ITC Holdings (NYSE:ITC) will acquire Entergy’s (NYSE:ETR) transmission business in a reverse Morris trust transaction, the companies announced Dec. 5.
“It’s transformational to our size, scale, and scope,” ITC CEO Joe Welch said during a webcast Dec. 5. “Basically you wake up and ITC is double in size. That’s not an insignificant event.”
The transaction will add 28,000 MW of load to its existing 26,000 MW, making it the largest load-serving transmission company in the United States, and add 15,700 miles to its 15,100 miles of transmission lines, making it the second largest transmission company on a miles-served basis, Welch said.
The Entergy acquisition will also increase ITC’s net power plant and equipment (PP&E) to $6.3bn from $3.2bn.
ITC has a $3.9bn market cap. Entergy shareholders hold $1.4bn of equity in Entergy’s transmission business. After the merge, Entergy shareholders will own 50.1% of ITC, with ITC shareholders owning 49.9%.
The transaction will give ITC an east-west flow path, expand its geographic and regional footprint, open access to RTO seams, add sizeable new markets to its operations, and diversify its growth prospects, Welch said.
ITC operates in Michigan, Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma. The Entergy transmission assets would add Arkansas, Texas, Louisiana and Mississippi to its service territory.
ITC operates in the Midwest Independent Transmission System Operator and in the Southwest Power Pool. Entergy is in the process of moving to MISO, which it expects to complete by December 2013.
In addition to providing tangible customer and stakeholder benefits, the transaction will be immediately and substantially accretive to shareholders without having an impact on credit quality, Welch said.
“That’s not with some hocus pocus synergies,” he said. “It’s straight up accretive. It’s a natural extension of our business model and a diversification of our capital investment profile.”
The transaction will shift ITC’s expansion plans toward reliability projects, he said. Entergy has $400m to $500m budgeted for baseline spending to reinvest in its transmission system, which ITC will absorb.
“The size of new markets provides us an additional avenue for sustainable long-term growth through the Entergy system, accelerates growth and solidifies our transmission platform, shifts growth to more predictable platform, diversifies our growth portfolio and provides for incremental development growth projects,” Welch said.
The pro forma company would have a rate base in the range of $7bn, representing a multiple consistent with ITC’s previous transactions, Welch said.
The transaction, pending regulatory and shareholder approval, is expected to close in 2013.
State regulatory approvals are needed from the Arkansas Public Service Commission, Louisiana Public Service Commission, Mississippi Public Service Commission and the Public Utilities Commission of Texas. Because of some assets in other territories, state approvals may also be required in Missouri, Tennessee and Oklahoma. The City Council of New Orleans also must approve the transaction.
Federal regulatory approval is needed from FERC, and antitrust approval from the Department of Justice or the Federal Trade Commission. The IRS must approve the tax-free nature of the transaction.