Q1 2023 Suburban Propane Partners LP Earnings Call
Good day and 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 todays presentation, there will be an opportunity to ask questions.
To ask a question you May Press Star then one on you touched on something.
Draw. 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, Dambrosio, 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 Mike Sabella, our President and Chief Executive Officer, Mike critical and 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 21 E of the Securities Exchange Act of 1934.
And it relating to the partnerships future business expectations, and predictions and financial conditions and results of operations.
These forward looking statements involve certain risks and uncertainties.
We have listed some of the important factors that could cause actual results to differ materially.
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 suburban propane dot 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 contains additional disclosure regarding forward looking statements and risk factors copies may be obtained by contacting the partnership or the SEC.
Certain 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 Sabella for some opening remarks, Mike.
Great. Thanks Devin.
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 28.
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.
<unk> benefited from a combination of continued positive trends in our customer base growth and retention initiatives cooler.
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 continued to do an outstanding job delivering exceptional service to our customers and the communities we serve.
Continuing to drive efficiencies and effectively managing the things they can control.
Whether it 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.
But we believe that it's our best in class operating model.
And the hard work and dedication of our people et.
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 for erratic weather patterns.
Now, 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.
So to highlight some of the details of the acquisition and a newly formed joint venture.
Through our wholly owned subsidiary of suburban renewable energy, we acquired two R&D 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 R&D facilities in the United States processing dairy manure from seven local dairies.
A total of 55000 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 525000 M. M. B to use of RMG annually for injection into an interstate pipeline interconnects nearby.
<unk> revenues are generated from a combination of RMG sales.
CFS credits D. Three D five rens tipping fees in fertilizer sales.
The second facility located in Columbus, Ohio.
It's 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 100000 tons of waste into biogas and fertilizer.
And we will earn additional revenue from sales of RMG defy brands and fertilizer upon completion of an active development project to upgrade the biogas into pipeline quality RMG, which is expected to be completed over the next 18 to 24 months.
Once completed the facility is expected to have a run rate capacity of approximately 225000 M. N V to use of R&D per year.
Therefore, the platform once current expansion and upgrade plans are completed is expected to produce a run rate capacity of about 750000 M. N V to use per year.
And while there will be an immediate contribution to 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 one 2024 does.
<unk> 31 2025.
Only after EBITDA exceeds a certain minimum thresholds.
The maximum earn out potential is $45 million.
And will be paid in fiscal 2026 if earned.
EBITDA threshold was 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.
Our management services agreement that extends through December 2025, this will allow suburban to continue to benefit from a deep knowledge and experience of the equilibrium management team and 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 in equilibrium have formed a partnership to serve as a long term growth platform for the identification and development and operation of additional R&D projects.
Which includes an existing pipeline of identified R&D 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 R&D 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.
Establishing.
In 2008 equilibrium as 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 off takers were.
Extremely excited to be partnering with the team at equilibrium because we believe that our cultures have align so well.
And we can bring together equilibrium knowledge.
And more than a decade of experience in this rapidly growing R&D space.
With our deep knowledge of end use energy markets logistics and distribution expertise.
So as you can see there.
This acquisition and the formation of the partnership with equilibrium was a highly strategic and meaningful step forward.
And the support and execution of our long term strategic goals.
This combined with our previous investments in renewable DNA DMA through our 38% equity stake in Oberon fuels as.
As well as in hydrogen production and distribution through our 25% equity stake in independents.
And our first investment in the R&D production.
Market through our previously announced agreement with Adirondack farms in upstate New York feasible.
These have all greatly supported our efforts to diversify our business.
<unk> developed 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. However, at this point I'll turn the call over to Mike <unk> to discuss the first quarter results in some more detail Mike.
Thanks, Mike and 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.
<unk> to an unrealized loss of $33 $5 million in the prior year first quarter.
Excluding these items as well as a noncash equity and earnings of unconsolidated subsidiaries for under the equity method and.
And classes associated with the acquisition.
Renewable natural gas assets.
Net income for the first quarter was $63 million or <unk> 95 cents per common unit.
Compared to net income of $55 $4 million or <unk> 88 cents per common unit in the prior year first quarter.
Adjusted EBITDA for the first quarter of $90 million improved by $3 $5 million or four 1% compared to the prior year.
As 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 that was partially offset by continued inflationary pressures on our expenses.
Retail propane gallons sold in the first quarter were $108 8 million gallons, which was three 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 months during the quarter for heating demand in the <unk>.
Last two weeks of December .
With that said, although we experienced an overall increase in heating degree days compared to the prior year first quarter.
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.
You need 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 80 cents per gallon.
Which is 36% lower than the prior year first quarter and 26% lower in 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 seven 5% compared to the prior year.
Primarily due to higher volumes sold and higher unit margins.
Excluding the impact of the unrealized mark to market adjustments propane unit margins for the first quarter increased six cents or three 2% per gallon compared to the prior year.
I'm really 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 nine 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.
The 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 operating model to drive efficiencies, while continuing to provide superior customer service.
Net interest expense of $16 million for the first quarter increased $700000 or four 5% due 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 R&D production facility at Adirondack forums.
Capital spending during the quarter on the project was not significant.
Our growth capital.
Spending for the remainder of the fiscal year to be higher than historical levels as we build out the R&D production facility at Adirondack farms, which is expected to take 18 to 24 months to complete.
As we begin to integrate the assets acquired from equilibrium there'll 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 is 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 capital our total debt outstanding as of December 2022 was $52 $9 billion 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 12 month period was $3 six eight times.
Which was roughly flat to what we reported at the end of fiscal 2022 and reflects an improvement from where we ended in the prior year first quarter.
As a result of the recent acquisition of the R&D 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 four times range, depending on the level of EBITDA for the remainder of the year.
However, we expect to be well within our debt covenant requirement of 575 times.
Our working capital needs typically peak towards the end of the heating season late.
Late February or early March time frame, 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 R&D 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 reached the run rate potential.
At suburban propane, we have a long and proven track records of being great stewards of our balance sheet.
We have long believed that conservative balance sheet management provides added protection for the potential short term earnings impact of weather driven demand softness, but also provides a dry powder for opportunistic investments and the execution of our long term strategic initiatives.
Over the course of the last three years, we've reduced our total debt by nearly $150 million all while continuing to invest in the growth of the business.
As 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 32, 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 Rec.
Third as of January 31.
Our distribution coverage continues to remain strong at $2 six one times based on our trailing 12 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 and while the second quarter has started out unseasonably warm, we're 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 3200 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.
Society transitions to lower carbon alternatives.
And positioning suburban propane for long term growth for our employees.
Our valued unitholders and our key stakeholders.
We are taking a measured and long term approach.
We're positioning the business for the next 95 years.
As always we appreciate your support and attention and.
And we'll now open the call up for questions and Chad if you wouldn't mind, helping us with that.
Certainly thank you.
Yes.
We will now begin our question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two again.
Again pressing star then one will allow you to ask a question and at this time, we will pause momentarily to assemble our roster.
And 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 the cash flow I think you said in 2026.
Toyota 2024, Okay can you share the transaction multiple paid for the acquisition and then more generally speak about how.
How we should think about EBITDA generation from the.
The equilibrium assets in your renewables platform in general for 2024.
Yeah. So.
Don't give guidance on earnings potential as you know James.
So safe to say that obviously this is our first large acquisition in the R&D space.
The transaction multiple I think benefited actually from some some changes in the environment for RMG, particularly in relation to the environmental credit attribute market that.
It was particularly in California with L. CFS.
So the earnings for 2024, as we said is going to 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 oh.
Price consideration, depending on the level of EBITDA that level.
Would dramatically reduce the multiple I would say that the multiple is is in the in the high single digit going in and with the with the potential upside potential.
Sure.
For us to gain additional earnings potential as more expansion as is in the works and as the expansion that we're currently underway.
Generates the kind of run rate that that we expect in 2024 and if we can achieve the.
The ultimate minimum level of EBITDA that is set in the earn out provision.
It would reduce the multiple.
Into the into the lower to mid.
Single digit item.
Okay. So it sounds like you it.
It sounds like you think there's a high likelihood that you will get at least some portion of that earn out.
Yes.
I think there's I think we set the threshold in a way that.
That gives us a runway for upside at EBITDA.
Our suburban.
And then as the minimum threshold kicks in it will provide additional consideration for the seller.
And if that happens I think both the seller and suburban will be.
Really happy with the transaction overall, and if and if the EBITDA doesn't reach the minimum threshold level, we have a terrific deal.
And in its own right.
More suburban and our shareholders.
Okay, great understood.
And then I was also wondering about the Capex for next year.
Spoke about or this year.
You spoke about the upgrades and expansions or new facilities purchase from equilibrium.
And then you know some of your other investment commitments.
How should we think about Capex and then Oh.
As a follow on to that.
You know when we think about the balance sheet here and I know prior to this bill that you were targeting leverage of around three five times.
Just sort of wondering what the appropriate target is to think about at this point.
And if there were additional opportunities for acquisitions and build out.
Where can we see leverage leverage trend.
Yes, so I'll take the Capex question first so I think first I think you.
We have to.
Reflect on sort of the excess cash flow generating capacity of our core propane business in.
And what we've proven over the past couple of years and.
Relatively normal weather patterns, the business can generate sort of after propane related capex somewhere in the $70 million to $100 million range, depending on 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 to $50 million of growth capital.
For the rest of this year depending on.
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 so.
I think if you think about it as we have $70 million to $100 million or so of excess cash flow with current visibility of $10 million to $50 million, we still have some some dry powder within our existing cash flow generating capacity too.
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 when you think about our history.
On acquisition funding, we do typically like to be closer to 50, 50 debt and equity financing.
Given what we the focus that we've had over the past.
Several years and really delevering, the balance sheet and getting it down in the three six 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.
And so if you think about it we referenced in our opening remarks that in the past three years, we paid off $150 million.
And so 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.
On a pro forma basis without any earnings.
The expectation right today.
In terms of the balance sheet. If you just look at the leverage and the trailing 12 EBITDA in his own pro forma the earnings potential.
Still below four five times levered.
And if you if you pro forma the.
<unk>.
The potential earnings for 2024 and beyond it'll it'll get closer to four so.
So I think relative to this acquisition I think it.
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 run rate capacity.
So then naturally bring leverage down.
And so I think as you think about profiling us going forward, we still have a similar strategy for our leverage.
We're always going to be.
Focus on strengthening the balance sheet, because as Mike said in his remarks.
We plan for the potential for record warm type winters and 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.
And so I think youll see us continue to work towards bringing leverage back down below four.
So that we can we always have.
Sufficient capital to be opportunistic and as you know as as equity markets, perhaps improve in the future.
There may be an opportunity for us to.
Bring in some some capital on the equity side to offset some of the leveraging aspect of this particular acquisition or maybe future acquisitions. So we haven't accessed the equity markets in a long time, I'm, not saying I'm not telegraphing that we are.
Suggesting that if you look back at history.
We typically fund the acquisitions of this kind of size with with half that in half equity just to continue to manage the balance sheet. So it's a long way of saying.
Capex.
Can be funded with the excess cash flow that we see in the business right now.
Balance sheet.
Is.
It's still.
<unk>.
Well well positioned from a leverage perspective, and we'll continue to get better naturally as the earnings potential of this acquisition.
Start to start to come to fruition.
Yep Yep, Okay. No. That's that's very helpful. I appreciate the answers. Thank you.
And again, if you'd like to ask a question. Please press Star then one.
Next question is from Ned <unk> 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 RMG production volumes from the currently operating facilities.
<unk> is contracted under fixed price arrangements.
So we we.
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.
And 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 too.
Hello.
Pardon me. This is the operator, apparently are hosting site has disconnected. We please ask that you hold on the line until we get them reconnected. Thank you very much.
Yeah.
Once again, ladies and gentlemen, please standby, while we reconnect our presenters. Thank you very much.
Yes.
[music].
Okay.
Okay.
Chad I think we're good now so I apologize for to everybody for technical difficulties there apparently somebody didn't like my answer.
So I was just was answering your question there Ned on.
<unk>.
Hopefully.
You got the first part of it relative to the Arizona facility.
Being fully contracted.
A single off taker.
The Columbus facility is.
Going through an upgrade that is going to take the next 18 months or so to finish and we will be producing pipeline quality RMG.
And we are currently working with a number of potential offtake opportunities.
And and and I would expect those opportunities to also be market base.
And there may be multiple off takers that we will manage for perhaps one off taker that takes all the gas and handles it on our behalf. So we.
We have plenty of Optionality.
I think that the market for RMG is developing in lots of different ways. Obviously, a lot of a lot of RMG players are seeking to get R&D out to the California transportation market to take advantage of L. CFS credits, but there are other markets developing throughout the country.
For different applications, and and and so I think where we're going to continue to be somewhat patient and how we set up the offtake for not only the Columbus facility, but also we have the Adirondack facility in New York, which we at we own outright and we're currently building.
<unk>.
And are also working on <unk>.
<unk> customers to take that that R&D.
I appreciate the response can you maybe just review some of the I array benefits related to R&D from which you expect to benefit.
Well as you know our net a lot of the regulations now that will ultimately.
Carryout the legislation are still to be developed so.
I think the only thing that I would say at this point is that we've evaluated the potential credit opportunities under the I R. A.
It would seem safe to say that RMG, and particularly that the production of.
That we're doing at all of our facilities.
Should.
Should be eligible for 45 Z credits and those will kick in in 2025 and currently for 45 Z credits.
They are they will last through 2027 unless extended.
And.
But given the feedstock.
For these facilities, primarily being certainly.
The Arizona facility in the New York facility are both dairy biogas.
Got a pretty significant.
Reduction in carbon.
Intensity score, which should be eligible for <unk>.
A higher portion of those available credits than say.
Other.
Feedstock.
For RMG production so.
And that the other side of the opportunity here is that you know those that legislation all sort of came out.
Late mid to mid to late 2022.
And gave us the opportunity to sort of look at that as more.
Upside then.
Then factoring it into the deal to achieve the earnings potential.
Got it and then.
Moving onto propane do you think that current unit.
Gross margins in the in in this business are sustainable going forward and.
Does the pickup in doubtful accounts keep you up at night.
I do think.
Obviously.
Pricing is always going to be very.
Tied to the direction of commodity prices.
Commodity prices have ticked up now in the January time frame from when the average prices in the fiscal first quarter.
So theres still.
Fair amount of volatility.
I think what we're seeing in the marketplace is that.
All marketers are experiencing the same thing which is.
A bit of a challenge with respect to hiring and retaining.
Drivers and service tax.
And 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.
Insurance costs and the price of steel for the tanks that are that we buy in place at our customers' locations. So I think everybody is experiencing a higher operating threshold and that gives a.
It gives the market.
You know the sort of the need to ensure that we're covering those costs through our through our margin profile, but also ensuring that the customers are getting some of the benefits.
As commodity prices do come off but ensuring that we can cover our expenses and the inflationary factors that we face and 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.
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 and we're certainly seeing our customers.
Challenged with respect to their own household budgets and commodity prices have been elevated so we have more invested in receivables because of the pure level of commodity prices over the last year.
And so we are certainly working with and managing those receivables very closely and working with our customers to ensure that they have the kind of flexibility to manage their budgets and and continue to work with us through.
Whatever payment mechanism works best for them and for us So.
I would say 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.
And again, if you would like to ask a question. Please press star one.
The next question is from Jay <unk> with <unk> capital. Please go ahead.
Yeah. Thanks for taking the question guys.
A lot of my questions have been answered, but I did want to follow up on the equilibrium deal.
What.
This is a different acquisition for you. This is a production and commodity price risk type business.
Versus your distribution logistics customer service model.
Or are you.
No.
Going to hedge or.
Look to stabilize those cash flows.
Given that a lot of them are dependent I think on California type credits what is your ability to do that and how are you going to look to hedge those.
And maybe to help us out what is the current price that you're getting for your R&D.
These would be the price that you would get for a standard unit of natural gas.
Yes, so as I said earlier, Jay pricing right now first of all we're still.
Building out capacity for R&D, So I can't answer.
The question about the potential for how much of that R&D is going to be quote unquote tied to.
Something that is volatile okay.
As I said earlier in one of my responses Theres lots of different markets that are developing.
The need to replace traditional natural gas and different aspects of the economy, whether that's transportation.
Whether it's an and.
In energy consumption for industrial uses.
People are looking to lower their carbon footprint and one way to do that is to move to a renewable.
Our renewable.
Products, such as renewable natural gas, which can be a direct drop and replacement. So we did not look at this deal.
As an opportunity to take advantage of L. CFS credit values honestly.
There is volatility in that market, we understand that we.
We generate L. CFS credits in our propane business. So we already have a and.
An active process internally to manage those credits and we understand how those markets operate but.
But I think what what we're what we're seeing is in.
I'm sure you're aware, there's been a significant pullback in L. CFS prices from say $150 a ton to somewhere in the mid $60 per ton and in California.
The good thing is is all of that occurred sort of.
Before we were able to execute this deal and I would say.
We were never going to be paying a value for our business off of a $150 <unk> price anyway, but the.
The market did.
Quote unquote.
Correct itself.
And in a timeframe that allowed us to.
Stress the business for those things, but I think as more markets and more demand for a renewable products such as this develops there's either going to be.
Morrell CFS markets.
And different states that will will develop I know theres an active.
There's active legislation in several states that may adopt such programs, which could be beneficial but.
The way, we're going to be looking at the business. It is actually more with a a propane market eye towards how to make money in this business and that is being a trusted provider of that energy to the customers that are seeking a lower carbon alternatives.
And so it may not just be.
Selling it to one off take or like we have in in Arizona that is going to 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, so you know I think the.
The opportunities that we see in the R&D space are bigger than just taking advantage of environmental attributes.
Environmental attributes are there too.
To sort of kick start.
Our renewable market I think we're getting in at a really good time to get some visibility too.
More uses that are that are developing.
To to effectively make the natural gas price.
Price for the gas that we're selling.
To make these projects.
It makes sense in their own right.
Then.
With credits available.
Certainly enhances returns, but I think if we if we if we continue to think about.
The offtake in a in a in a more.
Propane like way.
I think that's going to benefit us.
And really growing and developing in this market.
Understood and I appreciate that but maybe specifically with respect to the Arizona facility, which you said had a current offtake agreement based upon market pricing.
I'm trying to get an appreciation for is what is that market pricing today that youre getting per M btu of R&D.
Versus looking at natural gas at.
And what is your ability under the current contract.
We hedge that.
The hedge that premium that you get for that R&D like are you able to go out and hedge that for any length of period of time.
As you transitioned as you were stating to all these different various uses or growth opportunities you have to do something different than just straight.
Commoditize and salad the R&D the R&D.
Yes, so I'm not going to get into specific pricing of the contracts for sure well I would say.
Is that particular contract is market based.
Market based pricing allows us to be able to.
Take advantage of whatever hedging profile that we decided to to use just like we do in our propane business.
I think that's that's how that particular.
Contract works it is market based and that's sort of what you'd want to be it's not a fixed price. So it's not as though we're locked into something that.
As you know outside of of what the market pricing structure.
Good.
It.
I would accept so.
The risk is not.
Really tied to something that we can't control the market is something we can't control, but as long as we're moving with the market.
We have the opportunity to make those hedging decisions.
Just like we do in our propane business.
Okay.
And then I guess, just one last question.
At a higher level like how do you think about your capital allocation strategy.
Going forward I know you've talked a lot about continuing to invest in renewable natural gas you do have your core propane business.
Which there seems to be it's still a very fragmented tuck in acquisitions, there makes sense, but as you look at that.
You still have a large ability to also increase your dividend.
What is your overall thoughts and mix between <unk>.
Acquisitions debt reduction and increasing the dividend.
Do you have a really stable business that gives you a lot of opportunities.
To manage all three and I just kind of wanted to get your high level thoughts on how you would look to manage that mix going forward.
Yeah, 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 youre right I mean, that's what we've been doing for.
For years.
As far as where do we go from here look I said it in the end of my remarks.
We have a great business that that you know I've been here for more than 20 years.
You know involved in the in the in the leadership of this business.
We are the best in class and run in the propane business. The first thing I would say is we are not deviating from our core propane business.
Our go Green initiative that we launched in 2019 had two tenants one advocacy for propane as a long term solution.
And a lower carbon economy.
And to innovation for the clean energy of the future.
And Thats, what Youre seeing us execute on right now.
We're enhancing preserving we're advocating for our propane business. The propane business has always been a gate are great.
Cash generator.
And you know I.
I referenced some of the excess cash flow earlier.
The past couple of years, we've used a lot of the excess cash flow to delever. Because we are taking a very long term strategic approach to to set this business up for the future.
And for growth.
And so you know I.
I think we we don't set arbitrary targets on specific allocation of that excess cash flow because we look at.
Every deal on its own right, whether it's a propane deal whether it's.
Our renewable energy deal, it's got to 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 going to look like five or 10 years from now because if you say X percent of our business is going to be propane and X percent is gonna be renewable well then you sort of have a.
Yeah.
You know.
Incentive to hit that Etsy, maybe at the behest of doing a good deal.
And I'd, rather just continue to be very patient be very measured and be very strategic about how we allocate our.
Our capital.
For the right set of circumstances, if you look at our history.
This $200 million deal is the third largest deal we've done since 2002.
We did a $206 million deal in 2003, we did a $1 8 billion dollar deal in 2012, and now we're doing a $200 million deal in 2022 so.
We're pretty patient and disciplined when it comes to allocating capital now we do have growth projects.
To fund and 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.
So that is a little different.
For us to manage because we are making commitments.
But as I said earlier that those commitments as we see the visibility today.
It gives us plenty of cushion for.
Within our own cash flow generation to fund that that that growth capital. So.
We're.
We're managing the business for the long term for growth.
And as growth comes.
It will it will that will provide growth opportunities for everybody for for our employees.
For our unit holders.
And all of our key stakeholders and that's really 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.
Have a stock price that is generating an 8.25% yield.
That is pretty.
Pretty darn stable.
And with this with this growth.
Opportunities that we have.
I think it provides our unit holders that comfort that not only is there a good stability in the distribution, but the company is making strategic moves.
For long term growth.
Yeah.
Okay. Thank you that's all I had.
Great. Thanks, Jay.
Ladies and.
This concludes our question and answer session I would like to turn the conference back over to Michael to falloff 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.
And 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.
Okay.
Okay.
Okay.
Yes.
Okay.
[music].