ATCO Ltd.
Annual Report 2022

Plain-text annual report

ATCO LTD. ANNUAL REPORT FOR THE YEAR ENDED DECEMBER 31, 2022 2 2 0 2 T R O P E R L A U N N A Message from the Chair & CEO Management Discussion & Analysis Financial Statements Consolidated Annual Results Consolidated Operating Summary General Information 1 4 96 176 177 178 With these tenets clear in our minds, the talents and passion of our ATCO people at the ready, and our values at our back, we will continue to do great things in shaping the future for generations to come. While mounting macroeconomic and geopolitical uncertainty reminds us that stability is the exception, we are resolute in our vision and our focus to deliver the enduring essentials required for global economic growth. In 2022, each of our businesses continued to cement their position at the forefront of their respective industries. I’m pleased to share with you a few of our notable achievements and some perspective on the future. ATCO Structures continued to grow its base business by increasing fleet size and average rental rates and by positioning new fleets across our markets and geographies. On the global workforce housing side of operations, Structures continued to progress their project work, particularly with Bechtel in Australia related to the Pluto II LNG expansion. You will see additional updates about Structures’ achievements in this report, but I do want to note the successful acquisition of Triple M Housing, a leading North American manufacturer of modular housing. This acquisition is key to solving urban housing shortages and affordability concerns. ATCO Frontec has delivered exciting and enhanced business results, many with Indigenous partners. We deeply believe that this kind of equity partnership business represents the future of development. Of note, the Government of Canada awarded Nasittuq, the partnership between Frontec and the Pan Arctic Inuit Logistics Corporation, a seven-year contract to operate and maintain the North Warning System, a chain of radar sites and support facilities that form part of Canada's North American Aerospace Defense Command (NORAD) agreement with the United States. Nasittuq was also awarded a support services contract at the Canadian Forces Station Alert on Ellesmere Island. With the Canadian federal government announcing its commitment to SHAPING OUR FUTURE Dear ATCO Share Owners, Two hours south of your company’s headquarters in Calgary lies the town of Longview, Alberta. This quaint and picturesque ranching community is just one of many communities in Alberta and Western Australia served by ATCO Gas. As you drive the aptly named Cowboy Trail Highway overlooking the Longview area, wide open views stretch from the high prairies to the majestic Rockies. This spot provides perspective on business and what’s important to ATCO. I am reminded how important the “long view” is— both when conducting our current business and considering our future opportunities to build shared prosperity. This special place also provides opportunity to reflect on what lies at the heart of ATCO and what we hold to be true after 75 years in business. The essence of ATCO is captured in the following strategic imperatives: • We create global opportunities to innovate, advise and lead in the energy transition. • We believe in building truly equitable partnerships with Indigenous communities. • We build accessible and innovative solutions for housing and community spaces. • We collaborate with community partners to enhance economic and social development. • We value a long-range outlook to build future prosperity. • We champion a diverse and inclusive environment where inspired people can make a meaningful difference. 1 ATCO LTD. 2022 ANNUAL REPORT spend $4.9 billion over six years to modernize NORAD's capabilities, ATCO and our partners are well positioned to support defence of the North. Through our investment in Canadian Utilities, we continue to energize homes, businesses, and industries—delivering reliable and increasingly sustainable solutions like no other company in the world. In the past year, we completed the acquisition of a high-quality portfolio of renewable energy assets that includes 232 MW of operational wind facilities and a development pipeline of more than 1,500 MW of wind and solar projects in Alberta and Ontario. This acquisition complements the previously announced Barlow, Deerfoot and Empress solar projects that we are actively pursuing in Alberta. Our growing renewable energy footprint further positions us as a leader in decarbonization and allows our company to play a prominent role in enabling the energy transition for our customers. Building upon our significant expertise in the production and utilization of clean fuels, Canadian Utilities is actively developing several hydrogen projects in Canada and Australia, including production, blending and refuelling facilities to drive down emissions and help progress the energy transition. In Western Australia we commissioned two significant hydrogen projects—a facility to allow for hydrogen blending to decarbonize our natural gas network and a hydrogen refuelling station for passenger transport. In Alberta, we made significant progress on the Suncor-ATCO Heartland Hydrogen Hub, a world-scale, vertically integrated, first-of-its-kind, clean hydrogen development in the Alberta Industrial Heartland. We are also pursuing a pilot project to blend hydrogen into our natural gas network in the same region, providing 2,100 customers with hydrogen-blended natural gas to fuel their homes and businesses safely and reliably. Alberta and Australia can produce ultra-low emissions hydrogen at a lower cost than almost any other jurisdiction in the world, and the utilization of this domestically produced clean fuel offers the most cost-effective pathway to decarbonize building heat and appliances. This strategic advantage will take on even greater importance in the years ahead, as governments seek to advance simultaneous policies targeting various pillars of the economy, such as clean electricity regulations and green building strategies. Energy storage is another key part of our business and will be crucial to managing energy supply in a changing energy system. We continue to advance the Central West Pumped storage hydro facility in Australia, and we have submitted the project to the New South Wales Government, with the aim of the project starting construction in 2024. In both Canada and Australia, we continue to explore options for hydrogen storage, as well as hydrogen refuelling initiatives. Neltume Ports, which positions us in the expanding global trade sector, continues to be a strong investment for ATCO. In 2022, Neltume invested in a number of operational improvements at existing ports, and we believe the pipeline of opportunities in the Neltume business remains strong. Across our global operations, we know that affordability and reliability are vital considerations for our customers and communities. We must continue to provide prosperity in the communities where we have the opportunity and privilege to work. That’s why we strive to provide value to our customers and communities through efficient, cost- effective and high-quality service. For example, we continue to deliver significant efficiencies in the transmission and distribution of electricity and natural gas. In Alberta, ATCO Electric has reduced 2023 rates across both its distribution and transmission businesses compared to 2022 levels despite significant inflationary pressures. Our ATCO Gas business has also achieved a similar result in reducing distribution charges. ATCO LTD. 2022 ANNUAL REPORT 2 I invite you to read this report and our Sustainability Report for more details on our progress and achievements. You can also stay abreast of our news and results via our quarterly reports, website and social media channels. Each member of the ATCO team has a role to play in delivering our strategic imperatives, balancing the deliverables of affordability, reliability and innovation. I thank each one of more than 10,000 direct and indirect members of the ATCO family who display courage and excellence and live by our values of safety, integrity, agility, caring and collaboration in delivering our essential services. My deep appreciation also goes out to the members of our Board of Directors for their ongoing direction, guidance and wisdom over the course of the past year. And I thank you – our share owners – for your continued investment and trust that you place in the ATCO group of companies. Sincerely yours, Nancy C. Southern Chair & Chief Executive Officer, ATCO Ltd. 3 ATCO LTD. 2022 ANNUAL REPORT ATCO LTD. MANAGEMENT’S DISCUSSION AND ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2022 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, 2022. This MD&A was prepared as of March 1, 2023, and should be read with the Company's audited consolidated financial statements (2022 Consolidated Financial Statements) for the year ended December 31, 2022. Additional information, including the Company's Annual Information Form (2022 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) (52.9 per cent ownership), ATCO Structures & Logistics Ltd. (100 per cent ownership), ATCO Land and Development Ltd. (100 per cent ownership), and ASCHOR Technologies Ltd. (Ashcor) (100 per cent ownership). The Company also has an 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. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 4 TABLE OF CONTENTS ATCO Vision and Values ............................................................................................................................................................ ATCO Strategies .......................................................................................................................................................................... Company Overview and Operating Environment ............................................................................................................... Performance Overview ............................................................................................................................................................. ATCO Scorecard .......................................................................................................................................................................... Strategic Priorities for 2023 ..................................................................................................................................................... Corporate Governance ............................................................................................................................................................. Business Unit Performance ..................................................................................................................................................... Structures & Logistics ............................................................................................................................................................. Neltume Ports .......................................................................................................................................................................... ATCO Corporate & Other ....................................................................................................................................................... Canadian Utilities .................................................................................................................................................................... Utilities ............................................................................................................................................................................... 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 .................................................................................................................................. Other Financial and Non-GAAP Measures ............................................................................................................................ Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares .................................... Reconciliation of Capital Investment to Capital Expenditures ......................................................................................... Other Financial Information ................................................................................................................................................... Glossary ........................................................................................................................................................................................ Appendix 1 Fourth Quarter Financial Information ............................................................................................................. Page 6 6 9 16 19 29 31 32 32 38 39 40 40 47 50 51 57 59 62 63 69 79 80 89 90 93 94 5 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO VISION AND VALUES EXCELLENCE: THE ATCO HEART & MIND "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 OUR VISION To create prosperity and opportunity for generations to come. ATCO STRATEGIES ATCO is a diversified holding company with a foundation of low volatility assets complimented with higher growth opportunities. Our essential services investments offer customers around the world tailored solutions to meet their individual needs and offer investors a stable and growing earnings profile, with exposure to favourable macroeconomic trends and a long-term investment horizon. Innovation, growth and financial strength provide the foundation from which we have built our Company. Our long-term success depends on our ability to expand into new markets by continuing to offer our customers premier, comprehensive and integrated solutions to meet their needs. 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. 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. We strive to live by the following values: Safety Safety is the first consideration in everything we do. We hold a shared belief that safety must direct all our day-to- day priorities and decisions, and we are accountable for understanding and following the health and safety requirements for any work we undertake. Integrity We are honest, ethical and treat others with fairness, dignity and respect. We make good decisions, take personal ownership of tasks, are responsible for our actions and deliver on our commitments. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 6 Agility We are creative, innovative and take a measured approach to opportunities and risk, balanced with a long term perspective. We stay relevant, reward action and learn from failure. Caring We care about our customers, our employees and their families, our communities and the environment. We seek to understand and care enough to challenge each other. Collaboration We work together, share ideas, recognize the contribution of others and learn from our failures and successes. We are clear about our intentions and communicate openly especially when problems or issues arise. We value and encourage diversity and different perspectives. We work together to build strong networks. SUSTAINABILITY ATCO's sustainability strategy has always been driven by a holistic, long-term perspective, one that prioritizes our sustainability objectives and environmental, social and governance (ESG) performance while reliably delivering essential products and services to our customers, each and every day. Energy Transition We are actively transitioning our portfolio of investments to meet the needs of a new energy future while maintaining energy safety, reliability and affordability. We are investing in innovative technology and developing a suite of solutions from which our customers can choose. Our strategic focus is on cleaner fuels, renewable energy, energy infrastructure and storage, and energy efficiency. Climate Change & Environmental Stewardship Our Climate Change Strategy not only minimizes our environmental footprint, it accelerates the clean energy transition. Critical to this approach is our focus on decarbonization and exploring new and more efficient ways to generate, transport and conserve energy. People Health and safety are the first considerations in everything we do. And, while we protect the people in our workforce and communities, we know we must also reflect the people in our communities by promoting diversity, equity and inclusion. Operational Reliability & Resilience We prepare for the future so that even in times of crisis our system continues to provide the essential services our customers need. We are committed to providing reliable energy, working around the clock to minimize service outages, and ensuring our assets are resilient for decades to come. Community & Indigenous Relations Building respectful and mutually beneficial relationships with communities, with Indigenous Peoples and with businesses has long defined how we do business. Together with our Indigenous and community partners, we are continually exploring new ways to collaborate. 7 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS STRATEGIC ENVIRONMENTAL, SOCIAL AND GOVERNANCE TARGETS FOR 2030 In January 2022, ATCO announced an initial set of 2030 environmental, social and governance targets, and a commitment to achieve net-zero greenhouse gas (GHG) emissions by 2050. These 2030 targets include reducing our operational GHG intensity and customer emissions, growing our renewable energy footprint and transitional products, increasing economic benefits for Indigenous partners, continuing our focus on safety, and further promoting diversity, equity and inclusion in the workplace. The 2050 net-zero commitment builds upon the Company's significant progress in recent years in decarbonizing its portfolio. ATCO continues to evaluate further ESG targets and conduct additional analyses with respect to the Company's 2050 net-zero commitment. Additional information and progress towards ATCO's ESG targets is included in this MD&A and will be included in the Company's annual Sustainability Report, which will be available in May 2023. FURTHER COMMENTARY REGARDING STRATEGIES AND COMMITMENTS Our financial and operational achievements in 2022 relative to the strategies outlined are included in this MD&A, the 2022 Consolidated Financial Statements and 2022 AIF. Further commentary will be provided in the forthcoming 2022 Management Proxy Circular, Business Profile, and Sustainability Report. The 2022 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. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 8 COMPANY OVERVIEW AND OPERATING ENVIRONMENT With approximately 7,600 employees, 11,400 employees in non-controlled interests, and assets of $24 billion, ATCO is privileged to serve more than four million customers around the world, providing innovative, sustainable solutions in the sectors that are essential to global growth and prosperity. 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. 9 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ORGANIZATIONAL STRUCTURE (1) ATCO Land and Development Ltd. is a commercial real estate business that holds investments for sale, lease or development. (2) ASHCOR Technologies Ltd. (Ashcor) is engaged in the processing and marketing of fly ash predominantly reclaimed from landfills. (3) Canadian Utilities' 100 per cent owned subsidiary CU Inc. includes Electricity Distribution, Electricity Transmission, Natural Gas Distribution and Natural Gas Transmission. (4) (5) International Electricity Operations consists of Canadian Utilities' 50 per cent ownership in LUMA Energy, LLC (LUMA Energy), a company which is transforming, modernizing and operating Puerto Rico's 30,000-km electricity transmission and distribution system. International Natural Gas Distribution is a regulated provider of natural gas distribution services in Western Australia, serving metropolitan Perth and surrounding regions. (6) Canadian Utilities owns and operates 348-MW of non-regulated electricity generation assets in Australia, Mexico, Canada and Chile and 103-MW of assets under development in Canada as of December 31, 2022. Subsequent to year-end, 242-MW of operational non-regulated electricity generation was added when the acquisition of Suncor Energy Inc.'s renewable energy portfolio closed on January 3, 2023. (7) Storage & Industrial Water builds, owns and operates non-regulated natural gas storage, natural gas liquids storage, natural gas related infrastructure, and industrial water. (8) Clean Fuels includes large-scale hydrogen production opportunities, renewable natural gas, and technical expertise support. (9) ATCO Energy Ltd. (ATCO Energy) includes Rümi, Blue Flame Kitchen, and Retail Energy and offers home products, home maintenance services, professional homeowners advice, and retail electricity and natural gas services in Alberta. The 2022 Consolidated Financial Statements includes our share of joint venture (JV) investments and its equity- accounted investment in an associate company (40 per cent of Neltume Ports). Principal subsidiaries are Canadian Utilities, of which ATCO owns 52.9 per cent (37.9 per cent of the Class A non-voting shares and 96.7 per cent of the Class B common shares), and ATCO Structures & Logistics Ltd., of which ATCO owns 100 per cent of the common shares. ATCO also owns 100 per cent of the common shares of ATCO Land and Development Ltd. and ASHCOR Technologies Ltd. The 2022 Consolidated Financial Statements have been prepared in accordance with International Financial Reporting Standards (IFRS) and the reporting currency is the Canadian dollar. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 10 STRUCTURES & LOGISTICS BUSINESS DESCRIPTION ATCO Structures & Logistics' 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 is to generate sustainable earnings growth by increasing our market presence in the regions we operate, identifying opportunities in new markets, and delivering 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 deliver our strategic offerings in workforce housing, permanent modular construction, 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 regions within geographies in which we operate, while continuing to utilize our manufacturing platform to scale quickly when needed to meet the demand of workforce housing opportunities. We continue to pursue customer diversification opportunities and the expansion of our product offerings. Non-traditional modular markets, particularly residential housing, public education facilities, and healthcare facilities, continue to offer development opportunities. We will continue to pursue organic and acquisition growth opportunities. Globally, our operations continue to provide strategic value and opportunities for growth. MARKET CHALLENGES ATCO Structures, Calgary, Alberta, Canada The modular construction industry is influenced by the capital spending cycles of our clients and their respective industries. There is also a high level of competition in the markets in which we operate. We face additional challenges with ongoing worldwide health and geopolitical events, and unprecedented inflationary and interest rate pressures. Many active projects are presented with varying levels of disruption, which is generating labor shortages of critical trades, and persistent global supply chain delays affecting project productivity and delivery. 11 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO Frontec BUSINESS STRATEGY Our strategy is to grow our business as an international provider of integrated operational support services to government, defence and commercial clients. With our expertise in workforce housing camp services, facility operations and maintenance services, defense operations services, and disaster and emergency management, we are able to apply our competitive advantages of being a bundled services provider with proven long-term, collaborative partnerships. MARKET OPPORTUNITIES We see opportunity to expand our operations within Canada and the US, particularly as defence spending in these countries increases. Frontec specializes in supporting public and private sector clients operating in remote and austere locations. Our strategic Indigenous partnerships, presence and ongoing operations in northern communities, and extensive knowledge of the unique operating requirements make Frontec a favourable choice. 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 for large scale projects within Canada may limit the demand for workforce housing camp services. We are pursuing contracts with customers whose projects remain subject to comprehensive approval processes. Changes in government policy and social license have resulted in a decrease of large-scale projects in Canada that historically provided potential contracts for ATCO Frontec. Inflationary pressures could impact our operating costs, though we look to mitigate this risk with carefully constructed contracts. There is a high level of competition in the defence sector of the US that could present difficulty securing contracts. ATCO Employee, Resolute Bay, Nunavut, Canada ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 12 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, Brazil, and the US. Neltume Ports employs approximately 7,400 people and operates 17 port facilities and 6 port operation services businesses. In 2022, Neltume Ports handled 43 million tonnes of product, including copper, forestry products, consumer goods and agricultural products. BUSINESS STRATEGY Neltume Ports' sustained growth will continue to be achieved by improving operational efficiency, increasing volumes and ownership at existing ports, and investing in brownfield, greenfield and acquisition opportunities throughout the Americas. Neltume's strategy is focused on continuous improvement initiatives to refine operational practices throughout all facets of its business. 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. 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 other global trends. Neltume Ports continuously reviews opportunities to increase its ownership position in ports that are jointly owned and continues to actively explore brownfield and greenfield opportunities, as well as acquisition expansion potential. MARKET CHALLENGES The ports industry by nature is sensitive to changes in international trade, supply chain constraints, labour shortages, commodity prices and foreign exchange, all of which could impact Neltume Ports. In recent years, Neltume Ports has seen challenges caused by the global pandemic, social unrest, political instability, and economic issues in the region. Terminal Puerto Coquimbo, Coquimbo, Chile 13 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS CANADIAN UTILITIES Canadian Utilities is a diversified global energy infrastructure corporation delivering operating and service excellence and innovative business solutions in Utilities (Electricity and Natural Gas transmission and distribution, and International Operations); Energy Infrastructure (Energy Storage, Energy Generation, Industrial Water Solutions, and Clean Fuels); and Retail Energy (Electricity and Natural Gas Retail Sales, and Whole-Home Solutions). Utilities BUSINESS DESCRIPTION The Utilities business unit operates in Canada, Australia and Puerto Rico. The four regulated utilities (Electricity Transmission and Distribution, and Natural Gas Transmission and Distribution) in Alberta, Saskatchewan and the northern regions of Canada have delivered reliable electricity and clean-burning natural gas to customers for many decades. International Operations consists of the regulated natural gas distribution business in Western Australia, and the electricity operations business in Puerto Rico; Canadian Utilities' 50 per cent ownership in LUMA Energy. BUSINESS STRATEGY Our strategy is to invest in regulated electricity and natural gas transmission and distribution assets, capitalize on opportunities to provide long-term contracted electricity and natural gas transmission and distribution services, and to enable renewable energy generation, delivery, and storage. Our strategic priorities are focused on investments that provide lower emissions and clean energy solutions for our customers, and continuing to invest in our core business while maintaining energy reliability, safety, and affordability. MARKET OPPORTUNITIES The utilities industry is changing with an increased focus on decarbonization, digitalization, decentralization, and evolving customer demand. The worldwide push towards reaching net-zero, 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 this movement. 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. Provincial and federal governments have expressed concerns about existing levels of customer rates and affordability, which may impact the pace of growth. The ongoing energy transition is driving policy uncertainty and risks delaying investment decisions that would align with our decarbonization targets. Technology risks associated with decarbonization, digitalization, and decentralization could lead to disruption of the Company's existing business models and create competitive market dynamics. ATCO Employee, Alberta, Canada ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 14 Energy Infrastructure BUSINESS DESCRIPTION The Energy Infrastructure non-regulated businesses include: hydro, solar, wind, 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 solutions in Alberta. Energy Infrastructure is also developing its clean fuels business including hydrogen, renewable natural gas, carbon capture and underground storage projects. BUSINESS STRATEGY Energy transition is a key component of our growth strategy, focused on the three pillars of clean fuels, renewable generation, and energy storage. Energy Infrastructure is striving to be a leader in clean energy development while focusing on delivering reliable, affordable and clean energy infrastructure that supports our customers’ decarbonization objectives and leverages our core competencies and assets in the Americas and Australia. Energy Infrastructure continues to actively explore potential opportunities that will complement our growing renewable portfolio. Additionally, we continue to optimize and drive growth in our energy storage business. Storage is critical to energy stability and to support the reliability of the grid as the world transitions to clean, but more intermittent, sources of energy. 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 clean energy, mainly supplied through renewables and clean fuels. Energy markets will be focused on providing firm, reliable and affordable energy supply as the share of renewables grows; this will drive further investment into storage and grid balancing solutions to improve system reliability. MARKET CHALLENGES There is significant competition as financial, strategic and traditional fossil fuel-based energy producers become increasingly interested in renewables and clean fuels as part of the global energy transition. Government policy and regulatory constraints present challenges to renewables and clean fuel projects aligned with energy transition strategies. Macroeconomic conditions such as global economic activity, interest rates, inflation, and political uncertainty pose challenges for investment. Forty Mile Wind, Alberta, Canada 15 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS PERFORMANCE OVERVIEW FINANCIAL METRICS The following chart summarizes key financial metrics associated with our financial performance. ($ millions, except per share data and outstanding shares) 2022 2021 2020 Year Ended December 31 Key Financial Metrics Revenues Adjusted earnings (loss) (1) Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Limited Utilities (1) Energy Infrastructure Canadian Utilities Corporate & Other Adjusted earnings ($ per share) Earnings attributable to Class I and Class II Shares Earnings attributable to Class I and Class II Shares ($ per share) Diluted earnings attributable to Class I and Class II Shares ($ per share) Total assets Long-term debt Class I and Class II Share owners' equity Cash dividends declared per Class I and Class II Share ($ per share) Cash flows from operating activities Capital investment (2) Capital expenditures Other Financial Metrics 4,978 4,289 3,944 423 382 352 61 14 — 379 19 (50) 3.71 370 3.25 3.24 53 13 6 336 15 (41) 3.35 246 2.16 2.15 57 15 — 305 15 (40) 3.08 252 2.21 2.20 24,139 23,004 22,200 10,087 9,852 4,376 4,111 1.85 1.79 2,396 1,864 1,650 1,463 1,597 1,352 9,619 4,052 1.74 1,843 1,069 1,041 Weighted average Class I and Class II Shares outstanding (thousands): Basic Diluted 113,958 114,172 114,396 114,269 114,450 114,713 (1) Additional information regarding these total of segments measures is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. (2) Additional information regarding this non-GAAP measure is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Capital Investment to Capital Expenditures” in this MD&A. REVENUES Revenues in 2022 were $4,978 million, $689 million higher than the same period in 2021. Higher revenues, largely in Electricity Distribution and Natural Gas Distribution, are a result of rate relief provided to customers in 2021 in light of the COVID-19 global pandemic and subsequently the AUC decision to maximize the collection of 2021 deferred revenues in 2022. Higher revenues were also due to work on ATCO Structures' Bechtel Pluto Train II project, higher electricity and natural gas commodity prices at ATCO Energy, higher flow-through revenues in Natural Gas Distribution, growth in rate base in the Alberta Utilities, and additional revenue from the Alberta Hub natural gas storage facility acquired in December 2021 in the Energy Infrastructure segment. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 16 ADJUSTED EARNINGS (1) Our adjusted earnings in 2022 were $423 million or $3.71 per share, compared to $382 million or $3.35 per share for the same period in 2021. Higher adjusted earnings in 2022 were mainly due to inflation indexing on rate base in Australia which positively impacted earnings in Canadian Utilities' International Natural Gas Distribution business, ATCO Structures' strong business performance driven by space rentals activity globally and earnings from the Bechtel Pluto Train II project, cost efficiencies throughout our Alberta Utilities, and earnings from the Alberta Hub natural gas storage facility acquired in December 2021 in the Energy Infrastructure's business. 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 $370 million in 2022, $124 million higher compared to 2021. 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, 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. 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. CASH FLOWS FROM OPERATING ACTIVITIES Cash flows from operating activities were $2,396 million in 2022, $532 million higher than the same period in 2021. The increase was mainly due to higher cash flows from Canadian Utilities' Electricity Distribution and Gas Distribution businesses resulting from revenue attributable to the recovery of the 2021 deferral of customer rate increases, and higher cash flows at ATCO Structures' due to the Bechtel Pluto II Project in Australia. COMMON SHARE DIVIDENDS We have increased our common share dividend every year for the past 30 years, a track record of which we are very proud. Dividends paid to Class I and Class II Share owners totaled $211 million in 2022. On January 12, 2023, the Board of Directors declared a first quarter dividend of 47.56 cents per share or $1.90 on an annualized basis. ATCO continues to grow its dividends consistent with the sustainable growth of its investments. (1) Additional information is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. 17 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Quarterly Dividend Rate 1993 - 2023(dollars per share)$0.475693949596979899000102030405060708091011121314151617181920212223CAPITAL INVESTMENT (1) AND CAPITAL EXPENDITURES Total capital investment of $1,650 million in 2022 was $187 million higher compared to the same period in 2021 mainly due to ongoing capital investment in the Regulated Utilities, increased construction activities within Canadian Utilities' Energy Infrastructure segment, and continued expansion of ATCO Structures' space rental fleet globally and the fourth quarter acquisition of Triple M Housing Ltd. (Triple M). The increase in 2022 was partially offset by Canadian Utilities' 2021 acquisition of the Pioneer Pipeline and the completed construction of the Calgary Northwest Connector in 2021 in the Natural Gas Transmission business, and the acquisition of the Alberta Hub natural gas storage facility in the Energy Infrastructure business in December 2021. Total capital expenditures of $1,597 million in 2022 were $245 million higher compared to the same period in 2021 mainly due to the factors outlined above with the exception of the 2022 Triple M and the 2021 Alberta Hub acquisitions as these business combinations were excluded from capital expenditures. Capital spending in Canadian Utilities' Regulated Utilities accounted for 71 per cent of total capital expenditures in 2022. The remaining 29 per cent was mainly related to ATCO Structures' continued expansion of its space rental fleet globally and increased capital spending within Canadian Utilities' Energy Infrastructure segment, including the Barlow, Deerfoot and Empress Solar Projects, the expansion of the Carbon natural gas storage facility, and the Suncor ATCO Heartland Hydrogen Hub (SAH3). (1) Additional information regarding this non-GAAP measure is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Capital Investment to Capital Expenditures” in this MD&A. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 18 Capital Expenditures in 202271%29%Regulated UtilitiesOtherATCO SCORECARD The following scorecard outlines our performance in 2022. INNOVATION New and existing products and services STRUCTURES 2022 Target Performance ASHCOR 2022 Target Performance CANADIAN UTILITIES 2022 Target Performance Demonstrate continued product and service expansion within ATCO Structures to diversify revenue, expand customer base, achieve market penetration, and improve manufacturing and installation. ATCO Structures expanded its product and service offering with the Bechtel Pluto Train II project, a major project that supplements the base trade and rental activity of the Western Australia business. The project scope includes a significant component of relocating and refurbishing existing client assets, augmenting Structures’ typical service offerings of manufacturing and installation elements. In December 2022, Structures acquired Triple M Housing Ltd., a leading manufacturer of factory-built, modular housing. This acquisition establishes Structures’ presence in the North American residential housing market, and provides new capabilities in the construction and sale of single family modular homes. Continue to build and enhance Ashcor's business model for the processing and marketing of ash within the North American market. In 2022, Ashcor developed key strategic partnerships with leading civil construction and engineering firms, positioning us to offer a turnkey solution to utilities desiring closure-by-removal and beneficiation solutions. Through the collection of critical operating information and the extensive knowledge gained from the operation of our flagship Alberta facility, we will shorten the time to establish and ramp up production, facilitating the swift establishment of Reclaimed Ash Management (RAM) operations in potential new locations. Continue to progress Canadian Utilities’ energy transition strategies across the regulated and non-regulated energy businesses to increase ownership, develop or manage renewable generation, energy storage and/or clean fuel facilities, and/ or modernize natural gas and/or electricity delivery. Utilities and Energy Infrastructure continued to focus on energy transition with a specific emphasis on renewable generation, hydrogen blending, clean fuels and energy storage. Through the calendar year we announced or provided updates on the following projects (further details can be found in the Business Unit Performance section of this MD&A): • • • • • • • • Suncor Energy Inc. Renewable Energy Portfolio Acquisition; Suncor ATCO Heartland Hydrogen Hub (SAH3); Atlas Carbon Sequestration Hub (Atlas Hub); Empress and Calgary Solar Development Projects; Central West Pumped Storage Hydro project, Australia; Canadian Pacific (CP) Hydrogen Locomotive Project; Beaver Creek Solar Facility and Burwash Landing Wind Facility Electricity Purchase Agreements; and Clean Energy Innovation Hub & Hydrogen Refuelling Station, Australia. 19 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 2022 Target Performance Continue to prioritize Canadian Utilities’ role in working with remote communities to reduce their reliance on diesel fuels in a way that continues to support economic growth, energy independence, reconciliation and community building with Indigenous peoples. The Yukon Electrical Company Limited (ATCO Electric Yukon) finalized two landmark Electricity Purchase Agreements with the Copper Niisüü Limited Partnership as well as the Kluane First Nation for the upcoming Beaver Creek solar and the Burwash Landing wind facilities. Once complete, these projects will support the White River and Kluane First Nations to reduce reliance on diesel power, achieve greater energy autonomy, and generate economic benefits for the next 30 years. In 2022, Canadian Utilities was selected as the partner and commenced construction on the Métis Crossing Solar Project (MCSP), a community generation solar project located in Smoky Lake County at Métis Crossing, a signature cultural destination of the Métis Nation of Alberta (MNA). The MCSP is a collaboration between the MNA, the Town of Smoky Lake, and Smoky Lake County. The development of the solar facility will provide economic and community benefits to all community partners. In 2022, ATCO formed a partnership with Indigenous Clean Energy (ICE), which is a pan-Canadian, not-for-profit platform focused on promoting Indigenous inclusion in Canada’s energy future by advancing Indigenous leadership and collaboration. This partnership provides opportunities for us to support Indigenous projects, engage and mentor the community clean energy champions, build capacity, and ensure project success. With participation from energy experts across our company, ATCO hosted a free four-part webinar series, "The Project Lifecycle Of Remote Community Clean Energy Projects". These webinars provided the opportunity for communities to learn about the critical stages and key considerations in the development of community clean energy projects. The webinars are hosted on our website and YouTube channel, extending their reach to any interested parties. GROWTH Regulated and long-term contracted capital investment CANADIAN UTILITIES 2022 Target Performance Continue to invest in Canadian Utilities' technology and the modernization of both the natural gas and electricity networks to enhance sustainability and flexibility. Electricity developed a comprehensive Grid Modernization roadmap and strategy, and the Alberta Utilities Commission (AUC) approved, as filed, the scope, timing, and 2023 forecast of this Grid Modernization program in the 2023 Cost of Service Application. Digitization of the grid continued with further progression on implementing the technology to support the Advanced Distribution Management Systems (ADMS). As of year end, our control center has a dedicated SCADA (supervisory control and data acquisition) system serving our distribution grid. Additionally the deployment of Advanced Metering Infrastructure (AMI) continued to advance with a total of 8,606 installations completed in 2022. LUMA Energy installed 149 new automation devices in 2022 at strategic locations across Puerto Rico. These innovative devices detect outages within milliseconds, shorten outage duration and reduce the number of customers that experience an outage. In 2022, LUMA Energy activated distributed energy resources for 30,700 customers, representing 179-MW of distributed solar. In addition, LUMA Energy performed interconnection studies for clean energy projects representing more than 800-MW of renewable generation and 500-MW of energy storage. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 20 2022 Target Performance 2022 Target Performance 2022 Target Performance 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. In 2022, all major components were completed for the Urban Pipeline Replacement (UPR) Program, a program to replace and relocate aging, high- pressure natural gas pipelines in the densely populated areas of Calgary and Edmonton to address safety, reliability and support future growth. Final clean up and project close outs remain to be completed in 2023. As part of Electricity’s ongoing improvement and replacement programs, in 2022 Electricity advanced its wildfire mitigation program to address the ongoing risk of a powerline-related wildfire ignition in light of the increasing frequency of severe weather events. The program includes a focus on vegetation management in conjunction with ongoing life extension programs. In 2022, Electricity completed the second phase of its three phase replacement of a 97-km transmission line in central Alberta. The line will facilitate increased reliability in the region and enable the addition of renewable generation onto Alberta’s electricity grid. Continue to implement the System Remediation Plan in LUMA Energy; designed to lift the Transmission & Distribution System to the standards of a world-class utility. While Hurricane Fiona caused significant damage across Puerto Rico, the LUMA Energy team restored service to over 90 per cent of customers impacted by the devastation of the hurricane within 12 days – a historic pace that has never been seen before in Puerto Rico. By October 10, 2022 (three weeks after the hurricane), LUMA had restored service to 99 per cent of customers. LUMA Energy has continued to improve the Transmission and Distribution System by implementing the System Remediation Plan and to date has advanced critical improvements to Puerto Rico’s electric system including: • • • • • • • Replaced more than 3,800 broken and failing poles; Connected over 42,000 customers to rooftop solar - adding 200-MW of clean energy to the grid; Replaced over 21,100 streetlights as part of our US $1 billion Federal Emergency Management Agency funded Community Streetlight Initiative; Replaced dozens of critical distribution breakers to reduce the likelihood of future outages; Restored equipment, including one substation that had not been in operation since 2010; Inspected and completed engineering on the 37 worst performing feeders, of which the first six feeders’ work has begun; and Performed high-level assessments on 168 feeders, 118 transmission lines, and 10 substation sites to support project scoping and identifying focus areas for upcoming repairs and reconstruction. Increase the average contracted life of the in-service renewable generation portfolio by securing new power purchase agreements. In line with our overall generation strategy, we continue to seek opportunities to enter into long-term offtake agreements with high quality counterparties that underpin new developments and provide greater stability of cash flow and earnings for share owners. In 2022, Canadian Utilities entered into a 15-year power purchase agreement (PPA) with Microsoft Corporation. Under the terms of the agreement, Microsoft will purchase all renewable energy generated by Canadian Utilities’ 37-MW Deerfoot solar project in Calgary, Alberta. Continuing into 2023, Canadian Utilities entered into a new 15-year renewable energy purchase agreement (REPA) with Microsoft Corporation. Under the terms of the agreement, Microsoft will purchase 150-MW of renewable energy generated by Canadian Utilities' newly acquired Forty Mile Wind Phase 1 Project in Alberta. 21 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Global expansion - continue expansion into select global markets including: North America, South America and Australia STRUCTURES 2022 Target Performance 2022 Target Performance FRONTEC 2022 Target Performance 2022 Target Performance Continue to build sustainable growth within ATCO Structures through the expansion of the rental fleet, space rental business and permanent modular construction business in select markets. In 2022, Structures’ global space rentals fleet grew by 14 per cent from 19,684 units to 22,433 units. Targeted expansion of the US space rentals fleet is a significant component of this growth with the fleet nearly doubling from 853 units to 1,703 during the year. The additional fleet is key in growing market presence in the US, and will be deployed through existing branches, and new branch locations. This includes the Denver branch, which commenced operations in 2022, and the Houston branch, which was opened during the year. During 2022, Structures expanded its space rentals customer base in the US, with 160 distinct customers during the year compared to only 4 distinct customers in 2021. In November 2022, ATCO Structures executed its sixth affordable housing project with the completion of a supportive housing permanent modular construction building located in Vernon, BC for the Government of British Columbia’s BC Housing organization. Continue to optimize idle workforce housing fleet capitalizing on opportunities as they arise. 2022 saw Structures tailor their fleet size and unit type, primarily through the strategic sale of used and under-utilized fleet assets in the US, Canada and Australia. This strategy ensured that Structures retained sufficient capacity to support the rapidly evolving needs of customers while generating strong cashflows to refresh the workforce housing fleet and support other business objectives. Expand ATCO Frontec's North American camp business and enter the Australian market. Based on exploratory research and a visit to Australia in 2022, a decision was made to redirect our attention from Australia to the United States. Frontec has already seen great success in the US market - six project wins over the last three years - and the opportunity to expand our offerings to include our Facilities Operations and Maintenance and Disaster and Emergency Management offerings, while expanding our market share in the camp services space. Our most recent win in 2022 of the Pogo camp, discussed below, further expands our operations in the US. ATCO Frontec will expand into new geographies with the focus of servicing remote communities. ATCO Frontec announced a new contract to provide camp support services to Northern Star Resources' Pogo mine, located approximately 220-km southeast of Fairbanks, Alaska. The Nasittuq contracts discussed below highlight why Frontec is the preferred choice for remote community opportunities, with our strategic Indigenous partnerships, extensive knowledge of the unique operating environment, and ongoing operations in the North. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 22 2022 Target Performance ASHCOR 2022 Target Performance NELTUME PORTS 2022 Target Performance CANADIAN UTILITIES 2022 Target Performance Grow ATCO Frontec's Facilities Operations & Maintenance Business with further commercial and government clients, including large scale defence contracts. The North Warning System (NWS) Operations and Maintenance contract awarded by Public Services and Procurement Canada, on behalf of the Department of National Defence, to Nasittuq Corporation (Nasittuq), an Inuit majority-owned corporation and a partnership between ATCO Frontec and Nunasi Corporation and Pan Arctic Inuit Logistics Corporation, commenced contract year one on October 1, 2022. Nasittuq was also successful in rebidding the contract to continue providing support services at the Canadian Forces Station (CFS) Alert on Ellesmere Island, by Public Services and Procurement Canada, on behalf of the Department of National Defence. Nasittuq has been the incumbent provider since 2012 for this contract, and the new contract is set to commence June 1, 2023. ATCO Frontec successfully delivered the United Kingdom (UK) training camp for the US Defense Threat Reduction Agency (DTRA). ATCO Frontec provided a field camp for 130 personnel from DTRA and US Department of Energy in order to test their mobile facilities. The camp was mobilized in April, operated in May and demobilized in early June 2022 in accordance with schedule. Ashcor to secure additional commercial agreements and ash rights in North America. Although additional commercial agreements have not yet been secured, Ashcor has further advanced its RAM technology through continued process improvements. Additional research and development efforts have been invested in the development of mobile RAM technology, expanding the existing technologies' flexibility and potential applications, with its rapid deployment capabilities improving our business' competitiveness. Seek opportunities with Neltume Ports' available cash in brownfield, greenfield and acquisition opportunities. Growth and the deployment of capital continues to be a key priority for Neltume. In 2022, capital deployment was centered around operational improvements at existing ports. Our pipeline of opportunities in the Neltume business remains strong and we’re confident that this will create meaningful opportunities for new investment. Continue to build upon Canadian Utilities' existing renewables generation and energy storage, and invest in Clean Fuels innovation in the Energy Infrastructure business. Building on our solar and clean fuel developments, Energy Infrastructure announced in October that Canadian Utilities entered into a definitive agreement with Suncor Energy Inc. to acquire a portfolio of assets which includes a suite of operational wind facilities and a development pipeline of wind and solar projects in Alberta and Ontario. The transaction closed on January 3, 2023. Throughout 2022, Energy Infrastructure focused on optimizing our storage facilities, the integration of the Alberta Hub natural gas storage facility, and the completion and operation of the fifth cavern at the ATCO Heartland Energy Centre that is now storing customer products. Storage is critical to energy stability and to support the reliability of the grid as the world transitions to clean, but more intermittent sources of energy. SAH3 continues to make considerable progress. The hydrogen production facility will be located at ATCO's Heartland Energy Centre near Fort Saskatchewan, Alberta, and is expected to be operational as early as 2028, subject to a 2024 sanctioning decision. Canadian Utilities announced in September a $9 million AUD recoverable grant had been awarded from the New South Wales Government to help fund pre- investment activities in the development of the 325-MW Central West Pumped Storage Hydro project in Australia. Further details can be found in Energy Infrastructures' Recent Developments section in this MD&A. 23 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS FINANCIAL STRENGTH Credit Rating 2022 Target Performance Access To Capital Markets 2022 Target Performance Maintain investment grade credit rating. Maintained 'A (low)' long-term credit rating with stable outlook on ATCO Ltd. and 'A' long-term credit rating with stable outlook on Canadian Utilities Limited with DBRS Limited. Standard & Poors revised its issuer rating for ATCO Ltd. and Canadian Utilities Limited from 'A-' with a negative outlook to 'BBB+' with a stable outlook. Fitch Ratings assigned a first-time issuer rating of 'BBB+' with stable outlook to ATCO Ltd. and 'A-' with stable outlook to Canadian Utilities Limited. Continue to manage liquidity and access to capital in a prudent manner that facilitates strong access to capital at appropriate rates. Despite heightened volatility and market turmoil globally, our businesses retained strong liquidity and market access in the year, with the market recognizing our financial strength and stability. On June 3, 2022, Canadian Utilities Limited issued $250 million of 4.851 per cent 30-year debentures. Proceeds from this issuance were used to repay existing indebtedness, and for other general corporate purposes. The issue was oversold and completed at an attractive spread of 198 basis points above Government of Canada 30-year bond rates. On September 14, 2022, CU Inc. issued $210 million of 4.773 per cent 30-year debentures. Proceeds from this issuance were used for financing capital expenditures, and for other general corporate purposes. The issue was oversold and completed at an attractive spread of 163 basis points above Government of Canada 30-year bond rates. OPERATIONAL EXCELLENCE In 2022, Safety was included as a fifth core value alongside Integrity, Collaboration, Caring, and Agility. This value reiterates that safety is the first consideration in everything we do. We hold a shared belief that safety must direct all our day-to-day priorities and decisions, and we are accountable for understanding and following the health and safety requirements for any work we undertake. Employees Lost-Time Incident Frequency (LTIF) ATCO 2022 Target Performance Compare favourably to safety benchmarks. Our lost time incident frequency in 2022 was 0.26/200,000 hours worked. Our lost-time incident frequency compares favourably to many benchmarks including Alberta Occupational Health and Safety, US private industry, and industry best practice rates. While our results are favourable to benchmarks, we continue to strive to have best-in-class safety programs that prioritize the safety of our people. Employees Total Recordable Incident Frequency (TRIF) ATCO 2022 Target Performance Compare favourably to safety benchmarks. Our total recordable incident frequency in 2022 was 0.99 incidents/200,000 hours worked. Our total recordable incident frequency in 2022 compares favourably to many benchmarks including US private industry and industry best practice rates. While we have made great progress and continue to improve, we continue to strive to have best-in-class safety programs that prioritize the safety of our people. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 24 Customer Satisfaction CANADIAN UTILITIES 2022 Target Performance 2022 Target Performance Achieve exemplary service for the customers and communities we serve. Results from customer satisfaction surveys should be consistent with or better than prior years. Electricity and Natural Gas Distribution achieved high service satisfaction levels, with approximately 95 per cent of customers agreeing that Canadian Utilities provides good service. These results compare favourably to industry averages and are consistent with previous years. ATCO Gas Australia’s Customer Satisfaction (CSAT) was 8.8 out of a possible 10, above the national industry benchmark of 8.4. ATCO Gas Australia consistently outperforms the broader energy industry in terms of both customer satisfaction and also a second measurement, the ease of implementation of its services. The ease of implementation scored 8.9 out of a possible 10, above the national industry benchmark of 8.6. Continue to prioritize improvements in LUMA Energy based on customer input and measure effectiveness via overall Customer Satisfaction scores. LUMA Energy had a year-over-year increase of 3 per cent in overall customer satisfaction, a 13 per cent increase in the area of billing and payment, and a 9 per cent increase in contact centre customer service as measured by J.D. Power CSAT scoring. Organizational Transformation - Streamline and gain operational efficiencies ATCO 2022 Target Performance Continue to demonstrate progress in leadership development, succession planning, and diversity, equity and inclusion initiatives across the organization. In 2022, ATCO was selected as a Top Employer in Alberta and a Top Employer for Young People in Canada. ATCO continues to evolve the succession management program platform and reporting to incorporate key metrics in the areas of growth, critical roles, top talent and diversity groups. Critical roles have successors identified and incumbents have development plans for retention. The Company continues to progress the development of our leaders with psychological safety and additional leadership training programs offered through the Leadership Development Academy. In July 2022, ATCO's Diversity, Equity and Inclusion (DE&I) Committee hosted guests from 38 companies across Canada, to join our inaugural DE&I event, facilitating conversations and knowledge-sharing around the power of representation. The key-note speaker was Hon. Scott Brison, P.C., Vice-Chair, Investment & Corporate Banking, BMO. 2022 was the inaugural year of the Women’s Speed Networking events, one of our cross-organization mentoring programs. Almost 60 participants were given the opportunity to connect with company leaders, including the Chair and CEO of ATCO and Canadian Utilities, Nancy Southern. The events kicked off in Calgary during Gender Equality Week and not only provided professional development, but also encouraged women to find their voice, advocate for themselves, and build networks across the Company. 25 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS STRUCTURES 2022 Target Performance LAND & DEVELOPMENT 2022 Target Performance CANADIAN UTILITIES 2022 Target Performance 2022 Target Performance Pivot Structures' manufacturing business to a more flexible and agile operating model across all geographies that creates cost efficiencies in its global manufacturing operations. During the year, Structures reduced the size of its manufacturing facility in Mexico to better align with the business needs. It provides adequate capacity to enter projects that are within the execution scope of the organization while reducing overhead burden. Structures continues to leverage key relationships and strategically utilize global manufacturing capacity. The US currently uses two third-party sourcing arrangements for space rentals product, reducing the logistics costs and providing flexibility to be selective and opportunistic with manufacturing projects. Utilization of excess capacity in the Canadian facility allows additional flexibility for the US facility to balance trade sales opportunities with the space rentals strategic expansion targets. ATCO Land and Development will work with all ATCO businesses to optimize the group’s real estate portfolio for operational use and long-term value and optionality. ATCO Land and Development is undertaking renovations to the two downtown office buildings in Calgary, with significant updates that modernize the buildings and improve the amenities. This will increase the competitiveness of these properties in the Calgary real estate market, while attracting new tenants and providing a better experience for everyone working at the locations. Additionally, ATCO Land and Development sold three vacant properties in 2022, further optimizing our real estate portfolio. Continue to optimize enterprise resource planning, workforce and asset management, customer information systems and computerized maintenance management systems within Canadian Utilities. Canadian Utilities continued to progress the implementation of its Workforce and Asset Management program for the Electricity and Natural Gas businesses, aimed at advancing 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 and is expected to be fully complete in 2023. In 2021, ATCO Gas Australia commenced an upgrade of its billing and metering system to comply with Australian Energy Market Operator (AEMO) regulations. This project will provide stakeholders with added functionality and upgrades the software to the latest version. The upgrade is expected to be complete in 2023. The Alberta Utilities Customer Information System (CIS) replacement program for both Natural Gas and Electricity is well underway. CIS holds our metering asset information, collects meter reads, calculates billing, and applies rates and production tariff bills for retailers. Both programs have experienced delays in in-service dates but are expected to be completed in 2023. LUMA Energy will advance its integrated safety culture and programs that will allow prioritization of safety risks and mitigations across business functions and enable employee safety, compliance and continual improvement. In the first year of operations, over 140,000 hours of mentorship, safety and technical training have been completed by employees and contractors at LUMA Energy. Since the commencement of operations, LUMA Energy has driven significant improvements in all safety measures across the business. In 2022, LUMA Energy achieved a TRIF of 2.66, a 65 per cent improvement from the prior operator and had a severity rate of 15.5, a 75 per cent improvement from the prior operator. During Hurricane Fiona, LUMA Energy achieved a TRIF of 2.42. This is a result of significant emphasis placed upon safety during emergency response efforts, including onboarding contractor safety specialists and setting expectations for adequate hazard assessment and worksite observations during restoration efforts. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 26 2022 Target Performance LUMA Energy has developed baseline performance metrics and will monitor progress in, among other areas, customer service, safety, reliability and the delivery of budgeted results. LUMA Energy is currently operating under an extended fixed fee arrangement during the Supplemental Agreement period. The extension of the Agreement was approved November 30, 2022; support for the work done to date was a consideration in the extension. While the agreement does not contain specific performance metrics, LUMA Energy created and progressed baseline performance metrics that are being reported quarterly to the regulatory body and the public. Once Puerto Rico Electric Power Authority (PREPA) exits from bankruptcy, incentive compensation will be measured through achieving performance metrics. Performance metrics have been submitted to the Puerto Rico Energy Bureau (PREB), the energy regulatory agency. The key performance metric categories currently being proposed are as follows: • • • Customer Satisfaction - Achieve a high-level of customer satisfaction across all customer classes. Technical, Safety & Regulatory - Operate a safe and reliable electrical grid while remaining compliant with applicable safety regulations. Financial Performance - Meet the approved Federally Funded Operating & Capital Budget and Non-Federally Funded Capital Budget. COMMUNITY INVOLVEMENT Indigenous Relations ATCO 2022 Target Performance Continue to work together with Indigenous communities to contribute to economic and social development in their communities. Across ATCO, $81,000 was awarded to 68 students across Canada, including the territories, through the ATCO Indigenous Education Awards Program. Across ATCO, 4,528 employees participated in one of the many Indigenous training courses offered in 2022 through in-person and virtual classroom training platforms. ATCO Frontec was awarded Silver-level certification from the Canadian Council for Aboriginal Business’s (CCAB) Progressive Aboriginal Relations (PAR) program. The program evaluates a company's commitment to Indigenous communities and recognizes sustained leadership in Indigenous relations. We continue to innovate new, collaborative models for our partnerships with Indigenous Peoples. Highlights in 2022 include a share purchase agreement between Denendeh Investments Incorporated (DII) and ATCO Electric Ltd. to increase DII’s ownership stake in Northland Utilities Enterprises Ltd. from 14 per cent to 50 per cent. In addition, AEY finalized two landmark Electricity Purchase Agreements for the upcoming Beaver Creek solar and the Burwash Landing wind facilities, and Canadian Utilities was selected as the partner and commenced construction on the MCSP, a community generation solar project located in Smoky Lake County. Employee-led Charitable Campaigns ATCO 2022 Target Performance Continue to administer the employee-led campaign to give employees the opportunity to contribute to charitable organizations in the communities in which they work. With the combined efforts of our employees around the world and the company donation match program, ATCO pledged more than $3.6 million to support hundreds of community charities in 2022. The annual ATCO Employees Participating In Communities (EPIC) campaign has a cumulative fundraising total of nearly $54 million since its inception in 2006. 27 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS CANADIAN UTILITIES 2022 Target Performance Community Investment STRUCTURES 2022 Target Performance CANADIAN UTILITIES 2022 Target Performance 2022 Target Performance LUMA Energy will establish the Somos LUCES (LUMA Committed with Employees) program. In 2022, the Somos LUCES program was launched. The program offers a 1:1 company match for donations and this year LUMA employees saw their donations matched at twenty different non-profit organizations. LUMA pledged more than $75,000 during the 2022 program. As a community partner in the Homes for Heroes Foundation, ATCO Structures' will continue to provide expertise in design, manufacturing, transportation and placement to provide housing along with the resources, services and training that will support a successful transition. During the year, ATCO Structures provided ongoing support to the ATCO Villages in Calgary and Edmonton through training initiatives, and operational consultation. Technical expertise was also provided to the Homes for Heroes Foundation for construction projects Structures was unable to directly participate in. Building on the momentum of the ATCO Villages in Calgary and Edmonton, the Homes for Heroes Foundation continues to expand into other Canadian cities. 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. The formal college is expected to open in the second quarter of 2022. Construction of the LUMA College for Technical Training is scheduled to be completed at the end of the second quarter of 2023 with a grand opening scheduled for later in 2023. The college’s primary purpose is to develop a local pipeline of future lineworkers and to enhance the skills of the initial LUMA craft employees. While the initial opening was delayed, partially due to Hurricane Fiona, our programs continued at our Palo Seco facility, and over 750 certification, training and development programs were completed. LUMA Energy will continue its grassroots community investment program across Puerto Rican municipalities through partnership with the American Red Cross of Puerto Rico and the Boys & Girls Club of Puerto Rico. LUMA Energy and the Puerto Rico Chapter of the American Red Cross announced in July 2022 the continuation of their partnership. This partnership provides communities across Puerto Rico with educational resources and programs for students and families focused on preparing for emergencies and improving electrical safety in the home. LUMA Energy also renewed the collaborative agreement with Boys & Girls Clubs of Puerto Rico. Through this agreement, LUMA Energy impacted more than 800 students through different programs that Boys & Girls Clubs of Puerto Rico offers. With the renewal of this agreement, we continue to reaffirm our social responsibility in Puerto Rico, and we will continue to support the education of children through various educational projects. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 28 STRATEGIC PRIORITIES FOR 2023 Our 2022 performance highlights that our corporate strategy, which includes leadership in environmental, social and governance matters, continues to drive success. ATCO's 2023 strategy will build on these achievements and look to create additional value through the execution of the priorities identified below. GROWTH Support energy transition with strategic regulated and non-regulated capital investments. Canadian Utilities will invest in its core utility assets to ensure continued safe and reliable operations and continue to invest in renewable generation, clean fuels and energy storage within Energy Infrastructure. Additionally, Canadian Utilities will target investments that support system growth and the modernization needed to support the energy transition and the decarbonization needs of our customers. Continue expansion into select global markets including Australia and the Americas. ATCO businesses will leverage our reputation to drive growth in markets where we are a known, trusted brand. We will also seek opportunities to collaborate where an alignment of key values and complementary expertise exists; prioritizing Indigenous partnerships. We continue to explore acquisition opportunities that will complement our growth strategies for each business, specifically those that increase diversification, advance energy transition, and provide access to higher-growth sectors. Explore diversification opportunities that complement our current products, services and assets. Each business within the ATCO group of companies continues to evaluate opportunities to expand offerings and better serve customers. These efforts aim to specifically target new business areas and services that build upon their core competencies and leverage existing assets. Additionally, in 2023 we will focus on promoting cross-organizational opportunities to find efficiencies and change the way we do business, by fully utilizing the strengths of our diverse and high-performing workforce. INNOVATION Execute initiatives and projects to drive meaningful progress towards our 2030 ESG targets. With the January 2022 announcement of ATCO's 2030 ESG goals, our businesses have committed to the achievement of their own supporting initiatives and have embedded these goals within their respective strategies. Across the Company, businesses are pursuing opportunities and developing programs that create operational efficiency and effectiveness, while increasing Indigenous benefits and supporting leadership development and career opportunities for all employees. Canadian Utilities is also continuing to advance its energy transition strategies across regulated and non-regulated businesses, while simultaneously modernizing our existing electricity and natural gas systems to support the energy transition and ensure continued reliability. Cultivate the continued financial strength needed to create prosperity and opportunity for generations to come. FINANCIAL STRENGTH Our business strategies, funding of operations, and planned future growth are supported by maintaining our strong investment grade credit ratings and continued access to capital markets at competitive rates. 29 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Compare favourably to safety benchmarks. ATCO companies are committed to a culture of health and safety excellence and our positive performance will continue to be reflected in the favourable rankings against industry safety benchmarks, such as lost-time incidents and incident frequency. Achieve high service satisfaction levels for the customers and communities we serve. OPERATIONAL EXCELLENCE Results from customer satisfaction surveys should be consistent with or better than prior years and we will leverage customer input and effectiveness measures in the prioritization of process improvements. Be an employer of choice while building and strengthening the capacity of our people. We continue to focus on employee engagement and programs that enhance diversity, equity and inclusion across our organization. Leadership development that lends to effective succession planning and opportunities for employee growth will continue to be a priority; supporting both employee satisfaction and retention. Committed to reconciliation with Indigenous communities and the maximizing of benefits. COMMUNITY INVOLVEMENT We believe that our Indigenous partners should be provided with opportunities to share in the economic and social benefits of developments that happen within their communities. We look to increase net economic benefits to our Indigenous partners each year. Be a leader in supporting initiatives and charitable organizations within the communities we live and work. ATCO will continue to administer the incredibly successful employee-led charitable campaigns of ATCO EPIC and Somos LUCES. Within the communities that ATCO does business, we will continue to seek out and support programs that deliver meaningful benefits to community members. ATCO EPIC Days of Caring ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 30 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 prosperity and opportunity for generations to come. Following are some of the highlights of our model for corporate governance. For a more complete picture, please see the Governance section of the 2022 Management Proxy Circular, which will be available in March 2023. 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 the 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. Dr. Robert J. Routs is the current Lead Director for ATCO, and was appointed to this position on July 22, 2021. The Lead Director provides the Board with the leadership necessary to ensure independent oversight of management. The Lead Director must be an independent director and is a member of GOCOM. Designated Audit Directors Distinctly unique to ATCO are Designated Audit Directors (DAD). 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. 31 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS BUSINESS UNIT PERFORMANCE ATCO Structures & Logistics' 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 they 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. REVENUES Structures & Logistics revenues of $241 million in the fourth quarter of 2022 were $2 million lower than the same period in 2021 mainly due to lower workforce housing trade sale activity in most geographies as installed projects moved to rental contracts, and lower permanent modular construction activity in Canada. Lower revenues were partially offset by revenues from ATCO Structures' Bechtel Pluto Train II project, performance improvement for space rentals across most geographies, and new projects and increased occupancy for ATCO Frontec-operated camps. Structures & Logistics revenues of $929 million in the full year of 2022 were $152 million higher than the same period in 2021 mainly due to revenues from ATCO Structures' Bechtel Pluto Train II project, performance improvement for space rentals, higher trade sale activity for workforce housing in Chile and Mexico, and new projects and increased occupancy for ATCO Frontec-operated camps. Higher revenues were partially offset by lower workforce housing trade sales activity as installed projects shifted to rentals, and lower revenues from ATCO Structures' LNG Canada Cedar Valley Lodge project, which was substantially completed in 2021. ADJUSTED EARNINGS ($ millions) ATCO Structures (1) (2) ATCO Frontec (1) (2) Total Structures & Logistics (2) (1) Considered to be non-GAAP financial measures. Three Months Ended December 31 Year Ended December 31 2022 2021 Change 2022 2021 Change 7 (3) 4 6 (1) 5 1 (2) (1) 54 7 61 48 5 53 6 2 8 (2) Additional information is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. Structures & Logistics adjusted earnings of $4 million in the fourth quarter of 2022 were $1 million lower than the same period in 2021. Lower adjusted earnings are mainly due to ATCO Structures' lower workforce housing trade sales activity in the US, and lower earnings in ATCO Frontec's disaster and emergency management response projects. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 32 Structures & Logistics adjusted earnings of $61 million in the full year of 2022 were $8 million higher than the same period in 2021. Higher earnings were mainly due to ATCO Structures' strong business performance driven by higher space rentals activity globally and earnings from the Bechtel Pluto Train II project, and ATCO Frontec's UK Training Camp Exercise project and higher occupancy at Trans Mountain camps. Higher earnings were partially offset by ATCO Structures' performance on a workforce housing trade sale project in Mexico and lower workforce housing trade sales activity across most geographies. 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 housing, 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. Residential housing manufactures and sells pre-fabricated, modular residential homes. ATCO Structures adjusted earnings of $7 million and $54 million in the fourth quarter and full year of 2022 were $1 million and $6 million higher than the same periods in 2021 mainly due to strong business performance driven by space rentals activity globally, and earnings from the Bechtel Pluto Train II project. Higher earnings were partially offset by performance on a workforce housing trade sale project in Mexico, and lower workforce housing trade sales activity as installed projects shifted to rentals across most geographies. The following table compares ATCO Structures' rental fleet for the fourth quarter and full year of 2022 and 2021. Three Months Ended December 31 Year Ended December 31 2022 2021 (1) Change 2022 2021(1) Change Global Space Rentals Number of units Average utilization (%) Average rental rate ($ per month) Global Workforce Housing Number of units Average utilization (%) 22,433 19,684 14% 22,433 19,684 77 660 83 579 (6%) 14% 79 627 82 571 2,652 2,879 (8%) 2,652 2,879 78 76 2% 75 71 Average rental rate ($ per month) 1,931 2,064 (6%) 1,908 1,801 14% (3) % 10% (8%) 4% 6% (1) In 2022, management has reclassified space rental fleet units to workforce housing fleet units. 2021 number of units, average utilization and average rental rate have been restated for comparability. Rental Fleet Space Rentals The year-over-year growth of the space rentals fleet is the result of continued strategic expansion in targeted regions of Canada, Australia, the US and Chile. ATCO Structures has increased the number of units on rent and realized higher average rental rates due to sustained higher demand for space rentals fleet in these regions. This is driven by activity across multiple sectors including mining, construction, education, and healthcare, although utilization has decreased due to the timing of placing fleet additions on rent. Workforce Housing ATCO Structures decreased the size of the workforce housing fleet and increased the average utilization rate by selling used and under-utilized fleet assets in Canada, Australia, and the US. In the fourth quarter and full year of 2022 the utilization increase was also due to the workforce housing fleet on rent for the third phase of the Trans Mountain Expansion project in BC. 33 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO STRUCTURES RECENT DEVELOPMENTS Canada Triple M Housing Ltd. Acquisition In December 2022, ATCO Structures acquired a 100 per cent ownership interest in Triple M Housing Ltd. a leading North American manufacturer of pre-fabricated, modular residential homes. Triple M is headquartered in Lethbridge, Alberta, and primarily serves Western Canada and segments of the US. Triple M will operate as a specialized housing division for ATCO Structures within Canada. Triple M has contributed earnings accretion to ATCO Structures post-acquisition. Triple M's 230,000 square foot manufacturing facility, Lethbridge, Alberta, Canada British Columbia (BC) Housing - Government of British Columbia ATCO Structures was previously awarded a supportive housing contract in Vernon, BC for a four-story, 61-unit building. The contract reached substantial completion in October 2022, making this Structures’ sixth completed affordable housing project. Seabridge Gold ATCO Structures was awarded a contract from Seabridge Gold for the supply and installation of a 120-person camp for the Kerr-Sulphurets-Mitchell (KSM) Project in Northwest BC. Work commenced in July 2022 and concluded in October 2022. Sabina Gold ATCO Structures was awarded a supply contract for a 276-bed accommodation complex for a mining client in Nunavut. Manufacturing for phase 2 of the project, a 216-person complex, was completed during the second quarter of 2022. Trans Mountain Expansion Project ATCO Structures was previously awarded a rental contract to supply a 550-person camp for the Trans Mountain Expansion Project in Blue River, BC. This is the third camp for the project with the previous camps located in Valemount and Clearwater, BC. Site personnel were mobilized in the fourth quarter of 2021 and the camp was completed during the first quarter of 2022. The rental contract is expected to be complete in the third quarter of 2023. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 34 United States Integrated Modular Solutions (IMS) ATCO Structures was awarded a $12 million rental contract for 63 units; the accommodations are for National Guard supporting the staffing of state penitentiaries in Florida. The contract commenced in November 2022 for an initial term of nine months with option for extension in 2023. TIC (Kiewit) In December 2022, ATCO Structures was awarded an $8 million rental contract for 116 units to support a new chemical plant construction project in Orange, Texas. The units will be installed in multiple phases starting in the first quarter of 2023 through the third quarter of 2023. The rental terms range from 33 to 39 months. Hensel Phelps Contract In the third quarter of 2022, ATCO Structures was awarded a rental contract with Hensel Phelps for 40 space rental units for a data centre in the Northwestern United States. The contract commenced in August 2022 for an initial term of 14 months. Plaquemines LNG Export Facility – KBR & Zachry Group Joint Venture (KZJV) ATCO Structures was awarded a rental contract for 50 space rentals units to support the LNG export facility construction project in Plaquemines Parish, Louisiana. The contract term is 36 months and commenced in September 2022. Australia Bechtel Pluto Train II ATCO Structures commenced construction of the previously awarded 2,200-person accommodation village in the first quarter of 2022 with installation scope and site setup. The stage one milestone was completed in the third quarter of 2022, and included the handover of the manufactured units. The stage two milestone was completed in the fourth quarter of 2022, and included relocated and refurbished accommodations and central facilities. Site preparation, relocation, and refurbishment of buildings for stage three and four milestones are underway with handovers expected through the second quarter of 2023. The project continues to track ahead of planned progress. In the first quarter of 2022, ATCO Structures was awarded a space rentals contract to manufacture and install a parallel modular facility. Manufacturing commenced in the second quarter of 2022, which continued through the fourth quarter of 2022. Delivery and handover began in the fourth quarter of 2022 and is expected to continue through the second quarter of 2023. Bechtel Pluto Train II, near Karratha, Western Australia 35 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Central America Collahuasi Project In the fourth quarter of 2022, ATCO-Sabinco S.A. was awarded a $6 million contract to refurbish 8 existing buildings at the Collahuasi mine site in Northern Chile. The contract commenced in the first quarter of 2023 and is expected to conclude in the third quarter of 2023. ATCO FRONTEC ATCO Frontec provides facility operations and maintenance services, workforce lodging and support services, defence operations services, and disaster and emergency management services. ATCO Frontec adjusted earnings in the fourth quarter of 2022 were $2 million lower than the same period in 2021 mainly due to lower earnings in ATCO Frontec's disaster and emergency management response projects. ATCO Frontec adjusted earnings of $7 million in the full year of 2022 were $2 million higher than the same period in 2021 mainly due to increased occupancy at the Trans Mountain camps, the UK Training Camp Exercise conducted in the second quarter, and the North Warning System contract which commenced October 1, 2022. Higher earnings were partially offset by lower earnings for disaster and emergency management response projects. ATCO FRONTEC RECENT DEVELOPMENTS NATO Headquarters (HQ) Support Contract In the fourth quarter of 2022, ATCO Frontec received confirmation of a one-year contract extension for the NATO HQ communication and information systems (CIS) support contract until December 31, 2023. For over 19 years, ATCO Frontec has held the contract to provide NATO Support and Procurement Agency CIS support to the NATO headquarters at the 820-person Camp Butmir near Sarajevo, Bosnia. North Warning System (NWS) Contract In February 2022, Nasittuq, an Inuit majority-owned corporation and a partnership between ATCO Frontec and Nunasi Corporation and Pan Arctic Inuit Logistics Corporation, was awarded the seven-year contract for the Operation and Maintenance of the NWS by Public Services and Procurement Canada, on behalf of the Department of National Defence. The NWS contract commenced April 1, 2022 and the transition was completed September 30, 2022, with the contract year one beginning on October 1, 2022. Pogo Mine Contract In September 2022, Frontec was awarded a three year contract for the provision of camp services to Pogo Gold Operations at Pogo Mine near Fairbanks, Alaska. All mobilization activities were completed on time for a commencement date of November 1, 2022. Canadian Forces Station Alert Contract On October 2022, Nasittuq was awarded a $122 million eight-and-a-half-year contract to provide support services at the Canadian Forces Station Alert on Ellesmere Island, by Public Services and Procurement Canada, on behalf of the Department of National Defence. Nasittuq has been the incumbent provider since 2012 for this contract, and the new contract is set to commence June 1, 2023. UK Training Camp Exercise In the second quarter of 2022, ATCO Frontec successfully delivered the UK training camp for the US Defense Threat Reduction Agency (DTRA). As a sub-contractor to Bechtel Inc. and Black & Veatch, ATCO Frontec's role was to provide a field camp for 130 personnel from DTRA and US Department of Energy in order to test their mobile facilities. The camp was mobilized in April, operated in May and demobilized in early June 2022 in accordance with schedule and budget, with no recordable incidents. Defence Construction Canada (DCC) In October 2021, ATCO Frontec secured two facility maintenance and site services contracts with DCC to maintain 15 Department of National Defence sites and the associated infrastructure across Alberta for a five-year period. Mobilization was successfully completed and operations commenced on April 1, 2022. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 36 Trans Mountain Expansion Project In August 2021, ATCO Frontec commenced mobilization of a 550-bed facility near Blue River, BC for the Trans Mountain Expansion Project, with the first occupants in the camp in November 2021. Mobilization was completed and the camp was fully operational in February 2022. SUBSEQUENT EVENT BHP Jansen Discovery Lodge In February 2023, Wicehtowak Frontec Services (WFS), ATCO Frontec’s joint venture partnership with George Gordon Developments Ltd., was awarded a three-and-a-half-year base contract to provide camp support services for the BHP Jansen Discovery Lodge in Saskatchewan. The lodge, which was originally designed and built in 2012 by ATCO Structures, features diverse, high-end amenities, and accommodates up to 2,500 workers. WFS will provide management and administration, food services, retail, housekeeping and janitorial, and maintenance work for the facility. The contract is expected to commence in the second quarter of 2023. ATCO’s collaboration with George Gordon First Nation began in 2011 as a 50-50 joint venture. Evolving over the years and recently restructured, Wicehtowak Frontec Services was created as a majority Indigenous-owned company. It will provide opportunities for employment, skills development and procurement for surrounding Indigenous communities. BHP Jansen Lodge, Saskatchewan, Canada 37 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Neltume Ports is a port operator and developer with a diversified portfolio of 17 multi-purpose, bulk cargo and container port facilities and 6 port operation services. The business is located primarily in Chile with additional operations in Uruguay, Argentina, Brazil and the US. ADJUSTED EARNINGS ($ millions) Neltume Ports (1) Three Months Ended December 31 Year Ended December 31 2022 2021 Change 2022 2021 Change 2 3 (1) 14 13 1 (1) Additional information is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. Neltume Ports adjusted earnings of $2 million in the fourth quarter of 2022 were $1 million lower than the same period in 2021 mainly due to lower volumes during the quarter. Neltume Ports adjusted earnings of $14 million in the full year of 2022 were $1 million higher than the same period in 2021. Higher adjusted earnings were mainly due to increased activity and revenues across the portfolio of ports in 2022 and favourable exchange rates. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 38 ATCO Corporate & Other contains ATCO Land and Development Ltd. which is a commercial real estate business that holds investments for sale, lease or development, as well as Ashcor, a company engaged in the processing and marketing of fly ash, predominantly reclaimed from landfills. ATCO Corporate & Other also includes the global corporate head office in Calgary, Canada, ATCO licensing fees received, and financing expenses associated with credit facilities. ADJUSTED EARNINGS ($ millions) 2022 2021 Change 2022 2021 Change ATCO Corporate & Other (1) 8 5 3 — 6 (6) (1) Additional information is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. Three Months Ended December 31 Year Ended December 31 ATCO Corporate & Other adjusted earnings of $8 million in the fourth quarter of 2022 were $3 million higher compared to the same period in 2021 mainly due to higher interest income earned and timing of certain expenses, partially offset by one-time tax benefits that were recognized in 2021. ATCO Corporate & Other adjusted earnings in the full year of 2022 were $6 million lower compared to the same period in 2021 mainly due to one-time tax benefits that were recognized in 2021 and increased costs at Ashcor, partially offset by higher interest income earned. 39 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Canadian Utilities is a diversified global energy infrastructure corporation delivering operating and service excellence and innovative business solutions in Utilities (Electricity and Natural Gas transmission and distribution, and International Operations); Energy Infrastructure (Energy Storage, Energy Generation, Industrial Water Solutions, and Clean Fuels); and Retail Energy (Electricity and Natural Gas Retail Sales, and Whole-Home Solutions). UTILITIES REVENUES Utilities revenues of $902 million and $3,384 million in the fourth quarter and full year of 2022 were $18 million and $343 million higher than the same periods in 2021. Higher revenues, largely in Electricity Distribution and Natural Gas Distribution, are a result of rate relief provided to customers in 2021 in light of the COVID-19 global pandemic and subsequently the AUC decision to maximize the collection of 2021 deferred revenues in 2022. Higher revenues are also due to growth in rate base, and higher flow-through revenues in the Natural Gas Distribution business. ADJUSTED EARNINGS ($ millions) 2022 2021 Change 2022 2021 Change Three Months Ended December 31 Year Ended December 31 Electricity Electricity Distribution (1) Electricity Transmission (1) International Electricity Operations (1) Total Electricity Natural Gas Natural Gas Distribution (1) Natural Gas Transmission (1) International Natural Gas Distribution (1) Total Natural Gas Total Utilities (2) 17 19 6 42 34 11 13 58 20 19 8 47 38 11 13 62 100 109 (3) — (2) (5) (4) — — (4) (9) 85 87 27 80 81 23 5 6 4 199 184 15 84 47 49 180 379 75 43 34 152 336 9 4 15 28 43 (1) Additional information regarding these non-GAAP measures is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. (2) Additional information regarding this total of segments measure is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. Utilities adjusted earnings of $100 million in the fourth quarter of 2022 were $9 million lower than the same period in 2021 mainly due to timing of cost recoveries in International Electricity Operations and the timing of operating costs in Electricity Distribution, Natural Gas Distribution and International Electricity Operations. Utilities adjusted earnings of $379 million in the full year of 2022 were $43 million higher than the same period in 2021. Higher adjusted earnings were mainly due to the impact of inflation indexing on rate base in the International ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 40 Natural Gas Distribution business, cost efficiencies, and growth in rate base. Higher adjusted earnings were also due the impact of the Electricity Transmission 2018-2019 General Tariff Application (GTA) Compliance Filing and the 2020-2022 GTA Compliance Filing decisions received from the AUC in the second and third quarters of 2021. Detailed information about the activities and financial results of the Utilities business segments is provided in the following sections. 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 $17 million in the fourth quarter of 2022 were $3 million lower than the same period in 2021 mainly due to the timing of operating costs. Electricity Distribution adjusted earnings of $85 million in the full year of 2022 were $5 million higher than the same period in 2021 mainly due to cost efficiencies. Electricity Transmission Electricity Transmission provides regulated electricity transmission mainly in Northern and Central East Alberta, and in the Lloydminster area of Saskatchewan. Electricity Transmission has a 35-year contract to be the operator of Alberta PowerLine, a 500-km electricity transmission line between Wabamun, near Edmonton, and Fort McMurray, Alberta. Electricity Transmission adjusted earnings of $19 million in the fourth quarter of 2022 were comparable to the same period in 2021. Electricity Transmission adjusted earnings of $87 million in the full year of 2022 were $6 million higher than the same period in 2021. Adjusted earnings in 2021 were lower as a result of the Electricity Transmission 2018-2019 GTA Compliance Filing and the 2020-2022 GTA Compliance Filing decisions received from the AUC in the second and third quarters of 2021. Combined, these decisions included a $6 million (after-tax and non-controlling interests) reduction of earnings in 2021 related to prior periods. 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 (P3A) and the Puerto Rico Electric Power Authority. LUMA Energy continues to operate under the terms of a Supplemental Agreement, which was extended on November 30, 2022 and will continue until such time that PREPA's bankruptcy is resolved. The agreement allows LUMA Energy to collect an annualized fixed fee equivalent of $115 million USD. Following the resolution of PREPA's bankruptcy proceeding, LUMA Energy will transition to year one of the Operations and Maintenance agreement. International Electricity Operations adjusted earnings of $6 million in the fourth quarter of 2022 were $2 million lower than the same period in 2021 mainly due to timing of operating costs and timing of cost recoveries. International Electricity Operations adjusted earnings of $27 million in the full year of 2022 were $4 million higher than the same period in 2021. Higher adjusted earnings were mainly due to ongoing operations, as compared to the ongoing transition work in the first half of 2021 and the impact of foreign exchange rates. 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 $34 million in the fourth quarter of 2022 were $4 million lower than the same period in 2021 mainly due to timing of operating costs. Natural Gas Distribution adjusted earnings of $84 million in the full year of 2022 were $9 million higher than the same period in 2021 mainly due to cost efficiencies. 41 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 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 $11 million in the fourth quarter of 2022 were comparable to the same period in 2021. Natural Gas Transmission adjusted earnings of $47 million in the full year of 2022 were $4 million higher than the same period in 2021 mainly due to growth in rate base, including the acquisition of the Pioneer Pipeline which occurred in June 2021. International Natural Gas Distribution International Natural Gas Distribution is a regulated provider of natural gas distribution services in Western Australia (WA), serving metropolitan Perth and surrounding regions. International Natural Gas Distribution adjusted earnings of $13 million in the fourth quarter of 2022 were comparable to the same period in 2021. International Natural Gas Distribution adjusted earnings of $49 million in the full year of 2022 were $15 million higher than the same period in 2021 mainly due to the impact of inflation indexing on rate base. The impact of inflation on rate base is added to the rate base annually and is reflected in customer rates in future periods through the recovery of depreciation. Customer rates are adjusted annually through a mechanism, which adjusts the approved rates in real dollars for actual inflation. Higher earnings were partially offset by the impact of foreign exchange rates. UTILITIES RECENT DEVELOPMENTS Electricity Distribution White River First Nation Saa Sè Energy Project ATCO Electric Yukon, a subsidiary of Canadian Utilities, and Copper Niisüü Limited Partnership, have finalized a landmark Electricity Purchase Agreement that will help the White River First Nation reduce their reliance on diesel power, achieve greater energy autonomy, and generate economic benefits for the next 30 years. Under the agreement, CNLP will build, own and operate the Beaver Creek solar facility, designed to be the largest penetration solar project in the Yukon Territory – a measure of how much power generated by current means is being replaced by solar electricity. Canadian Utilities will provide technical expertise throughout the duration of the project and will manage the installation of equipment that helps connect solar equipment to Canadian Utilities' existing systems. Once construction is completed, CNLP will serve as the Independent Power Producer, owning and operating the solar facility. Canadian Utilities will purchase the solar electricity generated, connect it to the grid and redistribute it back to the community. The facility is expected to be fully operational by 2024. The Government of the Northwest Territories (GNWT) Electric Vehicle (EV) Investment In August 2022, GNWT announced it is providing Northland Utilities Enterprises Ltd. (NUE), a 50/50 joint-venture partnership between a subsidiary of the Company and Denendeh Investments Incorporated (DII), with up to $300,000 to support the installation of two public EV fast-charger stations in Yellowknife. The charger stations are part of the planned EV charging corridor between Yellowknife and the Alberta border committed to by the GNWT as part of their 2030 Energy Strategy. It will also support the purchasing of EVs for Northern Canadian residents by increasing public access to the charging infrastructure. This partnership highlights our Company's continued focus on collaboration to enable and accelerate the clean energy transition. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 42 Northland Utilities Enterprises Ltd. Ownership Structure On March 31, 2022, the Company and Denendeh Investments Incorporated entered into a share purchase agreement to increase DII's ownership interest in NUE from 14 per cent to 50 per cent. NUE is an electric utility company operating in the Northwest Territories and a subsidiary of ATCO Electric Ltd. The change in ownership interest was accomplished through DII's purchase of 36 per cent of the outstanding shares of NUE for a purchase price, net of cash disposed, of $8 million. The transaction results in each party having a 50 per cent ownership interest in NUE and highlights our continued commitment to foster Indigenous community ownership and self- sustaining economic development. International Natural Gas Distribution Clean Energy Innovation Hub Hydrogen Projects In December 2022, Canadian Utilities announced the commissioning of two hydrogen projects at the Clean Energy Innovation Hub in Australia, the blending of hydrogen into the Western Australia natural gas network and the first hydrogen fuelling station. A small percentage of hydrogen has been blended into a portion of the natural gas distribution network for around 2,700 homes within the City of Cockburn. Canadian Utilities, in partnership with Fortescue Future Industries, has constructed WA's first Hydrogen Refuelling Station that will enable Fortescue, Canadian Utilities and third parties such as the WA Police to support their fleets of hydrogen fuel cell vehicles for emissions-free travel. UTILITIES REGULATORY FRAMEWORKS 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. 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 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. 43 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Performance Based Regulation (PBR) 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 2022, the Natural Gas Distribution and Electricity Distribution businesses concluded their second PBR term resulting in earnings achieved through cost efficiencies implemented in 2022 and prior periods. These efficiencies will be passed on to customers upon rebasing. Following a one-year cost-of-service rebasing in 2023, these businesses will move to a third generation of performance-based regulation (PBR3). More information on PBR3 is outlined below in the Regulatory Updates section. 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 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 weighted average cost of capital (WACC) • Significant capital costs that are extraordinary, not previously incurred and required by a third party, are recovered through a “Type I” K Factor Return On Equity (ROE) Used for Going-in Rates • 8.5% • + 0.5% ROE ECM achieved from PBR First Generation added to 2018 and 2019 Efficiency Carry-over Mechanism (ECM) Reopener 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 ROE Used for Reopener Calculation • 2018: 8.5% excluding impact of ECM • 2019: 8.5% excluding impact of ECM • 2020 - 2022: 8.5% Access Arrangement - International Natural Gas Distribution Under the existing Access Arrangement (AA5), ATCO Gas Australia is using the Post-Tax Revenue Model method to determine revenue requirement and customer rates. This approach incorporates an annual addition of the impact of inflation to the rate base, which is reflected in future customer rates through the recovery of depreciation. Customer rates are annually adjusted through a mechanism that aligns approved rates in real dollars with actual inflation. The Economic Regulation Authority is required to publish a Rate of Return Instrument that details the methodology and parameters to determine the WACC relevant to the Access Arrangement period. The current AA5 applicable period is January 1, 2020 to December 31, 2024. The ERA reviews and updates the Instrument every four years, with the most recent Instrument published in December 2022. This updated Instrument will not be applied until the next Access Arrangement period (AA6) and has no impact on the current AA5 ROE of 5.02 per cent. More information on AA6 is outlined below in the Regulatory Updates section. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 44 REGULATORY UPDATES Common Matters Generic Cost of Capital Proceeding (GCOC) On March 31, 2022, the AUC approved the extension of the current ROE of 8.5 per cent and equity thickness ratio of 37 per cent on a final basis for the 2023 period. On June 29, 2022, the AUC initiated a process schedule to determine the cost-of-capital parameters and explore a formula-based approach to determine the ROE for 2024 and future test years. As part of this proceeding, the AUC has also highlighted the need to establish the deemed equity ratios for the 2024 test period and in future years if a formula is implemented. A decision is expected in the third quarter of 2023. 2023 Cost of Service (COS) for Distribution Utilities On July 28, 2022 and September 1, 2022, the AUC issued decisions on Electricity Distribution's and Natural Gas Distribution’s 2023 COS applications which resulted in the majority of the requested revenue requirement being approved. The AUC accepted the forecasting methodology and confirmed that it reflects achieved efficiencies, which are being passed onto customers. Electricity and Natural Gas Distribution received AUC approval in December 2022, approving 2023 distribution rates on an interim basis effective January 1, 2023. Third Generation Performance Based Regulation On May 26, 2022, the AUC initiated a proceeding to establish parameters for a third generation of performance- based regulation. Following a one-year cost of service rebasing in 2023, this proceeding will set rates for the Distribution utilities for the subsequent PBR term which commences in 2024. A decision on third generation parameters is expected in the fourth quarter of 2023. Bill 18 – Utility Commodity Rebate Act On April 25, 2022, the provincial government passed Bill 18: Utility Commodity Rebate Act which includes legislation to allow the government to provide upcoming electricity and gas rebates to Albertans. Bill 18 enables the Government of Alberta (GOA) to provide monthly electricity rebates from July 2022 to April 2023 for a total rebate of $500, to almost all homes and businesses, as well as a natural gas rebate (administrated through retailers) if regulated natural gas rates exceed $6.50 per gigajoule over winter (October 1, 2022 to March 31, 2023). Since the rebate is government funded there is no financial impact to Canadian Utilities. Electricity Transmission Application of AUC Enforcement Staff for the Commencement of Proceeding Pursuant to Sections 8 and 63 of the Alberta Utilities Commission Act On November 29, 2021, the AUC enforcement branch filed an application with the AUC recommending an enforcement proceeding be initiated. A proceeding was commenced to determine whether ATCO Electric Transmission failed to comply with AUC decisions and enactments under the AUC's jurisdiction with respect to a sole source contract for the Jasper interconnection project and the actions leading up to and including the filing of the 2018-2020 Deferral Account Application. The AUC enforcement branch and ATCO Electric Transmission commenced settlement discussions in January 2022. On March 18, 2022, the AUC enforcement branch and ATCO Electric Transmission concluded discussions and notified the AUC that the parties had reached a settlement on all matters. On April 14, 2022, the AUC Enforcement branch and ATCO Electric Transmission filed the settlement with the AUC, which reflected an agreed administrative penalty of $31 million, a commitment to amend the ongoing Deferral Account Application to ensure the estimated $11 million of additional rate base remains excluded from customer rates, and the implementation of revised practices and policies. On June 29, 2022, the AUC issued its decision approving the settlement in its entirety. In the fourth quarter of 2021 and first quarter of 2022, the Company recognized costs of $7 million and $14 million (after- tax and non-controlling interests), respectively, related to the proceeding. 45 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO Electric Transmission 2018-2021 Deferral Account The proceeding was re-opened on June 29, 2022 to address the costs associated with the Jasper interconnection project and include the 2021 deferral balances. ATCO Electric Transmission filed a comprehensive update to all information originally filed in support of the Jasper Interconnection Project and a Decision is expected in the second quarter of 2023. ATCO Electric Transmission 2023-2025 GTA Application On May 19, 2022, ATCO Electric Transmission filed a GTA requesting approval of revenue requirements related to operational and maintenance costs as well as capital expenditures needed over the 2023-2025 period. The application also requested new deferral accounts and changes to a number of existing deferral accounts. A comprehensive negotiated settlement was reached with all the participating interveners, and a negotiated settlement application was filed with the AUC in January 2023. A decision from the AUC is expected in the second quarter of 2023. Natural Gas Transmission Pioneer Pipeline Acquisition In 2020, Natural Gas Transmission entered into an agreement to acquire the 131-km Pioneer Pipeline from Tidewater Midstream & Infrastructure Ltd. and its partner TransAlta Corporation. Consistent with the geographic areas defined in the Integration Agreement, Natural Gas Transmission transferred to Nova Gas Transmission Ltd. (NGTL) the 30-km segment of pipeline that is located in the NGTL footprint. The transaction to acquire the Pioneer Pipeline closed in 2021. The transfer to NGTL received approval from the Canada Energy Regulator on December 22, 2021, and on February 25, 2022, Natural Gas Transmission completed the transfer to NGTL of the 30-km segment of pipeline located in the NGTL footprint for $63 million. International Natural Gas Distribution Access Arrangement 6 (AA6) ATCO Gas Australia is advancing its AA6 submission to the Economic Regulation Authority for the period January 1, 2025 to December 31, 2029. ATCO Gas Australia will formally submit its Access Arrangement proposal to the ERA by September 1, 2023. The ERA published the 2022 Rate of Return Instrument on December 16, 2022. On the return on equity, compared to the 2018 Instrument, the 2022 Instrument is favourable as it adopts a 10-year term for the risk free rate (in the 2018 Instrument a 5-year term was adopted) and a 6.1 per cent market risk premium (in the 2018 Instrument a 6.0 per cent market risk premium was adopted). On the cost of debt, the 2022 Instrument retains the hybrid trailing average approach and incorporates a small increase (0.074 per cent) in debt hedging and raising costs. This new rate of return instrument will not apply to ATCO Gas Australia until AA6 commences on January 1, 2025. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 46 ENERGY INFRASTRUCTURE REVENUES Energy Infrastructure revenues of $94 million and $312 million in the fourth quarter and full year of 2022 were $20 million and $103 million higher than the same periods in 2021. Higher revenues were mainly due to revenue from the Alberta Hub natural gas storage facility acquired in December 2021 and higher natural gas prices at the Carbon and Alberta Hub natural gas storage facilities. ADJUSTED EARNINGS ($ millions) 2022 2021 Change 2022 2021 Change Three Months Ended December 31 Year Ended December 31 Electricity Generation (1) (2) Storage & Industrial Water (1) (2) Total Energy Infrastructure (2) (1) Considered to be non-GAAP financial measures. (2) 5 3 — 2 2 (2) 3 1 2 17 19 7 8 15 (5) 9 4 (2) Additional information is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. Energy Infrastructure adjusted earnings of $3 million and $19 million in the fourth quarter and full year of 2022 were $1 million and $4 million higher than the same periods in 2021 mainly due to earnings from the Alberta Hub natural gas storage facility acquired in December 2021, partially offset by higher project development costs incurred in 2022, largely in Australia. 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 include the supply of electricity from solar, hydroelectric, and natural gas generating plants in Western Canada, Australia, Mexico, and Chile and non-regulated electricity transmission in Alberta. Electricity Generation adjusted earnings in the fourth quarter and full year of 2022 were $2 million and $5 million lower compared to the same periods in 2021 mainly due to higher project development costs incurred in 2022, largely in Australia. Storage & Industrial Water Storage & Industrial Water provides non-regulated natural gas storage and transmission activities, natural gas liquids storage, and industrial water services in Alberta and the Northwest Territories. Storage & Industrial Water adjusted earnings of $5 million and $17 million in the fourth quarter and full year of 2022 were $3 million and $9 million higher compared to the same periods in 2021 mainly due to earnings from the Alberta Hub natural gas storage facility acquired in December 2021. ENERGY INFRASTRUCTURE RECENT DEVELOPMENTS Renewable Energy Portfolio Acquisition In October 2022, Canadian Utilities announced it had entered into a definitive agreement with Suncor Energy Inc. to acquire a portfolio of wind and solar assets and development projects located in Alberta and Ontario. Subsequent to year-end, on January 3, 2023, the transaction closed for a purchase price of $713 million, net of cash acquired, and subject to working capital adjustments. The acquisition includes a majority interest in the Adelaide wind facility in Ontario, the new 202-MW Forty Mile wind project in Alberta, and a development pipeline with more than 1,500-MW of wind and solar projects at various stages of development, including several late-stage projects. 47 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Through a formal preemptive rights process, existing partners on the Chin Chute and Magrath Wind projects opted to acquire the additional interest in these facilities. As a result, the corresponding 20-MW of net nameplate capacity of the previously announced 252-MW operational portfolio was not acquired by Canadian Utilities as part of this transaction and the purchase price was adjusted accordingly from $730 million to $713 million. Concurrent with the close of this acquisition, Canadian Utilities entered into a new 15-year renewable energy purchase agreement with Microsoft Corporation. Under the terms of the agreement, Microsoft will purchase 150-MW of renewable energy generated by Canadian Utilities' newly acquired Forty Mile Wind Phase 1 Project in Alberta. The offtake from the Adelaide wind facility is also contracted under a long-term power purchase agreement. Adelaide wind facility, Ontario, Canada This investment drives meaningful progress towards meeting our previously announced goal of owning, developing or managing more than 1,000-MW of renewable energy by 2030. Central West Pumped Storage Hydro Project In February 2021, Canadian Utilities announced an agreement to acquire the rights to develop the 325-MW Central West Pumped Storage Hydro project, located approximately 175-km west of Sydney, Australia. The project is in close proximity to significant renewable energy resources and will be integral in supporting the development of new renewable generation capacity in the state of New South Wales (NSW). In September 2022, a $9 million AUD recoverable grant was awarded by the NSW Government to help fund pre-investment activities. A final investment decision on project construction is expected in 2023. Canadian Pacific Hydrogen Locomotive Project In May 2022, Canadian Utilities announced an agreement with Canadian Pacific (CP) to provide engineering, procurement and construction services for two hydrogen production and refueling facilities in Calgary and Edmonton. The fuelling stations will be essential in bringing zero-emissions hydrogen locomotive propulsion into reality as part of CP's commitment to sustainable and responsible operations. The construction of these facilities will advance CP's innovative Hydrogen Locomotive Program, which has its sights set on building its first line-haul hydrogen-powered freight locomotive. Early stages of siting and construction has commenced, with production and supply of hydrogen expected to be provided to locomotives in 2023. Suncor ATCO Heartland Hydrogen Hub (SAH3) In May 2021, Canadian Utilities and Suncor Energy announced the decision to collaborate on early stage design and engineering of a potential clean hydrogen project. The project is currently progressing through early design and engineering phases, which will continue throughout 2023 ahead of the sanctioning decision currently expected as early as 2024. Atlas Carbon Sequestration Hub (Atlas Hub) To support Canadian Utilities' hydrogen strategy and the development of SAH3, as well as the Province of Alberta’s carbon sequestration ambitions, Canadian Utilities and its partners are developing the Atlas Carbon Sequestration Hub. The Atlas Hub development has been proposed east of Edmonton by a partnership led by Shell Canada Limited, ATCO Energy Solutions Ltd., and Suncor Energy Inc. On March 31, 2022, Atlas Hub was shortlisted for further evaluation by the Government of Alberta. Proponents have been invited to work with the government to further evaluate the suitability of each location for safely storing ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 48 carbon from industrial emissions. If the evaluation demonstrates that the proposed projects can provide permanent storage, companies can work with the government on an agreement that provides them with the right to inject captured carbon dioxide. This agreement will also ensure proponents will provide open access to all emitters and affordable use of the hub. Canadian Utilities and its partners continue to progress development of Atlas Hub, which is expected to advance throughout 2023. Calgary Solar Development Projects In September 2021, Canadian Utilities announced it had acquired the development rights to build two solar projects, the Deerfoot and Barlow projects in Calgary, Alberta, with a combined capacity of 64-MW. In March 2022, Canadian Utilities entered into a 15-year power purchase agreement with Microsoft Corporation. Under the terms of the agreement, Microsoft will purchase all renewable energy generated by Canadian Utilities’ 37-MW Deerfoot solar project in Calgary, Alberta. Once operational, the Deerfoot solar project will be one of the largest solar installations in a major urban centre in Western Canada. Both the Barlow and the Deerfoot projects have received all major permits. Construction started on Barlow in June 2022 and Deerfoot in September 2022. The Barlow Solar Project achieved its in-service date with the Alberta Electric System Operator along with exporting power to the grid with the energization of the first array of solar panels in December 2022, with full commercial operations expected in the second quarter of 2023. Deerfoot is expected to commence energization in the third quarter of 2023, with full commercial operations expected in the fourth quarter of 2023. Barlow solar site, Calgary, Alberta, Canada Empress Solar Development Project In September 2021, Canadian Utilities announced that it had acquired the rights to the Empress Solar project, a 39-MW solar facility under development near Empress, Alberta. Electricity from this solar project may be sold through a contracted Power Purchase Agreement with any uncontracted electricity sold into the Alberta power market. The project will provide enough renewable electricity to power more than 11,000 homes. Construction began late in the third quarter of 2022. Commercial operation is expected to commence in the fourth quarter of 2023. 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 and associated pipeline at the ATCO Heartland Energy Centre, near Fort Saskatchewan, Alberta. Construction of the facilities were completed in the third quarter of 2022 and commenced commercial operations in the fourth quarter of 2022. Subsequent Event Osborne Power Purchase Agreement Extension Subsequent to year-end, on February 3, 2023, Canadian Utilities executed an extension to the current PPA with Origin Energy Electricity Limited for the Osborne electricity cogeneration facility in South Australia. The extension is for a period of three years, commencing on January 1, 2024, with a further one year option. The terms of the extension are similar to the current tolling arrangement with increased flexibility and dispatch capability for the customer. 49 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS CANADIAN UTILITIES CORPORATE & OTHER Canadian Utilities' Corporate & Other segment includes Rümi, Blue Flame Kitchen and Retail Energy through ATCO Energy which provides home products, home maintenance services, professional advice, and 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. Canadian Utilities' Corporate & Other includes CU Inc. and Canadian Utilities preferred share dividend and debt expenses. ADJUSTED EARNINGS Three Months Ended December 31 Year Ended December 31 ($ millions) 2022 2021 Change 2022 2021 Change Canadian Utilities Corporate & Other (1) (7) (10) 3 (50) (41) (9) (1) Additional information is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. Including intersegment eliminations, Canadian Utilities' Corporate & Other adjusted earnings in the fourth quarter of 2022 were $3 million higher compared to the same period in 2021 mainly due to the timing of certain expenses and higher interest income earned, partially offset by increased financing costs from a new preferred dividend issuance in December 2021. Canadian Utilities' Corporate & Other adjusted earnings in the full year of 2022 were $9 million lower compared to the same period in 2021 mainly due to increased financing costs from a new preferred share issuance in December 2021. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 50 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 while consistently delivering safe, reliable and affordable services. SUSTAINABILITY REPORTING AND ESG TARGETS Our 2022 Sustainability Report, which will be published in May 2023, focuses on the following material topics: • • • • • 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, emergency preparedness and response, and supply chain resilience and responsibility; People - diversity, equity and inclusion, occupational health and safety, public health and safety; and Community and Indigenous Relations - Indigenous engagement, economic opportunity and reconciliation, and community engagement and investment. In January 2022, we released our net zero by 2050 commitment as well as an initial set of 2030 ESG Targets. Our Board of Directors recognizes and fully supports our net-zero commitment and 2030 targets, and agrees that these commitments and targets align with our strategic direction. More detailed information and progress towards these targets will be found in the 2022 Sustainability Report. Achieving net zero by 2050 is a societal challenge that no individual, business, or government can solve on its own. It will require unprecedented collaboration among all constituents, as well as an informed, pragmatic, and affordable roadmap from policymakers to unlock the necessary scale and pace of private sector investment and expertise. 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 2022 Sustainability Report, ESG Datasheet, Corporate Governance, materiality assessment, and additional details and other disclosures will be available in May 2023 on our website at www.atco.com. CLIMATE CHANGE AND ENERGY TRANSITION To contribute to a net-zero future, we continue to pursue initiatives to integrate cleaner fuels, renewable energy and energy storage. This includes looking at ways to modernize our energy infrastructure to accommodate new and innovative sources of energy as well as ways to further use energy more efficiently. We are decarbonizing our operations and enabling our customers to transition to lower emitting sources of energy, while maintaining safety, reliability and affordability. 51 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ENERGY TRANSITION HIGHLIGHTS AND PERFORMANCE As our portfolio of assets and businesses evolve, so too does our environmental footprint. Since 2005, we have significantly decarbonized our portfolio. Energy Transition Highlights To support the energy transition, we continue to explore and implement opportunities in cleaner fuels, renewable energy, energy infrastructure and storage, and energy efficiency. Below are examples of 2022 energy transition developments, with further details included in the Business Unit Performance section in this MD&A: • • • • • • • Suncor ATCO Heartland Hydrogen Hub; Canadian Pacific Hydrogen Locomotive Project; Clean Energy Innovation Hub & Hydrogen Refuelling Station, Australia; Empress and Calgary Solar Development Projects; Central West Pumped Storage Hydro project, Australia; Suncor Energy Inc. Renewable Energy Portfolio Acquisition; and Atlas Carbon Sequestration Hub. Historical Portfolio Direct (Scope 1) GHG Emissions Our 2022 estimated direct (Scope 1) GHG emissions are 0.79 million tonnes CO2e, which is a slight increase over 2021. The reason for this increase can be attributed to an increase in energy demand from our natural gas power plants in Australia. Final 2022 direct GHG emissions data will be available in our Sustainability Report, which will be released in May 2023. *This graph represents historical portfolio direct GHG emissions, and therefore includes data from assets that were later sold/divested. POLICY/REGULATORY UPDATE We actively and constructively work with all levels of government to advocate for enabling policy and regulation, and to identify barriers that impede cost-effective, economy-wide decarbonization. We participate in a wide number of discussions, and the following are examples of where we focus our efforts on policies or regulations most relevant to our existing or planned projects. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 52 ATCO Historical Portfolio Direct (Scope 1) GHG Emissions (million tonnes CO2e)200520062007200820092010201120122013201420152016201720182019202020212022E05101520Canadian Net-Zero Emissions Accountability Act As required under its Canadian Net-Zero Emissions Accountability Act enacted in March 2022, the Government of Canada released its 2030 Emissions Reduction Plan: Canada’s Next Steps for Clean Air and a Strong Economy. The plan outlines a sector-by-sector approach for Canada to reduce emissions by 40 per cent below 2005 levels by 2030. The plan includes specific sector reduction intentions such as: • • Clean Electricity Regulation – intention to have a net-zero electricity grid by 2035. Green Building Strategy – reducing direct residential, commercial and institutional building emissions by 37 per cent from 2005 levels by 2030. • Methane Reductions – reducing oil and gas methane emissions by at least 75 per cent below 2012 levels by 2030. • • Oil and Gas Cap – reducing oil and gas sector emissions by 31per cent from 2005 levels by 2030. Zero Emissions Vehicle Mandate – setting Zero Emission Vehicle sales targets for manufacturers and importers of new passenger cars, SUVs, and pickup trucks requiring that at least 20 per cent of new vehicles sold in Canada to be zero emission by 2026, at least 60 per cent by 2030, and 100 per cent by 2035. Consultations have been ongoing on most of the above mentioned reduction intentions, with plans to introduce regulations for some of the initiatives in 2023. Government of Canada Clean Fuel Regulations (CFR) The CFR were published in the Canada Gazette Part II on July 6, 2022, with reduction requirements coming into force on July 1, 2023. The CFR will require gasoline and diesel suppliers to reduce carbon intensity by approximately 13 per cent by 2030 and will create opportunities to generate credits through clean fuels production and fuel switching. Government of Canada Carbon Capture, Utilization and Storage (CCUS) Investment Tax Credit (ITC) The Canadian Federal Budget 2022 established a refundable ITC for CCUS. For 2022-2030, the CCUS ITC is 60 per cent for investments in equipment for capturing carbon from air, 50 per cent for investments that capture and store carbon, and 37.5 per cent for investments in equipment for storage, transportation, and use. In August 2022, the Government of Canada released for public comments draft legislative proposals to the Income Tax Act and the Income Tax Regulations related to the ITC for CCUS. Government of Canada 2022 Fall Economic Statement (FES) In November 2022, the FES was announced, introducing a series of measures designed to grow the Canadian economy — both in the short and medium term. Key energy policies include: • • • An Investment Tax Credit for Clean Technologies – a refundable tax credit equal to 30 per cent of the capital cost of investments in clean technologies. An Investment Tax Credit for Clean Hydrogen – an investment tax credit to support investments in clean hydrogen production. Canada Growth Fund – a fund that will help to attract private capital to invest in building a thriving, sustainable Canadian economy with thousands of new, good-paying jobs. In August 2022, the US passed an energy bill called the Inflation Reduction Act (IRA). It offers extensive financial supports to firms that locate their production in the United States—from electric vehicle battery production, to hydrogen, to biofuels, and beyond. The Canadian government has stated its commitment to respond to the IRA and ensure that Canada remains a first-choice destination for businesses to invest and create jobs. It has launched consultations to seek input on how best to design and implement the initiatives mentioned above. Alberta Utilities Commission Hydrogen Inquiry Report Following the release of its Hydrogen Roadmap, the Government of Alberta directed the AUC to inquire into and report to the Minister of Energy on matters relating to hydrogen blending into natural gas distribution systems. On September 6, 2022, the AUC publicly released the Hydrogen Inquiry Report, which provides further information on hydrogen blending into natural gas distribution systems. It discusses the role of regulated natural gas distribution systems and unregulated competitive markets for up to 20 per cent blending by volume, impacts of blending hydrogen into low-pressure natural gas distribution systems, the safe and reliable delivery of blended hydrogen, 53 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS and regulatory ambiguity. While the AUC report represents a positive step forward, it is a consultative inquiry and changes to legislation must be passed through legislature. Government of Alberta Bill 22 Electricity Statutes (Modernizing Alberta’s Electricity Grid) Amendment Act, 2022 Bill 22, which received royal assent on May 31, 2022, enables the integration of energy storage (batteries) into Alberta’s interconnected electric system and will include the development of new transmission regulations. Carbon Pricing/Output-Based Pricing Systems In January 2022, the carbon price in Canada increased from $40 to $50 per tonne. The Government of Canada’s plan on climate change proposes to increase the carbon price by $15 per tonne each year starting in 2023, rising to $170 per tonne by 2030. As a result, beginning April 2023, the minimum national carbon price in Canada is expected to be $65 per tonne. In December 2022, the Government of Alberta introduced amendments to Technology Innovation and Emissions Reduction (TIER) Regulation to help bring the regulation in line with the minimum federal standards, ensuring the continuation of the provincial emissions trading and carbon pricing system in Alberta. These changes come after a stakeholder consultation process which was introduced in June 2022. A significant change includes the creation of sequestration credits and the recognition of captured tonnes under the federal Clean Fuel Regulation. Other changes include alignment with the federal carbon pricing, increases to benchmark tightening, reduced periods to use created credits, increases to credit limit use and the inclusion of flaring for aggregated oil and gas facilities. 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 and affects our natural gas-fired power generation facilities. 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. Government of Australia Climate Change Bill 2022 In July 2022, the Australian Government introduced the Climate Change Bill 2022 legislating the nation’s commitment to reduce greenhouse gases by 43 per cent below 2005 levels by 2030, and net zero by 2050. The legislation strengthens accountability through an annual statement and tasks the independent Climate Change Authority to provide advice on Australia's progress towards these targets, and on what Australia's future targets should be. Government of Australia National Gas Rules In October 2022, it was agreed to amend the National Gas Law and Regulations to bring hydrogen blends, biomethane and other renewable gases under the national gas regulatory framework. This work supports the development of the domestic hydrogen and biomethane industries by removing barriers for producers to access infrastructure and markets. It also ensures consumers are protected as Australia’s energy system transitions in line with net zero goals. CLIMATE CHANGE RESILIENCY We carefully manage climate-related risks, including preparing for, and responding to, extreme weather events through activities such as proactive route and site 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 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 54 where appropriate through asset improvement projects. We have also mapped and continue to regularly inspect pipeline water crossings. In our Structures & Logistics business, 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. In addition, our global property insurance provider conducted an assessment of our global locations (excluding electricity and natural gas transmission and distribution) and determined that ATCO is in the top quartile for climate change resiliency. This means that, when compared to other global customers, our score is in the lowest climate risk quartile. We continue to evaluate priority investments and actions in 2023 and beyond to further reduce climate change physical risks to assets. 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 following table provides further information on how we address specific climate-related challenges and opportunities. 55 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 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 Hydrogen research and development l a n o i t i s n a r T l a c i s y h P Market Changes in carbon policy, costs of operations, and commodity prices Increasing demand for lower-emitting technologies Participation in carbon markets Business diversification Changing customer behaviour Hydrogen market development Technology Replacement of current products/services with lower-emitting options Prosumer movement may affect energy load profiles in the future Reputational Public perception of carbon risk Physical Extreme weather events Long-term changes in temperature and weather patterns Distributed energy solutions A transition to lower- emitting energy systems provides opportunities to utilize expertise in: generation, energy storage, integration and delivery of new energy sources including hydrogen, renewable natural gas, EV networks, and transmission and distribution infrastructure to ensure energy network reliability and security Increase in demand for trusted long-term partners to deliver lower- emitting solutions Climate change mitigation and adaptation Rapidly deployable structures and logistics services Providing a suite of lower-emitting technology solutions so our customers can pick the right solutions for their unique situation Transparent reporting Authentic engagement and collaboration Climate change resiliency efforts Emergency Response & Preparedness plans and training ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 56 OTHER EXPENSES AND INCOME A financial summary of other consolidated expenses and income items for the fourth quarter and full year of 2022 and 2021 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 Depreciation, amortization and impairment 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 2022 2021 Change 2022 2021 Change 884 195 2 24 97 38 765 156 3 23 118 68 119 3,044 2,607 437 39 (1) 1 (21) (30) 717 717 14 81 391 214 13 62 423 148 — 1 19 (32) 66 Operating costs, which are total costs and expenses less depreciation, amortization and impairment, increased by $119 million and $437 million in the fourth quarter and full year of 2022 compared to the same periods in 2021. Higher operating costs were mainly due to net increased material costs associated with ATCO Structures' projects and other trade sales, higher energy costs and higher unrealized and realized losses on derivative financial instruments in ATCO Energy, higher flow-through costs in the Alberta Utilities, and increased fuel costs at Energy Infrastructure's Carbon and Alberta Hub natural gas storage facilities. Higher operating costs compared to the same periods in 2021 were partially offset by the Information Technology (IT) transition costs incurred in 2021 for the early termination of the master services agreements with Wipro Ltd. (Wipro). DEPRECIATION, AMORTIZATION AND IMPAIRMENT Depreciation, amortization and impairment increased by $39 million in the fourth quarter of 2022 compared to the same period in 2021 mainly due to the recognition of project cost recoveries in 2021 related to the conclusion of an international project that had previously been impaired, and ATCO Structures' increase in rental fleet assets. Depreciation, amortization and impairment in the full year of 2022 was comparable to the same period in 2021. 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 based in South America with operations in 17 port facilities and 6 port operation services businesses located in Chile, Uruguay, Argentina, Brazil, and the US. Earnings from investment in associate company in the fourth quarter of 2022 were $1 million lower than the same period in 2021 mainly due to lower volumes during the quarter. Earnings from investment in associate company in the full year of 2022 were $1 million higher compared to the same period in 2021. Higher earnings were mainly due to increased activity and revenues across the portfolio of ports in 2022 and favourable exchange rates. 57 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS EARNINGS FROM INVESTMENT IN JOINT VENTURES Earnings from investment in joint ventures is mainly comprised of Canadian Utilities' ownership positions in electricity generation plants, Northland Utilities Enterprises electricity operations in the Northwest Territories, 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. Earnings from investment in joint ventures in the fourth quarter of 2022 were comparable to the same period in 2021. Earnings from investment in joint ventures increased by $19 million in the full year of 2022 compared to the same period in 2021. Higher earnings were generated as a result of LUMA Energy's ongoing operations as compared to continued transition work in the first half of 2021, and the impact of foreign exchange rates. Earnings in 2022 were also higher due to the 2022 reversal of an impairment of an investment previously recognized in 2021 in the Energy Infrastructure segment. NET FINANCE COSTS Net finance costs decreased by $21 million and $32 million in the fourth quarter and full year of 2022 compared to the same periods in 2021 mainly due to higher interest income from cash investments. INCOME TAX EXPENSE Income taxes were lower by $30 million in the fourth quarter of 2022 compared to the same period in 2021 mainly due to lower IFRS earnings before income taxes and a 2021 write down of deferred tax assets in ATCO Mexico. Income taxes were higher by $66 million in the full year of 2022 compared to the same period in 2021 mainly due to increased IFRS earnings before income taxes. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 58 LIQUIDITY AND CAPITAL RESOURCES Our financial position is supported by our diversified portfolio with a structured foundation of regulated and long- term contracted businesses. 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 capital markets. We consider it prudent to maintain enough liquidity to fund approximately one full year of cash requirements to preserve strong financial flexibility. Liquidity is generated by cash flow from operations and is supported by appropriate levels of cash and available committed credit facilities. CREDIT RATINGS 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 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 A (high) A (high) R-1 (low) BBB+ BBB+ BBB A-1 (low) P-2 (low) A- A- A-1 (low) PFD-2 (high) P-2 Fitch BBB+ A- A- F2 BBB A- A F2 BBB+ N/A BBB+ N/A (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 March 2, 2022, S&P Global Ratings revised its issuer rating on ATCO Ltd. and Canadian Utilities Limited from 'A-' with a negative outlook to 'BBB+' with a stable outlook. S&P Global Ratings affirmed ATCO subsidiary CU Inc.'s 'A-' issuer credit rating and stable outlook, reflecting S&P's view that CU Inc. is an insulated entity to ATCO Ltd. and Canadian Utilities Limited. On March 17, 2022, Fitch Ratings assigned a first-time issuer rating of 'A-' with a stable outlook to both Canadian Utilities Limited and CU Inc., as well as a first-time issuer rating of 'BBB+' with a stable outlook to ATCO Ltd. On March 24, 2022, S&P Global Ratings affirmed ATCO subsidiary ATCO Gas Australia Pty Ltd's 'BBB+' issuer credit rating and stable outlook. On August 2, 2022, DBRS Limited affirmed its 'A (high)' long-term corporate credit rating and stable outlook on Canadian Utilities subsidiary CU Inc. On August 4, 2022, S&P Global Ratings affirmed Canadian Utilities subsidiary CU Inc.'s 'A-' long-term issuer credit rating and stable outlook. On August 11, 2022, S&P Global Ratings affirmed its 'BBB+' long-term issuer credit rating and stable outlook on Canadian Utilities Limited. On September 12, 2022, DBRS Limited affirmed its 'A (low)' long-term corporate credit rating and stable outlook on ATCO Ltd. and its 'A' long-term corporate credit rating and stable outlook on Canadian Utilities Limited. On September 21, 2022, S&P Global Ratings affirmed its 'BBB+' long-term issuer credit rating and stable outlook on ATCO Ltd. 59 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS LINES OF CREDIT At December 31, 2022, ATCO and its subsidiaries had the following lines of credit. ($ millions) Long-term committed Uncommitted Total Total Used Available 3,396 669 4,065 1,080 258 1,338 2,316 411 2,727 Of the $4,065 million in total lines of credit, $669 million was in the form of uncommitted credit facilities with no set maturity date. The other $3,396 million in credit lines was committed, with maturities between 2024 and 2026, and may be extended at the option of the lenders. Of the $1,338 million in lines of credit used, $656 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. CONSOLIDATED CASH FLOW At December 31, 2022, the Company's cash position was $1,033 million, a decrease of $55 million compared to December 31, 2021. Major movements are outlined in the following table: ($ millions) Cash flows from operating activities Net issue (repayment) of long-term debt (Repayment) issue of short-term debt Cash used for capital investment (1) Issue of equity preferred shares by subsidiary company Redemption of equity preferred shares by subsidiary company Dividends paid to Class I and Class II Share owners Dividends paid to non-controlling interests Interest paid Other Decrease in cash position Year Ended December 31 2022 2021 Change 2,396 1,864 532 222 273 (51) (206) 206 (412) (1,650) (1,463) (187) — — 201 (201) (110) 110 (211) (205) (288) (297) (6) 9 (426) (401) (25) 108 (55) (80) (12) 188 (43) (1) Additional information regarding this non-GAAP measure is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Capital Investment to Capital Expenditures” in this MD&A. Cash Flows from Operating Activities Cash flows from operating activities were $696 million and $2,396 million in the fourth quarter and full year of 2022, $154 million and $532 million higher than the same periods in 2021. The increase in the fourth quarter was mainly due to higher cash flows from ATCO Structures' Bechtel Pluto II Project in Australia, and the timing of payables. Cash flows from operating activities for the full year 2022 were higher due to ATCO Structures' Bechtel Pluto II Project, and higher cash flows from Canadian Utilities' Electricity Distribution and Gas Distribution businesses resulting from revenue attributable to the recovery of the 2021 deferral of customer rate increases. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 60 Lines of Credit($ millions)$4,065$(1,338)$2,727TotalUsedAvailable Cash Used for Capital Investment (1) and Capital Expenditures Total capital investment of $560 million and $1,650 million in the fourth quarter and full year of 2022 was $141 million and $187 million higher compared to the same periods in 2021 mainly due to ongoing capital investment in the Regulated Utilities, and ATCO Structures' continued expansion of its space rental fleet globally and fourth quarter acquisition of Triple M. In addition to the fourth quarter variances, full year 2022 capital investment was higher due to increased construction activities within Canadian Utilities' Energy Infrastructure segment, partially offset by Canadian Utilities' 2021 acquisition of the Pioneer Pipeline and the completed construction of the Calgary Northwest Connector in 2021 in the Natural Gas Transmission business. The fourth quarter and full year 2022 capital investment increases were partially offset by the acquisition of the Alberta Hub natural gas storage facility in the Energy Infrastructure business in December 2021. Total capital expenditures of $517 million and $1,597 million in the fourth quarter and full year of 2022 were $190 million and $245 million higher compared to the same periods in 2021 mainly due to the factors outlined above with the exception of the 2022 Triple M and the 2021 Alberta Hub acquisitions as these business combinations were excluded from capital expenditures. Capital investment and capital expenditures for the fourth quarter and full year of 2022 and 2021 are shown in the following table. Three Months Ended December 31 Year Ended December 31 2021 114 11 125 Change 90 (1) 89 ($ millions) Structures & Logistics ATCO Corporate & Other (1) Canadian Utilities Utilities Electricity Natural Gas Energy Infrastructure CU Corporate & Other Canadian Utilities Total Capital Expenditures (2) (3) ATCO Total Capital Expenditures Capital Expenditures in Joint Ventures Utilities Electricity Energy Infrastructure Business Combinations Structures & Logistics Energy Infrastructure Canadian Utilities Total Capital Investment (4) ATCO Total Capital Investment (4) 2022 60 5 65 199 185 384 64 4 452 517 1 — 42 — 453 560 2021 33 (40) (7) 92 159 251 80 3 334 327 2 6 — 84 426 419 Change 27 45 72 107 26 133 (16) 1 118 190 (1) (6) 42 (84) 2022 204 10 214 566 571 1,137 234 12 350 747 1,097 120 10 1,383 1,227 1,597 1,352 5 6 42 — 5 22 — 84 27 1,394 1,338 141 1,650 1,463 216 (176) 40 114 2 156 245 — (16) 42 (84) 56 187 (1) (2) In the fourth quarter of 2021, ATCO Land and Development sold land that was purchased in the second quarter of 2021 to an ATCO affiliate for project development. Includes additions to property, plant and equipment, intangibles and $4 million and $14 million (2021 - $(3) million and $6 million) of capitalized interest during construction for the fourth quarter and full year of 2022. The $(3) million of capitalized interest during construction recognized in the fourth quarter of 2021 relates to a project cancellation. (3) Includes $26 million and $178 million for the fourth quarter and full year of 2022 (2021 - $38 million and $169 million) of capital expenditures, mainly in the Utilities, that were funded with the assistance of customer contributions. (4) Additional information regarding these non-GAAP measures is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Capital Investment to Capital Expenditures” in this MD&A. (1) Additional information regarding this non-GAAP measure is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Capital Investment to Capital Expenditures” in this MD&A. 61 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Base Shelf Prospectus - CU Inc. Debentures On September 16, 2020, CU Inc. filed a base shelf prospectus that permitted it to issue up to an aggregate of $1.2 billion of debentures over the 25-month life. The prospectus expired on October 17, 2022 and the aggregate issuances of the debentures were $820 million. Debenture Issuances On September 14, 2022, CU Inc. issued $210 million of 4.773 per cent 30-year debentures. Proceeds from the issue were used to finance capital expenditures, and for other general corporate purposes. On June 3, 2022, Canadian Utilities issued $250 million of 4.851 per cent 30-year debentures. Proceeds from this issuance were used to repay existing indebtedness, and for other general corporate purposes. Other Debt Issuance On December 8, 2022, ATCO Energy Solutions Ltd. and ATCO Power (2010) Ltd., wholly owned subsidiaries of Canadian Utilities Limited, entered into a $250 million extendible credit agreement maturing in December 2025 with a syndicate of lenders, as well as an aggregate $100 million of uncommitted credit facilities with no set maturity date. Debenture Repayments On April 1, 2022, CU Inc. repaid $125 million of 9.92 per cent debentures. On November 9, 2022, Canadian Utilities repaid $200 million of 3.122 per cent debentures. Preferred Shares On May 24, 2022, Canadian Utilities reset the quarterly dividend rate on its Series Y Preferred Shares for the five year period from and including June 1, 2022 to May 31, 2027. The fixed dividend will be paid as and when declared by the Board of Directors of Canadian Utilities based on an annual dividend rate of 5.196 per cent. Dividends and Common Shares We have increased our common share dividend each year since 1993, a 30-year track record. Dividends paid to Class I and Class II Share owners totaled $53 million in the fourth quarter of 2022 and $211 million in the full year of 2022. On January 12, 2023, the Board of Directors declared a first quarter dividend of 47.56 cents per share. The payment of any dividend is at the discretion of the Board of Directors and depends on our financial condition and other factors. Normal Course Issuer Bid 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, 2022, we commenced a normal course issuer bid to purchase up to 1,011,907 outstanding Class I Shares. The bid will expire on March 8, 2023. Between March 9, 2022 and February 28, 2023, 486,400 shares have been purchased for $23 million. SHARE CAPITAL ATCO's equity securities consist of Class I Shares and Class II Shares. At February 28, 2023, we had outstanding 101,488,182 Class I Shares, 12,424,996 Class II Shares, and options to purchase 1,878,600 Class I Shares. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 62 CLASS I NON-VOTING SHARES AND CLASS II VOTING SHARES Each Class II Share may be converted into one Class I Share at any time at the share owner’s option. If an offer to purchase all Class II Shares is made, and such offer is accepted and taken up by the owners of a majority of the Class II Shares, and, if at the same time, an offer is not made to the Class I Share owners on the same terms and conditions, then the Class I Shares will be entitled to the same voting rights as the Class II Shares. The two share classes rank equally in all other respects, except for voting rights. Of the 10,200,000 Class I Shares authorized for grant of options under our stock option plan, 8,305,300 Class I Shares were available for issuance at December 31, 2022. Options may be granted to officers and key employees of the Company and its subsidiaries at an exercise price equal to the weighted average of the trading price of the shares on the Toronto Stock Exchange for the five trading days immediately preceding the grant date. The vesting provisions and exercise period (which cannot exceed 10 years) are determined at the time of grant. QUARTERLY INFORMATION The following table shows financial information for the eight quarters ended March 31, 2021 through December 31, 2022. ($ millions, except for per share data) Q1 2022 Q2 2022 Q3 2022 Q4 2022 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 ($) Adjusted earnings (loss) Structures & Logistics Neltume Ports ATCO Corporate & Other Canadian Utilities Utilities (1) Energy Infrastructure Canadian Utilities Corporate & Other Total adjusted earnings (1) ($ 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 (1) Energy Infrastructure Canadian Utilities Corporate & Other Total adjusted earnings (1) 1,311 128 1.12 1.12 1.17 1,161 90 0.79 0.79 0.81 1,158 71 0.62 0.62 0.76 1,348 81 0.72 0.71 0.97 20 4 (6) 124 4 (12) 134 19 4 (3) 82 6 (16) 92 18 4 1 73 6 (15) 87 4 2 8 100 3 (7) 110 Q1 2021 Q2 2021 Q3 2021 Q4 2021 1,072 83 0.73 0.72 1.04 970 12 0.10 0.10 0.70 977 52 0.46 0.46 0.60 1,270 99 0.87 0.87 1.01 14 3 1 106 5 (10) 119 18 3 (1) 65 4 (9) 80 16 4 1 56 4 (12) 69 5 3 5 109 2 (10) 114 (1) Additional information regarding these total of segments measures is provided under the headings "Other Financial and Non-GAAP Measures" and "Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares" in this MD&A. 63 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Our financial results for the previous eight quarters reflect the cyclical demand for workforce housing and seasonality with our space rental products and services in ATCO Structures and ATCO Frontec, cargo volumes 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. STRUCTURES & LOGISTICS In the first quarter of 2021, adjusted earnings were higher than the same period in 2020 mainly due to ATCO Structures' workforce housing trade sale activity in Canada and the US, workforce housing rental activity in Canada, higher space rental activity in Canada and Australia, and additional ATCO Frontec client work requests at the BC Hydro Site C Camp due to COVID-19 proactive and preventative safety measures. In the second quarter of 2021, adjusted earnings were lower than the same period in 2020 mainly due to ATCO Structures' lower workforce housing trade sale activity in Canada, Australia and the US. Lower adjusted earnings were partially offset by ATCO Structures' higher space rental activity in Canada, Australia, and the US, and ATCO Frontec's recently awarded workforce housing service contract for the Trans Mountain Expansion project. In the third quarter of 2021, adjusted earnings were higher than the same period in 2020 mainly due to ATCO Structures' higher space rental activity, and higher occupancy and additional work requests at all workforce housing camps serviced by ATCO Frontec. Higher earnings were partially offset by the completion of manufacturing work on ATCO Structures' LNG Canada Cedar Valley Lodge project in 2020. In the fourth quarter of 2021, adjusted earnings were lower than the same period in 2020 mainly due to lower contributions from ATCO Structures' LNG Canada Cedar Valley Lodge project which reached substantial completion in the third quarter of 2021, lower earnings from workforce housing trade sales in Mexico, and lower client work requests at the BC Hydro Site C and Alaska Radar System sites serviced by ATCO Frontec. Lower earnings were partially offset from continued focus on the build-out of space rentals in ATCO Structures. In the first quarter of 2022, adjusted earnings were higher than the same period in 2021 mainly due to higher space rental activity across all geographies, and higher occupancy and client work requests at BC Hydro Site C, and Trans Mountain camps located in Clearwater and Valemount, BC. In the second quarter of 2022, adjusted earnings were comparable to the same period in 2021. In the third quarter of 2022, adjusted earnings were higher than the same period in 2021 mainly due to ATCO Structures' strong business performance driven by higher space rentals activity globally and earnings from the Bechtel Pluto Train II project, and ATCO Frontec's UK Training Camp Exercise project and higher occupancy at Site C and Trans Mountain camps. Higher earnings were partially offset by ATCO Structures' project performance on workforce housing trade sales in Mexico and lower workforce housing trade sales activity in Canada. In the fourth quarter of 2022, adjusted earnings were lower compared to the same period in 2021 mainly due to ATCO Structures' lower workforce housing trade sales activity in the US, and lower earnings in ATCO Frontec's disaster and emergency management response projects. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 64 $14M$18M$16M$5M$20M$19M$18M$4MQ1 2021Q2 2021Q3 2021Q4 2021Q1 2022Q2 2022Q3 2022Q4 2022NELTUME PORTS In the first quarter of 2021, Neltume Ports' adjusted earnings were comparable to the same period in 2020. In the second quarter of 2021, Neltume Ports' adjusted earnings were higher than the same period in 2020. Higher earnings were mainly due to unplanned equipment maintenance activity at the Puerto Mejillones port in 2020, and higher volumes in 2021 across the portfolio of ports. In the third quarter of 2021, Neltume Ports' adjusted earnings were higher compared to the same period in 2020. Higher earnings were mainly due to a return to normal operations following unplanned equipment maintenance activity at the Puerto Mejillones port in 2020, and higher volumes in 2021 across the portfolio of ports. In the fourth quarter of 2021, Neltume Ports' adjusted earnings were lower compared to the same period in 2020. Lower earnings were mainly due to a gain on sale of equipment in the fourth quarter of 2020 and timing of certain revenue and expenses. In the first quarter of 2022, Neltume Ports' adjusted earnings were higher compared to the same period in 2021. Higher earnings were mainly due to higher volumes across the portfolio of ports largely resulting from improved weather conditions over the same time frame in 2021. In the second quarter of 2022, Neltume Ports' adjusted earnings were higher compared to the same period in 2021. Higher earnings were mainly due to increased activity and revenues across the portfolio in 2022 and favourable exchange rates. In the third quarter of 2022, Neltume Ports' adjusted earnings were comparable to the same period in 2021. In the fourth quarter of 2022, Neltume Ports' adjusted earnings were lower than the same period in 2021 mainly due to lower volumes during the quarter. CANADIAN UTILITIES Utilities (1) In the first quarter of 2021, adjusted earnings in the Utilities were higher than the same period in 2020. Higher earnings were mainly due to cost efficiencies and continued growth in the regulated rate base, earnings from International Electricity Operations, and inflation indexing and foreign exchange adjustments in International Natural Gas Distribution. In the second quarter of 2021, adjusted earnings in the Utilities were higher than the same period in 2020. Higher earnings were mainly due to contributions from International Electricity Operations, a higher inflation rate in International Natural Gas Distribution, and cost efficiencies, partially offset by the impact of the Electricity Transmission 2018-2019 General Tariff Application (GTA) Compliance Filing decision received in the second quarter of 2021. In the third quarter of 2021, adjusted earnings in the Utilities were higher than the same period in 2020. Higher earnings were mainly due to higher earnings from International Electricity Operations, inflation indexing in International Natural Gas Distribution, and cost efficiencies within the Electricity Distribution business. In the fourth quarter of 2021, adjusted earnings in the Utilities were higher than the same period in 2020 mainly due to higher earnings from International Electricity Operations, and inflation indexing in International Natural Gas Distribution. Higher earnings were partially offset by timing of operating costs. (1) Additional information regarding this total of segments measure is provided under the headings “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in this MD&A. 65 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS $3M$3M$4M$3M$4M$4M$4M$2MQ1 2021Q2 2021Q3 2021Q4 2021Q1 2022Q2 2022Q3 2022Q4 2022In the first quarter of 2022, adjusted earnings in the Utilities were higher than the same period in 2021. Higher earnings were mainly due to timing of operating costs, cost efficiencies, growth in rate base, and earnings from International Electricity Operations. In the second quarter of 2022, adjusted earnings in the Utilities were higher than the same period in 2021. Higher earnings were mainly due to the impact of inflation indexing on rate base in the International Natural Gas Distribution business, timing of operating costs, cost efficiencies, and growth in rate base. Higher adjusted earnings were also due to the impact of the Electricity Transmission 2018-2019 GTA Compliance Filing decision received from the AUC in the second quarter of 2021. In the third quarter of 2022, adjusted earnings in the Utilities were higher than the same period in 2021. Higher earnings were mainly due to the impact of inflation indexing on rate base in the International Natural Gas Distribution business, timing of operating costs, cost efficiencies, and growth in rate base. Higher earnings were also due to the impact of the Electricity Transmission 2020-2022 GTA Compliance Filing decision received from the AUC in the third quarter of 2021. In the fourth quarter of 2022, adjusted earnings in the Utilities were lower than the same period in 2021 mainly due to timing of cost recoveries in International Electricity Operations and the timing of operating costs in Electricity Distribution, Natural Gas Distribution and International Electricity Operations. Energy Infrastructure In the first quarter of 2021, Energy Infrastructure adjusted earnings were higher than the same period in 2020 mainly due to increased demand for natural gas storage services and recovered business development costs. In the second quarter of 2021, Energy Infrastructure adjusted earnings were higher than the same period in 2020 mainly due to recovered business development costs, partially offset by lower demand for natural gas storage services. In the third quarter of 2021, Energy Infrastructure adjusted earnings were higher than the same period in 2020 mainly due to increased demand for natural gas storage services and recovered business development costs. In the fourth quarter of 2021, Energy Infrastructure adjusted earnings were lower than the same period in 2020 mainly due to the costs associated with the purchase of the Alberta Hub natural gas storage facility, Central West Pumped Hydro development costs, non-recurring recoveries in 2020, and lower demand for natural gas storage services. In the first quarter of 2022, Energy Infrastructure adjusted earnings were lower than the same period in 2021 mainly due to recovered business development costs in 2021, project development costs incurred in 2022, and unfavourable movements in the Australian foreign exchange rate, partially offset by earnings from the Alberta Hub natural gas storage facility acquired in December 2021. In the second quarter of 2022, Energy Infrastructure adjusted earnings were higher than the same period in 2021 mainly due to earnings from the Alberta Hub natural gas storage facility acquired in December 2021 and an insurance recovery related to the Karratha facility in Australia. In the third quarter of 2022, Energy Infrastructure adjusted earnings were higher than the same period in 2021 mainly due to earnings from the Alberta Hub natural gas storage facility acquired in December 2021, and higher power pricing at the Old Man River hydro facility, partially offset by higher project development costs incurred in 2022, largely in Australia. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 66 $106M$65M$56M$109M$124M$82M$73M$100MQ1 2021Q2 2021Q3 2021Q4 2021Q1 2022Q2 2022Q3 2022Q4 2022In the fourth quarter of 2022, Energy Infrastructure adjusted earnings were higher than the same period in 2021 mainly due to earnings from the Alberta Hub natural gas storage facility acquired in December 2021, partially offset by higher project development costs incurred in 2022, largely in Australia. 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, impairments, 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: • Early Termination of the Master Services Agreements (MSA) for Managed IT Services ◦ ◦ In the fourth quarter of 2020 and first quarter of 2021, Canadian Utilities signed MSAs with IBM Canada Ltd. (subsequently novated to Kyndryl Canada Ltd.) and IBM Australia Limited (IBM), respectively, to provide managed IT services. These services were previously provided by Wipro under ten-year MSAs expiring in December 2024. ATCO recognized onerous contract provisions relating to the Wipro MSAs of $32 million and $2 million (after-tax and non-controlling interests) in the fourth quarter of 2020 and first quarter of 2021, respectively. The transition of the managed IT services from Wipro to IBM commenced on February 1, 2021 and was completed by December 31, 2021. In 2021, ATCO recognized transition costs of $22 million (after-tax and non-controlling interests). In the second quarter of 2021, impairments and other costs not in the normal course of business of $33 million (after-tax and non-controlling interests) were recorded. Canadian Utilities incurred $28 million of these costs in Mexico, related mainly to its Veracruz hydro facility within its Energy Infrastructure segment. The charge reflected an adverse arbitration decision, changes in market regulations, ongoing political uncertainty, and a challenging operating environment, resulting in an impairment of the carrying value of the assets. Other costs recorded were individually immaterial. During the fourth quarter of 2021, the Company recorded earnings of $9 million (after-tax and non- controlling interests) following the conclusion of the Company's involvement in an international project. AUC Enforcement Proceeding • • • ◦ On April 14, 2022, the AUC Enforcement branch and ATCO Electric Transmission filed a settlement with the AUC regarding a sole source contract for the Jasper interconnection project. On June 29, 2022, the AUC issued its decision approving the settlement in its entirety. In the fourth quarter of 2021 and first quarter of 2022, the Company recognized costs of $7 million and $14 million (after-tax and non-controlling interests), respectively, related to the proceeding. • Workplace COVID-19 Vaccination Standard ◦ To safeguard the health and safety of employees, business partners, customers and communities, the Company required its employees, subject to certain exemptions, to be vaccinated against COVID-19 effective January 1, 2022. Employees who did not demonstrate they were vaccinated or did not have an approved exemption were provided severance. In 2022, the Company incurred $5 million (after-tax and non-controlling interests) in severance and related costs associated with the Workplace COVID-19 vaccination standard. 67 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS $5M$4M$4M$2M$4M$6M$6M$3MQ1 2021Q2 2021Q3 2021Q4 2021Q1 2022Q2 2022Q3 2022Q4 2022• Gain on sale of ownership interest in a subsidiary company ◦ On March 31, 2022, the Company and Denendeh Investments Incorporated entered into a share purchase agreement to increase DII's ownership interest in Northland Utilities Enterprises Ltd. from 14 per cent to 50 per cent. The transaction resulted in a gain on sale of $3 million (after-tax and non-controlling interests). Effective March 31, 2022, the Company no longer consolidates NUE as a controlled subsidiary, and instead, accounts for its interest in NUE as an investment in joint venture using the equity method. • In the fourth quarter of 2022, a reversal of impairment of $2 million (after-tax and non-controlling interests) was recorded mainly related to Energy Infrastructure's joint venture investment in the Osborne electricity cogeneration facility located in South Australia. The reversal resulted from an improvement in the future outlook of power market prices. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 68 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. As it relates to the Company’s energy transition investments, the Company faces additional risks including policy certainty, pace of energy transition, commodity and environmental attribute price risk and climate risk. Risk Management Approach The Company attempts to reduce the risks of project delays and cost increases by careful project feasibility, development and management processes, 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 reduces risks associated with policy certainty, pace of energy transition, commodity and environmental attribute price risk and climate-related risk by leveraging our competitive advantages and assigning clear accountability and leadership for executing and realizing capital investment. Planned capital investments for Energy Infrastructure are based on the following significant assumptions: a diversified approach to business development focused on multiple pillars (energy storage, clean fuels, renewables) and development in areas closest to economic feasibility; ensuring long-term assets are matched with appropriate customer offtake agreements with investment grade counterparties; pursuing projects in markets where fundamentals and competitive advantages enable us to be successful; and self-performing or working with Engineering, Procurement and Construction firms and partners to ensure construction activities are completed by parties with the competencies to ensure successful project delivery. The Company believes these assumptions are reasonable. 69 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 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. The Government of Alberta recently completed its review of the Technology Innovation and Emissions Reduction (TIER) Regulations and in December 2022, released the TIER Regulation Amendments which met equivalency with the federal Output-Based Pricing System. 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. Energy Infrastructure has pivoted its growth strategy to largely focus on energy transition assets. A lack of clarity on proposed regulations creates revenue uncertainty for these projects. 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 four main business lines: space rentals, workforce housing, permanent modular construction and residential housing. Energy Infrastructure is targeting investments that benefit from climate change. In addition, we are actively and constructively working with all levels of government as well as Indigenous communities to ensure ongoing communication and that the impacts and costs of proposed policy changes are identified and understood. Where appropriate, the Company is also working with its peers and industry associations to develop common positions and strategies. 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. Assets across all of ATCO's and Canadian Utilities' businesses 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 and site 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. 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. While we are also exposed to extreme weather events in Puerto Rico the risk is limited to operating activities as the Company does not own the transmission and distribution assets. These are the material climate related risks. For more detailed information on additional climate-related risks please refer to the Sustainability, Climate Change and Energy Transition section of this MD&A. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 70 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 accounts receivable and contract assets are from the Company’s operations in Alberta, followed by operations in Australia. The largest credit risk concentration is from the Alberta Utilities, which are able to recover an estimate for doubtful accounts through approved customer rates and to request recovery through customer rates for any material losses from the retailers beyond the retailer security mandated by provincial regulations. The second largest concentration of credit risk is within the Structures & Logistics business. The counterparties' financial quality is monitored regularly to ensure appropriate mitigation of credit risk. Business Risk: Cybersecurity Businesses Impacted: • All businesses Description & 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. 71 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Energy Commodity Price Businesses Impacted: • Retail Energy • Energy Infrastructure Description & Context Associated Strategies: • Financial Strength Retail Energy's earnings are affected by short-term price volatility. Energy Infrastructures' natural gas storage facility in Carbon, Alberta, and the Alberta Hub natural gas storage facility near Edson, Alberta are exposed to storage price differentials. The growth of Energy Infrastructure's renewable electricity business has increased exposure to merchant power markets. Risk Management Approach In conducting its business, the Company may use various instruments, including forward physical contracts, financial swaps, energy or power purchase agreements, and storage service contracts to manage the risks arising from fluctuations in commodity prices. To manage its exposure to natural gas storage spreads the Company uses a combination of storage service contracts to lease space and to capture future storage spreads. 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. Risk Management Approach To address this risk, the Company manages its capital structure to maintain strong investment grade 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. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 72 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 known 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, 2022, the Company had fixed interest rates, either directly or through interest rate swap agreements, on 97 per cent (2021 - 97 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 is 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. 73 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS Business Risk: Inflation Risk Businesses Impacted: • All businesses Description & Context Associated Strategies: • Financial Strength Inflation has the potential to impact the economies and business environments that the Company operates in. Increased inflation and any economic conditions resulting from governmental monetary policy intended to reduce inflation may negatively impact demand for products and services and/or adversely affect profitability. Risk Management Approach The Company monitors the impacts of inflation on the procurement of goods and services and seeks to minimize its effects in future periods through pricing strategies, productivity improvements, and cost reductions. The majority of the impact on costs resulting from inflation is mitigated through the regulatory construct, long-term contractual terms, and pricing of short-term contractual sales. The Company maintains strong investment grade ratings, which helps mitigate the risk of higher interest costs, and the vast majority of the Company’s outstanding debt carries fixed rate interest, which helps to alleviate the impact of increasing short-term interest rates. Business Risk: Industry 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 & Logistics' 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 & Logistics has managed fluctuations in the resource sector through expansion of its global space rentals business while diversifying into the residential housing sector via the acquisition of Triple M, and development of permanent modular construction and facility operations and maintenance services. These businesses provide stable earnings and cash flows and greater geographic diversity thereby reducing ATCO Structures & Logistics' risk exposure to any one particular industry sector or geography. Neltume Ports has a diversified operational portfolio that is linked to a mix of cargos, economies, economic cycles, and political environments in Chile, Uruguay, Argentina, Brazil and the US. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 74 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, inflation risk, labour shortages and shutdowns as a result of government regulation and prevention measures. These impacts would increase strain on employees and compromise levels of customer service, either 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. Risk Management Approach 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. ATCO has a comprehensive Pandemic Plan that is activated when a pandemic is declared. The plan includes 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). Additionally, the Company follows recommendations by local and national public health authorities across the globe to adjust operational requirements as needed to ensure a coordinated approach across ATCO. Business Risk: Workforce Retention Businesses Impacted: • All businesses Description and Context: Associated Strategies: • Growth • Financial Strength • Operational Excellence A low level of retention in a workforce, especially within critical roles, could result in a shortage of people that could hamper Company operations and may negatively impact meeting business objectives. Risk Management Approach ATCO’s investment in our people provides an attractive environment that fosters retention. ATCO continuously reviews and enhances its people resourcing and management strategy. This includes enhancing ATCO branding and highlighting our Company values, building strong partnerships with educational institutions to attract new graduates and co-operative education students, aligning total rewards of compensation, benefits, pension and employee share purchase programs with market, and delivering orientation and onboarding for cultural and strategy awareness. We promote and support the development of our people, complete succession and development planning annually with a significant focus on critical roles and skills, and provide leadership and individual development programs that are available for all leaders and employees. The annual performance management program facilitates discussions on annual goals, development plans and career planning. To promote a culture of inclusiveness, actions taken include supporting a flexible work environment, and through a focus on Diversity, Equity and Inclusion (DE&I) with our DE&I Council and many committees along with our Well- being@ATCO programs, we continue to build an environment where people feel safe (physically and psychologically), have equal opportunity, and feel included. To understand more deeply the risks to retention, exit interviews are conducted and an annual employee engagement survey is conducted, of which 84 per cent of employees participated in 2022. Results are reviewed to inform areas of risk and engagement action plans are developed by leaders to address risks. As a result, ATCO’s retention rates continue to be at or higher than global benchmarks in the industries we operate. 75 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 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's and Natural Gas Transmission's Urban Pipeline Replacement and integrity programs, and Natural Gas Distribution's 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 • Operational Excellence • Financial Strength 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. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 76 Business Risk: Regulated Operations Businesses Impacted: • Utilities Description & Context Associated Strategies: • Growth • Operational Excellence • Financial Strength The Regulated Utilities are subject to the risks associated with 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. The Company is also subject to the potential risk of the regulator disallowing costs incurred. Electricity Distribution and Natural Gas Distribution operate under 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 a rate of return instrument review process, which is then adopted in subsequent Access Arrangement proceedings, 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 ensure 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. 77 ATCO LTD. 2022 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. At December 31, 2022, the Company’s cash position was approximately $1 billion and there were available committed and uncommitted lines of credit of approximately $2.7 billion which can be utilized for general corporate purposes. Liquidity risk includes contractual financial obligations which the Company will meet with cash flow from operations, existing cash balances and external financing, if necessary. These contractual financial obligations for the next five years and thereafter are shown below. ($ millions) 2023 2024 2025 2026 2027 2028 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 Business Acquisition (3) Other Total 1,161 — — — — — 109 412 160 1,842 526 409 713 24 1,672 3,514 458 426 52 936 439 — — 9 448 1,384 346 422 21 789 131 — — 23 154 943 395 414 10 819 83 — — 6 89 908 3 376 10 389 8,828 7,196 — 16,024 66 — — 6 72 461 120 — — 6 126 16,150 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2022. 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, 2022. (3) On January 3, 2023, ATCO Power (2010) Ltd., a wholly owned subsidiary of Canadian Utilities, acquired a portfolio of wind and solar assets and projects in Alberta and Ontario, Canada. The transaction was financed by a non-revolving credit facility issued by a syndicate of lenders. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 78 OTHER FINANCIAL AND NON-GAAP MEASURES Other financial measures presented in this MD&A consist of: 1. Adjusted earnings which are a key measure of segment earnings that are used to assess segment performance and allocate resources; and 2. Total of segments measures, which are defined as financial measures disclosed by an issuer that are a subtotal or total of two or more reportable segments. 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, 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. Adjusted earnings are presented in Note 3 of the 2022 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. Adjusted earnings are most directly comparable to earnings attributable to Class I and Class II shares but is not a standardized financial measure under the reporting framework used to prepare our financial statements. Adjusted earnings may not be comparable to similar financial measures disclosed by other issuers. Management’s view is that adjusted earnings allow for a more effective analysis of operating performance and trends. For investors, adjusted earnings may provide value as they exclude items that are not in the normal course of business and, as such, provide insight as to earnings resulting from the issuer's usual course of business. A reconciliation of adjusted earnings to earnings attributable to Class I and Class II Shares is presented in this MD&A. Total of segments measures are most directly comparable to total earnings attributable to Class I and Class II shares. Comparable total of segments measures for the same period in 2021 have been calculated using the same composition and are disclosed alongside the current total of segments measures in this MD&A. A reconciliation of the total of segments measures with total earnings attributable to Class I and Class II shares is presented in this MD&A. Non-GAAP financial measures presented in this MD&A are defined as financial measures disclosed by an issuer that are not disclosed in the financial statements. Capital investment is a non-GAAP financial measure defined as cash used for capital expenditures, business combinations, and cash used in the Company's share of capital expenditures in joint ventures. Capital expenditures includes additions to property, plant and equipment and intangibles as well as interest capitalized during construction. Capital investment is most directly comparable to capital expenditures. Capital investment is not a standardized financial measure under the reporting framework used to prepare our financial statements. Capital investment may not be comparable to similar financial measures disclosed by other issuers. Management views capital investment as the Company's total cash investment in assets. For investors, capital investment is useful because it identifies how much cash is being used to acquire and invest in assets. A reconciliation of capital investments to capital expenditures is presented in this MD&A. 79 ATCO LTD. 2022 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, 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. Additional information regarding this measure is provided in the Other Financial and Non-GAAP Measures section of this MD&A. ATCO Ltd. Canadian Utilities Limited Structures & Logistics Neltume Ports ATCO Corporate & Other Utilities Energy Infrastructure CUL Corporate & Other Consolidated ATCO Consolidated Three Months Ended December 31 ($ millions) 2022 2021 Revenues Adjusted earnings (loss) Impairment reversal Unrealized (losses) gains on mark-to- market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Transition of managed IT services AUC enforcement proceeding Project cost recovery Other Earnings (loss) attributable to Class I and Class II Shares 241 243 4 5 — — — — 2 3 — — — (1) 8 5 — — 902 884 100 109 — — 94 74 3 2 2 — 111 70 (7) (10) — — 1,107 1,028 96 101 2 — 1,348 1,270 110 114 2 — — — — — — (11) (11) (11) — — — — — — (1) — — — — — — 4 4 — — — — — — — — — — — — — 2 3 — — — — — — 3 — — — — — — 8 8 — (18) (15) (2) (2) — (3) — (7) — — — — 80 82 (1) — — — — — — — — — 9 — (1) 5 9 3 — — — — — — — — — — — — (18) (7) 2 (18) (15) (2) (2) — (3) — (7) — 9 — (1) 67 84 2 (18) (15) (2) (2) — (1) — (7) — 9 — (1) 81 99 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 80 ($ millions) 2022 2021 Revenues Adjusted earnings (loss) Impairment reversal (charge) and other costs Unrealized losses on mark-to-market forward and swap commodity contracts Rate-regulated activities IT Common Matters decision Transition of managed IT services AUC enforcement proceeding Project cost recovery Workplace COVID-19 vaccination standard Gain on sale of ownership interest in a subsidiary company Other Earnings (loss) attributable to Class I and Class II Shares ATCO Ltd. Canadian Utilities Structures & Logistics Neltume Ports ATCO Corporate & Other Utilities Energy Infrastructure CUL Corporate & Other Consolidated Year Ended December 31 ATCO Consolidated 929 777 61 53 — — — — 14 13 — — 1 3,384 (3) 3,041 — 6 — 1 379 336 — — 312 209 19 15 2 (34) 352 265 (50) (41) — — 4,048 3,515 348 310 2 (34) 4,978 4,289 423 382 2 (33) — — — — — (36) (36) (36) — — — — — — (2) — — — — — — — — — — — — — — — — — — — — — — — — 61 51 — — — 14 13 — — — — — — — — — — — — — — — (1) 2 — 6 (64) (8) (7) — (20) (14) (7) — — (5) — 3 — — — (1) — — — — — (1) — — — 9 — — — — — (2) (9) — — — — — (1) — — — — — — — — — — (10) 6 (64) (8) (7) — (22) (14) (7) — 9 (5) — 3 — — (2) (10) 6 (64) (8) (7) — (24) (14) (7) — 9 (5) — 3 — (1) — (1) 361 9 238 21 (14) (86) (51) 296 173 370 246 IMPAIRMENT REVERSAL (CHARGE) AND OTHER COSTS In the second quarter of 2021, impairments and other costs not in the normal course of business of $33 million (after-tax and non-controlling interests) were recorded. Canadian Utilities incurred $28 million of these costs in Mexico, related mainly to its Veracruz hydro facility within its Energy Infrastructure segment. The charge reflected an adverse arbitration decision, changes in market regulations, ongoing political uncertainty, and a challenging operating environment, resulting in an impairment of the carrying value of the assets. Other costs recorded were individually immaterial. In the fourth quarter of 2022, a reversal of impairment of $2 million (after-tax and non-controlling interests) was recorded mainly related to Energy Infrastructure's joint venture investment in the Osborne electricity cogeneration 81 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS facility located in South Australia. The reversal resulted from an improvement in the future outlook of power market prices. 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. These contracts are measured at fair value. Unrealized gains and losses due to changes in the fair value of fixed-price swap commodity contracts are recognized in the earnings of the Corporate & Other segment. The CODM believes that removal of the unrealized gains and 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 Transmission, ATCO Electric Distribution, ATCO Electric Yukon, Northland Utilities (NWT), Northland Utilities (Yellowknife), ATCO Gas, ATCO Pipelines and ATCO Gas Australia 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. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 82 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 the earnings from a regulatory decision pertaining to current and prior periods when the decision is received. 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 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 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 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: ($ millions) Additional revenues billed in current period Future removal and site restoration costs (1) Impact of colder temperatures (2) Revenues to be billed in future periods Deferred income taxes (3) Distribution rate relief (4) Impact of warmer temperatures (2) Impact of inflation on rate base (5) Settlement of regulatory decisions and other items Distribution rate relief (4) Other (6) Three Months Ended December 31 Year Ended December 31 2022 2021 Change 2022 2021 Change 13 6 (22) — — 11 — (17) (13) 2 (12) (10) 10 (13) (18) — 12 (15) 2 6 61 2 (5) 13 (2) (2) 10 (25) (3) (56) — — (34) 55 (22) 6 56 — (56) (63) (1) (17) — 17 (64) 5 2 — 63 1 (17) 55 (39) 70 (1) Removal and site restoration costs are billed to customers over the estimated useful life of the related assets based on forecast costs to be incurred in future periods. (2) Natural Gas Distribution's 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 normal temperatures in the current period are refunded to or recovered from customers in future periods. (3) (4) Income taxes are billed to customers when paid by the Company. In 2021, in response to the COVID-19 pandemic, Electricity Distribution and Natural Gas Distribution applied for interim rate relief for customers to hold current distribution base rates in place. Following approval by the AUC, Electricity Distribution and Natural Gas Distribution recorded a decrease in earnings for the fourth quarter and year ended December 31, 2021 of $13 million and $63 million (after-tax and non-controlling interests). Based on direction from the AUC, collection of 2021 deferred rates commenced in 2022 and for the fourth quarter and year ended December 31, 2022, $10 million and $55 million (after-tax and non-controlling interests) was billed to customers. (5) The inflation-indexed portion of International Natural Gas Distribution's rate base is billed to customers through the recovery of depreciation in subsequent years based on the actual or forecasted annual rate of inflation. Under rate-regulated accounting, revenue is recognized in the current year 83 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 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 2022, Electricity Distribution recorded a decrease in earnings of $10 million (after-tax and non-controlling interests) related to payments of electricity transmission costs and Natural Gas Distribution recorded a decrease in earnings of $8 million (after-tax and non-controlling interests) related to payments of gas pipeline system load balancing costs. In 2021, Natural Gas Distribution collected $28 million (after-tax and non-controlling interests) related to depreciation and transmission rate riders, which was partly offset by a decrease in earnings of $15 million (after-tax and non-controlling interests) related to payments of transmission costs. 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 during the fourth quarter and year ended December 31, 2022 was $2 million and $8 million (after-tax and non-controlling interests) (2021 - $2 million and $7 million (after-tax and non-controlling interests)). TRANSITION OF MANAGED IT SERVICES In the fourth quarter of 2020 and first quarter of 2021, Canadian Utilities signed MSAs with IBM Canada Ltd. (subsequently novated to Kyndryl Canada Ltd.) and IBM Australia Limited, respectively, to provide managed IT services. These services were previously provided by Wipro under ten-year MSAs expiring in December 2024. The transition of the managed IT services from Wipro to IBM commenced on February 1, 2021 and was completed by December 31, 2021. The amount excluded from adjusted earnings during the fourth quarter and year ended December 31, 2022 was $nil (2021 - $1 million and $24 million (after-tax and non-controlling interests)). AUC ENFORCEMENT PROCEEDING On April 14, 2022, the AUC Enforcement branch and ATCO Electric Transmission filed a settlement with the AUC regarding a sole source contract for the Jasper interconnection project. On June 29, 2022, the AUC issued its decision approving the settlement in its entirety. In the fourth quarter of 2021 and first quarter of 2022, the Company recognized costs of $7 million and $14 million (after-tax and non-controlling interests), respectively, related to the proceeding. PROJECT COST RECOVERY During the fourth quarter and full year of 2021, the Company recorded earnings of $9 million (after-tax and non- controlling interests) following the conclusion of the Company's involvement in an international project. WORKPLACE COVID-19 VACCINATION STANDARD To safeguard the health and safety of employees, business partners, customers and communities, the Company required its employees, subject to certain exemptions, to be vaccinated against COVID-19 effective January 1, 2022. Employees who did not demonstrate they were vaccinated or did not have an approved exemption were provided severance. In 2022, the Company incurred $5 million (after-tax and non-controlling interests) in severance and related costs associated with the Workplace COVID-19 vaccination standard. GAIN ON SALE OF OWNERSHIP INTEREST IN A SUBSIDIARY COMPANY On March 31, 2022, the Company and Denendeh Investments Incorporated (DII) entered into a share purchase agreement to increase DII's ownership interest in NUE from 14 per cent to 50 per cent. The transaction resulted in a gain on sale of $3 million (after-tax and non-controlling interests). Effective March 31, 2022, the Company no longer consolidates NUE as a controlled subsidiary, and instead, accounts for its interest in NUE as an investment in joint venture using the equity method. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 84 STRUCTURES & LOGISTICS The following tables reconcile adjusted earnings for the Structures & Logistics business unit to the directly comparable financial measure, earnings attributable to Class I and Class II shares. ($ millions) 2022 2021 Adjusted earnings (loss) Transition of managed IT services Earnings (loss) attributable to Class I and Class II shares Three Months Ended December 31 ATCO Ltd. Structures Frontec Structures & Logistics 7 6 — — 7 6 (3) (1) — (1) (3) (2) 4 5 — (1) 4 4 ($ millions) 2022 2021 Adjusted earnings Transition of managed IT services Earnings attributable to Class I and Class II shares Year Ended December 31 ATCO Ltd. Structures Frontec Structures & Logistics 54 48 — (1) 54 47 7 5 — (1) 7 4 61 53 — (2) 61 51 85 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS UTILITIES The following tables reconcile adjusted earnings for the Utilities business unit to the directly comparable financial measure, earnings attributable to Class I and Class II shares. ($ millions) 2022 2021 Adjusted earnings Rate-regulated activities IT Common Matters decision Transition of managed IT services AUC enforcement proceeding Earnings attributable to Class I and Class II shares Electricity Natural Gas Canadian Utilities Limited Three Months Ended December 31 Utilities Electricity Distribution Electricity Transmission International Electricity Consolidated Electricity Natural Gas Distribution Natural Gas Transmission International Natural Gas Consolidated Natural Gas 17 20 (11) (13) (1) (1) — (1) — — 5 5 19 19 (4) 4 — — — (1) — (7) 15 15 6 8 — — — — — — — — 6 8 42 47 (15) (9) (1) (1) — (2) — (7) 26 28 34 38 14 8 (1) (1) — (1) — — 47 44 11 11 (4) (3) — — — — — — 7 8 13 13 (13) (11) — — — — — — — 2 58 62 (3) (6) (1) (1) — (1) — — 54 54 100 109 (18) (15) (2) (2) — (3) — (7) 80 82 A T C O L T D . ' 2 0 2 2 M A N A G E M E N T S D I S C U S S I O N & A N A L Y S I S 8 6 8 7 A T C O L T D . ' 2 0 2 2 M A N A G E M E N T S D I S C U S S I O N & A N A L Y S I S ($ millions) 2022 2021 Adjusted earnings Rate-regulated activities IT Common Matters decision Transition of managed IT services AUC enforcement proceeding Workplace COVID-19 vaccination standard Gain on sale of ownership interest in a subsidiary company Earnings attributable to Class I and Class II shares Electricity Natural Gas Canadian Utilities Limited Electricity Distribution Electricity Transmission International Electricity Consolidated Electricity Natural Gas Distribution Natural Gas Transmission International Natural Gas Consolidated Natural Gas 85 80 (15) (40) (3) (2) — (5) — — (1) — 3 — 69 33 87 81 9 10 (2) (2) — (2) (14) (7) (1) — — — 79 80 27 23 — — — — — — — — — — — — 27 23 199 184 (6) (30) (5) (4) — (7) (14) (7) (2) — 3 — 175 136 84 75 52 (5) (2) (2) — (8) — — (2) — — — 132 60 47 43 (6) (11) (1) (1) — (1) — — (1) — — — 39 30 49 34 (34) (18) — — — (4) — — — — — — 15 12 180 152 12 (34) (3) (3) — (13) — — (3) — — — 186 102 Year Ended December 31 Utilities 379 336 6 (64) (8) (7) — (20) (14) (7) (5) — 3 — 361 238 ENERGY INFRASTRUCTURE The following tables reconcile adjusted earnings for the Energy Infrastructure business unit to the directly comparable financial measure, earnings attributable to Class I and Class II shares. ($ millions) 2022 2021 Adjusted earnings (loss) Impairment reversal Unrealized losses on mark-to-market forward and swap commodity contract Project cost recovery Other Earnings attributable to Class I and Class II shares ($ millions) 2022 2021 Adjusted earnings Impairment reversal (charge) and other costs Unrealized losses on mark-to-market forward and swap commodity contract Transition of managed IT services Project cost recovery Other Earnings (loss) attributable to Class I and Class II shares Three Months Ended December 31 Canadian Utilities Limited Electricity Generation Storage & Industrial Water Energy Infrastructure (2) — 2 — — — — — — — — — 5 2 — — — (1) — 9 — (1) 5 9 3 2 2 — — (1) — 9 — (1) 5 9 Canadian Utilities Limited Year Ended December 31 Electricity Generation Storage & Industrial Water Energy Infrastructure 2 7 2 (34) — — — — — — — — 4 (27) 17 8 — — — (1) — (1) — 9 — (2) 17 13 19 15 2 (34) — (1) — (1) — 9 — (2) 21 (14) ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 88 RECONCILIATION OF CAPITAL INVESTMENT TO CAPITAL EXPENDITURES Capital investment is a non-GAAP financial measure defined as cash used for capital expenditures, business combinations, and cash used in the Company's share of capital expenditures in joint ventures. 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. Additional information regarding this non-GAAP measure is provided in the Other Financial and Non-GAAP Measures section of this MD&A. ($ millions) 2022 2021 Capital Investment Capital Expenditure in joint ventures Business combination (1) Capital Expenditures Three Months Ended December 31 ATCO Ltd. Canadian Utilities Limited Structures & Logistics Neltume Ports ATCO Corporate & Other Utilities Energy Infrastructure CUL Corporate & Other Consolidated ATCO Consolidated 102 33 — — (42) — 60 33 — — — — — — — — 5 (40) — — — — 5 (40) 385 253 (1) (2) — — 384 251 64 170 — (6) — (84) 64 80 4 3 — — — — 4 3 453 426 (1) (8) — (84) 452 334 560 419 (1) (8) (42) (84) 517 327 (1) Business combination refers to the acquisition of Triple M in the ATCO Structures & Logistics segment in 2022 and the acquisition of the Alberta Hub natural gas storage facility in Canadian Utilities' Energy Infrastructure segment in 2021. ($ millions) 2022 2021 Capital Investment Capital Expenditure in joint ventures Business combination (1) Capital Expenditures ATCO Ltd. Canadian Utilities Limited Structures & Logistics Neltume Ports ATCO Corporate & Other Utilities Energy Infrastructure CUL Corporate & Other Consolidated Year Ended December 31 ATCO Consolidated 246 114 — — (42) — 204 114 — — — — — — — — 10 11 — — — — 10 11 1,142 1,102 (5) (5) — — 1,137 1,097 240 226 (6) (22) — (84) 234 120 12 10 — — — — 12 10 1,394 1,338 1,650 1,463 (11) (27) — (84) (11) (27) (42) (84) 1,383 1,227 1,597 1,352 (1) Business combination refers to the acquisition of Triple M in the ATCO Structures & Logistics segment in 2022 and the acquisition of the Alberta Hub natural gas storage facility in Canadian Utilities' Energy Infrastructure segment in 2021. 89 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS OTHER FINANCIAL INFORMATION OFF BALANCE SHEET ARRANGEMENTS ATCO does not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the results of operations or financial condition, including, without limitation, the Company's liquidity and capital resources. CONTINGENCIES The Company is party to a number of disputes and lawsuits in the normal course of business. The Company believes the ultimate liability arising from these matters will have no material impact on its 2022 Consolidated Financial Statements. SIGNIFICANT ACCOUNTING ESTIMATES The Company’s significant accounting estimates are described in Note 23 of the 2022 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. FINANCIAL INSTRUMENTS Financial instruments are measured at amortized cost or fair value. The valuation methods used to measure financial instruments are described in Note 20 of the 2022 Consolidated Financial Statements, which are prepared in accordance with IFRS. 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. For further information, please refer to Note 32 of the 2022 Consolidated Financial Statements. ACCOUNTING CHANGES At December 31, 2022, 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 2023 Consolidated Financial Statements once adopted. DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2022, 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, 2022. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 90 INTERNAL CONTROL OVER FINANCIAL REPORTING There was no change in the Company’s internal control over financial reporting that occurred during the period beginning on January 1, 2022, and ended on December 31, 2022, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 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. As of December 31, 2022, 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. 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, 2022. 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", "goals", "targets", "strategy", "future", and similar expressions. In particular, forward-looking information in this MD&A includes, but is not limited to, references to: strategic plans, goals and targets, including ESG targets and the commitment to achieve net zero GHG emissions by 2050; expected emissions reductions; expected electricity generation capacity and/or productive capacity of assets and projects, including assets and projects that have been acquired or that are expected to be developed in the future; the expected timing of regulatory decisions, or the commencement or completion of activities and/or contracts; the impact or benefits of contracts, including contract value or fees to be paid or received; growth expectations; the expected purchase and sale of electricity; the timing for commencement, construction or commercial operations of facilities, assets or projects; other information pertaining to planned but not yet fully developed projects, including development projects acquired as part of the Renewable Energy Portfolio Acquisition from Suncor, also the Central West Pumped Storage Hydro Project, also the Canadian Pacific Hydrogen Locomotive Project, also the Suncor ATCO Heartland Hydrogen Hub Project, also the ATLAS Carbon Sequestration Hub Project, also the Calgary Solar Development Projects, also the Empress Solar Development Project; and future minimum national carbon pricing per tonne in Canada. Although the Company believes that the expectations reflected in the forward-looking information are reasonable based on the information available on the date such statements are made and processes used to prepare the information, such statements are not guarantees of future performance and no assurance can be given that these expectations will prove to be correct. Forward-looking information should not be unduly relied upon. By their nature, these statements involve a variety of assumptions, known and unknown risks and uncertainties, and other factors, which may cause actual results, levels of activity, and achievements to differ materially from those anticipated in such forward-looking information. The forward-looking information reflects the Company's beliefs and assumptions with respect to, among other things, the Company's ability to successfully achieve its net-zero GHG target by 2050; the development and performance of technology and technological innovations and the ability to otherwise access and implement all technology necessary to achieve GHG and other environmental, social and governance targets; continuing collaboration with certain regulatory and environmental groups; the performance of assets and equipment; demand levels for oil, natural gas, gasoline, diesel and other energy sources; certain levels of future energy use; future production rates; future revenue and earnings; the ability to meet current project schedules, and other assumptions inherent in management's expectations in respect of the forward-looking information identified herein. The Company's actual results could differ materially from those anticipated in this forward-looking information as a result of, among other things, risks inherent in the performance of assets; capital efficiencies and cost savings; applicable laws and government policies; regulatory decisions; competitive factors in the industries in which the Company operates; prevailing economic conditions; credit risk; interest rate fluctuations; the availability and cost of labour, materials, services, and infrastructure; the development and execution of projects; prices of electricity, 91 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS natural gas, natural gas liquids, and renewable energy; the development and performance of technology and new energy efficient products, services, and programs including but not limited to the use of zero-emission and renewable fuels, carbon capture, and storage, electrification of equipment powered by zero-emission energy sources and utilization and availability of carbon offsets; potential termination or breach of contract by contract counterparties; the occurrence of unexpected events such as fires, severe weather conditions, explosions, blow- outs, equipment failures, transportation incidents, and other accidents or similar events; and other risk factors, many of which are beyond the control of the Company. Due to the interdependencies and correlation of these factors, the impact of any one material assumption or risk on a forward-looking statement cannot be determined with certainty. Readers are cautioned that the foregoing lists are not exhaustive. For additional information about the principal risks that the Company faces, see “Business Risks and Risk Management” in this MD&A. This MD&A may contain information that constitutes future-oriented financial information or financial outlook information, all of which are subject to the same assumptions, risk factors, limitations and qualifications set forth above. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise or inaccurate and, as such, undue reliance should not be placed on such future-oriented financial information or financial outlook information. The Company's actual results, performance and achievements could differ materially from those expressed in, or implied by, such future-oriented financial information or financial outlook information. The Company has included such information in order to provide readers with a more complete perspective on its future operations and its current expectations relating to its future performance. Such information may not be appropriate for other purposes and readers are cautioned that such information should not be used for purposes other than those for which it has been disclosed herein. Future-oriented financial information or financial outlook information contained herein was made as of the date of this MD&A. 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 2022 Consolidated Financial Statements and MD&A for the year ended December 31, 2022. 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, or email investorrelations@atco.com. ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 92 GLOSSARY AESO means Alberta Electric System Operator. EV means electric vehicle. Alberta Utilities means Electricity Distribution, Electricity Transmission, Natural Gas Distribution and Natural Gas Transmission. AUC means the Alberta Utilities Commission. AUD means Australian dollars. 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. CO2e means Carbon dioxide equivalent. Customer Contributions are non-refundable cash contributions made by customers for certain additions to property, plant and equipment, mainly in the Utilities. These contributions are made when the estimated revenue is less than the cost of providing service. ECM means efficiency carry-over mechanism. ESG means Environmental, Social and Governance. GAAP means Canadian generally accepted accounting principles. GHG means greenhouse gas. GTA means general tariff application. IFRS means International Financial Reporting Standards. I-X means the Inflation adjuster (I Factor) and Productivity Adjuster (X Factor). K Bar means the AUC allowance for capital additions under performance based regulation. LNG means liquefied natural gas. Megawatt (MW) is a measure of electric power equal to 1,000,000 watts. NCI means non-controlling interest. O&M means operating and maintenance. PBR means Performance Based Regulation. Regulated Utilities means Electricity Distribution, Electricity Transmission, Natural Gas Distribution, Natural Gas Transmission and International Natural Gas Distribution. REPA means Renewable Energy Purchase Agreement. RNG means renewable natural gas. It is a renewable fuel produced by capturing methane emissions which would otherwise be released to the atmosphere. ROE means return on equity. USD means United States dollars. 93 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS APPENDIX 1 FOURTH QUARTER FINANCIAL INFORMATION Financial information for the three months ended December 31, 2022 and 2021 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 Materials and consumables Depreciation, amortization and impairment Franchise fees Property and other taxes Other 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 2022 2021 1,348 1,270 (158) (69) (86) (55) (87) (145) (195) (84) (18) (182) (1,079) 2 24 295 18 (115) (97) 198 (38) 160 81 79 160 $0.72 $0.71 (151) (69) (69) (46) (78) (158) (156) (76) (18) (100) (921) 3 23 375 4 (122) (118) 257 (68) 189 99 90 189 $0.87 $0.87 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS 94 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 Cash flows from operating activities Three Months Ended December 31 2022 2021 160 361 175 696 189 365 (12) 542 Investing activities Additions to property, plant and equipment (469) (301) Proceeds on disposal of property, plant and equipment Additions to intangibles Acquisition, net of cash acquired Investment in joint ventures Changes in non-cash working capital Other 3 (44) (41) — 5 (4) — (29) (84) (6) 1 99 Cash Flows used in investing activities (550) (320) Financing activities (Repayment) issue of short-term debt Issue of long-term debt Repayment of long-term debt Repayment of lease liabilities Issue of equity preferred shares by subsidiary company Net issue of shares by subsidiary company Net issue of Class I Shares Dividends paid to Class I and Class II Share owners Dividends paid to non-controlling interests Interest paid Other Cash flows (used in) from financing activities (Decrease) increase in cash position Foreign currency translation Beginning of period End of period (19) 151 (258) (5) — — (1) (53) (71) (123) 1 (378) (232) (4) 1,269 1,033 206 57 (203) (5) 201 2 2 (51) (74) (117) (6) 12 234 (4) 858 1,088 95 ATCO LTD. 2022 MANAGEMENT'S DISCUSSION & ANALYSIS ATCO LTD. CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2022 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 96 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 3. Segmented Information ................................................................................................................................................................ 4. Revenues .......................................................................................................................................................................................... 5. Other Costs and Expenses............................................................................................................................................................ 6. Interest Expense ............................................................................................................................................................................. 7. Income Taxes ................................................................................................................................................................................... 8. Earnings per Share ......................................................................................................................................................................... Information on Financial Position 9. Inventories ....................................................................................................................................................................................... 10. Property, Plant and Equipment ................................................................................................................................................... 11. Intangibles ........................................................................................................................................................................................ 12. Goodwill ............................................................................................................................................................................................ 13. Short-Term Debt ............................................................................................................................................................................. 14. Long-Term Debt .............................................................................................................................................................................. 15. Retirement Benefits ....................................................................................................................................................................... 16. Balances from Contracts with Customers ................................................................................................................................ 17. Leases ................................................................................................................................................................................................ 18. Class I and Class II Shares ............................................................................................................................................................. Information on Cash Flow Page 98 99 105 106 107 108 109 110 110 111 120 121 121 122 124 124 125 127 128 128 129 130 135 136 138 19. Cash Flow Information .................................................................................................................................................................. 1 139 Risk 20. Financial Instruments .................................................................................................................................................................... 21. Risk Management ........................................................................................................................................................................... 22. Capital Disclosures ......................................................................................................................................................................... 23. Significant Judgments, Estimates and Assumptions ............................................................................................................... Group Structure 6 24. Business Combinations ................................................................................................................................................................. . 25. Investment in Associate Company ............................................................................................................................................. 26. Subsidiaries ...................................................................................................................................................................................... 27. Investment in Joint Ventures ........................................................................................................................................................ 28. Non-Controlling Interests ............................................................................................................................................................. Other Information 29. Share-Based Compensation Plans .............................................................................................................................................. 30. Contingencies .................................................................................................................................................................................. 31. Commitments .................................................................................................................................................................................. 32. Related Party Transactions ........................................................................................................................................................... 33. Accounting Policies ......................................................................................................................................................................... 34. Subsequent Event ........................................................................................................................................................................... 141 145 149 150 153 154 156 156 158 161 163 164 164 164 175 97 ATCO LTD. 2022 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 material 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 K. Patrick] Executive Vice President, Chief Financial & Investment Officer March 1, 2023 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 98 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, 2022 and 2021, 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, 2022 and 2021; the consolidated statements of comprehensive income for the years ended December 31, 2022 and 2021; the consolidated balance sheets as at December 31, 2022 and 2021; the consolidated statements of changes in equity for the years ended December 31, 2022 and 2021; the consolidated statements of cash flows for the years ended December 31, 2022 and 2021; and the notes to the 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. 99 ATCO LTD. 2022 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, 2022. 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 15 – Retirement benefits and note 23 – Significant judgments, estimates and assumptions to the consolidated financial statements. The Company maintains registered defined benefit or 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, 2022, total accrued benefit obligations were $2,636 million and the market value of plan assets was $2,437 million. These balances are presented net on the consolidated balance sheet, resulting in a retirement benefit asset of $24 million and retirement benefit obligations of $223 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 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 included the following: – Utilized professionals with specialized skill 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 rate, future compensation rates, health care costs trend rates and life expectancy rates. – – Tested certain 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, the competence, capabilities and objectivity of management’s independent actuaries were evaluated, the work performed was understood and the appropriateness of the work as audit evidence was evaluated. The procedures performed also included evaluation of the methods and assumptions used by management’s independent ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 100 Key audit matter How our audit addressed the key audit matter 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. actuaries, tests of the data used by management’s independent actuaries and an evaluation of their findings. • Tested disclosures related to the sensitivity assumptions used in estimating retirement benefit obligations. Assessment of unbilled revenue related to the Utilities segment Our approach to addressing the matter included the following procedures, among others: • 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 included the following: – Tested a sample of billings made after December 31, 2022 and compared the relevant amounts of these billings to the corresponding estimate of unbilled revenue recorded. – Agreed the pricing applied to a sample of billings to externally published rates. • Tested the operating effectiveness of internal controls relating to unbilled revenue, including information technology (IT) general controls of the relevant IT systems that management uses for billings. Refer to note 4 – Revenues and note 23 – Significant judgments, estimates and assumptions to the consolidated financial statements. The Company had $180 million of unbilled revenue related to the Utilities segment as at December 31, 2022. The revenue recognized by the Company includes an estimate of consumption by customers of natural gas and electricity distribution services 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 measurement 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. 101 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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 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. 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 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 102 guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. • • • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • 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 103 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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 Courtney Kolla. [Original signed by “PricewaterhouseCoopers LLP”] Chartered Professional Accountants Calgary, Alberta March 1, 2023 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 104 CONSOLIDATED STATEMENTS OF EARNINGS (millions of Canadian Dollars except per share data) Note 2022 2021 Year Ended December 31 4 4,978 4,289 Revenues Costs and expenses Salaries, wages and benefits Energy transmission and transportation Plant and equipment maintenance Fuel costs Purchased power Materials and consumables Depreciation, amortization and impairment 10, 11, 17 5 25 27 6 7 28 8 8 Franchise fees Property and other taxes Other 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. 105 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS (599) (271) (245) (176) (308) (535) (717) (328) (74) (508) (573) (267) (211) (116) (296) (420) (717) (263) (74) (387) (3,761) (3,324) 14 81 13 62 1,312 1,040 45 (436) (391) 921 (214) 707 370 337 707 $3.25 $3.24 14 (437) (423) 617 (148) 469 246 223 469 $2.16 $2.15 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (millions of Canadian Dollars) Earnings for the year Other comprehensive income, net of income taxes Items that will not be reclassified to earnings: Re-measurement of retirement benefits (1) Note 2022 707 Year Ended December 31 2021 469 15 (2) 189 Items that are or may be reclassified subsequently to earnings: Cash flow hedges (2) Foreign currency translation adjustment (3) Share of other comprehensive income (loss) in associate company (3) Share of other comprehensive income of joint ventures (3) 20 25 27 Other comprehensive income Comprehensive income for the year Comprehensive income attributable to: Class I and Class II Shares Non-controlling interests (1) (2) (3) Net of income taxes of nil for the year ended December 31, 2022 (2021 - $(56) million). Net of income taxes of $(47) million for the year ended December 31, 2022 (2021 - $(21) million). Net of income taxes of nil. See accompanying Notes to Consolidated Financial Statements. 146 57 3 1 207 205 912 506 406 912 60 (76) (7) — (23) 166 635 324 311 635 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 106 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 Retirement benefit asset 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 Short-term debt 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 income (loss) Non-controlling interests Total equity Total liabilities and equity Note 2022 2021 December 31 19 16 17 9 10, 20 10 11 15 17 12 27 25 17 7 20 19 17 20, 30 13 14 7 15 16 17 20 14 18 28 1,033 956 11 80 281 2,361 19,504 870 24 109 89 264 473 138 64 243 24,139 — 1,161 16 240 — 109 1,526 1,843 223 1,989 99 137 9,978 15,795 179 10 4,090 97 4,376 3,968 8,344 24,139 1,091 844 12 61 213 2,221 18,791 752 93 87 73 228 445 149 54 111 23,004 3 852 14 161 206 350 1,586 1,624 292 1,870 76 105 9,502 15,055 180 8 3,962 (39) 4,111 3,838 7,949 23,004 See accompanying Notes to Consolidated Financial Statements. [Original signed by N.C. Southern] [Original signed by M.R.P. Rayfield] DIRECTOR DIRECTOR 107 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (millions of Canadian Dollars) December 31, 2020 Earnings for the year Other comprehensive income Gains on retirement benefits transferred to retained earnings Net issuance of equity preferred shares issued by subsidiary company Shares issued Shares purchased and cancelled Dividends Share-based compensation Changes in ownership interest in subsidiary company (1) Other December 31, 2021 Earnings for the year Other comprehensive income Shares issued Shares purchased and cancelled Dividends (1) Share-based compensation Changes in ownership interest in subsidiary company (2) Other Note Class I and Class II Shares 178 15 28 18, 28 18, 28 18, 28 29 18, 28 18, 28 18, 28 29 — — — — 2 — — — — — 180 — — — (1) — — — — Contributed Surplus Retained Earnings Accumulated Other Comprehensive (Loss) Income 6 — — — — — — — 2 — — 8 — — — — — 2 — — 3,880 246 — 104 — — (9) (205) 1 (56) 1 3,962 370 — — (22) (211) — (9) — (12) — 78 (104) — — — — — — (1) (39) — 136 — — — — — — Non- Controlling Interests Total Equity 3,797 7,849 223 88 469 166 Total 4,052 246 78 — — — — 2 (9) (205) 3 (56) — 4,111 370 136 — (23) (211) 2 (9) — 88 2 (119) (297) (1) 56 1 3,838 337 69 21 — (308) 1 9 1 88 4 (128) (502) 2 — 1 7,949 707 205 21 (23) (519) 3 — 1 December 31, 2022 179 10 4,090 97 4,376 3,968 8,344 (1) Dividends paid to non-controlling interests of $308 million include $20 million of dividends paid by Canadian Utilities Limited through the issuance of Class A shares under its dividend reinvestment program (see note 28). (2) The changes in ownership interest in subsidiary company are due to Canadian Utilities Limited's purchases of Class A shares under the normal course issuer bid program. See accompanying Notes to Consolidated Financial Statements. A T C O L T D . 2 0 2 2 C O N S O L I D A T E D F I N A N C A L S T A T E M E N T S I 1 0 8 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 Note 2022 2021 707 1,542 147 2,396 (1,435) 5 (148) (41) 8 (8) 52 71 (1,496) (206) 724 (502) — — (18) 1 (23) (211) (288) (426) (4) (953) (53) (2) 1,088 1,033 469 1,391 4 1,864 (1,200) 30 (146) (84) — (27) 8 36 (1,383) 206 534 (261) 201 (110) (19) (117) (7) (205) (297) (401) (10) (486) (5) (7) 1,100 1,088 (millions of Canadian Dollars) Operating activities Earnings for the year Adjustments to reconcile earnings to cash flows from operating activities Changes in non-cash working capital 19 19 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 sale of ownership interest in a subsidiary company, net of cash disposed Investment in joint ventures Changes in non-cash working capital Other Cash flows used in investing activities Financing activities Net (repayment) issue of short-term debt Issue of long-term debt Repayment of long-term debt Issue of equity preferred shares by subsidiary company Redemption of equity preferred shares by subsidiary company Repayment of lease liabilities Net issue (purchase) of shares by subsidiary company 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 in cash position (1) Foreign currency translation Beginning of year End of year 24 3 27 19 3, 10 13 14, 19 14, 19 28 28 17 18 18 28 19 (1) Cash position includes $18 million which is not available for general use by the Company (2021 - $18 million). See accompanying Notes to Consolidated Financial Statements. 109 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 (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 (energy storage, electricity generation, industrial water solutions, and clean fuels) Retail Energy (electricity and natural gas retail sales, and whole-home solutions) (included in the Corporate & Other segment); and • Neltume Ports (ports and transportation logistics) (see Note 25). The consolidated financial statements include the accounts of ATCO Ltd. and its subsidiaries (see Note 26). The statements also include the accounts of a proportionate share of the Company's investments in joint ventures (see Note 27) and its investment in associate company (see Note 25). In these financial statements, "the Company" means ATCO Ltd., its subsidiaries, joint ventures 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 March 1, 2023. 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 material accounting policies are described in Note 33. 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 110 USE OF JUDGMENTS AND ESTIMATES Management makes judgments and estimates that could significantly affect how policies are applied, how amounts in the consolidated financial statements are reported, and how 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 23. 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 Chief Executive Officer, and the other members of the Executive Committee. The accounting policies applied by the segments are the same as those applied by the Company, except for those used in the calculation of adjusted earnings. Intersegment transactions are measured at the exchange amount, as agreed to by the related parties. Management has determined that the operating subsidiaries in the reportable segments below share similar economic characteristics, as such, they have been aggregated. The descriptions and principal operating activities of the segments are as follows: Structures & Logistics Utilities Electricity Natural Gas Energy Infrastructure Canadian Utilities Limited The Structures & Logistics segment includes ATCO Structures & Logistics. This segment 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, the Northwest Territories and in the Lloydminster area of Saskatchewan, and the Company's 50 per cent ownership interest in LUMA Energy, LLC, which provides international electricity operations (see Note 27). 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), 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, and a whole- home solution provider. Neltume Ports Corporate & Other The Neltume Ports segment includes the equity interest in Neltume Ports S.A., a leading port operator and developer based in South America. Neltume Ports operates seventeen port facilities and six port operation services businesses located in Chile, Uruguay, Argentina, Brazil and the United States. ATCO Corporate & Other includes commercial real estate owned by the Company, intersegment eliminations and Ashcor, a business engaged in the processing and marketing of live ash and ash reclaimed from landfills. 111 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS Results by operating segment for the year ended December 31 are shown below. 2022 Structures Neltume Corporate Canadian Utilities Limited & Logistics Ports & Other Utilities (1) Energy Infrastructure Corporate & Other Consolidated ATCO Consolidated 2021 Revenues - external Revenues - intersegment Revenues Operating expenses (2) Depreciation, amortization and impairment 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) Total assets Capital expenditures (3) 929 777 — — 929 777 (789) (653) (66) (59) — — 5 3 (8) (7) 71 61 (16) (14) 55 47 61 53 1,147 1,032 204 114 — — — — — — — — — — 14 13 — — — — 14 13 — — 14 13 14 13 473 448 — — 1 (3) — — 1 (3) 18 28 (9) (7) — — — 1 (12) (14) (2) 5 1 4 (1) 9 — 6 3,362 3,030 22 11 3,384 3,041 (1,546) (1,513) (610) (599) — — 53 47 (368) (381) 913 595 (227) (136) 686 459 379 336 234 162 78 47 312 209 (257) (180) 452 323 (100) (58) 352 265 (470) (289) 4,048 3,515 4,978 4,289 — — 4,048 3,515 (2,273) (1,982) — — 4,978 4,289 (3,044) (2,607) (20) (12) (642) (717) (42) (10) (651) (717) — — 23 11 (9) (18) 49 (20) (10) (6) 39 (26) 19 15 — — — — 6 (3) (124) (37) 38 4 (86) (33) (50) (41) — — 76 58 (371) (402) 838 538 (199) (138) 639 400 348 310 14 13 81 62 (391) (423) 921 617 (214) (148) 707 469 423 382 545 19,507 1,342 1,125 21,974 24,139 449 18,984 1,194 897 21,075 23,004 10 11 1,137 1,097 234 120 12 10 1,383 1,227 1,597 1,352 (1) (2) (3) Includes the collective results of the Electricity and the Natural Gas operating segments. Details of the results by operating segment included in the Utilities are disclosed below. Includes total costs and expenses, excluding depreciation, amortization and impairment expense. Includes additions to property, plant and equipment, intangibles and $14 million of interest capitalized during construction for the year ended December 31, 2022 (2021 - $6 million). ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 112 Results of the operating segments included in the Utilities for the year ended December 31 are shown below. Utilities Electricity Natural Gas Intersegment Eliminations 2022 2021 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 Earnings for the year Adjusted earnings Total assets Capital expenditures (2) 1,493 1,402 21 12 1,514 1,414 (591) (575) (321) (322) 53 47 (222) (232) 433 332 (100) (71) 333 261 199 184 10,644 10,405 566 350 1,869 1,628 7 4 1,876 1,632 (961) (943) (289) (277) — — (146) (149) 480 263 (127) (65) 353 198 180 152 8,865 8,581 571 747 Consolidated 3,362 3,030 22 11 3,384 3,041 (1,546) (1,513) (610) (599) 53 47 (368) (381) 913 595 (227) (136) 686 459 379 336 — — (6) (5) (6) (5) 6 5 — — — — — — — — — — — — — — (2) (2) — — 19,507 18,984 1,137 1,097 (1) (2) Includes total costs and expenses, excluding depreciation and amortization expense. Includes additions to property, plant and equipment, intangibles and $12 million of interest capitalized during construction for the year ended December 31, 2022 (2021 - $6 million). GEOGRAPHIC SEGMENTS Financial information by geographic area for the year ended and as at December 31 is summarized below. Revenues - external Canada Australia Other Total 2022 4,187 526 265 4,978 2021 3,678 374 237 4,289 113 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS Non-current assets Canada Australia South America Other Total Property, Plant and Equipment 2022 17,759 1,431 53 261 19,504 2021 17,177 1,370 43 201 18,791 Intangible Assets 2022 845 16 1 8 870 2021 732 11 1 8 752 Other Assets (1) 2021 337 40 435 5 817 2022 413 45 470 12 940 2022 19,017 1,492 524 281 21,314 Total 2021 18,246 1,421 479 214 20,360 (1) Other assets exclude financial instruments, retirement benefit assets, 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; 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 114 The reconciliation of adjusted earnings and earnings for the year ended December 31 is shown below. 2022 2021 Structures Neltume Corporate Canadian Utilities Limited & Logistics Ports & Other Utilities Energy Infrastructure Corporate & Other Consolidated ATCO Consolidated 61 53 14 13 — 6 — — — — — — — (2) — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 61 51 14 13 — — — — — — — — — 1 — — — — — — — — (1) 2 (1) 9 379 336 (14) (7) (5) — 3 — — (20) — — — — 6 (64) — — (8) (7) — — 361 238 19 15 (50) (41) — — — — — — — (1) 2 (34) — (1) — — — 9 — — — (2) 21 (14) — — — — — — — (1) — — (36) (9) — — — — — — — — (86) (51) 348 310 (14) (7) (5) — 3 — — (22) 2 (34) (36) (10) 6 (64) — 9 (8) (7) — (2) 296 173 Adjusted earnings (loss) AUC enforcement proceeding Workplace COVID-19 vaccination standard Gain on sale of ownership interest in a subsidiary company Transition of managed IT services Impairment reversal (charge) and other costs Unrealized losses on mark-to-market forward and swap commodity contracts Rate-regulated activities Project cost recovery 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 423 382 (14) (7) (5) — 3 — — (24) 2 (33) (36) (10) 6 (64) — 9 (8) (7) (1) — 370 246 337 223 707 469 115 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS The reconciliation of adjusted earnings and earnings for the operating segments included in the Utilities for the year ended December 31 are shown below. 2022 2021 Adjusted earnings AUC enforcement proceeding Workplace COVID-19 vaccination standard Gain on sale of ownership interest in a subsidiary company Transition of managed IT services Rate-regulated activities IT Common Matters decision Earnings attributable to Class I and Class II Shares Utilities Electricity Natural Gas 199 184 (14) (7) (2) — 3 — — (7) (6) (30) (5) (4) 175 136 180 152 — — (3) — — — — (13) 12 (34) (3) (3) 186 102 Total 379 336 (14) (7) (5) — 3 — — (20) 6 (64) (8) (7) 361 238 Alberta Utilities Commission (AUC) enforcement proceeding On November 29, 2021, the AUC enforcement branch filed an application with the AUC recommending an enforcement proceeding be initiated. A proceeding was commenced to determine whether ATCO Electric Transmission failed to comply with AUC decisions and enactments under the AUC's jurisdiction with respect to a sole source contract for the Jasper interconnection project and the actions leading up to and including the filing of the 2018-2020 Deferral Account Application. The AUC enforcement branch and ATCO Electric Transmission commenced settlement discussions in January 2022. On March 18, 2022, the AUC enforcement branch and ATCO Electric Transmission concluded discussions and notified the AUC that the parties had reached a settlement on all matters. On April 14, 2022, the AUC enforcement branch and ATCO Electric Transmission filed the settlement with the AUC, which reflected an agreed administrative penalty of $31 million, a commitment to amend the ongoing Deferral Account application to ensure the estimated $11 million of additional rate base remains excluded from customer rates, and the implementation of revised practices and policies. On June 29, 2022, the AUC issued its decision approving the settlement in its entirety. In 2021 and 2022, the Company recognized costs of $7 million and $14 million (after-tax and non-controlling interests (NCI)), respectively, related to the proceeding. As this proceeding is not in the normal course of business, these costs have been excluded from adjusted earnings. Workplace COVID-19 vaccination standard To safeguard the health and safety of employees, business partners, customers and communities, the Company required its employees, subject to certain exemptions, to be vaccinated against COVID-19 effective January 1, 2022. Employees who did not demonstrate they were vaccinated or did not have an approved exemption were placed on unpaid leave. These employees were subsequently offered severance and in 2022, the Company incurred $5 million after-tax and NCI related to amounts paid and accrued. As these costs are not in the normal course of business and are a one-time item, they have been excluded from adjusted earnings. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 116 Gain on sale of ownership interest in a subsidiary company On March 31, 2022, the Company and Denendeh Investments Incorporated (DII) entered into a share purchase agreement to increase DII's ownership interest in Northland Utilities Enterprises Ltd. (NUE) from 14 per cent to 50 per cent. NUE is an electric utility company operating in the Northwest Territories, Canada and was a subsidiary of ATCO Electric Ltd. The change in ownership interest was accomplished through the Company's sale to DII of a 36 per cent ownership interest in NUE for proceeds, net of cash disposed, of $8 million. The transaction results in the Company and DII each having a 50 per cent ownership interest in NUE. The share purchase agreement includes a put option whereby the Company may be required to purchase the 36 per cent ownership interest that was sold to DII for fair market value, if certain conditions occur. Commencing March 31, 2022, the Company no longer consolidates NUE as a controlled subsidiary, and instead, accounts for NUE as an investment in joint venture using the equity method of accounting. The transaction resulted in a gain on sale of $3 million after-tax and NCI. As the gain on sale is not in the normal course of business, it has been excluded from adjusted earnings. Transition of managed IT services In 2020, the ATCO Technology Management Ltd. (a wholly owned subsidiary of Canadian Utilities Limited) signed Master Services Agreements (MSAs) with IBM Canada Ltd. (subsequently novated to Kyndryl Canada Ltd. (Kyndryl)) to provide managed information technology services. In 2021, ATCO Gas Australia Pty Ltd and ATCO Australia Pty Ltd (both wholly owned subsidiaries of Canadian Utilities Limited) signed MSAs with IBM Australia Limited (IBM) to provide managed information technology services. These services were previously provided by Wipro Ltd. (Wipro) under ten-year MSAs expiring in December 2024. The transition of the managed IT services from Wipro to Kyndryl and IBM commenced on February 1, 2021 and was complete at December 31, 2021. In 2020, and during the first quarter of 2021, the Company recognized onerous contract provisions of $75 million ($32 million after-tax and NCI), and $6 million ($2 million after-tax and NCI), respectively, relating to the Wipro MSAs (see Note 30). The provisions are included in provisions and other current liabilities in the consolidated balance sheets. The onerous contract provisions are not in the normal course of business and have been excluded from adjusted earnings. In addition, in 2021 the Company recognized transition costs of $52 million ($22 million after-tax and NCI). The transition costs related to activities to transfer the managed IT services from Wipro to IBM. As these costs are not in the normal course of business, they have been excluded from adjusted earnings. 2022 Reversal of impairment In 2022, a reversal of impairment of $2 million after-tax and NCI was recorded relating to Energy Infrastructure's joint venture investment in the Osborne electricity cogeneration facility located in Southern Australia. The reversal resulted from an improvement in the future outlook for power market prices. As the reversal relates to a previous impairment, it has been excluded from adjusted earnings. 2021 Impairment and other costs In 2021, impairments and other costs not in the normal course of business of $33 million after-tax and NCI were recorded, mainly in Mexico, related to Energy Infrastructure's Veracruz hydro facility in the amount of $28 million after-tax and NCI (see notes 10 and 11). Other costs recorded were individually immaterial. The charge reflected an adverse arbitration decision, changes in market regulations, ongoing political uncertainty, and a challenging operating environment, resulting in an impairment of the carrying value of the assets. The recoverable amount of Energy Infrastructure’s Veracruz hydro facility was determined based on fair value less costs of disposal. The expected future cash flows were estimated under an assumption of 43 years of operations, representing the useful life of the Veracruz hydro facility, and were discounted at an after-tax rate of approximately 10 per cent. The fair value measurement is categorized as level 3 on the fair value hierarchy. The recoverable amount of Energy Infrastructure’s Veracruz hydro facility was estimated to be $22 million. As the charges relate to impairments, they have been excluded from adjusted earnings. 117 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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. These contracts are measured at fair value. Unrealized gains and losses due to changes in the fair value of fixed-price swap commodity contracts are recognized in the earnings of the Corporate & Other segment. The CODM believes that removal of the unrealized gains and 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 Transmission, ATCO Electric Distribution, ATCO Electric Yukon, Northland Utilities (NWT), Northland Utilities (Yellowknife), ATCO Gas, ATCO Pipelines and ATCO Gas Australia 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. Rate-regulated accounting differs from IFRS in the following ways: Timing Adjustment Items RRA Treatment IFRS Treatment 1. Additional revenues billed in current year 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 years 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. 3. Regulatory decisions received Regulatory decisions received which relate to current and prior years. The Company recognizes the earnings from a regulatory decision pertaining to current and prior years when the decision is received. 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 does not recognize earnings from a regulatory decision when it is received as regulatory assets and liabilities are not recorded under IFRS. 4. Settlement of regulatory decisions and other items Settlement of amounts receivable or payable to customers and other items. 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 118 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) Distribution rate relief (4) Impact of warmer temperatures (2) Impact of inflation on rate base (5) Settlement of regulatory decisions and other items Distribution rate relief (4) Other (6) 2022 2021 61 2 (56) — — (34) 55 (22) 6 56 — (56) (63) (1) (17) — 17 (64) (1) (2) (3) (4) (5) (6) 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 years. ATCO Gas Distribution's 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 temperatures in the current year are refunded to or recovered from customers in future years. Income taxes are billed to customers when paid by the Company. In 2021, in response to the ongoing COVID-19 Pandemic, ATCO Electric Distribution and ATCO Gas Distribution applied for interim rate relief for customers to hold current distribution base rates in place. Following approval by the AUC, ATCO Electric Distribution and ATCO Gas Distribution recorded a decrease in earnings in 2021 of $63 million (after-tax and NCI). Based on direction from the AUC, collection of 2021 deferred rate amounts commenced in 2022 and for the year ended December 31, 2022, $55 million (after-tax and NCI) was billed to customers. The inflation-indexed portion of ATCO Gas Australia's (part of Natural Gas Distribution) rate base is billed to customers through the recovery of depreciation in subsequent years based on the actual or forecasted annual rate of inflation. Under rate-regulated accounting, revenue is recognized in the current year for the inflation component of rate base when it is earned. Differences between the amounts earned and the amounts billed to customers are deferred and recognized in revenues over the service life of the related assets. In 2022, ATCO Electric Distribution recorded a decrease in earnings of $10 million (after-tax and NCI) related to payments of electricity transmission costs and ATCO Gas Distribution recorded a decrease in earnings of $8 million (after-tax and NCI) related to payments of gas pipeline system load balancing costs. In 2021, ATCO Gas Distribution collected $28 million (after-tax and NCI) related to depreciation and transmission rate riders, which was partly offset by a decrease in earnings of $15 million (after-tax and NCI) related to payments of transmission costs. Project cost recovery In 2021, the Company recorded earnings of $9 million ($110 million in project costs recovered net of abandonment costs, accretion, income taxes and NCI of $101 million) following the conclusion of the Company's involvement in an international project. As this project recovery is not a result of day-to-day operations, it has been excluded from adjusted earnings. 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 in 2022 was $8 million after-tax and NCI (2021 - $7 million after-tax and NCI). 119 ATCO LTD. 2022 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 the year ended December 31 is shown below. 2022 2021 Revenue Streams Rendering of Services Distribution services Transmission services Modular structures - services Logistics and facility operations and maintenance services Lodging and support Customer contributions Franchise fees Retail electricity and natural gas services Storage and industrial water Total rendering of services Sale of Goods Electricity generation and delivery Commodity sales Modular structures - goods Total sale of goods Lease income Finance lease Operating lease Total lease income Other Total Structures & Logistics Utilities Electricity (1) Natural Gas (1) Total Energy Infrastructure Corporate & Other (2), (3) Consolidated — — — — 339 183 123 104 97 92 — — — — — — — — 609 548 724 712 — — — — — — 33 33 36 34 — — — — 1,187 1,796 1,036 1,584 337 1,061 308 1,020 — — — — — — — — — — — — 22 22 292 229 55 55 328 263 — — — — — — — — 559 379 1,402 1,327 1,838 3,240 1,595 2,922 — — — — 193 241 193 241 — — 176 157 176 157 1 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 91 75 31 33 122 108 929 777 1,493 1,402 1,869 3,362 1,628 3,030 — — — — — — — — — — — — — — — — 66 28 66 28 46 38 80 52 — — 126 90 14 16 — — 14 16 28 28 234 162 — — — — — — — — — — — — — — 431 304 — — 431 304 — — 17 11 — — 17 11 — — — — — — 5 5 453 320 1,796 1,584 1,061 1,020 339 183 123 104 97 92 55 55 328 263 431 304 66 28 4,296 3,633 46 38 97 63 193 241 336 342 14 16 176 157 190 173 156 141 4,978 4,289 (1) (2) For the year ended December 31, 2022, Electricity and Natural Gas segments include $180 million of unbilled revenue (2021 - $156 million). At December 31, 2022, $180 million of the unbilled revenue is included in accounts receivable and contract assets (December 31, 2021 - $156 million). For the year ended December 31, 2022, Corporate & Other segment includes $63 million of unbilled revenue (2021 - $58 million) from retail electricity and natural gas energy services. At December 31, 2022, $63 million of the unbilled revenue is included in accounts receivable and contract assets (December 31, 2021 - $58 million). (3) Includes revenues from the Corporate & Other segment in Canadian Utilities and ATCO Ltd. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 120 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, 2022, the most significant remaining performance obligations are as follows: (i) the Company's 35-year service agreement to operate the Fort McMurray 500 kV Transmission line that amounts to $0.8 billion (2021 - $0.8 billion). The remaining duration of the agreement is 32 years. The Company expects that approximately 2 per cent of the amount will be recognized as revenue during the year ending December 31, 2023, subject to satisfaction of related performance obligations; (ii) provision of storage and industrial water services over the life of the contracts that in aggregate approximates $0.3 billion (2021 - $0.3 billion). The remaining duration of the contracts ranges between 6 to 25 years. The Company expects that approximately 12 per cent of the amount will be recognized as revenue during the year ending December 31, 2023; and (iii) manufacturing of transportable workforce housing and space rental products under the terms of fixed price contracts that in aggregate approximates $0.1 billion (2021 - $0.2 billion). The remaining duration of the contracts ranges between 1 to 2 years. The Company expects that approximately 97 per cent will be recognized as revenue during the year ending December 31, 2023. 5. OTHER COSTS AND EXPENSES Other costs and expenses include rent, utilities, goods and services such as professional fees, contractor costs, technology-related expenses, advertising, and other general and administrative expenses. For the year ended December 31, 2022, other costs and expenses also included unrealized and realized losses on commodity contracts of $165 million (2021 - $39 million), costs related to the AUC Enforcement proceeding of $28 million (2021 - $16 million), gain on sale of ownership interest in a subsidiary company of $7 million (2021 - nil) and transition of managed information technology services of nil (2021 - $58 million). 6. INTEREST EXPENSE Interest expense primarily arises from interest on long-term debentures. The components of interest expense for the year ended December 31 are summarized below. Long-term debt Retirement benefits net interest expense (Note 15) Accretion expense on asset retirement obligation Amortization of deferred financing charges Short-term debt Interest expense on lease liabilities (Note 17) Other Less: interest capitalized (Notes 10, 11) 2022 417 7 1 4 11 3 7 450 (14) 436 2021 409 13 10 4 2 3 2 443 (6) 437 Borrowing costs capitalized to property, plant and equipment and intangibles during 2022 were calculated by applying a weighted average interest rate of 3.93 per cent (2021 - 4.31 per cent) to expenditures on qualifying assets. 121 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 7. INCOME TAXES INCOME TAX EXPENSE The income tax rate for 2022 is 23.0 per cent (2021 - 23.0 per cent). The components of income tax expense for the year ended December 31 are summarized below. 2022 2021 Current income tax expense Canada Australia United States Other 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 39 15 2 — (3) 53 158 — 3 161 214 The reconciliation of statutory and effective income tax expense for the year ended December 31 is as follows: Earnings before income taxes Income taxes, at statutory rates Equity earnings Foreign tax rate variance Non-deductible items Tax cost on equity preferred share financing Unrecognized deferred income tax assets International financing Other 921 212 (20) 8 8 6 1 — (1) 214 2022 % 23.0 (2.3) 0.9 0.9 0.7 0.1 — (0.1) 23.2 617 142 (12) 1 3 5 14 (5) — 148 26 (1) 2 (1) 6 32 122 1 (7) 116 148 2021 % 23.0 (1.9) 0.2 0.4 0.8 2.3 (0.8) — 24.0 INCOME TAX ASSETS AND LIABILITIES Income tax assets and liabilities in the consolidated balance sheets at December 31 are summarized below. Balance Sheet Presentation 2022 2021 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 35 64 99 13 1,843 1,856 42 54 96 12 1,624 1,636 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 122 DEFERRED INCOME TAXES The changes in deferred income tax assets are as follows: Movements December 31, 2020 (Charge) credit to earnings Charge to other comprehensive income Other December 31, 2021 Credit (charge) to earnings Credit (charge) to other comprehensive income Other December 31, 2022 Property, Plant and Equipment Intangibles Reserves (1) 1 11 (13) Tax Loss Carry Forwards and Tax Credits (1) 7 (12) — (6) 9 3 — 6 — — (2) — — — (2) — — — — — — — Retirement Benefit Obligations Other 12 (1) (1) — 7 2 — 10 1 (1) — 10 (4) 5 — — 6 11 Total 85 (14) (13) (4) 54 2 2 6 64 57 (10) — — 47 (8) — — 39 The Company does not expect any deferred income tax assets to reverse within the next twelve months. The changes in deferred income tax liabilities are as follows: Movements December 31, 2020 Charge (credit) to earnings Charge to other comprehensive income Change in income taxes resulting from decrease in provincial corporate tax rate Acquisition (Note 24) Foreign exchange adjustment Other December 31, 2021 Charge (credit) to earnings Charge (credit) to other comprehensive income Acquisition (Note 24) Foreign exchange adjustment Other December 31, 2022 — (1) 24 (6) (2) 1,762 158 — — 2 (13) 1,909 Property, Plant and Equipment Intangibles Reserves 106 (1) (33) (1) 1,624 123 Tax Loss Carry Forwards and Tax Credits Retirement Benefit Obligations Other (137) 2 Total (20) 1,443 (28) 103 55 — 64 (97) 8 — — — — — — — — — — 9 — — — — — — — — (80) 1 (2) — — — — — (1) 24 (5) (4) (49) 1,624 15 163 1 (2) — 1 49 6 2 (1) 13 (20) 1,843 — 105 18 (25) (10) (89) (19) 51 (1) — — — — — — — 6 — (1) 128 15 (108) (81) The Company does not expect any of its deferred income tax liabilities to reverse within the next twelve months. At December 31, 2022, the Company had $633 million of non-capital tax losses and credits which expire between 2024 and 2042 and $88 million of tax losses which do not expire. The Company recognized deferred income tax assets of $147 million for these losses and credits. The Company had $109 million of aggregate temporary differences for investments in subsidiaries, branches and joint ventures for which deferred income tax liabilities were not recognized (2021 - $110 million). The Company had $123 million of aggregate temporary differences for which no deferred tax assets were recognized (2021 - $95 million). 123 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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 (1) Work-in-progress (1) Finished goods (1) 2022 2021 113,957,680 114,171,978 60,868 35,451 250,772 242,222 114,269,320 114,449,651 707 (337) 370 469 (223) 246 $3.25 $3.24 $2.16 $2.15 2022 2021 16 29 24 11 80 15 17 25 4 61 (1) On December 7, 2022, ATCO Structures & Logistics Ltd., a subsidiary of the Company, acquired a 100 per cent ownership interest in Triple M Housing Ltd. Inventories acquired amounted to $6 million in raw materials and consumables, $1 million in work-in-progress and $2 million in finished goods (see Note 24). For the year ended December 31, 2022, inventories of $256 million were used in operations and expensed (2021 - $285 million). Inventories with a carrying value of $15 million were pledged as security for liabilities at December 31, 2022 (2021 - $12 million). ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 124 10. PROPERTY, PLANT AND EQUIPMENT A reconciliation of the changes in the carrying amount of property, plant and equipment is as follows: Utility Transmission & Distribution Energy Infrastructure Land and Buildings Construction Work-in- Progress Rental Assets Other Total Cost December 31, 2020 21,004 393 998 651 657 890 24,593 Additions Transfers Retirements and disposals Acquisition (Note 24) Foreign exchange rate adjustment Changes to asset retirement costs 65 895 (110) — (83) — — 8 — 104 (4) (1) 59 13 (3) 2 (7) 1,025 (1,052) (175) 75 70 (66) (5) 66 (44) — — — 1,219 — (398) 106 (4) (18) (4) (120) — — — — (1) December 31, 2021 21,771 500 1,062 903 25,399 Additions Transfers Retirements and disposals Sale of ownership interest in a subsidiary company (Note 3) Acquisition (Note 24) Foreign exchange rate adjustment Changes to asset retirement costs 58 693 (123) (111) — 4 — — 102 (5) 9 16 (5) 445 1,195 (861) (10) 718 190 4 (75) — — (8) (2) — — — — 11 1 3 17 7 46 (30) (5) 2 6 1,459 — (248) (126) 2 42 5 5 — — — — December 31, 2022 22,292 613 1,075 770 854 929 26,533 Accumulated depreciation and impairment December 31, 2020 Depreciation and impairment Retirements and disposals Foreign exchange rate adjustment December 31, 2021 Depreciation Retirements and disposals Sale of ownership interest in subsidiary company (Note 3) Foreign exchange rate adjustment December 31, 2022 Net book value December 31, 2021 December 31, 2022 5,119 153 216 77 255 446 6,266 486 (110) (17) 5,478 500 (111) (52) 1 32 — (1) 184 15 (5) — 3 5,816 197 16,293 16,476 316 416 27 (3) (2) 238 24 (2) (3) — 257 824 818 69 (146) — — — — — — — 41 (34) (6) 256 46 (32) — 3 55 (46) (3) 452 60 (29) (2) 5 710 (339) (29) 6,608 645 (179) (57) 12 273 486 7,029 445 770 462 581 451 443 18,791 19,504 The additions to property, plant and equipment included $9 million of interest capitalized during construction for the year ended December 31, 2022 (2021 - $2 million). 125 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS PIONEER NATURAL GAS PIPELINE In 2021, ATCO Gas and Pipelines Ltd., a wholly owned subsidiary of CU Inc., completed the acquisition of a 131 km natural gas pipeline that runs from the Drayton Valley area to the Wabamum area west of Edmonton (Pioneer Pipeline) from Tidewater Midstream & Infrastructure Ltd. and its partner TransAlta Corporation for approximately $265 million. The optional IFRS 3 Business Combinations concentration test was applied to the acquisition, which resulted in the acquired asset being accounted for as an asset acquisition. In 2022, consistent with the geographic areas defined in the Integration Agreement, ATCO Gas and Pipelines Ltd. completed the sale to Nova Gas Transmission Ltd. (NGTL) of the 30 km segment of the Pioneer Pipeline that is located in NGTL's footprint for $63 million. At December 31, 2021, the costs incurred for the segment of the pipeline sold to NGTL were recorded as assets held-for-sale in prepaid expenses and other current assets in the consolidated balance sheets. The 2021 purchase and 2022 sale were included in other investing activities in the consolidated statements of cash flows for the years ended December 31, 2021 and 2022. IMPAIRMENT Energy Infrastructure Segment In 2021, impairment of property, plant and equipment of $21 million ($8 million after-tax and NCI) was recorded in respect of Energy Infrastructure’s Veracruz hydro facility. The charge reflects an adverse arbitration decision, changes in market regulations, ongoing political uncertainty, and a challenging operating environment, resulting in an impairment of the carrying value of the assets. The recoverable amount of Energy Infrastructure’s Veracruz hydro facility was determined based on fair value less costs of disposal. The expected future cash flows were estimated under an assumption of 43 years of operations, representing the useful life of the Veracruz hydro facility, and were discounted at an after-tax rate of approximately 10 per cent. The fair value measurement is categorized as level 3 on the fair value hierarchy. The recoverable amount of Energy Infrastructure’s Veracruz hydro facility was estimated to be $22 million. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 126 11. INTANGIBLES Intangible assets consist mainly of computer software not directly attributable to the operation of property, plant and equipment and land rights. 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, 2020 Additions Transfers Acquisition (Note 24) Retirements Foreign exchange rate adjustment December 31, 2021 Additions Transfers Acquisition (Note 24) Retirements Sale of ownership interest in subsidiary company (Note 3) Foreign exchange rate adjustment December 31, 2022 Accumulated amortization and impairment December 31, 2020 Amortization and impairment Retirements Foreign exchange rate adjustment December 31, 2021 Amortization Retirements Foreign exchange rate adjustment December 31, 2022 Net book value December 31, 2021 December 31, 2022 443 6 46 — (33) (3) 459 15 69 — (40) (1) (1) 501 238 49 (31) (1) 255 52 (40) (1) 266 204 235 407 1 24 5 — — 437 — 21 — — (1) — 457 60 5 — — 65 5 — — 70 87 141 (72) — — — 156 139 (93) — — (2) — 200 — — — — — — — — — 372 387 156 200 62 (2) 2 — (2) — 60 — 3 28 (1) — — 999 146 — 5 (35) (3) 1,112 154 — 28 (41) (4) (1) 90 1,248 16 26 (2) — 40 3 (1) — 42 20 48 314 80 (33) (1) 360 60 (41) (1) 378 752 870 The additions to intangibles include interest capitalized during construction of $5 million for the year ended December 31, 2022 (2021 - $4 million). IMPAIRMENT Energy Infrastructure Segment In 2021, impairment of intangibles of $24 million ($10 million after-tax and NCI) was recorded in respect of Energy Infrastructure’s Veracruz hydro facility. The charge reflects an adverse arbitration decision, changes in market regulations, ongoing political uncertainty, and a challenging operating environment, resulting in an impairment of the carrying value of the assets. The recoverable amount of Energy Infrastructure’s Veracruz hydro facility was determined based on fair value less costs of disposal. The expected future cash flows were estimated under an assumption of 43 years of operations, representing the useful life of the Veracruz hydro facility, and were discounted at an after-tax rate of approximately 10 per cent. The fair value measurement is categorized as level 3 on the fair value hierarchy. The recoverable amount of Energy Infrastructure’s Veracruz hydro facility was estimated to be $22 million. 127 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 12. GOODWILL The carrying value of goodwill for the Utilities and Structures & Logistics segments at December 31 is shown below. Utilities, Electricity Utilities, Natural gas Structures & Logistics (1) Carrying value 2022 38 33 18 89 2021 38 33 2 73 (1) On December 7, 2022, ATCO Structures & Logistics Ltd., a subsidiary of the Company, acquired a 100 per cent ownership interest in Triple M Housing Ltd. (see Note 24). 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. The Company used an average enterprise value-to-earnings before interest, taxes, depreciation, and amortization multiple of 11.3 and 11.7 (2021 - 12.9 and 12.7) and price-to-earnings value of 21.3 and 19.7 (2021 - 26.2 and 24.9) for the Electricity and Natural gas 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. SHORT-TERM DEBT At December 31, 2022, the Company had no commercial paper outstanding (2021 - $206 million of commercial paper outstanding at an effective interest rate of 0.32 per cent, matured in January 2022). The commercial paper is supported by the Company's long-term committed credit facilities. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 128 14. LONG-TERM DEBT Long-term debt outstanding at December 31 is as follows: Effective Interest Rate 2022 2021 CU Inc. debentures - unsecured (1) 4.397% (2021 - 4.410%) 8,525 8,440 CU Inc. other long-term obligation, due June 2024 - unsecured (2) 6.45% (2021 - 2.45%) 7 7 Canadian Utilities Limited debentures - unsecured, 3.122%, due November 2022 3.187% — 200 Canadian Utilities Limited debentures - unsecured, 4.851%, due June 2052 4.899% 250 — ATCO Power Australia credit facility, payable in Australian dollars, at BBSY rates, due June 2025, secured by a pledge of project assets and contracts, $45 million AUD (2021 - $58 million AUD) (3) Floating (4) 42 47 ATCO Gas Australia revolving credit facility, payable in Australian dollars, at BBSY rates, due August 2024, $350 million AUD (2021 - $350 million AUD)(3) Floating (4) 322 322 ATCO Gas Australia revolving credit facility, payable in Australian dollars, at BBSY rates, due August 2026, $362 million AUD (2021 - $330 million AUD)(3) Floating (4) 334 304 Electricidad del Golfo credit facility, payable in Mexican pesos, at Mexican Interbank rates, due November 2025, $335 million MXP (2021 - $570 million MXP) 11.31% (2021 - Floating) 23 35 ATCO Energy Solutions Ltd. and ATCO Power (2010) Ltd. extendible revolving credit facility, at CDOR or Canadian prime rates, due December 2025 (3) Floating 88 — ATCO Investments Ltd. mortgage, at BA rates, payable in Canadian dollars, due March 2028 Floating (4) 88 90 ATCO Ltd. extendible revolving credit facility, at BA rates, due November 2025 (3) Floating 84 129 ATCO Ltd. fixed-to-floating rate subordinated notes, due November 2078 5.50% (5) 200 200 ATCO Structures & Logistics credit facility, at BA and Libor rates, due August 2024 (3) Floating 114 ATCO Structures & Logistics credit facility, at BBSY rates, due July 2025, $38 million AUD (2021 - $32 million AUD) (3) Floating 35 81 29 ATCO Sabinco credit facility, payable in Chilean pesos, at Libor rates, due August 2024, $17 billion CLP (2021 - $13 billion CLP) (6) Floating 27 18 Less: deferred financing charges Less: amounts due within one year BBSY - Bank Bill Swap Benchmark Rate BA - Bankers’ Acceptance Libor - London Inter-Bank Offered Rate CDOR - Canadian Dollar Overnight Rate (52) 10,087 (109) 9,978 (50) 9,852 (350) 9,502 (1) Interest rate is the average effective interest rate weighted by principal amounts outstanding. (2) (3) (4) (5) In 2022, the expiry date of the CU Inc. other long-term obligation was extended from June 2023 to June 2024. During 2022, the above interest rates had additional margin fees at a weighted average rate of 1.43 per cent (2021 - 0.92 per cent). The margin fees are subject to escalation. Floating interest rates have been partially or completely hedged with interest rate swaps (see Note 20). 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) During 2022, the above interest rate had an additional margin fee of 2.60 per cent (2021 - 2.60 per cent). 129 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS LONG-TERM DEBT ISSUANCES AND REPAYMENTS On June 3, 2022, Canadian Utilities Limited issued $250 million of 4.851 per cent debentures maturing on June 3, 2052. Canadian Utilities Limited also repaid $200 million of 3.122 per cent debentures on November 9, 2022. On September 14, 2022, CU Inc., a wholly owned subsidiary of Canadian Utilities Limited, issued $210 million of 4.773 per cent debentures maturing on September 14, 2052. CU Inc. also repaid $125 million of 9.92 per cent debentures on April 1, 2022. On September 3, 2021, CU Inc. issued $460 million of 3.174 per cent debentures maturing on September 5, 2051. CU Inc. also repaid $160 million of 4.801 per cent debentures on November 22, 2021. On December 8, 2022, ATCO Energy Solutions Ltd. and ATCO Power (2010) Ltd., wholly owned subsidiaries of Canadian Utilities Limited, entered into a $250 million extendible credit agreement maturing in December 2025 with a syndicate of lenders, as well as an aggregate $100 million of uncommitted credit facilities with no set maturity date. 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. The ATCO Energy Solutions Ltd. and ATCO Power (2010) Ltd. credit agreement is secured by their present and future properties, assets, and equity interests in certain subsidiaries and joint ventures. At December 31, 2022, the book value of assets pledged to maintain the Company's long-term credit facilities was $1,691 million (2021 - $825 million). 15. RETIREMENT BENEFITS The Company maintains registered defined benefit or 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 Ltd., 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 Ltd. 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. 2022 CONSOLIDATED FINANCIAL STATEMENTS 130 BENEFIT PLAN ASSETS, OBLIGATIONS AND FUNDED STATUS The changes in Company's pension and OPEB plan assets and obligations for the year ended December 31 are as follows: Market value of plan assets Beginning of year Interest income 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 Benefit payments from plan assets Benefit payments by employer Actuarial gains Past service cost End of year (1) Funded status Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2022 2021 3,084 92 8 (144) (603) 2,437 — — — — — — 3,105 76 12 (138) 29 3,084 — — — — — — 3,156 127 3,405 139 9 95 (144) (9) (564) 1 2,544 3 4 — (5) (37) — 92 14 85 (138) (9) (201) — 3,156 3 4 — (4) (15) — 127 Net retirement benefit obligations 107 92 72 127 Included in net retirement benefit obligations are: Registered funded defined benefit pension plan asset (1) Non-registered, non-funded defined benefit pension plans benefit obligation (2) OPEB Plans (24) 131 — 107 — — 92 92 (93) 165 — 72 — — 127 127 (1) (2) The registered funded defined benefit pension plan was in an asset position of $24 million at December 31, 2022 (2021- $93 million) due to the impacts of returns on plan assets, increase in the liability discount rate, and the restriction of the net retirement benefit asset by the asset ceiling adjustment. In the Company's non-registered, non-funded defined benefit pension plans, accrued benefit obligations decreased to $131 million at December 31, 2022 due to an increase in the liability discount rate and experience adjustments (2021 - decreased to $165 million due to an increase in the liability discount rate and experience adjustments). 131 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS BENEFIT PLAN COST The components of benefit plan cost for the year ended December 31 are as follows: Current service cost Interest cost Interest income Past service cost Defined benefit plans cost Defined contribution plans cost Total cost Less: capitalized Net cost recognized in earnings Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2022 2021 9 95 (92) 1 13 30 43 16 27 3 4 — — 7 — 7 3 4 14 85 (76) — 23 30 53 20 33 3 4 — — 7 — 7 3 4 RE-MEASUREMENT OF RETIREMENT BENEFITS Re-measurements of the pension and OPEB plans for the year ended December 31 are as follows: (Losses) gains on plan assets from: Return on plan assets, excluding amounts included in net interest income Gains on plan obligations from: Changes in financial assumptions (Losses) gains recognized in other comprehensive income (1) Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2022 2021 (603) 564 (39) — 37 37 29 201 230 — 15 15 (1) Losses net of income taxes were $2 million for the year ended December 31, 2022 (2021 - gains net of income taxes of $189 million). ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 132 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 2022 % Quoted Un-quoted Total 2021 % 2 111 62 — 175 1,061 735 46 — 1,842 — — — 47 7 3 57 2,074 — — — 2 2 — — — 124 124 14 223 237 — — — — 363 2 111 62 2 177 1,061 735 46 124 1,966 14 223 237 47 7 7 81 10 3 161 90 — 254 1,457 839 50 5 2,351 — — — 49 44 3 57 2,437 2 100 9 102 2,707 — — — 2 2 — — — 149 149 14 212 226 — — — — 377 3 161 90 2 256 1,457 839 50 154 2,500 14 212 226 49 44 8 81 7 9 102 3,084 4 100 (1) The land and building are leased by the Company. FUNDING In 2022, an actuarial valuation for funding purposes as of December 31, 2021 was completed for the registered defined benefit pension plans. The estimated contribution for 2023 is $8 million. The next actuarial valuation for funding purposes must be completed as of December 31, 2024. 133 ATCO LTD. 2022 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 Average compensation increase for the year Accrued benefit obligations Discount rate at December 31 Long-term inflation rate (1) Health care cost trend rate: Drug costs (2) Other medical costs Dental costs Pension Benefit Plans OPEB Plans Pension Benefit Plans OPEB Plans 2022 2021 3.16 % 2.25 % 5.28 % 2.00 % n/a n/a n/a 3.16 % n/a 5.28 % n/a 5.00 % 4.00 % 4.00 % 2.58 % 2.25 % 3.16 % 2.00 % n/a n/a n/a 2.58 % n/a 3.16 % n/a 5.05 % 4.00 % 4.00 % (1) (2) The long-term inflation rate used to calculate the accrued benefit obligation at December 31, 2022 was 7.00 per cent for 2022, 3.50 per cent for 2023, 2.30 per cent for 2024 and 2.00 per cent thereafter. The Company uses a graded drug cost trend rate, which assumes a 5.00 per cent rate per annum (2021 - 5.05 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 12.7 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 The Company mitigates interest rate risk by holding a large proportion of pension assets in fixed income securities. A decrease in long-term interest rates will result in an increase in the accrued benefit obligations, which will be partially offset by an increase in the value of the plan's fixed income securities. Other things remaining the same, the opposite is also true. 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. 2022 CONSOLIDATED FINANCIAL STATEMENTS 134 Life expectancy Should pensioners live longer than assumed, benefit obligations and liabilities will be larger than expected. SENSITIVITIES The 2022 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 % (267) 3 310 7 (61) 318 (2) (263) (6) 67 4 — 8 — (2) (6) — (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. 16. 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 2022 917 39 956 3 959 2021 811 33 844 3 847 A reconciliation of the changes in trade accounts receivable and contract assets during the year ended December 31 are as follows: Beginning of year Revenue from satisfied performance obligations Customer billings and other items not included in revenue Credit loss allowance Acquisitions (Note 24) Payments received Sale of ownership interest in a subsidiary company (Note 3) Foreign exchange rate adjustment and other End of year CUSTOMER CONTRIBUTIONS 2022 814 4,621 619 (1) 3 2021 714 3,989 582 (5) 1 (5,129) (4,465) (6) (1) 920 — (2) 814 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 135 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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 during the year ended December 31 are summarized below. Beginning of year Receipt of customer contributions Amortization Transfers from other liabilities and foreign exchange rate adjustment Sale of ownership interest in a subsidiary company (Note 3) End of year 17. LEASES THE COMPANY AS LESSEE Right-of-use assets 2022 1,870 178 (55) 5 (9) 2021 1,756 169 (55) — — 1,989 1,870 The Company's right-of-use assets mainly relate to the lease of land and buildings. A reconciliation of the changes in the carrying amount of right-of-use assets for the year ended December 31 is as follows: Note 2022 2021 Cost Beginning of year Additions Acquisition Disposals Foreign exchange rate adjustment End of year Accumulated depreciation Beginning of year Depreciation Disposals End of year Net book value Lease liabilities 24 134 14 25 (6) — 167 47 17 (6) 58 109 129 8 — (1) (2) 134 32 16 (1) 47 87 The Company has recognized lease liabilities mainly in relation to the arrangements to lease land and buildings. A reconciliation of movements in lease liabilities during the year ended December 31 is as follows: Beginning of year Additions Acquisition Interest expense Lease payments Foreign exchange rate adjustment End of year Less: amounts due within one year End of year Note 2022 24 6 90 14 25 3 (18) 1 115 (16) 99 2021 100 8 — 3 (19) (2) 90 (14) 76 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 136 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 23 81 77 181 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 2022 15 — 15 2021 11 4 15 During the years ended December 31, 2022 and 2021, leases with variable payments were less than $1 million. 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, 2022 and 2021, the Company's operating leases include rentals of modular structures. Finance leases The total net investment in finance leases at December 31 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 2022 2021 271 (122) 149 11 138 149 25 101 145 271 11 55 83 149 277 (116) 161 12 149 161 28 102 147 277 12 50 99 161 During the year ended December 31, 2022, $2 million of contingent rent was recognized as income from these finance leases (2021 - $2 million). 137 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS Operating leases The aggregate future minimum lease payments receivable under non-cancellable operating leases at December 31 are: Minimum lease payments receivable In one year or less In more than one year, but not more than five years 2022 2021 78 33 111 63 27 90 During the years ended December 31, 2022 and 2021, no contingent rent was recognized as income from these operating leases. 18. CLASS I AND CLASS II SHARES A reconciliation of the number and dollar amount of outstanding Class I non-voting and Class II voting shares at December 31 is shown below. AUTHORIZED AND ISSUED Authorized: Issued and outstanding: December 31, 2020 Purchased and cancelled Stock options exercised December 31, 2021 Purchased and cancelled Stock options exercised Converted: Class II to Class I December 31, 2022 Class I Non-Voting Shares 300,000,000 Amount Shares 50,000,000 Class II Voting Amount Shares 350,000,000 Total Amount 101,347,899 (220,000) 59,750 101,187,649 (486,400) 15,200 652,695 101,369,144 186 13,196,129 — 2 188 (1) — — — 13,196,129 — — — (652,695) 187 12,543,434 — — 2 114,544,028 (220,000) 59,750 2 114,383,778 (486,400) 15,200 — — — — 188 — 2 190 (1) — — 2 113,912,578 189 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 113,912,578 189 114,383,778 Shares held in trust for the mid-term incentive plan (254,021) (10) (243,638) Shares outstanding, net of shares held in trust 113,658,557 179 114,140,140 190 (10) 180 2022 2021 Shares Amount Shares Amount DIVIDENDS The Company declared and paid cash dividends of $1.8468 per Class I and Class II Share during 2022 (2021 - $1.7932). 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 12, 2023, the Company declared a first quarter dividend of $0.4756 per Class I and Class II Share, payable on March 31, 2023 to share owners of record as of March 2, 2023. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 138 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, 2022, ATCO Ltd. began a normal course issuer bid (NCIB) to purchase up to 1,011,907 outstanding Class I Shares. The bid expires on March 8, 2023. The prior year NCIB to purchase up to 1,013,478 outstanding Class I Shares began on March 9, 2021 and expired on March 8, 2022. During the year ended December 31, 2022, 486,400 Class I shares were purchased for $23 million, resulting in a decrease to share capital of $1 million and a decrease to retained earnings of $22 million (2021 - 220,000 Class l shares were purchased for $9 million, resulting in a decrease to share capital of less than $1 million and a decrease to retained earnings of $9 million). 19. 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 Earnings from investment in associate company Dividends received from associate company Earnings from investment in joint ventures Dividends and distributions received from investment in joint ventures Income tax expense Unrealized losses on derivative financial instruments Contributions by customers for extensions to plant Amortization of customer contributions Net finance costs Income taxes paid Interest received Other 2022 717 (14) 15 (81) 73 214 89 178 (55) 391 (42) 39 18 2021 717 (13) 15 (62) 46 148 26 169 (55) 423 (51) 13 15 1,542 1,391 139 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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 Accounts payable and accrued liabilities DEBT RECONCILIATION The reconciliation of the changes in debt for the year ended December 31 is shown below. Liabilities from financing activities December 31, 2020 Net issue of debt Foreign currency translation Debt issue costs Amortization of deferred financing charges December 31, 2021 Net (repayment) issue of debt Foreign currency translation Debt issue costs Amortization of deferred financing charges December 31, 2022 2022 2021 (120) (9) 6 281 (11) 147 7 45 52 (110) 12 (4) 115 (9) 4 (12) 20 8 Short-term debt Long-term debt — 206 — — — 206 (206) — — — — 9,619 273 (39) (5) 4 9,852 222 15 (6) 4 10,087 See Note 17 for the reconciliation of the changes in lease liability for the years ended December 31, 2022 and 2021. CASH POSITION Cash position at December 31 is comprised of: Cash Short-term investments Restricted cash (1) Cash and cash equivalents Bank indebtedness 2022 1,012 3 18 1,033 — 1,033 2021 1,072 1 18 1,091 (3) 1,088 (1) Cash balances which are restricted under the terms of joint arrangement agreements are considered not available for general use by the Company. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 140 20. 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, accounts payable and accrued liabilities and short-term debt Finance lease receivables Long-term debt and long-term advances due from joint venture Measured at Fair Value Interest rate swaps Foreign currency contracts Commodity contracts Assumed to approximate carrying value due to their short-term nature. 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 forward 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 or forward prices in certain commodity contracts (Level 3). FINANCIAL INSTRUMENTS MEASURED AT AMORTIZED COST The fair values of the Company’s financial instruments measured at amortized cost at December 31 are as follows: Recurring Measurements Financial Assets Finance lease receivables Long-term advances due from joint venture (1) Financial Liabilities Carrying Value 2022 Fair Value Carrying Value 2021 Fair Value 149 33 185 30 161 217 — — Long-term debt 10,087 9,099 9,852 11,395 (1) Long-term advances due from joint venture are recorded in other assets on the consolidated balance sheets. 141 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL INSTRUMENTS MEASURED AT FAIR VALUE The Company's derivative instruments are measured at fair value. At December 31 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; 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, 2022 Financial Assets Prepaid expenses and other current assets (1) Other assets (1) Financial Liabilities Provisions and other current liabilities (1) Other liabilities (1) (2) December 31, 2021 Financial Assets Prepaid expenses and other current assets (1) Other assets (1) Financial Liabilities Provisions and other current liabilities Other liabilities (1) Subject to Hedge Accounting Not Subject to Hedge Accounting Interest Rate Swaps Commodities (2) Commodities (3) Total Fair Value of Derivatives 7 46 1 2 — 8 2 3 184 91 36 33 52 35 12 8 4 14 98 21 2 6 20 6 195 151 135 56 54 49 34 17 (1) (2) (3) At December 31, 2022, financial assets and financial liabilities include $18 million and $137 million, respectively, of Level 3 derivative financial instruments (December 31, 2021 - financial assets and financial liabilities included $8 million and $26 million, respectively, of Level 3 derivative financial instruments). In 2022, the Company executed two 15-year renewable power purchase agreements with Microsoft Corporation on certain renewable generation facilities. Under the agreements, the Company will receive a fixed price per megawatt per hour (MWh) and pay the settled price per MWh from the Alberta Electric System Operator as well as deliver the related renewable energy credits. The Company designated the energy component within the agreements as cash flow hedges. At December 31, 2022, other liabilities include $18 million of derivative financial liabilities, calculated using an internal forecasting model. Inputs to the model (Level 3) to calculate fair value include electricity generation forecast volumes and extrapolated forward power prices. The sensitivity of a 10 per cent increase or decrease in electricity generation forecast volumes and extrapolated forward power prices would increase or decrease fair value of derivatives by $2 million and $44 million, respectively. Derivative financial instruments related to customer contracts in the Company's retail electricity and natural gas business are calculated using an internal forecasting model. Inputs to the model (Level 3) to calculate fair value of derivatives include electricity and natural gas forecast consumption volumes. The sensitivity of a 10 per cent increase or decrease in electricity and natural gas forecast consumption volumes would increase or decrease the fair value of derivatives by $11 million and $1 million, respectively (2021 - $1 million and $2 million, respectively). ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 142 A reconciliation of the Company's derivative financial instruments classified as Level 3 is summarized as follows: December 31, 2020 (1) Settlement of derivative contracts Losses recognized in earnings December 31, 2021 (1) Settlement of derivative contracts Losses recognized in earnings Losses recognized in other comprehensive income December 31, 2022 (1) (1) Net financial (liabilities) assets classified as Level 3 at end of year. Subject to Hedge Accounting Not Subject to Hedge Accounting — — — — — — (18) (18) (1) 35 (52) (18) 95 (178) — (101) Total (1) 35 (52) (18) 95 (178) (18) (119) For the year ended December 31, the following realized and unrealized gains and losses on derivative financial instruments were recognized in the consolidated statements of earnings: Realized gains (losses) Revenues Fuel costs Purchase power Other costs and expenses Unrealized gains (losses) Other costs and expenses Total 2022 2021 Level 2 Level 3 Total Level 2 Level 3 Total (28) 16 113 19 120 — — — (95) (95) (28) 16 113 (76) 25 (6) (83) 114 (178) (89) (64) (19) 6 53 22 62 (9) 53 — — — (35) (35) (17) (52) (19) 6 53 (13) 27 (26) 1 Hedge ineffectiveness of $14 million was recognized in the consolidated statements of earnings during 2022 (2021 - $14 million). During the year ended December 31, 2022, unrealized gains before income taxes of $281 million were recognized in other comprehensive income (OCI) (2021 - unrealized gains of $111 million), and $88 million of realized gains were reclassified to the consolidated statements of earnings (2021 - $30 million). Over the next 12 months, the Company estimates that net gains before income taxes of $129 million will be reclassified from accumulated other comprehensive income (AOCI) to earnings. 143 ATCO LTD. 2022 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 Interest Rate Swaps) Natural Gas (1) Power (2) Foreign Currency Forward Contracts Natural Gas (1) Power (2) Foreign Currency Forward Contracts Notional value and maturity December 31, 2022 Purchases (3) Sales (3) Currency Canadian dollars Australian dollars Mexican pesos U.S. dollars Maturity December 31, 2021 Purchases (3) Sales (3) Currency Canadian dollars Australian dollars Mexican pesos U.S. dollars Maturity 2023-2045 2023-2026 2023-2038 2023 2023-2027 2023-2027 2023 — — 443 725 — — 35,272,100 4,234,062 1,227,947 10,451,215 — — — — — — — — — — 88 732 570 — 23,062,900 3,240,005 2,313,227 526,314 — — — — — — — — 3 — — — — — — — — — — 2 — — 24,050,972 2,181,310 — — — — — — — — — — 11,015,969 1,232,616 — — — — — — — — — — — — 23 7 — — — — 79 — 2023-2028 2022-2026 2022-2026 2022 2022-2024 2022-2024 2022 (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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 144 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: 2022 Financial Assets Derivative assets (1) (2) Accounts receivable and contract assets Financial Liabilities Derivative liabilities (1) (3) 2021 Financial Assets Derivative assets (1) (2) Accounts receivable and contract assets Financial Liabilities Derivative liabilities (1) (3) Effects of Offsetting on the Balance Sheet Gross Amount Gross Amount Offset Net Amount Recognized 303 61 — (56) 191 — 95 65 46 — (39) — 303 5 191 95 26 46 (1) (2) (3) 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. At December 31, 2022, $194 million is included in prepaid expenses and other assets, and $109 million is included in other assets in the consolidated balance sheets (2021 - $54 million and $41 million). At December 31, 2022, $135 million is included in provisions and other current liabilities, and $56 million is included in other liabilities in the consolidated balance sheets (2021 - $32 million and $14 million). 21. RISK MANAGEMENT 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 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 source of risk exposure and how each is managed is outlined below. MARKET RISK Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in interest rates. The Company’s interest-bearing assets and liabilities include cash and cash equivalents, bank indebtedness, short-term debt and long-term debt. The interest rate risk faced by the Company is primarily due to its cash and cash equivalents and floating rate long-term debt. Cash and cash equivalents include fixed rate instruments with maturities of generally 90 days or less that are reinvested as they mature. The Company is exposed to interest rate movements after these investments mature. The Company's risk management policy is to hedge all material interest rate risk exposures related to long-term financings when the risk is incurred, unless commercial arrangements or mechanisms are in place to offset such 145 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS interest rate risk. The Company has fixed interest rates, either directly or through interest rate swap agreements, on 97 per cent (2021 - 97 per cent) of total long-term debt. Consequently, the exposure to fluctuations in market interest rates is limited. A 100 basis point increase or decrease in interest rates would increase or decrease earnings by $1 million (2021 - nil) and increase or decrease OCI by $12 million (2021 - $12 million). This analysis has been determined based on the exposure to interest rates for financial instruments outstanding at December 31, 2022. Interest rate benchmark reform risk A fundamental reform of major interest rate benchmarks is being undertaken globally, including the replacement of some interbank offered rates (IBORs) with alternative reference rates (IBOR reform). IBOR reform could impact interest rates with respect to the Company's credit facilities, debt agreements and interest rate swap agreements that are referenced to IBORs. The Company is currently managing the transition so that the existing credit facilities and agreements that refer to IBORs shall be modified to ensure continuity of financing arrangements and address differences between IBORs and alternative reference rates. 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 the U.S. dollar and Australia dollar would each increase or decrease earnings and OCI by less than $1 million (2021 - less than $1 million). 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, 2022. 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 natural gas storage, retail energy and electricity generation 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 prices. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 146 A 10 per cent increase or decrease in the forward prices of natural gas or electricity at December 31 would increase or decrease earnings or OCI as follows: Forward prices of natural gas Forward prices of electricity Earnings 8 23 2022 OCI 10 3 Earnings 3 8 2021 OCI 5 16 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 receivables and derivative instrument assets. The exposure to credit risk represents the total carrying amount of these financial instruments in the consolidated balance sheets. 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 receivables credit risk is reduced by transacting with credit-worthy customers in accordance with the established credit approval policies, and a large and diversified customer base and through collateral arrangements such as letters of credit, corporate guarantees and cash deposits. The Alberta Utilities are also able to recover an estimate for their credit loss allowances through approved customer rates and to request recovery through customer rates for any losses from retailers beyond the retailer security mandated by provincial regulations. Derivative credit risk arises from the possibility that a counterparty to a contract fails to perform according to its terms and conditions. This risk is mitigated by dealing with large, credit-worthy counterparties and continuous monitoring of the counterparty risk exposure. The Company has in certain instances entered into master netting agreements with its derivative counterparties, which provides a right to offset for certain exposures between the parties. The Company does not have a concentration of credit risk with any counterparty, except for finance lease receivables, which by its nature is with a single counterparty. Depending on the nature of accounts receivable and contract assets, the Company estimates credit losses based on the expected credit loss rates for respective credit ratings. At December 31, the summary of the expected credit loss rates for respective credit ratings is as follows: December 31, 2022 December 31, 2021 High (AA to AAA) Medium (BBB to A) Low (BB and below) 0%-0.02% 0.05%-0.14% 0.46%-2.99% 0%-0.02% 0.05%-0.15% 0.48%-3.13% At December 31, 2022, the Company had $51 million of accounts receivable and contract assets classified as Low (BB and below) (2021 - $57 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 for the year ended December 31 is as follows: Beginning of year Credit loss allowance Utilization of credit loss allowance End of year 2022 13 4 (6) 11 2021 8 6 (1) 13 147 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS The aging analysis of trade receivables at December 31 is as follows: Up to 30 days 31 to 60 days 61 to 90 days Over 90 days 2022 885 13 2 10 910 2021 734 21 7 24 786 At December 31, 2022, the Company held $606 million in letters of credit for certain counterparty receivables (2021 - $285 million). The Company did not take possession of any collateral it holds as security in 2022 or 2021. The Company has also entered into guarantee arrangements with the parent company of Direct Energy Partnership (NRG Energy) relating to the retail energy supply functions performed by Direct Energy (see Note 30). 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 flows from operations provide a substantial portion of the Company’s cash requirements. Additional cash requirements are met with the use of existing cash balances, bank borrowings and issuance of long-term debt and preferred shares. Commercial paper borrowings and short-term bank loans are also used under available credit lines to provide flexibility in the timing and amounts of long-term financing. Lines of credit At December 31, the Company has the following lines of credit that enable it to obtain financing for general business purposes: Long-term committed Uncommitted Total 3,396 669 4,065 Used 1,080 258 1,338 2022 Available 2,316 411 2,727 Total 3,128 584 3,712 Used 1,208 186 1,394 2021 Available 1,920 398 2,318 Long-term committed credit facilities have maturities greater than one year. Uncommitted credit facilities have no set maturity and the lender can demand repayment at any time. Lines of credit utilized at December 31 are comprised of: Short-term debt Long-term debt Letters of credit Commercial paper 2022 — 1,001 337 1,338 2021 206 941 247 1,394 The Company is authorized to issue $1.2 billion of commercial paper against its long-term committed credit facilities. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 148 Maturity analysis of financial obligations The table below analyzes the remaining contractual maturities at December 31, 2022 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) 2023 1,161 109 412 160 1,842 2024 2025 2026 2027 2028 and thereafter — — — — — 458 426 52 936 346 422 21 789 395 414 10 819 3 376 10 389 8,828 7,196 — 16,024 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2022. 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, 2022. The table below analyzes the remaining contractual maturities at December 31, 2021 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, 2021. Accounts payable and accrued liabilities Short-term debt Long-term debt: Principal Interest expense (1) Derivatives (2) 2022 852 206 351 371 32 1,812 2023 2024 2025 2026 2027 and thereafter — — 233 371 9 613 — — 451 363 4 818 — — 62 358 1 421 — — — — 307 365 8,498 7,015 — — 672 15,513 (1) Interest payments on floating rate debt have been estimated using rates in effect at December 31, 2021. 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, 2021. 22. 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 and long- term debt (including its respective current portion). It defines total capitalization as the sum of Class I and Class II 149 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS shares, contributed surplus, retained earnings, AOCI, NCI and total debt. Management maintains the debt capitalization ratio well below 75 per cent to sustain access to cost-effective financing. Debt capitalization does not have standardized meaning under IFRS and might not be comparable to similar measures presented by other companies. Also, the definitions of total debt and total capitalization vary slightly in the Company’s debt-related agreements. The Company’s capitalization at December 31 is as follows: Bank indebtedness Short-term debt Long-term debt Total debt Class I and Class II shares Contributed surplus Retained earnings Accumulated other comprehensive income (loss) Non-controlling interests Total equity Total capitalization Debt capitalization 2022 — — 10,087 10,087 179 10 4,090 97 3,968 8,344 2021 3 206 9,852 10,061 180 8 3,962 (39) 3,838 7,949 18,431 18,010 55 % 56 % For the year ended December 31, 2022, the Company complied with externally imposed requirements on its capital, including covenants related to debentures and credit facilities. 23. 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 150 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 including the potential impact of climate change and energy transition risks, 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 in 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 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. 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 as well as retail electricity and natural gas services. 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 measurement and value of the estimated consumption. Impairment of financial assets The impairment loss allowance for financial assets is 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 21. 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 including the potential impact of climate change and energy transition risks. 151 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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. 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 estimates used 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 15. 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 either the most likely amount method or the expected value method based on the sum of the probability-weighted amounts in a range of possible outcomes, depending on which method the Company expects to better estimate the amount of the provision. Fair Value Measurements The Company has material accounting policies and disclosures that require the measurement of fair values, for both financial and non-financial assets and liabilities. When measuring the fair value of an asset or a liability, The Company uses market observable data, where available. Significant unobservable inputs and valuation adjustments are periodically reviewed. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the Company uses the evidence obtained from third parties to support measurement valuations. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 152 24. BUSINESS COMBINATIONS Acquisition of Triple M Housing Ltd. (Triple M) On December 7, 2022, ATCO Structures & Logistics Ltd., a subsidiary of the Company, acquired a 100 per cent ownership interest in Triple M, a manufacturer of factory-built, modular housing in Alberta, Canada. The acquisition is reported in the Structures & Logistics segment. The aggregate consideration paid for Triple M was $44 million, which included cash acquired of $3 million and identifiable assets acquired and liabilities assumed of $41 million. There is no contingent consideration with this acquisition. The fair values of the identifiable assets acquired and liabilities assumed were as follows: Assets Accounts receivable and contract assets Inventory Property, plant and equipment Intangible assets (1) Rights-of-use asset Goodwill Other assets Total Assets Liabilities Deferred income tax liabilities Other liabilities Lease liabilities Total Liabilities Total identifiable net assets acquired 3 9 2 28 25 16 1 84 (6) (12) (25) (43) 41 (1) Other intangible assets comprise brand name, $11 million, dealer relationships, $16 million, and non-compete agreements, $1 million. The fair value of the acquired accounts receivable approximated the carrying value due to their short-term nature. None of the accounts receivable acquired were impaired. From the date of acquisition, revenues of $5 million and earnings attributable to Class I and Class II shares of less than $1 million were included in the consolidated statements of earnings for the year ended December 31, 2022, as a result of the acquisition. Transaction costs of $1 million for incremental legal and advisory services fees were expensed during the year ended December 31, 2022 and included in other costs and expenses in the consolidated statements of earnings. The Company's pro-forma consolidated revenues and earnings attributable to Class I and Class II shares for the year ended December 31, 2022, would have been $5,067 million and $375 million, respectively, if the acquisition had occurred on January 1, 2022. These pro-forma adjustments reflect the Company’s adjustments for depreciation and amortization if the purchase price allocation occurred on January 1, 2022 and differences in accounting policies. These pro-forma results may not necessarily be indicative of actual results had the acquisition occurred on January 1, 2022. Acquisition of the natural gas storage business in Canada On December 2, 2021, ATCO Energy Solutions Ltd., a subsidiary of Canadian Utilities Limited, acquired a 100 per cent ownership interest in Alberta Hub, an underground natural gas storage business in Alberta, Canada. The acquisition is reported in the Energy Infrastructure segment. The aggregate consideration paid for Alberta Hub was $135 million, which included cash acquired of $51 million and identifiable assets acquired and liabilities assumed of $84 million. There was no contingent consideration with this acquisition. 153 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS The fair values of the identifiable assets acquired and liabilities assumed were as follows: Accounts receivable and contract assets Property, plant and equipment Intangible assets Deferred income tax liabilities Other liabilities Total identifiable net assets acquired 1 106 5 (24) (4) 84 The fair value of the acquired accounts receivable approximated the carrying value due to their short-term nature. None of the accounts receivable acquired were impaired. From the date of acquisition, revenues of $1 million and earnings attributable to Class I and Class II shares of less than $1 million were included in the consolidated statements of earnings for the year ended December 31, 2021, as a result of the acquisition. Transaction costs of $1 million for incremental legal and advisory services fees were expensed during the year ended December 31, 2021 and included in other costs and expenses in the consolidated statements of earnings. The Company's pro-forma consolidated revenues and earnings attributable to Class I and Class II shares for the year ended December 31, 2021, would have been $4,314 million and $252 million, respectively, if the acquisition had occurred on January 1, 2021. These pro-forma adjustments reflect the Company’s historic natural gas storage margin and adjustments for depreciation and amortization assuming the fair values attributed in the purchase price allocation occurred on January 1, 2021. These pro-forma results may not necessarily be indicative of actual results had the acquisition occurred on January 1, 2021. 25. INVESTMENT IN ASSOCIATE COMPANY The Company has a 40 per cent interest in Neltume Ports S.A. (Neltume Ports), a port operator and developer with a diversified portfolio of 17 multi-purpose, bulk cargo, and container port facilities and six port operation services. The business is primarily located in Chile with additional operations in Uruguay, Argentina, Brazil and the United States. The equity interest in Neltume Ports is reported as a separate operating segment (see Note 3). Selected information from the statement of earnings and comprehensive income (loss) for the year ended December 31 is as follows: Statement of earnings and other comprehensive income (loss) Revenues Depreciation and amortization Interest income Interest expense Income taxes Earnings Other comprehensive income (loss) ATCO's share of earnings ATCO's share of other comprehensive income (loss) 2022 2021 413 346 (64) 4 (10) (7) 36 8 14 3 (60) 1 (11) (7) 33 (17) 13 (7) ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 154 The summarized financial information at December 31 of Neltume Ports, over which the Company has significant influence, is provided below. 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. 2022 2021 232 101 333 1,263 1,596 (49) (68) (117) (149) (147) (296) (413) 265 70 335 1,172 1,507 (48) (65) (113) (169) (112) (281) (394) 1,183 1,113 473 445 A reconciliation of the carrying amount of the investment in associate company for the year ended December 31 is as follows: Beginning of year ATCO's share of earnings ATCO's share of other comprehensive income (loss) Dividends received Foreign exchange Other End of year 2022 445 14 3 (15) 31 (5) 473 2021 460 13 (7) (15) (6) — 445 155 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 26. SUBSIDIARIES Principal operating subsidiaries are listed below. Subsidiaries are wholly owned, unless otherwise indicated. Principal Operating Subsidiaries Principal Place of Business Principal Activity ATCO Structures & Logistics Ltd. Canada Inversiones ATCO Chile Limitada Canadian Utilities Limited (1) ATCO Energy Solutions Ltd. Chile Canada Canada Workforce housing, modular facilities, construction, site support services and logistics and operations management. Holds 40 per cent investment in associate, Neltume Ports S.A. Holding company Develops, owns and operates non-regulated energy and water- related infrastructure Electricidad del Golfo, S. de R.L. de C.V. ATCO Gas Australia Pty Ltd ATCO Australia Pty Ltd ATCO Energy Ltd. ATCO Power (2010) Ltd. CU Inc. ATCO Electric Ltd. (2) Mexico Electricity generation and related infrastructure services Australia Australia Canada Canada Canada Canada Natural gas distribution services Electricity generation services Electricity and natural gas retailer and a provider of whole-home solutions Electricity generation and related infrastructure services Holding company Electricity transmission, distribution, and related infrastructure services ATCO Gas and Pipelines Ltd. (3) Canada Natural gas transmission, distribution, and related infrastructure services (1) (2) (3) At December 31, 2022, ATCO Ltd. has an ownership interest of 52.9 per cent (2021 - 53.0 per cent). ATCO Electric Ltd. comprises two divisions, ATCO Electric Transmission and ATCO Electric Distribution. ATCO Gas and Pipelines Ltd. comprises two divisions, ATCO Pipelines and ATCO Gas. 27. INVESTMENT IN JOINT VENTURES The carrying amount of the investment in joint ventures for the year ended December 31 is as follows: Strathcona Storage LP Other joint ventures Total Beginning of year The Company's share of net earnings The Company's share of other comprehensive income Dividends received Change in ownership of NUE (Note 3) Contributions Foreign exchange End of year Strathcona Storage LP 2022 2021 2022 147 10 — (14) — 3 2021 137 11 — (14) — 13 — — 81 71 1 (59) 17 5 2 146 147 118 49 51 — (32) — 14 (1) 81 2022 228 81 1 (73) 17 8 2 2021 186 62 — (46) — 27 (1) 264 228 Strathcona Storage Limited Partnership (Strathcona Storage LP) is a partnership that operates hydrocarbon storage facilities at the Alberta Industrial Heartland near Fort Saskatchewan, Alberta. The facility consists of five underground storage salt caverns, which have a combined storage capacity of 544,000 cubic metres (m3). The Company holds a 60 per cent ownership in Strathcona Storage LP and its equity interest is included in the Energy Infrastructure segment. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 156 Selected information from the statement of earnings for the year ended December 31 of Strathcona Storage LP is as follows: Statement of earnings Revenues Depreciation and amortization Operating expenses Earnings The Company's share of earnings Strathcona Storage LP 2022 2021 35 (7) (12) 16 10 34 (6) (10) 18 11 Strathcona Storage LP had no other comprehensive income for the years ended December 31, 2022 and 2021. Summarized financial information from the balance sheet at December 31 of Strathcona Storage LP is provided below. Balance sheet Cash and cash equivalents Other current assets Current assets Non-current assets Total assets Current liabilities Non-current liabilities Total liabilities Net assets The Company's share of net assets Other joint ventures Strathcona Storage LP 2022 2021 2 5 7 253 260 (4) (13) (17) 243 146 6 5 11 252 263 (9) (10) (19) 244 147 Other joint ventures of the Company comprise 15 joint ventures, which include LUMA Energy and Osborne Cogeneration Facility described below. LUMA Energy LUMA Energy, LLC (LUMA Energy) is a limited liability 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 and the Puerto Rico Electric Power Authority (PREPA) over a term of 15 years. Under the terms of the agreement, LUMA Energy will not assume ownership of the electricity transmission and distribution system. The Company provided a guarantee of up to $105 million USD to PREPA in connection with the services to be performed by LUMA Energy under the Operations and Maintenance Agreement. LUMA Energy currently operates under the terms of a Supplemental Agreement, which was extended on November 30, 2022 and will continue until such time that PREPA's bankruptcy is resolved. The agreement allows LUMA Energy to collect an annualized fixed fee equivalent of $115 million USD (Company's proportionate share is $58 million USD). Following the resolution of PREPA's bankruptcy proceeding, LUMA Energy will transition to year one of the Operations and Maintenance Agreement. The Company holds a 50 per cent ownership in LUMA Energy and its interest is reported in the Utilities, Electricity segment. 157 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS For the year ended December 31, 2022, the Company's share in LUMA Energy's net earnings and dividends received amounted to $53 million (2021 - $47 million) and $51 million (2021 - $22 million), respectively. Osborne Cogeneration Facility The Osborne Cogeneration Facility is a 180 megawatt natural gas-fired combined cycle facility located in South Australia. The facility has a power purchase agreement (PPA) with Origin Energy Electricity Limited (Origin Energy). In 2018, the Company negotiated a five-year extension to the PPA with Origin Energy to December 31, 2023. On February 3, 2023, the Company executed an extension to the current PPA. The extension is for a period of three years with a further one year option. The terms of the extension are similar to the current tolling arrangement with increased flexibility and dispatch capability for the customer. The Company holds a 50 per cent ownership in the Osborne Cogeneration Facility and its interest is reported in the Energy Infrastructure segment. For the year ended December 31, 2022, the Company's share in Osborne Cogeneration Facility's net earnings and dividends amounted to $12 million (2021 - less than $1 million) and $5 million (2021 - $8 million), respectively. Commitments The joint ventures have contractual obligations in the normal course of business. The Company’s total share of these unrecognized commitments, based on contractual undiscounted cash flows, was $7 million at December 31, 2022 (2021 - $25 million). Dividends and Distributions The Company requires approval from its joint venture partners before any dividends or distributions can be paid. 28. 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 (Class B Voting Common shares of Canadian Utilities Limited) Proportion of non-voting rights held (Class A Non-voting shares of Canadian Utilities Limited) 2022 3,975 2021 3,834 (7) 4 3,968 3,838 2022 % 47.1 3.2 2021 % 47.0 8.4 62.1 61.2 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 158 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 in cash position Dividends paid to NCI Class A and Class B share owners Equity preferred shares 2022 2021 4,048 3,515 639 784 337 406 400 589 223 311 1,867 1,731 20,107 19,344 (1,317) (1,418) (13,591) (12,835) 7,066 3,975 6,822 3,834 2,140 (1,256) (932) (48) 226 82 308 1,718 (1,262) (478) (22) 225 72 297 CANADIAN UTILITIES LIMITED DIVIDEND REINVESTMENT PROGRAM On January 13, 2022, Canadian Utilities Limited reinstated its dividend reinvestment program (DRIP) for eligible Class A non-voting (Class A) and Class B voting common (Class B) share owners who are enrolled in the program. The DRIP was previously suspended effective January 10, 2019. The DRIP allows eligible Class A and Class B share owners of Canadian Utilities Limited to reinvest all or a specified portion of their dividends in additional Class A shares. The Class A shares are issued from treasury at a two per cent discount to the volume weighted average price of the Class A shares traded on the Toronto Stock Exchange during the last five qualifying trading days preceding the dividend payment date. During the year ended December 31, 2022, non-controlling interests acquired 527,471 Class A shares of Canadian Utilities Limited, using re-invested dividends of $20 million. The shares were priced at an average of $37.26 per share. 159 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS EQUITY PREFERRED SHARES Equity preferred shares held by non-controlling interests at December 31 are shown below. CU Inc. Equity Preferred Shares Cumulative Redeemable Preferred Shares, at 2.292% to 4.60% (1) Canadian Utilities Limited Equity Preferred Shares Cumulative Redeemable Second Preferred Shares, at 4.50% to 5.25% Issuance costs 2022 2021 190 190 1,601 (30) 1,761 1,601 (30) 1,761 (1) (2) Effective June 1, 2021, the annual dividend rate for the Series 4 Preferred Shares was reset at 2.292 per cent for the five-year period from June 1, 2021 to May 31, 2026. Prior to the reset on June 1, 2021, the annual dividend rate was 2.24 per cent. Effective June 1, 2022, the annual dividend rate for the Series Y Preferred Shares was reset at 5.196 per cent for the five-year period from June 1, 2022 to May 31, 2027. Prior to the reset on June 1, 2022, the annual dividend rate was 3.403 per cent. In August 2021, Canadian Utilities Limited redeemed all of the issued 4.60 per cent Perpetual Cumulative Second Preferred Shares for $110 million plus accrued dividends. In December 2021, Canadian Utilities Limited issued 8,050,000 Series HH Preferred Shares yielding 4.75 per cent per annum for gross proceeds of $201 million. 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 0.14325 Cumulative Redeemable Second Preferred Shares Does not reset Currently redeemable Not convertible Series 5 (5) June 1, 2026 (4) 1.36 % Series Y Series AA Series BB Series CC Series DD Series EE Series FF Series HH 25.00 25.00 25.00 25.00 25.00 25.00 25.00 25.00 0.32475 0.30625 0.30625 0.28125 0.28125 0.328125 0.28125 0.296875 2.40 % Does not reset Does not reset Does not reset Does not reset Does not reset 3.69 % Does not reset June 1, 2027 (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) March 1, 2027 (6) 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 160 29. 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 Stock options (1) (2) Eligibility Vesting Period Term Officers and key employees 10 years Settlement Class I shares (4) 20% per year over 5 years 25% per year over 4 years 20% per year over 5 years 8 years Class I shares (4) 10 years Cash 4 or 5 years 4 or 5 years Cash Share appreciation rights (1) Directors, officers and key employees International executives and key employees Mid-term incentive plan Officers and key employees 2-3 years (3) 2-3 years Class I 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 from 2020 onwards vest over 4 years with a term of 8 years. Stock Options that were granted prior to 2020 vest over 5 years with a term of 10 years. Based on achieving certain performance criteria. Issued from Treasury. Purchased on the secondary market. STOCK OPTION PLAN Information about the options outstanding and exercisable at December 31 is summarized below. Options authorized for grant Options available for issuance (1) Outstanding options, beginning of year Granted Exercised Forfeited Outstanding options, end of year Options exercisable, end of year 2022 Weighted Average Exercise Price Options 10,200,000 107,150 2021 Weighted Average Exercise Price Options 10,200,000 8,305,300 1,431,050 $43.70 1,115,200 $42.33 482,000 47.54 515,000 (15,200) (15,250) 38.60 (59,750) 46.32 (139,400) 1,882,600 $44.71 1,431,050 817,100 $44.15 572,300 45.30 34.12 42.76 $43.70 $44.53 (1) The share owners voted to approve the replenishment of the stock option plan by 8,664,900 Class I shares on May 11, 2022. Options Range of Exercise Prices $38.40 - $38.93 $40.38 - $44.97 $45.38 - $49.51 $50.33 - $51.97 $38.40 - $51.97 Outstanding Exercisable Number Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price 463,950 172,550 1,174,400 71,700 1,882,600 5.5 3.2 6.6 1.4 5.8 $38.49 269,450 $38.55 43.23 46.94 51.89 148,050 327,900 71,700 43.45 47.38 51.89 $44.71 817,100 $44.15 Compensation expense related to stock options was $2 million in 2022 (2021 - $2 million), with a corresponding increase to contributed surplus. 161 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS SHARE APPRECIATION RIGHTS Information about the share appreciation rights (SARs) outstanding and exercisable at December 31 is summarized below. Outstanding SARs, beginning of year 639,700 $46.01 736,200 $44.99 2022 Weighted Average Exercise Price SARs 2021 Weighted Average Exercise Price SARs Granted Exercised Forfeited Expired Outstanding SARs, end of year SARs exercisable, end of year SARs Range of Exercise Prices $38.40 - $38.93 $40.38 - $44.97 $45.38 - $49.51 $50.33 - $51.97 $38.40 - $51.97 21,000 (11,100) (6,000) (13,000) 630,600 510,350 47.54 37.83 47.51 49.12 8,000 (72,100) (32,400) 45.38 35.28 46.65 — — $46.06 639,700 $46.08 472,450 $46.01 $45.81 Outstanding Exercisable Number Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Number Exercisable Weighted Average Exercise Price 83,200 181,550 294,150 71,700 630,600 3.1 2.7 3.1 1.4 2.8 $38.89 76,200 $38.93 43.18 48.44 51.89 145,300 217,150 71,700 43.48 48.40 51.89 $46.06 510,350 $46.08 In 2022, compensation expense related to SARs was an expense of $1 million (2021- $2 million). The total carrying value of liabilities arising from SARs at December 31, 2022 was $3 million (2021 - $3 million). The total intrinsic value of all vested SARs at December 31, 2022 was less than $1 million (2021 - less than $1 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 Expected holding period prior to exercise Options $47.54 3.17 % 25.98 % 3.98 % 7.1 years 2022 SARs $47.54 3.56 % 29.62 % 3.98 % 4 years Options $45.30 1.11 % 26.19 % 3.94 % 7.1 years 2021 SARs $45.38 0.67 % 24.87 % 3.93 % 4 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 162 MID-TERM INCENTIVE PLAN Information about the MTIPs outstanding at December 31 is summarized below. Outstanding MTIPs, beginning of year Exercised Forfeited (1) Outstanding MTIPs, end of year Unallocated shares held by trustees (2) Total number of shares held by trustees, end of year 2022 Weighted Average Grant Date Fair Value MTIPs $44.38 15,558 MTIPs 3,150 (3,150) 44.38 (11,008) — — 254,021 254,021 — — (1,400) 3,150 240,488 243,638 2021 Weighted Average Grant Date Fair Value $42.29 43.43 42.36 $44.38 (1) (2) Forfeitures occur when certain performance criteria are not met. Unallocated shares are Class I shares held by the trustee which have not been awarded to officers or key employees. Compensation expense related to MTIP awards was less than $1 million for 2022 (2021 - less than $1 million) with a corresponding increase to contributed surplus. The Company, through a trustee, did not purchase any shares during 2022 to be distributed to employees on vesting of the awards (2021 - nil). 30. CONTINGENCIES IT Master Services Agreements In 2020, ATCO Technology Management Ltd. (a wholly owned subsidiary of Canadian Utilities Limited) signed Master Services Agreements (MSAs) with IBM Canada Ltd. (subsequently novated to Kyndryl Canada Ltd.) to provide managed information technology services. In 2021, ATCO Gas Australia Pty Ltd and ATCO Australia Pty Ltd (both wholly owned subsidiaries of Canadian Utilities Limited) signed MSAs with IBM Australia Limited, to provide managed information technology services. These services were previously provided by Wipro Ltd. (Wipro) under ten-year MSAs expiring in December 2024. The Company recognized onerous contract provisions in 2020 and 2021 of $75 million and $6 million relating to the Wipro MSAs, which were included in provisions and other current liabilities in the consolidated balance sheets. On February 26, 2023, the matters relating to the Wipro MSAs were concluded resulting in no significant changes to the onerous contract provisions. Measurement inaccuracies 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. Direct Energy Partnership retail obligation In 2004, ATCO Gas and ATCO Electric Distribution transferred their retail energy supply businesses to Direct Energy Partnership (Direct Energy). The legal obligations of ATCO Gas and ATCO Electric Distribution 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 Distribution, with no refund of the transfer proceeds to Direct Energy. NRG Energy Inc. (NRG), Direct Energy’s parent company, provided a $300 million guarantee, supported by a $300 million letter of credit for Direct Energy’s obligations to ATCO Gas and ATCO Electric Distribution 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. 163 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS Other 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. 31. 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 Acquisition (Note 34) Other 32. RELATED PARTY TRANSACTIONS 2023 2024 2025 2026 2027 2028 and thereafter 526 409 713 24 1,672 439 131 83 66 120 — — 9 448 — — 23 154 — — 6 89 — — 6 72 — — 6 126 In transactions with the Company’s joint ventures, the Company recognized revenues of $33 million relating to management fees and other charges (2021 - $38 million). In transactions with the Company’s group pension plans, the Company paid occupancy costs of $3 million relating to property owned by the pension plans (2021 - $5 million). The Company received $1 million (2021 - less than $1 million) in retail electricity and natural gas services revenue and incurred $3 million in advertising, promotion and other expenses from entities related through common control (2021 - $1 million). At December 31, 2022, the Company had $33 million of unsecured interest-bearing long-term advances due from NUE, a joint venture. These advances are included in other assets on the consolidated balance sheets. 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 2022 13 2 4 19 2021 15 3 5 23 Key management personnel comprise members of executive management and the Board, a total of 23 individuals (2021 - 23 individuals). 33. 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 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 164 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 per cent and 50 per cent of the voting rights. Associates are equity accounted. Under this method, the Company’s interests in associates are initially recognized at cost. The interests are subsequently adjusted to recognize the Company’s share of post-acquisition profits or losses, movements in OCI and dividends or distributions received. The Company’s interests in associates are tested for recoverability when events or circumstances indicate a possible impairment. An impairment loss is recognized in earnings when the carrying value of the Company’s interest in an individual associate is higher than its recoverable amount. The recoverable amount is the higher of fair value less disposal costs and value in use. An impairment loss may be reversed if there is objective evidence that a change in the estimated recoverable amount of the investment is warranted. JOINT ARRANGEMENTS A joint arrangement can be classified as either a joint operation or joint venture and represents the contractually agreed sharing of control by two or more parties. A joint operation is an arrangement in which the Company has the rights and obligations to the corresponding assets and liabilities of the arrangement, whereas a joint venture is an arrangement in which the Company has the rights to the net assets of the arrangement. Joint operations are proportionately consolidated by including the Company’s share of assets, liabilities, revenues, expenses and OCI in the respective consolidated accounts. Joint ventures are equity accounted. Under this method, the Company’s interests in joint ventures are initially recognized at cost. The interests are subsequently adjusted to recognize the Company’s share of post-acquisition profits or losses, movements in OCI and dividends or distributions received. The Company’s interests in joint ventures are tested for recoverability when events or circumstances indicate a possible impairment. An impairment loss is recognized in earnings when the carrying value of the Company’s interest in an individual joint venture is higher than its recoverable amount. The recoverable amount is the higher of fair value less disposal costs and value in use. An impairment loss may be reversed if there is objective evidence that a change in the estimated recoverable amount of the investment is warranted. BUSINESS COMBINATIONS Business combinations are accounted for using the acquisition method. Assets acquired and liabilities assumed are measured at their fair value at the acquisition date. Acquisition costs are expensed in the period incurred. 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. 165 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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 electricity generation, capacity and related products under power purchase arrangements (PPAs) or in the merchant market is recognized based on output delivered and capacity provided over the contract term and is measured at rates agreed in the PPAs or rates prevailing in the spot market. Revenue from operating and maintaining the generation plant is recognized as the Company incurs costs to service the plant. Electricity and natural gas transmission Revenue from electricity and natural gas transmission services is recognized when service is provided to customers and is measured in proportion to the amount it has the right to invoice under the contract. Customer contributions for extensions to plant are recognized as revenue over the life of the related asset. Electricity and natural gas distribution Revenue from distribution of electricity and natural gas is recognized when the services are provided to the customer based on metered consumption, which is adjusted periodically to reflect differences between estimated and actual consumption. Distribution of regulated and non-regulated electricity and natural gas is based on tariff- approved rates established by the Alberta Electric System Operator and Natural Gas Exchange and rates stipulated in the contracts, respectively. The Company recognizes revenue in an amount that corresponds directly with the services delivered and the amount invoiced. Customer contributions for extensions to plant are recognized as revenue over the life of the related asset. Gas storage and transportation Revenue from hydrocarbon storage and transportation is recognized as the service is rendered to customers based on the length of the required service and contracted schedule of injections and withdrawals from the storage facilities. Modular structures and related services Revenue on manufactured modular structures is recognized upon delivery to or acceptance by the customer. Revenue from certain long-term contracts that relate to highly customized modular structures is recognized over time based on the costs incurred. Lease revenue Operating lease revenue from the rental of modular structures and other equipment is recognized over the term of the rental contract. Certain Power Purchase Arrangements (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. 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 166 SHORT-TERM EMPLOYEE BENEFITS Short-term employee benefits are recognized as an expense in salaries, wages and benefits as employees render service. These benefits include wages, salaries, social security contributions, short-term compensated absences, incentives and non-monetary benefits, such as medical care. Costs for employee services incurred in constructing an asset that meet the asset recognition criteria are included in the related property, plant and equipment or intangible asset. Termination benefits are recognized as an expense in salaries, wages and benefits at the earlier of when the Company can no longer withdraw the offer of those benefits and when the Company recognizes costs for a restructuring that includes the payment of termination benefits. In the case of an offer made to encourage voluntary redundancy, the termination benefits are measured based on the number of employees expected to accept the offer. INCOME TAXES Income taxes are the sum of current and deferred taxes. Income tax is recognized in earnings, except to the extent it relates to items recorded in OCI or in equity. Current tax is calculated on taxable earnings using rates enacted or substantively enacted at the balance sheet date in the jurisdictions in which the Company operates. The liability method is used to determine deferred income tax on temporary differences between the financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred income tax is calculated using the enacted or substantively enacted tax rates that are expected to apply in the period when the liability is settled or the asset is realized. If expected tax rates change, deferred income taxes are adjusted to the new rates. Deferred income tax assets and liabilities are not recognized if the temporary differences arise from the initial recognition of goodwill or of other assets and liabilities in a transaction, other than a business combination, that does not affect accounting or taxable earnings. The tax effect of temporary differences from investments in subsidiaries and joint arrangements are not accounted for where the Company is able to control the reversal of the temporary differences and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets are recognized only when it is probable that future taxable earnings will be available against which the temporary differences can be applied. Current income tax assets and liabilities are offset where the Company has the legally enforceable right to offset and the Company intends to either settle on a net basis or realize the asset and settle the liability simultaneously. 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. MARKETABLE SECURITIES INVESTMENTS Marketable securities investments include highly-liquid short term debt and equity investments with a maturity of more than 90 days but not exceeding one year at the time of 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, 167 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS transport, handling and other costs directly attributable to the purchase of finished goods, materials or services. Conversion costs include direct material and labour costs and a systematic allocation of fixed and variable overheads incurred in converting materials into finished goods. The standard cost method is used to approximate cost in the Company’s Structures & Logistics manufacturing operations. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are recorded at cost less accumulated depreciation and any recognized impairment losses. Cost includes expenditures that are directly attributable to the purchase or construction of the asset, such as materials, labour, borrowing costs incurred during construction, contracted services and asset retirement costs. Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset only when it is probable that future economic benefits will flow to the Company and the cost can be measured reliably. Major overhaul costs are capitalized and depreciated on a straight-line basis over the period to the next major overhaul, which varies from three to eight years. The cost of repair and maintenance activities performed every two years or less which do not enhance or extend the useful life of the asset are expensed when incurred. Borrowing costs attributable to a construction period of substantial duration are added to the cost of the asset. The effective interest method is used to calculate capitalized interest using specified rates for specific borrowings and a weighted average rate for general borrowings. Interest capitalization starts when borrowing costs and expenditures are incurred at the onset of construction and ends when construction is substantially complete. The Company allocates the amount initially recognized in property, plant and equipment to its significant components and depreciates each component separately. Assets are depreciated mainly on a straight-line basis over their estimated useful lives. No depreciation is provided on land and construction work-in-progress. The carrying amount of a replaced asset is derecognized when the cost of replacing the asset is capitalized. When an asset is derecognized, any resulting gain or loss is recorded in earnings. 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 Energy infrastructure plant and equipment: Gas-fired generation Hydroelectric generation Solar power generation Wind power generation Other energy infrastructure Buildings Other: Rental assets Other plant, equipment and machinery Useful Life Average Useful Life Average Depreciation Rate 25 to 67 years 15 to 103 years 3 to 57 years 3 to 120 years 15 years 43 to 50 years 10 to 30 years 30 years 3 to 100 years 10 to 73 years 2 to 17 years 2 to 50 years 52 years 42 years 42 years 41 years 13 years 56 years 21 years 30 years 32 years 39 years 18 years 18 years 1.9 % 2.4 % 2.4 % 2.5 % 7.5 % 1.8 % 4.8 % 3.3 % 3.1 % 2.6 % 5.7 % 5.4 % 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 168 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. Assets that cannot be tested individually for impairment are assessed at the CGU level to which the assets belong, which is the smallest identifiable group of assets that generates independent cash inflows. An impairment loss is recognized in earnings when the CGU’s carrying value is higher than its recoverable amount. The recoverable amount is the greater of the CGU’s fair value less disposal costs and its value in use. An impairment loss may be reversed in whole or in part if there is objective evidence that a change in the estimated recoverable amount is warranted. A reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognized for the asset in prior years. GOODWILL Goodwill is not amortized. The carrying value of goodwill is tested for impairment annually or more frequently if there is an indicator of impairment. Impairment is tested at the operating segment level. If the carrying value of the segment to which goodwill has been assigned exceeds its recoverable amount, then any excess of the carrying value of a segment's goodwill over its recoverable amount is expensed and is not subsequently reversed. LEASES The Company as a lessee At the inception of a contract, the Company assesses whether the contract is, or contains, a lease based on whether the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. A right-of-use asset representing the right to use the underlying asset with a corresponding lease liability is recognized when the leased asset becomes available for use by the Company. 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 169 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 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. 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 Contingent liabilities are potential obligations and contingent assets are potential assets, that arise from past events and whose existence will be confirmed by the occurrence or non-occurrence of one or more uncertain future events and whose existence is not wholly within the control of the Company. Contingent liabilities, when identified, are assessed as either probable, possible or remote. Contingent liabilities are recognized in the consolidated financial statements when it is probable that future events will confirm them and when they can be reasonably estimated. Contingent liabilities assessed as possible are disclosed, together with a possible loss range, when determinable, in the notes to the consolidated financial statements. Contingent liabilities assessed as remote are neither recognized nor disclosed in the consolidated financial statements. Contingent assets are not recognized in the consolidated financial statements. Determining contingencies inherently involves the exercise of judgment and the calculation of the estimated outcomes of future events. Actual results could differ from the 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 170 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 principal and interest. All other financial assets are classified as fair value through profit or loss. Financial liabilities are classified as amortized cost or fair value through profit or loss. Amortized cost Financial instruments classified as amortized cost are initially measured at fair value and subsequently measured at their amortized cost using the effective interest method. Fair value through profit or loss Financial instruments classified as fair value through profit or loss are initially measured at fair value with subsequent changes in fair value recognized in earnings. 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 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). 171 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS The Company applies settlement date accounting to the purchases and sales of financial assets. Settlement date accounting means recognizing an asset on the day it is received by the Company and recognizing the disposal of an asset on the day it is delivered by the Company. Any gain or loss on disposal is also recognized on that day. IMPAIRMENT OF FINANCIAL INSTRUMENTS At each reporting date, the Company assesses whether there is evidence that a financial asset or group of financial assets is impaired. If such evidence exists, an impairment loss is recognized in earnings. Impairment losses on financial assets carried at amortized cost are calculated as the difference between the amortized cost and the present value of estimated future cash flows discounted at the financial asset’s original effective interest rate. Impairment losses on financial assets carried at amortized cost may be reversed in whole or in part if there is evidence that a change in the estimated recoverable amount is warranted. The revised recoverable amount cannot exceed the carrying amount that would have been determined had no impairment charge been recognized in previous periods. The Company applies the expected credit loss allowance matrix based on historical credit loss experience, aging of financial assets, default probabilities, forward-looking information specific to the counterparty, and industry-specific economic outlooks. For accounts receivable and contract assets and finance lease receivables, the Company estimates credit loss allowances at initial recognition and throughout the life of the receivable. For receivable under service concession 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. ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS 172 If the Company discontinues hedge accounting, the cumulative gain or loss in AOCI is transferred to earnings at the same time as the hedged item affects earnings. The amount in AOCI is immediately transferred to earnings if the hedged item is derecognized or it is probable that a forecast transaction will not occur in the originally specified time frame. RETIREMENT BENEFITS The Company accrues for its obligations under defined benefit pension and OPEB plans. Pension plan assets at the balance sheet date are reported at fair value. Accrued benefit obligations at the balance sheet date are determined using a discount rate that reflects market interest rates. The rates are equivalent to those on high quality corporate bonds that match the timing and amount of expected benefit payments. The cost for defined benefit plans includes net interest expense. This expense is calculated by applying the discount rate to the net defined benefit asset or liability at the beginning of the year plus projected contributions and benefit payments during the year. Gains and losses resulting from experience adjustments and changes in assumptions used to measure the accrued benefit obligations are recognized in OCI in the period in which they occur. Those gains and losses are then transferred directly to retained earnings. Employer contributions to the defined contribution pension plans are expensed as employees render service. 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. 173 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS FOREIGN CURRENCY TRANSLATION Foreign currency transactions Transactions denominated in foreign currencies are translated at the exchange rate on 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. 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 2022 2021 2022 1.3546 0.9212 1.2656 0.9200 1.3013 0.9034 2021 1.2793 0.9164 ACCOUNTING STANDARDS AND INTERPRETATIONS NOT YET ADOPTED At December 31, 2022, 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. 2022 CONSOLIDATED FINANCIAL STATEMENTS 174 34. SUBSEQUENT EVENT ACQUISITION OF RENEWABLE ENERGY BUSINESS On January 3, 2023, ATCO Power (2010) Ltd., a wholly owned subsidiary of the Company, acquired from Suncor Energy Inc. a portfolio of wind and solar assets and projects in Alberta and Ontario, Canada. The aggregate consideration paid was $713 million, which included cash acquired of $38 million and identifiable assets acquired and liabilities assumed of $675 million. The aggregate consideration paid is subject to working capital adjustments. The transaction was financed by a non-revolving credit facility issued by a syndicate of lenders. The acquisition will be accounted for as a business acquisition and its results will be reported in the Energy Infrastructure operating segment starting in the first quarter of 2023. The preliminary fair value calculation of the major classes of assets acquired and liabilities assumed is shown below which will be finalized within one year. Assets Accounts receivable and contract assets Property, plant and equipment Construction work-in-progress Intangible assets Other assets Goodwill Total assets Liabilities and non-controlling interest Accounts payable and accrued liabilities Deferred income tax liabilities Other liabilities Non-controlling interest Total liabilities and non-controlling interest Total identifiable net assets acquired 6 641 46 61 9 150 913 (46) (150) (8) (34) (238) 675 Transaction costs of $2 million for incremental legal and advisory services fees were expensed during the year ended December 31, 2022 and included in other costs and expenses in the consolidated statements of earnings. In December 2022, the Company entered into a 15-year renewable power purchase agreement with Microsoft Corporation relating to the 202 megawatt (MW) Forty Mile Wind Phase 1 project. The agreement was contingent upon the successful acquisition of the project included in the transaction. Under the agreement, Microsoft Corporation will purchase 150 MW of the generation capacity and related renewable energy credits generated by the project for a fixed price once fully energized. The Company will receive a fixed price per MW hour (MWh) and pay the settled price per MWh from the Alberta Electric System Operator. 175 ATCO LTD. 2022 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED ANNUAL RESULTS (1) YEAR ENDED DECEMBER 31, 2022 (Millions of Canadian dollars, except as indicated) EARNINGS STATEMENT Revenues Earnings attributable to Class I and Class II shares Adjusted earnings (2) Structures & Logistics Neltume Ports Corporate & Other Canadian Utilities Limited Utilities Energy Infrastructure Corporate & Other Eliminations Adjusted earnings BALANCE SHEET Cash (3) Total assets Capitalization Bank indebtedness Short-term debt Long-term debt Non-recourse long-term debt Non-controlling interests Share owners' equity Capitalization CASH FLOW STATEMENT Cash flows from operating activities Capital expenditures Structures & Logistics Corporate & Other and Eliminations Canadian Utilities Limited Utilities (Electricity) Utilities (Natural Gas) Energy Infrastructure Corporate & Other Capital expenditures PER SHARE DATA Earnings per share ($) Adjusted earnings per share ($) (2) Dividends paid per share ($) Equity per share ($) Class I non-voting closing share price ($) Class II Voting closing share price ($) 2022 2021 2020 2019 2018 4,978 370 4,289 246 3,944 252 4,706 513 4,888 328 61 14 – 379 19 (50) 423 53 13 6 336 15 (41) 382 57 15 – 305 15 (40) 352 37 15 (6) 301 57 (39) 365 15 4 17 275 83 (39) 355 1,033 691 24,139 23,004 22,200 21,703 23,344 1,100 1,140 1,088 – – 10,087 – 3,968 4,376 – 175 9,397 1,401 3,687 3,755 18,431 18,010 17,471 17,294 18,415 – – 9,436 – 3,858 4,000 3 206 9,852 – 3,838 4,111 3 – 9,619 – 3,797 4,052 2,396 1,864 1,843 1,542 999 204 10 114 11 125 13 105 (16) 88 10 566 571 234 12 1,597 3.25 3.71 1.85 38.42 42.38 40.45 350 747 120 10 1,352 2.16 3.35 1.79 35.94 42.70 43.00 366 510 19 8 1,041 2.21 3.08 1.74 35.37 36.49 37.81 389 646 88 6 1,218 4.49 3.19 1.62 34.88 49.77 49.55 467 622 51 16 1,254 2.87 3.10 1.51 32.75 38.61 38.55 Full disclosure of all financial information is available on the SEDAR website - www.sedar.com. (1) (2) Financial results have been prepared in accordance with International Financial Reporting Standards (IFRS). Adjusted earnings are earnings attributable to Class I & Class II shares after adjusting for the timing of revenues and expenses associated with rate- regulated activities and unrealized gains or losses on mark-to-market forward and swap commodity contracts. Adjusted earnings also exclude one-time gains and losses, impairments and items that are not in the normal course of business or a result of day-to-day operations. The most directly comparable measure to “adjusted earnings” that is reported in accordance with IFRS is “earnings attributable to Class I and Class II shares”. For additional information regarding these total of segment measures, see “Other Financial and Non-GAAP Measures” and “Reconciliation of Adjusted Earnings to Earnings Attributable to Class I and Class II Shares” in Management’s Discussion and Analysis for year-ended December 31, 2022, which is available at www.atco.com, and incorporated by reference herein. (3) Cash is defined as cash and cash equivalents less current bank indebtedness. ATCO LTD. 2022 CONSOLIDATED OPERATING SUMMARY 176 CONSOLIDATED OPERATING SUMMARY YEAR ENDED DECEMBER 31, 2022 (Millions of Canadian dollars, except as indicated) 2022 2021 2020 2019 2018 Structures & Logistics Capital expenditures 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 204 114 125 105 3 75 22 79 3 71 20 82 3 52 19 73 3 48 16 72 88 3 40 15 75 Port products handling (millions of tonnes) 43 46 45 46 44 Utilities Electricity distribution and transmission operations Capital expenditures Power lines (thousands of kilometres) Power lines owned (thousands of kilometres) 566 105 71 350 105 71 366 389 467 75 71 75 71 75 71 Electricity distributed (millions of kilowatt hours) 12,489 12,491 12,012 12,664 12,928 Average annual use per residential customer (kWh) 7,334 7,535 7,528 7,227 7,398 Average customers during the year (thousands) 263 261 261 260 258 Natural gas distribution operations Capital expenditures 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 428 55 385 55 307 55 353 55 383 55 2,509 2,476 2,535 2,304 2,292 304 299 300 311 304 108 111 113 112 111 14 14 13 13 14 Average customers during the year (thousands) 2,063 2,036 2,014 1,989 1,964 Natural gas transmission operations Capital expenditures 143 362 203 293 239 Pipelines (thousands of kilometres) 9 9 9 9 9 Energy Infrastructure Electricity generation operations (1) Capital expenditures Non-regulated generating capacity (megawatts) Non-regulated generating capacity owned (megawatts) Energy storage & industrial water operations Capital expenditures Seasonal natural gas storage capacity (petajoules) Salt cavern storage capacity (thousands of m3) Industrial water infrastructure intake capacity (thousands of m3/day) 123 348 248 111 117 550 28 348 248 92 101 400 2 347 247 17 52 59 30 344 3,922 244 2,517 29 52 21 52 400 400 400 85 85 85 85 85 (1) 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. 177 ATCO LTD. 2022 CONSOLIDATED ANNUAL RESULTS GENERAL INFORMATION INCORPORATION REGISTRAR & TRANSFER AGENT 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 Mailing Address: Investor Relations c/o ATCO 3rd Floor, West Building 5302 Forand St SW Calgary, AB Canada T3E 8B4 Class I Non-Voting and Class II Voting Shares TSX Trust Company Calgary/Montreal/Toronto/Vancouver Telephone: 8:30 a.m. to 6:30 p.m. ET Monday–Friday Toll-Free in North America: 1 800 360 4519 Outside of North America: 1 416 682 3860 Fax: 1 416 595 9593 Email: shareholderinquiries@tmx.com www.tsxtrust.com Mailing Address: TSX Trust Company 301 - 100 Adelaide Street West Toronto, ON Canada M5H 4H1 Printed in Canada ATCO LTD. 2022 ANNUAL REPORT 2022 178 

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