Analysts Call Integrys Merger Sound

This story was published via The Medill News Service on February 14, 2008. It was written for a class while Molly was attending Northwestern’s Medill School of Journalism.

After a first year burdened by merger costs, Chicago-based Integrys Energy Group Inc. gets good marks from analysts on a solid balance sheet and high synergies of the merger partners.

Next week marks the one-year anniversary of the marriage between WPS Resources Corp. of Green Bay and Peoples Energy Corp. of Chicago to form Integrys Energy. After three quarters of earnings deemed shaky by analysts, they expect a good fourth-quarter earnings report on Tuesday. They estimate $2.56 per diluted share; there’s no comparable year-earlier figure.

“There was dilution, especially the first year, from the merger, but now going forward, it seems the biggest risk is over” and each company should benefit from having merged, said Maurice May, an equity analyst with Power Insights/Soleil Securities Group Inc.

Integrys is a holding company for natural gas and electric utility companies, including North Shore Gas Co. and the Peoples Gas Light & Coke Co. Both serve the Chicago area. Integrys’ subsidiaries have more than 1.8 billion customers in four Midwestern states.

The merger gave Integrys assets of about $10.3 billion. With the stock trading Thursday at $48.36, the current market capitalization is $3.7 billion.

In its 2007 annual report to the SEC, Integrys wrote, “The estimated total cost of accomplishing the merger and achieving synergies and cost savings is approximately $186 million in transaction and integration costs (excluding internal labor costs), most of which will be incurred through 2010.”

On the other hand, the joining of WPS Resources and Peoples Energy was expected to deliver annual synergies of $94 million over a five-year time period.

“They have a very good balance sheet and I would say the financial health of Integrys overall is good,” May said. “They actually have an AA- bond rating at their core utility in Wisconsin. I don’t know if you know anything about bond ratings, but AA- is very good.”

Before the merger, Peoples Energy was struggling with erosion in the gas distribution segment and posted a 2006 loss of $17.6 million, a dramatic drop from a 2005 profit of $78.1 million. The company also had a $107.3 million settlement payoff that included $100 million in customer refunds. Integrys reported at the time that its natural gas utilities, Peoples Gas and North Shore Gas, had not upped its delivery rates in 11 years, despite rising operating costs.

At the same time, WPS Resources was in the black, but profits were meager in 2006, at $155.8 billion, down 1 percent, from $157.4 billion. The company said acquisitions in Michigan and Minnesota were responsible for the decline.

On Thursday, natural gas delivery rates for customers of Peoples Gas and North Shore Gas were raised. This is the first time the base rate has been raised for their Illinois customers since 1995.

“Utilities have two rates, an energy rate and a base rate,” May said. “The base rate is what was at issue with the general rate case. Shareholders only make money on the base rates.”

Analysts say the rate increase is related to lower earnings and a need to update expenses, along with “decoupling” charges.

Decoupling is a company’s act of separating the link between volumes of energy sold and the earnings the company makes. Ordinarily, there is a direct correlation, but decoupling provides a cushion for utility companies, particularly when they explore other forms of energy.

“If we are going to make a serious effort [towards] conservation, you can’t ask that agent of conservation – the utility companies who actually do the conservation – to kill themselves in the process,” May said.

The decoupling process, also known as volume balancing adjustment, is proceeding on a four-year trial basis.

No Comments

Post a Comment