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Electricity and natural gas company Xcel Energy Inc.'s (XEL - Analyst Report) operating earnings for the third quarter 2012 of 78 cents per share were up 9 cents from the year-ago quarter and 6 cents higher than the Zacks Consensus Estimate.

Earnings during the said quarter benefited from higher electric and gas margins due to different rate hikes becoming effective from 2012. The results were partially offset by higher property taxes and interest expenses.

Xcel Energy’s GAAP earnings for the reported quarter were 81 cents per share versus 69 cents per share recorded in the year-ago quarter. The three cent difference between operating and GAAP earnings in the reported quarter was due to a three cent gain from a tax benefit associated with federal subsidies for prescription drug plans.

Total Revenue

Xcel Energy clocked total revenue of $2.72 billion in the reported quarter, down 3.9% from $2.83 billion in the year-ago period. The year-over-year decline was due to lower contributions from the Natural Gas and Electric segments.

Reported quarter revenue was also lower than the Zacks Consensus Estimate of $3.01 billion.

Segment-wise Revenue

Electric: Revenue from this segment declined 3.3% year over year to $2.53 billion from $2.62 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 widely affected by volatile input costs.
 
Natural Gas: Revenue at this segment decreased 10.5% to $174.5 million from $194.9 million in the year-ago period.

Other: Segment revenue in the reported quarter was $17.1 million versus $17.2 million in the year-ago period, reflecting a nominal decline of 0.6%.

Quarterly Highlights

Total operating expenses declined 8% to $2 billion from $2.18 billion in the year-ago quarter. Higher expenses were mainly due to a 12.5% decline in electric power and purchased power expenses. The cost of natural gas sold and transported also dipped from the year-earlier period.

Operating expenses, as a percentage of total revenue, decreased 343 basis points year over year, which positively impacted the operating results of the company. Operating income accordingly increased 10.6% year over year to $720.4 million from $651.5 million reported in the year-ago period.

Total interest charges at the end of the third quarter 2012 rose 3.9% to $153.7 million from $148.01 million at the end of the third quarter 2011. 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, 2012 were $10.1 billion while the debt-to-capital ratio at the end of the quarter was 56%.

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 2012 the company issued four series of bonds aggregating $1.6 billion, which were utilized for varied purposes.

In October, the company issued $100 million of 30-year first mortgage bonds with a coupon of 3.70% to meet its financial obligations.

2012 Guidance

Xcel Energy reaffirmed its earnings guidance for 2012 in the range of $1.75–$1.85 per share. The guidance assumes normal weather pattern for the remainder of 2012. The company guides weather-adjusted retail electric utility sales to likely remain flat in 2012, while weather-adjusted retail firm natural gas sales are expected to decline 1% from 2011 levels.

The company expects GAAP earnings per share for 2012 in the upper range of $1.75 to $1.85.

In 2012, operating and maintenance expenses of the company are estimated to increase 2% year over year. Depreciation expense is projected to increase in a range of $40 million to $45 million from 2011 levels.

Interest expenses are forecast to go up in the range of $0 to $15 million, while the effective tax rate of the company is expected to be in the range of 34% to 35% in 2012.

The company expects its 2013 ongoing earnings per share to be between $1.85 and $1.95.

Peer Update

American Electric Power Co. Inc. (AEP - Analyst Report), competing with Xcel Energy, reported earnings of $1.02 per share in the third quarter 2012, below the year-ago figure of $1.07, but at par with the Zacks Consensus Estimate.

The company reported net revenue of $4.15 billion in the third quarter, below the Zacks Consensus Estimate and the year-ago revenue of $4.33 billion.

Our View

The company surpassed our expectation for three straight quarters in 2012. The earnings beat to some extent was aided by favorable electricity and gas rates. The cost control measures and warm weather conditions in its service territories also boosted the results.

We believe the company will match its performance of the first nine months in the last three months of 2012 and will meet its earnings guidance per share for the year.

Xcel Energy currently retains a short term Zacks # 3 Rank (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. With a market capitalization of $13.48 billion, the company has 11,312 full time employees.

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