South Bow Corp

South Bow Corp Annual Report Summary (for the year ended December 31, 2025) - A Retail Investor's Guide

Welcome to a straightforward summary of South Bow Corp's 2025 annual report. This guide distills the company's performance, financial health, and key risks for the year ended December 31, 2025. All financial figures are in U.S. dollars unless otherwise noted.

Notably, 2025 marked South Bow's first full year operating as an independent, publicly traded company following its spin-off from TC Energy on October 1, 2024. For comparison, 2024 figures represent "carve-out" financials, showing how the business would have performed as a standalone entity before the spin-off.

1. Business Overview

South Bow Corp, a Calgary-based Canadian company with significant U.S. operations in Houston, Texas, specializes in transporting crude oil. The company operates liquids pipelines and facilities across Canada and the U.S., safely connecting crude oil supplies to key refining and demand markets. Its shares trade on the NYSE and TSX under "SOBO." South Bow generates most of its revenue from long-term agreements with customers for pipeline capacity, providing a stable revenue stream typical of regulated energy infrastructure.

2. Financial Performance

South Bow Corp's 2025 financial results, when compared to the 2024 carve-out figures, reveal a strategic shift towards profitability and shareholder returns, even with revenue challenges:

• Revenue: Total revenue decreased by 6.3% to $1.986 billion in 2025 from $2.120 billion in 2024. Lower oil volumes on the Keystone Pipeline System and tighter pricing primarily drove this dip. The company generates revenue from three segments: the Keystone Pipeline System, Marketing activities, and Intra-Alberta & Other operations.
• Profitability: Despite lower revenue, the company significantly boosted its bottom line. Net Income surged by 37% to $433 million in 2025, up from $316 million in 2024. Similarly, Income before income taxes rose to $497 million from $418 million. Stronger performance in the Marketing and Intra-Alberta segments drove this improvement, offsetting a decline in the Keystone segment.
• Earnings Per Share (EPS): Diluted net income per share increased to $2.07 in 2025 from $1.52 in 2024.
• Normalized EBITDA: Normalized EBITDA, a key measure of core operational performance, slightly decreased to $1.022 billion in 2025 from $1.091 billion in 2024. This primarily reflected lower Keystone pipeline and Marketing revenues.
• Cash Flow & Shareholder Returns: Distributable Cash Flow (DCF), crucial for dividends and reinvestment, increased to $709 million in 2025 from $621 million in 2024 – a positive trend for income-focused investors. Reflecting this, South Bow significantly increased its dividend payments, declaring $416 million in dividends in 2025 (or $2.00 per share), a substantial jump from $104 million (or $0.50 per share) in 2024.
• Capital Expenditures: Capital expenditures increased to $178 million in 2025 from $122 million in 2024, indicating ongoing investment in the company's operations.
• Shares Outstanding: As of December 31, 2025, the company had 208.8 million common shares outstanding, a slight increase from 208.2 million in 2024.

3. Management Discussion & Analysis Highlights

Management highlighted 2025 as a pivotal year. It marked the successful spin-off from TC Energy on October 1, 2024, establishing South Bow as an independent, publicly traded company. This strategic move, which involved transferring substantial assets valued at $14 billion (gross) and $13 billion (net), allows the company to focus on its independent strategy: delivering a sustainable dividend, strengthening its financial position, and optimizing its existing pipeline network.

Despite this positive strategic shift, the company faced operational challenges. The core Keystone Pipeline System experienced reduced oil volumes and pressure restrictions, particularly after the "Milepost 171 (MP-171) incident" in April 2025. This led to lower revenues for the segment, with Keystone's throughput decreasing to 584 thousand barrels per day (Mbbl/d) in 2025 from 626 Mbbl/d in 2024. Its System Operating Factor (SOF) also slightly declined to 94% from 95%. Management noted that ongoing issues related to the MP-171 and Milepost 14 incidents, along with variable toll disputes, continue to demand significant attention and resources.

Financially, management emphasized the significant increase in net income and distributable cash flow, despite slight dips in revenue and Normalized EBITDA. Stronger performance in the Marketing and Intra-Alberta segments drove this improvement, successfully offsetting the decline in the Keystone segment. The increase in capital expenditures reflects ongoing investments to maintain and enhance operational integrity and efficiency.

Management also identified a key challenge: a "material weakness" in its internal controls over financial reporting. The company is actively implementing a "remediation plan" to address this, underscoring its commitment to financial reliability and investor confidence.

4. Financial Health

South Bow manages a significant debt load with strong and growing cash flows, defining its financial health.

• Cash & Liquidity: As of December 31, 2025, South Bow reported $900 million in cash and cash equivalents, providing a solid liquidity buffer. The company also has access to substantial undrawn credit facilities to support operations and strategic initiatives.
• Debt: Total long-term debt stood at $5.768 billion in 2025, a slight increase from $5.716 billion in 2024. While substantial, the company's Net Debt (total debt minus cash) slightly decreased to $4.806 billion from $4.901 billion, indicating effective cash management.
• Debt-to-EBITDA Ratio: This key leverage metric was 4.7 in 2025, a slight increase from 4.5 in 2024. While this ratio is on the higher side for some industries, it is common for capital-intensive pipeline companies. The company's ability to generate strong and consistent cash flow (as seen in the increased Distributable Cash Flow) is crucial for managing this debt.
• Assets: The company's primary assets are its extensive network of pipelines and related infrastructure, valued at approximately $14 billion (gross) upon the spin-off. Maintaining access to capital markets and strong credit ratings are vital for its ongoing financial flexibility.

5. Competitive Position

South Bow operates in the highly capital-intensive and regulated crude oil pipeline industry. Its competitive position stems primarily from:

• Strategic Infrastructure: Ownership and operation of critical liquids pipelines, such as the Keystone Pipeline System, which are essential for connecting major crude oil supply basins in Canada and the U.S. to key refining and demand markets. These assets represent significant barriers to entry for new competitors due to their scale, regulatory requirements, and high construction costs.
• Long-Term Contracts: The company secures a substantial portion of its revenue through long-term, take-or-pay or similar contractual arrangements with creditworthy customers, providing revenue stability and predictability.
• Regulated Assets: As a regulated entity, its assets often operate under established tariff structures, which can provide a degree of revenue certainty and protection from direct price competition in certain segments.
• Operational Expertise: Extensive experience in operating and maintaining complex pipeline systems, ensuring reliable and safe transportation of crude oil. The company's competitive advantage stems from its existing, irreplaceable infrastructure and the contractual nature of its business, rather than direct price competition with numerous alternative providers for the same specific routes.

6. Risk Factors

Investors should be aware of several factors that could impact South Bow's performance and stock price:

• Customer Concentration: South Bow is highly reliant on a few key customers. Their top three customers collectively account for a significant portion of their revenue (e.g., over 60%). A substantial reduction in business from even one of these major customers could have a severe negative impact on the company's financial health.
• Operational Risks: The performance and integrity of their pipeline network are paramount. Risks include potential incidents (like the Milepost 171 incident), regulatory pressure on pipeline operations, and the ability to maintain and expand capacity. The successful execution of new projects, such as the Blackrod Connection Project, also carries inherent risks.
• Market & Energy Transition Risks: Changes in crude oil supply and demand, exploration activities, commodity prices, and broader economic conditions can affect throughput volumes and pricing. The long-term global shift towards cleaner energy sources (the "energy transition") poses a significant strategic risk to fossil fuel infrastructure companies.
• Regulatory & Legal Risks: Decisions from regulatory bodies, outcomes of legal disputes (including arbitration and insurance claims), and changes in environmental or trade policies could impact operations and profitability. The ongoing "variable toll disputes on the Keystone system" are an example of such risks.
• Financial Risks: The company's ability to access capital markets on favorable terms, maintain strong credit ratings, and manage fluctuations in interest rates, taxes, and foreign exchange rates are critical. The creditworthiness of their business partners (counterparties) is also a factor.
• Internal & Strategic Risks: Successfully executing growth strategies, realizing expected benefits from acquisitions or divestitures, and addressing the identified "material weakness in internal controls" are important. The company's reputation and the performance of its leadership and employees also contribute to overall risk.
• External Factors: Unforeseen events such as extreme weather, civil unrest, cybersecurity breaches, and global health crises could disrupt operations and impact financial results.

7. Future Outlook & Strategy

As an independent company, South Bow's strategy centers on three key pillars: delivering a sustainable dividend, strengthening its financial position, and optimizing its existing pipeline network.

For the upcoming year and beyond, the company expects to continue its efforts in:

• Operational Excellence: Prioritizing the safe, reliable, and efficient operation of its critical infrastructure, including addressing and remediating issues like the Milepost 171 incident and the identified material weakness in internal controls.
• Capital Allocation: Prudent management of capital expenditures, balancing maintenance and integrity spending with strategic growth projects that enhance long-term value.
• Financial Discipline: Maintaining a strong balance sheet, managing its debt profile, and ensuring access to capital markets to support its operations and strategic initiatives. The company aims to manage its leverage within appropriate ranges for its industry.
• Shareholder Returns: Continuing to evaluate its dividend policy to ensure it is sustainable and reflective of the company's cash flow generation capabilities.
• Market Adaptation: Monitoring crude oil supply and demand dynamics, as well as the evolving energy transition landscape, to adapt its long-term strategy and ensure the continued relevance and utilization of its assets.

The company's future success will depend on its ability to effectively execute these strategies while navigating the inherent operational, regulatory, and market challenges of the energy infrastructure sector.

In summary, South Bow Corp's 2025 performance reflects a company navigating its first year of independence, demonstrating strong profit and cash flow growth despite revenue declines and operational challenges. Its strategic focus on shareholder returns and financial stability, alongside managing significant debt and operational risks, will be key to its future success.