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DATE
Thursday, August 7, 2025 at 2 p.m. ET
CALL PARTICIPANTS
President and Chief Executive Officer — Bevin Wirzba
Executive Vice President and Chief Financial Officer — Van Dafoe
Vice President, Pipelines — Richard Prior
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RISKS
Milepost 171 incident— The estimated total cost of the incident, including response, repair, and cleanup, is approximately $60 million, with insurance policies expected to cover most of these expenses.
Spot capacity— The company will have limited ability to transport uncommitted or spot volumes on the Keystone system for the remainder of 2025.
Corrective action order— South Bow Corporation is required to comply with PHMSA's corrective action order, with remedial steps dependent on final results of the root cause failure analysis.
TAKEAWAYS
Normalized EBITDA-- $250 million in normalized EBITDA was generated in Q2 2025, with 90% of normalized EBITDA is contracted and The 2025 outlook for normalized EBITDA is reaffirmed at $1.01 billion.
Distributable Cash Flow Outlook-- 2025 distributable cash flow (non-GAAP) has been revised upward to $590 million from $535 million, driven by approximately $15 million in annual U.S. tax savings and a change in the distributable cash flow definition.
Maintenance Capital Expenditures-- Reduced by $10 million to a new maintenance capital expenditures target of $55 million for 2025 due to prioritization of remedial actions at Milepost 171.
Net Debt to Normalized EBITDA Ratio-- The projected net debt to normalized EBITDA ratio is approximately 4.8x at year-end 2025; deleveraging initiatives will accelerate as cash flows from BlackRock begin in 2026.
Milepost 171 Update-- Site cleanup and reclamation completed in June; root cause failure analysis expected in September; four in-line inspection runs and eight integrity digs yielded no notable issues so far.
Keystone System Utilization-- Committed throughput contracts of 585,000 barrels per day will be fulfilled through the remainder of 2025, but “limited capacity to transport uncommitted or spot volumes”
Dividend-- payable October 15 to shareholders of record on September 29.
Transition Services Agreements (TSAs)-- Expected full exit by end of the quarter, with SCADA systems as the last major component.
Growth Spending Capacity-- After covering obligations, annual U.S. dollar growth capital available to spend is estimated at $100 million to $130 million per year, with excess cash flows allocated to reducing leverage.
MarketLink Segment-- Second quarter volumes increased over the first, with management stating that the MarketLink segment "moved more barrels in the second quarter than it did in the first.", with open season outcomes described by management as “entirely within our expectations and our plans.”
SUMMARY
South Bow Corporation (NYSE:SOBO) emphasized the operational stability of its pipeline network, noting that “the pipeline is safe to operate” despite ongoing compliance with corrective actions related to Milepost 171. Management confirmed that the transition off TSAs is nearly complete, allowing workflows to be optimized and sole focus placed on core business processes. Company executives stated that contract structure is market-driven and provides confidence in future renegotiation, backed by renewal provisions with CER and FERC approval. BlackRock project cash flows are projected to support deleveraging as South Bow targets a net debt to normalized EBITDA ratio of 4 times within four years, with deleveraging beginning as BlackRock cash flows commence in 2026 and increase through 2027. Management reiterated that the company’s 2%-3% EBITDA compound annual growth rate (CAGR) forecast remains unchanged despite the operational and strategic transition activities described.
“testing determined the source of the failure was an axial crack initiated on the long seam weld, which propagated during operation until the failure occurred,” according to Prior, with ongoing third-party analysis expected to further define remedial actions.
The open season process for the MarketLink portion of the system produced 'successful' results consistent with management expectations, with Segment throughput grew sequentially from Q1 to Q2 2025.
Company leaders outlined a balanced pipeline of organic and inorganic opportunities across both Canadian and U.S. markets, with further detail to be released during Investor Day in November.
INDUSTRY GLOSSARY
PHMSA: Pipeline and Hazardous Materials Safety Administration, the U.S. regulatory body overseeing pipeline safety and corrective actions.
Corrective Action Order: A formal directive issued by a regulator, such as PHMSA, mandating specific actions to address and remedy a safety concern or loss event on critical infrastructure.
TSAs (Transition Service Agreements): Temporary arrangements where a spun-off entity continues to receive operational or IT support from its previous parent.
SCADA: Supervisory Control and Data Acquisition system, used for real-time monitoring and control of pipeline operations.
MarketLink: The southernmost segment of South Bow’s Keystone system, transporting crude oil from Cushing, Oklahoma, to the Gulf Coast.
Open Season: A defined period in which pipeline companies solicit shipping commitments from customers to secure contracted volumes.
In-Line Inspection: The use of specialized tools to detect pipeline integrity issues internally through the pipeline bore.
Integrity Digs: Excavation and direct examination of pipeline sections to inspect or repair potential integrity threats identified during inspection runs.
RCFA: Root Cause Failure Analysis, a technical investigation to identify the origin of a failure event and inform remedial action requirements.
Full Conference Call Transcript
Bevin Wirzba: Thanks, Martha. And good morning, everyone. We appreciate you joining us today. South Bow Corporation's second quarter financial results once again exemplified the resilience of our business with our strong commercial underpinnings protecting our cash flows from the market volatility and operational downtime. We generated $250 million of normalized EBITDA in the period, and for the second consecutive quarter successfully maintained our debt metrics as we prioritized strengthening our financial position. We also demonstrated our execution abilities by advancing our BlackRock Connection project and continuing to establish South Bow Corporation's capabilities as we transition from a large rate-regulated entity to a more commercially focused and entrepreneurial organization.
Now that we are using our own ERP system, and are close to substantially exiting our transition service agreements, within a year of spinning, we are optimizing our workflows to ensure South Bow Corporation's long-term competitiveness and success. Now regarding Milepost 171, we expect to have the root cause failure analysis findings by the end of the third quarter. Richard will share more on that later. While we don't have all the answers yet, what I can share is that South Bow Corporation's agility as a stand-alone company has allowed us to respond, repair, recover, and remediate quicker than before.
This gives me the confidence that we are developing and executing a remedial action plan that will address the findings of the independent investigations and ensure the continued safe and reliable operations of our pipeline all while maintaining our solid financial outlook for 2025. While this year has had its fair share of challenges, I'm incredibly proud of the way our team continues prioritizing the safety of our operations and surrounding communities while remaining focused on the future as we work to enhance our value proposition of providing customers with the optimal path to the strongest demand markets. I will now ask Richard and Van to provide some additional details on our operational and financial outlooks.
Richard Prior: Thank you, Bevin. And good morning. Today, I'll provide updates on the progress we've made responding to Milepost 171 and next steps as we address PHMSA's corrective action order. An independent third party continues the root cause failure assessment. The most important points to be made today are that one, the pipeline is safe to operate; two, we are confident the independent third party investigation will identify causal and contributing factors to the incident, and remedial steps will be taken that address these findings; and three, while we comply with the corrective action order, we are able to continue delivering on our contractual commitments of 585,000 barrels per day.
Our operations and remediation crews completed the cleanup and reclamation of the site in early June. We estimate the total cost for the incident inclusive of the response, repair, and cleanup will be approximately $60 million owing to the rapid and well-orchestrated initial response which mitigated the environmental impacts of the incident. Our insurance policies are expected to cover most of these costs. As Bevin mentioned, the third party root cause failure analysis is ongoing, we anticipate the results will be completed in the September time frame. We can confirm that the mechanical and testing completed to date concluded that the pipe and welds met industry standards for design, materials, and mechanical properties.
The testing determined the source of the failure was an axial crack initiated on the long seam weld, which propagated during operation until the failure occurred. The root cause investigation is a dynamic process. And we will continue to learn more as it unfolds. In parallel, our engineering and pipeline integrity teams have worked closely with our integrity providers and we've begun implementing remedial actions. We've already completed four in-line inspection runs since April, with a preliminary finding of these tool runs indicating no injurious issues. We've also completed eight integrity digs in the vicinity of the failure location again, with no notable issues to report.
Additional in-line inspection tool runs and further integrity digs will be completed through the balance of 2025 and into 2026. As we conduct these activities, all findings will be reported to PHMSA as well as incorporated into our programs to strengthen our confidence in the integrity and reliability of the system keeping our assets safely operating. Through this process, we will maintain transparency with the regulators, customers, and industry peers. So with that brief operational update, I'll pass it over to Van to discuss South Bow Corporation's financial outlook for the remainder of the year.
Van Dafoe: Thanks, Richard. South Bow Corporation's base business remains largely unaffected by tariffs and market volatility, with 90% of our normalized EBITDA contracted. We are reaffirming our 2025 outlook for normalized EBITDA of $1.01 billion. South Bow Corporation expects to fulfill our committed throughput contracts for the remainder of the year, but we will have limited capacity to transport uncommitted or spot volumes on our Keystone system. We are revising our outlook for distributable cash flow to $590 million up from $535 million to reflect a few items. First are the positive impacts from changes in US tax legislation which will contribute approximately $15 million of our run rate current tax savings.
Second is our modified definition of the measure, which now includes interest income of about $3.03 billion for 2025. The remainder is made up of small wins that came through the first half of the year. We are reducing our maintenance capital expenditures outlook by $10 million bringing it down slightly to $55 million in 2025 as we focus on prioritizing the remedial actions related to Milepost 171 that Richard just spoke to. With our outlook for normalized EBITDA remaining unchanged, we expect to exit 2025 with a net debt to normalized EBITDA ratio of approximately 4.8 times. Our deleveraging will begin as the cash flows associated with BlackRock start in 2026 and increase through 2027.
Finally, our board of directors has approved a quarterly dividend of 50¢ per share payable on October 15 to shareholders of record on September 29. I will now hand it back to Bevin for his closing remarks.
Bevin Wirzba: Thanks, Van. As we approach our one-year anniversary as a stand-alone company and look back at the priorities we initially set for our organization, I'm proud to say that the team is successfully delivering on our business objectives. First, financially, we are on track to meet our near-term deleveraging targets. And our dividend, underpinned by our highly contracted cash flows, remains an important component of our total return proposition. Second, operationally, we are safely advancing our integrity and reliability work to achieve a timely resolution to the corrective actions from Milepost 171. While also making significant progress on the Black Rod connection project.
And finally, strategically, we are optimizing our business to enable future growth to support our customers by providing them solutions that leverage our existing infrastructure in North America's most strategic energy corridor. With that, I'll now ask the operator to open the line for questions.
Operator: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press 11 on your telephone, and wait for your name to be announced. To withdraw a question, please press 11 again. Our first question is from Maurice Choy of RBC Capital Markets. Your line is now open.
Maurice Choy: Thank you, and good morning, everyone. Just wanted to have two questions. The first one is a big picture question about the headlines that we still see about building more energy infrastructure in Canada. Including crude oil pipeline, with the assumption that we will indeed see higher crude oil production in the coming years through the end of the decade. Specific to South Bow Corporation, can you speak to what you may be working on, how the timing of such projects could line up to some of the contracts that are expiring later at the start of the next decade? Just thoughts on what it means specifically to South Bow Corporation.
Bevin Wirzba: Thank you, Maurice. It's Bevin. So our strategic corridor serves the strongest supply basin to the strongest demand markets for heavy oil. And as you've noticed, we anticipate to see that supply grow over the coming years quite quietly over the last decade, we've seen heavy oil supply grow by a million barrels a day. And with the startup of the TMX pipeline, that's served that market. And so over the next couple of years, we anticipate that supply will continue to grow. And by the end of perhaps or by early 2027, we'll be in a position again where we may see, again, constraint in the egress out of the basin given the strong demand for that heavy product.
For South Bow Corporation, we remain committed to leveraging our pre-invested capital that we have, not only in our Alberta systems but also in our Gulf Coast section. And we're looking to work with customers to find solutions to provide incremental capacity solutions for them over the next number of years. Our initial focus as we've highlighted in the earlier remarks, was to leverage our Grand Rapids corridor to provide a solution for IPC to bring on that production in the near term. And we continue to see like, opportunities not only in Alberta but throughout our system down through the Gulf Coast.
Maurice Choy: So then if I could finish off with a question on the TSAs, actually. Can you speak to what opportunities that may open up for you as you exit your final TSAs? And what if anything, of that might be factored into the 2-3% EBITDA CAGR guidance that you have?
Bevin Wirzba: Yeah. Maurice, getting off the TSAs is really allowing us to focus solely on our business. You know, we accelerated moving on to our new ERP system that came with, you know, some extra manual processes but now we're able to start rebuilding some of the workflows in our business. And so what I mean by that is, you know, we were having to operate under the processes of the previous systems until we switched over. So accelerating that just allows us to advance our business plans a little bit quicker. By the end of this quarter, we hope to be off the last of those major TSAs, and that's our SCADA systems.
And that will likely get us then in a position that within one year since our spin date will be completely done with the TSAs, and we'll have repositioned our business for that longer-term growth. So that our teams can legitimately just focus on South Bow Corporation's business going forward as opposed to the spin activities. So it doesn't change our 2-3% CAGR growth outlook. But it allows our team to be much more focused just on our base business. Which will then, in turn, I'm sure, find opportunities for us to continue to grow and, you know, optimize our solutions for our customers.
Maurice Choy: That's great color. Thank you very much.
Van Dafoe: Thank you.
Operator: Our next question is from Burke Censiviro of Wolfe Research. Your line is now open.
Burke Censiviro: Hi. Good morning. Just one for me today. Seems like there was a little bit of a delay on the third party root cause analysis. Is there anything in particular to call out on the timing lag? And can you just walk through any early takeaways in more detail on how you think the process might go from here?
Richard Prior: Yeah. I don't think there's too much of a delay as I'd see it. It's a dynamic process. We were probably a it took us a little bit longer than anticipated at the very front end, getting our root cause failure analysis third party and having PHMSA approve that. So that was maybe a very few weeks at the very front. But you know, that process continues on. You know, the lab has completed the majority of their work. Although there's some follow-up things that they're working on with the RCFA provider. And I think that the way it's gonna play out is, you know, we expect the analysis to be delivered in the September time frame.
And then as I mentioned in parallel, we've got a lot of activities on the remedial side already ongoing. You know, we have completed four in-line inspection runs. We've got two more scheduled. We've completed eight integrity digs. We've got four more scheduled. And so that will take shape through September. And then once we have that RCFA, we'll work with PHMSA in developing a more detailed remedial work plan, and we'll have that approved, and then we'll continue that scope. But it's a little too early until we see the results of the RCFA to define exactly what that remedial work plan is gonna look like and then what the duration of it's gonna be.
Burke Censiviro: Thanks. That's all for me.
Van Dafoe: Thank you.
Operator: Our next question is from Robert Hope of Scotiabank. Your line is now open.
Jessica Hoyle: Good morning. This is Jessica Hoyle on for Robert Hope. Thanks so much for taking my questions. So just to start, regarding the comment in the MD and A that demand uncommitted capacity is expected to remain low in the near term. With Enbridge's mainline under apportionment, how do you envision uncommitted barrels returning to your system versus TMX?
Bevin Wirzba: Yeah. Thank you, Jessica. When we set guidance for 2025, that was ahead of a couple other headwinds that showed up. But for 2025 with the startup of TMX, we anticipated that we'd have lower demand for our walk-up spot capacity. And just to remind folks, we have 94% of our Keystone system is fully contracted and flowing. And we have to reserve 6% for spot capacity. So for that spot capacity, we remain extremely competitive as we serve the highest demand market in the Gulf Coast. And so as additional barrels as supply starts to grow and exceed available capacity, we believe that we provide the most competitive route to the strongest market.
And the most important thing, that we manage is to improve the netback for our customers. And wherever this strongest netback is for those barrels is where those barrels will likely land. And so not only do we believe we provide the highest netback we also are the only batch system, and we deliver the barrels faster than any other system to those strongest markets. So we haven't guided this year to anticipate much spot volumes coming onto our system. Obviously, we're under a derate. Moving all 585,000 barrels a day of our contracted volumes. Out of the basin.
And we anticipate that as we address the next steps of our integrity program that once we see supply later in '26 and '27, our goal is to have our system ready to accept those walk-up barrels.
Jessica Hoyle: Thanks for that. And then can you update us on your initiatives to add contracts to the southern end of Keystone?
Van Dafoe: Yeah. On the MarketLink Portion of the System, Sure. So that really is at this point just in an ongoing, you know, part of our business is we just recently ran another open season that closed successfully, like, with entirely within our expectations and our plans. I expect that we're gonna continue to run open seasons, you know, throughout the year. As we work with our customers on exactly what they're looking for terms that they'll move, you know, domestic barrels from Cushing down into the Gulf Coast. And as you'll notice, in our release that we've been keeping that segment of the system quite full.
It's actually moved more barrels in the second quarter than it did in the first.
Jessica Hoyle: Thank you.
Van Dafoe: Thank you.
Operator: Our next question is from Sam Burwell of Jefferies. Your line is now open.
Sam Burwell: Hey. Good morning, guys. Just curious how you'd characterize the organic and maybe inorganic growth opportunities for South Bow Corporation as things stand today? And any color on whether you see more attractive opportunities on the Canadian side versus the U.S. side?
Bevin Wirzba: Yes, Sam. Great question. You know, our focus as per our earlier remarks, was to, you know, get through our first year get off our TSAs, get in a position where we were lined out to be able to start pursuing that additional growth both organically and inorganically. And so very happy that we've achieved our objectives on that front. When we initiated, though, it wasn't as if we were waiting to start building that hopper of opportunities. And on Richard's team, they've been maturing quite a large list of opportunities both organically and inorganically.
But those take time to mature, and we intend to provide a bit more color at our Investor Day in November as to how those are progressing. What I would say is that we have noted a slight increase in the balance of opportunities on the Canadian side of the border. Kind of balancing out now between the US and Canada where earlier in our journey, we probably articulated that we anticipated the balance to be more US focused. And so that's great to see because we're here to serve our customers in both jurisdictions and find those solutions.
So, those happy to say that the are you know, it takes you gotta have a lot of irons in the fire to get ones to the finish line and fortunately, for us, we're seeing that progress quite well.
Sam Burwell: Looks like you're making great progress on the Blackrod project. But fair to say that the majority of that cash flow contribution in '26 and '27 goes toward deleveraging rather than growth CapEx?
Bevin Wirzba: So the way we think about growth CapEx, Sam, is after covering off our interest and dividend obligations and tax, that leaves us roughly between $100 and $130 million US dollars a year to allocate against growth. That kind of component stays consistent year over year. And the projects that we've identified like BlackRock you know, on average, to underwrite that 2-3% growth CAGR, we need to spend roughly that $100 million per year. Now how it gets spent it's not gonna be 100 exactly every year. It's a bit lumpy.
But we're just as those cash flows from BlackRock come on, the priority is to keep that consistent capitalization of the business and all the extra cash flow goes to our deleveraging targets to get to our within four years, get down to that four times level.
Sam Burwell: Alright. Got it. Thank you, guys.
Van Dafoe: Thank you.
Operator: Our next question is from Praneeth Satish of Wells Fargo.
Praneeth Satish: Thanks. Good morning. Just on cash taxes, so I think you mentioned cash taxes come down. $50 million in 2025. I guess that's from a 100 so roughly from a hundred to 50. Because of the, the one big beautiful bill. I guess, how should we think about the cash tax trajectory in 2026 and beyond? Because if you're is it gonna be at that $50 million run rate going into '26 if we assume the current pace of CapEx persists? And then, if so, that's quite a sizable reduction going from a 100 down to 50, basically gives you $50 million of extra free cash flow.
So does that all go towards debt pay down or that put you in a position to maybe, you know, increase your CapEx budget a bit and sanction more bolt-on projects?
Van Dafoe: Thanks, Praneeth. It's Van here. I said $15 million, not $50 million. So yeah. So it'll be $15 million for the foreseeable future will be the reductions in current tax. And that's just a flip between current tax and deferred tax. And we'll use that's just additional distributable cash flow that we'll use either for growth capital or ultimately deleveraging.
Praneeth Satish: Gotcha. Okay. Maybe I guess I misheard that. That makes sense.
Van Dafoe: Yeah. And then maybe just switching gears. So can you elaborate on you mentioned you ran a metallurgical analysis or with a third party. And what those findings revealed and whether just broadly do those findings kind of suggest that the rupture wasn't isolated manufacturing or installation issue rather than a systemic problem? And then just maybe broadly, like, how does this study how does that metallurgical study differ from the third party root cause analysis? And, does that does the study does the metallurgical study kinda help narrow this scope of potential remedial actions that could arise from the RCFA?
Richard Prior: Yeah. I think you know, simply the lab report and analysis, you know, which was all completed by a third party, you know, that was approved by PHMSA. That ended up becoming a component of the root cause failure analysis and investigation. You know, I just think, like, that's all the scientific lab work that they did to study the pipe and examine exactly what occurred and what it did determine is that it was an axial crack on the long seam, which propagated during operations and until the failure occurred. I think to provide much more detail than that, we're gonna have to wait for the RCFA to be completed, which should be in the September time frame.
But I would say that from everything that we've seen so far, we're not seeing evidence that this is a broad systemic issue that we're not gonna be able to get our arms around. Through remedial actions that we're either completing now or that we add once the RCFA is done or enhancements and that we make to our ongoing integrity program in the future.
Praneeth Satish: Gotcha. That's helpful. Thank you.
Operator: Thank you. Our next question is from Aaron MacNeil of TD Cowen. Your line is now open.
Ali: Good morning, all. This is Ali on for Aaron MacNeil. Thanks for taking my question. Bevin, the recent Alliance settlement is top of mind for investors and this got us thinking about if other Canadian pipeline assets may experience some sort of negative toll revisions in the future. I can appreciate you can't directly link Alliance with Keystone, but I'd like to get your perspective on the differences. With contracting beyond the end of the decade, do you think there could be a resetting of revenue and cost assumptions in the future?
Bevin Wirzba: Yeah. Thanks, Ali. You know, with Keystone, we've negotiated market-driven contracts with renewal provisions and terms already approved by the CER and the FERC. So our market-driven approach is really focused as per my earlier comments to provide the most competitive route, to preserve the highest netback for our customers. And so we continue to see that our approach is actually quite a different circumstance than what some of our competitors' tolling mechanisms are. We feel quite confident that because we serve the strongest supply base in most directly to the strongest demand market, that we'll be in a very good position to renegotiate our contracts with our customers.
Really focused again, though, on providing that strong netback for them and a great return for our shareholders.
Ali: Fair enough. Thanks, Bevin. I'll turn it over. Thank you.
Operator: This now concludes the question and answer session. I would now like to turn it back to Bevin for closing remarks.
Bevin Wirzba: Well, thank you all for joining us today. We look forward to connecting with you in November when we report our third quarter earnings and host our first Investor Day. Thank you all.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.