TC Energy Corporation (TRP) Earnings Call Transcript & Summary

Good morning. My name is Bevin Wirzba. I'm the President and Chief Executive Officer of South Bow Corporation. We are taking the opportunity to broadly share the South Bow story and tell you a little bit more about our business ahead of legal separation on October 1. Joining me today are Hal Kvisle, our Board Chair; Richard Prior, our Chief Operating Officer; and Van Dafoe, our Chief Financial Officer. We intend to keep our remarks brief so that we can reserve time at the end for your questions and answers with sell-side analysts. Before we get started, please be reminded that this presentation contains estimates, projections and other forward-looking statements. These statements are subject to certain risks and uncertainties and other factors that may cause our actual results to differ. Please review the advisory statements on the screen and available online. We will also be referring to certain non-GAAP financial measures that may not be comparable to similar measures presented by other issuers. Please refer to the reconciliations of these financial measures in the appendix to this presentation. South Bow is a critical energy infrastructure company that connects the most resilient crude oil supply to the strongest demand in refining markets in the U.S. Midwest and Gulf Coast. I will later speak to the following key attributes. The structural demand is critical. We have a supply push and demand pull asset. We have enduring fundamentals with a multi-decade persistent outlook. We have industry-leading commercial structures in place at market-driven rates with over 7.5 years of remaining life on our contracts. We have a pre-invested strategic corridor with the most direct and competitive pathway for our customers. And we have an investment-grade debt capital structure. We also will be providing a meaningful and sustainable dividend, supported by 88% contracted EBITDA with 96% investment-grade customers. I joined TC Energy 5 years ago to be a part of the liquids business. We had significant pre-investment into our system to make way for the Keystone XL project, which included the Gulf Coast section and our Alberta corridor and our Alberta systems, but we needed to shift our strategy post the cancellation of Keystone XL. And we've made sustainable improvements over the past number of years in how we operate the assets, how we partner with our customers and stakeholders and how we measure performance. One of South Bow's values is we win as a team. So we built an amazing team, bringing together individuals who have been closely managing the Operating and Liquids Pipelines assets since inception. But we've added and brought in people to the team that have the functional expertise in financial, legal, human resources, external relations and information systems. So I'm just going to introduce a few of the team that are with me today. So our CFO, Van has 4 decades of accounting, finance, capital markets and Board experience. He has attracted strong talent to join his finance organization, and it also works with Tamara Loewen to lead our information systems organization. I have known and worked with Van for a long time, and I couldn't imagine launching South Bow with anyone else. Richard, our Chief Operating Officer, has been my partner since nearly the beginning of my time at TC, where he led the Liquids Pipelines business over the last number of years and supported me in the execution of getting Coastal GasLink mechanically complete late last year. He started his career on the Pipeline right aways and has tremendous operational, commercial and financial expertise. Richard is a strong leader who intimately knows our business. And Lori, our General Counsel, has hit the ground running at South Bow. She was the General Counsel of Shell's Midstream Partners business and having her experience in spinning that organization on our team has been invaluable. Her deep and strong governance skills and intimate knowledge of our business has made her an ideal partner for our team. I've highlighted these 3 senior members of our team, but we have a great bench across each function. We've also assembled a top-tier Board of Directors that will guide South Bow in reaching its full potential, with deep energy infrastructure experience from all perspectives. We have also brought together a workforce that is agile, has breadth of skills and experience and a can-do attitude. Together, we are building an operating model that is bespoke to a business of our size with the commercial and operational constructs of our liquids pipeline system. We took a significant amount of time and effort to focus on developing our South Bow vision, values and commitments. This is more than just putting words on a page. Values have to be verbs. They have to be lived. Collectively, our team of founders established a vision that will compel our team to strategically grow our business and unlock value from our corridor through commercial and operational excellence. We will deliver on this vision by operating safely and holding ourselves to the highest standards of integrity. We will do so with pride and most importantly, as a team. South Bow's franchise corridor has many strategic attributes that are irreplicable. Every day, we strive to safely and reliably deliver a premium service to our customers as a critical energy infrastructure company. We connect the most resilient crude oil supply to the strongest demand markets in North America and uniquely, our supply push and demand pull asset with half of our customers on both ends of our system. We offer competitive tolls and commercial structures to customers that will help preserve their netbacks. We provide the most direct path to the U.S. Gulf Coast. And we are actively working to enhance our system, making it increasingly connected to additional delivery points to provide our customers increased optionality and flexibility. Lastly, our batch system ensures our customers know the product they're getting, and this is especially important to our vertically integrated and refiner customers. Underpinning our strategic corridor is a high-quality contractual framework. South Bow generates stable, predictable cash flows with 88% of our comparable EBITDA contracted and on a weighted average remaining contract term of around 7.5 years. We are partnered with some of the most relevant upstream Canadian producers and the most relevant downstream refiners. Our business is low risk. 96% of our revenue exposure is to investment-grade counterparties. And we carry little to no volumetric or commodity price risk. And nearly all of our operating costs and maintenance capital are recovered through our variable toll. Not only are our business fundamentals durable, so too is the outlook for crude oil. The Western Canadian Sedimentary Basin's crude oil production profile is resilient. The Canadian oil sands have a reserve life index of over 50 years with low sustainable capital requirements and an improving carbon footprint. Our system serves the 2 largest refining markets in the United States, the PADD II in the Midwest and the PADD III in the Gulf Coast. Over the next several decades, it is forecast that these refining markets will increase their market share backstopping the growing demand for Canadian heavy crude oil. The WCSB crude oil supply has grown over 1 million barrels per day over the last decade, and we expect that it could grow by another 1 million barrels per day over the next decade. Many of our customers are publicly stating their intentions to grow. We believe that, as this growth takes place, we are ideally situated to move these barrels out of Western Canada, given the strategic attributes of our system I just spoke to. Our view that any incremental egress out of the WCSB is good for the Canadian energy industry. And while we're experiencing near-term headwinds to our spot movements because the basin is currently long pipe, our long-term strategy centers around strengthening and enhancing our corridor, so that we can capitalize when the basin becomes egress constrained again, which we expect could happen within the next 2 to 3 years. We have been busy meeting with equity and fixed income investors over the last year to ensure that they understand the merits of the spin and the overall durability of the South Bow business. To date, we have been met with strong support. We received 97% shareholder approval of the spin transaction and we saw strong market interest in our inaugural debt offering last month. The total offering was over 6x oversubscribed, while our hybrid notes were 8x oversubscribed, resulting in better-than-expected pricing and placing South Bow in a stronger financial position heading into the legal separation. Strong support speaks to the underlying outlook for crude oil and the ability of our assets and our customers to meet growth in global demand. That brings me to South Bow's capital allocation priorities and how we intend to deliver the best risk-adjusted return for our shareholders. As part of the spin-off transaction, we are taking proportionate share of debt and dividend from TC Energy. While our stable cash flow profile and solid contractual framework support these higher leverage and dividend levels, we will initially be focused on strengthening our investment-grade financial position, lowering leverage to be more in line with peers of our size. We're targeting 4.5x net debt to comparable EBITDA in the medium term plus the Blackrod project coming in service and around 4x over the long term. We will deleverage by investing in our pre-capitalized corridor, including our recently sanctioned Blackrod Connection Project. This project is credit accretive and supports South Bow's accelerated deleveraging profile. Not only does debt reduction put us in a stronger financial position, it accrues value to the equity shareholder by lowering our debt service charges. At South Bow, we want to preserve optionality in how we allocate capital, and we will look to enhance our return of capital to shareholders through potential share buybacks. We want the option to be opportunistic when we believe dislocations exist between our share price and the intrinsic value of our business. And lastly, we will pay a dividend that is both stable and sustainable. However, we believe dividends must come out of profits. So we will not consider increasing our dividend until we can reduce our payout ratio to below 100% on an earnings basis. In summary, we believe that South Bow provides a differentiated investment opportunity. Not only will we pay a compelling dividend that will be attractive to income investors, we have a significant runway of low-risk, modest growth projects that deleverages -- or leverages our pre-capitalized corridor and provides last-mile connectivity and flexibility to deliver those options to our customers. We believe we can unlock a significant amount of value as a stand-alone company, and our team is incredibly excited to get going on this journey. We have the right people, the right assets and the right market backdrop to successfully execute our vision of delivering energy, forging progress together. It now brings me the great pleasure to introduce our Board Chair, Hal Kvisle, someone who knows South Bow's business intimately, making Keystone a reality in 2010 when he was the CEO of TransCanada. I wouldn't have wanted to take on this unique challenge with anyone else. Hal has been a great mentor to me over the years, and I'm thrilled at the opportunity to partner with him again. So over to you, Hal.

Thank you, Bevin, and it's a real pleasure for me to be involved with South Bow at this stage and to work with Bevin and the executive team. Bevin and I gave a fair bit of thought to the priorities for a new Board at South Bow. We set out to create a Board that brings both a high standard of corporate governance and deep energy sector expertise. Recognizing our large asset base in the United States and the importance of shippers and customers in both Canada and the U.S., we deliberately recruited a group of industry experts with deep experience across the North American oil value chain. I won't go into the background of each director. You can find their resumes on the South Bow website. But I'd like to highlight the strong capabilities of our 4 committee chairs, just as an example of the kind of directors that we brought on board. First of all, Don Wishart will chair our safety, environment and operations committee. Don was the executive leader on the construction start-up and operation of the Keystone pipeline when Don and I worked together at TransCanada. Don is an expert on all aspects of oil pipeline engineering, construction and operations. I'm confident our safety, operations and environment committee will work well with Richard Prior's operating team and fulfill its responsibilities to a high standard. Sonya Reed will chair our Human Resources Committee. Her experience and success is the senior HR executive at Phillips 66 and the organizational work that I've done with Sonya over the past 6 months gives me confidence that our Human Resource Committee will be in very good hands. Shannon Ryhorchuk will chair our Audit Committee. Her extensive career with PwC and her deep accounting and audit experience will serve South Bow very well. Shannon will be an excellent Chair of our Audit Committee. And finally, George Lewis will chair our Governance and Risk Committee. I know George from our time together on the Synovus Board. His executive experience at Royal Bank, his deep knowledge of the North American financial sector and his governance expertise have already and will continue to serve South Bow well. So South Bow is now up and running as an independent company. The commencement of trading in October will be the final step. Over the past 6 months, we benefited greatly from the expertise and contribution of our Board members, all working on an interim basis to position the new company for success. I'm delighted to chair an exceptional Board. Turning to Slide 19. I'm often asked why the Keystone pipeline was built along the zig zag route from Alberta to Wood River, Patoka. Well, when we conceived of Keystone, we had to be competitive with the large and extensive Enbridge system. We needed to find some sort of competitive edge if we were to enter the oil pipeline business successfully. Fortunately, TransCanada had an underutilized large diameter gas pipeline from Empress to Winnipeg. We were able to convert that gas line to crude oil service at a very attractive cost. And from there, we built the new line South to Nebraska and East Wood River. Right from the earliest days of Keystone, we first saw the opportunity to build self to Cushing and Houston and that's why the original route made sense. Don Wishart and I spend a lot of time with the engineering and construction teams on the original Keystone system. As the photo shows, I was honored to turn the valve and commenced the flow into our customer facilities at Wood River and Patoka as my last act as the CEO of TransCanada. So going on to Slide 20. TransCanada really does have an exceptional project management and execution team starting right from the original Keystone project team. And I'd now like to turn it over to someone who's involved right from the start, Richard Prior, a member of our team back in 2010. Richard, over to you.

Thanks very much, Hal. As Hal mentioned, I was part of the Keystone project team that constructed the first phase of the system under Hal's CEO leadership, as you mentioned, Don, and -- it's very exciting to work alongside Hal again as well as Bevin and Van and to be a part of the leadership team as we take this business into the next chapter. So as Hal mentioned, Keystone started as a grand idea to convert underutilized capacity on TransCanada's gas mainline into crude oil service. And after 3 years of permitting design and then 2 years of construction, Keystone was placed into service in early 2010 when first barrels were delivered into Wood River, Illinois. So Keystone connects world-class crude oil supply from the Western Canadian Sedimentary Basin with refining markets in the U.S. Midwest and Gulf Coast. For our customers, Keystone provides delivery flexibility and the most direct path to these markets, maximizing their transportation value. Keystone originates in Hardisty, Alberta, transporting crude oil across the Canadian Prairies before reaching the U.S. border to south of Winnipeg. From the border, barrels are transported itself until reaching a junction at Steel City, Nebraska and then from Steel City barrels moving east are destined for Wood River or Patoka, Illinois, and barrels moving south are either destined for Cushing, Oklahoma or go on to the Gulf Coast. Cushing, being the largest crude oil storage hub in North America, provides our customers connectivity to domestic refineries and other third-party pipelines. In the Gulf Coast, the Keystone line forks either between Port Arthur or Houston, which sits in the heart of the PADD III refining and export market. Throughout Keystone's history, we've seen flows along the system evolve and following completion of the Gulf Coast segment in 2014 and an increasing portion of volumes are being delivered to the Gulf Coast. As shown on this slide, we've steadily increased throughput on the Keystone system over the past 5 years. Currently, we have 585,000 barrels per day of contracted capacity in addition to 35,000 barrels per day that we reserved for spot or uncommitted volumes. This increase in throughput is underpinned by strong demand, and it's made possible by steady incremental improvements in our operating performance. So to measure South Bow's operational performance, we think about Keystone System Operating Factor, or SOF. SOF is how we measure the availability of the system's design capacity. So the higher the SOF, the more barrels that can be safely transported. And through technology, targeted investments and process improvements, our engineering and operations teams have been able to sustainably increase SOF over the past 5 years from the mid-80s -- sorry, in the high 80s up into the mid-90s. And in the first half of this year, we've achieved a system operating factor of 95%, which has enabled us to safely transport over 620,000 barrels per day. So I'll note that while our team has delivered exceptional results this year, we do expect that throughput will be tempered over the balance of this year. With TMX coming on stream in May, price differentials have narrowed. And as a result, we've seen some expected near-term reduced demand for the uncommitted capacity on Keystone. However, Keystone is 94% contracted which mitigates against the risk of reduced volumes, and we continue to see our contracted volumes flow. South Bow also operates terminals in Hardisty, Cushing and Houston that provide both operational storage for the system as well as merchant services. In total, we have 7.6 million barrels of storage capacity between 3 locations. So in sum, as an innovative solution brought into reality, the Keystone system is the backbone of our irreplaceable corridor. So the Gulf Coast segment of Keystone went into service in 2014 and it added delivery locations to Houston and Port Arthur. At the same time, we also established Marketlink, which leases capacity from Keystone on the Gulf Coast segment effectively creating a pipe within a pipe. So the same physical pipe provides long-haul transportation from Hardisty to the Gulf Coast via Keystone and short-haul domestic transportation from Cushing to the Gulf Coast via Marketlink. And in total, this Gulf Coast leg is capable of delivering in excess of 800,000 barrels per day. We've had recent success attracting additional volumes to Marketlink, which is partly attributable to our focus on creative commercial terms and our focus on operational excellence. And through the first 6 months of 2024, the Keystone Gulf Coast and Marketlink volumes have reached multiyear high throughput levels. We have strong connectivity in the Gulf Coast segment of our pipeline system as well. Our Cushing terminal is connected to all the major third-party terminals in Cushing, which provide access to crude grades from all of the top producing basins in North America. And then in the Gulf Coast, we have significant connectivity to terminals, pipelines and marine export facilities, which provides customers with competitive delivery options. So we'll move on to the next slide. Our U.S. Gulf Coast connectivity, as I mentioned, with the interconnections in Port Arthur and Houston, our systems connect to over 4 million barrels per day of refining and terminal capacity. And thinking about a subset of compelling growth projects that South Bow may pursue, we're focused on projects that enhance the value of our existing corridor or can help us attract more barrels to flow greater distances through the system. When we think about enhancing the value of our corridor, we believe this can be done in several ways. Our first is by continuing the connect to add and build to the connectivity of our assets. And then the second is increasing our customer optionality and flexibility. So our recent Gulf Coast ventures are examples of capital-efficient projects that enhance the value of our corridor. In 2023, we partnered with Motiva to place the Port Neches Link pipeline into service. So Port Neches Link, or PNL, is a 4-mile 36-inch lateral that provides a direct connection from the Keystone system to Motiva's Port Arthur refinery. At a capital cost of CAD 160 million mentioned delivered on time and under budget, Port Neches Link is an example of a capital-efficient project that has compelled short-haul and long-haul barrels onto our system and to flow either the short path or the longer path of our system. And likewise, through a joint venture we have with ONEOK, our HoustonLink pipeline provides a connection to their East Houston terminal, which gives optionality for barrels to come off of our system and access their entire Houston distribution network of refineries and terminals. So next, an important component of our business is our intra-Alberta pipelines, which provide transportation from the Canadian oil sands to the Edmonton and Heartland areas. With reserves of more than 160 billion barrels, Canada's Oil Sands are a world-class supply source and will continue to be for decades to come. On the north end, the White Spruce pipeline provides service from CNL's Horizon facility to an interconnect to the Grand Rapids pipeline at our McKay terminal. And then the Grand Rapids pipeline, which is a 50-50 joint venture with PetroChina, provides a connection from Fort McKay to Edmonton and the Heartland region. Our Grand Rapids system is also, I should mention, directly connected to TMX. And with the remaining contract term length of 20 years, our intra-Alberta pipeline systems will continue to underpin South Bow's stable cash flow profile. So this brings me to South Bow's next growth project, the Blackrod Connection. So the Blackrod project connects to IPC SAGD production facility, which is a new oil sands development. The project consists of a dual 25-kilometer crude oil and natural gas pipelines, which connect Blackrod into Grand Rapids and then it also supplies gas -- natural gas to their facility from NGTL. We first announced the project in April of this year, and we've since received all of our regulatory permits. Capital costs are expected to be CAD 250 million with a build multiple at the low end of our target range of 6 to 8x. Construction has started with the tank pads and right-of-way clearing, and we have an estimated in-service date in 2026. The expected cash flows from this project underwrite a substantial portion of South Bow's near-term growth outlook and the project is credit accretive to our deleveraging profile, which Van is going to talk about in a few minutes. So with remaining latent capacity and competitive expansion opportunities on our Alberta system, South Bow is well positioned to be a big part of Alberta's future oil sands production growth which is forecast to increase by over 500,000 barrels per day through the end of the decade. So guided by our values, at South Bow, we placed our strongest focus on safety and operational performance. South Bow is a -- safety is a core value and will always be the #1 priority at South Bow. Our team has steadily improved our occupational safety metrics, and we expect with strong oversight and guidance from the safety, environment and operations committee of our Board of Directors, we will deliver on our safety objectives. The integrity of our assets is critical to our ability to deliver on our business objectives. And subsequent to the Milepost 14 incident that occurred in 2022, working with our engineering teams, expert consultants and with oversight from FEMSA, we've conducted in-line inspections on the entirety of the new build sections of the Keystone system spanning over 3,400 kilometers of pipeline. We are deploying a world-class pipeline integrity program and are confident in the integrity of our assets. So combined with a strong focus on our system operations, we've been able to achieve new throughput records on our Keystone system by minimizing downtime while providing competitive commercial offerings to our customers. So I'll now turn it over to Van, who will walk through our South Bow financial strategy. Thank you.

Thank you, Richard. As Bevin mentioned, our job as a management team is to allocate capital to generate the best risk-adjusted returns for our shareholders. We will be disciplined in allocating capital. Our stable cash flow profile is underpinned by our highly contracted assets with 88% of comparable EBITDA locked in for the next 7 plus years. This provides us with the flexibility in how we choose to allocate capital. South Bow's capital structure includes taking our share of TC Energy's debt and dividend obligation, approximately $7.9 billion of debt and a dividend obligation of $570 million or $2.75 per share. Walking through our capital allocation priorities. First, we'll be focused on strengthening our financial position through reducing leverage. We can accomplish this with absolute debt reduction, growing our EBITDA or both. By investing in our pre-capitalized assets through discretionary capital projects, we can grow our EBITDA and enhance our strategic corridor. Richard has already highlighted examples of this in previous slides with the Port Neches Link and the Blackrod project. Next, we will look to enhance our return of capital to shareholders through opportunistic share buybacks when we see dislocations in our share price relative to the intrinsic value of our business. Last, we will consider growing our sustainable base dividend once we have reduced our payout ratio, both on a distributable cash flow and an earnings basis. Foundational to the spin-off of South Bow is an investment-grade rating, and we received that from 3 rating agencies. Last month, we successfully raised $7.9 billion of long-term debt. We issued the debt to match the approximate currency split in our revenues, 80% U.S. dollar denominated and 20% Canadian dollar denominated. We spread out the maturities ranging from 3 years to 30 years. This helps us reduce refinancing risk. As Bevin mentioned, our inaugural debt offering was met with considerable market interest with almost $50 billion in orders. This strong market feedback reaffirmed our views that we have a unique long-term value proposition for both debt and equity investors. South Bow's weighted average interest rate is 5.68% with an annual interest charge of approximately $450 million. This came inside our initial expectations, putting South Bow in a stronger free cash flow position at the outset. Our initial net debt to comparable EBITDA ratio is approximately 5x. That is high compared to our peers. We have line of sight to reduce it to 4.5x in 3 to 4 years and a longer-term goal of around 4x. We also have a $2 billion credit facility with 15 banks. This gives us additional liquidity if needed. A key component to South Bow's value proposition is paying a meaningful and sustainable dividend. Our dividend philosophy at South Bow is simple. Dividends will be primarily means of returning capital to shareholders and stability and sustainability, our dividend is critical. Our low-risk, high contracted cash flow protect the stability of that dividend. South Bow was starting with relatively high payout ratios, both on a distributable cash flow and earnings basis. We believe that dividends should be distributed out of earnings. We plan to grow those earnings through modest capital investments like the Blackrod project. We will not increase our dividend until our payout ratios are more in line likely in 4 years. We intend to declare our inaugural quarterly dividend of CAD 0.69, $0.50 per share, concurrent with TC Energy's dividend declaration in the fourth quarter. The dividend will be payable on January 31 to shareholders of record on December 31. We expect that future dividends of South Bow will be declared in U.S. dollars. This next slide provides some helpful parameters to our financial outlook. One important item to note is that South Bow will report its financial results in U.S. dollars. And we've articulated several times already today, our cash flows are expected to be relatively stable over the medium term. The predictability in our revenue and EBITDA is underscored by our very limited exposure to commodity prices. And that operating, maintenance and administrative costs are recovered through our tools. It's also worth highlighting that our maintenance capital expenditures are also a flow-through cost. As Richard's team develops a backlog of compelling growth projects, we expect that we will invest approximately $0.5 billion in discretionary growth projects over the next 4 years or an average of about $150 million annually. We can comfortably fund this discretionary growth out of free cash flow while simultaneously strengthening our financial position. The $0.5 billion is inclusive of the $250 million earmarked for Blackrod. With approximately 3 weeks remaining until expected legal separation, we have received the required tax rulings in Canada and the U.S. as well as all the shareholder and court approvals. Standing up our investment-grade debt capital structure was the last major milestone to consummate the transaction, which remains on track to close on October 1. That brings me to the expected trading timeline of South Bow's common shares on both the Toronto and New York Stock Exchanges. This morning, TC Energy announced that we have set a spin distribution record date of September 25 with an expected closing date of October 1. This means that if you are a shareholder of TC Energy on September 25, you will receive 1 South Bow common share for every 5 common shares of TC Energy you hold. As a means of price discovery, South Bow's equity when issued trading will be available to investors on the TSX between September 25 and October 1. Our first day of regular trading on the TSX is expected to be October 2. It is on this date that we anticipate we will be removed from the TSX S&P 60 Index. For the New York Stock Exchange, we will begin regular way trading on or about October 7. Lastly, I want to highlight a few important dates for the investment community to look out for. South Bow expects to provide market guidance for 2025 early next year, ahead of our Q4 2024 reporting, which will be released on March 5, 2025. Our Investor Relations program will include quarterly earnings calls that will provide brief insights from Bevin, Richard and I, dedicating the majority of our calls to Q&A with our sell-side analysts. We will also publish updated investor presentations with our quarterly results. Once we have a strategic planning session with our Board of Directors, we will host an inaugural Investor Day in late 2025 or early 2026. So with that, we welcome the opportunity to answer questions from our online participants.

So there are no questions at the moment. We'll open the line to analysts. [Operator Instructions] Okay. We have an audio question from Manav. Go ahead. I will just read the question. Can you talk about WCSB volume growth over the next 3 years, please?

Over the last decade despite what people might not have been aware has grown over 1 million barrels. And at the end of Q2 of this year, the 4 largest oil sands producers each in their quarterly releases describe the growth aspirations of their organizations. And so we anticipate -- I mentioned in my remarks that we're over -- we're long pipe today. But we expect that within the next between 18 months and 3 years to that -- to supply to already eclipse what is available for egress out of the basin. And so we're already in discussion with our customers on what their long-term aspirations are and where they want to move their barrels. Unfortunately, we're connecting, again, the most premium supply base into the premium demand markets. And so if we can offer them that service, we will find solutions to do so. So over the next 2 to 3 years, we believe that the gap currently of a couple of hundred thousand barrels a day gets closed, and we're back to a short pipe situation in Western Canada.

Okay. Our next question comes from Robert Hope at Scotiabank. How do you think about the ultimate capacity on Keystone in 2027 and 2028, if pressure restrictions are reduced and some incremental capital is spent?

Yes. Thank you, Robert. I'll start and then I'll pass it over to Richard if he has any augmenting kind of comments. So our plan today is -- we're fortunate we have 94% of our Keystone asset fully contracted, and we have to reserve 6% for spot. Irrespective of the market conditions and the D rate, we've been able to deliver 100% of our contracted volumes and 100% of our spot volumes have also flowed. You'll recall, Robert, back in 2019, we ran an open season to seek if there is additional interest on contracting volumes on Keystone, we declared a partial amount of that open season, but we've reserved that we didn't declare the balance in order to just ensure that we could deliver safely and reliably. And since Milepost 14 and those pressure restrictions that you've identified, we've similarly been able to deliver all our contracted volumes and spot volumes because those movements are very competitive, but also because our system operating performance has been very strong through that period, allowing us to make those movements. I don't know if there's anything else you'd like to add?

Yes. I don't have a lot to add to that. I would just put the emphasis on our focus in the near term is working through the requirements in the corrective action order and that we're -- at this time, we're not providing any additional guidance to upward increases in throughput. And so through a combination of, as I talked about, very strong operating performance as well as the technology that's been delivered through drag-reducing agents, we've been able to deliver that 620,000 barrel month -- per day average amount through the year-to-date.

Okay. We have another question online. This comes from John Mackay at Goldman Sachs. How many new WCSB oil growth projects like Blackrod SAGD are this close to your existing assets?

Well, we're fortunately situated right through the heart way of -- our heartland of the oil sands area. There are quite a number of projects that are offsetting us, that have been currently producing for many, many years. Many have been producing and delivering through actually trucking to oil terminals as opposed to being pipeline-connected. If you think about our assets, though the Grand Rapids and White Spruce were effectively a catchers mitt to any growth in the oil sands going north. And in particular, the White Spruce, as Richard pointed out, is right into the Horizon mine area that Canadian Natural Resources is operating today and has identified technology to increase its capacity as well. And over the last couple of years, one additional connection point that we made, in advance of the TMX pipeline coming on, was a TMX connection directly off of our Heartland terminal. So we're able to provide service for customers that want to allocate, take capacity on our system and deliver into the TMX system as well.

Thank you, Bevin. We have another one from John. What does the ongoing FERC court process look like?

I think I'll do a very high level, and then I'll pass it right away over to Richard. We, over the last number of years, have been responding to a FERC challenge by a number of our customers. We were very successful with the litigation through that period of time. But what's most important is our -- getting to a settlement or an agreement with our customers going forward. And the steps, I'll just turn it over to Richard on the details.

Yes. I just -- there is a small subset of customers that have filed protests with both the Canadian energy regulator and the FERC around certain components of our variable toll that go into our -- the pass-through component of our toll. And so we've been working through that process. It's a legal process. There is -- certain outcomes that have occurred with the CER and there's still a compliance filing aspect to that to get the Canadian portion finished and then there's the FERC decision, there's been an ALJ decision and then the FERC Commission recently ruled largely affirmed the ALJ decision. And now it's anticipated that there may be an appeal process that we'll have to work through. So one thing that I'd point you to is though that there is information in our disclosures with around how the liabilities with respect to these decisions will be allocated between TC Energy and South Bow.

Okay. The next question online comes from Ben Pham at BMO. How do you think about diversification of cash flow long term relative to peers? Are you comfortable with it today? And what are your future plans?

Thank you, Ben. The first low-hanging fruit that we have is that pre-invested corridor that we've got in the Gulf Coast and in our Alberta system. So by bringing on organic low capital, highly capital-efficient growth projects that can leverage that pre-invested capital that we've got on the ground, that will accrete more value to the shareholders as quickly as possible and get us on our deleveraging journey. Diversifying our revenues and cash flows going forward will be opportunistic, but we want to ensure that we can accrete value back to the shareholders as quickly as possible, and we see that first and foremost, with our existing corridor.

Thanks, Bevin. The next question comes from Burke Sansiviero at Wolfe Research. What other projects are you considering within the $0.5 billion worth of growth CapEx over the next 4 years? And what type of visibility do you have on unsanctioned to growth?

So great question. When we set our guidance of the 2% to 3% EBITDA capital -- or EBITDA growth over the number of years, that was made with tremendous amount of confidence in the outlook of what our system can deliver. The Blackrod project gives us that first step. But both on the upstream side of our system as well as in the downstream side, we see a tremendous amount of opportunity. You'll have to recall that the liquids business hadn't been afforded capital over the last number of years. So we're just now becoming open for business again, and we're in a number of conversations with customers in both jurisdictions in the Gulf Coast as well as in Alberta. We do have a significant project in already identified, not ready for prime time, but very akin to what we're doing with low capital with our existing system that would follow subsequent to the Blackrod project coming into service. And with Blackrod, just to give a couple more details on it, it is a very short cycle time low EV to EBITDA build multiple projects that will come in service in around 15 months from now.

Okay. This next question is probably for Richard, from Zack Van Everen at TPH. On market at length, there's an incentive rate, which adjusts frequently and somewhat correlates with the spread between Cushing and the U.S. Gulf Coast. I was hoping you could talk about the outlook for that spread and how much financial upside you could see from potential widening?

Yes. And so good question. we obviously price the capacity on the Marketlink system to attract volumes and throughput on to the Marketlink system, and we have to price that according to what the arbs are differentials between Cushing and the Gulf Coast are doing. As I mentioned, that portion of the line is also shared with Keystone and Marketlink. So we look at barrels flowing long haul from Hardisty all the way to the Gulf Coast and barrels using that for domestic capacity from Cushing to the Gulf Coast. And so I don't have a crystal ball predictor of what arbs are going to do into future years. But I do know that we've put a lot of emphasis on creating creative customer solutions or commercial solutions with our customers. We've got a couple of offerings out there that essentially have an arb sharing component to them. And through that, we've been able to increase the amount of flow that we've had on the system. And I think we're largely seeing that part of our system at capacity right now. And so as the pipelines get closer to capacity, that's typically when you see the arbs start to expand and widen.

Thanks, Richard. The next question comes from Keith Stanley at Wolfe Research, and I might pitch this one over to Van. The $1.4 billion to $1.5 billion EBITDA outlook is different than TC's prior 2026 liquids outlook of $1.6 billion. Can you please discuss what some of the differences are in operating and cost assumptions between the 2 outlooks?

Yes, I'll take it. I was here at the time, and Van wasn't. So not a fair question. At that time, we saw the arbs wider on between Cushing and the Gulf Coast and our outlook a little bit stronger. We've seen that tempered and with the onset of TMX coming on and those are impact to our spot volumes here in the near term being challenged with a lower spot toll. That's what's reduced that outlook here in the near term. We also, at the time, had owned the Northern Courier asset, which was sold in that time frame, which is out of our current EBITDA outlook.

Okay. That looks to be the end of questions. So Bevin, if you wanted to wrap it up.

Yes. Thank you, everyone, for joining us for our inaugural webcast. Just a brief outlook of how excited we are about launching South Bow. We've got a very unique asset. We've got a tremendous investment opportunity for shareholders to consider. And we look forward to giving you ample updates as we go forward and start being our stand-alone public entity. So thank you for your time. If you have any follow-up questions, please don't hesitate to reach out to any of us and directly to our Investor Relations team, and we wish you a great week. Have a great day.