South Bow Corp (SOBO) 2024 Q4 法說會逐字稿

Hello everyone and welcome to the fourth-quarter and year ending 2024 results conference call and webcast. (Operator Instructions) Please be advised that today's conference is being recorded.

Now it's my pleasure to turn the call over to the Director of Investor Relations, Martha Wilmot. Please proceed.

Thank you, Carmen, and welcome everyone to Sabo's fourth quarter and year-end 2024 earnings call. With me today are Bevin Wirzba, President and Chief Executive Officer; Van Dafoe, Senior Vice President and Chief Financial Officer; and Richard Prior, 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 as required.

Before handing it to Bevin, 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 Bow's SEDAR+ profile and South Bow's filings with the SEC. Today's discussion will also include non-gap financial measures and ratios, which may not be comparable to measures presented by other entities. Finally, I'll ask our analyst callers to hold themselves to 2 questions each to keep the discussion moving along.

With that, I'd like to turn the call over to Bevin.

Thanks, Martha, and thank you everyone for joining us today and for your interest in South Bow. The last year has been filled with many firsts. I promise not to mention them all, but I'd like to call out a few accomplishments of our team that make me very proud. First and foremost is our outstanding safety performance. 2024 was a record year for both occupational and process safety performance, and we delivered record operational results with strong system availability and throughput across our systems. That's in addition to a successful vet raise IPOs on both Toronto and New York stock exchanges and attracting a top tier board of directors and team.

While we have already accomplished so much, I remind the team that we've only just climbed the first mountain, and we still have a couple more to go. To extract as much value from our strategic corridor as possible, we continue to fully establish our organizational capabilities and optimize the way we run our business to ensure long-term success and competitiveness. That brings me to South Bow's capital allocation priorities and our risk managed approach to delivering shareholder value.

In addition to paying a sustainable dividend with an attractive yield, we are keenly focused on strengthening our investment grade financial position. The best way for us to do that is to leverage our existing infrastructure to deliver the highest returns possible for our shareholders. Our Blackrod Connection project in our Grand Rapids corridor is a great example of that ability to leverage existing infrastructure. We also want to preserve flexibility so that we can weigh deleveraging and growth opportunities, which both accrete value to our equity holders.

Against return of capital measures. Against return of capital measures, our capital allocation decisions are and will be measured against our risk appetite. We are encouraged by our by the enthusiasm expressed in the United States and Canada regarding advancing energy solutions, and we are 100% behind those efforts. I do want to emphasize that our approach to growth and project development will be within our risk preferences and adhere to the capital allocation priorities I just outlined.

We've received a lot of inbounds regarding our current open season. We are looking at ways to leverage our existing infrastructure to provide a new solution for customers. We look forward to be able to talk about this potential solution in the future. With that, I'll briefly highlight our strong financial performance in 2024. South Bow generated $1.09 billion of normalized EBITDA and distributable cash flow of $608 million. These results were underscored by our highly contracted assets, significant demand for uncommitted capacity on Keystone early in the year, and continued strength and demand for capacity on the US Gulf Coast segment of our system.

Now looking to 2025, our financial expectations are underpinned by 90% of our normalized EBITDA secured through committed arrangements. These carry minimal commodity price or volumetric risk, resulting in stable and predictable cash flows. We expect to generate normalized EBITDA of $1.01 billion this year within a range of 3%.

While a very small component of our business, the ongoing uncertainty around tariffs may create headwinds for our uncommitted capacity. We have taken steps to reduce our risk exposure within our marketing segment in the face of such market volatility as we shift more of our market-link business to our contracted, regulated portfolio.

We are entering 2025 in a strong financial position and remain on track to meet our near-term deleveraging targets. Consistent with our outlook at spin, we expect our leverage to increase modestly through 2025 as we advance the Black Rod connection project and incur one-time cost to continue establishing our organizational capabilities.

We forecast that we will exit the year with a net debt to normalized EBITDA ratio of approximately 4.8 times. Our deleveraging journey will begin in 2026 when the Blackrod Connection project starts generating cash flow. Lastly, we will continue to return shareholder value through our quarterly dividend of $0.50 per share, which our board of directors approved yesterday.

The dividend will be payable on April 15th to shareholders of record on March 31st.

With that brief brief look back at 2024 and an outline of our expectations of 2025, Southpaw is strongly positioned to continue safely and efficiently delivering value to our customers and our shareholders. I'll now turn it back to the operator for questions.

(Operator Instructions)

Maurice Choy, RBC Capital Markets.

Thanks and good morning, everyone. Maybe it's coming back to one of your prepared remarks about receiving a lot of inbounds in regards to your current open season. I assume that's regards to, possibly Big Skype, but maybe just speaking more broadly, can you just discuss, what have you been seeing and what kind of inbounds you've been getting in terms of sizes, in terms of interest, in terms of timing, in terms of getting more WCSB egress, whether that be the solution or other solutions.

Great question, Maurice. This is Bevin.

It's been long noted that the Western Canadian sedimentary basin has been egress constrained for years and, with the Uptake on TMX last year we saw the first really increase to that egress in decades out of the province. With respect to future demand, we've seen supply growth also exceed expectations, and we're seeing customers continue to consider increases to development within their basin, given the competitiveness of their assets. And so we don't talk about the commercial interest on any open seasons. It's a confidential process, but we're very encouraged by the base fundamentals within the basin, not only from the supply side, but also the demand side.

We're seeing extreme. Demand, in the Gulf Coast in particular for heavy barrels out of Canada, and we believe that both the supply and demand fundamentals will persist here over the next few decades.

Thanks. And I believe it's a quick follow up to that, you mentioned as well that your growth approach is going to be within the risk preferences that you've outlined today and as well as in the past. Has there been any change in terms of how fast you may get to your long-term debt to a target, which I think in the past, we were all trajecting towards somewhat closer to the end of the decade, but not.

Maybe just before that.

Yeah, we're laser focused as our first capital allocation priority on the deleveraging of getting down to that 4 times, and we see that in that 2028 time frame, Morris, and we would never sacrifice that, it's very important for us as we mature our business to maintain a strong balance sheet and we see that as also a creative to the equity investor.

Thanks. And just finishing off on the guidance piece, obviously a lot of discussion here about tariffs both on the Keystone spot side as well as the marketing and sounds like you de-risk the guidance a little bit, but I wonder whether you could paint us a little bit of a picture as to how, what are the things should be watching out for from a downside perspective from the guidance that you've seen today.

So we, fortunately for us we have such a strong contracted base, I mentioned 90% of our EBITDA is fully contracted. And in our guidance, we put that 3% range, there has been quite a bit of uncertainty in the marketplace, as you point out, even with the tariffs not in place earlier in the year, we saw volatility in terms of the arbs that drive the uncommitted barrel, not only on our Keystone system but our marketing system. So, but with what we see today, we believe we can manage.

The balance of the uncertainty on tariffs within that 3% range on our guidance and. And so perhaps I'll turn it over to Van maybe to just walk through you know how we got from last year to this year's guidance because I think that will provide some clarity for all.

Thanks, Bevin. Yeah, so in 2024, our EBITDA of $1.91 billion and walking that down to $1.10 billion, that uncommitted capacity that Bevin talked about, that's approximately $40 million and then reducing our outlook for a marketing segment is another $30 million.

Also, if you remember what we What we said is our Q3 '24 financials would be a good indication of what 2025 would look like. And so a reminder that EBITDA in Q3 '24 was CAD360 million. So if you annualize that and take the current exchange rate, you get to that $1.10 billion range.

Understood. Thank you very much.

Aaron McNeil, TD Cowen.

Hey, morning all thanks for taking my questions. As we think about potential future growth opportunities for South Bow, I was wondering if you could give us a bit of a rundown on your recapitalized optionality if you want to call it that or some capital maybe that was sent as part of Keystone XL or associated with that. I'm thinking of like, the 150,000 or 150 kilometers of installed pipe made I think there are a few pump stations. Maybe additional potential capacity on the Inter Alberta pipelines or the Gulf Coast segment. So again, just sort of what's sort of in the portfolio today, any, and any details on, what the some capital or replacement value of that those assets might be.

Yeah, thanks, Aaron. I'll remind the audience here that when we think about our pre-capitalized corridor, there's two main corridors that have seen the most pre-investment, and I'll start first on the south end of our system, that being our Gulf Coast pipe segment that originates from Steel City going to Cushing and then Cushing to the Gulf Coast. That was a pre-built, that capital is in the ground. And that's a 36 inch pipeline that originates at Steel City. And so we've been optimizing the utilization of that through our Marketlink commercial asset.

And as we add additional delivery points like the Port Neches Link in the Gulf Coast, we're looking to move away from a strategy that had a lot of volumes been moved by our marketing affiliate. To more a contracted strategy on that asset. And so by adding additional delivery points, we're we're able to strengthen that contracted position on that Gulf Coast segment. So the capital there is in the ground and as you mentioned, pump stations through the development of Keystone XL, some of that capital did go into that Gulf Coast section as well.

So. That capital is in the ground and we are currently and have been optimizing it. The other main corridor that was a pre-investment for Keystone XL was our Grand Rapids corridor, and that corridor, our first example of how we've been able to leverage that is the Blackrod Connection project, which allowed us to provide a very competitive tool to our customer. And bring on, 40,000 barrels a day of long term contracted production into our system.

So that corridor in Alberta includes, originating barrels all the way up into the oil sands in north of Fort McMurray, all the way into our Heartland and Edmonton terminals.

In addition to that, as you mentioned, we did progress some capital opportunities in Alberta. As a pre-investment and part of the investment of Keystone XL and that capital is in the ground, but we don't comment in terms of that that that capital was previously impaired and we're we're looking to see how we can optimize those corridors in the future.

Okay, fair enough.

And then just switching gears, understand the guidance in terms of the uncommitted volumes, but as it relates to Q1 specifically.

Did volumes remain uncommitted volumes that is on Keystone remain elevated prior to tariffs being implemented or can you give us a sense of, the year-to-date actuals?

Yeah, so you know this goes back to what we've been pretty consistent on what our outlook has been for 2025. So you'll recall back to even mid last year when on a second quarter conference call I highlighted that. The TMX pipeline successfully got into service in May. That was 5 months later than what we had anticipated for 2024. So our 2024 results were higher due to a much wider arb being able to drive a higher value for our uncontracted.

Barrels on the system. Once that service got into, once that capacity got into service, we indicated to shareholders that we anticipated that the arbs would be much tighter for our uncontracted barrel and that we saw that that outlook would remain through 2025. And so we are seeing quite a tight arb.

In for our uncontracted Keystone barrels, and we saw that in Q1.

What tariffs did do, and even with them not being put into place until earlier this week, it did affect the arbs. And so when you think about a liquid system, a customer has to make a determination of their nominations a month ahead of those barrels being moved onto the system. And given that uncertainty we did see some changes in behaviors of our customers with the potential of tariffs coming on and the other options for our customers are to, leave those barrels in storage or move them east or west and so we anticipate that that that will continue to be a headwind as long as tariffs are in place as it it provides. Another incentive for customers to consider other options than moving their barrels so.

Okay great thanks I'll turn it back.

Robert Hope, Scotiabank.

Good morning, everyone. Two relatively high level questions. The first is regarding incremental egress out of the basin.

You don't need to specifically talk about the open season, but how do you think about projects increasing egress out of Western Canada, in the context of. Your Keystone contracts expiring in a couple of years, could that be competitive there, or are you seeing, such growth out of Western Canada that you don't see any incremental egress cannibalizing, the strength of your recontracting efforts?

Yeah Robert, that's a great question. I think what you're hearing from our competitors and what you could imply from our open season is that.

There are modest opportunities to expand egress, and when I say modest, when you think about 4 million to 5 million barrels leaving Canada, south, we're talking a few percentage points at best in terms of optimization and growth on that on that base, and so we see supply and the strength of the base and. And the demand for heavies in particular, outstripping that.

That optimization or that modest kind of egress capacity that could be developed so we don't see it jeopardizing our long term recontracting of of Keystone. I also remind folks that you know we we do provide the most direct route on our base system with the fastest transit times with the only batch system. Which is, which have very compelling attributes to serve our customers which straddle both the supply and the demand side of our system. So we do have a very unique corridor that we believe has has attributes that will still be very compelling when we go to the recontracting of our base asset.

Alright, that's helpful.

And then in your prepared remarks you mentioned, growth capital would be, see through the lens of your risk preferences as well as leverage, when you think about, your delevering past as well as some opportunities on the growth side. You know how much capital or how large of a project would be too large, just given your intentions to delever just trying to get a sense of, maybe some goalposts of what is the upper end of projects you'd look at.

So Robert, our job is to create value for, not only our customers but for our shareholders. So our base guidance of 2% to 3% EBITDA growth, really is underpinned by around USD400 million to USD500 million of being spent over a four-to-five-year period, so around $100 million a year. At our build multiples that that creates that base 2% to 3% growth if there's opportunities that come forward in in our corridors that might have increased capital requirements, we'll look at those in a bespoke way to see what is the right way to finance those going forward but again not to jeopardize our balance sheet strength.

Going forward, and we believe that the types of Contracts that we could achieve could support the financing solutions that we might put in place to to to develop those projects in the future.

Alright appreciate that. Thank you.

Patrick Kenny, NBF.

Thank you, good morning, just maybe on the open season here and and outside of the commercial aspect, but. more from a process timing perspective, when do you think you might have the route fully mapped out and I guess from a cross border standpoint, are you contemplating utilizing some of the infrastructure that was put in place from Harvey down towards Montana or is the thinking, going further east across Saskatchewan and then entering the US through North Dakota just in order to, mitigate some of the risk around legal challenges at the state level.

Yeah, so Patrick, we're, as I mentioned, we don't, we don't talk about.

These very early feasibility stages of an open season and what we're contemplating I think our comments regarding leveraging our our existing corridors, you can take that as guidance as to what we're focused on and contributing to a potential egress option, leveraging what has been capitalized historically is is what we can bring to the table. And obviously, as we move forward, today's environment is not an easy environment, for our customers or or for developers, given the level of uncertainty, so it's going to take us some time to determine the feasibility of this, open season and you know when we have something meaningful that we can talk to. In terms of, routes and what type of capital exposure there may or may not be, we'll bring that forward at the right time when it, when it's actually meaningful and we can be clear with our investors.

Understood, and maybe just from an ownership perspective I mean should we be thinking of. Classic 50/50 JV with your partner on all the the new infrastructure that might be required to make this happen or. Are you thinking maybe or you're open to maybe a smaller minority ownership stake. Just to keep the time frame in line with pre previous guidance to get down to the, 4.5 times leverage ratio within the next 2 to 3 years and reach that 4 times marker, longer term.

Yeah, Patrick, I mean you just highlighted even in your question there's there's a ton of different alternative ways of of advancing a project in terms of ownership levels and and our participation, and we're looking at all those alternatives right now our main focus right now is is just listening to our customers and understanding what they may or may not need that will be the foundation of what we.

Will inform us of what alternatives then that we need to consider whether we can participate going forward but the first step and it is just to determine if there's commercial interest in something being developed and and that's not a guarantee. And so until we know what that looks like we can't advance on our alternative analysis around what is the best way of our participation going forward.

Okay, got it. That's great, thanks Bevin.

Robert Catellier, CIBC Capital Markets.

Okay, just wanted to address the the marketing situation for a minute, you know I.

Applaud your discipline and risk management in light of a volatile market, but I'm curious what you need to see in the market to be comfortable returning your exposure and activity levels to where they were previously is it simply a question?

Of tariffs or a question of arbs, or is there something more holistic involved in the whole equation?

That's a great question, Robert. When this asset was within TC Energy, our marketing strategy had perhaps a little bit more latitude in terms of its risk preferences, and was able to be perhaps a little bit more of a price taker given the size of our entity and and our approach to. Contracting and the risk preferences that we have and to service to ensure that we can.

Really focused on our capital allocation priorities of deleveraging and the like. We shifted even ahead of learning about the potential even of tariffs. We had begun the shift to move our marketing affiliate strategy more to a contracted basis. As you recall, like our market link asset was.

Was effectively a pre pre-commercial strategy to Keystone Xcel coming on and all of those contracts fell off at the time of effectively though.

Determination of the Keystone Xcel project and so we've been building up the quality and tenor of of those contracts on that system and and so that shift to our marketing strategy to convert those uncertain more merchant type barrels into a contracted barrel was consistent without even seeing the tariffs and I think the tariffs have just.

Made reinforced our decision to pursue a more contracted strategy for those barrels. Now we'll always use our marketing affiliate to optimize, and really the optimization is in support of our customers.

The more barrels that we can put through our system allows us to reduce the variable cost for all our customers. So we'll always maintain a marketing strategy to optimize, to improve the variable pool for our customers. But we're we're very focused on.

Making our contracted base even stronger, which I think our shareholders cot based on kind of the risk profile of our business.

Okay, and then, maybe just on the variable toll issue there's been a lot of process so far where do you think you are in terms of, reaching conclusion on this issue and what sort of risks do you see, going forward on that issue?

Yeah, I'll start with that, Robert, and then I'll pass it over to Richard. Number one, for us is, we're a customer centric entity and, being in a dispute with our customers is not where we want to be. So we've made it a very high priority for us to TRY to find a solution with our customers. That's the way we can find a path forward to develop new opportunities when we're aligned with all our customer base. But to give you an update of where we're at in that process, I'll turn it over to Richard.

Yeah, sure, thanks. And as you pointed out, there's there's been a big, a few years of process and I.

I can, I guess, elaborate on where we are a little bit. I can't get into too much details as it's an ongoing, commercial and legal issue, but, regarding the process, there, the variable to complaint was filed in Canada and the United States, and so on the Canadian side.

The CER hearing process has been completed and we're awaiting a decision that would come from the CER in the very near term. We think that could come in, potentially even later this quarter, but likely if not, early in the next quarter.

On the US side with the FERC, decisions have been made by the ALJ and the FERC commission, and, but that is being appealed. And so with the decisions that have been made, we have provisions that are that are in our financials and we have incorporated those decisions into our future guidance. But one thing I just remind you of is that this is all subject to the liability indemnification provisions that that we have with TC Energy as part of our separation agreement and what that entails is that that Salfo, would accrue up to 14%. Of, with a cap at CAD30 million, so that is our kind of our aggregate exposure that that we could reach from this issue and incident. But as Bevin started his his comments, we are absolutely still continuing to have commercial discussions with with our customers, ideally we can reach a commercial resolution that that is acceptable to all parties.

Okay, thank you for the update.

AJ O'Donnell, TPH.

Morning everyone, thanks for taking my questions. Maybe just kind of starting on the longer term outlook of 2% to 3% growth rate in EBITDA. I'm just curious, what needs to happen over the next couple of years to hit that target. Is this just, strictly reversing some of the headwinds that we've seen to the 2025 budget, or just what other additional details can you provide on that longer term outlook?

Yeah, so AJ we.

We actually just became open for business a few months ago, to be H1st, we didn't have a capital budget over the last number of years. We were fortunate to be able to develop the port and interest link as an example and then as part of the spin, commit to the Black Rod project. But the team has been extremely active in the last even 5 months of existence here in listening to customers, understanding what potential opportunities that they are looking to see us capitalize, and so we don't see any necessarily any headwinds or barriers for us to develop and deliver on the 2% to 3%.

We'll provide more transparency as those evolve and move from feasibility stages to To more firm ground, but, the nature of our corridors in both the United States and in Canada is such that we're right in the heart of where movements are very compelling delivery points, increased delivery points to export options on the south end of our system and capturing additional volumes in in Alberta are exactly what we're we're built to do.

And so we don't see any barriers to those and we'll provide more transparency as we mature those along the curve, but. We literally just became open for business on October 1st and so you know it takes a bit of time to to mature opportunities and then prioritize them so that we can maximize the value to shareholders going forward.

Understood that and maybe just. One more on the marketing business. I mean, given what we've seen so far this year between, underlying volatility, the impacts on tariffs, just trying to think about your strategy to navigate the volatility. In crude markets in 2025 and to what extent if we saw much higher volatility, would you be able to kind of capture or recoup some of the expected Marketing headwinds that you're guiding to in 2025.

Yeah, so for my previous remarks, our primary driver is to move our marketing strategy to a much more contracted, approach to to limit that volatility for shareholders, but as you say there our team is in place we we will look to see windows when when there are abilities to move more barrels and capture capture some of that upside that could exist.

In that volatility, but we haven't guided to any of that in in our release, and we wouldn't try to make any expectations of what we may or may not be able to achieve there, we've seen, in the past couple months, arbs move upwards of, up 50% down 50%, so there have been quite. A significant movements within the ARPs that drive our business in both our market link and our Keystone uncontracted barrels. So, we'll look to continue to optimize and try to claw back some additional dollars, but I wouldn't see it material to our guidance going forward.

Appreciate the detail. Thank you very much.

Keith Stanley, Wolfe Research.

Hi, good morning. On the recent approval from FISA to lift the pressure restriction, can you give a sense of how much capacity this will add back and if you'll now be pretty much back to where you were prior to Milepost 14?

Yeah, sure, thanks. So this is Richard Pryor. So, earlier this week, as you mentioned, we received approval from FIMSA to lift the press restrictions on the affected segment of the Keystone system. So that that effective segment is kind of the very specific section of the pipeline where we had our model post 14 incident a couple of years ago.

The main Bevinefit to the pipeline system of lifting that pressure restriction is going to be just the operations and the operational efficiency of the system. We, we've been using. I drag reducing agents and we, and we've been able to work with a very high system operating factor, over the last, year and a bit to ensure that we've been able to move all of our contract volumes and we've also been able to make quite a bit of space available for uncom committed capacity and so I see in the future that that this is going to help us with our operations reliability and it's going to help with our operational costs. Which are just a Bevinefit to keeping the the pipeline toll as competitive as we can and and making sure our customers can can move as many barrels as possible, but I'm not providing at this time any any additional throughput that that would come with this with the rate lift.

Understood, thanks. Second question, I just wanted to go back to the 2025 ebi outlook, and I appreciate the year over year walk versus 2024, but the outlook is also lower than what you had laid out in in September prior to the spin using FX rates at at that time.

Can you say how I guess impactful the hedge on wines were this year to manage some of the tariff risks? And then also just how much lower I guess uncommitted volumes you're assuming versus what you might have thought last fall.

It's Van here, and so on the marketing segment, we mentioned that's down $30 million is what we're expecting year over year and that's made up of some of the reduced activity in the marketing business and secondly, the certain unwinds of positions that we did to reduce risk. So combined there it's $30 million and then again on the spot price, it's a combination, we have a lower system operating factor that we're thinking about in 2025.

And that's, -- and so that will reduce the volumes on uncommitted capacity and also the revenue because of the diffs will be less as well.

Got it, thank you.

James Fracas, BMO.

Hi, good morning. Maybe going back to marketing, as you think about the key drivers, for this segment, what do you need to see, for performance to potentially improve into 2026 and longer term, what would be a, reasonable normalized assumption for the segment?

Yeah, so James, our marketing segment and our uncontracted barrels, are heavily and and primarily driven by the ARP, and so as I commented earlier, last year in 2024, the ARB was much wider in the first five months of the year because we didn't TMX capacity wasn't on. Once that came on, ARB tightened and exactly as what we anticipated.

Making that tougher and then so you have less margin, out of the base and to capture with that uncontracted barrel, so as we see, so in addition to the headwind that we saw last year in terms of that additional egress come on, we now have a tariff situation that has added. A bit of a headwind to to additional movements and that are going down to out of out of Alberta down to the Gulf Coast.

So in terms of what we need to see, obviously if there was a lifting of the tariff, that's the first headwind to go away. And then as supply growth and supply growth that we do anticipate given what we've seen coming out of the base and. That should, improve the arb going forward and and return us back in terms of an ongoing run rate for the marketing segment, I'd say, to my earlier comments we're actually trying to move it to a much smaller component of our EBITDA outlook going forward and shift those barrels on market link more to a contracted strategy, and.

With a contracted strategy, those dollars of EBITDA should be worth much more to our shareholders given the consistency of them. So we haven't landed a run rate of what we're targeting for the marketing segment, given all the uncertainty that we're seeing today with respect to arbs and tariffs. But our strategy has been pretty firm in that we've been focused on trying to move more of those barrels, and we have, if you look at even last year, we would have talked about our EBITDA contracting at 88%. Now we're saying 90%, and we're continuing to increase that by way of moving to a more contracted strategy.

Okay great thanks and then.

Shifting over to growth, when you look at the opportunities set there, how do you think about the balance sheet reduction, versus a potentially growing list of secure projects to to underpin the 2% to 3% growth?

Well, I think we.

When you look at our capital allocation priorities, the first two, like the the deleveraging and investing in our pre-capitalized corridor go very hand in hand. And so, Black Rod is a great example that, we're not reducing leverage this year. It will tip up until we get to probably 4.8 by the end of the year as we finish off Black Rod. And then we'll see the contributions of IITA in 2026 and then full year in 2027 how far delevering it. So as we grow, we're that accelerates our lever leveraging when we're able to pursue.

Projects that are within our corridors really allow us to to get to our leverage targets and so we see, growth kind of paired with the leveraging because of of the corridor that we're developing.

Great thanks I'll turn it back.

Praneeth Satish, Wells Fargo.

Thanks. Good morning. Maybe going back to the FEMA comments, how are you thinking about either reducing DRA usage and lowering the operating cost or continuing to use DRA and contracting the additional capacity that's created on the system? Sounds like from your comments maybe you're thinking about just lowering the DRA usage, but I just want to confirm that and and how you think about those two scenarios.

Yeah, and so when when you you think about the the system, we have to manage.

The the throughput on the volumes over over the entirety of the, 2,100 miles of the path, right? And this D rate was only specific to a very small segment of the system and so, just having the D rate lifted this week, it'll take us.

Several weeks to work through the, some internal engineering analysis and that work we need to do with the control center to to remove the D rate and then we need to see the pipeline operate for for some time and see and see where we're at and and so I would say, certainly in the near term it would look like a reduction in DRA and and more operating efficiencies, lower operating costs and that that's a Bevinefit to our overall toll and and and to our customers and then.

In the long run, we'll have to look at our system operating factor and how the line is operating and then we'll make decisions at some point in the future as to what that means for aggregate capacity.

And I just want to, Prene that it's not direct to your question, but it's maybe a remark that I overlooked in some of the previous questions was that.

With the potential, the little bit of the headwinds that we see this year with respect to the ARBs, and, Richard's comments around bringing our system back, with lower DRA we're going to take.

Some of the opportunity in the market to do increased maintenance activities this year and so that that will help us be positioned for when we see ours come back so we're going to take advantage of maybe some of the softness in the market to advance on some of the maintenance that we'd like to do and both on pipeline integrity but just more broadly.

To to be in a really good spot for when we do see the market tighten back up again.

Got it. That's helpful.

And not to belabor the point here, but, just going back to to Big Sky, I recognize you're in commercial discussions, but obviously leverage is a key focus for investors given that you've got a lot of levers here including ownership interest, can you comment at a minimum on whether this project would be small enough to kind of fit within your annual cadence of CapEx and not cause your leverage to go up?

So pretty, as I mentioned, we're right now we're just focused to see what the level of interest is. We have a number of alternative ways of moving the project forward from a financing perspective, but we've been very consistent that we're not going to change our risk preferences and our capital allocation priorities, so. Our leverage, will be pointed down in the direction, that we've been highlighting since inception and since spin. So our target of getting down to 4.0 is not going to be jeopardized by us advancing on any of these other projects.

Got it very clear, thank you.

Thank you, and this concludes our Q&A sessions for today. I will turn it back to Bevin Wirzbafor his final comments.

Well, thank you all. Thanks to our analysts for all your thoughtful questions today, and we really appreciate your interest in South Pole and for joining us for on another first, our first earnings call as a public company. We have an exciting future ahead of us and look forward to updating you along the way and so wish you all a great day and thanks again for participating.

And thank you all for participating in today's conference. You may now disconnect.