Proposed Entergy deal is a milestone in opening the grid to outside competition
The deal, the first of its size, “serves to validate the benefits of the independent transmission model,” said ITC Chairman and CEO Joseph Welch.
Known as a Reverse Morris Trust transaction, the deal is designed to allow Entergy to sell its transmission network and take out cash tax-free through a complex, closely scheduled set of moves. Entergy said it expects to receive $1.775 billion in cash, which becomes debt on ITC’s balance sheet. Entergy shareholders will wind up with 50.1 percent of ITC’s stock, and ITC said it plans to pay a $700 million dividend to shareholders.
In an unusual outcome, the shares of both buyer and seller rose yesterday, with Entergy’s gaining 3.95 percent to close at $72.39. ITC shares jumped 7 percent to a five-year high of $81.90 before closing at $76.07.
Utility gets cash for new investments
As the nation’s second-largest owner of nuclear plants, and with its coal-fired generators facing environmental regulatory costs, Entergy wanted a way to concentrate its capital where it was most needed, Leonard said. “The transaction enables us to maintain the financial flexibility necessary to address the growing challenges our industry faces, including substantial infrastructure investment,” he said in a statement. Entergy intends to use the cash primarily to pay down existing debt, providing it more investment leeway, it said.
Previously, Entergy had forecast spending $7.1 billion from 2012 through 2014 on its entire operation, including over $3 billion for maintenance. The transmission investments alone could claim $2 billion, Leonard said. “It’s a business that is best suited in the hands of someone who does only this,” he said.
“They have multiple places to put money and can’t put it in all those places,” said one industry expert. Entergy has gone into federal court to try to stop the state of Vermont from blocking the federal license renewal of the Vermont Yankee nuclear power plant, where anger over Entergy’s handling of tritium leaks from plant piping cost the company its welcome. It is also contesting New York state officials’ demands for construction of cooling towers at the Indian Point nuclear power plant on the Hudson River north of Manhattan.
By selling off its high-voltage assets, Entergy could escape a long-running conflict with state officials in its home territory over the quality and fairness of its transmission operations. Following a FERC conference of Entergy customers in 2009, the Electric Power Supply Association, representing competitive energy suppliers, said that “the entity controlling transmission in the Entergy region must have more authority to facilitate true open access and ensure adequate infrastructure.”
The Arkansas Public Service Commission, one of Entergy’s sharpest critics, said in an order Oct. 28 that it “does not anticipate nor will it condone any scenario” that does not assure the future independence of Entergy’s Arkansas subsidiary from Entergy’s companywide transmission operation.
Transmission owner gains capacity
Entergy disclosed to shareholders that it is facing a civil investigation by the Justice Department “of competitive issues concerning certain generation procurement, dispatch, and transmission system practices and policies.” The specific nature of the Justice inquiry has not been announced.
Entergy spokesman Michael Burns said the company’s deal with ITC “is not in response to complaints or anything like that. We are pursuing what is right for consumers and other stakeholders. We feel the time is right to pursue the spinoff” of the transmission network, he said.
In a recent investors’ conference, Welch stressed the challenges companies like ITC face. “While transmission has certainly gained much attention over the recent years, we have yet to see a significant amount of transmission actually built, largely due to the long lead time and regulatory processes required for the projects,” he said.
The deal’s completion would double, in one move, a network that ITC has spent eight years building, and challenge the company to prove that its model works at a time when the power industry’s growth has flattened.
“While there is a great deal of speculation as to what sources of power we will ultimately rely on and what technology or technologies will prevail, the reality is that regardless of what you believe, the need for transmission investment is clear and evident,” Welch said.