Q2 2025 South Bow Corp Earnings Call
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Welcome to the South boat quarter 2 conference call at this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session
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I would now like to hand the conference over to Martha your first speaker for today. Please go ahead.
Thank you Brianna and welcome everyone to South Go's second quarter 2025 earnings call with me today are Bev and wispa president and Chief Executive Officer Van Deo, senior vice, president, and Chief Financial Officer and Richard Pryor, senior vice president, and Chief Operating Officer. We also have additional members of our leadership team in the room to help with the question and answer session. Before I turn it over to bevon, 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 both Cedar Plus profile. And in South, both filings with the SEC. Today's discussion will also include non-gaap Financial measures and ratios which may not be comparable to measures presented by other entities with that. I'll turn it over to Ben.
Thanks Martha. And good morning everyone. We appreciate you joining us today.
South Pole's second quarter financial results once again exemplified the resilience of our business, with our strong commercial underpinnings protecting our cash flows from market volatility and operational downtime. We generated $250 million of normalized EBITDA during the period and, for the second consecutive quarter, successfully maintained our debt metrics as we prioritize strengthening our financial position.
We also demonstrated our execution abilities. By advancing our black broad connection project and continuing to establish South Bose'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 Bose's long-term competitiveness and success.
Now, regarding multiples, 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 Bose, agility as a standalone 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 now ask Richard and Van to provide some additional details on our operational and financial outlooks. Richard
Thank you, B, and good morning.
Today I'll provide updates on the progress. We've made responding to my post 171, and next steps. As we address fins as corrective action order and an independent third-party continues, the root cause failure assessment.
Will identify causal and contributing factors to the incident and remedial steps will be taken that address these findings and 3 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, the response repair and cleanup will be approximately 60 million dollars, 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 bevon mentioned, the third party root cause failure analysis is ongoing and we anticipate the results will be completed in the September time frame.
We can con confirm that the mechanical and metallurgical 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 that initiated on the long seam weld, which propagated during operations 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 4 inline. Inspection runs since April with a preliminary finding of these tool runs indicating. No injurious issues.
We've also completed 8 Integrity dates in the vicinity of the failure location again with no notable issues to report.
Additional inline. Inspection tool runs and further Integrity dates will be completed through the balance of 2025 and into 2026.
As we conduct these activities, all findings will be reported to fimsa.
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 regulators, customers, and industry peers.
So with that brief operational update, I'll pass it over to Van to discuss self, post Financial outlook for the remainder of the year.
Thanks Richard, southpost based business remains largely unaffected by tariffs and Market volatility with 90% of our normalized evoc contracted. We are reaffirming our 2 2025 outlook for normalized. Evida of 1.01 billion. Southwest expects to fulfill our committed throughput contract.
For the remainder of the year, 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, there are the positive impacts from changes in U.S. 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 interesting income of about 30 30 million 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 mile post 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 flow is associated with black Rod, start in the second half of 2026 and in increased through 2027.
Finally, our board of directors have approved a quarterly dividend of 50 cents per share payable on October 15th, to shareholders of record on September 29th.
I will now hand it back to bevon for his closing remarks. Thanks fam, as we approach our 1-year anniversary, as a standalone 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 Financial, 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 mile post 171 while also making a significant progress on the black Rod connection project.
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.
Thank you. At this time. We will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1 1 on your telephone and wait for your name to be announced to withdraw your question. Please, press star 1 1, again please, stand by while we compile the Q&A roster.
Our first question is from Maurice Choy of RBC Capital markets. Your line is now open.
Thank you and good morning, everyone. Um, 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 pipelines, with the assumption that we will indeed see higher crude oil production in the coming years through the end of the decade. Um, specific to South Bow, can you speak to what you may be working on and 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? Um, just thoughts on what it means specifically to South Bow.
Yeah. Thank you, Maurice, it's Bevan. Um, so
Our, 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, uh, grow over the coming years. Um, quite quietly over the last decade we've seen, um, heavy oil supply grow by a million barrels a day, um, and with the startup of the TMX, uh, pipeline that served that market. And so over the next couple years, we anticipate, that, that Supply will continue to grow and by the end of perhaps, uh, or by early 2027, will be in a position again, where we may see, uh, again, constraint in the egress out of the base and given the strong demand for that heavy product. Um, for South bow, we remain committed to leveraging our uh, pre- invested Capital that we have not
Not only in our our Alberta systems and but also in our Gulf Coast section and we we're looking to work with customers to find solutions to provide incremental capacity, solutions for them. Over the next number of years. Um, our initial Focus as we've um highlighted in the earlier remarks was to leverage our Grand, Rapids Corridor um to
Provide a solution for IPC um to bring on that production in the near term. Um and we continue to see uh like opportunities not only in Alberta but throughout our system down through the Gulf Coast.
So then, if I could finish off with the question on the tsa's actually, um, can you speak to what opportunities that may open up for you, as you exit your final TSA? And what if anything of that, might be factored into the 2, 3%? If you like, kegger guidance, that you have,
Yeah, Maurice getting off the TSA is really allowing us to focus solely on our business. You know, we, 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, uh, a little bit quicker. Um, by the end of this quarter, we hope to be off the last of those major tsas and that's our scada systems and, and that will likely get us. Then, in a position that within 1 year, since our spend date will be completely done with the tsas. Um, and we'll have repositioned our
our business for that longer term growth, so that our teams can
Oh, that's great. Thank you very much.
Thank you.
Our next question is from Burke senso of wolf research. Your line is now open.
Hi, good morning, just 1 for me today. Um, seems like there was a little bit of a delay on the third party, uh, 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?
Yeah, I don't think there's...
too much of a delay as I, as I see it. It's, it's a, it's a dynamic process. Um, we, we were probably
a it, it, it took us a little bit longer than just anticipated at the very front end. Actually getting our our root cause failure analysis, third-party selected and, and having fins approve that so that that was maybe a very few few weeks at at the very front but uh, know that, that, that process continues on, you know, the the the lab has, uh, completed the majority of their work all those. There's some follow-up things that they're, they're working on with the with the rcfa provider. And I, I think that the way it's going to play out is, you know, we expect the, the analysis to be delivered in the September time frame. Um, and then, as I mentioned in in parallel, we, we, we've got a lot of activities on the remedial side are
ongoing, you know, we've we have
Completed foreign line inspection runs. We've got 2 more scheduled. We've completed 8, Integrity digs, we've got 4 more scheduled and so that that will call will take shape through September. And then once we, we have that rcfa will work with fimsa 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 a little too early until we see the results of the RCF faded. Define exactly what that remedial work. Plan is going to look like and then what the duration of its going to be
That's all for me.
Thank you.
Our next question is from Robert Hope of Scotia Bank. Your line is now open,
good morning. Uh, this is Jessica Hoy on for Robert hope. Uh, thanks so much for taking my questions. Uh, so just to start regarding the, the comment in the mdna that demand for uncommitted capacity is expected to remain low in the near term, uh, with Enbridge is Mainline under a portion. How do you envision uncommitted, barrels returning to your system, uh, versus PMX?
Yeah, thank you, Jessica. Um, when we set guidance for 2025, that was ahead of a couple of other headwinds that showed up. But, uh, for 2025, with the startup of TMX, we anticipated that we'd have lower demand for our...
walk up Spa capacity and and just to remind folks, we have 94% of our Keystone system is is
Fully contracted and and flowing. And we have to reserve 6% for spot capacity. Um, so for that spot capacity. We remain extremely competitive. As we serve the, the highest demand Market in the Gulf Coast. And so as, as additional barrels, um,
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, um, that we manage is to improve the net back for our customers, um, and wherever the strongest netback is for those barrels is where those barrels were likely land. And so, not only do we believe we provide the highest net back. Um, we also are the only batch system and we deliver the barrels, um, faster than any other system to those strongest markets. So, we we haven't guided this year to anticipate much, uh, uh, spot volumes coming onto our system. Obviously we're under a d rate. Um, moving all 585,000, barrels a day of our contracted volumes out of the Basin, um, and we anticipate that as we address the, uh, the next steps of our integrity program that once we see Supply later,
8 and 26 and 27. Um, our goal is to have our system ready to accept those uh those walk up barrels.
Thanks for that. Uh, and then can you update us on your initiatives to add contracts to the the southern end of Keystone?
Please at this point, just an an ongoing, you know, part of our business is, uh, you know, we we just recently ran another Open Season that closed, uh, successfully like entirely within our expectations and our plans. I I expect that we're going to continue to to run Open Seasons, you know, throughout the year as as we work with our customers on, you know, exactly what they're looking for for for for terms that they they'll move, you know, domestic barrels from pushing down into the Gulf Coast and and as you'll you'll notice
In our, in our, our release that that we, we've been keeping that that segment of the system quite full. Um, it it's actually moved more barrels in the second quarter than in the first. So
Thank you.
Thank you.
Our next question.
Is from Sam Burwell of Jeffrey's your line is now open.
Hey, good morning guys. Um, just curious how you'd characterize the organic and and maybe inorganic growth opportunities for South bow as things stand today. And um, any color on whether you see more attractive opportunities on the Canadian side, versus the US side.
Yes um, great question. You know, um, our Focus
um,
as per our earlier remarks was to, you know, get through our first year. Get off our tsa's, get in a position where we were lined out, um, 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. Um, when we initiated though, it wasn't, as if we were waiting to start building that Hopper of opportunities and um on Richard's team, they've been maturing quite a large list of opportunities. Um, both organically and inorganically. Um, but those take time to mature and we, we're we intend to provide a bit more color at our investor day in November as to, um, how those are progressing. What I would say is that, um, we have noted, uh, slight increase in balance of opportunities, um, on the Canadian side of the Border, um, 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 uh us focused. And so that's great to see because we're we're here to serve our customers in both jurisdictions and find those Solutions. So, um,
those I'm happy to say that the our you know it takes you got to have a lot of irons in the fire to to get uh certain ones to the finish line and and uh
Fortunately, for us, we're we're seeing that uh, progressed quite well.
Okay, great. And then sort of somewhat related to that, looks like you're making great progress on the Black Rod project. But fair to say that the majority of that cash flow contribution in 2026 and 2027 goes towards the leveraging rather than growth capex.
So the way we think about growth capex, Amazon as our um after after covering off our uh, interest and and dividend obligations and tax that leaves us roughly between 100 and 130 million US dollars a year to, you know, allocate against growth that kind of components stays consistent year over year. And and the projects that we've identified like black Rod um you know on average our to underwrite that 2 to 3%, growth Kerr, we need to spend roughly that hundred million dollars, uh, per year. Now how it how it gets, uh, spent it's not going to be 100 exactly every year. It's a bit lumpy. Um, but we're just, as we as those cash flows from black Rod, come on, the priority is, is to, you know, keep that consistent capitalization of the business and and all the
extra cash flow goes to our deleveraging targets, um, to get to our, um,
you know, within 4 years, get down to that 4 times level.
All right, got it. Thank you guys.
Thank you.
Our next question is from praneet Satish of Wells. Fargo, your line is now open.
Um because if you're is it going to be at that 50 million dollar run rate going into 26? If we assume the current pace of capex um persists and then uh, if so uh that's quite a sizable reduction going from 100 down to 50 basically gives you 50 million of of extra free cash flow. So, does that all go towards Debt Pay down or could that put you in a position to maybe, you know, increase your capex budget a bit and sanction more, um bolt on projects?
I have. Thanks, Brittany. It's Van here. I said $15 million, not $50 million. So, um, yeah, so it'll be $15 million for the foreseeable future; there will be reductions in current tax, and that's just a flip between current tax and deferred tax.
And we'll use that.
That's just additional distributable cash flow that we'll use either for growth capital or ultimately deleveraging.
Gotcha. Okay. Maybe I I I, I guess I misheard that, that makes sense. Yeah, and then maybe just Switching gears. Um, so can you elaborate on on? Kind of you mentioned, you you ran a metallurgical analysis, um, or, or were the third party and um, what? What those findings revealed and, and whether it just broadly, um, you know, do those findings kind of suggests that the rupture was an isolated.
Uh, 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, um, does that? Does the does the study does metallurgical study kind of help narrow the scope of potential remedial actions that could arise from the, uh, rcfa?
Yeah, I I I think you know simply the the the lab report and and and Analysis, you know, which was also completed by a third party. You know, that was that was approved by fenza that ends up becoming a component of the root cause failure invested analysis and investigation. Um, you know, I just think like that that's all the the scientific lab work that they did to to study the pipe and and and examine exactly what occurred and and what what it did determine is it it was an axial track on the long seam which propagated during operations and and and until the failure, it could occurred. Um, I I think to, to provide you know, much more detail than that, we're going to have to wait for the rcfa to be completed, which should be in the September time frame. But but I would say that from everything that we've seen so far, we we're not seeing evidence that this is a broad systemic issue that we're not going to be able to get our arms around.
through you know, remedial actions that that we that we're either completing now or that we we add additionally once the rcfa is done or enhancements and and additions that we make to our ongoing Integrity program in the future,
That's that's helpful. Thank you.
Thank you.
Our next question is from Aaron mcneel of TV Cohen. Your line is now open.
Good morning, all this is Ally on Brier mcneel. Thanks for taking my question.
Um, bevon 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 your cat directly linked Alliance uh with Keystone but I'd like to get your perspective on the differences, um, with Contracting beyond the end of the decade. Do you think there could be a resetting of Revenue and cost assumptions in the future?
Yeah, thanks Ally. Um, you know with Keystone we've negotiated Market driven contracts um with renewal provisions and terms already approved by the CEO, and the ferc. Um, so our market-driven approach with is is really focused as per my earlier, comments to provide the most competitive route, um, to preserve the highest net back for our customers. And so we we continue to see that. Our our approach is is actually quite a different circumstance.
Circumstance then um, what some of our competitors, uh, tolling mechanisms are. Um, we feel quite confident that because we serve the strongest Supply base and most directly to the strongest demand Market, that will be in a very good position to renegotiate our contracts with our customers. Um, really focused. Again though, on providing that strong net back for them and a and a great return for our shareholders.
Thank you. This now concludes the question and answer session, I would now like to turn it back to bevon for closing remarks.
Well, thank you all for joining us today. Um 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
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