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Portfolio Update

What’s Going On

By Roger S. Conrad, on Oct. 7, 2013

Entergy Corp has submitted a revised plan to the Texas Public Utility Commission to transfer the electric utility’s regulated transmission operations to ITC Holdings Corp (NYSE: ITC). The two parties had withdrawn their initial application in early August after it became clear the regulator was unlikely to approve the merger without revisions.

The updated plan includes about $90 million worth of rate concession in Texas, $134.4 million in Arkansas, $169 million in Louisiana (including New Orleans) and $77.5 million in Mississippi.

State regulators appear to be worried that the merger would open the door to future encroachment by the Federal Energy Regulatory Commission (FERC) in the Midsouth region. Entergy has already joined the Midcontinent Independent System Operator (MISO), a group that directs the flow of electricity to lowers customers’ bills, suggesting that FERC’s reach will extend to the region even if the state regulators reject the revised proposal.

There’s a lot riding on this proposed spin-off and merger, which has already received the blessing of federal authorities.

The Justice Dept has threatened to sue Entergy for allegedly discriminating against other power producers on its transmission system; the authorities agreed to drop this lawsuit if the company joined MISO and divested its transmission assets to ITC Holdings.

And Entergy’s shareholders stand to benefit from $10 to $12 in additional upside per share if the deal closes. Equally important, the utility’s regulated power generation and distribution operations produce enough cash flow to cover the firm’s quarterly dividend comfortably.

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