NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1
.
GENERAL
These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements as of and for the year ended
December 31, 2015
included in ITC Holdings’ annual report on Form 10-K for such period.
The accompanying condensed consolidated financial statements have been prepared using accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Rule 10-01 of Securities and Exchange Commission (“SEC”) Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These accounting principles require us to use estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from our estimates.
The condensed consolidated financial statements are unaudited, but in our opinion include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim period. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.
Supplementary Cash Flows Information
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|
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|
|
|
|
Six months ended
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
Supplementary cash flows information:
|
|
|
|
Interest paid (net of interest capitalized)
|
$
|
95,366
|
|
|
$
|
93,803
|
|
Income taxes paid — net
|
20,796
|
|
|
40,776
|
|
Supplementary non-cash investing and financing activities:
|
|
|
|
Additions to property, plant and equipment and other long-lived assets (a)
|
$
|
100,390
|
|
|
$
|
70,737
|
|
Allowance for equity funds used during construction
|
16,440
|
|
|
15,013
|
|
____________________________
|
|
(a)
|
Amounts consist of accrued liabilities for construction, labor, materials and other costs that have not been included in investing activities. These amounts have not been paid for as of
June 30, 2016
or
2015
, respectively, but have been or will be included as a cash outflow from investing activities for expenditures for property, plant and equipment when paid.
|
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance requiring entities to apply a new model for recognizing revenue from contracts with customers. The guidance will supersede the current revenue recognition guidance and require entities to evaluate their revenue recognition arrangements using a five-step model to determine when a customer obtains control of a transferred good or service. The guidance is effective for annual reporting periods beginning after December 15, 2017 and may be adopted using a full or modified retrospective approach. We do not expect the guidance to have a material impact on our consolidated results of operations, cash flows, or financial position.
Going Concern
In August 2014, the FASB issued authoritative guidance on (1) how to perform a going concern assessment and (2) when going concern disclosures are required under GAAP. The guidance extends the responsibility for performing a going concern assessment to company management; previously, this requirement existed only in auditing literature. The standard is expected to enhance the timeliness, clarity and consistency of going concern disclosures. The guidance is effective for the annual period ending after December 15, 2016, and for interim periods and annual periods thereafter. Early application is permitted. We do not expect the standard to have a material impact on our consolidated financial statements, including our disclosures.
Amendments to the Consolidation Analysis
In February 2015, the FASB issued authoritative guidance that amends the variable interest entity consolidation analysis under GAAP. The new standard was issued to improve targeted areas of consolidation guidance. Although the FASB’s
deliberations were largely focused on the investment management industry, the standard is applicable for reporting entities across industries. Specifically, the guidance amends the consolidation analysis for limited partnerships, clarifies when fees paid to a decision maker should be a factor in the consolidation analysis and amends how variable interests held by related parties affect consolidation. We adopted this guidance as of January 1, 2016 and it did not change our conclusions with regard to identification of variable interest entities or consolidation of any entities.
Amendment to the Balance Sheet Presentation of Debt Issuance Costs
In April 2015, the FASB issued authoritative guidance that amends the balance sheet presentation of debt issuance costs. This new standard requires debt issuance costs to be shown as a direct deduction from the carrying amount of the related debt, consistent with debt discounts. The guidance is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. On January 1, 2016, we adopted this guidance retrospectively and have applied this change to all amounts presented in our condensed consolidated statements of financial position. The following shows the impact of this adoption on our previously reported consolidated statement of financial position as of December 31, 2015:
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|
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|
|
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|
|
|
(In thousands)
|
Reported
|
|
Adjustment
|
|
Adjusted
|
Deferred financing fees (net of accumulated amortization)
|
$
|
29,298
|
|
|
$
|
(26,800
|
)
|
|
$
|
2,498
|
|
Debt maturing within one year
|
395,334
|
|
|
(229
|
)
|
|
395,105
|
|
Long-term debt
|
4,060,923
|
|
|
(26,571
|
)
|
|
4,034,352
|
|
We have accounted for this adoption as a change in accounting principle that is required due to a change in the authoritative accounting guidance. In connection with implementing this guidance, we adopted an accounting policy to present unamortized debt issuance costs associated with revolving credit agreements, commercial paper and other similar arrangements as an asset that is amortized over the life of the particular arrangement. In addition, we present debt issuance costs incurred prior to the associated debt funding as an asset for all other debt arrangements. This standard did not impact our consolidated statements of operations or cash flows.
Classification and Measurement of Financial Instruments
In January 2016, the FASB issued authoritative guidance amending the classification and measurement of financial instruments. The guidance requires entities to carry most investments in equity securities at fair value and recognize changes in fair value in net income, unless the investment results in consolidation or equity method accounting. For financial liabilities measured using the fair value option, the change in fair value caused by a change in instrument-specific credit will be presented separately in other comprehensive income as opposed to reflecting the entire amount of the change in fair value in earnings. Additionally, the new guidance amends certain disclosure requirements associated with the fair value of financial instruments. The guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. The guidance is required to be adopted using a modified retrospective approach, with limited exceptions. We are currently assessing the impacts this guidance will have on our consolidated financial statements, including our disclosures.
Accounting for Leases
In February 2016, the FASB issued authoritative guidance on accounting for leases, which impacts accounting by lessees as well as lessors. The new guidance creates a dual approach for lessee accounting, with lease classification determined in accordance with principles in existing lease guidance. Income statement presentation differs depending on the lease classification; however, both types of leases result in lessees recognizing a right-of-use asset and a lease liability, with limited exceptions. Under existing accounting guidance, operating leases are not recorded on the balance sheet of lessees. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years and will be applied using a modified retrospective approach, with possible optional practical expedients. Early application is permitted. We are currently assessing the impacts this guidance will have on our consolidated financial statements, including our disclosures.
Contingent Put and Call Options in Debt Instruments
In March 2016, the FASB issued authoritative guidance intended to standardize the assessment of whether embedded features within a debt host contract, including contingent put and call options, should be bifurcated and accounted for separately. This guidance clarifies that an entity does not have to separately assess whether the event that triggers the ability to exercise
the contingent option is itself indexed only to interest rates or credit risk as part of the analysis of whether an embedded contingent option is clearly and closely related to the debt host. The guidance is effective for fiscal years beginning after December 15, 2016 and required to be adopted using a modified retrospective approach. We do not expect this guidance to have a material impact on our consolidated financial statements, including our disclosures.
Simplification of Employee Share-Based Payment Accounting
In March 2016, the FASB issued authoritative guidance that simplifies several aspects of the accounting for employee share-based payment transactions. The new guidance (1) requires that an entity recognize all excess tax benefits and tax deficiencies as income tax benefit or expense in the income statement, (2) allows an entity to elect as an accounting policy either to estimate forfeitures (as currently required) or account for forfeitures when they occur, (3) modifies the current exception to liability classification of an award when an employer uses a net-settlement feature to withhold shares to meet the employer’s minimum statutory tax withholding requirement to apply if the withholding amount does not exceed the maximum statutory tax rate and (4) specifies the statement of cash flow presentation for excess tax benefits and cash payments to taxing authorities when shares are withheld to meet tax withholding requirements. The new guidance is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. The various amendments require different transition methods including modified retrospective approach through a cumulative effect adjustment to retained earnings, prospective adoption and retrospective adoption. We are currently assessing the impacts this guidance will have on our consolidated financial statements, including our disclosures.
3
.
REGULATORY MATTERS
ITC Interconnection
ITC Interconnection was formed in 2014 by ITC Holdings to pursue transmission investment opportunities. On June 1, 2016, ITC Interconnection acquired certain transmission assets from a merchant generating company and placed a newly constructed 345 kV transmission line in service. As a result, ITC Interconnection became a transmission owner in the FERC-approved RTO, PJM Interconnection, and is subject to rate-regulation by the FERC. The revenues earned by ITC Interconnection are based on its facilities reimbursement agreement with the merchant generating company. The financial results of ITC Interconnection are currently not material to our consolidated financial statements.
MISO Funding Policy for Generator Interconnections
On June 18, 2015, FERC issued an order initiating a proceeding, pursuant to Section 206 of the Federal Power Act (“FPA”), to examine MISO’s funding policy for generator interconnections, which allows a transmission owner to unilaterally elect to fund network upgrades and recover such costs from the interconnection customer. In this order, FERC suggested the MISO funding policy be revised to require mutual agreement between the interconnection customer and transmission owner to utilize the election to fund network upgrades. On July 20, 2015, MISO and its transmission owners (“TOs”) filed a request for a rehearing of the FERC order to examine MISO’s funding policy for generator interconnections, which was subsequently denied by FERC on December 29, 2015. On January 8, 2016, MISO made a compliance filing to revise its funding policy to adopt the FERC suggestion to require mutual agreement between the customer and TO, with an effective date of June 24, 2015. On January 28, 2016, our MISO Regulated Operating Subsidiaries, together with several other utilities, filed a request with FERC for rehearing of certain aspects of the December 29, 2015 order. Additionally, on February 26, 2016, our MISO Regulated Operating Subsidiaries, along with Ameren Services Company, filed an appeal of certain aspects of the December 29, 2015 order. We do not expect the resolution of this proceeding to have a material impact on our consolidated results of operations, cash flows or financial condition.
MISO Formula Rate Template Modifications Filing
On October 30, 2015, our MISO Regulated Operating Subsidiaries requested modifications, pursuant to Section 205 of the FPA, to certain aspects of their respective FERC-approved formula rate templates (“formula rate templates”) which included, among other things, changes to ensure that various income tax items are computed correctly for purposes of determining their revenue requirements. Our MISO Regulated Operating Subsidiaries requested an effective date of January 1, 2016 for the proposed template changes. On December 30, 2015, the FERC conditionally accepted the formula rate template modifications and required a further compliance filing, which was made on February 8, 2016. On April 14, 2016, the FERC issued an order accepting the February 8, 2016 compliance filing, effective January 1, 2016. The formula rate templates, prior to any proposed modifications, include certain deferred income taxes on contributions in aid of construction in rate base that
resulted in the joint applicants recovering excess amounts from customers. As of
June 30, 2016
and
December 31, 2015
, our MISO Regulated Operating Subsidiaries had recorded an aggregate refund liability of
$6.4 million
and
$10.4 million
, respectively.
Challenges Regarding Bonus Depreciation
On December 18, 2015, Interstate Power and Light Company (“IP&L”) filed a formal challenge (“IP&L challenge”) with the FERC against ITC Midwest on certain inputs to ITC Midwest’s formula rates. The IP&L challenge alleged that ITC Midwest has unreasonably and imprudently opted out of using bonus depreciation in the calculation of its federal income tax expense and thereby unduly increased the transmission charges for transmission service to customers. On March 11, 2016, the FERC granted the IP&L challenge in part by requiring ITC Midwest to recalculate its revenue requirements, effective January 1, 2015, to simulate the election of bonus depreciation for 2015. FERC denied IP&L’s request that ITC Midwest be required to elect bonus depreciation in any past or future years; however, stakeholders will be able to challenge any decision by ITC Midwest not to take bonus depreciation in future years. On June 8, 2016, FERC denied ITC Midwest’s request for rehearing of the March 11, 2016 order. Additionally, on April 15, 2016, Consumers Energy Company filed a formal challenge, or in the alternative, a complaint under Section 206 of the FPA, with the FERC against METC relating to METC’s historical practice of opting out of using bonus depreciation. On July 8, 2016, FERC denied Consumers Energy Company’s formal challenge and dismissed the complaint without prejudice.
These condensed consolidated financial statements reflect the election of bonus depreciation for tax years 2015 and 2016 and the corresponding effects on 2016 revenue requirements for our Regulated Operating Subsidiaries. Additionally, as required by the March 11, 2016 FERC order, we have simulated the election of bonus depreciation for ITC Midwest’s 2015 revenue requirement and included the impact of the corresponding refund obligation in these condensed consolidated financial statements. The total impact from reflecting the election of bonus depreciation as described above was lower revenues of
$3.6 million
and
$9.0 million
and lower net income of approximately
$2.2 million
and
$5.4 million
for the
three and six months ended June 30, 2016
, respectively, as compared to the same period if bonus depreciation was not reflected. These matters also resulted in additional net deferred income tax liabilities of approximately
$152.7 million
and a corresponding income tax receivable as of
June 30, 2016
. We are unable to predict the final outcome of this matter; however, the election of bonus depreciation will result in higher cash flows in the year of the election and reduce our rate base and therefore decrease our revenues and net income over the tax lives of the eligible assets.
Rate of Return on Equity Complaints
See “Rate of Return on Equity Complaints” in
Note 11
for a discussion of the complaints.
Cost-Based Formula Rate Templates with True-Up Mechanism
The transmission revenue requirements at our Regulated Operating Subsidiaries are set annually, using formula rate templates, and remain in effect for a
one
-year period. By completing their formula rate templates on an annual basis, our Regulated Operating Subsidiaries are able to make adjustments to reflect changing operational data and financial performance, including the amount of network load on their transmission systems (for our MISO Regulated Operating Subsidiaries), operating expenses and additions to property, plant and equipment when placed in service, among other items. The formula rate templates do not require further action or FERC filings each year, although the template inputs remain subject to legal challenge at the FERC. Our Regulated Operating Subsidiaries will continue to use formula rate templates to calculate their respective annual revenue requirements unless the FERC determines any template to be unjust and unreasonable or another mechanism is determined by the FERC to be just and reasonable. See “Rate of Return on Equity Complaints” in
Note 11
for detail on return on equity (“ROE”) matters including incentive adders approved by FERC in 2015.
Our formula rate templates include a true-up mechanism, whereby our Regulated Operating Subsidiaries compare their actual revenue requirements to their billed revenues for each year to determine any over- or under-collection of revenue requirements. Revenue is recognized for services provided during each reporting period based on actual revenue requirements calculated using the formula rate templates. Our Regulated Operating Subsidiaries accrue or defer revenues to the extent that the actual revenue requirement for the reporting period is higher or lower, respectively, than the amounts billed relating to that reporting period. The amount of accrued or deferred revenues is reflected in future revenue requirements and thus flows through to customer bills within
two years
under the provisions of the formula rate templates.
The net changes in regulatory assets and liabilities associated with our Regulated Operating Subsidiaries’ formula rate revenue accruals and deferrals, including accrued interest, were as follows during the
six months ended June 30, 2016
:
|
|
|
|
|
|
(in thousands)
|
|
Total
|
Net regulatory liability as of December 31, 2015
|
|
$
|
(2,564
|
)
|
Net refund of 2014 revenue deferrals and accruals, including accrued interest
|
|
11,190
|
|
Net revenue accrual for the six months ended June 30, 2016
|
|
7,206
|
|
Net accrued interest payable for the six months ended June 30, 2016
|
|
(405
|
)
|
Net regulatory asset as of June 30, 2016
|
|
$
|
15,427
|
|
Regulatory assets and liabilities associated with our Regulated Operating Subsidiaries’ formula rate revenue accruals and deferrals, including accrued interest, are recorded in the condensed consolidated statements of financial position at
June 30, 2016
as follows:
|
|
|
|
|
|
(in thousands)
|
|
Total
|
Current assets
|
|
$
|
19,112
|
|
Non-current assets
|
|
29,290
|
|
Current liabilities
|
|
(22,168
|
)
|
Non-current liabilities
|
|
(10,807
|
)
|
Net regulatory asset as of June 30, 2016
|
|
$
|
15,427
|
|
4
.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
At
June 30, 2016
and
December 31, 2015
, we had goodwill balances recorded at ITCTransmission, METC and ITC Midwest of
$173.4 million
,
$453.8 million
and
$323.0 million
, respectively, which resulted from the ITCTransmission acquisition, the METC acquisition and ITC Midwest’s asset acquisition, respectively.
Intangible Assets
We have recorded intangible assets as a result of the METC acquisition in 2006. The carrying value of these assets was
$29.7 million
and
$31.2 million
(net of accumulated amortization of
$28.7 million
and
$27.2 million
) as of
June 30, 2016
and
December 31, 2015
, respectively.
We have also recorded intangible assets for payments made by and obligations of ITC Great Plains to certain TOs to acquire rights, which are required under the SPP tariff to designate ITC Great Plains to build, own and operate projects within the SPP region, including the KETA Project and the Kansas V-Plan Project. The carrying amount of these intangible assets was
$14.6 million
and
$14.4 million
(net of accumulated amortization of
$1.2 million
and
$1.0 million
) as of
June 30, 2016
and
December 31, 2015
, respectively.
During each of the three month periods ended
June 30, 2016
and
2015
, we recognized
$0.9 million
of amortization expense of our intangible assets and
$1.7 million
during each of the six month periods ended
June 30, 2016
and
2015
. For each of the next five years, we expect the annual amortization of our intangible assets that have been recorded as of
June 30, 2016
to be
$3.3 million
per year.
5
.
DEBT
Derivative Instruments and Hedging Activities
We may use derivative financial instruments, including interest rate swap contracts, to manage our exposure to fluctuations in interest rates. The use of these financial instruments mitigates exposure to these risks and the variability of our operating results. We are not a party to leveraged derivatives and do not enter into derivative financial instruments for trading or speculative purposes. As of
March 31, 2016
, we held 10-year interest rate swap contracts with a notional amount of
$200.0 million
. We entered into two additional 10-year interest rate swap contracts in June 2016, with notional amounts of
$50.0 million
each and fixed interest rates of
1.736%
and
1.631%
. These interest rate swaps managed the interest rate risk associated with the unsecured Notes issued by ITC Holdings described below and were terminated in June 2016 by us in conjunction with this debt issuance. A summary of the terminated interest rate swaps is provided below:
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|
|
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|
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|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Notional Amount
|
|
Weighted Average
Fixed Rate of
Interest Rate Swaps
|
|
Comparable
Reference Rate
of Notes
|
|
Loss on
Derivative
|
|
Settlement
Date
|
(Amounts in millions)
|
|
|
|
|
|
|
|
|
|
|
10-year interest rate swaps
|
|
$
|
300.0
|
|
|
1.99%
|
|
1.37%
|
|
$
|
17.2
|
|
|
June 2016
|
The interest rate swaps qualified for hedge accounting treatment and the loss of
$17.2 million
was recognized as of
June 30, 2016
for the effective portion of the hedges and recorded net of tax in AOCI. This amount is being amortized as a component of interest expense over the life of the related debt. The ineffective portion of the hedges was recognized in the condensed consolidated statement of operations for the three and six months ended June 30, 2016 and was not material.
In July 2016, ITC Holdings entered into two 10-year interest rate swap contracts with notional amounts of
$25.0 million
and
$50.0 million
and fixed interest rates of
1.584%
and
1.632%
, respectively. The interest rate swaps manage interest rate risk associated with the forecasted future issuance of fixed-rate debt related to the expected refinancing of the maturing ITC Holdings
6.05%
Senior Notes, due January 31, 2018. As of June 30, 2016, ITC Holdings had
$384.2 million
outstanding under the
6.05%
Senior Notes.
The 10-year term interest rate swaps call for ITC Holdings to receive interest quarterly at a variable rate equal to LIBOR and pay interest semi-annually at various fixed rates effective for the 10-year period beginning January 31, 2018, after the agreements have been terminated. The agreements include a mandatory early termination provision and will be terminated no later than the effective date of the interest rate swaps of January 31, 2018. The interest rate swaps have been determined to be highly effective at offsetting changes in the fair value of the forecasted interest cash flows associated with the expected debt issuance, resulting from changes in benchmark interest rates from the trade date of the interest rate swaps to the issuance date of the debt obligation.
METC
On April 26, 2016, METC issued
$200.0 million
of
3.90%
Senior Secured Notes, due April 26, 2046. The proceeds were used to repay the
$200.0 million
borrowed under METC’s term loan credit agreement. The METC Senior Secured Notes were issued under its first mortgage indenture and secured by a first mortgage lien on substantially all of its real property and tangible personal property.
ITC Holdings
Commercial Paper Program
ITC Holdings has an ongoing commercial paper program for the issuance and sale of unsecured commercial paper in an aggregate amount not to exceed
$400.0 million
outstanding at any one time. As of
June 30, 2016
, ITC Holdings had approximately
$312.0 million
of commercial paper issued and outstanding under the program, with a weighted-average interest rate of
0.8%
and weighted average remaining days to maturity of
7 days
. The proceeds from the issuances under the program were used for general corporate purposes, including the repayment of borrowings under ITC Holdings’ revolving credit agreement. The amount outstanding as of
June 30, 2016
was classified as debt maturing within one year in the condensed consolidated statements of financial position.
Unsecured Notes
On July 5, 2016, ITC Holdings issued
$400.0 million
aggregate principal amount of unsecured
3.25%
Notes, due
June 30, 2026
. The proceeds from the issuance were used to repay the
$161.0 million
outstanding under ITC Holdings’ term loan credit agreement and for general corporate purposes, primarily the repayment of indebtedness outstanding under ITC Holdings’ commercial paper program discussed above. These Notes were issued under ITC Holdings’ indenture, dated April 18, 2013. As of June 30, 2016, the
$161.0 million
outstanding under ITC Holdings’ term loan credit agreement was presented within long-term debt due to the refinancing of the debt on a long term basis as supported by the issuance of these Notes.
Revolving Credit Agreements
At
June 30, 2016
, ITC Holdings and its Regulated Operating Subsidiaries had the following unsecured revolving credit facilities available:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(amounts in millions)
|
Total
Available
Capacity
|
|
Outstanding
Balance (a)
|
|
Unused
Capacity
|
|
Weighted Average
Interest Rate on
Outstanding Balance
|
|
|
Commitment
Fee Rate (b)
|
ITC Holdings
|
$
|
400.0
|
|
|
$
|
7.0
|
|
|
$
|
393.0
|
|
(c)
|
1.7%
|
(d)
|
|
0.175
|
%
|
ITCTransmission
|
100.0
|
|
|
59.8
|
|
|
40.2
|
|
|
1.4%
|
(e)
|
|
0.10
|
%
|
METC
|
100.0
|
|
|
28.9
|
|
|
71.1
|
|
|
1.4%
|
(e)
|
|
0.10
|
%
|
ITC Midwest
|
250.0
|
|
|
113.2
|
|
|
136.8
|
|
|
1.4%
|
(e)
|
|
0.10
|
%
|
ITC Great Plains
|
150.0
|
|
|
62.6
|
|
|
87.4
|
|
|
1.4%
|
(e)
|
|
0.10
|
%
|
Total
|
$
|
1,000.0
|
|
|
$
|
271.5
|
|
|
$
|
728.5
|
|
|
|
|
|
|
____________________________
|
|
(a)
|
Included within long-term debt.
|
|
|
(b)
|
Calculation based on the average daily unused commitments, subject to adjustment based on the borrower’s credit rating.
|
|
|
(c)
|
ITC Holdings’ revolving credit agreement may be used for general corporate purposes, including to repay commercial paper issued pursuant to the commercial paper program described above, if necessary. While outstanding commercial paper does not reduce available capacity under ITC Holdings’ revolving credit agreement, the unused capacity under this agreement adjusted for the commercial paper outstanding was
$81.0 million
as of
June 30, 2016
.
|
|
|
(d)
|
Loan bears interest at a rate equal to LIBOR plus an applicable margin of 1.25% or at a base rate, which is defined as the higher of the prime rate, 0.50% above the federal funds rate or 1.00% above the one month LIBOR, plus an applicable margin of 0.25%, subject to adjustments based on ITC Holdings’ credit rating.
|
|
|
(e)
|
Loans bear interest at a rate equal to LIBOR plus an applicable margin of 1.00% or at a base rate, which is defined as the higher of the prime rate, 0.50% above the federal funds rate or 1.00% above the one month LIBOR, subject to adjustments based on the borrower’s credit rating.
|
On April 7, 2016, each of ITC Holdings and its Regulated Operating Subsidiaries amended its respective unsecured revolving credit agreement to allow for the consummation of the Merger (defined below in
Note 12
).
Covenants
Our debt instruments contain numerous financial and operating covenants that place significant restrictions on certain transactions, such as incurring additional indebtedness, engaging in sale and lease-back transactions, creating liens or other encumbrances, entering into mergers, consolidations, liquidations or dissolutions, creating or acquiring subsidiaries, selling or otherwise disposing of all or substantially all of our assets and paying dividends. In addition, the covenants require us to meet certain financial ratios, such as maintaining certain debt to capitalization ratios and maintaining certain interest coverage ratios. As of
June 30, 2016
, we were not in violation of any debt covenant.
6
.
STOCKHOLDERS’ EQUITY
The changes in stockholders’ equity for the
six months ended
June 30, 2016
were as follows:
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|
|
|
|
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|
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|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
Stockholders’
|
(in thousands, except share and per share data)
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income (Loss)
|
|
Equity
|
BALANCE, DECEMBER 31, 2015
|
152,699,077
|
|
|
$
|
829,211
|
|
|
$
|
875,595
|
|
|
$
|
4,265
|
|
|
$
|
1,709,071
|
|
Net income
|
—
|
|
|
—
|
|
|
134,963
|
|
|
—
|
|
|
134,963
|
|
Repurchase and retirement of common stock
|
(191,215
|
)
|
|
(8,318
|
)
|
|
—
|
|
|
—
|
|
|
(8,318
|
)
|
Dividends declared ($0.375 per share)
|
—
|
|
|
—
|
|
|
(57,378
|
)
|
|
—
|
|
|
(57,378
|
)
|
Stock option exercises
|
378,250
|
|
|
9,278
|
|
|
—
|
|
|
—
|
|
|
9,278
|
|
Shares issued under the Employee Stock Purchase Plan
|
40,219
|
|
|
1,228
|
|
|
—
|
|
|
—
|
|
|
1,228
|
|
Issuance of restricted stock
|
460,739
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeiture of restricted stock
|
(17,037
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeiture of performance shares
|
(5,008
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share-based compensation, net of forfeitures
|
—
|
|
|
11,393
|
|
|
—
|
|
|
—
|
|
|
11,393
|
|
Other comprehensive loss, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,341
|
)
|
|
(7,341
|
)
|
Other
|
—
|
|
|
101
|
|
|
—
|
|
|
—
|
|
|
101
|
|
BALANCE, JUNE 30, 2016
|
153,365,025
|
|
|
$
|
842,893
|
|
|
$
|
953,180
|
|
|
$
|
(3,076
|
)
|
|
$
|
1,792,997
|
|
The changes in stockholders’ equity for the
six months ended
June 30, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Other
|
|
Total
|
|
Common Stock
|
|
Retained
|
|
Comprehensive
|
|
Stockholders’
|
(in thousands, except share and per share data)
|
Shares
|
|
Amount
|
|
Earnings
|
|
Income
|
|
Equity
|
BALANCE, DECEMBER 31, 2014
|
155,140,967
|
|
|
$
|
923,191
|
|
|
$
|
741,550
|
|
|
$
|
4,816
|
|
|
$
|
1,669,557
|
|
Net income
|
—
|
|
|
—
|
|
|
139,468
|
|
|
—
|
|
|
139,468
|
|
Repurchase and retirement of common stock
|
(664,719
|
)
|
|
(21,838
|
)
|
|
—
|
|
|
—
|
|
|
(21,838
|
)
|
Dividends declared ($0.325 per share)
|
—
|
|
|
—
|
|
|
(50,513
|
)
|
|
—
|
|
|
(50,513
|
)
|
Stock option exercises
|
1,068,085
|
|
|
9,608
|
|
|
—
|
|
|
—
|
|
|
9,608
|
|
Shares issued under the Employee Stock Purchase Plan
|
34,097
|
|
|
1,096
|
|
|
—
|
|
|
—
|
|
|
1,096
|
|
Issuance of restricted stock
|
243,493
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeiture of restricted stock
|
(44,034
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of performance shares
|
287,464
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeiture of performance shares
|
(4,447
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Share-based compensation, net of forfeitures
|
—
|
|
|
8,704
|
|
|
—
|
|
|
—
|
|
|
8,704
|
|
Other comprehensive income, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
1,262
|
|
|
1,262
|
|
Other
|
—
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
46
|
|
BALANCE, JUNE 30, 2015
|
156,060,906
|
|
|
$
|
920,807
|
|
|
$
|
830,505
|
|
|
$
|
6,078
|
|
|
$
|
1,757,390
|
|
Accumulated Other Comprehensive Income
The following table provides the components of changes in AOCI for the
three and six months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance at the beginning of period
|
$
|
2,103
|
|
|
$
|
4,195
|
|
|
$
|
4,265
|
|
|
$
|
4,816
|
|
Derivative instruments
|
|
|
|
|
|
|
|
Reclassification of net loss relating to interest rate cash flow hedges from AOCI to interest expense — net (net of tax of $100 and $86 for the three months ended June 30, 2016 and 2015, respectively, and net of tax of $192 and $161 for the six months ended June 30, 2016 and 2015, respectively)
|
111
|
|
|
125
|
|
|
230
|
|
|
261
|
|
(Loss) gain on interest rate swaps relating to interest rate cash flow hedges (net of tax of $3,944 and $1,333 for the three months ended June 30, 2016 and 2015, respectively, and net of tax of $5,767 and $719 for the six months ended June 30, 2016 and 2015, respectively)
|
(5,459
|
)
|
|
1,861
|
|
|
(8,001
|
)
|
|
998
|
|
Derivative instruments, net of tax
|
(5,348
|
)
|
|
1,986
|
|
|
(7,771
|
)
|
|
1,259
|
|
Available-for-sale securities
|
|
|
|
|
|
|
|
Unrealized net gain (loss) on available-for-sale securities (net of tax of $122 and $74 for the three months ended June 30, 2016 and 2015, respectively, and net of tax of $309 and $2 for the six months ended June 30, 2016 and 2015, respectively)
|
169
|
|
|
(103
|
)
|
|
430
|
|
|
3
|
|
Available-for-sale securities, net of tax
|
169
|
|
|
(103
|
)
|
|
430
|
|
|
3
|
|
Total other comprehensive (loss) income, net of tax
|
(5,179
|
)
|
|
1,883
|
|
|
(7,341
|
)
|
|
1,262
|
|
Balance at the end of period
|
$
|
(3,076
|
)
|
|
$
|
6,078
|
|
|
$
|
(3,076
|
)
|
|
$
|
6,078
|
|
The amount of net loss relating to interest rate cash flow hedges to be reclassified from AOCI to interest expense for the 12-month period ending
June 30, 2017
is expected to be approximately
$2.5 million
.
7
.
SHARE-BASED COMPENSATION
Long-Term Incentive Plan Grants
On
May 19, 2016
, pursuant to the 2015 Long-Term Incentive Plan, we granted
453,219
shares of restricted stock. Holders of outstanding restricted stock have all the rights of a holder of common stock of ITC Holdings, including dividend and voting rights. Restricted stock holders receive cash dividends at each dividend payment date. The restricted stock shares generally vest
three years after the grant date
. Holders of restricted shares generally may not sell, transfer or pledge their respective shares until vesting occurs.
Stock Option Exercises
We issued
378,250
and
1,203,376
shares of our common stock during the
six months ended June 30, 2016
and the year ended
December 31, 2015
, respectively, due to the exercise of stock options.
8
.
EARNINGS PER SHARE
We report both basic and diluted EPS. Our restricted stock contain rights to receive nonforfeitable dividends and thus, are participating securities requiring the two-class method of computing EPS. A reconciliation of both calculations for the
three and six months ended June 30, 2016
and
2015
is presented in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
|
|
June 30,
|
(in thousands, except share, per share data and percentages)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
|
|
Net income
|
$
|
70,726
|
|
|
$
|
72,336
|
|
|
$
|
134,963
|
|
|
$
|
139,468
|
|
Less: dividends declared and paid — common and restricted shares
|
(28,693
|
)
|
|
(25,248
|
)
|
|
(57,278
|
)
|
|
(50,467
|
)
|
Undistributed earnings
|
42,033
|
|
|
47,088
|
|
|
77,685
|
|
|
89,001
|
|
Percentage allocated to common shares (a)
|
99.3
|
%
|
|
99.3
|
%
|
|
99.3
|
%
|
|
99.2
|
%
|
Undistributed earnings — common shares
|
41,739
|
|
|
46,758
|
|
|
77,141
|
|
|
88,289
|
|
Add: dividends declared and paid — common shares
|
28,487
|
|
|
25,076
|
|
|
56,890
|
|
|
50,100
|
|
Numerator for basic and diluted earnings per common share
|
$
|
70,226
|
|
|
$
|
71,834
|
|
|
$
|
134,031
|
|
|
$
|
138,389
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic earnings per common share — weighted average common shares outstanding
|
151,770,359
|
|
|
154,228,727
|
|
|
151,615,321
|
|
|
154,100,335
|
|
Incremental shares for stock options, employee stock purchase plan shares and performance shares — weighted average assumed conversion
|
1,177,814
|
|
|
1,190,632
|
|
|
1,095,057
|
|
|
1,316,716
|
|
Diluted earnings per common share — adjusted weighted average shares and assumed conversion
|
152,948,173
|
|
|
155,419,359
|
|
|
152,710,378
|
|
|
155,417,051
|
|
Per common share net income:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.46
|
|
|
$
|
0.47
|
|
|
$
|
0.88
|
|
|
$
|
0.90
|
|
Diluted
|
$
|
0.46
|
|
|
$
|
0.46
|
|
|
$
|
0.88
|
|
|
$
|
0.89
|
|
|
|
|
|
|
|
|
|
____________________________
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Weighted average common shares outstanding
|
151,770,359
|
|
|
154,228,727
|
|
|
151,615,321
|
|
|
154,100,335
|
|
|
Weighted average restricted shares (participating securities)
|
1,003,216
|
|
|
1,134,649
|
|
|
993,032
|
|
|
1,171,852
|
|
|
Total
|
152,773,575
|
|
|
155,363,376
|
|
|
152,608,353
|
|
|
155,272,187
|
|
|
Percentage allocated to common shares
|
99.3
|
%
|
|
99.3
|
%
|
|
99.3
|
%
|
|
99.2
|
%
|
The incremental shares for stock options and employee stock purchase plan (“ESPP”) shares are included in the diluted EPS calculation using the treasury stock method, unless the effect of including them would be anti-dilutive. Additionally, performance shares are included in the diluted EPS calculation using the treasury stock method when the performance metric is substantively measurable as of the end of the reporting period and has been met under the assumption the end of the reporting period was the end of the performance period. The outstanding stock options, ESPP shares and performance shares and the anti-dilutive stock options and ESPP shares excluded from the diluted EPS calculations were as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Outstanding stock options, ESPP shares and performance shares (as of June 30)
|
3,709,118
|
|
|
4,244,903
|
|
Anti-dilutive stock options and ESPP shares (for the three and six months ended June 30)
|
—
|
|
|
1,078,158
|
|
9
.
RETIREMENT BENEFITS AND ASSETS HELD IN TRUST
Pension Plan Benefits
We have a qualified defined benefit pension plan (“retirement plan”) for eligible employees, comprised of a traditional final average pay plan and a cash balance plan. The traditional final average pay plan is noncontributory, covers select employees, and provides retirement benefits based on years of benefit service, average final compensation and age at retirement. The cash balance plan is also noncontributory, covers substantially all employees and provides retirement benefits based on eligible compensation and interest credits. Our funding practice for the retirement plan is to contribute amounts necessary to
meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus additional amounts as we determine appropriate. During the second quarter of 2016, we contributed
$2.8 million
to the retirement plan. We
do not
expect to make any additional contributions to this plan in 2016.
We also have two supplemental nonqualified, noncontributory, defined benefit pension plans for selected management employees (the “supplemental benefit plans” and collectively with the retirement plan, the “pension plans”). The supplemental benefit plans provide for benefits that supplement those provided by the retirement plan. We contributed
$5.2 million
to the supplemental benefit plans during the second quarter of 2016. We
do not
expect to make any additional contributions to these plans in 2016.
Net periodic benefit cost for the pension plans, by component, was as follows for the
three and six months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
1,604
|
|
|
$
|
1,624
|
|
|
$
|
3,208
|
|
|
$
|
3,248
|
|
Interest cost
|
872
|
|
|
924
|
|
|
1,744
|
|
|
1,848
|
|
Expected return on plan assets
|
(932
|
)
|
|
(959
|
)
|
|
(1,864
|
)
|
|
(1,919
|
)
|
Amortization of prior service credit
|
(4
|
)
|
|
(11
|
)
|
|
(8
|
)
|
|
(21
|
)
|
Amortization of unrecognized loss
|
876
|
|
|
1,060
|
|
|
1,752
|
|
|
2,121
|
|
Net pension cost
|
$
|
2,416
|
|
|
$
|
2,638
|
|
|
$
|
4,832
|
|
|
$
|
5,277
|
|
Other Postretirement Benefits
We provide certain postretirement health care, dental and life insurance benefits for eligible employees. During the second quarter of 2016, we contributed
$3.7 million
to the postretirement benefit plan. We expect to make estimated additional contributions of
$3.7 million
to the postretirement benefit plan during the second half of 2016.
Net postretirement benefit plan cost, by component, was as follows for the
three and six months ended June 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
June 30,
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
$
|
1,855
|
|
|
$
|
2,121
|
|
|
$
|
3,710
|
|
|
$
|
4,243
|
|
Interest cost
|
630
|
|
|
619
|
|
|
1,260
|
|
|
1,238
|
|
Expected return on plan assets
|
(531
|
)
|
|
(463
|
)
|
|
(1,061
|
)
|
|
(926
|
)
|
Amortization of unrecognized loss
|
—
|
|
|
125
|
|
|
—
|
|
|
250
|
|
Net postretirement cost
|
$
|
1,954
|
|
|
$
|
2,402
|
|
|
$
|
3,909
|
|
|
$
|
4,805
|
|
Defined Contribution Plan
We also sponsor a defined contribution retirement savings plan. Participation in this plan is available to substantially all employees. We match employee contributions up to certain predefined limits based upon eligible compensation and the employee’s contribution rate. The cost of this plan was
$0.9 million
for each of the three month periods ended
June 30, 2016
and
2015
, and
$2.5 million
and
$2.4 million
for the
six months ended June 30, 2016
and
2015
, respectively.
10
.
FAIR VALUE MEASUREMENTS
The measurement of fair value is based on a three-tier hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. For the
six months ended June 30, 2016
and the year ended
December 31, 2015
, there were
no
transfers between levels.
Our assets and liabilities measured at fair value subject to the three-tier hierarchy at
June 30, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — fixed income securities
|
$
|
42,045
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — equity securities
|
958
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
43,003
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Our assets and liabilities measured at fair value subject to the three-tier hierarchy at
December 31, 2015
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
(in thousands)
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Cash and cash equivalents — cash equivalents
|
$
|
49
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — fixed income securities
|
35,813
|
|
|
—
|
|
|
—
|
|
Mutual funds — equity securities
|
976
|
|
|
—
|
|
|
—
|
|
Interest rate swap derivative
|
—
|
|
|
112
|
|
|
—
|
|
Financial liabilities measured on a recurring basis:
|
|
|
|
|
|
Interest rate swap derivatives
|
—
|
|
|
(3,548
|
)
|
|
—
|
|
Total
|
$
|
36,838
|
|
|
$
|
(3,436
|
)
|
|
$
|
—
|
|
As of
June 30, 2016
and
December 31, 2015
, we held certain assets and liabilities that are required to be measured at fair value on a recurring basis. The assets included in the table consist of investments recorded within cash and cash equivalents and other long-term assets, including investments held in a trust associated with our supplemental nonqualified, noncontributory, retirement benefit plans for selected management employees. Our cash and cash equivalents consist of money market funds that are recorded at cost plus accrued interest to approximate fair value. Our mutual funds consist of publicly traded mutual funds and are recorded at fair value based on observable trades for identical securities in an active market. Changes in the observed trading prices and liquidity of money market funds are monitored as additional support for determining fair value. Gain and losses are recorded in earnings for investments classified as trading securities and other comprehensive income for investments classified as available-for-sale.
The asset and liability related to derivatives consist of interest rate swaps discussed in
Note 5
. The fair value of our interest rate swap derivatives as of
December 31, 2015
was determined based on a discounted cash flow (“DCF”) method using LIBOR swap rates, which are observable at commonly quoted intervals.
We also held non-financial assets that are required to be measured at fair value on a non-recurring basis. These consist of goodwill and intangible assets. We did not record any impairment charges on long-lived assets and no other significant events occurred requiring non-financial assets and liabilities to be measured at fair value (subsequent to initial recognition) during the
six months ended June 30, 2016
. For additional information on our goodwill and intangible assets, please refer to the notes to the consolidated financial statements as of and for the
year ended December 31, 2015
included in our Form 10-K for such period and to
Note 4
of this Form 10-Q.
Fair Value of Financial Assets and Liabilities
Fixed Rate Debt
Based on the borrowing rates obtained from third party lending institutions currently available for bank loans with similar terms and average maturities from active markets, the fair value of our consolidated long-term debt and debt maturing within one year, excluding revolving and term loan credit agreements and commercial paper, was
$4,305.4 million
and
$3,879.7 million
at
June 30, 2016
and
December 31, 2015
, respectively. These fair values represent Level 2 measurements under the three-tier hierarchy described above. The total book value of our consolidated long-term debt and debt maturing within one year, net of discount and deferred financing fees and excluding revolving and term loan credit agreements and commercial paper, was
$3,853.7 million
and
$3,653.6 million
at
June 30, 2016
and
December 31, 2015
, respectively.
Revolving and Term Loan Credit Agreements
At
June 30, 2016
and
December 31, 2015
, we had a consolidated total of
$432.5 million
and
$680.9 million
, respectively, outstanding under our revolving and term loan credit agreements, which are variable rate loans. The fair value of these loans approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. These fair values represent Level 2 under the three-tier hierarchy described above.
Other Financial Instruments
The carrying value of other financial instruments included in current assets and current liabilities, including cash and cash equivalents, special deposits and commercial paper, approximates their fair value due to the short-term nature of these instruments.
11
.
COMMITMENTS AND CONTINGENT LIABILITIES
Environmental Matters
We are subject to federal, state and local environmental laws and regulations, which impose limitations on the discharge of pollutants into the environment, establish standards for the management, treatment, storage, transportation and disposal of solid and hazardous wastes and hazardous materials, and impose obligations to investigate and remediate contamination in certain circumstances. Liabilities relating to investigation and remediation of contamination, as well as other liabilities concerning hazardous materials or contamination, such as claims for personal injury or property damage, may arise at many locations, including formerly owned or operated properties and sites where wastes have been treated or disposed of, as well as properties currently owned or operated by us. Such liabilities may arise even where the contamination does not result from noncompliance with applicable environmental laws. Under some environmental laws, such liabilities may also be joint and several, meaning that a party can be held responsible for more than its share of the liability involved, or even the entire share. Although environmental requirements generally have become more stringent and compliance with those requirements more expensive, we are not aware of any specific developments that would increase our costs for such compliance in a manner that would be expected to have a material adverse effect on our results of operations, financial position or liquidity.
Our assets and operations also involve the use of materials classified as hazardous, toxic or otherwise dangerous. Many of the properties that we own or operate have been used for many years, and include older facilities and equipment that may be more likely than newer ones to contain or be made from such materials. Some of these properties include aboveground or underground storage tanks and associated piping. Some of them also include large electrical equipment filled with mineral oil, which may contain or previously have contained polychlorinated biphenyls, or PCBs. Our facilities and equipment are often situated on or near property owned by others so that, if they are the source of contamination, others’ property may be affected. For example, aboveground and underground transmission lines sometimes traverse properties that we do not own and transmission assets that we own or operate are sometimes commingled at our transmission stations with distribution assets owned or operated by our transmission customers.
Some properties in which we have an ownership interest or at which we operate are, or are suspected of being, affected by environmental contamination. We are not aware of any pending or threatened claims against us with respect to environmental contamination relating to these properties, or of any investigation or remediation of contamination at these properties, that entail costs likely to materially affect us. Some facilities and properties are located near environmentally sensitive areas such as wetlands.
Claims have been made or threatened against electric utilities for bodily injury, disease or other damages allegedly related to exposure to electromagnetic fields associated with electric transmission and distribution lines. While we do not believe that a causal link between electromagnetic field exposure and injury has been generally established and accepted in the scientific community, the liabilities and costs imposed on our business could be significant if such a relationship is established or accepted. We are not aware of any pending or threatened claims against us for bodily injury, disease or other damages allegedly related to exposure to electromagnetic fields and electric transmission and distribution lines that entail costs likely to have a material adverse effect on our results of operations, financial position or liquidity.
Litigation
We are involved in certain legal proceedings before various courts, governmental agencies and mediation panels concerning matters arising in the ordinary course of business. These proceedings include certain contract disputes, eminent domain and
vegetation management activities, regulatory matters and pending judicial matters. We cannot predict the final disposition of such proceedings. We regularly review legal matters and record provisions for claims that are considered probable of loss.
Michigan Sales and Use Tax Audit
The Michigan Department of Treasury has conducted sales and use tax audits of ITCTransmission for the audit periods April 1, 2005 through June 30, 2008 and October 1, 2009 through September 30, 2013. The Michigan Department of Treasury has denied ITCTransmission’s claims of the industrial processing exemption from use tax that it has taken beginning January 1, 2007. The exemption claim denials resulted in use tax assessments against ITCTransmission. ITCTransmission filed administrative appeals to contest these use tax assessments.
In a separate, but related case involving a Michigan-based public utility that made similar industrial processing exemption claims, the Michigan Supreme Court ruled in July 2015 that the electric system, which involves altering voltage, constitutes an exempt, industrial processing activity. However, the ruling further held the electric system is also used for other functions that would not be exempt, and remanded the case to the Michigan Court of Claims to determine how the exemption applies to assets that are used in electric distribution activities. On March 30, 2016, ITCTransmission withdrew its administrative appeals, and subsequently filed a civil action in the Michigan Court of Claims seeking to have the use tax assessments at issue canceled. Given the status of this litigation as pending, ITCTransmission cannot estimate the timing of any potential tax assessments or refunds.
The amount of use tax associated with the exemptions taken by ITCTransmission through
June 30, 2016
is estimated to be approximately
$19.2 million
, including interest. This amount includes approximately
$10.5 million
, including interest, assessed for the audit periods noted above. ITCTransmission believes that portions of the use tax assessments will be sustained upon resolution of this matter. ITCTransmission has recorded
$9.1 million
and
$5.9 million
for this contingent liability, including interest, as of
June 30, 2016
and December 31, 2015, respectively, primarily as an increase to property, plant and equipment, which is a component of revenue requirement in our cost-based formula rate.
METC has also taken the industrial processing exemption, estimated to be approximately
$10.1 million
for open periods. METC has not been assessed any use tax liability and has not recorded any contingent liability as of
June 30, 2016
associated with this matter. In the event it becomes appropriate to record additional use tax liability relating to this matter, ITCTransmission and METC would record the additional use tax primarily as an increase to the cost of property, plant and equipment, as the majority of purchases for which the exemption was taken relate to equipment purchases associated with capital projects.
Rate of Return on Equity Complaints
On November 12, 2013, the Association of Businesses Advocating Tariff Equity, Coalition of MISO Transmission Customers, Illinois Industrial Energy Consumers, Indiana Industrial Energy Consumers, Inc., Minnesota Large Industrial Group and Wisconsin Industrial Energy Group (collectively, the “complainants”) filed a complaint with the FERC under Section 206 of the FPA (the “Initial Complaint”), requesting that the FERC find the current
12.38%
MISO regional base ROE rate (the “base ROE”) for all MISO TOs, including ITCTransmission, METC and ITC Midwest, to no longer be just and reasonable. The complainants sought a FERC order reducing the base ROE used in our MISO Regulated Operating Subsidiaries’ formula transmission rates to
9.15%
. The Initial Complaint also alleged that the rates of any MISO TO using a capital structure with greater than
50%
for the equity component are likewise not just and reasonable (our MISO Regulated Operating Subsidiaries use their actual capital structures, which target
60%
equity, as FERC had previously authorized). The Initial Complaint also alleged the ROE adders currently approved for certain ITC Holdings operating companies, including an adder currently charged by ITCTransmission for being a member of an RTO and adders charged by ITCTransmission and METC for being independent TOs, are no longer just and reasonable, and sought to have them eliminated.
On June 19, 2014, in a separate Section 206 complaint against the regional base ROE rate for ISO New England TOs, FERC adopted a new methodology for establishing base ROE rates for electric transmission utilities. The new methodology is based on a two-step DCF analysis that uses both short-term and long-term growth projections in calculating ROE rates for a proxy group of electric utilities. The previous methodology used only short-term growth projections. FERC also reiterated that it can apply discretion in determining how ROE rates are established within a zone of reasonableness and reiterated its policy for limiting the overall ROE rate for any company, including the base and all applicable adders, at the high end of the zone of reasonableness set by the two-step DCF methodology. The new method presented in the ISO New England ROE case will be used in resolving the MISO ROE case.
On October 16, 2014, FERC granted the complainants’ request in part by setting the base ROE for hearing and settlement procedures, while denying all other aspects of the Initial Complaint. FERC found that the complainants failed to show that
the use of actual or FERC-approved capital structures that include more than
50%
equity is unjust and unreasonable. FERC also denied the request to terminate ITCTransmission’s and METC’s ROE incentives. The order reiterated that any TO’s total ROE rate is limited by the top end of a zone of reasonableness and the TO’s ability to implement the full amount of previously granted ROE adders may be affected by the outcome of the hearing. FERC set the refund effective date for the Initial Complaint as November 12, 2013.
During the fourth quarter of 2014, the MISO TOs engaged in the ordered FERC settlement procedures with the complainants, but were not able to reach resolution. On January 5, 2015, the Chief Judge of FERC issued an order which terminated settlement procedures and initiated the hearing process, with an initial decision due within 47 weeks of the order. On April 6, 2015, the MISO TOs filed
expert witness testimony
in the Initial Complaint proceeding supporting the existing base ROE as just and reasonable. However, in the event that FERC elects to change the base ROE, the testimony included a recommendation of
11.39%
base ROE for the period from November 12, 2013 through February 11, 2015 (the “Initial Refund Period”). On December 22, 2015, the presiding administrative law judge issued an initial decision on the Initial Complaint, which recommended a base ROE of
10.32%
for the Initial Refund Period, with a maximum ROE of
11.35%
. The initial decision is a non-binding recommendation to FERC on the Initial Complaint, and exceptions to the initial decision have been filed by the MISO TOs and the complainants. In resolving the Initial Complaint, we expect FERC to establish a new base ROE and zone of reasonable returns that will be used to determine any potential refund liability for the Initial Refund Period. The new base ROE as well as any ROE adders, subject to the limitations of the top end of any zone of reasonableness that is established, are expected to be used to calculate the refund liability for the Initial Refund Period. We anticipate a FERC order on the Initial Complaint by the end of 2016.
On February 12, 2015, an additional complaint was filed with the FERC under Section 206 of the FPA (the “Second Complaint”) by Arkansas Electric Cooperative Corporation, Mississippi Delta Energy Agency, Clarksdale Public Utilities Commission, Public Service Commission of Yazoo City and Hoosier Energy Rural Electric Cooperative, Inc., seeking a FERC order to reduce the base ROE used in the formula transmission rates of our MISO Regulated Operating Subsidiaries to
8.67%
, with an effective date of February 12, 2015. On March 11, 2015, the MISO TOs filed an answer to the Second Complaint with the FERC supporting the current base ROE as just and reasonable. On June 18, 2015, FERC accepted the Second Complaint and set it for hearing and settlement procedures. FERC also set the refund effective date for the Second Complaint as February 12, 2015.
On October 20, 2015, the MISO TOs filed
expert witness testimony
in the Second Complaint proceeding supporting the existing base ROE as just and reasonable. However, in the event that FERC elects to change the base ROE, the testimony included a recommendation of
10.75%
base ROE for the period from February 12, 2015 through May 11, 2016 (the “Second Refund Period”). Updated data to be considered in establishing any new base ROE was filed by the parties to the Second Complaint in January 2016, including a recommendation in the updated MISO TO expert witness testimony to use a
10.96%
base ROE. On June 30, 2016, the presiding administrative law judge issued an initial decision on the Second Complaint, which recommended a base ROE of
9.70%
for the Second Refund Period, with a maximum ROE of
10.68%
. The initial decision is a non-binding recommendation to FERC on the Second Complaint, and may be contested by the MISO TOs and/or the complainants. In resolving the Second Complaint, we expect FERC to establish a new base ROE and zone of reasonable returns that will be used, along with any ROE adders, to calculate the refund liability for the Second Refund Period. We anticipate a FERC order on the Second Complaint in 2017.
We believe it is probable that refunds will be required for these matters and as of
June 30, 2016
, the estimated range of refunds on a pre-tax basis is expected to be from
$196.8 million
to
$258.8 million
for the period from November 12, 2013 through
June 30, 2016
. As of
June 30, 2016
and
December 31, 2015
, our MISO Regulated Operating Subsidiaries had recorded an aggregate estimated regulatory liability of
$196.8 million
and
$168.0 million
, respectively, representing the low end of the range of potential refunds as of those dates, as there is no best estimate within the range of refunds. The recognition of this estimated liability resulted in a reduction in revenues of
$8.2 million
and
$13.3 million
for the three months ended
June 30, 2016
and 2015, respectively, and
$25.7 million
and
$20.8 million
for the
six months ended June 30, 2016
and 2015, respectively, and an increase in interest expense of
$1.7 million
and
$0.5 million
for the three months ended
June 30, 2016
and 2015, respectively, and
$3.1 million
and
$0.9 million
for the
six months ended June 30, 2016
and 2015, respectively. This resulted in an estimated after-tax reduction to net income of
$6.2 million
and
$8.5 million
for the three months ended
June 30, 2016
and 2015, respectively, and
$17.7 million
and
$13.3 million
for the
six months ended June 30, 2016
and 2015, respectively.
Based on the estimated range of refunds identified above, we believe that it is reasonably possible that these matters could result in an additional estimated pre-tax refund of up to
$62.0 million
(or a
$38.1 million
estimated after-tax reduction of net income) in excess of the amount recorded as of
June 30, 2016
. It is also possible the outcome of these matters could differ from the estimated range of losses and materially affect our consolidated results of operations due to the uncertainty of the
calculation of an authorized base ROE along with the zone of reasonableness under the newly adopted two-step DCF methodology, which is subject to significant discretion by the FERC. As of
June 30, 2016
, our MISO Regulated Operating Subsidiaries had a total of approximately
$3.0 billion
of equity in their collective capital structures for ratemaking purposes. Based on this level of aggregate equity, we estimate that each
10
basis point reduction in the authorized ROE would reduce annual consolidated net income by approximately
$3.0 million
.
In a separate but related matter, in November 2014, METC, ITC Midwest and other MISO TOs filed a request with FERC, under FPA Section 205, for authority to include a
50
basis point incentive adder for RTO participation in each of the TOs’ formula rates. On January 5, 2015, FERC approved the use of this incentive adder, effective January 6, 2015. Additionally, ITC Midwest filed a request with FERC, under FPA Section 205, in January 2015 for authority to include a
100
basis point incentive adder for independent transmission ownership, which is currently authorized for ITCTransmission and METC. On March 31, 2015, FERC approved the use of a
50
basis point incentive adder for independence, effective April 1, 2015. On April 30, 2015, ITC Midwest filed a request with FERC for rehearing on the approved incentive adder for independence and this request was subsequently denied by FERC on January 6, 2016. An appeal of FERC’s decision has been filed. The RTO participation incentive adder will be applied to METC’s and ITC Midwest’s base ROEs and the independence incentive adder will be applied to ITC Midwest’s base ROE in establishing their total authorized ROE rates, subject to the limitations of the top end of any zone of reasonableness that is established. Collection of these recently approved incentive adders is being deferred, pending the outcome of the ROE complaints.
Challenges Regarding Bonus Depreciation
See “Challenges Regarding Bonus Depreciation” in
Note 3
for discussion of these challenges.
Legal Matters Associated with Proposed Merger
Following the announcement of the Merger (defined below in
Note 12
), four putative state class action lawsuits have been filed by purported shareholders of ITC Holdings on behalf of a purported class of ITC Holdings shareholders. Initially, the four actions (
Paolo Guerra v. Albert Ernst, et al.
,
Harvey Siegelman v. Joseph L. Welch, et al.
,
Alan Poland v. Fortis Inc., et al.
,
Sanjiv Mehrotra v. Joseph L. Welch, et al.)
were filed in the Oakland County Circuit Court of the State of Michigan. The complaints name as defendants a combination of ITC Holdings and the individual members of the ITC Holdings board of directors, Fortis Inc. (“Fortis”), FortisUS Inc. (“FortisUS”) and Element Acquisition Sub Inc. (“Merger Sub”). The complaints generally allege, among other things, that (1) ITC Holdings’ directors breached their fiduciary duties in connection with the Merger Agreement (defined below in
Note 12
), (including, but not limited to, various alleged breaches of duties of good faith, loyalty, care and independence), (2) ITC Holdings’ directors failed to take appropriate steps to maximize shareholder value and claims that the Merger Agreement contains several deal protection provisions that are unnecessarily preclusive and (3) a combination of ITC Holdings, Fortis, FortisUS and Merger Sub aided and abetted the purported breaches of fiduciary duties. The complaints seek class action certification and a variety of relief including, among other things, enjoining defendants from completing the proposed Merger, unspecified rescissory and compensatory damages, and costs, including attorneys’ fees and expenses. The
Siegelman
case was voluntarily dismissed by the plaintiff on March 22, 2016. On March 23, 2016, the state court entered an order directing that the related cases be consolidated under the caption
In re ITC Holdings Corporation Shareholder Litigation.
On April 8, 2016,
Poland
filed an amended complaint to add derivative claims on behalf of ITC Holdings.
On March 14, 2016, the
Guerra
state court action was dismissed by the plaintiff and refiled in the United States District Court, Eastern District of Michigan, as
Paolo Guerra v. Albert Ernst, et al
. The federal complaint names the same defendants (plus FortisUS), asserts the same general allegations and seeks the same types of relief as in the state court cases. On March 25, 2016,
Guerra
amended his federal complaint. The amended complaint dropped Fortis US, Fortis and Merger Sub as defendants and added claims alleging that the defendants violated Sections 14(a) and 20(a) of the Exchange Act because the preliminary proxy statement/prospectus, filed with the SEC in connection with the special meeting of shareholders to approve the Merger Agreement, is allegedly materially misleading and allegedly omits material facts that are necessary to render it non-misleading.
Another lawsuit was filed on April 8, 2016 in the United States District Court, Eastern District of Michigan captioned
Harold Severance v. Joseph L. Welch et al.
against the individual members of the ITC Holdings board of directors, Fortis, FortisUS and Merger Sub, asserting the same general allegations and seeking the same type of relief as
Guerra
.
On April 22, 2016, the
Mehrotra
state court action was dismissed by the plaintiff and refiled in the United States District Court, Eastern District of Michigan, as
Sanjiv Mehrotra v. Joseph L. Welch, et al
. With the exception of Fortis, the federal complaint names the same defendants and asserts the same general allegations as the other federal complaints.
On June 8, 2016, the state court denied a motion for summary disposition filed by ITC Holdings and the individual members of the ITC Holdings board of directors. ITC Holdings voluntarily made supplemental disclosures related to the Merger in response to certain allegations, which are set forth in a Form 8-K filed with the SEC on June 13, 2016. Nothing in those supplemental disclosures shall be deemed an admission of the legal necessity or materiality under applicable laws of any of the disclosures set forth therein.
On July 6, 2016, the federal actions were voluntarily dismissed by the federal plaintiffs. The federal plaintiffs reserved the right to make certain other claims, and ITC Holdings and the individual members of the ITC Holdings board of directors reserved the right to oppose any such claim.
On July 8, 2016, the plaintiffs in
Poland
filed a motion for class certification. On July 13, 2016, ITC Holdings and the individual members of the ITC Holdings board of directors filed their respective answers to the amended complaint in
Poland
. On July 19, 2016, the
Poland
state court
issued a scheduling order, which, among other things, requires the parties to complete discovery by March 10, 2017, and sets a trial date for June 5, 2017. On July 25, 2016, the
Poland
state court issued an order allowing a new plaintiff, Washtenaw County Employees’ Retirement System, to intervene in the
Poland
case.
We believe the lawsuits are without merit and intend to vigorously defend against them. Additional lawsuits arising out of or relating to the Merger Agreement or the Merger may be filed in the future. See
Note 12
for additional discussion on the proposed Merger.
12
.
PROPOSED MERGER
On February 9, 2016, Fortis, FortisUS, Merger Sub and ITC Holdings entered into an agreement and plan of merger (the “Merger Agreement”), pursuant to which Merger Sub will merge with and into ITC Holdings, as a result of which ITC Holdings will become a subsidiary of FortisUS (the “Merger”). In the Merger, our shareholders will receive
$22.57
in cash and
0.7520
Fortis common shares for each share of common stock of ITC Holdings (the “Merger consideration”). Under the Merger Agreement, outstanding options to acquire common stock of ITC Holdings will vest immediately prior to closing and be converted into the right to receive the difference between the Merger consideration and the exercise price of the option in cash, restricted stock will vest immediately prior to closing and be converted into the right to receive the Merger consideration in cash and performance shares will vest immediately prior to closing at the higher of target or actual performance through the effective time of the Merger and be converted into the right to receive the Merger consideration in cash. Upon completion of the Merger, ITC Holdings shareholders will hold approximately
27%
of the common shares of Fortis. Fortis will apply to list its common shares on the New York Stock Exchange and will continue to have its shares listed on the Toronto Stock Exchange.
On April 20, 2016, FortisUS assigned its rights, interest, duties and obligations under the Merger Agreement to ITC Investment Holdings Inc. (“Investment Holdings”), a subsidiary of FortisUS formed to complete the Merger. On the same date, Fortis reached a definitive agreement with GIC Private Limited to acquire an indirect
19.9%
equity interest in ITC Holdings and debt securities to be issued by Investment Holdings for aggregate consideration of
$1.228 billion
in cash upon completion of the Merger.
During the second quarter of 2016, the shareholders of Fortis and the shareholders of ITC Holdings approved and adopted the Merger Agreement at separately held special meetings. The Committee on Foreign Investment in the United States concluded its review of the Merger and confirmed on July 8, 2016 that there are no unresolved national security concerns with respect to the Merger. The closing of the Merger, expected to occur in late 2016, remains subject to the satisfaction of customary closing conditions and certain regulatory, state and federal approvals including, among others, those of the FERC, the U.S. Federal Trade Commission, the U.S. Department of Justice and various state utilities regulators. Many of these conditions are outside our control, and we cannot provide any assurance as to whether or when the Merger will be consummated or whether our shareholders will realize the anticipated benefits of completing the Merger. Also, if the Merger does not receive timely regulatory approval or if an event occurs that delays or prevents the Merger, such delay or failure to complete the Merger may cause uncertainty and other negative consequences that may materially and adversely affect our business, financial position and results of operations.
The Merger Agreement contains certain termination rights, including the right of ITC Holdings to terminate the Merger Agreement to accept a superior proposal (subject to compliance with certain notice and other requirements). In addition, subject to certain exceptions and limitations, ITC Holdings or Fortis may terminate the Merger Agreement if the Merger is not consummated by February 9, 2017 (as such date may be extended pursuant to the terms of the Merger Agreement). The Merger Agreement provides that, in connection with termination of the Merger Agreement by ITC Holdings or Fortis upon specified conditions, a termination fee of
$245 million
may be required to be paid by ITC Holdings or Fortis. If the Merger
Agreement is terminated as a result of the failure to obtain certain regulatory approvals or due to a legal prohibition related to regulatory matters, a termination fee of
$280 million
will be payable by Fortis to ITC Holdings, subject to certain limitations.
For the
three and six months ended June 30, 2016
, we expensed external legal, advisory and financial services fees related to the Merger of
$12.4 million
and
$22.3 million
, respectively, and certain internal labor and associated costs related to the Merger of approximately
$3.2 million
and
$6.3 million
, respectively. The external and internal costs related to the Merger will not be included as components of revenue requirement at our Regulated Operating Subsidiaries as they were incurred at ITC Holdings.
Per the Merger Agreement, prior to completion of the Merger, there are certain restrictions on our ability to pay dividends other than those paid in the ordinary course of business with record dates and payment dates consistent with our past practice. Management does not expect the restrictions to have an impact on our ability to pay dividends at the current level for the foreseeable future.
See
Note 11
for legal matters associated with the proposed Merger with Fortis.
13
.
SEGMENT INFORMATION
We identify reportable segments based on the criteria set forth by the FASB regarding disclosures about segments of an enterprise, including the regulatory environment of our subsidiaries and the business activities performed to earn revenues and incur expenses. As discussed in Note 3, during the second quarter of 2016, ITC Interconnection became a transmission owner in the FERC-approved RTO, PJM Interconnection. As a result, the newly regulated transmission business at ITC Interconnection is included, along with our Regulated Operating Subsidiaries, in the regulated operations segment as of June 1, 2016. The following tables show our financial information by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
OPERATING REVENUES:
|
June 30,
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Regulated operations (a)
|
$
|
297,954
|
|
|
$
|
274,990
|
|
|
$
|
577,970
|
|
|
$
|
547,440
|
|
ITC Holdings and other
|
288
|
|
|
209
|
|
|
595
|
|
|
386
|
|
Intercompany eliminations
|
(198
|
)
|
|
(141
|
)
|
|
(388
|
)
|
|
(281
|
)
|
Total Operating Revenues
|
$
|
298,044
|
|
|
$
|
275,058
|
|
|
$
|
578,177
|
|
|
$
|
547,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
INCOME BEFORE INCOME TAXES:
|
June 30,
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Regulated operations (a)
|
$
|
166,639
|
|
|
$
|
149,640
|
|
|
$
|
319,426
|
|
|
$
|
298,458
|
|
ITC Holdings and other
|
(50,734
|
)
|
|
(34,208
|
)
|
|
(99,541
|
)
|
|
(75,434
|
)
|
Total Income Before Income Taxes
|
$
|
115,905
|
|
|
$
|
115,432
|
|
|
$
|
219,885
|
|
|
$
|
223,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
NET INCOME:
|
June 30,
|
|
June 30,
|
(in thousands)
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Regulated operations (a)
|
$
|
102,935
|
|
|
$
|
92,081
|
|
|
$
|
197,120
|
|
|
$
|
183,520
|
|
ITC Holdings and other
|
70,726
|
|
|
72,336
|
|
|
134,963
|
|
|
139,468
|
|
Intercompany eliminations
|
(102,935
|
)
|
|
(92,081
|
)
|
|
(197,120
|
)
|
|
(183,520
|
)
|
Total Net Income
|
$
|
70,726
|
|
|
$
|
72,336
|
|
|
$
|
134,963
|
|
|
$
|
139,468
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS:
|
June 30,
|
|
December 31,
|
(in thousands)
|
2016
|
|
2015
|
Regulated operations
|
$
|
7,954,645
|
|
|
$
|
7,463,557
|
|
ITC Holdings and other
|
4,344,359
|
|
|
4,147,915
|
|
Reconciliations / Intercompany eliminations (b)
|
(4,232,038
|
)
|
|
(4,056,150
|
)
|
Total Assets
|
$
|
8,066,966
|
|
|
$
|
7,555,322
|
|
____________________________
|
|
(a)
|
Amount includes the results of operations from ITC Interconnection for the period June 1, 2016 through June 30, 2016.
|
|
|
(b)
|
Reconciliation of total assets results primarily from differences in the netting of deferred tax assets and liabilities at our subsidiaries in the regulated operations segment as compared to the classification in our condensed consolidated statements of financial position.
|