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Integrys Energy Group, Inc. (TEG - Analyst Report) reported second quarter 2012 pro forma earnings of 26 cents per share, down from the year-ago figure of 38 cents and below the Zacks Consensus Estimate of 39 cents.

Quarterly earnings plummeted due to lower sales from the company’s natural gas segment resulting from mild weather conditions. This was, however, partially offset by favorable performance from the company’s electric utility business owing to lower interest rates.

The company’s GAAP earnings were 62 cents per share in the reported quarter compared with 37 cents in the year-earlier quarter. The variance between quarterly GAAP and pro forma earnings was due to a 36 cent non-cash gain related to derivative and inventory accounting activities.

Total Revenue

Integrys Energy’s total revenue stood at $841.9 million, down 16.7% from $1,010.8 million in the prior-year quarter. This decline in revenue was due to a combined fall in sales from the company’s regulated and non-regulated segments. Reported revenue also widely missed the Zacks Consensus Estimate of $1,056 million.

Operating Results

Integrys Energy’s retail electric sales volume in the second quarter 2012 was 3,082.7 million kilowatt-hours (“Kwh”), up from 2,997 million Kwh in the comparable year-ago period. Retail natural gas sales volume was 23.3 billion cubic feet (“Bcf”), marginally down from 23.9 Bcf in the year-ago quarter.

In the reported quarter, Integrys Energy’s fuel, natural gas and power costs declined 30% to $225.9 million from $305.2 million in the year-ago quarter.

Operating and maintenance expenses in the second quarter were $252.2 million, down 34.1% year over year.

Operating income surged 24.6% to $84.1 million from $67.5 million in the prior-year quarter due to the decline in operating costs which more than offset the shortfall in revenue.

Financial Update

Cash and cash equivalents were $25.7 million as of June 30, 2012 versus $28.1 million as of December 31, 2011. As of June 30, 2012, long-term debt was $1,735.0 million versus $1,872.0 million as of December 31, 2011.

Net cash generated from operating activities for the first half of 2012 was $433.7 million compared with $588.2 million in the first six months of 2011. In the first six months of 2012 capital expenditure was $249.2 million versus $114.5 million in the six months ending 2011.

Guidance for 2012

Integrys Energy Group expects adjusted earnings for full year 2012 in the band of $3.00–$3.15 per share. GAAP earnings for 2012 is projected in the range of $3.02–$3.17 per share. The company for its 2012 earnings guidance takes into account continued operational improvement assumptions, normal weather conditions and availability of generation units.

Peer Comparison

Integrys Energy’s closest peer CMS Energy Corporation (CMS - Analyst Report) reported adjusted earnings of 40 cents per share in second quarter 2012 compared with 26 cents in the year-ago quarter. The quarterly earnings were higher than the Zacks Consensus Estimate of 38 cents.

CMS Energy’s revenue in the reported quarter grossed $1.33 billion, down 2.3% year over year. The reported revenue fell short of the Zacks Consensus Estimate by $214 million.

Our View

Integrys Energy’s depressing financial outcome in the second quarter resulted from low energy prices. However, natural gas prices are expected to swing back as customer demand for electricity will strengthen owing to warmer temperatures. The company is expected to benefit from rising prices in the upcoming quarters as it has engaged in several high-quality programs for diversifying its natural gas business during the quarter.

However, uncertainty regarding pending regulatory rate cases filed by the company’s People Gas and North Shore units and failure to acquire long-term lucrative contracts are a matter of concern.

Integrys Energy Group. Inc. currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We have a long-term Neutral recommendation on the stock.

Chicago, Illinois-based Integrys Energy Group, Inc. is a diversified holding company providing products and services in both regulated and non-regulated energy markets through its subsidiaries.

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