First Choice Power Reports Lower Earnings on Expected Margin Compression

First Choice Power reported lower ongoing earnings of $12.8 million for the third quarter of 2010, versus $18.3 million a year ago, on expected margin compression partially offset by lower bad debt expense and increased commercial sales

GAAP earnings were $3.6 million versus $17.1 million a year ago.

Lower First Choice Power margins, largely due to lower retail pricing, were responsible for a $7 million negative impact versus the prior-year quarter. Still, compression in margins was not as tight as expected, said Pat Vincent-Collawn, PNM Resources president and CEO.

Quarter-over-quarter, there was about a 20% reduction in First Choice Power margins, and year-to-date, there was about a 13% reduction in margins.

First Choice Power's customer count stood at 215,300 as of September 30, 2010, relatively flat versus 216,100 as of June 30, 2010. For comparison, net churn from March 31, 2010 to June 30, 2010 was about 5,300 customers.

Customer count as of September 30, 2009 was 232,100.

Commercial volumes were up about 20% versus the year ago quarter, reflecting an increased focus on the commercial space and particularly an increase in the average size of commercial customers. See chart for First Choice Power sales in GWh and operating revenue by customer class

The increased commercial sales were partially responsible for the compressed margins and improved bad debt levels.

Also helping reduce bad debt were First Choice Power's prepaid offerings launched in January, and tighter credit thresholds

Third quarter bad debt was down about $2 million at $7.3 million versus $9.1 million a year ago, and was considerably better than expected, executives said. First Choice had projected third quarter bad debt at 8.5% of revenue, but actual bad debt ended up a little under 5% of revenue, due to reduced customer departures and lower final bills.

Year-to-date bad debt expense was $19.3 million compared with $33.5 million during the same period in 2009.

First Choice Power now projects bad debt to average about 5.5% of revenue for the year, which is down a whole percentage point from its previous estimate.

Executives reported that First Choice Power has opened additional customer service offices (which also function as stores to market to new customers) in addition to the initial office opened in Lewisville (6/14).

PNM Resources' share of Optim Energy's quarterly net ongoing earnings was $1.8 million, compared with $4.5 million in 2009, as Optim continues to be negatively impacted from lower wholesale market prices.

PNM Resources has not yet filed a 10-Q