South Bow Corporation Q4 FY2025 earnings call

• Safety: Had significant construction activity in 2025 with 0 recordable safety incidents across over 2.5 million work hours, supporting workforce and community well-being.
• Growth initiatives: First growth initiative Black Rod Connection project placed into commercial service within 24 months of sanctioning, on time, on budget, and with exceptional safety performance. Prairie Connector Project in early stages, with open season underway to determine commercial interest. Leverages existing infrastructure and customer-led strategy.
• Milepost 171: PHMSA confirmed incident characteristics unique and pipe/wells met industry standards. Made significant progress on remedial actions and integrity work with 11 inline inspection runs and 51 integrity digs. Keystone pipeline operating at high system operating factor, expecting phased lifting of pressure restrictions in 2026, which could lead to modest increase in spot movements later in 2026.
• Financial discipline: Strong financial performance in 2025 supported by high contracted and predictable cash flows, enabling capital allocation priorities. 2026 starts in a strong position, reaffirming financial outlook, directing free cash flow to strengthening balance sheet, aiming for leverage targets, and maintaining sustainable dividend to shareholders.

In 2025, Southbow delivered normalized EBITDA of $1.02 billion, slightly above the expectation of $1.01 billion, with a modest outperformance driven by the marketing segment. Distributable cash flow was $709 million, in line with revised guidance and more than 30% above the original guidance. The net debt to normalized EBITDA ratio exited 2025 at 4.7 times, slightly better than the expected 4.8 times. 90% of the business is underpinned by high quality cash flows from long-term contracts, while the marketing affiliate makes small contributions to the bottom line.

• 2025 financial results slightly ahead of expectations, first growth initiative completed. - 2026: Black Rod cash flows to ramp in second half, free cash flow to be directed to strengthening balance sheet, on track to meet leverage targets in medium term. - Keystone pipeline pressure restrictions expected to be lifted in phased manner in 2026, potentially allowing modest increase in spot movements later in 2026.

• Uncertainty in regulatory approval progress for projects like Prairie Connector. - Competition from other U.S.-bound WCS egress paths such as Enbridge and Energy Transfer. - Impact of policy environment changes in North America on project advancement. - Market price volatility affecting the marketing segment's performance.

Q: With respect to the open season for the Prairie Connector Project, Can you discuss any early indications of commercial interest at this point, understanding that you are still very early on? And in general, how are you thinking about competition for U.S.-bound WCS egress from Enbridge and energy transfer, as well as the impact of incremental Venezuelan barrels flowing to the U.S. Gulf Coast, potentially displacing WCS in Path 3? What do you see as Prairie Connector's key competitive advantages?

A: Bevan responded that the Prairie Connector is in early stages with a customer-led strategy, and details on open season outcome are not yet available. Believes the offering is competitive and Southbow's existing position of owning and controlling a competitive path to the Gulf Coast is an advantage.

Q: In relation to the existing Keystone system, after sharing the root cause analysis related to milepost 171, Can you talk about the timeline of lifting the pressure restrictions in a phased manner? Can you give some details around this? What are your expectations for how much the pressure and hydraulic capacity could step up beginning in second half of 2026? And then within your annual guidance, how much of an impact is this given expected capacity for higher spot movements, but also the expectations for tight differentials nonetheless? Can you help us reconcile this?

A: Bevan stated that they've made progress on remedial efforts, intend to continue at pace to see lifting of correction action order by end of 2026, expect to return to pre-incident operational capacity around 600,000 barrels a day, and guidance accounts for impact of not being able to move as many spot volumes earlier but expects to take advantage of market growth when pressure restrictions are lifted.

Q: Two questions on the Prairie Connector. Maybe first, just in terms of a follow-up on when you think incremental capacity will be needed out of the basin, and then how would that mesh with what you would think would be a reasonable regulatory timeframe and construction timeframe if this project does proceed?

A: Rob was told that the strategy focuses on pre-invested corridors with permits in place in Canada, and the need for the project aligns with customer growth ambitions over the next 3-5 years, with ability to advance construction quickly in a regulated environment similar to the Black Rod project.

Q: If I can just ask about your growth initiatives. I'm just wondering, is there a preference or how do you think about the role of joint ventures and partnerships versus just outright acquisitions kind of over and about the organic initiatives?

A: Bevan said that organic development leveraging pre-invested capital has a favorable EV to EBITDA build multiple, but there are inorganic opportunities that provide diversity and synergies, with a combination of both strategies expected to deliver shareholder returns.

Q: Another open season question, but maybe from a different angle. Like, are there any learnings to be had from what happened with the original Keystone XL? Like, especially on the U.S. side. I mean, anything that went wrong on that project that's within your control to perhaps do differently with this one?

A: Bevan mentioned there are learnings from the Keystone XL experience, leveraging learnings in commercial discussions, and the more constructive policy environment in North America provides a better backdrop for the Prairie Connector project.

Q: I'm going to sneak in one more about the Prairie Connector, maybe just talking about your existing, leveraging your existing corridor. You know, I think we know that you guys have some pipe already in the ground. in Canada, but let's say things go to plan and the project moves forward, thinking about these barrels getting into Cushing and ultimately getting down to the Gulf Coast, I'm wondering if you could speak to what's needed on your U.S. Gulf Coast infrastructure in order to be able to accommodate potentially 450,000 barrels a day going down to the coast. Would that be all on the existing Keystone system or would you be looking to leverage other infrastructure as well.

A: Bevan stated that the Keystone system's Gulf Coast section is part of a sequenced expansion, with some facility modifications to the base Keystone system, and it's a continuation of the broader corridor's expansion.

Q: Switching into marketing i realize it's a smaller portion of your business but spreads have been on the move particularly you know wcs houston's trading pretty far back from brent and wti right now curious if you could speak to kind of what is going on at wcs houston and if you're seeing any opportunities either in the short or medium term to potentially capture some upside there either through marketing or maybe storage opportunities?

A: Bevan said that the marketing affiliate has a risk-off strategy, reevaluated its approach after early year volatility, and the marketing strategy focuses on reducing operating costs and variable pulls for customers, with the marketing affiliate being a non-material part of the strategy, focused on the 90% contracted business.

Q: You guys highlighted BlackRod as a successful project in the context of the balance sheet and in your prepared remarks. Maybe bigger picture, can you speak to how you may look to finance a potentially larger capital and longer duration project given the leverage and payout ratio profile of Southbow?

A: Aaron was told that at the investor day, different financing strategies like asset-level financing or partnering with other capital sources are considered, with focus on managing cost of capital and matching to execution risk, and adhering to risk preferences for debt financing.

Q: Most of my questions have been exhausted here, but I'll take a shot in the dark to see if you're interested in putting out a potential capital number for the Prairie Connector project. Should it... make it through the open season and have enough commercial interest?

A: Bevan said they're in early stages and not establishing costs at this point, and are in commercial discussions for the Prairie Connector project.

Q: Just wanted to turn to slide 19, if we could, with Blackrod in Project Ramp there. If you could just, I guess, remind us, you know, what gives you confidence to the ramp as you laid out in the slide. Looks like the 27 contribution could be three to four times the size of 26. with the project just online now. Wondering if you could walk us through that a little bit more.

A: Jeremy was told that the final tie-in weld was done earlier this year, and there's a buildup process involving the customer's asset steaming, well production, tankage filling, etc., with commercial agreements acknowledging the ramp, and full year contribution expected in 2027.

Q: Just going to be back on the funding plan for Prairie Connector, assuming a successful open season here. Just wondering if you can confirm your desire for the Alberta government's involvement, if any, either as an equity partner or partner perhaps providing loan guarantees through construction just to help protect your financial guardrails along the way.

A: Bevan said they're pursuing Prairie Connector as Southbow today, and are looking at risk framework and allocating risks appropriately among stakeholders, with the Premier indicating private developers should develop projects.

Q: I may just start off on potential acquisitions. Can you talk about updates on your appetite and observations on acquisition since your investor day. I'm also particularly interested in valuation levels on M&A versus organic growth.

A: Ben was told that they're advancing conversations on both organic and inorganic in parallel, with organic leveraging pre-invested corridors having better valuations, and valuations in the energy infrastructure space having improved, providing a tailwind for potential inorganic transactions.

Q: I was just curious about how you mentioned that you materially exited the TSA with TC and were you able to see some workflow optimization? We're just curious about any specific examples of the optimization you could talk to.

A: Sumantra was told that they've begun workflow optimizations since exiting the TSAs, such as in supply chain and procurement with new procurement processes, and in financial planning and analysis with new budgeting and real-time financial analysis processes, leveraging technology like AI for efficiency.

Q: I just wanted to shift towards capital allocation really quickly. I know you outlined your priorities in the release, but just wanted to ask about how you're looking at balancing dividend growth versus reducing the leverage.

A: Van stated that payout ratios on DCF and earnings basis are higher than desired, and they won't contemplate dividend increase until achieving the four times leverage target and having consistent low DCF payout ratios, and will state dividend increase if decided upon