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Central PetroleumT R A N S F O R M I N G E N E R G Y F O R A S U S T A I N A B L E F U T U R E 20 22 A N N U A L R E P O R T 2 E N E R F L E X A N N UA L R E P O RT 2 0 2 2 L O R E M I S P U M Enerflex is in a position of unparalleled strength following the transformational acquisition of Exterran in 2022. Guided by our strategic plan and our Vision of Transforming Energy for a Sustainable Future, we are stronger, more capable, and more resilient than ever before. Our growing global footprint and expanded product and service solutions, paired with our skilled and passionate workforce, has us poised to continue meeting the dynamic needs of the evolving energy industry. Our future is bright. ENERFLEX ANNUAL REPORT 2022 3 C O N T E N T S 3 5 47 CEO Message to Shareholders Management’s Discussion and Analysis Management’s Responsibility for Financial Position 48 Independent Auditor’s Report 52 Consolidated Financial Statements and Notes 105 Directors and Executives 106 Shareholder Information CEO MESSAGE TO SHAREHOLDERS MARC ROSSITER PRESIDENT, CHIEF EXECUTIVE OFFICER, AND DIRECTOR Dear fellow Enerflex shareholders, On behalf of the Executive Management Team (the “EMT”), the Board of Directors (the “Board”), and my Enerflex teammates, I would like to thank you for your support over the last year. 2022 was a year marked by significant change, as we completed the transformational acquisition of Exterran Corporation (“Exterran”), to deliver on our decade-long strategic goal of increasing the recurring nature of our platform, including expanding our portfolio of globally owned-and-contracted energy infrastructure. Today, Enerflex is an infrastructure-first company – we are more resilient and have unparalleled geographic, customer, and product line diversity that has bolstered our ability to serve customers across the global natural gas and energy transition sectors. I could not be more excited about what the future holds for our organization. EXTERRAN ACQUISITION Following the completion of the Exterran acquisition in mid-October, our focus quickly shifted to integration and efficiently realizing the benefits and synergies identified through the evaluation process. We welcomed new teammates across 25 countries and began executing on our integration plans in earnest, capturing approximately two-thirds of the US$60 million of expected synergies within the first 100 days. ENERFLEX ANNUAL REPORT 2022 C E O M E S S A G E TO S H A R E H O L D E R S Through the acquisition, we also welcomed Mr. Roger George, President, Water Solutions, to the EMT and Mr. James Gouin to the Board. More recently, Ms. Laura Folse joined the Board, and we are fortunate to have these impressive individuals provide their leadership and valued expertise to the Enerflex team. 2023 PRIORITIES Enerflex is entering 2023 in a position of significant strength and with an unrelenting focus on shareholder value creation. Our near-term priorities are simple: • maximize cash flow generation to strengthen our financial position; • realize the benefits and synergies from the Exterran acquisition; and • continue to offer best-in-class natural gas and energy transition solutions to our customers across the globe. projects that employ low-carbon technologies. Our Energy Transition team, formalized in 2021, is doing an excellent job of building upon these successes to maintain Enerflex’s competitive advantage in the marketplace. In 2022, the team secured approximately $160 million of bookings that will collectively capture and permanently sequester over one million tonnes of carbon dioxide per annum once in operation. CLOSING REMARKS Enerflex is executing a differentiated vision that will continue to serve the growing need for natural gas and energy transition solutions across the globe for decades to come. With our optionality in geographies, customers, and product lines, coupled with our established base of stable energy infrastructure assets, my conviction in Enerflex’s business plan has never been stronger. On behalf of the Enerflex team, thank you for believing in our vision and for your continued support. With an Engineered Systems backlog of over $1.5 billion, the largest in our Company’s history, we are confident we have de-risked our plans for 2023. Sincerely, TRANSFORMING ENERGY FOR A SUSTAINABLE FUTURE Enerflex’s Vision of Transforming Energy for a Sustainable Future brings purpose to all that we do – we believe it is our responsibility to meet the world’s energy needs in a sustainable manner. Our organization is uniquely positioned to support global decarbonization efforts as natural gas becomes an increasingly important part of the global energy mix. Over our 40-plus-year history, our team has executed more than 150 carbon capture projects and numerous other Marc Rossiter President, Chief Executive Officer, and Director March 1, 2023 4 C E O M E S S A G E TO S H A R E H O L D E R S MANAGEMENT’S DISCUSSION AND ANALYSIS 5 ENERFLEX ANNUAL REPORT 2022 MANAGEMENT’S DISCUSSION AND ANALYSIS March 1, 2023 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 (the “Financial Statements”) for the years ended December 31, 2022 and 2021, and the cautionary statements regarding forward-looking information in the “Forward-Looking Statements” section of this MD&A. 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 Financial Statements, and considers known risks and uncertainties relating to the energy 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 factors 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 (“AIF”) and Management Information Circular, which are available on the Company’s website as www.enerflex.com and under the Company’s SEDAR and EDGAR profiles at www.sedar.com and www.sec.gov/edgar, respectively. THE COMPANY On October 13, 2022, Enerflex and Exterran Corporation (“Exterran”) combined, creating a premier integrated global provider of energy infrastructure and energy transition solutions. With enhanced scale and capabilities, Enerflex is optimally positioned to serve customers in key natural gas, energy transition, and water treatment markets, which is expected to enhance long-term shareholder value through sustainable improvements in efficiency, profitability, and cash flow generation. Exterran’s operations were very complementary to Enerflex, and the combined company will diversify operations across key growth regions where the Company already has a presence, and to provide offerings to a broader base of customers. Additionally, Enerflex’s scale of operations and depth of technical expertise provides an advantage over competitors. Our product offerings have also been improved. Energy Infrastructure includes critical infrastructure that Enerflex owns, operates, and manages under contract to its customers’ operations. Engineered Systems is the sale of customized modular natural gas-handling and low-carbon solutions, further enhanced by Exterran’s expanded capabilities which enable deeper removal of NGL’s, oil processing technology, and water treatment applications. After-Market Services offerings include installation, commissioning, O&M, and parts sales, along with global support for all product lines. Enerflex's Vision of Transforming Energy for a Sustainable Future is supported by a long-term strategy that is founded upon the following key pillars: technical excellence in modularized energy solutions; profitable growth achieved through vertically integrated and geographically diverse product offerings; financial strength and discipline; and sustainable returns to shareholders. Through consistent execution of this strategy and regular evaluation of the Company's capital allocation priorities and decisions, Enerflex has managed a resilient business to create shareholder value over its 40-plus-year history. Enerflex delivers energy infrastructure and energy transition solutions across the globe by leveraging its enhanced presence in growing natural gas markets. The Company's vertically integrated suite of product offerings includes processing, cryogenic, compression, electric power, and produced water solutions, spanning all phases of a project's lifecycle, from front-end engineering and design to after-market service. Enerflex has proven expertise in delivering low-carbon solutions, including carbon capture utilization and storage, electrification, renewable natural gas ("RNG"), and hydrogen solutions, and works closely with its customers to help facilitate global decarbonization efforts. Suite 904, 1331 Macleod Trail SW, Calgary, AB T2G 0K3 Canada | Telephone +1 403 387 6377 | Toll Free +1 800 242 3178 www. enerflex.com M1 MANAGEMENT’S DISCUSSION AND ANALYSIS Headquartered in Calgary, Alberta, Canada, the Company has approximately 5,000 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint operations, operate in over 90 locations globally, including in: Canada, the United States of America (“USA”), Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, the United Kingdom, the Netherlands, United Arab Emirates (“UAE”), Bahrain, Oman, Egypt, Kuwait, India, Iraq, Nigeria, Pakistan, Saudi Arabia, Australia, China, Indonesia, Malaysia, Singapore, and Thailand. Enerflex has state-of-the-art fabrication and workshop facilities in Calgary, Alberta, Canada; Houston, Texas, USA; Broken Arrow, Oklahoma, USA; Sharjah, UAE; Brisbane, Queensland, Australia; and Singapore, delivering standard or custom, long-life operating systems – globally. Enerflex is one of the leading suppliers of natural gas compression infrastructure within the energy infrastructure market in the USA, Canada, Latin America, and the Middle East, with a global energy infrastructure fleet of nearly two million horsepower. The Company is a highly qualified service provider with industry-certified mechanics and technicians strategically situated across a network of service locations across the globe. REPORTING SEGMENT CHANGE During the fourth quarter of 2022, the Company re-assessed its operating and reporting segments. Prior to this assessment, the Company’s operating and reporting segments were one and the same, with those segments being Canada, USA, and Rest of World (“ROW”). With the completion of the Exterran acquisition Management noted a change in how the Chief Operating Decision Maker (“CODM”) views the organization. On this basis, four operating segments have been identified with no change in the Canada and USA segments, while ROW has been bifurcated into Latin America (“LATAM”) and Eastern Hemisphere (“EH”). For external reporting purposes, Enerflex’s reportable segments are as follows: • North America (“NAM”) – comprised of operations in Canada and the USA; • • Latin America – comprised of operations in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico and Peru; and Eastern Hemisphere – comprised of operations in the Middle East, Africa, Europe and Asia Pacific. The segments and their product lines are described below. NORTH AMERICA The Energy Infrastructure product line provides natural gas compression infrastructure under contract to oil and natural gas customers in the USA under its Contract Compression operations, primarily operating in crude oil and liquids-rich plays, managing a fleet of low- to high-horsepower packages. These compressor packages are typically used in natural gas gathering systems, gas-lift, wellhead, and other applications primarily in connection with natural gas, natural gas liquids (“NGLs”), and oil production. In addition, power generation rental solutions are available in Canada. The Engineered Systems product line consists of custom and standard compression packages for reciprocating and screw compressor applications from Enerflex’s manufacturing facilities located in Houston, Texas; Broken Arrow, Oklahoma; and Calgary, Alberta. In addition, the Company engineers, designs, manufactures, constructs, and installs modular natural gas processing equipment, energy transition solutions, cryogenic systems, electric power solutions, water solutions, and carbon capture solutions. Retrofit provides re-engineering, re-configuration, and re-packaging of compressors for various field applications. 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 from certain service branches. The After-Market Services product line provides after-market mechanical services and parts distribution, as well as maintenance solutions to the oil and natural gas industry. M2 M-2 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 LATIN AMERICA The Energy Infrastructure product line provides natural gas compression and processing infrastructure under contract 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 energy needs. These BOOM facilities provide for the receipt of contracted long-term lease payments and are treated as either operating or finance leases. The region provides Engineered Systems products, including ITK natural gas compression, processing, electric power solutions, and water solutions, with local construction and installation capabilities. Most of the equipment deployed in the region is fabricated in Houston, Texas. The After-Market Services product line focuses on after-market mechanical services, parts, and components, as well as operations, maintenance, and overhaul services. EASTERN HEMISPHERE The EH segment, comprises of operations in the UK, the Netherlands, UAE, Bahrain, Oman, Egypt, Kuwait, India, Iraq, Nigeria, Pakistan, Saudi Arabia, Australia, China, Indonesia, Malaysia, Singapore, and Thailand. The Energy Infrastructure product line provides natural gas compression, power generation, and processing infrastructure under contract 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 energy and water needs. These BOOM facilities provide for the receipt of contracted long-term lease payments and are treated as either operating or finance leases. This segment also 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. Manufacturing capabilities are sourced from Enerflex’s facilities in Houston, Texas; Sharjah, UAE; and Singapore. The Australia region is headquartered in Brisbane, Queensland with additional locations throughout Queensland, Western Australia 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. ENERGY INFRASTRUCTURE The Energy Infrastructure product line includes infrastructure solutions under contract for natural gas processing, compression, produced water, and electric power equipment. Our infrastructure is deployed across the globe, and provides comprehensive contract operations services to customers in each of those regions. Our Energy Infrastructure product line provides customers with trained personnel, equipment, tools, materials, and supplies to meet their natural gas processing, compression, produced water, 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. These activities give rise to the receipt of future cash payments of varying terms, even though they have different accounting treatments depending on the terms of the lease. AFTER-MARKET SERVICES Enerflex’s After-Market Services product line provides after-market mechanical services, parts distribution, operations and maintenance solutions, equipment optimization and maintenance programs, manufacturer warranties, exchange components, long-term service agreements, 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’s after- market service and support business includes distribution and remanufacturing facilities, with significant presence situated in active natural gas producing areas. Management’s Discussion and Analysis | 2022 Annual Report M3 M-3 MANAGEMENT’S DISCUSSION AND ANALYSIS ENGINEERED SYSTEMS The Engineered Systems product line is comprised of the following product offerings: processing, compression, cryogenic, electric power, produced water, and carbon capture solutions. Enerflex can combine one or more of these product offerings into an ITK solution, including civil works, piping and structural fabrication, and electrical, instrumentation, controls, and automation, as well as installation and commissioning. Enerflex’s ITK offerings allows customers to simplify their supply chain, eliminate interface risk, and reduce the concept-to-commissioning cycle time of major projects. Compression packages range from low-specification field compressors to high-specification process compressors for onshore and offshore applications. The Company provides retrofit solutions, including re-engineering, re-configuration, and re-packaging 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 hydrogen sulfide or carbon dioxide. Electric power units can be natural-gas fired or electric. The Company also delivers systems to treat water from engineering to manufacturing, construction, and commissioning ranging in volumes from approximately 158 m3 to 160,000 m3 of water per day. The Company is exploring opportunities with customers to evaluate decarbonization, carbon capture technology, and supporting infrastructure for renewable energy by leveraging its expertise in providing modularized engineer-to-order process solutions. FINANCIAL OVERVIEW ($ thousands, except percentages and horsepower) 2022 20211 2022 20211 Three months ended December 31, Twelve months ended December 31, $ 689,839 $ 321,347 $ 1,777,798 $ 960,156 Revenue Gross margin Selling and administrative expenses (“SG&A”) Operating income (loss) Earnings before finance costs and income taxes 126,814 175,192 (48,378) 55,330 35,406 19,924 322,716 320,444 2,272 (“EBIT”)2 Net loss (44,747) 20,555 (40,810) $ (81,118) $ (32,707) $ (100,943) $ Key Financial Performance Indicators (“KPI”)3 Engineered Systems bookings Engineered Systems backlog Gross margin as a percentage of revenue Earnings before finance costs, income taxes, depreciation and amortization (“EBITDA”) Adjusted EBITDA4 Distributable cash flow4 Return on capital employed (“ROCE”)5 $ 415,073 $ 324,382 $ 1,312,883 $ 1,505,870 18.4% 557,549 17.2% 1,505,870 18.2% $ 17,897 $ 43,723 $ 87,477 $ 86,143 (25,806) (2.2)% 36,056 25,271 3.5% 223,601 44,955 (2.2)% 202,222 147,931 54,291 55,097 (18,455) 768,703 557,549 21.1% 142,719 135,053 99,097 3.5% 1 Comparative figures throughout this MD&A represent only Enerflex’s results prior to the closing of the Transaction on October 13, 2022, and therefore do not reflect pre-acquisition historical data from Exterran. 2 EBIT includes a $48.0 million goodwill impairment for the year ended December 31, 2022 (December 31, 2021 – nil). 3 These KPI’s are non-IFRS measures. Further detail is provided in the Non-IFRS Measures section of this MD&A. 4 Please refer to the Non-IFRS Measures section of this MD&A for more information on distributable cash flow. 5 Determined by using the trailing 12-month period. M4 M-4 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 FOURTH QUARTER 2022 OVERVIEW For the three months ended December 31, 2022: On October 13, 2022, the Company completed its acquisition of Exterran. Enerflex acquired Exterran by issuing 1.021 common shares of Enerflex for each share of Exterran common stock held. The total purchase consideration was approximately $222.6 million which included a total share value of $213.9 million on the exchange of shares; $8.6 million on the fair value of vested stock-based compensation. On October 12, 2022, Enerflex successfully closed its private offering (the “Offering”) of US$625 million aggregate principal amount of 9.00 percent senior secured notes due 2027 (the “Notes”). Upon closing of the Transaction, Enerflex used the net proceeds of the Offering, together with its US$150 million three-year secured term loan facility, an initial draw under its US$700 million three-year secured revolving credit facility (the “Revolving Credit Facility”), and cash on hand, to fully repay the existing Enerflex and Exterran notes and revolving credit facilities and put in place a new debt capital structure. The balance of the Revolving Credit Facility will be used for committed capital expenditures and other general corporate purposes and will provide liquidity for Enerflex. Engineered Systems bookings totaled $415.1 million, up significantly from $324.4 million in the same period of 2021, reflecting the increased activity in the manufacturing business, particularly in NAM. Engineered Systems backlog at December 31, 2022 was $1.5 billion compared to the backlog of $557.5 million at December 31, 2021. This $948.3 million increase was driven by the contracts acquired from Exterran, as well as a significant increase in Engineered Systems bookings, reflecting increased manufacturing activity in NAM. The Company recorded revenue of $689.8 million compared to $321.3 million in the comparable period. This increase is due to the contributions of the acquired Exterran businesses, a stronger opening backlog leading to improved Engineered Systems revenues, an increase in After-Market Services activities from improved parts sales and customer maintenance activities, and higher Energy Infrastructure revenue, primarily from higher contract compression utilizations in the USA, and the commencement of a finance lease project in the Middle East. Gross margin was $126.8 million, and 18.4 percent for the fourth quarter of 2022 compared to $55.3 million, and 17.2 percent for the comparable period. The higher gross margin is primarily due to the additional revenues contributed from Exterran, a higher margin opening backlog, primarily in the NAM segment, and an overall increased volume of work. SG&A of $175.2 million in the fourth quarter of 2022 was up from $35.4 million in the same period last year. This increase is primarily the result of $56.5 million of one-time Transaction costs, foreign exchange losses due to the ongoing devaluation of the Argentine peso, higher total compensation costs, increased share-based compensation on mark-to-market movements and increased third party service costs. The ongoing devaluation of the Argentine peso, caused by high inflation, resulted in foreign exchange losses of $18.0 million. Foreign exchange losses were partially offset by $6.7 million of interest income from associated instruments, though such offsets are not reflected in operating loss. The Company has implemented risk-mitigating strategies to minimize future exposure to this currency devaluation. A reported operating loss of $48.4 million was lower than the prior period operating income of $19.9 million, primarily due to the significantly higher SG&A in the fourth quarter of 2022, offset by increased gross margin from higher revenue. The Company invested $66.5 million in Energy Infrastructure assets; the majority of which was directed at major projects in EH which are now in commercial operation, while further expenditures were made towards the organic expansion of the USA contract compression fleet. The Company also invested $14.8 million for the construction of a natural gas infrastructure asset that was awarded in the fourth quarter of 2021 and will be accounted for as a finance lease. At December 31, 2022, the USA contract compression fleet totaled approximately 397,000 horsepower and its average fleet utilization was a record 95 percent for the quarter. At December 31, 2022, the Company’s senior secured net funded debt to EBITDA ratio was 1.1:1, compared to a maximum ratio of 2.5:1, and the Company’s net funded debt to EBITDA (“bank-adjusted net debt to EBITDA”) ratio was 3.3:1, compared to a maximum ratio of 4.5:1. Subsequent to December 31, 2022, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 6, 2023, to shareholders of record on March 16, 2023. The Board of Directors (the “Board”) will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow, anticipated market conditions, and the general needs of the business. Management’s Discussion and Analysis | 2022 Annual Report M5 M-5 MANAGEMENT’S DISCUSSION AND ANALYSIS For the twelve months ended December 31, 2022: Engineered Systems bookings totaled $1.3 billion, up significantly from $768.7 million in the same period last year, reflecting the increased activity in Enerflex’s manufacturing business. Movement in foreign exchange rates resulted in an increase of $35.5 million on foreign currency denominated backlog during the twelve months of 2022. Enerflex generated revenue of $1,777.8 million compared to $960.2 million in the prior year. Higher revenue generated in 2022 resulted from strengthened business activity including contributions from Exterran. Furthermore, revenue was driven by a higher opening backlog, a considerable increase in After-Market Services activities from improved parts sales and customer maintenance activities, and higher energy infrastructure utilizations in the USA. Gross margin was $322.7 million, and 18.2 percent compared to $202.2 million, and 21.1 percent in the comparative period. This increase to gross margin is primarily due to higher revenues from the increased volume of work, as well as contributions from Exterran. However, the Company reported a lower gross margin percent due to a shift in the product mix. The Company recognized a $48.0 million goodwill impairment in the Canada segment during the third quarter of 2022. SG&A of $320.4 million increased from $147.9 million in 2021. This increase is primarily the result of $70.6 million of one-time Transaction costs and losses on foreign exchange during the fourth quarter of 2022. The unfavorable variance is further driven by higher total compensation costs, foreign exchange impacts in Latin America, increased share-based compensation on mark- to-market movements, and increased third party service costs, all due to the higher activity levels for the Company. 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. 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 Company defines Adjusted EBITDA as earnings before finance costs, taxes , and depreciation and amortization. Further adjustments for items that are unique or not in the normal course of continuing operations and increases the comparability across items within the financial statements or between periods of financial statements. An example of items that are considered unique are transaction costs, while items that increase comparability include stock-based compensation which fluctuates based on share price, which can be influenced based on items directly relevant to the current period of operations of the Company. Items the Company have considered in the past, but not limited to include transaction costs, share-based compensation, severance costs associated with restructuring activities, government grants, the impact of finance leases, impairments or gains on idle facilities and impairment of goodwill, which are unique, non-recurring and non-cash transactions, that are not indicative of the ongoing normal operations of the Company. The Company modified its Adjusted EBITDA metric in the fourth quarter of 2022 to include the impact of finance leases. Where Enerflex is the lessor, leases are assessed upon commencement and classified as either an operating or finance lease. For finance leases, an upfront gain is recognized equal to the fair value of the equipment, or if lower, the present value of the minimum lease payments at a market rate of interest. Subsequent to this initial recognition, financing income is recognized reflecting a constant rate of return on the outstanding lease receivable from the end customer. The Company believes that the inclusion of finance leases in its Adjusted EBITDA calculation provides a better understanding of Enerflex’s cash generating capabilities and also improves comparability for similar assets with different contract terms. M6 M-6 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 ($ thousands) EBIT Transaction and integration costs Share-based compensation Depreciation and amortization Finance leases Adjusted EBITDA1 Three months ended December 31, 2022 Total NAM LATAM EH $ (44,747) $ (5,551) $ (22,632) $ (16,564) 56,502 11,683 62,644 61 30,092 6,921 23,211 21 14,206 2,622 18,565 663 $ 86,143 $ 54,694 $ 13,424 $ 12,204 2,140 20,868 (623) 18,025 1 Included in LATAM’s EBIT is a foreign exchange loss of $18.0 million based on the devaluation of the Argentine peso, caused by high inflation. The Company did recognize an offsetting interest income of $6.7 million from associated instruments that are not reflected in EBIT. If this interest income was presented in EBIT, Adjusted EBITDA for the three months ended December 31, 2022 would have been $20.1 million for LATAM and $92.8 million for Consolidated Enerflex. ($ thousands) EBIT Government grants in COGS and SG&A Share-based compensation Depreciation and amortization Finance leases Adjusted EBITDA Total NAM LATAM $ 20,555 $ 9,368 $ 3,134 $ (2,011) (224) 23,168 (5,432) (2,001) 31 13,288 106 - 42 6,807 - $ 36,056 $ 20,792 $ 9,983 $ EH 8,053 (10) (297) 3,073 (5,538) 5,281 Three months ended December 31, 2021 ($ thousands) EBIT Transaction and integration costs Share-based compensation Depreciation and amortization Impairment of goodwill Finance leases Adjusted EBITDA1 Twelve months ended December 31, 2022 Total NAM LATAM $ (40,810) $ (28,414) $ (14,550) $ 70,554 16,162 128,287 48,000 1,408 40,288 9,746 63,973 48,000 181 15,790 3,488 34,344 - 663 EH 2,154 14,476 2,928 29,970 - 564 $ 223,601 $ 133,774 39,735 $ 50,092 1 Included in LATAM’s EBIT is a foreign exchange loss of $18.0 million based on the devaluation of the Argentine peso, caused by high inflation. The Company did recognize an offsetting interest income of $6.7 million from associated instruments that are not reflected in EBIT. If this interest income was presented in EBIT, Adjusted EBITDA for the twelve months ended December 31, 2022 would have been $46.4 million for LATAM and $230.3 million for Consolidated Enerflex. ($ thousands) EBIT Severance costs in COGS and SG&A Government grants in COGS and SG&A Share-based compensation Depreciation and amortization Finance leases Adjusted EBITDA Total NAM LATAM EH $ 55,097 $ 18,712 $ 6,745 $ 29,640 Twelve months ended December 31, 2021 749 (16,361) 12,937 87,622 (4,991) 547 (16,351) 7,995 50,329 547 142 - 2,529 22,783 - $ 135,053 $ 61,779 $ 32,199 $ Please refer to the section “Segmented Results” for additional information about results by geographic location. Management’s Discussion and Analysis | 2022 Annual Report 60 (10) 2,413 14,510 (5,538) 41,075 M-7 M7 MANAGEMENT’S DISCUSSION AND ANALYSIS ENGINEERED SYSTEMS BOOKINGS AND BACKLOG Enerflex monitors its Engineered Systems bookings and backlog as indicators of future revenue generation and business activity levels. 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, while revenue recognized on Engineered Systems products decreases backlog in the period the revenue is recognized. The following tables set forth the Engineered Systems bookings and backlog by reporting segment: ($ thousands) Engineered Systems Bookings NAM LATAM EH Three months ended December 31, Twelve months ended December 31, 2022 2021 2022 2021 $ 352,566 $ 189,012 $ 1,213,254 $ 582,724 44,157 18,350 20,442 114,928 75,118 24,511 29,335 156,644 Total bookings $ 415,073 $ 324,382 $ 1,312,883 $ 768,703 ($ thousands) Engineered Systems Backlog NAM LATAM EH Total backlog December 31, 2022 December 31, 2021 $ 1,074,151 $ 377,894 52,825 378,894 24,221 155,434 $ 1,505,870 $ 557,549 Reflecting continued operational momentum in its manufacturing business, Enerflex recorded strong bookings of $415.1 million and $1.3 billion during the three months and twelve months ended December 31, 2022. Fourth quarter 2022 bookings were the Company’s largest quarterly bookings since 2018. Significant increases from 2021 were primarily driven by higher bookings in NAM, while the year- over-year decrease in EH bookings is primarily resulted from a large, manufactured equipment booking being recorded in the fourth quarter of 2021. The Engineered Systems backlog of $1.5 billion at December 31, 2022 has grown from December 31, 2021, as a result of the backlog acquired from Exterran, $588.5 million and the strong bookings outpacing revenue recognized in the period. The change in exchange rates resulted in a decrease in foreign currency-denominated backlog of $16.3 million during the three months ended December 31, 2022, and an increase of $35.5 million during the year ended December 31, 2022, compared to an increase of $0.9 million and $5.7 million in the same periods of 2021. The global demand for natural gas remains robust, and Enerflex is well positioned to expand its Engineered Systems business by serving the growing natural gas markets in the Company’s key operating regions. However, continued volatility in commodity prices and recessionary fears could affect the Company’s ability to secure future bookings. SEGMENTED RESULTS Enerflex has three reportable operating segments: NAM, LATAM and EH, each of which are supported by Enerflex’s corporate function. Corporate overheads are allocated to the operating segments based on revenue. In assessing its operating segments, the Company considers economic characteristics, the nature of products and services provided, the nature of production processes, the types of customers for its products and services, and distribution methods used. M8 M-8 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 NORTH AMERICA SEGMENT RESULTS ($ thousands, except percentages) Engineered Systems bookings Engineered Systems backlog Segment revenue Intersegment revenue Revenue Revenue – Energy Infrastructure Revenue – After-Market Services Revenue – Engineered Systems Operating income (loss) EBIT EBITDA NAM revenue as a % of consolidated revenue Operating income (loss) as a % of revenue EBIT as a % of revenue EBITDA as a % of revenue Three months ended December 31, Twelve months ended December 31, 2022 2021 2022 $ 352,566 $ 189,012 $ 1,213,254 $ 1,074,151 377,894 1,074,151 $ $ $ $ $ $ $ $ 443,006 $ 229,844 $ 1,303,885 $ $ $ $ $ $ $ $ (22,333) 420,673 36,673 88,688 295,312 (9,081) (5,551) 17,660 61.0% (2.2)% (1.3)% 4.2% (7,316) (93,778) 222,528 $ 1,210,107 27,518 $ 60,700 $ 134,310 $ 8,843 $ 141,900 298,333 769,874 14,769 9,368 $ (28,414) 22,656 $ 35,559 $ $ $ $ $ $ $ 69.2% 4.0% 4.2% 10.2% 68.1% 1.2% (2.3)% 2.9% 2021 582,724 377,894 680,062 (29,463) 650,599 103,096 215,876 331,627 18,041 18,712 69,041 67.8% 2.8% 2.9% 10.6% NAM recorded Engineered Systems bookings of $352.6 million in the fourth quarter of 2022, which is a considerable increase of $163.6 million compared to the same period in the prior year. The increase is attributable to a large volume of bookings in both Canada and the USA. Increased bookings reflect improved activity levels in the oil and natural gas industry in Canada and the USA. Sold margins continue to increase on new bookings. Revenue increased by $198.1 million and $559.5 million during the three and twelve months ended December 31, 2022 compared to the same periods last year. These increases are primarily due to higher Engineered Systems revenue on improved activity levels, a stronger opening backlog and continuing upward trend in bookings as well as the contribution from Exterran. After-Market Services revenues increased on strong parts sales, inflationary price adjustments and increased volume of work. Finally, Energy Infrastructure revenue was higher from increased contract compression utilizations, a larger fleet and improved pricing, as well as a non-recurring equipment sale of approximately $11.6 million during the third quarter of 2022, contributing to the increase over the prior year. Gross margin increased during the three and twelve months ended December 31, 2022 compared to last year, which is attributable to the increased activity and higher revenues generated by all product lines. During the year, the Company proactively worked with its customers and vendors, where possible, to mitigate supply chain challenges and inflationary pressures. As a result, the Company was able to trigger certain contract clauses to increase cost recoveries, rates, and pricing practices to better align with the current market environment. SG&A was higher during the three and twelve months ended December 31, 2022 compared to the same periods last year as a result of allocated one-time Transaction costs, increased total compensation and higher share-based compensation. The Company recorded an operating loss during the three months ended December 31, 2022 when compared to the same period in 2021, and lower operating income during the twelve months ended December 31, 2022 when compared to 2021. The decreases are due to the increase in SG&A, partially offset by the increased revenue generated by all three product lines. At December 31, 2022, the USA contract compression fleet totaled approximately 397,000 horsepower. The average utilization of the USA contract compression fleet for the three months and twelve months ended December 31, 2022 was 95 percent and 94 percent, significant increases from 82 percent and 83 percent in the comparative periods in 2021 due to strengthening customer demand and improving market fundamentals. NAM recognized a $48.0 million goodwill impairment in Canada during the third quarter of 2022 due to rising interest rates. Management’s Discussion and Analysis | 2022 Annual Report M9 M-9 MANAGEMENT’S DISCUSSION AND ANALYSIS LATIN AMERICA SEGMENT RESULTS ($ thousands, except percentages) Engineered Systems bookings Engineered Systems backlog Segment revenue Intersegment revenue Revenue Revenue – Energy Infrastructure Revenue – After-Market Services Revenue – Engineered Systems Operating income (loss) EBIT EBITDA LATAM revenue as a % of consolidated revenue Operating income as a % of revenue EBIT as a % of revenue EBITDA as a % of revenue $ $ $ $ $ $ $ $ $ Three months ended December 31, Twelve months ended December 31, 2022 2021 2022 44,157 $ 20,442 $ 75,118 $ 52,825 24,221 52,825 2021 29,335 24,221 98,964 $ 33,576 $ 221,628 $ 106,160 (399) (29) (434) 98,565 $ 33,547 $ 221,194 76,801 $ 18,807 $ 129,723 16,923 $ 4,841 $ (22,736) $ (22,632) $ (4,067) $ 14.3% (23.1)% (23.0)% (4.1)% 8,657 $ 6,083 $ 3,028 $ 3,134 $ 9,941 $ 10.4% 9.0% 9.3% 29.6% 38,057 53,414 (14,654) (14,550) 19,794 12.4% (6.6)% (6.6)% 8.9% $ $ $ $ $ $ $ (95) 106,065 66,069 24,158 15,838 6,575 6,745 29,528 11.0% 6.2% 6.4% 27.8% Engineered Systems bookings were higher during the three and twelve months ended December 31, 2022 compared to the same period of 2021 by $23.7 million and $45.8 million, respectively. These increases were the result of increased activity in the segment, as well as favourable foreign exchange impacts. During the three and twelve months ended December 31, 2022, LATAM revenues increased by $65.0 million and $115.1 million when compared to the same periods last year. Generally, the increase in revenue reflects the contribution of Exterran, especially in the Energy Infrastructure product line. Engineered Systems revenue for the fourth quarter of 2022 was lower than the same period in 2021 due to a smaller opening backlog position. After-Market Services revenues improved due to higher parts sales. Gross margins increased in the three and twelve months of 2022 compared to the same periods last year on higher overall revenues, partially offset by the impact of supply chain disruptions and inflation. SG&A was higher during the three and twelve months ended December 31, 2022 compared to the same periods last year as a result of one-time Transaction costs, foreign exchange losses from the ongoing devaluation of the Argentine peso, increased total compensation, and higher share-based compensation. The LATAM segment had an operating loss in the three and twelve months ended December 31, 2022 compared to operating income in the same periods of 2021. These losses are a result of higher SG&A, partially offset by much improved activity levels that resulted in higher revenues. M10 M-10 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 EASTERN HEMISPHERE SEGMENT RESULTS ($ thousands, except percentages) Engineered Systems bookings Engineered Systems backlog Segment revenue Intersegment revenue Revenue Revenue – Energy Infrastructure Revenue – After-Market Services Revenue – Engineered Systems Operating income (loss) EBIT EBITDA EH revenue as a % of consolidated revenue Operating income (loss) as a % of revenue EBIT as a % of revenue EBITDA as a % of revenue $ $ $ $ $ $ $ $ $ Three months ended December 31, Twelve months ended December 31, 2022 2021 2022 18,350 $ 114,928 $ 24,511 $ 378,894 155,434 378,894 2021 156,644 155,434 173,022 $ 65,291 $ 349,247 $ 203,585 (2,421) (19) (2,750) 170,601 $ 65,272 $ 346,497 49,449 $ 41,905 $ 39,915 $ 21,497 $ 81,237 $ (16,561) $ (16,564) $ 1,870 $ 8,053 $ 8,053 $ 4,304 $ 11,126 $ 24.7% (9.7)% (9.7)% 2.5% 20.3% 12.3% 12.3% 17.0% 109,464 107,270 129,763 2,157 2,154 32,124 19.5% 0.6% 0.6% 9.3% $ $ $ $ $ $ $ (93) 203,492 109,488 87,342 6,662 29,675 29,640 44,150 21.2% 14.6% 14.6% 21.7% During the fourth quarter of 2022, the EH region successfully commenced operations on a previously announced finance lease project and a previously announced water infrastructure project. These projects will help provide further revenue stability in the region as we continue to support our customers. Bookings in the fourth quarter of 2022 decreased to $18.4 million compared to $114.9 million in the comparable period. The year-over- year decrease is due to the booking of two large 10-year natural gas infrastructure contracts that were awarded in the fourth quarter of 2021, which did not repeat in the current quarter. EH’s backlog significantly increased in the fourth quarter of 2022 as a result of the addition from Exterran, however the increase was partially offset by the commencement of one of the aforementioned 10-year natural gas infrastructure contracts that were booked during the fourth quarter of 2021. Revenue increased by $105.3 million and $143.0 million during the three and twelve months ended December 31, 2022 compared to the same periods last year. Generally, the increase in revenue reflects the contribution from Exterran’s operations in the fourth quarter of 2022. Additionally, higher Engineered Systems revenue from the commencement and recognition of a finance lease project. And After- Market Services revenues increased from higher customer maintenance activities and parts sales. Energy Infrastructure revenue increased during the fourth quarter of 2022, supported by the aforementioned water infrastructure project, and the contribution from the Exterran transaction. Energy Infrastructure revenue decreased for the full year of 2022 compared to 2021 due to the recognition of a larger finance lease project through the Energy Infrastructure product line in the prior year, partially offset by the addition of Exterran’s business. Gross margins in the three and twelve months ended December 31, 2022 were higher than the comparable periods in 2021 primarily due to increased revenue, partially offset by availability bonuses in 2021 that did not repeat. SG&A was higher in the three and twelve months ended December 31, 2022 compared to the same periods in 2021. This unfavorable variance is the result of one-time transaction costs, increased share-based compensation on mark-to-market movements, and increased overall total compensation costs. The EH segment reported an operating loss during the three months ended December 31, 2022 compared to operating income in the same period of 2021. These losses are a result of higher SG&A and a lower gross margin percentage from Exterran’s contracts. EH reported a lower operating income for the twelve months ended December 31, 2022 compared to last year as a result of higher revenues, partially offset by higher SG&A. Management’s Discussion and Analysis | 2022 Annual Report M-11 M11 MANAGEMENT’S DISCUSSION AND ANALYSIS GROSS MARGIN BY PRODUCT LINE Each of Enerflex’s regional business segments participates in each of the three main product lines described above: Energy Infrastructure, After-Market Services and Engineered Systems. The Company considers its Energy Infrastructure and After-Market Services product lines to be recurring in nature, given that revenues are typically contracted and extend into the future. The Company aims to diversify and expand Energy Infrastructure and After-Market Services offerings, which the Company believes offer longer-term stability in earnings compared to Engineered Systems revenue, which historically have been dependent on the cyclical demand for new compression, process, and electric power equipment. While individual Energy Infrastructure and After-Market Services 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. The components of each product line's gross margins are disclosed in the tables below. ($ thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % ($ thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % ($ thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % Total Energy Infrastructure After-Market Services Three months ended December 31, 2022 Engineered Systems $ 689,839 $ 162,923 $ 145,526 $ 381,390 512,604 50,421 64,843 43,205 116,636 2,831 $ 126,814 $ 54,875 $ 26,059 $ 18.4% 33.7% 17.9% 331,125 4,385 45,880 12.0% Total Energy Infrastructure After-Market Services Three months ended December 31, 2021 Engineered Systems $ 321,347 $ 88,230 $ 90,854 $ 142,263 245,908 20,109 44,951 12,577 73,927 3,552 $ 55,330 $ 30,702 $ 13,375 $ 17.2% 34.8% 14.7% 127,030 3,980 11,253 7.9% Total Energy Infrastructure After-Market Services Twelve months ended December 31, 2022 Engineered Systems $ 1,777,798 $ 381,087 $ 443,660 $ 953,051 1,347,098 107,984 151,570 88,239 362,058 10,355 833,470 9,390 $ 322,716 $ 141,278 $ 71,247 $ 110,191 18.2% 37.1% 16.1% 11.6% M12 M-12 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 ($ thousands) Revenue Cost of goods sold: Operating expenses Depreciation and amortization Gross margin Gross margin % Total Energy Infrastructure After-Market Services Twelve months ended December 31, 2021 Engineered Systems $ 960,156 $ 278,653 $ 327,376 $ 354,127 682,574 75,360 110,107 54,758 264,133 10,679 $ 202,222 $ 113,788 $ 52,564 $ 21.1% 40.8% 16.1% 308,334 9,923 35,870 10.1% INCOME TAXES The Company had an income tax expense of $10.3 million and $21.2 million for the three and twelve months ended December 31, 2022, compared to an income tax expense of $50.9 million and $56.6 million in the same periods of 2021. Income tax expense for 2022 was lower due to the reduction in taxable income driven by lower operating income. The decrease is partially offset by the goodwill impairment recognized during the year, and the impact of unrecognized losses in foreign jurisdictions. ACQUISITION OF EXTERRAN On October 13, 2022, the Company completed the previously announced acquisition of Exterran. Pursuant to the Transaction, Enerflex acquired all issued and outstanding Exterran common stock in exchange for 1.021 Enerflex common shares for each whole common stock of Exterran. Enerflex’s common shares continue to trade on the Toronto Stock Exchange (“TSX”) under the symbol “EFX”, and the Company commenced trading on the New York Stock Exchange (“NYSE”) under the symbol “EFXT” on October 13, 2022. The Company will remain headquartered in Calgary, Alberta, Canada. As consideration for the Transaction, Enerflex issued 34,013,055 common shares with a fair value of $213.9 million, based on the October 12, 2022 closing share price of $6.29, as reported by the TSX. Enerflex also provided consideration of $8.6 million representing the fair value of vested stock-based compensation. Goodwill of approximately $139.4 million was generated as a result of the Transaction. Headquartered in Houston, Texas, Exterran had approximately 3,000 employees with operations in the USA, Argentina, Bolivia, Brazil, Mexico, Bahrain, Iraq, Oman, Nigeria, the UAE, China, Indonesia, Singapore and Thailand. Exterran’s operations were very complementary to Enerflex as they provide processing, treating, compression and water treatment services through the operation of natural gas compression equipment, crude oil and natural gas production and process equipment and water treatment equipment through their contract operations line of business. In their after-market service business line, Exterran sold parts and components, and provided operations, maintenance, repair, overhaul, upgrade, start-up and commissioning and reconfiguration services that own their own oil and natural gas compression, production, treating and related equipment. And in their product sales, Exterran designed, engineered, manufactured, installed and sold equipment used in the treating and processing of crude oil, natural gas and water as well as natural gas compression packages. These were offered on either a contract operations basis or a sale basis. Concurrent with the closing of the Transaction, Enerflex successfully closed its previously announced private offering of US$625 million aggregate principal amount of 9.00 percent senior secured notes due 2027 (the “Notes”). Enerflex used the net proceeds of approximately US$578 million of the Offering, together with its US$150 million three-year secured term loan facility, an initial draw under its US$700 million three-year secured revolving credit facility, and cash on hand, to fully repay the existing Enerflex and Exterran notes and revolving credit facilities and put in place a new debt capital structure. The balance of the Revolving Credit Facility will be used for committed capital expenditures and other general corporate purposes and will provide significant liquidity for Enerflex. Management’s Discussion and Analysis | 2022 Annual Report M-13 M13 MANAGEMENT’S DISCUSSION AND ANALYSIS The Company is subject to covenants under its new structure, all calculated on a rolling four-quarter basis: Senior secured net funded debt to EBITDA ratio not to exceed 2.5:1 for each quarter end; Net funded debt to EBITDA ratio not to exceed 4.5:1 at each quarter end up to September 30, 2023, where the ratio will be adjusted to a maximum of 4.0:1 for each quarter after September 30, 2023; and Interest coverage ratio for each quarter end not to be less than 2.5:1 Legal Proceedings Upon closing of the Transaction, Enerflex assumed a legal dispute from Exterran. On January 31, 2022 the Local Labor Board of the State of Tabasco in Mexico (the "Labor Board") awarded a former employee MXN$2,151.7 million (CAD$149.2 million) in connection with a dispute relating to the employee’s severance pay following termination of their employment. On February 24, 2022 this decision was served on Exterran. In March 2015, this employee was terminated and was paid the undisputed portion of their severance pay, as determined by a local labor board. From March 2015 to the present, the former employee has challenged various aspects of the severance payment through court proceedings. The Company has prevailed in these earlier processes and certain facts of the dispute were established by court rulings, including the fact that the employee’s salary was approximately MXN$3,500 per day (US$170 per day at the prevailing exchange rate). We believe the order of the Labor Board is in error and has no credible basis in law or fact. For instance, in 2017, the Labor Board ruled that the former employee was entitled to approximately MXN$1.4 million (approximately US$70,000 at the prevailing exchange rate) as severance based on an appellate court’s determination based on Company records that the employee’s salary was approximately MXN$3,500 per day. However, the Labor Board’s February 2022 order increased the amount the employee is owed to approximately US$120 million, an increase of over 170,000 percent, ignoring the actual salary that had been established and using approximately US$21,000 per day, an increase of over 12,000 percent and an amount the former employee never actually received while working for our subsidiary. Effectively, the Labor Board awarded the employee approximately 1,900 years of severance based on the correct wage rate. Exterran appealed the decision, and the appeal is pending before the First Collegiate Court of the Tenth Circuit in Labor Matters, in Villahermosa, Tabasco. Among other errors that are the subject of the appeal is the Labor Board’s (a) violation of principles of res judicata by disregarding prior court decisions establishing that the former employee’s salary was roughly MXN$3,500 per day (US$170 per day at the prevailing exchange rate), (b) ignoring the applicable one-year statute of limitations in these types of matters, and (c) award of salary differences that were never part of the former employee's original or subsequent claims. The Company is pursuing all available avenues to preserve its rights, including potentially asserting claims against the Mexican government should the First Collegiate Court of the Tenth Circuit in Labor Matters fail to reverse the Labor Board’s order. The Company is involved in litigation and claims associated with normal operations against which certain provisions may be made in the Financial Statements. 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. OUTLOOK The underlying macro drivers for Enerflex’s business are robust, with the ongoing focus on global energy security and the growing need for low-emission natural gas resulting in significant demand for Enerflex’s energy infrastructure and energy transition solutions. 2023 Priorities Following the completion of the Transaction, Enerflex’s focus has shifted to integration efforts and realizing the benefits identified through the evaluation process. The Company has identified US$60 million of annual run-rate synergies, which are expected to be captured within 12 to 18 months of the closing of the Transaction and be attained primarily through increased operational efficiencies and reductions in overhead. To date, Enerflex has captured approximately US$40 million of synergies. In 2023, Enerflex will advance the following in-flight project in the Middle East toward completion: The delivery of a modularized cryogenic natural gas processing facility that will be accounted for as a product sale. The facility, which experienced customer delays in 2022, has recently been reanimated and is now expected to be completed in 2024. M14 M-14 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 Three additional projects in the Middle East were recently completed: A BOOM produced water facility that started operations in the fourth quarter of 2022, and is underpinned by a four-year take- or-pay contract with a national oil company. A natural gas infrastructure asset that started operations in early 2023, and is underpinned by a 10-year take-or-pay contract with a national oil company. A BOOM produced water facility that started operations in early 2023, and is underpinned by a 10-year take-or-pay contract with a joint venture between a national oil company and an international super-major oil and gas company. The project will commence generating contracted revenue upon introduction of hydrocarbons and water, which is expected to occur late in the first quarter of 2023. Upon completion of the four projects, Enerflex anticipates generating significant excess cash flow, which will be used to strengthen the Company’s financial position. Enerflex expects to lower its bank-adjusted net debt to EBITDA ratio to below 2.5 times by the end of 2023. Additionally, work has recommenced on the modularized cryogenic natural gas processing facility that was temporarily suspended by the customer. The project will be accounted for as a product sale and is expected to be completed in 2024. Once its debt reduction target has been met, Enerflex anticipates it will have the ability to deliver increased capital returns to shareholders and the optionality to profitably invest in strategic growth projects. The Company expects to continue paying its quarterly dividend of at least $0.025 per share and will continue to be disciplined in its investments and discretionary spending to protect its financial position. 2023 Guidance To reflect Enerflex’s full-year 2022 results and updated completion dates of in-flight projects, , the Company has revised certain items of its 2023 guidance: Enerflex reaffirms its expectations for Adjusted EBITDA for 2023. Deleveraging remains a top priority for Enerflex, with the Company continuing to expect that it will reduce its bank-adjusted net debt to EBITDA ratio to below 2.5 times by the end of 2023. Increased work-in-progress (“WIP”) for 2023 relates to the recommencement of work at the Cryogenic Facility, including restoration activities resulting from site inactivity. US$ millions, except ratios and percentages Annual run-rate synergies2 Adjusted EBITDA2 Bank-adjusted net debt to EBITDA3 Capital expenditures and WIP Maintenance capital expenditures WIP Total non-discretionary expenses4 Accretion to shareholders5 Earnings per share6 Cash flow per share 2023 Guidance August 10, 20221 March 1, 2023 60 380 – 420 <2.5x 40 – 50 – 170 – 210 20% 11% 60 380 – 420 <2.5x 40 – 50 40 – 50 210 – 260 20% 20% 1 See the previously announced transaction-related guidance in our MD&A for the three months ended June 30, 2022, dated August 10, 2022. 2 Synergy capture is subject to timing considerations of being realized within 12 to 18 months of Transaction close. 3 Calculated in accordance with the Company’s debt covenants, which permit the exclusion of Exterran’s bank-adjusted EBITDA for the trailing 12 months. 4 Includes capital expenditures and WIP, net working capital, finance costs, income taxes, and dividends. 5 Subject to potential purchase price allocation adjustments. 6 Excludes amortization of refinancing costs and amortization of intangible assets. Management’s Discussion and Analysis | 2022 Annual Report M-15 M15 MANAGEMENT’S DISCUSSION AND ANALYSIS Energy Transition As the transition to a lower-carbon economy continues to unfold, Enerflex is collaborating with customers to advance projects that decarbonize and electrify operations and support infrastructure for RNG, biofuels, and new hydrogen solutions. In the USA, the roll-out of the Inflation Reduction Act has accelerated the development of numerous carbon capture projects, growing the opportunity set for Enerflex given its expertise in delivering modularized engineer-to-order process solutions. Enerflex also continues to evaluate carbon capture and other low-carbon solutions through piloting activities with a number of its Canadian customers. Over the long term, Enerflex will continue to evaluate and create paths that will allow for participation in developing and growing markets, which is expected to shape the energy transition landscape of the next several decades. OUTLOOK BY SEGMENT North America Capital discipline continues to be at the forefront for North American upstream E&P companies, particularly in the context of potential inflationary impacts to input costs. Early 2023 capital expenditure guidance set by upstream E&P companies indicates that production will grow modestly year-over-year. In the USA, natural gas production growth is expected to be driven by the Haynesville, Permian, and Marcellus Basins. In Canada, the recent resolution of outstanding issues between the Blueberry River First Nations and the Government of British Columbia has provided clarity on future resource development in the province; however, the pace at which activity levels return to historical levels is still unknown. Over the medium term, the Company anticipates that future LNG exports associated with LNG Canada Phase 1 will be a positive tailwind for Enerflex’s Canadian business. Given the strong demand profile for natural gas and LNG exports in the USA, Enerflex anticipates that utilization rates for its contract compression fleet will remain elevated and that sold margins on new Engineered Systems bookings will continue to expand from current levels. The Exterran Cryogenic product line is also expected to be a synergistic revenue-generating business in the region. The Company expects that the recent increase in After-Market Services-related activities across the region continues into 2023, including overhaul and retrofitting activities. Latin America With its expanded Energy Infrastructure platform, Enerflex expects continued stability within its recurring businesses in Latin America. In the near term, the Company will look to increase its contract compression fleet utilization through re-contracting and redeployment of idle fleet to meet rising local demand. Over the longer term, many nations throughout the region have indicated a growing need for reliable power and a desire to reduce their overall dependency on imported natural gas, which Enerflex expects will be a constructive market driver for the Company. Eastern Hemisphere As Middle Eastern nations respond to the increasing need for reliable power, Enerflex continues to observe significant demand for larger- scale, long-term energy infrastructure assets and ITK projects. With two large projects recently completed and two in-flight projects being advanced toward completion, Enerflex’s near-term focus in the Middle East is strong operational execution and delivering cost improvements within existing operations. Enerflex continues to explore new markets and opportunities requiring modular solutions to bolster cash flow stability in the region. In Australia, a strong LNG export market, as well as recent legislation surrounding emissions-reduction targets for the nation, is expected to strengthen the demand for natural gas and energy transition solutions in the region. M16 M-16 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 ENERFLEX STRATEGY Enerflex’s Vision of Transforming Energy for a Sustainable Future is supported by a long-term strategy that is founded upon the following key pillars: technical excellence in modularized energy solutions; profitable growth achieved through vertically integrated and geographically diverse product offerings; financial strength and discipline; and sustainable returns to shareholders. Through consistent execution of this strategy and regular evaluation of the Company’s capital allocation priorities and decisions, Enerflex has managed a resilient business to create shareholder value over its 40-plus-year history. Enerflex delivers energy infrastructure and energy transition solutions across the globe by leveraging its enhanced presence in growing natural gas markets. The Company’s vertically integrated suite of product offerings includes processing, cryogenic, compression, electric power, and produced water solutions, spanning all phases of a project’s lifecycle, from front-end engineering and design to after-market service. Enerflex has proven expertise in delivering low-carbon solutions, including carbon capture utilization and storage, electrification, RNG, and hydrogen solutions, and works closely with its customers to help facilitate global decarbonization efforts. Enerflex will continue to build an increasingly resilient and sustainable business through its Energy Infrastructure and After-Market Services product lines over the long term, stabilizing cash flows and reducing cyclicality in the business. To support its overarching corporate strategy, Enerflex has developed region-specific strategies: North America In North America, Enerflex provides natural gas solutions to support the development of upstream resources and the midstream infrastructure required to meet local demand. Enerflex benefits from a growing LNG export industry in the USA and anticipates that a future LNG export industry in Canada will provide additional opportunities for the Company. Energy Infrastructure: In the USA, Enerflex profitably invests in the organic expansion of its contract compression fleet by engineering, designing, fabricating, and operating compression units to customers on a contracted basis. Enerflex focuses on natural gas compression packages and electric power equipment rentals in Canada. After-Market Services: Enerflex services a large installed base of compression solutions across key resource plays in the USA and, in Canada, looks to secure long-term service and maintenance contracts with customers. Engineered Systems: Enerflex engineers, designs, fabricates, and sells modularized processing, cryogenic, compression, electric power, and carbon capture solutions. Latin America In Latin America, Enerflex focuses primarily on long-term growth opportunities through energy infrastructure ownership and its contract compression fleet. Energy Infrastructure: Enerflex targets long-term BOOM solutions and other infrastructure leases of varying size and scope to support the Company’s ongoing strategy to grow the recurring nature of its business. After-Market Services: Leveraging its large Energy Infrastructure and Engineered Systems footprint, Enerflex continues to grow its after-market service capabilities. Engineered Systems: Enerflex delivers electric power solutions to meet the rising need for reliable power, and engineers, designs, compression and processing solutions which require construction and installation support at site. Eastern Hemisphere Across the Eastern Hemisphere region, Enerflex focuses primarily on long-term growth opportunities through energy infrastructure ownership. Energy Infrastructure: Enerflex targets long-term BOOM solutions and other infrastructure leases of varying size and scope to support the Company’s ongoing strategy to grow the recurring nature of its business. After-Market Services: Leveraging its large Energy Infrastructure and Engineered Systems footprint to grow its after-market service capabilities. Engineered Systems: Enerflex delivers electric power solutions to meet the rising need for reliable power, and engineers, designs, and manufactures compression and processing solutions which require construction and installation support at site. Management’s Discussion and Analysis | 2022 Annual Report M-17 M17 MANAGEMENT’S DISCUSSION AND ANALYSIS DEFINITIONS Enerflex measures its financial performance using several key financial performance indicators, some of which do not have standardized meanings as prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. Refer to the Non- IFRS Measures section of this MD&A. 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. Accordingly, 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 Energy Infrastructure and After-Market Services product lines, as well as the impact of finance leases where Enerflex is the lessor by removing margin recognized on commencement and the non-cash interest income earned, and adding the cash received from the customer. These revenue streams are typically contracted and extend into the future, rather than only being recognized as a single transaction. Energy Infrastructure revenues relate to compression, processing, and electric power equipment. After-Market Services revenues are derived from the ongoing maintenance of equipment that produces gas over the life of a field. Conversely, revenue from the Company’s Engineered Systems product line are for the manufacturing and delivery of equipment and are non-recurring 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. Operating Income Operating income assists the reader in understanding the net contributions made from the Company’s core businesses after considering SG&A. 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 are not attributable to business segments on a meaningful basis. 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 in which the Company operates. EBITDA EBITDA provides the results generated by the Company’s primary business activities prior to consideration of how those activities are financed, how its 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 EBITDA for the trailing 12 months. 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. M18 M-18 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 NON-IFRS MEASURES Enerflex measures its financial performance using several key financial performance indicators, some of which do not have standardized meanings as prescribed by IFRS and therefore may not be comparable to similar measures presented by other issuers. 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, and 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 IFRS measure is provided below where appropriate. Engineered Systems bookings and backlog do not have a directly comparable IFRS measure. ($ thousands) EBITDA and Adjusted EBITDA EBIT Depreciation and amortization EBITDA Adjusted EBITDA1 Recurring Revenue Energy Infrastructure After-Market Services Impact of Finance leases Total Recurring Revenue ROCE Three months ended December 31, Twelve months ended December 31, 2022 2021 2022 2021 $ $ (44,747) $ 20,555 $ (40,810) $ 62,644 23,168 128,287 17,897 $ 43,723 $ 87,477 $ 86,143 36,056 223,601 $ 162,923 $ 88,230 $ 381,087 $ 145,526 11,036 90,854 (20,593) 443,660 18,939 55,097 87,622 142,719 135,053 278,653 327,376 (20,152) $ 319,485 $ 158,491 $ 843,686 $ 585,877 Trailing 12-month EBIT $ (40,810) $ 55,097 $ (40,810) $ 55,097 Capital employed – beginning of period Net debt2 Shareholders’ equity Capital employed – end of period Net debt2 Shareholders’ equity Average capital employed3 ROCE $ $ $ $ $ 169,626 $ 243,030 $ 158,664 $ 294,036 1,419,844 1,394,047 1,353,754 1,396,695 1,589,470 $ 1,637,077 $ 1,512,418 $ 1,690,731 1,136,549 $ 158,664 $ 1,136,549 $ 158,664 1,542,908 1,353,754 1,542,908 1,353,754 2,679,457 $ 1,512,418 $ 2,679,457 $ 1,512,418 1,848,678 $ 1,595,281 $ 1,848,678 $ 1,595,281 (2.2)% 3.5% (2.2)% 3.5% 1 Please refer to the “Adjusted EBITDA” section of this MD&A. 2 Net debt is defined as short- and long-term debt less cash and cash equivalents. 3 Based on a trailing four-quarter average. Management’s Discussion and Analysis | 2022 Annual Report M-19 M19 MANAGEMENT’S DISCUSSION AND ANALYSIS Distributable Cash Flow The Company has introduced a new key performance indicator for distributable cash flow. Distributable cash flow may not be comparable to similar measures presented by other companies as it does not have a standardized meaning under IFRS. Management has adopted this non-IFRS measure as a way to help users of the financial statements assess the level of free cash generated and to fund other non-operating activities such as capital expenditures, dividends and payments to creditors. The Company defines distributable cash flow as cash provided by operating activities adjusted for the net change in working capital and other, less maintenance capital expenditures and lease payments. The following tables reconciles distributable cash flow to the most directly comparable IFRS measure, cash provided by operating activities: ($ thousands) Cash provided by (used in) operating activities Add (deduct): Net change in working capital and other Maintenance capital expenditures Leases Distributable cash flow1 $ $ $ Three months ended December 31, Twelve months ended December 31, 2022 2021 2022 2021 (16,330) $ 123,750 $ 19,768 $ 208,194 14,994 (1,336) (19,669) (4,801) $ (25,806) $ (88,798) 34,952 $ (5,357) (4,324) 25,271 $ 71,318 91,086 $ (30,373) (15,758) 44,955 $ (82,937) 125,257 (11,945) (14,215) 99,097 1 If the Company were to add back the non-recurring transaction and integration costs incurred in relation to the Exterran Transaction of $56.5 million and $70.6 million for the three and twelve months ended December 31, 2022, distributable cash flow would be $30.7 million and $115.5 million for the same periods. CAPITAL EXPENDITURES AND EXPENDITURES FOR FINANCE LEASES Enerflex distinguishes capital expenditures invested in energy infrastructure equipment as either growth or maintenance. Growth expenditures are intended to expand the Company’s energy infrastructure fleet, while maintenance expenditures are necessary costs to continue utilizing existing energy infrastructure equipment. The Company also incurred costs related to the construction of energy infrastructure assets determined to be finance leases. These costs are accounted for as work-in-progress related to finance leases, and once the project is completed and enters service, it is reclassified to COGS. Capital expenditures and expenditures for finance leases are shown in the table below: Three months ended December 31, Twelve months ended December 31, ($ thousands) 2022 2021 2022 Additions to property, plant and equipment $ 3,132 $ 1,305 $ 8,043 $ Additions to energy infrastructure assets: Growth Maintenance Total capital expenditures Expenditures for finance leases Total capital expenditures and expenditures for finance leases $ $ $ 46,821 19,669 69,622 14,526 $ $ 11,468 5,357 77,424 30,373 18,130 $ 115,840 $ 13,037 $ 74,543 $ 84,148 $ 31,167 $ 190,383 $ 93,510 2021 5,154 40,242 11,945 57,341 36,169 M20 M-20 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 FINANCIAL POSITION The following table outlines significant changes in the consolidated statements of financial position as at December 31, 2022 compared to December 31, 2021: ($ millions) Increase (Decrease) Current assets $736.3 Contract assets $223.2 Energy infrastructure assets $640.0 Finance leases receivable $146.4 Intangible assets $92.7 Goodwill $113.1 Current liabilities $783.5 Long-term debt $1,031.8 Total shareholders’ equity $189.2 Explanation The increase in current assets is primarily due to significantly higher inventories and accounts receivable, work-in-progress related to finance leases and cash and cash equivalents primarily from the acquisition of Exterran’s current assets, increased activity levels, and foreign exchange from the strengthened US dollar. The non-current portion of contract assets is from the addition of Exterran, and represents amounts to be billed to customers more than 12 months from the date of the balance sheet. Energy infrastructure assets increased primarily due to the acquisition of Exterran’s energy infrastructure assets, and organic investments in the Company’s energy infrastructure fleet. The increases were offset by depreciation, disposals, and impairments. The increase in the long-term portion of finance leases receivable is due to the recognition of two 10-year natural gas infrastructure project in the Middle East that began operations during the current year, as well as the addition of finance leases from Exterran, and the impact of foreign exchange from the strengthened US dollar. The increase in intangible assets is the result of certain customer relationships and contracts, and software acquired from Exterran, partially offset by amortization. The increase in goodwill is due to the addition of the preliminary calculated goodwill on the Exterran Transaction and foreign exchange from the strengthened US dollar, offset by the impairment of goodwill in Canada in the third quarter of 2022 due to movements in interest rates. The increase in current liabilities is primarily due to movements in accounts payable and accrued liabilities, and deferred revenues, driven by increased activity levels and the assumption of current liabilities from Exterran, as well as foreign exchange from the strengthened US dollar. The increase in long-term debt is primarily due to the issuance of new Notes, Term Loan and Revolving Credit Facility, which the Company used to extinguish the assumed Exterran debt as well as Enerflex’s existing debt, including its previous Notes, the Bank Facility and Asset-Based Facility. The increase is partially offset by the recognition of deferred transaction costs. Total shareholders’ equity increased primarily due to the shares issued on the Transaction, $213.9 million, $84.2 million impact on unrealized gains on the translation of foreign operations and the impact of stock options, $1.8 million, offset by net loss of $100.9 million and dividends of $9.8 million. Management’s Discussion and Analysis | 2022 Annual Report M-21 M21 MANAGEMENT’S DISCUSSION AND ANALYSIS LIQUIDITY The Company expects that 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, 2022, the Company held cash and cash equivalents of $253.8 million and had cash drawings of $662.4 million against the Revolving Credit Facility and Term Loan, leaving the Company with significant liquidity and access to $313.8 million for future drawings. The Company continues to meet the covenant requirements of its funded debt, including the Revolving Credit Facility, Term Loan and Notes, with a senior secured net funded debt to EBITDA ratio of 1.1:1, compared to a maximum ratio of 2.5:1, and a bank-adjusted net debt to EBITDA ratio of 3.3:1, compared to a maximum ratio of 4.5:1. The Company also finished the year with an interest coverage ratio of 4.4:1 compared to a minimum ratio of 2.5:1. The interest coverage ratio is calculated by dividing the trailing 12-month EBITDA, as defined by the Company’s lenders, by interest expense over the same timeframe. SUMMARIZED STATEMENTS OF CASH FLOW ($ thousands) 2022 2021 2022 2021 Cash and cash equivalents, beginning of period $ 198,787 $ 102,273 $ 172,758 $ 95,676 Three months ended December 31, Twelve months ended December 31, Cash provided by (used in): Operating activities Investing activities Financing activities (16,330) 54,184 20,730 123,750 (35,519) (19,040) 19,768 43,248 11,854 208,194 (48,861) (80,456) Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies (3,595) 1,294 6,148 (1,795) Cash and cash equivalents, end of period $ 253,776 $ 172,758 $ 253,776 $ 172,758 Operating Activities For the three and twelve months ended December 31, 2022, cash provided by (used in) operating activities was lower than the comparative period, primarily driven by net changes in working capital, and a significant net loss due to higher SG&A from Exterran and related Transaction costs. Movements in the net change in working capital are explained in the “Financial Position” section of this MD&A. Investing Activities Cash provided by investing activities for the three and twelve months ended December 31, 2022 is higher when compared to the same periods in 2021 primarily due to the cash acquired from the Transaction, partially offset by increased capital expenditures on energy infrastructure assets and increased investment in associates and joint ventures. Financing Activities Cash provided by financing activities is higher for the three and twelve months ended December 31, 2022 compared to the previous year primarily due to the issuance of new Notes and Term Loan and the net proceeds on the Revolving Credit Facility, partially offset by the repayment of Enerflex’s previous Notes and Bank and Asset-Based Facilities. M22 M-22 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 QUARTERLY SUMMARY ($ thousands, except per share amounts) Revenue Net earnings (loss) Earnings (loss) per share – basic Earnings (loss) per share – diluted December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 $ 689,839 $ (81,118) $ (0.68) $ 392,813 372,077 323,069 321,347 231,097 204,507 203,205 298,837 265,037 287,438 365,740 (32,808) 13,352 (369) (32,707) 6,958 4,291 3,003 32,668 10,736 7,415 37,438 (0.37) 0.15 (0.00) (0.36) 0.08 0.05 0.03 0.36 0.12 0.08 0.42 (0.68) (0.37) 0.15 (0.00) (0.36) 0.08 0.05 0.03 0.36 0.12 0.08 0.42 SELECTED ANNUAL INFORMATION ($ thousands, except per share amounts) December 31, 2022 December 31, 2021 December 31, 2020 Total Assets Total Non-Current Financial Liabilities Cash Dividends Declared Per Share $ 4,269,589 $ 1,363,237 $ 2,191,442 2,179,576 331,422 349,712 0.100 0.085 0.175 RISK FACTORS An investment in Enerflex Common Shares involves a number of risks including, but not necessarily limited to, those set forth below. Energy Prices, Industry Conditions, and the Cyclical Nature of the Energy Industry The industry in which Enerflex operates 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; regulatory compliance; and access to capital, none of which can be accurately predicted. Any downturn in commodity prices may lead to reduced levels of 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 reduced demand for products and services offered by Enerflex. 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. The supply and demand for oil and gas is influenced by a number of factors, including political, economic, or military circumstances throughout the energy producing regions of the world. This has been highlighted over the past year with the Russian invasion of Ukraine which is continuing to have wide ranging consequences on the world economy. As Russia is a major exporter of oil and natural gas, the disruption of supply from Russia has triggered a significant and worldwide supply shortage resulting in significant and rapid commodity price increases which has heightened many of the other risks described in this “Risk Factors” section. As the Russian-Ukraine conflict continues, the impact to the Enerflex business is difficult to predict and depends on many factors that are evolving and not within the control of Enerflex and such impact could have a material adverse effect on the Company’s business, financial condition, and results of operations. Management’s Discussion and Analysis | 2022 Annual Report M-23 M23 MANAGEMENT’S DISCUSSION AND ANALYSIS Competition The business in which Enerflex operates is highly competitive with lower barriers to entry for natural gas processing and compression services, contract compression, the processing and compression fabrication business, and the produced water business. Several companies target the same customers as Enerflex in markets where margins can be low and contract negotiations can be challenging. Enerflex has several competitors in all aspects of its business, both domestically and abroad. Some of these competitors, particularly in the Energy Infrastructure and Engineered Systems product lines, are large, multi-national companies who 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. See “Description of the Business – Competitive Conditions”. 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 labor availability and productivity; availability and cost of materials, parts, and services; the accuracy of design, engineering, and construction; the ability to safely 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 quickly 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 emissions-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 energy infrastructure, 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. There is also a risk that Enerflex could face claims initiated by third parties relating to climate or related laws and regulations. Any such claims, 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 such claims, and 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. Physical Risks There has been public discussion that climate change may be associated with extreme weather conditions such as more intense hurricanes, flooding, droughts, forest fires, thunderstorms, tornados, and snow or ice storms, as well as rising sea levels and other acute M24 M-24 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 (event-driven) and chronic (long-term) climate events. Another possible consequence of climate change is increased volatility in seasonal temperatures with some studies suggesting 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, operations could be materially impacted (for instance, 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 hydrogen and renewables), electric grids, electric vehicles, and batteries may reduce demand for hydrocarbons, 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 operations. 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 of their investment 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 governance practices, 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, EMT, 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. 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 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 Management’s Discussion and Analysis | 2022 Annual Report M25 M-25 MANAGEMENT’S DISCUSSION AND ANALYSIS contamination may be present, it is possible that neighbouring 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 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 jurisdictions and 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. See “Risk Factors – Health and Safety Risks”. 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 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. Interest Rate Risk The Company's liabilities include long-term debt that may be subject to fluctuations in interest rates. The Company's 9.00% Notes outstanding at December 31, 2022 are at fixed interest rates and therefore will not be impacted by fluctuations in market interest rates. The Company's Revolving Credit Facility and Term Loan, however, are subject to changes in market interest rates. As at December 31, 2022 the Company had $662.4 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. See “Dividends – Restrictions on Paying Dividends”. For each one per cent change in the rate of interest on the Revolving Credit Facility and Term Loan, the change in interest expense for the twelve months ended December 31, 2022 would be approximately $4.6 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. 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 M26 M-26 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 enforcing contractual rights due to the lack of a developed legal system or otherwise; confiscation, expropriation, or nationalization of property without fair compensation; and difficulties in engaging third-party agents to interface with clients or otherwise act on the Company's behalf in certain jurisdictions. 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. 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, monitoring of 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 networks of the Company, its customers, or suppliers. These phishing emails may appear upon a cursory review to be legitimate emails sent by an employee or representative 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, tabletop exercises, 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 upon which Enerflex relies. 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. See also “Risk Factors – Insurance”. Management’s Discussion and Analysis | 2022 Annual Report M27 M-27 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 to maintain customer satisfaction through industry-leading design, build, and installation of the Company’s product offerings. Enerflex competes for these professionals, not only with other companies in the same industry, but with companies in other industries such as oil and natural gas producers. 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 After-Market Services 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. 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. 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. Contract Compression Operations The duration of Enerflex’s Energy Infrastructure arrangements with customers varies 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 Energy Infrastructure 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 Energy Infrastructure 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 such contracts with any customer could lead to a reduction in revenues and net income, which reduction 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 commodity prices, 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 reduction could have a material adverse effect on Enerflex’s business, financial condition, results from operations and cash flows. Health and Safety Risks Enerflex's business is 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; malfunctioning or improperly used tools and equipment; and vehicle collisions and other transportation incidents. M28 M-28 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 Failure to mitigate, 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, property damage, 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. 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 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. Corruption, Sanctions, and Trade Compliance The Company is required to comply with Canadian, USA, 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. While Enerflex has developed policies, procedures, screening protocols, 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 US Department of Justice, the SEC, the US 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 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. 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 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 29 “Financial Instruments” in the audited consolidated financial statements for the year ended December 31, 2022. 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 US dollar. Most of Enerflex’s international orders are manufactured in the United States where the contracts are primarily denominated in US 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 Management’s Discussion and Analysis | 2022 Annual Report M29 M-29 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 objectives. Translation Exposure The Company’s earnings from and net investment in foreign subsidiaries are exposed to fluctuations in exchange rates. The Company is also exposed to the translation risk of monetary items in their local currency to their functional currency. The currencies with the most significant impact are the US dollar, Australian dollar, Brazilian real, and Argentine peso. 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. 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, untreated water 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, the Company 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. See also “Risk Factors – Insurance”. 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. 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 makes it a priority to maintain and enhance these strategic relationships in its supply chain, there can be no assurance that these relationships will continue. 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 and OEMs, 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. M30 M-30 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 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 COVID-19 pandemic. 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. The Company continues to monitor the potential impacts of the COVID-19 pandemic, focusing on the jurisdictions in which the Company and its subsidiaries operate. In particular, Enerflex continues to adhere to public health orders and governmental guidance and maintains communication with suppliers, customers, stakeholders, and other business partners to identify and monitor potential risks to our ongoing operations. Although the COVID-19 pandemic improved in 2022 and restrictions and limitations were eased, any future developments or a subsequent outbreak of COVID-19 could materially and adversely impact the Company's business, operations, financial condition, and cash flows. As the situation continues to evolve, the extent of any future material adverse effect on the Company cannot be predicted with confidence. 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 (see “Risk Factors – Information Technology and Information Security”) and executive liability insurance to limit exposure to unforeseen incidents. However, there can be no assurance that any such insurance policies will cover all losses 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 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. Significant instability or disruptions to the capital markets, including the credit markets, may impact the Company’s ability to access capital on reasonable commercial terms, if at all, and this turn may result in 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. The Company's Revolving Credit Facility also contains 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 which require the Company to repay its indebtedness 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. See “Dividends – Restrictions on Paying Dividends”. Management’s Discussion and Analysis | 2022 Annual Report M31 M-31 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 Enerflex Common Shares may deteriorate if cash dividends are reduced or suspended. 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. 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. 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. Section 404 of the Sarbanes-Oxley Act of 2002 Enerflex maintains disclosure controls and procedures and internal control over financial reporting pursuant to the Canadian Securities Administrators National Instrument 52-109 – Certification of Disclosure in Issuers’ Annual and Interim Filings, and has commenced an assessment of whether its current internal controls procedures satisfy the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley, and the related rules of the SEC and the Public Company Accounting Oversight Board. Pursuant to Section 404(b) of Sarbanes-Oxley and the related rules adopted by the SEC and the Public Company Accounting Oversight Board, starting with the second annual report that Enerflex files with the SEC after the effectiveness of the registration statement, Enerflex’s independent auditors will be required to attest to the effectiveness of Enerflex’s internal control over financial reporting. The M32 M-32 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 process of obtaining the required attestation from Enerflex’s independent auditors has commenced and will require the investment of substantial additional time and resources, including by Enerflex’s Chief Financial Officer and other members of Enerflex’s senior management, as well as higher than anticipated operating expenses including independent auditor fees. Enerflex’s failure to satisfy the requirements of Section 404 of Sarbanes-Oxley on an ongoing and timely basis, or any failure in Enerflex’s internal controls, could result in the loss of investor confidence in the reliability of Enerflex’s financial statements, which in turn could negatively affect the trading price of the Enerflex Common Shares and could have a material adverse effect on Enerflex’s results of operations and harm its reputation. Further, Enerflex can provide no assurance that its independent auditors will provide the required attestation. If Enerflex is required in the future to make changes to its internal controls over financial reporting, it could adversely affect Enerflex’s operations, financial reporting and/or results of operations and could result in an adverse opinion on internal controls over financial reporting from its independent auditors. 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. CAPITAL RESOURCES On January 31, 2023, Enerflex had 123,739,020 common shares outstanding. Enerflex has not established a formal dividend policy and the Board anticipates setting the quarterly dividends based on the availability of cash flow, anticipated market conditions, and the general needs of the business. Subsequent to the fourth quarter of 2022, the Board declared a quarterly dividend of $0.025 per share. At December 31, 2022, the Company had combined drawings of $662.4 million against the Revolving Credit Facility and Term Loan (December 31, 2021 – nil). The weighted average interest rate on the Revolving Credit Facility and Term Loan at December 31, 2022 was 7.0 percent and 7.8 percent (December 31, 2021 – nil). The composition of the borrowings on the Revolving Credit Facility, Term Loan, and the Company’s Notes were as follows: ($ thousands) Drawings on the Revolving Credit Facility Drawings on the Term Loan (US$150,000) Notes due October 15, 2027 (US$625,000) Drawings on the Bank Facility Drawings on the Asset-Based Facility Notes due December 15, 2024 Notes due December 15, 2027 December 31, 2022 December 31, 2021 $ 459,202 $ 203,160 846,500 - - - - - - - 30,522 37,411 148,119 118,746 (3,376) Deferred transaction costs and Notes discount (118,537) Total long-term debt Current portion of long-term debt Non-current portion of long-term debt Total long-term debt $ $ $ 1,390,325 $ 331,422 27,088 $ - 1,363,237 331,422 1,390,325 $ 331,422 At December 31, 2022 without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $1,508.9 million, and nil thereafter. Management’s Discussion and Analysis | 2022 Annual Report M33 M-33 MANAGEMENT’S DISCUSSION AND ANALYSIS CONTRACTUAL OBLIGATIONS, COMMITTED CAPITAL INVESTMENT, AND OFF- BALANCE SHEET ARRANGEMENTS The Company’s contractual obligations are contained in the following table: ($ thousands) 2023 2024 2025 2026 2027 Thereafter Leases Purchase Obligations $ 23,776 $ 775,339 $ 18,427 15,493 12,173 9,848 32,287 19,306 1,005 - - - Total contractual obligations $ 112,004 $ 795,650 $ The Company’s lease commitments are operating leases for premises, equipment, and service vehicles. Total 799,115 37,733 16,498 12,173 9,848 32,287 907,654 The majority of the Company’s purchase commitments relate to major components for the Energy Infrastructure and Engineered Systems 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 during the 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 parties. 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 All related party transactions are settled in cash. 2022 2021 $ 1,755 $ 4 22 352 - 128 SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENT The timely preparation of these 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, uncertainties about the current economic environment including significant market volatility in commodity prices, high inflation, high interest rates, and increasing energy prices. M34 M-34 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 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, customer attrition rates, operating margins, discount rates, and economic lives. Property, Plant and Equipment, Energy Infrastructure Assets and Intangible Assets Property, plant and equipment, energy infrastructure assets and intangible assets are stated at cost less accumulated depreciation and accumulated amortization and any impairment losses. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property, plant and equipment, energy infrastructure assets and intangible assets is reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of property, plant and equipment, energy infrastructure assets and intangible assets requires judgment and is based on currently available information. Property, plant and equipment, energy infrastructure assets and intangible assets are 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, energy infrastructure assets and intangible assets constitutes a change in accounting estimate and are applied prospectively. Management’s Discussion and Analysis | 2022 Annual Report M35 M-35 MANAGEMENT’S DISCUSSION AND ANALYSIS 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. 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. The Company has determined the group of CGUs to be its operating segments for purposes for its impairment assessment. 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 15. 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 for uncertain tax positions, 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. The Company reviews the adequacy of these provisions at the end of each reporting period and adjusts them as required. However, it is possible that, at some future date, current income tax liabilities are in excess M36 M-36 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 of the Company’s current income tax provision as a result of these audits, adjustments, or litigation with tax authorities. These differences could materially impact the Company’s assets, liabilities, and net income. 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 25. Government Grants Government grants are recognized when there is reasonable assurance that the grant will be received, and all conditions associated with the grant are met. If a grant is received, but reasonable assurance and compliance with conditions is not achieved, the grant is recognized as a deferred liability until the conditions are fulfilled. As long as the Company is eligible for any such programs the grants received are recorded as a reduction against the associated expenses to which they relate and in the period the expenses are recognized. Segment Change and Fair Value Allocation During the fourth quarter of 2022, the Company reassessed its operating and reporting segments. Prior to this assessment, the Company’s operating and reporting segments were one and the same, with those segments being Canada, USA, and Rest of World. With the completion of the Exterran acquisition Management noted a change in how the Chief Operating Decision Maker (“CODM”) views the organization. On this basis, four operating segments have been identified with no change in the Canada and USA segments, while Rest of World has been bifurcated into LATAM and EH. For external reporting purposes, Enerflex’s reportable segments are as follows: • North America – comprised of operations in Canada and the USA; • • Latin America – comprised of operations in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico and Peru; and Eastern Hemisphere – comprised of operations in the Middle East, Africa, Europe and Asia Pacific. The Canada and USA segments have been combined as they have similar economic characteristics including: • • • • • the nature of the products and services provided; the nature of the production processes; the type or class of customer for their products and services; the methods used to distribute their products or provide their services; and the nature of the regulatory environment. Goodwill that was previously allocated to the ROW segment was distributed between the LATAM and EH segments on a basis of the estimated fair value allocation. 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. Management’s Discussion and Analysis | 2022 Annual Report M37 M-37 MANAGEMENT’S DISCUSSION AND ANALYSIS FUTURE ACCOUNTING PRONOUNCEMENTS The Company has reviewed new and revised accounting pronouncements that have been issued but are not yet effective. The Company determined that the following amendments may have an impact on future financial statements: IAS 1 Presentation of Financial Statements (“IAS 1”) In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements, in which it provides guidance and examples to help a company apply materiality judgements to accounting policy disclosures. The amendments seek to help a company provide more useful accounting policy disclosures by replacing the requirement for a company to disclose their ‘significant’ accounting policies with a requirement to disclose their ‘material’ accounting policies, as well as add guidance on how a business applies the concept of materiality in making decisions about accounting policy disclosures. The company will now have to consider both the size of the transactions, other events or conditions, and the nature of them. ‘Material’ is a defined term in IFRS and is more widely understood by users of financial statements. In October 2022, the IASB issued amendments to clarify that the classification of liabilities as current or non-current is based solely on a company’s right to defer settlement for at least twelve months at the reporting date. The Right needs to exist at the reporting date and must have substance. In addition to the amendment from January 2020 where the IASB issued amendments to IAS 1, to provide a more general approach to the presentation of liabilities as current or non-current, only covenants with which a company must comply on or before the reporting date may affect this right. Covenants to be complied with after the reporting date do not affect the classification of a liability as current or non-current at the reporting date. These amendments are effective January 1, 2024 and are to be applied retrospectively. Management has not yet determined the impact this amendment will have on the Company. IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”) Effective January 1, 2023, the definition of accounting estimates will be amended under IAS 8. Under the amended definition, a change in an input or a change in a measurement technique are changes in accounting estimates if they do not result from the correction of prior period errors. The amendment further clarifies that accounting estimates are monetary amounts in the financial statements subject to measurement uncertainty. Under the prior definition, IAS 8 stated that a change in accounting estimates specified that changes in accounting estimates may result from new information or new developments. Therefore, such changes are not corrections of errors. This amendment will impact changes in accounting policies and changes in accounting estimates made after the amendment is adopted by the Company. IAS 12 Income Taxes (“IAS 12”) In May 2021, the IASB issued amendments to IAS 12, which narrow the scope of the initial recognition exception under IAS 12, so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences. The amendment is effective January 1, 2023, and clarifies how a business should account for deferred tax related to assets and liabilities arising from a single transaction. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a related asset and liability give rise to taxable and deductible temporary differences that are not equal. Management believes these amendments will have no impact on the Company. M38 M-38 Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 RESPONSIBILITY OF MANAGEMENT AND THE BOARD OF DIRECTORS Management is responsible for the information disclosed in this MD&A and the accompanying 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, 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 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 DC&P and ICFR as at December 31, 2022, 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 DC&P were adequate and effective as at December 31, 2022, 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. Management also concluded that the design and operation of ICFR was adequate and effective as at December 31, 2022, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial reporting in accordance with IFRS. As permitted by Canadian securities laws and SEC guidance, the Company has excluded Exterran control, policies and procedures, from Management’s evaluation of the system of ICFR for the year ended December 31, 2022. Additional information regarding this acquisition is included above and in Note 7 of the Financial Statements. Exterran will be included in Management’s evaluation of ICFR for the fiscal year ending December 31, 2023. Management identified a material weakness in design and operation of the control over review of financial statement presentation and disclosure, which led to the amendment and restatement of its audited Consolidated Financial Statements for the year ended December 31, 2021. This deficiency was due to reliance on system automation to correctly classify and present amounts in the financial statements and insufficient precision of financial statement review controls to have identified a material misstatement in the financial statements. Due to this material weakness, certain financial statement presentation was incorrect, which included the misclassification of certain cash flows, and non-cash items being reflected as transfers between Operating, Investing, and Financing cash flows. The Statements of Cash Flows and related disclosures have been adjusted for this misclassification and these non-cash transfers. The Company has taken and will continue to take a number of actions to remediate this material weakness. During the second quarter of 2022, the Company developed and implemented a remediation plan to address this material weakness that identifies areas where enhanced precision will help detect and prevent material misstatements. This remediation plan includes, but is not limited to: a new reconciliation process that identifies any new transactions being reflected in the Statement of Cash Flows; a robust review methodology for complex and non-normal course transactions which includes all aspects of presentation and disclosure; a proof to ensure that non-cash transfers are no longer reflected within the Statement of Cash Flows; and plans to use outside resources to enhance the business process documentation. Certain remedial measures were undertaken in the second quarter of 2022 that resulted in an effective control design over the Company’s reliance on system automation to correctly classify and prepare the Statements of Cash Flows. Management has concluded that these controls are operationally effective. Management believes the ongoing efforts will reduce the risk of material weaknesses in the future. Outside of the material weakness noted above, there have been no significant changes in the design of the Company’s ICFR during the twelve months ended December 31, 2022 that would materially affect, or is reasonably likely to materially affect, the Company’s ICFR. Management’s Discussion and Analysis | 2022 Annual Report M39 M-39 MANAGEMENT’S DISCUSSION AND ANALYSIS While the Officers of the Company have designed the Company’s DC&P and ICFR, they expect that these controls and procedures may While the Officers of the Company have designed the Company’s DC&P and ICFR, they expect that these controls and procedures may While the Officers of the Company have designed the Company’s DC&P and ICFR, 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, While the Officers of the Company have designed the Company’s DC&P and ICFR, 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, 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. 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. assurance that the objectives of the control system are met. assurance that the objectives of the control system are met. SUBSEQUENT EVENTS SUBSEQUENT EVENTS SUBSEQUENT EVENTS Subsequent to December 31, 2022, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 6, 2023, to shareholders SUBSEQUENT EVENTS Subsequent to December 31, 2022, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 6, 2023, to shareholders of record on March 16, 2023. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of Subsequent to December 31, 2022, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 6, 2023, to shareholders Subsequent to December 31, 2022, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 6, 2023, to shareholders of record on March 16, 2023. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow, anticipated market conditions, and the general needs of the business. of record on March 16, 2023. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of of record on March 16, 2023. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow, anticipated market conditions, and the general needs of the business. cash flow, anticipated market conditions, and the general needs of the business. cash flow, anticipated market conditions, and the general needs of the business. FORWARD-LOOKING STATEMENTS FORWARD-LOOKING STATEMENTS FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking information and statements within the meaning of applicable Canadian securities laws and within FORWARD-LOOKING STATEMENTS This MD&A contains forward-looking information and statements within the meaning of applicable Canadian securities laws and within the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to the This MD&A contains forward-looking information and statements within the meaning of applicable Canadian securities laws and within This MD&A contains forward-looking information and statements within the meaning of applicable Canadian securities laws and within the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to the respective Management expectations about future events, results of operations, and the future performance (both financial and the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to the the meaning of the safe harbor provisions of the US Private Securities Litigation Reform Act of 1995. These statements relate to the respective Management expectations about future events, results of operations, and the future performance (both financial and operational) and business prospects of Enerflex, Exterran, or the combined entity. All statements other than statements of historical fact respective Management expectations about future events, results of operations, and the future performance (both financial and respective Management expectations about future events, results of operations, and the future performance (both financial and operational) and business prospects of Enerflex, Exterran, or the combined entity. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “future", “plan”, “contemplate”, “continue”, “estimate”, “expect”, operational) and business prospects of Enerflex, Exterran, or the combined entity. All statements other than statements of historical fact operational) and business prospects of Enerflex, Exterran, or the combined entity. All statements other than statements of historical fact are forward-looking statements. The use of any of the words “anticipate”, “future", “plan”, “contemplate”, “continue”, “estimate”, “expect”, “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, are forward-looking statements. The use of any of the words “anticipate”, “future", “plan”, “contemplate”, “continue”, “estimate”, “expect”, are forward-looking statements. The use of any of the words “anticipate”, “future", “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 and statements. In particular, this “intend”, “propose”, “might”, “may”, “will”, “shall”, “project”, “should”, “could”, “would”, “believe”, “predict”, “forecast”, “pursue”, “potential”, “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 and statements. In particular, this MD&A includes (without limitation) forward-looking information and statements pertaining to: the expectations for enhanced “objective” and “capable” and similar expressions are intended to identify forward-looking information and statements. In particular, this “objective” and “capable” and similar expressions are intended to identify forward-looking information and statements. In particular, this MD&A includes (without limitation) forward-looking information and statements pertaining to: the expectations for enhanced shareholder value through sustainable improvements in efficiency, profitability, and cash flow generation; the expectation for the MD&A includes (without limitation) forward-looking information and statements pertaining to: the expectations for enhanced MD&A includes (without limitation) forward-looking information and statements pertaining to: the expectations for enhanced shareholder value through sustainable improvements in efficiency, profitability, and cash flow generation; the expectation for the combined company to diversify its operations across key growth regions where the Company already has a presence and to provide shareholder value through sustainable improvements in efficiency, profitability, and cash flow generation; the expectation for the shareholder value through sustainable improvements in efficiency, profitability, and cash flow generation; the expectation for the combined company to diversify its operations across key growth regions where the Company already has a presence and to provide offerings to a broader base of customers; expectations and results from the exploration activities by the Company around combined company to diversify its operations across key growth regions where the Company already has a presence and to provide combined company to diversify its operations across key growth regions where the Company already has a presence and to provide offerings to a broader base of customers; expectations and results from the exploration activities by the Company around decarbonization, carbon capture technologies, and supporting infrastructure opportunities with customers; expectations for the offerings to a broader base of customers; expectations and results from the exploration activities by the Company around offerings to a broader base of customers; expectations and results from the exploration activities by the Company around decarbonization, carbon capture technologies, and supporting infrastructure opportunities with customers; expectations for the Company to pay and to continue to pay a quarterly dividend to shareholders and that the Board will set the dividend based on the decarbonization, carbon capture technologies, and supporting infrastructure opportunities with customers; expectations for the decarbonization, carbon capture technologies, and supporting infrastructure opportunities with customers; expectations for the Company to pay and to continue to pay a quarterly dividend to shareholders and that the Board will set the dividend based on the availability of cash flow, anticipated market conditions, and the general needs of the business; the disclosures under the section Company to pay and to continue to pay a quarterly dividend to shareholders and that the Board will set the dividend based on the Company to pay and to continue to pay a quarterly dividend to shareholders and that the Board will set the dividend based on the availability of cash flow, anticipated market conditions, and the general needs of the business; the disclosures under the section “Outlook” and “Outlook by Segment” including, but not limited to, the expectations to capture $60 million in annual run-rate synergies availability of cash flow, anticipated market conditions, and the general needs of the business; the disclosures under the section availability of cash flow, anticipated market conditions, and the general needs of the business; the disclosures under the section “Outlook” and “Outlook by Segment” including, but not limited to, the expectations to capture $60 million in annual run-rate synergies within 12 to 18 months of the closing of the Transaction and the sources in which such run-rate synergies will be derived from; the timing “Outlook” and “Outlook by Segment” including, but not limited to, the expectations to capture $60 million in annual run-rate synergies “Outlook” and “Outlook by Segment” including, but not limited to, the expectations to capture $60 million in annual run-rate synergies within 12 to 18 months of the closing of the Transaction and the sources in which such run-rate synergies will be derived from; the timing for expected completion of in flight projects in the Middle East; expectations for the Company to generate significant excess cash flow within 12 to 18 months of the closing of the Transaction and the sources in which such run-rate synergies will be derived from; the timing within 12 to 18 months of the closing of the Transaction and the sources in which such run-rate synergies will be derived from; the timing for expected completion of in flight projects in the Middle East; expectations for the Company to generate significant excess cash flow from operations and to lower its bank-adjusted net debt to EBITDA ratio to below 2.5 times by the end of 2023; the expectations of for expected completion of in flight projects in the Middle East; expectations for the Company to generate significant excess cash flow for expected completion of in flight projects in the Middle East; expectations for the Company to generate significant excess cash flow from operations and to lower its bank-adjusted net debt to EBITDA ratio to below 2.5 times by the end of 2023; the expectations of Enerflex to have the ability to deliver increased capital returns to shareholders and to continue to pay a quarterly dividend of at least from operations and to lower its bank-adjusted net debt to EBITDA ratio to below 2.5 times by the end of 2023; the expectations of from operations and to lower its bank-adjusted net debt to EBITDA ratio to below 2.5 times by the end of 2023; the expectations of Enerflex to have the ability to deliver increased capital returns to shareholders and to continue to pay a quarterly dividend of at least $0.025 per share; Enerflex’s 2023 guidance; expectations that production of oil and natural gas will grow modestly year-over-year in Enerflex to have the ability to deliver increased capital returns to shareholders and to continue to pay a quarterly dividend of at least Enerflex to have the ability to deliver increased capital returns to shareholders and to continue to pay a quarterly dividend of at least $0.025 per share; Enerflex’s 2023 guidance; expectations that production of oil and natural gas will grow modestly year-over-year in North America and the regions where such growth will be driven from; expectations for future LNG exports associated with LNG Canada $0.025 per share; Enerflex’s 2023 guidance; expectations that production of oil and natural gas will grow modestly year-over-year in $0.025 per share; Enerflex’s 2023 guidance; expectations that production of oil and natural gas will grow modestly year-over-year in North America and the regions where such growth will be driven from; expectations for future LNG exports associated with LNG Canada Phase 1 and the net effect for the Company; utilization rates for the contract compression fleet of the Company and that such rates will North America and the regions where such growth will be driven from; expectations for future LNG exports associated with LNG Canada North America and the regions where such growth will be driven from; expectations for future LNG exports associated with LNG Canada Phase 1 and the net effect for the Company; utilization rates for the contract compression fleet of the Company and that such rates will remain elevated and that sold margins on new Engineered Systems booking will continue to expand from current levels; the expectations Phase 1 and the net effect for the Company; utilization rates for the contract compression fleet of the Company and that such rates will Phase 1 and the net effect for the Company; utilization rates for the contract compression fleet of the Company and that such rates will remain elevated and that sold margins on new Engineered Systems booking will continue to expand from current levels; the expectations that the Exterran Cryogenic product line to be a synergistic revenue-generating business in the North American region; expectations remain elevated and that sold margins on new Engineered Systems booking will continue to expand from current levels; the expectations remain elevated and that sold margins on new Engineered Systems booking will continue to expand from current levels; the expectations that the Exterran Cryogenic product line to be a synergistic revenue-generating business in the North American region; expectations that the recent increase in After-Market Services across the North American region continues into 2023; expectations for continued that the Exterran Cryogenic product line to be a synergistic revenue-generating business in the North American region; expectations that the Exterran Cryogenic product line to be a synergistic revenue-generating business in the North American region; expectations that the recent increase in After-Market Services across the North American region continues into 2023; expectations for continued stability in the recurring business in Latin America; expectations to increase contract compression fleet utilization rates through re- that the recent increase in After-Market Services across the North American region continues into 2023; expectations for continued that the recent increase in After-Market Services across the North American region continues into 2023; expectations for continued stability in the recurring business in Latin America; expectations to increase contract compression fleet utilization rates through re- contracting and redeployment of idle fleet; expectations that in Latin America there is a growing need for reliable power and a desire to stability in the recurring business in Latin America; expectations to increase contract compression fleet utilization rates through re- stability in the recurring business in Latin America; expectations to increase contract compression fleet utilization rates through re- contracting and redeployment of idle fleet; expectations that in Latin America there is a growing need for reliable power and a desire to reduce overall dependency on imported natural gas and the impacts on the Company; expectations for strengthening demand for natural contracting and redeployment of idle fleet; expectations that in Latin America there is a growing need for reliable power and a desire to contracting and redeployment of idle fleet; expectations that in Latin America there is a growing need for reliable power and a desire to reduce overall dependency on imported natural gas and the impacts on the Company; expectations for strengthening demand for natural gas and energy transition solutions in the Eastern Hemisphere region; the expectations that a future LNG export industry in Canada will reduce overall dependency on imported natural gas and the impacts on the Company; expectations for strengthening demand for natural reduce overall dependency on imported natural gas and the impacts on the Company; expectations for strengthening demand for natural gas and energy transition solutions in the Eastern Hemisphere region; the expectations that a future LNG export industry in Canada will provide additional opportunities for the Company; expectations that cash flows from operations in 2022, together with cash and cash gas and energy transition solutions in the Eastern Hemisphere region; the expectations that a future LNG export industry in Canada will gas and energy transition solutions in the Eastern Hemisphere region; the expectations that a future LNG export industry in Canada will provide additional opportunities for the Company; expectations that 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 provide additional opportunities for the Company; expectations that cash flows from operations in 2022, together with cash and cash provide additional opportunities for the Company; expectations that 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; the anticipated financial performance of the combined entity, including its expected gross margin; the equivalents on hand and currently available credit facilities, will be more than sufficient to fund its requirements for investments in 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; the anticipated financial performance of the combined entity, including its expected gross margin; the intended use by Enerflex of the remaining funds under the Revolving Credit Facility; the expected cost savings and synergies of the working capital and capital assets; the anticipated financial performance of the combined entity, including its expected gross margin; the working capital and capital assets; the anticipated financial performance of the combined entity, including its expected gross margin; the intended use by Enerflex of the remaining funds under the Revolving Credit Facility; the expected cost savings and synergies of the combined company to be achieved as a result of the Transaction and the timing to realize such cost savings and synergies; anticipated intended use by Enerflex of the remaining funds under the Revolving Credit Facility; the expected cost savings and synergies of the intended use by Enerflex of the remaining funds under the Revolving Credit Facility; the expected cost savings and synergies of the combined company to be achieved as a result of the Transaction and the timing to realize such cost savings and synergies; anticipated shareholder value; expected accretion to adjusted EBITDA, cash flow per share, and earnings per share for shareholders of Enerflex; combined company to be achieved as a result of the Transaction and the timing to realize such cost savings and synergies; anticipated combined company to be achieved as a result of the Transaction and the timing to realize such cost savings and synergies; anticipated shareholder value; expected accretion to adjusted EBITDA, cash flow per share, and earnings per share for shareholders of Enerflex; future capital expenditures, including the amount and nature thereof; commodity prices and the impact of such prices on demand for the shareholder value; expected accretion to adjusted EBITDA, cash flow per share, and earnings per share for shareholders of Enerflex; shareholder value; expected accretion to adjusted EBITDA, cash flow per share, and earnings per share for shareholders of Enerflex; future capital expenditures, including the amount and nature thereof; commodity prices and the impact of such prices on demand for the combined entity’s products and services; development trends in the oil and natural gas industry; seasonal variations in the activity levels future capital expenditures, including the amount and nature thereof; commodity prices and the impact of such prices on demand for the future capital expenditures, including the amount and nature thereof; commodity prices and the impact of such prices on demand for the combined entity’s products and services; development trends in the oil and natural gas industry; seasonal variations in the activity levels of certain crude oil and natural gas markets; business prospects and strategy; expansion and growth of the business and operations; combined entity’s products and services; development trends in the oil and natural gas industry; seasonal variations in the activity levels combined entity’s products and services; development trends in the oil and natural gas industry; seasonal variations in the activity levels of certain crude oil and natural gas markets; business prospects and strategy; expansion and growth of the business and operations; implications of changes in government regulation, laws and income taxes; and environmental, social, and governance matters. of certain crude oil and natural gas markets; business prospects and strategy; expansion and growth of the business and operations; of certain crude oil and natural gas markets; business prospects and strategy; expansion and growth of the business and operations; implications of changes in government regulation, laws and income taxes; and environmental, social, and governance matters. implications of changes in government regulation, laws and income taxes; and environmental, social, and governance matters. implications of changes in government regulation, laws and income taxes; and environmental, social, and governance matters. This forward-looking information and statements are based on assumptions, estimates and analysis made by Enerflex and its perception This forward-looking information and statements are based on assumptions, estimates and analysis made by Enerflex and its perception of trends, current conditions and expected developments, as well as other factors that are believed by Enerflex to be reasonable and This forward-looking information and statements are based on assumptions, estimates and analysis made by Enerflex and its perception This forward-looking information and statements are based on assumptions, estimates and analysis made by Enerflex and its perception of trends, current conditions and expected developments, as well as other factors that are believed by Enerflex to be reasonable and of trends, current conditions and expected developments, as well as other factors that are believed by Enerflex to be reasonable and of trends, current conditions and expected developments, as well as other factors that are believed by Enerflex to be reasonable and M40 M-40 M-40 M-40 M-40 Enerflex Ltd. | 2022 Annual Report Enerflex Ltd. | 2022 Annual Report Enerflex Ltd. | 2022 Annual Report Enerflex Ltd. | 2022 Annual Report ENERFLEX ANNUAL REPORT 2022 relevant in the circumstances and in light of the Transaction. All forward-looking information and statements in this MD&A is subject to important risks, uncertainties, and assumptions, which are difficult to predict and which may affect Enerflex’s operations, including, without limitation: the impact of economic conditions including volatility in the price of crude oil, natural gas, and natural gas liquids; supply chain interruptions leading to delays in receiving materials and parts to produce equipment; interest rates and foreign exchange rates; industry conditions including supply and demand fundamentals for oil and natural gas, and the related infrastructure including new environmental, taxation and other laws and regulations; continued 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 and difficulties in retaining personnel; political unrest; and other factors, many of which are beyond the control of Enerflex. Readers are cautioned that the foregoing list of assumptions and risk factors should not be construed as exhaustive. While Enerflex 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 and such differences could be material from those expressed in, or implied by, these statements. The forward-looking information and statements included in this MD&A should not be unduly relied upon as a number of factors could cause actual results to differ materially from the results discussed in these forward-looking statements, including but not limited to: the ability of the combined entity to realize the anticipated benefits of, and synergies from, the Transaction and the timing and quantum thereof; potential undisclosed liabilities unidentified during the due diligence process; the accuracy of the pro forma financial information of the combined entity; the interpretation of the Transaction by tax authorities; the success of business integration and the time required to successfully integrate; the ability to maintain desirable financial ratios; the ability to access various sources of debt and equity capital, generally, and on acceptable terms, if at all; the ability to utilize tax losses in the future; the ability to maintain relationships with partners and to successfully manage and operate integrated businesses; risks associated with technology and equipment, including potential cyberattacks; the occurrence of unexpected events such as pandemics, war, terrorist threats, and the instability resulting therefrom; risks associated with existing and potential future lawsuits, shareholder proposals, and regulatory actions; and those factors referred to under the heading "Risk Factors" in Enerflex's Annual Information Form ("AIF") for the year ended December 31, 2022. This MD&A contains information that may constitute future-oriented financial information or financial outlook information (“FOFI”) about Enerflex and the combined entity’s prospective financial performance, financial position, or cash flows, including leverage, operational efficiencies, scale, capital expenditures and WIP, non-discretionary expenses, and accretion, 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 prove to be imprecise or inaccurate and, as such, undue reliance should not be placed on FOFI. 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 statements and FOFI contained herein is expressly qualified in its entirety by the above cautionary statement. The forward-looking information and statements 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 and statements, whether as a result of new information, future events or otherwise. Management’s Discussion and Analysis | 2022 Annual Report M41 M-41 MANAGEMENT’S DISCUSSION AND ANALYSIS 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 as issued by the International Accounting Standards Board, 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 over financial reporting as described in Management’s Annual Report on Internal Control Over Financial Reporting on page M-39 of Management’s Discussion and Analysis. The Audit Committee is appointed by the Board of Directors annually and is comprised exclusively of outside, independent 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 the standards of the Public Company Accounting Oversight Board (United States) (PCAOB). Their report outlines the nature of their audits and expresses their opinion on the consolidated financial statements. [signed] “Marc Rossiter” [signed] “Sanjay Bishnoi” Marc Rossiter President, Chief Executive Officer, and Director Sanjay Bishnoi Senior Vice President and Chief Financial Officer March 1, 2023 47 Ernst & Young LLP 2200, 215 2nd St SW Calgary, AB T2P 1M4 Tel: +1 403 206 5000 Fax: +1 403 290 4265 ey.com/ca Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Enerflex Ltd. Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated statements of financial position of Enerflex Ltd. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of earnings, comprehensive income, cash flows and changes in equity for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements“). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and its financial performance and its cash flows for the years then ended, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Basis for Opinion These consolidated financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 48 Ernst & Young LLP 2200, 215 2nd St SW Calgary, AB T2P 1M4 Tel: +1 403 206 5000 Fax: +1 403 290 4265 ey.com/ca Ernst & Young LLP 2200, 215 2nd St SW Calgary, AB T2P 1M4 Tel: +1 403 206 5000 Fax: +1 403 290 4265 ey.com/ca Description of the Matter How We Addressed the Matter in Our Audit Description of the Matter Acquisition of Exterran Corporation During 2022, the Company completed its acquisition of Exterran Corporation (“Exterran”) for total purchase consideration of $222.6 million, as disclosed in note 3c, 5 and 7 to the consolidated financial statements. The preliminary purchase price allocation includes goodwill of $139.4 million and customer relationship intangible assets of $50.9 million at the acquisition date. The acquisition was accounted for under the acquisition method of accounting. The assets acquired and liabilities assumed have been recorded based on preliminary estimates of fair value, and the values are subject to change based on the finalization of the fair values of the assets acquired and liabilities assumed. Auditing the Company’s preliminary allocation of purchase price for its acquisition of Exterran was determined to be a critical audit matter as it involved significant estimation uncertainty and judgement in evaluating the inputs and assumptions used in determining the fair value of the customer relationship intangible assets as at the date of acquisition. The significant estimation was primarily due to a high degree of management judgement in determining key assumptions that include revenue growth rates, customer attrition rates, operating margins and discount rates. Changes to these assumptions could have a significant impact on the fair value of the customer relationship intangible assets. To test the fair value of the Company's acquired customer relationship intangible assets, our audit procedures included, among others, with assistance of our valuation specialists, evaluating the appropriateness of the Company's valuation methodology and significant assumptions used. We evaluated the reasonableness of significant assumptions and estimates used by management, including revenue growth rates, customer attrition rates and operating margins by considering the past performance of the acquired business, comparing projections to historical performance and to available external data. In addition, we performed sensitivity analyses on significant assumptions to evaluate the changes in the fair value of the acquired customer relationship intangible assets that would result from changes in the assumptions. Evaluation of goodwill impairment At December 31, 2022, the Company's goodwill was $679.4 million. As disclosed in notes 3f, 5, 15 and 35 to the consolidated financial statements, for the purposes of its impairment assessment, goodwill is allocated to cash generating units, which the Company has determined to be its operating segments. Goodwill is tested for impairment annually, or at any time an indicator of impairment exists. During the year ended December 31, 2022, the Company performed its impairment tests which resulted in the Company recording $48 million of goodwill impairment allocated to its Canada operating segment. No impairment was recorded in the other operating segments. Subsequent to the acquisition of Exterran on October 13, 2022, the Company reorganized its reporting structure and changed the composition of its operating segments. The 49 Company then reassigned goodwill to the new operating segments using a relative fair value allocation. Auditing the recoverable amounts in the Company’s goodwill impairment tests and the relative fair value used to reassign goodwill was determined to be a critical audit matter as it involved significant estimation uncertainty and judgement primarily due to the sensitivity of the respective operating segments’ estimated recoverable amounts and relative fair values to underlying significant assumptions. Significant assumptions included cash flow projections, discount rates, revenue growth rate, operating margins and terminal growth rate, which are affected by expectations about future market and economic conditions. How We To test the estimated recoverable amounts of the Company’s operating segments and the Addressed the relative fair values used to reassign goodwill, our audit procedures included, among Matter in Our others, assessing management’s methodologies and testing the significant assumptions Audit discussed above and the completeness and accuracy of underlying data used by the Company in its analysis. We involved our valuation specialists to assess the Company’s impairment model, valuation methodology applied, and certain significant assumptions, including the discount rate and terminal growth rate. We compared commodity price forecasts used in management’s estimated bookings calculation to external industry outlook data. We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses on significant assumptions to evaluate the changes in the recoverable amounts of the operating segments that would result from changes in the assumptions. Measurement of revenue recognized from the supply of engineered systems Description of the For the year ended December 31, 2022, the Company recognized $953.1 million of revenue Matter from the supply of engineered systems. As described in notes 3q, 5 and 24 to the consolidated financial statements, revenues from the supply of engineered systems typically involve engineering, design, manufacture, installation and start-up of equipment recognized on a percentage-of-completion basis proportionate to the costs incurred in the construction of the project. Auditing the Company’s measurement of the revenue recognized related to engineered systems projects where the Company had not fulfilled all performance obligations of the contract’s scope of work at December 31, 2022 was determined to be a critical audit matter as it involved especially subjective auditor judgement because the percentage-of- completion accounting related to these projects involves subjective management assumptions about estimates of the expected margin to be earned and the estimated remaining costs to complete for each project. To test the estimate of the measurement of revenue recognized based on the percentage of completion accounting, we performed audit procedures that included, among others, evaluating a sample of contractual arrangements, including pricing and billing terms, change orders and terms and conditions impacting revenue recognition, if any. For a How We Addressed the Ernst & Young LLP 2200, 215 2nd St SW Calgary, AB T2P 1M4 Tel: +1 403 206 5000 Fax: +1 403 290 4265 ey.com/ca Company then reassigned goodwill to the new operating segments using a relative fair value allocation. Auditing the recoverable amounts in the Company’s goodwill impairment tests and the relative fair value used to reassign goodwill was determined to be a critical audit matter as it involved significant estimation uncertainty and judgement primarily due to the sensitivity of the respective operating segments’ estimated recoverable amounts and relative fair values to underlying significant assumptions. Significant assumptions included cash flow projections, discount rates, revenue growth rate, operating margins and terminal growth rate, which are affected by expectations about future market and economic conditions. How We Addressed the Matter in Our Audit Description of the Matter To test the estimated recoverable amounts of the Company’s operating segments and the relative fair values used to reassign goodwill, our audit procedures included, among others, assessing management’s methodologies and testing the significant assumptions discussed above and the completeness and accuracy of underlying data used by the Company in its analysis. We involved our valuation specialists to assess the Company’s impairment model, valuation methodology applied, and certain significant assumptions, including the discount rate and terminal growth rate. We compared commodity price forecasts used in management’s estimated bookings calculation to external industry outlook data. We also assessed the historical accuracy of management’s estimates and performed sensitivity analyses on significant assumptions to evaluate the changes in the recoverable amounts of the operating segments that would result from changes in the assumptions. Measurement of revenue recognized from the supply of engineered systems For the year ended December 31, 2022, the Company recognized $953.1 million of revenue from the supply of engineered systems. As described in notes 3q, 5 and 24 to the consolidated financial statements, revenues from the supply of engineered systems typically involve engineering, design, manufacture, installation and start-up of equipment recognized on a percentage-of-completion basis proportionate to the costs incurred in the construction of the project. Auditing the Company’s measurement of the revenue recognized related to engineered systems projects where the Company had not fulfilled all performance obligations of the contract’s scope of work at December 31, 2022 was determined to be a critical audit matter as it involved especially subjective auditor judgement because the percentage-of- completion accounting related to these projects involves subjective management assumptions about estimates of the expected margin to be earned and the estimated remaining costs to complete for each project. To test the estimate of the measurement of revenue recognized based on the percentage of completion accounting, we performed audit procedures that included, among others, evaluating a sample of contractual arrangements, including pricing and billing terms, change orders and terms and conditions impacting revenue recognition, if any. For a How We Addressed the 50 Ernst & Young LLP 2200, 215 2nd St SW Calgary, AB T2P 1M4 Tel: +1 403 206 5000 Fax: +1 403 290 4265 ey.com/ca Matter in Our Audit sample of projects, we obtained an understanding of the projects’ performance throughout the year and at year-end through inquiries with project managers from the contract project team. We evaluated the reasonableness of management’s assumptions for estimated costs to complete by comparing the key inputs in the initial budget to actual costs incurred, and assessing trends based on our knowledge of similar projects. We evaluated the reasonableness of management’s historical assumptions of estimated costs to complete by comparing previous cost estimation forecasts to actual results. /s/ Ernst & Young LLP Chartered Professional Accountants We have served as the Company’s auditor since 2010. Calgary, Canada March 1, 2023 51 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 52 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($ Canadian thousands) Assets Current assets Cash and cash equivalents Accounts receivable (Note 8) Contract assets (Note 8) Inventories (Note 9) Work-in-progress related to finance leases (Note 9) Current portion of finance leases receivable (Note 12) Income taxes receivable (Note 21) Derivative financial instruments (Note 29) Prepayments Total current assets Property, plant and equipment (Note 10) Energy infrastructure assets (Note 10) Contract assets (Note 8) Lease right-of-use assets (Note 11) Finance leases receivable (Note 12) Deferred tax assets (Note 21) Other assets (Note 13) Intangible assets (Note 14) Goodwill (Note 15) Total assets Liabilities and Shareholders’ Equity Current liabilities Accounts payable and accrued liabilities (Note 16) Provisions (Note 17) Income taxes payable (Note 21) Deferred revenues (Note 18) Current portion of long-term debt (Note 19) Current portion of lease liabilities (Note 20) Derivative financial instruments (Note 29) Total current liabilities Deferred revenues (Note 18) Long-term debt (Note 19) Lease liabilities (Note 20) Deferred tax liabilities (Note 21) Other liabilities Total liabilities Shareholders’ equity Share capital (Note 22) Contributed surplus (Note 23) Retained earnings Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity December 31, 2022 December 31, 2021 $ $ $ $ $ 253,776 $ 456,578 186,259 369,298 41,986 60,020 5,460 901 71,772 1,446,050 152,505 1,250,338 223,179 78,372 234,484 19,435 83,076 102,773 679,377 172,758 212,206 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 4,269,589 $ 2,191,442 627,149 $ 18,826 78,697 366,085 27,088 20,125 977 1,138,947 33,435 1,363,237 72,908 96,397 21,757 2,726,681 $ 589,827 $ 660,072 164,200 128,809 1,542,908 240,747 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 2,191,442 See accompanying Notes to the consolidated financial statements, including guarantees, commitments, and contingencies (Note 32). F1 Consolidated Financial Statements | 2022 Annual Report F-1 $ 4,269,589 $ ENERFLEX ANNUAL REPORT 2022 CONSOLIDATED STATEMENTS OF EARNINGS ($ Canadian thousands, except per share amounts) Revenue (Note 24) Cost of goods sold Gross margin Selling and administrative expenses (Note 7) Operating income Gain on disposal of property, plant and equipment (Note 10) Equity earnings from associates and joint ventures Impairment of goodwill (Note 15) Earnings (loss) before finance costs and income taxes Net finance costs (Note 27) Earnings (loss) before income taxes Income taxes (Note 22) Net loss Loss per share – basic (Note 28) Loss per share – diluted (Note 28) Weighted average number of shares – basic Weighted average number of shares – diluted See accompanying Notes to the consolidated financial statements. Years ended December 31, 2022 $ 1,777,798 $ 1,455,082 322,716 320,444 2,272 199 4,719 (48,000) (40,810) 38,923 (79,733) 21,210 2021 960,156 757,934 202,222 147,931 54,291 135 671 - 55,097 16,995 38,102 56,557 $ (100,943) $ (18,455) $ $ (1.04) (1.04) $ $ (0.21) (0.21) 97,045,917 97,045,917 89,678,845 89,678,845 F-2 Enerflex Ltd. | 2022 Annual Report F2 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ($ Canadian thousands) Net 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 Loss on derivatives designated as cash flow hedges transferred to net loss, net of income tax expense Unrealized gain on translation of foreign-denominated debt Unrealized gain (loss) on translation of financial statements of foreign operations Other comprehensive income (loss) Total comprehensive loss See accompanying Notes to the consolidated financial statements. Years ended December 31, 2022 2021 $ (100,943) $ (18,455) 360 (389) 11,779 72,406 $ $ 84,156 $ (16,787) $ 247 (167) 232 (18,958) (18,646) (37,101) F3 Consolidated Financial Statements | 2022 Annual Report F-3 ENERFLEX ANNUAL REPORT 2022 CONSOLIDATED STATEMENTS OF CASH FLOWS ($ Canadian thousands) Operating Activities Net loss Items not requiring cash and cash equivalents: Depreciation and amortization Equity earnings from associates and joint ventures Deferred income taxes (Note 21) Share-based compensation expense (Note 25) Gain on disposal of property, plant and equipment (Note 10) Impairment on property, plant and equipment and energy infrastructure assets (Note 10) Impairment of goodwill (Note 15) Net change in working capital and other (Note 31) Cash provided by operating activities Investing Activities Net cash acquired from Acquisition (Note 7) Additions to: Property, plant and equipment (Note 10) Energy infrastructure assets (Note 10) Proceeds on disposal of: Property, plant and equipment (Note 10) Energy infrastructure assets (Note 10) Investment in associates and joint ventures Dividends received from associates and joint ventures Net change in accounts payable related to the addition of property, plant and equipment, and energy infrastructure assets Cash provided by (used in) investing activities Financing Activities Net proceeds from the Revolving Credit Facility (Note 19) Issuance of the Notes (Note 19) Issuance of the Term Loan (Note 19) Repayment of assumed debt on Acquisition (Note 7) Repayment of the Notes (Note 19) Repayment of the Bank Facility (Note 19) Net proceeds from (repayment of) the Asset-Based Facility (Note 19) Lease liability principal repayment (Note 20) Dividends Stock option exercises (Note 22) Deferred transaction costs Cash provided by (used in) financing activities Effect of exchange rate changes on cash and cash equivalents denominated in foreign currencies Increase 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. Years ended December 31, 2022 2021 $ (100,943) $ (18,455) 128,287 (4,719) 3,265 16,162 (199) 1,233 48,000 91,086 (71,318) 19,768 $ 87,622 (671) 43,422 12,937 (135) 537 - 125,257 82,937 208,194 133,218 $ - (8,043) (107,797) 416 15,907 (5,950) 3,094 (5,154) (52,187) 220 4,670 (130) - 12,403 43,248 $ 3,720 (48,861) 464,624 797,629 207,062 (1,022,112) (285,722) (31,213) (39,295) (15,758) (8,969) 260 (54,652) - - - - (40,000) (53,891) 36,916 (14,215) (7,171) - (2,095) 11,854 $ (80,456) 6,148 $ 81,018 172,758 253,776 $ (1,795) 77,082 95,676 172,758 F4 $ $ $ $ $ $ $ F-4 Enerflex Ltd. | 2022 Annual Report CONSOLIDATED FINANCIAL STATEMENTS AND NOTES CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY ($ Canadian thousands) Share capital Contributed surplus Retained earnings Foreign currency translation Accumulated other comprehensive adjustments Hedging reserve income Total At January 1, 2021 $ 375,524 $ 656,832 $ 301,040 $ 63,270 $ 29 $ 63,299 $ 1,396,695 Net loss Other comprehensive loss Effect of stock option plans Dividends - - - - - - 1,783 - (18,455) - - (7,623) - (18,726) - - - 80 - - - (18,646) - - (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 Net loss Other comprehensive income Common shares issued (Notes 7 and 22) Effect of stock option plans Dividends - - 213,942 361 - - - - 1,457 - (100,943) - - - (9,819) - 84,185 - - - - (29) - - - - (100,943) 84,156 84,156 - - - 213,942 1,818 (9,819) At December 31, 2022 $ 589,827 $ 660,072 $ 164,200 $ 128,729 $ 80 $ 128,809 $ 1,542,908 See accompanying Notes to the consolidated financial statements. F5 Consolidated Financial Statements | 2022 Annual Report F-5 ENERFLEX ANNUAL REPORT 2022 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”) delivers energy infrastructure and energy transition solutions to natural gas markets. The Company's vertically integrated suite of product offerings includes processing, cryogenic, compression, electric power, and produced water solutions, spanning all phases of a project's lifecycle, from front-end engineering and design to after-market service. Enerflex has proven expertise in delivering low-carbon solutions, including carbon capture utilization and storage, electrification, renewable natural gas, and hydrogen solutions, and works closely with its customers to help facilitate global decarbonization efforts. Headquartered in Calgary, Alberta, Canada, Enerflex’s registered office is located at 904, 1331 Macleod Trail SE, Calgary, Alberta, Canada. Enerflex has approximately 5,000 employees worldwide. Enerflex, its subsidiaries, interests in associates and joint operations, operate in almost 100 locations in: Canada, the United States of America (“USA”), Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico, Peru, the United Kingdom, the Netherlands, United Arab Emirates (“UAE”), Bahrain, Oman, Egypt, Kuwait, India, Iraq, Nigeria, Pakistan, Saudi Arabia, Australia, China, Indonesia, Malaysia, Singapore, and Thailand. Enerflex operates four business segments and reports in three business segments: Canada and USA, which combine into the North America (“NAM”) reporting segment, Latin America (“LATAM”) which includes our operations in Mexico and South America, and Eastern Hemisphere (“EH”) which includes the Company’s international operations from Europe, Africa, the Middle East, Australia and Asia. The following table represents material subsidiaries of the Company as at December 31, 2022: Name Enerflex Ltd. Jurisdiction of Incorporation Canada Ownership Operating Segment Public Shareholders North America Enerflex International Holdings Ltd. Barbados Enerflex Energy Systems Inc. Delaware, USA Enerflex US Holdings Inc. 1 Delaware, USA Exterran Energy Solutions, LP Delaware, USA Enerflex Energy Systems (Australia) PTY Ltd. Enerflex Middle East LLC Enerflex Middle East WLL3 Australia Oman Bahrain Enerflex Holding Company NL B.V. Netherlands Exterran Middle East LLC Oman 1 Formerly named Exterran Corporation. 2 Enerflex indirectly owns 100.0 percent of Enerflex Middle East LLC. 3 Formerly named Enerflex Middle East SPC. 100.0 percent 100.0 percent 100.0 percent 100.0 percent 100.0 percent 70.0 percent2 100.0 percent 100.0 percent 100.0 percent Eastern Hemisphere North America North America North America Eastern Hemisphere Eastern Hemisphere Eastern Hemisphere Eastern Hemisphere Eastern Hemisphere 6 Enerflex Ltd. | 2022 Annual Report F6 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 2. BASIS OF PRESENTATION (a) Statement of Compliance These consolidated financial statements (“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 (the “Board”) on March 1, 2023. Certain prior year amounts have been reclassified to conform with the current period’s presentation. (b) Basis of Measurement The 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 Financial Statements. Standards and guidelines issued but not yet effective for the current accounting period are described in Note 6. (c) Functional Currency and Presentation Currency These 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. (d) Use of Estimates and Judgment The timely preparation of these 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 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. F7 Notes to the Consolidated Financial Statements | 2022 Annual Report F-7 ENERFLEX ANNUAL REPORT 2022 NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Investments in Associates and Joint Ventures Investments in associates and joint ventures are accounted for under the equity method. Under this 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 significant associates and joint ventures held by the Company are as follows: 45 percent interest in Roska DBO Inc. (“Roska DBO”). 65 percent interest in a joint venture in Brazil. 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 associates 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 individual subsidiaries’ 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. (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. Results of operations of businesses acquired are included in the Company’s consolidated financial statements from the date of acquisition. 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. F-8 Enerflex Ltd. | 2022 Annual Report F8 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (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) Energy Infrastructure Assets Energy infrastructure assets are 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 five 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 two and five 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. (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. F9 Notes to the Consolidated Financial Statements | 2022 Annual Report F-9 ENERFLEX ANNUAL REPORT 2022 (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 three to 12 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. 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 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. F-10 Enerflex Ltd. | 2022 Annual Report F10 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (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 25. 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. F11 Notes to the Consolidated Financial Statements | 2022 Annual Report F-11 ENERFLEX ANNUAL REPORT 2022 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 the 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 F-12 Enerflex Ltd. | 2022 Annual Report F12 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 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. 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. Energy Infrastructure Revenue from energy infrastructure assets 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 assets at the end of the rental period. Should 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 relating to existing or pre-owned equipment, are recorded as Energy Infrastructure revenue. At the inception of a contract, all leases are classified as either an operating or finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Whether a lease is an operating or finance lease depends on the substance of the transaction rather than the form of the contract. Examples of situations, which typically would lead to a lease being classified as a finance lease, include but are not limited to: a) b) c) d) e) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term; the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised; the lease term is for the major part of the economic life of the underlying asset even if title is not transferred; at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and the underlying asset is of such a specialised nature that only the lessee can use it without major modifications. 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. F13 Notes to the Consolidated Financial Statements | 2022 Annual Report F-13 ENERFLEX ANNUAL REPORT 2022 After-Market Services After-Market Services 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. 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 a cancellation. Revenue from contracts that have been classified as finance leases for newly manufactured equipment are recorded as Engineered Systems revenue. At the inception of a contract, all leases are classified as either an operating or finance lease. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an underlying asset. Whether a lease is an operating or finance lease depends on the substance of the transaction rather than the form of the contract. Examples of situations, which typically would lead to a lease being classified as a finance lease include, but are not limited to: a) b) c) d) e) the lease transfers ownership of the underlying asset to the lessee by the end of the lease term; the lessee has the option to purchase the underlying asset at a price that is expected to be sufficiently lower than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the inception date, that the option will be exercised; the lease term is for the major part of the economic life of the underlying asset even if title is not transferred; at the inception date, the present value of the lease payments amounts to at least substantially all of the fair value of the underlying asset; and the underlying asset is of such a specialised nature that only the lessee can use it without major modifications. Upon commencement of a new finance 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. Engineered Systems projects are typically completed within a year; however, this timing can be impacted by both internal and external factors such as shop loading and customer delivery requests. 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, 2022 and 2021, 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. F-14 Enerflex Ltd. | 2022 Annual Report F14 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (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 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. (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. F15 Notes to the Consolidated Financial Statements | 2022 Annual Report F-15 ENERFLEX ANNUAL REPORT 2022 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. 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-settled 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. F-16 Enerflex Ltd. | 2022 Annual Report F16 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES Finance costs comprise interest expense on borrowings, amortization of the Senior Note discount using the effective interest rate method, 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 these 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, uncertainties about the current economic environment including significant market volatility in commodity prices, high inflation, high interest rates, and increasing energy prices. 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. F17 Notes to the Consolidated Financial Statements | 2022 Annual Report F-17 ENERFLEX ANNUAL REPORT 2022 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, customer attrition rates, operating margins, discount rates, and economic lives. Property, Plant and Equipment, Energy Infrastructure Assets and Intangible Assets Property, plant and equipment, energy infrastructure assets and intangible assets are stated at cost less accumulated depreciation and accumulated amortization and any impairment losses. Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of property, plant and equipment, energy infrastructure assets and intangible assets is reviewed on an annual basis. Assessing the reasonableness of the estimated useful lives of property, plant and equipment, energy infrastructure assets and intangible assets requires judgment and is based on currently available information. Property, plant and equipment, energy infrastructure assets and intangible assets are 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, energy infrastructure assets and intangible assets 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. 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. F-18 Enerflex Ltd. | 2022 Annual Report F18 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 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. The Company has determined the group of CGUs to be its operating segments for purposes for its impairment assessment. 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 15. 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 for uncertain tax positions, 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. The Company reviews the adequacy of these provisions at the end of each reporting period and adjusts them as required. However, it is possible that, at some future date, current income tax liabilities are in excess of the Company’s current income tax provision as a result of these audits, adjustments, or litigation with tax authorities. These differences could materially impact the Company’s assets, liabilities, and net income. 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 25. Government Grants Government grants are recognized when there is reasonable assurance that the grant will be received, and all conditions associated with the grant are met. If a grant is received, but reasonable assurance and compliance with conditions is not achieved, the grant is recognized as a deferred liability until the conditions are fulfilled. As long as the Company is eligible for any such programs the grants received are recorded as a reduction against the associated expenses to which they relate and in the period the expenses are recognized. Segment Change and Fair Value Allocation During the fourth quarter of 2022, the Company reassessed its operating and reporting segments. Prior to this assessment, the Company’s operating and reporting segments were one and the same, with those segments being Canada, USA, and Rest of World. With F19 Notes to the Consolidated Financial Statements | 2022 Annual Report F-19 ENERFLEX ANNUAL REPORT 2022 the completion of the Exterran acquisition Management noted a change in how the Chief Operating Decision Maker (“CODM”) views the organization. On this basis, four operating segments have been identified with no change in the Canada and USA segments, while Rest of World has been bifurcated into LATAM and EH. For external reporting purposes, Enerflex’s reportable segments are as follows: • North America – comprised of operations in Canada and the USA; • • Latin America – comprised of operations in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico and Peru; and Eastern Hemisphere – comprised of operations in the Middle East, Africa, Europe and Asia Pacific. The Canada and USA segments have been combined as they have similar economic characteristics including: • • • • • the nature of the products and services provided; the nature of the production processes; the type or class of customer for their products and services; the methods used to distribute their products or provide their services; and the nature of the regulatory environment. Goodwill that was previously allocated to the ROW segment was distributed between the LATAM and EH segments on a basis of the estimated fair value allocation. 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. The Company determined that the following amendments may have an impact on future financial statements: IAS 1 Presentation of Financial Statements (“IAS 1”) In February 2021, the IASB issued amendments to IAS 1 and IFRS Practice Statement 2 Making Materiality Judgements, in which it provides guidance and examples to help a company apply materiality judgements to accounting policy disclosures. The amendments seek to help a company provide more useful accounting policy disclosures by replacing the requirement for a company to disclose their ‘significant’ accounting policies with a requirement to disclose their ‘material’ accounting policies, as well as add guidance on how a business applies the concept of materiality in making decisions about accounting policy disclosures. The company will now have to consider both the size of the transactions, other events or conditions, and the nature of them. ‘Material’ is a defined term in IFRS and is more widely understood by users of financial statements. In October 2022, the IASB issued amendments to clarify that the classification of liabilities as current or non-current is based solely on a company’s right to defer settlement for at least twelve months at the reporting date. The Right needs to exist at the reporting date and must have substance. In addition to the amendment from January 2020 where the IASB issued amendments to IAS 1, to provide a more general approach to the presentation of liabilities as current or non-current, only covenants with which a company must comply on or before the reporting date may affect this right. Covenants to be complied with after the reporting date do not affect the classification of a liability as current or non-current at the reporting date. These amendments are effective January 1, 2024 and are to be applied retrospectively. Management has not yet determined the impact this amendment will have on the Company. F-20 Enerflex Ltd. | 2022 Annual Report F20 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (“IAS 8”) Effective January 1, 2023, the definition of accounting estimates will be amended under IAS 8. Under the amended definition, a change in an input or a change in a measurement technique are changes in accounting estimates if they do not result from the correction of prior period errors. The amendment further clarifies that accounting estimates are monetary amounts in the financial statements subject to measurement uncertainty. Under the prior definition, IAS 8 stated that a change in accounting estimates specified that changes in accounting estimates may result from new information or new developments. Therefore, such changes are not corrections of errors. This amendment will impact changes in accounting policies and changes in accounting estimates made after the amendment is adopted by the Company. IAS 12 Income Taxes (“IAS 12”) In May 2021, the IASB issued amendments to IAS 12, which narrow the scope of the initial recognition exception under IAS 12, so that it no longer applies to transactions that give rise to equal taxable and deductible temporary differences. The amendment is effective January 1, 2023, and clarifies how a business should account for deferred tax related to assets and liabilities arising from a single transaction. Under the amendments, the initial recognition exception does not apply to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. It only applies if the recognition of a related asset and liability give rise to taxable and deductible temporary differences that are not equal. Management believes these amendments will have no impact on the Company. NOTE 7. ACQUISITION (a) Summary of the Acquisition On October 13, 2022, the Company completed the acquisition (the “Transaction”) of Exterran Corporation (“Exterran”). Pursuant to the agreement and plan of merger among Enerflex, Enerflex US Holdings Inc., a wholly-owned subsidiary of Enerflex, and Exterran, Enerflex acquired all issued and outstanding Exterran common stock in exchange for 1.021 Enerflex common shares for each whole common stock of Exterran. Enerflex’s common shares continue to trade on the Toronto Stock Exchange (“TSX”) under the symbol “EFX,” and the Company commenced trading on the New York Stock Exchange (“NYSE”) under the symbol “EFXT” on October 13, 2022. The Company remains headquartered in Calgary, Alberta, Canada. The Transaction established an integrated global provider of energy infrastructure and energy transition solutions by combining Enerflex and Exterran’s highly complementary product lines, geographies, and asset bases, enhancing the Company’s scale and utilization and providing operational efficiencies for Enerflex’s customers. The Transaction was accounted for using the acquisition method pursuant to IFRS 3 “Business Combinations”. Under the acquisition method, assets and liabilities are measured at their estimated fair value on the date of acquisition, with the exception of income taxes. The total consideration was allocated to the tangible and intangible assets acquired and liabilities assumed, with any excess recorded as goodwill on the consolidated statements of financial position. (b) Preliminary Purchase Price Allocation and Capital Structure The total purchase consideration was approximately $222.6 million. Enerflex issued 34,013,055 common shares with a fair value of $213.9 million, based on the October 12, 2022, closing share price of $6.29, as reported on the TSX. The Company also provided $8.6 million on the fair value of vested stock-based compensation, including cash payments totaling $1.9 million to Exterran stockholders with fractional shares. F21 Notes to the Consolidated Financial Statements | 2022 Annual Report F-21 ENERFLEX ANNUAL REPORT 2022 The preliminary purchase price allocation is based on Management’s best estimate of fair value of the assets acquired and liabilities assumed. The purchase price allocation is preliminary because of property, plant, and equipment, intangible assets, deferred taxes, uncertain tax positions, and certain other assets and liabilities are still being assessed. Upon finalizing the value of net assets acquired, adjustments to initial estimates, including goodwill, may be required. The following table provides a summary of the consideration and the identifiable assets acquired and liabilities assumed at the date of acquisition: Purchase consideration Shares exchanged Fair value of vested stock-based compensation1 Total purchase consideration Identifiable assets acquired and liabilities assumed Net working capital Property, plant, and equipment Energy infrastructure assets Contract assets Finance leases receivables Intangible assets Other long-term assets Long-term debt Other long-term liabilities Total net identifiable assets Goodwill October 13, 2022 $ $ $ 213,942 8,641 222,583 56,715 60,395 581,338 217,585 77,578 102,789 66,602 (1,019,436) (60,408) 83,158 139,425 1 Included in the fair value of vested stock-based compensation is $1.9 million of cash payments to Exterran stockholders that held fractional shares on the date of acquisition. The fair value of trade and other receivables acquired as part of the acquisition was $187.5 million, representing gross contractual amounts receivable of $222.0 million less Management’s best estimate of the contractual cash flows not expected to be collected of $34.5 million. Intangible assets includes $50.9 million of customer relationship intangible assets that were valued based on a discounted cash flow model, which required the Company to estimate future cash flows and use judgment in determining key assumptions that include revenue growth rates, customer attrition rates, operating margins and discount rates. Factors that contributed to the recognition of goodwill include the expected future growth potential of expanded Energy Infrastructure in LATAM, the completion of two large projects and two in-flight projects nearing completion in the Middle East, expanded opportunities in Energy Transition, and the expected cost synergies. None of the goodwill is expected to be deductible for income tax purposes. Revenues and net loss for the acquired business from the date of acquisition to December 31, 2022 were $196.0 million and $60.7 million, respectively. Revenue would have been approximately $789.3 million higher and net loss would have increased by approximately $48.6 million if the business was acquired on January 1, 2022. Transaction costs exclude share issuance costs related to common shares. Total transaction costs, integration costs and restructuring costs directly related to the acquisition and included in SG&A in the consolidated statements of earnings was $70.6 million. F-22 Enerflex Ltd. | 2022 Annual Report F22 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 8. 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 period Currency translation effects Closing balance Movement in contract assets: December 31, Balance, January 1 Acquisition (Note 7) Unbilled revenue recognized Amounts billed Currency translation effects Closing balance Current contract assets Non-current contract assets 2022 457,850 $ (7,652) 450,198 $ 6,380 456,578 $ 2022 405,196 $ 52,654 457,850 $ $ $ $ $ $ 2022 $ 10,334 $ 628 (3,499) 189 $ 7,652 $ 2022 $ 82,760 $ 281,509 559,229 (517,828) 3,768 409,438 $ 186,259 $ 223,179 409,438 $ $ $ $ 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 2021 66,722 - 244,372 (228,327) (7) 82,760 82,760 - 82,760 Amounts recognized as current contract assets are typically billed to customers within three months and amounts recognized as non- current contract assets will be billed to customers more than twelve months from the date of the balance sheet. F23 Notes to the Consolidated Financial Statements | 2022 Annual Report F-23 ENERFLEX ANNUAL REPORT 2022 NOTE 9. INVENTORIES Inventories consisted 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 2022 107,575 $ 136,876 98,297 26,550 2021 83,943 54,156 31,298 3,290 369,298 $ 172,687 2022 41,986 $ 2021 36,169 $ $ $ The amount of inventory and overhead costs recognized as an expense and included in COGS during 2022 was $1,455.1 million (December 31, 2021 – $757.9 million). COGS is made up of direct materials, direct labour, depreciation on manufacturing assets, post- manufacturing expenses, and overhead. COGS also includes inventory write-downs pertaining to obsolescence and aging, and recoveries of past write-downs upon disposition. The net change in inventory reserves charged to the consolidated statements of earnings and included in COGS for the year ended December 31, 2022 was $2.1 million (December 31, 2021 – $6.1 million). The costs related to the construction of energy infrastructure 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 is reclassified to COGS. During the year ended December 31, 2022 the Company invested $74.5 million (December 31, 2021 – $36.2 million) related to finance leases. F-24 Enerflex Ltd. | 2022 Annual Report F24 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 10. PROPERTY, PLANT AND EQUIPMENT AND ENERGY INFRASTRUCTURE ASSETS Land Building Equipment Assets under construction Total property, plant and equipment Energy infrastructure assets Cost January 1, 2022 Acquisition (Note 7) Additions Reclassification Disposals Currency translation effects $ 18,411 $ 114,021 $ 64,492 $ 3,068 $ 199,992 $ 4,237 31,864 - - (6) 917 6 885 (1,100) 5,724 22,952 2,001 4,022 (1,925) (844) 1,342 6,036 (5,314) - (547) 60,395 8,043 (407) (3,031) 5,250 839,734 581,338 107,797 - (23,233) 36,318 December 31, 2022 $ 23,559 $ 151,400 $ 90,698 $ 4,585 $ 270,242 $ 1,541,954 Accumulated depreciation January 1, 2022 $ - $ (50,087) $ (53,491) $ - $ (103,578) $ (229,406) Depreciation charge Impairment Disposals Currency translation effects December 31, 2022 Net book value – December 31, 2022 $ $ - - - - (7,205) (8,352) - 987 (2,361) - 1,827 945 - - - - (15,557) (83,289) - 2,814 (1,416) (1,233) 9,671 12,641 - $ (58,666) $ (59,071) $ - $ (117,737) $ (291,616) 23,559 $ 92,734 $ 31,627 $ 4,585 $ 152,505 $ 1,250,338 Land Building Equipment Assets under construction Total property, plant and equipment Energy infrastructure assets Cost January 1, 2021 $ 18,471 $ 112,179 $ 63,844 $ 4,050 $ 198,544 $ 881,684 Additions Reclassification Disposals Currency translation effects - - - - 2,327 (66) 831 2,566 (2,436) (60) (419) (313) 4,323 (5,297) - (8) 5,154 (404) (2,502) 52,187 - (82,304) (800) (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) - 66 137 (4,451) - 2,351 183 - - - - (10,407) - 2,417 (55,466) (537) 62,990 320 7,477 - $ (50,087) $ (53,491) $ - $ (103,578) $ (229,406) 18,411 $ 63,934 $ 11,001 $ 3,068 $ 96,414 $ 610,328 F25 Notes to the Consolidated Financial Statements | 2022 Annual Report F-25 ENERFLEX ANNUAL REPORT 2022 Depreciation of PP&E and energy infrastructure assets included in earnings for the year ended December 31, 2022, was $98.8 million (December 31, 2021 – $65.9 million), of which $94.7 million was included in COGS (December 31, 2021 – $64.6 million) and $4.1 million was included in SG&A (December 31, 2021 – $1.3 million). Impairment of energy infrastructure assets included in earnings for the year ended December 31, 2022, was $1.2 million (December 31, 2021 – $0.5 million). NOTE 11. LEASE RIGHT-OF-USE ASSETS Cost January 1, 2022 Acquisition (Note 7) Additions Disposal Currency translation effects December 31, 2022 Accumulated depreciation January 1, 2022 Depreciation charge Disposal Currency translation effects December 31, 2022 Net book value – December 31, 2022 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 Land and buildings Equipment Total lease right-of-use assets 58,380 $ 24,359 $ 31,192 7,173 (3,935) 1,297 1,240 4,029 (6,129) 1,559 94,107 $ 25,058 $ (20,198) $ (12,654) $ (9,994) 3,543 (508) (5,824) 5,731 (889) (27,157) $ 66,950 $ (13,636) $ 11,422 $ 82,739 32,432 11,202 (10,064) 2,856 119,165 (32,852) (15,818) 9,274 (1,397) (40,793) 78,372 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) $ (8,350) 1,535 144 (20,198) $ 38,182 $ (7,891) $ (5,492) 714 15 (12,654) $ 11,705 $ 75,602 10,875 (3,227) (511) 82,739 (21,418) (13,842) 2,249 159 (32,852) 49,887 $ $ $ $ $ $ $ $ $ $ Depreciation of lease right-of-use (“ROU”) assets included in earnings for the year ended December 31, 2022 was $15.8 million (December 31, 2021 – $13.8 million), of which $13.1 million was included in COGS (December 31, 2021 – $11.2 million) and $2.7 million was included in SG&A (December 31, 2021 – $2.6 million). F-26 Enerflex Ltd. | 2022 Annual Report F26 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 12. FINANCE LEASES RECEIVABLE The Company has entered into finance lease arrangements for certain of its energy infrastructure assets, with initial terms ranging from three to 10 years. The value of the finance lease receivable is comprised of the following: December 31, Less than one year Between one and five years Later than five years Less: Unearned finance income December 31, Balance, January 1 Acquisition (Note 7) Additions Interest income Billings and payments Currency translation effects Closing balance Minimum lease payments and unguaranteed residual value Present value of minimum lease payments and unguaranteed residual value 2022 2021 2022 73,614 $ 16,420 $ 60,020 $ 196,314 144,482 64,739 62,827 149,052 85,432 2021 15,248 49,546 38,564 414,410 $ 143,986 $ 294,504 $ 103,358 (119,906) (40,628) - - 294,504 $ 103,358 $ 294,504 $ 103,358 $ $ $ 2022 $ 103,358 $ 110,097 86,602 14,801 (33,740) 13,386 2021 64,274 - 40,154 5,417 (6,597) 110 $ 294,504 $ 103,358 For the years ended December 31, 2022 and 2021 the Company recognized selling profit related to the commencement of finance leases of $17.5 million and $6.2 million, respectively. Additionally, the Company recognized $14.8 million and $5.4 million of interest income on the finance leases receivable, during the years ended December 31, 2022 and 2021. Income related to variable lease payments was nominal during the years ended December 31, 2022 and 2021. The average interest rates implicit in the leases are fixed at the contract date for the entire lease term. At December 31, 2022, the average interest rate was 9.4 percent per annum (December 31, 2021 – 8.0 percent). The finance leases receivables at the end of reporting period are neither past due nor impaired. NOTE 13. OTHER ASSETS December 31, Investment in associates and joint ventures Long-term receivables1 Prepaid deposits Total other assets 2022 34,977 $ 34,127 13,972 83,076 $ $ $ 2021 27,064 24,172 79 51,315 1 Included in long-term receivables are preferred shares in the amount of $28.0 million (December 31, 2021 – $24.2 million). The full amount was settled subsequent to the end of the year. F27 Notes to the Consolidated Financial Statements | 2022 Annual Report F-27 ENERFLEX ANNUAL REPORT 2022 NOTE 14. INTANGIBLE ASSETS Cost January 1, 2022 Acquisition (Note 7) Disposal Reclassification Currency translation effects December 31, 2022 Accumulated amortization January 1, 2022 Amortization charge Disposal Currency translation effects December 31, 2022 Net book value – December 31, 2022 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 Customer relationships and other Software Total intangible assets $ 69,594 $ 49,069 $ 80,514 - - 1,202 22,275 (11) 407 2,563 118,663 102,789 (11) 407 3,765 $ $ $ $ $ $ $ $ $ 151,310 $ 74,303 $ 225,613 (63,817) $ (44,728) $ (108,545) (7,239) - (2,371) (2,198) 11 (2,498) (9,437) 11 (4,869) (73,427) 77,883 $ $ (49,413) $ (122,840) 24,890 $ 102,773 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 F-28 Enerflex Ltd. | 2022 Annual Report F28 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 15. GOODWILL AND IMPAIRMENT REVIEW OF GOODWILL December 31, Balance, January 1 Acquisition (Note 7) Impairment Currency translation effects Closing balance 2022 2021 $ 566,270 $ 576,028 139,425 (48,000) 21,682 $ 679,377 $ - - (9,758) 566,270 Goodwill is allocated to CGU’s which are the Company’s operating segments that represents the lowest level at which goodwill is monitored for internal management purposes. During the fourth quarter of 2022, the Company reassessed its operating and reporting segments, refer to Note 35, and goodwill was re-allocated to the CGU’s representing the Company’s four operating segments. As a result, the Company performed its annual goodwill assessment on the new operating segments, comparing the carrying value and recoverable amounts for each segment in accordance with IAS 36.10(b). Goodwill acquired through historical business combinations was allocated to the Canada, USA, LATAM, and EH operating segments. Goodwill that was previously allocated to the prior ROW operating segment was re-allocated to LATAM and EH based on the recoverable amount of these operating segments as determined based on value-in-use calculations of these segments, and excluding the impact of the Exterran Transaction. In assessing whether goodwill has been impaired, the carrying amount of each operating 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. Goodwill acquired from the Transaction was allocated to the USA and EH segments. The recoverable amounts for the operating segments have been determined based on value-in-use calculations, using discounted cash flow projections as at December 31, 2022. 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 for 2023 and Management’s expectations of cash flows for 2024 to 2027. At September 30, 2022, the Company determined that there was a $48.0 million impairment in Canada. 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 Canada, USA, LATAM and EH operating segments exceeded the carrying amount using a 12.0 percent (December 31, 2021 – 10.7 percent), 10.7 percent (December 31, 2021 – 9.4 percent), 15.3 percent and 14.5 percent (December 31, 2021 – 12.6 percent on a combined ROW segment) post-tax discount rate, respectively. The estimation of value-in-use involves significant judgment in the determination of inputs to the discounted cash flow model and is most sensitive to changes in cash flow projections, revenue growth rate, operating margins, 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 (“EBIT”) were changed by ten percent while the discount rate was changed by one percent. The USA, EH, and Canada operating segments have sufficient room as their recoverable amounts are significantly higher than their carrying values, and therefore, the sensitivities will not indicate an impairment. The sensitivities below would not put Canada in an impairment due to the impairment that was recognized during the third quarter of 2022, and an improved cash flow outlook for the region. LATAM is more sensitive to changes in EBIT and the discount rate as follows: • EBIT: 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 EBIT, the impact on the value-in-use would be $43.7 million for the LATAM segment. A ten percent decrease in EBIT would trigger an impairment in the LATAM segment. A ten percent change in EBIT in the Company’s other three segments would not trigger an impairment. • 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 operating segment. This discount rate has been calculated using an estimated risk-free F29 Notes to the Consolidated Financial Statements | 2022 Annual Report F-29 ENERFLEX ANNUAL REPORT 2022 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 $54.8 million for the LATAM segment. A one percent increase in weighted average cost of capital would trigger an impairment in the LATAM segment. A one percent change in the discount rate in the Company’s other three segments would not trigger an impairment. 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 potential for future impairments as interest rates continue to fluctuate, and as the Company gets more visibility regarding future cash flows. NOTE 16. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 2022 610,579 $ 3,093 13,477 2021 234,212 2,242 4,293 627,149 $ 240,747 2022 13,411 $ 3,406 2,009 2021 6,636 - - 18,826 $ 6,636 $ $ $ $ December 31, Accounts payable and accrued liabilities Accrued dividend payable Cash-settled share-based payments Total accounts payable and accrued liabilities NOTE 17. PROVISIONS December 31, Warranty provision Legal provision Restructuring provision Total provisions 2022 Balance, January 1 Acquisition (Note 7) Additions during the year Amounts settled and released in the year Currency translation effects Warranty Provision Legal Provision Restructuring Provision $ 6,636 $ - $ 5,888 4,395 (3,669) 161 2,691 717 - (2) - $ - 2,009 - - Closing balance $ 13,411 $ 3,406 $ 2,009 $ 2021 Balance, January 1 Additions during the year Amounts settled and released in the year Currency translation effects Warranty Provision Legal Provision Restructuring Provision $ 10,549 $ - $ - $ 849 (4,681) (81) - - - - - - Closing balance $ 6,636 $ - $ - $ Total 6,636 8,579 7,121 (3,669) 159 18,826 Total 10,549 849 (4,681) (81) 6,636 F-30 Enerflex Ltd. | 2022 Annual Report F30 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 18. DEFERRED REVENUES December Balance, January 1 Acquisition (Note 7) Cash received in advance of revenue recognition Revenue subsequently recognized Currency translation effects Closing balance Current deferred revenues Non-current deferred revenues 2022 $ 84,614 $ 135,409 526,924 (354,531) 7,104 399,520 $ 366,085 $ 33,435 399,520 $ $ $ $ 2021 35,409 - 167,956 (118,438) (313) 84,614 84,614 - 84,614 Amounts recognized as current deferred revenues are typically recognized into revenue within six months and amounts recognized as non-current deferred revenues will be recognized into revenue more than twelve months from the date of the balance sheet. NOTE 19. LONG-TERM DEBT In October 2022 the Company secured new debt financing as part of the Transaction. The debt financing was comprised of US$625.0 million aggregate principal amount of senior secured notes due 2027 (the “Notes”), a US$150.0 million three-year secured term loan facility (the “Term Loan”), and a US$700 million three-year secured revolving credit facility (the “Revolving Credit Facility”). Together the Notes, Term Loan, Revolving Credit Facility along with cash on hand were used to fully repay the existing Enerflex and Exterran Notes, Bank Facility and Asset-Based Facility. The Term Loan and the Revolving Credit Facility have a maturity date of October 13, 2025 (the “Maturity Date”). In addition, the Revolving Credit Facility may be increased by US$150.0 million at the request of the Company, subject to the lenders’ consent. The Maturity Date of the Revolving Credit Facility may be extended annually on or before the anniversary date with the consent of the lenders. On the last business day of each quarter end beginning on September 30, 2023 the Company is required to make a US$10.0 million payment to be applied to the outstanding principal of the Term Loan. There are no required or scheduled repayments of principal until the maturity date of the Revolving Credit Facility. Drawings on the Revolving Credit Facility are available by way of Prime Rate loans, U.S. Base Rate loans, Secured Overnight Financing Rate (“SOFR”) loans, and Bankers’ Acceptance notes. The Company may also draw on the Revolving Credit Facility through bank overdrafts in either Canadian or U.S. dollars and issue letters of credit under the Revolving Credit Facility. The initial drawing as well as subsequent rollovers and conversions on the Term Loan are available through U.S. Base Rate Loans and SOFR Loans. Pursuant to the terms and conditions of the Revolving Credit Facility and the Term Loan, a margin is applied to drawings on the Revolving Credit 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 Notes consist of US$625.0 million principal amount, bears interest of 9.00 percent, and has a maturity of October 15, 2027. F31 Notes to the Consolidated Financial Statements | 2022 Annual Report F-31 ENERFLEX ANNUAL REPORT 2022 The Revolving Credit Facility, Term Loan and the Notes are secured. The Revolving Credit Facility and Term Loan rank senior to the Notes. The Company is required to maintain certain covenants on the Revolving Credit Facility, Term Loan and the Notes as follows, all calculated on a rolling four-quarter basis: Senior secured net funded debt to EBITDA ratio not to exceed 2.5:1 for each quarter end; Net funded debt to EBITDA ratio not to exceed 4.5:1 at each quarter end up to September 30, 2023 where the ratio will be adjusted to a maximum of 4.0:1 for each quarter after September 30, 2023; and Interest coverage ratio for each quarter end not to be less than 2.5:1 As at December 31, 2022, the Company was in compliance with its covenants. The composition of the borrowings on the Revolving Credit Facility, Term Loan, and the Company’s Notes were as follows: December 31 Drawings on the Revolving Credit Facility Drawings on the Term Loan (US$150,000) Notes due October 15, 2027 (US$625,000) Drawings on the Bank Facility Drawings on the Asset-Based Facility Notes due December 15, 2024 Notes due December 15, 2027 Deferred transaction costs and Notes discount Current portion of long-term debt Non-current portion of long-term debt 2022 459,202 $ 203,160 846,500 - - - - (118,537) 1,390,325 $ 27,088 $ 1,363,237 1,390,325 $ $ $ $ $ 2021 - - - 30,522 37,411 148,119 118,746 (3,376) 331,422 - 331,422 331,422 The weighted average interest rate on the Revolving Credit Facility for year ended December 31, 2022 was 7.0 percent (December 31, 2021 – nil), and the weighted average interest rate on the Term Loan for the year ended December 31, 2022 was 7.8 percent (December 31, 2021 – nil). At December 31, 2022 without considering renewal at similar terms, the Canadian dollar equivalent principal payments due over the next five years are $1,508.9 million, and nil thereafter. F-32 Enerflex Ltd. | 2022 Annual Report F32 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 20. LEASE LIABILITIES December 31, Balance, January 1 Acquisition (Note 7) 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 2022 $ 57,014 $ 39,845 9,977 3,398 (19,156) 1,955 93,033 $ 20,125 $ 72,908 93,033 $ $ $ $ 2021 61,926 - 9,721 3,029 (17,244) (418) 57,014 13,906 43,108 57,014 In addition to the lease payments made above, during the year ended December 31, 2022, the Company paid $0.8 million (December 31, 2021 – $0.3 million) relating to short-term and low-value leases which were expensed as incurred. During the year ended December 31, 2022, the Company also paid $1.7 million (December 31, 2021 – $3.0 million) in variable lease payments not included in the measurement of lease liabilities, of which $0.9 million (December 31, 2021 –$1.8 million) was included in COGS and $0.8 million (December 31, 2021 – $1.2 million) was included in SG&A. Interest expense on lease liabilities was $3.4 million for the year ended December 31, 2022 (December 31, 2021 –$3.0 million). Total cash outflow for leases for the year ended December 31, 2022 was $21.7 million (December 31, 2021 –$20.5 million). Future minimum lease payments under non-cancellable leases were as follows: 2023 2024 2025 2026 2027 Thereafter Less: Imputed interest Short-term leases Low-value leases December 31, 2022 $ 23,776 18,427 15,493 12,173 9,848 32,287 $ 112,004 18,811 156 4 $ 93,033 F33 Notes to the Consolidated Financial Statements | 2022 Annual Report F-33 ENERFLEX ANNUAL REPORT 2022 NOTE 21. 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 $ $ 2022 17,945 $ 3,265 21,210 $ 2021 13,135 43,422 56,557 (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): Change in unrecognized deferred tax asset Impairment of goodwill 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 Other 2022 (79,733) $ 23.4% (18,658) $ $ $ 27,664 11,232 (2,223) 543 - - 4,373 (1,104) (617) 2021 38,102 23.8% 9,068 44,704 - (2,269) 2,313 (660) 2,763 811 (160) (13) Income tax expense from continuing operations $ 21,210 $ 56,557 The applicable statutory tax rate is the aggregate of the Canadian federal income tax rate of 15.0 percent (2021 – 15.0 percent) and the Alberta provincial income tax rate of 8.4 percent (2021 – 8.8 percent). 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 energy infrastructure assets in Argentina and Mexico, the tax base of these assets is denominated in Argentine peso and Mexican peso, respectively. The functional currency is 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 the local currency. 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. F-34 Enerflex Ltd. | 2022 Annual Report F34 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES (c) Income Tax Recognized in Other Comprehensive Income Years ended December 31, Deferred Tax 2022 2021 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 Total income tax recognized in other comprehensive income $ $ (55) $ 77 59 4 $ (53) 24 (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 January 1, 2022 $ 7,022 $ 6,519 $ (86,255) $ 511 $ (10,476) $ - $ (82,679) Acquisition (Note 7) Charged to net earnings Charged to OCI Exchange differences 756 49,513 (30,308) (7,467) - 51 1,325 - (860) 1,022 - (2,511) (511) - - - (6,538) - 13,423 1,858 - (613) (4) 4 - (3,266) 4 (4,444) December 31, 2022 $ 362 $ 56,497 $ (118,052) $ - $ (15,769) $ - $ (76,962) 1Net deferred tax liabilities at December 31, 2022 of $77.0 million consist of liabilities of $96.4 million net of assets of $19.4 million. 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) (10,945) (21,808) (12,398) - (91) - (642) - 99 (572) - 539 2,269 - 54 32 (24) (43,422) (24) (41) January 1, 2021 Charged to net earnings Charged to OCI Exchange differences 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. F35 Notes to the Consolidated Financial Statements | 2022 Annual Report F-35 ENERFLEX ANNUAL REPORT 2022 (e) Unrecognized Deferred Tax Assets As at December 31, 2022, the Company did not recognize deductible temporary differences of $2,172.3 million (December 31, 2021 - $225.9 million) and unused Canadian tax credits of $1.1 million (December 31, 2021 – $1.1 million) for which it is unlikely that sufficient future taxable income will be available to offset against. An additional $122.4 million of U.S. tax credits were acquired but utilization is restricted and therefore the benefit is not recognized. The deductible temporary differences consist of: Years ended December 31, Canadian: Tax losses Long-term assets Accounting provisions and other accruals Foreign1: Tax losses Long-term assets Accounting provisions and other accruals 2022 2021 $ 215,703 $ 23,896 29,143 2,089,604 (59,931) (126,117) 138,408 22,758 26,363 38,374 - - $ 2,172,298 $ 225,903 1 The movement in foreign tax losses, long-term assets, and accounting provisions and other accruals for 2022 were primarily acquired as part of the Transaction. The Company’s unused tax losses and tax credits are subject to expiration in the years 2023 through 2042 with some having an indefinite life. NOTE 22. 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 December 31, Balance, January 1 Issued on Acquisition (Note 7) Exercise of stock options 2022 2021 Number of common shares Common share capital Number of common shares Common share capital 89,678,845 $ 34,013,055 47,120 375,524 213,942 361 89,678,845 $ 375,524 - - - - Closing balance 123,739,020 $ 589,827 89,678,845 $ 375,524 Enerflex acquired all issued and outstanding Exterran common stock in exchange for 1.021 Enerflex common shares. Enerflex issued 34,013,055 million Enerflex common shares with a fair value of $213.9 million, based on the October 12, 2022, closing share price of $6.29. Total dividends declared in the year were $9.8 million, or $0.10 per share (December 31, 2021 – $7.6 million, or $0.085 per share). F-36 Enerflex Ltd. | 2022 Annual Report F36 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 23. 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: December 31, Balance, January 1 Share-based compensation Exercise of stock options Closing balance NOTE 24. REVENUE Years ended December 31, Energy Infrastructure1,2 After-Market Services Engineered Systems Total revenue 2022 658,615 $ 1,558 (101) 2021 656,832 1,783 - 660,072 $ 658,615 2022 381,087 $ 443,660 953,051 1,777,798 $ 2021 278,653 327,376 354,127 960,156 $ $ $ $ 1 Energy Infrastructure revenue for 2022 and 2021 includes the recognition of revenue from finance lease transactions. Upon commencement of the lease, the Company recognized the sale of the related energy infrastructure assets and a corresponding finance lease receivable. Refer to Note 12 for further details on finance leases. 2 During the year ended December 31, 2022, the Company recognized $111.3 million of revenue related to operating leases in its LATAM and EH segments (December 31, 2021 –$64.3 million). Additionally, the Company recognized $127.0 million of revenue related to its NAM contract compression fleet (December 31, 2021 – $102.0 million). Revenue by geographic location, which is attributed by destination of sale, was as follows: Years ended December 31, United States 2022 $ 890,899 $ Canada Oman Bahrain Argentina Australia Mexico Brazil Iraq Colombia United Arab Emirates Egypt Other Total revenue 261,865 119,906 85,540 80,524 65,618 64,325 45,367 25,917 21,278 20,995 20,319 75,245 $ 1,777,798 $ 2021 451,675 173,181 84,486 40,361 34,321 61,520 27,355 17,289 - 17,795 2,494 7,323 42,356 960,156 F37 Notes to the Consolidated Financial Statements | 2022 Annual Report F-37 ENERFLEX ANNUAL REPORT 2022 The following table outlines the Company’s unsatisfied performance obligations, by product line, as at December 31, 2022: Energy Infrastructure After-Market Services Engineered Systems Less than one year One to two years Greater than two years Total $ $ 550,009 $ 492,096 $ 1,826,923 $ 2,869,028 76,260 1,483,773 26,176 22,097 49,583 - 152,019 1,505,870 2,110,042 $ 540,369 $ 1,876,506 $ 4,526,917 NOTE 25. 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 2022 $ 1,558 $ 3,622 117 4,172 4,454 2,239 2021 1,783 3,053 102 3,470 2,751 1,778 Share-based compensation expense $ 16,162 $ 12,937 (b) Equity-Settled Share-Based Payments Years ended December 31, 2022 Weighted average exercise price Number of options 2021 Weighted average exercise price Number of options Options outstanding, beginning of period 4,456,444 $ 11.66 4,057,142 $ Granted Exercised1 Forfeited Expired Options outstanding, end of period Options exercisable, end of period - (47,120) (27,286) (1,292,809) 3,089,229 1,671,421 $ $ - 5.51 13.51 13.98 10.77 12.48 654,847 - (24,267) (231,278) 4,456,444 $ 2,445,230 $ 12.78 7.85 - 9.25 20.75 11.66 13.62 1 The weighted average share price of options at the date of exercise for the year ended December 31, 2022 was $8.03 (December 31, 2021 – nil). The Company did not grant stock options for the year ended December 31, 2022 (December 31, 2021 – 654,847). Using the Black- Scholes option pricing model, the weighted average fair value of stock options granted for the period ended December 31, 2021 was $2.89 per option. F-38 Enerflex Ltd. | 2022 Annual Report F38 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES The following table summarizes options outstanding and exercisable at December 31, 2022: Options Outstanding Options Exercisable Range of exercise prices $5.51 – $6.68 $6.69 – $13.51 $13.52 – $16.12 Total Number outstanding 783,880 1,072,991 1,232,358 3,089,229 Weighted average remaining life (years) 4.62 $ 4.30 2.86 3.81 $ Weighted average exercise price 5.51 9.81 14.95 10.77 Weighted average remaining life (years) 4.62 $ 2.95 2.70 Number outstanding 286,552 460,251 924,618 1,671,421 3.10 $ Weighted average exercise price 5.51 11.48 15.14 12.48 (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 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, 2022, the value of directors’ compensation and executive bonuses elected to be received in DSUs totalled $2.2 million (December 31, 2021 – $2.1 million). The Company paid $0.6 million for the year ended December 31, 2022 representing units vested in the year (December 31, 2021 – nil). DSUs outstanding, January 1, 2022 Granted In lieu of dividends Vested DSUs outstanding, December 31, 2022 Number of DSUs Weighted average grant date fair value per unit 1,406,170 $ 307,037 20,806 (108,500) 1,625,513 $ 10.51 7.12 6.86 5.45 10.16 The carrying amount of the liability relating to DSUs as at December 31, 2022 included in current liabilities was $3.4 million (December 31, 2021 – nil) and in other long-term liabilities was $10.5 million (December 31, 2021 – $10.8 million). (d) Phantom Share Entitlement Plan The Company utilizes a PSE plan for key employees of affiliates located in Australia and 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 2022, no PSEs were granted to employees (December 31, 2021 – 24,715). The intrinsic value of the vested awards at December 31, 2022 was $0.8 million (December 31, 2021 – $0.9 million). F39 Notes to the Consolidated Financial Statements | 2022 Annual Report F-39 ENERFLEX ANNUAL REPORT 2022 PSEs outstanding, January 1, 2022 Expired PSEs outstanding, December 31, 2022 Number of PSEs Weighted average grant date fair value per unit 222,920 $ (22,669) 200,251 $ 12.15 11.69 12.21 The carrying amount of the liability relating to the PSEs as at December 31, 2022 included in current liabilities was $0.3 million (December 31, 2021 – $0.2 million) and in other long-term liabilities was $0.1 million (December 31, 2021 – $0.1 million). (e) Performance Share Units The Company offers a PSU plan for executive officers of the Company. A 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 assess 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 $2.2 million for the year ended December 31, 2022 representing units vested in the year (December 31, 2021 – $1.0 million). PSUs outstanding, January 1, 2022 Granted In lieu of dividends Vested PSUs outstanding, December 31, 2022 Number of PSUs Weighted average grant date fair value per unit 1,308,416 $ 634,382 17,835 (318,887) 1,641,746 $ 9.02 6.29 6.93 6.10 8.51 The carrying amount of the liability relating to PSUs as at December 31, 2022 included in current liabilities was $4.0 million (December 31, 2021 – $2.0 million) and in other long-term liabilities was $2.5 million (December 31, 2021 – $2.6 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. 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. In 2022, the Board granted 995,336 RSUs to executive officers and other key employees of the Company (2021 – 472,819). In connection with the Transaction, Enerflex replaced the Exterran cash-settled share-based with 572,260 units RSU’s to executive officers and other key employees. The Company paid $2.4 million for units vested during the year ended December 31, 2022 (December 31, 2021 – $2.3 million). F-40 Enerflex Ltd. | 2022 Annual Report F40 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES RSUs outstanding, January 1, 2022 Granted Acquisition (Note 7) In lieu of dividends Vested Forfeited RSUs outstanding, December 31, 2022 Number of RSUs Weighted average grant date fair value per unit 896,474 $ 995,336 572,260 11,344 (394,537) (79,044) 2,001,833 $ 7.62 6.29 6.29 6.98 6.15 6.73 6.90 The carrying amount of the liability included in current liabilities relating to RSUs at December 31, 2022 was $4.3 million (December 31, 2021 – $1.3 million) and in other long-term liabilities was $0.7 million (December 31, 2021 – nil). (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. 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 2022, the Board of Directors distributed $3.1 million of CPT cash grants (2021 – $2.2 million). The Company paid $1.6 million for the year ended December 31, 2022, representing units vested in the year (December 31, 2021 – $1.5 million). The weighted average grant fair value per unit was $6.29 (December 31, 2021 – $7.85), 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, 2022 was $1.4 million (December 31, 2021 – $0.8 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 SG&A when paid. This plan is administered by a third party. NOTE 26. 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 $ $ 2022 5,169 $ 4,110 9,279 $ F41 Notes to the Consolidated Financial Statements | 2022 Annual Report 2021 4,567 3,025 7,592 F-41 ENERFLEX ANNUAL REPORT 2022 NOTE 27. FINANCE COSTS AND INCOME Years ended December 31, Finance Costs Short and long-term borrowings1 Interest on lease liability Total finance costs Finance Income Interest income Net finance costs 2022 2021 $ $ $ $ 46,009 $ 3,398 49,407 $ 10,484 $ 38,923 $ 17,252 3,029 20,281 3,286 16,995 1 Finance costs on short and long-term borrowings primarily relate to interest on the Company’s newly issued Notes, Term Loan and Revolving Credit Facility. Refer to Note 19 for more information on interest rates on the Notes, Term Loan and Revolving Credit Facility. NOTE 28. RECONCILIATION OF EARNINGS PER SHARE CALCULATIONS Year ended December 31, 2022 Basic Dilutive effect of stock option conversion Diluted Year ended December 31, 2021 Basic Dilutive effect of stock option conversion Diluted Net loss (100,943) - Weighted average shares outstanding 97,045,917 $ - (100,943) 97,045,917 $ Net loss (18,455) - Weighted average shares outstanding 89,678,845 $ - (18,455) 89,678,845 $ $ $ $ $ Per share (1.04) - (1.04) Per share (0.21) - (0.21) F-42 Enerflex Ltd. | 2022 Annual Report F42 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 29. FINANCIAL INSTRUMENTS Designation and Valuation of Financial Instruments The Company has designated its financial instruments as follows: December 31, 2022 Financial Assets Cash and cash equivalents Carrying value Estimated fair value $ 253,776 $ 253,776 Derivative instruments in designated hedge accounting relationships 901 901 Loans and receivables: Accounts receivable Preferred shares receivable Financial Liabilities 456,578 27,954 456,578 28,702 Derivative instruments in designated hedge accounting relationships 977 977 Other financial liabilities: Accounts payable and accrued liabilities Long-term debt – Revolving Credit Facility Long-term debt – Term Loan Long-term debt – Notes Other long-term liabilities December 31, 2021 Financial Assets Cash and cash equivalents 627,149 459,202 203,160 846,500 21,757 Carrying value 627,149 459,202 203,160 869,288 21,757 Estimated fair value $ 172,758 $ 172,758 Derivative instruments in designated hedge accounting relationships 294 294 Loans and receivables: Accounts receivable Preferred shares receivables Financial Liabilities 212,206 24,172 212,206 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 240,747 30,522 37,411 266,865 15,785 240,747 30,522 37,411 280,295 15,785 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, 2022 and indicates the fair value hierarchy of the valuation techniques used to determine such fair value. During the year ended December 31, 2022, there were no transfers between Level 1 and Level 2 fair value measurements. 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 F43 Notes to the Consolidated Financial Statements | 2022 Annual Report F-43 ENERFLEX ANNUAL REPORT 2022 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 Preferred shares receivable Financial Liabilities Derivative financial instruments Long-term debt – Notes Carrying value 901 27,954 977 846,500 $ $ $ $ $ $ $ $ Fair Value Level 1 Level 2 Level 3 - $ - $ 901 $ 28,702 $ - $ - $ 977 $ 869,288 $ - - - - 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. 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 9.0 percent, was $869.3 million at December 31, 2022. Preferred Shares The Company holds preferred shares that 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, 2022 was $28.0 million and $28.7 million, respectively (December 31, 2021 – $24.2 million and $27.5 million, respectively). 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, 2022: Canadian Dollar Denominated Contracts Purchase contracts Sales contracts Purchase contracts Sales contracts USD USD EUR EUR Notional amount Maturity $ 29,182 January 2023 – November 2023 (26,180) 3,568 (2,453) January 2023 – November 2023 January 2023 – March 2023 March 2023 F-44 Enerflex Ltd. | 2022 Annual Report F44 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES Management estimates that a loss of $0.1 million would be realized if the contracts were terminated on December 31, 2022. Certain of these forward contracts are designated as cash flow hedges and accordingly, a gain of $0.4 million has been included in other comprehensive income for the year ended December 31, 2022 (December 31, 2021 – gain of $0.2 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, 2022, was a loss of $0.4 million (December 31, 2021 – loss of $0.2 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 Company is also exposed to the translation risk of monetary items in their local currency to their functional currency. The currencies with the most significant impact are the U.S. dollar, Australian dollar, Brazilian real, and Argentine peso. Enerflex currently uses U.S. dollar denominated borrowings to hedge against a portion of the foreign exchange exposure that arises from U.S. foreign subsidiaries as a net investment hedge. As a result, exchange gains and losses on the translation of US$615.8 million in designated foreign currency borrowings are included in accumulated other comprehensive income for the year ended December 31, 2022. With the ongoing devaluation of the Argentine peso, caused by high inflation, the Company is at risk for significant foreign exchange losses. The Company has implemented risk-mitigating strategies to minimize future exposure to this currency devaluation. F45 Notes to the Consolidated Financial Statements | 2022 Annual Report F-45 ENERFLEX ANNUAL REPORT 2022 Assets and liabilities denominated in foreign currencies are translated into Canadian dollars using the exchange rates in effect at the reporting 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. 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, 2022, 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 five percent USD AUD Earnings from foreign operations Earnings before income taxes $ 4,024 $ (113) $ BRL 216 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, 2022 and for the year then ended. Canadian dollar weakens by five percent USD AUD 17,625 $ 634 $ BRL 342 Financial instruments held in foreign operations Other comprehensive income Financial instruments held in Canadian operations Earnings before income taxes $ $ (23,450) $ - $ - 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, 2022 has a fixed interest rate and therefore the related interest expense will not be impacted by fluctuations in interest rates. Conversely, the Company’s Revolving Credit Facility and Term Loan are subject to changes in market interest rates. For each one percent change in the rate of interest on the Revolving Credit Facility and Term Loan, the change in annual interest expense would be $4.6 million. All interest charges are recorded on the annual 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. F-46 Enerflex Ltd. | 2022 Annual Report F46 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES The Company evaluates the concentration of risk at December 31, 2022 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, 2022 and 2021, the Company had no individual customers that accounted for more than 10 percent of its revenue or accounts receivable. 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. 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 Revolving Credit Facility for future drawings to meet the Company’s future growth targets. As at December 31, 2022, the Company held cash and cash equivalents of $253.8 million and had drawn $662.4 million against the Revolving Credit Facility and Term Loan, leaving it with access to $313.8 million for future drawings. The Company continues to meet the covenant requirements of its funded debt, including the Revolving Credit Facility, Term Loan and Notes, with a senior secured net funded debt to EBITDA ratio of 1.1:1, compared to a maximum ratio of 2.5:1, and a net funded debt to EBITDA (“bank-adjusted net debt to EBITDA”) ratio of 3.3:1, compared to a maximum ratio of 4.5:1. The Company also finished the year with an interest coverage ratio of 4.4:1 compared to a minimum ratio of 2.5:1. The interest coverage ratio is calculated by dividing the trailing 12-month EBITDA, as defined by the Company’s lenders, by interest expense over the same timeframe. 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, 2022: Less than 3 months 3 months to 1 year Greater than 1 year Derivative financial instruments Foreign currency forward contracts $ 712 $ 265 $ Accounts payable and accrued liabilities 627,149 Long-term debt – Revolving Credit Facility Long-term debt – Term Loan Long-term debt – Notes Other long-term liabilities - - - - - - 27,088 - - - $ - 459,202 176,072 846,500 21,757 Total 977 627,149 459,202 203,160 846,500 21,757 The Company expects that cash flows from operations in 2023, together with cash and cash equivalents on hand, the Revolving Credit Facility and the Term Loan, will be more than sufficient to fund its requirements for investments in working capital and capital assets. NOTE 30. 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 adjusts 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: F47 Notes to the Consolidated Financial Statements | 2022 Annual Report F-47 ENERFLEX ANNUAL REPORT 2022 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, 2022, 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 $ $ $ $ 2022 1,390,325 $ (253,776) 1,136,549 $ (40,810) $ 128,287 2021 331,422 (172,758) 158,664 55,097 87,622 87,477 $ 142,719 12.99:1 1.11:1 The net debt to EBITDA ratio, as defined above is not equivalent to the senior secured net funded debt to EBITDA or the bank-adjusted net debt to EBITDA ratio as defined by the Company’s lenders. The bank-adjusted net debt to EBITDA ratio at December 31, 2022 was 3.3:1. As at December 31, 2022, the Company was in compliance with its covenants. NOTE 31. SUPPLEMENTAL CASH FLOW INFORMATION 2022 2021 Years ended December 31, Net change in working capital and other1 Accounts receivable Contract assets Inventories Work-in-progress related to finance leases Finance leases receivable Income taxes receivable Prepayments Accounts payable and accrued liabilities and provisions2 Income taxes payable Deferred revenue Foreign currency and other $ $ (56,861) $ (45,169) (78,697) (5,817) (81,049) 3,097 (35,198) 77,875 (11,042) 179,497 (17,954) (71,318) $ 1 The net change in working capital and other excludes the impact of assets acquired and liabilities assumed as a part of the Exterran Transaction. 2 The change in accounts payable and accrued liabilities and provisions represents only the portion relating to operating activities. 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 $ $ 2022 29,640 $ 3,398 33,038 $ 1,269 27,813 5,399 1,169 (16,038) 39,564 (36,169) (39,084) 19,986 (4,806) 50,510 4,931 49,205 13,669 82,937 2021 17,315 3,029 20,344 454 13,725 23,137 F-48 Enerflex Ltd. | 2022 Annual Report F48 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES Changes in liabilities arising from financing activities during the period: Years ended December 31, Long-term debt, opening balance Debt assumed on Acquisition (Note 7) Changes from financing cash flows The effect of changes in foreign exchange rates Amortization of deferred transaction costs Accretion of Notes discount Debt transaction costs Long-term debt, closing balance 2022 $ 331,422 $ 1,022,112 90,973 (4,099) 4,046 2,070 (56,199) $ 1,390,325 $ 2021 389,712 - (56,975) (406) 1,186 - (2,095) 331,422 NOTE 32. GUARANTEES, COMMITMENTS, AND CONTINGENCIES At December 31, 2022, the Company had outstanding letters of credit of $175.1 million (December 31, 2021 - $42.1 million). The Company has purchase obligations over the next three years as follows: 2023 2024 2025 $ 775,339 19,306 1,005 Legal Proceedings Upon closing of the Transaction, Enerflex assumed a legal dispute from Exterran. On January 31, 2022 the Local Labor Board of the State of Tabasco in Mexico (the "Labor Board") awarded a former employee MXN$2,151.7 million (CAD$149.2 million) in connection with a dispute relating to the employee’s severance pay following termination of their employment. On February 24, 2022 this decision was served on Exterran. In March 2015, this employee was terminated and was paid the undisputed portion of their severance pay, as determined by a local labor board. From March 2015 to the present, the former employee has challenged various aspects of the severance payment through court proceedings. The Company has prevailed in these earlier processes and certain facts of the dispute were established by court rulings, including the fact that the employee’s salary was approximately MXN$3,500 per day (US$170 per day at the prevailing exchange rate). We believe the order of the Labor Board is in error and has no credible basis in law or fact. For instance, in 2017, the Labor Board ruled that the former employee was entitled to approximately MXN$1.4 million (approximately US$70,000 at the prevailing exchange rate) as severance based on an appellate court’s determination based on Company records that the employee’s salary was approximately MXN$3,500 per day. However, the Labor Board’s February 2022 order increased the amount the employee is owed to approximately US$120 million, an increase of over 170,000 percent, ignoring the actual salary that had been established and using approximately US$21,000 per day, an increase of over 12,000 percent and an amount the former employee never actually received while working for Exterran’s subsidiary. Effectively, the Labor Board awarded the employee approximately 1,900 years of severance based on the correct wage rate. Exterran appealed the decision, and the appeal is pending before the First Collegiate Court of the Tenth Circuit in Labor Matters, in Villahermosa, Tabasco. Among other errors that are the subject of the appeal is the Labor Board’s (a) violation of principles of res judicata by disregarding prior court decisions establishing that the former employee’s salary was roughly MXN$3,500 per day (US$170 per day at the prevailing exchange rate), (b) ignoring the applicable one-year statute of limitations in these types of matters, and (c) award of salary differences that were never part of the former employee's original or subsequent claims. The Company is pursuing all available avenues to preserve its rights, including potentially asserting claims against the Mexican government should the First Collegiate Court of the Tenth Circuit in Labor Matters fail to reverse the Labor Board’s order. F49 Notes to the Consolidated Financial Statements | 2022 Annual Report F-49 ENERFLEX ANNUAL REPORT 2022 The Company is involved in litigation and claims associated with normal operations against which certain provisions may be made in the Financial Statements. 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. NOTE 33. RELATED PARTY TRANSACTIONS (a) Key Management Compensation Key management includes members of the Board and executive management. Remuneration of directors and executive management is determined by the Board having consideration of overall performance of individuals and market trends. Information on key management compensation is shown below: Years ended December 31, 2022 Salaries, Director fees and other short-term benefits $ 6,350 $ Post-employment compensation1 Share-based payments 721 8,315 2021 5,711 580 6,979 1Post-employment compensation represent the present value of future pension benefits earned during the year. (b) Other Related Party Transactions Enerflex transacts with certain related parties in the 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 All related party transactions are settled in cash. NOTE 34. SEASONALITY 2022 2021 $ 1,755 $ 4 22 352 - 128 The energy 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 Energy Infrastructure and After-Market Services 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, LATAM and EH segments are not significantly impacted by seasonal variations. Variations from these trends usually occur when hydrocarbon energy fundamentals are either improving or deteriorating. F-50 Enerflex Ltd. | 2022 Annual Report F50 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES NOTE 35. SEGMENTED INFORMATION During the fourth quarter of 2022, the Company re-assessed its operating and reporting segments. Prior to this assessment, the Company’s operating and reporting segments were one and the same, with those segments being Canada, USA, and ROW. With the completion of the Exterran acquisition Management noted a change in how the CODM views the organization. On this basis, four operating segments have been identified with no change in the Canada and USA segments, while ROW has been bifurcated into LATAM and EH. For external reporting purposes, Enerflex’s reportable segments are as follows: • North America – comprised of operations in Canada and the USA; • • Latin America – comprised of operations in Argentina, Bolivia, Brazil, Colombia, Ecuador, Mexico and Peru; and Eastern Hemisphere – comprised of operations in the Middle East, Africa, Europe and Asia Pacific. Each of the reporting segments are supported by the Corporate head office. Corporate overheads are allocated to the operating segments based on revenue. In assessing its reportable operating segments, the Company considered economic characteristics, the nature of products and services provided, the nature of production processes, the types of customers for its products and services, and distribution methods used. These considerations factored into the decision to combine Canada and USA into one reporting segment. For each of the operating segments, the CODM reviews internal management reports on at least a quarterly basis. Goodwill that was previously allocated to the ROW segment was distributed between the LATAM and EH segments on a basis of a relative fair value allocation. The fair value allocation was determined based on the value-in-use for LATAM and EH stand-alone segments and applying that percentage to the goodwill held in ROW. For the year ended December 31, 2022, the Company had no individual customers which accounted for more than 10 percent of its revenue (December 31, 2021 - none). The following summary describes the operations of each of the Company’s reportable segments: • NAM generates revenue from manufacturing natural gas infrastructure under contract, refrigeration, processing, and electric power equipment, including custom and standard compression packages and modular natural gas processing equipment, refrigeration systems and water treatment services, in addition to generating revenue from mechanical services and parts, and maintenance solutions, and operating our compression assets under contract for oil and gas and midstream customers; LATAM generates revenue from operating our Energy Infrastructure assets under take or pay contracts, providing after- market services, including parts and components, as well as operations, maintenance, and overhaul services; and EH generates revenue by operating our Energy Infrastructure assets under take or pay contracts, 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 accounting policies of the reportable operating segments are the same as those described in the summary of significant accounting policies. F51 Notes to the Consolidated Financial Statements | 2022 Annual Report F-51 ENERFLEX ANNUAL REPORT 2022 The following tables provide certain financial information by geographic area. Revenues and Operating Income Years ended December 31, NAM LATAM EH Total 2022 2021 2022 2021 2022 2021 2022 2021 Segment revenue $ 1,303,885 $ 680,062 $ 221,628 $ 106,160 $ 349,247 $ 203,585 $ 1,874,760 $ 989,807 Intersegment revenue (93,778) (29,463) (434) (95) (2,750) (93) (96,962) (29,651) Revenue $ 1,210,107 $ 650,599 $ 221,194 $ 106,065 $ 346,497 $ 203,492 $ 1,777,798 $ 960,156 Revenue – Energy Infrastructure Revenue – After- Market Services Revenue – Engineered Systems Operating income (loss)1 141,900 103,096 129,723 66,069 109,464 109,488 381,087 278,653 298,333 215,876 38,057 24,158 107,270 87,342 443,660 327,376 769,874 331,627 53,414 15,838 129,763 6,662 953,051 354,127 $ 14,769 $ 18,041 $ (14,654) $ 6,575 $ 2,157 $ 29,675 $ 2,272 $ 54,291 1 The company did not receive any government grants during the twelve months ended December 31, 2022 (December 31, 2021 – $16.4 million). Government grants are recorded in COGS and SG&A within the interim condensed consolidated statements of earnings in accordance with where the associated expenses were recognized. Segment Assets As at December 31, 2022 2021 2022 2021 2022 2021 2022 2021 NAM LATAM EH Total Segment assets $ 1,638,195 $ 1,547,005 $ 838,063 $ 214,340 $ 831,652 $ 440,629 $ 3,307,910 $ 2,201,974 Goodwill1 Corporate 224,992 242,804 89,264 85,622 365,121 237,844 679,377 566,270 - - - - - - 282,302 (576,802) Total segment assets $ 1,863,187 $ 1,789,809 $ 927,327 $ 299,962 $ 1,196,773 $ 678,473 $ 4,269,589 $ 2,191,442 1 The total amount of goodwill in the Canada operating segment is $40.4 million and, in the USA, operating segment is $184.6 million. NOTE 36. SUBSEQUENT EVENTS Subsequent to December 31, 2022, Enerflex declared a quarterly dividend of $0.025 per share, payable on April 6, 2023, to shareholders of record on March 16, 2023. The Board will continue to evaluate dividend payments on a quarterly basis, based on the availability of cash flow, anticipated market conditions, and the general needs of the business. F-52 Enerflex Ltd. | 2022 Annual Report F52 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES F O D R A O B S R O T C E R I D FERNANDO ASSING Houston, TX, USA 1 MAUREEN CORMIER JACKSON AUDIT COMMITTEE CHAIR Calgary, AB, CA 2 W. BYRON DUNN Dallas, TX, USA 1, 3 LAURA FOLSE Boerne, TX, USA JAMES GOUIN Belle River, ON, CA 2 MONA HALE Edmonton, AB, CA 2 E V I T U C E X E M A E T T N E M E G A N A M H. STANLEY MARSHALL HUMAN RESOURCES AND COMPENSATION COMMITTEE CHAIR Paradise, NL, CA 1, 3 KEVIN REINHART BOARD CHAIR Calgary, AB, CA MARC ROSSITER PRESIDENT AND CHIEF EXECUTIVE OFFICER Calgary, AB, CA JUAN CARLOS VILLEGAS Lo Barnechea, RM, CL 1, 3 2, 3 MICHAEL WEILL NOMINATING AND CORPORATE GOVERNANCE COMMITTEE CHAIR Houston, TX, USA 1 Member of Human Resources and Compensation Committee 2 Member of Audit Committee 3 Member of Nominating and Corporate Governance Committee MARC ROSSITER PRESIDENT AND CHIEF EXECUTIVE OFFICER Calgary, AB, CA SANJAY BISHNOI SVP AND CHIEF FINANCIAL OFFICER Calgary, AB, CA DAVID IZETT SVP AND GENERAL COUNSEL Calgary, AB, CA PATRICIA MARTINEZ CHIEF ENERGY TRANSITION OFFICER Houston, TX, USA GREG STEWART PRESIDENT, USA Houston, TX, USA HELMUTH WITULSKI PRESIDENT, CANADA Calgary, AB, CA MAURICIO MEINERI PRESIDENT, LATIN AMERICA Houston, TX, USA PHIL PYLE PRESIDENT, EASTERN HEMISPHERE Abu Dhabi, UAE ROGER GEORGE PRESIDENT, WATER SOLUTIONS Atlanta, GA, USA 105 R E D L O H E R A H S N O I T A M R O F N I STOCK EXCHANGE LISTINGS Toronto Stock Exchange Trading Symbol: EFX New York Stock Exchange Trading Symbol: EFXT TRANSFER AGENT, REGISTRAR, AND DIVIDEND-DISBURSING AGENT TSX Trust Company PO Box 700 Station B Montreal, QC, CA H3A 2A6 North America: 1-800-387-0825 Outside North America: 1-416-682-3860 E-mail: shareholderinquiries@tmx.com Website: https://tsxtrust.com AUDITORS Ernst & Young LLP Chartered Professional Accountants Calgary, AB, CA INVESTOR RELATIONS Telephone: 1-403-387-6377 E-mail: IR@enerflex.com Website: www.enerflex.com 106 HEAD OFFICE Enerflex Ltd. Suite 904, 1331 Macleod Trail SE Calgary, AB, Canada T2G 0K3 1-403-387-6377 www.enerflex.com 2 0 2 2 A N N U A L R E P O R T T R A N S F O R M I N G E N E R G Y F O R A S U S T A I N A B L E F U T U R E ENERFLEX ANNUAL REPORT 2022
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