Good day, welcome to the Suburban Propane Partners first quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Davin D'Ambrosio, Vice President and Treasurer. Please go ahead.
Thanks, Chad. Good morning, everyone. Thank you for joining us this morning for our fiscal 2023 first quarter earnings conference call. Joining me this morning are Michael Stivala, our President and Chief Executive Officer, Michael Kuglin, Chief Financial Officer and Chief Accounting Officer, and Steve Boyd, our Chief Operating Officer. This morning, we will review our first quarter financial results, along with our current outlook for the business. Once we concluded our prepared remarks, we will open the session to questions. Our conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, relating to the partnership's future business expectations and predictions and financial conditions and results of operations. These forward-looking statements involve certain risk and uncertainties.
We have listed some of the important factors that could cause actual results to differ materially from those discussed in such forward-looking statements, which are referred to as cautionary statements in our earnings press release, which can be viewed on our website at suburbanpropane.com. All subsequent written and oral forward-looking statements attributable to the partnership or persons acting on its behalf are expressly qualified in their entirety by such cautionary statements. Our annual report on Form 10-K for the fiscal year ended September 24, 2022, and Form 10-Q for the period ended December 24, 2022, which will be filed by the end of business today, contain additional disclosure regarding forward-looking statements and risk factors. Copies may be obtained by contacting the partnership or the SEC.
Where non-GAAP measures will be discussed on this call, we have provided a description of those measures, as well as a discussion of why we believe this information to be useful in our Form 8-K, which was furnished to the SEC this morning. Form 8-K will be available through a link in the investor relations section of our website. At this point, I will turn the call over to Mike Stivala for some opening remarks. Mike?
Great. Thanks, Davin. Good morning, and thank you all for joining us today. Let me start with some color on our first quarter performance, and then I will give you some details on the acquisition that we closed on December 28th, just after the end of our fiscal first quarter. Looking at the first quarter, the positive momentum from our strong performance in fiscal 2022 carried into the first quarter of fiscal 2023. Results benefited from a combination of continued positive trends in our customer base growth and retention initiatives, cooler average temperatures, and excellent management of selling prices and expenses in a challenging economic backdrop. Propane volumes increased more than 3% and Adjusted EBITDA improved by more than 4% to $90 million for the fiscal 2023 first quarter.
Our operating personnel continue to do an outstanding job delivering exceptional service to our customers and the communities we serve while continuing to drive efficiencies and effectively managing the things they can control. Weather is certainly a positive factor in the first quarter, particularly in the latter half of December 2022, which presented heating degree days that were 26% cooler than normal. We believe that it's our best-in-class operating model and the hard work and dedication of our people that sets us apart from the competition in our core propane business and allows us to continually adapt to the business circumstances that we face, whether that's volatile commodity prices, inflationary factors, or erratic weather patterns. Let me comment on the progress toward our long-term strategic growth plans, and specifically, the continued build-out of our renewable energy platform.
As announced on December 28, 2022, we took a significant step to immediately and meaningfully increase the scale of our renewable energy portfolio and created a platform for visible growth in this rapidly developing market for renewable natural gas distribution. To highlight some of the details of the acquisition and the newly formed joint venture, through our wholly owned subsidiary, Suburban Renewable Energy, we acquired two RNG production and distribution facilities from Equilibrium Capital Group for $190 million plus transaction fees and expenses. This was funded with borrowings of approximately $112 million under our existing revolver and the assumption of approximately $80 million of green bonds that were associated with the assets.
One facility located in Stanfield, Arizona, is one of the largest dairy manure to RNG facilities in the United States, processing dairy manure from seven local dairies with a total of 55,000 dairy cows. With the completion of expansion and plant optimization plans over the next 12 months, it is expected to have a run rate capacity of approximately 525,000 MMBtus of RNG annually for injection into an interstate pipeline interconnect nearby. Revenues are generated from a combination of RNG sales, LCFS credits, D3 and D5 RINs, tipping fees, and fertilizer sales. The second facility, located in Columbus, Ohio, is currently the main source of receiving and processing municipal waste, as well as food waste from several large food and beverage providers in the Columbus area. The facility earns tipping fees for accepting and processing approximately 100,000 tons of waste into biogas and fertilizer.
Will earn additional revenue from sales of RNG, D5 RINs, and fertilizer upon completion of an active development project to upgrade the biogas into pipeline-quality RNG, which is expected to be completed over the next 18-24 months. Once completed, the facility is expected to have a run rate capacity of approximately 225,000 MMBtus of RNG per year. The platform, once current expansion and upgrade plans are completed, is expected to produce a run rate capacity of about 750,000 MMBtus per year. While there will be an immediate contribution to Adjusted EBITDA in fiscal 2023, the acquired facilities are projected to be accretive to our overall distributable cash flow per unit in fiscal 2024, as earnings benefit from the upgrades, expansion, and efficiency gains.
Under the purchase agreement, Equilibrium could earn additional consideration based on a multiple of EBITDA that it's earned for the two-year period from January 1, 2024, through December 31, 2025, but only after EBITDA exceeds a certain minimum threshold. The maximum earn-out potential is $45 million and will be paid in fiscal 2026 if earned. The EBITDA threshold was established at a level that would reduce the overall transaction multiple and significantly enhance the accretion of the deal even after making any additional payments under the earn-out provision. Additionally, Equilibrium has agreed to provide ongoing operational, management, and transitional support to Suburban under a management services agreement that extends through December 2025.
This will allow Suburban to continue to benefit from the deep knowledge and experience of the Equilibrium management team in operating these assets during the transition and ensure that the parties' interests are well-aligned for the future optimization of the earnings potential of these assets through the earn-out mechanism. In addition to the acquired facilities, Suburban Renewable Energy and Equilibrium have formed a partnership to serve as a long-term growth platform for the identification, development, and operation of additional RNG projects, which includes an existing pipeline of identified RNG projects that are in various stages of development. Under the joint venture agreement, the parties have agreed to invest up to $155 million to develop additional RNG projects over the next three years or so, of which Suburban will fund $120 million and Equilibrium will fund $35 million.
Suburban Renewables will own approximately 70% of the joint venture once capital has been fully committed and deployed. Established in 2008, Equilibrium is a leading sustainability-driven asset management firm that has developed deep expertise in the development and operation of waste-to-energy projects and that is supported by a well-established network of operators, engineering and construction providers, and offtakers. We are extremely excited to be partnering with the team at Equilibrium because we believe that our cultures have aligned so well, and we can bring together Equilibrium's knowledge and more than a decade of experience in this rapidly growing RNG space with our deep knowledge of end-use energy markets, logistics, and distribution expertise. As you can see, this acquisition and the formation of the partnership with Equilibrium was a highly strategic and meaningful step forward in the support and execution of our long-term strategic goals.
This, combined with our previous investments in renewable DME through our 38% equity stake in Oberon Fuels, as well as in hydrogen production and distribution through our 25% equity stake in Independence, and our first investment in the RNG production market through our previously announced agreement with Adirondack Farms in upstate New York. These have all greatly supported our efforts to diversify our business and develop what we call an interconnected portfolio of renewable energy assets. In a moment, I'll come back with some closing remarks and provide added color on our strategic initiatives. At this point, I'll turn the call over to Mike Kuglin to discuss the first quarter results in some more detail. Mike?
Thanks, Mike. Good morning, everyone. To be consistent with previous reporting, as I discuss our first quarter results, I'm excluding the impact of unrealized mark-to-market adjustments on our commodity hedges, which resulted in an unrealized loss of $13.7 million for the first quarter compared to an unrealized loss of $33.5 million in the prior year first quarter. Excluding these items, as well as the non-cash equity and earnings of unconsolidated subsidiaries under the equity method and costs associated with the acquisition of the renewable natural gas assets, net income for the first quarter was $60.3 million, or $0.95 per common unit. Compared to net income of $55.4 million or $0.88 per common unit in the prior year first quarter.
Adjusted EBITDA for the first quarter of $90 million improved by $3.5 million or 4.1% compared to the prior year. Mike mentioned the improvement in earnings was driven by several factors, including organic growth in our customer base and cooler weather that contributed to higher volumes, along with solid margin management, thus partially offset by continued inflationary pressures on our expenses. Retail propane gallons sold in the first quarter were 108.8 million gallons, which was 3.3% higher than the prior year, primarily due to cooler weather and favorable customer base trends. With respect to the weather, average temperatures during the first quarter were 3% warmer than normal and 13% cooler than the prior year first quarter.
The increase in heating degree days was experienced in early October, which is the least critical month during the quarter for heating demand and the last two weeks of December. Although we experienced an overall increase in heating degree days compared to the prior year first quarter, seven of the nine weeks in the November and December period were negatively impacted by warmer temperatures, particularly in our East and Midwest operating territories. From a commodity perspective, propane inventory levels in the U.S. continued to build during the quarter as solid domestic production outpaced demand and a softening in exports. At the end of the first quarter, U.S. propane inventories were at 84 million barrels, which was 27% higher than December 2021 levels and 14% higher than historical averages for that time of the year.
As a result of the increase in inventories and other factors, wholesale propane prices trended lower during the quarter. Overall, average wholesale prices basis Mont Belvieu for the first quarter were $0.80 per gallon, which was 36% lower than the prior year first quarter and 26% lower than the fourth quarter of fiscal 2022. Excluding the impact of the mark-to-market adjustments on our commodity hedges that I mentioned earlier, total gross margin of $228.5 million for the first quarter increased $15.9 million or 7.5% compared to the prior year, primarily due to higher volume sold and higher unit margins.
Excluding the impact of the unrealized market adjustments, propane unit margins for the first quarter increased $0.06 or 3.2% per gallon compared to the prior year, primarily due to effective selling price management during a period of declining commodity prices that helped offset the impact of inflationary pressures on our delivery costs and other expenses. With respect to expenses, excluding acquisition-related costs of approximately $1 million during the first quarter, combined operating and G&A expenses of $137.8 million increased $12.3 million or 9.8% compared to the prior year, primarily due to continued inflationary pressures across most areas of the business, including higher payroll and benefit related expenses, higher vehicle lease and fuel costs, and higher provisions for doubtful accounts.
Although inflationary pressures persist, we remain focused on leveraging our investments in technology and our operating model to drive efficiencies while continuing to provide superior customer service. Net interest expense of $16 million for the first quarter increased $700,000 or 4.5% due to the impact of higher benchmark interest rates for borrowings under our revolver, which was substantially offset by a lower average level of outstanding debt. Total capital spending for the quarter of $10.8 million was flat to the prior year, and the mix between maintenance and growth was roughly evenly split. During the first quarter, we started construction on the assets associated with the RNG production facility at Adirondack Farms.
Although the capital spending during the quarter on the project was not significant, we expect our growth capital spending for the remainder of the fiscal year to be higher than historical levels as we build out the RNG production facility at Adirondack Farms, which is expected to take 18-24 months to complete. As we begin to integrate the assets acquired from Equilibrium, there will be additional growth capital to complete the expansion and upgrade efforts underway at those facilities that Mike mentioned earlier in his remarks. Turning to our balance sheet. Given the seasonal nature of our business, we typically borrow under our revolving credit facility during the first quarter to help fund a portion of our seasonal working capital needs.
With that said, we borrowed $34 million under the revolver during the first quarter, which was lower than our borrowings during the prior year first quarter due to the impact of lower commodity prices on our seasonal working capital build. Despite the borrowings to help fund our working capital, our total debt outstanding as of December 2022 was $52.9 million lower than December 2021, given our efforts to significantly reduce debt during the prior fiscal year. At the end of the first quarter, our consolidated leverage ratio for the trailing twelve-month period was 3.68x , which was roughly flat to what we reported at the end of fiscal 2022 and reflects an improvement from where we ended the prior year first quarter.
As a result of the recent acquisition of the RNG assets from Equilibrium, we expect our leverage for the second quarter and the remainder of this fiscal year to be elevated relative to the current level. Somewhere in the mid 4x range, depending on the level of EBITDA for the remainder of the year. We expect to be well within our debt covenant requirement of 5.75x. Our working capital needs typically peak towards the end of the heating season, late February or early March timeframe, after which we expect to generate excess cash flows. We will continue to remain focused on utilizing excess cash flows to strengthen the balance sheet as opportunities arise to fund strategic growth, including growth capital for RNG expansion efforts.
We have more than ample borrowing capacity under our revolver to fund our remaining working capital needs for the heating season, as well as to support our capital expansion plans and ongoing strategic growth initiatives. While the recent debt-funded acquisition will temporarily add to our leverage profile, we expect our leverage metrics to improve as the earnings from the acquired assets reach their run rate potential. At Suburban Propane, we have a long and proven track record of being great stewards of our balance sheet. We have long believed that conservative balance sheet management provides added protection from the potential short-term earnings impact of weather-driven demand softness, but also provides a dry powder for opportunistic investments in the execution of our long-term strategic initiatives.
Over the course of the last three years, we have reduced our total debt by nearly $150 million, all while continuing to invest in the growth of the business. We continue to focus on the execution of our long-term strategic goals, we will also stay focused on maintaining a strong balance sheet. Back to you, Mike.
Thanks, Mike. As announced on January 19th, our board of supervisors declared our quarterly distribution of thirty-two and a half cents per common unit in respect of our first quarter of fiscal 2023. This equates to an annualized rate of $1.30 per common unit. Our quarterly distribution will be paid on February 7th to our unit holders of record as of January 31st. Our distribution coverage continues to remain strong at 2.61x based on our trailing twelve-month distributable cash flow for the quarter. Looking ahead to the rest of fiscal 2023, there is still a significant amount of the heating season ahead. While the second quarter has started out unseasonably warm, we are very well positioned, both operationally and financially, to adapt as demand dictates.
The foundation of our ongoing success continues to be rooted in our more than 3,200 dedicated employees at Suburban Propane and their hard work and unwavering focus on the safety and comfort of our customers and the communities we serve. I will close with this. We have a proud 95-year legacy of being a trusted provider of energy to local communities. Leveraging the strength and stability of our core propane business, we are investing in the clean energy economy of the future as society transitions to lower carbon alternatives and positioning Suburban Propane for long-term growth for our employees, our valued unit holders, and our key stakeholders. We are taking a measured and long-term approach toward positioning the business for the next 95 years. As always, we appreciate your support and attention and will now open the call up for questions.
Chad, if you wouldn't mind helping us with that.
Certainly. Thank you.
Thank you.
We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Again, pressing star then one will allow you to ask a question. At this time, we will pause momentarily to assemble our roster. Our first question today will be from James Spicer with TD Securities. Please go ahead.
Hey, good morning. You mentioned that the Equilibrium acquisition is accretive to cash flow, I think you said in 2026.
Twenty-four.
Can Oh, 2024. Okay. Can you share the transaction multiple paid for the acquisition and then more generally speak about, you know, how we should think about EBITDA generation from the Equilibrium assets and your renewables platform in general for 2024?
Yeah. We don't give guidance on earnings potential, as you know, James. It's safe to say that obviously this is our first large acquisition in the RNG space. The transaction multiple, I think, benefited actually from some changes in the environment for RNG, particularly in relation to the environmental credit attribute market that, you know, is particularly in California with LCFS credits. The earnings for 2024, as we said, is gonna be accretive to distributable cash flow. There is upside for lots of different opportunities, which is why I highlighted the earn out potential that we have in the deal for the seller to earn additional purchase price or consideration, depending on the level of EBITDA.
That level would dramatically reduce the multiple. I would say that the multiple is in the high single-digit going in and with the upside potential for us to gain additional earnings potential as more expansion is in the works, and as the expansion that we're currently underway generates the kind of run rate that we expect in 2024. If we can achieve the ultimate minimum level of EBITDA that is set in the earn-out provision, it would reduce the multiple into the lower to mid single-digit item.
It sounds like you think there's a high likelihood that you'll get at least some portion of that earn-out?
I think we set the threshold in a way that gives us a runway for upside of EBITDA for Suburban. As the minimum threshold kicks in, it'll provide additional consideration for the seller. If that happens, I think both the seller and Suburban will be really happy with the transaction overall. If the EBITDA doesn't reach the minimum threshold level, we have a terrific deal in its own right for Suburban and our shareholders.
Okay. Great. Understood. I was also wondering about CapEx for next year. You spoke about, Or, this year. You spoke about the upgrades and expansions of the new facilities purchased from Equilibrium, and then, you know, some of your other investment commitments. You know, how should we think about CapEx? As a follow-on to that, you know, when we think about the balance sheet here, you know, I know prior to this build-out, you were targeting leverage of around three and a half times. Just sort of wondering what the appropriate target is to think about at this point. If there were additional opportunities for acquisitions and build-out, you know, where could we see leverage trend?
I'll take the CapEx question first. I think first, I think you have to reflect on sort of the excess cash flow generating capacity of our core propane business and what we've proven over the past couple of years in, you know, relatively normal-ish weather patterns. The business can generate sort of after propane-related CapEx somewhere in the $70 million-$100 million range, depending on weather. Currently, we have visibility to the expansion efforts and projects that we've committed to so far and the cadence of that cash, the cash needs for that CapEx.
We have visibility to anywhere from $10 million-$50 million of growth capital for the rest of this year, depending on, you know, how some of the projects, you know, continue to develop and the cash needs for 2023 versus some of the capital shifting into 2024. As well as depending on how fast and what kind of opportunities that come our way in the joint venture to deploy additional capital.
You know, I think if you think about it as we have $70 million-$100 million or so of excess cash flow with current visibility of $10 million-$50 million, we still have some dry powder within our existing cash flow generating capacity to do additional CapEx as opportunities arise. As it relates to the balance sheet, you know, I mentioned, or Mike mentioned in his opening remarks, that obviously this was all funded with debt, this particular acquisition. I think if you think about our history on acquisition funding, we do typically like to be closer to 50/50 on debt and equity financing.
Given what we've the focus that we've had over the past several years in really delevering the balance sheet and getting it down in the 3.6 range at the end of fiscal 2022 really did allow us to take on additional leverage for something that was highly strategic, like this Equilibrium acquisition. If you think about it, we referenced in our opening remarks that in the past 3 years, we paid off $150 million. That really did reload the balance sheet to be able to take on the additional $200 million or so of debt associated with this deal, and still not really damage the balance sheet, you know, on a pro forma basis without any earnings expectation, right, you know, today.
In terms of the balance sheet, if you just look at the leverage and the trailing twelve EBITDA and you don't pro forma the earnings potential, it's still below 4.5x levered. If you pro forma the potential earnings for 2024 and beyond, it'll get closer to 4x. I think relative to this acquisition, I think the steps we took over the past several years to continue to strengthen the balance sheet put us in a very advantageous position to be able to add some leverage. To allow the business to get to its run rate capacity, to then naturally bring leverage down.
I think as you think about profiling us going forward, we still have a similar strategy for our leverage. You know, we're always gonna be focused on strengthening the balance sheet because as Mike said in his remarks, you know, we plan for the potential for record warm type winters in the propane industry. We plan for being able to be very opportunistic when the right deals come our way. I think we've demonstrated a pretty good discipline in our acquisition approach. I think you'll see us continue to work towards bringing leverage back down below four so that we always have sufficient capital to be opportunistic.
As, you know, as equity markets perhaps improve in the future, there may be an opportunity for us to bring in some capital on the equity side to offset some of the leveraging aspect of this particular acquisition or maybe future acquisitions. We haven't, you know, accessed the equity markets in a long time. I'm not telegraphing that we are. I'm just suggesting that if you look back at history, we typically fund acquisitions of this kind of size with half debt and half equity just to continue to manage the balance sheet. It's a long way of saying, CapEx can be funded with the excess cash flow that we see in the business right now.
The balance sheet is still, you know, well-positioned from a leverage perspective and will continue to get better naturally as the earnings potential of this acquisition start to come to fruition.
Yep. Okay. That's very helpful. Appreciate the answer. Thank you.
Again, if you'd like to ask a question, please press star then one. The next question is from Ned Baramov with Wells Fargo. Please go ahead.
Hi. Good morning. Thanks for taking the questions. Just to go back on the Equilibrium transaction, could you maybe provide additional details on the contract structure of some of the assets? More specifically, what percentage of RNG production volumes from the currently operating facilities, is contracted under fixed price arrangements?
We do not have any fixed price offtake at this point. We do have the one major offtake player for the Stanfield operations, but that's market-based pricing. They're taking all of the offtake from that facility. The Columbus facility in Ohio is currently going through an upgrade, as I said, from biogas to... Hello?
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Mm-hmm.
Once again, ladies and gentlemen, please stand by while we reconnect our presenters. Thank you very much.
Chad, I think we're good now. I apologize to everybody for technical difficulties there. Apparently, somebody didn't like my answer. I just was answering a question there, Ned, on offtake. Hopefully, you got the first part of it relative to the Arizona facility being fully contracted to a single offtaker. The Columbus facility is going through an upgrade that's gonna take the next 18 months or so to finish, and we'll be producing pipeline quality RNG. We are currently working with a number of potential offtake opportunities. I would expect those opportunities to also be market-based. There may be multiple offtakers that we'll manage or perhaps one offtaker that takes all the gas and handles it on our behalf.
We have plenty of optionality. I think the market for RNG is developing in lots of different ways. Obviously a lot of RNG players are seeking to get RNG out to the California transportation market to take advantage of LCFS credits. There are other markets developing throughout the country for different applications. I think we're gonna continue to be somewhat patient in how we set up the offtake for not only the Columbus facility, but also, we have the Adirondack facility in New York, which we own outright, and we're currently building out and are also working on potential customers to take that RNG.
Appreciate the response. Can you maybe just review some of the IRA benefits related to RNG from which you expect to benefit?
As you know, Ned, a lot of the regulations now that will ultimately carry out the legislation are still to be developed. I think the only thing that I would say at this point is that we've evaluated the potential credit opportunities under the IRA. It would seem safe to say that RNG, and particularly the production that we're doing at all of our facilities should be eligible for Section 45Z credits. Those will kick in in 2025. Currently for Section 45Z credits, they will last through 2027 unless extended.
But given the feedstock for these facilities primarily being certainly the Arizona facility and the New York facility are both dairy biogas, so it's got a pretty significant reduction in carbon intensity score, which should be eligible for, you know, a higher portion of those available credits than say, you know, other feedstock for RNG production. The other side of the opportunity here is that, you know, that legislation all sort of came out, you know, late mid to late 2022, and gave us the opportunity to sort of look at that as more sort of upside than factoring it into the deal to achieve the earnings potential.
Got it. Moving on to propane, do you think the current unit gross margins in this business are sustainable going forward? Does the tick up in doubtful accounts keep you up at night?
I do think, you know, obviously, pricing is always gonna be very tied to the direction of commodity prices. You know, commodity prices have ticked up now in the January timeframe from the average prices in the fiscal first quarter. There's still a fair amount of volatility.
You know, I think what we're seeing in the marketplace is that, you know, all marketers are experiencing the same thing, which is a bit of a challenge with respect to hiring and retaining drivers and service techs, and inflationary factors in payroll as a result of the competitive landscape to attract qualified individuals for those positions, and the inflationary factors around fuel costs and insurance costs and the price of steel for the tanks that we buy and place at our customers' locations.
I think everybody's experiencing a higher operating threshold and, you know, that gives, it gives the market, you know, sort of the need to ensure that we're covering those costs through our margin profile, but also ensuring that the customers are getting some of the benefits, as commodity prices do come off. Ensuring that we can cover our expenses and the inflationary factors that we face. I think what we see in the market is that all the marketers are experiencing that same dynamic and are pretty disciplined in their own pricing structure, and that's created a lot of stability in the marketplace.
As far as doubtful accounts, you know, the only thing I would say is we do a heck of a job at the field level in terms of setting credit limits and the upfront credit profile for our customers. Not to say that receivable management isn't a bigger challenge in an environment like this. We're certainly seeing our customers challenged with respect to their own household budgets. You know, commodity prices have been elevated, so we have more invested in receivables because of the pure level of commodity prices over the last year.
You know, we are certainly working with and managing those receivables very closely and working with our customers to ensure that, you know, they have the kind of flexibility to manage their budgets and continue to work with us through, you know, whatever payment mechanism works best for them and for us. I would say, you know, it doesn't keep me up at night because I know just how focused our team is on that every single day, but it certainly is a challenge.
Thanks, Mike. That's all I had.
Great. Thanks, Ned.
Again, if you would like to ask a question, please press star one. The next question is from Jay Kanive with Tonka Capital. Please go ahead.
Yeah, thanks for taking the question, guys. A lot of my questions have been answered. I did want to follow up on the Equilibrium deal. What, you know, this is a different acquisition for you. This is a production and commodity price risk type business, you know, versus your distribution logistics customer service model. How are you know, going to hedge or, you know, look to stabilize those cash flows, you know, given that a lot of them are dependent, I think on California type credits? What is your ability to do that? How are you going to look to hedge those? Maybe to help us out, you know, what is the current price that you're getting for your RNG, you know, kind of vis-a-vis the price that you would get for a standard unit of natural gas?
As I said earlier, Jay, pricing right now, first of all, we're still building out capacity for RNG. I can't answer the question about the potential for how much of that RNG is going to be, quote-unquote, "tied to," something that is volatile, okay? There's as I said earlier in one of my responses, there's lots of different markets that are developing the need to replace traditional natural gas in different aspects of the economy, whether that's transportation, whether it's in energy consumption for industrial uses. You know, people are looking to lower their carbon footprint, one way to do that is to move to a renewable product such as renewable natural gas, which can be a direct drop-in replacement.
We did not look at this deal as an opportunity to take advantage of LCFS credit values, honestly. There is volatility in that market. We understand that. We generate LCFS credits in our propane business, we already have an active process internally to manage those credits, and we understand how those markets operate. I think what we're seeing is, and I'm sure you're aware, there's been a significant pullback in LCFS prices from, say, $150 a ton to, you know, somewhere in the mid-$60 per ton in California. The good thing is all that occurred sort of before we were able to execute this deal.
I would say We were never going to be paying a value for a business off of a $150 LCFS price anyway. The market did, you know, quote-unquote, correct itself in a time frame that allowed us to, you know, sort of stress the business for those things. I think as more markets and more demand for a renewable product such as this develop, there's either gonna be, you know, more LCFS markets in different states that will develop. I know there's an active, there's active legislation in several states that may adopt such programs, which could be beneficial.
I think the way we're gonna be looking at the business is actually more with a propane market eye towards how to make money in this business. That is being a trusted provider of that energy to the customers that are seeking a lower carbon alternative, you know? It may not just be selling it to one offtaker like we have in Arizona that's gonna put it into a transportation market. There could be direct fueling into fleets with customers that we have in our propane business, as an example. You know, I think the opportunities that we see in the RNG space are bigger than just taking advantage of environmental attributes, okay? Environmental attributes are there to sort of kickstart a renewable market.
I think we're getting in at a really good time to get some visibility to more uses that are developing to effectively make the natural gas price, the pure price for the gas that we're selling to make these projects make sense in their own right. Then with credits available, it certainly enhances returns. I think if we continue to think about the offtake in a more propane-like way, I think that's gonna benefit us in really growing and developing this market.
Understood. You know, I appreciate that. Maybe specifically with respect to the Arizona facility, which you said has a current offtake agreement based upon market pricing. What I'm trying to get an appreciation for is what is that market pricing today that you're getting per MMBtu of RNG, you know, versus, you know, looking at natural gas at, you know, $2.50, and what is your ability under that current contract to hedge that, you know, to hedge that premium that you get for that RNG? Like, you know, are you able to go out and hedge that for any length or period of time?
You know, as you transition, as you were stating, to all these different various uses or growth opportunities, you have to do something different than just straight, you know, commoditize and sell the you know, the RNG.
Yeah. I'm not gonna get into specific pricing of the contract for sure. all I would say-
Okay
is that particular contract is market-based. You know, market-based pricing allows us to be able to take advantage of whatever hedging profile that we decide to use, just like we do in our propane business. You know, I think that's how that particular, you know, contract works. It is market-based, that's sort of what you'd want it to be. It's not a fixed price, it's not as though we're locked into something that is, you know, outside of what the market pricing structure would accept. The risk is not really tied to something that we can't control. The market is something we can't control.
As long as we're moving with the market, you know, we have the opportunity to make those hedging decisions, just like we do in our propane business.
Okay. I guess just one last question, just at a higher level. Like, how do you think about your capital allocation strategy going forward? You know, you've talked a lot about continuing to invest in renewable natural gas. You know, you do have your core propane business, you know, which there seems to be... it's still very fragmented. Tuck-in acquisitions there makes sense. As you look at this, you still have a large ability to, you know, also increase your dividend. What is your overall thoughts and mix between, you know, acquisitions, debt reduction, increasing the dividend?
You do have a really, you know, stable business that gives you a lot of opportunities, you know, to manage all three. I just kinda wanted to get your high-level thoughts on how you would look to manage that mix going forward.
Yeah. No, you sort of answered your own question at the end there by saying we have this great stable business that we can manage all three. You're right. I mean, that's what we've been doing for years. As far as, you know, where do we go from here, look, I said it in the end of my remarks. We have a great business that, you know, I've been here for more than 20 years, you know, involved in the leadership of this business. We are the best in class in running the propane business. The first thing I would say is we are not deviating from our core propane business. You know, our Go Green initiative that we launched in 2019 had two tenets.
One, advocacy for propane as a long-term solution in a lower carbon economy. Two, innovation for the clean energy of the future. That's what you're seeing us execute on right now. We're enhancing, preserving, we're advocating for our propane business. The propane business has always been a great cash generator. You know, I referenced some of the excess cash flow earlier. The past couple years, we've used a lot of the excess cash flow to delever because we are taking a very long-term strategic approach to set this business up for the future, and for growth.
You know, I think we don't set arbitrary targets on specific allocation of that excess cash flow because we look at every deal in its own right, whether it's a propane deal, whether it's a renewable energy deal. It's gotta stand on its own merits, which is also why we don't go out there and talk about big, broad targets for what the business makeup is gonna look like five or 10 years from now. If you say X% of our business is gonna be propane and X% is gonna be renewable, well, then you sort of have a, you know, a incentive to hit that at the maybe at the behest of doing a good deal.
I'd rather just continue to be very patient, be very measured, and be very strategic about how we allocate our capital for the right set of circumstances. You know, if you look at our history, this $200 million deal is the 3rd largest deal we've done since 2002. You know, we did a $206 million deal in 2003. We did a $1.8 billion deal in 2012, now we're doing a $200 million deal in 2022. We're pretty patient and disciplined when it comes to allocating capital. We do have growth projects to fund.
You know, we are looking at the allocation of capital to fund those growth projects because that's how these businesses are going to reach their run rate potential and then some. That is a little different for us to manage because we are making commitments. But as I said earlier, those commitments, as we see the visibility today, gives us plenty of cushion for within our own cash flow generation to fund that growth capital. We're managing the business for the long term for growth. As growth comes, it'll provide growth opportunities for everybody. For our employees, for our unitholders, and all of our key stakeholders.
lly what we're here to do is to take a long-term view. In the meantime, we have a business that's generating great cash flow. We have a stock price that is generating an 8.25% yield that is pretty darn stable. And with this, with this growth, you know, opportunities that we have, I think it provides our unitholders that comfort that not only is there good stability in the distribution, but that the company is making strategic moves for long-term growth
Okay. Thank you. That's all I have.
Great. Thanks, Jay.
Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Michael Stivala for any closing remarks.
Great. Thanks for your help, Chad. Thank you all for your interest and your support. We look forward to talking to you again in February at the end of our second quarter. I hope you all stay safe and warm. Thank you.
Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.