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Transcos Reborn

Recent attrition raises the question: Consolidation or death spiral?

Fortnightly Magazine - July 2005

February 2003, DTE sold the subsidiary to ITC Holdings Corp., owned by a limited partnership of private-capital investors (90.55 percent), plus management and employees of the company (9.45 percent). Thus ITC is a "pure" independent transco; DTE, which remains ITC's primary customer, retains no ownership in the company.

ITC's assets include about 2,700 miles of transmission lines and 30 substations, mostly serving southeastern Michigan. It began operations with about $450 million in assets, and since has invested about $122 million in upgrades and new facilities. In 2004 the company invested about $81.5 million in its assets, and expects to invest about $100 million more in 2005. The company finances its investments with bonds and lines of credit totaling $483 million. Overall, ITC is leveraged to a ratio of about 71 percent debt.

In addition to upgrading ITCs' existing lines and building out to new facilities and markets in the region, ITC intends to expand its footprint by acquiring other transmission systems. ITC made an investment in Conjuction LLC, which had hoped to build the $700 million Empire Connection transmission project in New York. That project ran aground, however, and ITC has not since made any acquisitions or investments outside its Michigan-based footprint.

ITC hopes to advance this business strategy with its planned $300 million initial public offering (IPO) of stock, which FERC approved in early May. (Because of the IPO, ITC was under a quiet period and could not speak to for this story.) With publicly traded stock, ITC might be better positioned for merger and acquisition activity, by virtue of the ability to undertake stock-for-stock merger transactions.

More broadly, a successful ITC public offering would achieve two important goals for the transco business. First, it would establish transcos as a public investment vehicle on the New York Stock Exchange and open a new source of capital to finance transmission investments. Second, and perhaps most importantly, ITC's IPO could pave an exit path that would help FERC become more comfortable with hybrid transco models.

To the degree regulators have concerns about passive investment by former transmission owners, the possibility of a public offering down the road might provide some assurance that these owners will be able to sell down their shares in a liquid market. As a result, all eyes are on ITC as it proceeds with its IPO.

Trans-Elect Inc.

Trans-Elect's primary asset is Michigan Electric Transmission Company (METC), a transmission system comprised of 5,400 miles of lines and associated substations, which it acquired from Consumers Energy in May 2002 for $290 million. METC is not Trans-Elect's only system, however.

Just before it acquired METC, Trans-Elect was part of a consortium of investors that acquired TransAlta's former transmission assets in Alberta, Canada, in a $829 million transaction. Trans-Elect now owns a 10 percent stake in the AltaLink system, which includes 7,200 miles of high-voltage transmission lines and 260 substations.

Also, Trans-Elect led the 1,500 MW upgrade of California's notorious Path 15-blamed for contributing to blackouts in the state's 2000-2001 power crisis. Trans-Elect financed and built the $300 million line, and brought

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