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

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 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, contains additional disclosure regarding forward-looking statements and risk factors, copies may be obtained by contacting the partnership or the SEC. For 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 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…

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 noncash 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. Expected weather, 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. With that said, 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…

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. And 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 will 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.

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

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

2024.

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?

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 digit going in and with the potential 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. And 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.

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

I think there's -- 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. And if that happens, I think both the seller and Suburban will be really happy with the transaction overall. And 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. 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?

Yes. So I'll take the CapEx question first. So I think, first, I think you have to reflect on sort of the excess cash flow generating capacity of our core propane business. And and what we've proven over the past couple of years in relatively normal weather patterns. The business 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 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 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 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 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, that obviously, this was all funded with debt, this particular acquisition. I think when -- 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…

[Operator Instructions] The next question is from Ned Baramov with Wells Fargo. Please go ahead.

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?

So, 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...

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.

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 just was answering your question there, Ned, on off-take. Hopefully, you got the first part of it relative to 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 R&D, and we are currently working with a number of potential off-take opportunities. And I would expect those opportunities to also be market based, and there may be multiple off-takers that will manage or perhaps one off-taker that takes all the gas and handles it on our behalf. So 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, but there are other markets developing throughout the country for different applications. And so, I think we're going to continue to be somewhat patient in how we set up the off-take 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?

Well, as you know, Ned, a lot of the regulations now that will ultimately carry out 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 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 45 credits, and those will kick in 2025 and currently for 45z credits. They will last through 2027 unless extended. And 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 a higher portion of those available credits than, say, other feedstock for RNG production. So -- and that -- the other side of the opportunity here is that those -- that legislation all sort of came out like 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. 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?

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 the average prices in the fiscal first quarter. So 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 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. So I think everybody is experiencing a higher operating threshold, and that gives it gives the market 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, 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. 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 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.

[Operator Instructions] The next question is from Jay Kanive with Tonka Capital. Please go ahead.

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 in commodity price risk type business versus your distribution, logistics, 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? 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 RNG kind of vis-à-vis 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 RNG. So I can't answer the question about the potential for how much of that RNG is going to be 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. People are looking to lower their carbon footprint. And one way to do that is to move to a renewable a renewable product such as renewable natural gas, which can be a direct drop in replacement. So 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. So we already have an active process internally to manage those credits, and we understand how those markets operate. But 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 somewhere in the mid-$60 per ton in California. The good thing is, is all 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 a business off of $150 LCFS price anyway. But the market did correct itself in a time frame that allowed us to sort of stress the business for those things. But I think as more markets and more demand for a renewable product such as this develop there's either going to be…

Understood, and I appreciate that. But maybe specifically with respect to the Arizona facility, which you said has a current off-take agreement based upon market pricing. What I'm trying to get an appreciation for us, 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 to hedge that premium that you get for that RNG? Like are you able to go out and hedge that for any length or 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 sell the RNG?

Yes. So 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 be able to take advantage of whatever hedging profile that 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 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 is outside of what the market pricing structure 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. Just at a higher level. Like how do you think about your capital allocation strategy going forward? 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 very fragmented tuck-in acquisitions there makes sense. But as you look at this, you still have a large ability to also increase your dividend. What is your overall thoughts and mix between acquisitions, debt reduction, increasing the dividend? You do 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.

Yes. And 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 where do we go from here? Look, I said it in the end of my remarks, we have a great business that 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 had two tenants; one, advocacy for propane as a long-term solution in a lower carbon economy; and two, innovation for the clean energy of the future. And 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. And 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 set this business up for the future and for growth. And so I think 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 a 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…

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, 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.