(ETR) Entergy Progresses on Divestment

Entergy Corporation (ETR) is moving ahead with its divestment plan for its electric transmission business for gross cash of $1.775 billion. The divested business would be merged with the operations of ITC Holdings Corporation (ITC). The planned spin-off and merger of the electric business into a subsidiary of ITC involves a multi-state and federal regulatory process. The company is making brisk progress in getting the necessary approvals.

Taking the process to the next step, Entergy New Orleans Inc. and Entergy Louisiana LLC, in conjunction with ITC and ITC Midsouth LLC, have filed a joint application with the New Orleans City Council. Entergy and ITC initiated the regulatory process with a joint application filing with the Louisiana Public Service Commission on September 5, 2012. Entergy is seeking approval to transfer about 15,800 miles of interconnected transmission lines at voltages of 69kV and above and the associated substations to ITC, which will then be one of the largest electric transmission companies in the U.S., with more than 30,000 miles of transmission lines spanning from the Great Lakes to the Gulf Coast. Meanwhile, Entergy’s operating companies will continue to own and operate their respective distribution and generation businesses.

New Orleans, Louisiana-based Entergy is an integrated energy company engaged primarily in electric power production and retail distribution operations. Entergy owns and operates power plants with approximately 30,000 megawatts of electric generating capacity and is the second-largest nuclear generator in the U.S.

Entergy delivers electricity to 2.8 million utility customers in Arkansas, Louisiana, Mississippi and Texas. The company is the second largest U.S. nuclear power generator after Exelon Corporation (EXC).

Earlier, in December 2011, Entergy entered into a definitive agreement with ITC Holdings under which the former will divest its electric transmission business to the latter. The divested business would be merged with the operations of ITC Holdings.

The transaction will require consent from Entergy’s retail regulators, the Federal Energy Regulatory Commission and ITC shareholders. The company expects the transaction to complete by 2013.

Post-merger, ITC will become one of the largest electricity transmission companies in the U.S. Its area of operations will stretch from the Great Lakes to the Gulf Coast, with more than 30,000 miles of transmission lines.

Per the divestiture 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 same 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.

Entergy presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. The stock is now trading at a discount in terms of forward earnings estimates versus its utility peers like The AES Corporation (AES) and American Electric Power Company Inc. (AEP).

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