Electricity and natural gas company Xcel Energy Inc. (XEL) announced its operating earnings for the third quarter 2010 of 62 cents per share versus 48 cents per share in the year-ago quarter, reflecting a growth of 29.1%. The results were higher than the Zacks Consensus Estimate of 54 cents per share.

Xcel Energy’s GAAP earnings for the third quarter of 2010 were 67 cents per share versus 48 cents per share recorded in the year-ago period. The difference between GAAP and operating earnings, during the third quarter, was owing to an impact of 5 cents from the COLI settlement, PSRI and Medicare Part D.

Total Revenue

Xcel Energy reported total revenue of $2,628.8 million for the third quarter 2010 versus $2,314.6 million in the year-ago period, reflecting a growth of 13.6%. The year-over-year increase was driven by higher contribution from the Electric segment. The other two segments, Natural Gas and Others, performed well compared with the previous year, but their contribution to total revenue decreased year over year.  

Revenue in the reported quarter missed the Zacks Consensus Estimate of $2,765 million by $136.2 million.

Segment-wise Revenue

Electric: The revenue contribution from this segment during the third quarter 2010 increased 14.7% to $2,440.9 million from $2,218.9 million in the year-ago period. The fuel recovery mechanism, which allows the company to recover current expenses, came in handy, otherwise revenues and margins would have been affected by volatile input costs.

Natural gas: Revenue at this segment increased 0.6% to $170.6 million from $169.6 million a year ago.

Other: Segment revenue in the reported quarter was $17.3 million versus $16.0 million in the year-ago period, reflecting a growth of 8.3%.

Operational Update

Total operating expenses climbed 11.4% to $2,060.2 million from $1,849.4 million in the year-ago quarter. The increase in expenses was mainly due to a 13.1% increase in input costs used for generation of electricity. However, operating expenses, as a percentage of total revenue, declined year over year, which benefited the operating results of the company.

Operating income was $568.3 million versus $465.1 million in the year-ago period, showing an improvement of 22.2%.

Interest expenses increased to $138.5 million from $129.7 million in the year-ago period. The increase was mainly due to higher long-term debt levels to fund investment in utility operations, partially mitigated by lower interest rates.

Financial Update

Xcel Energy ended the quarter with a total debt of $9.3 billion and a total debt to capitalization of 55%, compared with $8.6 billion of total debt and a total debt to capitalization of 54% in the year-ago period.

The company from time to time issues debt and equity to refinance debts, fund operations and for other general corporate purposes. During the quarter, one of its subsidiaries, NSP- Minnesota, issued 250 million of five-year first mortgage bonds with a coupon of 1.95% and $250 million of 30-year first mortgage bonds with a coupon of 4.85%.  Another subsidiary, Public Service Company of Colorado, plans to issue $400 million of first mortgage bonds in the fourth quarter of 2010.

Dividend

On October 20, 2010, the board of directors of Xcel Energy paid a quarterly dividend of 25.25 cents per share to shareholders of record on September 23, 2010, as declared on August 25, 2010.

Guidance

Xcel Energy reaffirmed its earnings guidance for 2010 in the range of $1.55–$1.65 per share. The guidance assumes normal weather pattern for the rest of the year. The guidance also anticipates the revenue to increase in 2010 due to the full year impact of 2009 electric rate increases in Colorado, Texas and New Mexico, along with the 2010 electric rate increase in Colorado.

Xcel Energy guides weather-adjusted retail electric utility sales to grow in the 1.2% – 1.4% range in 2010. The company also expects weather-adjusted retail firm natural gas sales to increase in the 0%–1% range.

Xcel Energy projects operating and maintenance expenses in 2010 to increase in a band of 8% – 9% from 2009 levels. Depreciation expense is projected to increase in a range of $35 million to $45 million in 2010. Interest expense is likewise projected to increase in the $20 million to $30 million range.

Xcel Energy provided earnings guidance for 2011 in the range of $1.65–$1.75 per share. The guidance assumes normal weather pattern for the rest of the year. The company guides weather-adjusted retail electric utility sales to grow 1% in 2011, while the weather-adjusted retail firm natural gas sales is expected to remain flat from 2010 levels.

Our View

Xcel Energy currently retains a Zacks #3 Rank (short-term Hold rating). We maintain our long-tern Neutral rating on the stock, as the positive catalysts of the company, which are its favorable geographical and financial position versus its peers, are already discounted in current valuation.

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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