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Edited Transcript of BPL earnings conference call or presentation 2-Nov-18 3:00pm GMT

Q3 2018 Buckeye Partners LP Earnings Call

HOUSTON Nov 5, 2018 (Thomson StreetEvents) -- Edited Transcript of Buckeye Partners LP earnings conference call or presentation Friday, November 2, 2018 at 3:00:00pm 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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* Adam Benjamin Breit

SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst

* Dennis Paul Coleman

BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD

* James Eugene Carreker

U.S. Capital Advisors LLC, Research Division - Executive Director

* Jeremy Bryan Tonet

JP Morgan Chase & Co, Research Division - Senior Analyst

* Michael Jacob Blum

Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst

* Selman Akyol

Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research

* 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

* Sunil K. Sibal

Seaport Global Securities LLC, Research Division - MD

* Theresa Chen

Barclays Bank PLC, Research Division - Research Analyst

* Timothy D. Howard

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* 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 welcome to the BPL 2018 Third Quarter Financial Results Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Mr. Kevin Goodwin, Vice President and Treasurer. Mr. Goodwin, you may begin.

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

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Thank you, Merida. Good morning. Welcome to Buckeye Partners' financial results conference call for the third quarter of 2018. On this morning's conference call, Clark Smith, our Chairman, President and Chief Executive Officer, will discuss the outcome of the strategic review and provide additional details about the actions we announced this morning. Keith St. Clair, Executive Vice President and Chief Financial Officer will then review further the financial impacts of the outcome of our strategic review as well as discuss our financial results for the quarter. Also on the call this morning are Bob Malecky, Executive Vice President and President of Domestic Pipelines & Terminals; Khalid Muslih, Executive Vice President and President of Global Marine Terminals; Bill Hollis, Senior Vice President and President of Buckeye Services; Todd Russo, Senior Vice President and General Counsel; Joe Sauger, Senior Vice President of Operations of Global Marine Terminals and Engineering Services; and Gary Bohnsack, Vice President, Controller and Chief Accounting Officer.

After our prepared remarks, we will take your questions. I 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 in our most recent Form 10-Q, each was 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 pertaining to completed fiscal periods. Reconciliations of these non-GAAP measures to their most directly comparable GAAP measures are included in the press release issued this morning as well as in the supplemental reconciliation, both of which are available in the Investor Center section of the Buckeye Partners' website.

During the call we will also discuss forward-looking estimates of adjusted EBITDA and cash flows related to the assets that we intend to divest. We cannot provide a reconciliation of estimated adjusted EBITDA or cash flows to estimated GAAP net income, which is the GAAP measure -- financial measure most directly comparable to each non-GAAP measure, without unreasonable efforts due to the inherent difficulty and impracticality of quantifying certain amounts that would be required to calculate projected GAAP net income, such as unrealized gains and losses on derivatives mark-to-market and potential changes in estimates for certain contingent liabilities. In addition, interest and debt expense are corporate-level expenses that are not allocated among Buckeye's individual assets and could not allocated to the operation of the assets being divested without unreasonable effort. These amounts that would require unreasonable effort to quantify could be significant, such that the amounts of projected GAAP net income would vary substantially from the amounts of projected adjusted EBITDA or cash flows.

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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Thanks, Kevin, and good morning, everyone. Thanks for joining us today. As you saw, we announced the results of our strategic review earlier this morning. Let me start by saying that we are pleased with the outcome of this review process, and we're very excited about Buckeye's future plans. Before I discuss our plans moving forward, I'd like to first start with a safety highlight. We're very proud of our safety performance and our employee teams across the Buckeye assets this quarter. Buckeye had 0 OSHA recordable injuries across almost 800,000 work hours during the third quarter. This strong safety performance represents the achievement of our goal of 0 injuries, which is a (inaudible) feat but clearly achievable target, as I have discussed in the past.

Turning now to our strategic review. As you'll recall, when we announced this comprehensive review 3 months ago, we indicated that our actions were necessary due to an increased need for capital based on attractive investment opportunities, the dislocated public equity markets and near-term weakness in our segregated storage.

The equity markets have clearly not rewarded Buckeye for the level of distributions being paid nor for a significant level of cash flows we are generating and expect to grow in the future. We continue to believe the market value of our units does not reflect the intrinsic value of our diverse asset base nor the value of our backlog of attractive organic growth projects. While market conditions in our segregated storage business remains challenging, the balance of our diversified businesses continue to perform well and in line with our expectations.

The timing of our strategic review was also influenced by the significant increase in growth capital investments that our commercial and operational teams have identified in the near term. As we indicated last quarter, we expect to spend over $600 million of gross capital in 2018 on investment opportunities that we anticipate will drive long-term value for our unitholders. And we have a healthy backlog of additional projects and further expansions under assessment.

Current conditions in the MLP equity markets, however, have significantly increased our cost of capital, which without the actions announced today could have limited Buckeye's ability to execute on these growth opportunities. In addition, although we expect to see some improvement in our segregated storage business in the second half of 2019 and into 2020, with the anticipated benefits of the IMO, marine fuel regulatory changes, both our leverage and distribution coverage have been negatively impacted by the continued weak market conditions in storage. Segregated storage makes up about 15% of our total EBITDA, but has certainly put stress on our financial results. This weakness in storage, combined with the expected level of capital expenditure, required us to reassess our strategy and financial positioning.

On our call in August we outlined several objectives that we expected to address with our strategic review. First objective was to reposition Buckeye for long-term success with a constant focus on maximizing unitholder value. Second, our strategy continues to stay committed to maintaining our investment-grade credit rating to ensure access to capital in varying financial market conditions. And third, we wanted to improve the flexibility of Buckeye's capital structure to allow us to adapt to the change in MLP landscape.

The mindset of the MLP investor has evolved, and we fully recognize that the market has embraced the strategic value of a self-funding model that eliminates the need to issue equity via the public markets.

We also believe our go-forward strategy will allow us to maintain and grow our core business as we allocate capital on a disciplined basis towards our businesses and assets that offer the highest potential returns for our unitholders. Buckeye has a great team and a tremendous asset base, and we are highly confident in our employees and our plans moving forward. To prepare this plan, we conducted a comprehensive analysis across all of Buckeye's lines of business with the active involvement of our board of directors and outside financial advisers over the past several months. This work led to the following actions. First, we have negotiated the sale of our entire equity interest in VTTI for cash proceeds of $975 million, which represents a multiple in excess of 12x the expected 2019 cash flows. Second, we have sold a package of domestic pipeline of terminal assets for cash proceeds of $450 million, which represents a multiple over 13x expected EBITDA from these assets in 2019.

We believe these 2 transactions, which are both expected to close by year end in the multiples realized are more representative of the true value of our remaining asset portfolio versus Buckeye's current equity value.

Finally, we've adjusted our quarterly cash distribution to $0.75 per unit for the third quarter, which equates to $3 per unit on an annual basis. I'd like to now provide some more color on each one of these actions. As you recall, the original thesis for our investment in VTTI was to gain access to an international terminal platform that operated in key hubs in emerging markets with very attractive growth profiles. We also recognized that incremental capital would be required to realize those growth objectives. However, the capital markets have deteriorated materially since we announced our investment. And given the scarcity of reasonably priced sources of the capital, we concluded that Buckeye and our unitholders are better served by allocating available capital to our growth initiatives across our domestic assets, particularly the opportunities we see along the Gulf Coast. The announced sale of our interest in VTTI will allow us to realize and redeploy sizable cash proceeds of $975 million. The sale also eliminates our share of VTTI debt of approximately $500 million. And very importantly, Buckeye avoids any future VTTI capital investment requirements.

We also announced the sale of a discrete package of domestic refined product terminals in pipeline assets. These assets included our jet fuel pipeline from Port Everglades, Florida to the Fort Lauderdale in Miami airport, our Pipelines & Terminal facilities serving the Reno, San Diego and Memphis airports, and our refined product -- petroleum products to terminals in Sacramento and Stockton. The San Diego, Sacramento and Stockton terminals represent Buckeye's remaining assets in California.

As you would expect, there were high levels of interest in this portfolio, which allowed us to execute a definitive agreement to sell this package to a single buyer for proceeds of $450 million. It's important to note that we expect to continue to operate these domestic assets for the purchaser under a long-term contract in exchange for an annual multimillion dollar management fee, although Buckeye will not bear any ownership risk going forward.

The VTTI divestiture will result in a loss on sale in the third quarter of approximately $300 million, while the domestic asset sale will generate a gain of $350 million, which is expected to be recognized in the fourth quarter. Keith will provide more color around these accounting issues in his comments.

Last, we redefined our distribution policy, reducing our annual distribution to $3 per unit from our previous level of $5.05 per unit. This reduction is expected to allow us to retain nearly $300 million of cash flow on an annual basis that we can utilize to fund our attractive backlog and growth opportunities.

We believe that reduced distribution, which we recognize as disappointing to our unitholders, is necessary to increase our financial flexibility. If storage conditions improve and cash flow is realized from our growth projects, we expect to resume growing our distribution levels when appropriate.

Taken altogether, these actions once complete are expected to allow us to meaningfully reduce leverage and maintain our investment grade credit rating, which has always been a central goal of ours. We reported distribution coverage of 1.35x for the quarter, and we calculate pro forma leverage to be less than 4.5x at September 30, 2018.

Over the long term, we expect to operate with leverage less than 4.5x and a targeted annual coverage in excess of 1.2x. Finally, very importantly, we expect to fund our current slate of growth capital projects for the remainder of 2018 and beyond without the need to access the public equity markets. The continued pressure on both rates and utilization in our segregated storage facilities, particularly in the Caribbean, required us to perform an interim assessment of the recoverability of our goodwill as of September 30, although we will expect a recovery in the segregated storage business and have a positive long-term outlook for these facilities. The current weakness contributed to the decision to impair the goodwill related to our Caribbean and New York Harbor businesses. This goodwill impairment of $537 million is reflected as a noncash charge, which is excluded from our calculation of adjusted EBITDA.

Now I'd like to shift the discussion to the very attractive set of growth opportunities that are obtained for currently executing our (inaudible). We expect these growth capital investments will provide a meaningful contribution to Buckeye's financial performance in 2019 and beyond.

Starting with the Gulf Coast, it's well recognized that Buckeye's facilities benefited from our advantage location in Corpus Christi. The port of Corpus Christi is the most efficient export outlet on the Gulf Coast and offers optionality and connectivity to the Permian Basin and Eagle Ford Shale plays.

Our facilities are also expected to benefit from the port of Corpus Christi's approved project to expand and deepen the ship channel, which will enable the berth and loading of VLCC.

We also continue to advance our South Texas Gateway project at Ingleside. This deepwater open access marine terminal's position to serve as the primary destination point, an export outlet for crude oil and condensate volumes delivered of the Gray Oak Pipeline, which is being expanded to capture incremental market share Permian crude oil volumes. Our Permian and construction efforts remain on schedule and are expected to allow us to commence operations at the Gateway facility by the end of 2019.

We have continued to secure incremental throughput volume commitments at Gateway from additional customers over the past 3 months and are stating this project to over 5 million barrels of tank capacity. The facility is permitted for throughput above 800,000 barrels per day and has space available on the 212 acre site for up to 10 million barrels of petroleum products [train] capacity.

We're also exploring additional connectivity to other crude oil pipeline from the Permian and Eagle Ford, including the potential connection to midway junction to support new throughput expansion opportunities. The strong demand for export access to the water highlights the importance of the Corpus Christi marine terminals to the Permian and Eagle Ford producers. The LPG storage and handling capabilities for Buckeye Texas have continued to drive opportunities for further investment as well. We have completed projects and increased pipeline connectivity to butane and propane supply for export. We are also increasing throughput capabilities for LPG products across our docks. We continue to see strong customer interest where LPG handling and export capabilities doing expansion of our existing facilities or for the construction of a new greenfield facility. The new facility would serve as a new aggregation and distribution center for LPG and crude volumes.

These projects are just a partial lift that highlight the growing level of investment opportunities across the Gulf Coast, which could total in excess of $1 billion over the next 3 years.

In addition to the Gulf Coast, we have very attractive opportunities for investment across the balance of our diversified asset portfolio. We continue to wait for a ruling from FERC our Michigan/Ohio tube project. We believe our proposed bidirectional services is a solution that provides Pennsylvania consumers with increased access to lower cost Midwest supply [steels], while allowing current shippers continued access to Western Pennsylvania market.

We expect a decision from FERC and a time frame to permit us to begin service in early 2019. With respect to the Chicago Complex, we are ahead of schedule and have claimed all necessary permits for our expansion project, which increases our refined product storage capacity and our blending and truck rack capabilities at this key hub. This project, which is supported by a long-term volume -- which is supported by long-term volume commitments from (inaudible) products North America, solidifies our position as the premier storage and trading facilities in the Midwest region.

We are also advancing a number of other smaller projects across our footprint. In New York Harbor, we are nearing completion of negotiations on the restart of crude by rail, which we expect will be supported by a long-term contract from a customer planning to export crude oil to supply its refinery operations with price advantage Canadian heavy crude. This requires minimal capital investment, given our existing crude oil offloading infrastructure and is expected to yield an attractive return.

Following the completion earlier this year of our pipeline connection between Raritan Bay and our Perth Amboy and Port Reading terminals, we are able to offer customers maximum flexibility across an integrated network of Pipelines & Terminals with Deepwater marine-berthing capabilities in the New York Harbor.

We are also engaged in conversations with customers to expand our product-handling capabilities, including asphalt service in multiple locations and jet fuel service in Allentown and in Indianapolis. Even though these smaller organic growth projects are less notable, they consistently average $75 million to $125 million in annual investment opportunities and generate attractive earnings multiples.

Turning to the Caribbean, starting with our Yabucoa terminal in Puerto Rico, we entered into a long-term arrangement with a customer to reintroduce jet fuel storage and throughput service. In the Bahamas, we are advancing services to enhance our handling and storage capabilities for blending oxinated gasoline for customers targeting demand across the Caribbean and Latin America. Much like the crude by rail, it's important to recognize the expected future uplift to Buckeye's financial performance from increased in utilization and revenues with minimal capital investment as storage fundamentals improve across the Caribbean and New York Harbor markets.

Let me conclude by saying the Buckeye team and our board of directors are excited about our future. We are highly confident that these actions will allow us to deliver attractive returns to our unitholders moving forward. We are strengthening our balance sheet, solidifying our investment-grade credit rating and meaningfully improving distribution coverage by moving to a self-funding business model. Importantly, we are now well positioned to fund our annual growth capital of $250 million to $350 million without accessing the public equity market.

Following completion of these actions, we believe Buckeye will have the financial flexibility necessary to deliver growth and solid returns to our unitholders [throughout] business cycle.

I will now turn the call over to Keith for more detail on our strategic review and third quarter financial performance.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [4]

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Thank you, Clark, and good morning, everyone. I'll now provide some details about our third quarter financial results and discuss the financial implications of the transactions we announced today.

For the third quarter of 2018, we reported a net loss attributable to Buckeye unitholders of $745.8 million compared to a net income attributable to Buckeye unitholders of $116.2 million last year. This decrease was primarily attributable to the $537 million noncash goodwill impairment charge associated with our operations in the Caribbean and the New York Harbor, combined with the $300 million noncash loss related to the anticipated sale of our equity investment in VTTI.

I will go into further detail on these noncash charges later in the call. Excluding the impact of these noncash charges, net income attributable to Buckeye unitholders would have been $90.7 million. The remainder of the decrease year-over-year was primarily attributable to weaker overall segregated storage market conditions, incident response and remediation cost associated with product releases during the quarter. Higher interest and debt expense related to our senior notes issuance in late 2017 and our junior subordinated notes issued in January of this year and increased depreciation and amortization expense related to new assets placed in service during the last 12 months.

The impact of these factors was partially offset by lower acquisition and transition expenses, lower hurricane-related costs, net of recoveries and effective cost management across all of our business segments.

The net loss attributable to Buckeye unitholders was $4.86 per diluted unit for the third quarter of 2018 compared to net income of $0.81 per diluted unit for the same period last year.

Excluding the impact of noncash charges, net income attributable to Buckeye unitholders for the third quarter of 2018 would have been $0.59 per diluted unit.

The diluted weighted average number of units outstanding during the quarter was 153.5 million compared to 142.8 million last year. This increase was primarily due to the September 2017 block trade unit issuance and the Class C PIK units issued in January of 2018.

On a consolidated basis, we reported adjusted EBITDA, which is our primary measure of financial performance, of $253.7 million for the third quarter, representing a decrease of $23.6 million compared to last year.

I'll go into greater detail regarding EBITDA of each segment, but first I'd like to discuss the transactions that resulted from our comprehensive review of Buckeye strategy and capital allocation plans.

As Clark discussed earlier, we negotiated the sale of all of our equity interest in VTTI for cash proceeds of $975 million, which represents a multiple on excess of 12x expected 2019 cash flows. It's important to point out that this is our equity value and excludes our portion of the $1 billion of VTTI debt outstanding at September 30. Said another way, the enterprise value of the 50% we sold was $1.475 billion.

In addition, we reached an agreement to divest certain nonintegrated domestic assets for cash proceeds of $450 million, which represents a multiple of 13x expected 2019 EBITDA from these assets.

I'd like to reiterate Clark's point that we believe these transactions, and the multiples realized, are representative of the intrinsic value of our remaining asset portfolio versus our current equity value.

We plan to use these proceeds to reduce the borrowings on our revolver, which will be used to fund the upcoming maturity of $400 million senior notes during November of this year and to extinguish certain other debt outstanding. As a result, we expect to improve our leverage and fund our growth capital projects, which retain cash and available liquidity, eliminating our dependency on public equity markets.

These transactions will provide us with the financial flexibility to take advantage of higher return investments across our domestic assets, particularly the opportunities that we've identified along the U.S. Gulf Coast.

We also remain committed to maintaining our investment-grade rating, and we believe the outcome of our strategic review and the corresponding reduction in leverage and improvement in distribution coverage will be positively received by the rating agencies.

In conjunction with these transactions, and in consideration of revised projections developed within the scope of the strategic view -- review, we conducted a goodwill recoverability assessment as of September 30, 2018, for all of our reporting units.

As a result, and in accordance with the accounting requirements, we recorded a $537 million goodwill impairment charge associated with our reporting unit that includes the Caribbean and New York Harbor assets.

The impairment, which represents 100% of the goodwill associated with this reporting unit, was primarily attributable to the acquisition of Buckeye Bahamas Hub in 2011. Under current accounting guidance, if the carrying amount of a reported unit exceeds its estimated fair value and impairment is recorded for the amount of the excess up to the amount of the goodwill for the respective reporting unit. This assessment was triggered by the current unfavorable market conditions for our segregated storage assets. All of the other reporting units' fair value were well in excess of their carrying values.

Additionally, in anticipation of the sale of our equity investment in VTTI, we recorded a $300 million loss on the planned sale of this investment, which represents the difference between its expected sales price of $975 million and the recorded book value.

Accounting guidance requires that the investment be written down to fair value regardless of whether the transaction is completed. Alternatively, the anticipated gain on the sale of the domestic assets of approximately $350 million cannot be recognized until the transaction is completed.

As part of our strategic review, we determined that the highest and best use of our capital is to direct investments to our South Texas assets and our Domestic Pipelines & Terminal business. With the completion of these transactions and our strengthened financial position, we can more effectively focus on our growth strategy.

Now I'll discuss in further detail the change in adjusted EBITDA for each of our reporting segments.

Our Domestic Pipelines & Terminals segment adjusted EBITDA was $137.7 million for the third quarter of 2018, a reduction of $1.2 million compared to last year. This segment experienced substantial growth in Pipeline & Terminals throughput volumes for the quarter, which resulted from stronger demand in the segment -- in the markets served by our systems as well as benefiting from higher-average pipeline tariffs. The strong performance for the quarter when compared to the prior year was offset by the impact of the exploration of a crude-by-rail contract in our Chicago Complex during the first quarter of this year as well as expenses associated with 2 product releases that occurred during the quarter.

The aggregate impact of the loss of the crude-by-rail contract and the releases was in excess of $12 million. I would like to note that neither incident resulted in serious injuries, and the cleanup response was immediate and thorough, with minimal disruption to our customers.

[While over] segregated storage revenues primarily related to the current backward-dated market structure also impacted this segment's overall performance. Average pipeline transportation volumes increased 3% this quarter to 1,528,000 barrels per day compared to an average of 1,484,000 barrels per day in the third quarter of '17.

Volumes increased across several of our systems, driven by strong demand, which has continued into the fourth quarter. Several throughput volumes also grew significantly during the quarter, with volumes totaling 1,337,000 barrels per day across our portfolio. This represented increase -- this represents an increase of nearly 7% over the third quarter of 2017, which was driven by incremental market share as well as the benefit of growth capital investments that allowed us to provide enhanced service offerings to our existing customers.

An example of this is the Jacksonville, Florida expansion project mentioned in our last call is now online and has expanded the volumes delivered for our largest customers at that facility. This single project increased the performance of our incremental storage, tankage, rail and truck offloading systems along with ethanol and butane handling capabilities. Looking forward, we expect our Domestic Pipelines & Terminal assets to continue to deliver steady, reliable returns. We anticipate continued growth through our investments in capital projects and expanded service offerings across our asset portfolio.

In particular, we expect a meaningful increase in EBITDA in 2019 as both our Michigan/Ohio phase 2 and Chicago Complex projects are expected to be in service.

Our Global Marine segment produced EBITDA of $111.7 million during the quarter compared to $128.7 million last year. Continued strong performance by our Buckeye Texas Partners assets, which achieved record processing volumes this quarter, was more than offset by the lower capacity utilization and lower rates in our segregated storage business.

The favorable contribution from Buckeye Texas Partners year-over-year reflects consistent operating performance, record crude processing volumes and a full quarter's contribution from the 20% minority interest acquired in April 2018.

Looking at our segregated storage business, the average available capacity utilization of our marine storage assets was 78% for the third quarter of 2018 compared to 89% during the same period in 2017 and 85% for the second quarter of 2018.

The decline in capacity utilization and rates was related to ongoing challenging market conditions, driven by reduced product flows from South American production, continued backwardation and increased storage capacity in the Caribbean.

Looking at the fourth quarter and the first half of 19, we expect continued softness, particularly in the Caribbean, but it's anticipated that the market will begin to recover as the year progresses. Our teams continue to identify opportunities to position our assets to capture incremental storage volumes related to the implementation of the IMO fuel standards, growing U.S. oil exports, recovery and production from South America and other opportunities as they arise.

As we look forward, we believe that our operations in the Caribbean and New York Harbor have significant upside for us, with minimal incremental capital investments as the segregated storage market continues to strengthen over time.

VTTI's adjusted EBITDA contribution for the quarter was $32.3 million versus $33.4 million last year. VTTI declared a cash distribution to Buckeye of $22.6 million for the quarter compared to $24 million last year.

The Merchant Services segment reported adjusted EBITDA of $4.4 million for the third quarter of 2018 compared to $9.7 million during the same period last year. This decrease is primarily driven by lower rack margins for distillate and rack sales volumes below the 2017 levels.

This business continues to generate meaningful contributions to our other operating segments and has contributed over $34 million to the Buckeye umbrella on a year-to-date basis.

Now turning to our balance sheet. At the end of the third quarter, we had $700,000 in cash and cash equivalents and approximately $5 billion in long-term debt. We had $572.6 million outstanding on our credit facility, of which $178 million is reflected as short-term debt as it supports our Merchant Services segment's working capital requirements.

We had $924 million of incremental liquidity available on our revolving credit facility, and our total debt to trailing 12-month adjusted EBITDA, based on our credit facility calculation, was 4.35x.

As I mentioned previously, our next significant debt maturity is $400 million, which is due later this month, which we intend to initially fund with borrowings on our revolver, which will then subsequently be paid down with the proceeds from the previously announced asset divestitures.

Distributable cash flow for the third quarter of 2018 totaled $157 million compared to $182 million last year. The decrease in distributable cash flow was driven by reduced EBITDA contribution from our business segments and higher interest expense. As Clark discussed previously, our third quarter distribution unitholders will be $0.75 per unit. This level of quarterly distribution allows us to preserve liquidity and support Buckeye's growth capital initiatives, which will drive long-term value for our unitholders.

As a result of this reduction and distribution, all 6.7 million Class C units outstanding will convert into LP units on a one-for-one basis on Monday, November 5. And as such, the holders of the converted units will receive their quarterly distribution in cash consistent with other LP unitholders.

Our distribution coverage ratio, based on distributions declared on the units outstanding at the end of the quarter, including the newly converted Class C units, was 1.35x. Buckeye's maintenance capital spending for the third quarter of 2018 totaled $32 million as compared to $35.5 million for the third quarter of '17. We expect maintenance CapEx for the full year to be within the range of $110 million to $120 million.

Return capital spending for the quarter was $75 million, and we expect return capital spending to be in the $370 million to $400 million range for the full year. In addition, we expect to contribute between $45 million and $60 million for the full year to fund our portion of capital expenditures at our South Texas Gateway joint venture. In total, including our acquisition of the 20% equity interest in Buckeye Texas Partners earlier this year, our capital spend will be $625 million to $670 million for 2018.

In closing, we believe the actions taken as the result of our strategic review will facilitate achieving our targeted leverage as measured by the rating agencies of less than 4.5x and annual distribution coverage in excess of 1.2x, which are consistent with our investment-grade credit rating, while also providing increased financial flexibility by eliminating the need to access the public equity markets to fund growth capital and reallocating capital to more strategic and higher return growth opportunities across our remaining assets.

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 Jeremy Tonet from JPMorgan.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just want to touch base with VTTI. If you could just give us a housekeeping item, what was the debt at for quarter end there?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [3]

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It's $1 billion.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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$1 billion. Got you.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [5]

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Yes, on AH basis.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [6]

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Right. So you guys have half, so it's like about 11x multiple on current quarter annualized?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [7]

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Yes. I haven't done that math on current quarter annualized, what we were communicating earlier was in excess of 12x based on where we see 2019 EBITDA as well as 2019 distributions.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [8]

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That's helpful, thanks. And for Global Marine Terminals, I was just wondering, when you exited the quarter, if you could update us there on the utilization rate at that point? And I think you set up until back half of '19, could be some softness there? Just wondering if you could provide a bit more color as far as how you see that trajectory? Have we kind of bottomed out here and we kind of struggle on here? Or could it go a bit lower before it goes higher?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [9]

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Yes, Jeremy, this is Khalid. I mean, I would say going into the latter part of this year and then certainly going into, I'd say, the first half of next year, we could see as we continue to transition some of our capacity away from crude oil into some of the other commodities that we could foresee some further degradation in utilization. But I think alongside with what both Keith and Clark mentioned, we see a rebound in utilization levels materializing really in the back half of next year. So I see a little bit of variability here in the, I guess, in the front, in the near term. But we believe we'll see a rebound in the latter half of next year.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [10]

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Got you. And could you dive in a little bit more as far as the factors with the rebound there?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [11]

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Yes, I think -- what I mean -- if we kind of give you just the bigger perspective, I mean we exited the quarter around 76% on a total utilization basis. We would expect exiting the back half of next year to be in somewhat similar territory from utilization standpoint. Albeit, I can mention just given the fact that you still see backwardation across all commodities, I know here lately we've seen both rents and (inaudible) FERC with a little bit of contango. But -- I mean, I think as we look at the portfolio, we do see growing demand for services. But again, I think we see some weakness continues to be around crude oil. And of course, as we continue to transition the capacity over to some of the other feedstocks, clean products, fuel oil, we can at this stage -- some level of variability, like I mentioned here in the latter part of the year and then going into the first half of the year.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [12]

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Got you. That's helpful. Maybe just one more on the topic here. Given kind of an absence of contango in market right now, what do you kind of see is the determinant driving rates and renewals in GMT at this point?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [13]

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Yes, I mean, I think really more the fundamentals, I mean, around just demand for our services. And if you look at kind of where we are in New York, just given some of the things that we've done here over the recent past with the connectivity, we've actually started to see record throughput rates through our system. Yet, we're not obviously very pleased with where rates are at the moment. But when you look at the utilization standpoint, we've actually seen it pickup in utilization there and throughput levels. So I mean I think that really speaks volumes to the investment thesis that we had with respect to integrating these collection of assets that we've acquired over the course of the years and created now a single integrated network that ties into our long-haul pipeline system. I think going down into the Caribbean and namely focusing on the Bahamas, we've seen, again, increased demand for services alongside of both the distillate and gasoline. Substantial demand for gasoline going into markets such as Mexico, and I think it's also buoyed by the fact that we have both the segregated handling capabilities for oxygenate, but then also the ability to blend that material. And so we've seen pretty good demand on that front. We've also started to see some tell-tale signs of IMO, although I'd like to somewhat conservative on that front. But we've seen transition of some of the crude oil capacity that we have moving over into fuel oil. We've also seen some increased demand for distillate. I think it was public news, we actually offloaded the first ULCC of diesel or ULSD into both the Bahamas and St. Eustatius and I think that kind of gives you a little bit of maybe a taste of what we're going to see some flows start to evolve as some of these regulatory changes takes shape. So I think -- from, I think, a rate standpoint, there obviously could still be some variability. But I feel like just given some of the recontracting that we've been able to achieve and some of the roles that we've done, we seem to have found some -- I guess some line of sight the there. However, where we still could see some additional variability is really around, I think, some utilization. And again, I think I pointed more towards the crude oil capacity, and I think that's largely to do what we've experienced here over the summer around very strong backwardation in the crude oil market, I think -- but I think more importantly, in Caribbean, really a decline in some of the [envision] of, I guess, South American production, namely flows coming out of Venezuela and then maybe some of the flows coming out of the balance of LatAm being pulled towards Asia as as a function of certain sanctions that were just recently imposed.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [14]

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Jeremy, another thing I think that's important to consider, and Clark mentioned it in his comments earlier is that we're -- we believe we're very close to being able to execute on a crude by rail opportunity that will leverage our G&P assets, particularly New York Harbor, that will provide some contribution to uplift in EBITDA, we expect, in probably beginning sometime in the late first half of the year, probably beginning of the second quarter.

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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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Yes. I mean, I think really the important point, -- I mean, while maybe there are some continuous headwinds here in the near term, but I think as we look forward at our business overall, we think we're very well positioned to capitalize on some very strong macro trends, including the IMO of (inaudible) that I spoke about, but more importantly, just robust participation in U.S. crude and -- or North American crude and product exports, really, across all locations. And we can talk about that more around South Texas, New York Harbor, but also in the Caribbean, because we do believe that the Caribbean will play a role in managing that quality disconnect of the various grades that will continue to be produced. So I think we're very, very well positioned to be able to capitalize on those emerging market and macro trends.

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Jeremy Bryan Tonet, JP Morgan Chase & Co, Research Division - Senior Analyst [16]

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Got you. Sorry, I'm just a little unclear then. I guess what led to the impairment if this is kind of like this tailwind?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [17]

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Well, the impairment is really -- as far as a mathematical exercise, and there are a number of things that impact -- a number of different factors that impacted the determination of an impairment. One is our outlook is somewhat muted relative to where it had been in prior years based on current market conditions. But there are other factors as well that impacted that, and that is the overall equity markets in the MLP sector. When you look at valuation multiple, when you look at weighted average cost of capital, et cetera, that also factored into that determination. And when you sit and you look at these assets and you think about -- again, our entry point in the Bahamas, in BORCO in particular, in 2011 and the investment there and what we've seen in some of the deterioration [even] when the cash flows, again, it's a mathematical exercise. But it's one that -- when you look at all the different inputs, again, which look at not only our cash flows, projected cash flows, but also the multiples that you're seeing today in the MLP market, weighted average cost of capital, all of those factors contributed to the recording -- to recording the impairment.

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Operator [18]

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And our next question comes from Theresa Chen from Barclays.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [19]

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So following up on some of Jeremy's comments and questions around the segregated storage. Can you just clarify how much do you have left either in capacity or percentage? How much do you have left to be contract that you haven't done so yet? And what has been the rate degradation from the contracts you've placed in contango to contracts that you have now being placed in backwardation?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [20]

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Theresa, this is Khalid. And -- I mean, I guess -- I don't think we're get into the actual specifics. I mean, I think it's pretty clear when you're comparing year-over-year, the periods. I mean, you see obviously a decline in our -- on our cash flow as a result of both the decline in the utilization rates and obviously rate as well. We've been pretty successful in recontracting the (inaudible) that has come up for renewal. We do have some capacity that will be coming up in the latter part of the year that we feel reasonably confident that we'll be able to renew. However, I don't know if I really want to go and get into the specifics of the actual capacity that's coming up, and again, assuming the capacity that we are renewing is being done on a short-term basis, just given the fact that the market is not necessarily very strong for storage at the moment and nor do we necessarily want to lock in some of these rates that we're currently recontracting at.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [21]

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Okay. And following up on your comments earlier, Khalid, about the utilization, so exiting 70% -- 76% this quarter and expecting a similar range in the back half of '19, even though you expect, overall, the contribution should be higher. So are we looking for rates to go higher but utilization to stay still in this mid-70s range? And what would explain that?

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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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No. I think the way that I would characterize this, Theresa, is -- yes, I don't know if necessarily we're going to see a substantial variance in rates until I think we get into beyond the latter part of 2019, maybe going into 2020, where we do see some variabilities in the utilization, as I mentioned. I think as we continue to transition away from some of the remaining crude oil capacity that we have, we have a small amount that's coming up in the fourth quarter that we're assuming that we will not get the [nude], and so effectively, what you'll see is, potentially, some further softness in utilization. But what we do see is further upward trajectory in that utilization rate as a function of strengthening demand and prepositioning associated with IMO. And also when you look forward and look at just some of the telltale signs around demand, we started to see some of the green shoots appear that would support further utilization storage. However, again, we're taking a very cautiously optimistic approach. We're taking a conservative approach. And again, we do see some headwinds going into the balance of this year and into next year, just given the tightness on supply and demand. But we do believe that the latter part of 2019 should serve well for rebound in storage conditions.

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Theresa Chen, Barclays Bank PLC, Research Division - Research Analyst [23]

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Got it. And Clark, on your comments about the $1 billion over the next 3 years in the Gulf Coast. Is this driven primarily by additions or expansions to South Texas Gateway? What other types of assets are you looking to build?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [24]

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Yes. There are additional terminalling opportunities, primarily terminalling opportunities that we're looking at. And again that's -- it's a swag, but it's a -- we're seeing a number of good investments coming across our business development group. So obviously, we will measure that around our available capital, Theresa, but South Texas is a outstanding opportunity for Buckeye going forward.

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [25]

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Yes. (inaudible) I can just add to that, Theresa. So -- I mean, I think as you heard on Clark's remarks, we've already expanded the storage footprint for our South Texas Gateway asset. And I think more importantly, we are in advanced contract discussions with a number of parties, where, frankly, we see line of sight to filling out that terminal location. So we're actually very, very excited about the future around Gateway. Clark also mentioned in his remarks, there are other opportunities that we have around South Texas. But I think what I really like to be focused on is not just growing some of these discrete opportunities, but really try to back up and explain to you what we're trying to put together there is really more of an integrated network that enables both the aggregation, distribution and then, ultimately, export of both crude oil and LPGs out of the Corpus Christi Ship Channel. And I think we're very, very well positioned to do that, given our existing footprint.

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Operator [26]

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And our next question comes from Michael Blum with Wells Fargo.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [27]

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Just a couple of questions for me. One, the target leverage, the under 4.5 on a rating agency basis and the 1.2 coverage. Just when do you expect to hit those targets? Is that like a year-end 2019? Or is that sooner? That was the first question.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [28]

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No. We would expect to hit those targets sooner. I mean, obviously, hitting the 4.5x for a rating agency perspective, Michael, would be contingent upon being able to utilize the proceeds from the announced transactions today. So obviously, once we redeploy those proceeds to pay down debt, that will get us well within that 4.5x. In fact, if you were to kind of pro forma those proceeds over our third quarter results, backing out the associated EBITDA and assuming the reduction in interest expense, we would be at roughly 4.3x. And from a coverage standpoint, if you were to lay -- do the same thing, we would be in excess of 1.2x for the quarter as well. So frankly, when these transactions are complete, we will accomplish those objectives.

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Michael Jacob Blum, Wells Fargo Securities, LLC, Research Division - MD and Senior Analyst [29]

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Okay, great. And then any kind of early rough estimate of what 2019 CapEx numbers might look like?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [30]

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$250 million to $350 million. Clark mentioned that his remarks. But yes, it's $250 million to $350 million is what we would anticipate in 2019. And just -- he also mentioned -- and maybe this will just help, well, he also mentioned the further expansion of our Gateway project, a little over 5 million barrels of tank capacity. That project now, on an [80 days] basis, looks like that'll be spend between $400 million and $425 million. So that will drive a piece of that, not all of that's next year. And then we would expect, again, based on the level of interest that we're seeing from customers, that there's a very high probability that, that spend will actually increase and we'll get to the buildout of the full 10 million barrels.

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Operator [31]

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And our next question comes from Spiro Dounis from Crédit Suisse.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [32]

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Just wanted to go back to the strategic review. Trying to get a sense if you consider that process effectively closed at this point because I'm just trying to get a sense of if you could sell more assets here, not because you need the cash, but maybe just to keep high grading the portfolio and [asset] in the context because you mentioned the sales multiples in the 12 to 13 range and the ability to recycle that and maybe the 6 to 7 range seems like pretty compelling opportunity.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [33]

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No. The process is -- it's closed, Spiro. We -- I don't think we could've done a better job than what we did to achieve the objectives we wanted out of our strategic review. Now I'm not saying that down the road, we won't look for more ventures and manage around our capital. But the formal process that we started with the announcement in the second quarter is now closed.

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Spiro Michael Dounis, Crédit Suisse AG, Research Division - Director [34]

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Okay. That's fair. Yes. And I know this agreement. You clearly checked all the boxes on what you set out to do. Second one, just around the environment that maybe you think you need to see to recommence distribution growth. I think you mentioned in your prepared remarks, when appropriate. But wondering if you could just give a sense of what you define as appropriate?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [35]

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Well, obviously, it'll come from the financial metrics that are driven from our growth, I believe. So the primary variable, as that starts to happen, I think you're talking about a time frame that's certainly no sooner than late 2019 into 2020. But it's all dependent upon how we do and how we execute.

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Operator [36]

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And our next question comes from Shneur Gershuni from UBS.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [37]

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It's Shneur Gershuni. Just -- first, to start off. In your prepared remarks, you talked about you're effectively planning on recycling the capital. Can you talk about the expected returns on the capital that you plan to deploy? I mean, I know that you talked about (inaudible) details on Gateway and so forth. But what kind of return should we be thinking about with the capital that you're going to put into effect?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [38]

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Yes. I think from an organic growth standpoint, Shneur, there's no difference in what we're looking at today than we typically communicated, and that's generally our organic growth projects are looking at 5 to 7x. Now there are some of these projects, in fairness, right, as you start initially and you look at the initial capital spend and what may be supported from a cash flow perspective, it may be on the higher end of that range or possibly outside of it. But as you continue to grow and expand, you get the economies of scale and the incremental cost, so the incremental capacity is much lower. But 5 to 7x is the range that we're looking at.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [39]

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Okay, great. And as part of your strategic review, it sort of seems to me that you've reforecast -- refocused your business to being more U.S. North America-centric. What kind of color can you give us going forward on the remaining business? You sort of talked about the backwardation of the (inaudible) curve, but

-- maybe my screen's broken, but I actually see a modest contango right now. How big of a contango do we need to see for things to actually change, where utilization pegs out and it becomes a better contracting environment?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [40]

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Yes. Shneur, this is Khalid. And my remarks were really more towards the last 3 three months. You're right, I think I've mentioned that both Brent and TI are somewhat flat. TI is actually showing some mild contango. But I can assure you the numbers that you're seeing on the screen are not necessarily going to incentivize anyone to take out storage unless they absolutely have a need for it. I think it's reality a tale of 2 cities. I think you can maybe put Brent aside and focus on TI for a second. We do see -- as you think about, obviously, the growing production from the Permian and other basins and you think about that pipeline capacity that's going to be coming online here in the next, call it, 12 months or so, will start to alleviate, I guess, some of these differentials or discounts that we're seeing between the basin and the water. But I think the next piece is really when you think about the terminalling capacity and the export capacity, there are still going to be constraints there. And so notionally, you can see how TI can actually go into further contango as a result of that particular constraint. I think that will demonstrate to why you're seeing a plus or a different midstream companies like ourselves jumping into -- figuring out how to alleviate that constraint that, is forthcoming. I think -- look, on brands, I mean, it's a little bit of a different equation. Part of the issue that we've had there is really to do with maybe some changes around the buying of various refiners, maybe it's one of the China teapots, folks going into turnaround. But again, whether or not does that persist? I'm not sure. We kind of go back to some thoughts around whether or not is demand growth really that robust. We are starting to see, obviously, production coming out greater than what folks had anticipated in places like UAE, Iraq, et cetera. So I think that's all kind of playing into what you're seeing on the screen for the near term. I think really what we looked at as far as we'll facilitate, some of the folks coming back into the storage business, perhaps in the Caribbean, like I mentioned, we see, obviously, IMO taking shape. We don't believe that there's anything there that necessarily will do well. It's implementation. And I think once you obviously get towards the back half of the year, you'll start to see folks prepositioning capacity and start to stockpile inventories in advance of implementation of that rule. I think also you're going to see -- as a result, there'll be obviously some issues or at least a disconnect that will take shape between the heavy crude barrel and the light barrel. And obviously, that provides some incentive for folks to obviously look for storage. So I think all those various factors is what we've looked at that make us feel very, I think, encouraged about future. And again, the other piece that we mentioned is we've got somewhere around 17 million barrels of flex storage capacity that we can move from crude oil to feedstocks to fuel with very little capital. And so as you think about limitation of IMO, and all of a sudden, you got this lengthened high-sulfur fuel that's going to take shape. Places like the Bahamas are going to be very well situated to be able to grab that market share and then maybe even potentially play a role in the blending of marine gas oils and marine diesel. So those are all the various factors that give us comfort that we can see a rebound and recovery in that area.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [41]

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Shneur, let me jump in. I'll just make some brief remarks on this. I've touched on it in my prepared remarks. Getting back to the business model of the entire enterprise, in addition to what Khalid has gone through, I mean, we've got a unique set of assets that are extremely well positioned, very stable in their cash flows. But we also have a balance that we have -- assets that are underutilized and, with minimal capital investment, can provide a lot of upside. And this is why we think our -- the Buckeye units are understated or undervalued. When you look at the crude by rail contract that we're close to completing and you look at -- we know conditions are going to get better in our segregated storage. When you just take a look at the intrinsic value of assets and services, it's clear that this balance, I think, is going to play out well for our unitholders going forward.

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Shneur Z. Gershuni, UBS Investment Bank, Research Division - Executive Director in the Energy Group and Analyst [42]

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Okay. And one final question, if I may. As part of your strategic review, was there any conclusion about having a formalized guidance process kind of on a go-forward basis so that we can benchmark and -- as well as you and the board can benchmark performance?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [43]

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Well, we've always -- the history of our guidance is we give very little formal guidance. We feel like that's more appropriate for our business model. We try to be as helpful as possible with kind of splitting up the post that show directionally where we're headed with our businesses. So we haven't made any changes in terms of our formality of guidance going forward.

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Operator [44]

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And our next question comes from James Carreker from U.S. Capital Advisors.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [45]

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I just wanted to clarify. Clark, did you happen to mention your expectation for excess cash flow next year in light of the distribution cut? I thought I heard a number like $300 million.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [46]

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No. The $300 million is the differential of what we're generating from the reduced distribution, I mentioned that. We didn't address anything about excess cash flow uses.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [47]

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Okay. I guess in that vein though, the 1.2x target coverage ratio, your post cut 1.35x this quarter even with the disappointing Global Marine segment. I guess is that something that you anticipate being at next year? Or is it potential for it to be higher and you work towards 1.2 over time? Or what's kind of the trajectory there?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [48]

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Well, that's an annual number, and that's where we're working toward and feel comfortable. That's where we're going to -- the (inaudible) will perform at those levels going forward.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [49]

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James, if you were to pro forma the transactions that we spoke about, factoring in the conversion of the Class C units, the reduced interest expense as a result of reduced leverage as well as reducing our DCF for the EBITDA or distributions from VTTI, our coverage was in excess of 1.2x for the quarter and leverage would've been 4.3x, so just to kind of frame that.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [50]

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Yes. No, I was just -- I was thinking maybe it's -- you mentioned in excess of 1.2. I didn't know if it was well in excess or just modestly in excess?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [51]

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[We're hoping] (inaudible) very well in excess.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [52]

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And then -- I guess I'll try to ask a guidance question in a different way. But you talked about significant growth in EBITDA for your Domestic Pipelines & Terminals, but also softness in your Global Marine. And I guess kind of thinking about '19 on a same-store sales basis, I mean, kind of how should we think about '19 relative to '18, given the puts and takes?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [53]

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Well, I mean, '19, I mean, you're just thinking about Domestic Pipes and Terminals, and I highlighted 2 projects, the Michigan/Ohio 2 project as well as the Chicago Complex. And the Michigan/Ohio 2, we have communicated previously that that's a $200 million of capital spend. Chicago Complex was only $80 million of capital spend. And those projects, I can assure you, are in that 5 to 7x. We expect Michigan/Ohio 2 to be in service early '19, Chicago complex midyear. So you can do that math and that's going to show some uplift, obviously, without any benefit from other smaller projects that we've engaged in or any increase in utilization, tariff, et cetera.

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [54]

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Well, I guess -- and just thinking about the same math on the Global Marine side, the 12x multiple for VTTI sale, obviously implies that there was some degradation expected in '19 from those cash flows relative to '18. Is it a similar type degradation that we could expect on the segregated storage side? Or are those 2 fundamentally different businesses?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [55]

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Again, James, where you're going here is you're trying to get us to kind of plant the flag from a standpoint of what we're seeing in '19 sort of versus '18, and we're just simply not in a position to provide guidance relative to our performance. What we have done is we've talked about some of the opportunities that we see that contribute to improved performance relative to crude by rail. These projects that are coming in line are domestic business. So we're not going to sit here and specifically talk about what we think '19 is going to be relative to '18. Again, we believe that we'll be able to meet our targeted metrics of coverage of an excess of 1.2x and leverage inside of 4.5x, but that's about as far as we want to go from the standpoint of providing goalpost for you..

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James Eugene Carreker, U.S. Capital Advisors LLC, Research Division - Executive Director [56]

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Okay, understand. And then -- I mean,, I guess any thought about the potential impact of IMO? Is there like -- what's the best way to think about how much that could add? Maybe not even in '19, but just 2020 longer term. How should we think about modeling that as we move out to those years?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [57]

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I mean -- again, I mean, we're talking about IMOs as something that will take shape in 2020 and beyond. I mean, I think we absolutely believe that we'll see an increase in our utilization rate above and beyond from where we are today. But I don't think we're in a position where we can specifically point to you what that level is on this call today.

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Operator [58]

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And our next question comes from Adam Breit from SunTrust.

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Adam Benjamin Breit, SunTrust Robinson Humphrey, Inc., Research Division - Research Analyst [59]

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Just a couple of quick ones from me. You all mentioned extinguishing some debt outstanding in terms of use of proceeds. I wanted to make sure I understood. Are you talking about maybe tendering for some of your outstanding bonds? Then the other thing I was wondering about is it looks like a lot of the large cap investment grade peers of yours are trying to achieve mid-BBB credit ratings. Is that something that you've talked to the rating agencies about? Do you have an idea of what kind of credit metrics you might need to achieve to get there, if that's something that you all want to do down the road?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [60]

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Yes. Adam, I think it'd be inappropriate for us to suggest how exactly we're going to accomplish the reduction in debt. I mean, we have significant balances outstanding on our revolver, we have term loans that's out. We have $400 million of debt maturing in the fourth quarter. So the specifics around how we delever is something that, when the time is right, we'll communicate the specifics around that. As it relates to other large caps and them trying to get to BBB flat investment grade credit rating, at this point in time, we're optimistic that when we complete these transactions, that we'll see the rating agencies likely remove their negative outlook. But as far as moving up one notch on the scale, that's not something that we're really targeting.

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Operator [61]

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And our next question comes from Dennis Coleman from Bowman (sic) [Bank of America Merrill Lynch].

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Dennis Paul Coleman, BofA Merrill Lynch, Research Division - Global Head of High Grade Debt Research and MD [62]

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Just one for me. Could you expand a little bit about the $1 billion of projects that you talked about? Would it be -- I mean, is it JV? It sounds like some of it is the expansion of the South Texas Gateway to the 10 million barrels. And then maybe what kind of timing till we see more official announcements on those kind of things?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [63]

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Yes. I mean, this Khalid. So again -- I mean, you're right. We obviously do see additional activity around Gateway. And hopefully, as we progress through the balance of this year, we'll have more news to communicate with respect to our capital plans and our growth plans there. Clark also mentioned that we're also active in the same area around LPG. We're advancing with a feed study for a new LPG distribution and export facility. Hopefully, we'll have more to report on that opportunity later this year, and we would hope that, to the extent that we could come to an agreement with our customers, that we'd be able to reach a final investment decision somewhere around probably the first part of next year. We also have a variety of different aggregation and distribution projects around, again, our Corpus complex, mainly looking at the opportunity to aggregate through the multitude of different pipelines in the midway junction area and then connecting to both our facilities at Gateway and also Buckeye Texas. So there's some storage and pipeline opportunities there. And then of course, we're very well positioned, just given the export capabilities that we have at Gateway to really look to try to tie that asset to any of the various full-fledged VLCC opportunities that we believe are emerging in the area. So that's kind of a number of the various projects that we are advancing on. Like Clark mentioned, we also have this export opportunity up in Perth that we believe we should go into service in, call it, the latter part or the first half of second quarter of next year. And again, these opportunities, many of them may indeed be on a joint venture basis. That's how we're able to obviously rightsize the capital and further diversify the risk.

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Operator [64]

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And our next question comes from Selman Akyol from Stifel.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [65]

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Maybe you said this and I missed it. But if you run this pass through rating agencies, does it achieve all your objectives you're looking from them?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [66]

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We had conversations, in fact, with the rating agencies yesterday and previewed with them the outcome of our strategic review. I can't speak for them. But certainly, our implication from those conversations is that they clearly view this as being credit positive. Whether we'll see any change from our rating perspective relative to our outlook, I'm not sure what that timing may be. But I would expect that all 3 of the agencies will likely put on, no doubt, communicating their view in the next few days.

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Selman Akyol, Stifel, Nicolaus & Company, Incorporated, Research Division - MD of Equity Research [67]

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Very good, appreciate that. And then clearly, I heard in terms of IMO, it doesn't drive pricing per se, but it drives utilization. So as we think about sort of the end of 2019, should we still think we're in this high 70s number? Or do you see it being enough of a delta that it could take it above low 80s per se?

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Khalid A. Muslih, Buckeye Partners, L.P. - Executive VP & President of Global Marine Terminals - Buckeye GP LLC [68]

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Yes. Look, if you ask me, I don't want to get into the specifics. But I mean, I think what I was trying to allude to we're taking more of a conservative outlook around how folks start to preposition for IMO. I mean, all you got to do is look at the forward curve, and it's not necessarily shown you that things are going to take shape until, call it, the first part of 2020. So it's a -- but I think folks are wanting to start positioning their logistics assets in advance of that. Obviously, folks are going to see a ramp-up in distillate production in advance of the implementation. And so I think what we said was what we're looking for is a rebound more towards the levels that we are currently at towards the latter half of next year.

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Operator [69]

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And our next question comes from Tristan Richardson from SunTrust.

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Tristan James Richardson, SunTrust Robinson Humphrey, Inc., Research Division - VP [70]

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Really appreciate the help on framing up the $1 billion of opportunities on the Gulf Coast. Could you kind of expand on maybe from a total company perspective, whether that be deploying capital in GMT as markets recover or other singles and doubles in the other parts of the domestic business, sort of the CapEx, I don't know, company-wide?

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Robert A. Malecky, Buckeye Partners, L.P. - Executive VP and President of Domestic Pipelines & Terminals Business Unit - Buckeye GP LLC [71]

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This is Bob Malecky. I think you've heard a lot from GMT group in terms of their growth. The domestic assets -- Domestic Pipeline & Terminal assets have some of the project in front of us that Keith and Clark had both talked about. But the funnel as an overall organization -- as an overall organization, I think we also talked about the singles and doubles, if you will, are in the one -- in the $75 million to $125 million a year. We think that to be sustaining as a pool as an overall. I think as well as projects above that, that the $250 million to $350 million capital spend for next year is something that we see a range of -- outside of the larger projects in the Gulf Coast going forward.

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [72]

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The other thing, Tristan, I think, is important for us to point out here is you talk about, again, the -- across the entire asset portfolio, we believe that our segregated storage assets were really very well positioned to capture significant upside without any incremental capital spend. So when you think about that capital spend, it's going to be targeted largely on our domestic footprint as well as South Texas.

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Timothy D. Howard, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [73]

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Helpful. And then Keith, I know you don't necessarily have -- or ready at this point to lay out exact priorities for expected cash. But can you help maybe just frame up for us expected interest cost savings, either qualitatively or quantitatively?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [74]

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Well, if you're looking at $1.4 billion of proceeds, round numbers here, and if you're thinking about -- if we were paying down revolver or floating rate debt or anything LIBOR, [a sense of] plus 150. So 3 months LIBOR is somewhere around, what, 230. So you're talking about 4% on $1.4 billion. So it's somewhere between $55 million, $60 million.

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Operator [75]

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And our next question comes from Sunil Sibal from Seaport Global Securities.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [76]

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So just a couple of quick clarifications for me. The 4.3x leverage number that you mentioned, that's basically pro forma for the transaction you've announced today, correct?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [77]

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Well, just to be clear. There are 2 4.3s that we really talked about. I think we said 4.35 is where we exited the quarter based on the calculation for our credit facility. That excludes 100% of the hybrids that we issued earlier in the year and also the short-term borrowings on the revolver, which support our working capital. The other 4.3 that we talked about is if you were to pro forma all the proceeds we used to pay down debt, pro forma and the corresponding interest savings and also adjust out all of the EBITDA or cash flow related to our VTTI investment and the asset package that we sold, we'd be right at 4.3x based on our calculus of the rating agency computation, specifically Moody's, because that's the most restrictive.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [78]

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Right. Okay. And then I think you mentioned a couple of spills which impacted the results during the quarter. Is there a good way to quantify that impact?

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Keith E. St. Clair, Buckeye Partners, L.P. - Executive VP & CFO of Buckeye GP LLC [79]

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The impact for the entire quarter was about $12 million across all of our operating segments.

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Sunil K. Sibal, Seaport Global Securities LLC, Research Division - MD [80]

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Okay, got it. And then just last one for me. As part of the strategic review that you undertook, was there any consideration in terms of even cutting the dividends further than what you announced and kind of take -- have a deeper level of deleveraging?

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [81]

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Well, yes and no. We looked at all options. It was extremely comprehensive, Sunil, in terms of looking at everything. And we believe the plan we put together is the right one and absolutely most optimal going forward for Buckeye and our unitholders.

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Operator [82]

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And I'm not showing any further questions at this time. I would now like to turn the call back over to Mr. Clark Smith for any closing remarks.

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Clark C. Smith, Buckeye Partners, L.P. - Chairman, President & CEO of Buckeye GP LLC [83]

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Thank you, Mariel, and thanks, again, to our investors for joining us on the call this morning. We look forward to updating you as we work to close these transactions before year-end while our employees remain focused on delivering safe and reliable services for our customers and community.

Have a great weekend.

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Operator [84]

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