Executive Summary / Key Takeaways

• South Bow Corporation (SOBO) stands as a resilient energy infrastructure play, underpinned by a highly contracted business model with 90% of its normalized EBITDA secured by long-term agreements, providing stable and predictable cash flows.
• Despite operational challenges like the Milepost 171 incident, SOBO reaffirmed its 2025 normalized EBITDA guidance of $1.01 billion, demonstrating the robustness of its asset base and effective risk mitigation strategies, including comprehensive insurance coverage.
• The company is strategically focused on deleveraging, targeting a net debt to normalized EBITDA ratio of approximately 4.8x by year-end 2025, with cash flows from the Blackrod Connection Project accelerating this goal to 4x by 2028.
• SOBO differentiates itself with its Keystone System's unique "batch system" capability, offering faster transit times and a competitive route to the U.S. Gulf Coast, aiming for the highest netback for its customers.
• Future growth is anchored in leveraging pre-invested capital in strategic corridors and a 2% to 3% EBITDA CAGR outlook, supported by approximately $100 million in annual growth capital, as the company transitions to a fully independent and commercially focused entity.

South Bow's Strategic Corridor and Foundational Strengths

South Bow Corporation (SOBO) operates as a critical energy infrastructure company, managing 4,900 kilometers (3,045 miles) of crude oil pipeline infrastructure. This extensive network connects the abundant crude oil supplies of Alberta, Canada, to key U.S. refining markets in Illinois, Oklahoma, and the highly strategic U.S. Gulf Coast. The company's core business model is built on providing essential transportation services, complemented by ancillary offerings like storage at terminals. This positioning places South Bow at the heart of North America's energy landscape, serving as a vital link between a robust supply basin and strong demand markets for heavy oil.

The industry landscape is characterized by an anticipated increase in heavy oil supply, with management noting a 1 million barrels per day growth over the last decade. This trend is expected to continue, potentially leading to egress constraints out of the basin by early 2027. In this environment, South Bow's strategic corridor offers distinct competitive advantages. The company asserts its Keystone System provides the most competitive route to the U.S. Gulf Coast, delivering the highest netback for its customers. A key differentiator is its status as the "only batch system," enabling faster transit times for crude oil to these high-demand markets. This operational efficiency and market access are fundamental to its value proposition.

South Bow's operational and systemic advantages are crucial to its reliability and competitive edge. The company has invested significantly in its integrity programs over several years, conducting numerous in-line inspections and integrity digs to proactively manage its pipeline system. Following the spin-off, SOBO accelerated the implementation of its own Enterprise Resource Planning (ERP) system and is nearing completion of its transition service agreements (TSAs), including critical SCADA systems by the end of Q3 2025. This independence allows for optimized workflows and a singular focus on South Bow's business objectives. The metallurgical testing conducted after the Milepost 171 incident, which confirmed the pipe and welds met industry standards, underscores the engineering rigor applied to its assets. These operational technologies and integrity management practices ensure the safe, reliable, and efficient transportation of crude oil, directly contributing to its competitive moat and ability to meet contractual commitments.

The Journey to Independence: Building a Resilient Foundation

South Bow's journey as an independent entity began with its incorporation in 2023, culminating in its spin-off from TC Energy on October 1, 2024. This transition marked a significant milestone, allowing the company to forge its own path as a commercially focused and entrepreneurial organization. In its first year of independent operation in 2024, South Bow achieved a record year for both occupational and process safety performance, alongside strong operational results and system availability. The company successfully completed a South raise and conducted initial public offerings on both the Toronto and New York Stock Exchanges, attracting a top-tier Board of Directors and team.

The company's capital allocation priorities are clear: strengthening its investment-grade financial position, paying a sustainable dividend, and pursuing growth that leverages its existing infrastructure. This risk-managed approach is designed to deliver shareholder value by optimizing its strategic corridor. Early growth initiatives include the development of the Port Neches Link and the commitment to the Blackrod Connection Project, which exemplifies the strategy of leveraging pre-invested capital to provide competitive solutions for customers.

Financial Fortitude Amidst Headwinds

South Bow's financial performance in 2024 demonstrated the resilience of its business model, generating $1.09 billion of normalized EBITDA and $608 million of distributable cash flow. These results were primarily driven by its highly contracted assets and robust demand for uncommitted capacity early in the year, particularly on the U.S. Gulf Coast segment.

The first half of 2025 continued to underscore this financial resilience. In Q1 2025, normalized EBITDA reached $266 million, followed by $250 million in Q2 2025. Despite a volatile market backdrop and operational downtime, the company successfully maintained its debt metrics, prioritizing financial strength. A significant operational challenge arose with the Milepost 171 incident in North Dakota in April 2025. The company's rapid response, including a system-wide shutdown and quick repair, allowed the line to return to service within days. The estimated total cost for the incident, including response, repair, and cleanup, is approximately $60 million, with insurance policies expected to cover most of these costs. This swift and effective mitigation strategy protected the company's cash flows.

The cornerstone of South Bow's financial stability is its highly contracted business. Approximately 90% of its normalized EBITDA is secured through committed arrangements, extending over seven years, which insulates it from commodity price and volumetric risks. Even with pressure restrictions imposed after Milepost 171, South Bow expects to fulfill its contractual commitments of 585,000 barrels per day. The company's transportation service agreements include provisions for continued collection of fixed tolls during outages, further safeguarding revenue. For 2025, South Bow reaffirmed its normalized EBITDA outlook of $1.01 billion, a testament to the stability of its base business. The distributable cash flow outlook was revised upwards to $590 million from $535 million, reflecting positive impacts from changes in U.S. tax legislation (contributing approximately $15 million in current tax savings) and the inclusion of about $30 million in interest income. Maintenance capital expenditures for 2025 were reduced by $10 million to $55 million, prioritizing remedial actions for Milepost 171.

Strategic Growth and Deleveraging Pathway

South Bow's forward-looking strategy is anchored in both disciplined deleveraging and targeted growth. The company expects to exit 2025 with a net debt to normalized EBITDA ratio of approximately 4.8x. The deleveraging journey is set to accelerate significantly as cash flows from the Blackrod Connection Project commence in the second half of 2026 and increase through 2027, with a firm target of reaching a 4x leverage level by 2028. This commitment to strengthening its balance sheet is a primary capital allocation priority and is considered accretive to equity investors.

The Blackrod Connection Project is a prime example of South Bow's growth strategy, leveraging its pre-invested Grand Rapids corridor. This project is expected to bring 40,000 barrels per day of long-term contracted production into the system, contributing directly to the company's 2% to 3% EBITDA CAGR guidance. This growth outlook is underpinned by an anticipated annual capital expenditure of approximately $100 million to $130 million, allocated to projects within its existing corridors. Beyond Blackrod, South Bow is actively maturing a pipeline of organic and inorganic growth opportunities, noting a balancing increase in opportunities on both the Canadian and U.S. sides of the border.

Furthermore, the company is strategically optimizing its Marketlink business, shifting from a merchant-type approach to a more contracted strategy by adding additional delivery points like the Port Neches Link. This move aims to limit volatility for shareholders and enhance the predictability of cash flows. The completion of its transition service agreements, particularly the SCADA systems by the end of Q3 2025, will allow the team to focus entirely on South Bow's business, further enabling the pursuit and optimization of these growth initiatives.

Competitive Landscape: A Niche Player's Edge

South Bow operates within a competitive energy infrastructure landscape, positioning itself as a nimble entrant with a specialized niche. While larger players like Enbridge Inc. (ENB), TC Energy Corporation (TRP), Kinder Morgan Inc. (KMI), and Williams Companies Inc. (WMB) benefit from greater scale and diversified portfolios, South Bow leverages its focused approach and unique operational advantages.

Compared to its peers, South Bow's Keystone System offers a highly direct route with the fastest transit times to the U.S. Gulf Coast, a critical advantage for customers seeking optimal market access. Its "batch system" capability is a key operational differentiator, contributing to its ability to offer the highest netback for producers. While competitors like Enbridge possess vast networks and economies of scale, South Bow's agility and customer-centric approach, focused on competitive tolls and strong netbacks, allow it to maintain a strong market position for its contracted volumes. The company's market-driven contracts, approved by CER and FERC, also represent a distinct tolling mechanism compared to some competitors.

However, South Bow's smaller scale compared to industry giants like Enbridge and TC Energy presents certain vulnerabilities, particularly in terms of overall cash flow generation and the ability to absorb large-scale capital projects without impacting its deleveraging targets. The start-up of the TMX pipeline in May 2024 introduced additional egress capacity from the Western Canadian Sedimentary Basin, tightening arbitrage opportunities and creating headwinds for South Bow's uncommitted or spot volumes. Similarly, ongoing uncertainty around tariffs has further impacted demand for uncommitted capacity. Despite these pressures, South Bow anticipates that long-term supply growth and demand for heavy crude will eventually outstrip this modest incremental egress, thereby not jeopardizing its recontracting efforts for Keystone. The high capital requirements and stringent regulatory hurdles in the pipeline industry act as significant barriers to entry, which inherently protect South Bow's established infrastructure and market position, even as it competes with larger, more diversified players.

Risks and Mitigation: Safeguarding the Investment Thesis

Investing in energy infrastructure carries inherent risks, and South Bow is actively managing several key challenges. The Milepost 171 incident, while effectively contained and remediated, highlights the operational risks associated with pipeline integrity. The root cause analysis identified an axial crack on a long-seam weld, but mechanical and metallurgical testing confirmed the pipe and welds met industry standards. Importantly, management does not see evidence of a "broad systemic issue" and is implementing comprehensive remedial actions, including ongoing in-line inspections and integrity digs, to ensure continued safe and reliable operations. The estimated $60 million cost of the incident is largely covered by insurance, mitigating financial impact.

Uncertainty surrounding tariffs poses another risk, primarily affecting South Bow's uncommitted capacity and marketing segment. To mitigate this, the company has proactively shifted its Marketlink business towards a more contracted strategy, reducing exposure to market volatility and tariff-related headwinds. This strategic pivot reinforces the stability of its overall cash flows.

Furthermore, South Bow is involved in a variable toll complaint process in both Canada and the United States. While the Canadian Energy Regulator (CER) decision is pending, and the U.S. FERC decisions are under appeal, South Bow has incorporated these potential impacts into its financial guidance. Crucially, the company's aggregate exposure from this issue is capped at CAD30 million, subject to liability indemnification provisions with TC Energy, limiting the financial downside for shareholders. South Bow's commitment to transparent communication with regulators, customers, and industry peers, coupled with its agile response capabilities as a standalone entity, underpins its ability to manage these risks effectively.

Conclusion

South Bow Corporation presents a compelling investment thesis rooted in its resilient, highly contracted business model and strategic focus on leveraging existing infrastructure for growth. The company's ability to maintain strong financial performance and reaffirm its 2025 normalized EBITDA guidance of $1.01 billion, even amidst operational incidents and market headwinds, underscores the stability provided by its long-term contracts. With a clear path to deleveraging, supported by the Blackrod Connection Project and disciplined capital allocation, South Bow is poised to strengthen its investment-grade financial position.

The company's operational and systemic advantages, including its unique batch system and robust integrity programs, provide a competitive edge in connecting Western Canadian crude to the high-demand U.S. Gulf Coast. While facing competition from larger, diversified players, South Bow's focused strategy and commitment to customer netback position it favorably for future contract renegotiations and modest egress expansions. Investors should monitor the progress of its deleveraging, the successful integration of new projects, and the resolution of regulatory matters, as these factors will continue to shape South Bow's trajectory as a stable and growing energy infrastructure provider.