Earnings Call Transcript - SPH Q1 2023

Operator, Operator

Good day, and welcome to the Suburban Propane Partners First Quarter Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also 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.

Davin D'Ambrosio, Vice President and Treasurer

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 Stivala, our President and Chief Executive Officer; Mike 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 conclude 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 risks 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, contains additional disclosure regarding forward-looking statements and risk factors, copies may be obtained by contacting the partnership or the SEC. 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?

Mike Stivala, President and CEO

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 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. 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 hidden 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 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. 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 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. Additionally, it will earn 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 to 24 months. Once completed, the facility is expected to have a run rate capacity of approximately 225,000 MMBtus of RNG per year. Therefore, 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 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 is earned for the two-year period from January 1, 2024, through December 31, 2025, but only after EBITDA exceeds a specific 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. Besides 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 is supported by a well-established network of operators, engineering and construction providers, and off-takers. We are extremely excited to be partnering with the team at Equilibrium because we believe that our cultures have aligned so well. 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 support of our long-term strategic goals. This combined with our previous investments in renewable DME through our 38% equity stake in overall fuels as well as in hydrogen production and distribution through our 25% equity stake in independents and our first investment in the RNG production market through our previously announced agreement with Adirondack Farms in Upstate New York have 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. However, at this point, I'll turn the call over to Mike Kuglin to discuss the first quarter results in more detail. Mike?

Mike Kuglin, CFO and Chief Accounting Officer

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 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 before 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. 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 3.3% higher than the prior year, primarily due to cooler weather and favorable customer base trends. Average temperatures during the first quarter were 3% warmer than normal and 13% cooler than the prior year first quarter. The increase in degree days was experienced in early October, which is the least critical month during the quarter for heating demand in 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 based out of 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 by $15.9 million or 7.5% 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 by $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 by $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 by $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. Total 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 to 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 12-month period was 3.68 times, 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-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 5.75 times. Our working capital needs typically peak towards the end of the heating season, 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 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 always believed that conservative balance sheet management provides added protection for potential short-term earnings impacts from weather-driven demand softness but also provides us dry powder for opportunistic investments and 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 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.

Mike Stivala, President and CEO

Thanks, Mike. As announced on January 19, our Board of Supervisors declared our quarterly distribution of $0.325 for a 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 7 to our unitholders of record as of January 31. Our distribution coverage continues to remain strong at 2.61 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. 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 unitholders, 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 we'll now open the call up for questions, and Chad, if you wouldn't mind helping us with that.

Operator, Operator

We will now begin the question-and-answer session. And our first question today will be from James Spicer with TD Securities. Please go ahead.

James Spicer, Analyst

You mentioned that the Equilibrium acquisition is accretive to cash flow. I think you said in 2026. Can you...

Mike Stivala, President and CEO

2024.

James Spicer, Analyst

2024, okay. Can you share the transaction multiple paid for the acquisition? And then more generally, speak about how we should think about EBITDA generation from the Equilibrium assets and your renewables platform in general for 2024?

Mike Stivala, President and CEO

Yes. So, we don't give guidance on earnings potential, as you know, James. So, 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 is particularly in California with LCFS credits. 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 earnout 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 digits going in, with the potential upside 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.

James Spicer, Analyst

Okay. So it sounds like you think there's a high likelihood that you'll get at least some portion of that earn-out?

Mike Stivala, President and CEO

I think we set the threshold in a way that gives us a runway for upside of EBITDA for Suburban, and then as the minimum threshold kicks in, it will 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.

James Spicer, Analyst

Okay. Great. Understood. And then I was also wondering about the 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 some of your other investment commitments. How should we think about CapEx? And then as a follow-on to that, when we think about the balance sheet here, and I know prior to this build-out, you were targeting leverage of around 3.5 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 trend?

Mike Stivala, President and CEO

Yes. So I'll take the CapEx question first. You have to reflect on the excess cash flow generating capacity of our core propane business. We can generate sort of after propane-related somewhere in the $70 million to $100 million range depending on weather. Currently, we have visibility to the expansion efforts and projects we have 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 growth capital for the rest of this year, depending on how some of the projects 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 come our way in the joint venture to deploy additional capital. 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 dry powder within our existing cash flow generating capacity to do additional CapEx as opportunities arise. As it relates to the balance sheet, I mentioned or Mike mentioned in his opening remarks, this was all funded with debt, this acquisition. If you think about our history on acquisition funding, we typically like to be closer to 50-50 on debt and equity financing, given the focus we've had over the past several years in really deleveraging 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 three 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 on a pro forma basis, without any earnings expectation right now. If you look at the trailing 12 EBITDA and the pro forma earnings potential, it's still below 4.5 times leveraged. If you pro forma the potential earnings for 2024 and beyond, it will get closer to four. 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 focused on strengthening the balance sheet because as we plan for the potential for record warm-type winters in the propane industry. We plan to be very opportunistic when the right deals come our way. I think we've demonstrated solid discipline in our acquisition approach. You'll see us continue to work towards bringing leverage back down below four so we can always have sufficient capital to be opportunistic. If 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 accessed equity markets in a long time. I'm not saying I'm telegraphing that we are. I'm just suggesting if you look back at history, we typically fund acquisitions of this size with half debt and half equity just to continue to manage the balance sheet. CapEx can be funded with the excess cash flow that we see in the business right now. The balance sheet is still 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.

Operator, Operator

The next question is from Ned Baramov with Wells Fargo. Please go ahead.

Ned Baramov, Analyst

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?

Mike Stivala, President and CEO

Ned, we do not have any fixed price off-take at this point. We do have the one major off-take player for the Stanfield operations, but that's market-based pricing, and they're taking all of the off-take from that facility. The Columbus facility in Ohio is currently going through an upgrade, as I said, from biogas to...

Operator, Operator

Pardon me, this is the operator. Apparently, our hosting site has inadvertently disconnected. We please ask that you be hold on the line until we get them reconnected. Thank you very much. Gentleman, please stand by while we reconnect our presenters. Thank you very much.

Mike Stivala, President and CEO

Chad, I think we're good now. So I apologize for the technical difficulties there. Apparently, somebody didn't like my answer. I was answering your question there, Ned, on off-take. Hopefully, you got the first part of it regarding the Arizona facility being fully contracted as to a single off-taker. The Columbus facility is going through an upgrade that's going to take the next 18 months or so to finish, and we'll be producing pipeline-quality RNG. We are currently working with several potential off-take opportunities, and I expect those opportunities to also be market-based. There may be multiple off-takers or perhaps one off-taker 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 several ways. A lot of RNG players seek to get RNG out to the California transportation market to take advantage of LCFS credits, but there are other markets developing throughout the country for different applications. I think we will continue to be somewhat patient in how we set up the off-take for not only the Columbus facility but also for the Adirondack Facility in New York, which we own outright and are currently building out while also working on potential customers to take that RNG.

Ned Baramov, Analyst

Appreciate the response. Can you maybe just review some of the IRA benefits related to RNG from which you expect to benefit?

Mike Stivala, President and CEO

As you know, Ned, a lot of the regulations that will ultimately carry out the legislation are still to be developed. I think the only thing 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, particularly the production that we're doing at all of our facilities, should be eligible for 45 credits, and those will kick in in 2025 and currently for 45z credits. They will last through 2027 unless extended. Given that the feedstock for these facilities primarily comes from dairy biogas in the Arizona Facility and the New York Facility, which has a significant reduction in carbon intensity score, they should be eligible for a higher portion of those available credits than, say, other feedstocks for RNG production. The other side of the opportunity here is that legislation came out mid- to late 2022 and gave us the opportunity to look at that as upside rather than factoring it into the deal to achieve the earnings potential.

Ned Baramov, Analyst

Got it. And then moving on to propane. Do you think that current unit gross margins in this business are sustainable going forward? And does the pickup in doubtful accounts keep you up at night?

Mike Stivala, President and CEO

I do think that pricing is always going to be very tied to the direction of commodity prices. 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. I think what we're seeing in the marketplace is that all marketers are experiencing the same challenges regarding 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, insurance costs, and the price of steel for the tanks we purchase for customers' locations. I think everybody is experiencing a higher operating threshold, which puts pressure on the need to ensure that we cover those costs through our margin profile while ensuring the customers receive some benefits as commodity prices decline. I think what we see in the market is that all marketers are experiencing that dynamic and are disciplined in their own pricing structure, which has created a lot of stability in the marketplace. As far as doubtful accounts, I would say we do a great 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 their household budgets since commodity prices have been elevated. We are working with our customers to ensure they have the kind of flexibility to manage their budgets and continue to work with us through whatever payment mechanism works best for them and for us. I would say it doesn't keep me up at night because I know how focused our team is on that every single day, but it certainly is a challenge.

Operator, Operator

The next question is from Jay Kanive with Tonka Capital. Please go ahead.

Jay Kanive, Analyst

A lot of my questions have been answered, but I wanted to follow up on the Equilibrium deal. This is a different acquisition for you since this is a production in commodity price risk type business versus your distribution and logistics and customer service model. How are you 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? How do you look to hedge those? And to help us out, what is the current price that you're getting for your RNG compared to the price that you would get for a standard unit of natural gas?

Mike Stivala, President and CEO

As I said earlier, Jay, pricing right now — first of all, we're still building out capacity for RNG, so I can't answer the question about the potential for how much of that RNG is tied to something that is volatile. There are a lot of different markets developing the need to replace traditional natural gas in various aspects of the economy, whether that's transportation or 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 product such as renewable natural gas, which can be a direct drop-in replacement. We did not look at this deal as an opportunity solely to take advantage of LCFS credit values. There is volatility in that market. We understand that. We generated LCFS credits in our propane business. We have an active process internally to manage those credits and understand how those markets operate. I think what we're seeing is there has been a significant pullback in LCFS prices from around $150 a ton to somewhere in the mid-$60 per ton in California. The good thing is that all that occurred before we could execute this deal. I would say we would never pay for a business off of $150 LCFS price anyway. The market did correct itself in a time frame that allowed us to stress the business for those factors. More markets and more demand for a renewable product like this are developing; either there will be more LCFS markets in different states that may develop, or we can find other market-based strategies. We will consider that as we set up off-take for not only the Columbus facility but also for the Adirondack Facility in New York, which we own outright and are currently developing while also working on potential customers to take that RNG.

Jay Kanive, Analyst

Understood, and I appreciate that. But specifically with respect to the Arizona facility, which you said has a current off-take agreement based on market pricing. What I'm trying to get an appreciation for is, what is that market pricing today that you're getting for MMBtu of RNG versus looking at natural gas at $250? And what is your ability under that current contract to hedge that premium that you get for that RNG? Are you able to go out and hedge that for any length or period of time as you transition, as you were stating, to all these different uses or growth opportunities? Do you have to do something different than just straight commoditize and sell the RNG?

Mike Stivala, President and CEO

I'm not going to get into specific pricing of the contracts for sure. All I would say is that particular contract is market-based; market-based pricing allows us to take advantage of whatever hedging profile we decide to use, just like we do in our propane business. So I think that's how that particular contract works. It is market-based, and we are not locked into something outside of what the market pricing structure would accept. The risk is not tied to something 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.

Jay Kanive, Analyst

I guess just one last question. At a higher level, how do you think about your capital allocation strategy going forward? You've talked about continuing to invest in renewable natural gas. You do have your core propane business, which there seems to be a lot of fragmentation; tuck-in acquisitions there make sense. But as you look at this, you still have a large ability to also increase your dividend. What are your overall thoughts on the mix between acquisitions, debt reduction, and increasing the dividend? You do have a stable business that gives you a lot of opportunities to manage all three. I wanted to get your high-level thoughts on how you would look to manage that mix going forward.

Mike Stivala, President and CEO

You sort of answered your own question 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 for where do we go from here? I said it in the end of my remarks; we have a great business. I've been here for more than 20 years 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. Our GoGreen initiative that we launched in 2019 has two tenets; one, advocacy for propane as a long-term solution in a lower carbon economy, and two, innovation for the clean energy of the future. That's what you're seeing us execute on right now. We're enhancing, preserving, and advocating for our propane business. The propane business has always been a great cash generator. 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 deleverage because we are taking a long-term strategic approach to set this business up for the future and for growth. We don't set arbitrary targets on specific allocations of that excess cash flow, as we look at every deal on its own right, whether it's a propane deal or a renewable energy deal; it has to stand on its own merits. We don't go out there and talk about big broad targets for what the business makeup is going to look like five or ten years from now. If you say x percent of our business will be propane and x percent will be renewable, then you sort of have an incentive to hit that at the behest of doing a good deal. I’d rather continue to be very patient and strategic about how we allocate 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, a $1.8 billion deal in 2012, and 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, and we are looking at the allocation of capital to fund those. I believe that those commitments give us cash flow generation to fund that growth capital. We're managing the business for long-term growth; when growth comes, it will provide opportunities for everyone: our employees, our unitholders, and all stakeholders. That's what we are here for, to take a long-term view. We have a business generating great cash flow. Our stock price generates an 8.25% yield that is pretty darn stable. I think that with this growth, opportunities that we have provide our unitholders comfort that not only is there stability in the distribution, but the Company is making strategic moves for long-term growth.

Operator, Operator

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.

Mike Stivala, President and CEO

Great. Thanks for your help, Chad. Thank you all for your interest and 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.

Operator, Operator

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.