Companies outline plans for ITC/Entergy transition

ITC Holdings (NYSE:ITC), Entergy (NYSE:ETR), and the Midwest ISO (MISO) held the first of two stakeholder meetings Aug. 27 to discuss the mechanics of the pending acquisition of Entergy’s transmission business by ITC.

“Our goal is to be transparent and to share this information about the transition prior to making the needed regulatory filings to ensure understanding to address any questions or concerns stakeholder may have,” ITC Holdings’ vice president of operations, Beth Howell, said during the two-hour conference call.

Participants had planned to hold a face-to-face meeting with stakeholders in New Orleans but cancelled those plans at the 11th hour in favor of a conference call because of Tropical Storm Isaac.

MISO presented a proposed three-phase transition plan.

The first phase is Entergy transitioning from Southwest Power Pool (SPP), its current independent coordinator of transmission (ICT), to MISO on Dec. 1.

The second phase will take place during mid-2013, immediately following the close of the transaction. In that phase, ITC’s mid-south operating companies will become transmission owners in MISO, allowing them to become part of the RTO’s planning process. Concurrent with that, MISO will take over functional control of the transmission assets and become the reliability coordinator.

During the second phase, MISO will also submit tariff sheets necessary to eliminate rate pancaking and implement formula rates for transmission service.

The final phase involved Entergy’s operating companies integrating into MISO and becoming market participants. That is scheduled for Dec. 18, 2013.

ITC, Entergy and MISO will hold a second stakeholder meeting later this week. Following that meeting, they will incorporate the questions and feedback received, and schedule a follow-up session in early September. Within a week or so of that session, MISO plans to submit draft tariff language for stakeholder review and comment prior to its planned end-of-September FERC filing, according to Todd Hillman, MISO executive director, Southern Region.  

Transaction overview

ITC plans to acquire all of Entergy’s transmission assets at 69-kV and above in a tax-free transaction under a “reverse Morris trust,” pending IRS approval, Howell said. A reverse Morris trust allows for a division or a portion of a company to be spun off and merged into another company in a stock-for-stock exchange, she explained, noting that an IRS letter ruling regarding the tax-free nature of the transaction will be required.

Entergy’s and ITC’s transmission businesses are “strikingly similar in size, both from the perspective of load served and line-miles or assets,” Howell said, noting that use of a reverse Morris trust is feasible only in situations where the two participant businesses have comparable equity values, so shareholders of the company that is spun off will own over 50% of the combined company after the transaction is complete.

In this case, Entergy shareholders will own 50.1% of the company post-merger, while ITC shareholders will own the remaining 49.9%.

From a governance and management perspective, ITC will be adding two independent board members who have knowledge and experience in the Entergy region, she said, noting that ITC’s current management team will be “supplemented by existing Entergy transmission executives.” While she did not specify the number of executives who would move to ITC, Howell did note that approximately 50 current Entergy employees would make the transition.

Regulatory approvals needed

Numerous approvals are necessary before the transaction can close, Howell said, noting, “Approval from all Entergy retail jurisdictions to join an acceptable RTO is a prerequisite to the transaction.” In addition to the IRS approval noted earlier, necessary approvals must be obtained from FERC, the Department of Justice and Federal Trade Commission, and ITC shareholders.

An official from Entergy said recent regulatory rulings in Arkansas are not expected to interfere with transition plans.

“We don’t expect the Arkansas ruling to change” the companies’ filing plans, Entergy’s vice president of transmission regulatory compliance, Mark McCulla, said, referring to the conditional approval of the transaction granted by the Arkansas Public Service Commission (PSC) Aug. 3.

Specifically, the PSC said “it is unable to reach a finding that [Entergy Arkansas’] application is in the public interest,” but upon finding that the company and MISO have complied with the conditions, the PSC will grant conditional approval of the application, as being in the public interest, and will authorize Entergy Arkansas to sign the MISO transmission owners agreement and move forward with the MISO integration process.

MISO and ITC plan to submit the necessary FERC filings by the end of September. Six retail jurisdictions require change-of-control filings for Entergy; those are planned for 3Q12 and will be submitted in a pre-determined sequence rather than simultaneously.