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Integrys Energy Poised at Neutral

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We reaffirm our Neutral recommendation on diversified holding company, Integrys Energy Group Inc. . The company posted weak top and bottom line results in the second quarter 2012. Lower energy prices due to mild weather conditions contributed to dull operational performance. However, we expect natural gas price to gradually recover in the future.  

We believe the company’s goal of providing long-term value to shareholders and customers as well as maintaining an effective portfolio mix of generation assets and natural gas distribution properties would propel its stock position in the coming years.

Its recent growth-related programs include the Main Replacement Activity project in Chicago which is anticipated to significantly benefit its gas business. The company’s green retrofit project at the Columbia Power plant is also making remarkable progress which will provide an impetus to the company’s eco-friendly initiatives.

Conversely, the outcomes of the rate case filed by the company’s Peoples Gas and North Shore Gas units are uncertain which could upset the company’s margins in the upcoming quarters. Besides, weather variations and weak macroeconomic fundamentals could impact Integrys’ financial position.

On a positive note, the customer retention rate at Integrys would strengthen in the near term leading to favorable margins in 2012. With the addition of 32 communities to the Illinois aggregation programs and around 243,000 small electric consumers in the second quarter 2012, we project its retail electric operation will accentuate customer footprint. This upward trend in customer growth is expected to prevail in 2013.

Nonetheless, any unexpected natural disaster and unplanned plant outage could hamper the company’s smooth energy services. Also, pro-environment laws would continue to add to the company’s cost.

Integrys Energy estimates pro forma earnings for 2012 in the band of $3.00–$3.15 per share. GAAP earnings for 2012 are projected in the range of $3.02–$3.17 per share. The Zacks Consensus Estimates for the third quarter and full year 2012 currently stand at 38 cents per share and $3.09 per share, respectively. One of its closest peers is Wisconsin-based Alliant Energy Corporation (LNT - Free Report) .

Based in Illinois, Chicago, the company, through its subsidiaries, provides products and services in both regulated and non-regulated energy markets. In addition, the company has a 34% equity ownership interest in American Transmission Company LLC (ATC). With market capitalization of $4.07 billion, it has total employees of 4,619.

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