Projections, conjecture swirl around ITC/Entergy spinoff and merger

ITC Holdings’ (NYSE:ITC) acquisition of Entergy’s (NYSE:ETR) transmission business, while still underway, met with some regulatory hiccups in August that ignited speculation about whether the deal would ultimately close.

After an administrative law judge recommended that Texas regulators reject the spinoff and merger, the companies withdrew their application with the Texas Public Utilities Commission (PUCT) on Aug. 15.

Subsequent decisions on Aug. 21 and Aug. 23 by the Louisiana and Arkansas Public Service Commissions (PSCs), respectively, to suspend hearing proceedings pending further action from the PUCT further fanned speculation that the deal will die.

ITC and Entergy have said there is time to re-file their application with the PUCT. An Entergy spokesperson told TransmissionHub on Aug. 19 that despite the Texas withdrawal, the transaction was on track to close by Dec. 31, the deadline for the merger agreement.

The companies acknowledged in an Aug. 30 filing with the Missouri PSC that the Texas withdrawal does present a hitch in the transaction’s timeline and said that although the schedule for regulatory approval would be expedited, it will not be known what that schedule is until the companies re-file in Texas.

They also indicated that the assumption that they withdrew in Texas because they were expecting a rejection of their application is false.

“[T]he Arkansas motion to suspend provided the impression that the PUCT intended to reject the ITC transaction outright,” they said in an Aug. 30 filing. “While the PUCT’s intentions cannot be known at this time, the clear indication was that one of the PUCT commissioners had concluded that, due to the strict statutory deadline in that proceeding, the PUCT was unable to consider certain information.”

Among the information that could not be given due consideration was a five-year rate mitigation plan the companies filed in Arkansas in June. As proposed, the rate mitigation plan would not end unless, at the end of the five-year period, ITC is able to demonstrate that the annual benefits of ITC’s ownership of the transmission system exceed the actual annual weighted average cost of capital (WACC) effects of ITC’s ownership of the Entergy assets. If such a demonstration cannot be made, then rate mitigation would continue until it can, ITC CFO Cameron Bready said in testimony filed with the Arkansas PSC on June 21.

Regulators unfazed in other states

Of the remaining state commissions that need to give approval, none has yet suspended or delayed their hearing schedules. The transaction, which involves spinning off Entergy’s transmission business and merging it with an ITC subsidiary, needs state regulatory approvals from Arkansas, Louisiana, Texas, Mississippi and Missouri. The City Council of New Orleans also must approve the transaction. The transaction has received federal regulatory approval from FERC, ITC shareholder approval, a private letter ruling from the Internal Revenue Service and Hart-Scott-Rodino Act approval.

“The [Texas] withdrawal is not permanent and does not impact New Orleans,” Stacy Head, councilmember-at-large of the New Orleans City Council, told TransmissionHub.  “We are still carefully considering if the ITC transaction benefits our ratepayers appropriately, and negotiations with ITC and Entergy are ongoing.”

Head further indicated that it was unlikely the Texas development would scuttle the whole deal. In response to whether she thought the companies will withdraw their filing before the New Orleans City Council as they did at the PUCT, Head said: “No. We are still engaged in thoughtful negotiations and I would be surprised if the deal is shelved because of the setback in [Texas].”

Bethanne Dufour, director of communications for the Southern District at the Mississippi PSC echoed those remarks.

“The withdrawal in Texas has no impact to the schedule in [Mississippi],” she told TransmissionHub, adding that the briefing process will be complete by Sept. 25, and the commission may make a decision “anytime thereafter” due to the nature of the paper hearing.

“The applicants have given no indication that they intend to withdraw their petition” in Mississippi, she said.

An ITC investor noted that any of the commissions could have rejected the transaction by now.

“Texas could’ve said no before ITC and Entergy withdrew their proposal and they did not,” the investor told TransmissionHub. “Each of the other states, they have had the chance to say no. None of them has done that yet.”

However, he noted that the market’s reaction to the news that the companies were withdrawing their application in Texas indicated that the development has been looked on unfavorably.

“Certainly, the changes in timelines clearly have impacted the market’s view as to whether or not the deal is actually going to get done,” the investor said. “I think you can tell by the market reaction – particularly Entergy’s stock [and] how much it’s traded off since the Texas decision – that the market has gotten more pessimistic.”

Since Aug. 15, Entergy shares have fallen about 5%, compared to the approximate 2.75% drop in the Dow Jones Utility Average for the same period.

“Maybe you can associate some portion of [Entergy’s decline] to the utility index being down and another portion of that to whether or not investors are thinking that a deal will not be reached here and it’s a negative for Entergy,” the investor said. “There’s been a reaction is the bottom line.”

ITC shares have risen about 1.6% since Aug. 15.

In Missouri, Great Plains Energy (NYSE:GXP) subsidiaries Kansas City Power & Light, KCP&L Greater Missouri Operations and Empire District Electric (NYSE:EDE) on Aug. 20 requested that the commission delay its decision on the transaction. Missouri PSC staff on Aug. 30 said they were neutral on the request but did ask that ITC and Entergy file any changes to the rate mitigation plan they have proposed.

“Staff neither endorses nor opposes the joint movants’ request that ‘the commission delay its decision regarding the transfer of assets until such time as the Texas and Arkansas proceedings are resolved’; however, any change in the five-year rate mitigation plan that ITC witness Cameron Bready testified would mitigate approximately 58% of the rate increase impact that would result from the contemplated transactions that are the subject of [the ITC/Entergy spinoff and merger] would change the detriment-benefit analysis,” staff said in the filing.

In response to Missouri staff’s filing, ITC and Entergy on Aug. 30 said they are evaluating “whether and when” to resubmit the Texas application, and that they would not oppose the commission if it decides to delay the proceeding there until procedural schedules are adopted in Arkansas and/or Texas. They added that they would then notify the commission so as to allow for a decision to be rendered before the end of the year, and provide the information the Missouri staff requested about the rate mitigation plan at that time.

But two industry bankers expressed skepticism that the deal will even get that far.

“It feels like it’s more likely that it won’t happen than it will at this point,” the first banker told TransmissionHub. He cited ITC’s 2007 acquisition of Interstate Power & Light’s (IPL) transmission assets, which he claimed turned into an “acrimonious” dispute. 

“They said they wouldn’t raise rates and then six months later were trying to jam through all these [operations and maintenance and general and administrative] costs and got into a lawsuit, so they’ve got a burden of proof to overcome,” he said.

FERC in 2009 ruled in favor of ITC in the dispute.

The second banker said the deal “didn’t make sense from the beginning.”

“As a regulator, why would I approve that deal when there’s no benefit to my constituents? All I get is higher rates,” he told TransmissionHub.

He added that Entergy’s move to MISO is a positive one for ratepayers, but said the subsequent decision to sell to ITC will lead to FERC rates, “which are higher than what they are now.”

The investor, however, said that until a firm rejection is issued, it is too soon to think of the deal as dead.

“ITC and Entergy have been public about saying, ‘We have to consider if there is not a deal,’ but until they say ‘no,’ the deal isn’t sunk,” he said.  

About Rosy Lum 525 Articles
Rosy Lum, Analyst for TransmissionHub, has been covering the U.S. energy industry since 2007. She began her career in energy journalism at SNL Financial, for which she established a New York news desk. She covered topics ranging from energy finance and renewable policies and incentives, to master limited partnerships and ETFs. Thereafter, she honed her energy and utility focus at the Financial Times' dealReporter, where she covered and broke oil and gas and utility mergers and acquisitions.