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On Dec 27, 2013, we have reiterated our Neutral recommendation on the utility provider Xcel Energy Inc. (XEL - Analyst Report). The company currently has a Zacks Rank #3 (Hold).

Why the Reiteration?

The Neutral stance takes into account higher cost of compliance in the wake of strict environmental regulations and volatility in commodity prices. We have at the same time identified several positives, including a steady effort toward expanding the renewable portfolio along with strengthening the traditional generation asset base, which will act as important growth drivers.

In third-quarter 2013, Xcel Energy’s operating earnings surpassed the Zacks Consensus Estimate by a penny. However, quarterly results were a penny lower than the prior-year figure primarily due to higher operating and maintenance expenses, and lower demand as a fallout of cooler weather.

Xcel Energy’s operations are subject to a number of legislative requirements, as well as environmental regulations, relating to emission of greenhouse gases, and air and water quality. Changes in environmental regulations are expected to impact the company’s cost of operations.

On the positive, Xcel Energy continues with its systematic investments in transmission infrastructure to deliver reliable energy to its customers. The company plans to spend $13 billion over the next five years, of which 30% will be allocated to the development of transmission infrastructure and 26% to generation projects. The company’s transmission projects under the CapX2020 program are progressing well, which will act as a catalyst in the future.

In addition, the company is currently focusing on developing its renewable portfolio and intends to add up to 1,900 megawatts (“MW”) of wind resources over the next 20 years. The company has already received approvals from several federal commissions to construct new projects. Timely completion of these ventures will enable Xcel Energy to fulfill government mandates on renewable generation requirements and provide uninterrupted, clean electricity to its customers.

Other Stocks to Consider

Stocks worth considering in the utility sector include Westar Energy, Inc. (WR - Snapshot Report), The AES Corporation (AES - Analyst Report) and Alliant Energy Corporation (LNT - Snapshot Report). While Westar Energy holds a Zacks Rank #1 (Strong Buy), The AES Corporation and Alliant Energy carry a Zacks Rank #2 (Buy).

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