Big and Getting Bigger: ITC Doubles its Transmission Business with Entergy Deal

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Entergy Corporation (NYSE:ETR) (New Orleans, Louisiana) announced plans to divest its transmission business in a December 5 transaction with ITC Holdings Corporation (NYSE:ITC) (Novi, Michigan). Now, the New Orleans company is out of a business it didn't want to be in, and the Michigan company is achieving its goal of scaling up to meet the expected build-out of the U.S. electric transmission business.

"We were in a business that we shouldn't be in," Entergy Chief Executive Wayne Leonard told Reuters, referring to the power transmission business. Electric transmission "is a business that is best suited in the hands of someone who does only this," he added.

"This transaction furthers ITC's position as a preeminent electric transmission owner, operator and developer in the U.S. and also serves to validate the benefits of the independent transmission model," Joseph L. Welch, ITC chairman, president and chief executive, said in a statement announcing the transaction. "By combining these businesses, we will significantly enhance the scale of our operations and financial resources as we continue to invest in electric transmission infrastructure for the benefit of customers, resulting in improved reliability, reduced system congestion and greater access to competitive energy markets."

The transaction, expected to close in 2013, must be approved by the Federal Energy Regulatory Commission (FERC) (Washington, D.C.), state utility regulatory commissions in Texas, Arkansas, Mississippi and Louisiana, and ITC's shareholders.

If approved as proposed, Entergy will spin off about 15,700 miles of electric transmission lines--69,000 kilovolts (kV) and above--to a newly formed company, MidSouth TransCo LLC. TransCo will then merge with and into a newly created unit of ITC in an all-stock, Reverse Morris Trust transaction. Entergy shareholders will receive a 50.1% stake in ITC in exchange for their shares in TransCo. Although a transaction price was not disclosed, Entergy expects to receive about $1.78 billion in cash proceeds from a debt offering in connection with the transaction.

The transaction would spare Entergy the need to invest up to $1.6 billion in its transmission business through 2014, allowing it to focus on investments in other aspects of the Power Industry--generation and distribution.

ITC Holdings, already the nation's largest standalone transmission company, with about 15,000 circuit-miles of electric transmission line, will double in size with this transaction, to about 31,000 circuit-miles of transmission. Its asset base will swell to $6.3 billion from $3.2 billion prior to the deal. The combined entity's asset base is expected to reach $7.1 billion by yearend 2013. For comparison, American Electric Power Company (NYSE:AEP) (Columbus, Ohio) owns the nation's largest transmission system, with about 39,000 circuit-miles of high-voltage line. AEP's transmission assets are valued at about $5.7 billion, ITC said in a meeting with financial analysts on December 5.

A wide range of Entergy's competitive practices, including the way it operates its transmission system, have been under investigation by the U.S. Department of Justice, Reuters reported. Entergy has been trying to integrate its four-state mid-south transmission system into the Midwest Independent System Operator (MISO) (Carmel, Indiana), which spans 12 states and one Canadian province. ITC operates in seven Midwestern states: Michigan, Minnesota, Iowa, Illinois, Missouri, Kansas and Oklahoma.

The MISO board of directors recently approved more than $5 billion of high-voltage transmission projects, including several involving ITC. For more on that decision, see December 19, 2011, article - MISO Approves Billions of Dollars of Midwestern Transmission Projects.

ITC said the transaction would provide it with the size and scale to meet the growing investment requirements of the transmission business. It also will serve to diversify and enhance ITC's long-term growth prospects. Michigan-based ITC added that the standalone transmission business model should lead to improved planning, operations and performance. This approach also aligns with national policy objectives to facilitate investment in regional and inter-regional transmission, advances open access initiatives and promotes access to competitive energy markets, it said in announcing the deal.

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