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Entergy Says MISO Transition Not Impacted by Divestiture, Merger of Transmission Assets with ITC
December 5, 2011
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Copyright 2010-
Entergy Corporation and ITC Holdings Corp. announced this morning that the Boards of Directors of both companies have approved a definitive agreement under which Entergy will divest and then merge its electric transmission business into ITC.
As part of a separate effort, Entergy continues to seek the necessary approvals to join the Midwest Independent System Operator regional transmission organization. Entergy said that its pursuit of this process is not altered due to the transaction with ITC.
However, executives did say that approval for Entergy to join an RTO (which rests with state regulators) would be necessary in order for the intended divestiture and merger of its transmission assets with ITC to occur, given ITC's business model.
Retail regulator approval is also needed for the divestiture of the Entergy transmission assets, as they are owned by the franchised electric utilities.
Among other reasons, the transaction is undoubtedly eyed as providing higher return on equity for transmission investment under more favorable FERC jurisdiction for setting transmission rates. Executives admitted that retail regulators may be hesitant at ceding jurisdiction over setting transmission rates.
This again begs the question, should Entergy customers be subject to higher transmission rates under the transaction, whether Entergy Texas customers would be, upfront integration costs notwithstanding, better off if the Entergy Texas system were integrated into ERCOT and removed from the Eastern Interconnect, allowing Texas regulators to exercise complete control over the rates and service available to Entergy Texas customers.
The terms of the transaction agreements call for Entergy to divest its electric transmission business to a newly-formed entity, Mid South TransCo LLC ("Transco"), and distribute this newly-formed entity to its shareholders in the form of a tax-free spin-off. Transco will then merge with and into a newly-created merger subsidiary of ITC in an all-stock, Reverse Morris Trust transaction.
Prior to the merger, ITC expects to effectuate a $700 million recapitalization, currently anticipated to take the form of a one-time special dividend to its shareholders.
The merger will result in shareholders of Entergy receiving 50.1 percent of the shares of pro forma ITC in exchange for their shares of Transco, with existing shareholders of ITC owning the remaining 49.9 percent of the combined company.
The transaction is expected to be immediately value accretive to ITC shareholders. Rate base for pro forma ITC is projected to be approximately $7.1 billion by year-end 2013.
Entergy expects to receive gross cash proceeds of $1.775 billion from indebtedness that will be incurred in connection with the transaction, and this indebtedness will be assumed by ITC at the close of the merger.
Email This StoryCopyright 2010-
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