricity Transmission International Electricity Operations Total Electricity Natural Gas Natural Gas Distribution Natural Gas Transmission International Natural Gas Distribution Total Natural Gas Total Utilities Adjusted Earnings Three Months Ended December 31 Year Ended December 31 2020 2019 Change 2020 2019 Change 20 22 3 45 41 12 4 57 102 16 27 — 43 32 9 8 49 92 4 (5) 3 2 9 3 (4) 8 10 69 91 6 66 106 — 166 172 76 47 16 139 305 62 39 28 129 301 3 (15) 6 (6) 14 8 (12) 10 4 Utilities adjusted earnings of $102 million and $305 million in the fourth quarter and full year of 2020 were $10 million and $4 million higher than the same periods in 2019. Higher earnings were mainly due to cost efficiencies, rate base growth, and contributions in International Electricity Operations from Canadian Utilities' 50 per cent joint venture ownership in LUMA Energy. Higher earnings were partially offset by the adverse earnings impact of the five-year Access Arrangement and adjustment for the impact of forecasted inflation rates in International Natural Gas Distribution, and Electricity Transmission's transition to APL operating activities in 2019. Detailed information about the activities and financial results of the Utilities business segments is provided in the following sections. 31 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Electricity Distribution Electricity Distribution provides regulated electricity distribution and distributed generation mainly in northern and central east Alberta, the Yukon, the Northwest Territories and in the Lloydminster area of Saskatchewan. Electricity Distribution adjusted earnings of $20 million and $69 million in the fourth quarter and full year of 2020 were $4 million and $3 million higher compared to the same periods in 2019. Higher earnings were mainly due to cost efficiencies and continued growth in rate base. Higher earnings were partially offset by the completion of the Efficiency Carry-over Mechanism (ECM) funding in 2019. Electricity Transmission Electricity Transmission provides regulated electricity transmission mainly in northern and central east Alberta, and in the Lloydminster area of Saskatchewan. Electricity Transmission was the construction project manager for APL and is the operator under a 35-year contract. Electricity Transmission adjusted earnings of $22 million in the fourth quarter of 2020 were $5 million lower than the same period in 2019. Lower earnings were mainly due to the transition to APL operating activities by Electricity Transmission with the completion of project management construction activities in 2019, and the timing of certain costs. Electricity Transmission adjusted earnings of $91 million in the full year of 2020 were $15 million lower than the same period in 2019. Lower earnings were mainly due to the transition to APL operating activities by Electricity Transmission with the completion of project management construction activities in 2019, and the positive earnings impact of the Electricity Transmission 2018-2019 General Tariff Application (GTA) decision received in 2019. International Electricity Operations International Electricity Operations includes Canadian Utilities' 50 per cent ownership in LUMA Energy, a company formed to transform, modernize and operate Puerto Rico's 30,000-km electricity transmission and distribution system under an Operations and Maintenance Agreement with the Puerto Rico Public-Private Partnerships Authority for a 15-year term after a one-year transition period which commenced on June 22, 2020. International Electricity Operations adjusted earnings in the fourth quarter and full year of 2020 were $3 million and $6 million due to operations and maintenance transition work. Natural Gas Distribution Natural Gas Distribution serves municipal, residential, commercial and industrial customers throughout Alberta and in the Lloydminster area of Saskatchewan. Natural Gas Distribution adjusted earnings of $41 million and $76 million in the fourth quarter and full year of 2020 were $9 million and $14 million higher than the same periods in 2019. Higher earnings were mainly due to ongoing cost efficiencies, the timing of certain operating costs, and growth in the regulated rate base. Higher earnings were partially offset by the completion of ECM funding in 2019. 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. Natural Gas Transmission adjusted earnings of $12 million and $47 million in the fourth quarter and full year of 2020 were $3 million and $8 million higher than the same periods in 2019. Higher adjusted earnings were mainly due to growth in the regulated rate base, and ongoing cost efficiencies. 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. International Natural Gas Distribution adjusted earnings of $4 million and $16 million in the fourth quarter and full year of 2020 were $4 million and $12 million lower compared to the same periods in 2019. Lower earnings were mainly due to the five-year Access Arrangement which resulted in new rates commencing on January 1, 2020, with a ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 32 lower rate of return and rebasing of the demand forecast, financing, and operating allowances. Lower earnings were also due to an adjustment for the impact of forecasted inflation rates, partially offset by higher earnings from cost efficiencies and interest savings which became effective in January 2020. UTILITIES RECENT DEVELOPMENTS International Electricity Operations LUMA Energy On June 22, 2020, LUMA Energy, a newly-formed company owned 50 per cent by Canadian Utilities and 50 per cent by Quanta Services, Inc., was selected by the P3A to transform, modernize and operate Puerto Rico’s 30,000-km electricity transmission and distribution system over a term of 15 years after a one-year transition period. The transition period commenced in the second quarter of 2020. This innovative arrangement allows the Puerto Rico Electric Power Authority to retain ownership of all utility assets while benefiting from the expertise of a qualified operator. LUMA Energy combines Canadian Utilities' world-class utility operations and customer service expertise with Quanta’s superior utility services and project execution capabilities. LUMA Energy, Canóvanas, Puerto Rico Key financial terms associated with the LUMA Energy contract are highlighted in the table below. USD (millions) Transition Period Contract Year 1 Contract Year 2 Contract Year 3 Contract Year 4+ Front-End Service Fee (1) Fixed Fee (1) (2) (paid monthly) Potential Incentive Fee (1) (2) 60 70 90 100 105 13 17 19 20 (1) All compensation figures above are at the LUMA Energy level. Canadian Utilities Limited holds a 50 per cent interest in LUMA Energy. (2) Fixed Fee and Incentive Fee are escalated annually at US CPI. 33 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Natural Gas Transmission Pembina Keephills In the second quarter of 2020, Natural Gas Transmission completed and placed in-service the $230 million 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. Pioneer Pipeline Acquisition In the third quarter of 2020, Natural Gas Transmission entered into an agreement to acquire the Pioneer Pipeline from Tidewater Midstream & Infrastructure Ltd. (Tidewater) and its partner TransAlta Corporation (TransAlta) for a purchase price of $255 million. The 131-km natural gas pipeline runs from the Drayton Valley area to the Wabamun area west of Edmonton, Alberta. This agreement replaces the previously announced Tidewater and TransAlta purchase and sale agreement to sell the Pioneer Pipeline to NOVA Gas Transmission Ltd. (NGTL) and is under substantially similar terms. NGTL and Natural Gas Transmission agreed that, consistent with the geographic areas defined in their Integration Agreement, Natural Gas Transmission would transfer to NGTL the 30-km segment of the Pioneer Pipeline located in the NGTL footprint for approximately $63 million. Natural Gas Transmission will retain ownership and continue to operate the portion of the Pioneer Pipeline located in the Natural Gas Transmission footprint. Upon completion of this transfer, and some additional investment to connect the pipeline to the existing system, the Pioneer Pipeline acquisition will add a net $200 million to the Natural Gas Transmission asset base. The transactions are subject to customary conditions including regulatory approvals by the AUC and the Alberta Energy Regulator, which are expected in the second quarter of 2021. Following the close of the transaction, the Pioneer Pipeline will be integrated into NGTL's and ATCO's Alberta integrated regulated natural gas transmission systems to provide reliable natural gas supply to TransAlta's power generating units at Sundance and Keephills, facilitating the conversion of these coal plants to cleaner-burning natural gas. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 34 UTILITIES 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 approved equity component 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 uses 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 approved going-in rates and 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. Generic Cost of Capital Proceeding (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. In December 2019, the AUC initiated the 2021 GCOC proceeding. The main focus of the proceeding was to determine the rate of return for the years 2021 and 2022, and provide consideration for returning to a formula-based approach. Initial evidence was filed in January 2020 focusing on comparability to other investments, capital attraction and financial integrity. On October 13, 2020, the AUC issued a decision approving the extension of the current ROE of 8.5 per cent and capital structure of 37 per cent equity on a final basis for 2021. The AUC commenced a new GCOC process in December 2020 to address ROE and equity thickness for 2022 and beyond. Performance Based Regulation Under the 2018 to 2022 second generation PBR framework, electricity and natural gas distribution utility rates are adjusted by a formula that estimates annual inflation 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. While subsequent proceedings have occurred to review the setting of going-in rates, none of these proceedings have resulted in any changes for our Electricity Distribution and Natural Gas Distribution rates. 35 ATCO LTD. 2020 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: 8.5% • 2022: 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. On November 15, 2019 the ERA published its final rate of return guidelines which outlined the parameters for the weighted average cost of capital (WACC) applicable to AA5. 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, the approved capital expenditure program, and the forecast of demand and throughput. The common equity ratio for AA5 is 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 COMMON MATTERS 2021 Interim Rate Relief Request In December 2020, the AUC approved the Electricity Distribution and Natural Gas Distribution requests to defer the compulsory distribution rate increases which would normally come into effect on January 1, 2021 for both businesses. The rate relief was requested to defer significant distribution rate increases which would be passed onto end use customers due to the formulaic approach of rate calculations under the AUC PBR mechanism. Electricity Distribution and Natural Gas Distribution cited the current economic situation in Alberta, including the hardships faced by some end use customers due to the COVID-19 pandemic, as rationale to proceed with these interim rates. Electricity Distribution and Natural Gas Distribution are to file an application by March 1, 2021, outlining the duration of the rate freeze and collection timelines, expected deferral values including carrying costs and anticipated impacts to customers. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 36 ELECTRICITY TRANSMISSION 2020-2022 GENERAL TARIFF APPLICATION (GTA) In October 2019, Electricity Transmission filed a GTA for the period 2020-2022. The application also requests the ability to advance an application to establish 2023 and 2024 revenue requirements by escalating the 2022 approved revenue requirement. This proceeding has concluded, and a decision is expected in the first quarter of 2021. 2015-2017 Direct Assigned Projects Deferral Application In November 2020, Electricity Transmission received a decision regarding its 2019 application for the disposal of its 2015-2017 transmission deferral accounts and annual filing adjustment balances. Electricity Transmission's application included capital additions for 27 projects, most notably the Eastern Alberta Transmission Line (EATL), which represented $1.8 billion of the $2.2 billion of capital additions in this proceeding. The AUC approved the $2.2 billion in capital additions to be added to rate base with minimal disallowance. NATURAL GAS TRANSMISSION Natural Gas Transmission 2021-2023 General Rate Application (GRA) In June 2020, Natural Gas Transmission filed a GRA for the period 2021-2023. The application requests, among other things, additional revenues due to rate base growth driven by capital expenditures, such as the Pembina-Keephills Pipeline project and operations and maintenance costs. A decision from the AUC is expected in the first quarter of 2021. 37 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS ENERGY INFRASTRUCTURE REVENUES Energy Infrastructure revenues of $59 million in the fourth quarter were $34 million lower than the same period in 2019 mainly due to the sale of Alberta PowerLine in the fourth quarter of 2019. Energy Infrastructure revenues of $195 million in the full year of 2020 were $661 million lower than the same period in 2019 mainly due to the sale of the Canadian fossil fuel-based electricity generation business and Alberta PowerLine in 2019. ADJUSTED EARNINGS Three Months Ended December 31 Year Ended December 31 ($ millions) 2020 2019 Change 2020 2019 Change Electricity Generation Storage & Industrial Water Adjusted Earnings from Businesses Sold in 2019 Canadian Fossil Fuel-Based Electricity Generation Alberta PowerLine (APL) Total Energy Infrastructure Adjusted Earnings 2 5 7 — — — 7 2 5 7 — 1 1 8 — — — — (1) (1) (1) 7 8 15 — — — 15 4 8 12 32 13 45 57 3 — 3 (32) (13) (45) (42) Energy Infrastructure adjusted earnings of $7 million and $15 million in the fourth quarter and full year of 2020 were $1 million and $42 million lower than the same periods in 2019 mainly due to the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and sale of APL in the fourth quarter of 2019. Excluding the earnings impact for the sale of these businesses in 2019, adjusted earnings in the fourth quarter were comparable to the same period in 2019. Excluding the earnings impact from the sale of these businesses in 2019, adjusted earnings for the full year of 2020 were $3 million higher than the same period in 2019 mainly due to cost efficiencies and recovered business development costs. Detailed information about the activities and financial results of Energy Infrastructure's businesses is provided in the following sections. Electricity Generation Non-regulated electricity activities supply electricity from hydroelectric, solar and natural gas generating plants in western Canada, Australia, Mexico and Chile and non-regulated electricity transmission in Alberta. Electricity Generation adjusted earnings of $2 million in the fourth quarter of 2020 were comparable to the same period in 2019. Electricity Generation adjusted earnings of $7 million in the full year of 2020 were $3 million higher than the same period in 2019. Higher earnings were mainly due to cost efficiencies and recovered business development costs. Storage & Industrial Water Storage & Industrial Water provides non-regulated natural gas storage and transmission activities, NGL storage, and industrial water services in Alberta and the North West Territories. Storage & Industrial Water adjusted earnings of $5 million and $8 million in the fourth quarter and full year of 2020 were comparable to the same periods in 2019. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 38 ENERGY INFRASTRUCTURE RECENT DEVELOPMENTS Chile 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 El Resplandor solar project. This project, located in Cabrero, Chile, will provide solar energy to the Chilean electricity grid. Construction on the first 3-MW of solar generation capacity was completed at the end of the second quarter of 2020 with the next 6-MW expected to be complete in 2021. The total investment for the 9-MW project is approximately $13 million. El Resplandor Solar Project, Cabrero, Chile La Laguna Cogeneration Facility In March 2018, Canadian Utilities entered into a commercial agreement with Chemours to build a 26-MW cogeneration facility, known as La Laguna Cogeneration, on the site of the Chemours Company Mexicana S. de R.L. de C.V.'s chemical facility near Gómez Palacio, Mexico. Developed in partnership with RANMAN Energy, the La Laguna Cogeneration facility was expected to provide low-carbon and cost-effective heat and electricity under a long-term agreement. The total investment associated with the project was expected to be $70 million. In February 2021, due to ongoing construction permitting delays, Canadian Utilities and Chemours mutually agreed to terminate the La Laguna Cogeneration facility contract. The contract provides for the recovery of Canadian Utilities' incurred costs on the project. 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 known as the Heartland Petrochemical Complex. Construction activities commenced in 2019 and construction of the pipeline is now complete. The pipeline is expected to be in service by the second quarter of 2021 in coordination with Inter Pipeline’s facility needs. Natural Gas Liquids Storage In the fourth quarter of 2019, Canadian Utilities secured a long-term contract for the construction and operation of a fifth storage cavern at the ATCO Heartland Energy Centre, near Fort Saskatchewan, Alberta. This cavern will store hydrocarbon products for customers in the Alberta Industrial Heartland. Canadian Utilities also secured a long-term transportation contract for the construction and operation of a regional pipeline to connect the new cavern to existing facilities in the area, further strengthening the ATCO Heartland Energy Centre as a key storage hub in the largest hydrocarbon processing region in Canada. Construction began in the fourth quarter of 2019, with construction on track to be completed by the end of 2021. 39 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS CANADIAN UTILITIES CORPORATE & OTHER Canadian Utilities' Corporate & Other segment includes Retail Energy through ATCOenergy which provides 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) 2020 2019 Change 2020 2019 Change Canadian Utilities Corporate & Other (11) (8) (3) (40) (39) (1) Three Months Ended December 31 Year Ended December 31 Including intersegment eliminations, Canadian Utilities' Corporate & Other adjusted earnings in the fourth quarter of 2020 were $3 million lower than the same period in 2019 mainly due to the timing of certain expenses, partially offset by improved earnings from ATCOenergy. Including intersegment eliminations, Canadian Utilities' Corporate & Other adjusted earnings in the full year of 2020 were $1 million lower than the same period in 2019 mainly due to interest expenses that are no longer recoverable as a result of Canadian Utilities' sale of the Canadian fossil fuel-based electricity generation business in 2019. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 40 SUSTAINABILITY, CLIMATE CHANGE AND ENERGY TRANSITION Within our group of companies, we balance the short and long-term economic, environmental and social considerations of our businesses while creating value for our customers, employees, share owners, and Indigenous and community partners. As a provider of essential services in diverse communities around the world, we operate in an inclusive manner to meet the needs of society today and for generations to come. SUSTAINABILITY REPORTING In 2020, we completed a refresh of the material topics for our Sustainability Report, incorporating feedback from internal and external groups. Our 2020 Sustainability Report, which will be published in May 2021, focuses on the material topics listed below: • • • • • Energy Transition - energy transition and innovation, and energy access and affordability; Climate Change and Environmental Stewardship - climate change and GHG emissions, and environmental stewardship; Operational Reliability and Resilience - system reliability and availability, and emergency preparedness and response; People - occupational health and safety, public safety, and diversity, inclusion and equity; and Community and Indigenous Relations - Indigenous engagement, economic opportunity and reconciliation, and community engagement and investment. 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 2019 Sustainability Report, Sustainability Framework Reference Document, more details of our materiality assessment and other disclosures are available on our website, at www.atco.com. CLIMATE CHANGE AND ENERGY TRANSITION To contribute to a low carbon future, we continue to pursue initiatives looking at integrating cleaner fuels and renewable energy. We look to expand our ownership and development of clean energy solutions, as well as enable our customers to transition to lower emitting sources of energy. 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 In Alberta, the Technology Innovation and Emissions Reduction (TIER) regulations came into effect on January 1, 2020. These regulations meet the Government of Canada’s stringency requirements for carbon emitting pricing systems for Large Industrial Emitters. In April 2020, the carbon price in Canada increased from $20 to $30 per tonne, and by 2022 it is expected to reach $50 per tonne. In December 2020, the Government of Canada announced their plan on climate change, proposing to increase the carbon price by $15 per tonne each year starting in 2023, rising to $170 per tonne by 2030. The Company's exposure is mitigated for the Alberta Utilities as carbon charges are generally recovered in rates. 41 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS In Australia, under the National Greenhouse and Energy Reporting scheme, a 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. Canadian Utilities applied for an adjusted baseline which was approved in December 2020 by the Clean Energy Regulator. Methane Reductions In December 2020, Alberta reached equivalency with federal methane regulations to reduce methane emissions by 40 to 45 per cent from 2012 levels by 2025. The methane regulations affect a portion of Canadian Utilities' fugitive and venting emissions from the Canadian natural gas pipeline-related operations. Canadian Utilities continues to implement programs to reduce or eliminate fugitive and venting emissions in our Natural Gas Distribution and Transmission businesses. Canadian Utilities' exposure is mitigated because requirements to upgrade equipment to further reduce methane emissions are expected to be included in rate base on a go-forward basis. In January 2020, a new estimation method to report Unaccounted for Gas (UAFG) emissions resulting from natural gas distribution activities was introduced in Australia. This approach enables site/network specific UAFG values to be used, allowing Canadian Utilities to translate network maintenance and replacement activities into reportable reductions in UAFG emissions. Clean Fuel Standards In December 2020, the Government of Canada announced that the scope of the Clean Fuel Standards (CFS) had been narrowed to cover only liquid fossil fuels and will no longer include gaseous and solid fuels. The regulations for the liquid class include gasoline, diesel, and oil, which are mainly used in the transportation sector, and will come into effect in 2022. CLEANER FUELS AND RENEWABLE ENERGY INITIATIVES We continue to explore and implement opportunities for fuel switching to lower-emitting options for both ourselves and our customers. Solar Electricity Generation In the fourth quarter of 2020, Canadian Utilities completed Canada’s largest off-grid solar and storage installation in the remote northern Alberta community of Fort Chipewyan. In partnership with Three Nations Energy (3NE), which is jointly owned by the Athabasca Chipewyan First Nation, Mikisew Cree First Nation and Fort Chipewyan Métis Association, Canadian Utilities designed and built the two-phased project that includes a 600-kW solar farm owned and operated by Canadian Utilities, and a 2,200-kW solar farm owned by 3NE and operated by Canadian Utilities. The project will provide about 25 per cent of Fort Chipewyan's electricity needs, reducing local diesel use by approximately 800,000 litres annually – equivalent to a decrease in greenhouse gas emissions of 2,145 tons annually. Fort Chipewyan Solar Project, Fort Chipewyan, Alberta ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 42 In the fourth quarter of 2019, Canadian Utilities entered into a partnership with Impulso Capital, a Chilean developer, to build and operate the El Resplandor solar project. This project, located in Cabrero, Chile, will provide solar energy to the Chilean electricity grid. Construction on the first 3-MW of solar generation capacity was completed at the end of the second quarter of 2020 with the next 6-MW expected to be complete in 2021. Electric Vehicle Fast Charging Stations In 2020, Canadian Utilities continued to expand its number of EV fast charging stations providing end-users an opportunity to replace liquid fuel with a low-carbon emitting energy. To date, Canadian Utilities has installed a total of 25 public EV fast charging stations in Alberta. Hydrogen In July 2020, Canadian Utilities was awarded funding from Emission Reduction Alberta’s Natural Gas Challenge to advance a first-of-its-kind hydrogen blending project in Fort Saskatchewan, Alberta. Once complete, the project will be Canada’s largest hydrogen blending project, injecting an initial five per cent hydrogen by volume into a section of Fort Saskatchewan’s residential natural gas distribution network. In Australia, Canadian Utilities continues to build on its work at the Clean Energy Innovation Hub, a test bed for hybrid energy solutions integrating natural gas, solar photovoltaic, battery storage, and hydrogen production. In 2020, Canadian Utilities was able to successfully test a 10 per cent hydrogen blend injected into the natural gas supply at its major depot at Jandakot in Perth, Western Australia. In August 2020, Canadian Utilities and Fortescue Metals Group Ltd. (FMG) were awarded $1 million in funding from the Government of Western Australia's Renewable Hydrogen Fund to initiate an H2 Refueller project. This project will provide Canadian Utilities with an opportunity to refuel vehicles capable of utilizing hydrogen as a primary fuel source. Our Performance As our portfolio of assets evolves, so too does our environmental footprint. Our direct greenhouse gas (GHG) emissions are estimated to have been reduced by almost 90 per cent from 2019 to 2020, primarily as a result of Canadian Utilities' sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019, eliminating coal-fired generation from the portfolio. Since 2008, we have also reduced direct GHG emissions through the implementation of fuel-switching and other efficiency programs. Direct GHG Emissions (million tonnes CO2e) 20 15 10 5 0 2008 ..... 2015 2016 2017 2018 2019 2020E GHG Emissions GHG Emissions Related to Assets Divested in Q3-2019 Our 2020 estimated direct GHG emissions are 0.87 million tonnes CO2e. Final 2020 direct GHG emissions data will be available in our Sustainability Report, which will be released in May 2021. 43 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 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 Canadian Utilities' 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 transmission 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 Canadian Utilities' Natural Gas Transmission and Distribution businesses, the majority of the 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. 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 44 CLIMATE CHANGE CHALLENGES AND OPPORTUNITIES While climate-related challenges and opportunities are integrated throughout our strategy and risk management processes, we understand that specifically disclosing climate-related information aligned with the TCFD recommendations is also 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. Category/Driver Challenges Opportunities Policy/Regulatory Operations in several jurisdictions subject to emissions limiting regulations Aggressive shifts in policy which do not allow for transition in an effective, affordable manner Continued fuel switching to lower-emitting options Coal-to-gas electricity generation conversions by other companies present opportunities for increased demand for natural gas transmission infrastructure investment in the near to medium term Electricity grid modernization Hydrogen economy development Mitigation Options/ Measures Active participation in policy development, industry groups, and regulatory discussions Business diversification Removal of coal-fired electricity generation from our portfolio in 2019 Hydrogen research projects Market Changes in carbon policy, costs of operations, and commodity prices Changing customer behaviour Increasing demand for lower- emitting technologies Participation in carbon markets Hydrogen market development Business diversification Technology Replacement of current products/services with lower- emitting options Prosumer movement may affect energy load profiles in the future Removal of coal-fired electricity generation from our portfolio in 2019 Internal innovation teams to evaluate new technologies Distributed energy solutions A transition to lower-emitting energy systems provides opportunities 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 Reputational Public perception of carbon risk Physical Extreme weather events Long-term changes in temperature and weather patterns Increase in demand for trusted long-term partners to deliver lower-emitting solutions Transparent reporting Authentic engagement and collaboration Climate change mitigation and adaptation Climate change resiliency efforts Rapidly deployable structures and logistics services Emergency Responses & Preparedness plans and training 45 ATCO LTD. 2020 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 2020 and 2019 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, amortization and impairment Gain on sale of operations Earnings from investment in associate company Earnings from investment in joint ventures Net finance costs Income tax expense OPERATING COSTS Three Months Ended December 31 Year Ended December 31 2020 2019 Change 2020 2019 Change 631 — 174 — 7 13 104 38 663 (32) 2,254 2,598 9 172 21 4 7 115 90 (9) 2 (21) 3 6 (11) (52) — 669 — 15 34 407 166 127 637 174 15 24 484 66 (344) (127) 32 (174) — 10 (77) 100 Operating costs, which are total costs and expenses less service concession arrangement costs and depreciation, amortization and impairment, were $32 million lower in the fourth quarter of 2020 compared to the same period in 2019. Lower operating costs were mainly due to lower material costs in ATCO Structures resulting from the completion of manufacturing activities for ATCO Structures' LNG Canada Cedar Valley Lodge project in the second quarter and lower plant and equipment maintenance and contractor services expenses in the Alberta Utilities. These lower operating costs were partially offset by higher costs in 2020 due to the early termination of the Master Services Agreement with Wipro for managed IT services. Operating costs of $2,254 million for the full year of 2020 were $344 million lower than the same period in 2019 mainly due to the sale of the Canadian fossil-fuel based electricity generation business in the third quarter of 2019, and the completion of manufacturing activities for ATCO Structures' LNG Canada Cedar Valley Lodge project. SERVICE CONCESSION ARRANGEMENT COSTS Service concession arrangement costs were recorded for third party construction and operation activities for Canadian Utilities' Alberta PowerLine Fort McMurray West-500-kV project. Service concession arrangement costs in the fourth quarter and full year of 2020 were $9 million and $127 million lower compared to the same periods in 2019 due to the transition to APL operating activities by Electricity Transmission with the completion of project management construction activities at the end of the first quarter of 2019, and subsequent sale in the fourth quarter of 2019. DEPRECIATION, AMORTIZATION AND IMPAIRMENT Depreciation, amortization and impairment increased by $2 million in the fourth quarter of 2020 compared to the same period in 2019 mainly due to an impairment of assets that no longer represent strategic value to the Company, and continued capital investment in the Regulated Utilities. Depreciation, amortization and impairment increased by $32 million in the full year of 2020 compared to the same period in 2019 mainly due to an impairment of assets that no longer represent strategic value to the Company, a rate change regulatory decision received in the third quarter of 2019 in Electricity Distribution which resulted in a one-time depreciation adjustment, continued capital investment in the Regulated Utilities, and higher depreciation at ATCO Structures due to the expansion of the global space rentals fleet. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 46 GAIN ON SALE OF OPERATIONS In the second, third and fourth quarters of 2019, the Company closed a series of transitions related to the sale of its Canadian fossil fuel-based electricity generation business and Alberta PowerLine. These sales resulted in an aggregate gain of $174 million in 2019. EARNINGS FROM INVESTMENT IN ASSOCIATE COMPANY Earnings from investment in associate company relate to 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 in the fourth quarter of 2020 were $3 million higher than the same period in 2019 mainly due to the timing of certain revenue and expenses, and higher cargo volumes and margins at select ports. Earnings from investment in associate company in the full year of 2020 were comparable to the same period in 2019. EARNINGS FROM INVESTMENT IN JOINT VENTURES Earnings from investment in joint ventures is mainly comprised of Canadian Utilities' ownership positions in electricity generation plants, LUMA Energy electricity operations and maintenance in Puerto Rico, and the Strathcona Storage Limited Partnership which operates hydrocarbon storage facilities at the ATCO Heartland Energy Centre near Fort Saskatchewan, Alberta. It also includes ATCO Sabinco S.A. which operates an ATCO Structures business in Chile and certain ATCO Frontec facility operations and maintenance contracts. Earnings from investment in joint ventures increased by $6 million in the fourth quarter of 2020 compared to the same period in 2019 mainly due to earnings at LUMA Energy with the commencement of transition work under the Operations and Maintenance Agreement. Earnings from investment in joint ventures increased by $10 million in the full year of 2020 compared to the same period in 2019 mainly due to earnings at LUMA Energy with the commencement of transition work under the Operations and Maintenance Agreement. Higher earnings were partially offset by the 2019 sale of joint venture ownership positions included within the sale of the Canadian fossil fuel-based electricity generation business. NET FINANCE COSTS Net finance costs decreased by $11 million in the fourth quarter of 2020 when compared to the same period in 2019 mainly due to lower interest expense under service concession arrangement accounting for APL. Net finance costs decreased by $77 million in the full year of 2020 when compared to the same period in 2019 mainly due to lower interest expense under service concession arrangement accounting for APL and lower interest expense on non-recourse long-term debt related to Canadian Utilities' 2019 sale of its the Canadian fossil fuel-based electricity generation business. Decreased net finance costs were also due to the positive impact of interest savings in Canadian Utilities' International Natural Gas Distribution business, which became effective in January, 2020. INCOME TAX Income taxes were lower by $52 million in the fourth quarter of 2020 compared to the same period in 2019 mainly due to lower earnings before taxes in the fourth quarter of 2020 as a result of the 2019 sale of APL. Income taxes were higher by $100 million in the full year of 2020 compared to the same period in 2019 mainly due to the realization of the deferred tax benefit from the Alberta tax rate reduction in 2019, partially offset by lower earnings before taxes resulting from the sale of the Canadian fossil fuel-based electricity generation business and Alberta PowerLine in 2019. In June 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 1 of each of the next three years. On October 20, 2020, the Government of Alberta accelerated the date of the decrease in the provincial corporate income tax rate to 8 per cent effective July 1, 2020. 47 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Our financial position is supported by Regulated Utilities 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 capital markets. Under normal market conditions, 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 S&P A (low) A A R-1 (low) PFD-2 (high) A (high) R-1 (low) A- A- BBB+ A-1 (low) P-2 A- A-1 (low) PFD-2 (high) 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 20, 2020, Dominion Bond Rating Service affirmed its 'A (high)' long-term corporate credit rating and stable trend on ATCO subsidiary CU Inc. On August 10, 2020, Dominion Bond Rating Service affirmed its 'A' long-term corporate credit rating and stable trend on ATCO subsidiary Canadian Utilities. On August 28, 2020, Dominion Bond Rating Service affirmed its 'A (low)' long-term corporate credit rating and stable trend on ATCO Ltd. On September 17, 2020, S&P Global Ratings affirmed its 'A-' long-term issuer credit ratings on ATCO Ltd. and Canadian Utilities with the outlooks revised from stable to negative. On September 17, 2020, S&P Global Ratings affirmed ATCO subsidiary CU Inc.'s 'A-' long-term issuer credit rating and maintained a stable outlook, reflecting S&P's decision to insulate CU Inc.'s rating from ATCO's issuer credit rating. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 48 LINES OF CREDIT At December 31, 2020, ATCO and its subsidiaries had the following lines of credit. ($ millions) Long-term committed Short-term committed Uncommitted Total Of the $3,635 million in total lines of credit, $571 million was in the form of uncommitted credit facilities with no set maturity date. The other $3,064 million in credit lines was committed, with maturities between 2021 and 2023, and may be extended at the option of the lenders. Of the $1,106 million in lines of credit used, $661 million was related to ATCO Gas Australia Pty Ltd. Long-term committed credit lines are used to satisfy all of ATCO Gas Australia Pty Ltd.'s term debt financing needs. The majority of the remaining usage is for the issuance of Canadian Utilities' letters of credit and ATCO Structures & Logistics' funding to expand its global rental fleet and working capital needs on workforce housing projects. Total 2,914 150 571 3,635 Used 814 138 154 1,106 Available 2,100 12 417 2,529 Lines of Credit ($ millions) $3,635 $2,529 $(1,106) Total Used Available 49 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS CONSOLIDATED CASH FLOW At December 31, 2020, the Company's cash position was $1,100 million, a decrease of $40 million compared to December 31, 2019. Major movements are outlined in the following table: ($ 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 repayment 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 (Decrease) increase in cash position Year Ended December 31 2020 2019 Change 1,804 1,927 (123) — — 329 (329) 903 (903) 129 78 — (175) (1,069) (1,324) (200) (186) (301) (294) (413) (498) 51 175 255 (14) (7) 85 10 (40) (311) 449 321 (489) (1) Additional information regarding this measure is provided in the Non-GAAP and Additional GAAP Measures section of this MD&A. Changes in Consolidated Cash Balances in 2020 ($ Millions) $1,804 $129 $(1,069) $1,140 $(501) $10 $1,100 $(413) Cash Dec 31, 2019 Funds generated by operations Net Issue of long-term debt Cash used for capital investment Dividends paid Interest paid Other Cash Dec 31, 2020 Funds Generated by Operations Funds generated by operations were $516 million in the fourth quarter of 2020, $47 million higher compared to the same period in 2019. The increase was mainly due to higher funds generated in the Regulated Utilities as a result of the timing of certain revenues and expenses from regulatory decisions in Canadian Utilities, and in ATCO Structures due to higher workforce housing trade sale activity and higher space rental activity in Canada, US and Australia. Funds generated by operations were $1,804 million in the full year of 2020, $123 million lower compared to the same period in 2019. The decrease was mainly due to lower funds generated in Canadian Utilities' Energy Infrastructure business as a result of the sale of APL and the Canadian fossil fuel-based electricity generation ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 50 business in 2019, and in the Alberta Utilities as a result of the timing of certain revenues and expenses from regulatory decisions. These amounts were partially offset by higher funds generated in ATCO Structures due to higher workforce housing trade sale activity and higher space rental activity in Canada, the US, and Australia. Cash Used for Capital Investment Cash used for capital investment was $298 million in the fourth quarter of 2020, $84 million lower compared to the same period in 2019 mainly due to higher capital investment in 2019 on the Pembina-Keephills transmission pipeline in Natural Gas Transmission. Lower spending was partially offset by ATCO Structures' additional 50 per cent acquisition of the ATCO Sabinco S.A. joint venture in December of 2020. Cash used for capital investment was $1,069 million in the full year of 2020, $255 million lower than the same period in 2019 mainly due to lower overall capital investment in the Regulated Utilities in 2020, the completion of construction on APL in 2019, and lower capital investment in Electricity Generation due to the sale of the Canadian fossil fuel-based electricity generation business and APL in 2019. Lower spending was partially offset by ATCO Structures' additional 50 per cent acquisition of its ATCO Sabinco S.A. joint venture in December 2020 and expansion of its global rental fleet. Capital investment for the fourth quarter and full year of 2020 and 2019 is shown in the table below. ($ millions) Structures & Logistics Neltume Ports ATCO Corporate & Other Intersegment Eliminations Canadian Utilities Utilities Electricity Distribution Electricity Transmission Natural Gas Distribution Natural Gas Transmission International Natural Gas Distribution Energy Infrastructure Electricity Generation Storage & Industrial Water Capital Investment from Businesses Sold in 2019 (1) Canadian Fossil Fuel-Based Electricity Generation Alberta PowerLine CU Corporate & Other 2020 43 — 2 — 45 56 39 71 49 28 243 3 4 7 — — — 3 Three Months Ended December 31 Change 2019 Year Ended December 31 2020 2019 Change 25 — 3 (20) 8 73 26 92 130 19 340 2 19 21 10 — 10 3 18 — (1) 20 37 (17) 13 (21) (81) 9 (97) 1 (15) (14) (10) — (10) — 144 — 13 — 157 0.00000 105 9 4 (20) 98 221 145 237 203 70 224 165 284 293 69 876 1,035 7 21 28 — — — 8 6 31 37 53 95 148 6 39 (9) 9 20 59 (3) (20) (47) (90) 1 (159) 1 (10) (9) (53) (95) (148) 2 Canadian Utilities Total Capital Investment ATCO Total Capital Investment (2) (3) 253 374 (121) 912 1,226 (314) 298 382 (84) 1,069 1,324 (255) (1) Capital investment specific to the Canadian fossil fuel-based electricity generation business sold in September 2019 and Alberta PowerLine sold in December 2019. (2) (3) Includes capital expenditures in joint ventures of $2 million and $9 million (2019 - nil and $2 million) for the fourth quarter and full year of 2020. Includes additions to property, plant and equipment, intangibles of $3 million and $13 million (2019 - $2 million and $16 million) of interest capitalized during construction for the fourth quarter and full year of 2020. 51 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Debt Issuances and Repayments On September 28, 2020, CU Inc. issued $150 million of 2.609 per cent 30-year debentures. Proceeds from this issuance were used to fund capital investments, to repay existing indebtedness, and for other general corporate purposes of the Alberta Utilities. Base Shelf Prospectus - CU Inc. Debentures On September 16, 2020, CU Inc. filed a base shelf prospectus that permits it to issue up to an aggregate of $1.2 billion of debentures over the 25-month life of the prospectus. As of February 24, 2021, aggregate issuances of debentures were $150 million. Dividends and Common Shares We have increased our common share dividend each year since 1993, a 28-year track record. Dividends paid to Class I and Class II Share owners totaled $50 million in the fourth quarter and $200 million in the full year of 2020. On January 14, 2021, the Board of Directors declared a first quarter dividend of 44.83 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. 28 year track record of increasing common share dividends Normal Course Issuer Bid 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 Class I Shares represents a 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 9, 2020, we commenced a normal course issuer bid to purchase up to 1,014,684 outstanding Class I Shares. This bid will expire on March 8, 2021. From March 9, 2020 to February 24, 2021, 150,000 shares were purchased for $6 million. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 52 SHARE CAPITAL ATCO's equity securities consist of Class I Shares and Class II Shares. At February 23, 2021, we had outstanding 101,347,899 Class I Shares, 13,196,129 Class II Shares, and options to purchase 1,115,200 Class I Shares. CLASS I NON-VOTING SHARES AND CLASS II VOTING SHARES Each Class II Share may be converted into one Class I Share at any time at the share owner’s option. If an offer to purchase all Class II Shares is made, and such offer is accepted and taken up by the owners of a majority of the Class II Shares, and, if at the same time, an offer is not made to the Class I Share owners on the same terms and conditions, then the Class I Shares will be entitled to the same voting rights as the Class II Shares. The two share classes rank equally in all other respects, except for voting rights. Of the 10,200,000 Class I Shares authorized for grant of options under our stock option plan, 1,994,950 Class I Shares were available for issuance at December 31, 2020. Options may be granted to our officers and key employees at an exercise price equal to the weighted average of the trading price of the shares on the Toronto Stock Exchange for the five trading days immediately preceding the grant date. The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of grant. 53 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS QUARTERLY INFORMATION The following table shows financial information for the eight quarters ended March 31, 2019 through December 31, 2020. ($ millions, except for per share data) Q1 2020 Q2 2020 Q3 2020 Q4 2020 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 ($) Adjusted earnings (loss) Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Utilities Energy Infrastructure Canadian Utilities Corporate & Other Total adjusted earnings ($ millions, except for per share data) 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 (loss) Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Utilities Energy Infrastructure Canadian Utilities Corporate & Other Total adjusted earnings ADJUSTED EARNINGS 1,056 87 0.76 0.76 0.93 7 3 1 99 3 (7) 106 938 45 0.39 0.39 0.61 21 2 (1) 57 2 (11) 70 897 54 0.48 0.47 0.47 12 3 — 47 3 (11) 54 1,053 66 0.58 0.58 1.07 17 7 — 102 7 (11) 122 Q1 2019 Q2 2019 Q3 2019 Q4 2019 1,324 112 0.98 0.98 0.98 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 3 4 — 93 19 (7) 112 7 4 — 68 10 (11) 78 13 3 3 48 20 (13) 74 14 4 (9) 92 8 (8) 101 Our financial results for the previous eight quarters reflect the cyclical demand for workforce housing and space rental products and services in ATCO Structures and ATCO Frontec, cargo volume and margins at Neltume Ports, and in Canadian Utilities, the timing of utility regulatory decisions, and the seasonal nature of demand for natural gas and electricity. $112M $101M $106M $78M $74M $122M $70M $54M Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 54 STRUCTURES & LOGISTICS In the first quarter of 2019, earnings were adversely impacted by low demand globally for workforce housing camps in the natural resource sector, partially offset by asset expansions in Mexico and Chile, improving space rentals activity, higher trade sale activity particularly in permanent modular construction in Canada and Australia, and commencement of work on the LNG Canada Cedar Valley Lodge project. In the second quarter of 2019, earnings were positively impacted by the continued progress of ATCO Structures' LNG Canada Cedar Valley Lodge project and higher space rental activity. In the third and fourth quarters of 2019, earnings were positively impacted by continued progress on ATCO Structures' LNG Canada Cedar Valley Lodge project and incremental ATCO Frontec earnings from North American camp services and maintenance contracts. In the first quarter of 2020, earnings increased compared to the same period in 2019, mainly due to incremental earnings from ATCO Structures' LNG Canada Cedar Valley Lodge project, higher space rental activity in Canada, and higher workforce housing trade sale and rental activity in Australia. Higher earnings were partially offset by higher operating and administrative costs. In the second quarter of 2020, earnings increased compared to the same period in 2019, mainly due to higher workforce housing trade sale activity in Canada, the US and Australia, continued progress with the LNG Canada Cedar Valley Lodge project and higher space rental activity in Canada, the US and Australia. In the third quarter of 2020, earnings decreased compared to the same period in 2019, mainly due to the scheduled completion of ATCO Frontec North American contracts in late 2019 and early 2020, partially offset by additional client work requests at existing contract sites for COVID-19 proactive and preventative safety measures. In the fourth quarter of 2020, earnings increased compared to the same period in 2019, mainly due to additional ATCO Frontec client work requests at existing contract sites for COVID-19 proactive and preventative safety measures. $13M $14M $7M $7M $3M $21M $17M $12M Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 NELTUME PORTS In the third quarter of 2018, ATCO invested in a 40 per cent interest in Neltume Ports. In 2019, Neltume Ports recorded consistent quarterly earnings of $4 million, $4 million, $3 million and $4 million, respectively. In the first quarter of 2020, Neltume Ports recorded adjusted earnings that were $1 million lower than the same period in 2019. Lower earnings were mainly due to lower cargo volumes and margins in the first quarter of 2020. In the second quarter of 2020, Neltume Ports recorded adjusted earnings that were $2 million lower than the same period in 2019. Lower earnings were mainly due to unplanned equipment maintenance activity at Puerto Mejillones in northern Chile and overall lower cargo volumes related to the COVID-19 pandemic. In the third quarter of 2020, Neltume Ports recorded adjusted earnings that were comparable to the same period in 2019. 55 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS In the fourth quarter of 2020, Neltume ports recorded adjusted earnings that were $3 million higher than the same period in 2019. Higher earnings were mainly due to the timing of certain revenues and expenses, and higher cargo volumes and margins at select ports. $4M $4M $4M $3M $3M $3M $2M $7M Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 CANADIAN UTILITIES Utilities Utilities adjusted earnings are impacted by the timing of certain major regulatory decisions and seasonality. In the first quarter of 2019, earnings were positively impacted mainly by growth in the regulated rate base and cost efficiencies in Natural Gas and Electricity Distribution, partially offset by inflation adjustments applied to the rate of return calculations in International Natural Gas Distribution. In the second quarter of 2019, earnings were positively impacted mainly by the Electricity Transmission 2018-2019 GTA decision, the Natural Gas Transmission 2019-2020 GRA decision, continued growth in the regulated rate base, cost efficiencies, and lower income taxes. In the third and fourth quarters of 2019, Utilities earnings were positively impacted by the Electricity Transmission 2018-2019 GTA decision received in the second quarter of 2019, overall cost efficiencies and lower income taxes. In the first quarter of 2020, Utilities adjusted earnings increased compared to the same period in 2019 mainly due to cost efficiencies, rate base growth, and lower income taxes. Higher earnings were partially offset by the completion of ECM funding in 2019 for Electricity Distribution and Natural Gas Distribution. In the second quarter of 2020, adjusted earnings in the Utilities were lower compared to the same period in 2019 mainly due to the prior period impact of the Electricity Transmission 2018-2019 GTA decision received in the second quarter of 2019, the adverse earnings impact of the new five-year Access Arrangement regulatory decision in International Natural Gas Distribution, the transition to APL operating activities by Electricity Transmission with completion of project management construction activities at the end of the first quarter of 2019, and the completion of the incremental ECM funding in 2019 for Electricity Distribution and Natural Gas Distribution. In the third quarter of 2020, adjusted earnings in the Utilities were lower than the same period in 2019 mainly due to the adverse earnings impact of the five-year Access Arrangement regulatory decision, an adjustment for the impact of forecasted inflation rates in International Natural Gas Distribution and the transition to APL operating activities by Electricity Transmission. Lower earnings were partially offset by ongoing cost efficiencies and rate base growth across the Utilities, and contributions in International Electricity Operations from Canadian Utilities' 50 per cent joint venture ownership in LUMA Energy which commenced work in Puerto Rico at the end of the second quarter of 2020. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 56 In the fourth quarter of 2020, adjusted earnings in the Utilities were higher than the same period in 2019. Higher earnings were mainly due to cost efficiencies, rate base growth, and contributions in International Electricity Operations from Canadian Utilities' 50 per cent joint venture ownership in LUMA Energy. $93M $92M $99M $102M $68M $48M $57M $47M Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 Energy Infrastructure Up until the third quarter of 2019 when the Canadian fossil fuel-based electricity generation business was sold, Energy Infrastructure's adjusted earnings could be materially impacted by Alberta Power Pool pricing and spark spreads. Demand for hydrocarbon and natural gas storage and water services continues to have a potential impact on Energy Infrastructure adjusted earnings. In the first quarter of 2019, earnings were positively impacted by increased Alberta power market prices. In the second quarter of 2019, the adverse earnings impact of planned outages in Electricity Generation was offset by incremental earnings from two additional hydrocarbon storage caverns. In the third quarter of 2019, Energy Infrastructure earnings were positively impacted by cost efficiencies and realized forward sales in Electricity Generation. In the fourth quarter of 2019, Energy Infrastructure earnings were adversely impacted by forgone earnings from the sale of the Canadian fossil fuel-based electricity generation business. In all quarters of 2020, Energy Infrastructure earnings were lower compared to the same periods in 2019 mainly due to the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019 and the sale of APL in the fourth quarter of 2019. $19M $20M $10M $8M $3M $2M $3M $7M Q1 2019 Q2 2019 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020 Q4 2020 EARNINGS ATTRIBUTABLE TO CLASS I AND CLASS II SHARES Earnings attributable to Class I and Class II Shares include timing adjustments related to rate-regulated activities and unrealized gains or losses on mark-to-market forward and swap 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: 57 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS • • • 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 business and Alberta PowerLine resulting in a gain on sale of operations of $65 million (after-tax and non-controlling interests). As these transactions are one-time in nature, they are excluded from adjusted earnings. In 2020, impairment and other costs not in the normal course of business of $20 million (after-tax and non-controlling interests) were recorded. These costs mainly relate to certain assets that no longer represent strategic value for the Company. As these costs are one-time in nature, they are excluded from adjusted earnings. In the fourth quarter of 2020, Canadian Utilities signed a Master Services Agreement with IBM to provide managed information technology services. These services are currently provided by Wipro under a ten-year MSA maturing in December 2024. ATCO has recognized costs of $32 million (after-tax and non- controlling interests) which represents management’s best estimate of the costs to exit the Wipro MSA. As these costs are one-time in nature, they are excluded from adjusted earnings. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 58 BUSINESS RISKS AND RISK MANAGEMENT The Board of Directors 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 & Context Associated Strategies: • Growth • Financial Strength The Company is subject to the normal risks associated with major capital projects, including cancellations, delays and cost increases. Risk Management Approach The Company attempts to reduce the risks of project delays and cost increases by careful planning, diligent procurement practices and entering into fixed price contracts when possible. 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. Business Risk: Climate Change Businesses Impacted: • All businesses Description & Context - Policy Risks Associated Strategies: • Operational Excellence • Innovation ATCO has operations in several jurisdictions subject to emission regulations, including carbon pricing, output-based performance standards, and other emission management policies. For example, in Alberta the output-based 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 industries 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. 59 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Risk Management Approach - Policy Risks The Company's exposure is mitigated 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 in the natural gas utilities, 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. Description & Context - 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 exposed to extreme weather events. Risk Management Approach - 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. 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. Business Risk: Credit Risk Businesses Impacted: • All businesses Description & Context Associated Strategies: • Financial Strength For cash and cash equivalents and accounts receivable and contract assets, credit risk represents the carrying amount on the consolidated balance sheet. Derivative and finance lease receivable 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. Risk Management Approach Cash and cash equivalents credit risk is reduced by investing in instruments issued by credit-worthy financial institutions and in federal government issued short-term 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 60 Business Risk: Cybersecurity Businesses Impacted: • All businesses Description & Context Associated Strategies: • Operational Excellence • Innovation The Company’s reliance on technology, which supports its information and industrial control systems, is subject to potential cyber-attacks including unauthorized access of confidential information and outage of critical infrastructure. Risk Management Approach The Company has an enterprise wide cybersecurity program covering all technology assets. The cybersecurity program includes employee awareness, layered access controls, continuous monitoring, network threat detection, and coordinated incident response through a centralized Security Operations Centre. The Company’s cybersecurity management is consolidated under a common, centralized organization structure to increase effectiveness and compliance across the entire enterprise. Business Risk: Energy Commodity Price Businesses Impacted: Associated Strategies: • Retail Energy • Energy • Financial Strength Infrastructure Description & Context Retail Energy's earnings are affected by short-term price volatility. Storage & Industrial Water's natural gas storage facility in Carbon, Alberta, is also exposed to storage price differentials. Risk Management Approach In conducting its business, the Company may use various instruments, including forward physical contracts, financial swaps, and storage service contracts to manage the risks arising from fluctuations in commodity prices. The Company enters into natural gas physical contracts and forward power swap 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. Business Risk: Financing Businesses Impacted: • All businesses Description & Context Associated Strategies: • Financial Strength The Company’s financing risk relates to the price volatility and availability of external financing to fund the capital expenditure program and refinance existing debt maturities. Financing risk is directly influenced by market factors. As financial market conditions change, these risk factors can affect the availability of capital and also the relevant financing costs. 61 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Risk Management Approach To address this risk, the Company manages its capital structure to maintain strong credit ratings which allow continued ease of access to the capital markets. The Company also considers it prudent to maintain sufficient liquidity to fund approximately one full year of cash requirements to preserve strong financial flexibility. This liquidity is generated by cash flows from operations and supported by appropriate levels of cash and available committed credit facilities. Business Risk: Foreign Currency Exchange Rate Risk Businesses Impacted: • All businesses Description & Context Associated Strategies: • Financial Strength The Company’s earnings from, and carrying values of, its foreign operations are exposed to fluctuations in exchange rates. The Company is also exposed to transactional foreign exchange risk through transactions denominated in a foreign currency. Risk Management Approach In conducting its business, the Company may use forward contracts to manage the risks arising from fluctuations in exchange rates. Such instruments are used only to manage risk and not for trading purposes. This foreign exchange impact is partially offset by foreign denominated financing and by hedging 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 & Context Associated Strategies: • Financial Strength The interest rate risk faced by the Company is largely a result of its long-term debt at variable rates as well as cash and cash equivalents. The Company also has exposure to interest rate movements that occur beyond the term of maturity of the fixed-rate investments. Risk Management Approach In conducting its business, the Company may use swap agreements to manage the risks arising from fluctuations in interest rates. All such instruments are used only to manage risk and not for trading purposes. The Company has converted certain variable rate long-term debt to fixed rate debt through interest rate swap agreements. At December 31, 2020, the Company had fixed interest rates, either directly or through interest rate swap agreements, on 98 per cent (2019 - 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. Business Risk: Natural Gas Supply Businesses Impacted: • Energy Infrastructure Description & Context Associated Strategies: • Financial Strength All commercial natural gas storage in Alberta is subject to interruptible transport constraints. An Alberta natural gas transportation provider's curtailment protocol in 2017 related to maintenance and expansion work on their system contributed to ongoing low natural gas prices in Alberta and volatility in the market. Further natural gas ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 62 transportation maintenance is scheduled for the summer of 2021, which may result in transportation constraints. There are on going discussions at the Canadian Energy Regulator (CER) on the appropriate solution to enhance access to natural gas storage in Alberta during the summer of 2021. Risk Management Approach To reduce the impact to natural gas storage operations, Canadian Utilities structures its natural gas storage portfolio around the natural gas transportation provider’s planned maintenance schedules to minimize the impact of natural gas supply curtailments. Further, Energy Infrastructure is an intervenor in the CER process providing input to help CER make the appropriate decisions. The Energy Infrastructure business is also an active participant in consultations with natural gas transportation and other natural gas service providers to further enhance access to storage. Business Risk: Natural Resource Sector Business Cycles Businesses Impacted: • Structures & Logistics • Neltume Ports Description & Context Associated Strategies: • Growth • Operational Excellence • Financial Strength Demand for Structures & Logistics’ workforce housing products and services, and the services provided by Neltume Ports are directly related to capital spending cycles and levels of development activity in various industries, primarily in the natural resources sector. Several key external factors influence customers’ decision-making on whether or not to purchase products and services offered by the Company and/or to utilize the services provided by Neltume Ports. These factors include expected commodity prices, global economic and political conditions, and access to debt financing and equity capital. Any adverse impact on these influential key decision factors for a prolonged period could affect demand for the Company’s products and services. Risk Management Approach ATCO Structures' cost structure has a high variable cost component which provides flexibility in the Company's ability to reduce costs when the resource sector experiences a decline. In recent years, ATCO Structures has managed fluctuations in the natural resource sector through its diversification into permanent modular construction and facility operations and maintenance services, while expanding its global space rentals business. These businesses provide stable earnings and cash flows and greater geographic diversity thereby reducing ATCO Structures' risk exposure to any one particular industry sector or geography. Neltume Ports has a diversified operational portfolio linked to a mix of economic activity in Chile, Uruguay, Argentina, and Brazil. Business Risk: Pandemic Risk Businesses Impacted: • All businesses Description & Context Associated Strategies: • Growth • Operational Excellence • Financial Strength • Community Involvement An outbreak of infectious disease, a pandemic or a similar public health threat, such as the COVID-19 pandemic, or a fear of any of the foregoing, could adversely impact the Company by causing operating, supply chain and project development delays and disruptions, labour shortages and shutdowns as a result of government regulation and prevention measures, increased strain on employees and compromised levels of customer service, any of which could have a negative impact on the Company’s operations. Any deterioration in general economic and market conditions resulting from a public health threat could negatively affect demand for electricity and natural gas, revenue, operating costs, timing and extent of capital expenditures, results of financing efforts, or credit risk and counterparty risk; any of which could have a negative impact on the Company’s business. 63 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Risk Management Approach While ATCO's investments in essential services are largely focused on regulated utilities and long-term contracted businesses with strong counterparties, creating a resilient investment portfolio, the extent of the COVID-19 pandemic and its future impact on the Company remains uncertain. In response to the evolving situation, ATCO's Pandemic Plan was activated in February 2020. The plan included travel restrictions, limited access to facilities, a direction to work from home whenever possible, physical distancing measures and other protocols (including the use of personal protective equipment while at a work premise). Since then, the Company has been following recommendations by local and national public health authorities across the globe to adjust operational requirements as needed to ensure a coordinated approach across ATCO. As a result of these efforts and the Company’s experience in crisis response, ATCO has been able to minimize the impact of the current COVID-19 pandemic on the Company’s businesses and the essential services it provides to customers. Business Risk: Pipeline Integrity Businesses Impacted: • Utilities Description & Context Associated Strategies: • Operational Excellence • Community Involvement Natural Gas Transmission, Natural Gas Distribution and International Gas Distribution have significant pipeline infrastructure. Although the probability of a pipeline rupture is very low, the consequences of a failure can be severe. Risk Management Approach Programs are in place to monitor the integrity of the pipeline infrastructure and replace pipelines or pipeline infrastructure as required to address safety, reliability, and future growth. These programs include Natural Gas 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. The Company actively engages in damage prevention initiatives including proactive direct engagement with the building and excavation communities. The Company also promotes ground disturbance and excavation safety to homeowners and the excavation community. Business Risk: Political Businesses Impacted: • All businesses Description & Context Associated Strategies: • Growth • Financial Strength • Operational Excellence Operations are exposed to a risk of change in the business environment due to political change. Legislative or policy changes may impact the financial performance of operations. This could negatively impact earnings, return on equity and assets, and credit metrics. Risk Management Approach Participation in policy consultations with governments and engagement of stakeholder groups ensure ongoing communication and that the impacts and costs of proposed policy changes are identified and understood. Where appropriate, the Company works with its peers and industry associations to develop common positions and strategies. Geographic diversification of assets by region and by country reduces the impact of political and legislative changes. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 64 Business Risk: Regulated Operations Businesses Impacted: • Utilities Description & Context Associated Strategies: • Growth • Operational Excellence • Financial Strength The Regulated Utilities are subject to the normal risks faced by regulated companies. These risks include the regulator's approval of customer rates that permit a reasonable opportunity to recover service costs on a timely basis, including a fair return on rate base. These risks also include the regulator's potential disallowance of costs incurred. Electricity Distribution and Natural Gas Distribution operate under performance 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 expenditures and expected throughput on the network through an Access Arrangement proceeding. Risk Management Approach The Regulated Utilities file forecasts in the rate-setting process to recover the costs of providing services and earn a fair rate of return. The determination of a fair rate of return on the common equity component of rate base is determined in a generic cost of capital proceeding in Alberta and an Access Arrangement proceeding in Australia. The Regulated Utilities continuously monitor various regulatory decisions and cases to assess how they might impact the Company's regulatory applications for the recovery of costs. The Regulated Utilities are proactive in demonstrating prudence and continuously look for ways to lower operating costs while maintaining service levels. Business Risk: Technological Transformation and Disruption Businesses Impacted: • All businesses Description & Context Associated Strategies: • Growth • Operational Excellence • Financial Strength • Innovation The introduction and rapid, widespread adoption of transformative technology could lead to disruption of the Company's existing business models and introduce new competitive market dynamics. Failure to effectively identify and manage disruptive technology and / or changing consumer attitudes and preferences may result in disruptions to the business and an inability to achieve strategic and financial objectives. Risk Management Approach The strategic plans of each business unit incorporate transformative technology into the evolution of their business and ensures that the best available technology is deployed to support current state operational efficiency and reliability. The business seeks opportunities to minimize costs by monitoring trends occurring in other jurisdictions that may be ahead of the technological curve. 65 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Liquidity Businesses Impacted: • All businesses Description & Context Associated Strategies: • Financial Strength Liquidity risk is the risk that the Company will not be able to meet its financial obligations. Risk Management Approach 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 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, 2020, the Company’s cash position was approximately $1 billion and there were available committed and uncommitted lines of credit of approximately 2.5 billion which can be utilized for general corporate purposes. Liquidity risk includes contractual financial obligations which the Company will meet with cash flow from operations, existing cash balances and external financing, if necessary. These contractual financial obligations for the next five years and thereafter are shown below. ($ millions) 2021 2022 2023 2024 2025 2026 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 695 — — — — — 329 398 13 1,435 407 231 14 652 2,087 379 384 5 768 817 364 2 1,183 319 — — 319 1,087 329 — — 329 1,512 129 343 — 472 299 — — 299 771 35 342 — 377 7,979 6,986 — 14,965 47 — — 47 424 151 — — 151 15,116 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2020. 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, 2020. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 66 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 US 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 3 of the 2020 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. 67 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 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) 2020 2019 Revenues Adjusted earnings (loss) Loss on sale of operations Unrealized (losses) gains on mark-to- market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Early termination of the master service agreement for managed IT services 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 Utilities Energy Infrastructure CUL Corporate & Other Consolidated 171 245 17 14 — — — — 7 4 — — 1 8 — (9) — — 784 817 102 92 — — — — — — — — — — — (3) — — — 14 14 — — — — — — — — — 7 4 — — 2 — — — — (1) 1 (1) (6) — (16) (5) (5) (3) (26) — — — 55 84 59 93 7 8 — (7) — 3 — — — — (1) — 1 (6) 7 (2) 38 19 (11) (8) — — (4) (1) 1 (1) — — (2) — — (1) (16) (11) 881 929 98 92 — (7) (4) 2 1,053 1,182 122 101 — (7) (4) 2 (15) (15) (6) (5) (3) (4) (5) (3) (29) (32) — 1 (7) 46 71 — — (6) 66 83 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 68 ($ millions) 2020 2019 Revenues Adjusted earnings (loss) Gain on sale of operations Impairment and other costs Unrealized (losses) gains on mark-to- market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Early termination of the master service agreement for managed IT services Other E Earnings (loss) attributable to Class I and Class II Shares Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Utilities Energy Infrastructure CUL Corporate & Other Consolidated Year Ended December 31 ATCO Consolidated 106 3,233 714 803 57 37 — — (5) — — — 15 15 — — — — — — — — — — — (3) — — — 49 37 — — — — — — — — — 15 15 (3) (2) — (6) — — — — — — — 2 — — — — (1) 1 (1) (3) 2,932 2,956 305 301 — — (4) — — — (34) 97 (10) (12) (26) — — — 231 386 195 856 15 57 — 65 (2) — (2) (4) — — — — (1) — (1) (6) 9 112 3,905 280 319 — 65 (15) — (4) 3 (32) 96 (10) (12) 3,944 4,706 352 365 — 65 (20) — (4) 3 (32) 98 (10) (12) (29) (32) — (1) (7) 189 464 — (2) (6) 252 513 93 (40) (39) — — (9) — (2) 7 2 (1) — — (2) — — (1) (51) (34) GAIN ON SALE OF OPERATIONS In 2019, the Company closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation business and Alberta PowerLine. These sales resulted in an aggregate gain of $65 million (after-tax and non-controlling interests). As the gain was related to a series of one-time transactions, it was excluded from adjusted earnings. IMPAIRMENT AND OTHER COSTS In 2020, impairment and other costs not in the normal course of business of $20 million (after-tax and non- controlling interests) were recorded. These costs mainly relate to certain assets that no longer represent strategic value to the Company. Canadian Utilities' subsidiary ATCO Oil & Gas Ltd. holds a five per cent working interest in oil and gas assets in Northern Canada. With continued low oil prices and the COVID-19 pandemic continuing to cause economic uncertainty, an impairment of $9 million was recorded in the second quarter of 2020 reflecting the reduced likelihood of future recovery of these costs. ATCO Structures closed its manufacturing facility located in Pocatello, Idaho, relocated materials and equipment to its manufacturing facilities in Calgary, Alberta and Diboll, Texas and recorded $3 million in one-time closure costs in the second quarter of 2020. 69 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS The remaining costs mainly relate to the continued transformation and realignment of certain functions in the Company, as well as an adjustment to certain real estate assets in small markets within the Company's real estate portfolio due to continued low prices and economic uncertainty. UNREALIZED (LOSSES) GAINS ON MARK-TO-MARKET FORWARD AND SWAP COMMODITY CONTRACTS 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 business in the third quarter of 2019, 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 of Canadian Utilities Limited. Additionally, prior to the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019, 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 Energy Infrastructure operating segment where hedge accounting was not applied. 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 Electricity Distribution and Transmission and their 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 the Regulated 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 Regulated Utilities do not recognize assets and liabilities from rate-regulated activities as may be directed by regulatory decisions. Instead, the Regulated 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 70 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 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. 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 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. 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 (warmer) 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 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 2020 2019 Change 2020 2019 Change 11 (3) 5 (1) 6 (2) 41 1 34 7 7 (6) (17) (13) (4) (55) (54) (1) — (1) — (5) (15) — (2) 2 5 (4) — 1 (2) (10) (11) — (3) — (16) (32) 106 (106) (7) 3 9 98 4 (3) (25) (130) (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. Natural Gas Distribution 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 starting July 1, 2019. 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 International Natural Gas Distribution's rate base is billed to customers through the recovery of depreciation in subsequent periods based on the actual or forecasted annual 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. 71 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS (6) In 2020, Electricity Distribution recorded a decrease in earnings of $14 million related to payments to customers for transmission costs and capital related items. 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. Decision Amount Description 1. Information Technology (IT) Common Matters 12 In August 2014, the Company sold its IT services business to Wipro Ltd. (Wipro) and signed a ten-year IT 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. 2. Electricity Transmission General Tariff Application (GTA) (9) 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 capital expenditures and operating costs requested. The increase in adjusted earnings resulting from the decision of $9 million was recorded in 2019. IT COMMON MATTERS DECISION Consistent with the treatment of the gain on sale in 2014 from the IT services business by the Company, financial impacts associated with the IT Common Matters decision are excluded from adjusted earnings. The amount excluded from adjusted earnings for the fourth quarter and year ended December 31, 2020 was $5 million and $10 million (2019 - $3 million and $12 million). EARLY TERMINATION OF THE MASTER SERVICE AGREEMENT FOR MANAGED IT SERVICES In the fourth quarter of 2020, Canadian Utilities signed a Master Services Agreement with IBM Canada Ltd. to provide managed information technology services. These services are currently provided by Wipro Ltd. (Wipro) under a ten-year MSA maturing in December 2024. The transition of the managed IT services from Wipro to IBM will be completed over a six-month period, which commenced February 1, 2021. ATCO has recognized costs of $32 million (after-tax and non-controlling interests), which represents management’s best estimate of the costs to exit the Wipro MSA. The actual costs will be finalized later in 2021. As these costs are one-time in nature, they are excluded from adjusted earnings. OTHER Each quarter, the Company adjusts the deferred tax asset which was recognized as a result of the 2015 Tula Pipeline Project impairment. During the year ended December 31, 2020, the Company recorded a foreign exchange loss of $2 million (after tax and non-controlling interests) (2019 - nil) due to a difference between the tax base currency, which is the Mexican peso, and the US dollar functional currency. In 2019, the Company recognized costs of $6 million (after tax and non controlling interests) with regard to a number of disputes related to the Tula Pipeline project. The Company continues to work with the involved parties to achieve a resolution of these disputes. As these costs related to a significant non-recurring event, they were excluded from adjusted earnings. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 72 RECONCILIATION OF FUNDS GENERATED BY OPERATIONS TO CASH FLOWS FROM OPERATING ACTIVITIES Funds generated by operations is defined as cash flow from operations before changes in non-cash working capital and change in receivable under service concession arrangement. In management’s opinion, funds generated by operations is a significant performance indicator of the Company’s ability to generate cash during a period to fund capital expenditures. Funds generated by operations does not have any standardized meaning under IFRS and might not be comparable to similar measures presented by other companies. ($ millions) 2020 2019 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 31 516 469 (38) 2 — (28) 478 443 1,804 1,927 39 (205) — (180) 1,843 1,542 73 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 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. ($ millions) 2020 2019 Capital Investment Capital expenditure in joint ventures Business combinations Capital Expenditures ($ millions) 2020 2019 Capital Investment Equity investment in associate company Capital expenditure in joint ventures Business combinations Service concession arrangement Capital Expenditures Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Three Months Ended December 31 ATCO Consolidated Utilities Energy Infrastructure CUL Corporate & Other Consolidated 43 25 — — (19) — 24 25 — — — — — — — — 2 (17) — — — — 2 (17) 243 340 — — — — 243 340 7 31 (2) — — — 5 31 3 3 — — — — 3 3 Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited 253 374 (2) — — — 251 374 298 382 (2) — (19) — 277 382 Year Ended December 31 ATCO Consolidated Utilities Energy Infrastructure CUL Corporate & Other Consolidated 144 105 — — — — (19) — — — 125 105 — 9 — (9) — — — — — — — — 13 876 (16) 1,035 — — — — — — — — — — — — — — — — 13 876 (16) 1,035 28 185 — — (9) (2) — — — (95) 19 88 8 6 — — — — — — — — 8 6 912 1,226 1,069 1,324 — — (9) (2) — — — (95) 903 1,129 — (9) (9) (2) (19) — — (95) 1,041 1,218 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 74 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 2020 Consolidated Financial Statements. SIGNIFICANT ACCOUNTING ESTIMATES The Company’s significant accounting estimates are described in Note 22 of the 2020 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 At December 31, 2020, there are no new or amended standards issued, or interpretations that need to be adopted in future periods, which will have a material effect on the 2021 Consolidated Financial Statements once adopted. DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2020, 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). 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, 2020. INTERNAL CONTROL OVER FINANCIAL REPORTING As of December 31, 2020, 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. 75 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 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, 2020. There was no change in the Company’s internal control over financial reporting that occurred during the period beginning on January 1, 2020, and ended on December 31, 2020, 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 (including as may be affected by the COVID-19 pandemic) 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 2020 Consolidated Financial Statements and MD&A for the year ended December 31, 2020. 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. ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 76 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. NCI means non controlling interest. PBR means Performance Based Regulation. Regulated Utilities means Electricity Distribution, Electricity Transmission, Natural Gas Distribution, Natural Gas Transmission and International Natural Gas Distribution. Thermal Plant is a coal-fired power station in which heat energy is converted to electric power. 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, Electricity Transmission, Natural Gas Distribution and Natural Gas Transmission. AUC means the Alberta Utilities Commission. 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. IFRS means International Financial Reporting Standards. 77 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS APPENDIX 1 FOURTH QUARTER FINANCIAL INFORMATION Financial information for the three months ended December 31, 2020 and 2019 is shown below. CONSOLIDATED STATEMENT OF EARNINGS (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 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 Three Months Ended December 31 2020 1,053 2019 1,182 (122) (139) (57) (44) (22) (55) — (93) (174) (64) (17) (157) (805) — 7 13 268 5 (109) (104) 164 (38) 126 66 60 126 $0.58 $0.58 (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 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS 78 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 Additions to intangibles Acquisition, net of cash acquired Proceeds on sales of operations, net of cash disposed Changes in non-cash working capital Other Cash flows used in investing activities Financing activities Issue of long-term debt Repayment of long-term debt Release of projected restricted funds Purchase of shares by subsidiary companies 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 financing activities (Decrease) increase in cash position Foreign currency translation Beginning of period End of period Three Months Ended December 31 2020 2019 126 390 (38) — 478 (238) — (36) — — (3) (14) (291) 19 (128) — (12) — (4) (5) (50) (75) (126) (2) (383) (196) (2) 1,298 1,100 165 304 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 79 ATCO LTD. 2020 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2020 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. The Company and its Operations....................................................................................................................................... Basis of Presentation............................................................................................................................................................ Information on Financial Performance Segmented Information....................................................................................................................................................... 3. 4. Revenues................................................................................................................................................................................ 5. Other Costs and Expenses................................................................................................................................................... 6. 7. 8. Interest Expense................................................................................................................................................................... Income Taxes......................................................................................................................................................................... Earnings per Share............................................................................................................................................................... Information on Financial Position 9. Inventories............................................................................................................................................................................. 10. Property, Plant and Equipment........................................................................................................................................... 11. Intangibles............................................................................................................................................................................. 12. Goodwill................................................................................................................................................................................. 13. Long-Term Debt.................................................................................................................................................................... 14. Retirement Benefits.............................................................................................................................................................. 15. Balances from Contracts with Customers......................................................................................................................... 16. Leases..................................................................................................................................................................................... 17. Class I Non-Voting and Class II Voting Shares................................................................................................................... Page 82 83 88 89 90 91 92 93 93 94 102 103 103 104 107 107 108 110 110 111 112 117 118 121 Information on Cash Flow 18. Cash Flow Information......................................................................................................................................................... 1 122 Risk 19. Financial Instruments........................................................................................................................................................... 20. Risk Management................................................................................................................................................................. 21. Capital Disclosures............................................................................................................................................................... 22. Significant Judgments, Estimates and Assumptions........................................................................................................ Group Structure 6 . 23. Business Combinations........................................................................................................................................................ 24. Investment in Equity Interest in Associate Company....................................................................................................... 25. Subsidiaries........................................................................................................................................................................... 26. Joint Arrangements............................................................................................................................................................... 27. Non-Controlling Interests.................................................................................................................................................... Other Information 28. Share-Based Compensation Plans..................................................................................................................................... 29. Contingencies........................................................................................................................................................................ 30. Commitments........................................................................................................................................................................ 31. Related Party Transactions.................................................................................................................................................. 32. Accounting Policies............................................................................................................................................................... 124 127 131 133 135 139 140 140 142 144 147 147 147 148 81 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING Management is responsible for preparing the consolidated financial statements of ATCO Ltd. (the Company) 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 February 24, 2021 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 82 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, 2020 and 2019, 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, 2020 and 2019; the consolidated statements of comprehensive income for the years ended December 31, 2020 and 2019; the consolidated balance sheets as at December 31, 2020 and 2019; the consolidated statements of changes in equity for the years ended December 31, 2020 and 2019; the consolidated statements of cash flows for the years ended December 31, 2020 and 2019; and the notes to consolidated financial statements, which include significant accounting policies and other explanatory information. 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. PricewaterhouseCoopers LLP 111-5th Avenue SW, Suite 3100, Calgary, Alberta, Canada T2P 5L3 T: +1 403 509 7500, F: +1 403 781 1825 “PwC” refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 83 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter Assessment of retirement benefit obligations Refer to note 14 – Retirement Benefits and note 22 – Significant Judgments, Estimates and Assumptions to the consolidated financial statements. The Company maintains registered defined benefit and defined contribution pension plans for most of its employees. It also provides other post-employment benefits for retirees and their dependents. The Company accrues for its obligations under defined benefit pension and other post-employment benefits plans (the retirement benefit obligations). As at December 31, 2020, total accrued benefit obligations were $3,544 million and the market value of plan assets was $3,105 million. These balances are presented net on the consolidated balance sheet, resulting in net retirement benefit obligations of $439 million. In determining the retirement benefit obligations, management consults with independent actuaries when setting the assumptions used to estimate retirement benefit obligations and the cost of providing retirement benefits during the period. The significant assumptions used by management in determining the Company’s retirement benefit obligations include discount rate, long-term inflation rate, future compensation rates, health care cost trend rates and life expectancy rates. We determined that this is a key audit matter due to the significance of the retirement benefit obligations and the significant judgment made by management in estimating the Company’s retirement benefit obligations. In addition, our audit effort involved the use of professionals with specialized skill and knowledge in the field of actuarial services. How our audit addressed the key audit matter Our approach to addressing the matter involved the following procedures, among others: • Tested how management determined the retirement benefit obligations, which includes: – – – Utilized a professional with specialized skills and knowledge in the field of actuarial services, who assisted in testing management’s process for estimating the total accrued benefit obligations, appropriateness of the methodology, and assessed the reasonableness of management's assumptions such as discount rate, long-term inflation rates, future compensation rates, healthcare costs trend rates and life expectancy rates. Tested the underlying data used in the determination of retirement benefit obligations. The work of management’s independent actuaries was used in performing the procedures to evaluate the reasonableness of the retirement benefit obligations. As a basis for using this work, management’s independent actuaries’ competence, capability and objectivity were evaluated, their work performed was understood and the appropriateness of their work as audit evidence was evaluated by considering the relevance and reasonableness of the assumptions, methods and findings. • Tested disclosures related to the sensitivity assumptions used in estimating retirement benefit obligations. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 84 Key audit matter How our audit addressed the key audit matter Assessment of unbilled revenue related to Utilities segment Our approach to addressing the matter included the following procedures, among others: Refer to note 4 – Revenues and note 22 – Significant Judgments, Estimates and Assumptions to the consolidated financial statements. The Company had $132 million of unbilled revenue related to Utilities segment as at December 31, 2020. The revenue recognized by the Company includes an estimate of consumption by customers of natural gas and electricity that has not yet been billed (unbilled revenue). The estimate is derived from unbilled gas and electricity distribution services supplied to customers and is based on historical consumption patterns. Management applies judgment to the measure and value of the estimated consumption. We determined that this is a key audit matter due to (i) the significance of the unbilled revenue; (ii) the judgment applied by management to estimate the consumption; and (iii) the significant auditor effort in performing procedures to test the estimated amount of unbilled revenue. • Tested the reasonableness of the estimate of unbilled revenue through evidence obtained from events occurring up to the date of the auditor's report, which includes the following: – – Tested a sample of billings made after December 31, 2020 and compared the relevant amounts of these billings to the corresponding estimate of unbilled revenue recorded. Agreed the pricing applied to the sample of billings to the externally published rates. • Tested the operating effectiveness of internal controls relating to billed and unbilled revenue, including information technology (IT) general controls of the relevant IT systems that management uses for meter readings and billings. 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. 85 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 86 • • 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. • 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. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Shannon Ryhorchuk. [Original signed by “PricewaterhouseCoopers LLP”] Chartered Professional Accountants Calgary, Alberta February 24, 2021 87 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF EARNINGS (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, amortization and impairment Franchise fees Property and other taxes Other Gain on sale of operations 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. Year Ended December 31 Note 2020 2019 4 3,944 4,706 (531) (225) (200) (86) (211) — (388) (669) (243) (72) (298) (2,923) — 15 34 (538) (203) (272) (199) (207) (127) (480) (637) (239) (154) (306) (3,362) 174 15 24 1,070 1,557 18 (425) (407) 663 (166) 497 252 245 497 $2.21 $2.20 27 (511) (484) 1,073 (66) 1,007 513 494 1,007 $4.49 $4.47 10, 11, 16 5 23 24 26 6 7 27 8 8 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 88 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (millions of Canadian Dollars) Earnings for the year Other comprehensive income (loss), net of income taxes Items that will not be reclassified to earnings: Re-measurement of retirement benefits (1) Year Ended December 31 Note 2020 2019 497 1,007 14 2 (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) Share of other comprehensive loss in associate company (5) 23 24 Other comprehensive income (loss) Comprehensive income for the year Comprehensive income attributable to: Class I and Class II Shares Non-controlling interests (1) (2) (3) (4) (5) Net of income taxes of nil for the year ended December 31, 2020 (2019 - $14 million). Net of income taxes of $6 million for the year ended December 31, 2020 (2019 - $1 million). Net of income taxes of nil for the year ended December 31, 2020 (2019 - $(3) million). Net of income taxes of nil for the year ended December 31, 2020 (2019 - $(2) million). Net of income taxes of nil. See accompanying Notes to Consolidated Financial Statements. (13) — — 25 (2) 10 12 509 257 252 509 (2) 8 9 (83) (2) (70) (114) 893 431 462 893 89 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (millions of Canadian Dollars) ASSETS Current assets Cash and cash equivalents Accounts receivable and contract assets Finance lease receivables Inventories 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 Other assets Total assets LIABILITIES Current liabilities Bank indebtedness Accounts payable and accrued liabilities Lease liabilities Provisions and other current liabilities Long-term debt Non-current liabilities Deferred income tax liabilities Retirement benefit obligations Customer contributions Lease liabilities Other liabilities 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 Non-controlling interests Total equity Total liabilities and equity Note 2020 2019 December 31 18 15 16 9 10 11 16 12 26 24 16 7 18 16 3 13 7 14 15 16 3 13 17 27 1,103 727 9 76 124 2,039 18,327 685 97 82 186 460 166 85 73 22,200 3 695 16 164 196 1,074 1,443 439 1,756 84 132 9,423 14,351 178 6 3,880 (12) 4,052 3,797 7,849 22,200 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 See accompanying Notes to Consolidated Financial Statements. [Original signed by N.C. Southern] [Original signed by R.J. Routs] DIRECTOR DIRECTOR ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 90 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY 9 1 A T C O L T D . 2 0 2 0 C O N S O L I D A T E D F I N A N C I A L S T A T E M E N T S Class I and Class II Shares Contributed Surplus Retained Earnings D e c e m b e r 3 1 , 2 0 2 0 S e e a c c o m p a n y i n g N o t e s t o C o n s o l i O t h e r C h a n g e s i n o w n e r s h p i i n t e r e s t i S h a r e s i s s u e d D i v i d e n d s S h a r e - b a s e d c o m p e n s a t i o n S h a r e s p u r c h a s e d a n d c a n c e l l e d i r e t a n e d e a r n n g s i D e c e m b e r 3 1 , 2 0 1 8 E a r n n g s i f o r t h e y e a r O t h e r c o m p r e h e n s i v e l o s s L o s s e s o n r e t i r e m e n t b e n e f i t s ( m i l l i o n s o f C a n a d a n D o i l l a r s ) D i v i d e n d s D e c e m b e r 3 1 , 2 0 1 9 E a r n n g s i f o r t h e y e a r S h a r e - b a s e d c o m p e n s a t i o n O t h e r c o m p r e h e n s i v e i n c o m e S h a r e s i s s u e d , p u r c h a s e d a n d c a n c e l l e d i r e t a n e d e a r n n g s i i G a n s o n r e t i r e m e n t b e n e f i t s t r a n s f e r r e d t o t r a n s f e r r e d t o n s u b s i d a r y i c o m p a n y d a t e d F i n a n c i a l S t a t e m e n t s . (millions of Canadian Dollars) December 31, 2018 Earnings for the year 1 7 , 2 7 1 7 , 2 7 2 8 1 7 1 4 Other comprehensive loss 1 7 8 Losses on retirement benefits transferred to retained earnings Shares issued, purchased and cancelled 1 4 — — — — — — — Dividends Share-based compensation December 31, 2019 6 — — Earnings for the year ( 6 ) Other comprehensive income — — — — — — 1 7 3 1 2 Note 1 7 , 2 7 1 7 , 2 7 1 4 2 8 14 3 — 17, 27 1 — — — 17, 27 28 1 — — — — — 173 1 1 Gains on retirement benefits transferred to retained earnings — ( 3 ) 3 ( 6 ) — 2 ( 2 0 0 ) 3 , 8 8 0 Shares issued Shares purchased and cancelled Dividends 2 5 2 — , 3 8 3 2 — ( 1 8 6 ) 5 1 3 — ( 5 ) 14 ( 2 5 ) 17 17, 27 17, 27 Share-based compensation Changes in ownership interest in subsidiary company 1 5 1 — — — — — ( 2 ) ( 1 2 ) 28 2 5 ( 8 2 ) — — — — ( 1 7 ) Other December 31, 2020 4 , 0 5 2 ( 2 0 0 ) See accompanying Notes to Consolidated Financial Statements. 2 5 2 ( 6 ) ( 2 ) 4 1 1 5 1 — ( 1 8 6 ) , 4 0 0 0 178 3 7 5 5 , 5 1 3 ( 4 ) — ( 8 2 ) 3 , 7 9 7 7 , 8 4 9 ( 1 ) 2 — ( 3 0 1 ) ( 1 3 ) — — 7 , 3 8 5 8 2 4 5 ( 2 9 4 ) 3 — — , 3 6 8 7 4 9 4 ( 3 2 ) — — 1 ( 5 0 1 ) ( 1 9 ) 1 — 4 9 7 1 2 , 7 8 5 8 ( 4 8 0 ) 7 ( 4 ) — , 1 0 0 7 , 7 4 4 2 ( 1 1 4 ) 91 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 169 — — 1 — 6 1 9 — 3 — — , 3 5 3 — 5 1 — — 4 4 0 — — N o t e S h a r e s C l a s s I I C o n t r i b u t e d S u r p u s l E a r n n g s i R e t a i n e d C o m p r e h e n s i v e ( L o s s ) I n c o m e 11 C l a s s I a n d — — — — — 1 12 — — — — — — A c c u m (6) u l a t e d — O t h e r — 6 C o n t r o l l i n g N o n - T o t a l I n t e r e s t s T o t a l E q u i t y C O N S O L I D A T E D S T A T E M E N T S O F C H A N G E S I N E Q U I T Y 3,535 513 — (25) (5) (186) — 3,832 252 — 2 — (6) (200) 3 (3) — 3,880 Accumulated Other Comprehensive (Loss) Income Non- Controlling Total Interests Total Equity 40 3,755 3,687 — (82) 25 — — — 513 (82) 494 (32) — (4) (186) (294) (480) 4 3 (17) 4,000 3,858 7,858 — 5 (2) — — — — 1 1 252 5 245 7 497 12 (200) — 1 (6) 1 (2) 1 (12) 4,052 3,797 7,849 7,442 1,007 (114) — (4) 7 — 1 1 — — — — — — — 2 (1) (13) (301) (19) (501) CONSOLIDATED STATEMENTS OF CASH FLOWS (millions of Canadian Dollars) Note 2020 2019 Year Ended December 31 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 Additions to intangibles 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 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) 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 financing activities (Decrease) increase in cash position (1) Foreign currency translation Beginning of year End of year 18 18 24 23 26 18 18 13, 18 13, 18 18 16 17 27 18 497 1,307 39 — 1,843 (940) 7 (88) — — (9) (4) (27) (1,061) — 348 (219) — — (18) (12) (5) (200) (301) (413) (3) (823) (41) 1 1,140 1,100 1,007 920 (205) (180) 1,542 (1,128) 4 (74) (9) 903 — 7 8 (289) (175) 632 (554) 329 (32) (19) 3 (2) (186) (294) (498) 14 (782) 471 (22) 691 1,140 (1) Cash position includes $39 million which is not available for general use by the Company (2019 - $79 million). See accompanying Notes to Consolidated Financial Statements. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2020 (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 business activities: • • Structures & Logistics (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); Canadian Utilities Limited, including: • • • Utilities (electricity and natural gas transmission and distribution and international electricity operations); Energy Infrastructure (electricity generation, energy storage and industrial water solutions); Retail Energy (electricity and natural gas retail sales) (included in the Corporate & Other segment); and • Neltume Ports (ports and transportation logistics) (see Note 24). The consolidated financial statements include the accounts of ATCO Ltd. and its subsidiaries (see Note 25). 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 26) and its equity-accounted investment in associate company (see Note 24). 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 24, 2021. 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 32. 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. 93 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 22. 3. 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. In 2020, the Company reorganized its operating subsidiaries into the following segments: • • • • • Structures & Logistics; Utilities (Electricity and Natural Gas); Energy Infrastructure; Neltume Ports; and Corporate & Other. Comparative amounts for prior periods have been restated to reflect the realigned segments. Management has determined that the operating subsidiaries in the reportable segments below share similar economic characteristics, as such, they have been aggregated. The descriptions and principal operating activities of the realigned reportable segments are as follows: Structures & Logistics Utilities Electricity Natural Gas Energy Infrastructure Canadian Utilities Limited The Structures & Logistics segment includes ATCO Structures & Logistics. This company offers 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. The Utilities (Electricity) segment includes ATCO Electric, which provides regulated electricity transmission and distribution services in northern and central east Alberta, the Yukon and the Northwest Territories and the Company's 50 per cent ownership interest in LUMA Energy LLC which provides international electricity operations (see Note 26). The Utilities (Natural Gas) segment includes ATCO Gas, ATCO Pipelines and ATCO Gas Australia. These businesses provide integrated natural gas transmission and distribution services throughout Alberta, in the Lloydminster area of Saskatchewan and in Western Australia. The Energy Infrastructure segment includes ATCO Power (2010) (in 2019, the Company sold its Canadian fossil fuel-based electricity generation business), Alberta PowerLine (before sale in 2019), ATCO Energy Solutions and ATCO Power Australia. Together these businesses provide electricity generation, natural gas storage, industrial water solutions and related infrastructure development throughout Alberta, the Yukon, the Northwest Territories, Australia, Mexico and Chile. 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. ATCO Corporate & Other includes commercial real estate owned by the Company and intersegment eliminations. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 94 Results by operating segment for the year ended December 31 are shown below. 2020 Structures Neltume Corporate Canadian Utilities Limited & Logistics Ports & Other Utilities (1) Energy Infrastructure Corporate & Other Consolidated ATCO Consolidated 2019 Revenues - external Revenues - intersegment Revenues Operating expenses (2) Depreciation, amortization and impairment Gain on sale of operations (Note 23) 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 (3) 714 801 — 2 714 803 (595) (702) (52) (45) — — — — 3 3 (7) (7) 63 52 (14) (15) 49 37 57 37 1,069 987 125 105 — — — — — — — — — — — — 15 15 — — — — 15 15 — — 15 15 15 15 460 466 — — (3) — — (2) (3) (2) 2,907 2,910 25 46 2,932 2,956 149 824 46 32 195 856 177 171 (71) (78) 106 93 3,233 3,905 3,944 4,706 — — — — 3,233 3,905 3,944 4,706 23 22 (1,408) (1,315) (159) (647) (115) (83) (1,682) (2,045) (2,254) (2,725) (7) (568) (20) (22) (610) (7) (582) (10) (542) — — — — — — (14) (15) (1) (5) — 2 (1) (3) — (6) — — — — 14 — (373) (379) 597 720 (145) 27 452 747 305 301 (33) — 174 — — 17 21 (10) (87) 23 284 (7) (69) 16 215 15 57 375 18,310 206 17,852 13 (16) 876 1,035 993 1,754 19 88 — — — — — — (3) 4 (34) 7 — (11) (34) (4) (40) (39) 993 438 8 6 (669) (637) — 174 15 15 34 24 (407) (484) 663 1,073 (166) (66) 497 1,007 352 365 — 174 — — 31 21 (386) (462) 586 1,011 (152) (53) 434 958 280 319 20,296 20,044 903 1,129 22,200 21,703 1,041 1,218 (1) Includes the collective results of the Electricity and the Natural Gas operating segments, and related intersegment eliminations. Details of the results by operating segments included in the Utilities are disclosed below. (2) Includes total costs and expenses, excluding depreciation, amortization and impairment expense. (3) Includes additions to property, plant and equipment and intangibles and $13 million of interest capitalized during construction for the year ended December 31, 2020 (2019 - $16 million). 95 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Results of the operating segments included in the Utilities for the year ended December 31 are shown below. 2020 2019 Revenues - external Revenues - intersegment Revenues Operating expenses (1) Depreciation and amortization Earnings from investment in joint ventures Net finance costs Earnings before income taxes Income tax (expense) recovery Earnings for the year Adjusted earnings for the year Total assets Capital expenditures (2) Utilities Electricity Natural Gas Intersegment eliminations 1,368 1,390 19 44 1,387 1,434 (545) (500) (309) (296) 14 — (229) (231) 318 407 (77) 37 241 444 166 172 10,326 10,211 366 389 1,539 1,520 9 4 1,548 1,524 (866) (820) (259) (246) — — (144) (148) 279 310 (68) (9) 211 301 139 130 7,985 7,641 510 646 — — (3) (2) (3) (2) 3 5 — — — — — — — 3 — (1) — 2 — (1) (1) — — — Consolidated 2,907 2,910 25 46 2,932 2,956 (1,408) (1,315) (568) (542) 14 — (373) (379) 597 720 (145) 27 452 747 305 301 18,310 17,852 876 1,035 (1) (2) Includes total costs and expenses, excluding depreciation and amortization expense. Includes additions to property, plant and equipment and intangibles and $12 million of interest capitalized during construction for the year ended December 31, 2020 (2019 - $16 million). GEOGRAPHIC SEGMENTS Financial information by geographic area is summarized below. Revenues - external Canada Australia Other Total 2020 3,428 385 131 3,944 2019 4,180 364 162 4,706 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 96 Non-current assets Canada Australia South America Other Total Property, Plant and Equipment 2020 16,567 1,402 44 314 18,327 2019 16,247 1,288 — 322 17,857 Intangible Assets 2020 660 13 1 11 685 2019 635 14 — 13 662 Other Assets (1) 2019 229 54 492 6 781 2020 277 53 461 4 795 2020 17,504 1,468 506 329 19,807 Total 2019 17,111 1,356 492 341 19,300 (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. 97 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of adjusted earnings and earnings for the year ended December 31 is shown below. 2020 2019 Structures Neltume Corporate Canadian Utilities Limited & Logistics Ports & Other Utilities Energy Infrastructure Corporate & Other Consolidated ATCO Consolidated 15 15 — (6) 305 301 15 57 (40) (39) 280 319 352 365 57 37 (3) — — — (5) — — — — — — — — — — — — — — — — — — — — — — — 49 37 15 15 Adjusted earnings (loss) Early termination of the master service agreement for managed IT services Gain on sale of operations Impairment and other costs 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 (26) (1) (2) (29) (32) — — — — — — — — (4) — — — 65 (2) — — (9) — — 65 (15) — — 65 (20) — — — — — — — — — 2 — — (1) 1 (1) (3) — — (34) 97 (10) (12) — — 231 386 (2) (2) (4) (4) (4) — — — — (1) (6) 9 112 7 2 (1) — — — (1) (51) (34) 3 (32) 96 (10) (12) (1) (7) 189 464 3 (32) 98 (10) (12) (2) (6) 252 513 245 494 497 1,007 Early termination of the master service agreement for managed IT services On December 31, 2020, the Company signed a Master Services Agreement (MSA) with IBM Canada Ltd. (IBM) to provide managed information technology (IT) services. These services are currently provided by Wipro Ltd. (Wipro) under a ten-year MSA expiring December 2024. The transition of the managed IT services from Wipro to IBM will be completed over a six-month period, which commenced February 1, 2021. On December 31, 2020, the Company recognized an onerous contract provision of $75 million ($32 million after-tax and non-controlling interests (NCI), which represents management’s best estimate of the costs to exit the Wipro MSA. The provision is included in provisions and other current liabilities in the consolidated balance sheets and other expenses in the consolidated statements of earnings. The actual costs will be finalized later in 2021. The onerous contract provision is not in the normal course of business and has been excluded from adjusted earnings. Gain on sale of operations In 2019, the Company closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation business and Alberta PowerLine (see Note 23). These sales resulted in an aggregate gain of $174 million ($65 million after-tax and NCI). As the gain was related to a series of one-time transactions, it was excluded from adjusted earnings. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 98 Impairment and other costs In 2020, impairment (see Note 10) and other costs not in the normal course of business of $20 million, after tax and NCI, were recorded. These costs mainly relate to certain assets that no longer represent strategic value to the Company. Canadian Utilities' subsidiary ATCO Oil & Gas Ltd. holds a five per cent working interest in oil and gas assets in Northern Canada. With continued low oil prices and the COVID-19 pandemic continuing to cause economic uncertainty, an impairment of $9 million was recorded in the second quarter of 2020 reflecting the reduced likelihood of future recovery of these costs. ATCO Structures & Logistics Ltd. closed its manufacturing facility located in Pocatello, Idaho, relocated materials and equipment to its manufacturing facilities in Calgary, Alberta and Diboll, Texas and recorded $3 million in one-time closure costs in the second quarter of 2020. The remaining costs mainly relate to the continued transformation and realignment of certain functions in the Company, as well as an adjustment to certain real estate assets in small markets within the Company's real estate portfolio due to continued low prices and economic uncertainty. Unrealized gains and losses on mark-to-market forward and swap commodity contracts 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 business in the third quarter of 2019, 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 of Canadian Utilities Limited. Additionally, prior to the sale of the Canadian fossil fuel-based electricity generation business in the third quarter of 2019, 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 Energy Infrastructure operating segment where hedge accounting was not applied. 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 the 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. 99 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 inflation on rate base (5) Regulatory decisions received (see below) Settlement of regulatory decisions and other items (6) 2020 2019 41 1 (55) — (3) — (16) (32) 34 7 (54) 106 (7) 3 9 98 (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 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 was phased in increments from July 1, 2019 (see Note 7). 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 or forecasted annual 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 2020, ATCO Electric Distribution recorded a decrease in earnings of $14 million related to payments to customers for transmission costs and capital related items. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 100 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. Decision Amount Description 1. Information Technology (IT) Common Matters 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. 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 of $9 million was recorded in 2019. IT Common Matters decision Consistent with the treatment of the gain on sale in 2014 from the IT services business by the Company, financial impacts associated with the IT Common Matters decision are excluded from adjusted earnings. The amount excluded from adjusted earnings for the year ended December 31, 2020 was $10 million (2019 - $12 million). Other The Company adjusts the deferred tax asset which was recognized as a result of the 2015 Tula Pipeline Project impairment. During the year ended December 31, 2020, the Company recorded a foreign exchange loss of $2 million after tax and NCI (2019 - $nil) due to a difference between the tax base currency, which is the Mexican peso, and the US dollar functional currency. For the year ended December 31, 2019, the Company recognized costs of $6 million after tax and NCI with regard 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 related to a significant non-recurring event, they were excluded from adjusted earnings. 101 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 4. REVENUES The Company disaggregates revenues based on the nature of revenue streams. The disaggregation of revenues by each operating segment for year ended December 31 is shown below: 2020 2019 Structures & Logistics Utilities Electricity (1) Natural Gas (1) Total Energy Infrastructure Corporate & Other (2) Consolidated 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 — — — — 124 188 124 188 — — — — 276 310 97 105 90 89 — — — — — — — — — — — — — — — — 531 589 716 674 — — — — — — 34 47 31 32 — — — — — — — — — — — — — — — — — — — — 969 1,500 988 1,577 296 1,012 952 278 — — — — — — — — — — — — 22 19 212 207 56 66 243 239 — — — — — — — — Total rendering of services 463 504 1,312 1,342 1,499 2,811 1,492 2,834 Lease income Finance lease Operating lease Total lease income Service concession arrangement Other Total 1 1 126 108 127 109 — — — — — — — — — — — — — — — — — — — — — — — — — — — — 56 48 40 28 96 76 714 801 1,368 1,390 1,539 2,907 1,520 2,910 31 412 28 36 — — 59 448 — — — — — — — — — — — — — — — — 27 23 27 23 17 21 — 65 17 86 — 232 46 35 149 824 — — 8 — — — 8 — — — — — — — — — — — — — — — 162 162 — — 162 162 — — — — — — — — 4 9 174 171 31 412 36 36 124 188 191 636 1,500 1,577 1,012 952 276 310 97 105 90 89 56 66 243 239 162 162 27 23 3,463 3,523 18 22 126 173 144 195 — 232 146 120 3,944 4,706 (1) For the year ended December 31, 2020, Electricity and Natural Gas segments include $132 million of unbilled revenue (2019 - $130 million). At December 31, 2020, $132 million of the unbilled trade accounts receivables are included in trade accounts receivable and contract assets (2019 - $130 million). (2) Includes revenues from the Corporate & Other in Canadian Utilities Limited and ATCO Ltd. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 102 Remaining performance obligations 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, 2020, 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 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, 2021, 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 7 per cent of the amount will be recognized as revenue during the year ending December 31, 2021; and (iii) manufacturing of transportable workforce housing and space rental products under the terms of fixed price contracts that in aggregate approximates $0.3 billion. The Company expects that approximately 95 per cent will be recognized as revenue during the year ending December 31, 2021. 5. OTHER COSTS AND EXPENSES Other costs and expenses include costs related to early termination of the master service agreement for managed information technology services (see Note 3), 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. 6. 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 16) Other Less: interest capitalized (Notes 10, 11) 2020 413 — 14 3 1 3 4 438 (13) 425 2019 427 57 18 5 6 3 11 527 (16) 511 Borrowing costs capitalized to property, plant and equipment during 2020 were calculated by applying a weighted average interest rate of 4.45 per cent (2019 - 4.54 per cent) to expenditures on qualifying assets. 103 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAXES IMPACT OF CHANGE IN INCOME TAX RATE On May 28, 2019, the Alberta government passed Bill 3, the Job Creation Tax Cut (Bill 3), which reduces the Alberta provincial corporate tax rate from 12.0 per cent to 8.0 per cent in a phased approach between July 1, 2019 and January 1, 2022. As a result of this change, in 2019, the Company recorded an adjustment to current and deferred income taxes of $1 million and $210 million, respectively. On October 20, 2020, Bill 35, Tax Statutes (Creating Jobs and Driving Innovation) (Bill 35) received first reading in the legislative assembly of Alberta and became substantively enacted for financial reporting purposes. The Bill received Royal Assent on December 9, 2020. Bill 35 accelerated the reduction of the Alberta provincial corporate tax rate, which was previously announced in Bill 3, to 8.0 per cent on July 1, 2020. The financial impact of this change is not significant. The income tax rate for 2020 is 24.0 per cent (2019 - 26.5 per cent). 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: 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 Other 663 159 5 (4) (8) 12 — 5 (3) 166 2020 % 24.0 0.8 (0.6) (1.2) 1.8 — 0.8 (0.6) 25.0 2020 2019 40 (10) 10 3 — (4) 39 119 5 3 127 166 1,073 284 80 (5) (2) 2 (1) 3 77 203 (210) (4) (11) 66 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 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 104 INCOME TAX ASSETS AND LIABILITIES Income tax assets and liabilities in the consolidated balance sheet at December 31 are summarized below. Balance Sheet Presentation 2020 2019 Income tax assets Current Deferred Income tax liabilities Current Deferred Prepaid expenses and other current assets Deferred income tax assets Provisions and other current liabilities Deferred income tax liabilities DEFERRED INCOME TAXES The changes in deferred income tax assets are as follows: 47 85 132 37 1,443 1,480 33 83 116 12 1,319 1,331 Property, Plant and Equipment Tax Loss Carry Forwards and Tax Credits Retirement Benefit Obligations Other Movements 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 (Note 23) Foreign exchange adjustment Other December 31, 2019 Credit (charge) to earnings Charge to other comprehensive income Business combinations Foreign exchange adjustment Other December 31, 2020 Intangibles Reserves (7) 3 38 1 (6) (10) 50 23 — — — — 1 7 (1) — (9) 20 — — — — 1 1 — — (2) 1 — — — — (2) (33) — — 4 (4) (1) — — — (4) — — — 69 (13) — 1 — — 8 2 15 — (7) — — 18 (6) — — — — Total 85 22 15 (5) (32) (1) (1) 83 — (1) 1 1 1 85 2 3 — (1) — — (1) 3 2 — — 1 1 7 11 (1) (1) 57 12 The Company does not expect any deferred income tax assets to reverse within the next twelve months (2019 - $7 million). 105 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Property, Plant and Equipment Tax Loss Carry Forwards and Tax Credits The changes in deferred income tax liabilities are as follows: Movements 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 (Note 23) Foreign exchange adjustment Other December 31, 2019 Charge (credit) to earnings Charge (credit) to other comprehensive income Change in income taxes resulting from decrease in provincial corporate tax rate Foreign exchange adjustment Other December 31, 2020 Intangibles Reserves 121 (4) (48) (22) 1,540 223 — — (220) (109) (4) — 1,430 190 — — 4 — (18) (2) — — 97 9 — — — — 4 6 46 — — (14) (12) (7) — — — Retirement Benefit Obligations Other (137) 8 Total 31 1,399 1 221 1 — 5 (108) 15 — 6 4 — — 15 (14) — — (83) (20) (127) (10) — 5 1 — — — — — — (4) (14) (215) (89) (4) 2 16 1,319 (35) 122 2 — (7) — 5 3 1 (20) 1,443 (2) 1 1,624 106 (33) (97) (137) The Company does not expect any of its deferred income tax liabilities to reverse within the next twelve months. At December 31, 2020, the Company had $628 million of non-capital tax losses and credits which expire between 2024 and 2040 and $85 million of tax losses which do not expire. The Company recognized deferred income tax assets of $154 million for these losses and credits. The Company had $125 million of aggregate temporary differences for investments in subsidiaries, branches and joint ventures for which deferred income tax liabilities were not recognized (2019 - $122 million). The Company had $87 million of aggregate temporary differences for which no deferred tax assets were recognized (2019 - $45 million). ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 106 8. 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 9. INVENTORIES Inventories at December 31 are comprised of: Natural gas and fuel in storage Raw materials and consumables Work-in-progress Finished goods 2020 2019 114,396,312 114,369,909 50,697 47,937 265,547 327,978 114,712,556 114,745,824 497 (245) 252 1,007 (494) 513 $2.21 $2.20 $4.49 $4.47 2020 2019 20 38 15 3 76 21 29 10 4 64 For the year ended December 31, 2020, inventories of $256 million were used in operations and expensed (2019 - $341 million). Inventories with a carrying value of $11 million were pledged as security for liabilities at December 31, 2020 (2019 - $10 million). 107 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 10. PROPERTY, PLANT AND EQUIPMENT A reconciliation of the changes in the carrying amount of property, plant and equipment is as follows: Cost December 31, 2018 Additions Transfers Retirements and disposals Sale of operations (Note 23) Foreign exchange rate adjustment December 31, 2019 Additions Transfers Retirements and disposals Acquisition of ATCO Sabinco (Note 26) Changes to asset retirement costs Foreign exchange rate adjustment December 31, 2020 Accumulated depreciation December 31, 2018 Depreciation Retirements and disposals Sale of operations (Note 23) Foreign exchange rate adjustment December 31, 2019 Depreciation and impairment Retirements and disposals Foreign exchange rate adjustment December 31, 2020 Net book value December 31, 2019 December 31, 2020 Utility Transmission & Distribution Electricity Generation Land and Buildings Construction Work-in- Progress Other Total 19,315 1,950 1,007 670 1,683 24,625 53 874 (87) — (72) 20,083 46 855 (75) — 1 94 21,004 11 10 (27) (1,801) (1) 142 5 — (1) — — (6) 140 4,384 1,338 434 (86) — (12) 4,720 455 (75) 19 5,119 32 (18) (1,335) — 17 2 — (1) 18 15,363 15,885 125 122 4 13 (15) (13) — 996 2 7 (18) 7 — 4 1,095 (971) (15) (21) (10) 40 74 (55) (21) (24) 1,203 — (199) (1,856) (107) 748 1,697 23,666 823 (922) — — — (2) 98 60 (95) 36 (2) 10 974 — (189) 43 (1) 100 998 647 1,804 24,593 201 25 (15) — 1 212 21 (18) 1 216 784 782 83 754 6,760 — — — (4) 79 — — (1) 78 92 (41) (13) (11) 781 124 (75) 5 583 (160) (1,348) (26) 5,809 602 (168) 23 835 6,266 669 569 916 969 17,857 18,327 The additions to property, plant and equipment included $13 million of interest capitalized during construction for the year ended December 31, 2020 (2019 - $15 million). Property, plant and equipment with a carrying value of $343 million were pledged as security for liabilities at December 31, 2020 (2019 - $274 million). IMPAIRMENT Canadian Utilities Limited - Corporate & Other Segment ATCO Oil & Gas Ltd., a subsidiary of Canadian Utilities Limited, holds a five per cent working interest in oil and gas assets in Northern Canada. With the continued lower oil prices and the COVID-19 pandemic continuing to cause economic uncertainty (see Note 20), the Company determined that the total net book value of these assets was not recoverable due to reduced likelihood of future development of the assets, and, therefore, impaired these assets in full, recognizing an impairment of $9 million, after tax and NCI. The impairment was included in depreciation, amortization and impairment expense. After recognizing the impairment, the recoverable amount of these assets was nil. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 108 PIONEER NATURAL GAS PIPELINE ACQUISITION Utilities Segment On September 30, 2020, ATCO Gas and Pipelines Ltd., a wholly owned subsidiary of CU Inc., entered into an agreement to acquire the 130 km Pioneer Pipeline from Tidewater Midstream & Infrastructure Ltd. and its partner TransAlta Corporation for a purchase price of $255 million. NOVA Gas Transmission Ltd. (NGTL) and ATCO Gas and Pipelines Ltd. subsequently agreed that, consistent with the geographic footprints defined in their Integration Agreement, ATCO Gas and Pipelines Ltd. would subsequently transfer to NGTL the approximately 30 km segment of the Pioneer Pipeline located in the NGTL footprint for approximately $63 million. ATCO Gas and Pipelines Ltd. will retain ownership and continue to operate the portion of the Pioneer Pipeline located in the its footprint. The transaction is subject to satisfaction of customary conditions, including regulatory approvals by the Alberta Utilities Commission and the Alberta Energy Regulator, which are expected in the second quarter of 2021. 109 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 11. 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 Work-in- Progress Other Total Cost December 31, 2018 Additions Transfers Sale of operations (Note 23) Retirements Foreign exchange rate adjustment December 31, 2019 Additions Transfers Retirements Foreign exchange rate adjustment December 31, 2020 Accumulated amortization December 31, 2018 Amortization Sale of operations (Note 23) Retirements Foreign exchange rate adjustment December 31, 2019 Amortization Retirements Foreign exchange rate adjustment December 31, 2020 Net book value December 31, 2019 December 31, 2020 656 8 39 (25) (117) (1) 560 1 58 (177) 1 443 442 51 (15) (117) (1) 360 53 (176) 1 238 200 205 364 — 19 — — — 383 — 24 — — 407 48 5 — — — 53 7 — — 60 80 60 (59) — — — 81 88 (82) — — 87 — — — — — — — — — — 330 347 81 87 74 — 1 (10) (2) — 63 1 — (2) — 62 12 2 (2) — — 12 4 — — 16 51 46 1,174 68 — (35) (119) (1) 1,087 90 — (179) 1 999 502 58 (17) (117) (1) 425 64 (176) 1 314 662 685 The additions to intangibles include interest capitalized during construction of nil for the year ended December 31, 2020 (2019 - $1 million). 12. GOODWILL The carrying value of goodwill for the Utilities and Structures & Logistics segments is shown below. Utilities, Electricity Utilities, Natural gas Structures & Logistics Carrying value 2020 47 33 2 82 2019 47 33 2 82 The recoverable amount of goodwill is measured based on each segment’s fair value less costs of disposal, which is 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 is compared to its carrying value and is sufficient to support the carrying value of allocated goodwill. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 110 The Company used an average enterprise value-to-earnings before interest, taxes, depreciation, and amortization of 11.5 and 9.8 (2019 - 11.8 and 13.6) and price-to-earnings value of 17.0 and 13.3 (2019 - 19.6 and 16.3) 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. 13. 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 2022 - unsecured (2) Canadian Utilities Limited debentures - unsecured, 3.122%, due November 2022 ATCO Power Australia credit facility, payable in Australian dollars, Effective Interest Rate 2020 2019 4.487% (2019 - 4.616%) 8,140 8,090 2.45% (2019 - 3.95%) 6 6 3.187% 200 200 at BBSY Rates, due June 2025, secured by a pledge of project assets and contracts, $58 million AUD (2019 - $63 million AUD) (3) Floating (4) 56 58 ATCO Gas Australia revolving credit facility, payable in Australian dollars, at BBSY rates, due October 2023, $275 million AUD Floating (4) (2019 - $275 million AUD) (3) 268 250 ATCO Gas Australia revolving credit facility, payable in Australian dollars, at BBSY rates, due July 2023, $405 million AUD (2019 - $405 million AUD) (3) Floating (4) 394 369 Electricidad del Golfo credit facility, payable in Mexican pesos, at Mexican Interbank rates, due March 2023, $570 million MXP (2019 - $570 million MXP) ATCO Investments Ltd. mortgage, at BA rates, payable in Canadian dollars, due March 2028 Floating (4) Floating (4) ATCO Ltd. extendible revolving credit facility, at BA rates, due August 2021 (3) Floating ATCO Ltd. fixed-to-floating rate subordinated notes, due November 2078 ATCO Structures & Logistics credit facility, at BA rates, due January 2021 (3) ATCO Structures & Logistics credit facility, at BA rates, due September 2023 (3) 5.50% (5) Floating Floating ATCO Sabinco credit facilities, payable in Chilean pesos, 2.86%, due April 2021, $4 billion CLP (2019 - nil) (6) ATCO Sabinco credit facility, payable in Chilean pesos, 2.88%, due February 2021, $2 billion CLP (2019 - nil) (6) Less: deferred financing charges Less: amounts due within one year BBSY - Bank Bill Swap Benchmark Rate BA - Bankers’ Acceptance 3.221% 3.221% 36 39 93 138 200 106 20 7 4 (49) 9,619 (196) 9,423 95 138 200 40 — — — (49) 9,436 (173) 9,263 (1) Interest rate is the average effective interest rate weighted by principal amounts outstanding. (2) (3) (4) (5) During 2020, the expiry date of the CU Inc. other long-term obligation was extended from June 2021 to June 2022. During 2020, the above interest rates had additional margin fees at a weighted average rate of 1.22 per cent (2019 - 0.99 per cent). The margin fees are subject to escalation. Floating interest rates have been partially or completely hedged with interest rate swaps (see Note 19). 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. (6) ATCO Sabinco credit facilities were acquired as part of the increase in ownership interest in ATCO Sabinco S.A. (see Note 26). 111 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS DEBENTURE ISSUANCES On September 28, 2020, CU Inc., a wholly owned subsidiary of Canadian Utilities Limited, issued $150 million of 2.609 per cent debentures maturing on September 28, 2050. The Company also repaid $100 million of 11.77 per cent debentures on November 30, 2020. On September 5, 2019, CU Inc. issued $580 million of 2.963 per cent debentures maturing on September 7, 2049. CU Inc. also 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. OTHER LONG TERM DEBT ISSUANCES AND REPAYMENTS ATCO Power Australia re-financing In the first quarter of 2020, ATCO Power Australia, a subsidiary of Canadian Utilities Limited, refinanced its $63 million Australian dollars credit facility with a new lender at Bank Bill Swap Benchmark Rate (BBSY) plus margin fee, extending the credit facility's maturity from February 2020 to June 2025. The floating BBSY interest rate is hedged to June 23, 2025 with an interest rate swap agreement which fixes the interest rate at 1.68 per cent. 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 facilities are 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, 2020, the book value of assets pledged to maintain the Company's long-term credit facilities was $860 million at (2019 - $709 million). 14. 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 112 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 Past service cost (credit) End of year (2) Funded status Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2020 2019 2,903 87 1 13 (139) 240 3,105 — — — — — — — 2,667 95 1 21 (127) 246 2,903 — — — — — — — 3,207 125 2,933 118 16 97 1 (139) (7) — 226 4 3,405 2 4 — — (4) — 12 — 139 19 108 1 (127) (8) (10) 297 (6) 2 5 — — (5) (2) 7 — 3,207 125 Net retirement benefit obligations 300 139 304 125 (1) In 2019, as a result of a reduction of plan members due to the sale of the Canadian fossil fuel-based electricity generation business (see Note 23), the Company recorded a curtailment gain of $12 million. This gain was included in salaries, wages and benefits expense in the consolidated statements of earnings. (2) The non-registered, non-funded defined benefit pension plans accrued benefit obligations increased to $180 million at December 31, 2020 due to a decrease in the liability discount rate and experience adjustments (2019 - increased to $166 million due to a decrease in the liability discount rate and experience adjustments). 113 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS BENEFIT PLAN COST The components of benefit plan cost are as follows: Current service cost Interest cost Interest income Curtailment gain Past service cost (credit) Defined benefit plans cost Defined contribution plans cost Total cost Less: capitalized Net cost recognized Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2020 2019 16 97 (87) — 4 30 29 59 24 35 2 4 — — — 6 — 6 3 3 19 108 (95) (10) (6) 16 29 45 20 25 2 5 — (2) — 5 — 5 3 2 RE-MEASUREMENT OF RETIREMENT BENEFITS Re-measurements of the pension and OPEB plans are as follows: Gains 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 Gains (losses) recognized in other comprehensive income (1) Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2020 2019 240 — 246 (226) (12) (297) 14 (12) (51) — (7) (7) (1) Gains net of income taxes were $2 million for the year ended December 31, 2020 (2019 - Losses net of income taxes of $44 million). ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 114 PLAN ASSETS The market values of the Company’s defined benefit pension plan assets at December 31 are as follows: 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 Quoted Un-quoted Total 2020 % Quoted Un-quoted Total 2019 % 17 379 288 — 684 1,141 764 131 4 2,040 — — — 16 20 15 51 2,775 — — — 3 3 — — — 106 106 23 198 221 — — — — 330 17 379 288 3 687 1,141 764 131 110 2,146 23 198 221 16 20 22 69 7 6 329 228 — 563 1,141 672 118 4 1,935 — — — 16 25 15 51 3,105 2 100 3 44 2,542 — — — 10 10 — — — 118 118 30 203 233 — — — — 361 6 329 228 10 573 1,141 672 118 122 2,053 30 203 233 16 25 20 71 8 3 44 2,903 1 100 (1) The land and building are leased by the Company. FUNDING In 2020, an actuarial valuation for funding purposes as of December 31, 2019 was completed for the registered defined benefit pension plans. The estimated contribution for 2021 is $13 million. The next actuarial valuation for funding purposes must be completed as of December 31, 2022. 115 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 2020 2019 3.10 % 2.50 % 2.58 % 2.00 % n/a n/a n/a 3.10 % n/a 2.58 % n/a 5.11 % 4.00 % 4.00 % 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 % (1) The discount rate assumption for 2019 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 23). 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 5.11 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 13.5 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 116 Life expectancy Should pensioners live longer than assumed, benefit obligations and liabilities will be larger than expected. SENSITIVITIES The 2020 sensitivities of significant 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 Per cent Change Accrued Benefit Obligation Decrease in Assumption Increase in Assumption Net Benefit Plan Cost Decrease in Assumption Increase in Assumption 1 % 1 % 1 % 1 % 10 % (435) 10 459 11 (88) 541 (8) (378) (9) 101 6 1 10 — (1) (9) — (7) — 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. 15. 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 Contract assets included in other assets The significant changes in trade accounts receivable and contract assets are as follows: December 31, 2018 Revenue from satisfied performance obligations Customer billings and other items not included in revenue Sale of operations (Note 23) Payments received Foreign exchange rate adjustment December 31, 2019 Revenue from satisfied performance obligations Customer billings and other items not included in revenue Acquisition of ATCO Sabinco (Note 26) Credit loss allowance Payments received Foreign exchange rate adjustment and other December 31, 2020 117 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 2020 712 15 727 2 729 2019 711 20 731 — 731 719 4,132 556 (72) (4,621) (3) 711 3,644 411 16 (2) (4,055) (11) 714 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 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, 2018 Receipt of customer contributions Sale of operations (Note 23) Amortization December 31, 2019 Receipt of customer contributions Amortization Transfers from other liabilities and foreign exchange rate adjustment December 31, 2020 16. 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 Additions Foreign exchange rate adjustment December 31, 2019 Additions Disposals Foreign exchange rate adjustment December 31, 2020 Accumulated depreciation January 1, 2019 Depreciation December 31, 2019 Depreciation Disposals December 31, 2020 Net book value December 31, 2019 December 31, 2020 1,798 85 (97) (66) 1,720 82 (56) 10 1,756 Land and Buildings 107 9 (2) 114 15 (2) 2 129 — 18 18 16 (2) 32 96 97 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 118 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 Additions Interest expense Lease payments Foreign exchange rate adjustment December 31, 2019 Additions Interest expense Lease payments Foreign exchange rate adjustment December 31, 2020 Less: amounts due within one year December 31, 2020 Note 6 6 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 107 9 3 (19) (1) 99 15 3 (18) 1 100 (16) 84 18 62 46 126 The amounts expensed in the consolidated statements of earnings for the year ended December 31, in relation to short-term leases and low-value leases are as follows: Short-term leases Low-value leases 2020 9 6 15 2019 8 6 14 During the years ended December 31, 2020 and 2019, less than a million of expenses were incurred in relation to low-value leases, and no expenses were incurred in relation to 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, 2020 and 2019, the Company's operating leases include rentals of modular structures. 119 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 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 2020 2019 315 (140) 175 9 166 175 27 109 179 315 9 49 117 175 331 (152) 179 9 170 179 26 105 200 331 9 44 126 179 During the year ended December 31, 2020, $1 million of contingent rent was recognized as income from these finance leases (2019 - $2 million). 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 2020 2019 79 72 1 152 45 26 — 71 During the year ended December 31, 2020 and 2019, no contingent rent was recognized as income from these operating leases. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 120 17. 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 is shown below. AUTHORIZED AND ISSUED Authorized: Issued and outstanding: December 31, 2018 Purchased and cancelled Stock options exercised Converted: Class II to Class I December 31, 2019 Purchased and cancelled Stock options exercised Converted: Class II to Class I December 31, 2020 Class I Non-Voting Shares 300,000,000 Amount Shares 50,000,000 Class II Voting Amount Shares 350,000,000 Total Amount 101,428,881 (101,350) 107,950 28,300 101,463,781 (150,000) 27,300 6,818 101,347,899 182 13,231,247 — 3 — 185 — 1 — — (28,300) 13,202,947 — — — (6,818) 186 13,196,129 2 114,660,128 (101,350) 107,950 — — — — 2 114,666,728 (150,000) 27,300 — — — — 184 — 3 — 187 — 1 — 2 114,544,028 188 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 114,544,028 188 114,666,728 Shares held in trust for the mid-term incentive plan (244,209) (10) (321,948) Shares outstanding, net of shares held in trust 114,299,819 178 114,344,780 187 (14) 173 2020 2019 Shares Amount Shares Amount DIVIDENDS The Company declared and paid cash dividends of $1.7408 per Class I and Class II Share during 2020 (2019 - $1.6192). 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 14, 2021, the Company declared a first quarter dividend of $0.4483 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. NORMAL COURSE ISSUER BID On March 9, 2020, ATCO Ltd. began a normal course issuer bid to purchase up to 1,014,684 outstanding Class I Shares. The bid expires on March 8, 2021. The prior year normal course issuer bid to purchase up to 1,014,294 outstanding Class I Shares began on March 8, 2019 and expired on March 7, 2020. 121 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS During the year ended December 31, 2020, 150,000 shares were purchased for $6 million, resulting in no impact to share capital and a decrease to retained earnings of $6 million (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). 18. 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, amortization and impairment Gain on sale of operations (Note 23) Earnings from investment in associate company Dividends received from associate company Earnings from investment in joint ventures, net of dividends and distributions received Dividends and distributions received from investment in joint ventures, net of earnings Income tax expense Unearned availability incentives Unrealized losses (gains) on derivative financial instruments Contributions by customers for extensions to plant Amortization of customer contributions Net finance costs Income taxes paid Provision on early termination of the master service agreement for managed IT services (Note 3) Other 2020 669 — (15) 17 (14) — 166 — 10 82 (56) 407 (31) 75 (3) 1,307 2019 637 (174) (15) 12 — 1 66 7 (7) 85 (66) 484 (94) — (16) 920 CHANGES IN NON-CASH WORKING CAPITAL The changes in non-cash working capital for the year ended December 31 are summarized below. 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 and other current assets Accounts payable and accrued liabilities 2020 2019 28 (2) (4) 12 5 39 (4) — — — (4) 64 (5) (37) (202) (25) (205) 7 4 2 (6) 7 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 122 DEBT RECONCILIATION The reconciliation of the changes in debt for the year ended December 31 is shown below. Liabilities from financing activities December 31, 2018 Net (repayment) issue of debt Foreign currency translation Sale of operations (Note 23) Debt issue costs Amortization of deferred financing charges December 31, 2019 Net issue of debt Acquisition of ATCO Sabinco (Note 26) Foreign currency translation Debt issue costs Amortization of deferred financing charges December 31, 2020 Short-term debt Long-term debt Non-recourse debt Total 175 (175) — — — — — — — — — — — 9,397 1,401 10,973 78 (38) — (4) 3 9,436 129 11 43 (3) 3 9,619 (32) — (129) (38) (1,371) (1,371) — 2 — — — — — — — (4) 5 9,436 129 11 43 (3) 3 9,619 See Note 16 for the reconciliation of the changes in lease liability for the years ended December 31, 2020 and 2019. CASH POSITION Cash position in the consolidated statements of cash flows at December 31 is comprised of: Cash Short-term investments Restricted cash (1) Cash and cash equivalents Bank indebtedness 2020 1,059 5 39 1,103 (3) 1,100 2019 1,061 — 79 1,140 — 1,140 (1) Cash balances which are restricted under the terms of joint arrangement agreements are considered not available for general use by the Company. 123 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 19. 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, bank indebtedness, and accounts payable and accrued liabilities Assumed to approximate carrying value due to their short-term nature. Finance lease receivables Long-term debt Measured at Fair Value Interest rate swaps Foreign currency contracts Commodity contracts Determined using a risk-adjusted interest rate to discount future cash receipts (Level 2). Determined using quoted market prices for the same or 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 Financial Liabilities Long-term debt Carrying Value 2020 Fair Value Carrying Value 2019 Fair Value 175 254 179 227 9,619 11,987 9,436 11,098 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 124 FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE The Company's derivative instruments are measured at fair value. At December 31, 2020 and 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 Mexican pesos and U.S. dollars; 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 December 31, 2020 Financial Assets Prepaid expenses and other current assets Other assets Financial Liabilities Provisions and other current liabilities Other liabilities (1) December 31, 2019 Financial Assets Prepaid expenses and other current assets Other assets Financial Liabilities Provisions and other current liabilities (1) Other liabilities (1) Subject to Hedge Accounting Not Subject to Hedge Accounting Interest Rate Swaps Commodities Commodities Foreign Currency Forward Contracts Total Fair Value of Derivatives — — 3 27 — 5 1 5 25 12 6 4 20 21 11 10 5 4 8 3 — — — — — — — — — — 2 — 30 16 17 34 20 26 14 15 (1) At December 31, 2020, financial liabilities include $1 million of Level 3 derivative financial instruments (December 31, 2019 - $7 million). During the year ended December 31, 2020, losses before income taxes of $19 million were recognized in other comprehensive income (OCI) (2019 - losses of $3 million), none of which were reclassified to the statement of earnings (2019 - losses of $22 million were reclassified to the statement of earnings, of which $11 million were reclassified on sale of the Canadian fossil fuel-based electricity generation business (see Note 23)). Hedge ineffectiveness of $3 million was recognized in the statement of earnings during 2020 (2019 - $19 million). Over the next 12 months, the Company estimates that gains before income taxes of $6 million will be reclassified from accumulated other comprehensive income (AOCI) to earnings. 125 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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, 2020 Purchases (3) Sales (3) Currency Canadian dollars Australian dollars Mexican pesos Maturity December 31, 2019 Purchases (3) Sales (3) Currency Canadian dollars Australian dollars Mexican pesos U.S. dollars Maturity — — 93 738 570 10,593,800 2,203,836 — — 3,238,242 759,246 7,867,560 1,089,495 — — — — — — — — — — — — 2023-2028 2021-2025 2021-2025 2021-2024 2021-2024 — — 96 743 570 — 19,680,771 2,627,765 — 20,456,673 2,215,145 7,000,000 — — — — — — — — — — — — 2020-2028 2020-2024 2020-2024 2020-2021 — — — — — — — Foreign Currency Forward Contracts — — — — 100 2021 — — — — 100 46 2020 (1) (2) (3) Notional amounts for the natural gas purchase contracts are the maximum volumes that can be purchased over the terms of the contracts. Notional amounts for the forward power sale and purchase contracts are the commodity volumes committed in the contracts. 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: 2020 Financial Assets Derivative assets (1) Accounts receivable and contract assets Financial Liabilities Derivative liabilities (1) 2019 Financial Assets Effects of Offsetting on the Balance Sheet Gross Amount Gross Amount Offset Net Amount Recognized 45 61 20 — (39) — 45 22 20 Accounts receivable and contract assets 59 (37) 22 (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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 126 20. 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 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 97 per cent (2019 - 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, 2020. 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 5 58 127 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS The sensitivity analysis is based on management’s assessment that an average 10 per cent increase or decrease in these currencies 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, 2020. 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 increase or decrease earnings by $6 million, and would increase or decrease OCI by $8 million. 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 128 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 rates for respective credit ratings is as follows: December 31, 2020 December 31, 2019 High (AA to AAA) Medium (BBB to A) Low (BB and below) 0%-0.02% 0.05%-0.16% 0.51%-3.20% 0%-0.02% 0.06%-0.16% 0.53%-3.41% At December 31, 2020, the Company had approximately $90 million of accounts receivable and contract assets classified as Low (BB and below) (2019 - approximately $150 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: Beginning of year Credit loss allowance Utilization of credit loss allowance End of year 2020 6 12 (10) 8 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 2020 652 18 6 16 692 2019 6 4 (4) 6 2019 640 25 10 25 700 At December 31, 2020, the Company held $237 million in letters of credit for certain counterparty receivables (2019 - $246 million). The Company did not take possession of any collateral it holds as security in 2020 or 2019. The Company has also entered into guarantee arrangements with the parent company of Direct Energy Partnership (Direct Energy) relating to the retail energy supply functions performed by Direct Energy (see Note 29). 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. 129 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 2,914 150 571 3,635 Used 814 138 154 1,106 2020 Available 2,100 12 417 2,529 Total 2,985 18 571 3,574 Used 839 13 174 1,026 2019 Available 2,146 5 397 2,548 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: Long-term debt Letters of credit Commercial paper 2020 906 200 1,106 2019 797 229 1,026 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, 2020 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) 2021 695 329 398 13 1,435 2022 2023 2024 2025 2026 and thereafter — — — — — 379 384 5 768 817 364 2 1,183 129 343 — 472 35 342 7,979 6,986 — — 377 14,965 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2020. 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, 2020. 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, as reported in the consolidated financial statements for the year ended December 31, 2019. 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 7,767 6,687 — — 460 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 130 PANDEMIC RISK An outbreak of infectious disease, a pandemic or a similar public health threat, such as the COVID-19 pandemic, could adversely impact the Company by causing operating, supply chain and project development delays and disruptions, labor shortages and shutdowns as a result of government regulation and prevention measures, increased strain on employees and compromised levels of customer service, any of which could have a negative impact on the Company’s operations. Any deterioration in general economic and market conditions resulting from a public health threat could negatively affect demand for electricity and natural gas, revenue, operating costs, timing and extent of capital expenditures, results of financing efforts, or credit risk and counterparty risk; any of which could have a negative impact on the Company’s business. While the Company’s investments are largely focused on regulated utilities and long-term contracted businesses with strong counterparties creating a resilient investment portfolio, the extent of the COVID-19 pandemic and its future impact on the Company remains uncertain. In response to the evolving situation, the Company's Pandemic Plan was activated in February 2020. The plan included travel restrictions, limited access to facilities, a direction to work from home whenever possible, physical distancing measures and other protocols (including the use of personal protective equipment while at a work premise). Since then, the Company has been following recommendations by local and national public health authorities across the globe to adjust operational requirements as needed to ensure a coordinated approach across the Company. As a result of these efforts and the Company’s experience in crisis response, the Company’s operations, financial position and performance have not been significantly impacted for the year ended December 31, 2020. 21. 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. 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. 131 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS The Company’s capitalization at December 31 is as follows: Bank indebtedness Long-term debt Total debt Class I and Class II Shares Contributed surplus Retained earnings Accumulated other comprehensive loss Non-controlling interests Total equity Total capitalization Debt capitalization 2020 3 9,619 9,622 178 6 3,880 (12) 3,797 7,849 2019 — 9,436 9,436 173 12 3,832 (17) 3,858 7,858 17,471 17,294 55 % 55 % For the year ended December 31, 2020, the Company complied with externally imposed requirements on its capital, including covenants related to debentures and credit facilities. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 132 22. 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 133 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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. 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 based on 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 20. 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. 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 134 Onerous contracts In assessing the unavoidable costs of meeting obligations under an onerous contract at the reporting date, the Company identifies and quantifies any compensation or penalties, other costs arising from the need to terminate a contract or inability to fulfil it. This process involves judgment about the future events, interpretation of legal terms of a contract, as well as estimates on the timing and amount of future cash flows. The change in used estimates and underlying assumptions can significantly impact the amount of recognized provision in relation to onerous contracts. 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. Significant assumptions used to determine the retirement benefit cost and obligation are shown in Note 14. Asset retirement obligations The Company's estimates regarding asset retirement costs and related obligations change as a result of changes in cost estimates, legal and constructive requirements, market rates and technological advancement. The significant assumptions used to record asset retirement obligations include, but are not limited to, expected timing of retirement of an asset, scope and costs of retirement and reclamation activities, rates of inflation and a pre-tax risk- free discount rate. The estimates and assumptions for asset retirement obligations are reviewed at each reporting period. Changes to the estimates or assumptions could significantly impact the carrying values of the asset retirement obligations. 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. 23. BUSINESS COMBINATIONS SALE OF OPERATIONS IN 2019 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 business Sale of Alberta PowerLine operations 770 (89) 681 13 694 175 78 222 — 222 — 222 (1) (13) Total 992 (89) 903 13 916 174 65 135 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Sale of the Canadian fossil fuel-based electricity generation business In 2019, the Company closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation business. A transaction with Heartland Generation Ltd., an affiliate of Energy Capital Partners 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 sold 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. The sale 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 assets and liabilities of the Canadian fossil fuel-based electricity generation business were reported in the Energy Infrastructure operating segment. The below summary illustrates major classes of assets and liabilities included in the sale of the Canadian fossil fuel- based electricity generation business. (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 Total assets LIABILITIES Current liabilities Accounts payable, accrued liabilities and other current liabilities Non-recourse long-term debt Non-current liabilities Deferred income tax liabilities Customer contributions Other liabilities Non-recourse long-term debt Total liabilities Carrying value of net assets sold Assets and liabilities sold 89 77 12 18 196 535 17 35 202 32 49 1,066 159 10 169 33 96 187 32 517 549 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 136 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 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) Transaction costs relate to success fees, legal costs and other advisory costs directly attributable to the sale of operations. 137 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Sale of Alberta PowerLine operations In 2019, the Company sold its entire 80 per cent ownership interest in Alberta PowerLine, a partnership between the Company and Quanta Services Inc. The sale resulted in gross proceeds of $222 million and the assumption of $1.4 billion of debt, excluding deferred financing charges. Prior to the sale, the assets and liabilities of Alberta PowerLine were reported in the Energy Infrastructure operating segment. The below summary illustrates major classes of assets and liabilities included in the sale of Alberta PowerLine. (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 Total assets 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 Total liabilities Carrying value of net assets sold (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 sold 7 83 106 196 1,470 18 1,684 25 20 45 56 62 1,309 1,472 212 222 (212) (11) (223) (1) (24) (25) 12 (13) ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 138 24. INVESTMENT IN EQUITY INTEREST IN ASSOCIATE COMPANY In 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 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 3). 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 2020 December 31 2019 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 ATCO's share of earnings ATCO's share of other comprehensive loss 139 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 307 63 370 1,180 1,550 (53) (45) (98) (197) (104) (301) (399) 322 78 400 1,186 1,586 (48) (57) (105) (215) (95) (310) (415) 1,151 460 1,171 468 2020 2019 326 (65) 2 (13) (4) 40 (5) 15 (2) 328 (62) 8 (14) (2) 37 (6) 15 (2) A reconciliation of the carrying amount of the investment in associate company is as follows: Balance at the beginning of the year ATCO's share of net earnings ATCO's share of other comprehensive loss Dividends received Foreign exchange Other Balance at the end of the year 25. SUBSIDIARIES 2020 468 15 (2) (17) (3) (1) 460 2019 491 15 (2) (12) (24) — 468 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, 2020 and December 31, 2019 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 sold during the year ended December 31, 2019 (see Note 23) ATCO Power Canada (3) Alberta PowerLine (4) Canada Canada Electricity generation and related infrastructure services Design, build, own, and operate transmission infrastructure (1) At December 31, 2020, ATCO Ltd. has an ownership interest of 52.3 per cent (2019 - 52.2 per cent). (2) Following the sale of the Canadian fossil fuel-based electricity generation business (see Note 23), ATCO Power (2010) holds the remaining Canadian electricity generation and related infrastructure assets. (3) Included the Canadian fossil fuel-based electricity generation business sold in 2019 (see Note 23). (4) Prior to the sale of operations in 2019, Canadian Utilities Limited had an ownership interest of 80 per cent. 26. 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 business (see Note 23). Prior to the sale, the significant joint operations, all of which were included in the Energy Infrastructure segment, were as follows. Significant Joint Operations Sheerness Generating Plant Joffre Cogeneration Plant Cory Cogeneration Plant Muskeg River Cogeneration Plant Operating Jurisdiction Canada Canada Canada Canada Ownership % 50 40 50 70 Principal Activity Electricity generation Electricity generation Electricity generation Electricity generation ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 140 JOINT VENTURES The following joint ventures are considered the most significant; however, they are not individually material to the operations of the Company. Significant Joint Ventures Segment Joint ventures at December 31, 2020 and December 31, 2019 Operating Jurisdiction Ownership % Principal Activity LUMA Energy LLC Utilities, Electricity Puerto Rico Osborne Cogeneration Plant Electricity Australia Strathcona Storage Limited Partnership Pipelines & Liquids Canada Joint venture at December 31, 2019, and during the period ended December 30, 2020 50 50 60 Operations and management services Electricity generation Hydrocarbon storage Sabinco Soluciones Modulares S.A. Structures & Logistics Chile 50 Modular structures Aggregate information for the Company’s interest in joint ventures is shown below. Earnings and comprehensive income for the year Dividends received Aggregate carrying amount of interests in joint ventures ATCO Sabinco 2020 34 20 186 2019 24 25 187 On December 30, 2020, the Company increased its ownership in Sabinco Soluciones Modulares S.A. (ATCO Sabinco) from 50 per cent to 100 per cent. The increase in ownership was accounted for using the acquisition method. The aggregate consideration paid was $20 million and is included in other investing activities in the consolidated statements of cash flows. ATCO Sabinco was previously accounted for as a joint venture, and, effective December 30, 2020, is consolidated. Significant assets and liabilities acquired and, as a result included in the consolidated balance sheets at December 31, 2020, include $43 million of property, plant and equipment, $16 million of trade accounts receivable and contract assets, and $11 million of long-term debt. ATCO Sabinco is reported in the Structures & Logistics segment. LUMA Energy LLC On June 22, 2020, LUMA Energy LLC (LUMA), a Commonwealth of Puerto Rico based joint venture between the Company and Quanta Services, Inc., where each party holds a 50 per cent ownership interest, was selected by the Puerto Rico Public-Private Partnerships Authority to modernize and operate Puerto Rico's electric transmission and distribution system over a term of 15 years after a one year transition period which commenced in June 2020. LUMA contractual arrangements do not assume ownership of any electric transmission and distribution assets. The functional currency of LUMA is US dollars. The Company has accounted for its 50 per cent ownership interest as a joint venture, whereby the initial investment shall be adjusted for the Company's share of LUMA's earnings, other comprehensive income, dividends received from LUMA, and foreign exchange. When making the assessment on whether LUMA represents a joint venture, the Company considered the structure, legal form and contractual terms of the arrangement with Quanta Services, Inc., as well as other facts and circumstances. LUMA is reported in the Utilities, Electricity segment. At December 31, 2020, the investment in LUMA was $14 million. Earnings from investment in LUMA during the year ended December 31, 2020, were $14 million. No dividends or distributions were received from LUMA during the year ended December 31, 2020. Joint venture disposed of as part of the sale of operations In 2019, Canadian Utilities Limited 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 business (see Note 23). Prior to the sale, Brighton Beach Plant was included in the Energy Infrastructure segment. 141 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Investment in joint ventures In 2020, contributions of $9 million were made to the Strathcona Storage Limited Partnership (2019 - nil). 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 $25 million at December 31, 2020 (2019 - $45 million). Restrictions The Company requires approval from its joint venture partners before any dividends or distributions can be paid. 27. 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 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 2020 3,794 2019 3,853 3 5 3,797 3,858 2020 % 47.7 9.7 61.7 2019 % 47.8 9.8 61.8 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 142 The summarized consolidated financial information for Canadian Utilities Limited, before inter-company eliminations, is provided below. Consolidated Statements of Comprehensive Income 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 financing activities (Decrease) Increase in cash position Dividends paid to NCI Class A and Class B share owners Equity preferred shares EQUITY PREFERRED SHARES Equity preferred shares held by non-controlling interests at December 31 are shown below. 2020 2019 3,233 3,905 434 451 245 252 958 892 494 462 1,559 1,714 18,737 18,330 (856) (739) (12,632) (12,384) 6,808 3,794 6,921 3,853 1,631 1,358 (905) (924) (198) 227 74 301 (172) (788) 398 220 74 294 2020 2019 CU Inc. Equity Preferred Shares Cumulative Redeemable Preferred Shares, at 2.243% to 4.60% 190 190 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 1,400 1,400 110 (30) 110 (30) 1,670 1,670 143 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS Rights and privileges Preferred shares Cumulative Redeemable Preferred Shares Quarterly Dividend (2) Redemption Amount (1) Reset Premium (3) Date Redeemable/ Convertible Convertible To Series 1 Series 4 25.00 25.00 0.2875 0.1401875 Cumulative Redeemable Second Preferred Shares Does not reset Currently redeemable Not convertible Series 5 (5) June 1, 2021 (4) 1.36 % 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 0.2126875 0.30625 0.30625 0.28125 0.28125 0.328125 0.28125 2.40 % Does not reset Does not reset Does not reset Does not reset Does not reset 3.69 % 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) December 1, 2025 (4) Perpetual Cumulative Second Preferred Shares Series V 25.00 0.2875 No premium Currently redeemable Not convertible (1) (2) (3) (4) (5) (6) Plus accrued and unpaid dividends. Cumulative, payable quarterly as and when declared by the Board. 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. 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. 28. 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) (2) 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 25% per year over 4 years 20% per year over 5 years 2-3 years (3) Term Settlement 10 years Class I Non-Voting Shares (4) 8 years Class I Non-Voting Shares (4) 10 years Cash 2-3 years Class I Non-Voting Shares (5) (1) (2) (3) (4) (5) 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. Stock Options granted in 2020 vest over 4 years with a term of 8 years. Stock Options that were granted in 2019 and prior vest over 5 years with a term of 10 years. Based on achieving certain performance criteria. Issued from Treasury. Purchased on the secondary market. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 144 STOCK OPTION PLAN Information about the options outstanding and exercisable at December 31 is summarized below. Options authorized for grant Options available for issuance 2020 Weighted Average Exercise Price Options 10,200,000 2,444,540 2019 Weighted Average Exercise Price Options 10,200,000 1,994,950 Outstanding options, beginning of year 693,000 $44.40 705,500 $41.31 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 - $51.97 450,000 (27,300) 38.40 106,000 29.96 (107,950) (500) 42.08 (10,550) 1,115,200 $42.33 693,000 461,950 $44.44 397,850 49.51 29.04 45.92 $44.40 $43.21 Number Outstanding Weighted Average Remaining Contractual Life 9,000 584,900 176,050 269,750 75,500 1,115,200 0.2 7.0 5.1 6.8 3.4 6.3 Outstanding Exercisable Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $28.32 9,000 $28.32 38.15 43.26 48.60 51.89 119,100 113,500 146,650 73,700 37.08 43.93 48.03 51.91 $42.33 461,950 $44.44 Compensation expense related to stock options was less than $1 million in each of 2020 and 2019, with a corresponding increase to contributed surplus. SHARE APPRECIATION RIGHTS Information about the share appreciation rights (SARs) outstanding and exercisable at December 31 is summarized below. Outstanding SARs, beginning of year 775,000 $44.56 787,500 $41.76 2020 Weighted Average Exercise Price SARs 2019 Weighted Average Exercise Price SARs 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 7,000 38.40 127,000 (27,300) (18,500) 736,200 461,950 29.96 (107,950) 46.79 (31,550) $44.99 775,000 $44.44 397,850 49.51 29.04 47.51 $44.56 $43.21 Outstanding Exercisable Number Outstanding Weighted Average Remaining Contractual Life 9,000 148,900 199,050 301,750 77,500 736,200 0.2 3.9 5.4 6.9 3.5 5.4 Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price $28.32 9,000 $28.32 37.43 43.15 48.67 51.86 119,100 113,500 146,650 73,700 37.08 43.93 48.03 51.91 $44.99 461,950 $44.44 145 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS In 2020, compensation credit related to SARs was a credit of $1 million (2019 - expense of $3 million). The total carrying value of liabilities arising from SARs at December 31, 2020 was $2 million (2019 - $3 million). The total intrinsic value of all vested SARs at December 31, 2020 was less than $1 million (2019 - $3 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 $38.40 0.52 % 21.76 % 4.62 % 2020 SARs $38.40 0.37 % 24.67 % 4.62 % Options $49.51 1.47 % 18.88 % 3.25 % 2019 SARs $49.51 1.47 % 18.85 % 3.25 % Expected holding period prior to exercise 7.1 years 4.0 years 7.1 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. MID-TERM INCENTIVE PLAN Information about the MTIPs outstanding at December 31 is summarized below. Outstanding MTIPs, beginning of year 321,948 $45.00 342,212 $44.34 2020 Weighted Average Grant Date Fair Value MTIPs 2019 Weighted Average Grant Date Fair Value MTIPs Granted Vested Forfeited (1) Change in unallocated shares (2) Outstanding MTIPs, end of year — — 49.21 43.49 — 108,650 (28,770) (48,558) (51,586) $42.16 321,948 (78,401) (224,799) 225,461 244,209 (1) Forfeitures occur when certain performance criteria are not met. (2) Unallocated shares are Class I Shares held by the trustee which have not been awarded to officers or key employees. 44.46 42.62 41.77 — $45.00 Outstanding Weighted Average Grant Date Fair Value $42.16 Weighted Average Remaining Contractual Life 0.6 Number Outstanding 12,950 231,259 244,209 — 0.6 — $42.16 MTIPs Range of Prices $40.92 - $44.38 Unallocated shares $40.92 - $44.38 Compensation expense related to MTIP grants was a credit of $3 million for 2020 with a corresponding decrease to contributed surplus (2019 - expense of $2 million with a corresponding increase to contributed surplus). The Company, through a trustee, did not purchase any shares during 2020 to be distributed to employees on vesting of the awards (2019 - 10,000 shares). ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 146 29. 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. Prior to and as at December 31, 2020, 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. On January 5, 2021, Centrica plc. closed a transaction to sell its entire ownership interest in Direct Energy to NRG Energy Inc. (NRG). Effective January 5, 2021, NRG provided a $300 million guarantee, supported by a $300 million letter of credit for Direct Energy’s obligations to ATCO Gas and ATCO Electric under the transaction agreements. 30. 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 31. RELATED PARTY TRANSACTIONS 2021 2022 2023 2024 2025 2026 and thereafter 407 231 14 652 319 329 299 47 151 — — — — — — — — — — 319 329 299 47 151 In transactions with the Company’s joint ventures, the Company recognized revenues of $21 million relating to management fees and other charges (2019 - $6 million). In transactions with the Company’s group pension plans, the Company paid occupancy costs of $7 million relating to property owned by the pension plans (2019 - $8 million). The Company received less than $1 million (2019 - less than $1 million) in electricity and gas sales revenue and incurred $1 million in advertising, promotion and other expenses from entities related through common control (2019 - $3 million). 147 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS KEY MANAGEMENT COMPENSATION Information on management compensation for the year ended December 31 is shown below. Salaries and short-term employee benefits Retirement benefits Share-based compensation (1) 2020 10 2 (3) 9 2019 11 2 8 21 (1) In 2020, relates to certain forfeitures of mid-term incentive plan grants. Key management personnel comprise members of executive management and the Board, a total of 18 individuals (2019 - 19 individuals). 32. 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. 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 148 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. 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. 149 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 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 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 150 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. 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 151 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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. 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 57 years 3 to 120 years 15 years 43 to 50 years 10 to 73 years 12 to 17 years 1 to 74 years 51 years 44 years 42 years 41 years 15 years 50 years 34 years 17 years 17 years 1.9 % 2.3 % 2.4 % 2.4 % 6.4 % 1.9 % 2.9 % 6.0 % 6.0 % 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 80 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 152 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. 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. 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. 153 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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. Current legal or constructive obligations arising from onerous contracts are recognized as provisions when the unavoidable cost of meeting the obligation under the contract exceeds the economic benefits expected to be received. 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 154 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. 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. 155 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 156 Employer contributions to the defined contribution pension plans are expensed as employees render service. 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. 157 ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 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 2020 2019 2020 1.2838 0.9726 1.2963 0.9112 1.3415 0.9247 2019 1.3281 0.9227 ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED At December 31, 2020, 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. ATCO LTD. 2020 CONSOLIDATED FINANCIAL STATEMENTS 158 CONSOLIDATED ANNUAL RESULTS (1) YEAR ENDED DECEMBER 31, 2020 (Millions of Canadian dollars, except as indicated) 2020 2019 2018 2017 2016 EARNINGS STATEMENT Revenues Earnings attributable to Class I and Class II shares Adjusted earnings (2) (6) Structures & Logistics Neltume Ports Corporate & Other Canadian Utilities Limited - Utilities (Electricity) - Utilities (Natural Gas) - Energy Infrastructure - Corporate & Other Eliminations Adjusted earnings 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 (5) (6) Structures & Logistics Neltume Ports Corporate & Other and Eliminations Canadian Utilities Limited - Utilities (Electricity) - Utilities (Natural Gas) - Energy Infrastructure - Corporate & Other 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 ($) 3,944 252 4,706 513 4,888 328 4,600 219 4,045 340 57 15 — 166 139 15 (40) 352 37 15 (6) 172 129 57 (39) 365 15 4 17 151 124 83 (39) 355 6 — 10 175 138 41 (35) 335 43 — 3 169 123 57 (35) 360 1,100 22,200 1,140 21,703 691 23,344 494 21,786 601 19,724 3 — — — 9,619 9,436 — — 3,797 4,052 17,471 3,858 4,000 17,294 — 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 1,804 1,927 1,897 1,813 1,912 144 — 13 366 510 28 8 1,069 2.21 3.08 1.74 35.37 36.49 37.81 105 9 (16) 389 646 185 6 1,324 4.49 3.19 1.62 34.88 49.77 49.55 113 444 10 467 622 846 16 2,518 2.87 3.10 1.51 32.75 38.61 38.55 37 — 81 438 761 501 3 1,821 1.92 2.93 1.31 30.76 45.00 44.90 97 — 70 470 678 289 5 1,609 2.97 3.15 1.14 30.93 44.66 44.78 Full disclosure of all financial information is available on the SEDAR website - www.sedar.com. (1) Financial results have been prepared in accordance with International Financial Reporting Standards (IFRS). 159 ATCO LTD. 2020 CONSOLIDATED ANNUAL RESULTS (2) 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 operations. Descriptions of the adjustments are provided in Note 3 of the 2020 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. This measure is not defined by IFRS and GAAP and may not be comparable to similar measures used by other companies. (5) 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. (6) In 2020, the Company reorganized its operating segments into Structures & Logistics, Utilities (Electricity and Natural Gas), Energy Infrastructure, and Corporate & Other. Comparative amounts for 2016 through 2019 have been restated to reflect the realigned segments. ATCO LTD. 2020 CONSOLIDATED ANNUAL RESULTS 160 CONSOLIDATED OPERATING SUMMARY YEAR ENDED DECEMBER 31, 2020 (Millions of Canadian dollars, except as indicated) 2020 2019 2018 2017 2016 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 (2) Port products handling (millions of tonnes) Utilities 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) 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) (4) Pipelines (thousands of kilometres) Energy Infrastructure Electricity generation operations (3) Capital investments (1) Non-regulated generating capacity (megawatts) Non-regulated generating capacity owned (megawatts) 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) 144 3 52 19 73 105 3 48 16 72 113 3 40 15 75 37 4 37 13 70 97 5 38 14 64 45 46 44 — — 366 75 12,012 7,528 261 389 75 12,664 7,227 260 467 75 12,928 7,398 258 438 75 11,961 7,325 256 470 76 11,659 7,198 256 307 55 2,535 300 353 55 2,304 311 383 55 2,292 304 464 55 2,381 287 426 55 2,097 263 113 112 111 116 116 13 2,023 13 2,003 14 1,978 14 1,952 15 1,924 203 9 293 9 239 9 297 9 252 9 7 348 248 21 52 400 59 344 244 31 52 400 156 3,922 2,517 24 3,887 2,482 108 3,870 2,473 12 52 400 10 52 200 26 52 200 85 85 85 85 85 (1) 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. (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. 161 ATCO LTD. 2020 CONSOLIDATED ANNUAL RESULTS (3) In 2019, the Company closed a series of transactions related to the sale of its Canadian fossil fuel-based electricity generation business. A transaction with Heartland Generation Ltd., an affiliate of Energy Capital Partners, 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 sold 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. (4) In 2020, the Company reorganized its operating segments into Structures & Logistics, Utilities (Electricity and Natural Gas), Energy Infrastructure, and Corporate & Other. Comparative amounts for 2016 through 2019 have been restated to reflect the realigned segments. ATCO LTD. 2020 CONSOLIDATED ANNUAL RESULTS 162 This page left intentionally blank 163 ATCO ANNUAL REPORT 2020 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 On the cover: Black bear cubs peer out from behind a tree in the Rocky Mountains of western Alberta, while mama bear keeps a close eye on them as she forages in a grassy meadow nearby. Photo by Liron Gertsman — lirongertsman.com Printed in Canada ATCO ANNUAL REPORT 2020 164 5302 FORAND ST SW, CALGARY, ALBERTA T3E 8B4 CANADA 403 292 7500 | ATCO.COM Printed in Canada 5 5 1 8 / 5 5 2 8 

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