Buckeye Partners, L.P. Management Discusses Q1 2013 Results - Earnings Call Transcript

| About: Buckeye Partners (BPL)

Buckeye Partners, L.P. (NYSE:BPL)

Q1 2013 Earnings Call

May 03, 2013 11:00 am ET

Executives

Clark C. Smith - Chief Executive Officer of Buckeye Gp, President of Buckeye Gp and Director of Buckeye Gp Llc

Todd J. Russo - Vice President of Buckeye Gp Llc, Secretary of Buckeye Gp Llc and General Counsel of Buckeye Gp Llc

Keith E. St. Clair - Chief Financial Officer of Buckeye GP LLC and Executive Vice President of Buckeye GP LLC

Robert A. Malecky - Senior Vice President of Buckeye GP LLC and President of Domestic Pipelines & Terminals Business Unit

Jeremiah J. Ashcroft - Senior Vice President of Buckeye GP LLC and President of Buckeye Services Business Unit

Analysts

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

James Jampel

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

Operator

Good day, ladies and gentlemen, and welcome to the Buckeye Partners, L.P. 2013 First Quarter Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to your host for today, Mr. Clark C. Smith, President and Chief Executive Officer. Sir, you may begin.

Clark C. Smith

All right. Thank you, Ben. Good morning, everyone, and welcome to the Buckeye Partners' first quarter 2013 conference call. Also speaking on the call today will be Keith St. Clair, our Executive Vice President and Chief Financial Officer. After I make some introductory remarks and discuss some important highlights for the quarter, Keith will review our financial results in further detail.

Also on the call today are Bob Malecky, President, Domestic Pipelines & Terminals; Jerry Ashcroft, President of Buckeye Services; Mary Morgan, President of International Pipelines & Terminals; Khalid Muslih, Senior Vice President, Corporate Development and Strategic Planning; Jeff Beason, Vice President and Controller; and Todd Russo, our General Counsel.

Todd J. Russo

Thanks, Scott -- thanks, Clark. Before we begin, I'd like to remind everyone that we may make statements on the call today that could be construed as forward-looking statements as defined by the SEC. Future results are subject to numerous contingencies, many of which are outside our control, and 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, 2012, as filed with the SEC.

In addition, during the call, we will be discussing Buckeye's adjusted EBITDA and certain other non-GAAP measures. A reconciliation of these non-GAAP measures to the most directly comparable GAAP measures is included in the press release that we issued earlier this morning, which is posted on the Investor Center section of Buckeye's website, www.buckeye.com.

With that, I'll turn the call back over to Clark.

Clark C. Smith

Thanks, Todd. I'd like to begin my comments by recognizing that Buckeye experienced another good quarter in terms of safety and operations, which is a critical focus of our employees across all of Buckeye's assets. We continue to enhance our health, safety, security and environmental programs to prevent incidents and reduce risk to our employees, contractors and communities.

One way we do this is through our participation in the Association of Oil Pipe Lines and American Petroleum Institute industry trade associations in our pursuit of continuous improvement in the areas of pipeline safety and emergency response. These trade associations identify opportunities to promote inter-company learning and sharing of best practices, areas where additional research and technology development are necessary, such as enhancements and leak detection, as well as other programs that will improve the industry's and Buckeye's pipeline safety performance.

In the area of emergency response, focus is being given to improving response communications and training of emergency responders. Buckeye's participation involves leadership positions on the AOPL board and the API Performance Excellence Team, as well as committee participation on many other critical API committees and work groups. Safety has been and always will be our highest priority at Buckeye.

Turning to our operating results. I am pleased that Buckeye's talented employees were able to follow up a strong second half performance in 2012 with an outstanding first quarter of 2013.

Adjusted EBITDA of $158.8 million is a first quarter record for Buckeye and represents a 38% improvement year-over-year. 4 of our 5 businesses showed improvement over the prior-year quarter, with our Domestic Pipelines & Terminals leading the way with a 31% improvement in adjusted EBITDA. Contributions from growth capital projects, particularly across our Terminal business, helped drive this performance.

In addition, Energy Services had a great quarter, delivering over $7 million of adjusted EBITDA, reinforcing their successful turnaround from the difficult market conditions experienced in late 2011 and early 2012. Also showing earnings improvements were our international operations in our Development & Logistics businesses.

We are pleased with Buckeye's distribution coverage, improving to 1.21x for the quarter and 1.15x over the last 12 months. This sustained improvement in performance, as well as our positive outlook, allowed us to declare a cash distribution of $1.05 per limited partner unit, which is an increase of $0.0125 over the prior sequential quarter in the year-ago quarter. This is significant, as we had suspended distribution increases beginning with the year-ago quarter after a long history of consecutive quarterly distribution growth.

Our Board takes a long-term view in determining the appropriate level of limited partner distributions, considering not only this quarter's results but, importantly, looking forward to the full year 2013 and into 2014 and beyond. The Board evaluates many factors, including the business environment, our historical and projected performance and other consideration, such as the strength of our balance sheet, in determining the appropriate level of distribution each quarter.

Also considered in this analysis this quarter was the resolution of a significant portion of the FERC matter, which I will discuss in further detail in a moment. The objective of this analysis is to return as much capital as is prudent to our unitholders. In completing this evaluation this quarter, our Board determined that a resumption of an increase in our quarterly distribution was the right decision for Buckeye and the right decision for our unitholders.

With regard to the FERC issues, I'd like to address what we believe is a positive progress to resolve these matters. As we previously announced on February 22, 2013, FERC issued an order in the show cause review of the tariff rate program used by Buckeye Pipe Line Company. That order discontinues Buckeye Pipe Line's previous rate making program, but permits Buckeye Pipe Line to continue charging its current rates.

The order also gives Buckeye Pipe Line full market-based rate authority in its markets that FERC had previously found to be competitive. Buckeye Pipe Line may establish future rates based solely upon competitive forces without the limits that were imposed under the previous rate making program. This order is final and not subject to judicial review.

On March 28, Buckeye Pipe Line filed rate increases in these markets that are subject to market-based rate authority. No protests were filed, and those rate increases became effective May 1. This order also authorized Buckeye Pipe Line to file future rates in its remaining markets pursuant to any of the methodologies permitted by FERC regulations, including the generic FERC index. We are still evaluating the extent to which we will increase the tariff rates in our index markets, but we do expect to file for a tariff increase in these markets effective with the normal July 1 cycle.

The next FERC matter relates to the complaint filed in September 2012 by 4 airlines, challenging Buckeye Pipe Line's rates for transporting jet fuel to the 3 New York City area airports. On February 22, FERC issued an order setting the complaint for hearing, but placing the hearing in abeyance, while settlement discussions before a FERC settlement judge are conducted. These settlement discussions are ongoing and, due to their nature, may take some time to resolve.

As I mentioned previously, both the airlines and Buckeye Pipe Line indicated in their filings at FERC that they're willing to engage in settlement discussions regarding the airlines' complaint. We are optimistic, but cannot predict whether the settlement process will be successful.

Finally, the Buckeye Pipe Line application filed with FERC in October 2012 seeking authority to charge market-based rates for deliveries of refined petroleum products to the New York City area market also remains pending. The only parties protesting that filing were the same airlines that filed the complaint, and several litigation pleadings had been filed by Buckeye Pipe Line and by the airlines regarding the application and the protest.

On February 28, 2013, FERC issued an order setting our application for hearing, but holding the hearing in abeyance and setting the matter for settlement. The settlement proceedings involving the market-based rate application and the airlines' complaint have been consolidated for settlement purposes. As a result, the ongoing settlement process that I mentioned earlier involves both proceedings.

As I have indicated before, we will continue to aggressively defend Buckeye Pipe Line's tariff rates and to look for opportunities to resolve these matters as expeditiously as possible.

Let me now shift to highlights for each of our operating segments, starting with our Domestic Pipelines & Terminals, which had a very strong quarter, both in earnings and operating performance.

Let me start by talking about our volumes. Terminal volumes continued to be strong, coming in at almost 9% over the year-ago quarter and up 3% compared to the prior sequential quarter. Our total pipeline volumes were up 3.3% year-over-year, led by our middle distillates, which increased 9.3%; our gasoline volume, which comprises about 50% of our total volumes, was also up 2.8%, which is really impressive when you look at the EIA reported demand data for the first quarter. This success is directly attributable to the performance of both our commercial and operations team. Their teamwork and commitment to high performance continues to provide safe and reliable pipeline services for our customers and communities.

Our commercial teams continue to do an exceptional job of identifying growth capital and diversification opportunities, particularly around our terminals to serve customers' needs while delivering attractive returns on our investments. Buckeye's history of completing these projects on time, while providing excellent customer service, gives customers the confidence to commit to these custom-built opportunities.

The repurposing of underutilized assets is another attractive investment opportunity for Buckeye. The Albany crude transformation project, which I've talked about previously, is a good example and is already a tremendous success story for both our customers and for Buckeye. This quarter benefited from the first full quarter of contribution from the Albany crude project.

I'm also pleased to report that, in April, we resumed ethanol service at Albany, which had been interrupted due to the reconfiguration of the Albany facility to handle the crude supply.

We also had a full quarter contribution from our propylene storage project at our Chicago complex. This project is one of several initiatives to diversify our Chicago area operations and provide storage and rail loading capabilities to facilitate transportation of propylene, which is the byproduct in the refining process. This project was underwritten by a long-term contract with throughput commitments and provides an attractive return for Buckeye. The significant capabilities and connectivity of our Chicago complex contribute to our diversification strategy. Buckeye is now receiving Diluent via railroad and pipeline, providing storage for the product and then facilitate shipping out on a pipeline to Canada.

We also have new facilities around the expansion of our butane blending capabilities and vapor recovery equipment at facilities across the Buckeye system. All of these projects drove incremental cash flows during the quarter.

Our Perth Amboy terminal modernization project continues. We're making good progress with our projects, including the pipeline connection of Perth Amboy to our Linden hub. This will be accomplished initially via a bi-directional connection to the Colonial Pipeline and into our own direct pipeline connection. We anticipate the Colonial connection to be complete in September of this year and the direct connection to be complete in April 2014, about 3 months ahead of schedule. We are also in advanced discussions with potential gasoline blending customers that have expressed strong interest in the facility, citing the outbound pipeline capacity of the direct connection as a key factor in their interest.

In addition, discussions are also continuing with interested parties for crude rail opportunities at Perth Amboy, having the ability to ship products out from our marine dock, via ship or barge or move it via pipeline or truck, Perth Amboy will emerge as one of the premiere marine terminals in the U.S.

Overall, we invested over $130 million in 2012 in growth capital in our Domestic Pipelines & Terminals system. And as discussed, we saw significant incremental contribution from that investment in this quarter. We also have a significant backlog of projects under development, in which we expect in the range -- to invest in the range of $200 million to $235 million in 2013, which should contribute to incremental cash flow in future quarters.

Turning to international. Growth projects continue to be a significant story for our International Operations segment. In BORCO, we achieved the third phase of our expansion project with an additional 1.6 million barrels of storage completed and fully leased in the quarter. That brings the total expansion capacity brought online since the first quarter of 2012 to 3.5 million barrels. Work continues on the next expansion of 1.2 million barrels of crude oil tankage, which should be operational -- should be in operation in the third quarter of this year and is fully contracted.

We remain confident we can bring that tankage online, on time and on budget as we have with all of the BORCO expansions to-date. We also saw increased ancillary revenues at BORCO, such as berthing and heating revenues, driven partially by a changing product slate. BGO storage has been a growth area for us and represents further product diversification for the facility. BGO, or back-end gas oil, is a refining byproduct that requires heating to store and move, and demand for storage and limited supply of facilities capable of handling this product has led to improved storage rates. BORCO is a leader in BGO storage in the Caribbean market, and we expect that lead to expand.

One thing I would like to point out is when converting tanks into a new product service line, we often have to take that tank out of service for a short period to upgrade and clean the tank. This may result in a short-term loss of revenue, but we look at it as part of the investment that leads to longer-term commitments, higher lease rates and the potential for more ancillary revenues once the tank is in the new product service.

As we mentioned on our last call, one of our new service offerings provides fuel supply and distribution services in the Caribbean. This emerging business just completed its first full quarter of operations. During the quarter, we experienced a $1 million loss as a result of a product downgrade and start-up cost. However, we remain highly confident about the future of this business and expect positive earnings going forward.

Natural Gas Storage. Our Natural Gas Storage business continues to be challenged by soft market conditions. Lodi is continuing to experience low lease rates, low volatility and depressed spreads, and we do not expect any significant improvements in performance in 2013.

On Energy Services segment -- continue to exceed expectations, producing an excellent quarter with improved rack [ph] margins, partially the result of renewable identification number, or RIN, sales. BES generates RINs through its ethanol blending and bio-diesel blending activities. The market for RINs, which are legislatively required to be purchased by refiners and others, experienced an unprecedented run-up in value during the first quarter. BES saw an approximately $3.5 million benefit from RIN sales during the quarter. It is difficult to project how RIN sales may impact us prospectively, as there are various factors that could impact the RIN value.

The quarter-over-quarter improvement at BES also benefited from more effective management of basis exposure despite the market remaining backwardated. The Energy Services segment has generated over $15 million of adjusted EBITDA over the past 2 quarters. And while certain aspects of that performance are not expected to be sustainable, it does reflect a remarkable turnaround for this business from its performance in late 2011 and 2012. As we have mentioned before, BES remains an important catalyst for the incremental utilization of Buckeye's Pipelines & Terminals.

The Development & Logistics segment continues to deliver increasing quarter-over-quarter results, increased lease volumes at our propane cavern assets and strong margins from our third-party engineering and operations business drove the performance of this segment. Looking forward, BDL has a strong book of opportunities it is pursuing, including expanding its portfolio of managed petrochemical assets.

In closing, this strong quarter follows on the heels of a record second half of 2012. This sustained performance demonstrated how our employees responded to the challenges in early 2012 and worked tirelessly through those challenges to position Buckeye for future growth. As you may recall, Buckeye began changing its business model back in 2009 to empower our employees to become multi-skilled, more team-oriented, more accountable, be more commercial and to strive for continuous improvement in all areas of our business. In my opinion, the current success of Buckeye is a direct reflection of this transformation and all the hard work that went into it by Buckeye's employees. We expect this improved performance to continue for the rest of 2013 and beyond.

This concludes my remarks. And now, Keith will review our quarterly financial results, after which we will open the call up for questions. Keith?

Keith E. St. Clair

Thank you, Clark, and good morning, everyone. I'll now review our first quarter financial results in a little more detail.

Our quarterly adjusted EBITDA increased 38.1% to $158.8 million compared to $115 million from the year-ago quarter. 4 of our segments reported improved financial performance compared to the prior-year quarter, driven primarily by strong performance from our Domestic Pipelines & Terminals, our International Operations and our Energy Services segments. I'll provide additional color regarding the segment results in a moment.

We reported net income attributable to Buckeye unitholders for the first quarter of 2013 of $89.3 million or $0.86 per diluted unit. This compares to $52 million or $0.54 per diluted unit for the prior-year quarter.

The diluted weighted average unit outstanding for the first quarter of 2013 were 103.6 million compared to 95.6 million units in the first quarter of 2012. This increase in units was the result of our $6.9 million -- or 6.9 million unit offering in January 2013, as well as the in-kind unit distributions on our Class B units.

Consolidated revenues for the first quarter of 2013 totaled $1.34 billion compared with $1.26 billion in the prior-year period. The increase in revenues is primarily attributable to the growth revenues from our new fuel oil business in our International segment. Also contributing to the increase in revenues were increased Pipeline & Terminals segment revenue, resulting from higher pipeline and terminal throughput compared to the year-ago quarter, partially offset by a 9.5% decline in sales volume for the Energy Services segment, which reflects our change in strategy for this business.

Operating expenses for the quarter were essentially flat at $97.4 million versus $97.2 million in 2012. In 2013, expenses included the incremental impact from the Perth Amboy terminal acquisition, expenses related to the -- operating the BORCO expansion capacity and other capital projects, which are now in service. It's important to point out that the prior quarter operating expenses were elevated as a result of certain transition costs related to the BP acquisition that continued into the first quarter of 2012. General and administrative expenses were also flat year-over-year, coming in at $17.2 million in 2013 compared with $17 million in the year-ago quarter.

Now I'd like to review in more detail the contribution of each segment to adjusted EBITDA, our primary measure of financial performance.

Adjusted EBITDA for our Pipeline & Terminals segment was $115.5 million for the first quarter of 2013 compared with $88.2 million for the first quarter of 2012. Certain seasonal activities, such as butane blending and heating oil deliveries, which drove record performance in the fourth quarter of 2012, continued to benefit the business in the first quarter, contributing over $10 million in incremental cash flows to our first quarter results. The contribution from growth capital projects was also a key driver for our improvement over the year-ago quarter.

Overall, our Terminals had continued strong performance as the benefit -- as they benefit from capital projects and the Perth Amboy acquisition that are exhibited in our higher terminal throughput, settlements, rental and incidental revenues, such as butane blending.

Looking at our pipeline system. Aggregate pipeline volumes for the quarter increased by 3.3% compared to the first quarter of 2012 to 1.4 million barrels per day. Middle distillate volumes, which include diesel and heating oil volumes, experienced the largest increase over the prior-year quarter. They're at 9.3%. This increase was primarily the result of an increase in heating oil volumes due to a return to a more normal winter compared to unseasonably warm weather in the year-ago quarter, combined with an increase in economic activity in the markets we serve, most notably exploration and production activity in and around Marcellus Shale area.

Gasoline volumes in the first quarter of 2013 increased approximately 2.8% over the first quarter of 2012, primarily the result of market share gains, including the impact of opportunistic rebalancing by the new owners of the Philadelphia and Trainer refineries and barrels pushed off Sunoco's line as a result of their Mariner West project. Jet fuel volumes, however, were down approximately 3.4% compared to the first quarter of 2012, primarily in the Midwest, for Gulf Coast supply, for which we provide a link to the Chicago airports, has been displaced to some degree by Midwest refinery expansions.

Average transportation tariff for the quarter of 2013 decreased about 0.5% compared to the year-ago quarter, largely as a result of Philadelphia source barrels, which are subject to PUC shorter haul tariffs, displacing New York Harbor source barrels, which are subject to FERC longer haul tariffs. This shift from the harbor to Philadelphia is the result of the resumption of normal operating rates at the Philadelphia and Trainer refineries.

Domestic Terminal volumes increased 8.7% from 877,200 barrels per day in the first quarter of 2012 to 953,900 barrels per day in the first quarter of 2013. Volumes at our Albany terminal showed significant growth for the quarter, the result of the first full quarter of the crude rail to marine project. Other contributors to increased volumes included the other growth projects that Clark mentioned, such as propylene storage projects, the Diluent Project and increased volumes transported through our Chicago complex.

Overall, net revenue improvements yielded an approximate $24 million benefit compared to the prior-year quarter. This segment also benefited from an approximate $2 million decrease in operating expenses, primarily the result of certain transition costs related to the 2011 BP acquisition that elevated expenses in the year-ago quarter. In addition, certain expenses were also deferred to later 2013 due to the unseasonably cold winter and availability of contractors.

Now turning to our International segment. This segment recorded adjusted EBITDA of $35.2 million in the first quarter of 2013 compared to $31.7 million in the comparable quarter last year. Excluding the impact of our fuel oil supply and distribution business, revenue and adjusted EBITDA for this segment increased $6.3 million and $4.6 million, respectively, compared to the first quarter of 2012. This improvement in the legacy business is largely the result of the 3.5 million barrels of expansion storage brought online since mid-2012 and higher ancillary revenues, including berthing and heating revenues, due to the increased customer utilization of our facilities and a change in product mix.

BGO storage is an example of the change in product mix that is driving improved results, as customers are interested in the unique storage segregation and expanded service capability BORCO offers compared to the competing terminals in the region.

Operating expenses increased in the first quarter of 2013 compared to the year-ago quarter as BORCO added headcount and other costs necessary to operate the expanding capabilities of the facility.

Our fuel oil supply and distribution business completed its first full quarter of operations, recording revenues of $114.3 million and negative adjusted EBITDA of $1 million. This business was adversely impacted by 1 transaction, where product was downgraded, generating a loss on its disposition. The product was tested by an independent third-party lab prior to loading into the vessel chartered to deliver the product. The lab incorrectly concluded that the product was on spec. When later tested at the destination, multiple lab tests validated that the product was, in fact, off spec, resulting in the loss. Excluding the effect of this transaction, the fuel oil business would have posted positive EBITDA for the quarter.

Looking forward, the second quarter of 2013 will see incremental benefit from the 1.6 million barrels of expansion capacity that was placed in service late in the first quarter and from the 1.9 million barrels of expansion storage that became operational in 2012.

Looking now to our Natural Gas Storage segment. The negative adjusted EBITDA generated by this segment widened to $1.8 million for the current quarter compared to a loss of $1.3 million a year ago. The degradation in financial results compared to the year-ago quarter is primarily due to reduced lease rates year-over-year and some timing differences in the execution of park and loan transactions compared to the prior-year quarter. The market remains challenged, as demonstrated by these results. Although we do not expect to have negative adjusted EBITDA for the year, we do not anticipate any material changes in business conditions for this segment in the near term.

Our Energy Services segment, which contributed $7.2 million of adjusted EBITDA for the first quarter of 2013 compared to the loss of $6.2 million in the same period last year. The current year quarter benefited from some seasonal strength, as BES continues to take advantage of butane blending opportunities during the quarter and from the significant increase in the market value of RINs created by ethanol and bio-diesel blending activities. The value of these RINs spiked to nearly $1 during the quarter before decreasing some, but still were significantly higher than in the prior year. The sustainability of this increased market value is unknown at this time, but BES is actively managing its RIN portfolio to take advantage of these market conditions while they continue. The improvement in adjusted EBITDA was also the result of higher rack margins and more effective application of our risk management strategy. The development and application of this strategy was initiated in the year-ago quarter, but positions were still being liquidated and consolidated, which generated losses in the first half of 2012.

Revenues in this segment declined by 6.7% to $961.8 million from $1.03 billion in the year-ago quarter, primarily attributable to a 9.5% decline in sales volume as a result of our decision in early 2012 to exit certain markets and reduce our exposure to basis moves and market backwardation.

Product sales volume in the first quarter of 2013 totaled 312 million gallons compared with 345 million gallons in the first quarter of 2012. It's also important to note that Energy Services contributed $24.5 million in revenues to our Pipelines & Terminals segments over the last 12 months, and our marketing operations remain a key catalyst for utilization of our pipeline and terminalling assets.

Wrapping up the segment review, our Development & Logistics segment generated $2.7 million of adjusted EBITDA in the first quarter of 2013 compared to $2.5 million in the first quarter of 2012. This segment benefited primarily from the contribution from the LPG storage facilities due to increased capacity leased and strong margins from its contract asset management business.

Now turning to our balance sheet. We ended the quarter with $4.6 million in cash and long-term debt of $2.5 billion. We also had $510 million borrowed under our revolving credit facility, including $385 million reflected as long-term debt. At the end of the first quarter of 2013, our leverage ratio of net long-term debt to the last 12 months' adjusted EBITDA, as calculated in accordance with our credit facility, was approximately 4x, down from 4.7x at year end and 4.6x at the end of the year-ago quarter. Our leverage has improved substantially due to our improved results combined with the equity offering we completed in January of 6.9 million units for net proceeds to Buckeye of approximately $350 million. These proceeds were used to pay down existing indebtedness on our long-term credit facilities.

Our efforts to strengthen our balance sheet have been positively received by the rating agencies, as demonstrated most recently by Moody's announcement earlier this week where they affirmed our Baa3 rating and upgraded our outlook to stable. Maintaining a strong balance sheet continues to be a key objective for Buckeye.

During the first quarter, Buckeye spent $5.1 million on maintenance capital expenditures, a reduction of approximately $8 million compared to the first quarter of 2012. This decrease in maintenance capital is primarily timing-related, as we were impacted by the weather and, to some extent, the availability of contractors due to the aftermath of Sandy.

For the year, we still expect to spend $60 million to $80 million of maintenance capital. We spent $62.1 million on return capital projects in the first quarter and estimate that the full year return capital spend for 2013 will be $280 million to $340 million.

Our distribution coverage ratio, based on distributions declared, which reflects the increase of $0.0125 per unit, was 1.21x for the quarter.

Looking forward, the conversion of the Class B units into cash-paying LP units, which is expected to occur late in the third quarter of 2013, which will be triggered by the completion of the BORCO crude storage expansion, will impact our coverage. However, we believe the strength of our businesses and contributions from our many growth initiatives will lead to coverage in 2013 in excess of 1x.

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

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Gabe Moreen of Bank of America Merrill Lynch.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

A couple of questions. In terms of the ongoing settlement discussions, it seems like the language and the body language there is a lot more positive about getting something reasonable done. Could you maybe talk about sort of maybe what the form of those settlements discussions might be taking in terms of whether there'll be refunds involved or whether you're just looking at prospective rates? And related to that, are you going to have to accrue something as you get closer to that, or have you accrued something, just from a financial standpoint, and should we read anything into that?

Clark C. Smith

Gabe, obviously, the settlement discussions are confidential, so we really can't go into any kind of discussion about them. We have not accrued anything. We are optimistic, but I think it's going to take some time to work out any elements of that settlement. So at this point, we really have nothing to report.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Got it. Then turning to the Albany terminal, can you just remind us sort of what your contract structure is right now in terms of rail and crude? Are you doing spot barrels? Have customers kind of signed up longer term deals. And if longer term, how much more you have to go to sign up to get everything under long-term deals?

Robert A. Malecky

Hello, Gabe. This is Bob Malecky. We have 1 long-term customer at that facility there. The throughput-er of the facility and have been moving quite a bit of product through there, but we are engaged with 1 party under the throughput contract.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

And, Bob, can you remind me, is that all strictly take or pay? Are you getting some variable rate there too based on spreads?

Robert A. Malecky

It's based on throughput contract. There is no margin involvement associated with it.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Okay. And then, last but not least, turning to the sort of the RIN's upside from the quarter, can you talk about maybe how many RINs you generated during the quarter and whether that's sort of an ongoing number that we should expect going forward, at least in the number of RINs you're generating? And then, in terms of managing that portfolio, I assume you've got a lot of refiners coming to you interested in those RINs. Kind of how wiling you are to sort of strike a balance between the short-term upside versus, I guess, locking in margin longer term?

Jeremiah J. Ashcroft

Hello, Gabe. This is Jerry Ashcroft. We generate about 1 million in ethanol a month and about 1 million in bio a month. And obviously, it's about how much rack throughputs you have. So it can move around. We do sell to refiners presently. We are trying to look at opportunities to sell forward because our current strategy is to go ahead and take on what the market has now and not to store the RIN. So that's kind of how we're looking at it.

Gabriel P. Moreen - BofA Merrill Lynch, Research Division

Okay. And then, in terms of kind of locking in the long-term contract with other refiners, I mean, is that something you're thinking about?

Jeremiah J. Ashcroft

We haven't seen any discussions like that come about, but it's something we'll probably look into.

Operator

Our next question comes from the line of James Jampel from HITE.

James Jampel

As you look forward to the conversion of the Class B units in the fourth quarter, what kind of coverage ratio are you targeting for that quarter when they do convert?

Clark C. Smith

James, those will actually convert in respect of the third quarter. And again, as we've mentioned in our comments, factoring in the conversion of those units from in-kind to cash pay, we still expect to have coverage for the year in excess of 1 and certainly improving on into 2014, where we'll feel the impact of those incremental distributions for the full period.

James Jampel

So is it possible that it could be back below 1 at the end of the year then, given that we have a good head start at the beginning of the year?

Clark C. Smith

I'm sorry. Say that again, James?

James Jampel

I mean, could coverage towards the end of the year get below 1 given that we're above 1 for the first quarter?

Clark C. Smith

Coverage, if you go back and look at our coverage, again, our strongest quarter is operationally from a financial perspective because the seasonality of the business are always the fourth quarter and first quarter. Again, the way we're managing our coverage, as we look at it on the longer-term continuum, we feel confident that if we're able to effectively execute our plan that for the full year of 2013 we'll be above 1x from a coverage perspective, as well as 2014. There may be interim periods where there is some weakness in coverage, where we could fall below 1. But again, our distribution policy, which is determined by the Board, is based on a longer-term view of our ability to generate cash flow and cover our distributions.

James Jampel

Now is the most recent resumption of an increase in distribution. Should we expect that to be periodic or more of a step change?

Keith E. St. Clair

I think the distribution policy, again, is something that the Board makes a decision on. But certainly, it would be our expectation, absent some material change in business conditions, that we would expect to be able to support distribution increases on a go-forward basis. It's not our intent to turn distribution increases on or off. We want to make sure that we have something that is sustainable. Again, James, that being said, we can't control business conditions. And if there's something unforeseen, in future periods, that could certainly always impact that.

James Jampel

Sure. Yes. But with 1.25% -- with 1.2% in the first quarter, I mean, that extrapolates out to -- close to a 5% distribution increase going forward, and that's very encouraging. And I'm wondering, should we be encouraged that the sort of the 5% rate from this forward is consistent with how you see the business?

Keith E. St. Clair

Again, James, I can just repeat what I said a moment ago, and that is our intent is to not to turn the distribution increase spigot on and off. I mean, we believe that our performance for the balance of this year and on into 2014 supports returning more cash to our unitholders, and we're very comfortable with that increase.

James Jampel

And last one for me. How do you see sort of the capital spending backlog after the spending of -- in the $300 million range this year?

Keith E. St. Clair

We would expect capital spend -- last year, we spent somewhere in the neighborhood of $270 million to $280 million. This year, we're looking at a level that we've said is $280 million to $340 million. I would expect, on an ongoing basis, that something $200 million to $300 million given the expansion opportunities that we have at Perth Amboy, at BORCO as well as -- associated with the legacy assets and all of the projects there that it's reasonable to expect that we're going to be at that sort of level on an ongoing basis. Again, it's going to be largely project-driven, but we would expect our legacy assets to -- typically to spend somewhere in excess of $100 million and then it's project related at BORCO, as well as Perth Amboy. And we have indicated at Perth that our expectation was that we're going to spend $2 million to $2.25 million in addition to the acquisition price, and we've only spent a portion of that. There's about $100 million, $125 million expected to be spent this year.

Operator

Our next question is from the line of David Labonte of Kayne Anderson.

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

Question for you, Keith. I'm just trying to reconcile EBITDA for the Pipelines & Terminals segment. You guys showed revenues of $194 million and OpEx of $100 million roughly, but EBITDA of $115 million. Where did that $20 million delta come from?

Keith E. St. Clair

I'm sorry. Say that again, David?

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

Yes. Segment revenues of about $194 million, OpEx of $100 million, yet EBITDA of $115 million.

Keith E. St. Clair

But the OpEx that you're looking at as $94 million includes depreciation and amortization.

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

No, it's actually separated -- it looks like?

Keith E. St. Clair

If you're looking at a $100 million in total cost and expenses, David -- I'm sorry, on the table of $100 million, that $99.9 million, that includes D&A. If you look at footnote 1 to the table?

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

Oh, yes. Okay. All right. That's helpful. All right. And then, the second question I had for Clark was, when you guys filed for rates -- for market-based rates, is there any color that you guys can provide with respect to how you think that might impact cash flows going forward?

Clark C. Smith

Well, the market-based rates were carefully evaluated market by market with -- in determining what those rates would be. Are you looking for a number, David, in terms of the impact on EBITDA?

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

Yes, I guess, well, any color you can provide. So basically, swapping to market-based rates in those competitive markets, I mean, what would be the theoretical impact on your business?

Clark C. Smith

In terms of our EBITDA?

David L. Labonte - Kayne Anderson Capital Advisors, L.P.

Yes.

Clark C. Smith

Okay. The EBITDA impact for...

Keith E. St. Clair

Well, what we did -- let me answer it in another way, David. I mean, basically, what we're looking for is an average increase across all of those markets, which we evaluated on a market-by-market basis, was around 6.5%, and that's effective May 1. That's on revenues. That round numbers are around $115 million to $120 million.

Operator

This does conclude our question-and-answer session, and I'd like to turn the conference back over to Mr. Smith for any closing remarks.

Clark C. Smith

All right. Thank you, Ben, and thank all of you for joining us today. This quarter was important because we're able to assume increasing the return of capital to our unitholders through an increase in the quarterly distribution. We look forward to continuing to execute our strategy and speaking with you regarding our progress on our next earnings call. Have a good weekend.

Operator

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may all disconnect. Have a great rest of the day.

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