First Choice Power Reports Higher Margins in Q4 from Commercial Sales, Expects Continued Unit Margin Compression

First Choice Power recorded higher margins during the fourth quarter of 2010 which helped lift ongoing EBITDA to $7.9 million from $5.8 million a year ago.

Higher margins lifted results by $2.1 million, while First Choice Power also saw a $2.0 million reduction in bad debt versus the year-ago quarter. The improvements were partially offset by, among other things, a $1.7 million increase in marketing expenses.

The improved margins reverse a trend during much of 2010 in which the retailer recorded softer margins versus the particularly strong margins recorded in 2009. An increase in commercial volumes helped mitigate a trend in reduced unit margins. First Choice Power expects unit margin compression to continue in 2011, and said every $1/MWh change in unit margins impacts earnings by about $2.7 million.

Though First Choice does not provide specific unit margins, executives reported, for the year 2010, unit margins were down about 11% year-over-year.

GAAP earnings at First Choice Power in the fourth quarter were $11.4 million, up from $4.4 million a year ago.

As first reported in Matters yesterday, First Choice Power ended the year with 214,200 customers (see 3/1 story for discussion of churn).

Residential customers at year-end were 172,506, versus 186,565 a year ago. PNM Resources' 2011 guidance for First Choice Power assumes a 5-15% increase in residential customer count, though its 2010 guidance had assumed a 5% increase in residential customer count.

For the year 2010, First Choice Power recorded 1,363.8 GWh of commercial sales, up from 1,218.9 GWh a year ago, as the retailer continues to emphasize commercial growth. First Choice Power forecasts a 15-20% increase in commercial sales for 2011.

Bad debt for the year 2010 was $25 million or 5.2% of revenue, which is less than half of what it was in 2008. Increased commercial sales are expected to further mitigate bad debt.

For 2011, First Choice Power forecasts bad debt at 4% to 5% of revenue, or $20 million to $25 million.