Integrys Energy Group (TEG) reported its second-quarter 2010 adjusted earnings of 47 cents per share, beating the Zacks Consensus Estimate of 41 cents by 6 cents. Results also compare favorably with 26 cents per share earned in the second quarter of 2009. Adjusted earnings were $36.4 million compared with $20.3 million in the prior-year quarter.

Better-than-expected results were attributable to strong earnings performance across the segments as well as controlled costs.

Including net non-cash gains related to derivative and inventory activities at Integrys Energy Services of $34.5 million or 44 cents per share, net gain of $15 million or 19 cents per share on dispositions related to Integrys Energy Services’ strategy change, restructuring charges of $3.9 million or 5 cents per share and settlement of Integrys Energy Services’ supply contracts for $3.1 million or 4 cents per share, the company reported net income of $78.9 million or $1.01 per share. Results were ahead of $34.7 million or 45 cents per share reported in second-quarter 2009.

The prior-year net income included net non-cash gains related to derivative and inventory activities at Integrys Energy Services of $26.3 million or 34 cents per share and restructuring charges of $11.9 million or 15 cents per share.

Total revenue of Integrys Energy in the quarter under review was $1.0 billion, down 28.9% from $1.4 billion in the prior-year quarter. Declines in both non-regulated and utility revenues led to the overall shortfall in the quarter. Results were almost in line with The Zacks Consensus Estimate.

Total cost of fuel, natural gas and purchased power in the quarter was $566.4 million, down 42.2% year over year.

Integrys Energy reported operating income of $136.1 million compared with $72.9 million in the year-ago period.

Interest expense in the quarter declined to $36.6 million from $40.0 million in the prior-year quarter.

Segment Results

Adjusted earnings at the Electric utility increased to $26.2 million from $22.9 million in the prior-year quarter. The year-over-year improvement was primarily driven by rate increase partially offset by higher operating costs.

The Natural gas utility segment posted a loss of $1.8 million, an improvement from a loss of $4.1 million a year ago due to rate increase partially offset by increase in depreciation and amortization expense and lower volumes.

Earnings at the Electric transmission investment segment were $11.5 million, slightly higher than $11 million in the prior-year period

Adjusted earnings at Integrys Energy Services were $3.2 million, a jump from a loss of $3.0 million, mainly owing to lower operating and maintenance expense.

Adjusted loss related to the holding company and other segment was $2.7 million, lower than the loss of $6.5 million in the prior-year period, largely due to lower interest and legal expenses.

Financial Update

Cash and cash equivalents of Integrys Energy at the end of the quarter were $233.2 million, a five-fold increase from $44.5 million at the end of fiscal 2009.

Long-term debt at the end of second-quarter 2010 was $2.1 billion, down 13.8% from $2.4 billion at the end of fiscal 2009.

Net cash provided by operating activities in the first half of 2010 was $0.8 billion, down from $1 billion in the first half of 2009.

Capital expenditures were $122.8 million in the first half of 2010 compared with $187.6 million in the comparable period a year ago.

Dividend

The board of directors of Integrys Energy declared a dividend of 68 cents per share in the quarter.

Guidance

Management expects adjusted earnings between $2.89 and $3.17 per share and GAAP earnings in a range of $2.80 to $3.08 per share for 2010.

Management expects adjusted earnings between $3.24 and $3.57 per share and GAAP earnings in a range of $3.28 to $3.61 per share for 2011.

Management expects long-term earnings per share to grow at a rate of 4% to 6% on an average annualized basis through 2015.

Integrys Energy’s strategies of effective cost management, lower debt levels and focus on shareholder return, along with its focus on select retail markets in the U.S. to grow its business, will position Integrys Energy to fare better in the upcoming quarters.

We maintain our ‘Neutral’ recommendation on Integrys Energy. The quantitative Zacks #3 Rank (Hold) for the company indicates no clear directional pressure on the shares over the near term.

 
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