Rising Costs Mar Integrys Energy Earnings; Misses Estimates

Zacks

Integrys Energy Group, Inc. (TEG) reported second-quarter 2014 pro forma earnings of 20 cents per share, down 55.6% from the year-ago quarter. Earnings also trailed the Zacks Consensus Estimate by 57.4%.

Earnings were negatively impacted by higher operating expenses at both the Natural Gas and Electric Utility segments.

GAAP earnings were 9 cents per share as against a loss of 7 cents per share in the year-earlier period. The difference between the quarterly GAAP and pro forma earnings was due to a goodwill impairment loss of 8 cents, merger cost of 5 cents and a 1 cent transaction cost related to the pending sale of Upper Peninsula Power Company. In addition, there was a one-time gain of 3 cents related to derivative and inventory accounting activities.

Revenue Update

Integrys Energy's total revenue was up nearly 28.4% year over year to $1,432.6 million. Reported revenue also comfortably beat the Zacks Consensus Estimate by 63.2%.

The revenue upturn resulted from a whopping 48.6% and 16.1% sales increase from the company’s non-regulated as well as regulated business divisions, respectively.

Operating Results

Total electric sales volume from the regulated segment declined 11.1% year over year to 3,506.2 million kilowatt-hours (Kwh). The regulated throughput gas volume was 698 million therms, down 2% year over year.

In the non-regulated segment, retail electric sales volume in the second quarter was 5,748.7 million Kwh, up 18.9% year over year. Retail natural gas sales volume was 44.6 billion cubic feet (Bcf) compared with 37.1 Bcf in the year-ago quarter. Wholesale electric sales volume was 17.8 million Kwh versus 15.7 million Kwh in the year-ago quarter.

Total operating expenses increased 25.2% year over year to $1,406.5 million.

Expenses shot up due to an increase in repairs and maintenance at the The Peoples Gas Light and Coke Company. In addition, higher maintenance costs drove an increase in operating expenses at the electric utility segment, primarily due to planned major outages at Wisconsin Public Service Corporation's Fox Energy Center and Weston 4 plant in 2014.

Interest expenses in the reported quarter were $38.7 million, up 35.3% year over year.

Guidance

Integrys Energy Group expects 2014 pro forma earnings in the band of $3.33–$3.47 per share. GAAP earnings for 2014 are expected in the range $3.77–$3.91 per share.

Other Company Releases

TECO Energy, Inc. (TE) announced second-quarter 2014 operating earnings of 28 cents per share, a penny above the Zacks Consensus Estimate.

NextEra Energy, Inc. (NEE) announced second-quarter 2014 adjusted earnings of $1.43 per share, missing the Zacks Consensus Estimate of $1.45 by 1.4%.

Our View

Integrys Energy’s earnings once again missed the estimates primarily due to spiraling operating costs.

In Jun 2014, Wisconsin Energy Corporation (WEC) inked a definitive agreement with Integrys Energy Group to acquire the latter for a total consideration of $9.1 billion. Subject to customary approvals, the deal is expected to close in the summer of 2015. The regulated rate base growth for the combined company is estimated at $16.8 billion for 2015. Since the companies have similar lines of operations and a complementary footprint, the combined unit will be better able to meet the increasing demand for utility services in the region.

Integrys Energy currently carries a Zacks Rank #3 (Hold).

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