Utility Sector Beckons Asset Acceptance

Debt purchaser Asset Acceptance Capital Corp. is working to build its portfolio of debt from utility companies as more of these providers look to garner returns from their charged-off receivables.

Warren, Mich.-based Asset Acceptance (Nasdaq: AACC) was approached by “dozens” of utilities seeking to sell last year, according to Deborah Everly, senior vice president and chief acquisitions officer.

Everly declined to share details on these firms but says that “there is increasing interest (from utilities) as we conduct outreach to learn more about their recovery process.”

In 2006, nearly 13 percent of Asset Acceptance’s collection mix was made up of utility, telecom and heathcare debt, according to its annual report. Traditional collections, such as credit card debt, accounted for more than 48 percent of the mix, while legal collections accounted for more than 39 percent. The firm gathered a total of about $341 million in cash collections that year.

Still, utility debt represents a huge market, with the electricity market alone posting 3.2 percent annual growth in 2005, up from the average of 2.3 percent seen since the 1980s, according to the 7th Edition of The Kaulkin Report: The Future of Receivables Management. Electric utility sales to residential users grew by 5.2 percent from 2004 to 2005.

At the same time, major providers of electric power are writing off millions in bad debt. Duke Energy, a provider of electricity to 5.5 million retail customers, set aside $94 million in provisions for bad debt in 2006, according to the Kaulkin Report.

Other major providers have also been setting aside significant amounts for bad debt. Exelon, serving 5.3 million customers in Illinois and Pennsylvania, set aside $94 million in 2006; Southern Co. with 4.3 million customers set aside $35 million; and Constellation Energy Group’s provision for bad debt was nearly $49 million in 2006.

The arguments for selling debt are well-known ­­– the collection of past-due accounts can be an expensive and time consuming task; the strategic sale of debt portfolios can be a revenue boost and help a firm to better forecast returns; and it reduces liabilities.

Perhaps most importantly, utilities are power generators, not collectors, said Everly.

“Everyone has a core competency. A utility’s is power, not debt collection,” said Everly. “We have the time and resources to work (a portfolio). That’s our core competency.”

Asset Acceptance and other debt purchasers work with the potential client to determine if a deal would fit both partners. Asset Acceptance typically will analyze a utility’s sample placement file or data file and send the company a bid on the value on the various portfolios within it, said Everly.

If the two decide to move forward, Asset Acceptance sends the client a questionnaire on the history of a portfolio, how the accounts were handled, what collections have occurred, information on determining the identity of the debtors and so on, said Everly.

“The process is relatively quick. If they send it to us on a timely basis, we resend it on timely basis,” said Everly.

Asset Acceptance reports that it is typical for first time sellers to “start with a large sale of older receivables that are no longer generating significant returns.” If the firm decides to expand its debt sale program, it may offer “a mix of internal and third party collections for their more current delinquent accounts.”