Xcel Fails to Shine, Keeps Guidance

Electricity and natural gas company Xcel Energy Inc.’s (XEL - Analyst Report) operating earnings for the third quarter 2011 of 69 cents per share were up 7 cents from the year-ago quarter and at par with the Zacks Consensus Estimate.

Earnings during the said quarter benefited from higher electric margins owing to interim rate hikes in Minnesota and North Dakota. The results were partially offset by higher operating and maintenance expenses, property taxes and depreciation expense and property taxes.

Xcel Energy’s GAAP earnings for the reported quarter were 69 cents per share versus 67 cents per share recorded in the year-ago quarter.

Total Revenue

Xcel Energy clocked total revenue of $2.83 billion in the reported quarter, up 7.7% from $2.62 billion in the year-ago period. The year-over-year growth was due to higher contributions from the Natural Gas and Electric segments.

Reported quarter revenue was however lower than the Zacks Consensus Estimate of $2.89 billion.

Segment-wise Revenue

Electric: Revenue from this segment increased 7.3% year over year to $2.62 billion from $2.44 billion in the year-ago period.

Sales at this segment were largely impacted by the fluctuation in the price of natural gas, coal and uranium used in the generation of electricity. However, the fuel recovery mechanism, which allows the company to recover current expenses, came in handy; or else revenues and margins would have been affected by volatile input costs.

Natural Gas: Revenue at this segment increased by 14.3% to $194.9 million from $170.59 million in the year-ago period.

Other: Segment revenue in the reported quarter was $17.2 million versus $17.3 million in the year-ago period, reflecting a nominal decline of 0.2%.

Quarterly Highlights

Total operating expenses rose 5.8% to $2.18 billion from $2.06 billion in the year-ago quarter. Higher expenses were mainly due to a 5.1% inflation in input costs incurred for the generation of electricity.

However, operating expenses, as a percentage of total revenue, decreased by 142 basis points year over year, which positively impacted the operating results of the company. Operating income accordingly increased by 14.6% year over year to $651.5 million from $568.6 million reported in the year-ago period.

Total interest charges at the end of the third quarter 2011 rose 2.1% to $148.01 million from $144.85 million at the end of the third quarter 2010. Expenses rose on account of higher long-term debt levels to fund investment in utility operations, partially mitigated by lower interest rates.

Financial Update

Long-term debts of the company as of September 30, 2011 were $9.5 billion while the debt-to-capital ratio at the end of the quarter was 54%.

Excel Energy from time to time issues debt and equity to refinance debts, fund operations and for other general corporate purposes. During the third quarter of 2011 the company issued  three series of bonds aggregating $700 million, which were utilized for varied purposes.

The company may also issue $75 million of equity through the Dividend Reinvestment and Stock Purchase Plan and various benefit programs in 2011.

2011 Guidance

Xcel Energy reaffirmed its earnings guidance for 2011 in the range of $1.65–$1.75 per share. The guidance assumes normal weather pattern in 2011. The company guides weather-adjusted retail electric utility sales to grow 1% in 2011, while the weather-adjusted retail firm natural gas sales are expected to decline by 3% from 2010 levels.

The company expects earnings per share in 2012 to be in the range of $1.75 to $1.85, which is consistent with its 5% to 7% earnings growth objective.

Operating and maintenance expenses of the company are estimated to increase by 4.5%, while depreciation expense is projected to increase in a range of $60 million to $70 million in 2011.

Interest expenses are forecast to go up in the range of $10 to $15 million, while the effective tax rate of the company is expected to be in the range of 35% to 36% in 2011.

Peer Update

American Electric Power Co. Inc. (AEP - Analyst Report), competing with Xcel Energy, reported earnings of $1.17 per share in the third quarter 2011, ahead of the year-ago figure of $1.15 and the Zacks Consensus Estimate of $1.14.

The company reported net revenue of $4.3 billion in the third quarter, below the Zacks Consensus Estimate of $4.78 billion but ahead of year-ago revenue of $4.1 billion.

Our View

The quarterly performance of the company is a touch below our expectation. The company has retained its earnings per share expectation for 2011 and provided expectations for 2012. We believe the approval of pending rate cases would have a positive impact on the company’s earnings.

Xcel Energy currently retains a Zacks # 3 Rank, which translates into a short-term Hold rating.

Based in Minneapolis, Minnesota, Xcel Energy is a U.S. electricity and natural gas company, with operations in eight Western and Midwestern states.

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