EX-13.1 2 d792648dex131.htm EX-13.1

EX-13.1

Exhibit 13.1

Management’s discussion and analysis

November 7, 2024

On July 27, 2023, the Board of Directors of TC Energy Corporation (TC Energy or the Parent) approved a proposed reorganization of TC Energy into two independent, investment-grade, publicly listed companies (the spinoff Transaction). On June 4, 2024, TC Energy shareholders approved the spinoff Transaction.

On October 1, 2024, TC Energy successfully completed the spinoff of its Liquids Pipelines business into a separate, publicly traded entity named South Bow Corporation (South Bow). Common shareholders of TC Energy retained their interest in TC Energy and received 0.2 of a South Bow common share for each TC Energy common share held. South Bow’s common shares commenced regular way trading on the Toronto Stock Exchange on October 2, 2024 and on the New York Stock Exchange on October 8, 2024, under the ticker symbol SOBO.

This management’s discussion and analysis (MD&A) has been prepared in respect of the assets and liabilities comprising the Liquids Pipelines business of TC Energy. It discusses our business, operations, financial position, risks and other factors for the three and nine months ended September 30, 2024 and should be read with the accompanying unaudited financial statements of South Bow and unaudited Condensed consolidated and combined carve-out financial statements of the Liquids Pipelines business for the three and nine months ended September 30, 2024, which have been prepared in accordance with U.S. GAAP.

This MD&A should also be read in conjunction with the audited financial statements of South Bow for the period from incorporation on December 15, 2023 to December 31, 2023 and the audited Combined carve-out financial statements for the Liquids Pipelines business for the years ended December 31, 2023, 2022 and 2021.

Basis of Presentation

The unaudited Condensed consolidated and combined carve-out financial statements for the Liquids Pipelines business have been prepared on a carve-out basis and reflect the historical results of TC Energy’s Liquids Pipelines business. The Condensed consolidated and combined carve-out financial statements are not necessarily indicative of results that would have been realized if the Liquids Pipelines business had been operated separately as a stand-alone company during the periods presented, nor will they necessarily be indicative of future results of the Liquids Pipelines business as they will exist upon completion of the spinoff Transaction.

About This Document

South Bow became an independent, public corporation on October 1, 2024.

Throughout this MD&A, the terms we, us and our mean the Liquids Pipelines business. All information is as of November 7, 2024 and all amounts are in Canadian dollars, unless noted otherwise.

FORWARD-LOOKING INFORMATION

We disclose forward-looking information to help the reader understand management’s assessment of our future plans and financial outlook and our future prospects overall.

Statements that are forward looking are based on certain assumptions and on what we know and expect today and generally include words like anticipate, expect, believe, may, will, should, estimate or other similar words.

Forward-looking statements in this MD&A include information about the following, among other things:

• our financial and operational performance

• expectations about strategies and goals for growth and expansion

• expected cash flows and future financing options available, including portfolio management

• expectations about South Bow following the completion of the spinoff Transaction

• expectations regarding the size, timing, conditions and outcome of ongoing and future transactions

• expected access to and cost of capital

2  |  Liquids Pipelines Business Third Quarter 2024

• expected costs and schedules for planned projects, including projects under construction such as the Blackrod Connection project

• expected capital expenditures, contractual obligations, commitments and contingent liabilities, including environmental remediation costs

• expected regulatory processes and outcomes

• expected outcomes with respect to legal proceedings, including arbitration and insurance claims

• the expected impact of future tax and accounting changes

• expected industry, market and economic conditions, including their impact on our customers and suppliers.

Forward-looking statements do not guarantee future performance. Actual events and results could be significantly different because of assumptions, risks or uncertainties related to our business or events that happen after the date of this MD&A.

Our forward-looking information is based on the following key assumptions and subject to the following risks and uncertainties:

Assumptions

• realization of expected benefits from acquisitions, divestitures and the spinoff Transaction

• regulatory decisions and outcomes

• planned and unplanned outages and the use of our pipelines

• integrity and reliability of our assets

• anticipated construction costs, schedules and completion dates

• access to capital markets, including portfolio management

• expected industry, market and economic conditions, including the impact of these on our customers and suppliers

• inflation rates, commodity and labour prices

• interest, tax and foreign exchange rates

• nature and scope of hedging.

Risks and uncertainties

• realization of expected benefits from acquisitions, divestitures and the spinoff Transaction

• our ability to successfully implement our strategic priorities and whether they will yield the expected benefits

• our ability to implement a capital allocation strategy aligned with maximizing shareholder value

• operating performance of our pipelines and storage assets

• amount of capacity sold and rates achieved in our business

• production levels within supply basins

• construction and completion of capital projects

• cost and availability of, and inflationary pressures on, labour, equipment and materials

• availability and market prices of commodities

• access to capital and insurance markets on competitive terms

• interest, tax and foreign exchange rates

• performance and credit risk of our counterparties

• regulatory decisions and outcomes of legal proceedings, including arbitration and insurance claims

• our ability to effectively anticipate and assess changes to government policies and regulations, including those related to the environment

• our ability to realize the value of tangible assets and contractual recoveries

• competition in the business in which we operate

• unexpected or unusual weather

• acts of civil disobedience

• cyber security and technological developments

• sustainability-related risks

Liquids Pipelines Business Third Quarter 2024 |  3

• impact of energy transition on our business

• economic conditions in North America as well as globally

• global health crises, such as pandemics and epidemics, and the impacts related thereto

• recovery of costs resulting from unexpected pollution or environmental events related to our operations.

You can read more about these factors and others in this MD&A and our 2023 MD&A.

As actual results could vary significantly from the forward-looking information, you should not put undue reliance on forward-looking information and should not use future-oriented information or financial outlooks for anything other than their intended purpose. We do not update our forward-looking statements due to new information or future events unless we are required to by law.

FOR MORE INFORMATION

You can find more information about the Liquids Pipelines business in our 2023 MD&A, as well as disclosure documents filed by TC Energy, which are available under TC Energy’s profile on SEDAR+ (www.sedarplus.ca).

NON-GAAP MEASURES

This MD&A references the following non-GAAP measures:

• comparable EBITDA

• comparable EBIT

• comparable earnings

• funds generated from operations

• comparable funds generated from operations.

We believe such non-GAAP measures improve our ability to compare results between reporting periods and enhance understanding of our operating performance. These measures do not have any standardized meaning as prescribed by GAAP and therefore may not be comparable to similar measures presented by other entities. Discussions throughout this MD&A on the factors impacting comparable earnings are consistent with the factors that impact net income, except where noted otherwise. Discussions throughout this MD&A on the factors impacting comparable earnings before interest, taxes, depreciation and amortization (comparable EBITDA) and comparable earnings before interest and taxes (comparable EBIT) are consistent with the factors that impact earnings, except where noted otherwise.

Comparable measures

We calculate comparable measures by adjusting certain GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period. Except as otherwise described herein, these comparable measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable.

Our decision not to adjust for a specific item in reporting comparable measures is subjective and made after careful consideration. We adjust for the following items:

• gains or losses on sales of assets or assets held for sale

• valuation allowances and adjustments resulting from changes in legislation and enacted tax rates

• unrealized fair value adjustments related to risk management activities

• legal, contractual, bankruptcy and other settlements

• impairment of plant, property and equipment, equity investments and other assets

• acquisition, integration and restructuring costs.

We exclude from comparable measures the unrealized gains and losses from changes in the fair value of derivatives related to commodity price risk management activities. These derivatives generally provide effective economic hedges but do not meet the criteria for hedge accounting. These changes in fair value are recorded in net income. As these amounts do not accurately reflect the gains and losses that will be realized at settlement, we do not consider them reflective of our underlying operations.

4  |  Liquids Pipelines Business Third Quarter 2024

Separation costs related to the spinoff Transaction recognized in our results primarily include internal costs and external fees related to separation activities. These items have been excluded from comparable measures as we do not consider them reflective of our ongoing underlying operations.

The following table identifies our non-GAAP measures against their most directly comparable GAAP measures:

Comparable measure		GAAP measure
comparable EBITDA		earnings (losses)
comparable EBIT		earnings (losses)
comparable earnings		net income (loss)
funds generated from operations		net cash provided by operations
comparable funds generated from operations		net cash provided by operations

Comparable EBITDA and comparable EBIT

Comparable EBITDA represents earnings (losses) adjusted for specific items described in the Comparable measures section above, excluding charges for depreciation and amortization. We use comparable EBITDA as a measure of our earnings from ongoing operations as it is a useful indicator of our performance. Comparable EBIT represents earnings (losses) adjusted for specific items and is an effective tool for evaluating trends. Refer to the Financial results section for a reconciliation to earnings (losses).

Comparable earnings

Comparable earnings represents Net income adjusted for specific items described in the Comparable measures section above. Comparable earnings is comprised of earnings (losses), Interest expense, Interest income and other and Income tax (expense) recovery, adjusted for specific items. Refer to the Financial highlights section for reconciliations to Net income.

Funds generated from operations and comparable funds generated from operations

Funds generated from operations reflects net cash provided by operations before changes in operating working capital. The components of changes in working capital are disclosed in our Combined carve-out financial statements for the year ended December 31, 2023. We believe funds generated from operations is a useful measure of our operating cash flows because it excludes fluctuations from working capital balances, which do not necessarily reflect underlying operations in the same period, and is used to provide a consistent measure of the cash-generating ability of our business. Comparable funds generated from operations is adjusted for the cash impact of specific items described in the Comparable measures section above. Refer to the Financial Condition section for a reconciliation to Net cash provided by operations.

Liquids Pipelines Business Third Quarter 2024 |  5

Financial highlights

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Income
Revenues			728				715				2,220				1,972
Net income			82				121				353				455
Comparable EBITDA1			357				397				1,088				1,073
Comparable earnings1			118				170				371				557
Cash flows
Net cash provided by operations1			475				391				766				739
Comparable funds generated from operations			286				300				695				926
Capital spending2			83				11				127				35
Proceeds from sales of assets, net of transaction costs			(1	)			5				30				68

1 Comparable EBITDA, comparable earnings and comparable funds generated from operations are all non-GAAP measures. Additional information on Earnings (losses), the most directly comparable GAAP measure, can be found in the Earnings and Net Income table set forth below.

2 Capital spending reflects cash flows associated with our Capital expenditures and Contributions to equity investments. Refer to the Financial condition – Cash (used in) provided by investing activities section for additional information.

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Earnings			243				253				829				702
Interest expense			(158	)			(100	)			(414	)			(156	)
Interest income and other			36				3				54				34
Income before income taxes			121				156				469				580
Income tax expense			(39	)			(35	)			(116	)			(125	)
Net income			82				121				353				455

Net income decreased by $39 million and $102 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023. The following specific items were recognized in Net income and were excluded from comparable earnings:

2024 results

• an after-tax charge of $31 million and $42 million for the three and nine months ended September 30, 2024 incurred due to separation costs related to the spinoff Transaction. Refer to the Recent developments – Liquids Pipelines section for additional information

• an after-tax expense of $16 million for the three and nine months ended September 30, 2024 related to Keystone XL asset disposition and termination activities

• an after-tax charge of $12 million for the three and nine months ended September 30, 2024 as a result of the FERC Administrative Law Judge decision on Keystone in respect of a tolling-related complaint pertaining to amounts recognized in prior periods.

6  |  Liquids Pipelines Business Third Quarter 2024

2023 results

• a $49 million after-tax charge as a result of the FERC Administrative Law Judge initial decision on Keystone issued in February 2023 in respect of a tolling-related complaint pertaining to amounts recognized in prior periods, which consists of a one-time, pre-tax charge of $57 million and accrued pre-tax carrying charges of $6 million

• after-tax preservation and other costs for Keystone XL pipeline project assets of $3 million and $10 million for the three and nine months ended September 30, 2023, which could not be accrued as part of the Keystone XL asset impairment charge

• a $1 million after-tax charge related to Focus Project costs. The Focus Project was launched by TC Energy to identify opportunities to improve safety, productivity and cost-effectiveness.

Net income in each period included unrealized gains and losses from changes in our risk management activities, all of which we exclude along with the above noted items, to arrive at comparable earnings. A reconciliation of Net income to comparable earnings is shown in the following table.

RECONCILIATION OF NET INCOME TO COMPARABLE EARNINGS

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Net income			82				121				353				455
Specific items (net of tax):
Liquids Pipelines business separation costs			31				—				42				—
Keystone XL asset impairment charge and other			16				—				16				—
Keystone regulatory decisions			12				—				12				49
Keystone XL preservation and other			—				3				—				10
Focus Project costs			—				—				—				1
Risk management activities			(23	)			46				(52	)			42
Comparable earnings			118				170				371				557

COMPARABLE EBITDA TO COMPARABLE EARNINGS

Comparable EBITDA represents earnings (losses) adjusted for the specific items described above and excludes charges for depreciation and amortization. For further information on our reconciliation of comparable EBITDA to earnings (losses) refer to the Financial results section.

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Comparable EBITDA			357				397				1,088				1,073
Depreciation and amortization			(83	)			(82	)			(250	)			(246	)
Interest expense included in comparable earnings			(116	)			(100	)			(372	)			(150	)
Interest income and other included in comparable earnings			8				3				26				34
Income tax (expense) recovery included in comparable earnings			(48	)			(48	)			(121	)			(154	)
Comparable earnings			118				170				371				557

Comparable earnings – 2024 versus 2023

Comparable earnings decreased by $52 million and $186 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 and was primarily the net effect of:

• changes in comparable EBITDA described in the Financial Results section

• higher interest expense due to long-term debt issuances to affiliates in third quarter 2023.

Liquids Pipelines Business Third Quarter 2024 |  7

Financial Results

The following is a reconciliation of comparable EBITDA and comparable EBIT (our non-GAAP measures) to earnings (losses) (the most directly comparable GAAP measure).

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Keystone Pipeline System			344				382				1,046				1,028
Intra-Alberta pipelines1			18				18				53				53
Other			(5	)			(3	)			(11	)			(8	)
Comparable EBITDA			357				397				1,088				1,073
Depreciation and amortization			(83	)			(82	)			(250	)			(246	)
Comparable EBIT			274				315				838				827
Specific items:
Liquids Pipelines business separation costs			(26	)			—				(40	)			—
Keystone XL asset impairment charge and other			(21	)			—				(21	)			—
Keystone regulatory decisions			(15	)			—				(15	)			(57	)
Keystone XL preservation and other			—				(3	)			—				(13	)
Focus Project costs			—				—				—				(1	)
Risk management activities			31				(59	)			67				(54	)
Earnings			243				253				829				702
Comparable EBITDA denominated as follows:
Canadian dollars			97				95				292				277
U.S. dollars			190				227				585				593
Foreign exchange impact			70				75				211				203
Comparable EBITDA			357				397				1,088				1,073

1 Intra-Alberta pipelines include Grand Rapids and White Spruce.

Earnings decreased by $10 million and increased by $127 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 and included the above specific items which have been excluded from our calculation of comparable EBITDA and comparable EBIT. Refer to the Financial Highlights section for additional information on specific items.

A stronger U.S. dollar for the three and nine months ended September 30, 2024 had a positive impact on the Canadian dollar equivalent earnings from our U.S. operations compared to the same periods in 2023. Refer to the Foreign exchange section for additional information.

Comparable EBITDA decreased by $40 million and increased by $15 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023 primarily due to the net effect of:

• lower margins from liquids marketing activities due to the commencement of incremental WCSB egress capacity

• lower uncontracted volumes on the Keystone Pipeline System in third quarter 2024 compared to the same period in 2023

• higher uncontracted volumes for the nine months ended September 30, 2024 compared to the same period in 2023 as a result of Milepost 14 incident-related capacity impacts in 2023

• higher throughput on the U.S. Gulf Coast section of the Keystone Pipeline System driven by an increase in contracted volumes.

Depreciation and amortization was generally consistent for the three and nine months ended September 30, 2024 compared to the same periods in 2023.

8  |  Liquids Pipelines Business Third Quarter 2024

FOREIGN EXCHANGE

Certain of our entities generate all or most of their earnings in U.S. dollars and, since we report our financial results in Canadian dollars, changes in the value of the U.S. dollar against the Canadian dollar directly affect our comparable EBITDA and may also impact comparable earnings. If our U.S. operations continue to grow, this exposure would increase. A portion of the U.S. dollar-denominated comparable EBITDA exposure is naturally offset by U.S. dollar-denominated amounts below comparable EBITDA within Depreciation and amortization, Interest expense and other income statement line items.

The components of our financial results denominated in U.S. dollars are set out in the table below. Comparable EBITDA is a non-GAAP measure.

Pre-tax U.S. dollar-denominated income and expense items

		three months ended September 30								nine months ended September 30
(millions of US$)		2024				2023				2024				2023
Comparable EBITDA			190				227				585				593
Depreciation and amortization			(49	)			(48	)			(146	)			(145	)
Interest expense on long-term debt to affiliates			(58	)			(55	)			(187	)			(91	)
			83				124				252				357
Average exchange rate – U.S. to Canadian dollars			1.36				1.34				1.36				1.35

OTHER INCOME STATEMENT ITEMS

Interest Expense

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Interest expense on long-term debt to affiliates
Canadian dollar-denominated			(38	)			(26	)			(113	)			(26	)
U.S. dollar-denominated			(58	)			(55	)			(187	)			(91	)
Foreign exchange impact			(22	)			(19	)			(68	)			(32	)
			(118	)			(100	)			(368	)			(149	)
Other interest and amortization expense			2				—				(4	)			(1	)
Interest expense included in comparable earnings			(116	)			(100	)			(372	)			(150	)
Specific item:
Liquids Pipelines business separation costs			(42	)			—				(42	)			—
Keystone regulatory decisions			—				—				—				(6	)
Interest expense			(158	)			(100	)			(414	)			(156	)

Interest expense increased by $58 million and $258 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 and included the following specific items, which have been excluded from our calculation of comparable EBITDA and comparable EBIT:

• pre-tax Liquids Pipelines business separation costs of $42 million for the three and nine months ended September 30, 2024 related to interest expense from the South Bow debt issuance on August 28, 2024

• accrued carrying charges of $6 million for the first quarter 2023 as a result of a pre-tax charge related to the FERC Administrative Law Judge initial decision on Keystone. This decision was issued in February 2023 in respect of a tolling-related complaint pertaining to amounts recognized in prior periods. These carrying charges have been removed from our calculation of Interest expense included in comparable earnings.

Liquids Pipelines Business Third Quarter 2024 |  9

Interest expense included in comparable earnings increased by $16 million and $222 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to the net effect of:

• long-term debt to affiliates issuances in third quarter 2023

• higher effective interest rates in 2024 compared to 2023.

Interest Income and Other

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Interest income and other included in comparable earnings			8				3				26				34
Specific item:
Liquids Pipelines business separation interest income			28				—				28				—
Interest income and other			36				3				54				34

Interest income and other increased by $33 million and $20 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023. The following specific item has been removed from our calculation of Interest income and other included in comparable earnings:

• pre-tax interest income of $28 million for the three and nine months ended September 30, 2024 on proceeds from the South Bow debt issuance on August 28, 2024, which were held in escrow.

Interest income and other included in comparable earnings increased by $5 million and decreased by $8 million for the three and nine months ended September 30, 2024, respectively, compared to the same periods in 2023 primarily due to lower cash pooling balances with affiliates, partially offset by higher cash balances.

Income tax (expense) recovery

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Income tax (expense) recovery included in comparable earnings			(48	)			(48	)			(121	)			(154	)
Specific items:
Liquids Pipelines business separation costs			9				—				12				—
Keystone regulatory decisions			3				—				3				14
Keystone XL preservation and other			—				—				—				3
Keystone XL asset impairment charge and other			5				—				5				—
Risk management activities			(8	)			13				(15	)			12
Income tax (expense) recovery			(39	)			(35	)			(116	)			(125	)

Income tax expense increased by $4 million and decreased by $9 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023. The income tax impacts on specified items referenced throughout the MD&A have been removed from our calculation of Income tax expense included in comparable earnings.

Income tax expense included in comparable earnings did not change for the three months ended September 30, 2024 and decreased by $33 million for the nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to higher earnings subject to tax in 2023 and favourable U.S. state tax rate changes in 2023.

10  |  Liquids Pipelines Business Third Quarter 2024

Outlook

We expect our 2024 comparable EBITDA to be consistent with 2023.

We continue to monitor developments in energy markets, our construction projects and regulatory proceedings for any potential impacts on the above outlook.

Our expected total capital expenditures for 2024 as outlined in the 2023 MD&A increased due to costs associated with the Blackrod Connection project. Our 2024 capital program is focused on normal course maintenance capital expenditures and constructing the Blackrod Connection project.

Capital program

Our capital program consists of long-life infrastructure assets supported by long-term commercial arrangements with creditworthy counterparties and/or regulated business models.

Our capital program consists of approximately $459 million of secured projects that represent commercially supported, committed projects that are either under construction or are preparing to commence the permitting stage. The estimated costs of the Blackrod Connection project are included within this amount.

During the nine months ended September 30, 2024, approximately $64 million of maintenance capital expenditures and $58 million of Blackrod Connection project costs were incurred.

All projects are subject to cost and timing adjustments due to factors including weather, market conditions, route refinement, land acquisition, permitting conditions, scheduling and timing of regulatory permits, as well as other potential restrictions and uncertainties, including inflationary pressures on labour and materials. Amounts exclude capitalized interest, where applicable.

Secured projects

Estimated and incurred project costs referred to in the following table include 100 per cent of the capital expenditures related to our wholly-owned projects and our share of equity contributions to fund projects within our equity investments.

(millions of $)				Expected in-service date				Estimated project cost				Project costs incurred at September 30, 2024
Blackrod Connection Project					2026				250				58
Recoverable maintenance capital expenditures					2024-2026				207				64
Non-recoverable maintenance capital expenditures					2024-2026				2				1
Total secured projects									459				123

Recent developments

Spinoff of Liquids Pipelines Business

On October 1, 2024, TC Energy completed the spinoff of its Liquids Pipelines business into a separate, publicly traded entity, South Bow. Common shareholders of TC Energy retained their interest in TC Energy and received 0.2 of a South Bow common share for each TC Energy common share held. South Bow’s common shares commenced regular way trading on the Toronto Stock Exchange on October 2, 2024, and on the New York Stock Exchange on October 8, 2024, under the ticker symbol SOBO. Refer to Note 3, Spinoff of Liquids Pipelines business, of our Condensed consolidated and combined carve-out financial statements for additional information.

Liquids Pipelines Business Third Quarter 2024 |  11

We have incurred pre-tax Liquids Pipelines business separation costs related to the spinoff Transaction of $40 million ($31 million after tax) and $54 million ($42 million after tax) for the three and nine months ended September 30, 2024, respectively, of which $26 million and $40 million, respectively, of internal costs related to separation activities were included in our results. For the three and nine months ended September 30, 2024, $42 million of interest expense and $28 million of interest income were included in our results related to senior unsecured notes and junior subordinated notes issued on August 28, 2024 to establish South Bow’s debt capital structure, the net proceeds of which were placed in escrow pending the completion of the spinoff Transaction. These costs have been excluded from comparable measures.

TC Energy and South Bow entered into a Separation Agreement setting forth the terms of the separation of the Liquids Pipelines business from the business of TC Energy, including the transfer of certain assets related to the Liquids Pipelines business from TC Energy to South Bow and the allocation of certain liabilities and obligations related to the Liquids Pipelines business between TC Energy and South Bow. The Separation Agreement provides, among other things that TC Energy indemnify South Bow for 86 per cent of total net liabilities and costs associated with the Milepost 14 incident and the existing variable toll disputes on the Keystone Pipeline System (excluding any future disputes with respect to the variable toll after October 1, 2024) subject to a maximum liability to South Bow of $30 million, in aggregate, for those two matters. Any amounts that may ultimately be payable in respect of these net liabilities and costs above the current accrued amount are indeterminable at this time. As part of the Separation Agreement, any insurance recoveries related to the Milepost 14 incident will remain with TC Energy.

FERC Order on Initial Decision

In 2019 and 2020, three Keystone customers initiated complaints before FERC and the CER regarding certain costs within the variable toll calculation. In February 2023, FERC released its initial decision in respect of the complaint, which addressed previously charged tolls recognized in prior periods. On July 25, 2024, FERC released its Order on Initial Decision (Order) in respect of the complaint and as a result, we recognized an additional estimated liability of $25 million in second quarter 2024. At September 30, 2024, we reduced the estimated liability by $10 million and recognized a $15 million pre-tax charge for the nine months ended September 30, 2024 (2023 - nil and $57 million, respectively) with respect to the decision, which has been excluded from comparable EBITDA and EBIT. On October 8, 2024, South Bow submitted a compliance filing, which is subject to final FERC approval. Subsequent rulings, if any, will be subject to the indemnity provisions as outlined in the Separation Agreement.

Blackrod Connection Project

Supported by long-term committed contracts, South Bow is developing the Blackrod Connection project, which will consist of a 25 km (16 mile) crude oil pipeline and a 25 km (16 mile) natural gas lateral; and associated facilities to provide crude oil transportation from International Petroleum Corporation’s Blackrod project to the Grand Rapids Pipeline System. The expected total capital cost of the project is approximately $250 million with a targeted in-service date of early 2026.

NAFTA Claim Request for Arbitration

In 2021, TC Energy filed a Request for Arbitration to formally initiate a legacy North American Free Trade Agreement (NAFTA) claim to recover economic damages resulting from the revocation of the Presidential Permit for the Keystone XL pipeline project. The United States objected on the basis that the transition provisions under the United States-Mexico-Canada Agreement (USMCA) that protect investments made while NAFTA was in force apply only in connection with actions taken before July 1, 2020, when USMCA replaced NAFTA. The arbitral Tribunal adjudicating the claim issued a split decision on July 12, 2024, in which the majority of the panel agreed with the United States position and concluded that it did not have jurisdiction to hear TC Energy’s claim. After assessing the decision and available options to challenge it, TC Energy concluded that, while we continue to believe in the validity of the claim and believe the arbitral Tribunal’s decision to be incorrect, there is no viable path forward for the claim within the rules of the investor/state dispute resolution process under USMCA. Accordingly, no further action will be taken. This decision effectively ends TC Energy’s claim.

12  |  Liquids Pipelines Business Third Quarter 2024

Financial condition

Historically, our business has generated positive cash flows from operations. Following the spinoff Transaction on October 1, 2024, our capital structure and sources of liquidity has changed from our historical practices. Based upon our history of generating positive cash flows, we believe our existing cash and cash generated from operations will be sufficient to service our current obligations. Management believes that our cash balances and funds provided by operating activities, along with our new borrowing capacity and access to capital markets, taken as a whole, provide adequate liquidity to meet all of our current and long-term obligations when due, including third-party debt that we incurred in connection with the spinoff Transaction to refinance our long-term debt to affiliates and to fund capital expenditures.

At September 30, 2024, our current assets totaled $10.0 billion and current liabilities amounted to $9.3 billion, providing us with a working capital surplus of $0.7 billion compared to $0.8 billion at December 31, 2023. On August 28, 2024, South Bow Canadian Infrastructure Holdings Ltd. and 6297782 LLC completed an offering of approximately $7.9 billion Canadian-dollar equivalent of senior unsecured notes and junior subordinated notes, of which approximately $6.2 billion was placed in escrow pending the completion of the spinoff Transaction. Refer to Note 3, Spinoff of Liquids Pipelines business, of our Condensed consolidated and combined carve-out financial statements for additional information. Excluding the proceeds in escrow and the current portion of debt to affiliates, we consider these working capital levels to be normal for our business.

CASH PROVIDED BY OPERATING ACTIVITIES

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Net cash provided by operations			475				391				766				739
Increase (decrease) in operating working capital			(231	)			(94	)			(125	)			128
Funds generated from operations			244				297				641				867
Specific items:
Liquids Pipelines business separation costs, net of current income tax			22				—				33				—
Keystone regulatory decisions, net of current income tax			12				—				12				49
Keystone XL preservation and other, net of current income tax			—				3				—				10
Current income tax expense on risk management activities			8				—				9				—
Comparable funds generated from operations			286				300				695				926

Net cash provided by operations

Net cash provided by operations increased by $84 million and $27 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to changes in funds generated from operations and timing of working capital changes.

Comparable funds generated from operations

Comparable funds generated from operations, a non-GAAP measure, helps us assess the cash generating ability of our businesses by excluding the timing effects of working capital changes as well as the cash impact of our specific items.

Comparable funds generated from operations decreased by $14 million and $231 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 primarily due to changes in comparable EBITDA and higher interest expense.

Liquids Pipelines Business Third Quarter 2024 |  13

CASH USED IN BY INVESTING ACTIVITIES

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Capital expenditures			(83	)			(11	)			(127	)			(35	)
Proceeds from sale of assets, net of transaction costs			(1	)			5				30				68
Keystone XL contractual recoveries			2				2				7				7
Deferred amounts and other			(1	)			2				1				4
Net cash used in investing activities			(83	)			(2	)			(89	)			44

Net cash (used in) provided by investing activities decreased by $81 million for the three months ended September 30, 2024 compared to the same period in 2023 primarily due to higher capital expenditures offset by higher proceeds from the sale of Keystone XL assets.

Net cash (used in) provided by investing activities decreased by $133 million for the nine months ended September 30, 2024 compared to the same period in 2023 primarily due to lower proceeds from the sale of Keystone XL assets and higher capital expenditures.

CASH PROVIDED BY FINANCING ACTIVITIES

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Long-term debt issued, net of issue costs			4,652				821				4,652				821
Junior subordinated notes issued, net of issue costs			1,472				—				1,472				—
Long-term debt repaid to affiliates			—				(761	)			—				(761	)
Distributions on Class C interests			—				—				(2	)			(42	)
Parent’s net investment contributions (distributions), net			29				134				(139	)			(223	)
Net cash provided by financing activities			6,153				194				5,983				(205	)

Net cash provided by financing activities increased by $5,959 million and $6,188 million for the three and nine months ended September 30, 2024 compared to the same periods in 2023 due to the issuance of long-term debt and junior subordinated notes.

14  |  Liquids Pipelines Business Third Quarter 2024

Long-term debt issued

The following table outlines long-term debt issuances in the nine months ended September 30, 2024:

(millions of Canadian $, unless otherwise noted)

Company

Issue date

Type

Maturity date

Amount

Interest rate

South Bow Canadian Infrastructure Holdings Ltd.

August 2024

Senior Unsecured Notes

February 2030

450

4.32

%

August 2024

Senior Unsecured Notes

February 2032

500

4.62

%

August 2024

Senior Unsecured Notes

February 2035

500

4.93

%

August 2024

Junior Subordinated Notes

March 2055

US 450

7.63

%

August 2024

Junior Subordinated Notes

March 2055

US 650

7.50

%

6297782 LLC

August 2024

Senior Unsecured Notes

September 2027

US 700

4.91

%

August 2024

Senior Unsecured Notes

October 2029

US 1,000

5.03

%

August 2024

Senior Unsecured Notes1

October 2034

US 1,250

5.58

%

August 2024

Senior Unsecured Notes

October 2054

US 700

6.18

%

^1. Non-cash issuance

On August 28, 2024, South Bow Canadian Infrastructure Holdings Ltd. and 6297782 LLC completed an offering of approximately $7.9 billion Canadian-dollar equivalent of senior unsecured notes and junior subordinated notes. Approximately $6.2 billion Canadian-dollar equivalent of the net proceeds was placed in escrow pending the completion of the spinoff Transaction on October 1, 2024 and US$1.25 billion of senior unsecured notes were used to repay a TransCanada PipeLines Limited term loan. Upon completion of the spinoff Transaction, the escrowed funds were released to South Bow and used, along with available cash, to repay indebtedness owed by South Bow and its subsidiaries to TC Energy and its subsidiaries. Interest on these notes are paid semi-annually starting in 2025. Refer to Note 3, Spinoff of Liquids Pipelines business, of our Condensed consolidated and combined carve-out financial statements, for additional information.

At September 30, 2024, restricted cash was $6.2 billion which was comprised primarily of the proceeds of the South Bow debt offering held in escrow.

Subsequent affiliate debt repayments

On October 1, 2024, long-term debt to affiliates was fully repaid by South Bow as follows:

(millions of Canadian $, unless otherwise noted)
Company		Amount				Interest Rate
South Bow USA Infrastructure Holdings LLC (formerly 6297782 LLC)
US $2,000			2,703				6.63	%
South Bow Canadian Infrastructure Holdings Ltd. (formerly 15142121 Canada Ltd.)
Canadian			2,300				6.50	%
South Bow (USA) LLC (formerly TransCanada Keystone Pipeline, LLC)
US $750			1,014				4.83	%
South Bow Infrastructure Inc. (formerly TransCanada Oil Pipelines Inc.)
US $50			68				6.97	%
US $175			236				6.93	%

Liquids Pipelines Business Third Quarter 2024 |  15

CREDIT FACILITIES

At September 30, 2024, we had total revolving credit facilities of $250 million and US$500 million (December 31, 2023 – $100 million and nil, respectively) with an affiliate of TC Energy and had drawn $160 million and nil against the facilities, respectively (December 31, 2023 – nil). The amount drawn at September 30, 2024 was fully repaid on October 1, 2024.

During the third quarter of 2024, we entered into new committed revolving credit facilities with third parties providing availability of $2 billion. No amounts were drawn as at September 30, 2024.

CONTRACTUAL OBLIGATIONS

Capital expenditure commitments at September 30, 2024 have increased by approximately $136 million from those reported at December 31, 2023 reflecting commitments for development of the Blackrod project and other contractual commitments.

In February 2024, we entered into a 13-year lease contract for our Calgary office space. The total commitment for base rent under the lease contract is $32 million with payments starting in 2025.

There were no other material changes to our contractual obligations in third quarter 2024 or to payments due in the next five years or thereafter. Refer to 2023 MD&A for additional information about our contractual obligations.

16  |  Liquids Pipelines Business Third Quarter 2024

Financial risks and financial instruments

We are exposed to various financial risks and have strategies, policies and limits in place to manage the impact of these risks on our earnings and cash flows and, ultimately, shareholder value.

Risk management strategies, policies and limits are designed to ensure our risks and related exposures are in line with our business objectives and risk tolerance.

Refer to our 2023 Liquids Pipelines business carve-out MD&A for additional information about the risks we face in our business which have not changed materially since December 31, 2023, other than as noted within this MD&A.

INTEREST RATE RISK

We utilize both short- and long-term debt to finance our operations which exposes us to interest rate risk. We pay fixed rates of interest on our long-term debt and floating rates on short-term debt which includes amounts drawn on our credit facilities. We do not have any interest rate hedges in place at September 30, 2024.

FOREIGN EXCHANGE RISK

Certain of our entities generate all or most of their earnings in U.S. dollars and, since we report our financial results in Canadian dollars, changes in the value of the U.S. dollar against the Canadian dollar directly affect our comparable EBITDA and may also impact comparable earnings. If our U.S. dollar-denominated operations continue to grow, this exposure increases. A portion of this risk is offset by interest expense on our U.S. dollar-denominated debt. We do not have any foreign exchange hedges in place at September 30, 2024.

COUNTERPARTY CREDIT RISK

Our exposure to counterparty credit risk includes cash and cash equivalents, accounts receivable, environmental provision and certain contractual recoveries, available-for-sale assets and the fair value of derivative assets.

At times, our counterparties may endure financial challenges resulting from commodity price and market volatility, economic instability and political or regulatory changes. In addition to actively monitoring these situations, there are a number of factors that reduce our counterparty credit risk exposure in the event of default, including:

• contractual rights and remedies together with the utilization of contractually-based financial assurances

• the competitive position of our assets and the demand for our services

• potential recovery of unpaid amounts through bankruptcy and similar proceedings.

We review financial assets carried at amortized cost for impairment using the lifetime expected loss of the financial asset at initial recognition and throughout the life of the financial asset. We use historical credit loss and recovery data, adjusted for our judgment regarding current economic and credit conditions, along with reasonable and supportable forecasts to determine any impairment, which is recognized in Plant operating costs and other. We had no significant credit losses and no significant amounts past due or impaired, as well as no significant credit risk concentrations at September 30, 2024 and December 31, 2023.

LIQUIDITY RISK

Liquidity risk is the risk that we will not be able to meet our financial obligations as they come due. We have relied on TC Energy for funding and management of our liquidity risk; however, South Bow will be responsible to manage liquidity risk following completion of the spinoff Transaction.

Liquids Pipelines Business Third Quarter 2024 |  17

FINANCIAL INSTRUMENTS

With the exception of Long-term debt to affiliates, our derivative and non-derivative financial instruments are recorded on the Condensed consolidated and combined carve-out balance sheet at fair value or amounts that approximate fair value. In addition, fair value accounting is not required for other financial instruments that qualify for certain accounting exemptions.

Derivative instruments

We use derivative instruments to reduce volatility associated with fluctuations in commodity prices. Derivative instruments are recorded at fair value.

The majority of derivative instruments have been entered into as economic hedges to manage our exposure to market risk and are classified as held-for-trading. Changes in the fair value of held-for-trading derivative instruments are recorded in net income in the period of change. This may expose us to increased variability in reported operating results since the fair value of the held-for-trading derivative instruments can fluctuate significantly from period to period.

Balance sheet presentation of derivative instruments

The balance sheet presentation of the fair value of derivative instruments were as follows:

(millions of $)		September 30, 2024				December 31, 2023
Other current assets			918				696
Other long-term assets			133				—
Accounts payable and other			(882	)			(728	)
Other long-term liabilities			(134	)			—
			35				(32	)

Unrealized and realized gains (losses) on commodity derivative instruments

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Derivative Instruments Held for Trading1
Unrealized gains (losses) in the period			31				(65	)			67				(57	)
Realized gains in the period			152				223				439				496

1 Realized and unrealized gains and losses on held-for-trading derivative instruments used to purchase and sell liquids are included on a net basis in Revenues.

For further details on our non-derivative and derivative financial instruments, including classification assumptions made in the calculation of fair value and additional discussion of exposure to risks and mitigation activities, refer to Note 8, Risk management and financial instruments, of our Condensed consolidated and combined carve-out financial statements.

18  |  Liquids Pipelines Business Third Quarter 2024

RELATED PARTY TRANSACTIONS

TC Energy is responsible for providing certain administrative and operating services (corporate expenses) necessary to operate our business. As such, the allocation of corporate expenses attributable to us are considered related party transactions. Allocated corporate expenses are capitalized or expensed based on the nature of the underlying expenditure. We also incur operating costs with TC Energy’s subsidiaries for costs that are not allocated but are direct costs to us that are capitalized or expensed based on the nature of the underlying expenditure. The allocated corporate expenses and direct operating costs as well as interest expense on Long-term debt due to affiliates and interest income with affiliates were as follows:

		three months ended September 30								nine months ended September 30
(millions of $)		2024				2023				2024				2023
Allocated Corporate Expenses
Plant operating costs and other			39				44				120				154
Plant, property and equipment			1				1				4				3
Equity investments1			1				3				3				15
			41				48				127				172
Direct Operating Costs
Plant operating costs and other			25				49				110				113
Plant, property and equipment			2				2				5				4
Equity investments2			1				2				2				6
			28				53				117				123
Interest Income with Affiliates			—				—				—				29
Interest Expense on Long-Term Debt Due to Affiliates			118				99				368				149

1 For the three and nine months ended September 30, 2024, $1 million and $3 million, respectively (2023 – $3 million and $13 million, respectively) impacted Income from equity investments.

2 For the three and nine months ended September 30, 2024, $1 million and $2 million, respectively (2023 – $2 million and $6 million, respectively) impacted Income from equity investments.

The outstanding balances with affiliates at September 30, 2024 and December 31, 2023 were as follows:

(millions of $)		September 30, 2024				December 31, 2023				Affected line item on the Condensed consolidated and combined carve-out balance sheet
Due to affiliates			440				137			Payable to affiliates
Due from affiliates			4				4			Accounts receivable
Current portion of long-term debt to affiliates			6,321				—			Current portion of long-term debt to affiliates
Long-term debt to affiliates			—				7,879			Long-term debt to affiliates

At September 30, 2024, we had $250 million and US$500 million (December 31, 2023 – $100 million and nil, respectively) of revolving credit facilities with an affiliate, and had drawn $160 million and nil against the facilities, respectively (December 31, 2023 – nil).

Refer to our Condensed consolidated and combined carve-out financial statements, Note 7, Keystone environmental provision, for discussion of insurance recoveries from TC Energy’s wholly-owned captive insurance subsidiary.

Liquids Pipelines Business Third Quarter 2024 |  19

Other information

CRITICAL ACCOUNTING ESTIMATES AND ACCOUNTING POLICY CHANGES

When we prepare financial statements that conform with U.S. GAAP, we are required to make estimates and assumptions that affect the timing and amounts we record for our assets, liabilities, revenues and expenses because these items may be affected by future events.

We base the estimates and assumptions on the most current information available, using our best judgment. We also regularly assess the assets and liabilities themselves. Refer to 2023 MD&A for critical accounting estimates information.

Accounting changes

Our significant accounting policies have remained unchanged since December 31, 2023 other than as described in Note 2, Accounting changes, of our Condensed and consolidated and combined carve-out financial statements. A summary of our significant accounting policies is included in the audited Combined carve-out financial statements for the year ended December 31, 2023.

Quarterly results

SELECTED QUARTERLY FINANCIAL DATA

		2024												2023																2022
(millions of $)		Third				Second				First				Fourth				Third				Second				First				Fourth
Revenues			728				758				734				733				715				702				555				624
Net income			82				121				150				140				121				204				130				238
Comparable earnings			118				98				155				129				170				208				179				206

FACTORS AFFECTING QUARTERLY FINANCIAL INFORMATION

Quarter-over-quarter revenues and earnings are affected by:

• regulatory decisions

• newly constructed assets being placed in service

• acquisitions and divestitures

• demand for uncontracted transportation services

• marketing activities and commodity prices

• developments outside of the normal course of operations

• certain fair value adjustments

• foreign exchange rates.

FACTORS AFFECTING FINANCIAL INFORMATION BY QUARTER

We calculate comparable measures by adjusting certain GAAP measures for specific items we believe are significant but not reflective of our underlying operations in the period. Except as otherwise described herein, these comparable measures are calculated on a consistent basis from period to period and are adjusted for specific items in each period, as applicable.

We exclude from comparable measures the unrealized gains and losses from changes in the fair value of derivatives related to commodity price risk management activities. These derivatives generally provide effective economic hedges but do not meet the criteria for hedge accounting.

20  |  Liquids Pipelines Business Third Quarter 2024

In third quarter 2024, comparable earnings also exclude:

• an $31 million after-tax charge incurred due to Liquids Pipelines separation costs related to the spinoff Transaction.

• an $16 million after-tax expense related to sale of Keystone XL project assets and adjustments to the estimate for contractual and legal obligations related to termination activities.

• an $12 million after-tax charge as a result of the FERC Administrative Law Judge decision on Keystone in respect of a tolling-related complaint pertaining to amounts recognized in prior periods

In second quarter 2024, comparable earnings also exclude:

• a $7 million after-tax charge incurred due to Liquids Pipelines business separation costs related to the spinoff Transaction.

In first quarter 2024, comparable earnings also exclude:

• a $4 million after-tax charge incurred due to Liquids Pipelines business separation costs related to the spinoff Transaction.

In fourth quarter 2023, comparable earnings also excluded:

• preservation and other costs for Keystone XL pipeline project assets of $4 million after tax, which could not be accrued as part of the Keystone XL asset impairment charge

• a $4 million after-tax gain on the sale of Keystone XL project assets and adjustment to the estimate for contractual and legal obligations related to termination activities

• a $3 million after-tax charge for accrued carrying charges related to the FERC Administrative Law Judge initial decision on Keystone

• a $2 million after-tax charge for separation costs incurred related to the spinoff Transaction.

In third quarter 2023, comparable earnings also excluded:

• preservation and other costs for Keystone XL pipeline project assets of $3 million after tax, which could not be accrued as part of the Keystone XL asset impairment charge.

In second quarter 2023, comparable earnings also excluded:

• preservation and other costs for Keystone XL pipeline project assets of $3 million after tax, which could not be accrued as part of the Keystone XL asset impairment charge

• a $1 million after-tax charge related to Focus Project costs.

In first quarter 2023, comparable earnings also excluded:

• a $49 million after-tax charge as a result of the FERC Administrative Law Judge initial decision issued in February 2023 in respect of a tolling-related complaint pertaining to amounts recognized in prior periods

• preservation and other costs for Keystone XL pipeline project assets of $4 million after tax, which could not be accrued as part of the Keystone XL asset impairment charge.

In fourth quarter 2022, comparable earnings also excluded:

• a $20 million after-tax charge due to the CER decision on Keystone issued in December 2022 in respect of a tolling-related complaint pertaining to amounts reflected in 2021 and 2020

• preservation and other costs for Keystone XL pipeline project assets of $8 million after tax, which could not be accrued as part of the Keystone XL asset impairment charge

• a $90 million after-tax gain on the sale of Keystone XL project assets and reduction to the estimate for contractual and legal obligations related to termination activities.

Liquids Pipelines Business Third Quarter 2024 |  21

Glossary

General terms and terms related to our operations
WCSB		Western Canadian Sedimentary basin
Accounting terms
U.S. GAAP / GAAP		U.S. generally accepted accounting
		principles
Government and regulatory bodies terms
CER		Canada Energy Regulator
FERC		Federal Energy Regulatory
		Commission (U.S.)

22  |  Liquids Pipelines Business Third Quarter 2024