Entergy spin-off to double size of ITC Holdings

(Updated at 10:59 a.m. to include the comments of Wells Fargo Securities analyst Neil Kalton and at 3:59 p.m. with the comments of ITC Midwest President Doug Collins)

A deal announced Monday is expected to more than double the electric transmission assets of ITC Holdings, which owns the transmission operator serving Alliant Energy in Iowa.

Under the agreement announced Monday, Dec. 5, New Orleans-based Entergy Corp. plans to shed its electric transmission business and merge it into a new subsidiary of ITC Holdings Corp.

ITC Holdings, based in Novi, Mich., owns and operates the former transmission assets of Interstate Power & Light in Iowa through its Cedar Rapids-based ITC Midwest unit.

ITC Midwest President Doug Collins said he expects the merger to give ITC Midwest stronger purchasing power and access to Entergy's highly-regarded expertise in disaster recovery. The deal is also expected to boost the value of ITC as a company, and to improve the credit quality of the emerging company.

The deal would more than double the amount of transmission assets ITC Holdings owns and manages, from about 14,700 to about 30,000.

Entergy's transmission network covers most of Arkansas, coastal regions of Louisiana, northeastern Louisiana, eastern Mississippi, and a sliver of southeast Texas. Adding them to the assets already held by ITC in the North Central region will create a transmission network reach from the Great Lakes to the Gulf Coast, the companies said in a statement.

The combination will "significantly enhance the scale of our operations and financial resources as we continue to invest in electric transmission infrastructure for the benefit of customers, resulting in improved reliability, reduced system congestion and greater access to competitive energy market," ITC CEO Joseph Welch said.

Entergy will divest its electric transmission business to a new entity, Mid South Transco LLC. Existing Entergy shareholders will receive distributions of shares in Mid South Transco in the form of a tax-free spinoff.

Mid-South Transco will merge into a newly-created merger subsidiary of ITC. Before the merger, ITC will undertake a $700 million recapitalization. It is expected to take the form of a one-time special dividend to shareholders.

Entergy shareholders will receive 50.1 percent of the share of the reorganized ITC in exchange for their shares of Transco. Existing shareholders of ITC will own the remaining 49.9 percent of the combined company.

Entergy expects to receive $1.775 billion from indebtness that will be incurred in the transaction and assumed by ITC at the close of the merger. ITC expects to issue about $700 million of unsecured holding company debt.

Shares of Entergy and ITC received a boost from the deal, with ITC trading up $2.71 per share at $73.78 and Entergy up $2.73 per share shortly after 1 p.m. Monday.

The deal received favorable comments from Wells Fargo Securities Senior Analyst Neil Kalton. While still analyzing the financial implications, he said it appears that the deal is favorable for both parties.

The one concern expressed by Kalton was over regulatory approvals, which Kalton called "a definite question mark."

The deal is expected to close in 2013 subject to the approval of state regulators, the Federal Energy Regulatory Commission and ITC shareholders.