Suburban Propane Partners LP (SPH) 2003 Q3 法說會逐字稿

This 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. Important factors that could cause actual results to differ materially from those discussed in these forward-looking statements include, among other things, the impact of weather conditions on the demand for propane, fluctuations in the unit cost of propane, the ability of the partnership to compete with other suppliers of propane, and other energy sources, the ability of the partnership to retain customers, the impact of energy efficiency and technology advances on the demand for propane, the ability of management to continue to control expense, impact of regulatory developments on the partnership's business, the impact of legal proceedings on the partnership business, and the partnership's ability to implement its expansion and strategy and integrate acquired businesses successfully. All subsequent written and oral forward-looking statements attributable to the partnership or person's actions on its behalf are expressly qualified in their entirety by such cautionary statements.

Thank you for standing by. Welcome to the Suburban Propane third-quarter 2003 results conference. At this time, phone participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions given about time. If you should (CALLER INSTRUCTIONS) As a reminder, today's conference is being recorded. I'd like to turn the conference over to Robert Plant.

Thank you, Kim, and good morning, everyone. Welcome to the Suburban's third-quarter fiscal 2003 conference call. I am Bob Plant, Vice President Finance at Suburban. Hosting our call today will be Mark Alexander, President and Chief Executive Officer. And joining us are Mike Dunn, Senior Vice President of Corporate Development; and David Eastin, our Senior Vice President and Chief Operating Officer.

The purpose of today's calls is to review our financial results for the third-quarter fiscal 2003, and along with our current outlook for the business. Once we have concluded our prepared remarks, we will the session up for questions. Before we get started, I would like to just remind you that statements made in the course of this conference call that relate to the partnership's or management's expectations or predictions are forward-looking statements. The partnership's actual results may differ materially from those projected in such forward-looking statements. Additional information that could cause actual results to differ materially from those discussed in forward-looking statements is contained in the partnership's SEC filings, including its Form 10-K for the fiscal year ended September 28, 2002, and its Form 10-Q for the quarter ended March 29, 2003. Copies of these filings 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 is useful in our Form 8-K, furnished to the SEC this morning. The Form 8-K can be accessed through a link through our website, at www.SuburbanPropane.com. At this point, I would like to begin our discussion by turning the call over to Mark Alexander.

Thanks, Bob and thanks, everyone for joining us this morning. While seasonally a slow period, our results for the third-quarter were well within our ranges expectations. Our sales volume benefited from cooler April weather conditions as compared to the prior year. In addition, we successfully controlled retail margin pressures and maintained our prudent expense controls throughout the quarter. In a few minutes, Bob will discuss our quarterly results in more detail, as well as the significant steps we have taken to further strengthen our balance sheet.

Finally, I'm delighted to announce that because of our confidence in the earnings potential and financial strength of Suburban, we have this morning declared our seventh increase in our quarterly distributions. In keeping with our usual format, several of my partners have joined me this morning to discuss the current state of the business. Bob will summarize our third-quarter operating results as well as our successful execution of several important financial initiatives. Mike Dunn will then provide an update on a supply outlook; and David Eastin will elaborate on the status of our fields operations. Finally, I will rap it up with thoughts on our increased quarterly distributions and our outlook for the future.

Thanks, Mark. As we discussed our financial results for the quarter, to be consistent with our reporting for previous periods, I'm excluding the impact of the $100,000 unrealized gain and $1 million unrealized loss from our current and prior period results respectively all applicable for FAS 133 accounting. EBITDA for our third fiscal quarter ending June 28 totaled $3.1 million, compared to 5.5 million for the same quarter of a year ago. Our seasonal net loss totaled $12.1 million or 47 cents per common unit, compared to $10.1 million or 40 cents per unit in the prior year. Retail sales during the quarter sold 89.6 million gallons, an increase of 2.9 million gallons or three percent from a year ago. As Mark indicated, this increase in retail volumes was due principally to cooler temperatures during the month of April. As well as our customer growth initiatives. Offset partially by the continued negative impact attributable to the general state of the economy.

Revenues for the third-quarter increased $8.6 million or 6 percent to 146.2 million from 137.6 million in the third-quarter fiscal (technical difficulty) this increase is attributable primarily to higher average selling prices, reflecting the increase in the cost of propane, as well as the previously mentioned increase in retail sales items.

Total gross margin of $72.8 million for the quarter was within $300,000 of last year's third-quarter, due principally to the increase in retail sales volumes offset by moderately lower average margin contributions. As well as lower gross margin on our installation and service activities, reflecting customer retention initiatives.

Combined operating and general and administrative expenses of $69.9 million, were $2.2 million or three percent higher than a year ago, as a result of higher fuel expenses, reflecting the higher commodity price, as well as the anticipated increases in insurance and pension related costs. As to our balance sheet, we continue to get even stronger. During the third-quarter, we successfully executed a second amended and restated credit agreement, which extended our existing bank revolving credit agreement until May 31, 2006, on substantially the same terms as the previous agreement. Concurrent with the execution of this new agreement, we repaid a total of $21 million of outstanding borrowings on our revolving credit acquisition line from available cash balances. In June, we successfully completed a follow-on equity offering, which resulted in the issuance of approximately 2.6 million common units, which included the full of exercise of the underwriters over-allotment, and resulted in total net proceeds of $72.4 million. Also in June, we repaid the remaining balance of $25 million outstanding on our acquisition revolver.

In addition, shortly after the close of our third fiscal quarter, on June 30, to be exact, we repaid $42.5 million due on our senior notes. In total, therefore, we have repaid $88.5 million of outstanding debt since early May, which has further strengthened our balance sheet and our key credit statistics. Also, although not required, we will be making a $10 million contribution to our defined benefit pension plans before the end of fiscal 2003. Therefore, on a combined basis, we will have reduced outstanding debt and our unfunded pension liability by almost $100 million.

Our strong cash flow has resulted in our total distribution coverage remaining solid at 1.3 times as of the end of June. Capital spending during the quarter totaled $3.4 million, of which $1 million was deemed maintenance related. All in all, our operating results for the third-quarter were as expected, and we have taken several significant steps to reduce debt and further strengthen our balance sheet to keep us well positioned for the future. At this point I would like to turn the discussion over to Mike Dunn, to share with you our perspective on the current propane supply environment.

Thanks, Bob, and good morning everyone. Propane prices for the quarter ending June averaged 53.5 cents a gallon, (indiscernible) versus, $39.90 for the same quarter year ago. That is a 34 percent increase in today's product cost year-over-year. Prices have come off the recent June highs and locked step with the (indiscernible) natural gas prices. Today, propane for August delivery is offered a 53 cents, while (indiscernible) is offered 54 cents. That is basic, not Belleview (ph).

When we compare propane prices as a percentage of crude oil, we will to the relationship between the two commodities is more representative of historical levels to date this year. For the quarter, we have averaged 77.75 percent versus 63.5 percent for the same quarter a year ago. Today, that ratio stands at 75 percent. The reason for the higher propane prices this year-to-date are simply a function of natural gas and crude oil prices. Natural gas prices are approximately 70 percent higher this year than last year. Crude oil is about $6.85 a barrel on average year-to-date higher. Recent weekly natural gas injections into stores have been stronger than normal, and subsequently provided some price relief. Fuel switching and demand destruction are the main drivers.

The potential for increased nuclear or coal power generation may provide additional price relief later in the year. However, should the price spread between natural gas and crude oil alternatives continue to widen, end-users will probably switch back to natural gas, just possibly reversing the recent price (indiscernible).

Crude oil remained steady as OPEC reigned in production on certainties surrounding the availability of crude supplies from Iraq, provides additional price support. OPEC is scheduled to meet at the end of July, this meeting should provide further guidance.

Propane inventories continued to show healthy builds with input being the key component. June ending inventories were 44.3 million barrels, representing a near record 11.1 million barrel build for the month. However, this is still 10.2 million barrels below the five-year average for this time of year. Continued strong imports and lower natural gas prices should help to alleviate this inventory deficit. At this point, I would like to turn it over to David.

Thanks, Mike and good morning, everyone. As you already heard, our operating results for the third quarter were well within the range of our expectations and results for the first nine months of fiscal year have been solid. As Bob has reported, we are able to continue to effectively manage our overall average per gallon margin contribution, while staying very focused on our customer retention initiatives. We remain confident in our ability to manage pricing appropriately without jeopardizing our longer-term net customer growth objectives. Our focus on customer growth remains a top priority. We've achieved positive net customer growth through the first nine months of the fiscal year, despite the environment of increasing retail prices in a sluggish economy. This has been accomplished by continuing to emphasize the importance of meeting the needs of our existing customers to maximize customer retention, while at the same time attracting new customers to a variety of products and services that accentuate our value as a customer service provider.

With regard to expenses, our results for the quarter emphasize the fact that prudent expense management remains an integral part of our overall culture and business philosophy. Our expenses for the quarter increased for the most part due to such things as unfavorable environment for pension and insurance expenses, as well as significantly higher commodity price, which resulted in increase of vehicle fuel and bad debt expenses.

As we move through the fourth quarter, we will remain focused on our customer growth initiatives as well as our ongoing objective of maximizing our return on assets, as we prepare for the onset of the next heating season. And as always, our performance in the third-quarter and first nine months of fiscal year reflects the significant effort put forth by our employees of Suburban are dedicated to delivering value and safe service to all of our customers. Mark?

Thanks, David. As announced in our press release this morning, Suburban has declared a quarterly distribution of 58.75 cents per Common Unit representing our seventh distribution increase since our recap in 1999. This distribution, which equates to an annual distribution of $2.35 per unit, will be paid on August 12 for our third quarter ended June 28. As evidenced by this increase in our quarterly distribution, we're confident in the long-term prospects for our business. We remain focused in our commitment to delivering increasing value to our unitholders.

Although the fourth quarter of our fiscal year is never a major contributor to our full year results, the continuing effective of the sluggish economy will impact our results negatively for the quarter as compared to last year. However, our full year results will be strong and as clearly evidenced by announced increase in our distributions, we remain very confident in the future. Also, the proceeds from our very successful Equity offering, combined with our substantial internally generated cash has enabled us to further strengthen our balance sheet and substantially improve our credit profile. Before closing, I want to reiterate that our strong balance sheet and soundly managed operations leave us poised and ready to entertain potential acquisition opportunities as they arise. I appreciate your attention this morning. We would now like to open the call up for questions.

(CALLER INSTRUCTIONS) Yves Siegel (ph) of Wachovia Securities.

I've got three for you. First, could you discuss the retail business and what is the outlook there for you? And if you could, what the contribution was in the current quarter? Second, on the focus on customer growth, any numbers that you might be able to give us in terms of what progress you're making and what the target is for customer growth? I assume it is just marketshare growth, or are you actually encroaching on virgin territory? And third, on the bad debt expense, could you again review what the expectations are for that and was this within the norm? Thanks.

With respect to the retail business, I'm going to answer your questions with a question. Do you mean our HomeTown Hearth and Grill retail or do you mean Propane Retail?

HomeTown.

Well as you can imagine, the retail environment is very soft. So we have seen a drop in sales volumes at our retail locations. On the other side, we're encouraged with the model, as we tweak the model for our retail stores, which for clarification purpose, we see as a supplement to our propane, our core propane distribution business, a supplement in the sense that we have the retail space and we, with a professional retail approach, we could significantly increase our sales per square foot retail sales per square foot. In many cases it is almost tenfold. The numbers all-around are small, relative to anything we've talked about with our core propane business, so even though it is down, it is minor. The only thing I can to you as one of our -- we continue to tweak the model on our retail store concept, HomeTown Hearth and Grill. We have introduced an online website for it to sell grill parts in that medium. We also are looking more aggressively at cohabs. We are looking more and more and existing propane delivery retail locations that actually qualify as a niche retail locations. So we're going to step up our pace of converting the front end of our propane delivery stores into HomeTown retail stores. That adds up to a few million dollars a year. Overall, it is still not material. We do lose a few million dollars a year in that effort, though, in case you're wondering, that is for the past years has been a couple million dollars a year. With respect to customer growth, we're positive -- and I said last quarter while we're positive, we're not -- the numbers are not good enough. We don't have enough history to be comfortable to close the numbers. We also don't have enough history to draw any conclusions, except that we're an impatient type of management team and it's just not good enough for us. So our number one focuses is on customer growth. You asked two parts to that question, is it just maintaining the industry average growth rate? No, the answer is no. It is that and then some, so we will look to one, internal growth from the standpoint of capturing our piece of the market, but also we will take it a step further in looking to gain market share.

I want to add something to that because it's a two-stage approach, Yves. On is retention, primarily, let's keep our customers we have. And secondly, let's go out and acquire customers and markets where we're confident in all categories, but to add to Mark's comments, we're not satisfied with industry standards, in certain markets geographically we might be able to capture 5 to 6 percent of marketshare, we're going to go after that, not just settle for one or two. But the key is keeping the customers we have and that is going to be the big focus we have.

And I will turn over to Bob to address the bad debt question.

Our bad debt experience this year in terms of total dollars has been higher than the prior year, however we're still well within our internal guideline of keeping it at less than one half of one percent revenues. Obviously higher volumes this year versus last year, higher prices, and just the general state of the economy has impacted bad debts and we did in fact beef up our reserve in the third-quarter, which impacts the third-quarter expenses a little, but we're quite confident that our reserve is adequate at this point and overall our experience really has been quite good considering the negative factors.

And that's important point that Bob raised, is that you know we are a conservative bunch, so we take a very hard line on our reserve balances and particularly in these two quarters. And where we have any inkling of a potential risk, we will reserve for it. So that's that, and because these quarters are so insignificant to the third and fourth, it can impact our results dramatically. So read into that what you like. I appreciate the question.

David Fleisher of Goldman Sachs.

Thank you for the distribution increase and actually today you are trading over 30 for the first time, so that kind of nice to see as well. Let me ask you a few things. First, on the debt level, you indicated that you paid off 42.5 million senior notes, that is 7.45 percent. And then you gave us the other two pieces of the revolving debt and the acquisition revolver that you paid off as well. Can you tell us what the average cost of that debt was right now, the other $46 million, first of all? And then I am wondering as you look at your improved balance sheet and look at your improved balance sheet and debt investors, what have done -- how have you helped yourself? What bracket have you moved yourself into and what are your conversations with those different parties and what is your ability to prepay this debt and refinance on better terms? Or is this where you're going to be staying?

I'll turn most of this over to Bob. I appreciate the comment on the distribution increase. That is truly -- when you look at the third and fourth quarter, there really non-events for the propane companies because of the seasonal nature of the business, whether their good or bad, they're really non-events. The distribution increase, as I said several times in our introductory remarks, is confidence of our, in the future of the business, in our ability to grow this thing and the strength of our capital structure. We emphasize that in our roadshow, and I think it's about time we did that. We are relatively quiet about those kinds of things, but it was about time that we touted what this group is done here, particularly from a financial structure basis, where we have really taken steps in the last few months, and when you look back, I will get your question in a minute. When you back to our recap in 1999, we have paid back $300 million in debt, almost in total, 300 with the cost of the recap, the (indiscernible) acquisition and straight pure reduction of debt and working capital. We didn't use the working capital to do that, because that is just taking debt from one pocket the other. We have used free extra cash flow, if you will, that we have reserved for the rainy day when the debt markets are tough, when balance sheets quality is important, and I think it's served the purpose and serves our unitholders well. I'll turn over to Bob here in a minute about the rates of the debt that we have paid down, but in our trailing 12 months, correct me if I'm wrong, Bob, our debt to EBITDA ratio is down to 3.3.

Right.

That's a long way from most other MLPs. As you know, NAIC, they are a tough group to get to talk to and they downgraded the entire propane industry from NAIC 2, to NAIC 3, and we were the last ones to get downgraded and we're hoping to be the first one to get upgraded back to NAIC 2. One would think we're pretty darn close to investment-grade, if not already. Debt is not an issue for us. The key about the move that we've made to strengthen our balance sheet even further is to position ourselves for growth, to position ourselves to reinvest in the business and to make acquisitions. We are poised to do that. July activity, even though you didn't ask the question, there is a lot of activity both in propane and in other energies. We are all over it. As long as values come our way, we're going to be there.

I have a couple other questions after this one, don't worry.

Let me just, to just amplify some of Mark's comments, the leverage ratio is about 3.3 right now. That of the full 100 basis points lower than where we were at this time last year. We're in the low 4s last year, so that an improvement I think is significant obviously and will certainly help us in our discussions going forward with folks like the NAIC and anyone else. As far as the interest rate is concerned, you know the coupon on the 42.5 million was 7.54. The $46 million of bank debt is really a LIBOR based floating-rate. The average rate on that was somewhere in the mid to high, close to 4 percent, mid to high threes. But I think beyond the coupon on that, the significance of us being able to pay off $21 million in conjunction with us redoing our bank deal enables us to retain quite favorable conditions in our new bank facility that we will enjoy now out through 2006. So I think that we got a lot of mileage out of repaying that first plug. The second plug just made sense because we had the cash on hand. The average interest cost or total interest cost we're anticipating on a full year basis will be reduced by almost $5 million because of these paydowns.

Okay, second totally separate question, we will go to the margin issue and you have sustained margins at a pretty decent level here over the last year and after some difficult years in the past, you have had confidence in being able to know your costs and manage your margin well, and I guess what I would ask you at this point is, how you would characterize the marketplace now, given that everyone has had decent margins over the last couple years and what your confidence looking into the next year as to your ability to sustain margins here, are you seeing any competitors offering deals would maybe be a separate part of that question?

Dave, this is Mike. We have said this before, that it seems to be easier to maintain a margin or margin profile in higher market environment than a lower market environment. I think we're going to stay in what is perceived to be a higher market environment based on historical price levels. I'm not so sure that we haven't created another floor, a higher floor then historical levels have indicated in the past. I would say based on natural gas environments and certainly the crude oil environment, propane is going to track closer to the higher of the two. Because based on what has happened to natural gas over the course the last few weeks, propane should probably be in the mid to high 40s, but when you look at it against crude oil, it is right on at about that 75 percent ratio level, So propane is going to kind of find its way to track in line with the higher of the two commodities. Bottom line, I don't see us getting into the '30s this coming year, based on Bellevue, of course. I would say that we will probably be in the mid to high 40s, through the mid-50s, barring of course anything that is unforeseen today with respect to the Middle East and more extravagant weather conditions and so forth and so on. The key point too is to watch the Gulf over the course the next three-months with respect to hurricane season, because that is going to create a yo-yo opportunity as well with respect to natural gas. So I don't know if I have answered your question directly enough, but David can certainly talk a little bit more as to what the plans are in the field.

You asked, David if there are any deals out there in the field. Yes, in certain pockets, some independents have offered deals that may seem too good to be true, but consumers have grown somewhat wise to that because delivering that gas at that price is a whole different matter, and I think a lot of customers have realized that you pay for what you get and they see value, what we've offered and they like the fact that we maintain our commitments. And that is complement to Mike and his group, keeping us with gas and we perpetuate that down to the end users. So everything is copacetic as far as the marketplace is concerned. I don't see any pressure that we haven't seen before, and I think we can manage through it. We just have to be proactive.

And one other things too, David, not to interrupt Mark, is based on the way the inventories have been developing, it doesn't seem as though anyone is taking long positions certainly in the '50s, so you're probably going to see going into the season where most people will be operating at replacement cost, which subsequently creates, we think, a more manageable margin environment. Okay. And I had two other questions here that I want to ask, and just lost my train of thought there. But let me jump to the acquisition question, and then I will come back to those other two smaller ones. I just wanted to ask Mark, because we have been hearing for a long time that you have been looking outside as much probably more than inside the propane industry, and would love you to characterize as you have been disciplined here in the marketplace and been more competitors what you are seeing today in the marketplace, whether you feel more confident or less confident in being able to complete something, find the right thing or whether you've changed, given the time that has gone by in the different competitive aspects of the acquisition market, whether you've changed what you're looking for a more what you're willing to do?

We haven't changed what we're looking for. Both in propane and in energy, the activity continues to increase. What we see that is unfortunate is price expectations we believe are still unrealistic. We had shifted -- as we mentioned this last quarter, to probably smaller transactions, more relationship driven, more of a niche positioning, where we can leverage our balance sheet, not leverage up, leverage our balance sheet and move quickly. So we're looking for those unique opportunities. I would say I am not more encouraged than last time we spoke. I made actually be a little less encouraged because value expectations I think are still being held too high. Some of it is driven by the fact that the current owners overpaid for those assets, and they cannot afford to take a write-down on their balance sheet without triggering debt covenants, so, or going concern issues, for that matter. So the environment, the energy environment is ugly, and a lot of the assets that some of the better quality assets that we're looking at were pulled off the market, but the activities side we continue to study it, it preoccupies again more and more of our time, but I'm certainly not more optimistic. I have been -- you have drilled me on this question for seven years now, and I am more than anybody would love to sit here and announce a transaction. I may be criticized here for being too conservative, but the discipline posture we've taken over the past five plus years on -- we're just not going to step out and overpay for something, frankly I think it has been one of the driving reasons why our balance sheet is as strong as it is. And we are about as much as a pure play same-store sale and out as you can get, so I am hopeful, David, but I am no more optimistic that I was.

Okay, I won't push you further than that. I will ask you two final smaller questions, then I will leave it for someone else to come in. On the net customer growth question that Yves asked, I guess if you could characterize whether anything about your tension rate given the you're out of the season and this is the time when people would have been changing (indiscernible) if they're going to change, is that churn ratio down? Is one part of it retention, you talked about David, being so key, but then on the customer growth side, where are you seeing the customer growth? Is it in the residential customer, or is it in the non-residential customer side? And what are you seeing as maybe a bit of a leading indicator in the economy? What are you seeing from your industrial customers? Is or any recovery that you are seeing there? We hear conflicted information there, and the last small question for Bob, probably, goes back to this bad debt provision. Are you establishing a reserve as a percentage of revenues and therefore it is higher than previously, or are you increasing the bad debt at reserve the provision because of more expensive of the existing reserve and just trying to understand how conservative you're being or not being with that at this point.

David, you can answer the second part of David's four-part question there. Let me take it from a macro standpoint, David, as far as customer gains and loss is concerned, and then David can answer the part about trends both in the retail side and the commercial industrial side. From a gross churn perspective, and that is net churn, we'll take a gross gain perspective, our gross gain percentages are solid, and I think they're very comparable and solid. In a perfect world, there is not much we need to do there. Although we do have marketing program to increase that growth rate even further. Where are our focuses and our disappointment today is on our gross churn. Our gross churn is way too high from our perspective, the way we measure. We inflate the numbers and we include everything but the kitchen sink in the number, but it is still too high. We're in the process of automating it and making sure we have reason (ph) codes, to figure out the whys. The answers are different at every single market. What I can tell you that our gross churn percentage is dropping year-over-year. It is just not dropping fast enough. It is still too high, but this is -- we will finish this fiscal year will be the first time we have a year-over-year comparison. On a month-to-month basis, it is getting better. It is just not improving quick enough. So our main focus here is closing the back door. I still don't think we have done a good enough job. This group certainly as tough as we are on our sells, we are not satisfied. What are you seeing from a trend --

From a trend -- we are gaining more residential customers than, say, commercial industrial, or reseller, but we're gaining customers in all four categories. So the residential, has a nice mix, nice margins bump and we are able to facilitate that, but we're still looking at all factors. As far as what we're seeing in trends, commercial businesses came back slightly in volume and in customers taking product. However, in the industrial market that still seems to be spotty and somewhat harm geographically speaking, like for instance in Seattle, where Boeing is still having its woes, has had a trickle down affect to that area that we have seen in our marketplace. In the industrial volume. But pockets -- we're seeing strengthening and other pockets we see it not getting worse, but it's not getting better as we hoped, but residentially speaking, we're seeing that being improved in those sectors.

And I imagine residential has been less economically impacted, so commercial and industrial, if we are out there talking about an economic indicator, we still don't see any sustainable signs of a recovery.

In industrial sector, for instance, let's say we're not losing customers, David, we're losing volume. For instance, if they had three shifts, they went to one shift, their forklift gas is going to cut back appreciably, so that is what we're seeing. And they have not brought those shifts back, so that is going to take a little while longer.

David, quickly with respect to the bad debt reserve, when you cut through everything it is a function of revenues. We build our bad debt reserve and test it quarterly based on our accounts receivable balances and the aging of those balances, and we reserve according to the aging of those accounts receivable. Typically we are conservative, and our actual write-offs, although on an absolute dollar basis have been higher than last year, on a relative basis from the standpoint of percentage of revenues have actually been very good.

John Iceland (ph) of Raymond James.

I had a quick -- if you look at the higher priced propane environment I guess this summer and going into the winter, obviously natural gas has come off of it, but do you think as an industry margins in the propane business will be able to maintain this year over last year, where you saw prices come down and then kind of steadily ramp up throughout the winter? Are you seeing one, your customers delaying fills or do you expect maybe summer fills to be a little bit more pushed off due to the higher price environment? And if that is the case, what do you think margins will do following that? If you see propane prices just level out from where they are today? And if you could also address maybe where your inventories are and what how you plan on tackling the inventories situation and your supply situation going into the winter.

Let me answer your last question first. This is Mike. We are not about to disclose over the phone what our price position would be, however I can assure you that on a price (indiscernible) basis, our supply needs are contracted for and in place. As we do every year, we have a list of suppliers that we depend and count on, 90-some-odd different pickup points to satisfy the 330-some-odd service centers that we have around the country. But because we are conservative with respect to our business, we certainly don't look at the commodity and as respective of bid opportunity. That would certainly work against us. Particularly when you're looking at a commodity, almost twice the value of its historic price level, we're not going to add too much more risk to our business as it is.

With respect your first question, the margins scenario, we have seen in the past that a higher market certainly makes the opportunity easier to capture your margins. With respect to the energy environment over the course of last two years, I think people have grown accustomed to higher energy prices. Certainly people aren't driving less and gasoline prices are equally as high, so I'm not so sure that that has that much merit. With respect to margins in general, we're in a business or an industry that has limited growth opportunities. Our call base does go up, so one should think that margins should be able to grow at least in relationship to inflation to manage a sustainable P&L picture. But in any event, people over the years have tended to speculate with the commodity, thus giving themselves an opportunity to increase margins if they were right with their speculations.

To your second question, with pressures in mid- to high fifties, I don't think that there has been all that much speculation to date this year.

Do you -- if you look at summer fills, are you seeing customers push back when they are filling up their tanks in hopes of lower commodity prices, or has it just been business as usual?

Depends on what part of the country you are talking to. Out West, where we did not have a winter, those tanks were pretty well full going into the summer anyway. Customers in the East, we were probably managing the receivables to the point where we're making some decisions not to sell because we want to collect the money. There's other customers that are in the South that probably are -- probably holding off a little bit and we hope to recover that we go into the fall, but I don't think customers are waiting for a cheaper price. I think customers, going on Mike's point, are more educated thanks to the media that costs are going up, electricity and everything related is going up, so I think that they are a more educated consumer and not waiting for the cheap propane to make a buy.

Where we understand that customers are waiting for a cheaper price is the Midwest, which we're not. We have a minimal presence in the Midwest, but where we hear that's happening the most is in the middle part of the country, where they're waiting for the prices to come down and they haven't. So it could be a more troubling situation in the Midwest.

Also, one last question. In the pockets where you said that you see some people trying to get a price advantage, are those acquisition opportunities down the road where it might not be as consolidated as a market as maybe some of your other markets where you have stronger margins, and maybe you could firm up margins in those areas? If you could comment on that --

Part of the problem with that it would create an acquisition opportunity if the person guesses wrong and goes into financial dire straits. In a situation where they might guess right and then pass some of it on, they can impact the market and permanently hurt margins. And not an acquisition opportunity you really want to jump into, because you're trying to get your margins back to a normal level is a difficult thing to do. We don't see those -- generally speaking, we don't see that event creating an acquisition opportunity.

One last question on the HomeTown retail stores. That is I believe reported under other items in your revenue stream, is that correct?

Yes.

I guess year-over-year in the third quarter, it was down a little bit. Is that mainly due to -- is there any event there or any change in sales mix that you saw on a year-over-year basis, or is it just really more in step with the softer economy year-over-year?

It is all sales related. It is across the board on all lines of categories. It is just a very soft retail market, so the -- we are more comfortable with the model, our expense control, our management of it, our people, they're all during a terrific job. Were just not getting the foot traffic, and it is purely a function of the economy. You'll see the big boxes which we're not, we're just a small niche player that they are all struggling. The numbers are not anywhere near what they were for the past few years, and as a result, it falls right to the bottom line. We have managed to net some of that with some expense control, but the loss has widened in HomeTown quarter-over-quarter. Again, the number is not material, fortunately.

Ron Monding (ph) with (indiscernible).

Most of my questions have been answered. However, I just had a couple. As I would recalculate, you indicated for next year the interest expense would be around $27 million. Is that a good number?

I think more in the 28 to 29 million range would be more appropriate, because we will have some working capital borrowing during the season.

Okay. Also can you give us a feel for your percent contribution to revenues or earnings from residential versus commercial industrial? And kind of gallonage on a percentage basis east of the Mississippi and west of the Mississippi?

You are straining our memory banks. Historically, our commercial industrial business has been slightly larger than our residential volumes. Our customer count is just the opposite. Our residential customer counts are a significant percentage of our total. The mix is different in every region and every store. It will range, Ron, from a store that is 100 percent commercial/industrial to one that is almost just the opposite in a different market. So it is all over the map. We don't ever really look at it that way. I would say -- I can't imagine it is going to be wildly different than our average where commercial industrial is slightly higher as a percentage than residential from a gallon perspective. It is not going to change all that much throughout the country. You will see, I think by design, the further south you go, it is more critical to have higher percentage of commercial industrial because you just have less weather sensitivity as you go South and less of a winter, so you're looking for more of that year-round mode. So it's a difficult question to answer.

From the standpoint of acquisitions, with your balance sheet debt coming down, what do you think the maximum size of an acquisition you might be able to take on from a standpoint of borrowing capacity?

Well, if you consider a transaction where most MLPs are looking at 50-50 consideration where you're using half equity and half debt, we probably tap out at 4 to 500 million. We could do something larger. It depends on the structure, but I think realistically we would cap out there. Prior to that it was probably more like 2 to 250. We are now probably 400 to 500. Again, if there is a deal that makes good sense for us, we will find a way to get it done.

We have no further questions at this time.

Thank you, Kim. We appreciate it and again we appreciate everyone's cooperation and support for the company, our employees and our unitholders. We're delighted to see our unit is over 30. We think it is about time. Our seventh increase in distribution again, to reiterate is confidence on where we can go with this thing and continue to go. And continuing to increase value for our unitholders. I remind you of a comment I made earlier that we see a continuing struggle in the economy, so we see our fourth-quarter being negatively impacted year-over-year, so look for our earnings to go down year-over-year. The good thing is that the quarter is insignificant anyway you look at it, so it is not that big a deal. We're right now in a position to focusing on being ready from operational standpoint for the next winter and we have all the confidence in the world in our 3500 strong work force that we're ready to go now. We appreciate your support and the time you spend with us and look forward to speaking with you next quarter. Thank you, Kim, and thank you, everyone. (CONFERENCE CALL CONCLUDED)