Enerflex
Annual Report 2021

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2021 ANNUAL REPORT Since its inception, Enerflex has delivered on the value of natural gas, having crafted and successfully executed a diversified strategy built upon a growing demand for natural gas and cleaner energy sources. Today, we remain a sector-leading investment that is well-positioned to achieve our vision of Transforming Energy for a Sustainable Future. With a vertically integrated platform, a global presence, smart investments across the value chain, and an eye to tomorrow, Enerflex is building towards a bright future. This Annual Report contains forward-looking information within the meaning of applicable Canadian securities laws, including relating to the future of Enerflex and its continued success, the future role of and demand for natural gas, prospects for Enerflex to steadily grow earnings and returns for its shareholders, and prioritizing Enerflex’s energy transition strategy. All forward-looking information in this Annual Report is subject to the qualifications, risks, uncertainties, and assumptions described in the “Forward-Looking Statements” section of our Management’s Discussion and Analysis dated February 23, 2022, which is included on page 43 of this Annual Report. TABLE OF CONTENTS LETTER TO SHAREHOLDERS MANAGEMENT’S DISCUSSION AND ANALYSIS 2 4 CONSOLIDATED FINANCIAL STATEMENTS 49 54 96 97 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS DIRECTORS AND EXECUTIVES SHAREHOLDERS’ INFORMATION 1 1 ANNUAL REPORT 2021 | ENERFLEX LTD. Marc E. Rossiter LETTER TO SHAREHOLDERS Dear Enerflex Shareholders, On behalf of the Enerflex Management Team and Board of Directors, we would like to thank you for your investment in Enerflex. I would also like to extend my gratitude to Enerflex’s employees, customers, and suppliers for coming together to execute on our strategy in 2021. To call 2021 a transition year would be an understatement. We entered the year with a very low backlog, no vaccinations, and pervasive global uncertainty in the energy markets. Throughout the year, Enerflex reached the following important achievements: 1. Through vaccinations and testing protocols, we stayed at work. Serving our clients in our offices, manufacturing facilities, service trucks, and energy infrastructure in 17 countries. 2. Recorded reliable and predictable revenue from a growing base of energy infrastructure assets from the USA rental fleet to new and existing BOOM (build-own-operate-maintain) assets in Latin America and the Middle East. 2 LETTER TO SHAREHOLDERS | ANNUAL REPORT 2021 INTEGRITY COMMITMENT SUCCESS CREATIVITY 3. Created and developed an in-house Energy Transition (ETX) business to capitalize on 40 years of history in low carbon technologies. 4. Increased the backlog in Engineered Systems in four successive quarters closing out the year on a high note. Profit margins in Engineered Systems and After-Market Service did not reach pre-pandemic levels in 2021. Getting there remains a priority for Enerflex. Further, even though we have progressed our ETX plans via meaningful engagements with solid counterparties, we will be more satisfied when the studies, engineering, and MOU’s undertaken in 2021 convert to increased revenue and earnings. Getting to profitability in ETX will require government policy and producer actions that supports real infrastructure spending on low carbon energy. Since 2014, Enerflex’s stated strategy has been to invest in global energy infrastructure that builds on our core business of manufacturing modularized energy solutions including gas processing, power generation, and compression. While we have made these investments, we have also prioritized a market leading position in the Engineered Systems business which is a reliable, capital light source of cash that funds a conservative balance sheet. Indeed, it was this conservative balance sheet that allowed Enerflex to announce its intention to close on the all-share acquisition of long-time industry participant Exterran in January of 2022. This transaction will immediately create a true energy infrastructure company, building on a combined 105 years of technical excellence in modularized equipment and the collective talents of over 5,000 committed teammates globally. It will provide Enerflex with the right cost structure, capital structure, and talent to fulfill our vision of Transforming Energy for a Sustainable Future. Again, thank you for being investors. Thanks to Enerflex employees – you are “Best in Class” on delivering safe, reliable, and cost-effective energy to our communities. [signed] “Marc E. Rossiter” Marc E. Rossiter President, Chief Executive Officer, and Director February 23, 2022 ANNUAL REPORT 2021 | LETTER TO SHAREHOLDERS 3 MANAGEMENT’S DISCUSSION & ANALYSIS REPORT FOR THE YEAR ENDED DECEMBER 31, 2021 MANAGEMENT’S DISCUSSION AND ANALYSIS February 23, 2022 The Management’s Discussion and Analysis (“MD&A”) for Enerflex Ltd. (“Enerflex” or “the Company”) should be read in conjunction with the audited consolidated financial statements for years ended December 31, 2021 and 2020, and the cautionary statement regarding forward looking information in the “Forward-Looking Statements” section of this report. The financial information reported herein has been prepared in accordance with International Financial Reporting Standards (“IFRS”) and is presented in Canadian dollars unless otherwise stated. The MD&A focuses on information and key statistics from the audited consolidated financial statements, and considers known risks and uncertainties relating to the oil and gas services sector. This discussion should not be considered all-inclusive, as it excludes possible future changes that may occur in general economic, political, and environmental conditions. Additionally, other elements may or may not occur which could affect industry conditions and/or Enerflex in the future. Additional information relating to the Company can be found in the Company’s Annual Information Form and Management Information Circular, which are available on SEDAR at www.sedar.com. THE COMPANY Enerflex is a single-source supplier of natural gas compression, oil and gas processing, refrigeration systems, energy transition solutions, and electric power generation equipment with related in-house engineering and mechanical services expertise. The Company’s broad in-house resources provide the capability to engineer, design, manufacture, construct, commission, and service hydrocarbon and other gas handling systems. Enerflex’s expertise encompasses field production facilities, compression and natural gas processing plants, gas- lift compression, refrigeration systems, energy transition solutions, and electric power equipment serving the natural gas production industry. Headquartered in Calgary, Alberta, Canada, the Company has approximately 2,000 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint operations, operate in Canada, the United States of America (“USA”), Argentina, Bolivia, Brazil, Colombia, Mexico, the United Kingdom, Bahrain, Kuwait, Oman, the United Arab Emirates (“UAE”), Australia, New Zealand, Indonesia, Malaysia, and Thailand. Through Enerflex’s owned natural gas infrastructure, the Company transforms over 3.1 billion cubic feet of natural gas per day, globally. Enerflex has fabrication and workshop facilities in Calgary, Alberta; Houston, Texas; and Brisbane, Queensland; that supply custom fabricated and standard equipment to customers worldwide. Enerflex is one of the leading suppliers of natural gas compression within the rental market in Canada, the USA, Latin America, and the Middle East, with a global rental fleet of approximately 800,000 horsepower. The Company is a highly-qualified service provider with industry-certified mechanics and technicians strategically situated across a network of 53 service locations in Canada, the USA, Latin America, the Middle East, and Asia Pacific. Enerflex operates three business segments: USA, Rest of World (“ROW”), and Canada. Each regional business segment has three main product lines: Engineered Systems, Service, and Energy Infrastructure (formerly Rentals). A summary of the business segments and product lines is included below: USA  The Engineered Systems product line consists of custom and standard compression packages for reciprocating and screw compressor applications from Enerflex’s manufacturing facility located in Houston, Texas. In addition, the Company engineers, designs, manufactures, constructs, and installs modular natural gas processing equipment, energy transition solutions, refrigeration systems, and electric power solutions. Retrofit provides re-engineering, re-configuration, and re-packaging of compressors for various field applications.  The Service product line provides mechanical services and parts, as well as maintenance solutions to the oil and natural gas industry in the USA. The Company packages CAT engines and is also a Platinum Tier Gas Compression Solution Provider of INNIO Waukesha, providing worldwide access to parts and service for both products. Enerflex’s USA service branches are located in Colorado, Louisiana, New Mexico, North Dakota, Oklahoma, Pennsylvania, Texas, West Virginia, and Wyoming. Suite 904, 1331 Macleod Trail SW, Calgary, AB T2G 0K3 Canada | Telephone +1 403 387 6377 | Toll Free +1 800 242 3178 enerflex.com ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 5  The Energy Infrastructure product line provides natural gas compression equipment rentals to oil and natural gas customers in the USA under its Contract Compression operations, primarily operating in the Permian and SCOOP/STACK formations utilizing a fleet of low- to high-horsepower packages. These compressor packages are typically used in wellhead, gas-lift and natural gas gathering systems, and other applications primarily in connection with natural gas and oil production. In addition, power generation rental solutions are also available in the USA region. The Energy Infrastructure product line in the USA operates out of the Houston, Texas head office facility along with branches in West Texas, New Mexico and Oklahoma. REST OF WORLD        The Rest of World segment deploys products typically fabricated by Enerflex’s Engineered Systems division in Houston, Texas. The Latin America region, with locations in Argentina, Bolivia, Brazil, Colombia, and Mexico, provides Engineered Systems products, including integrated turnkey natural gas compression, processing, and electric power solutions, with local construction and installation capabilities. The Service product line in the region focuses on after-market services, parts, and components, as well as operations, maintenance, and overhaul services. The Energy Infrastructure product line provides natural gas compression and processing equipment for rent to oil and gas customers in the region. Enerflex has several operating Build-Own-Operate-Maintain (“BOOM”) facilities of varying size and scope in this region, providing customers with alternate solutions to meet their natural gas compression, processing, and electric power needs. These BOOM facilities can be treated as either operating or finance leases. The Middle East/Africa (“MEA”) region, through its operations in Bahrain, Oman, Kuwait, and the UAE, provides engineering, design, procurement, project management, and construction services for compression, process, and power generation equipment, as well as rentals, after-market service, parts, and operations and maintenance services for gas compression, power generation, and processing facilities in the region. The Energy Infrastructure product line provides natural gas compression, power generation, and processing equipment for rent to oil and gas customers in the region. Enerflex has several BOOM facilities of varying size and scope in this region providing customers with alternate solutions to meet their natural gas compression, processing, and electric power needs. These BOOM facilities can be treated as either operating or finance leases. The Australia region is headquartered in Brisbane, Queensland with additional locations in Queensland, Western Australia, and New Zealand providing after-market services, equipment supply, parts supply, and general asset management. The Brisbane facility also packages power generation equipment for use across the region. The Asia region, with locations and operations in Indonesia, Malaysia, and Thailand, provides Engineered Systems, as well as after-market services and parts through the Company’s local operations. Through its location in the United Kingdom, the Company provides customized compression, processing, and high-end refrigeration solutions in the Europe region. As a Platinum Tier Gas Compression Solution Provider of INNIO Waukesha engines, the Company provides factory-direct access to Waukesha engines and parts in its Rest of World regions. This region also packages CAT engines and parts. CANADA  The Engineered Systems product line is comprised of compression, process, energy transition, and electric power solutions. Enerflex provides custom and standard compression packages for reciprocating and screw compressor applications. It also engineers, designs, manufactures, constructs, and installs modular processing equipment and waste gas systems for natural gas facilities. Enerflex provides integrated turnkey (“ITK”) power generation, gas compression, and processing facilities. Retrofit solutions provide re-engineering, re-configuration, and re-packaging of compressors for various field applications. Enerflex has a manufacturing facility in Calgary, Alberta and retrofit facilities in Calgary, Grand Prairie, and Red Deer, Alberta. The Service product line provides after-market mechanical service and parts distribution. As a Platinum Tier Gas Compression Solution Provider of INNIO Waukesha, the Company has worldwide factory-direct access to Waukesha engines and parts. In addition, Enerflex is also the authorized distributor and service provider of INNIO’s Jenbacher gas engines and parts in Canada. The Company also packages CAT and MAN engines and parts. The Service product line operates out of service branches located in Alberta, British Columbia, Ontario, and Quebec. The Energy Infrastructure product line provides reciprocating and rotary screw natural gas compression packages ranging from 50 horsepower to 2,000 horsepower, as well as electric power equipment for rent to customers.   6 2 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report ENGINEERED SYSTEMS The Engineered Systems product line is comprised of four product offerings: compression, process, energy transition, and electric power. Enerflex is able to combine one or more of these product offerings into an integrated turnkey solution, including civil works, piping and structural fabrication, and electrical, instrumentation, controls, and automation, as well as installation and commissioning. Enerflex’s ITK offering allows customers to simplify their supply chain, eliminate interface risk, and reduce the concept-to-commissioning cycle time of major projects. Compression packages are offered from 20 horsepower to 10,000 plus horsepower and ranging from low specification field compressors to high specification process compressors for onshore and offshore applications. The Company also provides retrofit solutions which includes re-engineering, reconfiguration, and repackaging of compressors for various field applications. Processing equipment includes dehydration and liquids recovery, refrigeration and cryogenic processing, oil and natural gas separators, and amine sweetening to remove H2S or CO2. For electric power, a typical power generation unit is comprised of a natural gas reciprocating engine driver, a generator, and control devices. Facilities dedicated to the Engineered Systems product line occupy approximately 250,000 square feet of manufacturing space in Canada and approximately 315,000 square feet of manufacturing space in the USA. In addition, the Company has approximately 40,000 square feet of shop space in Australia that is devoted to retrofit, service, and overhaul activities. SERVICE Enerflex’s Service division provides after-market services, parts distribution, operations and maintenance solutions, equipment optimization and maintenance programs, manufacturer warranties, exchange components, and technical services to our global customers. The product line operates through an extensive network of branch offices and generally provides its services at the customer's wellsite location using trained technicians and mechanics. Enerflex is a Platinum Tier Gas Compression Solution Provider of INNIO Waukesha, which allows the Company to package and service Waukesha engines for its customers worldwide. Additionally, the Company is an authorized distributor and service provider of INNIO’s Jenbacher gas engines and parts in Canada. Enerflex is also the authorized distributor for Altronic, a leading manufacturer of electric ignition and control systems, in all of its operating regions. Enerflex’s after-market service and support business includes distribution and remanufacturing facilities, with 53 outlets situated in active natural gas producing areas, over 400 service vehicles, hundreds of skilled mechanics, and a sizable inventory of original equipment manufacturer parts from key manufacturers. ENERGY INFRASTRUCTURE The Energy Infrastructure product line includes a variety of rental and leasing alternatives for natural gas compression, processing, and electric power equipment. The rental fleet is deployed across Canada, the USA, Argentina, Brazil, Colombia, Mexico, Bahrain, and Oman, and provides comprehensive contract operations services to customers in each of those regions. In addition to Enerflex’s asset fleet, this product line provides customers with trained personnel, equipment, tools, materials, and supplies to meet their natural gas compression, processing, and power generation needs, as well as designing, sourcing, installing, operating, servicing, repairing, and maintaining equipment owned by the Company necessary to provide these services. The Energy Infrastructure product line encompasses a fleet of natural gas compressors totalling approximately 800,000 horsepower on rent or available for rent globally. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 3 7 FINANCIAL OVERVIEW ($ Canadian thousands, except percentages) 2021 2020 2021 2020 Three months ended December 31, Twelve months ended December 31, $ 321,347 $ 298,837 $ 960,156 $ 1,217,052 Revenue Gross margin Selling and administrative expenses Operating income Earnings before finance costs and income taxes (“EBIT”) 59,908 39,984 19,924 74,954 43,942 31,012 219,554 165,263 54,291 20,555 30,873 55,097 Net loss $ (32,707) $ 32,668 $ (18,455) $ Key Financial Performance Indicators1 Engineered Systems bookings $ 324,382 $ 52,730 $ 768,703 $ Engineered Systems backlog Recurring revenue growth2 Gross margin as a percentage of revenue EBIT as a percentage of revenue3 Earnings before finance costs, income taxes, depreciation and amortization (“EBITDA”) Return on capital employed (“ROCE”) 3 Rental horsepower 557,549 (11.7)% 18.6% 5.7% 142,973 557,549 31.2% 25.1% 9.7% (2.0)% 22.9% 5.7% $ 43,723 $ 52,503 $ 142,719 $ 203,317 3.5% 800,271 6.6% 713,929 3.5% 800,271 6.6% 713,929 298,179 182,167 116,012 118,052 88,257 273,782 142,973 3.6% 24.5% 9.7% 1 These key financial performance indicators are Non-GAAP measures. Further detail is provided in the Non-GAAP Measures section. 2 Recurring revenue is comprised of revenue from the Service and Energy Infrastructure product lines, which are typically contracted and extend into the future. While the contracts are subject to cancellation or have varying lengths, the Company does not believe these characteristics preclude them from being considered recurring in nature. Growth in recurring revenue is calculated on a period-over-period basis. 3 Determined by taking the trailing 12-month period. 8 4 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report FOURTH QUARTER AND TWELVE MONTHS OF 2021 OVERVIEW For the three months ended December 31, 2021:  Bookings totaled $324.4 million, up substantially from $52.7 million in the same period last year and $191.1 million in the third quarter of 2021, which mirrors the optimism in the recovering oil and gas sector and is reflected in the increased activity in our Engineered Systems business.  Operating income was lower than the prior year, primarily due to competitive margin pressures on Engineered Systems projects, the recognition of large finance leases in the prior year, and lower government grants received. These decreases were offset by improved Engineered Systems revenues on stronger opening backlog, reduced SG&A on lower share-based compensation and profit share, and the recognition of a finance lease in the current quarter.  During the quarter, the Company negotiated an extension of an existing contract on a significant BOOM asset. The extension is accounted for as a finance lease and is similar to the extensions that were signed in the fourth quarter of 2020 but has a lower impact in the current year and is the primary driver in the decrease in recurring revenues for the year.        Engineered Systems backlog at December 31, 2021 is $557.5 million, an increase of $414.5 million, compared to the backlog of $143.0 million on December 31, 2020 due to Engineered Systems bookings outpacing revenue recognized in the period, and favourable foreign exchange impacts of $5.7 million. SG&A costs of $40.0 million in the fourth quarter of 2021 were down from $43.9 million in the same period last year. This favourable variance was the result of lower share-based compensation on a decreasing share price during the fourth quarter. The movement in share price resulted in a $0.2 million recovery in the quarter, compared to a $5.1 million expense in the fourth quarter of 2020 – a net impact of $5.3 million period-over-period. Decreased profit share expense also contributed to lower SG&A. The Company derecognized $44.7 million of deferred tax assets. This non-cash event related to unused tax losses and other deductible temporary differences in Canada. The derecognized tax assets have a finite life and the continued challenging market conditions create uncertainty whether sufficient taxable income will be available to offset these unused tax losses prior to expiry. Inventory levels decreased $39.6 million when compared to December 31, 2020 as the Company continued to realize major equipment inventory into Engineered Systems projects and new contract compression units throughout 2021. The Company invested $16.8 million in rental assets; the majority of which was used to fund the organic expansion of the USA contract compression fleet. At December 31, 2021, the USA contract compression fleet totaled approximately 400,000 horsepower with an average fleet utilization of 89 percent for the quarter. The Company has also invested $13.0 million towards construction of natural gas infrastructure assets, which will be accounted for as a finance lease. The Company maintained balance sheet strength by managing working capital, reducing debt, and continuing to exercise capital discipline. We exited the quarter financially strong, with a bank-adjusted net debt to EBITDA ratio of 1.0:1, compared to a maximum ratio of 3:1. This leverage ratio excludes the non-recourse debt. Enerflex has substantial undrawn credit capacity and cash on hand. Subsequent to December 31, 2021, the Company’s Board of Directors approved its quarterly dividend of $0.025 per share, payable on April 7, 2022, to shareholders of record on March 10, 2022. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions.  On January 24, 2022, Enerflex and Exterran Corporation (NYSE: EXTN) announced they have entered into a definitive agreement to combine the companies in an all-share transaction to create a premier integrated global provider of energy infrastructure. Upon completion of the transaction, which will require shareholder and regulatory approval, the combined entity will operate as Enerflex Ltd. Subject to all approvals, the transaction is expected to close in the second or third quarter of 2022. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 5 9 For the twelve months ended December 31, 2021:  Operating income was lower than the prior year, primarily due to reduced Engineered Systems revenue on lower opening backlog, the recognition of the large finance leases in the prior year, significantly higher share-based compensation costs, reduced contribution from certain large, high margin Engineered Systems projects that were largely completed by the third quarter of 2020 and lower government grants received. These impacts were partially offset by improved Service revenues, increased contribution from higher margin recurring revenue product offerings, and lower SG&A due to the bad debt expense in the prior year.  SG&A costs of $165.3 million in the twelve months of 2021 were down from $182.2 million in the same period last year. This favourable variance was the result of lower bad debt provisions, decreased compensation expense on reduced average headcount, and decreased profit share on lower operational results, partially offset by higher share-based compensation, and lower cost recoveries from government subsidies. The movement in share price resulted in $12.9 million of share-based compensation expense, compared to $1.8 million in the twelve months 2020 – a net increase of $11.1 million period-over- period.  During the third quarter of 2021, the Company extended $660.0 million of its Bank Facility to June 30, 2025, under substantially the same terms and conditions.  Engineered Systems bookings totaled $768.7 million, up from $273.8 million in the same period last year reflecting improving conditions for customers and renewed optimism in the oil and gas sector. The movement in foreign exchange rates resulted in an increase of $5.7 million on foreign currency denominated backlog during the twelve months of 2021, compared to a $7.5 million increase in the comparable period. ADJUSTED EBITDA The Company’s results include items that are unique and items that management and users of the financial statements adjust for when evaluating the Company’s results. The presentation of Adjusted EBITDA should not be considered in isolation from EBIT or EBITDA as determined under IFRS. Adjusted EBITDA may not be comparable to similar measures presented by other companies and should not be considered in isolation or as a replacement for measures prepared as determined under IFRS. The items that have historically been adjusted for presentation purposes relate generally to four categories: 1) impairment or gains on idle facilities (not including rental asset impairments); 2) severance costs associated with restructuring activities and cost reduction activities undertaken in response to the COVID-19 pandemic; 3) transaction costs related to M&A activity; and 4) share-based compensation. Enerflex has presented the impact of share-based compensation as it is an item that can fluctuate significantly with share price changes during a period based on factors that are not specific to the long-term performance of the Company. The disposal of idle facilities is isolated within Adjusted EBITDA as they are not reflective of the ongoing operations of the Company and are idled as a result of restructuring activities. The Company added an additional adjustment related to government grants, most notably the Canada Emergency Wage Subsidy in the second quarter of 2020, the Canada Emergency Rent Subsidy in the first quarter of 2021, and the Hardest-Hit Business Recovery Program in the fourth quarter of 2021. The subsidies received have been recorded as a reduction in cost of goods sold and selling and administrative expenses within the consolidated statements of earnings in accordance with where the associated expenses were recognized. Enerflex considers this to be a unique item as these temporary grants relate to the recent COVID-19 pandemic and are not anticipated to be part of the ongoing financial results of the Company. 10 6 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Management believes that identification of these items allows for a better understanding of the underlying operations of the Company based on the current assets and structure. ($ Canadian thousands) Reported EBIT Government grants in COGS and SG&A Share-based compensation Depreciation and amortization Adjusted EBITDA Total USA ROW $ 20,555 $ 9,833 $ 11,187 $ (2,011) (224) - 152 (10) (255) Canada (465) (2,001) (121) 23,168 11,396 9,880 1,892 $ 41,488 $ 21,381 $ 20,802 $ (695) Three months ended December 31, 2021 ($ Canadian thousands) Reported EBIT Severance costs in COGS and SG&A Government grants in COGS and SG&A Share-based compensation Depreciation and amortization Total USA ROW $ 30,873 $ 5,916 $ 18,496 $ 1,974 (6,752) 5,114 21,630 465 - 2,588 10,317 591 (208) 1,708 9,105 Adjusted EBITDA $ 52,839 $ 19,286 $ 29,692 $ Canada 6,461 918 (6,544) 818 2,208 3,861 Three months ended December 31, 2020 Twelve months ended December 31, 2021 ($ Canadian thousands) Reported EBIT Severance costs in COGS and SG&A Government grants in COGS and SG&A Share-based compensation Depreciation and amortization Adjusted EBITDA Total USA ROW $ 55,097 $ 14,442 $ 36,385 $ 749 (16,361) 12,937 87,622 112 (1,645) 5,540 202 (10) 4,942 42,702 37,293 7,627 $ 140,044 $ 61,151 $ 78,812 $ 81 Twelve months ended December 31, 2020 Canada 4,270 435 (14,706) 2,455 ($ Canadian thousands) Reported EBIT Severance costs in COGS and SG&A Government grants in COGS and SG&A Share-based compensation Depreciation and amortization Total USA ROW $ 118,052 $ 56,496 $ 40,542 $ 5,718 (19,569) 1,816 85,265 1,437 - 1,035 41,312 725 (2,246) 727 35,107 Adjusted EBITDA $ 191,282 $ 100,280 $ 74,855 $ Canada 21,014 3,556 (17,323) 54 8,846 16,147 Please refer to the section “Segmented Results” for additional information about results by geographic location. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 7 11 ENGINEERED SYSTEMS BOOKINGS AND BACKLOG Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for the Engineered Systems product line. Bookings are recorded in the period when a firm commitment or order is received from customers. Bookings increase backlog in the period they are received. Revenue recognized on Engineered Systems products decreases backlog in the period the revenue is recognized. As a result, backlog is an indication of revenue to be recognized in future periods. The following tables set forth the Engineered Systems bookings and backlog by reporting segment for the following periods: ($ Canadian thousands) Bookings USA Rest of World Canada Total bookings ($ Canadian thousands) Backlog USA Rest of World Canada Total backlog Three months ended December 31, Twelve months ended December 31, 2021 2020 2021 2020 $ 114,352 $ 28,835 $ 404,717 $ 146,902 135,370 74,660 5,386 18,509 185,979 178,007 47,720 79,160 $ 324,382 $ 52,730 $ 768,703 $ 273,782 December 31, 2021 December 31, 2020 $ 262,937 $ 179,655 114,957 76,778 16,176 50,019 $ 557,549 $ 142,973 Engineered Systems bookings were significantly improved during the fourth quarter and twelve months of 2021. The Company’s bookings and backlog include newly manufactured equipment that will be accounted for as finance leases and will be fully realized in 2022. Improvements in supply and demand fundamentals and in the commodity price environment has led to an improved pipeline of opportunities and new bookings. While Enerflex’s customers remain focused on capital discipline and there is some uncertainty in the pace of recovery from pandemic lows, as well as uncertainty around energy development due to certain environmental pressures in the regions we operate, Enerflex is cautiously optimistic about the trajectory of the recovery. Backlog at December 31, 2021 was higher than at December 31, 2020 due to Engineered Systems bookings outpacing revenue recognized in the period, and favourable foreign exchange impacts. The movement in exchange rates resulted in an increase of $0.9 million and $5.7 million during the fourth quarter and twelve months of 2021 on foreign currency denominated backlog, compared to a decrease of $4.5 million and an increase $7.5 million in the same periods of 2020. 12 8 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report SEGMENTED RESULTS Enerflex has identified three reportable operating segments as outlined below, each supported by the Corporate function. Corporate overheads are allocated to the operating segments primarily based on revenue. In assessing its operating segments, the Company considered economic characteristics, the nature of products and services provided, the nature of production processes, the type of customer for its products and services, and distribution methods used. The following summary describes the operations of each of the Company’s reportable segments:    USA generates revenue from manufacturing natural gas compression, processing, refrigeration, energy transition, and electric power equipment, including custom and standard compression packages and modular natural gas processing equipment and refrigeration systems, in addition to generating revenue from mechanical services, parts, and maintenance solutions, and contract compression rentals; Rest of World generates revenue from manufacturing (focusing on large-scale process equipment), after-market services, including parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and processing equipment. The Rest of World segment has been successful in securing BOOM, ITK, and other long-term finance leases; and Canada generates revenue from manufacturing both custom and standard natural gas compression, processing, energy transition, and electric power equipment, as well as providing after-market mechanical service, parts, and compression and power generation rentals. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 9 13 USA SEGMENT RESULTS ($ Canadian thousands) 2021 2020 2021 2020 Engineered Systems bookings $ 114,352 $ 28,835 $ 404,717 $ 146,902 Engineered Systems backlog 262,937 76,778 262,937 76,778 Three months ended December 31, Twelve months ended December 31, Segment revenue Intersegment revenue Revenue Revenue – Engineered Systems Revenue – Service Revenue – Energy Infrastructure Operating income EBIT EBITDA Segment revenue as a % of total revenue Recurring revenue growth Operating income as a % of segment revenue EBIT as a % of segment revenue EBITDA as a % of segment revenue $ $ $ $ $ $ $ $ 173,482 $ 110,675 $ 497,630 $ $ $ $ $ $ $ $ (6,401) 167,081 95,286 45,420 26,375 9,841 9,833 21,229 52.0% 22.4% 5.9% 5.9% 12.7% $ $ $ $ $ $ $ (9,841) (27,247) 100,834 $ 470,383 42,201 $ 35,474 $ 23,159 $ 5,924 $ 5,916 $ 16,233 $ 33.7% (15.0)% 5.9% 5.9% 16.1% 218,558 153,722 98,103 14,442 14,442 57,144 49.0% 4.0% 3.1% 3.1% 12.1% 649,133 (16,847) 632,286 390,178 150,939 91,169 56,504 56,496 97,808 52.0% (2.5)% 8.9% 8.9% 15.5% Engineered Systems bookings of $114.4 million in the fourth quarter of 2021 represents an increase of $85.5 million compared to the same period in the prior year. The Company believes it is seeing signs of economic recovery, and with the recent improvement in activity levels, remain cautiously optimistic that this will translate into a steady increase in bookings into 2022. While activity levels have been improving, the competition for bookings and pricing pressures remains high, which will continue to put pressure on margins on new bookings, even as the bookings recover. Revenue increased by $66.2 million in the fourth quarter compared to last year. This increase is primarily due to higher Engineered Systems revenue on improved activity levels; higher Service revenues on increased volume of work; and higher Energy Infrastructure revenue from a larger rental fleet and higher utilizations. Revenue decreased $161.9 million in the twelve months of 2021 compared to 2020. This is primarily due to lower Engineered Systems revenue on lower opening backlog. Service revenues were higher compared to last year from increasing volumes of work, and Energy Infrastructure revenue was higher than the comparative period with a larger rental fleet and higher utilization. SG&A was lower in the fourth quarter compared to the previous year due to the mark-to-market impact on share-based compensation and lower profit share, partially offset by higher compensation due to the effect of the temporary cost savings measures that were removed in the previous quarter. SG&A was lower in the twelve months of 2021 compared to the same period last year due to the reduced bad debt provisions, reduced compensation expenses on lower average headcount and salaries, and decreased profit share on lower operational results, partially offset by mark-to-market impacts on share-based compensation. Operating income was higher by $3.9 million in the fourth quarter primarily due to higher gross margins and lower SG&A compared to the prior year. Gross margins increased mainly due to the higher Engineered Systems revenue on stronger bookings throughout 2021. Operating income for the twelve months of 2021 decreased by $42.1 million compared to the prior year due to lower gross margins than prior year due to tighter margins on recently booked Engineered Systems projects, as well as the reduced contribution from certain large, high margin Engineered Systems projects that were largely completed by the third quarter of 2020. At December 31, 2021, the USA contract compression fleet totaled approximately 400,000 horsepower, compared to approximately 350,000 horsepower at December 31, 2020. The average utilization of the USA contract compression fleet for the three and twelve months ended December 31, 2021 was 89 percent and 86 percent, respectively, compared to 82 percent and 83 percent in the comparative periods in 2020. 14 10 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report REST OF WORLD SEGMENT RESULTS ($ Canadian thousands) 2021 2020 2021 Engineered Systems bookings $ 135,370 $ 5,386 $ 185,979 $ Engineered Systems backlog 179,655 16,176 179,655 2020 47,720 16,176 Three months ended December 31, Twelve months ended December 31, Segment revenue Intersegment revenue Revenue Revenue – Engineered Systems Revenue – Service Revenue – Energy Infrastructure Operating income EBIT EBITDA Segment revenue as a % of total revenue Recurring revenue growth Operating income as a % of segment revenue EBIT as a % of segment revenue EBITDA as a % of segment revenue $ $ $ $ $ $ $ $ 98,868 $ 144,367 $ 309,695 $ 353,210 (49) (124) (138) 98,819 $ 144,243 $ 309,557 7,953 $ 17,179 $ 30,154 $ 24,320 $ 60,712 $ 102,744 $ 11,081 $ 18,495 $ 11,187 $ 18,496 $ 21,067 $ 27,601 $ 30.8% (28.5)% 11.2% 11.3% 21.3% 48.3% 86.4% 12.8% 12.8% 19.1% 22,500 111,500 175,557 36,250 36,385 73,678 32.2% (8.1)% 11.7% 11.8% 23.8% $ $ $ $ $ $ $ (199) 353,011 40,485 96,092 216,434 40,488 40,542 75,649 29.0% 15.7% 11.5% 11.5% 21.4% Engineered Systems bookings were higher in the current quarter and the twelve months of 2021 compared to the comparative periods. The increase is largely due to a new 10-year natural gas infrastructure contract that was awarded to Enerflex during the fourth quarter of 2021. The Company has determined that this contract will be accounted for as an Engineered Systems sale under finance lease accounting. When an agreement to build new equipment has been reached with a customer and that contract will be accounted for as a finance lease, the Company will recognize the booking in Engineered Systems. Revenue and gross margin from these contracts are recognized at the commencement of the lease. The finance lease interest portion will be recognized in the Energy Infrastructure product line over the lease term. Engineered Systems bookings in the Rest of World segment are typically larger in nature and scope and as a result are less frequent. During the three and twelve months ended December 31, 2021, Rest of World revenues have decreased by $45.4 million and $43.5 million relative to the comparative periods. Engineered Systems and Energy Infrastructure revenues decreased during the fourth quarter and the twelve months of 2021, offset by improved Service revenues. Engineered Systems revenue declined based on the timing of new bookings, which have not yet hit revenue recognition. The Company recognized revenue on the extension of a previous BOOM contract that is now recorded as a finance lease. The contribution is lower than the two finance leases recorded in the same quarter last year which is the primary reason for the lower Energy Infrastructure revenue and the regression in recurring revenue growth in the three and twelve months of 2021. These decreases were offset by an increase in Service revenues on higher activity levels in Argentina, Brazil, the Middle East, and Australia. Operating income decreased by $7.4 million and $4.2 million during the three and twelve months ended December 31, 2021 compared to the same periods in 2020, due to lower gross margins on lower Engineered Systems and Energy Infrastructure revenue, partially offset by improved Service revenues and lower SG&A. For the fourth quarter, SG&A costs are lower than the comparable period in 2020 due to lower share-based compensation on mark-to-market movement. For the twelve months of 2021, the lower SG&A costs compared to the prior year is due to the reduced bad debt provisions, partially offset with higher share-based compensation on mark-to-market movement and higher compensation due to the effect of the temporary cost savings measures that were removed in the previous quarter. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 11 15 CANADA SEGMENT RESULTS ($ Canadian thousands) Engineered Systems bookings Engineered Systems backlog Segment revenue Intersegment revenue Revenue Revenue – Engineered Systems Revenue – Service Revenue – Energy Infrastructure Operating income (loss) EBIT EBITDA Segment revenue as a % of total revenue Recurring revenue growth Operating income as a % of segment revenue EBIT as a % of segment revenue EBITDA as a % of segment revenue $ $ $ $ $ $ $ $ $ Three months ended December 31, Twelve months ended December 31, 2021 2020 2021 74,660 $ 18,509 $ 178,007 $ 114,957 50,019 114,957 62,831 $ 56,780 $ 194,439 $ (7,384) (3,020) (14,223) 55,447 $ 53,760 $ 180,216 39,024 $ 36,681 $ 113,069 15,280 $ 15,403 $ 62,154 1,143 $ (998) $ (465) $ 1,427 $ 17.3% (3.8)% (1.8)% (0.8)% 2.6% 1,676 $ 6,593 $ 6,461 $ 8,669 $ 18.0% (2.2)% 12.3% 12.0% 16.1% 4,993 3,599 4,270 11,897 18.8% 5.2% 2.0% 2.4% 6.6% $ $ $ $ $ $ $ 2020 79,160 50,019 247,390 (15,635) 231,755 167,903 56,238 7,614 19,020 21,014 29,860 19.0% (18.8)% 8.2% 9.1% 12.9% Bookings in the fourth quarter of 2021 increased to $74.7 million from $18.5 million a year ago, and $178.0 million during the twelve months ended December 31, 2021 compared to $79.2 million last year. The Company has seen an improvement in activity levels and is cautiously optimistic that this will continue to translate into new bookings in 2022. While activity levels have been improving, the competition for bookings and pricing pressures for the Canadian region also remain high, which will continue to put pressure on margins on new bookings. Revenue increased by $1.7 million during the three months ended December 31, 2021 compared to the same period last year primarily due to higher Engineered Systems revenue based on the strength of higher bookings in the second half of the year. Energy Infrastructure revenue decreased due to certain rental units being returned and Service revenue slightly decreased on lower activity levels. Revenue for the twelve months ended December 31, 2021 decreased by $51.5 million compared to the prior year primarily due to lower Engineered Systems revenues as a result of certain large projects that were completed and recognized in 2020 which did not repeat in 2021. Energy Infrastructure revenue decreased due to certain rental units being returned. Service revenue was higher due to stronger parts sales throughout the year compared to last year. The Canadian segment recorded an operating loss of $1.0 million for the fourth quarter and operating income of $3.6 million for the year ended December 31, 2021 compared to operating income of $6.6 million and $19.0 million in the same periods of 2020. Operating income during the fourth quarter decreased due to tighter margins on Engineered Systems projects, project pick-ups during the fourth quarter of 2020 that did not repeat in the current quarter, and reduced government grants, partially offset by lower share-based compensation expenses on mark-to-market movement and improved activity levels. For the twelve months of 2021, operating income decreased due to lower Engineered Systems and Energy Infrastructure revenues, reduced government grants, and higher share-based compensation expense on mark-to-market movements. 16 12 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report GROSS MARGIN BY PRODUCT LINE Enerflex operates three business segments, and each regional business segment has three main product lines: Engineered Systems, Service, and Energy Infrastructure. The Engineered Systems product line consists of the supply of equipment systems, typically involving engineering, design, manufacturing, installation, construction, and the start-up of equipment. Additionally, this product line also includes the sale of new equipment under long-term finance leases. The Service product line provides after-market services, parts distribution, operations and maintenance solutions, equipment optimization and maintenance programs, manufacturer warranties, exchange components, and technical services. The Energy Infrastructure product line encompasses a fleet of natural gas compression, processing, and electric power equipment totalling approximately 800,000 horsepower on rent or available for rent globally, generating revenue from rental agreements, and the sale of rental equipment to customers. In addition to Enerflex’s rental fleet, the Company’s Energy Infrastructure product line provides customers with personnel, equipment, tools, materials, and supplies to meet their natural gas compression, processing, and electric power needs, as well as designing, sourcing, owning, installing, operating, servicing, repairing, and maintaining equipment owned by the Company necessary to provide these services, including providing operation and maintenance as part of a BOOM agreement. Recurring revenue is comprised of revenue from the Service and Energy Infrastructure product lines, which are typically contracted and extend into the future. The Company aims to diversify and expand Service and Energy Infrastructure offerings, which we believe offer longer-term stability in earnings compared to Engineered Systems revenue, which historically has been dependent on cyclical demand for new compression, process, and electric power equipment. While individual Service and Energy Infrastructure contracts are subject to cancellation or have varying lengths, the Company does not believe these characteristics preclude these product lines from being considered recurring in nature. ($ Canadian thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % ($ Canadian thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % Total Engineered Systems Service Three months ended December 31, 2021 Energy Infrastructure $ 321,347 $ 142,263 $ 90,854 $ 88,230 242,818 18,621 127,448 3,981 71,035 2,256 $ 59,908 $ 10,834 $ 17,563 $ 18.6% 7.6% 19.3% 44,335 12,384 31,511 35.7% Total Engineered Systems Service Three months ended December 31, 2020 Energy Infrastructure $ 298,837 $ 96,061 $ 75,197 $ 127,579 206,915 16,968 74,214 2,089 58,423 1,016 $ 74,954 $ 19,758 $ 15,758 $ 25.1% 20.6% 21.0% 74,278 13,863 39,438 30.9% Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 13 17 ($ Canadian thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % ($ Canadian thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % Total Engineered Systems Service Twelve months ended December 31, 2021 Energy Infrastructure $ 960,156 $ 354,127 $ 327,376 $ 278,653 671,003 69,599 308,784 9,923 254,288 5,595 $ 219,554 $ 35,420 $ 67,493 $ 22.9% 10.0% 20.6% 107,931 54,081 116,641 41.9% Total Engineered Systems Twelve months ended December 31, 2020 Energy Infrastructure Service $ 1,217,052 $ 598,566 $ 303,269 $ 315,217 852,524 66,349 477,282 8,469 234,666 4,016 $ 298,179 $ 112,815 $ 64,587 $ 24.5% 18.8% 21.2% 140,576 53,864 120,777 38.3% INCOME TAXES Income tax expense totaled $50.9 million and $56.6 million for the fourth quarter and twelve months of 2021, compared to an income tax recovery of $6.6 million and an income tax expense of $7.3 million in the same periods of 2020. Income tax expense for the fourth quarter of 2021 included a $44.7 million derecognition of deferred tax assets in Canada. Despite the optimism in the Company’s bookings and backlog, the derecognition of certain deferred tax assets in Canada was due to a combination of factors which include losses in recent prior periods, current period losses and continued challenging market conditions. The derecognized tax assets possess a finite life, and as we enter the third year of the pandemic the likelihood of sufficient future taxable income to use against these tax losses is deemed to be low. During the fourth quarter of 2020, lower Alberta corporate income tax rates became substantially enacted. The Alberta corporate income tax rates are 9.0 percent for 2020 and 8.0 percent for 2021 and thereafter. OUTLOOK The outlook for Exploration & Production (“E&P”) capital spending has been steadily improving since mid-2020 when budgets were reset during the COVID-19 pandemic. Commodity prices have risen to a five-year high, and E&P and Midstream balance sheets and free-cash- flow positions have been improving. Oil and gas demand has been recovering, despite some continued effects of the COVID-19 pandemic and evolving regulatory risks associated with the curtailment of hydrocarbons at the regional, national, and international levels. As a result, Enerflex expects customer capital expenditures to increase as fundamentals improve in 2022. This trend can be seen in Enerflex’s bookings which have trended upward since the third quarter of 2020. Although customers continue to show discipline in spending within their cash flow and returning money to shareholders, we are cautiously optimistic that this trend should continue given the current fundamentals outlook. In addition, an “Energy Transition” towards less carbon-intensive energy sources is presenting new opportunities for the Company in several regions, leveraging the strength of Enerflex in providing modularized engineer-to-order solutions for the energy industry. The Company is working with existing and new customers to advance projects that: 1) decarbonize core operations; 2) capture carbon; 3) build infrastructure for biofuels; and 4) explore new hydrogen opportunities. On January 24, 2022 the Company announced the acquisition of Exterran for $735 million USD. The transaction will exchange 1.021 shares of Enerflex for each share of Exterran. Management expects the deal to close in the second or third quarter of 2022 after 18 14 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report shareholder votes for Exterran and Enerflex respectively, regulatory approvals, and other conditions customary for the transaction of this type. The Company will continue to preserve the strength of its balance sheet and maximize cash flow through disciplined capital spending, with investments prioritizing higher-margin, less-cyclical businesses with attractive returns. Once approved and closed, the acquisition of Exterran will result in accelerated growth of recurring revenues, expected to account for approximately 70 percent of the combined entity’s pro forma gross margin, as well as approximately doubling EBITDA. Leverage will temporarily rise to fund four major in-flight projects. We expect these projects to be completed in late 2022 or early 2023 and excess free cash flow after completion of these projects will be used to lower leverage ratios. Enerflex’s Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions. Enerflex remains focused on providing a safe working environment for all employees, while positioning the Company to capitalize on increased industry spending. Given the current environment, the Company is carefully assessing project spending, with a focus on ensuring future projects provide maximum returns on invested capital. In the longer term, the Company continues to balance the expected impacts of broader market factors, such as volatility in realized commodity prices, political and economic uncertainty, and consistent access to market, against the projected increases in global demand for natural gas, particularly as an energy transition fuel to support decarbonization. Enerflex continues to assess the effects of these contributing factors and the corresponding impact on customer activity levels, which will drive the demand for the Company’s products and services in future periods. OUTLOOK BY SEGMENT USA The Company continues to see improving fundamentals that should drive better activity for Engineered Systems. Natural gas prices have increased approximately 62 percent between December 31, 2020 and December 31, 2021 with prices continuing a steady pace. Oil prices steadily increased throughout the year, hitting its highest price of approximately $85/bbl in October before closing out the year at $75/bbl, compared to $49/bbl at the end of 2020, despite the increased production OPEC is bringing to the market. In North America, this improving backdrop has resulted in rigs increasing by over 100 percent versus the 2020 trough. While operator balance sheets have strengthened, there is still some hesitation to increase spending too quickly due to investor sentiment and some uncertainty in the speed of recovery from the COVID-19 pandemic. E&P companies are also facing pressure to increase cash returns to shareholders through increased dividends and share buy-backs. In aggregate, however, the Company is seeing improved operator spending and, therefore the demand for Enerflex products and services is growing. Recurring revenues, both in terms of after-market service and contract compression demand, have proven stable in terms of overall performance. Utilization rates in contract compression have been restored to pre-pandemic levels. Strengthening after-market service customer demand for equipment maintenance has been tempered with sporadic OEM supply chain challenges providing parts. While U.S. oil and gas production has been impacted by global events, the Company believes that the increased presence of larger, more patient producers in basins such as the Permian is supportive for long-term value creation. Energy Transition could provide significant opportunity for the Company in the USA. Our customers have started to adopt electric motor drive compression which entirely eliminates Scope 1 emissions from engine driven compression. In addition, carbon capture is getting additional attention and is supported through the federal government’s 45-Q tax incentive. Low-carbon fuel initiatives are being adopted across the USA which have the potential of increasing demand for the Company’s core competency of technical excellence in providing and maintaining modular equipment solutions. Rest of World In the Rest of World segment, the Company expects to continue generating strong recurring revenues in both the Middle East and Latin America regions through its existing rental fleet and new large-scale long-term projects, with earnings set to increase with a new 10-year natural gas infrastructure contract in the Middle East signed early in 2021 and commenced operations early in 2022, and a new investment awarded later in 2021 for a 10-year natural gas infrastructure contract, also in the Middle East. The Company continues to see demand for large-scale long-term rental assets and ITK projects in the Middle East, including the natural gas-fired power generation. These large-scale assets with long-term contracts can be accounted for as BOOM projects or finance leases. The Company continues to explore new markets and opportunities within this region, focusing on projects containing products engineered and manufactured by Enerflex, that provide long-term, stable cash flows. In Latin America, the Company successfully completed its first flare to power project in Colombia delivering 12 megawatts of power while substantially reducing emissions during the fourth quarter of 2021. Enerflex remains cautiously optimistic about the outlook in Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 15 19 Latin America as many countries have indicated a renewed desire to develop oil and natural gas in recent periods. Short-term, however, this region is still feeling the impacts of the COVID-19 pandemic. The Company is well positioned to provide products and services throughout the region as activity takes place in its key markets, particularly Argentina, Bolivia, Brazil, Colombia, and Mexico. In Australia, demand for Enerflex service and maintenance support remains solid. Liquified natural gas (“LNG”) supply contracts are providing a stable demand for gas from producers. Downward pressure on production costs is increasing customers’ desire to improve equipment reliability and efficiency, and Enerflex is well positioned to support production equipment optimization and improve reliability. Capital equipment demand in the Australian market has seen a slowdown in response to the current economic environment; however, multiple new opportunities have been approved by customers, including an award to package power generation equipment in Enerflex’s Brisbane facility, which will support activity in this region throughout 2022. Canada A sustained increase in rig count, as well as steadily increasing oil and gas prices, are positive indicators for this region. While the standard gas compression equipment market has provided modest opportunities, the Company has secured several gas processing opportunities in the third and fourth quarters of 2021. Opportunities in the electric power generation market have also been converted to orders in the latter part of the current quarter, with additional growth in this segment expected throughout 2022. The Company continues to evaluate various markets in Energy Transition. For Canada, the Company is seeing a lot of discussion around carbon capture and biofuels. These markets are dependent on supporting government policy and we are hopeful that this clarity will be provided in the next 12 to 24 months. Canada and various provincial governments are also evaluating hydrogen strategies which could also present a growth market for Enerflex. The after-market service product line has seen some major maintenance deferrals in the first half of 2021. The second half of 2021 saw a notable increase in maintenance activity in the market. The Company has capitalized on the increased activity assisting to drive after- market service revenues through the fourth quarter. The Company expects activity to increase steadily through 2022. ENERFLEX STRATEGY Enerflex’s global vision is “Transforming Energy for a Sustainable Future”. The Company’s strategy to support this vision centers on being an operationally focused, diversified, financially strong, dividend-paying company that delivers profitable growth by serving an expanding energy industry in seven gas producing regions worldwide. Enerflex believes that worldwide diversification and growth enhances shareholder value. This strategy has allowed the Company to overcome previous downturns and endure recent uncertainty while still delivering strong operating results. With a positive long-term outlook for natural gas, a cleaner burning fuel that can provide a practical reduction in carbon emissions as the global economy transitions to a growing proportion of renewable sources of energy, Enerflex aims to provide superior returns through the continued implementation of this strategy. The pending combination with Exterran is consistent with our strategy. The Company is working closely with our customers as they strive to reduce greenhouse gas emissions. The Company’s core competency of technological excellence in all aspects of modularized energy systems is expected to allow us to partner with customers on the various solutions being explored, which include projects related to carbon capture, flare gas-to-power, electrification of gas processing and compression solutions, renewable natural gas, and hydrogen. Across the Company, Enerflex looks to leverage its diversified international positioning to compete for projects in growing natural gas markets, and to offer integrated solutions spanning all phases of a project’s life-cycle from engineering and design through to after- market service, with a focus on recurring revenue from Service and Energy Infrastructure offerings. The Company works to leverage its Enterprise-wide collaborative approach to deploy key expertise worldwide and generate repeat business from internationally active customers. The Company also targets growth areas in the traditional natural gas industry, including the increasing global demand for natural gas-fired power generation. Enerflex has developed regional strategies to support its Company-wide goals. In the USA segment, Enerflex has concentrated its efforts on key regions and basins, driven by the U.S.’s increasingly complex natural gas sector. The Company has looked to build on its successes for gas processing solutions for liquids-rich plays in the region and support the development of upstream resources and midstream infrastructure required to feed local demand and an export-focused LNG industry. Our Engineered Systems business designs, engineers, and builds modularized solutions for the natural gas industry across the United States. The focus for the Service business has been on servicing the installed base of over 20 million horsepower across the country with a cost-effective service organization. For the Energy Infrastructure product line, the organic expansion of the contract compression fleet 20 16 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report has allowed Enerflex to increase recurring revenues, while the Company’s ability to design, engineer, and build contract compression units positions Enerflex well to respond to future growth in the segment. The Company believes that the long-term impact of continued focus on these recurring revenue product lines will be increased predictability and stability in earnings and cash flows, while strategic investment in the contract compression fleet should drive growth and strong returns for the Energy Infrastructure business. Enerflex has focused its efforts in the ROW segment on growing primarily in the Middle East and Latin America regions, through the sales, rental, and service of its products. In these regions, the Company has targeted ITK and BOOM solutions of varying size and scope, including projects requiring construction and installation support at site. Enerflex underscores the importance of BOOM and other long- term leases in this segment, as multi-year contracts for rental and maintenance of equipment align with the emphasis on growing recurring revenue streams and customers in this segment have proven to be receptive to these solutions. The Company has also seen increased interest in electric power solutions in many of the regions within the ROW segment and looks to leverage expertise developed across the organization to meet this demand. Elsewhere in the segment, Enerflex has expanded the capability of the Company’s Australian Service line in response to activity levels, which are projected to remain high on the strength of increasing demand for natural gas, contributing to recurring revenue. Enerflex has aimed its efforts in Canada on leveraging its capabilities and expertise to expand market share in the natural gas sector, particularly in liquids-rich reservoirs, and to support the development of natural gas resources for a future LNG industry. In addition, the Company has looked to build on its successes in the electric power market given sustained low natural gas prices and the resulting increase in demand for natural gas-fired power generation. Enerflex offers electric power solutions for purchase or for rent, the latter of which allows the Company to offer flexibility and provide maintenance while increasing recurring revenues. Lastly, there has been a focus on signing long-term service and maintenance contracts with customers to secure stability in Service revenues. Enerflex seeks to continue to diversify its revenue streams from multiple markets, grow its backlog, and ensure profitable margins globally by aggressively managing costs, with a medium-term goal of achieving a 10 percent EBIT margin. In addition, we are focused on expanding the diversification of its product lines, with a goal to increase recurring revenue by 10 percent annually. Enerflex recognizes that the current economic conditions may make it challenging to meet these goals in the near-term but believes these remain appropriate as medium-term and longer-term goals. DEFINITIONS The success of the Company and its business unit strategies is measured using several key financial performance indicators, some of which are outlined below. Some of these indicators do not have a standardized meaning as prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. These Non-IFRS measures are Engineered Systems bookings and backlog, recurring revenue, operating income, EBIT, EBITDA, net debt to EBITDA ratio, and return on capital employed (“ROCE”). Further information on these Non-IFRS measures is provided in the section, Non-IFRS Measures. Bookings and Backlog Bookings and backlog are monitored by Enerflex as an indicator of future revenue and business activity levels for the Engineered Systems product line. Bookings are recorded in the period when a firm commitment or order is received from customers. Bookings increase backlog in the period that they are received. Revenue recognized on Engineered Systems products decreases backlog in the period that the revenue is recognized. As a result, backlog is an indication of revenue to be recognized in future periods using percentage-of- completion accounting. Revenue from contracts that have been classified as finance leases for newly built equipment is recorded as Engineered Systems bookings. The full amount of revenue is removed from backlog at the commencement of the lease. Recurring Revenue Recurring revenue is defined as revenue from the Service and Energy Infrastructure product lines. These revenue streams are typically contracted and extend into the future, rather than only being recognized as a single transaction. Service revenues are derived from the ongoing maintenance of equipment that produces gas over the life of a field. Energy Infrastructure revenues relate to compression, processing, and electric power equipment. This classification is to contrast revenue from these product lines with the Company’s Engineered Systems revenues, which are for the manufacturing and delivery of equipment and do not have any recurring aspect once the goods are delivered. While the contracts are subject to cancellation or have varying lengths, the Company does not believe that these characteristics preclude them from being considered recurring in nature. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 17 21 Operating Income Operating income assists the reader in understanding the net contributions made from the Company’s core businesses after considering all SG&A expenses. Each operating segment assumes responsibility for its operating results as measured by, amongst other factors, operating income, which is defined as income before income taxes, interest (or finance) costs (net of interest income), equity earnings or loss, and gain or loss on sale of assets. Financing and related charges cannot be attributed to business segments on a meaningful basis that is comparable to other companies. Business segments and income tax jurisdictions are not synonymous, and it is believed that the allocation of income taxes distorts the historical comparability of the operating performance of business segments. EBIT EBIT provides the results generated by the Company’s primary business activities prior to consideration of how those activities are financed or taxed in the various jurisdictions that the Company operates in. EBITDA EBITDA provides the results generated by the Company’s primary business activities prior to consideration of how those activities are financed, how assets are amortized, or how the results are taxed in various jurisdictions. Net Debt to EBITDA Net debt is defined as short- and long-term debt less cash and cash equivalents at the end of the period which is then divided by the annualized EBITDA. ROCE ROCE is a measure to analyze operating performance and efficiency of the Company’s capital allocation process. The ratio is calculated by taking EBIT for the 12-month trailing period divided by capital employed. Capital employed is debt and equity less cash for the trailing four quarters. 22 18 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NON-IFRS MEASURES The success of the Company and its business unit strategies is measured using a number of key performance indicators, some of which do not have a standardized meaning as prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. These Non-IFRS measures are also used by management in its assessment of relative investments in operations and include Engineered Systems bookings and backlog, recurring revenue, EBITDA, net debt to EBITDA ratio, and ROCE. They should not be considered as an alternative to net earnings or any other measure of performance under IFRS. The reconciliation of these Non-IFRS measures to the most directly comparable measure calculated in accordance with IFRS is provided below where appropriate. Engineered Systems bookings and backlog do not have a directly comparable IFRS measure. ($ Canadian thousands) EBITDA EBIT Depreciation and amortization EBITDA Recurring Revenue Service Energy Infrastructure Total Recurring Revenue ROCE Trailing 12-month EBIT Capital Employed – beginning of period Net debt1 Shareholders' equity Capital Employed – end of period Net debt1 Shareholders' equity Average Capital Employed2 Return on Capital Employed Three months ended December 31, Twelve months ended December 31, 2021 2020 2021 2020 20,555 $ 30,873 $ 55,097 $ 118,052 23,168 21,630 87,622 85,265 43,723 $ 52,503 $ 142,719 $ 203,317 90,854 $ 75,197 $ 327,376 $ 88,230 127,579 278,653 303,269 315,217 179,084 $ 202,776 $ 606,029 $ 618,486 55,097 $ 118,052 $ 55,097 $ 118,052 243,030 $ 322,643 $ 294,036 $ 334,232 1,394,047 1,417,704 1,396,695 1,342,787 1,637,077 $ 1,740,347 $ 1,690,731 $ 1,677,019 158,664 $ 294,036 $ 158,664 $ 294,036 1,353,754 1,396,695 1,353,754 1,396,695 1,512,418 $ 1,690,731 $ 1,512,418 $ 1,690,731 1,595,281 $ 1,777,890 $ 1,595,281 $ 1,777,890 3.5% 6.6% 3.5% 6.6% $ $ $ $ $ $ $ $ $ $ 1 Net debt is defined as short- and long-term debt less cash and cash equivalents. 2 Based on a trailing four-quarter average. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 19 23 FREE CASH FLOW ($ Canadian thousands) Cash provided by operating activities Net change in non-cash working capital and other Add-back: Net finance costs Current income tax expense (recovery) Proceeds on the disposal of property, plant and equipment Proceeds on the disposal of rental equipment Deduct: Net interest paid Net cash taxes received (paid) Expenditure related to finance leases Additions to property, plant and equipment Additions to rental equipment: Growth Maintenance Dividends paid Three months ended December 31, Twelve months ended December 31, 2021 2020 2021 2020 $ $ 122,886 $ 55,277 $ 225,155 $ 220,248 87,986 (15,777) 100,435 32,776 34,900 $ 71,054 $ 124,720 $ 187,472 2,327 5,641 122 2,244 (8,095) 14,787 (13,037) (1,305) (11,468) (5,357) (1,790) 4,854 (18,152) 19 42 (9,342) (4,581) - (1,221) (9,815) (3,888) (1,794) 16,995 13,135 220 3,692 (19,890) 9,412 (36,169) (5,154) (40,242) (11,945) (7,171) 22,493 (6,872) 115 3,121 (22,374) (13,259) - (9,874) (110,820) (13,059) (24,212) Free cash flow $ 18,969 $ 27,176 $ 47,603 $ 12,731 For the three months ended December 31, 2021, free cash flows declined compared to the same period in 2020. This decrease is primarily due to lower cash provided by operating activities before non-cash working capital driven by lower net earnings, expenditures related to finance leases, and higher growth and maintenance expenditures on rental equipment. This unfavourable variance was partially offset by net cash taxes received in the current period. For the twelve months ended December 31, 2021, free cash flows improved with reduced rental equipment growth additions and lower property, plant and equipment additions, lower dividends paid, and net cash taxes received. These increases to free cash flow are partially offset by lower cash provided by operating activities before non-cash working capital driven by lower net earnings, and expenditures related to finance leases. The Company’s current financial position affords it some flexibility to pursue additional growth opportunities, should they arise when the macro environment is more constructive. Under favourable circumstances, additional capital may be directed to growth opportunities in any of our regions. 24 20 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report FINANCIAL POSITION The following table outlines significant changes in the Statements of Financial Position as at December 31, 2021 compared to December 31, 2020: ($ Canadian millions) Increase (Decrease) Current assets $85.4 Rental equipment $(27.5) Finance leases receivable $26.9 Deferred tax assets $(38.9) Current liabilities $67.8 Long-term debt $(18.3) Shareholders’ equity $(42.9) Explanation The increase in current assets is primarily due to higher cash and contract assets due to increased activity, and work-in-progress related to finance leases. Offsetting these increases, the Company had lower inventories as the Company is utilizing its stock on increased activity and lower income taxes receivable. The decrease is largely due to the extension of a previous BOOM contract in ROW being treated as a sale of the rental equipment under finance lease accounting. Rental equipment also decreased due to higher depreciation compared to last year. This decrease was partially offset by additions during the year, primarily for the contract compression fleet in the USA and a BOOM project in ROW. The increase in finance leases receivable is due to the recognition of the above noted finance lease transaction that occurred in the fourth quarter of 2021. The decrease in deferred tax assets is due to the derecognition of $44.7 million of unused tax losses and other deductible temporary differences in Canada. It is unlikely that sufficient taxable income will be available to offset these unused tax losses prior to expiry, nor will we have any available offsets to use against the deductible temporary differences. The increase in current liabilities is due to higher accounts payable, accrued liabilities, and deferred revenues on higher activity levels, and an increase in income taxes payable. These increases are partially offset by the repayment of the $40.0 million debt that had been classified as current at December 31, 2020, and lower warranty provisions. The decrease in long-term debt is due to repayments made on the Bank Facility, partially offset by drawings on the Asset-Based Facility. Shareholders’ equity decreased primarily due to $18.5 million net loss and $18.6 million impact on unrealized loss on translation of foreign operations and foreign denominated debt, and dividends of $7.6 million. This was partially offset by $1.8 million of stock options. LIQUIDITY The Company expects that continued cash flows from operations in 2022, together with cash and cash equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. As at December 31, 2021, the Company held cash and cash equivalents of $172.8 million and had cash drawings of $67.9 million against the Bank and Asset-Based Facilities leaving it with access to $681.5 million for future drawings. The Company continues to meet the covenant requirements of its funded debt, including the Bank Facility and the Company’s unsecured notes (the “Senior Notes”), with a bank-adjusted net debt to EBITDA ratio, excluding the non-recourse debt, of 1.0:1 compared to a maximum ratio of 3:1, and an interest coverage ratio of 8:1 compared to a minimum ratio of 3:1. The interest coverage ratio is calculated by dividing the trailing 12-month bank-adjusted EBITDA, as defined by the Company’s lenders, by interest expense over the same timeframe. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 21 25 SUMMARIZED STATEMENTS OF CASH FLOW ($ Canadian thousands) Cash, beginning of period Cash provided by (used in): Operating activities Investing activities Financing activities Exchange rate changes on foreign currency cash Three months ended December 31, Twelve months ended December 31, 2021 2020 2021 2020 $ 102,273 $ 99,529 $ 95,676 $ 96,255 122,886 (31,222) (21,014) (165) 55,277 (20,198) (38,425) (507) 225,155 (63,530) (83,891) (652) 220,248 (137,759) (82,050) (1,018) 95,676 Cash, end of period $ 172,758 $ 95,676 $ 172,758 $ Operating Activities For the three and twelve months ended December 31, 2021, cash provided by operating activities improved over the same periods in 2020, with positive movements in non-cash working capital, partially offset by lower net earnings. Movements in non-cash working capital and other are explained in the “Financial Position” section of this MD&A. Investing Activities For the three months ended December 31, 2021, cash used in investing activities increased due to higher capital expenditures on the rental fleet and lower proceeds on disposal of fixed assets. Cash used in investing activities in the twelve months ended December 31, 2021 decreased due to lower capital expenditures on the rental fleet and property, plant and compared to last year. Financing Activities For the three months ended December 31, 2021, cash used in financing activities decreased primarily due to lower repayments on long- term debt compared in the same quarter of 2020. For the twelve months ended December 31, 2021, cash used in financing activities increased primarily due to higher repayments of long-term debt, including a repayment of one of its Senior Notes, which was offset by the proceeds on the Asset-Based Facility. Cash used in financing activities was further offset by a reduction in dividends paid. QUARTERLY SUMMARY ($ Canadian thousands, except per share amounts) December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 June 30, 2019 March 31, 2019 Revenue Net earnings Earnings per share – basic Earnings per share – diluted $ 321,347 $ (32,707) $ (0.36) $ (0.36) 231,097 204,507 203,205 298,837 265,037 287,438 365,740 474,362 544,284 541,874 484,902 6,958 4,291 3,003 32,668 10,736 7,415 37,438 31,436 63,074 40,649 16,969 0.08 0.05 0.03 0.36 0.12 0.08 0.42 0.35 0.71 0.45 0.19 0.08 0.05 0.03 0.36 0.12 0.08 0.42 0.35 0.70 0.45 0.19 26 22 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report SELECTED ANNUAL INFORMATION ($ Canadian thousands, except per share amounts) December 31, 2021 December 31, 2020 December 31, 20191 Total Assets Total Non-Current Financial Liabilities Cash Dividends Declared Per Share $ 2,191,442 $ 331,422 $ 2,179,576 2,381,008 349,712 430,487 0.085 0.175 0.430 1 Certain December 31, 2019 balances were reclassified. Refer to Note 2(b) in the 2020 audited consolidated financial statement for additional detail. RISK FACTORS In the normal course of business, the Company is exposed to financial and operating risks that may potentially impact its operating results. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. The Company enters into derivative financial agreements to manage exposure to fluctuations in exchange rates and interest rates, but not for speculative purposes. Energy Prices, Industry Conditions, and the Cyclical Nature of the Energy Industry The oil and gas service industry is highly reliant on the levels of capital expenditures made by oil and gas producers and explorers. The capital expenditures of these companies, along with those midstream companies who service these oil and gas explorers and producers, impact the demand for Enerflex’s equipment and services. Capital expenditure decisions are based on various factors, including but not limited to: demand for hydrocarbons and prices of related products; exploration and development prospects in various jurisdictions; reserve production levels; oil and natural gas prices; and access to capital — none of which can be accurately predicted. Any downturn in commodity prices may lead to reduced levels of growth capital expenditures, which may negatively impact the demand for the products and services that Enerflex offers. Even the perception of lower oil or gas prices over the long term can result in a decision to cancel or postpone exploration and production capital expenditures, which may lead to a reduced demand for products and services offered by Enerflex. The supply and demand for oil and gas is influenced by a number of factors, including the outlook for worldwide economies, as well as the activities of the Organization of Petroleum Exporting Countries ("OPEC"). Changing political, economic, or military circumstances throughout the energy producing regions of the world may impact the demand for oil and natural gas for extended periods of time, which in turn impacts the price of oil and natural gas. If economic conditions or international markets decline unexpectedly and oil and gas producing customers decide to cancel or postpone major capital expenditures, the Company’s business may be adversely impacted. Competition The business in which Enerflex operates is highly competitive and there are low barriers to entry, especially for natural gas compression services, contract compression, and the compression fabrication business. Several companies target the same customers as Enerflex in markets where margins can be low and contract negotiations can be challenging. Enerflex has a number of competitors in all aspects of its business, both domestically and abroad. Some of these competitors, particularly in the Engineered Systems division, are also large, multi-national companies. The Company’s competitors may be able to adapt more quickly to technological changes within the industry or changes in economic and market conditions, more readily take advantage of acquisitions and other opportunities, and adopt more aggressive pricing policies. In addition, the Company could face significant competition from new entrants. Some of Enerflex’s existing competitors or new entrants may expand or fabricate new equipment that would create additional competition for the products, equipment, or services that Enerflex offers to customers. Further, the Company may not be able to take advantage of certain opportunities or make certain investments because of capital constraints, debt levels and other obligations. Any of these competitive pressures could have a material adverse effect on the Company’s business, financial condition, and results of operations. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 23 27 Project Execution Risk Enerflex engineers, designs, manufactures, constructs, commissions, operates, and services systems that process and/or compress products in a gaseous state. Enerflex's expertise encompasses field production facilities, gas compression and processing plants, gas lift compression, refrigeration systems, and electric power equipment, primarily serving the natural gas production industry. The Company participates in some projects that have a relatively larger size and scope than the majority of its projects, which may translate into more technically challenging conditions or performance specifications for its products and services. These projects typically specify delivery dates, performance criteria, and penalties for the failure to perform. The Company's ability to profitably execute on these solutions for customers is dependent on numerous factors which include, but are not limited to: changes in project scope; the availability and timeliness of external approvals and other required permits; skilled labour availability and productivity; availability and cost of material and services; the accuracy of design, engineering, and construction; the ability to access the job site; and the availability of contractors to support execution of the Company’s scope on these projects. Any failure to execute on these larger projects in a timely and cost- effective manner could have a material adverse effect on the business, financial condition, results of operations, and cash flows of the Company. The Company pursues continuous improvement initiatives to achieve accurate, complete, and timely provision of deliverables. Nonetheless, project risks can translate into performance issues and project delays, as well as project costs exceeding cost estimates. While the Company will assess the recoverability of any cost overruns, there can be no assurance that these costs will be reimbursed, which may result in a material adverse effect on the Company's business, financial condition, results of operations, and cash flows. Climate Change Risks Regulatory and Policy Risks Climate change policy is evolving at regional, national, and international levels, and political and economic events may significantly affect the scope and timing of climate change measures that are ultimately put in place. While Enerflex does not currently exceed the applicable thresholds for reduction initiatives in its jurisdictions of operations, there is a global trend in recent periods towards greater regulation of GHG emissions. Although it is not possible at this time to predict how new laws or regulations would impact the Company’s business, any such future requirements imposing carbon pricing schemes, carbon taxes, or emissions reduction obligations on the Company’s equipment and operations could require it to incur costs to reduce emissions or to purchase emission credits or offsets and may cause delays or restrictions in its ability to offer its products and services. Failure to comply with such laws and regulations could result in significant liabilities or penalties being imposed on Enerflex. Any such laws or regulations could also increase the costs of compliance for Enerflex’s customers, and thereby negatively impact demand for the Company’s products and services. The direct or indirect costs of compliance with such laws or regulations may have a material adverse effect on the business, financial condition, results of operations, and prospects of the Company. Given the evolving nature of the debate related to climate change and the control of GHGs and resulting regulatory requirements, it is not possible to predict with certainty the impact on the Company and its operations and financial condition. Physical Risks There has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, droughts, forest fires, thunderstorms, tornados, and snow or ice storms, as well as rising sea levels and other acute (event- driven) and chronic (long-term) climate events. Another possible consequence of climate change is increased volatility in seasonal temperatures. Some studies indicate that climate change could cause some areas to experience temperatures substantially colder or warmer than their historical averages. To the extent there are significant climate changes in the markets Enerflex serves or areas where Company assets reside, Enerflex could incur increased costs, its assets could be damaged, it could experience supply chain disruption, operations could be materially impacted (such as shut-down requirements), there may be health implications for its employees, and its customers may experience operational disruptions causing reduced demand for the Company’s products. At this time, the Company is unable to determine the extent to which climate change may affect its operations. Technological Risks Demand for the Company's products may also be affected by the development and demand for new technologies in response to global climate change. Many governments provide, or may in the future provide, tax incentives and other subsidies to support the use and development of alternative energy technologies. Technological advances and cost declines in alternative energy sources (such as 28 24 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report hydrogen and renewables), electric grids, electric vehicles, and batteries may reduce demand for hydrocarbon, which could lead to a lower demand for the Company’s low-carbon products and services. If customer preferences shift, the Company may also be required to develop new technologies, requiring significant investments of capital and resources, which may or may not be recoverable in the marketplace and which could result in certain products becoming less profitable or uneconomic. At this time, the Company is unable to determine the extent to which such technological risks may detrimentally impact its business prospects, financial condition, and reputation. ESG and Investor Sentiment A number of factors, including the impact of oil and natural gas operations on the environment, the effects of the use of hydrocarbons on climate change, ecological damage relating to spills of petroleum products during production and transportation, and human rights, have affected certain investors' sentiments towards investing in the oil and natural gas industry. As a result of these concerns, some institutional, retail, and governmental investors have announced that they are no longer willing to fund or invest in companies in the oil and natural gas industry, or are reducing the amount thereof over time. Any reduction in the investor base interested or willing to invest in the oil and natural gas industry may result in limiting Enerflex’s access to capital, increasing its cost of capital, and decreasing the price and liquidity of Enerflex’s securities. In addition, practices and disclosures relating to ESG matters (including but not limited to climate change and emissions, diversity and inclusion, data security and privacy, ethical sourcing, and water, waste and ecological management) are attracting increasing scrutiny by stakeholders. Certain stakeholders are requesting that issuers develop and implement more robust ESG policies and practices. Developing and implementing such policies and practices can involve significant costs and require a significant time commitment from the Board of Directors, Executive Management Team, and employees of Enerflex. Failing to implement the policies and practices, as requested or expected by Enerflex’s stakeholders, may result in such investors reducing their investment in Enerflex, or not investing in Enerflex at all. The Company’s response to addressing ESG matters and any negative perception thereof can also impact Enerflex’s reputation, business prospects, ability to hire and retain qualified employees, and vulnerability to activist shareholders. Such risks could adversely affect Enerflex’s business, future operations, and profitability. Customer Credit Risk A substantial portion of Enerflex's accounts receivable balances are with customers involved in the oil and natural gas industry. Many customers finance their exploration and development activities through cash flow from operations, the incurrence of debt, or the issuance of equity. During times when the oil or natural gas markets weaken, customers may experience decreased cash flow from operations, or a reduction in their ability to access capital. A reduction in borrowing bases under reserve-based credit facilities, the lack of availability of debt or equity financing or other factors that negatively impact customers’ financial condition may impair their ability to pay for products or services rendered. Enerflex may extend credit to certain customers for products and services that it provides during its normal course of business. Enerflex monitors its credit exposure to its customers, but there can be no certainty that a credit- related loss will not materialize or have a material adverse impact on the organization. The consolidation of energy producers and increased number of smaller start-up exploration and production companies may alter Enerflex's exposure to credit risk. The financial failure of a customer may impair the Company’s ability to collect on all or a portion of the accounts receivable balance from that customer. The Company has remained vigilant during 2021 in monitoring the aging of receivables and proactively collecting outstanding balances. To address the challenging economic conditions confronted by the oil and natural gas industry in recent years, Enerflex has implemented additional monitoring processes in assessing the creditworthiness of its customers. Public Health Crises, Including COVID-19 The Company’s business, operations, and financial condition could be materially adversely affected by the outbreak of epidemics or pandemics, or other health crises, including the ongoing COVID-19 pandemic which prevailed throughout 2021. Such public health crises may adversely affect Enerflex, causing a slowdown or temporary suspension of Enerflex’s operations in geographic locations impacted by an outbreak, including due to:    reduced global economic activity and a corresponding decrease in demand for oil and natural gas, which could result in producers being forced to shut-in production and serve to lower demand for the Company’s products and services; impaired supply chain as a result of mass quarantines, lockdowns, or border closures, thereby limiting the supply and increasing the cost of goods and services used in Enerflex's operations; and restricted workforce as a result of quarantines and health impacts, rendering employees unable to work or travel. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 25 29 Any limitations imposed on the mobility of Enerflex’s employees may have an impact on the Company’s ability to complete projects, including BOOM or ITK projects requiring installation in the field. In the event that Enerflex is unable to meet contractual requirements due to such public health crises, and is unable to claim force majeure relief under the applicable contract or otherwise secure concessions from counterparties, the Company’s operational or financial results may be adversely impacted. In addition to the overall slowdown in economic activity during the COVID-19 pandemic, the pandemic continued to impact the Company’s operations throughout 2021. COVID-related restrictions on travel and in-person gatherings remained in place in many parts of our operations, however business disruptions were not material, and the Company did not have to shut down any facilities or operations. Workforce COVID positivity rates were monitored to identify possible trends or operational vulnerabilities and the Company implemented continuity plans to mitigate the risk of business interruption. The Company was also able to maintain operations and otherwise mitigate COVID impacts by leveraging technologies which enable remote work arrangements, by proactively monitoring COVID cases and regulations in the communities in which we operate and by working with customers and supply chain partners to minimize disruptions. Enhanced cleaning protocols remained in place at Company facilities and the Company undertook efforts to ensure its workforce had access to advice from healthcare professionals. Where possible, the Company provided support to enable employees and their families to access vaccines. Contract Compression Operations The duration of Enerflex’s rental contracts with customers vary based on operating conditions and customer needs. Initial contract terms typically are not long enough to enable the Company to recoup the cost of the equipment deployed in the Energy Infrastructure segment. Many of Enerflex’s North American rental contracts have short initial terms and after the initial term are cancelable on short notice. While these contracts are frequently extended beyond their initial terms, Enerflex cannot accurately predict which of these contracts will be extended or renewed beyond the initial term or that any customer will continue to contract with Enerflex. The inability to negotiate extensions or renew a substantial portion of the Company’s rental contracts, the renewal of such contracts at reduced rates, the inability to contract for additional services with customers, or the loss of all or a significant portion of the rental contracts with any significant customer could lead to a reduction in revenues and net income and could result in asset impairments. This could have a material adverse effect upon Enerflex’s business, financial condition, results of operations and cash flows. Contracted Revenue Many of Enerflex’s customers finance their exploration and development activities through cash flow from operations, incurrence of debt, or issuance of equity. If customers experience decreased cash flow from operations and limitations on their ability to incur debt or raise equity, for example due to weak oil or natural gas prices or reservoir underperformance, then they may seek to preserve capital by pursuing price concessions on revenue contracts, cancelling contracts, or determining not to renew contracts. Under these circumstances, the Company may be unable to renew recurring revenue contracts with customers on favorable commercial terms, if at all. Terms of new contracts or renegotiated contracts may also transfer additional risk of liquidated damages, consequential loss, liability caps, and indemnities to the Company. These factors may lead to a reduction in revenue and net income, which could have a material adverse effect on Enerflex’s business, financial condition, results from operations and cash flows. Compliance with HSE Regulations The Company and many of its customers are subject to a variety of federal, provincial, state, local, and international laws and regulations relating to HSE. These laws and regulations are complex, subject to periodic revision, and are becoming increasingly stringent. The cost of compliance with these requirements may increase over time thereby increasing the Company’s operating costs or negatively impacting the demand for the Company’s products and services. Failure to comply with these laws and regulations may result in reputational damage, as well as the imposition of administrative, civil, and criminal enforcement measures, including assessment of monetary penalties, imposition of remedial requirements, and issuance of injunctions as to future compliance. Compliance with environmental laws is a continuous priority across Enerflex operations and in the manufacturing of the Company's products, as the Company uses and stores hazardous substances in its operations. In addition, many of the Company’s current and former properties are or have been used for industrial purposes. Certain environmental laws may impose joint and several and strict liability for environmental contamination, which may render the Company liable for remediation costs, natural resource damages, and other damages as a result of Company conduct or the conduct of, or conditions caused by, prior owners or operators or other third parties. In addition, where contamination may be present, it is possible that neighboring landowners and other third parties may file claims for personal injury, property damage, and recovery of response costs. Remediation costs and other damages arising as a result of 26 30 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report environmental laws and regulations could be substantial and could negatively impact financial condition, profitability and results of operations. Enerflex may need to apply for or amend facility permits or licenses from time to time with respect to storm water, waste handling, or air emissions relating to manufacturing activities or equipment operations, which may subject Enerflex to new or revised permitting conditions. These permits and authorizations may contain numerous compliance requirements, including monitoring and reporting obligations and operational restrictions, such as emission limits, which may be onerous or costly to comply with. Given the large number of facilities in which Enerflex operates, and the numerous environmental permits and other authorizations that are applicable to its operations, the Company may occasionally identify or be notified of technical violations of certain compliance requirements and could be subject to penalties related thereto. The adoption of new HSE laws or regulations, or more vigorous enforcement of existing laws or regulations, may also negatively impact Enerflex’s customers and demand for the Company’s products and services, which in turn would have a negative impact on the Company’s financial results and operations. The Company is also subject to various federal, provincial, state, and local laws and regulations relating to safety and health conditions in its manufacturing facilities and other operations. Those laws and regulations may also subject the Company to material financial penalties or liabilities for any noncompliance, as well as potential business disruption if any of its facilities, or a portion of any facility, is required to be temporarily closed as a result of any violation of those laws and regulations. Any such financial liability or business disruption could have a material adverse effect on the Company's projections, business, results of operations, and financial condition. Health and Safety Risks Enerflex's operations are susceptible to health and safety risks inherent in manufacturing, construction, and operations. These risks include but are not limited to: explosions caused by natural gas leaks; fires; severe weather and natural disasters; malfunctioning or improperly used tools and equipment; and vehicle collisions and other transportation incidents. Failure to prevent or appropriately respond to a safety or health incident could result in injuries or fatalities among employees, contractors, visitors, or residents in communities near Company operations. Such incidents may lead to liabilities arising out of personal injuries or death, operational interruptions, and shutdown or abandonment of affected facilities, including government imposed orders to remedy unsafe conditions or circumstances, penalties associated with the contravention of applicable health and safety legislation, and potential civil liability. Preventing or responding to accidents could require Enerflex to expend significant time and effort, as well as financial resources to remediate safety issues, compensate injured parties, and repair damaged facilities. Any of the foregoing could have an adverse impact on the Company's operations, financial results and reputation. International Operations Enerflex's operations in countries outside of North America account for a significant amount of the Company’s revenue. Enerflex is exposed to risks inherent in conducting international operations, including but not limited to: social, political, and economic instability; changes in foreign government policies, laws, regulations, and regulatory requirements, or the interpretation, application and/or enforcement thereof; tax increases or changes in tax laws or in the interpretation, application and/or enforcement thereof; difficulties in staffing and managing foreign operations including logistical, safety, security, and communication challenges; difficulties, delays, and expenses that may be experienced or incurred in connection with the movement and clearance of personnel and goods through the customs and immigration authorities of multiple jurisdictions; recessions and other economic crises that may impact the Company’s cost of conducting business in those countries; the adoption of new, or the expansion of existing, trade restrictions, or embargoes; limitations on the Company’s ability to repatriate cash, funds, or capital invested or held in jurisdictions outside Canada; difficulty or expense of enforcing contractual rights due to the lack of a developed legal system or otherwise; confiscation, expropriation, or nationalization of property without fair compensation; difficulties in engaging third-party agents to interface with clients or otherwise act on the Company's behalf in certain jurisdictions; and failure to comply with applicable anti-corruption, anti-bribery, sanctions, and trade laws. In addition, Enerflex may expand the business to markets where the Company has not previously conducted business. The risks inherent in establishing new business ventures, especially in international markets where local customs, laws, and business procedures present special challenges, may affect Enerflex’s ability to be successful in these ventures. To the extent Enerflex’s international operations are affected by unexpected or adverse economic, political, and other conditions, the Company’s business, financial condition, and results of operations may be adversely affected. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 27 31 Corruption, Sanctions, Trade Compliance The Company is required to comply with Canadian, U.S., and international laws and regulations regarding corruption, anti-bribery, sanctions, and trade compliance. Enerflex conducts business in many parts of the world that experience high levels of corruption, relies on third party agents to interface with its clients and otherwise act on the Company's behalf in some jurisdictions where the Company does not have a presence, and is subject to various laws that govern the import and export of its equipment from country to country. While Enerflex has developed policies, procedures and training designed to achieve and maintain compliance with applicable laws, the Company could be exposed to investigations, claims, and other regulatory proceedings for alleged or actual violations of laws related to Company operations, including anti-corruption and anti-bribery legislation, trade laws, and sanctions laws. The Canadian government, the U.S. Department of Justice, the Securities and Exchange Commission (SEC), the U.S. Office of Foreign Assets Control, and similar agencies and authorities in other jurisdictions have a broad range of civil and criminal penalties they may seek to impose against companies and individuals for such violations, including injunctive relief, disgorgement, fines, penalties, and modifications to business practices and compliance programs, among other things. While Enerflex cannot accurately predict the impact of any of these factors, if any of those risks materialize, it could have a material adverse effect on the Company's reputation, business, financial condition, results of operations, and cash flow. Litigation Risk and Liability Claims The Company’s operations entail inherent risks, including but not limited to equipment defects, malfunctions and failures, and natural disasters that could result in uncontrollable flows of natural gas or well fluids, fires, and explosions. Some of the Company's products are used in hazardous applications where an accident or a failure of a product could cause personal injury or loss of life, or damage to property, equipment, or the environment, as well as the suspension of the end-user's operations. If the Company's products were to be involved in any of these incidents, the Company could face litigation and may be held liable for those losses. In the normal course of Enerflex’s operations, it may become involved in, named as a party to, or be the subject of various legal proceedings, including regulatory proceedings, tax proceedings, and legal actions related to contract disputes, property damage, environmental matters, employment matters, and personal injury. The Company may not be able to adequately protect itself contractually and insurance coverage may not be available or adequate in risk coverage or policy limits to cover all losses or liabilities that it may incur. Moreover, the Company may not be able to maintain insurance in the future at levels of risk coverage or policy limits that management deems adequate. Any Claims made under the Company's policies may cause its premiums to increase. Any future damages deemed to be caused by the Company's products or services that are not covered by insurance, or that are in excess of policy limits or subject to substantial deductibles, could have a material adverse effect on the Company's projections, business, results of operations, and financial condition. Defense and settlement costs associated with lawsuits and claims can be substantial, even with respect to lawsuits and claims that have no merit. Due to the inherent uncertainty of the litigation process, the resolution of any particular legal proceeding could have an adverse effect on Enerflex’s operating results or financial performance. Information Technology and Information Security The Company is dependent upon the availability, capacity, reliability, and security of information technology infrastructure and the Company's ability to expand and continually update this infrastructure, to conduct daily operations. Information technology assets and protocols become increasingly important to Enerflex as it continues to expand internationally, provide information technology access to global personnel, develop web-based applications and monitoring products, and improve its business software applications. If any such programs or systems were to fail or create erroneous information in the Company’s hardware or software network infrastructure, it could have a material adverse effect on the Company’s business activities and reputation. Enerflex may be threatened by or subjected to cyberattack risks such as cyber-fraud, viruses, malware infections, or social engineering activities like phishing and employee impersonation, which may result in adverse outcomes including, but not limited to, the exposure of sensitive data, disruption of operations and diminished operating results. In recent years, cyberattacks have become more prevalent and much harder to detect and defend against. These threats may arise from a variety of sources, all ranging in sophistication from an individual hacker to alleged state-sponsored attacks. A cyberattack may be generic, or it may be custom-crafted to target the specific information technology used by Enerflex. The occurrence of any such cyberattacks could adversely affect the Company’s financial condition, operating results, and reputation. The Company may be targeted by parties using fraudulent spoof and phishing emails to misappropriate Enerflex information, or the information of customers and suppliers, or to introduce viruses or other malware through "trojan horse" programs into computer 32 28 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report networks of the Company, its customers or suppliers. These phishing emails may appear upon a cursory review to be legitimate emails sent by a member of Enerflex, its customers or suppliers. If a member of Enerflex or a member of one of its customers or suppliers fails to recognize that a phishing email has been sent or received and responds to or forwards the phishing email, the attack could corrupt the computer networks and/or access confidential information of Enerflex, its customers, employees, and/or suppliers, including passwords, through email or downloaded malware. In addition to spoof and phishing emails, network and storage applications may be subject to unauthorized access by hackers or breached due to operator error, malfeasance, or other system disruptions. It is often difficult to anticipate or immediately detect such incidents and the damage caused by them. Security measures, such as incident monitoring, vulnerability testing, and response planning, and employee education and training have been implemented to protect the Company’s information security and network infrastructure. However, the Company’s mitigation measures cannot provide absolute security, and the information technology infrastructure may be vulnerable to criminal cyberattacks or data security incidents due to employee or customer error, malfeasance, or other vulnerabilities. Additionally, Enerflex is reliant on third-party service providers for certain information technology applications. While the Company conducts due-diligence and believes that these third-party service providers have adequate security measures, there can be no assurance that these security measures will prevent any cyber events or computer viruses from impacting the applications that Enerflex relies on. If Enerflex’s information technology systems were to fail and the Company was unable to recover in a timely way, the Company might be unable to fulfill critical business functions, which could damage the Company’s reputation and have a material adverse effect on the business, financial condition, and results of operations. A breach of Enerflex’s information security measures or controls could result in losses of material or confidential information, reputational consequences, financial damages, breaches of privacy laws, higher insurance premiums, damage to assets, safety issues, operational downtime or delays, and revenue losses. The significance of any such event is difficult to quantify, but may in certain circumstances be material to the Company and could have adverse effects on the Company’s business, financial condition and results of operations. Availability of Raw Materials, Component Parts, or Finished Products Enerflex purchases a broad range of materials and components in connection with its manufacturing and service activities. Some of the components used in Enerflex’s products are obtained from a single source or a limited group of suppliers. While Enerflex and its people make it a priority to maintain and enhance these strategic relationships in its supply chain, there can be no assurance that these relationships will continue and reliance on suppliers involves several risks, including price increases, delivery delays, inferior component quality, and unilateral termination. In particular, long lead times for high demand components, such as engines, can result in project delays. While Enerflex has long standing relationships with recognized and reputable suppliers, it does not have long-term contracts with all of them, and the partial or complete loss of certain of these sources could have a negative impact on Enerflex’s results of operations and could damage customer relationships. Further, a significant increase in the price of one or more of these components could have a negative impact on Enerflex's operational or financial results. Though Enerflex is generally not dependent on any single source of supply, the ability of suppliers to meet performance, quality specifications, and delivery schedules is important to the maintenance of Enerflex customer satisfaction. If the availability of certain OEM components and repair parts, which are generally in steady demand, is constrained or delayed, certain of Enerflex’s operational or financial results may be adversely impacted. Personnel and Contractors The Company’s ability to attract and retain qualified personnel and provide the necessary organizational structure, programs, and culture to engage and develop employees is crucial to its growth and achieving its business results. Enerflex's Engineered Systems product line requires skilled engineers and design professionals in order to maintain customer satisfaction through industry leading design, build, and installation of the Company’s product offering. Enerflex competes for these professionals, not only with other companies in the same industry, but with oil and natural gas producers and other industries. In periods of high activity, demand for the skills and expertise of these professionals increases, making the hiring and retention of these individuals more difficult. Enerflex's Service product line relies on the skills and availability of trained and experienced tradespeople, mechanics, and technicians to provide efficient and appropriate services to Enerflex and its customers. Hiring and retaining such individuals is critical to the success of Enerflex’s business. Demographic trends are reducing the number of individuals entering the trades, making Enerflex's access to skilled individuals more difficult. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 29 33 There are certain jurisdictions where Enerflex relies on third-party contractors to carry out the operation and maintenance of its equipment. The ability of third-party contractors to find and retain individuals with the proper technical background and training is critical to the continued success of the contracted operations in these jurisdictions. If Enerflex’s third-party contractors are unable to find and retain qualified operators, or the cost of these qualified operators increases substantially, the contract operations business could be materially impacted. Additionally, in increasing measures, Enerflex is dependent upon the skills and availability of various professional and administrative personnel to meet the increasing demands of the requirements and regulations of various professional and governmental bodies. There are few barriers to entry in a number of Enerflex's businesses, so retention of qualified staff is essential in order to differentiate Enerflex's businesses and compete in its various markets. Enerflex’s success depends on key personnel and its ability to hire and retain skilled personnel. The loss of skilled personnel could delay the completion of certain projects or otherwise adversely impact certain operational and financial results. Inflationary Pressures Strong economic conditions and competition for available personnel, materials, and major components may result in significant increases in the cost of obtaining such resources. To the greatest extent possible, Enerflex passes such cost increases on to its customers and it attempts to reduce these pressures through proactive supply chain and human resource practices. Should these efforts not be successful, the gross margin and profitability of Enerflex could be adversely affected. Insurance Enerflex’s operations are subject to risks inherent in the oil and natural gas services industry, such as equipment defects, malfunctions and failures, and natural disasters with resultant uncontrollable flows of oil and natural gas, fires, spills, and explosions. These risks could expose Enerflex to substantial liability for personal injury, loss of life, business interruption, property damage, pollution, and other liabilities. Enerflex carries prudent levels of insurance to protect the Company against these unforeseen events, subject to appropriate deductibles and the availability of coverage. In addition, the Company has procured a dedicated cyber insurance policy designed to help mitigate against the risk of cyber-related events and executive liability insurance to limit exposure to unforeseen incidents. However, there can be no assurance that any such insurance policies will cover all loses or liabilities that may arise from the operation of Enerflex’s business. An annual review of insurance coverage is completed to assess the risk of loss and risk mitigation alternatives. Extreme weather conditions, natural occurrences, and terrorist activity have strained insurance markets leading to substantial increases in insurance costs and limitations on coverage. It is anticipated that appropriate insurance coverage will be maintained in the future, but there can be no assurance that such insurance coverage will be available on commercially reasonable terms or on terms as favourable as Enerflex's current arrangements. The occurrence of a significant event outside of the scope of coverage of the Enerflex insurance policies could have a material adverse effect on the results of the organization. Access to Capital Enerflex relies on its cash, as well as the credit and capital markets to provide some of the capital required to continue operations. Enerflex relies on its Bank Facility, Asset-Based Facility and Senior Notes to meet its funding and liquidity requirements. Of the Company's $725.0 million Bank Facility, which is senior unsecured indebtedness and is subject to floating rates of interest, $660.0 million is due on June 30, 2025 while the remaining $65.0 million is due on June 30, 2023 and may be renewed annually with the consent of the lenders. The Asset-Based Facility, which is subject to floating interest rates, is secured by certain assets of an Enerflex subsidiary band is non-recourse to the Company. The Senior Notes, which are also senior unsecured indebtedness of the organization, mature as follows: U$105.0 million and C$15.0 million of seven-year notes mature on December 15, 2024; and U$70.0 million and C$30.0 million of ten- year notes mature on December 15, 2027. As of December 31, 2021, the Company had $266.9 million in Senior Notes issued and outstanding, $37.4 million outstanding on its Asset-Based Facility, and $30.5 million outstanding on its Bank Facility. Significant instability or disruptions to the capital markets, including the credit markets, may impact the Company’s ability to successfully renegotiate all or part of its Bank Facility prior to its due date which could have important adverse consequences including: making it more difficult to satisfy contractual obligations; increasing vulnerability to general adverse economic conditions and industry conditions; limiting the ability to fund future working capital, capital expenditures or acquisitions; limiting the ability to refinance debt in the future or borrow additional funds to fund ongoing operations; and paying future dividends to shareholders. 30 34 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report As at December 31, 2021, the Company had $681.5 million combined available in borrowing base on its Bank Facility and Asset-Based Facility. The Company's Bank Facility and the Note Purchase Agreement also contain a number of covenants and restrictions with which Enerflex and its subsidiaries must comply, including, but not limited to, use of proceeds, limitations on the ability to incur additional indebtedness, transactions with affiliates, mergers and acquisitions, and the Company's ability to sell assets. The Company’s ability to comply with these covenants and restrictions may be affected by events beyond its control, including prevailing economic, financial, and industry conditions. If market or other economic conditions deteriorate, the Company’s ability to comply with these covenants may be impaired. Failure to meet any of these covenants, financial ratios, or financial tests could result in events of default under each agreement which require the Company to repay its indebtedness under those agreements and could impair the Company’s ability to access the capital markets for financing. While Enerflex is currently in compliance with all covenants, financial ratios, and financial tests, there can be no assurance that it will be able to comply with these covenants, financial ratios, and financial tests in future periods. These events could restrict the Company's and other guarantors' ability to fund its operations, meet its obligations associated with financial liabilities, or declare and pay dividends. Future Acquisitions Enerflex may, from time to time, seek to expand the Business and its operations by acquiring or developing additional businesses or assets in existing or new markets. Enerflex expects to realize strategic opportunities and other benefits as a result of its acquisitions. However, there can be no assurances as to whether, or to what extent, such benefits or opportunities will be realized. Enerflex can not predict whether it will be able to successfully identify, acquire, develop or profitably manage additional acquisitions, or successfully integrate any acquired business or assets into Enerflex's business, or to adjust to an increased scope of operations as a result of such acquisitions. There is a risk that any future acquisitions could adversely impact Enerflex's operations and results. Payment of Future Cash Dividends The amount and frequency of future cash dividends paid by the Company, if any, is subject to the discretion of the Board of Directors and may vary depending on a variety of factors and conditions existing from time to time, including, among other things, significant declines and volatility in commodity prices, demand for Enerflex products and services, restricted cash flows, capital expenditure requirements, debt service requirements, operating costs, foreign exchange rates, the risk factors described in this Annual Information Form and the satisfaction of the liquidity and solvency tests imposed by applicable corporate law for the declaration and payment of dividends. Depending on these and various other factors, many of which are beyond the control of Enerflex, future cash dividends could be reduced or suspended entirely or made less frequently. The market value of the Common Shares may deteriorate if cash dividends are reduced or suspended. Foreign Exchange Enerflex reports its financial results to the public in Canadian dollars; however, a significant percentage of its revenues and expenses are denominated in currencies other than Canadian dollars. The Company identifies and hedges all significant transactional currency risks and its hedging policy remains unchanged in the current year. Further information on Enerflex’s hedging activities is provided in Note 28 in the audited consolidated financial statements for the year ended December 31, 2021. Transaction Exposure The Canadian operations of the Company source the majority of their products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company also sells compression and processing packages in foreign currencies, primarily the U.S. dollar. Most of Enerflex’s international orders are manufactured in the United States where the contracts are primarily denominated in U.S. dollars. This minimizes the Company’s foreign currency exposure on these contracts. The Company has implemented a hedging policy, applicable primarily to the Canadian operations, with the objective of securing the margins earned on awarded contracts denominated in currencies other than Canadian dollars. In addition, the Company may hedge input costs that are paid in a currency other than the home currency of the subsidiary executing the contract. The Company utilizes a combination of foreign denominated debt and currency forward contracts to meet its hedging objective. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 31 35 Translation Exposure The Company’s earnings from and net investment in foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the U.S. dollar, Australian dollar, and Brazilian real. Assets and liabilities of foreign subsidiaries are translated into Canadian dollars using the exchange rates in effect at the balance sheet dates. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in earnings when there has been a reduction in the net investment in the foreign operations. Earnings from foreign operations are translated into Canadian dollars each period at average exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net earnings. Such exchange rate fluctuations could be material year-over-year relative to the overall earnings or financial position of the Company. Tax Matters The Company and its subsidiaries are subject to income and other taxes in Canada, the United States and numerous foreign jurisdictions. Changes in tax laws or interpretations thereof or tax rates in the jurisdictions in which the Company or its subsidiaries do business could adversely affect the Company's results from operations, returns to shareholders, and cash flow. Our effective tax rates could also be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation. While management believes the Company and its subsidiaries are in compliance with current prevailing tax laws and requirements, one or more taxing jurisdictions could seek to impose incremental or new taxes on the Company or its subsidiaries or the Company or its subsidiaries could be subject to assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings by any such taxing jurisdiction. The timing or impacts of any such assessment, reassessment, audit, investigation, inquiry or judicial or administrative proceedings or any future changes in tax laws, including the impacts of proposed regulations, cannot be predicted. Any adverse tax developments, including legislative changes, judicial holdings or administrative interpretations, could have a material and adverse effect on the results of operations, financial condition and cash flows of the Company. Interest Rate Risk The Company's liabilities include long-term debt that may be subject to fluctuations in interest rates. The Company's Senior Notes outstanding at December 31, 2021 are at fixed interest rates and therefore will not be impacted by fluctuations in market interest rates. The Company's Bank and Asset-Based Facilities, however, is subject to changes in market interest rates. As at December 31, 2021 the Company had $67.9 million of indebtedness that is effectively subject to floating interest rates. Changes in economic conditions outside of Enerflex’s control could result in higher interest rates, thereby increasing Enerflex’s interest expense which may have a material adverse impact on Enerflex’s financial results, financial condition, or ability to declare and pay dividends. For each one percent change in the rate of interest on the Bank and Asset-Based Facilities, the change in interest expense for the twelve months ended December 31, 2021 would be approximately $0.7 million. All interest charges are recorded in finance costs on the consolidated statements of earnings. Any increase in market interest rates could have a material adverse impact on the Company's financial results, financial condition, or ability to declare and pay dividends. Terrorism Terrorist activities (including environmental terrorism), anti-terrorist efforts, and other armed conflicts may adversely affect the global economies and could prevent the Company from meeting its financial and other obligations to the extent such conflicts impact operations. If any of these events occur, the resulting political instability and societal disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for the Company’s products and services and causing a reduction in the Company’s revenues. In addition, the Company’s assets may be direct targets of terrorist attacks that could disrupt Enerflex’s ability to service its customers. The Company may be required by regulators or by the future terrorist threat environment to make investments in security that cannot be predicted. The implementation of security guidelines and measures and the maintenance of insurance, to the extent available, to address such activities could increase Enerflex’s costs. These types of events could materially adversely affect the Company’s business and results of operations. 36 32 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Seasonal Factors and Demand Demand for natural gas fluctuates largely with the heating and electric power requirements caused by the changing seasons in North America. Hot summers and cold winters typically increase demand for, and the price of, natural gas. This increases customers' cash flow, which can have a positive impact on Enerflex. At the same time, access to many western Canadian oil and natural gas properties is limited to the period when the ground is frozen so that heavy equipment can be transported. As a result, the first quarter of the year is generally accompanied by increased winter deliveries of equipment. Warm winters in western Canada, however, can both reduce demand for natural gas and make it difficult for producers to reach well locations. This restricts drilling and development operations, reduces the ability to supply natural gas production in the short-term, and can negatively impact the demand for Enerflex's products and services. CAPITAL RESOURCES On January 31, 2022, Enerflex had 89,678,845 shares outstanding. Enerflex has not established a formal dividend policy and the Board of Directors anticipates setting the quarterly dividends based on the availability of cash flow and anticipated market conditions, taking into consideration business opportunities and the need for growth capital. Subsequent to the fourth quarter of 2021, the Company declared a quarterly dividend of $0.025 per share. Enerflex’s Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions. At December 31, 2021, the Company had drawn $67.9 million against the Bank and Asset-Based Facilities (December 31, 2020 – $84.4 million). The weighted average interest rate on the Bank and Asset-Based Facilities at December 31, 2021 was 2.1 percent and 3.0 percent (December 31, 2020 – 2.3 percent and nil). The composition of the borrowings on the Bank and Asset-Based Facilities and the Senior Notes was as follows: ($ Canadian thousands) Drawings on Bank Facility Drawings on Asset-Based Facility Notes due June 22, 2021 Notes due December 15, 2024 Notes due December 15, 2027 Deferred transaction costs Current portion of long-term debt Non-current portion of long-term debt December 31, 2021 December 31, 2020 $ 30,522 $ 84,369 37,411 - 148,119 118,746 (3,376) - 40,000 148,686 119,124 (2,467) $ $ $ 331,422 $ 389,712 - $ 331,422 40,000 349,712 331,422 $ 389,712 At December 31, 2021, without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $216.1 million, and $118.7 million thereafter. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 33 37 CONTRACTUAL OBLIGATIONS, COMMITTED CAPITAL INVESTMENT, AND OFF- BALANCE SHEET ARRANGEMENTS The Company’s contractual obligations are contained in the following table: ($ Canadian thousands) 2022 2023 2024 2025 2026 Thereafter Leases Purchase Obligations $ 15,448 $ 243,737 $ 11,167 8,192 6,313 4,561 22,817 2,904 125 - - - Total contractual obligations $ 68,498 $ 246,766 $ The Company’s lease commitments are operating leases for premises, equipment, and service vehicles. Total 259,185 14,071 8,317 6,313 4,561 22,817 315,264 The majority of the Company’s purchase commitments relate to major components for the Engineered Systems and Energy Infrastructure product lines and to long-term information technology and communications contracts entered into in order to reduce the overall cost of services received. The Company does not have off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, results of operations, liquidity, or capital expenditures. RELATED PARTIES Enerflex transacts with certain related parties as a normal course of business. Related parties include Roska DBO, and the Company’s 65 percent interest in a joint venture in Brazil. All transactions occurring with related parties were in the normal course of business operations under the same terms and conditions as transactions with unrelated companies. A summary of the financial statement impacts of all transactions with all related parties is as follows: Years ended December 31, Associate – Roska DBO Revenue Purchases Accounts receivable Accounts payable 2021 2020 $ 352 $ - 128 - 558 - 1 56 All related party transactions are settled in cash. There were no related party transactions with the joint venture in Brazil. 38 34 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report SIGNIFICANT ACCOUNTING ESTIMATES The timely preparation of financial statements requires that management make estimates and assumptions and use judgment. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could however result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company’s accounting policies, management has made the following judgments, estimates and assumptions which have a significant effect on the amounts recognized in the consolidated financial statements: Revenue Recognition – Performance Obligation Satisfied Over Time The Company reflects revenues relating to performance obligations satisfied over time using the percentage-of-completion approach of accounting. The Company uses the input method of percentage-of-completion accounting, whereby actual input costs as a percentage of estimated total costs is used as the basis for determining the extent to which performance obligations are satisfied. The input method of percentage-of-completion accounting provides a faithful depiction of the transfer of control to the customer, as the Company is able to recover costs incurred relating to the satisfaction of the associated performance obligation. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based on cost progression, and other detailed factors. Although these factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions could lead to changes in the revenues recognized in a given period. Certain contracts also include aspects of variable consideration, such as liquidated damages on project delays. For these contracts, management must make estimations as to the likelihood of the variable consideration being recognized or constrained, based on the status of each project, the potential value of variable consideration, communication received from the customer, and other factors. Enerflex continues to monitor these factors. Changes in estimated cost or revenue associated with a project, including variable consideration, could result in material changes to revenue and gross margin recognized on certain projects. Revenue Recognition – Performance Obligation Satisfied at a Point in Time The Company reflects revenues relating to performance obligations satisfied at a point in time when control – indicated by transfer of the legal title, physical possession, significant risks and rewards of ownership, or any combination of these indicators – is transferred to the customer. Provisions for Warranty Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual warranty obligations or specific provisions created in respect of individual customer issues undergoing commercial resolution and negotiation. Amounts set aside represent management’s best estimate of the likely settlement and the timing of any resolution with the relevant customer. Business Acquisitions In a business acquisition, the Company may acquire assets and assume certain liabilities of an acquired entity. Estimates are made as to the fair value of property, plant and equipment, intangible assets, and goodwill, among other items. In certain circumstances, such as the valuation of property, plant and equipment and intangible assets acquired, the Company relies on independent third-party valuators. The determination of these fair values involves a variety of assumptions, including revenue growth rates, projected cash flows, discount rates, and earnings multiples. Property, Plant and Equipment and Rental Equipment Property, plant and equipment and rental equipment is stated at cost less accumulated depreciation and any impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property, plant and equipment and rental equipment is reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of property, plant and equipment and rental equipment requires judgment and is based on currently available information. Property, plant and equipment and rental equipment is also reviewed for potential impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 35 39 Changes in circumstances, such as technological advances and changes to business strategy can result in actual useful lives differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of property, plant and equipment and rental equipment constitutes a change in accounting estimate and are applied prospectively. Right-of-Use Asset and Lease Liability The Company determines the right-of-use asset and lease liability for each lease upon commencement. In calculating the right-of-use asset and lease liability, the Company is required to determine a suitable discount rate in order to calculate the present value of the contractual payments for the right to use the underlying asset during the lease term. In addition, the Company is required to assess the term of the lease, including if the Company is reasonably certain to exercise options to extend the lease or terminate the lease. Discount rates and lease assumptions are reassessed on a periodic basis. Finance Lease Receivables In calculating the value of the Company’s finance lease receivables, the Company is required to determine the fair value of the underlying assets included in the finance lease transaction, or, if lower, the present value of the lease payments discounted using a market rate of interest. The fair value of the underlying assets should reflect the amount that the Company would otherwise recognize on a sale of those assets. Allowance for Doubtful Accounts Amounts included in allowance for doubtful accounts reflect the full lifetime expected credit losses for trade receivables. The Company determines allowances based on management’s best estimate of future expected credit losses, considering historical default rates, current economic conditions, and forecasts of future economic conditions. The impact of COVID-19 and negative economic factors surrounding the oil and gas industry on expected credit losses requires significant judgment, as it is not directly comparable with any recent similar events. Future economic conditions, especially around the oil and gas industry, may have a significant impact on the collectability of trade receivables from customers and the corresponding expected credit losses. Management has implemented additional monitoring processes in assessing the creditworthiness of customers and believes the current provision appropriately reflects the best estimate of its future expected credit losses. Significant or unanticipated changes in economic conditions could impact the magnitude of future expected credit losses. Impairment of Inventories The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes, and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Impairment of Non-Financial Assets Impairment exists when the carrying value of an asset or group of assets exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value-in-use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value-in-use calculation is based on a discounted cash flow model, which requires the Company to estimate future cash flows and use judgment to determine a suitable discount rate to calculate the present value of those cash flows. Impairment of Goodwill The Company tests goodwill for impairment at least on an annual basis, or when there is any indication that goodwill may be impaired. This requires an estimation of the value-in-use of the groups of cash generating units (“CGUs”) to which the goodwill is allocated. Estimating the value-in-use requires an estimate of the expected future cash flows from each group of CGUs and use judgment to determine a suitable discount rate in order to calculate the present value of those cash flows. The methodology and assumptions used, as well as the results of the assessment performed are detailed in Note 14 in the notes to the consolidated financial statements. 36 40 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Income Taxes Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income. The Company establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective company’s domicile. Deferred tax assets are recognized for all unused tax losses, carried forward tax credits or other deductible temporary differences to the extent that it is probable that taxable profit will be available against which these deferred tax assets can be utilized. Significant judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing of reversal, expiry of losses and the level of future taxable profits together with future tax planning strategies. The basis for this estimate is management’s cash flow projections. To the extent the Company determines the recoverability of deferred tax assets is unlikely, the deferred tax asset is not recognized. Management regularly assesses the unrecognized deferred tax asset to determine what portion can be recognized in response to changing economic conditions or recent events. Share-Based Compensation The Company employs the fair value method of accounting for stock options and phantom share entitlement. The determination of the share-based compensation expense for stock options and phantom share entitlement requires the use of estimates and assumptions based on exercise prices, market conditions, vesting criteria, length of employment, and past experiences of the Company. Changes in these estimates and future events could alter the determination of the provision for such compensation. Details concerning the assumptions used are described in Note 24 in the notes to the consolidated financial statements. Government Grants In response to the COVID-19 pandemic and associated restrictions, including mandated quarantines, business closures, and travel restrictions, governments in certain jurisdictions in which the Company does business have established programs to assist companies and individuals through the period for which these restrictions are in place. During the year, the Company continued to qualify for government grants in several jurisdictions, primarily the Canada Emergency Wage Subsidy, Canada Emergency Rent Subsidy, Hardest- Hit Business Recovery Program, and the Employee Retention Credit program in USA. Subsidies received have been recorded as a reduction in cost of goods sold and selling and administrative expenses within the consolidated statements of earnings in accordance with where the associated expense was recognized. There are no unfulfilled conditions or other contingencies relating to government assistance that has been recognized. Total subsidies received is in Note 34 in the notes to the consolidated financial statements. NEW ACCOUNTING POLICIES The Company has reviewed amendments to existing accounting standards and determined that no amendments would have a material impact on the financial statements. FUTURE ACCOUNTING PRONOUNCEMENTS The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that no pronouncements or amendments would be expected to have a material impact on future financial statements. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 37 41 RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS Management is responsible for the information disclosed in this MD&A and the accompanying audited consolidated financial statements, and has in place appropriate information systems, procedures, and controls to ensure that information used internally by management and disclosed externally is materially complete and reliable. In addition, the Company’s Audit Committee, on behalf of the Board of Directors, provides an oversight role with respect to all public financial disclosures made by the Company, and has reviewed and approved this MD&A and the audited consolidated financial statements. The Audit Committee is also responsible for determining that management fulfills its responsibilities in the financial control of operations, including disclosure controls and procedures (“DC&P”) and internal control over financial reporting (“ICFR”). INTERNAL CONTROL OVER FINANCIAL REPORTING The Chief Executive Officer and the Chief Financial Officer, together with other members of management, have evaluated the effectiveness of the Company’s disclosure controls and procedures and internal controls over financial reporting as at December 31, 2021, using the internal control integrated framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on that evaluation, management has concluded that the design and operation of the Company’s disclosure controls and procedures were adequate and effective as at December 31, 2021, to provide reasonable assurance that: a) material information relating to the Company and its consolidated subsidiaries would have been known to them and by others within those entities; and b) information required to be disclosed is recorded, processed, summarized, and reported within required time periods. They have also concluded that the design and operation of internal controls over financial reporting was adequate and effective as at December 31, 2021, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with IFRS. There have been no significant changes in the design of the Company’s ICFR during the twelve months ended December 31, 2021 that would materially affect, or is reasonably likely to materially affect, the Company’s ICFR. The Company recognizes that employees may be required to change how control activities are performed during offsite work arrangements resulting from the COVID-19 pandemic and has ensured that control objectives are being met during this period. While the Officers of the Company have designed the Company’s disclosure controls and procedures and internal controls over financial reporting, they expect that these controls and procedures may not prevent all errors and fraud. A control system, no matter how well conceived or operated, can only provide reasonable, not absolute, assurance that the objectives of the control system are met. SUBSEQUENT EVENTS Subsequent to December 31, 2021, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 7, 2022, to shareholders of record on March 10, 2022. Enerflex’s Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions. On January 24, 2022, Enerflex and Exterran Corporation (NYSE: EXTN) announced they have entered into a definitive agreement to combine the companies in an all-share transaction to create a premier integrated global provider of energy infrastructure. Upon completion of the transaction, which will require shareholder and regulatory approval, the combined entity will operate as Enerflex Ltd. Subject to all approvals, the transaction is expected to close in the second or third quarter of 2022. 42 38 MANAGEMENT’S DISCUSSION & ANALYSIS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking information within the meaning of applicable Canadian securities laws. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “objective” and “capable” and similar expressions are intended to identify forward-looking information. In particular, this MD&A includes (without limitation) forward-looking information pertaining to: anticipated financial performance; future capital expenditures, including the amount and nature thereof; bookings and backlog; oil and gas prices and the impact of such prices on demand for Enerflex products and services; development trends in the oil and gas industry; seasonal variations in the activity levels of certain oil and gas markets; business prospects and strategy; expansion and growth of the business and operations, including market share and position in the energy service markets; the ability to raise capital; the ability of existing and expected cash flows and other cash resources to fund investments in working capital and capital assets; the impact of economic conditions on accounts receivable; expectations regarding future dividends; and implications of changes in government regulation, laws and income taxes; and the anticipated outcomes of Enerflex’s proposed combination with Exterran Corporation, including the combined entity’s accelerated generation of recurring gross margins to approximately 70 percent of total, approximate doubling of EBITDA, and capital allocation priorities following the completion of in-flight projects in 2022 and 2023. This forward-looking information is based on assumptions, estimates and analysis made in the light of the Company's experience and its perception of trends, current conditions and expected developments, as well as other factors that are believed by the Company to be reasonable and relevant in the circumstances. All forward-looking information in this MD&A, primarily in the Outlook and Enerflex Strategy sections, is subject to important risks, uncertainties, and assumptions, which are difficult to predict and which may affect the Company’s operations, including, without limitation: the impact of economic conditions including volatility in the price of oil, gas, and gas liquids, interest rates and foreign exchange rates; industry conditions including supply and demand fundamentals for oil and gas, and the related infrastructure including new environmental, taxation and other laws and regulations; business disruptions resulting from the COVID-19 pandemic; the ability to continue to build and improve on proven manufacturing capabilities and innovate into new product lines and markets; increased competition; insufficient funds to support capital investments required to grow the business; the lack of availability of qualified personnel or management; political unrest; and other factors, many of which are beyond the Company's control. Readers are cautioned that the foregoing list of assumptions and risk factors should not be construed as exhaustive. While the Company believes that there is a reasonable basis for the forward-looking information and statements included in this MD&A, as a result of such known and unknown risks, uncertainties and other factors, actual results, performance, or achievements could differ materially from those expressed in, or implied by, these statements, and readers are cautioned not to unduly rely upon forward-looking information. This MD&A contains information that may constitute future-oriented financial information or financial outlook information (“FOFI”) about Enerflex and the entity resulting from its combination with Exterran, including with respect to the combined entity’s prospective financial performance, financial position or cash flows, all of which is subject to the same assumptions, risk factors, limitations and qualifications as 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 provide to be imprecise or inaccurate and, as such, undue reliance should not be placed on FOFI. Enerflex, Exterran or the combined entity’s actual results, performance and achievements could differ materially from those expressed in, or implied by, FOFI. Enerflex has included FOFI in this MD&A in order to provide readers with a more complete perspective on the combined entity’s future operations and management’s current expectations regarding the combined entity’s future performance. Readers are cautioned that such information may not be appropriate for other purposes. The forward-looking information and FOFI contained herein is expressly qualified in its entirety by the above cautionary statement. The forward- looking information included in this MD&A is made as of the date of this MD&A and, other than as required by law, 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. Management’s Discussion and Analysis | 2021 Annual Report ANNUAL REPORT 2021 | MANAGEMENT’S DISCUSSION & ANALYSIS 39 43 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL POSITION TO THE SHAREHOLDERS OF ENERFLEX LTD. The accompanying consolidated financial statements and all information in the Annual Report have been prepared by management and approved by the Board of Directors of the Company. The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and, where appropriate, reflect management’s best estimates and judgments. Management is responsible for the accuracy, integrity, and objectivity of the consolidated financial statements within reasonable limits of materiality and for the consistency of financial data included in the text of the Annual Report with that in the consolidated financial statements. To assist management in the discharge of these responsibilities, the Company maintains a system of internal controls designed to provide reasonable assurance that accounting records are reliable, and assets are safeguarded. The Audit Committee is appointed by the Board of Directors. The Audit Committee meets with management, as well as with the external auditors, Ernst & Young LLP, to satisfy itself that management is properly discharging its financial reporting responsibilities and to review the consolidated financial statements and the auditors’ report. The Audit Committee reports its findings to the Board of Directors for consideration in approving the consolidated financial statements for presentation to the shareholders. The external auditors have direct access to the Audit Committee of the Board of Directors. The consolidated financial statements have been audited independently by Ernst & Young LLP on behalf of the shareholders in accordance with generally accepted auditing standards. Their report outlines the nature of their audits and expresses their opinion on the consolidated financial statements. [signed] “Marc E. Rossiter” [signed] “Sanjay Bishnoi” Marc E. Rossiter President, Chief Executive Officer, and Director Sanjay Bishnoi Senior Vice President, Chief Financial Officer February 23, 2022 44 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL POSITION | ANNUAL REPORT 2021 INDEPENDENT INDEPENDENT AUDITORS’ REPORT AUDITORS’ REPORT TO THE SHAREHOLDERS OF ENERFLEX LTD. TO THE SHAREHOLDERS OF ENERFLEX LTD. Opinion We have audited the consolidated financial statements of Enerflex Ltd. and its subsidiaries (the Company), which comprise the consolidated statements of financial position as at December 31, 2021 and 2020, and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as at December 31, 2021 and 2020, and its consolidated financial performance and its consolidated cash flows for the years then ended in accordance with International Financial Reporting Standards (IFRSs). 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 are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the consolidated financial statements of the current period. These matters were addressed in the context of the audit of the consolidated financial statements as a whole, and in forming the auditor’s opinion thereon, and we do not provide a separate opinion on these matters. For each matter below, our description of how our audit addressed the matter is provided in that context. We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial statements section of our report, including in relation to these matters. Accordingly, our audit included the performance of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial statements. The results of our audit procedures, including the procedures performed to address the matters below, provide the basis for our audit opinion on the accompanying consolidated financial statements. ANNUAL REPORT 2021 | INDEPENDENT AUDITORS’ REPORT 45 Independent Auditors’ Report | 2021 Annual Report 41 Key audit matter How our audit addressed the key audit matter Revenue recognition from the supply of engineered systems As described in Note 3q, 5, and 23 to the consolidated financial statements, revenues from the supply of engineered systems involving design, manufacture, installation and start-up are recognized using the percentage of completion method, based on total costs incurred as a proportion of expected total costs of the project. The revenue recognized on projects where the company has not fulfilled all performance obligations of the contract’s scope of work as at December 31, 2021 requires management to make several estimates including expected margin to be earned on the contract to estimated complete. Significant changes in estimated costs to complete could have a material effect on the amount of revenue recognized. remaining costs and the Estimating the recoverable amount of goodwill As described in Note 3f, 5, and 14 to the consolidated financial statements, the carrying value of $576 million of goodwill is assessed against the estimated recoverable amount of each operating segment, at least annually or at any time an indicator of impairment exists. Auditing management’s annual goodwill impairment tests was complex, given the degree of judgment and subjectivity in in evaluating management’s estimates and assumptions determining the recoverable amount of the operating segments. Significant assumptions included cash flow projections, revenue growth rate, earnings margins, and discount rate, which are affected by expectations about future market and economic conditions. To test the estimate of revenue recognized based on the percentage of completion method, our audit procedures included, amongst others, the following:  We obtained an understanding of and evaluated the design of controls over the Company’s process of accounting for percentage of completion revenue. For certain operating segments, we tested the operating effectiveness of controls over the percentage of completion revenue recognition process related to management’s original total cost estimates.   Performed retrospective reviews of completed projects, performed inquiries with project managers on jobs that incurred a loss in the year, and identified monthly trending in order to assess the impact of significant margin changes. Compared estimated costs to complete for in-progress jobs to actual costs incurred on similar completed projects and obtained supporting third-party vendor quotes or price sheets for a sample of estimated costs to complete for in-progress jobs. involved our valuation specialists to evaluate the We methodology, mathematical accuracy, and select key assumptions in management’s estimation of the recoverable amounts, such as the discount rate used. In addition, to test other key assumptions, we performed, amongst others, the following procedures:  Compared assumptions incorporated into the estimated recoverable amount such as revenue forecasts and growth rates to publicly available data and historically realized results.  Obtained commodity price forecasts to identify trends in compared industry outlook provided management’s forecast related to estimated bookings. the to   Performed a comparative analysis between historical and forecasted gross margins, and the current year actual results against the prior year forecast to evaluate any trends. Performed a sensitivity analysis on the significant assumptions to evaluate the change in the calculated recoverable amount that would result from changes in the underlying inputs. 42 46 INDEPENDENT AUDITORS’ REPORT | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Other information Management is responsible for the other information. The other information comprises:  Management’s discussion and analysis  The information, other than the consolidated financial statements and our auditor’s report thereon, in the Annual Report Our opinion on the consolidated financial statements does not cover the other information and we do 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, 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. We obtained Management’s Discussion & Analysis and the Annual Report prior to the date of this auditor’s report. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard. 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 IFRSs, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company’s financial reporting process. Auditor’s responsibilities for the audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:  Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.  Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.   Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the consolidated financial statements or, if such disclosures Independent Auditors’ Report | 2021 Annual Report ANNUAL REPORT 2021 | INDEPENDENT AUDITORS’ REPORT 43 47 are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.  Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation.  Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. The engagement partner on the audit resulting in this independent auditor’s report is Gord Graham. Chartered Professional Accountants Calgary, Canada February 23, 2022 44 48 INDEPENDENT AUDITORS’ REPORT | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report CONSOLIDATED CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($ Canadian thousands) Assets Current assets Cash and cash equivalents Accounts receivable (Note 7) Contract assets (Note 7) Inventories (Note 8) Work-in-progress related to finance leases (Note 8) Current portion of finance leases receivable (Note 11) Income taxes receivable Derivative financial instruments (Note 28) Other current assets Total current assets Property, plant and equipment (Note 9) Rental equipment (Note 9) Lease right-of-use assets (Note 10) Finance leases receivable (Note 11) Deferred tax assets (Note 20) Other assets (Note 12) Intangible assets (Note 13) Goodwill (Note 14) Total assets Liabilities and Shareholders’ Equity Current liabilities Accounts payable and accrued liabilities (Note 15) Warranty provisions (Note 16) Income taxes payable Deferred revenues (Note 17) Current portion of long-term debt (Note 18) Current portion of lease liabilities (Note 19) Derivative financial instruments (Note 28) Total current liabilities Long-term debt (Note 18) Lease liabilities (Note 19) Deferred tax liabilities (Note 20) Other liabilities Total liabilities Shareholders’ equity Share capital (Note 21) Contributed surplus (Note 22) Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity December 31, 2021 December 31, 2020 $ $ $ $ $ $ 172,758 212,206 82,760 172,687 36,169 15,248 3,732 294 13,853 709,707 96,414 610,328 49,887 88,110 9,293 51,315 10,118 566,270 95,676 213,375 66,722 212,251 - 3,047 23,718 491 9,047 624,327 102,636 637,814 54,184 61,227 48,216 58,600 16,544 576,028 2,191,442 $ 2,179,576 $ 240,747 6,636 9,318 84,614 - 13,906 180 355,401 331,422 43,108 91,972 15,785 837,688 $ $ 375,524 658,615 274,962 44,653 1,353,754 182,152 10,549 4,387 35,409 40,000 14,693 371 287,561 349,712 47,233 87,408 10,967 782,881 375,524 656,832 301,040 63,299 1,396,695 2,179,576 $ 2,191,442 $ See accompanying Notes to the consolidated financial statements, including guarantees, commitments, and contingencies (Note 31). ANNUAL REPORT 2021 | CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements | 2021 Annual Report 49 45 CONSOLIDATED STATEMENTS OF EARNINGS ($ Canadian thousands, except per share amounts) Revenue (Note 23) Cost of goods sold Gross margin Selling and administrative expenses Operating income Gain on disposal of property, plant and equipment (Note 9) Equity earnings from associate and joint venture Earnings before finance costs and income taxes Net finance costs (Note 26) Earnings before income taxes Income taxes (Note 20) Net earnings (loss) Net earnings (loss) attributable to: Controlling interest Non-controlling interest Earnings (loss) per share – basic (Note 27) Earnings (loss) per share – diluted (Note 27) Weighted average number of shares – basic Weighted average number of shares – diluted See accompanying Notes to the consolidated financial statements. Years ended December 31, 2021 2020 $ 960,156 $ 1,217,052 740,602 219,554 165,263 54,291 135 671 55,097 16,995 38,102 56,557 $ (18,455) $ $ $ $ $ (18,455) $ - (18,455) $ (0.21) (0.21) $ $ 918,873 298,179 182,167 116,012 45 1,995 118,052 22,493 95,559 7,302 88,257 88,080 177 88,257 0.98 0.98 89,678,845 89,678,845 89,678,845 89,678,845 46 50 CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ Canadian thousands) Net earnings (loss) Other comprehensive income (loss): Other comprehensive income (loss) that may be reclassified to profit or loss in subsequent periods: Change in fair value of derivatives designated as cash flow hedges, net of income tax recovery Gain (loss) on derivatives designated as cash flow hedges transferred to net earnings (loss), net of income tax expense Unrealized gain on translation of foreign denominated debt Unrealized loss on translation of financial statements of foreign operations Other comprehensive income (loss) Total comprehensive income (loss) Other comprehensive income (loss) attributable to: Controlling interest Non-controlling interest See accompanying Notes to the consolidated financial statements. Years ended December 31, 2021 $ (18,455) $ 247 (167) 232 (18,958) (18,646) $ (37,101) $ (18,646) $ - (18,646) $ $ $ $ $ 2020 88,257 545 465 1,613 (21,323) (18,700) 69,557 (18,480) (220) (18,700) Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | CONSOLIDATED FINANCIAL STATEMENTS 47 51 Years ended December 31, 2021 2020 $ (18,455) $ 88,257 CONSOLIDATED STATEMENTS OF CASH FLOWS ($ Canadian thousands) Operating Activities Net earnings (loss) Items not requiring cash and cash equivalents: Depreciation and amortization Equity earnings from associate and joint venture Deferred income taxes (Note 20) Share-based compensation expense (Note 24) Gain on disposal of property, plant and equipment (Note 9) Net change in non-cash working capital and other (Note 30) Cash provided by operating activities $ 225,155 $ Investing Activities Additions to: Property, plant and equipment (Note 9) $ (5,154) $ Rental equipment (Note 9) Proceeds on disposal of: Property, plant and equipment (Note 9) Rental equipment (Note 9) Change in other assets Cash used in investing activities Financing Activities Repayment of long-term debt (Note 30) Lease liability principal repayment (Note 19) Lease interest (Note 19) Dividends Cash used in financing activities Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period See accompanying Notes to the consolidated financial statements. (63,530) $ (137,759) $ $ $ $ (59,476) $ (14,215) (3,029) (7,171) (83,891) $ (652) $ 77,082 95,676 $ 172,758 $ 87,622 (671) 43,422 12,937 (135) 124,720 100,435 (52,187) 220 3,692 (10,101) 85,265 (1,995) 14,174 1,816 (45) 187,472 32,776 220,248 (9,874) (123,879) 115 3,121 (7,242) (41,697) (12,770) (3,371) (24,212) (82,050) (1,018) (579) 96,255 95,676 48 52 CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY ($ Canadian thousands) Share capital surplus earnings adjustments reserve income interest interest Total Contributed Retained translation Hedging comprehensive non-controlling controlling At January 1, 2020 $ 375,524 $ 655,107 $ 228,843 $ 82,760 $ (981) $ 81,779 $ 1,341,253 $ 1,534 $ 1,342,787 Foreign currency Accumulated shareholders’ Total other equity before Non- Net earnings Other comprehensive income (loss) Purchase of non- controlling interest Effect of stock option plans Dividends - - - - - - - - 88,080 - - - 88,080 177 88,257 - (19,490) 1,010 (18,480) (18,480) (220) (18,700) (189) 1,725 - - (15,694) - - - - - - - - - (189) (1,491) (1,680) 1,725 (15,694) - - 1,725 (15,694) At December 31, 2020 $ 375,524 $ 656,832 $ 301,040 $ 63,270 $ 29 $ 63,299 $ 1,396,695 $ - $ 1,396,695 Net loss Other comprehensive income (loss) Effect of stock option plans Dividends - - - - - - 1,783 (18,455) - - - (18,726) - - - (7,623) - 80 - - - (18,455) (18,646) (18,646) - - 1,783 (7,623) - - - - (18,455) (18,646) 1,783 (7,623) At December 31, 2021 $ 375,524 $ 658,615 $ 274,962 $ 44,544 $ 109 $ 44,653 $ 1,353,754 $ - $ 1,353,754 See accompanying Notes to the consolidated financial statements. Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | CONSOLIDATED FINANCIAL STATEMENTS 49 53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (All amounts in thousands of Canadian dollars, except per share amounts or as otherwise noted.) NOTE 1. NATURE AND DESCRIPTION OF THE COMPANY Enerflex Ltd. (“Enerflex” or “the Company”) is a single-source supplier of natural gas compression, oil and gas processing, refrigeration systems, and electric power generation equipment – plus related in-house engineering and mechanical services expertise. The Company’s broad in-house resources provide the capability to engineer, design, manufacture, construct, commission, service, and operate hydrocarbon handling systems. Enerflex’s expertise encompasses field production facilities, compression and natural gas processing plants, gas-lift compression, refrigeration systems, and electric power solutions serving the natural gas production industry. Headquartered in Calgary, Alberta, Canada, the registered office is located at 904, 1331 Macleod Trail SE, Calgary, Canada. Enerflex has approximately 2,000 employees worldwide. Enerflex, its subsidiaries, interests in associates, and joint operations, operate in Canada, the United States of America (“USA”), Argentina, Bolivia, Brazil, Colombia, Mexico, the United Kingdom, Bahrain, Kuwait, Oman, the United Arab Emirates (“UAE”), Australia, New Zealand, Indonesia, Malaysia, and Thailand. Enerflex operates three business segments: USA, Rest of World (“ROW”), and Canada. The following table represents material subsidiaries of the Company: Name Enerflex Ltd. Jurisdiction of Incorporation Canada Enerflex Energy Systems Inc. Delaware, USA Enerflex Middle East LLC Enerflex Middle East SPC Oman Bahrain 1 Enerflex indirectly owns 100.0 percent of Enerflex Middle East LLC. Ownership Operating Segment Public Shareholders 100.0 percent 70.0 percent1 100.0 percent Canada USA Rest of World Rest of World NOTE 2. BASIS OF PRESENTATION (a) Statement of Compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and were approved and authorized for issue by the Board of Directors on February 23, 2022. Certain prior year amounts have been reclassified to conform with the current period’s presentation. (b) Basis of Measurement The consolidated financial statements are prepared on a historical cost basis except as detailed in the accounting policies disclosed in Note 3. The accounting policies described in Note 3 and Note 4 have been applied consistently to all periods presented in these consolidated financial statements. Standards and guidelines issues but not yet effective for the current accounting period are described in Note 6. (c) Functional Currency and Presentation Currency These consolidated financial statements are presented in Canadian dollars, which is the Company’s presentation currency. Transactions of the Company’s individual entities are recorded in their own functional currency based on the primary economic environment in which it operates. 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 50 Enerflex Ltd. | 2021 Annual Report (d) Use of Estimates and Judgment The timely preparation of financial statements requires that management make estimates and assumptions and use judgment. Accordingly, actual results may differ from estimated amounts as future confirming events occur. Significant estimates and judgment used in the preparation of the financial statements are described in Note 5. (e) Basis of Consolidation These consolidated financial statements include the accounts of the Company and its subsidiaries. Subsidiaries are fully consolidated from the date of acquisition and continue to be consolidated until the date that control ceases. The financial statements of the subsidiaries are prepared for the same reporting period as the parent Company, using consistent accounting policies. All intra-group balances, income and expenses, and unrealized gains and losses resulting from intra-group transactions are eliminated in full. NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Investments in Associates and Joint Ventures The Company uses the equity method to account for its 45 percent investment in Roska DBO Inc. (“Roska DBO”) and its 65 percent investment in a joint venture in Brazil. Under the equity method, the investment is carried on the consolidated statements of financial position at cost plus post acquisition changes in the Company’s share of net assets of the associate or joint venture. The consolidated statements of earnings reflect the Company’s share of the results of operations of associates and joint ventures. Unrealized gains and losses resulting from transactions between the Company and associates are eliminated to the extent of the interest in the associate or joint venture. The Company’s share of profits from associates and joint ventures is shown on the face of the consolidated statements of earnings. This is the profit attributable to equity holders of the associate and joint venture partners and, therefore, is profit after tax and non- controlling interests in the subsidiaries of the associates and joint ventures. (b) Foreign Currency Translation In the accounts of individual subsidiaries, transactions in currencies other than the Company’s functional currency are recorded at the prevailing rate of exchange at the date of the transaction. At year end, monetary assets and liabilities denominated in foreign currencies are translated at the rates of exchange prevailing at that date. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions. Non-monetary assets and liabilities measured at fair value in a foreign currency are translated using the rates of exchange at the date the fair value was determined. The assets and liabilities on the statements of financial position of foreign subsidiaries are translated into Canadian dollars at the rates of exchange prevailing at the reporting date. The statements of earnings of foreign subsidiaries are translated at average exchange rates for the reporting period. Exchange differences arising on the translation of net assets are taken to accumulated other comprehensive income. All foreign exchange gains and losses are taken to the consolidated statements of earnings with the exception of exchange differences arising on monetary assets and liabilities that form part of the Company’s net investment in subsidiaries. These are taken directly to other comprehensive income until the disposal of the foreign subsidiary at which time the unrealized gain or loss is recognized in the consolidated statements of earnings. On the disposal of a foreign subsidiary, accumulated exchange differences are recognized in the consolidated statements of earnings as a component of the gain or loss on disposal. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 51 55 (c) Business Combinations Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at fair value on the date of the acquisition. Acquisition costs incurred are expensed and included in selling and administrative expenses, except for those associated with the issuance of debt, which are included in the initial carrying amount of the liability. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed. (d) Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and any accumulated impairment losses. Cost comprises the purchase price or construction cost and any costs directly attributable to making the asset capable of operating as intended. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of assets and commences when the assets are ready for intended use. Asset Class Buildings Equipment Estimated Useful Life Range 5 to 20 years 2 to 20 years Major renewals and improvements are capitalized when they are expected to provide future economic benefit. When significant components of property, plant and equipment are required to be replaced at intervals, the Company derecognizes the replaced part, and recognizes the new part with its own associated useful life and depreciation. No depreciation is charged on land or assets under construction. Repairs and maintenance costs are charged to operations as incurred. The carrying amount of an item of property, plant and equipment is derecognized on disposal or when no future economic benefits are expected from its use or disposal. The gain or loss arising from derecognition of property, plant and equipment is included in the consolidated statements of earnings when the item is derecognized. Each asset’s estimated useful life, residual value, and method of depreciation are reviewed and adjusted, if appropriate, at each year end, or when factors and circumstances suggest a different useful life for the asset. (e) Rental Equipment Rental equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which are generally between 5 and 20 years. When the Company is responsible for major maintenance and overhauls, the actual overhaul cost is capitalized and depreciated over the estimated useful life of the overhaul, generally between 2 and 5 years. Repairs and maintenance costs are charged to operations as incurred. Each asset’s estimated useful life, residual value, and method of depreciation are reviewed and adjusted, if appropriate, at each year end, or when factors and circumstances suggest a different useful life for the asset. 52 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report (f) Goodwill Goodwill arising on an acquisition of a business is initially measured at cost, being the excess of the aggregate of the consideration transferred over the net identifiable assets acquired and liabilities assumed. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill allocated to a group of cash generating units (“CGUs”) is reviewed for impairment annually, or when there is an indication that a related group of CGUs may be impaired. Impairment is determined by assessing the recoverable amount of the group of CGUs to which the goodwill relates. Where the recoverable amount of the group of CGUs is less than the carrying amount of the CGUs and related goodwill, an impairment loss is recognized in the consolidated statements of earnings. Impairment losses on goodwill are not reversed. (g) Intangible Assets Intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Intangible assets with a finite life are amortized on a straight-line basis over management’s best estimate of their expected useful lives. The amortization charge is included in selling and administrative expenses in the consolidated statements of earnings. The expected useful lives and amortization method are reviewed on an annual basis with any change in the useful life or pattern of consumption adjusted at year end. Intangible assets are tested for impairment whenever there is an indication that the asset may be impaired. Acquired identifiable intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives. Customer relationships, software, and other intangible assets have an estimated useful life range of 3 to 8 years. (h) Impairment of Non-Financial Assets (excluding Goodwill) At least annually, the Company reviews the carrying amounts of its tangible and intangible assets with finite lives to assess whether there is an indication that those assets may be impaired. If any such indication exists, the Company makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s fair value less costs to sell and its value-in-use. In assessing its value-in-use, the estimated future cash flows attributable to the asset are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. A corresponding impairment loss is recognized in the consolidated statements of earnings. Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the original carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Any impairment reversal is recognized in the consolidated statements of earnings. (i) Inventories Inventories are valued at the lower of cost and net realizable value. Serialized inventory is determined on a first-in first-out basis. Non-serialized inventory is determined based on a weighted average cost. Cost of equipment, repair and distribution parts, and direct materials, include purchase costs and costs incurred in bringing each product to its present location and condition. Cost of work-in-progress includes cost of direct materials, labour, and an allocation of overheads, based on normal operating capacity. Costs of work-in-progress related to finance leases pertain to the construction of projects that will be accounted for as finance leases. Once the project is completed and enters service the costs will be reclassified to cost of goods sold. Cost of inventories includes the transfer from accumulated other comprehensive income of gains and losses on qualifying cash flow hedges in respect of the purchase of inventory. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 53 57 Inventories are written down to net realizable value when the cost of inventories is estimated to be unrecoverable due to obsolescence, damage, or declining selling prices. Inventories are not written down below cost if the finished products in which they will be incorporated are expected to be sold at or above cost. When circumstances that previously caused inventories to be written down below cost no longer exist or when there is clear evidence of an increase in selling prices, the amount of the write down previously recorded is reversed. (j) Trade Receivables Trade receivables are recognized and carried at original invoice amount less an allowance for any amounts estimated to be uncollectible. The Company calculates an expected credit loss based on historical experience of bad debts and specific provisions created when there is objective evidence that the collection of the full amount of a receivable is no longer probable under the terms of the original invoice. The amount of this allowance represents management’s best estimate of expected credit losses. Trade receivables are derecognized when they are assessed as uncollectible. (k) Cash Cash includes cash and cash equivalents, which are defined as highly liquid investments with original maturities of three months or less. (l) Provisions Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. (m) Onerous Contracts A provision for onerous contracts is recognized when the expected benefits to be derived by the Company from a contract are lower than the unavoidable cost of meeting its obligations under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net cost of continuing with the contract. Before a provision is established, the Company recognizes any impairment loss on the assets associated with that contract. (n) Employee Future Benefits The Company sponsors various defined contribution pension plans, which cover substantially all employees and are funded in accordance with applicable plan and regulatory requirements. Regular contributions are made by the Company to the employees’ individual accounts, which are administered by a plan trustee, in accordance with the plan document. The actual cost of providing benefits through defined contribution pension and the 401(k) matched savings plans is charged to earnings in the period in respect of which contributions become payable. (o) Share-Based Payments Equity-Settled Share-Based Payments The Company offers a Stock Option Plan to key employees, measured at the fair value of the equity instrument at the grant date. Details regarding the determination of the fair value of equity-settled share-based transactions are set out in Note 24. The fair value of equity-settled share-based payments is expensed over a five-year vesting period with a corresponding increase in equity. Stock options have a seven-year expiry and are exercisable at the designated common share price, which is determined by the average of the market price of the Company’s shares on the five days preceding the date of the grant. The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments that will ultimately vest. Cash-Settled Share-Based Payments The Company offers Deferred Share Unit (“DSU”), Performance Share Unit (“PSU”), Restricted Share Unit (“RSU”), and Cash Performance Target (“CPT”) plans to certain employees. The Company also offers the DSU plan to non-employee directors. For each cash-settled share-based payment plan, a liability is recognized at the fair value of the liability. At the end of each reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with changes in fair value recognized in the consolidated statements of earnings. 58 54 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report The Company also offers a Phantom Share Entitlement (“PSE”) plan to certain employees of affiliates located in Australia and the UAE. PSEs are measured at the fair value of the equity instrument at the grant date and expensed over a five-year vesting period and expire on the seventh anniversary. The exercise price of each PSE equals the average of the market price of the Company’s shares on the five days preceding the date of the grant. At the end of each reporting period until the liability is settled, and at the date of settlement, the fair value of the liability is remeasured, with changes in fair value recognized in the consolidated statements of earnings. The award entitlements for increases in the share trading value of the Company are to be paid to the recipient in cash upon exercise. (p) Leases Company as a Lessee A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company assesses whether: • • • The contract involves the use of an identified asset, either explicitly or implicitly, and whether the supplier has a substantive substitution right for the asset; The Company has the right to obtain substantially all the economic benefits from the use of the asset throughout the period; and The Company has the right to direct the use of the identified asset. The Company determines if a contractual arrangement is a lease at the inception of the contract term. The Company has identified leases for the following asset types: land and buildings (including manufacturing facilities, office space, and rental accommodations) and equipment (including vehicles, office equipment, and shop equipment). The Company recognizes a right-of-use asset and a lease liability to reflect the benefit the Company obtains from the underlying asset in the lease and the requirement to pay the amounts included in the lease contract, respectively. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability, adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to decommission the underlying asset, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line method over the lesser of lease term or the useful life of the underlying asset, where appropriate. The lease liability is initially measured at the present value of remaining lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Lease payments included in the measurement of the lease liability include fixed payments, variable lease payments that depend on an index or rate, amounts expected to be payable under a residual value guarantee, and amounts owing under purchase or termination options, if the Company is reasonably certain to exercise these options. If the lease contains an extension option that the Company is reasonably certain to exercise, all payments in the renewal period are also included in determining the lease liability. The lease liability is measured at amortized cost using the effective interest method. The amount of the liability is remeasured when there is a change in future lease payments arising 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, extension, or termination option. When the lease liability is remeasured, a corresponding adjustment is made to the carrying value of the right-of-use asset or is recorded on the consolidated statements of earnings if the carrying amount of the right-of-use asset has been reduced to zero. The Company has elected not to recognize right-of-use assets and lease liabilities for short-term and low-value leases. Lease payments associated with these leases will be recognized as an expense on a straight-line basis over the lease term. Certain leases include both lease and non-lease components, which are generally accounted for separately. For certain equipment leases, the Company applies a portfolio approach to effectively account for the lease right-of-use assets and lease liabilities. Company as a Lessor Leases in which the Company is the lessor are assessed upon commencement and are classified as either an operating lease or a finance lease. An operating lease does not transfer substantially all the risks and rewards of the leased asset to the customer. Lease payments from operating leases are recorded as income on a straight-line basis over the life of the lease. 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. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 55 59 Amounts due from lessees under finance leases are recorded as finance lease receivables. Finance leases are initially recognized at amounts equal to the net investment in the lease, determined to be the fair value of the underlying asset, or, if lower, the present value of the lease payments discounted using a market rate of interest. Payments that are part of the leasing arrangement are divided between a reduction in the finance lease receivable and finance lease income. Finance lease income is recognized to produce a constant rate of return on the Company’s investment in the lease and is included in revenues. (q) Revenue Recognition Revenue is recognized as the Company satisfies its performance obligations by transferring promised goods or services to customers, regardless of when payment is received. Revenue is measured at the amount of consideration to which the Company expects to be entitled in exchange for transferring promised goods or services to a customer, excluding amounts collected on behalf of third parties, and may include fixed amounts, variable amounts, or both. Variable amounts are recorded using either the “expected value approach” or the “most likely outcome approach”, as determined upon initial recognition of the contract, and are reassessed at each reporting period. The expected value approach measures variable consideration by probability weighting all the potential outcomes. The most likely outcome approach measures variable consideration as management’s best estimate of the variable component. In estimating variable consideration, the Company reviews any potential for returns, refunds, and other similar obligations. For contracts containing multiple performance obligations, the amount of consideration to which the Company expects to be entitled is allocated to individual performance obligations proportionately based on the stand-alone selling price. Engineered Systems Revenue from the supply of equipment systems – contracts typically involving engineering, design, manufacture, installation, and start-up of equipment – is accounted for as Engineered Systems revenue. Such revenue is recognized on a percentage-of- completion basis proportionate to the costs incurred in the construction of the project. At the completion of the contract, any remaining profit on the contract is recognized as revenue. When it is probable that total contract costs will exceed total contract revenue, the expected loss is recognized as an expense immediately. Revenue from Engineered Systems includes the supply of compression, processing, and electric power equipment, as well as retrofit work and construction on integrated turnkey projects. The Company also provides a warranty on manufactured equipment as part of the standard terms and conditions of the contract. No options are provided for the customer to purchase a warranty separately. For Engineered Systems contracts, the Company generally requires customers to pay based on milestones as manufacturing progresses. These milestones are generally structured to keep the Company cash flow positive. Contracts are also generally structured to ensure the Company is made whole for costs incurred in the event of cancellation of a contract. Revenue from contracts that have been classified as finance leases for newly built equipment is recorded as Engineered Systems revenue. Upon commencement of the new lease, the Company recognizes revenue, based on the fair value of the underlying assets, and cost of goods sold, determined to be the net book value of those assets, in the consolidated statements of earnings. The finance lease interest portion will be recognized in the Energy Infrastructure product line over the lease term. Service Service revenues include the sales of parts and equipment, as well as the servicing and maintenance of equipment. For the sale of parts and equipment, revenue is recognized when the transfer of control passes, which is typically at the point of shipping. For servicing and maintenance of equipment, revenue is recognized on a straight-line basis based on performance of the contracted- upon service. Revenue from long-term service contracts is recognized on a stage of completion basis proportionate to the service work that has been performed based on parts and labour service provided. Payments are typically required on a monthly basis or as work is performed, with no unusual payment terms. At the completion of the contract, any remaining profit on the contract is recognized as revenue. Any expected losses on such projects are charged to operations when determined. Long-term service contracts include scheduled milestone maintenance, corrective or crash maintenance, the supply of parts, and the operation of equipment. Energy Infrastructure (formerly Rentals) Revenue from equipment rentals is recognized in accordance with the terms of the relevant agreement with the customer on a straight-line basis over the term of the agreement. Payments are typically required on a monthly basis with no unusual payment terms. Certain rental contracts contain an option for the customer to purchase the equipment at the end of the rental period. Should 60 56 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report the customer exercise this option to purchase, revenue from the sale of the equipment is recognized directly in the consolidated statements of earnings. Revenue from contracts that have been classified as finance leases related to existing or pre-owned equipment, is recorded as Energy Infrastructure revenue. At the commencement of these finance leases, the Company recognizes revenue and a finance lease receivable equal to the net investment in the lease. Finance income is recognized in Energy Infrastructure revenue reflecting a constant periodic rate of return on the Company's net investment in the lease over the lease term. Practical Expedients The Company has elected to use the practical expedients in IFRS 15 Revenue from contracts with customers paragraphs 63 and 94 with regards to the existence of a significant financing component in the contract and incremental costs of obtaining a contract, respectively. For the years ended December 31, 2021 and 2020 the Company had no contracts with a significant financing component that is considered material. Incremental costs of obtaining a contract predominantly relate to commission costs on Engineered Systems projects, which are typically completed within one year. Accordingly, the Company did not recognize commission costs incurred as an asset in the consolidated statements of financial position. (r) Financial Instruments Financial instruments are measured at fair value on initial recognition of the instrument, plus or minus transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. For the purposes of measuring financial assets after initial recognition, the Company classifies financial assets as either amortized cost, fair value through other comprehensive income (“FVOCI”) or fair value through profit or loss (“FVTPL”), based on the contractual cash flow characteristics and the Company’s business model for managing the financial asset. For the purposes of measuring financial liabilities after initial recognition, the Company classifies all financial liabilities as amortized cost, except certain financial liabilities, such as derivatives, which are classified as FVTPL. Preferred shares included as long-term receivables in Other assets were recorded at fair value at inception and are subsequently measured at amortized cost. The Company primarily applies the market approach for recurring fair value measurements. Three levels of inputs may be used to measure fair value: • • • Level 1: Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. Active markets are those in which transactions occur in sufficient frequency and volume to provide pricing information on an on-going basis; Level 2: Fair value measurements are those derived from 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); and Level 3: Fair value measurements are those derived from inputs for the asset or liability that are not based on observable market data (unobservable inputs). In these instances, internally developed methodologies are used to determine fair value. The level in the fair value hierarchy within which the fair value measurement is categorized in its entirety is determined on the basis of the lowest level input that is significant to the fair value measurement in its entirety. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability and may affect placement within. The Company has made the following classifications: • • • Cash and cash equivalents are measured at fair value through profit or loss. Gains and losses resulting from the periodic revaluation are recorded in the consolidated statements of earnings; Accounts receivable and preferred shares are recorded at amortized cost using the effective interest rate method; and Accounts payable, accrued liabilities, and long-term debt are recorded at amortized cost using the effective interest rate method. Transaction costs are expensed as incurred for financial instruments classified or designated as FVTPL. Transaction costs related to other financial liabilities are added to the value of the instrument at acquisition and taken into the consolidated statements of earnings using the effective interest rate method. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 57 61 (s) Derivative Financial Instruments and Hedge Accounting The Company formally documents its risk management objectives and strategies to manage exposures to fluctuations in foreign currency exchange rates and interest rates. The risk management policy permits the use of certain derivative financial instruments, including forward foreign exchange contracts and interest rate swaps, to manage these fluctuations. The Company does not enter into derivative financial agreements for speculative purposes. Derivative financial instruments are measured at their fair value upon initial recognition and are remeasured to their fair value at the end of each reporting period. The fair value of quoted derivatives is equal to their positive or negative market value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. The Company elected to apply hedge accounting for foreign exchange forward contracts for anticipated transactions. These are designated as cash flow hedges. For cash flow hedges, fair value changes of the effective portion of the hedging instrument are recognized in accumulated other comprehensive income, net of taxes. The ineffective portion of the fair value changes is recognized in the consolidated statements of earnings. Amounts charged to accumulated other comprehensive income are reclassified to the consolidated statements of earnings when the hedged transaction affects the consolidated statements of earnings. The Company’s U.S. dollar denominated long-term debt has been designated as a hedge of net investment in self-sustaining foreign operations. As a result, a portion of unrealized foreign exchange gains and losses on the U.S. dollar denominated long-term debt are included in the cumulative translation account in other comprehensive income. On an ongoing basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions. (t) Income Taxes Income tax expense represents the sum of current income tax and deferred tax. Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Taxable earnings differ from earnings as reported in the consolidated statements of earnings as it excludes temporary and permanent differences. The Company’s current tax assets and liabilities are calculated by using tax rates that have been enacted or substantively enacted at the reporting date. Deferred income tax is recognized on all temporary differences at the reporting date based on the difference between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, with the following exceptions: • Where the temporary difference arises from the initial recognition of goodwill or of an asset or liability in a transaction that is not a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss; In respect of taxable temporary differences associated with investments in subsidiaries, associates and joint ventures, where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future; and • • Deferred income tax assets are recognized only to the extent that it is probable that a taxable profit will be available against which the deductible temporary differences, carried forward tax credits or tax losses can be utilized. The carrying amount of deferred income tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax assets to be utilized. Unrecognized deferred income tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax assets and liabilities are measured on an undiscounted basis at the tax rates that are expected to apply when the asset is realized or the liability is settled, based on tax rates and tax laws enacted or substantively enacted at the reporting date. Current and deferred income taxes are charged or credited directly to equity if it relates to items that are credited or charged to equity in the same period. Otherwise, income tax is recognized in the consolidated statements of earnings. 62 58 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report In accordance with IAS 12 Income taxes, where an entity’s tax return is prepared in a currency other than its functional currency, changes in the exchange rate between the two currencies create temporary differences with respect to the valuation of non- monetary assets and liabilities. As a result, deferred tax is recognized in the consolidated statements of earnings and the consolidated statement of financial position. (u) Earnings Per Share Basic earnings per share is calculated by dividing the net earnings for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by adjusting the weighted average number of common shares outstanding for dilutive common shares related to the Company’s equity share-based compensation plan. (v) Finance Income and Costs Finance income comprises interest income on funds invested. Finance income is recognized as it accrues in profit or loss, using the effective interest rate method. Finance costs comprise interest expense on borrowings and interest incurred on lease liabilities. (w) Government Grants Government grants are recorded as a reduction in cost of goods sold and selling and administrative expense within the consolidated statements of earnings in accordance with where the associated expense was recognized. Government grants are recognized when there is reasonable assurance that the grant will be received, and all related conditions are complied with. NOTE 4. CHANGES IN ACCOUNTING POLICIES The Company has reviewed amendments to existing accounting standards and determined that no amendments would have a material impact on the financial statements. NOTE 5. SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENT The timely preparation of financial statements requires that management make estimates and assumptions and use judgment. Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Uncertainty about these assumptions and estimates could however result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. In the process of applying the Company’s accounting policies, management has made the following judgments, estimates and assumptions which have a significant effect on the amounts recognized in the consolidated financial statements: Revenue Recognition – Performance Obligation Satisfied Over Time The Company reflects revenues relating to performance obligations satisfied over time using the percentage-of-completion approach of accounting. The Company uses the input method of percentage-of-completion accounting, whereby actual input costs as a percentage of estimated total costs is used as the basis for determining the extent to which performance obligations are satisfied. The input method of percentage-of-completion accounting provides a faithful depiction of the transfer of control to the customer, as the Company is able to recover costs incurred relating to the satisfaction of the associated performance obligation. This approach to revenue recognition requires management to make a number of estimates and assumptions surrounding the expected profitability of the contract, the estimated degree of completion based on cost progression, and other detailed factors. Although these factors are routinely reviewed as part of the project management process, changes in these estimates or assumptions could lead to changes in the revenues recognized in a given period. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 59 63 Certain contracts also include aspects of variable consideration, such as liquidated damages on project delays. For these contracts, management must make estimations as to the likelihood of the variable consideration being recognized or constrained, based on the status of each project, the potential value of variable consideration, communication received from the customer, and other factors. Enerflex continues to monitor these factors. Changes in estimated cost or revenue associated with a project, including variable consideration, could result in material changes to revenue and gross margin recognized on certain projects. Revenue Recognition – Performance Obligation Satisfied at a Point in Time The Company reflects revenues relating to performance obligations satisfied at a point in time when control – indicated by transfer of the legal title, physical possession, significant risks and rewards of ownership, or any combination of these indicators – is transferred to the customer. Provisions for Warranty Provisions set aside for warranty exposures either relate to amounts provided systematically based on historical experience under contractual warranty obligations or specific provisions created in respect of individual customer issues undergoing commercial resolution and negotiation. Amounts set aside represent management’s best estimate of the likely settlement and the timing of any resolution with the relevant customer. Business Acquisitions In a business acquisition, the Company may acquire assets and assume certain liabilities of an acquired entity. Estimates are made as to the fair value of property, plant and equipment, intangible assets, and goodwill, among other items. In certain circumstances, such as the valuation of property, plant and equipment and intangible assets acquired, the Company relies on independent third-party valuators. The determination of these fair values involves a variety of assumptions, including revenue growth rates, projected cash flows, discount rates, and earnings multiples. Property, Plant and Equipment and Rental Equipment Property, plant and equipment and rental equipment is stated at cost less accumulated depreciation and any impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property, plant and equipment and rental equipment is reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of property, plant and equipment and rental equipment requires judgment and is based on currently available information. Property, plant and equipment and rental equipment is also reviewed for potential impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Changes in circumstances, such as technological advances and changes to business strategy can result in actual useful lives differing significantly from estimates. The assumptions used, including rates and methodologies, are reviewed on an ongoing basis to ensure they continue to be appropriate. Revisions to the estimated useful lives of property, plant and equipment and rental equipment constitutes a change in accounting estimate and are applied prospectively. Right-of-Use Asset and Lease Liability The Company determines the right-of-use asset and lease liability for each lease upon commencement. In calculating the right-of-use asset and lease liability, the Company is required to determine a suitable discount rate in order to calculate the present value of the contractual payments for the right to use the underlying asset during the lease term. In addition, the Company is required to assess the term of the lease, including if the Company is reasonably certain to exercise options to extend the lease or terminate the lease. Discount rates and lease assumptions are reassessed on a periodic basis. Finance Lease Receivables In calculating the value of the Company’s finance lease receivables, the Company is required to determine the fair value of the underlying assets included in the finance lease transaction, or, if lower, the present value of the lease payments discounted using a market rate of interest. The fair value of the underlying assets should reflect the amount that the Company would otherwise recognize on a sale of those assets. 64 60 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Allowance for Doubtful Accounts Amounts included in allowance for doubtful accounts reflect the full lifetime expected credit losses for trade receivables. The Company determines allowances based on management’s best estimate of future expected credit losses, considering historical default rates, current economic conditions, and forecasts of future economic conditions. Future economic conditions, especially around the oil and gas industry, may have a significant impact on the collectability of trade receivables from customers and the corresponding expected credit losses. Management has implemented additional monitoring processes in assessing the creditworthiness of customers and believes the current provision appropriately reflects the best estimate of its future expected credit losses. Significant or unanticipated changes in economic conditions could impact the magnitude of future expected credit losses. Impairment of Inventories The Company regularly reviews the nature and quantities of inventory on hand and evaluates the net realizable value of items based on historical usage patterns, known changes to equipment or processes, and customer demand for specific products. Significant or unanticipated changes in business conditions could impact the magnitude and timing of impairment recognized. Impairment of Non-Financial Assets Impairment exists when the carrying value of an asset or group of assets exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value-in-use. The fair value less costs to sell calculation is based on available data from binding sales transactions in an arm’s length transaction of similar assets or observable market prices less incremental costs for disposing of the asset. The value-in-use calculation is based on a discounted cash flow model, which requires the Company to estimate future cash flows and use judgment to determine a suitable discount rate to calculate the present value of those cash flows. Impairment of Goodwill The Company tests goodwill for impairment at least on an annual basis, or when there is any indication that goodwill may be impaired. This requires an estimation of the value-in-use of the groups of CGUs to which the goodwill is allocated. Estimating the value-in-use requires an estimate of the expected future cash flows from each group of CGUs and use judgment to determine a suitable discount rate in order to calculate the present value of those cash flows. The methodology and assumptions used, as well as the results of the assessment performed are detailed in Note 14. Income Taxes Uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and the assumptions made, or future changes to such assumptions, could necessitate future adjustments to taxable income. The Company establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on various factors, such as experience of previous tax audits and differing interpretations of tax regulations by the taxable entity and the responsible tax authority. Such differences of interpretation may arise on a wide variety of issues depending on the conditions prevailing in the respective company’s domicile. Deferred tax assets are recognized for all unused tax losses, carried forward tax credits or other deductible temporary differences to the extent that it is probable that taxable profit will be available against which these deferred tax assets can be utilized. Significant judgment is required to determine the amount of deferred tax assets that can be recognized, based upon the timing of reversal, expiry of losses and the level of future taxable profits together with future tax planning strategies. The basis for this estimate is management’s cash flow projections. To the extent the Company determines the recoverability of deferred tax assets is unlikely, the deferred tax asset is not recognized. Management regularly assesses the unrecognized deferred tax asset to determine what portion can be recognized in response to changing economic conditions or recent events. Share-Based Compensation The Company employs the fair value method of accounting for stock options and phantom share entitlement. The determination of the share-based compensation expense for stock options and phantom share entitlement requires the use of estimates and assumptions based on exercise prices, market conditions, vesting criteria, length of employment, and past experiences of the Company. Changes in these estimates and future events could alter the determination of the provision for such compensation. Details concerning the assumptions used are described in Note 24. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 61 65 Government Grants In response to the COVID-19 pandemic and associated restrictions, including mandated quarantines, business closures, and travel restrictions, governments in certain jurisdictions in which the Company does business have established programs to assist companies and individuals through the period for which these restrictions are in place. During the year, the Company continued to qualify for government grants in several jurisdictions, primarily the Canada Emergency Wage Subsidy, Canada Emergency Rent Subsidy, Hardest- Hit Business Recovery Program, and the Employee Retention Credit program in USA. Subsidies received have been recorded as a reduction in cost of goods sold and selling and administrative expenses within the consolidated statements of earnings in accordance with where the associated expense was recognized. There are no unfulfilled conditions or other contingencies relating to government assistance that has been recognized. Total subsidies received is in Note 34. NOTE 6. NEW POLICIES, STANDARDS, INTERPRETATIONS, AND AMENDMENTS The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective and determined that no pronouncements or amendments would be expected to have a material impact on future financial statements. NOTE 7. ACCOUNTS RECEIVABLE AND CONTRACT ASSETS Accounts receivable consisted of the following: December 31, Trade receivables Less: allowance for doubtful accounts Trade receivables, net Other receivables Total accounts receivable Aging of trade receivables: December 31, Current to 90 days Over 90 days Movement in allowance for doubtful accounts: December 31, Balance, January 1 Impairment provision additions on receivables Amounts settled and derecognized during the year Currency translation effects 2021 213,815 $ (10,334) 203,481 $ 8,725 212,206 $ 2021 183,105 $ 30,710 213,815 $ 2021 11,439 $ 275 (1,317) (63) 10,334 $ 2020 194,777 (11,439) 183,338 30,037 213,375 2020 152,285 42,492 194,777 2020 2,144 21,072 (11,071) (706) 11,439 $ $ $ $ $ $ $ 66 62 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Movement in contract assets: December 31, Balance, January 1 Unbilled revenue recognized Amounts billed Amounts transferred to other assets Currency translation effects 2021 $ 66,722 $ 244,372 (228,327) - (7) $ 82,760 $ 2020 130,392 238,300 (281,145) (26,625) 5,800 66,722 Amounts recognized as contract assets are typically billed to customers within three months. NOTE 8. INVENTORIES Inventories consists of the following: December 31, Direct materials Repair and distribution parts Work-in-progress Equipment Total inventories December 31, Work-in-progress related to finance leases 2021 2020 $ 83,943 $ 119,342 54,156 31,298 3,290 52,125 25,185 15,599 172,687 $ 212,251 2021 36,169 $ 2020 - $ $ The amount of inventory and overhead costs recognized as an expense and included in cost of goods during 2021 was $740.6 million (December 31, 2020 – $918.9 million). Cost of goods sold is made up of direct materials, direct labour, depreciation on manufacturing assets, post-manufacturing expenses, and overhead. Cost of goods sold also includes inventory write-downs pertaining to obsolescence and aging together with recoveries of past write-downs upon disposition. The net amount of inventory write-downs charged to the consolidated statements of earnings and included in cost of goods sold for the year ended December 31, 2021 was $6.1 million (December 31, 2020 – $5.4 million). The costs related to the construction of rental assets determined to be finance leases are accounted for as work-in-progress related to finance leases. Once the project is completed and enters service it will be reclassified to cost of goods sold. During the year ended December 31, 2021 the Company spent $36.2 million (December 30, 2020 – nil) related to finance leases. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 63 67 NOTE 9. PROPERTY, PLANT AND EQUIPMENT AND RENTAL EQUIPMENT Land Building Equipment Assets under construction Total property, plant and equipment Rental equipment Cost January 1, 2021 $ 18,471 $ 112,179 $ 63,844 $ 4,050 $ 198,544 $ 881,684 Additions Reclassification Disposals - - - Currency translation effects (60) - 2,327 (66) (419) 831 2,566 (2,436) (313) 4,323 (5,297) - (8) 5,154 (404) (2,502) (800) 52,187 - (82,304) (11,833) December 31, 2021 $ 18,411 $ 114,021 $ 64,492 $ 3,068 $ 199,992 $ 839,734 Accumulated depreciation January 1, 2021 $ - $ (44,334) $ (51,574) $ - $ (95,908) $ (243,870) Depreciation charge Impairment Disposals Currency translation effects December 31, 2021 Net book value – December 31, 2021 $ $ - - - - (5,956) (4,451) - 66 137 - 2,351 183 - - - - (10,407) (55,466) - 2,417 320 (537) 62,990 7,477 - $ (50,087) $ (53,491) $ - $ (103,578) $ (229,406) 18,411 $ 63,934 $ 11,001 $ 3,068 $ 96,414 $ 610,328 Land Building Equipment Assets under construction Total property, plant and equipment Rental equipment Cost January 1, 2020 $ 18,756 $ 105,130 $ 63,386 $ 10,304 $ 197,576 $ 917,204 Additions Reclassification Disposals - - - 198 9,213 (76) Currency translation effects (285) (2,286) 1,176 3,324 (3,120) (922) 8,500 (14,956) - 202 9,874 (2,419) (3,196) (3,291) 123,879 - (119,251) (40,148) December 31, 2020 $ 18,471 $ 112,179 $ 63,844 $ 4,050 $ 198,544 $ 881,684 Accumulated depreciation January 1, 2020 $ - $ (39,262) $ (49,763) $ - $ (89,025) $ (275,109) Depreciation charge Impairment Disposals Currency translation effects December 31, 2020 Net book value – December 31, 2020 $ $ - - - - (5,945) (5,558) - 71 802 - 3,055 692 - - - - (11,503) (51,360) - 3,126 1,494 (2,607) 67,054 18,152 - $ (44,334) $ (51,574) $ - $ (95,908) $ (243,870) 18,471 $ 67,845 $ 12,270 $ 4,050 $ 102,636 $ 637,814 During the fourth quarter of 2021, the Company recorded a disposition of certain rental equipment that was recognized as a finance lease. Refer to Note 11 for further details on the finance lease transaction. 68 64 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Depreciation of property, plant and equipment and rental equipment included in earnings (loss) for the year ended December 31, 2021 was $65.9 million (December 31, 2020 – $62.9 million), of which $62.2 million was included in cost of goods sold (December 31, 2020 – $59.2 million) and $3.7 million was included in selling and administrative expenses (December 31, 2020 – $3.7 million). Impairment of rental equipment included in earnings for the year ended December 31, 2021 was $0.5 million (December 31, 2020 – $2.6 million). NOTE 10. LEASE RIGHT-OF-USE ASSETS Cost January 1, 2021 Additions Disposal Currency translation effects December 31, 2021 Accumulated depreciation January 1, 2021 Depreciation charge Disposal Currency translation effects December 31, 2021 Net book value – December 31, 2021 Cost January 1, 2020 Additions Disposal Currency translation effects December 31, 2020 Accumulated depreciation January 1, 2020 Depreciation charge Disposal Currency translation effects December 31, 2020 Net book value – December 31, 2020 Land and buildings Equipment Total lease right-of-use assets 56,242 $ 19,360 $ 4,097 (1,644) (315) 6,778 (1,583) (196) 58,380 $ 24,359 $ (13,527) $ (7,891) $ (8,350) 1,535 144 (5,492) 714 15 (20,198) $ (12,654) $ 38,182 $ 11,705 $ 75,602 10,875 (3,227) (511) 82,739 (21,418) (13,842) 2,249 159 (32,852) 49,887 Land and buildings Equipment Total lease right-of-use assets 55,463 $ 17,104 $ 3,923 (3,069) (75) 4,389 (1,821) (312) 56,242 $ 19,360 $ (8,028) $ (4,251) $ (8,106) 2,513 94 (13,527) $ 42,715 $ (5,601) 1,779 182 (7,891) $ 11,469 $ 72,567 8,312 (4,890) (387) 75,602 (12,279) (13,707) 4,292 276 (21,418) 54,184 $ $ $ $ $ $ $ $ $ $ Depreciation of lease right-of-use assets included in earnings for the year ended December 31, 2021 was $13.8 million (December 31, 2020 – $13.7 million), of which $7.4 million was included in cost of goods sold (December 31, 2020 – $7.1 million) and $6.4 million was included in selling and administrative expenses (December 31, 2020 – $6.6 million). Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 65 69 NOTE 11. FINANCE LEASES RECEIVABLE The Company entered into finance lease arrangements for certain of its rental assets. The terms of the leases entered into range from three to 10 years. During the fourth quarter of 2021, the Company entered into an agreement to extend an existing contract. The new arrangement has been determined to be accounted for as a finance lease. Enerflex, as a manufacturer lessor, recognizes selling profit or loss on a finance lease at the commencement date. Revenue from contracts that have been classified as finance leases for newly built equipment is recorded as Engineered Systems revenue. Revenue from contracts that have been classified as finance leases related to existing or pre- owned equipment, is recorded as Energy Infrastructure revenue. Upon commencement of the new lease, the Company recognizes revenue, based on the fair value of the underlying assets, and cost of goods sold, determined to be the net book value of those assets, in the consolidated statements of earnings. The finance lease interest portion will be recognized in the Energy Infrastructure product line over the lease term. In addition, the Company recognizes a finance lease receivable equal to the revenue recognized and derecognized the net book value of the underlying assets from rental equipment. The value of the finance lease receivable is comprised of the following: Minimum lease payments Present value of minimum lease payments December 31, 2021 2020 2021 Less than one year $ 16,420 $ 3,047 $ 15,248 $ Between one and five years Later than five years 64,739 62,827 42,129 45,445 49,546 38,564 Less: unearned finance income $ $ 143,986 $ 90,621 $ 103,358 $ (40,628) (26,347) - 103,358 $ 64,274 $ 103,358 $ December 31, Balance, January 1 Additions Interest income Billings and payments Currency translation effects 2021 $ 64,274 $ 40,154 5,417 (6,597) 110 $ 103,358 $ 2020 2,928 34,020 27,326 64,274 - 64,274 2020 900 64,270 80 (639) (337) 64,274 The average interest rates implicit in the leases are fixed at the contract date for the entire lease term. At December 31, 2021 the average interest rate was 8.0 percent per annum (December 31, 2020 – 7.5 percent). The finance lease receivables at the end of reporting period are neither past due nor impaired. 70 66 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NOTE 12. OTHER ASSETS December 31, Investment in associates and joint ventures Long-term receivables Prepaid deposits NOTE 13. INTANGIBLE ASSETS Cost January 1, 2021 Reclassification Currency translation effects December 31, 2021 Accumulated amortization January 1, 2021 Amortization charge Currency translation effects December 31, 2021 Net book value – December 31, 2021 Cost January 1, 2020 Reclassification Disposal Currency translation effects December 31, 2020 Accumulated amortization January 1, 2020 Amortization charge Disposal Currency translation effects December 31, 2020 Net book value – December 31, 2020 $ $ 2021 27,064 $ 24,172 79 51,315 $ 2020 26,566 31,910 124 58,600 Customer relationships and other Software Total intangible assets 69,824 $ 48,698 $ 118,522 - (230) 404 (33) 404 (263) 69,594 $ 49,069 $ 118,663 (59,296) $ (42,682) $ (101,978) (4,642) 121 (63,817) 5,777 $ $ (2,079) 33 (6,721) 154 (44,728) $ (108,545) 4,341 $ 10,118 Customer relationships and other Software Total intangible assets 70,895 $ 51,283 $ 122,178 - - (1,071) 2,419 (5,045) 41 2,419 (5,045) (1,030) 69,824 $ 48,698 $ 118,522 (55,232) $ (44,888) $ (100,120) (4,974) - 910 (2,798) 5,045 (41) (7,772) 5,045 869 (59,296) 10,528 $ $ (42,682) $ (101,978) 6,016 $ 16,544 $ $ $ $ $ $ $ $ $ $ Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 67 71 NOTE 14. GOODWILL AND IMPAIRMENT REVIEW OF GOODWILL December 31, Balance, January 1 Currency translation effects 2021 576,028 $ (9,758) 566,270 $ 2020 573,928 2,100 576,028 $ $ Goodwill acquired through business combinations was allocated to the USA, Rest of World, and Canada business segments, and represents the lowest level at which goodwill is monitored for internal management purposes. At December 31, 2021, the Company determined that there were no indicators of impairment, and performed an annual assessment comparing the carrying amount and recoverable amount for each segment in accordance with IAS 36.10(b). In assessing whether goodwill has been impaired, the carrying amount of the segment (including goodwill) is compared with its recoverable amount. The recoverable amount is the higher of the fair value less costs to sell and value-in-use. The recoverable amounts for the segments have been determined based on value-in-use calculations, using discounted cash flow projections as at December 31, 2021. Management has adopted a five-year projection period to assess each segment’s value-in-use. A terminal value is then determined using a perpetual growth methodology based on the fifth year. This five-year projection includes the financial budgets approved by the Board of Directors for 2022 and management’s expectations of cash flows for 2023 to 2026. Key Assumptions Used in Value-In-Use Calculations: The Company completed its annual assessment for goodwill impairment and determined that the recoverable amount for the USA, Rest of World, and Canada segments exceeded the carrying amount using a 9.4 percent (December 31, 2020 – 9.6 percent), 12.6 percent (December 31, 2020 – 12.8 percent), and 10.7 percent (December 31, 2020 – 10.9 percent) post-tax discount rate, respectively. The estimation of value-in-use involved significant judgment in the determination of inputs to the discounted cash flow model and is most sensitive to changes in terminal growth and discount rates. These key assumptions were tested for sensitivity by applying a reasonable possible change to those assumptions. Future earnings before finance costs and taxes were changed by ten percent while the discount rate was changed by one percent. • Earnings Before Finance Costs and Taxes: Management has made estimates relating to the amount and timing of revenue recognition for projects included in backlog, and the assessment of the likelihood of maintaining and growing market share. For each ten percent change in earnings before finance costs and taxes, the impact on the value-in-use would be $17.1 million for the Canada segment and $91.0 million for the ROW segment. This ten percent change in earnings before finance costs and taxes would trigger an impairment in the Canada and ROW segments. • Discount Rate: Management determines a discount rate for each segment based on the estimated weighted average cost of capital of the Company, using the five-year average of the Company’s peer group debt to total enterprise value, adjusted for a number of risk factors specific to each segment. This discount rate has been calculated using an estimated risk-free rate of return adjusted for the Company’s estimated equity market risk premium, the Company’s cost of debt, and the tax rate in the local jurisdiction. For each one percent change in the discount rate, the impact on the value-in-use would be $21.1 million for the Canada segment and $118.6 million for the ROW segment. This one percent change in weighted average cost of capital would trigger an impairment in the Canada and ROW segments. Management will continue to assess the long-term projected cash flows, as certain factors may cause a material variance from previously used cash flow projections. Management notes that there is a potential for future impairments as more certainty around future cash flows is achieved. 72 68 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NOTE 15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES December 31, Accounts payable and accrued liabilities Accrued dividend payable Cash-settled share-based payments NOTE 16. WARRANTY PROVISIONS December 31, Balance, January 1 Additions during the year Amounts settled and released in the year Currency translation effects NOTE 17. DEFERRED REVENUES December 31, Balance, January 1 Cash received in advance of revenue recognition Revenue subsequently recognized Currency translation effects 2021 2020 234,212 $ 178,303 2,242 4,293 1,794 2,055 240,747 $ 182,152 2021 10,549 $ 849 (4,681) (81) 6,636 $ 2020 15,563 8,203 (13,232) 15 10,549 2021 35,409 $ 167,956 (118,438) (313) 84,614 $ 2020 89,409 247,100 (306,334) 5,234 35,409 $ $ $ $ $ $ Amounts recognized as deferred revenues are typically recognized into revenue within six months. NOTE 18. LONG-TERM DEBT Through private placement, the Company has $266.9 million of senior unsecured notes (“Notes”) issued and outstanding. These Notes consist of $105.0 million U.S. dollar and $15.0 million Canadian dollar maturing December 15, 2024 bearing an interest rate of 4.67 percent and 4.50 percent respectively, and $70.0 million U.S. dollar and $30.0 million Canadian dollar maturing December 15, 2027 bearing an interest rate of 4.87 percent and 4.79 percent respectively. During the third quarter of 2021, Enerflex successfully extended the maturity date for $660.0 million of $725.0 million in commitments to its amended and restated syndicated revolving credit facility (“Bank Facility”) to June 30, 2025 (the “Maturity Date”). The maturity date for the other $65.0 million in commitments to the Bank Facility remains June 30, 2023. In addition, the Bank Facility may be increased by $150.0 million at the request of the Company, subject to the lenders’ consent. There are no required or scheduled repayment of principal until the maturity date of the Bank Facility. Drawings on the Bank Facility are available by way of Prime Rate loans, U.S. Base Rate loans, London Interbank Offered Rate (“LIBOR”) loans, and Bankers’ Acceptance notes. The Company may also draw on the Bank Facility through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Bank Facility. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 69 73 Pursuant to the terms and conditions of the Bank Facility, a margin is applied to drawings on the Bank Facility in addition to the quoted interest rate. The margin is established in basis points and is based on a consolidated net debt to earnings before finance costs, income taxes, depreciation and amortization (“EBITDA”) ratio. The margin is adjusted effective the first day of the third month following the end of each fiscal quarter based on the above ratio. The Bank Facility is unsecured and ranks pari passu with the Notes. The Company is required to maintain certain covenants on the Bank Facility and the Notes. As at December 31, 2021, the Company was in compliance with these covenants. During the second quarter of 2021, a subsidiary of the Company finalized access to a credit facility, secured by certain assets of the subsidiary, of up to $52.5 million U.S. dollars (the “Asset-Based Facility”). This new credit facility is non-recourse to the Company. Under the terms of the Asset-Based Facility, the Company is required to maintain certain covenants. As at December 31, 2021, the Company was in compliance with these covenants. Pursuant to the terms and conditions of the Asset-Based Facility, a margin is applied to drawings on the Asset-Based Facility in addition to the quoted interest rate. The margin is established as a percentage and is based on a consolidated total funded debt to EBITDA ratio. The composition of the borrowings on the Bank Facility, Asset-Based Facility, and the Company’s Notes is as follows: December 31, Drawings on Bank Facility Drawings on Asset-Based Facility Notes due June 22, 2021 Notes due December 15, 2024 Notes due December 15, 2027 Deferred transaction costs Current portion of long-term debt Non-current portion of long-term debt 2021 $ 30,522 $ 37,411 - 148,119 118,746 (3,376) 331,422 $ - $ 331,422 331,422 $ $ $ $ 2020 84,369 - 40,000 148,686 119,124 (2,467) 389,712 40,000 349,712 389,712 During the second quarter of 2021, the Company repaid $40.0 million of 6.0 percent senior unsecured notes that were due June 22, 2021. The repayment was financed by cash on hand and drawings on the Bank Facility. The weighted average interest rate on the Bank Facility for the year ended December 31, 2021 was 2.1 percent (December 31, 2020 – 2.3 percent). The weighted average interest rate on the Asset-Based Facility for the year ended December 31, 2021 was 3.0 percent (December 31, 2020 – nil). At December 31, 2021 without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $216.1 million, and $118.7 million thereafter. 74 70 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NOTE 19. LEASE LIABILITIES December 31, Balance, January 1 Additions Lease interest Payments made against lease liabilities Currency translation effects and other Closing balance Current portion of lease liabilities Non-current portion of lease liabilities 2021 $ 61,926 $ 9,721 3,029 (17,244) (418) 57,014 $ 13,906 $ 43,108 57,014 $ $ $ $ 2020 67,000 8,065 3,371 (16,141) (369) 61,926 14,693 47,233 61,926 In addition to the lease payments made above, during the year ended December 31, 2021, the Company paid $0.3 million (December 31, 2020 – $1.0 million) relating to short-term and low-value leases which were expensed as incurred. During year ended December 31, 2021, the Company also paid $3.0 million (December 31, 2020 – $1.6 million) in variable lease payments not included in the measurement of lease liabilities, of which $1.8 million (December 31, 2020 – $0.7 million) was included in cost of goods sold and $1.2 million (December 31, 2020 – $0.9 million) was included in selling and administrative expenses. Interest expense on lease liabilities was $3.0 million for the year ended December 31, 2021 (December 31, 2020 – $3.4 million). Total cash outflow for leases for the year ended December 31, 2021 was $20.5 million (December 31, 2020 – $18.7 million). Future minimum lease payments under non-cancellable leases is as follows: 2022 2023 2024 2025 2026 Thereafter Less: Imputed interest Short-term leases Low-value leases December 31, 2021 $ $ 15,448 11,167 8,192 6,313 4,561 22,817 68,498 11,273 165 46 $ 57,014 Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 71 75 NOTE 20. INCOME TAXES (a) Income Tax Recognized in Net Earnings The components of income tax expense were as follows: Years ended December 31, Current income taxes Deferred income taxes $ $ 2021 13,135 $ 43,422 56,557 $ 2020 (6,872) 14,174 7,302 (b) Reconciliation of Tax Expense The provision for income taxes differs from that which would be expected by applying Canadian statutory rates. A reconciliation of the difference is as follows: Years ended December 31, Earnings before income taxes Canadian statutory rate Expected income tax provision Add (deduct): Exchange rate effects on tax basis Earnings taxed in foreign jurisdictions Revaluation of Canadian deferred tax assets due to change in statutory rate Withholding tax on dividends received from foreign subsidiaries Amounts not deductible (taxable) for tax purposes Impact of accounting for associates and joint ventures Change in recognized deferred tax assets Other $ $ 2021 38,102 $ 23.8% 9,068 $ (2,269) 2,313 (660) 2,763 811 (160) 44,704 (13) 2020 95,559 24.4% 23,316 (4,007) (14,505) 597 - 2,426 (530) - 5 Income tax expense from continuing operations $ 56,557 $ 7,302 The applicable statutory tax rate is the aggregate of the Canadian federal income tax rate of 15.0 percent (2020 – 15.0 percent) and provincial income tax rates of 8.8 percent (2020 – 10.3 percent). During the fourth quarter of 2020, lower Alberta corporate income tax rates became substantially enacted. The Alberta corporate income tax rates are 9.0 percent for 2020, and 8.0 percent thereafter. The Company’s effective tax rate is subject to fluctuations in the Argentine peso and Mexican peso exchange rate against the U.S. dollar. Since the Company holds significant rental assets in Argentina and Mexico, the tax base of these assets is denominated in Argentine peso and Mexican peso, respectively. The functional currency is, however, the U.S. dollar and as a result, the related local currency tax bases are revalued periodically to reflect the closing U.S. dollar rate against these currencies. Any movement in the exchange rate results in a corresponding unrealized exchange rate gain or loss being recorded as part of deferred income tax expense or recovery. During periods of large fluctuation or devaluation of the local currency against the U.S. dollar, these amounts may be significant but are unrealized and may reverse in the future. Recognition of these amounts is required by IFRS, even though the revalued tax basis does not generate any cash tax obligation or liability in the future. 76 72 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report (c) Income Tax Recognized in Other Comprehensive Income Years ended December 31, Deferred Tax Arising on income and expenses recognized in other comprehensive income: Fair value remeasurement of hedging instruments entered into for cash flow hedges $ Arising on income and expenses reclassified from other comprehensive income to net earnings: Relating to cash flow hedges Arising on foreign exchange movement on long-term debt: Relating to net investment hedge Total income tax recognized in other comprehensive income $ 2021 2020 77 $ 186 (53) - 24 $ 158 61 405 (d) Net Deferred Tax Assets (Liabilities) Deferred tax assets and liabilities arise from the following: Accounting provisions and accruals Tax losses Long-term assets Other Exchange rate effects on tax bases Cash flow hedges Total1 $ 18,058 $ 28,969 $ (73,956) $ 544 $ (12,799) $ (8) $ (39,192) January 1, 2021 Charged to net earnings Charged to OCI (10,945) (21,808) (12,398) (572) 2,269 - - - 99 - 539 - 54 32 (24) (43,422) (24) (41) Exchange differences (91) (642) December 31, 2021 $ 7,022 $ 6,519 $ (86,255) $ 511 $ (10,476) $ - $ (82,679) 1Net deferred tax liabilities at December 31, 2021 of $82.7 million consist of liabilities of $92.0 million net of assets of $9.3 million. Accounting provisions and accruals Tax losses Long-term assets Other Exchange rate effects on tax bases Cash flow hedges Total1 $ 19,449 $ 26,082 $ (57,684) $ 1,330 $ (17,144) $ 335 $ (27,632) (2,080) 2,661 (18,003) - 689 - 226 - 1,731 (756) (61) 31 4,007 - 338 - (14,171) (344) 1 (405) 3,016 January 1, 2020 Charged to net earnings Charged to OCI Exchange differences December 31, 2020 $ 18,058 $ 28,969 $ (73,956) $ 544 $ (12,799) $ (8) $ (39,192) 1Net deferred tax liabilities at December 31, 2020 of $39.2 million consist of liabilities of $87.4 million net of assets of $48.2 million. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 73 77 (e) Unrecognized Deferred Tax Assets As at December 31, 2021, the Company did not recognize deductible temporary differences of $225.9 million (December 31, 2020 - $49.7 million) and unused Canadian tax credits of $1.1 million (December 31, 2020 - nil) for which it is unlikely that sufficient future taxable income will be available to offset against. The derecognition of certain deferred tax assets in Canada was due to a combination of factors which include losses in recent prior periods, current period losses and continued challenging market conditions. The deductible temporary differences consist of: Years ended December 31, Canadian: Tax losses Capital assets Accounting provisions & other accruals Foreign: Tax losses 2021 2020 $ 138,408 $ 22,758 26,363 38,374 $ 225,903 $ - - - 49,667 49,667 The Company’s unused tax losses and tax credits are subject to expiration in the years 2022 through 2041. NOTE 21. SHARE CAPITAL AUTHORIZED The Company is authorized to issue an unlimited number of common shares. Share capital comprises only one class of ordinary shares. The ordinary shares carry a voting right and a right to a dividend. Issued and Outstanding Years ended December 31, Balance, January 1 Exercise of stock options 2021 2020 Number of common shares Common share capital Number of common shares Common share capital 89,678,845 $ 375,524 89,678,845 $ 375,524 - - - - 89,678,845 $ 375,524 89,678,845 $ 375,524 Total dividends declared in the year were $7.6 million, or $0.02 per share during the first three quarters and $0.025 per share in the fourth quarter of 2021 (December 31, 2020 – $15.7 million, or $0.115 in the first quarter and $0.02 per share during the last three quarters of 2020). NOTE 22. CONTRIBUTED SURPLUS Contributed surplus consists of accumulated stock option expense less the fair value of the options at the grant date that have been exercised and reclassified to share capital. Changes in contributed surplus were as follows: Years ended December 31, Balance, January 1 Share-based compensation Exercise of stock options 2021 656,832 $ 1,783 - 2020 655,107 1,725 - 658,615 $ 656,832 $ $ 78 74 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NOTE 23. REVENUE Years ended December 31, Engineered Systems Service Energy Infrastructure1 Total revenue 2021 354,127 $ 327,376 278,653 2020 598,566 303,269 315,217 960,156 $ 1,217,052 $ $ 1 Energy Infrastructure revenue for 2021 and 2020 includes the recognition of revenue from finance lease transactions in the fourth quarter of the same period. Upon commencement of the renegotiated leases, the Company recognized the sale of the related rental assets and a corresponding finance lease receivable. Refer to Note 11 for further details on finance leases. Revenue by geographic location, which is attributed by destination of sale, is as follows: Years ended December 31, United States 2021 $ 451,675 $ Canada Oman Australia Bahrain Argentina Mexico Colombia Brazil Nigeria Bolivia Other 173,181 84,486 61,520 40,361 34,321 27,355 17,795 17,289 7,853 7,775 36,545 2020 549,854 206,508 53,664 65,683 108,358 21,276 32,945 32,671 11,130 92,334 6,264 36,365 Total revenue $ 960,156 $ 1,217,052 The following table outlines the Company’s unsatisfied performance obligations, by product line, as at December 31, 2021: Engineered Systems Service Energy Infrastructure Less than one year One to two years Greater than two years Total $ 556,844 $ 705 $ - $ 557,549 33,192 158,616 13,437 141,366 44,665 709,555 91,294 1,009,537 $ 748,652 $ 155,508 $ 754,220 $ 1,658,380 Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 75 79 NOTE 24. SHARE-BASED COMPENSATION (a) Share-Based Compensation Expense The share-based compensation expense included in the determination of net earnings was: Years ended December 31, Equity settled share-based payments Deferred share units Phantom share entitlement plan Performance share units Restricted share units Cash performance target 2021 $ 1,783 $ 3,053 102 3,470 2,751 1,778 2020 1,725 (1,830) (54) 667 755 553 Share-based compensation expense $ 12,937 $ 1,816 (b) Equity-Settled Share-Based Payments Years ended December 31, 2021 Weighted average exercise price Number of options Options outstanding, beginning of period 4,057,142 $ Granted Forfeited Expired Options outstanding, end of period Options exercisable, end of period 654,847 (24,267) (231,278) 4,456,444 2,445,230 $ $ 12.78 7.85 9.25 20.75 11.66 13.62 No options were exercised during December 31. 2021 (December 31, 2020 – nil). 2020 Weighted average exercise price 14.67 5.51 15.20 14.33 12.78 14.73 Number of options 3,565,521 $ 839,478 (121,547) (226,310) 4,057,142 $ 1,810,577 $ The Company granted 654,847 stocks options for the year ended December 31, 2021 (December 31, 2020 – 839,478). Using the Black- Scholes option pricing model, the weighted average fair value of stock options granted for the year ended December 31, 2021 was $2.89 per option (December 31, 2020 - $2.15). The weighted average assumptions used in determinations of fair values are noted below: Years ended December 31, Expected life (years) Expected volatility1 Dividend yield Risk-free rate Estimated forfeiture rate 2021 5.26 44.4% 1.0% 1.1% 3.9% 2020 5.34 43.6% 1.4% 0.5% 3.6% 1 Expected volatility is based on the historical volatility of Enerflex over a five-year period, consistent with the expected life of the option. 80 76 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report The following table summarizes options outstanding and exercisable at December 31, 2021: Options Outstanding Options Exercisable Range of exercise prices $5.51 – $9.77 $9.78 – $14.75 $14.76 – $16.12 Total Number outstanding 1,477,950 1,677,399 1,301,095 4,456,444 Weighted average remaining life (years) 6.06 $ 2.61 1.86 3.53 $ Weighted average exercise price 6.53 12.85 15.95 11.66 Weighted average remaining life (years) 5.62 $ 1.79 1.56 1.95 $ Weighted average exercise price 5.51 12.65 15.94 13.62 Number outstanding 167,895 1,194,130 1,083,205 2,445,230 (c) Deferred Share Units The Company offers a DSU plan for executives and non-employee directors, whereby they may elect on an annual basis to receive all or a portion of their annual bonus, or retainer and fees, respectively, in DSUs. In addition, the Board may grant discretionary DSUs to executives. A specified component of non-employee directors’ compensation must be received in DSUs. A DSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the implied market value calculated as the number of DSUs multiplied by the weighted average price per share on the Toronto Stock Exchange (“TSX”) for the five trading days immediately preceding the grant. Additional Enerflex DSUs will be credited on the regular dividend payment dates as all dividends are assumed to be reinvested. DSUs may be granted to eligible participants on an annual basis and will vest upon being credited to the executive or non-employee director’s account. Participants are not able to cash in their DSUs until they are no longer employed by or cease to be directors of Enerflex. The Company satisfies its payment obligation through cash payments to the participant. DSUs represent an indexed liability of the Company relative to the Company’s share price. For the year ended December 31, 2021, the value of directors’ compensation and executive bonuses elected to be received in DSUs totalled $2.1 million (December 31, 2020 – $2.6 million). DSUs outstanding, January 1, 2021 Granted In lieu of dividends DSUs outstanding, December 31, 2021 Number of DSUs Weighted average grant date fair value per unit 1,147,182 $ 247,317 11,671 1,406,170 $ 11.01 8.33 8.15 10.51 The carrying amount of the liability relating to DSUs as at December 31, 2021 included in other long-term liabilities was $10.8 million (December 31, 2020 – $7.5 million). (d) Phantom Share Entitlement Plan The Company utilizes a PSE plan for key employees of affiliates located in the UAE, for whom the Company’s Stock Option Plan would have negative personal taxation consequences. The exercise price of each PSE equals the average of the market price of the Company’s shares on the TSX for the five days preceding the date of the grant. The PSEs vest at a rate of one-fifth on each of the first five anniversaries of the date of the grant and expire on the seventh anniversary. The award entitlements for increases in the share trading value of the Company are to be paid to the recipient in cash upon exercise. In 2021, the Board of Directors granted 24,715 PSEs (December 31, 2020 – 34,853). The intrinsic value of the vested awards at December 31, 2021 was $0.9 million (December 31, 2020 – nil). Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 77 81 PSEs outstanding, January 1, 2021 Granted PSEs outstanding, December 31, 2021 Number of PSEs Weighted average grant date fair value per unit 198,205 $ 24,715 222,920 $ 12.69 7.85 12.15 The carrying amount of the liability relating to the PSEs as at December 31, 2021 included in current liabilities was $0.2 million (December 31, 2020 – $0.1 million) and in other long-term liabilities was $0.1 million (December 31, 2020 – less than $0.1 million). (e) Performance Share Units The Company offers a PSU plan for executive officers of the Company. The PSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested PSUs multiplied by the weighted average price per share on the TSX during the last five trading days immediately preceding the grant. Vesting is based on the achievement of performance measures and objectives specified by the Board of Directors. The Board of Directors assesses performance to determine the vesting percentage, which can range from zero percent to 200 percent. Within 14 days after the determination of the vesting percentage, the holder will be paid for the vested PSUs either in cash or in shares of the Company acquired on the open market on behalf of the holder, at the discretion of the Company. Additional Enerflex PSUs will be credited on the regular dividend payment dates as all dividends are assumed to be reinvested. The Company paid $1.0 million for the year ended December 31, 2021 representing units vested in the year (December 31, 2020 – $0.5 million). PSUs outstanding, January 1, 2021 Granted In lieu of dividends Vested PSUs outstanding, December 31, 2021 Number of PSUs Weighted average grant date fair value per unit 982,835 $ 419,195 10,423 (104,037) 1,308,416 $ 9.35 7.85 8.18 7.36 9.02 The carrying amount of the liability relating to PSUs as at December 31, 2021 included in current liabilities was $2.0 million (December 31, 2020 – $0.6 million) and in other long-term liabilities was $2.6 million (December 31, 2020 – $1.5 million). (f) Restricted Share Units The Company offers a RSU plan to executive officers and other key employees of the Company or its related entities. RSUs may be granted at the discretion of the Board of Directors. An RSU is a notional unit that entitles the holder to receive payment, as described below, from the Company equal to the number of vested RSUs multiplied by the weighted average price per share on the TSX during the last five trading days immediately preceding the vesting date. Unless otherwise determined by the Board, RSUs vest at a rate of one-third on the first, second, and third anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested RSUs. Executive officers receive payment in the form of Company shares acquired on the open market, and other key employees receive either cash or Company shares, at the discretion of the Company. Additional Enerflex RSUs will be credited on the regular dividend payment dates as all dividends are assumed to be reinvested. During 2021, the Board of Directors granted 472,819 RSUs to executive officers and other key employees of the Company (2020 – 680,200). The Company paid $2.3 million for the year ended December 31, 2021 representing units vested in the year (December 31, 2020 – $0.8 million). 82 78 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report RSUs outstanding, January 1, 2021 Granted In lieu of dividends Vested Forfeited RSUs outstanding, December 31, 2021 Number of RSUs Weighted average grant date fair value per unit 782,517 $ 472,819 8,021 (292,205) (74,678) 896,474 $ 7.52 7.85 8.15 7.79 7.37 7.62 The carrying amount of the liability included in current liabilities relating to RSUs at December 31, 2021 was $1.3 million (December 31, 2020 – $0.9 million). (g) Cash Performance Target Plan The Company offers a CPT plan to certain non-executive, U.S.-based employees of the Company or its related entities. The plan is denominated in U.S. dollars and may be granted at the discretion of the Board of Directors. Although the liability associated with the CPT plan follows Enerflex’s share performance, no actual shares or securities are issued under the plan. The cash payment fluctuates based on the percentage of appreciation or depreciation in the share price over the life of the award, which is calculated using the last five days immediately preceding the vesting date. The cash grants are held for three years, and vest at a rate of one-third on the first, second, and third anniversaries of the award date. Within 30 days of the vesting date, the holder will be paid for the vested cash grants, at the discretion of the Company. During 2021, the Board of Directors distributed $2.2 million of CPT cash grants (2020 – $2.4 million). The Company paid $1.5 million for the year ended December 31, 2021 representing units vested in the year (December 31, 2020 – $0.5 million). The weighted average grant fair value per unit was $7.85 (December 31, 2020 – $5.51), using the average share price over the five days preceding the grant date. The carrying amount of the liability included in current liabilities relating to CPT plan at December 31, 2021 was $0.8 million (December 31, 2020 – $0.5 million). (h) Employee Share Purchase Plan The Company offers an employee share purchase plan whereby employees who meet the eligibility criteria can purchase shares by way of payroll deductions. There is a Company match of up to $1,000 per employee per annum based on contributions by the Company of $1 for every $3 contributed by the employee. Company contributions vest to the employee immediately. Company contributions are charged to selling and administrative expense when paid. This plan is administered by a third party. NOTE 25. RETIREMENT BENEFITS PLAN The Company sponsors arrangements for substantially all of its employees through defined contribution plans in Canada, UK, Asia, and Australia, and a 401(k) matched savings plan in the United States. In the case of the defined contribution plans, regular contributions are made to the employees’ individual accounts, which are administered by a plan trustee, in accordance with the plan document. Both in the case of the defined contribution plans and the 401(k) matched savings plan, the pension expenses recorded in earnings are the amounts of actual contributions the Company is required to make in accordance with the terms of the plans. Years ended December 31, Defined contribution plans 401(k) matched savings plan Net pension expense $ $ 2021 4,567 $ 3,025 7,592 $ 2020 4,514 3,912 8,426 Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 79 83 NOTE 26. FINANCE COSTS AND INCOME Years ended December 31, Finance Costs Short and long-term borrowings Interest on lease liability Total finance costs Finance Income Interest income Net finance costs 2021 2020 $ $ $ $ 17,252 $ 3,029 20,281 $ 3,286 $ 16,995 $ 19,993 3,371 23,364 871 22,493 NOTE 27. RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS Year ended December 31, 2021 Basic Dilutive effect of stock option conversion Diluted Year ended December 31, 2020 Basic Dilutive effect of stock option conversion Diluted Net earnings Weighted average shares outstanding Per share (18,455) 89,678,845 $ (0.21) - - (18,455) 89,678,845 $ (0.21) Net earnings Weighted average shares outstanding 88,257 - 88,257 89,678,845 $ - 89,678,845 $ Per share 0.98 - 0.98 $ $ $ $ 84 80 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NOTE 28. FINANCIAL INSTRUMENTS The Company has designated its financial instruments as follows: December 31, 2021 Financial Assets Cash and cash equivalents Carrying value Estimated fair value $ 172,758 $ 172,758 Derivative instruments in designated hedge accounting relationships 294 294 Loans and receivables: Accounts receivable Contract assets Long-term receivables Financial Liabilities 212,206 82,760 24,172 212,206 82,760 27,471 Derivative instruments in designated hedge accounting relationships 180 180 Other financial liabilities: Accounts payable and accrued liabilities Long-term debt – Bank Facility Long-term debt – Asset-Based Facility Long-term debt – Notes Other long-term liabilities December 31, 2020 Financial Assets Cash and cash equivalents Derivative instruments in designated hedge accounting relationships Loans and receivables: Accounts receivable Contract assets Long-term receivables Financial Liabilities 240,747 30,522 37,411 266,865 15,785 Carrying value $ 95,676 $ 491 213,375 66,722 31,910 240,747 30,522 37,411 280,295 15,785 Estimated fair value 95,676 491 213,375 66,722 35,696 Derivative instruments in designated hedge accounting relationships 371 371 Other financial liabilities: Accounts payable and accrued liabilities Current portion of long-term debt - Notes Long-term debt – Bank Facility Long-term debt – Notes Other long-term liabilities 182,152 40,000 84,369 267,810 10,967 182,152 40,610 84,369 284,605 10,967 Fair Values of Financial Assets and Liabilities The following table presents information about the Company’s financial assets and financial liabilities measured at fair value on a recurring basis as at December 31, 2021 and indicates the fair value hierarchy of the valuation techniques used to determine such fair value. During the year ended December 31, 2021, there were no transfers between Level 1 and Level 2 fair value measurements. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 81 85 Fair values are determined using inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. Fair values determined using inputs including forward market rates and credit spreads that are readily observable and reliable, or for which unobservable inputs are determined not to be significant to the fair value, are categorized as Level 2. If there is no active market, fair value is established using valuation techniques, including discounted cash flow models. The inputs to these models are taken from observable market data where possible, including recent arm’s-length market transactions, and comparisons to the current fair value of similar instruments. Where this is not feasible, inputs such as liquidity risk, credit risk, and volatility are used. Financial Assets Derivative financial instruments Long-term receivables Financial Liabilities Derivative financial instruments Long-term debt – Notes Carrying value 294 24,172 180 266,865 $ $ $ $ $ $ $ $ Fair Value Level 1 Level 2 Level 3 - $ - $ 294 $ 27,471 $ - $ - $ 180 $ 280,295 $ - - - - Cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, and other liabilities are reported at amounts approximating their fair values on the consolidated statement of financial position. The fair values approximate the carrying values for these instruments due to their short-term nature. The fair value of derivative financial instruments is measured using the discounted value of the difference between the contract’s value at maturity based on the contracted foreign exchange rate and the contract’s value at maturity based on prevailing exchange rates. The financial institution’s credit risk is also taken into consideration in determining fair value. Long-term debt associated with the Company’s Notes is recorded at amortized cost using the effective interest rate method. The amortized cost of the Notes is equal to the face value as there were no premiums or discounts on the issuance of the debt. Transaction costs associated with the debt were deducted from the debt and are being recognized using the effective interest rate method over the life of the related debt. The fair value of these Notes, determined on a discounted cash flow basis using a weighted average discount rate of 3.5 percent, was $280.3 million at December 31, 2021. Preferred Shares During the third quarter of 2020, the Company accepted preferred shares from a customer in exchange for products and services. The preferred shares were initially recorded at fair value and subsequently measured at amortized cost and recognized as long-term receivables in Other assets. The carrying value and estimated fair value of the preferred shares at December 31, 2021 was $24.2 million and $27.5 million (December 31, 2020 – $22.0 million and $25.7 million). Derivative Financial Instruments and Hedge Accounting Foreign exchange contracts are transacted with financial institutions to hedge foreign currency denominated obligations and cash receipts related to purchases of inventory and sales of products. The following table summarizes the Company’s commitments to buy and sell foreign currencies as at December 31, 2021: Canadian Dollar Denominated Contracts Purchase contracts Sales contracts Purchase contracts Sales contracts USD USD EUR EUR Notional amount Maturity 16,119 (10,849) 1,091 (641) January 2022 – June 2022 January 2022 – September 2022 June 2022 June 2022 86 82 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Management estimates that a gain of $0.1 million would be realized if the contracts were terminated on December 31, 2021. Certain of these forward contracts are designated as cash flow hedges and accordingly, a gain of $0.2 million has been included in other comprehensive income for the year ended December 31, 2021 (December 31, 2020 – gain of $0.5 million). These gains are not expected to affect net earnings as the gains will be reclassified to net earnings and will offset losses recorded on the underlying hedged items, namely foreign currency denominated accounts payable and accounts receivable. The amount removed from other comprehensive income during the year and included in the carrying amount of the hedged items for the year ended December 31, 2021 was a loss of $0.2 million (December 31, 2020 – gain of $0.5 million). All hedging relationships are formally documented, including the risk management objective and strategy. On an on-going basis, an assessment is made as to whether the designated derivative financial instruments continue to be effective in offsetting changes in cash flows of the hedged transactions. Risks Arising from Financial Instruments and Risk Management In the normal course of business, the Company is exposed to financial risks that may potentially impact its operating results in any or all of its business segments. The Company employs risk management strategies with a view to mitigating these risks on a cost-effective basis. Derivative financial agreements are used to manage exposure to fluctuations in exchange rates and interest rates. The Company does not enter into derivative financial agreements for speculative purposes. Foreign Currency Translation Exposure In the normal course of operations, the Company is exposed to movements in the U.S. dollar, the Australian dollar, and the Brazilian real. In addition, Enerflex has significant international exposure through export from its Canadian operations, as well as a number of foreign subsidiaries, the most significant of which are located in the United States, Argentina, Brazil, Colombia, Mexico, Bahrain, Oman, the UAE, and Australia. The types of foreign exchange risk and the Company’s related risk management strategies are as follows: Transaction Exposure The Canadian operations of the Company source the majority of its products and major components from the United States. Consequently, reported costs of inventory and the transaction prices charged to customers for equipment and parts are affected by the relative strength of the Canadian dollar. The Company also sells compression and processing packages in foreign currencies, primarily the U.S. dollar. Most of Enerflex’s international orders are manufactured in the United States if the contract is denominated in U.S. dollars. This minimizes the Company’s foreign currency exposure on these contracts. The Company identifies and hedges all significant transactional currency risks. The Company has implemented a hedging policy, applicable primarily to the Canadian domiciled business units, with the objective of securing the margins earned on awarded contracts denominated in currencies other than Canadian dollars. In addition, the Company may hedge input costs that are paid in a currency other than the home currency of the subsidiary executing the contract. Translation Exposure The Company’s earnings from and net investment in foreign subsidiaries are exposed to fluctuations in exchange rates. The currencies with the most significant impact are the U.S. dollar, Australian dollar, and Brazilian real. Monetary assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the exchange rates in effect at the reporting dates. Non-monetary assets and liabilities measured at historical cost are translated using the rates of exchange at the date of the transaction. Unrealized translation gains and losses are deferred and included in accumulated other comprehensive income. The cumulative currency translation adjustments are recognized in earnings when there has been a reduction in the net investment in the foreign operations. Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 83 87 Earnings from foreign operations are translated into Canadian dollars each period at average exchange rates for the period. As a result, fluctuations in the value of the Canadian dollar relative to these other currencies will impact reported net earnings. The following table shows the effect of a five percent weakening of the Canadian dollar against the U.S. dollar, Australian dollar, and Brazilian real on net earnings before tax for the year ended December 31, 2021, all else being equal. A five percent strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis is provided as an indicative range in a volatile currency environment. Canadian dollar weakens by 5 percent USD Earnings before income taxes $ 1,776 $ AUD (90) $ BRL 167 Sensitivity Analysis The following sensitivity analysis is intended to illustrate the sensitivity to changes in foreign exchange rates on the Company’s financial instruments and show the impact on net earnings and other comprehensive income. Financial instruments affected by currency risk include cash and cash equivalents, accounts receivable, accounts payable, and derivative financial instruments. The following table shows the Company’s sensitivity to a five percent weakening of the Canadian dollar against the U.S. dollar, Australian dollar, and Brazilian real. A five percent strengthening of the Canadian dollar would have an equal and opposite effect. This sensitivity analysis relates to the position as at December 31, 2021 and for the year then ended. Canadian dollar weakens by 5 percent USD AUD Financial instruments held in foreign operations Other comprehensive income Financial instruments held in Canadian operations Earnings before income taxes $ $ 14,019 $ 908 $ BRL 221 (9,633) $ - $ - The movement in net earnings before tax in Canadian operations is a result of a change in the fair values of financial instruments. The majority of these financial instruments are hedged. Interest Rate Risk The Company’s liabilities include long-term debt that is subject to fluctuations in interest rates. The Company’s Notes outstanding at December 31, 2021 include interest rates that are fixed and therefore the related interest expense will not be impacted by fluctuations in interest rates. The Company’s Bank and Asset-Based Facilities, however, is subject to changes in market interest rates. For each one percent change in the rate of interest on the Bank and Asset-Based Facilities, the change in annual interest expense would be $0.7 million. All interest charges are recorded on the consolidated statements of earnings as finance costs. Credit Risk Financial instruments that potentially subject the Company to credit risk consist of cash equivalents, accounts receivable, net investment in finance lease, and derivative financial instruments. The Company has accounts receivable from clients engaged in various industries. These specific industries may be affected by economic factors that may impact accounts receivable. Credit quality of the customer is assessed based on an extensive credit rating scorecard and individual credit limits are defined in accordance with this assessment. Credit is extended based on an evaluation of the customer’s financial condition and, generally, advance payment is not required. Outstanding customer receivables are regularly monitored and an allowance for doubtful accounts is established based expected credit losses. The Company evaluates the concentration of risk at December 31, 2021 with respect to trade receivables as low, as its customers are located in several jurisdictions and industries and operate in largely independent markets. At December 31, 2021, the Company had no individual customers which accounted to more than 10 percent of its revenue or receivables. The maximum exposure to credit risk at the reporting date is the carrying value of each class of financial assets disclosed in this note. The Company does not hold collateral as security. 88 84 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report The credit risk associated with the net investment in finance leases arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into finance lease transactions only in select circumstances. Close contact is maintained with the customer over the duration of the lease to ensure visibility to issues as and if they arise. The credit risk associated with derivative financial instruments arises from the possibility that the counterparties may default on their obligations. In order to minimize this risk, the Company enters into derivative transactions only with highly-rated financial institutions. Liquidity Risk Liquidity risk is the risk that the Company may encounter difficulties in meeting obligations associated with financial liabilities. In managing liquidity risk, the Company has access to a significant portion of its Bank and Asset-Based Facilities for future drawings to meet the Company’s future growth targets and to pay its obligations as they come due. As at December 31, 2021, the Company held cash and cash equivalents of $172.8 million and had drawn $67.9 million against the Bank and Asset-Based Facilities, leaving it with access to $681.5 million for future drawings. The Company continues to meet the covenant requirements of its funded debt, including the Bank Facility and Notes, with a bank-adjusted net debt to EBITDA ratio of 1.0:1 compared to a maximum ratio of 3:1, and an interest coverage ratio of 8:1 compared to a minimum ratio of 3:1. The interest coverage ratio is calculated by dividing the trailing 12-month bank-adjusted EBITDA, as defined by the Company’s lenders, by interest expense over the same time frame. A liquidity analysis of the Company’s financial instruments has been completed on a maturity basis. The following table outlines the cash flows, including interest associated with the maturity of the Company’s financial liabilities, as at December 31, 2021: Less than 3 months 3 months to 1 year Greater than 1 year Derivative financial instruments Foreign currency forward contracts $ 124 $ 56 $ Accounts payable and accrued liabilities 240,747 Long-term debt – Bank Facility Long-term debt – Asset-Based Facility Long-term debt – Notes Other long-term liabilities - - - - - - - - - - $ - 30,522 37,411 266,865 15,785 Total 180 240,747 30,522 37,411 266,865 15,785 The Company expects that cash flows from operations in 2022, together with cash and cash equivalents on hand and credit facilities, will be more than sufficient to fund its requirements for investments in working capital and capital assets. NOTE 29. CAPITAL DISCLOSURES The capital structure of the Company consists of shareholders’ equity plus net debt. The Company manages its capital to ensure that entities in the Company will be able to continue to grow while maximizing the return to shareholders through the optimization of the debt and equity balances. The Company makes adjustments to its capital structure in light of changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new Company shares, or access debt markets. The Company formally reviews the capital structure on an annual basis and monitors it on an on-going basis. As part of this review, the cost of capital and the risks associated with each class of capital are considered. The Company uses the following measure to monitor its capital structure: Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 85 89 Net Debt to EBITDA Ratio Net debt to EBITDA is defined as short and long-term debt less cash and cash equivalents at the end of the period, divided by annualized EBITDA. At December 31, 2021, the net debt to EBITDA ratio was: Years ended December 31, Long-term debt Cash and cash equivalents Net debt Earnings before finance costs and income taxes Depreciation and amortization EBITDA Net debt to EBITDA ratio 2021 331,422 $ (172,758) 158,664 $ 55,097 $ 87,622 142,719 $ $ $ $ $ 2020 389,712 (95,676) 294,036 118,052 85,265 203,317 1.11:1 1.45:1 The net debt to EBITDA ratio, as defined above is not equivalent to the net debt to EBITDA as defined by the Company’s lenders. The bank-adjusted net debt to EBITDA ratio at December 31, 2021 was 1.00. As at December 31, 2021, the Company is in compliance with its covenants NOTE 30. SUPPLEMENTAL CASH FLOW INFORMATION Years ended December 31, Net change in non-cash working capital and other Accounts receivable Contract assets Inventories Work-in-progress related to finance leases Deferred revenue Accounts payable and accrued liabilities, provisions, and income taxes payable Foreign currency and other Cash interest and taxes paid and received during the period: Years ended December 31, Interest paid – short- and long-term borrowings Interest paid – lease liabilities Total interest paid Interest received Taxes paid Taxes received 2021 2020 $ 1,169 $ (16,038) 39,564 (36,169) 49,205 59,613 3,091 $ 100,435 $ $ $ 2021 17,315 $ 3,029 20,344 $ 454 13,725 23,137 170,646 63,670 57,134 - (54,000) (162,841) (41,833) 32,776 2020 19,311 3,371 22,682 308 18,825 5,566 90 86 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report Changes in liabilities arising from financing activities during the period: Years ended December 31, Long-term debt, opening balance Changes from financing cash flows The effect of changes in foreign exchange rates Amortization of deferred transaction costs Other changes Long-term debt, closing balance 2021 $ 389,712 $ (56,975) (406) 1,186 (2,095) 2020 430,487 (40,081) (1,358) 922 (258) $ 331,422 $ 389,712 NOTE 31. GUARANTEES, COMMITMENTS, AND CONTINGENCIES At December 31, 2021, the Company had outstanding letters of credit of $42.1 million (December 31, 2020 - $47.5 million). The Company is involved in litigation and claims associated with normal operations against which certain provisions may be made in the consolidated financial statements. At December 31, 2021, the Company did not record any legal provisions (December 31, 2020 – nil). Management is of the opinion that any resulting settlement arising from the litigation would not materially affect the consolidated financial position, results of operations, or liquidity of the Company. The Company has purchase obligations over the next three years as follows: 2022 2023 2024 $ 243,737 2,904 125 NOTE 32. RELATED PARTIES Enerflex transacts with certain related parties as a normal course of business. Related parties include the Company’s 45 percent equity investment in Roska DBO and the Company’s 65 percent interest in a joint venture in Brazil. All transactions occurring with related parties were in the normal course of business operations under the same terms and conditions as transactions with unrelated companies. A summary of the financial statement impacts of all transactions with all related parties is as follows: Years ended December 31, Associate – Roska DBO Revenue Purchases Accounts receivable Accounts Payable All related party transactions are settled in cash. There were no transactions with the joint venture in Brazil. 2021 2020 $ 352 $ - 128 - 558 - 1 56 Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 87 91 The remuneration of directors and other key management personnel was as follows: Years ended December 31, Short-term compensation Post-employment compensation Share-based payments 2021 $ 5,711 $ 580 6,979 2020 6,344 515 8,011 The remuneration of directors and key executives is determined by the Board of Directors having regard to the performance of individuals and market trends. NOTE 33. SEASONALITY The oil and natural gas service sector in Canada and in some parts of the USA has a distinct seasonal trend in activity levels which results from well-site access and drilling pattern adjustments to take advantage of weather conditions. Generally, Enerflex’s Engineered Systems product line has experienced higher revenues in the fourth quarter of each year while Service and Energy Infrastructure product line revenues have been stable throughout the year. Energy Infrastructure revenues are also impacted by both the Company’s and its customers’ capital investment decisions. The USA and Rest of World segments are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating. 92 88 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report NOTE 34. SEGMENTED INFORMATION Enerflex has identified three reportable operating segments as outlined below, each supported by the Corporate head office. Corporate overheads are allocated to the operating segments based on revenue. In assessing its operating segments, the Company considered economic characteristics, the nature of products and services provided, the nature of production processes, the type of customer for its products and services, and distribution methods used. For each of the operating segments, the Chief Operating Decision Maker reviews internal management reports on at least a quarterly basis. For the year ended December 31, 2021, the Company had no individual customers which accounted for more than 10 percent of its revenue. The following summary describes the operations of each of the Company’s reportable segments: • • • USA generates revenue from manufacturing natural gas compression, refrigeration, processing, and electric power equipment, including custom and standard compression packages and modular natural gas processing equipment and refrigeration systems, in addition to generating revenue from mechanical services and parts, operations and maintenance solutions, and contract compression rentals; Rest of World generates revenue from manufacturing (focusing on large-scale process equipment), after-market services, including parts and components, as well as operations, maintenance, and overhaul services, and rentals of compression and processing equipment. The Rest of World segment has been successful in securing build-own-operate-maintain and integrated turnkey projects; and Canada generates revenue from manufacturing both custom and standard natural gas compression, processing, and electric power equipment, as well as providing after-market mechanical service, parts, and compression and power generation rentals. The accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. Years ended December 31, USA Rest of World Canada Total 2021 2020 2021 2020 2021 2020 2021 2020 Segment revenue $ 497,630 $ 649,133 $ 309,695 $ 353,210 $ 194,439 $ 247,390 $ 1,001,764 $ 1,249,733 Intersegment revenue (27,247) (16,847) (138) (199) (14,223) (15,635) (41,608) (32,681) Revenue $ 470,383 $ 632,286 $ 309,557 $ 353,011 $ 180,216 $ 231,755 $ 960,156 $ 1,217,052 Revenue – Engineered Systems 218,558 390,178 22,500 40,485 113,069 167,903 354,127 598,566 Revenue – Service Revenue – Energy Infrasturcutre1 153,722 150,939 111,500 96,092 62,154 56,238 327,376 303,269 98,103 91,169 175,557 216,434 4,993 7,614 278,653 315,217 Operating income2 $ 14,442 $ 56,504 $ 36,250 $ 40,488 $ 3,599 $ 19,020 $ 54,291 $ 116,012 1 Energy Infrastructure revenue for 2021 includes the recognition of revenue from a finance lease transaction in the fourth quarter of 2021. Upon commencement of the renegotiated lease, the Company recognized the sale of the related rental assets and a corresponding finance lease receivable. Refer to Note 11 for further details on finance leases. 2 In the year ended December 31, 2021, the Company recognized $16.4 million of government grants (December 31, 2020 – $19.6 million). The subsidies received have been recorded as a reduction in cost of goods sold and selling and administrative expenses within the consolidated statements of earnings in accordance with where the associated expenses were recognized. As at December 31, 2021 2020 2021 2020 2021 2020 2021 2020 USA Rest of World Canada Total Segment assets $ 1,000,755 $ 895,022 $ 654,969 $ 610,597 $ 546,250 $ 525,510 $ 2,201,974 $ 2,031,129 Goodwill Corporate 154,437 155,094 323,466 332,567 88,367 88,367 566,270 576,028 - - - - - - (576,802) (427,581) Total segment assets $ 1,155,192 $ 1,050,116 $ 978,435 $ 943,164 $ 634,617 $ 613,877 $ 2,191,442 $ 2,179,576 Notes to the Consolidated Financial Statements | 2021 Annual Report ANNUAL REPORT 2021 | NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 89 93 NOTE 35. SUBSEQUENT EVENTS Subsequent to December 31, 2021, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 7, 2022, to shareholders of record on March 10, 2022. Enerflex’s Board of Directors will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow and anticipated market conditions. On January 24, 2022, Enerflex and Exterran Corporation (NYSE: EXTN) announced they have entered into a definitive agreement to combine the companies in an all-share transaction to create a premier integrated global provider of energy infrastructure. Upon completion of the transaction, which will require shareholder and regulatory approval, the combined entity will operate as Enerflex Ltd. Subject to all approvals, the transaction is expected to close in the second or third quarter of 2022. 94 90 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | ANNUAL REPORT 2021 Enerflex Ltd. | 2021 Annual Report QUARTERLY AND SHARE DATA QUARTERLY DATA (unaudited) 2021 2020 ($ millions, except per share data and percentages) Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 Revenue Operating income 321.4 231.1 204.5 203.2 298.8 265.0 287.4 365.7 19.9 9.6 17.8 Earnings before finance costs and income taxes 20.5 10.0 18.0 Net earnings - continuing operations (32.7) 6.9 4.3 Net earnings - discontinued operations - - - 7.0 6.6 3.0 - 31.0 20.3 14.4 50.2 30.9 21.7 15.4 50.0 32.7 10.7 - - 7.4 - 37.4 - Earnings per share - continuing operations (0.36) 0.08 0.05 0.03 0.36 0.12 0.08 0.42 Earnings per share - discontinued operations - - - - - - - - Depreciation and amortization 23.1 22.0 21.4 21.1 21.6 21.1 21.8 20.7 Cash from operations Capital expenditures, net Property, plant and equipment Rental equipment Dividends (declared) 122.9 12.8 29.5 60.0 55.3 90.7 64.9 9.3 1.2 14.6 1.8 1.1 8.5 1.8 1.3 1.3 1.2 1.8 2.4 4.3 14.6 10.8 13.7 17.4 29.7 60.0 1.8 1.8 1.8 1.8 1.8 10.3 Dividends per share 0.025 0.020 0.020 0.020 0.020 0.020 0.020 0.115 Pre-tax earnings (continuing as a % of revenue) 5.7% 2.3% 6.4% 0.8% 8.7% 6.1% 3.2% 12.0% SHARE DATA (unaudited) Trading price range of shares ($) High Low Close 2021 2020 Q4 Q3 Q2 Q1 Q4 Q3 Q2 Q1 11.12 9.54 9.21 9.75 7.64 6.33 7.06 12.39 6.87 6.76 7.29 6.43 4.51 4.60 4.25 4.18 7.66 9.28 8.39 8.11 6.56 4.62 5.14 5.83 Trading volume (millions) 16.282 11.115 16.477 24.059 17.735 21.442 34.226 32.040 Shares (millions) Outstanding at the end of the period 89.679 89.679 89.679 89.679 89.679 89.679 89.679 89.679 Weighted averages - basic 89.679 89.679 89.679 89.679 89.679 89.679 89.679 89.679 ANNUAL REPORT 2021 | QUARTERLY AND SHARE DATA 95 BOARD OF DIRECTORS FERNANDO ASSING4 Director Houston, TX KEVIN J. REINHART5 Director Calgary, AB ROBERT S. BOSWELL1, 4 Director Denver, CO MAUREEN CORMIER JACKSON6 Director Calgary, AB W. BYRON DUNN2, 4 Director Dallas, TX MONA HALE Director Edmonton, AB H. STANLEY MARSHALL2, 3 Director Paradise, NL MARC E. ROSSITER Director President and Chief Executive Officer Calgary, AB STEPHEN J. SAVIDANT7 Chairman Victoria, BC JUAN CARLOS VILLEGAS4 Director Lo Barnechea, RM, Chile MICHAEL A. WEILL2, 6 Director Houston, TX HELEN J. WESLEY2, 6 Director Tampa Bay, FL 1. Chair of the Nominating and Corporate Governance Committee 2. Member of the Nominating and Corporate Governance Committee 3. Chair of the Human Resources and Compensation Committee 4. Member of the Human Resources and Compensation Committee 5. Chair of the Audit Committee 6. Member of the Audit Committee 7. Chair of the Board EXECUTIVES SANJAY BISHNOI Senior Vice President, Chief Financial Officer Calgary, AB DAVID IZETT Senior Vice President, General Counsel Calgary, AB PATRICIA MARTINEZ Chief Energy Transition Officer and President, Latin America Houston, TX PHIL PYLE President, International Abu Dhabi, UAE GREG STEWART President, United States of America Houston, TX HELMUTH WITULSKI President, Canada Calgary, AB 96 BOARD OF DIRECTORS AND EXECUTIVES | ANNUAL REPORT 2021 SHAREHOLDERS’ INFORMATION COMMON SHARES The common shares of Enerflex are listed and traded on the Toronto Stock Exchange under the symbol “EFX”. AUDITORS Ernst & Young | Calgary, AB, Canada BANKERS The Toronto Dominion Bank | Calgary, AB, Canada The Bank of Nova Scotia | Toronto, ON, Canada INVESTOR RELATIONS Enerflex Ltd. Suite 904, 1331 Macleod Trail SE Calgary, AB, T2G 0K3, Canada Tel: +1.403.387.6377 | Email: ir@enerflex.com Requests for Enerflex’s Annual Report, Quarterly Reports, and other corporate communications should be directed to ir@enerflex.com. TRANSFER AGENT, REGISTRAR, AND DIVIDEND DISBURSING AGENT TSX Trust Company Calgary, AB, Canada and Toronto, ON, Canada For shareholder inquiries: TSX Trust Company 2001 Boul. Robert-Bourassa, Suite 1600 Montreal, QC, H3A 2A6, Canada Mail: PO Box 700 Station B Montreal, QC, H3B 3K3, Canada Tel: +1.800.387.0825 | +1.416.682.3860 Email: inquiries@astfinancial.com Web: astfinancial.com/ca-en All questions about accounts, share certificates, or dividend cheques should be directed to the Transfer Agent, Registrar, and Dividend Disbursing Agent. ANNUAL REPORT 2021 | SHAREHOLDERS’ INFORMATION 97 2021 ANNUAL REPORT Head Office: Suite 904 1331 Macleod Trail SE Calgary, Alberta, Canada T2G 0K3 + 1.403.387.6377 ir@enerflex.com enerflex.com

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