South Bow's Q3 2025: Contradictions Emerge on Crude Pipeline Projects, System Capacity, and Growth Strategies

Guidance:

• Revising 2025 distributable cash flow to approximately $700M and effective tax rate to 20–21%.
• Reaffirming 2025 normalized EBITDA of $1.01B; 2026 normalized EBITDA forecast approximately $1.03B (±2%).
• Forecast 2026 distributable cash flow of ~ $655M (±2%); outcomes sensitive to pressure restrictions and price differentials.
• 2026 capital plan: ~ $25M maintenance capex and ~ $10M growth capex; growth capital to be updated upon project sanction.
• Quarterly dividend approved at $0.50 per share (payable Jan 15; record Dec 31).

Business Commentary:

* Financial Performance and Tax Optimization: - South Bow reported $250 million in normalized EBITDA and a distributable cash flow of $236 million for Q3, benefited by a $71 million current tax recovery due to U.S. tax legislation changes and tax optimization efforts. - The tax optimization efforts and tax pool acceleration led to reduced effective tax rates, improving the company's financial outlook.

• BlackRod Project and Capital Allocation:
• South Bow successfully executed the BlackRod project, achieving mechanical completion and placing the natural gas laterals into service in October.

• The project aligns with the company's strategy to grow its business and enhance competitiveness by leveraging pre-invested corridors and investing in growth projects.

• Safe Operations and Asset Integrity:

• South Bow made progress in its remedial actions following the Milepost 171 incident, completing six inline inspection runs and 37 integrity digs with no notable concerns.

• The company aims to safely return Keystone to baseline operations by 2026, which will enhance system integrity and reliability.

• Dividend and Shareholder Returns:

• South Bow declared a quarterly dividend of $0.50 per share, payable on January 15th, reflecting the importance of dividends in their total return strategy.
• The company has demonstrated financial strength and capital discipline by paying a sustainable dividend and funding growth projects.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management repeatedly described results as demonstrating the “resilience of our business,” highlighted a “strong third-quarter performance” with normalized EBITDA of $250M, reaffirmed 2025 EBITDA guidance, and noted progress on transition services and delivery of BlackRod on schedule and budget — signaling constructive operational and financial momentum.

Q&A:

• Question from Sam Burwell (Jefferies): Update on the Alberta/West Coast proposed crude pipeline and South Bow’s role; can existing infrastructure (e.g., pre-invested corridors/Keystone XL) be leveraged to expand crude egress over medium/long term? Also, when might spreads widen and inventories normalize to restore bond volumes?
  Response: South Bow is providing limited advisory/engineering support on the West Coast initiative only; the company will evaluate leveraging pre‑invested corridors opportunistically but has no further commitments. It expects market conditions (wider spreads and more walk‑up/spot demand) to be more favorable in late‑2026 to early‑2027.

• Question from Maurice Choi (RBC Capital Markets): Can you detail the U.S. tax legislation changes and tax optimization that generated current tax recovery and whether benefits persist beyond 2026? Also, can you quantify the cost savings from exiting transition agreements and whether they feed into the 2–3% EBITDA CAGR objective?
  Response: Tax: an extension allowing additional interest deductions is beneficial as long as the law remains; accelerated tax pools provide benefits in 2025–2026 with a return to prior run‑rate in 2027. TSA/transition efficiencies exist but are not quantified and were not included in the 2–3% EBITDA CAGR guidance.

• Question from Jeremy Tonet (JP Morgan Securities): What types and geographies of organic growth projects are you pursuing and is BlackRod the template? Also, how does the Milepost 171 remediation plan affect pressure restrictions, potential DRA reduction and upside to next year’s guide?
  Response: Growth: pursuing both Canadian and U.S. organic/inorganic opportunities with BlackRod as an example; investor day will provide more detail and 2026 priority is to mature/execute projects. Remediation: system‑wide inspections and digs continue, a remedial plan will be filed with FIMSA, and pressure restrictions are expected to be lifted in phases in 2026—enabling more uncommitted volumes—but management cautions spot volumes would add limited EBITDA upside.

• Question from Praneesa Deesh (Wells Fargo): For modeling, should 2026 CapEx be assumed near 2025’s ~$165M, or likely lower? And confirm classification of remaining variable toll payments and receipts relative to EBITDA.
  Response: CapEx: only sanctioned projects are in the capex table; no projects currently sanctioned—management targets roughly $100M+/yr on average to support the 2–3% EBITDA CAGR and recommends using that as a proxy. Variable toll payments/receipts are normalized out of EBITDA (excluded from EBITDA), though they impact GAAP and cash.

Contradiction Point 1

Crude Pipeline Project and Supply Growth

It involves differing statements about the expected timeline and involvement in crude pipeline projects, which affect the company's strategic positioning and growth potential.

What is the update on the crude pipeline project in Alberta and any plans to leverage existing infrastructure to expand crude egress capacity over the medium to long term? When do you expect crude spreads to widen and Alberta inventories to normalize? - Sam Burwell(Jefferies)

2025Q3: South Bow is evaluating ways to leverage pre-invested corridors along its system. We're supporting Alberta's West Coast project but not actively involved in its development. We are encouraged by the ongoing dialogue between Canada and the U.S. regarding energy solutions. We anticipate favorable conditions for our systems by late 2026 or early 2027, with supply growth exceeding egress capacity. - Bevin Wirzba(CEO)

Can you clarify South Bow's current projects and how their timing aligns with contracts expiring in the next decade, and what this means for South Bow? - Maurice Choy(RBC Capital Markets)

2025Q2: South Bow's strategic corridor serves the strongest supply basin to the strongest demand markets for heavy oil. Supply is expected to grow over the coming years. South Bow aims to leverage its pre-invested capital in Alberta and the Gulf Coast to provide incremental capacity solutions for customers. Initiatives include leveraging the Grand Rapids corridor for IPC's production in the near term. - Bevin Wirzba(CEO)

Contradiction Point 2

System Capacity and Remediation Plan

It involves differing statements about the expected timeline and progress of system capacity recovery and remediation plans, which impact operational efficiency and financial performance.

How will the Milepost 171 remediation plan contribute to reducing the DRA and driving growth next year? - Jeremy Tonet(JP Morgan Securities)

2025Q3: South Bow's system capacity is recovering as contracted volumes are being honored. The comprehensive remediation program includes inline inspection runs and integrity digs. The goal is to progressively lift pressure restrictions in 2026, allowing access to uncommitted volumes. However, additional EBITDA from spot volumes is not expected at current differential levels. - Bevin Wirzba(CEO)

Can you highlight any specific issues with the timing lag in the third-party root cause analysis and share early takeaways and process details for the next steps? - Burke Charles Sansiviero(Wolfe Research, LLC)

2025Q2: The root cause failure analysis is on track for September delivery. Initial delays were due to selecting and PHMSA approving the third-party. In parallel, South Bow has completed 4 in-line inspection runs and 8 integrity digs. Once the RCFA is complete, a detailed remedial work plan will be developed with PHMSA approval before implementation. - Richard Prior(COO)

Contradiction Point 3

Opportunities for Growth and Strategic Focus

It involves differing statements about the focus on growth opportunities and strategic priorities, which impact the company's future direction and resource allocation.

Can you detail the upcoming development project and whether BlackRod serves as a model for growth projects? - Jeremy Tonet(JP Morgan Securities)

2025Q3: South Bow is maturing growth opportunities based on customer needs. More details will be provided at our investor day next week. The environment in Canada and the U.S. has become more constructive, leading to increased focus on growth initiatives. - Bevin Wirzba(CEO)

What opportunities may arise as you exit your final TSAs, and are these factored into your 2% to 3% EBITDA CAGR guidance? - Maurice Choy(RBC Capital Markets)

2025Q2: Exiting TSAs allows South Bow to focus solely on its business. Accelerated transition to the new ERP system. By Q3, all major TSAs will be exited, enabling South Bow to optimize workflows for long-term growth. Exiting TSAs doesn't change the 2% to 3% CAGR growth outlook, but it allows teams to focus on base business, potentially uncovering growth opportunities. - Bevin Wirzba(CEO)

Contradiction Point 4

Crude Spreads and Egress Capacity

It directly impacts expectations regarding the timeline and conditions for crude spreads to widen and inventories in Alberta to normalize, which are critical for South Bow's crude egress strategy and investor expectations.

Can you update on the Alberta crude pipeline project and plans to expand crude egress capacity using existing infrastructure? Additionally, when do you expect crude spreads to widen and Alberta inventories to normalize? - Sam Burwell (Jefferies)

2025Q3: We anticipate favorable conditions for our systems by late 2026 or early 2027, with supply growth exceeding egress capacity. - Bevin Wirzba(CEO)

What have you observed regarding interest and timing in the current open season, specifically about WCSB Egress? - Maurice Choy (RBC Capital Markets)

2024Q4: We do expect that supply growth will more than exceed capacity growth in the near term. And although there may be some volatility in the near term, over a two to three-year period, we expect that this will correct. - Bevin Wirzba(CEO)

Contradiction Point 5

Pressure Restrictions and Remediation Timeline

It involves differing expectations on when pipeline pressure restrictions may be lifted and the impact on the company's operational capacity.

How will the Milepost 171 remediation plan contribute to reducing the DRA and creating upside next year? - Jeremy Tonet (JP Morgan Securities)

2025Q3: South Bow's system capacity is recovering as contracted volumes are being honored. The comprehensive remediation program includes inline inspection runs and integrity digs. The goal is to progressively lift pressure restrictions in 2026, allowing access to uncommitted volumes. - Bevin Wirzba(CEO), Richard Prior(COO)

How long will pressure restrictions last, and will spot volumes be possible in 2026? - Robert Hope (Scotiabank)

2025Q1: It's too early to speculate on the investigation's timeline. Past incidents provide a reference, but this case might be different. We expect to share more information as the investigation unfolds and we address the issues. - Richard Prior(COO)