Owning the Transmission Lines: Better Than Growth-Challenged Utilities?
Weak growth in demand for electricity has prompted a scramble among major U.S. power companies for alternative growth strategies. New Orleans-based Entergy (ETR) wants to sell its high-voltage transmission lines to boost its financial flexibility in the new world of deregulated, highly competitive retail electricity sales.
Unloading its transmission assets -- valued at $3.34 billion, or 23% of total plant, property and equipment -- may be a good idea for Entergy shareholders, especially considering the $700 million special dividend the company wants to pay after the deal closes.
But a better idea is the company that’s agreed to acquire Entergy’s power lines, Michigan-based ITC Holdings (ITC), the largest independent U.S. operator of electricity transmission lines. A great deal of regulatory and political muscle stands behind modernizing the U.S. electricity grid. Unlike Entergy, many traditional utilities are getting deeper into the business.
For example, earnings from high voltage transmission climbed 41% at Northeast Utilities (NU) in the first nine months of 2012 and contributed 23 cents a share to the nine-month EPS of 66 cents. An enthusiastic Northeast Utilities CEO Thomas May told analysts at the third-quarter conference call, “Deregulation was something many of us in the industry fought… It is the best thing ever to happen to you, our shareholders, because it set off this [high voltage transmission] building boom.”
Retail utilities owning transmission lines, which must be available to competitors, potentially creates conflicts of interest and a regulatory thicket. ITC, as an independent transmission company with no retail business, doesn’t have that problem. It’s a pure play in a regulated, political popular industry.
Investors have noticed and bid up shares, pushing up its PE ratio.
On the other hand, ITC share price slipped earlier this month, as seen in a stock chart, when Texas utility regulators said they may hold up Entergy’s deal with ITC because of alleged misstatements by Entergy in a related matter. Losing Entergy’s transmission operations, which would expand ITC’s network significantly in the central south, would be a blow, no doubt. But it won’t be fatal to a company that seems to be in the right place at the right time.
Bill Barnhart, a contributing editor at YCharts, is a 36-year veteran of business reporting. Most recently he was the financial columnist for the Chicago Tribune, where he offered daily commentary on financial markets. He is a past president of the Society of American Business Editors and Writers. He can be reached at editor@ycharts.com.
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