Aecon : 2024 - Q4 MD&A (aecon group inc md a q4 2024 final)

Published: 2025-03-05 16:53:29 ET ARE.TO

Aecon Group Inc.

Management's Discussion and Analysis

of Operating Results and Financial Condition

December 31, 2024

Management's Discussion and Analysis of Operating Results

and Financial Condition

December 31, 2024

TABLE OF CONTENTS

1. INTRODUCTION

2. FORWARD-LOOKING INFORMATION

3. FINANCIAL REPORTING STANDARDS

4. NON-GAAP AND SUPPLEMENTARY FINANCIAL MEASURES

5. RECENT DEVELOPMENTS

6. BUSINESS STRATEGY

7. CONSOLIDATED FINANCIAL HIGHLIGHTS

8. REPORTABLE SEGMENTS FINANCIAL HIGHLIGHTS

8.1. CONSTRUCTION

8.2. CONCESSIONS

9. QUARTERLY FINANCIAL DATA

10. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

10.1 INTRODUCTION

10.2. CONTINGENCIES

10.3. CASH AND DEBT BALANCES

10.4. SUMMARY OF CASH FLOWS

10.5. CAPITAL MANAGEMENT

10.6. FINANCIAL INSTRUMENTS

10.7. NORMAL COURSE ISSUER BID

11. NEW ACCOUNTING STANDARDS

12. SUPPLEMENTAL DISCLOSURES

13. RISK FACTORS

14. OUTSTANDING SHARE DATA

15. OUTLOOK

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Management's Discussion and Analysis of Operating Results and Financial Condition ("MD&A")

The following discussion and analysis of the consolidated results of operations and financial condition of Aecon Group Inc. ("Aecon" or the "Company") should be read in conjunction with the Company's audited consolidated financial statements and accompanying notes for the year ended December 31, 2024. This MD&A is dated as at March 5, 2025, when the Company's Board of Directors approved this document. Additional information on Aecon is available through the System for Electronic Document Analysis and Retrieval+ ("SEDAR+") at www.sedarplus.ca and includes the Company's Annual Information Form and other securities and continuous disclosure filings.

1. INTRODUCTION

Aecon currently operates in two principal segments within the infrastructure development industry: Construction and Concessions.

The Construction segment includes all aspects of the construction of both public and private infrastructure, primarily in Canada, the United States, and, on a selected basis, internationally, and focuses primarily on the following market sectors:

Activities within the Concessions segment include the development, financing, build, and operation of construction projects, primarily by way of public-private partnership contract structures, as well as integrating the services of all project participants, and harnessing the strengths and capabilities of Aecon. The Concessions segment focuses primarily on providing the following services:

The infrastructure development industry in Canada is seasonal in nature for companies like Aecon that perform a significant portion of their work outdoors. As a result, less work is performed in the winter and early spring months than in the summer and fall months. Accordingly, Aecon has historically experienced a seasonal pattern in its operating results, with the first half of the year, and particularly the first quarter, typically generating lower revenue and profit than the second half of the year. Therefore, results in any one quarter are not necessarily indicative of results in any other quarter, or for the year as a whole.

2. FORWARD-LOOKING INFORMATION

The information in this Management's Discussion and Analysis includes certain forward-looking statements which may constitute forward-looking information under applicable securities laws. These forward-looking statements are based on currently available competitive, financial, and economic data and operating plans but

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are subject to risks and uncertainties. Forward-looking statements may include, without limitation, statements regarding the operations, business, financial condition, expected financial results, performance, prospects, ongoing objectives, strategies, and outlook for Aecon, including statements regarding: the timing, methods, and quantity of any purchases under the NCIB (defined below), the availability of cash for repurchases of common shares under the NCIB, and compliance with applicable laws and regulations pertaining to the NCIB; expectations regarding the impact of the three remaining fixed price legacy projects and expected timelines of such projects; backlog and estimated duration; the impact of certain contingencies on Aecon (see: Section 10.2 "Contingencies"); the uncertainties related to the unpredictability of global economic conditions; its belief regarding the sufficiency of its current liquidity position including sufficiency of its cash position, unused credit capacity, and cash generated from its operations; its strategy of seeking to differentiate its service offering and execution capability and the expected results therefrom; its efforts to maintain a conservative capital position; expectations regarding the pipeline of opportunities available to Aecon; statements regarding the various phases of projects for Aecon; its strategic focus on projects linked to decarbonization, energy transition and sustainability, and the opportunities arising therefrom; expectations regarding ongoing recovery in travel through Bermuda International Airport and opportunities to add to the existing portfolio of Canadian and international concessions in the next 12 to 24 months; Oaktree Capital Management, L.P.'s ("Oaktree") investment in Aecon Utilities Group Inc. ("Aecon Utilities"), the expected benefits thereof and results therefrom, including the acceleration of growth of Aecon Utilities in Canada and the U.S.; the expansion of Aecon Utilities' geographic reach and range of services in the U.S; the potential for additional contingent proceeds payable under the Aecon Utilities acquisition of a majority interest in Xtreme Powerline Construction ("Xtreme"); the ability of Aecon Utilities and Xtreme to integrate successfully following the Xtreme acquisition, the expansion in the U.S. utility services market and driving continued growth in priority markets; and the effective collaboration with Xtreme management; the ability of Aecon and United Engineers & Constructors Inc. ("United") to integrate successfully following the acquisition; the expansion in the North America and global nuclear services market and driving continued growth in priority markets; the ability to advance Aecon's diversification and growth with a focus on the energy transition; the ability to capitalize on, and the continued growth of, the increasing demand for clean, affordable, and reliable energy; and the effective collaboration with United management; the anticipated growth of Aecon's nuclear and engineering business, and Aecon's expansion in the U.S. and Canadian markets, expansion of market share and operational capacity. Forward-looking statements may in some cases be identified by words such as "will," "plans," "schedule," "forecast," "outlook," "potential," "seek," "strategy," "may," "could," "might," "can," "believes," "expects," "anticipates," "estimates," "projects," "intends," "prospects," "targets," "occur," "continue," "should" or the negative of these terms, or similar expressions. In addition to events beyond Aecon's control, there are factors which could cause actual or future results, performance, or achievements to differ materially from those expressed or inferred herein including, but not limited to: the risk of not being able to drive a higher margin mix of business by participating in more complex projects, achieving operational efficiencies and synergies, and improving margins; the risk of not being able to meet contractual schedules and other performance requirements on large, fixed priced contracts; the risk of not being able to meet its labour needs at reasonable costs; the risk of not being able to address any supply chain issues which may arise and pass on costs of supply increases to customers; the risk of not being able, through its joint operations, to enter into implementation phases of certain projects following the successful completion of the relevant development phase; the risk of not being able to execute its strategy of building strong partnerships and alliances; the risk of not being able to execute its risk management strategy; the risk of not being able to grow backlog across the organization by winning major projects; the risk of not being able to maintain a number of open, recurring, and repeat contracts; the risk of not being able to accurately assess the risks and opportunities related to its industry's transition to a lower-carbon economy; the risk of not being able to oversee, and where appropriate, respond to known and unknown

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environmental and climate change-related risks, including the ability to recognize and adequately respond to climate change concerns or public, governmental, and other stakeholders' expectations on climate matters; the risk of not being able to meet its commitment to meeting its greenhouse gas emissions reduction targets; the risks associated with the strategy of differentiating its service offerings in key end markets; the risks associated with undertaking initiatives to train employees; the risks associated with the seasonal nature of its business; the risks associated with being able to participate in large projects; the risks associated with legal proceedings to which it is a party; the ability to successfully respond to shareholder activism; the risk of increased costs due to the imposition of tariffs; the risk of non-compliance with government regulations, policies or executive orders; the risk that Aecon will not realize the opportunities presented by a transition to a net-zero economy; risks associated with future pandemics or health-related outbreaks and Aecon's ability to respond to and implement measures to mitigate the impact of such pandemics or health-related outbreaks; the risk that the strategic partnership with Oaktree will not realize the expected results and may negatively impact the existing business of Aecon Utilities; the risk that Aecon Utilities will not realize the anticipated balance sheet flexibility with the completion of the investment; the risk that Aecon Utilities will not realize opportunities to expand its geographic reach and range of services in the U.S; the risk of costs or difficulties related to the integration of Aecon Utilities and Xtreme being greater than expected; the risk of the anticipated benefits and synergies from the acquisition not being fully realized or taking longer than expected to realize; the risk of being unable to retain key personnel, including Xtreme management; and the risk of being unable to maintain relationships with customers, suppliers or other business partners of Xtreme.

These forward-looking statements are based on a variety of factors and assumptions including, but not limited to that: none of the risks identified above materialize, there are no unforeseen changes to economic and market conditions and no significant events occur outside the ordinary course of business. These assumptions are based on information currently available to Aecon, including information obtained from third-party sources. While the Company believes that such third-party sources are reliable sources of information, the Company has not independently verified the information. The Company has not ascertained the validity or accuracy of the underlying economic assumptions contained in such information from third-party sources and hereby disclaims any responsibility or liability whatsoever in respect of any information obtained from third-party sources.

Risk factors are discussed in greater detail in the Section 13 - "Risk Factors" in this MD&A which is available on SEDAR+ at www.sedarplus.ca. Except as required by applicable securities laws, forward-looking statements speak only as of the date on which they are made and Aecon undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise.

3. FINANCIAL REPORTING STANDARDS

The Company's audited consolidated financial statements and the accompanying notes for the year ended December 31, 2024 were prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board ("IFRS Accounting Standards").

All financial information in this MD&A is presented in Canadian dollars, unless otherwise indicated.

4. NON-GAAP AND SUPPLEMENTARY FINANCIAL MEASURES

The MD&A presents certain non-GAAP and supplementary financial measures, as well as non-GAAP ratios to assist readers in understanding the Company's performance ("GAAP" refers to IFRS Accounting Standards).

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These measures do not have any standardized meaning and therefore are unlikely to be comparable to similar measures presented by other issuers and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.

Throughout this MD&A, the following terms are used, which do not have a standardized meaning under GAAP.

Non-GAAP Financial Measures

A non-GAAP financial measure: (a) depicts the historical or expected future financial performance, financial position or cash flow of the Company; (b) with respect to its composition, excludes an amount that is included in, or includes an amount that is excluded from, the composition of the most comparable financial measure presented in the primary consolidated financial statements; (c) is not presented in the financial statements of the Company; and (d) is not a ratio.

Non-GAAP financial measures and ratios presented and discussed in this MD&A are as follows:

Management uses the above non-GAAP financial measures to analyze and evaluate operating performance. Aecon also believes the above financial measures are commonly used by the investment community for

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valuation purposes, and are useful complementary measures of profitability, and provide metrics useful in the construction industry. These non-GAAP financial measures exclude items which management believes will allow investors a consistent way to analyze Aecon's financial performance, allow for better analysis of core operating income and business trends, and improve comparability of companies within the industry.

Primary Financial Statements

Primary financial statement means any of the following: the consolidated balance sheets, the consolidated statements of income, the consolidated statements of comprehensive income, the consolidated statements of changes in equity, and the consolidated statements of cash flows.

Key financial measures presented in the primary financial statements of the Company and discussed in this MD&A are as follows:

The above measures are presented in the Company's consolidated statements of income and are not meant to be a substitute for other subtotals or totals presented in accordance with GAAP, but rather should be evaluated in conjunction with such GAAP measures.

Remaining Performance Obligations, i.e. Backlog, is presented in the notes to the Company's annual consolidated financial statements and is not meant to be a substitute for other amounts presented in accordance with GAAP, but rather should be evaluated in conjunction with such GAAP measures.

Non-GAAP Ratios

A non-GAAP ratio is a financial measure presented in the form of a ratio, fraction, percentage or similar representation, and that has a non-GAAP financial measure as one of its components and is not disclosed in the financial statements of the Company.

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A non-GAAP ratio presented and discussed in this MD&A is as follows:

Management uses the above non-GAAP ratio to analyze and evaluate operating performance. The most directly comparable measures calculated in accordance with GAAP are gross profit and operating profit that can be used to calculate gross profit margin and operating margin.

Supplementary Financial Measures

A supplementary financial measure: (a) is, or is intended to be, disclosed on a periodic basis to depict the historical or expected future financial performance, financial position or cash flow of the Company; (b) is not presented in the financial statements of the Company; (c) is not a non-GAAP financial measure; and (d) is not a non-GAAP ratio.

Key supplementary financial measures presented in this MD&A are as follows:

5. RECENT DEVELOPMENTS

Aecon Acquires United Engineers & Constructors Inc.

On December 17, 2024, Aecon acquired United Engineers & Constructors Inc. ("United"), a nuclear and conventional power engineer and contractor headquartered in Mount Laurel, New Jersey, from affiliates of CriticalPoint Capital, LLC. United's management and operational teams joined Aecon upon closing of the acquisition.

Founded in 1905, United provides end-to-end engineering, planning, and program and construction management services to nuclear and conventional power clients in the United States and Canada. United maintains a strategic focus on nuclear power plant life extensions and developing small modular reactor and power generation projects. The majority of United's revenues are conducted under master service agreements and are recurring in nature. Aecon and United are also collaboratively engaged in joint operations in executing steam generator replacement work and fuel channel and feeder replacements on six units at the Bruce Nuclear Generating Station in Ontario.

Aecon Utilities Acquires Ainsworth Power Construction

On December 2, 2024, Aecon Utilities Group Inc. ("Aecon Utilities") acquired Ainsworth Power Construction,

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an electrical services and power systems business unit of Ainsworth Inc., headquartered in Toronto, Ontario, from GDI Integrated Facility Services. Ainsworth Power Construction's management and operational teams joined Aecon Utilities upon closing of the acquisition, which is being financed through Aecon Utilities' standalone committed revolving credit facility.

Ainsworth Power Construction has over 80 employees and 80 years of experience as a comprehensive technical services contractor for electrical utility clients, primarily in Ontario. The majority of Ainsworth Power Construction's revenues are conducted under long-term master service agreements and are recurring in nature. Aecon Utilities and Ainsworth Power Construction are collaboratively engaged in joint operations delivering programs to utility and private sector clients to expand electricity distribution infrastructure across Ontario.

Aecon Utilities Acquires Electrical Distribution Utility Contractor Xtreme Powerline

On July 2, 2024, Aecon Utilities Group Inc. acquired a majority interest in Xtreme Powerline Construction ("Xtreme"), an electrical distribution utility contractor headquartered in Port Huron, Michigan. The acquisition was financed through Aecon Utilities' standalone committed revolving credit facility. Xtreme management are committed to supporting Aecon Utilities' expansion in the U.S. and retained a minority ownership in Xtreme as well as leadership responsibilities in the Xtreme business in partnership with Aecon Utilities' management team.

A privately-owned company founded in 2007, Xtreme is a full-service powerline constructor with approximately 300 employees. Xtreme specializes in overhead distribution line repair, maintenance, and expansion services throughout the Eastern United States, and provides emergency restoration services for over 20 utility clients across the U.S.

Normal Course Issuer Bid

On August 15, 2024, the Toronto Stock Exchange ("TSX") approved the Company's normal course issuer bid (the "NCIB") pursuant to which the Company may purchase for cancellation up to 3,126,306 common shares of Aecon, representing 5% of the issued and outstanding common shares as of August 7, 2024. The NCIB commenced on August 18, 2024 and will end no later than August 18, 2025. See also Section 10.7 "Normal Course Issuer Bid" of this MD&A.

Update on Certain Fixed Price Legacy Projects

Within the Construction segment, as part of its ongoing review of critical accounting estimates in respect of the remaining three large fixed price legacy projects now nearing completion and being performed by joint operations in which Aecon is a participant (see Section 10.2 "Contingencies" and Section 13 "Risk Factors" of this MD&A), Aecon recognized an operating loss of $35.8 million in the fourth quarter of 2024 (operating loss of $40.0 million in the same period of 2023) and an operating loss of $145.8 million in 2024 (operating loss of $215.2 million in 2023) from these three legacy projects. The remaining three legacy projects comprised 4% and 5%, respectively, of consolidated revenue in the fourth quarter and full year of 2024 compared to 8% and 6%, respectively, of consolidated revenue in the fourth quarter and full year of 2023.

Aecon and its joint operations partners are dedicating all necessary resources to drive the remaining legacy projects to completion and in the meantime continue to pursue fair and reasonable settlement agreements with

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the respective clients in each case. Of the remaining three projects, two are currently expected to be substantially complete by mid-year 2025, and the final project by the end of the third quarter of 2025. Future downside risk remains in the event that assumptions, estimates, and/or circumstances change. Such downside risks include, among others, the level of compensation for past and future impacts, including through the dispute resolution process where appropriate, productivity not meeting expectations, potential for unforeseen supply chain delays and disruptions, unknown commissioning risks, inflation related risk, and further client changes.

At December 31, 2024, the remaining backlog to be worked off on the three projects was $121 million compared to backlog of $324 million at December 31, 2023. The three fixed price legacy projects comprised 2% of backlog at December 31, 2024 compared to 5% at December 31, 2023.

Coastal Gaslink Pipeline Project Global Settlement Agreement

On June 28, 2024, Aecon announced that SA Energy Group (a general partnership of Aecon Construction Group Inc. and Robert B. Somerville Co. Ltd.) and Coastal GasLink Pipeline Limited Partnership, by its general partner Coastal GasLink Pipeline Ltd., reached an amicable and mutually agreeable global settlement to resolve their dispute fully and finally over the construction of Sections 3 and 4 of the Coastal GasLink Pipeline Project in British Columbia.

The settlement agreement is not an admission of liability by either party and the parties have mutually released their respective claims in the arbitration, thereby avoiding the expense, burden, and uncertainty associated with arbitration.

The terms of the settlement agreement did not result in any further cash impacts to Aecon. From an accounting perspective, Aecon recognized in its consolidated financial results a charge of $127 million in 2024 ($nil in 2023) related to the construction of Sections 3 and 4 of the Coastal GasLink Pipeline Project.

6. BUSINESS STRATEGY

Aecon's overall strategic goal is to be the number one Canadian infrastructure company that safely, profitably, and sustainably delivers integrated services, products, and solutions to meet its clients' needs.

Current Position

For over a decade, Aecon has built scale in core markets, achieved diversity and balance in geographic and end- market sectors, and embedded a culture of operating excellence, enhanced risk management, and consistent performance using a "One Aecon" approach to meeting the needs of its clients. In recent years, this effort has been highlighted by the development of a growing portfolio of concession investments tied to major Canadian and international infrastructure projects, and the selection of Aecon as a partner in consortiums developing large, collaborative, and progressive design build projects. Aecon has also completed strategic acquisitions and investments in core operations, while divesting select non-core operations, to allow for an increased focus on Aecon's chosen end-markets.

Aecon's core strategy is to differentiate its service offering and execution capability to secure higher-return projects with a lower risk profile by increasing the sophistication and efficiency of the work being performed

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Disclaimer

Aecon Group Inc. published this content on March 05, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on March 05, 2025 at 21:52:33.187.