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Integrys Energy Group, Inc. (TEG - Analyst Report) reported third-quarter 2012 pro forma earnings of 55 cents per share, outshining the Zacks Consensus Estimate of 38 cents per share. The quarter’s results were significantly up from the year-ago figure of 42 cents per share.

The results were driven by rate increases effective from January 2012 at The Peoples Gas Light and Coke Company, North Shore Gas Company, and Upper Peninsula Power Company. However, these were partially offset by the impact of lower sales volumes at the natural gas utilities and wholesale electric utility.

The company’s GAAP earnings were 83 cents per share in the reported quarter, up from with 47 cents in the year-earlier quarter. The variance of 28 cents between quarterly GAAP and pro forma earnings reflects a non-cash gain of 31 cents per share related to derivative and inventory accounting activities, a tax benefit of 7 cents at the regulated utility segments related to health care reform legislation and loss from discontinued operations of 10 cents per share.

Operating Results

Integrys Energy’s total revenue stood at $927.6 million, marginally down 0.73% from $934.4 million in the prior-year quarter. Reported revenue also missed the Zacks Consensus Estimate of $948 million.

Integrys Energy’s retail electric sales volume in the third quarter of 2012 was 4,010.6 million kilowatt-hours (“Kwh”), up from 3,504.6 million Kwh in the comparable year-ago period. Retail natural gas sales volume was 22.3 billion cubic feet (“Bcf”), up from 18.3 Bcf in the year-ago quarter.

In the reported quarter, Integrys Energy’s fuel, natural gas and power costs declined 7.1% to $228.2 million from $245.7 million in the year-ago quarter. Operating and maintenance expenses in the third quarter of 2012 were $240.6 million, approximately flat year over year. Operating income surged 53.9% to $108.2 million from $70.3 million in the prior-year quarter.

Financial Update

Cash and cash equivalents were $18.1 million as of September 30, 2012 versus $27.3 million as of September 30, 2011. Long-term debt was $1,707.1 million, down from $2,080.7 million as of September 30, 2011.

Guidance for 2012

Integrys Energy Group increased its adjusted earnings for full-year 2012 and expects it to be in the range of $3.22 to $3.88 per share versus its previous expectation of $3.00–$3.15 per share. The increase reflects the company’s continued cost control efforts.

The company expects GAAP earnings per share in the range of $3.19 to $3.37 per share. The guidance reflects continued operational improvements, the availability of generation units, and normal weather conditions for the rest of 2012.

Peer Comparison

One of the Integrys Energy’s peers, Wisconsin Energy Inc. (WEC - Analyst Report) posted third-quarter 2012 earnings from continuing operations per share of 67 cents, up 21.8% year over year from 55 cents per share. The reported quarter’s earnings also comfortably surpassed the Zacks Consensus Estimate of 57 cents per share. Revenue in the third quarter of 2012 was $1.04 billion, down 1.28% from $1.05 billion in the year-ago quarter. Revenues also fell short of the Zacks Consensus Estimate by $32.7 million.

Our View

Though Integrys Energy’s earnings surpassed the Zacks Consensus Estimate, the top line could not meet our expectations. Going forward, we expect increasing retail competitive pressure in the northeastern US markets and risks from weather variations to weigh on margins. Pro-environment regulations set by Environmental Protection Agency will also pose serious challenges to the company’s growth prospects.

However, these negatives could be offset by the company’s involvement in infrastructure expansion projects in Chicago and Columbia power plant in the near term to some extent. The company presently retains a short-term Zacks #3 Rank (Hold). We have a long-term Underperform recommendation on the stock.

Chicago, Illinois-based Integrys Energy Group is a diversified holding company providing products and services in both regulated and non-regulated energy markets, through its subsidiaries. In addition, the company has a 34% equity ownership interest in American Transmission Company LLC (“ATC”), an electric transmission company operating in Wisconsin, Michigan, Minnesota, and Illinois.

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