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Integrys Energy Earnings Marred by Costs

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Integrys Energy Group, Inc. reported third quarter 2013 pro forma earnings of 34 cents per share, down 37% from the year-ago quarter. Earnings also significantly trailed the Zacks Consensus Estimate of 46 cents by 26.1%.

The setback resulted from spiraling costs at the company’s utility divisions as the recovery period stretched several quarters.

GAAP earnings were 47 cents per share in the reported quarter compared with 83 cents in the third quarter of 2012. The difference between the quarterly GAAP and pro forma earnings was due to a 14 cent gain from derivative as well as inventory accounting activities and a 1 cent loss from discontinued operations.

Total Revenue

Integrys Energy's total revenue surged 21.8% year over year to $1,129.7 million. Reported revenues also comfortably surpassed the Zacks Consensus Estimate by 20.8%.

The revenue upturn reflects favorable returns from the company’s regulated as well as non-regulated business divisions.

Operating Results

Total gas retail throughput volumes from the regulated segment improved negligibly to 147.0 therms from 146.8 therms in the year-ago quarter. Electric sales volumes plummeted to 4,181.0 Kilowatt-hours (“Kwh”) from 4,642.7 Kwh in the prior-year period.

In the non-regulated segment however, retail electric sales volume in the third quarter increased 56.9% to 6,291.0 million Kwh from the comparable year-ago period. Retail natural gas volume was up 80.3% to 34.8 billion cubic feet from the year-ago quarter.

Cost continued to escalate in the third quarter with operating expenses rising 31.2% year over year to $1,074.4 million. Non-regulated cost of sales more than doubled year over year to $475.3 million in the third quarter while operating and maintenance expenses increased 17.5% year over year.

The cost upswing overshadowed the revenue upside, leading Integrys Energy to record a 49% fall in operating income from the year-ago period.

Financial Update

Integrys Energy’s cash and cash equivalents were $26.1 million as of Sep 30, 2013 compared with $27.4 million as of Dec 31, 2012. As of Sep 30, 2013, long-term debt was $2,506.2 million compared with $1,931.7 million as of Dec 31, 2012.

Net cash generated from operating activities in the first nine months of 2013 was $510.9 million compared with $544.3 million in the first nine months of 2012.

Capital expenditure in the first nine months of 2013 was $474.7 million versus $437.8 million in the first nine months of 2012.

Guidance for 2013

Integrys Energy tightened its 2013 pro forma earnings to the band of $3.42–$3.58 per share from the previous range of $3.35–$3.60 per share. The company revised its GAAP earnings guidance for 2013 to the range of $3.48–$3.64 per share from the prior range of $3.41–$3.66 per share.

Other Releases

TECO Energy Inc. announced third-quarter 2013 operating earnings of 30 cents per share, below the Zacks Consensus Estimate of 32 cents.

Xcel Energy Inc. (XEL - Free Report) recorded operating earnings in the third quarter 2013 of 77 cents per share, beating the Zacks Consensus Estimate by a penny.

CenterPoint Energy Inc. (CNP - Free Report) reported third quarter 2013 results with adjusted earnings of 35 cents per share missing the Zacks Consensus Estimate by a penny.

Our View

Integrys Energy’s earnings were a letdown in the third quarter 2013 as it fell behind our expectation and declined year over year. Revenues were on the other hand ahead of expectations. Utility sales might pick up in the fourth quarter 2013 as heating demand from customers rises during the winter months.  

However, we believe the company might face accelerating cost pressure unless its cost saving initiatives produces tangible results in the upcoming quarter. In the wake of the Obama Climate plan, Integrys Energy is retrofitting its plants with eco-friendly controls which will flare up compliance costs.

Moreover, competitive pressure will be a drag on unit margins at Integrys Energy’s Energy Services segment. Currently, the company carries a Zacks Rank #4 (Sell).

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