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Integrys Energy Group (TEG) announced on Monday that it will buy Fox Energy Company LLC in a deal valued at $440 million. Investors are enthusiastic about the deal, sending shares of Integrys up 4.6% in Monday's trading session.

The Deal

Integrys Energy Group announced that its subsidiary Wisconsin Public Service Corporation agreed to buy Fox Energy Company LLC. For $390 million, Integrys will acquire a 593-megawatt combined cycle generation facility in Kaukauna and make a $50 million payment for the early termination of existing tolling agreements.

The Fox Energy Center is a dual-fuel facility, equipped to use fuel oil, but is expected to run primarily on natural gas. The addition of the plant, will result in a more balanced mix of electric generation. Integrys now operates coal, natural gas, hydroelectric, wind and other renewable sources to produce electricity.

Currently, Fox Energy is owned by subsidiaries of General Electric (GE) and Tyr Energy.

WPS President Chuck Cloninger commented on the deal:

"This deal makes sense for our customers on several levels. The acquisition will add diversity to our generation fleet, enhance supply and pricing options for the company, and allow us to better manage our generation assets and the overall cost of energy for our customers' benefit."

Integrys did not provide financial information for the facility, making an evaluation of the deal rather difficult. Entering the deal, WPS has a production capacity of 2,175 megawatts, compared to 593 megawatts of the acquired facility.

Integrys expects to close the deal around April 2013. The proposed agreement is subject to state regulatory approvals, including cost recovery, and federal regulatory approvals among others.

Valuation

Integrys Energy Group ended its second quarter of 2012 with $26 million in cash and equivalents. The company operates with $2.4 billion in short and long-term debt, for a sizable net debt position of $2.4 billion.

For the first six months of 2012, Integrys generated revenues of $2.09 billion. The company net earned $149.3 million, or $1.86 per diluted share. For the full year, revenues could come in at $4.4 billion. Net earnings are expected to come in around $240 million, after the company guided for full year earnings of $3.00-$3.15 per diluted share.

After Monday's 4.6% gain, shares are valued at $4.3 billion. This implies a valuation of 1.0 times annual revenues and 14 times annual earnings.

Currently, Integrys pays a quarterly dividend of $0.68 per share, for a high annual dividend yield of 5.0%.

Investment Thesis

Year to date, shares of Integrys Energy Group trade roughly flat. Shares mostly traded between $50 and $55 during the first half of 2012, before shares rallied to $62 in August. In recent week, shares fell back to $55 at the moment after the company lowered its full-year outlook.

Over the past five years, shares traded roughly flat as well, excluding the annual dividend of $0.68 per share. Shares fell to lows of $24 in the beginning of 2009, but quickly rallied back to levels around $50 in 2010.

Integrys has scaled back significantly over the past years. Between 2008 and 2011, the company saw its revenues fall from $14.0 billion to $4.7 billion. Net income improved from $120 million in 2008 to $230 million in 2011.

The deal is welcomed by investors, despite the little information available. Integrys, which is a result of the merger between WPS Resources and Peoples Energy Corp in 2007, has seen a trajectory of divestitures over the past years. The deal ignites hope among investors that the company will finally grow its revenues once again.

Based on the full-year earnings outlook of $3.00-$3.15 per share, the dividend payout of $0.68 per quarter, comes in at 88% of annual net profits. This leaves little room for short-term dividend hikes, which is a potential drag on the shares.

Long-term dividend investors should applaud the deal. After years of declining operations, the company is on track to grow its operations, and hopefully future earnings again. Until higher earnings and dividends materialize, investors receive a nice 5.0% annual dividend yield.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.