We have lowered our recommendation on Integrys Energy Group, Inc. (TEG) to Underperform from Neutral. We believe the increasing retail competitive pressure in the northeastern US markets and risks from weather variations will weigh on the company’s margins.
Integrys Energy posted back-to-back weak financial results in the first and second quarters of 2012 and missed our expectation on both occasions. Integrys’ earnings in the first half of the year were impacted by lower sales from the natural gas segment due to mild weather conditions.
The company also needs to adhere to the regulations laid down by the Federal Energy Regulatory Authority and any changes in the policies from the authority could weigh on the margins of the company. The pending rate cases can impact earnings if the company fails to have a positive ruling.
The positive catalysts for the company are an effective mix of generation assets and natural gas distribution properties. Meanwhile, the company’s involvement in infrastructure expansion projects in Chicago and Columbia power plant could offer some relief in the near term.
However, to fund these development projects, the company needs to access the capital markets, which is extremely volatile in nature and might limit the availability of capital to the company and its subsidiaries, which can adversely affect its ability to sustain growth.
The company expects adjusted earnings for full year 2012 to be in the band of $3.00–$3.15 per share. Our expectation for the year is presently pegged at $3.09 per share.
Integrys Energy retains a short-term Zacks #3 Rank, (Hold rating). The company has to compete with OGE Energy Corporation (OGE) and Wisconsin Energy Corp. (WEC).
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. With a market capitalization of $4.28 billion, the company has 4,619 full time employees.
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