The Value Line Investment Survey

ITC Holdings is engaged in the transmission of electricity. The company serves as a conduit between generators and distributors. ITC serves almost all of Michigan’s lower peninsula and parts of Iowa, Minnesota, Illinois and Missouri. Rates are regulated by the Federal Energy Regulatory Commission (FERC), using a formula that allows for the recovery of nearly all expenses (including taxes, but excluding merger-related costs), plus a rate of return on assets.

Since its initial public offering in 2005, the stock has performed well, thanks to ITC’s expansion via acquisition. The equity is timely. Momentum investors may want to consider holding a stake here. As time goes by, and the company builds substantial scale, the stock likely will become more of a growth & income investment. The current yield is on a par with the Value Line average, and dividend growth potential to 2011-2013 is attractive.

Rapid Expansion

In October 2006, ITC acquired Michigan Electric Transmission Company, which provided access to Michigan’s lower peninsula. This purchase was the major reason for last year’s 79% advance in share earnings. ITC inked another big deal at the end of 2007, purchasing Interstate Power & Light (IPL) from Alliant Energy. IPL owns and operates transmission lines in Iowa, Illinois, Minnesota and Missouri. The acquisition should help to lift revenue 35%-40% this year. This latest transaction was financed with debt and equity. Despite related dilution, we estimate that share net will rise 15%-20%, to $1.95, for all of 2008.

Additionally, ITC intends to expand into Kansas and Nebraska. Management’s “Kansas V-Plan” aims to build a 180- mile, V-shaped transmission line, thereby providing improved access to power, especially that generated by wind. The company has another plan to build a 180-mile power line between Kansas and southern Nebraska. So far, these proposals have received support from the Southwest Power Pool, which oversees local transmission planning. We expect final approvals from the FERC and the Kansas Corporation Commission shortly. ITC will probably continue to expand beyond its Midwest base over the next few years.

Good Fundamentals

In the U.S., steady population growth, increasing energy demand and aging equipment are all intensifying the need for new transmission. The 2003 blackout in the Northeast highlighted the pressures on the nation’s power grid. Most states, and the federal government, are well aware of this situation. It’s true that ITC recently ran into some difficulty regarding its project to build a high-voltage line from southern Michigan into Ohio. (The Michigan Public Service Commission had some concerns about the line’s siting.) But, this project, and others, likely will move forward, since regulators and politicians do not like negative publicity from power disruptions.

One other positive fundamental is the increasing popularity of alternative generation. Given rising concerns over global warming, governments and power users are increasingly turning to environmentally friendly sources rather than oil, coal and even natural gas. New plants that utilize renewable energy need to be connected to consumers. Ahead, ITC stands to reap sizable benefits from the development, installation, operation, and maintenance of transmission systems. Currently high capital spending requires more debt and equity issuances. Cash flow is tight and debt leverage heavy, but we believe that this investment will pay off in rich returns to investors.

Tom Nikic
Analyst-Specialist