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Still Neutral on Xcel Energy

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We reiterate our Neutral Recommendation on Minnesota-based Xcel Energy Inc. (XEL - Free Report) . The company posted mixed financial results in the second quarter 2012, with a bottom-line exceeding and top-line missing the corresponding Zacks Consensus Estimates.

With a likely recovery in natural gas prices in the following quarters, Xcel Energy’s recent natural gas related Brush asset acquisition will help propel near-term top-line growth.

However, the company’s requests for deferred accounting for incremental property taxes as well as for property tax rider were overruled by the Minnesota Commission. This will lead to expenses amounting to $24 million of incremental property taxes, thereby dragging down Xcel Energy’s bottom-line by roughly 3 cents per share in 2012.

This impact could be tempered by the favorable outcomes in the electric rate case in Colorado and South Dakota which will generate substantial revenue upside for the company in the near term.

Going forward, the company’s robust string of regulated investment opportunities will aid Xcel Energy to post solid results in the upcoming quarters. The company plans to make investments of $13.4 billion over a period of five years from 2012 through 2016. In addition, the company’s agreement with NextEra Energy Inc. (NEE - Free Report) to expand wind resource generation by 400 megawatt (MW) would enhance future growth prospects.

Nonetheless, increasing compliance costs from regulatory bodies and revenue volatility rising out of seasonal variations are periodic challenges that could limit growth opportunities for the company. Besides, with the implementation of stringent pro-environment laws, Xcel planned to idle some of its coal-fired plants like Arapahoe unit 4, which will impact the revenue performance in the long term.

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 Zacks Consensus Estimates for the third quarter and full year 2012 for the company presently stand at 71 cents per share and $1.78 per share, respectively.

Ohio-based American Electric Power Co., Inc. (AEP - Free Report) , an Xcel Energy peer, faced with regulatory restriction by Environmental Protection Agency (“EPA”), depressing coal market outlook and moderate financial outcomes in the second quarter 2012, also closed down some of its coal-fired power stations.

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 #4 Rank (short-term Sell rating). With market capitalization of $13.48 billion, it has a total of 11,312 employees.

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