TC Energy(TRP) - 2024 Q1 - Quarterly Report

Notice of Application Notice of Application Summary TC Energy Corporation seeks court approval for a proposed arrangement to spin off South Bow Corporation - TC Energy has filed an application with the Court of King's Bench of Alberta regarding a proposed arrangement involving TC Energy, its shareholders, and South Bow Corporation[4] - The court hearing is scheduled for June 4, 2024, at 3:30 p.m. (MDT) in Calgary, Alberta[4] - Shareholders or interested parties wishing to appear at the hearing must file a notice of intention to appear by 5:00 p.m. (MDT) on May 15, 2024[4] - The court's approval will serve as the basis for an exemption from the registration requirements of the U.S. Securities Act of 1933 for the securities distributed under the Arrangement[4] Management Information Circular About the Shareholder Meeting The company will hold a virtual annual and special meeting on June 4, 2024, using a 'notice and access' model - The annual and special meeting of shareholders will be held virtually on June 4, 2024, at 8 a.m. MDT[619][522] - Shareholders of record as of April 16, 2024, are eligible to vote, with each common share entitling the holder to one vote[532] - The company is using a 'notice and access' system to deliver meeting materials electronically, reducing printing and postage costs[526] - Registered shareholders and duly appointed proxyholders can vote and ask questions in real-time during the virtual meeting[528][529] Business of the Meeting The meeting agenda includes director elections, auditor re-appointment, and key votes on the spin-off and compensation - Shareholders will vote on the election of 13 directors to the Board for a one-year term[743] - A key item is the vote on the Arrangement Resolution to approve the spin-off of the Liquids Pipelines business into South Bow Corporation[803] - Shareholders will vote on approving a shareholder rights plan for the newly formed South Bow Corporation[804] - An advisory 'say on pay' vote will be held on the company's approach to executive compensation[806] - The Board recommends re-appointing KPMG LLP as the auditor; total fees paid to KPMG in 2023 were $21.1 million, up from $15.5 million in 2022[792] The Arrangement This section details the proposed spin-off of the Liquids Pipelines business into a new public company, South Bow - The Arrangement will separate TC Energy into two independent, publicly listed companies: TC Energy (natural gas and energy solutions) and South Bow (liquids pipelines)[126] - Shareholders will receive one New TC Energy Common Share and 0.2 of a South Bow Common Share for each TC Energy share held[126] - The Board of Directors unanimously recommends that shareholders vote FOR the Arrangement Resolution, determining it is in the best interests of TC Energy[184][185] - Evercore provided a Fairness Opinion stating that the consideration to be received by shareholders is fair from a financial point of view[182][186] - The transaction is intended to be generally tax-free for both Canadian and U.S. shareholders, except for cash received in lieu of fractional shares[136][183] - The spin-off is the result of a two-year strategic review where alternatives like a sale or joint venture were deemed less optimal[178][127] South Bow Shareholder Rights Plan Shareholders will vote on a defensive shareholder rights plan for the new entity, South Bow, to ensure fair treatment - The plan is designed to ensure fair treatment of South Bow shareholders in a take-over bid and provide the board time to evaluate alternatives[349] - A 'flip-in event' is triggered if a person or group acquires 20% or more of outstanding South Bow Common Shares without making a 'permitted bid'[351] - A 'permitted bid' must be made to all shareholders, remain open for at least 105 days, and be accepted by more than 50% of independent shareholders[350] - Following a flip-in event, each right allows the holder to purchase South Bow shares at a 50% discount to the market price, causing significant dilution to the acquirer[353] Governance The company outlines its high standards of corporate governance, board structure, and committee responsibilities - TC Energy's governance practices comply with Canadian guidelines and NYSE standards for foreign private issuers[362][364] - The Board has 13 members, of which 12 (92%) are independent, and is led by an independent, non-executive Chair[366][407] - The company's Board Diversity Policy targets at least 30% women; currently, 38% of the board members are women[368][405] - The Board has four standing committees composed entirely of independent directors: Audit, Governance, HSSE, and Human Resources[566] - The Board has primary responsibility for overseeing the company's strategic planning process and its Enterprise Risk Management (ERM) program[413][417][419] Compensation This section details the 'pay for performance' compensation philosophy for directors and named executive officers - The compensation philosophy is based on four objectives: pay for performance, market competitiveness, alignment with stakeholder interests, and talent retention[639] - Directors are required to hold company equity valued at four times their annual retainer, with a significant portion paid in Deferred Share Units (DSUs)[605][607] - Executive compensation is benchmarked against a peer group of 20 large North American energy and industrial companies, with total direct compensation targeted at the market median[643] - The 2021 Performance Share Unit (PSU) award, which vested at the end of 2023, paid out at a performance multiplier of 0.93, reflecting strong EPS but lagging TSR[545] 2023 Summary Compensation for Named Executives | Name | Position | Salary ($) | Share-based awards ($) | Option-based awards ($) | Annual incentive ($) | Total compensation ($) | |:---|:---|---:|---:|---:|---:|---:| | François Poirier | President & CEO | 1,183,333 | 5,550,000 | 3,700,000 | 2,154,581 | 13,290,831 | | Joel Hunter | EVP & CFO | 616,667 | 1,035,000 | 690,000 | 671,207 | 3,418,409 | | Stanley Chapman III | EVP & COO, Natural Gas | 1,069,637 | 2,815,137 | 1,876,758 | 1,413,630 | 7,286,172 | | Annesley Wallace | EVP, Strategy & Corp Dev | 392,438 | 3,955,000 | - | 426,098 | 6,351,024 | | Bevin Wirzba | EVP & President, Liquids | 716,667 | 1,500,000 | 1,000,000 | 868,840 | 4,459,674 | Schedules Schedule C – Arrangement Agreement, including Plan of Arrangement This schedule contains the definitive legal agreement governing the spin-off, including conditions and termination terms - The Arrangement Agreement is the binding contract between TC Energy, South Bow, and South Bow Pipelines Ltd. to implement the spin-off[759] - Key conditions for closing include obtaining shareholder, court, regulatory, and stock exchange approvals, as well as favorable tax rulings[207][776] - TC Energy retains the right to terminate the agreement in its sole discretion at any time before the Certificate of Arrangement is issued[200][602] Appendix A - Plan of Arrangement The appendix provides the detailed, step-by-step legal mechanics for the corporate reorganization and spin-off - The Plan of Arrangement is the legal blueprint detailing the sequence of transactions under Section 192 of the Canada Business Corporations Act (CBCA)[10][11] - The process involves a series of steps commencing at the 'Effective Time', including amending articles, exchanging shares, transferring assets, and redeeming shares to finalize the separation[15][16][17][18] - The plan details adjustments for employee incentive securities, which will be exchanged for equivalent South Bow securities for transferring employees or adjusted for remaining TC Energy employees[19][20] - The transaction is intended to qualify as a tax-free 'reorganization' under Section 368(a)(1)(D) and Section 355 of the U.S. Internal Revenue Code[23] Schedule D – Fairness Opinion Evercore provides an independent opinion stating the transaction is financially fair to TC Energy shareholders - TC Energy's Board retained Evercore Group L.L.C. to provide an independent fairness opinion regarding the Arrangement[333] - Evercore's opinion is that the consideration is fair, from a financial point of view, to the Shareholders, subject to specified assumptions[393] - Evercore's analysis included reviewing financial projections, public market data, discounted cash flow analyses, and comparable company trading performance[379][380] - The opinion is not a formal valuation and does not constitute a recommendation on how shareholders should vote[385][386][387] Information Concerning South Bow Post-Arrangement This schedule provides a detailed overview of South Bow as a standalone company, including its business and governance - South Bow's business will be the Liquids Pipelines business currently operated by TC Energy, centered on the Keystone Pipeline System[515] - Bevin Wirzba is expected to be the President and Chief Executive Officer of South Bow upon completion of the Arrangement[845] - The proposed Board of Directors for South Bow is detailed, with Hal Kvisle expected to serve as the independent Chair[18] - South Bow's strategic priorities include enhancing value through capacity optimizations and making strategic in-corridor investments[134] Schedule H – Audited Combined Carve-Out Financial Statements for the Liquids Pipelines Business and MD&A This schedule presents the audited historical 'carve-out' financial statements for the Liquids Pipelines business - The financial statements present the historical performance of the Liquids Pipelines business as a standalone entity, prepared on a 'carve-out' basis[885] - These statements include allocations of TC Energy's centralized corporate expenses, which may not be indicative of future costs for South Bow[888][890] - KPMG LLP served as the auditor and identified the allocation of corporate expenses as a critical audit matter due to the significant judgment involved[863][880] Combined Carve-Out Net Income | Year Ended December 31 | Net Income (Loss) (millions of C$) | |:---|---:| | 2023 | 595 | | 2022 | 808 |