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Electricity and natural gas company Xcel Energy Inc.’s (XEL - Analyst Report) operating earnings for the second quarter 2012 of 41 cents per share were higher than the Zacks Consensus Estimate of 35 cents and the year-ago results of 36 cents.

The company’s year-over-year growth in earnings was attributed to higher electric margin, resulting from various rate increases and warmer-than-normal weather across all its service territories.

Xcel Energy’s GAAP earnings for the reported quarter were 38 cents per share versus 33 cents per share recorded in the year-ago quarter. The difference between GAAP and pro forma earnings of 3 cents was due to certain one-time items.

Total Revenue

Xcel Energy’s total revenue for second-quarter 2012 was $2.27 billion versus $2.43 billion reported in the year-ago period, reflecting a decline of 6.7%. The year-over-year decline in revenue was due to lower contribution from all its reporting segments.

Reported quarter revenue was also lower than the Zacks Consensus Estimate of $2.47 billion.

Segment-wise Revenue

Electric: Revenue from this segment during the second quarter 2012 decreased by 4.3% to $2.03 billion from $2.12 billion in the year-ago period.

Revenues 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; despite a small dip in revenues and electric margins improved 3.9% year over year to $1.18 billion.

Natural gas: Revenue at this segment decreased 24.1% to $221.3 million from $291.6 million in the year-ago period.

Other: Segment revenue in the reported quarter was $16.5 million versus $18.3 million in the year-ago period, reflecting a decline of 9.8%.

Quarterly Highlights

Total operating expenses incurred by Xcel Energy during the second quarter decreased 10.1% to $1.87 billion from $2.07 billion in the year-ago quarter. The decrease in expenses was mainly due to an 18.1% fall in input costs used for generation of electricity.

Operating expenses, as a percentage of total revenue, also decreased by 309 basis points year over year, which positively impacted the operating results of the company. As a result, operating income increased by 12.9% year over year to $405.7 million from $359.4 million reported in the year-ago period.

Financial Update

Long-term debts of the company as of June 30, 2012 were $8.7 billion versus $9.3 billion as of June 30, 2011. During the second quarter, the company issued $100 million first mortgage bonds with a coupon rate of 4.5%.

Xcel Energy from time to time issues debt and equity to refinance debts, fund operations and for other general corporate purposes. During the second half of 2011 the company plans to raise around $1.7 billion through the issue of bonds and unsecured notes.

2012 Guidance

Xcel Energy expects earnings per share for 2012 to be on the lower end of the guidance range of $1.75–$1.85 per share. The guidance assumes normal weather pattern during the rest of the year.

Operating and maintenance expenses of the company are expected to increase by 1% year over year, while depreciation expense is projected to increase in a range of $40 million to $50 million from 2011 levels.

Interest expenses are forecast to go up by $10 million, while the effective tax rate of the company is expected to be in the range of 34% to 35% in 2012.

Peer Update

Xcel Energy’s competitor, American Electric Power Co. Inc. (AEP - Analyst Report), announced operating earnings for the second quarter 2012 of 77 cents per share versus 73 cents per share in the year-ago quarter, reflecting growth of 5.5%. The results of the company also surpassed the Zacks Consensus Estimate of 72 cents per share.

American Electric Power’s revenue during the reported quarter was $3.6 billion, flat with both the Zacks Consensus Estimate and the year-ago figure.

Our View

The company reported mixed results during the quarter and exited the quarter with quite a few pending rate cases in its service territories. We believe a favorable outcome in these cases will surely expand the margins of the company.

The company’s decision to increase the dividend rate is also appreciable. During the quarter, the board of directors of Xcel Energy approved to increase the annual dividend payment rate by 4 cents.

Based in Minneapolis, Minnesota, Xcel Energy is a U.S. electricity and natural gas company, with operations in eight Western and Midwestern states. Xcel Energy currently retains a Zacks # 3 Rank (short-term Hold rating).

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