ITC CEO: Level of transmission investment ‘challenging’

In a move characterized as “challenging,” ITC Holdings (NYSE:ITC) plans to invest as much as $820m in capital investments across its four operating companies by the end of 2012, president and CEO Joe Welch said during the company’s 2Q12 earnings call Aug. 1.

“The level of planned capital investment in 2012 reflects a significant ramp-up relative to prior years and poses a challenge for our organization, particularly in light of the fact that we are simultaneously pursuing the Entergy (NYSE: ETR) transaction,” Welch said, referring to ITC’s planned acquisition of Entergy’s transmission operations.

During the first half of 2012, the company invested $429.2m across its four operating companies: ITCTransmission, Michigan Electric Transmission Company (METC), ITC Great Plains, and ITC Midwest.

This year’s capital investments are part of the company’s five-year CapEx plan to invest $4.2bn in new transmission over the next five years as the company continues to execute on its stand-alone strategic plan, Welch said.  Those investments will “improve reliability, reduce congestion, interconnect new generating resources, and develop regional infrastructure to support a robust 21st century grid.”

Those investments are expected to result in 15% to 17% growth in operating earnings over the five-year period, Cameron Bready, executive vice president and CFO, added.

ITC also expects to invest more than $600m in its portion of the Midwest ISO’s (MISO) $5.1bn multi-value project (MVP) portfolio for new regional transmission infrastructure, Bready said.

Entergy acquisition pending

Activities associated with the Entergy acquisition have occupied a great deal of the company’s time during the first half of 2012, Welch added, noting that ITC and Entergy soon plan to file a joint application with the Louisiana Public Service Commission, the first of the retail jurisdictions in which Entergy operates.

The filing “will highlight the key quantitative and qualitative benefits of the transaction as viewed by ITC and Entergy, including the benefits of ITC’s independent model and singular focus on transmission as well as greater financial strength and flexibility to support the needs of the region,” Welch said.

Following that filing, the companies will make similar filings in Entergy’s other retail jurisdictions. They will also complete and file the FERC applications required for the change in control of Entergy’s transmission business, as well as to establish new rate tariffs, he said.

Welch expects to complete the acquisition in 2013.

Performance ‘excellence’

Overall, Welch said he was pleased with the company’s performance thus far in 2012, both financially and operationally.

“We have seen consistent levels of higher peak load due to the recent heat wave in the Midwest, along with the ongoing economic recovery in Michigan,” Welch said. “During the summer months, ITC system performance has remained strong, and we have had no operational problems in serving the higher level of loads experienced.”

The METC system and ITC Midwest system set new peak loads in mid- to late July, he noted.

In addition, the company reached what Welch called “a very important milestone with our development activities during the second quarter when we energized our first development projects in Oklahoma and Kansas.”

The Hugo to Valliant line in Oklahoma, and the first phase of the KETA project were placed into service in June by ITC Great Plains. Both projects provide a platform for further opportunities within the Southwest Power Pool (SPP) region, Welch continued.

In addition, the first substation on Michigan’s Thumb Loop project was placed into service in July. Line construction is underway for a portion of the project, and right-of-way acquisition continues for the remaining segments. The project will provide the infrastructure to support previously approved wind zone development in the state, he said.

Regulatory activity and politics

Although Welch noted there have been few significant regulatory developments in 2012 related to transmission, he said the company has devoted time and effort to several issues, including Order 1000 implementation activities in both SPP and MISO, along with other surrounding regions.

ITC is also involved in responding to a complaint initiated by FERC in mid-May against MISO’s formula rate protocols, a complaint Welch said highlighted concerns about the level of transparency required by the current MISO protocols.

In its response to the FERC complaint, ITC detailed how its business protocols and practices differ from the MISO-wide protocols, and how ITC’s approach alleviates the specific concerns FERC cited in its complaint, he said.

“As an independent transmission company, we support transparency in the rate-setting process and have established protocols and business practices designed to allow for that, without interfering with the process itself,” Welch said.

ITC also continues to monitor developments associated with a FERC complaint concerning return on equity (ROE) for transmission projects in ISO New England.

In early May, FERC issued an order on the complaint, setting the matter for hearing. The parties involved are in settlement discussions and will move to a hearing process only if the discussions are not successful.

“We continue to believe that FERC will support previously established ROEs that remain within a zone of reasonableness,” Welch said.

ITC is still evaluating the potential impact of the EPA’s mercury and air toxics standards (MATS) rule. “I think it’s clear it’s truly going to change flows on the system,” Welch said. “Once we get a good read on that, we will be more involved” in development of a revised MISO MVP process to accommodate the changed power flows.

While he noted that it was his personal opinion and not a company position, Welch said he doesn’t think Michigan’s ballot initiative calling for a 25% renewable portfolio standard (RPS) by 2025 will pass.

“There’s a lot of momentum in the state, especially from the business community, to make everyone aware of the extreme price that’s going to be associated with that 25% renewable standard,” he said.

“When you look on a broad regional basis, Michigan isn’t really well-positioned as a place to produce wind energy, and we see that in our operational control centers, so the expansion of [the RPS] would, I don’t believe, be in the best interest of our customers,” Welch added.

The numbers

ITC said operating earnings for 2Q12 of $1.05 per diluted common share were up from $0.83 per share in 2Q11. Reported earnings for 2Q12 of $0.81 per diluted common share were down slightly from $0.83 per share in 2Q11. Both operating and reported year-to-date earnings were up slightly from the first six months of 2011.

Operating earnings are a non-GAAP measure that exclude the impact of after-tax expenses of approximately $4m for the second quarter and $6.6m for the six months ended June 30, associated with the Entergy transaction and $8.4m for both the second quarter and the six months ended June 30, associated with the estimated refund liability recorded for certain acquisition accounting adjustments for ITC Midwest, ITCTransmission and METC resulting from the FERC audit order on ITC Midwest issued in May.

ITC’s operating revenues for the six months ended June 30, increased to $405.1m, which excludes an $11m reduction in revenues associated with the ITC Midwest FERC audit related refunds recorded for ITCTransmission, METC and ITC Midwest, compared to $364.5m from the same period last year.

METC, ITCTransmission, ITC Midwest, and ITC Great Plains are wholly owned subsidiaries of ITC Holdings.