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Edited Transcript of BPL earnings conference call or presentation 8-Feb-19 4:00pm GMT

Q4 2018 Buckeye Partners LP Earnings Call

HOUSTON Feb 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Buckeye Partners LP earnings conference call or presentation Friday, February 8, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Clark C. Smith

Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC

* Keith E. St. Clair

Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC

* Kevin J. Goodwin

Buckeye Partners, L.P. - VP & Treasurer

* Khalid A. Muslih

Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC

* Robert A. Malecky

Buckeye Partners, L.P. - Executive VP and President of Domestic Pipelines & Terminals Business Unit - Buckeye GP LLC

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Conference Call Participants

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* Shneur Z. Gershuni

UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst

* Spiro Michael Dounis

Crédit Suisse AG, Research Division - Director

* Theresa Chen

Barclays Bank PLC, Research Division - Research Analyst

* Tristan James Richardson

SunTrust Robinson Humphrey, Inc., Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and thank you for standing by. We welcome you to Buckeye Partners, L.P. Fourth Quarter 2018 and Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Kevin Goodwin, Vice President and Treasurer. Please go ahead, sir.

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Kevin J. Goodwin, Buckeye Partners, L.P. - VP & Treasurer [2]

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Thank you, George, and good morning, everyone. Welcome to Buckeye Partners Financial Results Conference Call for the Fourth Quarter of 2018.

This morning's conference call, Clark Smith, our Chairman, President and Chief Executive Officer, will discuss key highlights from the fourth quarter and full year of 2018. Khalid Muslih, Executive Vice President and President of Global Marine Terminals will provide additional highlights of his segment and Keith St. Clair, Executive Vice President and Chief Financial Officer will review our financial results for the quarter. Also on the call are Bill Hollis, Senior Vice President and President of Buckeye Services; Bob Malecky, Executive Vice President and President of the Domestic Pipelines and Terminals segment; Todd Russo, Senior Vice President and General Counsel; Joe Sauger, Senior Vice President of Operations for Global Marine Terminals and Engineering Services; and Gary Bohnsack, Vice President and Chief Accounting Officer. After our prepared remarks, we will take your questions.

We would like to remind everyone that we may make comments on the call that could be construed as forward-looking statements as defined by the SEC, including statements regarding our target leverage and coverage ratios. Future results are subject to numerous contingencies, many of which are outside of our control. Any forward-looking statements we make are qualified by the risk factors and other information set forth in our Form 10-K for the year ended December 31, 2017 and our most recent Form 10-Q, each of which is filed with the SEC and available on the Buckeye Partners' website at www.buckeye.com. We undertake no obligation to revise our forward-looking statements to reflect events or circumstances occurring after today.

In addition, during the call, we will be discussing Buckeye Partners' adjusted EBITDA and certain other non-GAAP measures. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning, which is available on the Investors Center section of the Buckeye Partners website.

With that, I will turn the call over to our Chairman, President and CEO, Clark Smith.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [3]

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All right. Thank you, Kevin, and good morning, everyone. We appreciate you joining our call today. Before I begin with an update on the actions we previously announced as part of our strategic review, I'd like to share the success of our safety initiatives during 2018. We're very proud of our 2018 safety performance. Buckeye had 0 lost time injuries among our employees, a significant achievement of our Goal 0 program. We also had a 70% reduction in OSHA-recordable injuries among our employees and a nearly 2/3 reduction in OSHA-recordable injuries among our contractors. This level of performance reflects the focus and commitment Buckeye places on health and safety across all of our operations and functions. Buckeye is also implementing a new Safety & Operations Management System, called SOMS, that we expect will contribute to continuous improvement in Buckeye safety and reliability in the future.

Turning now to the results of our strategic review. We closed on the divestitures that we announced in November. We completed the sale of the package of domestic refined product pipeline and terminal assets in December for $450 million. We recognized a gain of $343 million related to this transaction, which is reflected in our reported results for the fourth quarter. This gain was excluded from our reported adjusted EBITDA and distributable cash flow metrics. Buckeye employees are continuing to operate these assets for the new owner under a long-term management contract through our Buckeye Development & Logistics, or BDL, platform. Importantly, this enables us to continue to maintain a profitable cash stream from these assets and minimize the impact to our employees.

We also closed the sale of our VTTI equity interest in January for proceeds of $975 million. It should be noted that although we owned the interest in VTTI for the full quarter, the terms of the purchase and sale agreement dictated that we did not have rights to any further cash distributions from VTTI beyond our third quarter distribution, which we received in November. Therefore, the fourth quarter results do not include any contribution from VTTI.

The significant capital proceeds generated from these 2 divestitures combined with the adjustment to our distribution policy have enabled us to address the 3 priorities we identified when we initiated our strategic review.

First, we substantially reduced our leverage by using all of the proceeds to pay down debt. We utilized the combined $1.4 billion of proceeds to repay all borrowings on our credit facility and to retire our $250 million term loan. In addition, we have initiated the redemption of our $275 million 2019 senior debt maturity, which we expect to complete this month. As you would expect, these actions were well received by the rating agencies. All 3 agencies have reaffirmed Buckeye's investment-grade credit rating and moved Buckeye to a stable outlook. These actions should also eliminate our need to access the debt capital markets until our 2021 maturity. Second, we have improved our financial flexibility by increasing our distribution coverage, allowing us to self-fund the equity portion of our growth capital spend. This has eliminated the need for Buckeye to access the public equity markets for the foreseeable future. And third, we are refocusing our capital and other resources to higher return growth opportunities across the Buckeye network. I will discuss some of these opportunities in a moment.

The completion of the strategic review initiatives was a significant achievement for Buckeye. We believe we have enhanced the stability of our diversified businesses and our balance sheet. Our self-funding business model is expected to allow us to access sufficient capital at an attractive cost to finance our most promising expansion projects to drive long-term assurance for our unitholders.

Let me now turn to an update on several of our larger growth projects. Regarding the second phase of our Michigan/Ohio project, we continue to wait for FERC's ruling on our PDO, or Petition for Declaratory Order, related to the proposed tariff for interstate deliveries through the planned bidirectional operation of our Laurel pipeline. Unfortunately, it is not possible to determine when FERC will issue a ruling, but importantly, we do not believe that the delay is related to issues with our specific request. Upon receipt of our PDO, our next step is to conduct the hydro test. We expect that we will complete the hydro test and commence operations on the bidirectional pipeline within 60 to 90 days of receiving FERC approval. We are currently projecting that we'll be able to commence pipeline movements on this project by mid-2019, but that timing is subject to certain seasonal restrictions on when the hydro test can be conducted and depending on receiving the FERC approval for our PDO.

Another high-value capital project in the Midwest is the expansion underway at our Chicago Complex. This project continues to progress on budget and ahead of schedule. The $80 million project is backed by a long-term contract and is part of a strategy to continue to expand our service offerings to our Midwest customers. This expansion includes the construction of additional product storage, the expansion of our truck rack as well as enhancing our product blending capabilities. In addition, we are continuing to discuss with our customers the potential for further enhancements to the complex, which is already one of the premier midstream hubs in the Midwest.

Turning to our South Texas Gateway project. We're very pleased with the continued strong interest in our new crude oil export terminal. We have continued to secure additional throughput commitments and storage contracts. The facility is up to 6.8 million barrels of contracted crude oil tank capacity with a total investment of approximately $500 million on a 100% basis. We also expect further expansions of Gateway based on advanced discussions with interested customers. Khalid will discuss more details about this project in his review of our Global Marine Terminals business outlook in a moment.

We are also advancing and have completed a number of smaller scale growth projects that require moderate capital investments and offer attractive return profiles. These return capital projects across our facilities include increasing capacity, adding connectivity and optionality for our customers, broadening our product handling and adding new offloading and takeaway capacity. For example, in Woodhaven, Michigan, we recently completed customer-supported improvements to a facility to provide a rail logistics solution to a customer moving cost advantage gasoline and distillate produced from Midwest refineries to markets not serviced by pipelines.

In Florida, we are expanding our Jacksonville and Tampa terminals to increase throughput capacity and adding ethanol and butane by rail capabilities. In Pittsburgh, we are creating an integrated and expanded complex to provide our customers with improved connectivity and incremental services in this market. In our Corpus Christi complex, we are evaluating enhancements and new opportunities around crude and LPG export capacity. These are a few examples of the opportunities that offer attractive investment profiles that our teams continue to identify across our diverse asset portfolio.

Overall, we expect our total growth capital expenditures for 2019 to be between $250 million and $300 million, which includes our portion of the spending in our South Texas Gateway joint venture. It is worth reiterating that this will be funded from our access operating cash flow and borrowings on our revolving credit facilities. The actions we have taken as a result of our strategic review eliminated the need to access the equity capital markets or the senior debt markets to fund these projects.

We continue to be diligent in our evaluation of potential projects to ensure that the forecast economics exceed our internal investment hurdle rates and represent the highest value use of our capital. Our commercial and business development teams remain focused on assuring that any project we undertake, ultimately drives incremental value for our customers and our unitholders.

Turning to our distribution. The board approved a quarterly distribution of $0.75 per unit, which is in line with the distribution we declared last quarter following our strategic review. We expect to maintain this level of distribution throughout 2019. Our performance for the quarter also resulted in a reported distribution coverage of 1.24x. We targeted an annual distribution of 1.2x or greater coming out of our strategic review and we expect to meet this target in 2019.

In summary, we expect incremental returns from growth capital investments, including those I have discussed a few moments ago, as well as increased pipeline and terminalling revenues to contribute to a solid performance in 2019. The year-over-year performance improvement will, of course, be offset by the impact of the sale of our equity interest in VTTI and the sale of the domestic asset package. I would like to note that we are continuing to evaluate the potential impact of the recently announced U.S. sanctions on Venezuela state-owned oil company, PDVSA, but at this time, we expect those sanctions to have little, if any, impact on our business.

And finally, as we've shared with you before, 2019 is expected to be a transitional year for Buckeye with significant uplift in projected cash flows in 2020 and beyond. Buckeye's financial structure and balance sheet are clearly improved, thanks to our strategic repositioning. Our employees are excited about Buckeye's future and remain focused on safe operations, capital discipline and successful execution of our business and commercial strategies.

Now I'll turn the call over to Khalid to discuss our Global Marine Terminals activities and outlook.

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [4]

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Thank you, Clark, and good morning, everyone. I'll begin my remarks by providing an update on the capital projects and opportunities we are advancing in the Global Marine segment. Following that update, I'll provide details on our segregated storage services and our outlook for 2019 and beyond.

Touching first on our opportunities in South Texas. We continue to see strong customer interest in contracting for our South Texas Gateway Terminal, the open access marine terminal we are constructing in Ingleside, Texas. This terminal is one of the largest greenfield terminals designed for export of U.S. produced crude oil that is currently under construction. The advantaged site benefits from its location near the mouth of the Corpus Christi Ship Channel, where it is ideally positioned to serve as a primary destination point and export outlook for Permian crude oil pipeline volumes that will be delivered to the Corpus Christi market, including from the Gray Oak Pipeline. Our partners in the construction of the Gateway Terminal, both 66 and Marathon are also equity holders in the Gray Oak Pipeline. This pipeline is being expanded to meet the growing demand of Permian producers to transport their barrels for export primarily out of the Corpus Christi area.

Importantly, the port of Corpus Christi recently announced the awarding of a construction contract for the first phase of its planned project to widen and deepen the Corpus Christi Ship Channel. Our Gateway Terminal is expected to be among the first terminals to benefit as the dredging project advances, given its location at Ingleside near the mouth of the channel. The dredging project is expected to increase the depth of the channel to 54 feet, which, when completed will allow our Gateway Terminal to partially load very large crude carrier vessels with approximately 1.5 million barrels of crude oil from either of our 2 VLCC-capable docks. Upon completion of the channel improvement project, both our Gateway and Buckeye Texas Partners terminals will also have the capability to fully load 1-million-barrel Suezmax vessels.

We are continuing to secure additional long-term minimum volume throughput commitments and storage contracts, and are currently planning to move forward to the third phase of our build out, which is expected to increase the total storage capacity under construction to 6.8 million barrels, based on current contracted throughput and storage volumes. We also continue to see strong incremental demand from existing customers and other potential counterparties, and we are advancing discussions around additional long-term minimum volume throughput and storage commitment that could lead to further expansions of facilities. This site will be permitted to allow for up to 800,000 barrels per day of crude oil throughput and the 212-acre property has space available for the construction of up to 10 million barrels of tank capacity. Our current expectation is that we will commence and ramp up operations at the facility by middle 2020. We expect to spend approximately $230 million to $250 million on this project in 2019 on a 100% basis with Buckeye responsible for finding half of that spend.

Regarding our existing Buckeye Texas facilities, we continue to advance some modifications that will enable enhanced access and export of growing volumes of crude oil and LPG. Infrastructure modifications at our Buckeye field services assets will facilitate initial receipts from the Cactus II Pipeline system through the Rio Bravo Pipeline to our facility. Direct connections into our Buckeye Texas processing and Buckeye Texas hub facilities from the Cactus II Pipeline are expected to be completed in the latter part of this year. In addition, we are advancing various facility optimization projects to enhance our export and pipeline transfer capabilities, all supported by firm commitments from our customer.

We believe that the combined storage, committed throughput and significant export capabilities of our Buckeye Texas and South Texas Gateway facilities will position us as a leading service provider to growing exports of U.S. crude oil, petroleum products and gas. We're also involved in ongoing efforts to further optimize our condensate splitters and to expand our LPG storage system. We continue to work with our customer to determine scope requirements and project feasibility. However, final investment decisions remain subject to achieving necessary financial returns within our self-funding capital program.

Finally, I'd like to take a few moments to address our segregated storage services and our outlook for 2019 and beyond. First, I want to provide some context about the financial contribution of our segregated storage services relative to our consolidated EBITDA. Segregated storage in our Global Marine Terminals segment represented a little over 15% of our consolidated EBITDA in 2018. Importantly, our segregated storage position in the Caribbean, which includes our Bahamian facility, where we have experienced the most significant challenges, represents approximately 10% of our overall adjusted EBITDA. In the near term, we do not expect market structure to improve to levels sufficient to incentivize incremental storage demand beyond existing structural flows. In the first quarter, we have experienced moderately increased demand for our differentiated services, but remain focused on shorter-term contracts until market rates rebound from cyclical lows.

Looking forward, we anticipate 2019 results to be impacted by the roll-up of certain higher price crude oil contracts in 2018 and expect, overall, realized rates to be marginally lower and utilization levels also marginally lower for the first half of the year. We expect to see improvement in utilization rates in the latter part of the year as market participants prepare for implementation of IMO.

I would now like to provide some commentary on market conditions affecting our assets. Tightness of the physical crude oil market further exasperated by curtailment of supply continues to have an impact to the business models of the strong structural players that have traditionally used our assets. While the forward market structure for Brent has primarily been in backwardation given OPEC's actions, we have experienced short episodes of moderate contango. However, those levels are insufficient to incentivize meaningful incremental storage demand. Further, tightness and availability of heavy and medium sour grades has decreased customer demand for crude oil storage services.

As a result, we have experienced declines in utilization rates for crude oil storage. However, we believe that the impact on our business has already been largely realized with the expiration of legacy contracts and repricing the contracted capacity. We expect crude utilization levels in the near term may be impacted by global crude oil flows as a result of fuel specification changes or continuing government and regulatory actions.

Now looking at clean products. We are experiencing stronger demand for storage both in the New York Harbor and the Caribbean, as a result of infrastructure improvements we have made. Our new Raritan Bay to Perth Amboy pipeline connection, along with enhanced connectivity between our Perth Amboy and Port Reading terminals to our Linden station has enabled the capture of incremental market demand. As a result, our customers are able to take advantage of enhanced capabilities to provide further efficiencies and to capture market arbitrage opportunities. Additional blending and handling capabilities in our Bahamas facility have attracted incremental market demand for our services.

Increased length in global gasoline supply has provided further incentives for gasoline-related storage with expectations for continuing storage beyond the turnaround in summer peak demand periods. Additionally, we anticipate stronger demand for distillate capacity and improved market structure to further incentivize and storage in the second half of the year.

Regarding residual fuels, we benefited in the fourth quarter from increased short-term demand for fuel oil and vacuum gas oil handling services with higher contributions from increased vessel berthing and ancillary services. However, we may see further curtailment of demand to residual fuel handling services in the first part of 2019 with the functioning of tightened supplies of heavier crude oils somewhat offset by some continuing demands of EGO handling services that are supported by positive SEC margins.

Looking further into the future, customer interest in blending low-sulfur fuels at our facilities is continuing to develop as a result of IMO 2020. We expect increased demand for storage and blending services as global demand for high-sulfur fuel significantly declines following implementation of the new standards. Given our existing asset flexibly and handling capabilities, we are well positioned to quickly respond to increasing levels of demand without the need for significant incremental capital.

Now I'll turn the call over to Keith.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [5]

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Thank you, Khalid, and good morning, everyone. I'll now discuss the details of our fourth quarter 2018 financial results.

For the quarter, we reported net income attributable to Buckeye of $482.5 million compared to the fourth quarter of 2017, where we had net income attributable to Buckeye unitholders of $126.3 million. Fourth quarter 2018 financial results included $343 million gain realized upon closing of the sale of the package of domestic pipeline and terminal assets Clark referenced earlier.

Record throughput volumes for both our Domestic Pipelines & Terminals and strong operational performance by our Buckeye Texas Partners assets contributed to our performance during the quarter. The quarter also benefited from lower interest expense due to the settlement of forward starting interest rate swaps in December. Those contributions were offset by the impact of the sale of our equity investment in VTTI, continued weakness in the segregated storage market, the expiration of a crude-by-rail contract early in 2018 and the impact of lower petroleum products prices on settlement revenues in our domestic pipes and terminals.

Net income attributable to Buckeye was $3.13 per diluted unit for the fourth quarter of 2018 compared to net income of $0.85 per diluted unit for the same period last year. The diluted weighted average number of units outstanding during the quarter was 154.1 million compared to 147.3 million last year. This increase was primarily due to the January 2018 issuance of Class C PIK units, which converted to common units in the third quarter.

On a consolidated basis, we reported fourth quarter 2018 adjusted EBITDA, which is our primary measure of financial performance, of $234.7 million compared to $289.9 million for the fourth quarter of 2017. The adjusted EBITDA for our Domestic Pipes & Terminals segment totaled $148.3 million for the quarter, or a reduction of $11 million compared to the prior year. This segment achieved record fourth quarter pipeline transportation and terminal throughput volumes due to strong demand on our Midwest systems and across our expanded Chicago Complex. We also benefited from higher butane blending revenue markets. However, this segment's strong operating performance during the fourth quarter of 2018 was offset by the expiration of a crude-by-rail contract in the Chicago Complex during the first quarter of this year, lower petroleum product prices that negatively impacted pipeline settlement revenues, and reduced storage revenues, in addition to an uptick in operating expenses, primarily due to the timing of maintenance activity within the year and some nonrecurring items that were reflected in the quarter as well.

Our average pipeline transportation volumes of 1.52 million barrels per day represents a record pipeline throughput level for Buckeye. This represents an increase of 2.2% compared to an average of 1.49 million barrels per day in the fourth quarter of 2017.

Volumes were stronger across several of our systems, particularly in the Midwest, due to our ability to transport gasoline and distillate from cost-advantaged markets into markets with strong demand. A portion of our volume growth was driven by market share gains on shorter haul routes, which impacted our average tariff per barrel, which is reflected in the 1% increase in average pipeline tariff to $0.913 per barrel for the quarter.

Average terminal throughput volumes grew by 4.6% during the quarter totaling 1.35 million barrels per day across our portfolio, which is also a record for Buckeye. The year-over-year increase was primarily driven by market share gains due to volume incentive arrangements with key customers principally through our Midwest facilities, partially offset by the loss of volumes at the facilities sold as part of the asset package as well as reduced diluent movements through our Chicago Complex into Canada.

We expect to benefit in 2019 from recently negotiated tariffs as well as annual increases on a market-based- and FERC-index-based tariff pipelines. The majority of our market-based tariff increases were effective in January of 2019, and average between 4.5% to 5%. We expect our FERC index-based tariffs to increase by approximately 4% to 4.5% effectively July 1, 2019.

Our Domestic Pipelines & Terminals assets are also positioned to continue their track record of consistent performance and execution on growth projects for 2019. We expect to initiate service on the second phase of the Michigan/Ohio II expansion project and to complete the expansion of our Chicago Complex, which both will provide meaningful contributions to future cash flows.

Our Global Marine Terminals segment produced adjusted EBITDA for the quarter of $78.8 million compared to $121.7 million last year. Adjusted EBITDA for the 2018 quarter declined compared to the prior year, due in large part to the sale of our equity interest in VTTI, which contributed $35.8 million to the prior year performance. This segment also continued to face challenging market conditions in segregated storage.

Our Buckeye Texas Partners facilities generated incremental EBITDA contribution in 2018 as a result of our team's effort to improve operating performance year-over-year, including the completion of various optimization projects backed by incremental customer commitments. In addition, the acquisition of the remaining 20% minority interest in April 2018 also generated incremental cash flows.

Now looking at New York Harbor. We are seeing the positive effects of the expanded connectivity and services capabilities in these facilities coupled with our customer service commercial focus. We've been able to maintain high utilization at these facilities as customers remain focused on incorporating these added capabilities into their commercial plans.

The average utilization across all of our marine storage assets based on total capacity was 78% for the fourth quarter of 2018 compared to 82% for the same period last year. Our commercial teams are focused on prompt marketing of short-term positions, while developing and evaluating longer-term strategic partnerships and opportunities. We are limiting contract tenor while rates are at cyclical lows to allow us to quickly capture additional rate and term when the market inflection point is reached.

One benefit of the shorter-term contracts that we have seen is incremental customer demand for additional services such as berthing. During the quarter, both our St. Lucia and Bahamian facilities saw strong ship traffic, with traffic on our Bahamas dock reaching record levels during the quarter.

Now turning to our Merchant Services segment. BMS reported adjusted EBITDA of $7.6 million for the quarter compared to $8.9 million last year. The decrease was primarily driven by unfavorable distillate spreads and lower rack margins, partially offset by favorable butane activity compared to last year. Despite these challenges, the Merchant Services segment posted a record quarterly contribution to the overall Buckeye umbrella of $14.5 million. It also posted its highest full year contribution of $48.7 million, emphasizing the segment's continued focus on optimizing our portfolio of domestic assets to drive utilization and incremental value to Buckeye.

Now turning to our balance sheet. $400 million of senior debt matured and was repaid during the fourth quarter using funds available under our credit facility. The credit facility was subsequently paid down with the $450 million of proceeds from the sale of domestic asset package. Further debt reduction resulting from the $975 million proceeds from the VTTI sale in January of this year is not reflected in the reported debt balance as of December 31, as this occurred subsequent to year-end.

At the end of the quarter, we had $1.8 million in cash and cash equivalents and approximately $4.5 billion in long-term debt, including the portion classified as current. We had $522.3 million outstanding on our credit facility, of which $177.7 million is reflected as short-term debt, as it supports our Merchant Services segment's working capital requirements. We had $974.6 million of incremental liquidity available on our revolving credit facility, and our total debt to trailing 12 months of adjusted EBITDA based on our credit facility calculation, was 4.1x.

Distributable cash flow for the fourth quarter of 2018 totaled $143.6 million compared to $188.9 million last year. The decrease in distributable cash flow was driven by the reduced EBITDA contribution from our business segments and the sale of our equity interest in VTTI. As discussed previously by Clark, our fourth quarter distribution to unitholders will be $0.75 per unit, and our distribution coverage ratio based on distributions declared on units outstanding at the end of the quarter was 1.24x. This level of quarterly distribution allows us to preserve liquidity and support Buckeye's growth capital initiatives without the need to access the public equity markets. We believe this self-funding model will drive long-term value for our unitholders. As previously indicated, following the completion of our strategic review, we are targeting annual distribution coverage of 1.2x or greater and leverage of 4.5x or less.

Buckeye's maintenance capital spending for the fourth quarter of 2018 totaled $32.3 million compared to $35.5 million last year. We expect maintenance capital for 2019 to be within the range of $105 million to $125 million.

Return capital spending for the quarter was $78.4 million. And we anticipate our total 2019 spend on return capital projects to be approximately $250 million to $300 million. This includes estimated capital contributions to fund our 50% portion of the capital spending at South Texas Gateway joint venture.

In closing, we believe that the actions taken as a result of our strategic review have achieved our stated objectives of reducing leverage, maintaining our investment-grade credit rating, providing increased financial flexibility, improving our distribution coverage and reallocating capital to higher return growth opportunities across our portfolio of assets.

Looking forward to 2019, we will continue to focus on cost control and disciplined allocation of capital, while we reposition ourselves for long-term success with a constant focus on maximizing returns for our unitholders.

That concludes my remarks, and we'll now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Theresa Chen with Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [2]

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Khalid, I really appreciate all the color around the segregated storage business. There are lot of moving parts to the outlook by product. So just boiling it all down, your near-term outlook for that business right now versus 3 months ago, is it better, worse or stayed the same?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [3]

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Theresa, yes, I tried to provide obviously, to give you more color around the various products, but I think in my remarks, what I was trying to provide also was demonstrating that we eventually seen and realized just the impact of some of the contracts that we entered into a few years back were maybe supported by market structure. So I would say that for the most part, particularly on some of the -- on the crude oil side, those particular positions that we have in place are largely to do with structural flows. I think what I said in remarks going forward, yes, we saw a little bit of stability perhaps in the fourth quarter, however, we do have some contracts that did roll off in the latter part of the year. We anticipate seeing some impact of that through the balance of this year. So we do feel like there will be some softness in perhaps the first half of the year, but as we mentioned before, we anticipate a pick-up towards the latter part of the year as market conditions improve for segregated storage.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [4]

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Okay. And just to be crystal clear, it's still your expectation that this part of your business troughs by midyear or so?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [5]

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Yes, Theresa, I mean, it certainly feels that way but of course, we need more time to really be able to establish a trend. We've seen obviously, some positives here in the last few months, and certainly, going into the first quarter, but again, just given, like I mentioned some commentary around just the tightness, the supply of various materials, obviously, some intervention by the various governments, et cetera, which also had an impact, but I do believe that when we look at our recontracting levels, when we look at the rates that we have been able to establish that have been largely supported in line, so to speak, we're not seeing much of a deterioration there. Like I said, we are approaching this with cautious optimism.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [6]

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Theresa, this is Keith. I was going to just add, I think it's fair to say that we certainly view 2019 as the trough given our outlook for the benefits of IMO and other potential changes in product flows that could positively impact our segregated storage assets. I think specifically defining is it first half, second half -- but I mean, we expect to see conditions as Khalid indicated earlier, improving in the back half of the year.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [7]

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Great. And shifting gears to the South Texas Gateway project. So 6.8 million barrels backed by commitments, are those all from Gray Oak, or have you already signed up additional customers at this point?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [8]

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Yes, Theresa, I mean, I'm sorry, I can't get into some of the specifics, but look, we will have connections to other pipelines. So we expect barrels to flow our way from some -- these other pipelines that are also under development. So again, we feel very, very good about our Gateway project.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [9]

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Okay. And could you just repeat what are your expectations for the 2019 Gateway CapEx was, of which you have 50%?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [10]

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It's $115 million to $130 million. That's our half.

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Operator [11]

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And our next question comes from the line of Shneur Gershuni with UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [12]

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I just wanted to start off looking at the storage market, I was wondering if you can talk about some signposts that we should be looking towards, specifically how it relates to contango? How big of a contango do we need to see to cover the cost of carry?

And then, secondly, how long it would take to translate into earnings for PL?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [13]

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It's Khalid, again. Look, I mean, what I would say is, in order for it to be something sustainable, where a trader is obviously going to be able to recover their cost of debt and to be able to generate positive rate of return, I would say that you need to see contango materialize to a level of somewhere around, let's say, $0.45 a barrel a month, maybe $0.50 a barrel a month. That way, what that does is effectively it gives that trader a free option. So pretty much everything from there is gravy. But I think, when we see contango -- and I know that this came up, I believe in the last quarterly call, where Brent at the time, was showing mild levels of contango. At those levels which were somewhere in the $0.10 to $0.15 or $0.20 range, that really was insufficient to be able to cover the cost of capital and then obviously, provide a rate of return. And so that's part of the reason why we did not necessarily see any incremental demand beyond what we typically see in the structural flows. Once you see that carry develop to those levels, then of course, other elements come into play, where traders can obviously look at developing more positive margins around blending, et cetera. So hopefully that answers your question.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [14]

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It does. And do you know how long it would take for it to translate into earnings, once it materializes?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [15]

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I would say, fairly quickly, very quickly. I mean, I think, we, obviously, are dealing with customer base that would quickly react towards that. I'm not talking about prospective customers, I'm talking about existing customers, and I think, it's just a function of being able to get a hold of the physical barrels. And that's partly the reason why you might be able to see something on the screen, but access to those barrels is also -- that needs to get into consideration. But again, I mean, our assets are available, we don't have any issues with being able to capitalize or monetize those opportunities should they arise.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [16]

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Fair enough. So essentially, contract structure wouldn't get in the way. Maybe just transitioning to IMO 2020. I was wondering if you can help us quantify the potential impact to Buckeye? Is it something that's an upside potential of $20 million or $30 million? Or is it something in the neighborhood of $100 million plus for EBITDA, when we think of 2020 or 2021? I was just wondering if you can talk about the magnitude of the impact given how much you've been talking about it.

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [17]

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Sure. I'll try to help to give some guideposts around that. I think what you need to do is kind of think about it in stages. Obviously, what we do know is, as we start approaching 2020, you'll probably see inventories with high-sulfur fuel oil start rapidly declining, because what we do know is the price of that material will rapidly decline and fall off the cliff. I think, in anticipation, you probably see folks start building up inventories of diesel. That -- there is some challenge associated with that at the moment because the market is extremely tight for diesel. It's a function light oil. We're seeing obviously that incremental length in gasoline and not enough diesel that partly goes back to your initial question on how do we realize cash flow from contango. We see that in the length of global gasoline oversupply, and that will continue for the foreseeable future. But look, after that, maybe kind of quantify what we believe will be the oversupply of high-sulfur fuel oil. I think maybe the best way to cuff this is that we've got somewhere between, call it, 14 million and 17 million barrels of capacity that we could easily switch over to service to be able to accommodate incremental IMO demand for very little capital. Again, I can't obviously sit here and exactly predict the future, but I mean, I think if we were to go back and look at levels back in 2010 -- 2009, 2010, where fuel oil was obviously in contango, you can see the high utilization levels of that particular asset. So hopefully that gives you some color around what that potential could be. It could be rather meaningful.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [18]

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Okay. Fair enough. I appreciate that. One final question, just with respect to the PDO approval for Michigan/Ohio. Is that a function of the fact that the FERC only has 4 commissioners? Is that kind of what's stalling it?

And then secondly, can you give us a time frame of when you need to receive the PDO, so that you can remain on schedule for your on-time startup?

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Robert A. Malecky, Buckeye Partners, L.P. - Executive VP and President of Domestic Pipelines & Terminals Business Unit - Buckeye GP LLC [19]

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This is Bob Malecky. We don't have clear visibility into FERC to exactly what's holding it up. We do nothing, because of the preponderance of PDOs that have not been approved, we don't think it's necessarily a function of the secretary, but rather -- or the commissioner, but it's rather a function of the process and some challenges with that. We're starting to see some rulings this week that we're hopeful that this might be an opportunity that they're going to put some things out here, but we're not necessarily linking into the commissioner at this point, or we have no information that points us in that direction. We have a window -- as far as turning to the window of timing on this. We have a window of about 90 days with which we really need to hear to be able to execute the hydro test in that period of time and then we're into a window that will be 4 or 5 months in which we likely will not be doing hydro test because of some of the process with the hydro test. So we have a somewhat short window in which we can get this done immediately to preserve our time line, but again, it opens up dramatically after that and we absolutely believe this is going to move forward. We're just in a position of being held up because of the process in Washington.

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Operator [20]

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And our next question comes from the line of Tristan Richardson with SunTrust.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [21]

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Just wanted to touch a little bit on the LPG opportunities you guys see out there. I think in the past you've talked about a full greenfield export option as well as just expansion around the Texas Partners facility. Just give us an update there. And then I think you also mentioned that FID will be highly dependent on return metrics, so just kind of some of the dynamics you're thinking about as you're looking at those projects?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [22]

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Yes, absolutely. This is Khalid, I'll touch on that. Yes, we're continuing to with the advance feasibility around our LPG project. We have obviously, worked on scoping out a standalone facility. However, we are working with our customers around an expansion of the Buckeye Texas facility. That particular single project is currently in feasibility steady. We commissioned that particular endeavor. We think that, that particular expansion of Buckeye Texas, obviously, will be more competitively advantaged than necessarily building a standalone asset. However, with some of the projections that we see with regards to potential for propane and butane to make its way to Corpus Christi, we'll obviously reach at some point, some physical constraint on our ability to expand Buckeye Texas. So that's part of the dynamic. And then, look, I mean -- and I do think that, that particular project has, I think, a high likelihood of going into, I guess, to final investment decision-making. However, just given that we do now have to deal with the parameters of self-funding, not only is it a function of just the returns profile, it's also a function of making sure that we can fit this within our capital allocation program. So I think, that's what we're trying to indicate in our prepared remarks.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [23]

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Okay. That's helpful. So I guess, maybe the takeaway is that when you think about '19 growth CapEx, it's difficult to say that there's really meaningful amount of LPG expansion spend this year, given you're in early phases?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [24]

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That is correct. That is correct. We are not looking to -- what I'm trying to get at is, we're not looking to all of a sudden expand our currently announced capital expansion program.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [25]

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That's very helpful. And then just kind of touch on older topic. As you guys look at the opportunities created by IMO and sort of your storage infrastructure footprint today, is there anything -- is there an amount we should think about in the growth CapEx number for 2019 that includes repositioning or reconfiguration of your existing infrastructure to better capture opportunities?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [26]

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Yes. Any modifications, I would characterize as being immaterial. We've largely got the asset flexibility in place. Obviously, there may be some costs we expense that if wanted to convert a tank that was in some dirty product service to clean, obviously there's some costs associated with that. But the reality is, is that the incremental cost associated with this initiative are not significant.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [27]

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Yes. It's interesting, and Khalid mentioned this earlier, we have in our Bahamian facility up to 17.5 million barrels of capacity that could be used to store high-sulfur fuel oil. Now some of that is currently in service, but there could be a significant uplift in capacity utilization if everything plays out in our favor relative to IMO.

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Operator [28]

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(Operator Instructions) And our next question comes from the line of Spiro Dounis with Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [29]

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So let's go back to some of your comments earlier. You mentioned some small, quick-hit, high-return-type projects. It just sounds like individually not a lot of high spend there, but just wondering if you can give us a sense of maybe the aggregate amount of spend? And what you think the full opportunity set looks like across the system?

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Robert A. Malecky, Buckeye Partners, L.P. - Executive VP and President of Domestic Pipelines & Terminals Business Unit - Buckeye GP LLC [30]

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This is Bob Malecky. I think a lot of the single and doubles really emanate out of the domestic pipeline system. I think obviously that's much, much larger project generally, but certainly a few omnis. I think we've given gave the total capital spend expected for 2019 in the range of $250 million to $300 million, $115 million of which -- $115 million to $130 million of which is for Gateway. The balance of those include our announced Chicago Complex project, which is progressing and will get done on time and on budget, actually, a little earlier -- a little before mid-year, this year. We continue to have projects in Woodhaven, that are different regions that include rail activity in a number of locations. We continue to demonstrate the flexibility, customers want for our flexibility, different service handlings in different areas are some of the attributes we'd look at to do. We invest in economic or cost-saving opportunity sets that include VRU maintenance issues and/or investments to improve the revenue stream we have for those investments in our assets. Those are the -- some of the basic outlines I think Clark touched on in his outline as well.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [31]

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Yes. If you looked at the smaller projects, I mean the 3 largest projects are South Texas Gateway, completion of the Michigan/Ohio II and then the expansion of the Chicago Complex. That would then leave somewhere in the neighborhood, round numbers, $100 million. $100 million to $125 million that's really pointed towards the smaller projects.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [32]

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Got it. That's really helpful. The second question just on, you mentioned market share gains on some of the shorter haul pipeline routes. Just wondering, can you give us a sense of maybe what enabled you capture market share during the quarter? And then, how much more opportunity there is to do that going forward?

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Robert A. Malecky, Buckeye Partners, L.P. - Executive VP and President of Domestic Pipelines & Terminals Business Unit - Buckeye GP LLC [33]

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This is Bob Malecky, again. The -- we continue to have one of the most flexible and diversified pipeline networks across the systems. Our network and capability to go from multiple source points to destinations is unparalleled in some situations. That is continued to resonate with our customers and allow was to gain market share in those locations.

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Operator [34]

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I show no further questions at this time. I would like to turn the call back over to Clark Smith for closing remarks.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [35]

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Thank you, George, and thanks to everyone for joining us on the call this morning. As we stated, we believe the actions we announced and completed after our strategic review have put Buckeye in a very attractive growth position moving into 2020 and beyond. We're excited about Buckeye's future and very much appreciate the support and confidence of our stakeholders. Have a great weekend.

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Operator [36]

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Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.