Q3 2025 South Bow Corp Earnings Call
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The conference over to your first speaker today, Martha will not director of Investor Relations. Please go ahead.
Martha Wilmot: Sure. Yeah. I touched on in my comments some of the work that we've completed to date. We're implementing a comprehensive remediation program that's system-wide. We've completed so far six inline inspection runs and 37 integrity digs. We'll continue that work through this year and into next year. What we'll end up doing is filing all of this work as it's ongoing, but we'll file a remedial work plan with PHMSA and eventually work with the regulator around lifting the pressure restrictions. Our goal is for that to happen sometime in 2026. It's hard to point to a precise timing for it. As we work through the year, I think we'll start to see pressure restrictions removed in increments, and that will allow us more access to uncommitted volumes, which we think will ramp up through the year.
Thank you Marvin and welcome everyone to South both third quarter 2025 earnings call with me today are better than where it is the president and Chief Executive Officer, Dan <unk>, Senior Vice President and Chief Financial Officer, and Richard Pryor, Senior Vice President and Chief operating Officer before I turn it over to Bourbon I'd like to.
We 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 SEDAR 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.
Bolton measures presented by other entities with that I'll turn it over to Kevin.
Thanks, Martha and good morning, everyone. We appreciate you joining us today, so suppose third quarter financial results. Once again demonstrated the resilience of our business with our stable earnings profile, allowing us to meaningfully deliver on our capital allocation priorities in our first year as an independent company we.
Van Dafoe: Eli, it's Van here. I think that even if pressure restrictions are lifted, with those tighter differentials, you won't see a ton of EBITDA from those spot volumes. That's just another thing to point out.
We have paid a sustainable dividend to our shareholders funded our first growth project at Blackrock and strengthened our financial position.
[Analyst] (JPMorgan Securities): Great. Appreciate the color. I'll leave it there. Thanks.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Pranisa Dish of Wells Fargo. Your line is now open.
We are also nearing the exit of all transition services with TC energy, which we expect to finalize by the end of 2025, almost a full year ahead of schedule, we have become more efficient in the process and are realizing cost savings that drive a more competitive tool for our customers and a strong straw.
Maurice Choy: Thanks, guys. Good morning. Recognizing you're going to talk about your projects more at the analyst day, as it stands today, do you think a placeholder assumption for CapEx in 2026 would be kind of in that $165 million range that you're spending in 2025? Do you think at this point, based on the nature of the discussions that you're having in the pipeline, that spend won't really hit in 2026, and therefore CapEx is likely to go down significantly in 2026, even if you announce new projects? Just trying to get a better sense of what to assume for CapEx and what to assume for free cash flow next year.
<unk> bottom line for our shareholders.
The team has successfully managed several priorities, while establishing itself as a standalone entity and I'm pleased maybe even a little relieved if I'm honest to say that we are now fully focused on our future strategic priorities of growing our business and enhancing our overall competitiveness, while ensuring safe operations financial strength.
And capital discipline.
Regarding our growth initiatives I visited our black Rod site last week and I am incredibly proud of the team's success. The team's success in executing this important project set to be delivered on schedule within budget and with an exceptional safety record.
Bevin Wirzba: Thank you, Pranisa. In our capital table, we only put capital that we have sanctioned. You'll note that we don't have anything sanctioned at present, but we're working towards maturing those projects forward. With what Van commented on and our tax optimization, we've created a bit more capacity with respect to free cash flow, and to be able to put towards capital. I would say that right now, we've consistently said that we need to invest roughly, on average, $100 million ± every year in order to deliver our 2% to 3% EBITDA growth CAGR. I would use that as probably a good proxy over the next few years. If we do find something that's larger or more material, then we would look to finance that on a different basis.
I'm confident that we will continue to demonstrate this type of project execution excellence as we mature our growth portfolio with organic and inorganic opportunities by adding more revenue lines through growth, we will become more competitive across our existing systems.
As we look to the future and the role <unk> will play in serving our customers. We are encouraged by the dialogue taking place in Canada, and the United States about advancing energy solutions. These conversations not only underscore the strength of the supply basin and the demand centers, we serve but also highlight the <unk>.
Zillions of our customers' businesses.
Both assets are strategically positioned to serve their needs and we are focused on being the first choice for our customers.
As we evaluate opportunities to leverage our pre invested corridors. It will be important to establish appropriate risk and return frameworks and carefully consider our investment requirements, which include minimizing shareholder capital exposure adhering to our capital allocation priorities and seeking permitting durability.
Bevin Wirzba: I think for your modeling efforts, remaining kind of consistent to what we originally guided right out of the gate would be the best approach.
Maurice Choy: Got it. That's helpful. Maybe following up on one of those modeling assumptions. I'm just trying to square the moving pieces here with the variable toll settlements and what the future P&L impact could look like at this point. I guess the way I read it is you've got maybe $33 million of remaining payments that South Bow would make over the next six years, but then you'd receive $19 million over the next two years. All of this, I think, is excluded from EBITDA. I just want to kind of double-check that.
On safe operations and asset integrity, we have made significant progress in our remedial actions following them up post 171 incident. The work our team is completing increases our confidence in the integrity of our system as we work towards returning Keystone to baseline operations and closing out.
The requirements of films as corrective action order.
Richard will provide further details on this shortly finally, we have laid out a clear set of priorities for our team as we focus our attention on our second year.
Van Dafoe: Yeah. It's Van here. All that would be normalized out of our EBITDA, so that wouldn't be included. If you're talking about GAAP and cash, then yes, yes, you're correct.
These priorities include maintaining safe operations maturing and executing on our growth portfolio continuing to enhance our competitiveness and the ongoing demonstration of discipline in our capital allocation and shareholder returns I will now ask fan and Richard to touch on the financial and operational edge.
Maurice Choy: Got it. Thank you.
Operator: Thank you. I'm showing no further questions at this time. I'll now turn it back to Bevin for closing remarks.
Bevin Wirzba: Well, thank you all for joining us today. We appreciate your continued interest in South Bow, and look forward to connecting with you next week at our investor day.
Spectation that come with these priorities Richard.
Thanks, Kevin and good morning.
I first want to speak to the progress we've made on our remedial actions milepost 171, while we await films as publication of the root cause analysis.
Operator: Thank you for your participation in today's conference. This has concluded the program. You may now disconnect.
The findings from the third party metallurgical lab report determined that the pipe and well to conform to industry standards for design materials and mechanical properties and our own records confirm the pipeline was operating within its design pressure at the time of the incident.
Through the remedial work, we've completed to date, we do not see evidence of a systemic issue and we're confident we will address the system's long term safety through actions, we've already taken or through planned enhancements to our integrity programs.
To that end since April we've completed six inline inspection runs the place of focus on the long seem pipe integrity.
Preliminary inspection results show no notable concerns reinforcing our confidence in the integrity and reliability of our system.
We've also completed 37 integrity digs with no one various issues to report.
Our investigative work will be ongoing through the end of this year and into 2026.
In parallel we are advancing important work, where they're in line inspection technology providers to address and resolve to limitations and apply the latest and advanced technologies across our system to increase our ability to prevent future incidents.
This work is being incorporated into a remedial work plan, which we will submit defensive for approval.
I anticipate that the Keystone pressure restrictions will eventually be lifted in a phased manner.
Proactively sharing with FEMSA the results of all investigative work being performed with the goal to safely returning Keystone to baseline operations. In 2026 ahead of when market differentials are expected to widen and demand for Uncoupler uncommitted capacity increases.
We have also completed 37 Integrity, digs, with no injurious issues to report.
Our investigative work will be ongoing through the end of this year and into 2026.
Switching gears to the Blackrock project.
We achieved overall project mechanical completion and place the 25 kilometer natural gas lateral into service.
In parallel, we are advancing important work where the inline inspection, technology providers to address and resolve tool limitations and apply the latest in Advanced Technologies across our system, to increase our ability to prevent future incidents.
Is being incorporated into our remedial work plan, which we will submit to finsa for approval.
These are both significant milestones and I want to extend a sincere. Thank you to the team for the tremendous effort and safely executing this project.
I anticipate that the Keystone pressure restrictions will eventually be lifted in a phased manner.
So the commissioning work is underway and we remain on schedule and within budget to place the project into service early in 2026.
Lastly, <unk>.
Over all parties withdrew from the legal proceedings related to the variable toll disputes filed with the Canadian and U S courts and regulators.
We're proactively sharing with fins, as a result of all investigative work, being performed with the goal to safely, return Keystone to Baseline operations in 2026. Ahead of when Market differentials are expected to widen and demand for UNC capacity, uncommitted capacity increases,
These proceedings had been active for nearly six years and with the matter behind US. The team is now focused that's turned its focus to new business opportunities to jointly create value for our customers and cell phone.
And a reminder, that as part of the separation agreement with TC energy self build was indemnified for this matter. In addition to other matters that existed prior to the spin up to a liability cap of $22 million.
Switching gears to the Black Rod project. In October, we achieved overall project mechanical completion and placed the 25 km natural gas lateral into service. These are both significant milestones, and I want to extend a sincere thank you to the team for the tremendous effort and safe execution of this project.
Facility commissioning, work is underway and we remain on schedule and within budget to place the project into service early in 2026.
I will now pass it over to Ben to discuss <unk> financial performance and outlook.
Thanks, Richard I'll start with our strong third quarter performance, which included delivering normalized EBITDA of $250 million as expected the marketing losses that we crystallized early in the year were largely offset by normalized EBITDA associated with higher maintenance capital expenditures in the period.
Lastly in October all parties withdrew from the legal proceedings related to the variable toll disputes filed with the Canadian and US courts and regulators.
These proceedings had been active for nearly six years, and with the matter behind us, the team has now turned its focus to new business opportunities that jointly create value for our customers and softball.
Distributable cash flow of $236 million.
Benefited from a current tax recovery of <unk> of $71 million, resulting from changes in U S tax legislation and successful optimization efforts from our tax team.
And a reminder that, as part of the separation agreement with TC Energy, South Bow was indemnified for this matter, in addition to other matters that existed prior to the spin, up to a liability cap of $22 million USD.
I will now pass it over to Van to discuss Health, post-financial performance and outlook.
To reflect these tax wins, we are revising our outlook for distributable cash flow to approximately $700 million for 2025, and our effective tax rate to range between 20%, 21%. We are reaffirming normalized EBIT guidance for 2025 of $1.01 billion.
Thanks, Richard. I'll start with our strong third quarter performance, which included delivering normalized EBITDA of $250 million. The expected marketing losses that we crystallized earlier in the year were largely offset by normalized EVA associated with higher maintenance capital expenditures in the period.
Turning to 2026, our outlook is supported by our highly contracted cash flows and the structural demand for our services. We are forecasting normalized EBITDA of $1.03 billion within a range of 2%.
Distribution cash flow of 236 million benefited from a current tax recovery of recovery of 71 million resulting from changes in US tax legislation and successful optimization efforts from our tax team.
The key drivers of the increase from 2025 include for marketing, we are expecting normalized EBITDA will be approximately $25 million higher reflect reflecting the recovery from losses recorded in 2025 for intra Alberta and other we expect normalized EBITDA will be approximately $10 million higher reflecting.
To reflect these tax wins, we are advising our outlook for distributable cash flow to be approximately $700 million for 2025, and our effective tax rate to range between 20% and 21%.
We are reaffirming normalized Eva guidance for 2025 of 1.01 billion dollars.
Blackrock cash flows ramping up in the second half of 2026 and for Keystone, We expect normalized EBITDA to be approximately $15 million lower primarily due to reduced planned maintenance capital expenditures following an active integrity program in 2025.
Turning to 2026. Our Outlook is supported by our highly contracted cash flows and the structural demand for our services. We are forecasting, normalized, ibida of 1.03 billion dollars within a range of 2%.
The key drivers of the increase from 2025 include.
Distributable cash flow is forecast to be approximately $655 million within a range of 2%.
As we consider the potential outcomes for the year, although I'll note that normalized EBITDA and distributable cash flow will be influenced by pressure restrictions and price differentials to exceed our baseline expectations pressure restrictions will need to be lifted early in the year and price differentials would need to widen on the other hand, the low end.
For marketing. We're expecting normalized ibida will be approximately 25 million dollars, higher rough reflecting the recovery from losses recorded in 2025.
Our guidance range reflect the scenario in which pressure restrictions have remained in place throughout the year and pricing differentials have tightened beyond.
For intra-Alberta and other, we expect normalized EBITDA will be approximately $10 million, higher, reflecting Black, Black Rod, cash flows ramping up in the second half of 2026. For Keystone, we expect normalized EBITDA to be approximately $15 million, lower, primarily due to reduced planned maintenance capital expenditures falling in active integrity program in 2025.
Current levels.
Our capital program next year includes approximately $25 million of maintenance capital, reflecting a less active plan and approximately $10 million of growth capital to complete the Blackrock connection project.
Distributor cash flow is forecast to be approximately $655 million, within a range of 2%.
We plan to update our outlook for growth capital once we have sanctioned our next development project.
Lastly, our board of Directors has approved a quarterly dividend of <unk> 50 per share payable on January 15th to shareholders of record on December 31 the.
As we consider the potential outcomes for the year, I'll know I'll note that normalized ibida and distrib cash flow will be influenced by pressure restrictions and price differentials to exceed our Baseline. Expectations pressure restrictions will need to be lifted early in the year and price differentials.
The dividend remains an important component of our total return proposition.
With that I'll hand, it back to <unk> for closing remarks.
Thanks, Dan after another solid quarter of financial and operational results and through the hard work and effort of the team and establishing south pole. We are strongly positioned our business for longer term growth and success our priorities for south both second year are clear, we will maintain safe operations and continue progressing towards returning Keystone.
Would need to widen. On the other hand, the low end of our guidance range reflects, a scenario in which pressure restrictions have remained in place throughout the year. And pricing differentials have tightened Beyond curtain, current levels our Capital program next year includes approximately, 25 million of Maintenance, Capitol reflecting, a less active plan and approximately 10 million of growth Capital to complete the black Rod connection project.
We plan to update our outlook for Growth Capital once we have sanctioned our next development project.
Baseline operations.
Mature and execute our growth portfolio of organic and inorganic opportunities continue to optimize our workflows and increase our competitiveness and maintain discipline with our capital allocation and shareholder returns.
Lastly, our board of directors has approved a quarterly, dividend of 50 cents per share payable, on January 15th, to shareholders, as a record on December 31st, the dividend remains an important component of our total return proposition.
With that, I'll hand it back to Bevin for closing remarks.
Look forward to sharing more on this next week at our first ever Investor day with that I'll now ask the operator to open the line for questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one I'm wondering if your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please standby with a composite Q&A roster.
We will maintain safe operations and continue progressing towards returning Keystone to baseline operations.
And our first question comes from the line of Sam Burwell of Jefferies. Your line is now open.
Hey, good morning, guys.
So we got the latest lift of a major project I believe yesterday in the.
Mature and execute our growth portfolio of organic and inorganic opportunities, continue to optimize our workflows, increase our competitiveness, and maintain discipline with our capital allocation and shareholder returns. We look forward to sharing more on this next week at our first-ever Investor Day. With that, I'll now ask the operator to open the line for questions.
Proposed crude pipeline that Alberta adapter was not on that but I understand that you are providing them.
At this time, we'll collect the question.
Engineering and permitting support so just curious for an update on that and then there are also some press reports that this is going back a little bit further about Keystone XL, a reboot of that being talked about in trade discussions between the U S and Canada, though with respect to that just curious about what sort of existing infrastructure, you guys might be able to leverage.
1 1 on your telephone and wait for your name to be announced.
To withdraw your question. Please press star 1. Again please stand by while we compile the Q&A roster.
And our first question comes a line of Sam Burwell of Jeffrey's your line is now open.
Two.
Man crew yesterday risk capacity over kind of the medium and longer term.
Yes. Thank you Sam it's <unk> here.
I mean first off one of our key capital allocation priorities is to.
Leverage our pre invested corridors that we have both in Alberta.
Pre invested capital that we made for the former Keystone XL project, and then pre invested capital along our system.
The United States.
Hey, good morning, guys. Um, so we got the, the latest list of major projects I believe. Yesterday in the, um, proposed, uh, crude pipeline that Alberta's after was was not on that. But I understand that you're providing some, uh, engineering and permitting support. So, they're just curious for, uh, an update on that. And then, there are also some press reports that I mean, this is going back a little bit further about, uh, Keystone XL. A reboot of that being uh, talked about in, uh, trade discussions between the US and Canada. So, with respect to that, just curious about what sort of, uh, existing infrastructure.
So we're always evaluating.
Ways of of of leveraging that pre spend.
So you guys might be able to leverage uh 2 uh expand crude capacity over kind of the, the medium and longer term.
For other solutions.
Directly to your question on the West Coast.
Project, Yes.
Yes, we are providing some advisory support.
Many members of our team have a long history in developing significant.
Significant capital projects and so we're lending some of that expertise to the provinces initiative there, but it goes no further than that.
With respect to trade negotiations to be honest, Sam that's way above our pay grade.
Where were.
We're obviously watching and encouraged by the ongoing dialogue between.
Canada than the U S but.
Can't really speak any more detail to what's going on behind closed doors that were not a part of so thank you.
Yes of course totally respect that.
The the commentary around marketing and tight crude spreads that certainly makes sense that squares with commentary from some of your peers.
Yeah. Thank you Sam. It's bevon here. Um, I mean first off, you know, 1 of our key Capital, allocation priorities is to uh leverage our pre-investment uh corridors that we have both in Alberta. Um, the pre-investment, the former Keystone XL project and then uh, pre-installed Capital along our system in the in the United States. Um, so we're always evaluating um, ways of of of leveraging that pre-pandemic to your question on the west coast, uh project. Um, yes we are providing some advisory support. Um, you know, many members of our team have have a long history and developing um significant capital projects and so we're lending some of that expertise to the provinces initiative there. But it goes no further than, than that.
I'm just curious if you have a view looking out a little bit further when you think that spreads can widen out inventories in Alberta can normalize and then we might start to see some contribution from Bard volume once presumably the debate has been lifted.
Um, with respect to, you know, trade negotiations, uh, you know, to be honest, I'm that's way above our pay grade. Uh, we're we're
Yeah, our views have remained very consistent on that front.
Where we are.
Anticipated with with our with the Tms pipeline coming on that that would relieve some of the egress issues that we had over the last number of years, but we're very encouraged by the supply growth that has been occurring by our customers. If you just listen to the last week of quarters from our customers here.
We're obviously uh watching and and encouraged by the ongoing dialogue between um Canada and the US. But uh I can't really speak any more detail to what's going on behind closed doors that were not a part of. So thank you.
Up in Canada.
You'll have noted that they are all very encouraged by potential growth in their organizations and so our outlook has us seeing <unk>.
Yeah, of course, totally respect that. Um, and then the, the the commentary around marketing and and tight crude spreads, that certainly makes sense and squares with commentary from some of your peers. Um, I'm just curious if you have a viewed looking out a little bit further, uh, when you think that, uh, spreads can widen out inventories in Alberta can normalize, and then we might start to see some contribution from Bad volumes once, presumably the uh, the gates been lifted.
<unk> being a lot more favorable in.
In and effectively late 'twenty six early 'twenty, seven where we see that.
That supply growth will exceed what currently exists for for egress.
Making making our systems likely to see more walkup and spot.
Spot needs.
Alright understood really appreciate the color. Thank you.
Yes. Thanks.
Thank you Omar for next question.
Our next question comes from the line of Maurice Choy of RBC capital markets. Your line is now open.
Yeah, our, our views have remained very consistent on that front. Um, you know, we were, you know, we anticipated with with our, uh, with the TMX pipeline coming on that. That would relieve some of the egress issues that we had over the last number of years. But we're very encouraged by the supply growth that has been occurring by our customers. If you just listen to the last week of quarters from our customers here, up in in Canada, um, you'll have noted that, uh, they are all very encouraged by potential growth in their organizations. And so our Outlook has us seeing um, conditions being a lot more favorable in, uh, 20 in in effectively late 20.
Thank you and good morning, everyone can I just double click on the tax optimization U S legislation changes can.
6 early, 27, where we see that, um, that supply growth will exceed what currently exists for egress.
Can you share a little bit more about what the score and if these benefits reflect.
And the guidance for this year for this and next year would actually translate to benefits also beyond 2026, or do you envision returning back to I guess, the prior cash tax run rate level.
Making making our our systems likely to see more walk up and then spot uh, spot needs.
All right, understood. I really appreciate the caller. Thank you.
Yeah, thanks. So
Thank you. One moment for our next question.
Yes. It is.
Van here Thanks for the question.
The tax.
We got were a couple of things one is the one big beautiful bill in the U S that allows us to deduct additional interest we had reached a cap on interest deductions. So that was extended so.
That would be as long as that legislation stays then we would continue to benefit from that.
Second piece was around tax optimization, and we identified some tax pools that we were able to accelerate.
Thank you and good morning, everyone. Um, can I just double click on the tax optimization and the US legislation changes? Uh, can you share a little bit more about what these were? And if these benefits, reflect, uh, in in the guidance for DCF for this and next year, would actually translate to the benefits also Beyond 2026, or do you envision returning back to a, I guess, a prior cash tax. Run rate level.
And so.
Tax pools were on our balance sheet and they were there we just accelerated them. So we'll get that benefit in 2025 and 2026 and then in 2027 will go back to more of a regular cadence. So it's really just a flip between current tax and our deferred tax.
Thanks.
Understood.
If I can finish with a question on the transition agreements.
Thank you previously mentioned that this transition will help improve your processes to be more efficient and realized cost savings for our customers to more competitive tool both of which I think you've reconfirmed today in your prepared remarks.
You also mentioned that could benefit our bottom line for our shareholders. So are you able to quantify what that is and whether this is within the 2% to 3% EBITDA CAGR of objective.
Yeah, it's it's van here. Thanks for the question. Uh, the tax uh, wins that we got were a couple things 1 is uh the 1, big, beautiful bill in the US that allows us to deduct additional interest. We had reached the cap on interest deductions so that was extended. So, um, that would be, you know, as long as that legislation stays then, then we would continue to benefit from that the second piece was around tax optimization and and we identified some tax pools that we were able to accelerate. Uh, and so those tax schools were on our balance sheet. And, and, and they were there, we just accelerated them. So, we'll get that benefit in 2025 and 2026. And then in 2027, we'll go back to more of a regular Cadence. So it's really just a flip between current tax and our deferred tax.
Yes, Maurice it's Bevan so.
Our objective of getting off of the TSA is as quick as possible in our first year.
It was yeah.
Youre not able to really optimize many of the processes within the company until Youre legitimately on your new systems.
A simple example of that would be.
Supply chain and procurement on how you issue and pay invoices.
We delivered Blackrock very successfully but it came with a very kind of clunky.
Understood, and if I could finish with a question on the transition agreements. I think you previously mentioned that this transition will help improve your processes to be more efficient and realize cost savings for your customers to a more competitive toll, both of which I think you reconfirmed today in your prepared remarks. But you also mentioned that this could benefit the bottom line for shareholders. So, are you able to quantify what that is and whether this is within the 23% objective?
Yeah, Maurice, it's bevon. So
Procurement system that we needed to use so were now as one just one example, being able to optimize that and the delivery I did point out in my remarks is that we believe that we can.
you know, our
Create those savings and those optimizations through too.
Our variable toll.
And but there are some of those cost savings that do then flow through as well down to EBITDA. We have not included any optimization efforts into.
Into our 2% to 3% outlook.
With respect to EBITDA going forward.
Those.
Those those elements, where we're still targeting to improve we've made good headway in that our year end results I hope to provide a good summary of what we found in our first year.
Objective of getting off of the TSA as quick as possible. In our first year is that it, it was you, you're not able to really optimize uh, many of the processes within the company until your legitimately on your new systems. And you know, and a simple example of that would be um, you know, supply chain and procurement and how you issue and pay invoices. And, you know, we delivered black Rod, um, very successfully. But it came with a very kind of clunky, um, procurement system that we needed to use. So we're now as 1, just 1 example, being able to optimize that and and the delivery I did point out in my remarks is that, you know, we believe that we can, um, create
Those savings and those optimizations through to, um, our variable toll, um,
But just for clarity Murray's we did not include that optimization into our EBITDA outlook guidance.
Okay. Thank you very much.
Thank you one moment for our next question.
Our next question comes from the line of Jeremy Tonet of Jpmorgan Securities. Your line is now open.
Hey, this is Ely on for Jeremy I wanted to circle back to the organic growth opportunity set I know opening remarks mentioned.
And but uh there are some of those cost savings that do then flow through as well down to ebitda. We have not included any optimization efforts um into our 2 to 3% Outlook. Um with respect to IBA going forward. Um those those those elements were were still targeting to improve. We made, good, Headway, and at our year end results, I hope to provide a good summary of what we found in our first year.
Coming development project, just hoping to get some more color on what types of projects you guys are looking at which side of the border and maybe just whether black rod kind of represents the template for a for growth projects as you see it.
But, uh, just for clarity Maurice, we we did not include that optimization into our ibida Outlook guidance.
Okay, so thank you very much.
Thank you Eli.
Thank you. 1 moment for our next question.
I think we're we're obviously going to have that as a subject area for our Investor Day next week, but.
Our next question comes from online of Jeremy, from JP Morgan Securities. The headline is not open.
Consistent to what we've said previously we've been listening to our customers and trying to understand what kind of services, they're looking for.
For their businesses to be competitive where we were able to provide a great solution for IPC on Blackrock and we're in a number of conversations both in Canada and in the United States.
Hey, this is Eli on for Jeremy. I wanted to circle back to the organic growth opportunity set. I know the opening remarks mentioned the upcoming development project. Just hoping to get some more color on what types of projects you guys are looking at, which side of the border, and maybe just whether Black Rod kind of represents the template for growth projects as you see it. Thanks.
And so we have seen probably the.
Yeah, thank you Eli. Um,
When we launched this business and made the announcement that the spin was occurring in mid 2023.
I'd say since that time, the environment actually has become a little bit more constructive in both.
Both Canada, and United States, and so where we've been maturing those those growth growth opportunities.
And Thats one of our key priorities for 2026 has to mature and execute on the next on the next organic and inorganic opportunities.
Thanks, looking forward to the Investor Day and then.
Just for the second question I think you guys had a helpful slide showing 2026 guidance drivers.
But just hoping to get some more context on how the kind of milepost 171 remediation plan fits into potentially reducing that DRA and.
Providing some upside next year, what does that process look like and when might be expect a little bit of color there.
Maybe framing how that how that fits into the guide.
We were able to provide a, a great solution for IPC on black rod and and we're, we're in a number of conversations both in Canada and in the United States. Um, and so we we've seen probably the, you know, when we launched this business and and made the announcement that the spin was occurring in in mid 2023, I would say since that time, you know, the environment actually has become a little bit more constructive in both, uh, both Canada and the United States. And so we're we've been maturing those those growth growth opportunities. Um, and that's 1 of our key priorities for 2026 is to mature and execute on the next on the next organic and inorganic opportunities.
So.
I'll start and then pass it over to Richard on the plans for this year.
When you look when we provided the guidance around the range that I just want to remind everyone that.
90% of our EBITDA comes in.
Every year through our contracted period. So we have a great solid base to start from.
And we've been working very diligently around getting our system capacity backup, but at a very high level, what has allowed us to deliver all of our contracts and deliver our base business is our system operating performance. Our Sof has really hit it out of the park and our team.
Uh thanks. Looking forward to the investor day and then um, just for the second question I think you, you know, you guys had a helpful slide showing 2026 guidance drivers, um but just hoping to get some more context on how the kind of mile post 171 remediation plan fits into, potentially reducing that drra and um you know, providing some upside next year, what is what is that process look like? And when might be expected a little bit of color there and um, you know, maybe framing how that how that fits into the guide
<unk> have done a great job.
Allowing our systems to be available for for the volumes that we're moving today, but I'll pass it to Richard to just talk about are.
Mitigation plans in the work that's left.
To do here.
As part of the Mount plus 171 sure yes.
I touched on in my comments some of the work that we've completed to date. So we're implementing a comprehensive remediation program that system wide.
We've completed so far six inline inspection runs 37 integrity digs will continue that work through this year and into next year and then what will end up doing is filing a all of this work as it's ongoing but we'll file a remedial work plan with FEMSA and eventually work with the regulator around.
Lifting the pressure restrictions our goal is for that to happen sometime in 2026, it's hard to point to a to a precise timing for it but as we as we work through the year, we'll I think we'll start to see pressure restrictions removed in increments and that will allow us more access to.
So, I'll, uh, I'll start and then pass it over to Richard on, on the plans for this year. Um, when you looked when we provided the guidance around the range, you know, I just want to remind everyone that, you know, 90% of our ebit, uh, comes in, uh, every year through our contracted period. So we have a, a great solid base to start from, um, and we've been working very diligently around getting our our system capacity back up. But at a very high level, what is allowed us to deliver all our contracts and deliver our base businesses? Our system, operating performance our SOS as as really hit it out of the park and our teams have done, a great job, uh, allowing our systems to be available for for the volumes that we're moving today. But I'll, I'll pass it to Richard to just talk about our, um, mitigation plans in the work. That's left, uh, to do here, um, as part of the m,
Two uncommitted volumes, which we think will ramp up through the year and Eli It's Dan here I think that even if pressure restrictions are lifted with those tighter differentials you won't see a ton of EBITDA from those spot volumes.
171 sure. Yeah and I and I I touched on in my comments, you know, some of the work that we've completed today. Uh you know, so we're we're implementing a comprehensive remediation program that that systemwide, uh, We've we've completed so far 6 in line inspection runs and 37 Integrity digs. We'll continue that work through this year and, and into next year and then what we'll end up doing is, is filing. A, uh, all of this work as it's ongoing, but we'll file a remedial.
So nothing to point out.
Great I appreciate the color I'll leave it there thanks.
Thank you one moment for our next question.
Our next question comes from the line of <unk> of Wells Fargo. Your line is now open.
Work plan with fimsa and eventually work with the regulator around, you know, lifting the pressure restrictions our our goal is for that to happen sometime in 2026. It it's hard to point to a, to a precise timing for it. But as we as as we work through the, the year will I, I think we'll start to see pressure, restrictions removed and and increments and, and that will allow us more access to uh,
Thanks, guys good morning.
So recognizing youre going to.
Talk about your projects more at the at the Analyst day.
But as it stands today do you think a placeholder assumption for Capex in 2026 would be kind of in that $165 million range that youre spending in 'twenty five or do you think at this point based on the nature of the discussions that youre, having in the pipeline that.
To uncommitted volumes, which we think will ramp up through the year and Eliza, I think that even if pressure restrictions are lifted with those tighter differentials, you won't see a ton of EBITDA from those spot volumes. So that's just another thing to point out.
Great. I appreciate the caller. I'll leave it there. Thanks.
Thank you. 1 moment for our next question.
That spend wont really hit in 2006.
Therefore, capex is likely to go down significantly in 2006, even if you announced new projects just trying to get Im just trying to get a better sense of what you assume for Capex.
Our next question comes from the line of pratish of West. Fargo, your line is now, open,
And what to assume for free cash flow next year.
Thank you <unk>.
So we in our capital table, we only put capital that.
We have sanctioned and so youll note that.
We don't have anything sanctioned at present, but we're working towards maturing those those projects forward.
With with wet van commented on in our tax optimization, we've created a bit more capacity with respect to.
Thanks, guys. Good morning. Um, so I, you know, recognizing your, you're going to, um, you talked about your projects more at the, uh, at the Analyst Day. Um, but, you know, as it stands today, do you think a placeholder assumption for capex in 2026 would be kind of in that $165 million range that you're spending in 2025? Or do you think at this point, based on the nature of the discussions that you're having in the pipeline, that, um, you know, that spend won't really hit in 2026, um, and therefore cap...
Free cash flow and just to be able to put towards capital.
Is is likely to go down significantly. Um in 26 even if you announce new projects just trying to get and just trying to get a better sense of, you know what, what to assume for capex, um and what to assume for free cash flow next year.
I would say that.
Right now we've we've consistently said that we need to invest roughly on average 100 $100 million plus or minus every year in order to deliver our 2% to 3% EBITDA growth CAGR and I want to use that is probably a good proxy over the next few years.
If we do find something that's larger more material then we would look to finance that.
On a on a different basis, but I think for your modeling efforts.
The remaining kind of consistent to what we originally guided right out of the gate would be would be the best approach.
Got it that's helpful and maybe following up on one of those modeling assumptions. So I'm just trying to square that.
The moving pieces here with the variable toll settlement and what the future P&L impact could look like at this point I guess the way I read it as you've got maybe 33 $33 million of remaining payments that <unk> would make over the next six years.
But then you had received from $19 million over the next two years and all of this I think is excluded from EBITDA I, just want to kind of double check that.
And we've created it a bit more capacity uh, with respect to um, uh free cash flow and just um, to be able to put towards Capital. Um, I would say that, uh, right now we've we've consistently said that we need to invest roughly on average, you know, 100 100 million plus or minus, uh, every year in order to deliver our 2 to 3% debit dog growth kager and I would use that as as probably a good proxy over the next few years. Um, if we do find something that's larger or more material than we would look to finance that at a, on a, on a different basis. But um, I think for your modeling efforts
Yes.
Uh, remaining kind of consistent to what we originally guided, right out of the gate would be would be the best approach.
Dan here all of that would be normalized out of our EBITDA. So that wouldn't be included if youre talking about.
GAAP and cash then yes, yes youre correct.
Got it thank you.
Thank you I'm showing no further questions at this time I would now like to.
Turn it back to Kevin for closing remarks.
Well. Thank you all for joining US today. We appreciate your continued interest in south bow and look forward to connecting with you next week at our Investor Day.
Got it, that's helpful. Um, to maybe following up on 1 of those modeling, uh, assumptions. So I, I'm just trying to square, um, you know, the moving pieces here with the variable toll settlements, um, and what the future pnl impact could look like at this point, I guess the way I read it is you've got maybe 33, 33 million of remaining payments. That's Sobo would make over the next 6 years. Um, but then you'd receive 19 million over the next 2 years. And, and all of this I think is excluded from ibida. I just want to kind of double check that
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Yeah, it's it's down here. All that would be normalized out of our evida so that wouldn't be included. If you're talking about, you know, Gap and and cash. Then yes, yes, you've you're you're correct.
Got it. Thank you.
Thank you. I'm showing no further questions at this time. I'm going to turn it back to Bevin for closing remarks.
Well, thank you all for joining us today. We appreciate your continued interest in South Bow and look forward to connecting with you next week at our Investor Day.
Thank you for your participation. In today's conference, this is conclude the program, you may now disconnect