Entergy Corporation (ETR) has entered into a definitive agreement with ITC Holdings Corporation (ITC) under which the former will divest its electric transmission business to the latter for gross cash of $1.775 billion. The divested business would be merged with the operations of ITC Holdings.
The transaction will require consent of Entergy's retail regulators, the Federal Energy Regulatory Commission and ITC shareholders. The company expects the transaction to complete by 2013.
Currently, Entergy’s electric transmission business consists of approximately 15,700 miles of interconnected transmission lines at voltages of 69kV and above and associated substations across its utility service territory in the Mid-South. Post merger, ITC will become one of the largest electric transmission companies in the U.S. across the Great Lakes to the Gulf Coast, with more than 30,000 miles of transmission lines.
Per the agreement, Entergy will divest its electric transmission business to a newly formed entity known as Mid South TransCo LLC ("Transco") which will be distributed to Entergy’s shareholders in the form of a tax-free spin-off. Then, under an all-stock Reverse Morris Trust transaction, Transco will merge with and into a newly created merger subsidiary of ITC.
Post merger, Entergy will have an approximately 50.1% stake in ITC in exchange for their shares in TransCo. The balance 49.9% stake of the combined company will be with the existing shareholders of ITC.
Entergy plans to utilize most of the cash proceeds from the transaction to redeem the debt at its utility operating companies and at the parent, Entergy. It expects the transaction to meet the criteria for tax-free treatment for U.S. federal income tax purposes.
The divestiture will provide more investment alternatives and enhance the credit quality of Entergy and its operating subsidiaries. It will allow the company to invest more in its generation operations. Moreover, the transaction will not affect its retail customers and they will continue to receive the high quality service as before.
In the past, the company spent much effort to create its own independent grid. Currently, it is seeking to integrate its transmission operations into the Midwest Independent System Operator.
In spite of the current divestiture, Entergy still plans to invest $400 million to $525 million in its transmission business through 2014. Given the increasing demand for and use of electricity, total capital investment in the electric utility industry is expected to touch the $2 trillion mark in the U.S. alone.
New Orleans-based Entergy Corporation is primarily engaged in electric power production and retail distribution of power. With 30,000MW of generating capacity, it distributes electricity to 2.7 million customers in Arkansas, Louisiana, Mississippi, and Texas. Of this, 14,631MW are gas/oil based, 2,259 are coal based, 70MW are hydro based and the rest are nuclear based. With around 13,000MW of nuclear-based energy, the company is the second-largest nuclear power generator in the U.S.
A geographically diverse mix of regulated and merchant operations, along with a strong balance sheet, positions Entergy well. The company is focused on maximizing shareholder value through steady investment for rate base growth, as well as through its ongoing stock buyback program and incremental dividend payouts.
However, we are cautious about the tepid growth at the company’s competitive business on account of lackluster power demand in the Northeast along with pending regulatory approvals and the fate of its Vermont Yankee plant.
Akin to its peer, American Electric Power Co. Inc. (AEP), Entergy also retains a short-term Zacks #3 Rank (Hold) rating. We also have a long-term Neutral recommendation on the stock.
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