South Bow Corporation ($SOBO)

Ladies and gentlemen, thank you for standing by. Welcome to the First Quarter 2026 Results Conference Call and Webcast. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Martha Wilmot, Director of Investor Relations. Please go ahead.

Thank you, Michelle, and welcome, everyone, to South Bow's First Quarter 2026 Earnings Call. With me today are Bevin Wirzba, President and Chief Executive Officer; Van Dafoe, Senior Vice President and Chief Financial Officer; and Richard Prior, Senior Vice President and Chief Operating Officer. Before I turn it over to Bevin, I'd like to remind listeners that today's remarks will include forward-looking information and statements, which are subject to the risks and uncertainties addressed in our public disclosure documents available under South Bow's SEDAR+ profile and in South Bow's filings with the SEC. Today's discussion will also include non-GAAP financial measures and ratios that may not be comparable to those presented by other entities. With that, I'll turn it over to Bevin.

Yes. Thank you, Martha, and good morning, everyone. We appreciate you joining us. South Bow delivered solid first quarter results underpinned by strong operational performance and stable cash flows despite heightened geopolitical and market uncertainty. During the quarter, we advanced the strategic priorities we laid out for the year. These included placing the Blackrod Connection Project into commercial service, continuing remedial pipeline integrity work on our Keystone Pipeline and conducting the open season for Prairie Connector, which I'll address in a moment. Throughout this work, we remain focused on safe and reliable operations and disciplined capital allocation. Before I turn it over to Richard and Van, I want to address Prairie Connector directly and set expectations for today's call. We closed bids for the open season at the end of March as planned, and we are currently in a 60-day evaluation period. As you can appreciate, these are significant decisions for South Bow and our customers being made against a complex macro regulatory and policy backdrop. We intend to use the full 60-day evaluation period to reach a commercial determination. So while I expect our analysts will have many ways to ask about it on today's call, we do not have anything further to add beyond what we have already disclosed. At the conclusion of the 60 days, we will communicate the outcome of the open season and outline potential next steps if the project continues to be advanced. As a reminder, the concept behind Prairie Connector is to move Canadian crude oil from Hardisty, Alberta to the Canadian U.S. border where it could connect with downstream pipeline systems, serving multiple U.S. markets, including Cushing, Oklahoma and destinations on the U.S. Gulf Coast. Last week, a presidential permit was issued to Bridger Pipeline for cross-border facilities that would transport the Canadian crude oil we are proposing to move into the United States. This represents a meaningful development in the permitting process for cross-border energy infrastructure and one that has understandably attracted its fair share of attention. That said, we are continuing to work diligently to ensure any project we advance is within our risk preferences and that risks are allocated appropriately among the parties best positioned to manage and mitigate them. Our team brings deep pipeline development experience across multiple jurisdictions and projects, some more famous than others. And we are applying all those learnings to find an allocation of risk that makes sense for all stakeholders. Recent global events have reinforced that secure, reliable energy and the infrastructure that delivers it truly matter. At South Bow, we are encouraged to be part of the conversation and to support our customers in increasing competitive, responsible Canadian energy in a world that continues to need more of it. With that, I'll turn it over to Richard.

Thanks, Bevin, and good morning. I'll start with safety and pipeline integrity, which remain top priorities. During the quarter, we continued to progress our remedial work related to the Milepost 171 incident, including a combination of in-line inspections and integrity digs across the Keystone system. In parallel, we're working closely with our in-line inspection technology providers to enhance tool performance and detection capabilities, including advancing the development of a new phased array ultrasonic tool, which we have now completed three successful runs with. We are encouraged that this tool enhances our overall detection capabilities and will be an important component of our ongoing integrity program. Overall, we are pleased with the progress we've made under the remedial work plan. Based on the work completed to date, we expect pressure restrictions to be lifted in a phased manner with the process beginning later this year. Turning to operations. Our first quarter throughput was driven by strong operational performance and ongoing optimization of our systems. The Keystone Pipeline operated with a 95% system operating factor, enabling us to transport more than 600,000 barrels per day during the quarter, providing customers with an opportunity to move makeup barrels as well as limited spot movements. As the quarter progressed, we started to see strong demand for capacity on our assets, most notably on the U.S. Gulf Coast segment with recent geopolitical events driving an increase in demand for export barrels. With the modest widening of Cushing to U.S. Gulf Coast differentials, we have been seeing higher throughput on our Marketlink asset in the second quarter. I'll finish with a brief comment on growth with broad macro changes supporting an increasing production outlook in the Western Canadian Sedimentary Basin. In that context, we continue to evaluate smaller scale customer-led opportunities within our existing footprint. These include either expanding interconnectivity that would direct more barrels onto our systems or deliver barrels off our systems into new destinations. As Bevin noted, we will advance these opportunities with the same level of discipline that we are applying to Prairie Connector and to our inorganic growth strategy. With that, I'll turn it over to Van to walk through our financial performance and outlook.

Thanks, Richard, and good morning. South Bow delivered normalized EBITDA of $257 million in the first quarter of 2026, which was in line with market expectations and modestly higher than the fourth quarter of 2025. While normalized EBITDA in our Keystone segment declined due to lower maintenance activity in the period, this was more than offset by higher contributions from our Marketing segment. Our expectations for 2026 remain unchanged, and we are reaffirming our normalized EBITDA outlook of $1.03 billion within a range of 2%. Based on our current outlook, any potential upside from the Marketing segment, reflecting current market dynamics is expected to fall within our guidance range. Distributable cash flow of $168 million increased quarter-over-quarter, driven primarily by lower current taxes in the period. We continue to maintain our full year distributable cash flow outlook of $655 million that we will use to fund our dividend, strengthen our balance sheet and where appropriate, allocate capital towards growth. Turning to leverage. We exited the quarter with a net debt to normalized EBITDA ratio of 4.7x. That is unchanged from December 31 and in line with our expectations. As Blackrod cash flows begin to ramp in the second half of the year, our leverage profile will improve modestly through the balance of 2026. Lastly, the Board of Directors approved our quarterly dividend of $0.50 per share yesterday. As we've said consistently, the dividend remains a foundational component of South Bow's total return proposition. Switching briefly to growth and building on Bevin and Richard's comments, we've received a number of questions on how we think about funding growth at South Bow. At a high level, our approach is straightforward. Any growth we pursue will be evaluated through a disciplined capital allocation lens. At our Investor Day in November, I outlined a range of potential financing alternatives for large-scale growth opportunities, including cash on hand, issuance capital and new equity, depending on the opportunity and the associated risk profile. Importantly, I also walked through the financing criteria that guides our decision-making. These include adhering to our capital allocation priorities, protecting our dividend sustainability, preserving our investment-grade credit profile, maintaining leverage neutrality and delivering per share accretion. With that brief financial overview and outlook, I'll turn it back to Bevin for closing remarks.

Thanks, Van, and thanks, Richard. To close, I want to come back to something I've said before because it really does define South Bow. We operate critical and enduring energy infrastructure in a corridor that connects one of the strongest and most secure supply basins in the world to some of the most attractive refining and demand markets. That positioning matters, and it matters to our customers. Canadian producers have clear ambitions to materially grow their asset bases. With our customer-led strategy, our focus is on putting forward the most competitive solutions to support that growth while staying firmly aligned with our capital allocation principles and risk preferences. As we've said consistently, growth at South Bow will be balanced with financial discipline. We are committed to maintaining a strong balance sheet and delivering a meaningful and sustainable dividend while investing in growth. That balance is central to how we run this company, and it's fundamental to our strategy. With that, I'll now ask the operator to open the line for questions.

[Operator Instructions] And our first question is going to come from Sam Burwell with Jefferies.

I appreciate the disclaimer around Prairie questions, but I'll give it a shot. I want to better understand like what the key hurdles are remaining prior to making a call and whether to advance Prairie. Just want to get a sense of like what's nonnegotiable prior to making a call before the end of the evaluation period relative to what could get sorted out prior to an [ FID ] down the line.

Yes. Thank you, Sam. There's lots to consider, obviously, in evaluating the proposals received. Certainly, when we review what our customers have submitted, we have to confirm a number of things amongst our partners to ensure that we're all aligned in whether or not we take -- execute on those agreements that come in and move forward to the next step. And the next step is really to prepare for a potential investment decision on the project. And certainly, the typical elements that you would evaluate before FID are ensuring that your contracting strategy, your supply chain, procurement, your cost estimates, the execution plan, all of those things are in line. But also we're kicking off significant permitting efforts across the system in the United States as well as doing the preliminary work in Canada. One thing, though, I want to remind everyone as to my remarks is that there are other elements that remain in the project outside of just commercial risk. We need to ensure that we manage and mitigate any last mile risk that could occur on the project in the future. Now we're seeing great alignment amongst the regulatory environment in both Canada and the United States, but we cannot expose our shareholders to risks that they cannot bear nor can we. So those would be the key gating items, Sam.

Okay. Perfect. And then a follow-up would be curious, what's the current max capacity on the Gulf Coast portion of Keystone? And how easily and cost effectively could that potentially be expanded?

Sure. Sam, it's Richard Prior here. So we're able to move in excess of 800,000 barrels a day on the Gulf Coast leg. Like remember, it was originally designed as part of the -- as part of what was going to be the Keystone XL system. And so it could move 830,000 barrels plus. I'd say at this point, it's pretty much max designed. There may be some modest amounts of optimization or using things like drag-reducing agent that we could kind of top that up a little bit, but it's at the upper end of what it can move. And we're seeing very strong throughput on it here in the second quarter. And so I think we'll see when we release our second quarter results, what kind of top end capacity we're able to move on the Gulf Coast section.

The next question will come from Maurice Choy with RBC Capital Markets.

Just sticking with the theme about the U.S. Gulf Coast segment of Keystone. I know you mentioned the Q2 being a little bit higher than Q1 because of the higher demand. Just curious to see how you think this durability of higher demand will be for the remainder of the year. But also more importantly, are you seeing any different submarkets within this region that's asking South Bow to consider expanding into?

Well, Maurice, I'll start, and maybe I'll ask if you could repeat the last part of your question. I think neither Richard and I really caught that. But before you do so, we're seeing volumes, as Richard has pointed out, flowing very high on our Gulf Coast segment right now. Just to remind everyone, Cushing volumes, though is what drives that and those flows and the Cushing volumes are reducing, and we're getting -- so our outlook is that much of the volume growth that we've seen has been macro driven here of late. And so we don't anticipate to see that level of strength through the back half of the year. But maybe if you could repeat the last part of your question, please?

Just thinking about as the -- as this part of the pipeline extends south, are there any customers or submarkets within this U.S. Gulf Coast that is asking South Bow to expand more like fingers and toes.

Yes. Great question. And we're in constant dialogue with our customers about increasing the amount of connectivity, both on the receipt end of our pipeline, but certainly on the delivery end, as you point out, in the Gulf Coast. And we're trying to make sure that as our customers that move barrels on the pipeline can efficiently as possible, reach end market destinations, whether that be refineries or whether that be additional marine terminals. And so I'd say we're in a number of discussions about adding additional connectivity at the southern end of our pipeline, so we can continue to serve as many markets and as many end users as possible.

And just to finish off, Van, you mentioned that any potential upside from marketing is expected to fall within your guidance range. Can I just ask how you would characterize the market conditions and the landscape that underpins this view differently? Is that a ceasefire type of environment? Or is that more of an extend to a year-end type of environment?

Thanks, Maurice. Yes. So for marketing, if you remember, what we did when we spun out is we reduced kind of the sandbox that marketing plays in. This quarter, the $9 million in EBITDA took advantage of some market volatility and the team was able to capture some value there. I wouldn't expect that to progress throughout the rest of the year. What you'll probably see, we'd rather have our customers take those volumes. And so our marketing group is kind of the shipper of last resort when no one else will take it.

And our next question will come from John Mackay with Goldman Sachs.

I will try one on Prairie Connector and feel free to punt if needed, given the disclaimer. But I guess I'd just be curious to hear some of your thoughts on kind of what the overall structure of this could look like? Are you guys planning or is this part of the process to think through forming a kind of total JV where you guys will own not just the kind of portion of the line down to the border, but kind of interest south of the border? I understand there's moving pieces, but maybe just walk us through kind of what the structure of this could look like over time.

Yes, John, we're still baking the cake on a few elements of that. And so as I mentioned in my remarks, we're not going to really add. Obviously, we have our system that is -- that we were just talking about at length in terms of the Gulf Coast segment that we operate and own. We obviously have the permitted right-of-way and existing pipe that's been constructed in Alberta and working with partners to determine the balance of the scope in the right way. Obviously, we're looking to execute this with as little risk as possible, and that's key to structuring our arrangements with our partners.

Right. That's absolutely fair. Just second one for me. You guys got Blackrod online with a good kind of, I want to say, proof of concept, but a good example of what you can do on that portion of the system. I understand it's still early days after the oil price spike. But just curious what conversations have been around about next potential projects up there, whether or not the pace of conversations has picked up with where oil has gone.

Yes, John, that's a great question. While there's been a lot of focus on Prairie Connector, we've actually been focused on just the balance of the increased egress potential out of the basin, which is great for our customers. So peers are moving west and east to satisfy or fill those expansions, including our own, there'll be a need to expand intra-Alberta systems. And so our team has been looking at our pre-invested corridor in the Grand Rapids, as you pointed out, where Blackrod is, that corridor is permitted. And so we would look to see if there is opportunity to attract barrels into that system. I recently visited the site last week at the Heartland facility where it was prebuilt for receiving those barrels and then delivering them. We have a connection directly to TMX off of that Grand Rapids route. So we're looking at multiple solutions. Intra-Alberta, it was great to see our customer, IPC be so successful with their first phase and encouraged by their comments on their quarter that they're evaluating Phase 2 as well. So these are all constructive elements to leveraging our invested corridors in intra-Alberta.

And our next question will come from Jeremy Tonet with JPMorgan.

This is Eli on for Jeremy. Just wanted to touch on the pressure restricting lifting process on Keystone. Can you just remind us the key milestones there? And then where you guys are at and how we should expect that to progress through the rest of the year?

Yes. Thanks. It's Richard Prior. I'll field this one. So first of all, I'd just say we're making very good progress. We're very pleased with the work that's been done to date on our remedial action program. And our view at this time is that it's going to put us in a position where later this year, we're going to be able to start removing pressure restrictions in a phased basis. So it will probably be -- look like a segment-by-segment basis. I think the process to remove all of the pressure restrictions on the pipeline is probably going to go into 2027 until we can lift it in its entirety or lift them in its entirety. But it's really just the process segment by segment of running inline inspection tools, analyzing the data, completing associated digs, verifying the integrity in each segment and completing the engineering analysis and then in certain cases, working with our regulator to lift those pressure restrictions.

Got it. That's helpful. And then maybe just thinking about the outlook for interruptible volumes back on Keystone, whether that's later this year or next year. Can you remind us the key differentials that make that economic for shippers and kind of how you see volumes above contracted resuming throughout this decade?

Yes. So we've been able to move in excess of our contracted volumes in the last quarter, actually, like we've had very high operational performance. We had a more measured amount of maintenance work in the first quarter. And so we were up at about 615,000 barrels. So that is beyond contracted capacity. A lot of that in the first quarter was makeup rights. So we did move a few spot batches. I'd say as this year continues and then you get into next year, we see differentials continuing to widen out as more crude production comes on in Alberta, and we'd see demand increasing for uncommitted space on the pipeline. I would say once we get all of the pressure restrictions removed, I think we're going to be back up in that, call it, 625,000 barrel type throughput volume that we'd be able to move.

And the next question will come from Benjamin Pham with BMO.

I know you touched base on some of the regional pipe outlook, which seems quite positive still. Can you comment with all the export projects [indiscernible] being announced, including yourself, do you get a sense that there could be a meaningful pent-up demand of a regional pipeline build-out, assuming one or more of these projects are sanctioned?

I think, Ben, this is Bevin. As I mentioned, we do see what's been encouraging, if you look at the growth CAGR of the basin over the last 10 years, it's been around 3%, approximately 1 million barrels of growth. That was able -- and then last year and this year, another growth of kind of 100,000 and 150,000 barrels a year -- per annum. So by what Richard was mentioning, by the end of this year, we see that egress will then be kind of tapped and then these expansions are being contemplated to address the outlook, which is, again, if you add up what we're hearing from customers, it may not be a 3% growth CAGR, but even a 2% growth CAGR is kind of what we've been hearing. And that looks to add over the course of the next 5, 6, 7 years, probably another 1 million barrels a day. And that's what's underpinning, I guess, the expansion potential that we're seeing. And so those barrels have to move, and they're all originating in the oil sands. And so there's a number of operators that have systems that can collect those barrels. We'll try to put forward the most competitive solutions. We have maybe a little bit more of an advantaged position on the west side as opposed to some of our peers who have great positions on the East. But we'll still look to see how we can participate broadly in that growth.

Got it. And just maybe just tied to your balance sheet and even thinking about any project you sanctioned today, the timing of CapEx and how it trends the next from years now, you probably don't have a pretty big need for CapEx if you do announce an organic growth project. But my question more specifically, like as you think about the balance sheet in a couple of years, how much CapEx do you think you can take on before considering asset sales or equity or partnerships?

Yes, Ben, I'll start and then I'll pass it to Van. When we spun, we reserved. Obviously, our #1 capital allocation priority is to reduce leverage. We had a target of getting down to 4x within 5 years. We're a little bit ahead on that schedule based on the current base plan, and Van can give those details. But we did reserve as you -- as we were planning around $150 million per year of free cash flow to invest in the business. That will now grow to closer to $180 million with Blackrod coming on. And right now, we're not deploying capital, so we're building up cash on the balance sheet. So that's the high level, and maybe I'll turn it to Van to kind of go through a little bit more detail.

Yes. Thanks, Ben. I think first and foremost, keeping an eye on our investment-grade rating and making sure that, that is that is maintained and actually a view to get to BBB flat over time is something that we are looking at. So we'll take that into account when we are financing these projects. I think our original value proposition at that 2% to 3% growth, we view that being able to be funded through our distributable cash flow. We have that additional free cash flow to be able to do that. It's more of the big chunkier ones that we would need some different financing besides our cash flow.

And when you think -- just to add on to that, Ben, the types of projects that we're investing in are all aligned with our risk preferences. And when you're building long contracted take-or-pay agreement style investments, the financing is more straightforward than something that has a lot of merchant or otherwise shorter tenure risk on it.

And the next question will come from Sumantra Banerjee with UBS.

I know in the press release that you mentioned that you expect the WCSB crude oil supply to still grow modestly throughout the rest of the year. I'm just curious, given the recent geopolitical events and I wanted to ask about the puts and takes that you're looking into and what could potentially change this view down the road?

Well, it's a great question. And we brought forward the Prairie Connector opportunity to customers to address really what we saw as more of the optimization growth within the basin, the additional technology that our customers are using, extended well pairs, those types of things that didn't need a significant amount of capital as well as regulatory reform. And I think if you look at the releases by our customers in the past week, they've all pointed to ensuring that the policy and regulatory environment, particularly around emissions are resolved in order to see them invest significant capital to grow the basin to meet that global desire for Canadian crude. So I think the next gating item, in particular, is beyond what we could service with Prairie Connector would be more clarity amongst in the regulatory and policy environment.

Got it. That's helpful. My quick follow-up is, I know you also mentioned previously that you expect leverage to tick down in the rest of the year, especially with Blackrod cash flows ramping up. I'm just curious about other puts and takes that we should consider there as well.

Could you repeat the back half of that, please, Sumantra?

Sure. So I know you mentioned Blackrod cash flows ramping up would help with the leverage to go down during the balance of the rest of the year. Just curious about anything -- any other factors that we should consider there?

And so if you think about that normalized debt-to-EBITDA ratio, obviously, there's two components of that. So year-over-year, our EBITDA would increase from [ 25 to 26 ]. And on top of that, we are paying down debt or accumulating cash on our balance sheet. We currently have limited growth capital in our guidance for this year. So that would put more cash on our balance sheet. So it's that combination of increased EBITDA year-over-year and increased cash or decreased net debt.

And there are no further questions in the queue at this time. I will now turn the call back over to Bevin for closing remarks.

Thank you, Michelle, and thank you to all the analysts that joined and asked questions. We really value your continued interest in South Bow, and we look forward to connecting with you again soon. Have a great day.

This does conclude today's conference call. Thank you for participating, and you may now disconnect.