South Bow Corp

Share-based Compensation

South Bow records share-based compensation for its long-term incentive plans, which includes stock options, restricted share units ("RSUs"), performance share units ("PSUs"), and deferred share units ("DSUs"). The Company established these plans upon Spinoff, which the existing grants and awards from the Company's Former Parent transferred to South Bow with similar contractual terms and valuations.

The stock option plan permits options for the purchase of common shares to be awarded to certain employees, including officers. Stock options granted are recorded using the fair value method. Under this method, compensation expense is measured at the grant date based on the fair value and is recognized on a straight-line basis over the vesting period, with an offset to contributed surplus. Forfeitures are accounted for when they occur. Upon exercise of stock options, amounts originally recorded against additional paid-in capital are reclassified to common shares within shareholders' capital on the consolidated balance sheets. No stock options have been granted under the Former Parent or South Bow's plans since 2023.

The expense related to RSU, PSU, and DSU incentive plans is accounted for on a liability basis. Under these plans, benefits vest when certain conditions are met, including the employees' continued employment during a specified period and for PSUs only, achievement of specified corporate performance targets. RSUs, PSUs, and DSUs accrue dividend equivalent units based on record date, increasing awards outstanding over time.