NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1
.
GENERAL
ITC Holdings Corp. (“ITC Holdings,” and together with its subsidiaries, “we,” “our” or “us”) and its subsidiaries are engaged in the transmission of electricity in the United States. Through our operating subsidiaries, ITCTransmission, METC, ITC Midwest, ITC Great Plains and ITC Interconnection (together, our “Regulated Operating Subsidiaries”), we operate high-voltage systems in Michigan and portions of Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma that transmit electricity from generating stations to local distribution facilities connected to our systems. Our business strategy is to operate, maintain and invest in transmission infrastructure in order to enhance system integrity and reliability, reduce transmission constraints and allow new generating resources to interconnect to our transmission systems. We also are pursuing transmission development projects not within our existing systems, which are intended to improve overall grid reliability, lower electricity congestion and facilitate interconnections of new generating resources, as well as enhance competitive wholesale electricity markets.
Our Regulated Operating Subsidiaries are independent electric transmission utilities, with rates regulated by the FERC and established on a cost-of-service model. ITCTransmission’s service area is located in southeastern Michigan, while METC’s service area covers approximately two-thirds of Michigan’s Lower Peninsula and is contiguous with ITCTransmission’s service area. ITC Midwest’s service area is located in portions of Iowa, Minnesota, Illinois and Missouri and ITC Great Plains currently owns assets located in Kansas and Oklahoma. The Midcontinent Independent System Operator, Inc. (“MISO”) bills and collects revenues from ITCTransmission, METC and ITC Midwest (“MISO Regulated Operating Subsidiaries”) customers. The Southwest Power Pool, Inc. (“SPP”) bills and collects revenue from ITC Great Plains customers. ITC Interconnection currently owns assets in Michigan and earns revenues based on its facilities reimbursement agreement with a merchant generating company.
2
.
THE MERGER
On
February 9, 2016, Fortis Inc
. (“Fortis”), FortisUS Inc. (“FortisUS”), Element Acquisition Sub Inc. (“Merger Sub”) and ITC Holdings entered into an agreement and plan of merger (the “Merger Agreement”), pursuant to which Merger Sub would merge with and into ITC Holdings with ITC Holdings continuing as a surviving corporation and becoming a majority owned indirect subsidiary of Fortis (the “Merger”). 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 a subsidiary of GIC Private Limited (“GIC”) for GIC 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. On
October 14, 2016
, ITC Holdings and Fortis completed the Merger contemplated by the Merger Agreement consistent with the terms described above. On the same date, the common shares of ITC Holdings were delisted from the New York Stock Exchange (“NYSE”) and the common shares of Fortis were listed and began trading on the NYSE. Fortis continues to have its shares listed on the Toronto Stock Exchange.
In the Merger, ITC Holdings shareholders received
$22.57
in cash and
0.7520
Fortis common shares for each share of common stock of ITC Holdings (the “Merger consideration”). Upon completion of the Merger, ITC Holdings shareholders held approximately
27%
of the common shares of Fortis. Under the Merger Agreement, outstanding share-based awards vested as described in
Note 13
. The per share amount of Merger consideration determined in accordance with the Merger Agreement and used for purposes of settling the share-based awards was
$45.72
. We elected not to apply pushdown accounting to ITC Holdings or its subsidiaries in connection with the Merger.
For the year ended
December 31, 2016
, we expensed external legal, advisory and financial services fees related to the Merger of
$55 million
and certain internal labor and associated costs related to the Merger of approximately
$58 million
, including approximately
$41 million
of expense recognized due to the accelerated vesting of the share-based awards described in
Note 13
. These merger-related costs were recorded within general and administrative expenses. The external and internal costs related to the Merger were recorded at ITC Holdings and have not been included as components of revenue requirement at our Regulated Operating Subsidiaries.
See
Note 15
for legal matters associated with the Merger with Fortis.
3
.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
Amendment to the Balance Sheet Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“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 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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|
|
|
|
|
|
|
|
|
|
(in millions)
|
Reported
|
|
Adjustment
|
|
Adjusted
|
Deferred financing fees (net of accumulated amortization)
|
$
|
29
|
|
|
$
|
(27
|
)
|
|
$
|
2
|
|
Debt maturing within one year
|
395
|
|
|
—
|
|
|
395
|
|
Long-term debt
|
4,061
|
|
|
(27
|
)
|
|
4,034
|
|
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.
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 to either estimate forfeitures 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.
We elected to early adopt the guidance during the fourth quarter of 2016. Upon adoption, we elected an accounting policy of recognizing forfeitures as they occur. The impact of this change was not material. In addition, we recorded a deferred tax asset through an adjustment to retained earnings of
$9 million
for state income tax net operating losses, related to excess tax benefits generated in periods prior to 2016 that had not been previously recognized in the consolidated statements of financial position. These aspects were adopted on a modified retrospective basis as of January 1, 2016. We also recorded an increase in deferred tax assets and a credit to income tax expense in 2016 for a total of
$27 million
for excess tax benefits generated during the year ended December 31, 2016; this change was adopted on a prospective basis as of January 1, 2016.
As a result of adoption, we began presenting excess tax benefits and deficiencies within operating activities on the statement of cash flows and adopted this change prospectively as of January 1, 2016; previously, such amounts were presented within financing activities. Therefore, the statements of cash flows for prior periods have not been adjusted. There were no other material impacts to our consolidated financial statements as a result of the other aspects of the guidance.
Recently Issued Pronouncements
We have considered all new accounting pronouncements issued by the FASB and concluded the following accounting guidance, which has not yet been adopted by us, may have a material impact on our consolidated financial statements.
Revenue Recognition
In May 2014, the 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 requires 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 majority of our revenue is generated from sales based on tariff rates, as approved by FERC, and is considered to be in the scope of the new guidance. However, we do not expect that the adoption of this guidance will have a material impact on our consolidated results of operations, cash flows or financial position. We continue to closely monitor outstanding industry specific interpretative issues, including contributions in aid of construction.
The guidance is effective for annual reporting periods beginning after December 15, 2017 and may be adopted using either (a) a full retrospective method, whereby comparative periods would be restated to present the impact of the new standard, with the cumulative effective of applying the standard recognized as of the earliest period presented, or (b) a modified retrospective method, under which comparative periods would not be restated and the cumulative effective of applying the standard would be recognized at the date of initial adoption, January 1, 2018. While we expect to use the modified retrospective approach, we continue to monitor industry developments and the outcome of those matters may impact our ultimate decision regarding transition method.
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. 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 adoption is permitted. We are currently assessing the impacts this guidance will have on our consolidated financial statements, including our disclosures.
4
.
SIGNIFICANT ACCOUNTING POLICIES
A summary of the major accounting policies followed in the preparation of the accompanying consolidated financial statements, which conform to accounting principles generally accepted in the United States of America (“GAAP”), is presented below:
Principles of Consolidation
— ITC Holdings consolidates its majority owned subsidiaries. We eliminate all intercompany balances and transactions.
Use of Estimates
— The preparation of the consolidated financial statements in accordance with GAAP requires 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.
Regulation
— Our Regulated Operating Subsidiaries are subject to the regulatory jurisdiction of the FERC, which issues orders pertaining to rates, recovery of certain costs, including the costs of transmission assets and regulatory assets, conditions of service, accounting, financing authorization and operating-related matters. The utility operations of our Regulated Operating Subsidiaries meet the accounting standards set
forth by the FASB for the accounting effects of certain types of regulation. These accounting standards recognize the cost based rate setting process, which results in differences in the application of GAAP between regulated and non-regulated businesses. These standards require the recording of regulatory assets and liabilities for certain transactions that would have been recorded as revenue and expense in non-regulated businesses. Regulatory assets represent costs that will be included as a component of future tariff rates and regulatory liabilities represent amounts provided in the current tariff rates that are intended to recover costs expected to be incurred in the future or amounts to be refunded to customers.
Cash and Cash Equivalents
— We consider all unrestricted highly-liquid temporary investments with an original maturity of
three months
or less at the date of purchase to be cash equivalents.
Consolidated Statements of Cash Flows
— The following table presents certain supplementary cash flows information for the years ended
December 31, 2016
,
2015
and
2014
:
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|
Year Ended December 31,
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Supplementary cash flows information:
|
|
|
|
|
|
Interest paid (net of interest capitalized)
|
$
|
190
|
|
|
$
|
191
|
|
|
$
|
185
|
|
Income taxes paid (a)
|
23
|
|
|
56
|
|
|
45
|
|
Supplementary non-cash investing and financing activities:
|
|
|
|
|
|
Additions to property, plant and equipment and other long-lived assets (b)
|
$
|
93
|
|
|
$
|
110
|
|
|
$
|
91
|
|
Allowance for equity funds used during construction
|
35
|
|
|
28
|
|
|
21
|
|
____________________________
|
|
(a)
|
Amount for the year ended
December 31, 2016
does not include the income tax refund of
$128 million
received from the Internal Revenue Service (“IRS”) in August 2016, which resulted from the election of bonus depreciation as described in
Note 5
.
|
|
|
(b)
|
Amounts consist of current liabilities for construction labor and materials that have not been included in investing activities. These amounts have not been paid for as of
December 31, 2016
,
2015
or
2014
, respectively, but have been or will be included as a cash outflow from investing activities for expenditures for property, plant and equipment when paid.
|
Excess tax benefits are recognized as an adjustment to income tax expense in the statement of operations. Cash retained as a result of those excess tax benefits is presented in the statement of cash flows as cash inflows from operating activities.
Accounts Receivable
— We recognize losses for uncollectible accounts based on specific identification of any such items. As of
December 31, 2016
and
2015
, we did
not
have an accounts receivable reserve.
Inventories
— Materials and supplies inventories are valued at average cost. Additionally, the costs of warehousing activities are recorded here and included in the cost of materials when requisitioned.
Property, Plant and Equipment
— Depreciation and amortization expense on property, plant and equipment was
$149 million
,
$136 million
and
$119 million
for
2016
,
2015
and
2014
, respectively.
Property, plant and equipment in service at our Regulated Operating Subsidiaries is stated at its original cost when first devoted to utility service. The gross book value of assets retired less salvage proceeds is charged to accumulated depreciation. The provision for depreciation of transmission assets is a significant component of our Regulated Operating Subsidiaries’ cost of service under FERC-approved rates. Depreciation is computed over the estimated useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes. The composite depreciation rate for our Regulated Operating Subsidiaries included in our consolidated statements of operations was
2.0%
,
2.1%
and
2.1%
for
2016
,
2015
and
2014
, respectively. The composite depreciation rates include depreciation primarily on transmission station equipment, towers, poles and overhead and underground lines that have a useful life ranging from
48
to
60 years
. The portion of depreciation expense related to asset removal costs is added to regulatory liabilities or deducted from regulatory assets and removal costs incurred are deducted from regulatory liabilities or added to regulatory assets. Certain of our Regulated Operating Subsidiaries capitalize to property, plant and equipment an allowance for the cost of equity and
borrowings used during construction (“AFUDC”) in accordance with the FERC regulations. AFUDC represents the composite cost incurred to fund the construction of assets, including interest expense and a return on equity capital devoted to construction of assets. The interest component of AFUDC of
$9 million
,
$7 million
and
$5 million
was a reduction to interest expense for
2016
,
2015
and
2014
, respectively. Certain projects at ITC Great Plains have been granted an incentive to include construction work in progress balances in rate base and we do not record AFUDC on those projects.
For acquisitions of property, plant and equipment greater than the net book value (other than asset acquisitions accounted for under the purchase method of accounting that result in goodwill), the acquisition premium is recorded to property, plant and equipment and amortized over the estimated remaining useful lives of the assets using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes.
Property, plant and equipment includes capital equipment inventory stated at original cost consisting of items that are expected to be used exclusively for capital projects.
Property, plant and equipment at ITC Holdings and non-regulated subsidiaries is stated at its acquired cost. Proceeds from salvage less the net book value of the disposed assets is recognized as a gain or loss on disposal. Depreciation is computed based on the acquired cost less expected residual value and is recognized over the estimated useful lives of the assets on a straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes.
Generator Interconnection Projects and Contributions in Aid of Construction
— Certain capital investment at our Regulated Operating Subsidiaries relates to investments made under generator interconnection agreements. The generator interconnection agreements typically consist of both transmission network upgrades, which are a category of upgrades deemed by the FERC to benefit the transmission system as a whole, as well as direct connection facilities, which are necessary to interconnect the generating facility to the transmission system and primarily benefit the generating facility.
Our investments in transmission facilities are recorded to property, plant and equipment, and are recorded net of any contribution in aid of construction. Contributions in aid of construction of
$11 million
,
$17 million
and
$20 million
were recorded as reductions to property, plant and equipment during the years ended
December 31, 2016
,
2015
or
2014
, respectively, and are included as cash inflows provided by investing activities in our consolidated statements of cash flows when received. We also receive refundable deposits from the generator for certain investment in network upgrade facilities in advance of construction, which are recorded to current or non-current liabilities depending on the expected refund date.
Available-For-Sale Securities
—
We have certain investments in debt and equity securities that are classified as available-for-sale securities. These investments currently fund our two supplemental nonqualified, noncontributory, retirement benefit plans for selected management employees as described in
Note 11
. Unrealized gains recorded for the investments are recognized, net of tax, in the accumulated other comprehensive income component of equity. Any unrealized losses (where cost exceeds fair market value) on the investments will also be recorded in the accumulated other comprehensive income component of equity, unless the unrealized loss is other than temporary, in which case it would be recorded as an investment loss in the consolidated statements of operations.
Impairment of Long-Lived Assets
— Other than goodwill, our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. If the carrying amount of the asset exceeds the expected undiscounted future cash flows generated by the asset, the asset is written down to its estimated fair value and an impairment loss is recognized in our consolidated statements of operations.
Goodwill
— Goodwill is not subject to amortization; however, goodwill is required to be assessed for impairment, and a resulting write-down, if any, is to be reflected in operating expense. We have goodwill recorded relating to our acquisitions of ITCTransmission and METC and ITC Midwest’s acquisition of the Interstate Power and Light Company (“IP&L”) transmission assets. Goodwill is reviewed at the reporting unit level at least annually for impairment and whenever facts or circumstances indicate that the value of goodwill may be impaired. Our reporting units are ITCTransmission, METC and ITC Midwest as each entity represents an individual operating segment to which goodwill has been assigned. In order to perform an impairment analysis, we have the option of performing a qualitative assessment to determine whether it is more likely
than not that the fair value of a reporting unit is greater than its carrying amount, in which case no further testing is required. If an entity bypasses the qualitative assessment or performs a qualitative assessment but determines that it is more likely than not that a reporting unit’s fair value is less than its carrying amount, a quantitative two-step, fair value-based test is performed to assess and measure goodwill impairment, if any. If a quantitative assessment is performed, we determine the fair value of our reporting units using valuation techniques based on discounted future cash flows under various scenarios and consider estimates of market-based valuation multiples for companies within the peer group of our reporting units.
We completed our annual goodwill impairment test for our reporting units as of
October 1, 2016
and determined that
no
impairment exists. There were no events subsequent to
October 1, 2016
, including the Merger consummated on October 14, 2016, that indicated impairment of our goodwill. Our intangible assets other than goodwill have finite lives and are amortized over their useful lives. Refer to
Note 7
for additional discussion on our goodwill and intangible assets.
Deferred Financing Fees and Discount or Premium on Debt
— Costs related to the issuance of long-term debt are generally recorded as a direct deduction from the carrying amount of the related debt and amortized over the life of the debt issue. Debt issuance costs incurred prior to the associated debt funding are presented as an asset. Unamortized debt issuance costs associated with the revolving credit agreements, commercial paper and other similar arrangements are presented as an asset (regardless of whether there are any amounts outstanding under those credit facilities) and amortized over the life of the particular arrangement. The debt discount or premium related to the issuance of long-term debt is recorded to long-term debt and amortized over the life of the debt issue. We recorded
$4 million
to interest expense for the amortization of deferred financing fees and debt discounts during each of the years ended
December 31, 2016
,
2015
and
2014
.
Asset Retirement Obligations
— A conditional asset retirement obligation is a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within our control. We have identified conditional asset retirement obligations primarily associated with the removal of equipment containing polychlorinated biphenyls (“PCBs”) and asbestos. We record a liability at fair value for a legal asset retirement obligation in the period in which it is incurred. When a new legal obligation is recorded, we capitalize the costs of the liability by increasing the carrying amount of the related long-lived asset. We accrete the liability to its present value each period and depreciate the capitalized cost over the useful life of the related asset. At the end of the asset’s useful life, we settle the obligation for its recorded amount. The standards for asset retirement obligations applied to our Regulated Operating Subsidiaries require us to recognize regulatory assets for the timing differences between the incurred costs to settle our legal asset retirement obligations and the recognition of such obligations under the standards set forth by the FASB. There were no significant changes to our asset retirement obligations in
2016
. Our asset retirement obligations as of
December 31, 2016
and
2015
of
$5 million
are included in other liabilities.
Financial Instruments
— For derivative instruments that have been designated and qualify as cash flow hedges of the exposure to variability in expected future cash flows, the gain or loss on the derivative is initially reported as a component of other comprehensive income (loss) and reclassified to the consolidated statement of operations when the underlying hedged transaction affects net income. Any hedge ineffectiveness is recognized in net income immediately at the time the gain or loss on the derivative instruments is calculated. Refer to
Note 9
for additional discussion regarding derivative instruments. Cash flows related to derivative instruments that are designated in hedging relationships are generally classified on the statement of cash flows in the same category as the cash flows from the associated hedged item.
Contingent Obligations
— We are subject to a number of federal and state laws and regulations, as well as other factors and conditions that potentially subject us to environmental, litigation and other risks. We periodically evaluate our exposure to such risks and record liabilities for those matters when a loss is considered probable and reasonably estimable in accordance with GAAP. Our liabilities exclude any estimates for legal costs not yet incurred associated with handling these matters. The adequacy of liabilities can be significantly affected by external events or conditions that can be unpredictable; thus, the ultimate outcome of such matters could materially affect our consolidated financial statements.
Revenues
— Revenues from the transmission of electricity are recognized as services are provided based on FERC-approved cost-based formula rates. We record a reserve for revenue subject to refund when such
refund is probable and can be reasonably estimated. This reserve is recorded as a reduction to operating revenues.
The cost-based formula rates at our Regulated Operating Subsidiaries include a true-up mechanism, whereby they compare their actual revenue requirements to their billed revenues for each year to determine any over- or under-collection of revenue requirements and record a revenue accrual or deferral for the difference. Refer to
Note 5
under “Cost-Based Formula Rates with True-Up Mechanism” for a discussion of our revenue accounting under our cost-based formula rates.
Comprehensive Income (Loss)
— Comprehensive income (loss) is the change in common stockholders’ equity during a period arising from transactions and events from non-owner sources, including net income, any gain or loss recognized for the effective portion of our interest rate swaps and any unrealized gain or loss associated with our available-for-sale securities.
Income Taxes
— Deferred income taxes are recognized for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred tax assets and liabilities are determined based on the differences between the financial statements and the tax bases of various assets and liabilities, using the tax rates expected to be in effect for the year in which the differences are expected to reverse, and classified as non-current in our consolidated statement of financial position.
The accounting standards for uncertainty in income taxes prescribe a recognition threshold and a measurement attribute for tax positions taken, or expected to be taken, in a tax return that may not be sustainable. As of
December 31, 2016
, we have not recognized any uncertain income tax positions.
We file income tax returns with the Internal Revenue Service and with various state and city jurisdictions. We are no longer subject to U.S. federal tax examinations for tax years
2012
and earlier. State and city jurisdictions that remain subject to examination range from tax years
2012
to
2015
. In the event we are assessed interest or penalties by any income tax jurisdictions, interest and penalties would be recorded as interest expense and other expense, respectively, in our consolidated statements of operations.
5
.
REGULATORY MATTERS
Rate of Return on Equity Complaints
See “Rate of Return on Equity Complaints” in
Note 15
for a discussion of the complaints.
Cost-Based Formula Rates with True-Up Mechanism
The transmission revenue requirements at our Regulated Operating Subsidiaries are set annually, using FERC-approved formula rates (“formula rates”), and remain in effect for a
one
-year period. By updating their formula rates on an annual basis, the revenues at our Regulated Operating Subsidiaries 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 rates 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 rates to calculate their respective annual revenue requirements unless the FERC determines the rates 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 15
for detail on return on equity (“ROE”) matters.
Our formula rates 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 rates. 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 rates.
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
year ended December 31, 2016
:
|
|
|
|
|
|
(In millions)
|
|
Total
|
Net regulatory liability as of December 31, 2015
|
|
$
|
(3
|
)
|
Net refund of 2014 revenue deferrals and accruals, including accrued interest
|
|
23
|
|
Net revenue deferral for the year ended December 31, 2016
|
|
(20
|
)
|
Net accrued interest payable for the year ended December 31, 2016
|
|
(1
|
)
|
Net regulatory liability as of December 31, 2016
|
|
$
|
(1
|
)
|
Regulatory assets and liabilities associated with our Regulated Operating Subsidiaries’ formula rate revenue accruals and deferrals, including accrued interest, are recorded in the consolidated statements of financial position at
December 31, 2016
as follows:
|
|
|
|
|
|
(In millions)
|
|
Total
|
Current regulatory assets
|
|
$
|
24
|
|
Non-current regulatory assets
|
|
16
|
|
Current regulatory liabilities
|
|
(9
|
)
|
Non-current regulatory liabilities
|
|
(32
|
)
|
Net regulatory liability as of December 31, 2016
|
|
$
|
(1
|
)
|
ITCTransmission Regional Cost Allocation Refund
In October 2010, MISO and ITCTransmission made a filing with the FERC under Section 205 of the FPA to revise the MISO tariff to establish a methodology to allocate and recover costs of ITCTransmission’s Phase Angle Regulating Transformers (“PARs”) among MISO and other FERC-approved Regional Transmission Organizations (“RTOs”) — the New York Independent System Operator and PJM Interconnection (“other RTOs”). In December 2010, the FERC accepted the proposed revisions, subject to refund, while setting them for hearing and settlement procedures. On September 22, 2016, the FERC issued an order largely affirming the presiding administrative law judge’s initial decision issued in December 2012, which stated, among other things, that MISO and ITCTransmission failed to show that the other RTOs will benefit from the operation of ITCTransmission’s PARs. The FERC order required ITCTransmission to provide refunds within 30 days for excess amounts collected from customers of the other RTOs. The refunds, including interest, were provided to the other RTOs in October 2016. As a result of the FERC order, ITCTransmission will collect the amounts refunded, plus interest, from network customers. On December 6, 2016, ITCTransmission made a filing with the FERC, under Section 205 of the FPA, requesting to recover the amount refunded to the other RTOs (“regional cost allocation recovery”) in network rates during the next calendar year, beginning January 1, 2017. On January 30, 2017, the FERC issued an order approving collection of the regional cost allocation recovery in 2017. ITCTransmission has recorded
$29 million
for the regional cost allocation recovery, including interest, in current regulatory assets on the consolidated statement of financial position as of
December 31, 2016
.
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 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, the FERC issued an order initiating a proceeding, pursuant to Section 206 of the 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, the 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 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. ITCTransmission, METC and ITC Midwest, along with another MISO TO, are currently appealing the FERC’s orders on this issue. 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 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 recovery of excess amounts from customers. As of
December 31, 2016
and 2015, our MISO Regulated Operating Subsidiaries had recorded an aggregate refund liability of
$2 million
and
$10 million
, respectively.
Challenges Regarding Bonus Depreciation
On December 18, 2015, 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. The 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, the FERC denied ITC Midwest’s request for rehearing of the March 11, 2016 order. On August 3, 2016, ITC Midwest filed a petition for review of the FERC’s March 11, 2016 and June 8, 2016 orders in the United States Court of Appeals, District of Columbia Circuit. On September 8, 2016, ITC Midwest filed a motion to defer the petition pending the resolution of a private letter ruling matter from the IRS. In a separate but related matter, on April 15, 2016, Consumers Energy 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, the FERC denied Consumers Energy’s formal challenge and dismissed the complaint without prejudice.
These 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 consolidated financial statements.
The total impact from reflecting the election of bonus depreciation as described above was lower revenues of
$20 million
and lower net income of approximately
$12 million
for the year ended
December 31, 2016
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
$109 million
and a corresponding income tax receivable of
$12 million
as of
December 31, 2016
, and income tax refunds of
$128 million
, which were received from
the IRS in August 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.
ITC Midwest’s Rate Discount
As part of the orders by the Iowa Utility Board and the Minnesota Public Utilities Commission approving ITC Midwest’s acquisition of the IP&L transmission assets, ITC Midwest agreed to provide a rate discount of
$4 million
per year to its customers for
eight
years, beginning in the first year customers experience an increase in transmission
charges following the consummation of the ITC Midwest asset acquisition. From 2009 through 2016, ITC Midwest’s net revenue requirement was reduced by
$4 million
for each year. The rate discount is recognized in revenues when we provide the service and charge the reduced rate that includes the rate discount.
6
.
REGULATORY ASSETS AND LIABILITIES
Regulatory Assets
The following table summarizes the regulatory asset balances at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Regulatory Assets:
|
|
|
|
Current:
|
|
|
|
Revenue accruals (including accrued interest of less than $1 as of December 31, 2016 and 2015) (a)
|
$
|
24
|
|
|
$
|
15
|
|
ITCTransmission regional cost allocation recovery (including accrued interest of less than $1 as of December 31, 2016) (b)
|
29
|
|
|
—
|
|
Total current
|
53
|
|
|
15
|
|
Non-current:
|
|
|
|
Revenue accruals (including accrued interest of less than $1 as of December 31, 2016 and 2015) (a)
|
16
|
|
|
26
|
|
ITCTransmission ADIT Deferral (net of accumulated amortization of $42 and $39 as of December 31, 2016 and 2015, respectively)
|
19
|
|
|
22
|
|
METC ADIT Deferral (net of accumulated amortization of $24 and $22 as of December 31, 2016 and 2015, respectively)
|
19
|
|
|
21
|
|
METC Regulatory Deferrals (net of accumulated amortization of $7 as of December 31, 2016 and 2015)
|
8
|
|
|
8
|
|
Income taxes recoverable related to AFUDC equity
|
124
|
|
|
103
|
|
ITC Great Plains start-up, development and pre-construction
|
11
|
|
|
13
|
|
Pensions and postretirement
|
25
|
|
|
19
|
|
Income taxes recoverable related to implementation of the Michigan Corporate Income Tax
|
9
|
|
|
9
|
|
Accrued asset removal costs
|
16
|
|
|
12
|
|
Total non-current
|
247
|
|
|
233
|
|
|
|
|
|
Total
|
$
|
300
|
|
|
$
|
248
|
|
____________________________
|
|
(a)
|
Refer to discussion of revenue accruals in
Note 5
under “Cost-Based Formula Rates with True-Up Mechanism.” Our Regulated Operating Subsidiaries do not earn a return on the balance of these regulatory assets, but do accrue interest carrying costs, which are subject to rate recovery along with the principal amount of the revenue accrual.
|
|
|
(b)
|
Refer to discussion of ITCTransmission regional cost allocation recovery in
Note 5
under “ITCTransmission Regional Cost Allocation Refund.”
|
ITCTransmission ADIT Deferral
The carrying amount of the ITCTransmission Accumulated Deferred Income Tax (“ADIT”) Deferral is the remaining unamortized balance of the portion of ITCTransmission’s purchase price in excess of the fair value of net assets acquired approved for inclusion in future rates by the FERC. ITCTransmission earns a return on the remaining unamortized balance of this regulatory asset that is included in rate base. The original amount recorded for this regulatory asset of
$61 million
is recognized in rates and amortized on a straight-line basis over
20
years. ITCTransmission recorded amortization expense of
$3 million
annually during
2016
,
2015
and
2014
, which is included in depreciation and amortization and recovered through ITCTransmission’s cost-based formula rate template.
METC ADIT Deferral
The carrying amount of the METC ADIT Deferral is the remaining unamortized balance of the portion of METC’s purchase price in excess of the fair value of net assets acquired from Consumers Energy approved for inclusion in future rates by the FERC. The original amount recorded for this regulatory asset of
$43 million
is recognized in rates and amortized on a straight-line basis over
18
years beginning January 1, 2007. METC earns a return on the remaining unamortized balance of this regulatory asset that is included in rate base. METC recorded amortization expense of
$2 million
annually during
2016
,
2015
and
2014
, which is included in depreciation and amortization and recovered through METC’s cost-based formula rate template.
METC Regulatory Deferrals
METC has deferred, as a regulatory asset, depreciation and related interest expense associated with new transmission assets placed in service from January 1, 2001 through December 31, 2005 that were included on METC’s balance sheet at the time Michigan Transco Holdings, LLC (“MTH”) acquired METC from Consumers Energy (the “METC Regulatory Deferrals”). The original amount recorded for this regulatory asset of
$15 million
is recognized in rates and amortized over
20
years beginning January 1, 2007. METC earns a return on the remaining unamortized balance of this regulatory asset that is included in rate base. METC recorded amortization expense of
$1 million
annually during
2016
,
2015
and
2014
, which is included in depreciation and amortization and recovered through METC’s cost-based formula rate template.
Income Taxes Recoverable Related to AFUDC Equity
Accounting standards for income taxes provide that a regulatory asset be recorded if it is probable that a future increase in taxes payable, relating to the book depreciation of AFUDC equity that has been capitalized to property, plant and equipment, will be recovered from customers through future rates. The regulatory asset for the tax effects of AFUDC equity is recovered over the life of the underlying book asset in a manner that is consistent with the depreciation of the AFUDC equity that has been capitalized to property, plant and equipment. We do not earn a return on this regulatory asset and the related deferred tax liabilities do not reduce rate base.
ITC Great Plains Start-Up, Development and Pre-Construction
In 2013, ITC Great Plains made a filing with the FERC, under Section 205 of the FPA, to recover start-up, development and pre-construction expenses in future rates. These expenses included certain costs incurred by ITC Great Plains for two regional cost sharing projects in Kansas prior to construction. In March 2015, FERC accepted ITC Great Plains’ request to commence amortization of the authorized regulatory assets, subject to refund, and set the matter for hearing and settlement judge procedures. In December 2015, the FERC issued an order accepting an uncontested settlement agreement establishing the amounts of the regulatory assets and associated carrying charges to be recovered. The unamortized balance of these regulatory assets is included in rate base and amortized over a
10
-year period, beginning in the second quarter of 2015. The amortization expense is recorded to general and administrative expenses and recovered through ITC Great Plains’ cost-based formula rate.
Pensions and Postretirement
Accounting standards for defined benefit pension and other postretirement plans for rate-regulated entities allow for amounts that otherwise would have been charged and/or credited to accumulated other comprehensive income (“AOCI”) to be recorded as a regulatory asset or liability. As the unrecognized amounts recorded to this regulatory asset are recognized, expenses will be recovered from customers in future rates under our cost based formula rates. Our Regulated Operating Subsidiaries do not earn a return on the balance of this regulatory asset.
Income Taxes Recoverable Related to Implementation of the
Michigan Corporate Income Tax
In May 2011, the Michigan Business Tax (“MBT”) was repealed and replaced with the Michigan Corporate Income Tax (“CIT”), effective January 1, 2012. Under the CIT, we are taxed at a rate of
6.0%
on federal taxable income attributable to our operations in the state of Michigan, subject to certain adjustments. In addition to the traditional income tax, the MBT had also included a modified gross receipts tax that allowed for deductions and credits for certain activities, none of which are part of the CIT. The change in Michigan tax law required us in 2011 to remove deferred income tax balances recognized under the MBT and establish new deferred income tax balances under the CIT, and the net result was incremental deferred state income tax liabilities at both ITCTransmission and METC. Under our cost-based formula rate, the future taxes receivable as a result of the tax law change has resulted
in the recognition of a regulatory asset, which will be collected from customers for the
23
-year period and the
32
-year period for ITCTransmission and METC, respectively, beginning in 2016. ITCTransmission and METC do not earn a return on the balance of this regulatory asset and the related net deferred tax liabilities do not reduce rate base.
Accrued Asset Removal Costs
The carrying amount of the accrued asset removal costs represents the difference between incurred costs to remove property, plant and equipment and the estimated removal costs included in rates. The portion of depreciation expense included in our depreciation rates related to asset removal costs reduces this regulatory asset and removal costs incurred are added to this regulatory asset. In addition, this regulatory asset has also been adjusted for timing differences between incurred costs to settle legal asset retirement obligations and the recognition of such obligations under the standards set forth by the FASB. Our Regulated Operating Subsidiaries include this item, excluding the cost component related to the recognition of our legal asset retirement obligations under the standards set forth by the FASB, as a reduction to accumulated depreciation for rate-making purposes, which is an increase to rate base.
Regulatory Liabilities
The following table summarizes the regulatory liability balances at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Regulatory Liabilities:
|
|
|
|
Current:
|
|
|
|
Revenue deferrals (including accrued interest of less than $1 and $2 as of December 31, 2016 and 2015, respectively) (a)
|
$
|
9
|
|
|
$
|
37
|
|
Refund related to the formula rate template modifications (including accrued interest of $1 and less than $1 as of December 31, 2016 and 2015, respectively) (b)
|
2
|
|
|
8
|
|
Estimated refund related to return on equity complaint (including accrued interest of $9 as of December 31, 2016) (c)
|
118
|
|
|
—
|
|
Total current
|
129
|
|
|
45
|
|
Non-current:
|
|
|
|
Revenue deferrals (including accrued interest of $1 and less than $1 as of December 31, 2016 and 2015, respectively) (a)
|
32
|
|
|
6
|
|
Accrued asset removal costs
|
68
|
|
|
70
|
|
Refund related to the formula rate template modifications (including accrued interest of less than $1 as of December 31, 2015) (b)
|
—
|
|
|
2
|
|
Estimated potential refund related to return on equity complaints (including accrued interest of $6 as of December 31, 2016 and 2015) (c)
|
140
|
|
|
168
|
|
Excess state income tax deductions
|
9
|
|
|
9
|
|
Total non-current
|
249
|
|
|
255
|
|
|
|
|
|
Total
|
$
|
378
|
|
|
$
|
300
|
|
____________________________
|
|
(a)
|
Refer to discussion of revenue deferrals in
Note 5
under “Cost-Based Formula Rates with True-Up Mechanism.” Our Regulated Operating Subsidiaries accrue interest on the true-up amounts which will be refunded through rates along with the principal amount of revenue deferrals in future periods.
|
|
|
(b)
|
Refer to discussion of the refund in
Note 5
under “MISO Formula Rate Template Modifications Filing.”
|
|
|
(c)
|
Refer to discussion of the estimated refund and potential refund in
Note 15
under “Rate of Return on Equity Complaints.”
|
Accrued Asset Removal Costs
The carrying amount of the accrued asset removal costs represents the difference between incurred costs to remove property, plant and equipment and the estimated removal costs included in rates. The portion of depreciation expense included in our depreciation rates related to asset removal costs is added to this regulatory liability and
removal expenditures incurred are charged to this regulatory liability. Our Regulated Operating Subsidiaries include this item within accumulated depreciation for rate-making purposes, which is a reduction to rate base.
Excess State Income Tax Deductions
We have taken income tax deductions associated with property additions that exceed the tax basis of property, and the unrealized income tax benefits resulting from these deductions are expected to be refunded to customers through future rates when the income tax benefits are realized. This regulatory liability and the related deferred tax assets do not affect rate base.
7
.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
At
December 31, 2016
and
2015
, we had goodwill balances recorded at ITCTransmission, METC and ITC Midwest of
$173 million
,
$454 million
and
$323 million
, respectively, which resulted from the ITCTransmission and METC acquisitions and ITC Midwest’s acquisition of the IP&L transmission assets, respectively.
Intangible Assets
Pursuant to the METC acquisition in October 2006, we have identified intangible assets with finite lives derived from the portion of regulatory assets recorded on METC’s historical FERC financial statements that were not recorded on METC’s historical GAAP financial statements associated with the METC Regulatory Deferrals and the METC ADIT Deferral. The carrying amounts of the intangible asset for the METC Regulatory Deferrals and the METC ADIT Deferral were
$20 million
and
$8 million
, respectively, as of
December 31, 2016
, and
$22 million
and
$9 million
, respectively, as of
December 31, 2015
. The amortization periods for the METC Regulatory Deferrals and the METC ADIT Deferral are
20 years
and
18 years
, respectively, beginning January 1, 2007. METC earns an equity return on the remaining unamortized balance of both intangible assets and recovers the amortization expense through METC’s cost-based formula rate template.
ITC Great Plains has 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 two regional cost sharing projects in Kansas. The carrying amount of these intangible assets was
$15 million
and
$14 million
(net of accumulated amortization of
$1 million
and
$1 million
, respectively) as of
December 31, 2016
and
2015
, respectively. The amortization period for these intangible assets is
50 years
.
During each of the years ended
December 31, 2016
,
2015
and
2014
, we recognized
$3 million
of amortization expense of our intangible assets. We expect the annual amortization of our intangible assets that have been recorded as of
December 31, 2016
to be as follows:
|
|
|
|
|
(In millions)
|
|
2017
|
$
|
3
|
|
2018
|
3
|
|
2019
|
3
|
|
2020
|
3
|
|
2021
|
3
|
|
2022 and thereafter
|
28
|
|
Total
|
$
|
43
|
|
8
.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment — net consisted of the following at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Property, plant and equipment
|
|
|
|
Regulated Operating Subsidiaries:
|
|
|
|
Property, plant and equipment in service
|
$
|
7,715
|
|
|
$
|
7,086
|
|
Construction work in progress
|
455
|
|
|
426
|
|
Capital equipment inventory
|
74
|
|
|
55
|
|
Other
|
15
|
|
|
13
|
|
ITC Holdings and other
|
14
|
|
|
18
|
|
Total
|
8,273
|
|
|
7,598
|
|
Less: Accumulated depreciation and amortization
|
(1,575
|
)
|
|
(1,488
|
)
|
Property, plant and equipment — net
|
$
|
6,698
|
|
|
$
|
6,110
|
|
Additions to property, plant and equipment in service and construction work in progress during
2016
and
2015
were due primarily for projects to upgrade or replace existing transmission plant to improve the reliability of our transmission systems as well as transmission infrastructure to support generator interconnections and investments that provide regional benefits such as our Multi-Value Projects.
9
.
DEBT
The following amounts were outstanding at
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
(Amounts in millions)
|
2016
|
|
2015
|
ITC Holdings 5.875% Senior Notes, due September 30, 2016 (a)
|
$
|
—
|
|
|
$
|
139
|
|
ITC Holdings 6.23% Senior Notes, Series B, due September 20, 2017 (a)
|
50
|
|
|
50
|
|
ITC Holdings 6.375% Senior Notes, due September 30, 2036
|
200
|
|
|
200
|
|
ITC Holdings 6.05% Senior Notes, due January 31, 2018
|
385
|
|
|
385
|
|
ITC Holdings 5.50% Senior Notes, due January 15, 2020
|
200
|
|
|
200
|
|
ITC Holdings 4.05% Senior Notes, due July 1, 2023
|
250
|
|
|
250
|
|
ITC Holdings 3.65% Senior Notes, due June 15, 2024
|
400
|
|
|
400
|
|
ITC Holdings 5.30% Senior Notes, due July 1, 2043
|
300
|
|
|
300
|
|
ITC Holdings 3.25% Notes, due June 30, 2026
|
400
|
|
|
—
|
|
ITC Holdings Term Loan Credit Agreement, due September 30, 2016 (a)
|
—
|
|
|
161
|
|
ITC Holdings Revolving Credit Agreement, due March 28, 2019
|
73
|
|
|
138
|
|
ITC Holdings Commercial Paper Program (a)
|
145
|
|
|
95
|
|
ITCTransmission 6.125% First Mortgage Bonds, Series C, due March 31, 2036
|
100
|
|
|
100
|
|
ITCTransmission 5.75% First Mortgage Bonds, Series D, due April 1, 2018
|
100
|
|
|
100
|
|
ITCTransmission 4.625% First Mortgage Bonds, Series E, due August 15, 2043
|
285
|
|
|
285
|
|
ITCTransmission 4.27% First Mortgage Bonds, Series F, due June 10, 2044
|
100
|
|
|
100
|
|
ITCTransmission Revolving Credit Agreement, due March 28, 2019
|
44
|
|
|
48
|
|
METC 5.64% Senior Secured Notes, due May 6, 2040
|
50
|
|
|
50
|
|
METC 3.98% Senior Secured Notes, due October 26, 2042
|
75
|
|
|
75
|
|
METC 4.19% Senior Secured Notes, due December 15, 2044
|
150
|
|
|
150
|
|
METC 3.90% Senior Secured Notes, due April 26, 2046
|
200
|
|
|
—
|
|
METC Term Loan Credit Agreement, due December 7, 2018
|
—
|
|
|
200
|
|
METC Revolving Credit Agreement, due March 28, 2019
|
31
|
|
|
3
|
|
ITC Midwest 6.15% First Mortgage Bonds, Series A, due January 31, 2038
|
175
|
|
|
175
|
|
ITC Midwest 7.12% First Mortgage Bonds, Series B, due December 22, 2017 (a)
|
40
|
|
|
40
|
|
ITC Midwest 7.27% First Mortgage Bonds, Series C, due December 22, 2020
|
35
|
|
|
35
|
|
ITC Midwest 4.60% First Mortgage Bonds, Series D, due December 17, 2024
|
75
|
|
|
75
|
|
ITC Midwest 3.50% First Mortgage Bonds, Series E, due January 19, 2027
|
100
|
|
|
100
|
|
ITC Midwest 4.09% First Mortgage Bonds, Series F, due April 30, 2043
|
100
|
|
|
100
|
|
ITC Midwest 3.83% First Mortgage Bonds, Series G, due April 7, 2055
|
225
|
|
|
225
|
|
ITC Midwest Revolving Credit Agreement, due March 28, 2019
|
127
|
|
|
72
|
|
ITC Great Plains 4.16% First Mortgage Bonds, Series A, due November 26, 2044
|
150
|
|
|
150
|
|
ITC Great Plains Revolving Credit Agreement, due March 28, 2019
|
59
|
|
|
59
|
|
Total principal
|
4,624
|
|
|
4,460
|
|
Unamortized deferred financing fees and discount
|
(34
|
)
|
|
(31
|
)
|
Total debt
|
$
|
4,590
|
|
|
$
|
4,429
|
|
____________________________
|
|
(a)
|
As of
December 31, 2016
and
2015
, there was
$235 million
and
$395 million
, respectively, of debt included within debt maturing within one year that is classified as a current liability in the consolidated statements of financial position.
|
The annual maturities of debt as of
December 31, 2016
are as follows:
|
|
|
|
|
|
(In millions)
|
|
|
2017
|
|
$
|
235
|
|
2018
|
|
485
|
|
2019
|
|
334
|
|
2020
|
|
235
|
|
2021
|
|
—
|
|
2022 and thereafter
|
|
3,335
|
|
Total
|
|
$
|
4,624
|
|
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 million
outstanding at any one time. As of
December 31, 2016
, ITC Holdings had approximately
$145 million
of commercial paper issued and outstanding under the program, with a weighted-average interest rate of
1.0%
and weighted average remaining days to maturity of
7 days
. The proceeds from issuances under the program during the year ended
December 31, 2016
were used to repay and retire the
$139 million
of ITC Holdings’
5.875%
Senior Notes, due September 30, 2016, and for general corporate purposes, including the repayment of borrowings under ITC Holdings’ revolving credit agreement. The amount outstanding as of
December 31, 2016
was classified as debt maturing within one year in the consolidated statements of financial position.
Unsecured Notes
On July 5, 2016, ITC Holdings issued
$400 million
aggregate principal amount of unsecured
3.25%
Notes, due
June 30, 2026
. The proceeds from the issuance were used to repay the
$161 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.
METC
Senior Secured Notes
On April 26, 2016, METC issued
$200 million
of
3.90%
Senior Secured Notes, due April 26, 2046. The proceeds were used to repay the
$200 million
borrowed under METC’s term loan credit agreement discussed below. 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.
Term Loan Credit Agreement
On December 8, 2015, METC entered into an unsecured, unguaranteed term loan credit agreement due December 7, 2018, under which METC borrowed
$200 million
. The proceeds were used to repay the
$175 million
of
5.75%
Senior Secured Notes, due December 10, 2015, and for general corporate purposes. This borrowing was repaid in full as of
December 31, 2016
. The weighted-average interest rate throughout the life of the loan was
1.4%
.
ITC Midwest
On April 7, 2015, ITC Midwest issued
$225 million
aggregate principal amount of
3.83%
First Mortgage Bonds, Series G, due April 7, 2055. The proceeds from the issuance were used for general corporate purposes, including the repayment of borrowings under ITC Midwest’s revolving credit agreement. ITC Midwest’s First Mortgage Bonds are issued under its first mortgage and deed of trust and secured by a first mortgage lien on substantially all of its property.
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. The interest rate swaps listed below 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
December 31, 2016
, ITC Holdings had
$385 million
outstanding under the
6.05%
Senior Notes.
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
(In millions, except percentages)
|
|
Notional Amount
|
|
Weighted Average Fixed Rate
|
|
Original Term
|
|
Effective Date
|
July 2016 swaps
|
|
$
|
75
|
|
|
1.616
|
%
|
|
10 years
|
|
January 2018
|
August 2016 swap
|
|
25
|
|
|
1.599
|
%
|
|
10 years
|
|
January 2018
|
Total
|
|
$
|
100
|
|
|
|
|
|
|
|
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.
The interest rate swaps qualify for cash flow hedge accounting treatment, whereby any gain or loss recognized from the trade date to the effective date for the effective portion of the hedge is recorded net of tax in AOCI. This amount will be accumulated and amortized as a component of interest expense over the life of the forecasted debt. As of
December 31, 2016
, the fair value of the derivative instruments was an asset of
$8 million
. None of the interest rate swaps contain credit-risk-related contingent features. Refer to
Note 12
for additional fair value information.
In June 2016, we terminated
$300 million
of
10
-year interest rate swap contracts that managed the interest rate risk associated with the unsecured Notes issued by ITC Holdings described below. A summary of the terminated interest rate swaps is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
(In millions, except percentages)
|
|
Amount
|
|
Weighted Average
Fixed Rate of
Interest Rate Swaps
|
|
Comparable
Reference Rate
of Notes
|
|
Loss on
Derivatives
|
|
Settlement
Date
|
10-year interest rate swaps
|
|
$
|
300
|
|
|
1.99%
|
|
1.37%
|
|
$
|
17
|
|
|
June 2016
|
The interest rate swaps qualified for cash flow hedge accounting treatment and the loss of
$17 million
was recognized in June 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 consolidated statement of operations for the year ended
December 31, 2016
and was not material.
Revolving Credit Agreements
At
December 31, 2016
, ITC Holdings and certain of its Regulated Operating Subsidiaries had the following unsecured revolving credit facilities available:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in millions, except percentages)
|
Total
Available
Capacity
|
|
Outstanding
Balance (a)
|
|
Unused
Capacity
|
|
Weighted Average
Interest Rate on
Outstanding Balance
|
|
Commitment
Fee Rate (b)
|
ITC Holdings
|
$
|
400
|
|
|
$
|
73
|
|
|
$
|
327
|
|
(c)
|
|
2.0%
|
(d)
|
|
0.175
|
%
|
ITCTransmission
|
100
|
|
|
44
|
|
|
56
|
|
|
|
1.7%
|
(e)
|
|
0.10
|
%
|
METC
|
100
|
|
|
31
|
|
|
69
|
|
|
|
1.7%
|
(e)
|
|
0.10
|
%
|
ITC Midwest
|
250
|
|
|
127
|
|
|
123
|
|
|
|
1.7%
|
(e)
|
|
0.10
|
%
|
ITC Great Plains
|
150
|
|
|
59
|
|
|
91
|
|
|
|
1.7%
|
(e)
|
|
0.10
|
%
|
Total
|
$
|
1,000
|
|
|
$
|
334
|
|
|
$
|
666
|
|
|
|
|
|
|
|
____________________________
|
|
(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
$182 million
as of
December 31, 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 the unsecured revolving credit agreements described above was amended to allow for the consummation of the Merger.
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 December 31, 2016, we were not in violation of any debt covenant.
10
.
INCOME TAXES
Our effective tax rate varied from the statutory federal income tax rate due to differences between the book and tax treatment of various transactions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Income tax expense at 35% statutory rate
|
$
|
120
|
|
|
$
|
134
|
|
|
$
|
138
|
|
State income taxes (net of federal benefit)
|
3
|
|
|
14
|
|
|
16
|
|
AFUDC equity
|
(11
|
)
|
|
(8
|
)
|
|
(6
|
)
|
Excess tax deductions for share-based compensation (a)
|
(23
|
)
|
|
—
|
|
|
—
|
|
Other — net
|
8
|
|
|
2
|
|
|
2
|
|
Total income tax provision
|
$
|
97
|
|
|
$
|
142
|
|
|
$
|
150
|
|
____________________________
|
|
(a)
|
Amount relates to a federal income tax benefit for excess tax deductions generated in 2016 as a result of adopting the new accounting guidance associated with share-based payments as described in
Note 3
.
|
Components of the income tax provision were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Current income tax (benefit) expense (a)
|
$
|
(122
|
)
|
|
$
|
65
|
|
|
$
|
60
|
|
Deferred income tax expense (b)(c)
|
219
|
|
|
77
|
|
|
90
|
|
Total income tax provision
|
$
|
97
|
|
|
$
|
142
|
|
|
$
|
150
|
|
____________________________
|
|
(a)
|
Amount for the year ended December 31, 2016 primarily relates to the cash benefit that resulted from the election of bonus depreciation as described in
Note 5
.
|
|
|
(b)
|
During the fourth quarter of 2016, we recognized total income tax benefits of
$27 million
for excess tax deductions for the year ended December 31, 2016 as a result of adopting the new accounting guidance associated with share-based payments as described in
Note 3
.
|
|
|
(c)
|
Amount for the year ended December 31, 2016 includes utilization of
$126 million
of net operating losses, primarily resulting from the election of bonus depreciation as described in
Note 5
.
|
Deferred tax assets and liabilities are recognized for the estimated future tax effect of temporary differences between the tax basis of assets or liabilities and the reported amounts in the financial statements.
Deferred income tax assets (liabilities) consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Property, plant and equipment
|
$
|
(1,026
|
)
|
|
$
|
(679
|
)
|
Federal income tax NOLs and other credits
|
140
|
|
|
1
|
|
METC regulatory deferral (a)
|
(11
|
)
|
|
(12
|
)
|
Acquisition adjustments — ADIT deferrals (a)
|
(15
|
)
|
|
(15
|
)
|
Goodwill
|
(163
|
)
|
|
(148
|
)
|
ITCTransmission regional cost allocation recovery (a)
|
(11
|
)
|
|
—
|
|
Refund liabilities (a)
|
56
|
|
|
70
|
|
Pension and postretirement liabilities
|
23
|
|
|
19
|
|
State income tax NOLs (net of federal benefit) (b)
|
47
|
|
|
20
|
|
Share-based compensation
|
—
|
|
|
14
|
|
Other — net (c)
|
(4
|
)
|
|
(5
|
)
|
Net deferred tax liabilities
|
$
|
(964
|
)
|
|
$
|
(735
|
)
|
Gross deferred income tax liabilities
|
$
|
(1,252
|
)
|
|
$
|
(888
|
)
|
Gross deferred income tax assets
|
288
|
|
|
153
|
|
Net deferred tax liabilities
|
$
|
(964
|
)
|
|
$
|
(735
|
)
|
____________________________
|
|
(a)
|
Described in
Note 6
.
|
|
|
(b)
|
During the fourth quarter of 2016, we recorded a deferred tax asset of
$9 million
for state income tax net operating losses, related to excess tax benefits generated in periods prior to 2016 that had not been previously recognized in the consolidated statements of financial position, upon adoption of the accounting guidance associated with share-based payments as described in
Note 3
.
|
|
|
(c)
|
Includes net revenue accruals and deferrals, including accrued interest, of
$1 million
as of December 31, 2016 and 2015.
|
We have federal income tax net operating losses (“NOLs”) and capital losses as of December 31, 2016, both of which we expect to use prior to their expirations starting in 2036 and 2018, respectively. We also have state income tax NOLs as of December 31, 2016, all of which we expect to use prior to their expiration starting in 2022
.
11
.
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. We made contributions of
$3 million
,
$4 million
and
$4 million
to the retirement plan in
2016
,
2015
and
2014
, respectively. We expect to contribute
$3 million
to the retirement plan in
2017
.
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. The obligations under these supplemental benefit plans are included in the pension benefit obligation calculations below. The investments held in trust for the supplemental benefit plans of
$42 million
and
$36 million
at
December 31, 2016
and
2015
, respectively, are not included in the plan asset amounts presented below, but are included in other assets on our consolidated statement of financial position. For the years ended
December 31, 2016
,
2015
and
2014
, we contributed
$5 million
,
$9 million
and
$5 million
, respectively, to these supplemental benefit plans.
Our investments held for the supplemental benefit plans are classified as available-for-sale securities and the life-to-date net unrealized loss of less than
$1 million
as of
December 31, 2016
and
December 31, 2015
was recognized in AOCI.
The plan assets of the retirement plan consisted of the following assets by category:
|
|
|
|
|
|
|
Asset Category
|
2016
|
|
2015
|
Fixed income securities
|
50.3
|
%
|
|
50.4
|
%
|
Equity securities
|
49.7
|
%
|
|
49.6
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
Net periodic benefit cost for the pension plans during
2016
,
2015
and
2014
was as follows by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
5
|
|
Interest cost
|
4
|
|
|
4
|
|
|
4
|
|
Expected return on plan assets
|
(4
|
)
|
|
(3
|
)
|
|
(4
|
)
|
Amortization of unrecognized loss
|
4
|
|
|
4
|
|
|
2
|
|
Net pension cost
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
7
|
|
Prior to 2016, we measured service and interest costs for all pension plans utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligations. Beginning in 2016, we adopted a spot rate approach for measuring service and interest costs for all our pension plans whereby specific spot rates along the yield curve used to determine the benefit obligations are applied to the relevant projected cash flows. We believe the new approach provides a more precise measurement of our service and interest costs; therefore, we have accounted for this change prospectively as a change in accounting estimate. This change does not affect the measurement of our total benefit obligation and it did not have a material impact on 2016 net pension cost.
The following table reconciles the obligations, assets and funded status of the pension plans as well as the presentation of the funded status of the pension plans in the consolidated statements of financial position as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Change in Benefit Obligation:
|
|
|
|
Beginning projected benefit obligation
|
$
|
(97
|
)
|
|
$
|
(96
|
)
|
Service cost
|
(6
|
)
|
|
(6
|
)
|
Interest cost
|
(4
|
)
|
|
(4
|
)
|
Actuarial net (loss) gain
|
(11
|
)
|
|
6
|
|
Benefits paid
|
2
|
|
|
3
|
|
Ending projected benefit obligation
|
$
|
(116
|
)
|
|
$
|
(97
|
)
|
Change in Plan Assets:
|
|
|
|
Beginning plan assets at fair value
|
$
|
58
|
|
|
$
|
56
|
|
Actual return on plan assets
|
5
|
|
|
—
|
|
Employer contributions
|
3
|
|
|
4
|
|
Benefits paid
|
(2
|
)
|
|
(2
|
)
|
Ending plan assets at fair value
|
$
|
64
|
|
|
$
|
58
|
|
Funded status, underfunded
|
$
|
(52
|
)
|
|
$
|
(39
|
)
|
Accumulated benefit obligation:
|
|
|
|
|
|
Retirement plan
|
$
|
(56
|
)
|
|
$
|
(49
|
)
|
Supplemental benefit plans
|
(55
|
)
|
|
(41
|
)
|
Total accumulated benefit obligation
|
$
|
(111
|
)
|
|
$
|
(90
|
)
|
Amounts recorded as:
|
|
|
|
|
Funded Status:
|
|
|
|
Accrued pension liabilities
|
$
|
(52
|
)
|
|
$
|
(45
|
)
|
Other non-current assets
|
4
|
|
|
6
|
|
Other current liabilities
|
(4
|
)
|
|
—
|
|
Total
|
$
|
(52
|
)
|
|
$
|
(39
|
)
|
Unrecognized Amounts in Non-current Regulatory Assets:
|
|
|
|
Net actuarial loss
|
$
|
25
|
|
|
$
|
19
|
|
Total
|
$
|
25
|
|
|
$
|
19
|
|
The unrecognized amounts that otherwise would have been charged and/or credited to AOCI in accordance with the FASB guidance on accounting for retirement benefits are recorded as a regulatory asset on our consolidated statements of financial position as discussed in
Note 6
. The amounts recorded as a regulatory asset represent a net periodic benefit cost to be recognized in our operating income in future periods.
Actuarial assumptions used to determine the benefit obligation for the pension plans at
December 31, 2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted average discount rate (a)
|
4.00%
|
|
4.26%
|
|
3.95%
|
Annual rate of salary increases
|
4.00%
|
|
4.00%
|
|
4.00%
|
____________________________
|
|
(a)
|
The prior year discount rate assumptions have been presented to conform to current year weighted average presentation.
|
Actuarial assumptions used to determine the benefit cost for the pension plans for the years ended
December 31, 2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Weighted average discount rate — service cost (a)
|
4.46%
|
|
3.95%
|
|
4.80%
|
Weighted average discount rate — interest cost (a)
|
3.62%
|
|
3.95%
|
|
4.80%
|
Annual rate of salary increases
|
4.00%
|
|
4.00%
|
|
4.00 - 6.00%
|
Expected long-term rate of return on plan assets
|
6.40%
|
|
6.70%
|
|
6.75%
|
____________________________
|
|
(a)
|
The prior year discount rate assumptions have been presented to conform to current year weighted average presentation.
|
At
December 31, 2016
, the projected benefit payments for the pension plans calculated using the same assumptions as those used to calculate the benefit obligation described above are as follows:
|
|
|
|
|
(In millions
|
|
2017
|
$
|
6
|
|
2018
|
6
|
|
2019
|
6
|
|
2020
|
7
|
|
2021
|
7
|
|
2022 through 2026
|
45
|
|
Investment Objectives and Fair Value Measurement
The general investment objectives of the retirement plan include maximizing the return within reasonable and prudent levels of risk and controlling administrative and management costs. The targeted asset allocation is weighted equally between equity and fixed income investments. Investment decisions are made by our retirement benefits board as delegated by our board of directors. Equity investments may include various types of U.S. and international equity securities, such as large-cap, mid-cap and small-cap stocks. Fixed income investments may include cash and short-term instruments, U.S. Government securities, corporate bonds, mortgages and other fixed income investments. No investments are prohibited for use in the retirement plan, including derivatives, but our exposure to derivatives currently is not material. We intend that the long-term capital growth of the retirement plan, together with employer contributions, will provide for the payment of the benefit obligations.
We determine our expected long-term rate of return on plan assets based on the current and expected target allocations of the retirement plan investments and considering historical and expected long-term rates of returns on comparable fixed income investments and equity investments.
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 years ended
December 31, 2016
and
2015
, there were
no
transfers between levels.
The fair value measurement of the retirement plan assets as of
December 31, 2016
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
Active Markets for
|
|
Other Observable
|
|
Unobservable
|
(In millions)
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — U.S. equity securities
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — international equity securities
|
7
|
|
|
—
|
|
|
—
|
|
Mutual funds — fixed income securities
|
32
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fair value measurement of the retirement plan assets as of
December 31, 2015
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
Active Markets for
|
|
Other Observable
|
|
Unobservable
|
(In millions)
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — U.S. equity securities
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — international equity securities
|
5
|
|
|
—
|
|
|
—
|
|
Mutual funds — fixed income securities
|
29
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The mutual funds consist primarily of publicly traded mutual funds and are recorded at fair value based on observable trades for identical securities in an active market.
Other Postretirement Benefits
We provide certain postretirement health care, dental and life insurance benefits for eligible employees. We contributed
$7 million
,
$9 million
and
$6 million
to the postretirement benefit plan in
2016
,
2015
and
2014
, respectively. We expect to contribute
$9 million
to the plan in
2017
.
The plan assets consisted of the following assets by category:
|
|
|
|
|
|
|
Asset Category
|
2016
|
|
2015
|
Fixed income securities
|
50.3
|
%
|
|
50.0
|
%
|
Equity securities
|
49.7
|
%
|
|
50.0
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
Net postretirement benefit plan cost for
2016
,
2015
and
2014
was as follows by component:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Service cost
|
$
|
7
|
|
|
$
|
8
|
|
|
$
|
6
|
|
Interest cost
|
3
|
|
|
3
|
|
|
2
|
|
Expected return on plan assets
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Amortization of unrecognized loss
|
—
|
|
|
1
|
|
|
—
|
|
Net postretirement cost
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
7
|
|
Prior to 2016, we measured service and interest costs for the postretirement benefit plan utilizing a single weighted-average discount rate derived from the yield curve used to measure the plan obligation. Beginning in 2016, we adopted a spot rate approach for measuring service and interest costs for the postretirement benefit plan whereby specific spot rates along the yield curve used to determine the benefit obligation are applied to the relevant projected cash flows. We believe the new approach provides a more precise measurement of our service and interest costs; therefore, we have accounted for this change prospectively as a change in accounting estimate. This change does
not affect the measurement of our total benefit obligation and it did not have a material impact on 2016 net postretirement benefit cost.
The following table reconciles the obligations, assets and funded status of the plan as well as the amounts recognized as accrued postretirement liability in the consolidated statements of financial position as of
December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
Change in Benefit Obligation:
|
|
|
|
Beginning accumulated postretirement obligation
|
$
|
(58
|
)
|
|
$
|
(58
|
)
|
Service cost
|
(7
|
)
|
|
(8
|
)
|
Interest cost
|
(3
|
)
|
|
(3
|
)
|
Actuarial net (loss) gain
|
(1
|
)
|
|
10
|
|
Benefits paid
|
1
|
|
|
1
|
|
Ending accumulated postretirement obligation
|
$
|
(68
|
)
|
|
$
|
(58
|
)
|
Change in Plan Assets:
|
|
|
|
Beginning plan assets at fair value
|
$
|
42
|
|
|
$
|
33
|
|
Actual return on plan assets
|
4
|
|
|
—
|
|
Employer contributions
|
7
|
|
|
9
|
|
Employer provided retiree premiums
|
—
|
|
|
1
|
|
Benefits paid
|
(1
|
)
|
|
(1
|
)
|
Ending plan assets at fair value
|
$
|
52
|
|
|
$
|
42
|
|
Funded status, underfunded
|
$
|
(16
|
)
|
|
$
|
(16
|
)
|
Amounts recorded as:
|
|
|
|
Funded Status:
|
|
|
|
Accrued postretirement liabilities
|
$
|
(16
|
)
|
|
$
|
(16
|
)
|
Total
|
$
|
(16
|
)
|
|
$
|
(16
|
)
|
Unrecognized Amounts in Non-current Regulatory Assets:
|
|
|
|
Net actuarial loss
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
The unrecognized amounts that otherwise would have been charged and/or credited to AOCI in accordance with the FASB guidance on accounting for retirement benefits are recorded as a regulatory asset on our consolidated statements of financial position as discussed in
Note 6
. The amounts recorded as a regulatory asset represent a net periodic benefit cost to be recognized in our operating income in future periods. Our measurement of the accumulated postretirement benefit obligation as of
December 31, 2016
and
2015
does not reflect the potential receipt of any subsidies under the Medicare Prescription Drug, Improvement and Modernization Act of 2003.
Actuarial assumptions used to determine the benefit obligation at
December 31, 2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Discount rate
|
4.28%
|
|
4.62%
|
|
4.20%
|
Annual rate of salary increases
|
4.00%
|
|
4.00%
|
|
4.00%
|
Health care cost trend rate
|
7.00%
|
|
7.15%
|
|
7.25%
|
Ultimate health care cost trend rate
|
5.00%
|
|
5.00%
|
|
5.00%
|
Year that the ultimate trend rate is reached
|
2022
|
|
2022
|
|
2022
|
Annual rate of increase in dental benefit costs
|
5.00%
|
|
5.00%
|
|
5.00%
|
Actuarial assumptions used to determine the benefit cost for the years ended
December 31, 2016
,
2015
and
2014
are as follows:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Discount rate — service cost
|
4.72%
|
|
4.20%
|
|
5.15%
|
Discount rate — interest cost
|
4.21%
|
|
4.20%
|
|
5.15%
|
Annual rate of salary increases
|
4.00%
|
|
4.00%
|
|
4.00%
|
Health care cost trend rate
|
7.15%
|
|
7.25%
|
|
7.50%
|
Ultimate health care cost trend rate
|
5.00%
|
|
5.00%
|
|
5.00%
|
Year that the ultimate trend rate is reached
|
2022
|
|
2022
|
|
2022
|
Expected long-term rate of return on plan assets
|
4.80%
|
|
5.20%
|
|
5.50%
|
At
December 31, 2016
, the projected benefit payments for the postretirement benefit plan calculated using the same assumptions as those used to calculate the benefit obligations listed above are as follows:
|
|
|
|
|
(In millions)
|
|
2017
|
$
|
1
|
|
2018
|
1
|
|
2019
|
1
|
|
2020
|
2
|
|
2021
|
2
|
|
2022 through 2026
|
14
|
|
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point increase or decrease in assumed health care cost trend rates would have the following effects on service and interest cost for
2016
and the postretirement benefit obligation at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
One-Percentage-
|
|
One-Percentage-
|
(In millions)
|
Point Increase
|
|
Point Decrease
|
Effect on total of service and interest cost
|
$
|
3
|
|
|
$
|
(2
|
)
|
Effect on postretirement benefit obligation
|
15
|
|
|
(11
|
)
|
Investment Objectives and Fair Value Measurement
The general investment objectives of the other postretirement benefit plan include maximizing the return within reasonable and prudent levels of risk and controlling administrative and management costs. The targeted asset allocation is weighted equally between equity and fixed income investments. Investment decisions are made by our retirement benefits board as delegated by our board of directors. Equity investments may include various types of U.S. and international equity securities, such as large-cap, mid-cap and small-cap stocks. Fixed income investments may include cash and short-term instruments, U.S. Government securities, corporate bonds, mortgages and other fixed income investments. No investments are prohibited for use in the other postretirement benefit plan, including derivatives, but our exposure to derivatives currently is not material. We intend that the long-term capital growth of the other postretirement benefit plan, together with employer contributions, will provide for the payment of the benefit obligations.
We determine our expected long-term rate of return on plan assets based on the current target allocations of the retirement plan investments as well as consider historical returns on comparable fixed income investments and equity investments.
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 years ended
December 31, 2016
and
2015
, there were
no
transfers between levels.
The fair value measurement of the other postretirement benefit plan assets as of
December 31, 2016
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
Active Markets for
|
|
Other Observable
|
|
Unobservable
|
(In millions)
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — U.S. equity securities
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — international equity securities
|
1
|
|
|
—
|
|
|
—
|
|
Mutual funds — fixed income securities
|
26
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
52
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fair value measurement of the other postretirement benefit plan assets as of
December 31, 2015
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Quoted Prices in
|
|
Significant
|
|
Significant
|
|
Active Markets for
|
|
Other Observable
|
|
Unobservable
|
(In millions)
|
Identical Assets
|
|
Inputs
|
|
Inputs
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — U.S. equity securities
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — international equity securities
|
1
|
|
|
—
|
|
|
—
|
|
Mutual funds — fixed income securities
|
21
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Our mutual fund investments consist primarily of publicly traded mutual funds and are recorded at fair value based on observable trades for identical securities in an active market.
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
$7 million
,
$5 million
and
$5 million
in
2016
,
2015
and
2014
, respectively.
12
.
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 years ended
December 31, 2016
and
2015
, there were
no
transfers between levels.
Our assets and liabilities measured at fair value subject to the three-tier hierarchy at
December 31, 2016
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
(In millions)
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — fixed income securities
|
$
|
42
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — equity securities
|
1
|
|
|
—
|
|
|
—
|
|
Interest rate swap derivatives
|
—
|
|
|
8
|
|
|
—
|
|
Total
|
$
|
43
|
|
|
$
|
8
|
|
|
$
|
—
|
|
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
|
(In millions)
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
Mutual funds — fixed income securities
|
$
|
36
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Mutual funds — equity securities
|
1
|
|
|
—
|
|
|
—
|
|
Financial liabilities measured on a recurring basis:
|
|
|
|
|
|
Interest rate swap derivatives
|
—
|
|
|
(3
|
)
|
|
—
|
|
Total
|
$
|
37
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
As of
December 31, 2016
and
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 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 AOCI for investments classified as available-for-sale.
The asset and liability related to derivatives consist of interest rate swaps as discussed in
Note 9
. The fair value of our interest rate swap derivatives is 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 years ended
December 31, 2016
and
2015
.
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
$4,306 million
and
$3,880 million
at
December 31, 2016
and
2015
, respectively. These fair values represent Level 2 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
$4,112 million
and
$3,654 million
at
December 31, 2016
and
2015
, respectively.
Revolving and Term Loan Credit Agreements
At
December 31, 2016
and
2015
, we had a consolidated total of
$334 million
and
$681 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.
13
.
STOCKHOLDERS' EQUITY
Share-Based Payment
Restricted Stock Awards —
On May 19, 2016, pursuant to the 2015 Long-Term Incentive Plan, we granted 453,219 shares of restricted stock. There were no additional share-based awards granted during 2016.
Merger —
Under the Merger Agreement, outstanding options to acquire common stock of ITC Holdings vested immediately prior to closing and were converted into the right to receive the difference between the Merger consideration and the exercise price of each option in cash, restricted stock vested immediately prior to closing and was converted into the right to receive the Merger consideration in cash and performance shares vested immediately prior to closing at the higher of target or actual performance through the effective time of the Merger and were converted into the right to receive the Merger consideration in cash. The per share amount of Merger consideration determined in accordance with the Merger Agreement and used for purposes of settling the share-based awards was
$45.72
. For the year ended
December 31, 2016
, we recognized approximately
$41 million
of expense due to the accelerated vesting of the share-based awards that occurred at the completion of the Merger. Refer to
Note 2
for additional discussion regarding the Merger. As of
December 31, 2016
, there were no outstanding share-based payment awards.
Share-Based Compensation —
We recorded share-based compensation in
2016
,
2015
and
2014
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Operation and maintenance expenses
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
1
|
|
General and administrative expenses (a)
|
52
|
|
|
11
|
|
|
9
|
|
Amounts capitalized to property, plant and equipment
|
5
|
|
|
5
|
|
|
5
|
|
Total share-based compensation
|
$
|
59
|
|
|
$
|
18
|
|
|
$
|
15
|
|
Total tax benefit recognized in the consolidated statement of operations
|
$
|
49
|
|
|
$
|
5
|
|
|
$
|
4
|
|
____________________________
|
|
(a)
|
Amount for the year ended
December 31, 2016
includes the expense recognized due to the accelerated vesting of the share-based awards upon completion of the Merger as described above.
|
Related Party Transactions
During the fourth quarter of 2016, we received
$137 million
from Investment Holdings for the cash settlement of the share-based awards that vested at the consummation of the Merger as described above. Additionally, we paid dividends of
$33 million
to Investment Holdings during the fourth quarter of 2016.
Accumulated Other Comprehensive Income
The following table provides the components of changes in AOCI for the years ended
December 31, 2016
,
2015
and
2014
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(In millions)
|
2016
|
|
2015
|
|
2014
|
Balance at the beginning of period
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
7
|
|
Reclassification of net loss relating to interest rate cash flow hedges from AOCI to interest expense — net (net of tax of $1 for the year ended December 31, 2016) (a)
|
1
|
|
|
—
|
|
|
—
|
|
Loss on interest rate swaps relating to interest rate cash flow hedges (net of tax of $2, $1 and $1 for the years ended December 31, 2016, 2015 and 2014, respectively)
|
(3
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Total other comprehensive loss, net of tax (b)
|
(2
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Balance at the end of period
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
5
|
|
____________________________
|
|
(a)
|
Includes reclassification of net loss relating to interest rate cash flow hedges from AOCI to interest expense, net of tax, of less than
$1 million
for the years ended December 31, 2015 and 2014.
|
|
|
(b)
|
Includes unrealized gains and losses on available-for-sale securities, net of tax, of less than
$1 million
for the years ended December 31, 2016, 2015 and 2014.
|
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 December 31, 2017 is expected to be
$3 million
.
14
.
JOINTLY OWNED UTILITY PLANT/COORDINATED SERVICES
Certain of our Regulated Operating Subsidiaries have agreements with other utilities for the joint ownership of substation assets and transmission lines. We account for these jointly owned assets by recording property, plant and equipment for our percentage of ownership interest. Various agreements provide the authority for construction of capital improvements and the operating costs associated with the substations and lines. Generally, each party is responsible for the capital, operation and maintenance and other costs of these jointly owned facilities based upon each participant’s undivided ownership interest. Our participating share of expenses associated with these jointly held assets are primarily recorded within operation and maintenance expenses on our consolidated statement of operations.
We have investments in jointly owned utility assets as shown in the table below as of
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investments (a)
|
(In millions)
|
Substations
|
|
Lines
|
|
Other
|
ITCTransmission (b)
|
$
|
—
|
|
|
$
|
29
|
|
|
$
|
—
|
|
METC (c)
|
14
|
|
|
41
|
|
|
—
|
|
ITC Midwest (d)
|
18
|
|
|
35
|
|
|
3
|
|
ITC Great Plains (e)
|
10
|
|
|
22
|
|
|
—
|
|
Total
|
$
|
42
|
|
|
$
|
127
|
|
|
$
|
3
|
|
____________________________
|
|
(a)
|
Amount represents our investment in jointly held plant, which has been reduced by the ownership interest amounts of other parties.
|
|
|
(b)
|
ITCTransmission has joint ownership in two 345 kV transmission lines with a municipal power agency that has a
50.4%
ownership interest in the transmission lines. The municipal power agency’s ownership portion entitles them to approximately 234 MW of network transmission service from the ITCTransmission system. An Ownership and Operating Agreement with the municipal power agency provides ITCTransmission with authority for construction of capital improvements and for the operation and management of the transmission lines. The
|
municipal power agency is responsible for the capital and operation and maintenance costs allocable to their ownership interest.
|
|
(c)
|
METC has joint sharing of several assets within various substations with Consumers Energy, other municipal distribution systems and other generators. The rights, responsibilities and obligations for these jointly owned assets are documented in the Amended and Restated Distribution — Transmission Interconnection Agreement with Consumers Energy and in numerous interconnection facilities agreements with various municipalities and other generators. In addition, other municipal power agencies and cooperatives have an ownership interest in several METC 345 kV transmission lines. This ownership entitles these municipal power agencies and cooperatives to approximately 608 MW of network transmission service from the METC transmission system. As of
December 31, 2016
, METC’s ownership percentages for jointly owned substation facilities and lines ranged from
6.3%
to
92.0%
and
1.0%
to
41.9%
, respectively.
|
|
|
(d)
|
ITC Midwest has joint sharing of several substations and transmission lines with various parties. As of
December 31, 2016
, ITC Midwest had net investments in jointly owned substation assets under construction and jointly shared transmission lines of
$2 million
and
$1 million
, respectively. ITC Midwest’s ownership percentages for jointly owned substation facilities and lines ranged from
28.0%
to
80.0%
and
11.0%
to
80.0%
, respectively, as of
December 31, 2016
.
|
|
|
(e)
|
In 2014, ITC Great Plains entered into a joint ownership agreement with an electric cooperative that has a
49.0%
ownership interest in a transmission project. ITC Great Plains will construct and operate the project and the electric cooperative will be responsible for their ownership percentage of capital and operation and maintenance costs. As of
December 31, 2016
, ITC Great Plains’ ownership percentage in the project was
51.0%
.
|
15
.
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 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. The discovery period for this litigation ended on December 5, 2016. On November 2, 2016, the Michigan Court of Claims denied a motion filed by the Michigan Department of Treasury for partial summary disposition of the ITCTransmission civil action. The Michigan Department of Treasury has appealed this denial with the Michigan Court of Appeals. The Court of Claims consolidated the ITCTransmission civil action with similar, pending litigation involving another company, and ordered both cases to mediation. Given the pending status of this litigation, 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
December 31, 2016
is estimated to be approximately
$21 million
, including interest. This amount includes approximately
$11 million
, including interest, assessed for the audit periods noted above. ITCTransmission believes it is probable that portions of the use tax assessments will be sustained upon resolution of this matter and has recorded
$10 million
and
$6 million
for this contingent liability, including interest, as of
December 31, 2016
and
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
$11 million
for open periods. METC has not been assessed any use tax liability and
has not
recorded any contingent liability as of
December 31, 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 then 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 the formula transmission rates for our MISO Regulated Operating Subsidiaries to
9.15%
,
reducing the equity component of our capital structure from the FERC approved
60%
to
50%
and terminating the ROE adders approved for certain ITC Holdings Regulated Operating Subsidiaries, including adders currently utilized by ITCTransmission and METC.
On June 19, 2014, in a separate Section 206 complaint against the regional base ROE rate for ISO New England TOs, the 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. The 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, the 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
. The FERC also denied the request to terminate ITCTransmission’s and METC’s ROE incentives, subject to the top end of a zone of reasonableness. The FERC set the refund effective date for the Initial Complaint as November 12, 2013.
On December 22, 2015, the presiding administrative law judge issued an initial decision on the Initial Complaint. On September 28, 2016, the FERC issued an order (the “September 2016 Order”) affirming the presiding administrative law judge’s initial decision and setting the base ROE at
10.32%
, with a maximum ROE of
11.35%
, effective for the period from November 12, 2013 through February 11, 2015 (the “Initial Refund Period”). Additionally, the rates established by the September 2016 Order will be used prospectively from the date of that order until a new approved rate is established by the FERC in ruling on the Second Complaint described below, resulting in an ROE used currently by ITCTransmission, METC and ITC Midwest of
11.35%
,
11.35%
and
11.32%
, respectively. The September 2016 Order requires all MISO TOs, including our MISO Regulated Operating Subsidiaries, to provide refunds within 30 days for the Initial Refund Period. The estimated refund for the Initial Complaint resulting from this FERC order, including interest, is
$118 million
for our MISO Regulated Operating Subsidiaries, recorded in current liabilities on the consolidated statements of financial position. On October 21, 2016, the MISO TOs, including our MISO Regulated Operating Subsidiaries, filed a request with the FERC for an extension of nine months, until July 28, 2017, to provide refunds, which was granted by the FERC on October 28, 2016. Additionally, on October 28, 2016, the MISO TOs, including our MISO Regulated Operating Subsidiaries, filed a request with the FERC for rehearing of the September 2016 Order regarding the future exclusion of certain short-term growth projections in the two-step DCF analysis used by FERC to determine the cost of equity of public utilities. On October 28, 2016, the complainants also filed a request with the FERC for rehearing, citing that FERC erred in several material respects in the September 2016 Order. The FERC issued a tolling order on November 28, 2016 to allow for additional time to address the rehearing requests. On February 14, 2017, our MISO Regulated Operating Subsidiaries provided
$119 million
to MISO to fund the payment of the refund, including interest, pursuant to the September 2016 Order.
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 June 18, 2015, the FERC set the Second Complaint for hearing and settlement procedures. The FERC also set the refund effective date for the Second Complaint as February 12, 2015.
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 February 12, 2015 through May 11, 2016 (the “Second Refund Period”), with a maximum ROE of
10.68%
.
The initial decision is a non-binding recommendation to the FERC on the Second Complaint, and all parties, including the MISO TOs and the complainants, have filed briefs contesting various parts of the proposed findings and recommendations. In resolving the Second Complaint, we expect the 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. The timing of providing refunds for the Second Complaint is uncertain; however, we do not expect to provide refunds during 2017 for the Second Complaint and therefore, the associated refund liability is recorded in non-current liabilities on the consolidated statements of financial position.
In addition to the estimated refund for the Initial Complaint noted above, we believe it is probable that a refund will be required in connection with the Second Complaint. As of
December 31, 2016
, the estimated range of aggregate refunds for the Initial Refund Period and Second Refund Period is expected to be from
$221 million
to
$258 million
on a pre-tax basis
. As of
December 31, 2016
, our MISO Regulated Operating Subsidiaries had recorded aggregate estimated regulatory liabilities totaling
$258 million
for the Initial Complaint and Second Complaint, representing the best estimate of the probable aggregate refunds based on the resolution of the Initial Complaint in the September 2016 Order. As of
December 31, 2015
, our MISO Regulated Operating Subsidiaries had recorded an aggregate estimated regulatory liability of
$168 million
,
which represented the low end of the range of potential refunds as of that date, as there was no best estimate within the range of refunds at that time.
The recognition of these estimated liabilities resulted in the following impacts to our consolidated results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
(in millions)
|
2016
|
|
2015
|
|
2014
|
Increase (decrease) in:
|
|
|
|
|
|
Operating revenues
|
$
|
(80
|
)
|
|
$
|
(115
|
)
|
|
$
|
(47
|
)
|
Interest expense
|
10
|
|
|
5
|
|
|
1
|
|
Estimated net income (a)
|
(55
|
)
|
|
(73
|
)
|
|
(29
|
)
|
____________________________
|
|
(a)
|
Includes an effect on net income of
$27 million
,
$28 million
and
$3 million
for the year ended
December 31, 2016
,
2015
and
2014
, respectively, for revenue initially recognized in 2015, 2014 and 2013.
|
It is 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
December 31, 2016
, our MISO Regulated Operating Subsidiaries had a total of approximately
$3 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 million
.
In a separate but related matter, in November 2014, METC, ITC Midwest and other MISO TOs filed a request with the 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, the FERC approved the use of this incentive adder, effective January 6, 2015. Additionally, ITC Midwest filed a request with the 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, the 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 the FERC for rehearing on the approved incentive adder for independence and this request was subsequently denied by the FERC on January 6, 2016. An appeal of the FERC’s decision has been filed. Beginning September 28, 2016, these incentive adders have been applied to METC’s and ITC Midwest’s base ROEs in establishing their total authorized ROE rates, subject to the maximum ROE limitation in the September 2016 Order of
11.35%
.
Challenges Regarding Bonus Depreciation
See “Challenges Regarding Bonus Depreciation” in
Note 5
for discussion of these challenges.
Legal Matters Associated with the Merger
Following the announcement of the Merger, four putative state class action lawsuits were 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, FortisUS and Merger Sub. The complaints generally allege, among other things, that (1)
ITC Holdings’ directors breached their fiduciary duties in connection with the Merger Agreement, (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 sought class action certification and a variety of relief including, among other things, enjoining defendants from completing the Merger, unspecified 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 named the same defendants (plus FortisUS), asserted the same general allegations and sought 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, was allegedly materially misleading and allegedly omitted material facts that were 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 named the same defendants and asserted the same general allegations as the other federal complaints.
On June 8, 2016, the Oakland County Circuit Court of the State of Michigan 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. The federal plaintiffs have sought a mootness fee application and the parties are currently exploring a mutually satisfactory resolution.
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. On January 20, 2017, the defendants filed an additional motion for summary disposition, which is expected to be heard by the
Poland
state court in March 2017. A hearing on class certification was held on February 9, 2017.
We believe the remaining lawsuit is without merit and intend to vigorously defend against it. However, there can be no assurance that the outcome of this litigation will not have a material adverse effect on our results of operations, financial condition or cash flows. See
Note 2
for additional discussion on the Merger.
Development Projects
We are pursuing strategic development projects that may result in us becoming obligated to make contingent payments to developers if the projects reach certain milestones. We believe it is reasonably possible that we will be required to make contingent development payments at a maximum amount of approximately
$120 million
from the period from 2017 through 2020. Based on the nature of the related agreements, it is expected that development
payments will be made at milestones that would indicate the project is financially viable. In the event it becomes probable that we will make these payments, we would recognize the liability and the corresponding intangible asset or expense as appropriate.
Purchase Obligations and Leases
At
December 31, 2016
, we had purchase obligations of
$44 million
representing commitments for materials, services and equipment that had not been received as of
December 31, 2016
, primarily for construction and maintenance projects for which we have an executed contract. The purchase obligations are expected to be paid in
2017
, with the majority of the items related to materials and equipment that have long production lead times.
We have operating leases for office space, equipment and storage facilities. We recognize expenses relating to our operating lease obligations on a straight-line basis over the term of the lease. We recognized rent expense of
$1 million
for each of the years ended
December 31, 2016
,
2015
and
2014
recorded in general and administrative expenses as well as operation and maintenance expenses. These amounts and the amounts in the table below do not include any expense or payments to be made under the METC Easement Agreement described below under “Other Commitments — METC — Amended and Restated Easement Agreement with Consumers Energy.”
Future minimum lease payments under the leases at
December 31, 2016
were:
|
|
|
|
|
(In millions)
|
|
2017
|
$
|
1
|
|
2018
|
1
|
|
2019
|
1
|
|
2020
|
1
|
|
2021 and thereafter
|
1
|
|
Total minimum lease payments
|
$
|
5
|
|
Other Commitments
METC
Amended and Restated Purchase and Sale Agreement for Ancillary Services with Consumers Energy.
Under the Purchase and Sale Agreement for Ancillary Services with Consumers Energy (the “Ancillary Services Agreement”), Consumers Energy provides reactive power, balancing energy, load following and spinning and supplemental reserves that are needed by METC and MISO. These ancillary services are a necessary part of the provision of transmission service. This agreement is necessary because METC does not own any generating facilities and therefore must procure ancillary services from third party suppliers, including Consumers Energy. The Ancillary Services Agreement establishes the terms and conditions under which METC obtains ancillary services from Consumers Energy. Consumers Energy will offer all ancillary services as required by FERC Order No. 888 at FERC-approved rates. METC is not precluded from procuring these services from third party suppliers and is free to purchase ancillary services from unaffiliated generators located within its control area or neighboring jurisdictions on a non-preferential, competitive basis. This
one
-year agreement became effective on May 1, 2002 and is automatically renewed each year for successive
one
-year periods. The Ancillary Services Agreement can be terminated by either party with six months prior written notice. Services performed by Consumers Energy under the Ancillary Services Agreement are charged to operation and maintenance expenses.
Amended and Restated Easement Agreement with Consumers Energy.
The Easement Agreement with Consumers Energy (the “Easement Agreement”) provides METC with an easement for transmission purposes and rights-of-way, leasehold interests, fee interests and licenses associated with the land over which the transmission lines cross. Consumers Energy has reserved for itself the rights to other uses of the infrastructure (such as for fiber optics, telecommunications and gas pipelines), along with the value of activities associated with such uses. The cost for use of the rights-of-way is
$10 million
per year. The term of the Easement Agreement runs through December 31, 2050 and is subject to
10
automatic
50
-year renewals thereafter. Payments to Consumers Energy under the Easement Agreement are charged to operation and maintenance expenses.
ITC Midwest
Operations Services Agreement For 34.5 kV Transmission Facilities.
ITC Midwest and IP&L have entered into the Operations Services Agreement For 34.5 kV Transmission Facilities (the “OSA”), effective as of January 1,
2011, under which IP&L performs certain operations of ITC Midwest’s 34.5 kV transmission system. The OSA will remain in full force and effect until December 31, 2015 and will extend automatically from year to year thereafter until terminated by either party upon not less than one year prior written notice to the other party.
ITC Great Plains
Amended and Restated Maintenance Agreement.
Mid-Kansas Electric Company LLC (“Mid-Kansas”) and ITC Great Plains have entered into a Maintenance Agreement (the “Mid-Kansas Agreement”), dated as of August 24, 2010, and most recently amended effective as of June 1, 2015, pursuant to which Mid-Kansas has agreed to perform various field operations and maintenance services related to certain ITC Great Plains assets. The Mid-Kansas Agreement has an initial term of
10 years
and automatic
10
-year renewal terms unless terminated (1) due to a breach by the non-terminating party following notice and failure to cure, (2) by mutual consent of the parties, or (3) by ITC Great Plains under certain limited circumstances. Services must continue to be provided for at least six months subsequent to the termination date in any case.
Concentration of Credit Risk
Our credit risk is primarily with DTE Electric, Consumers Energy and IP&L, which were responsible for approximately
20.7%
,
21.7%
and
25.5%
, respectively, or
$254 million
,
$267 million
and
$314 million
, respectively, of our consolidated billed revenues for the year ended
December 31, 2016
. These percentages and amounts of total billed revenues of DTE Electric, Consumers Energy and IP&L include the collection of
2014
revenue accruals and deferrals and exclude any amounts for the
2016
revenue accruals and deferrals that were included in our
2016
operating revenues, but will not be billed to our customers until
2018
. Any financial difficulties experienced by DTE Electric, Consumers Energy or IP&L could negatively impact our business. MISO, as our MISO Regulated Operating Subsidiaries’ billing agent, bills DTE Electric, Consumers Energy, IP&L and other customers on a monthly basis and collects fees for the use of our transmission systems. SPP bills customers of ITC Great Plains on a monthly basis and collects fees for the use of ITC Great Plains’ assets. MISO and SPP have implemented strict credit policies for its members’ customers, which include customers using our transmission systems. Specifically, MISO and SPP require a letter of credit or cash deposit equal to the credit exposure, which is determined by a credit scoring model and other factors, from any customer using a member’s transmission system.
The financial results of ITC Interconnection are currently not material to our consolidated financial statements, including billed revenues.
16
.
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 5
, 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 in the Regulated Operating Subsidiaries segment as of June 1, 2016.
Regulated Operating Subsidiaries
We aggregate ITCTransmission, METC, ITC Midwest, ITC Great Plains and ITC Interconnection into one reportable operating segment based on their similar regulatory environment and economic characteristics, among other factors. They are engaged in the transmission of electricity within the United States, earn revenues from the same types of customers and are regulated by the FERC.
ITC Holdings and Other
Information below for ITC Holdings and Other consists of a holding company whose activities include debt financings and general corporate activities and all of ITC Holdings’ other subsidiaries, excluding the Regulated Operating Subsidiaries, which are focused primarily on business development activities.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
|
|
|
|
|
Operating
|
|
ITC Holdings
|
|
Reconciliations/
|
|
|
2016
|
Subsidiaries (a)
|
|
and Other
|
|
Eliminations
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
1,140
|
|
|
$
|
1
|
|
|
$
|
(16
|
)
|
|
$
|
1,125
|
|
Depreciation and amortization
|
157
|
|
|
1
|
|
|
—
|
|
|
158
|
|
Interest expense — net
|
99
|
|
|
112
|
|
|
—
|
|
|
211
|
|
Income (loss) before income taxes
|
597
|
|
|
(254
|
)
|
|
—
|
|
|
343
|
|
Income tax provision (benefit)
|
227
|
|
|
(130
|
)
|
|
—
|
|
|
97
|
|
Net income
|
371
|
|
|
246
|
|
|
(371
|
)
|
|
246
|
|
Property, plant and equipment — net
|
6,687
|
|
|
11
|
|
|
—
|
|
|
6,698
|
|
Goodwill
|
950
|
|
|
—
|
|
|
—
|
|
|
950
|
|
Total assets (b)
|
8,162
|
|
|
4,503
|
|
|
(4,442
|
)
|
|
8,223
|
|
Capital expenditures
|
758
|
|
|
—
|
|
|
(8
|
)
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
|
|
|
|
|
Operating
|
|
ITC Holdings
|
|
Reconciliations/
|
|
|
2015
|
Subsidiaries
|
|
and Other
|
|
Eliminations
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
1,044
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1,045
|
|
Depreciation and amortization
|
144
|
|
|
1
|
|
|
—
|
|
|
145
|
|
Interest expense — net
|
97
|
|
|
107
|
|
|
—
|
|
|
204
|
|
Income (loss) before income taxes
|
530
|
|
|
(146
|
)
|
|
—
|
|
|
384
|
|
Income tax provision (benefit)
|
201
|
|
|
(59
|
)
|
|
—
|
|
|
142
|
|
Net income
|
329
|
|
|
242
|
|
|
(329
|
)
|
|
242
|
|
Property, plant and equipment — net
|
6,094
|
|
|
16
|
|
|
—
|
|
|
6,110
|
|
Goodwill
|
950
|
|
|
—
|
|
|
—
|
|
|
950
|
|
Total assets (b) (c)
|
7,463
|
|
|
4,148
|
|
|
(4,056
|
)
|
|
7,555
|
|
Capital expenditures
|
705
|
|
|
3
|
|
|
(7
|
)
|
|
701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated
|
|
|
|
|
|
|
|
Operating
|
|
ITC Holdings
|
|
Reconciliations/
|
|
|
2014
|
Subsidiaries
|
|
and Other
|
|
Eliminations
|
|
Total
|
(In millions)
|
|
|
|
|
|
|
|
Operating revenues
|
$
|
1,023
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
1,023
|
|
Depreciation and amortization
|
127
|
|
|
1
|
|
|
—
|
|
|
128
|
|
Interest expense — net
|
81
|
|
|
106
|
|
|
—
|
|
|
187
|
|
Income (loss) before income taxes
|
549
|
|
|
(155
|
)
|
|
—
|
|
|
394
|
|
Income tax provision (benefit)
|
211
|
|
|
(61
|
)
|
|
—
|
|
|
150
|
|
Net income
|
338
|
|
|
244
|
|
|
(338
|
)
|
|
244
|
|
Property, plant and equipment — net
|
5,483
|
|
|
14
|
|
|
—
|
|
|
5,497
|
|
Goodwill
|
950
|
|
|
—
|
|
|
—
|
|
|
950
|
|
Total assets (b) (c) (d)
|
6,839
|
|
|
3,932
|
|
|
(3,839
|
)
|
|
6,932
|
|
Capital expenditures
|
757
|
|
|
1
|
|
|
(5
|
)
|
|
753
|
|
____________________________
|
|
(a)
|
Amounts include the results of operations and capital expenditures from ITC Interconnection for the period June 1, 2016 through
December 31, 2016
.
|
|
|
(b)
|
Reconciliation of total assets results primarily from differences in the netting of deferred tax assets and liabilities at our Regulated Operating Subsidiaries as compared to the classification in our consolidated statements of financial position.
|
|
|
(c)
|
All amounts presented reflect the change in authoritative guidance on the presentation of debt issuance costs on the balance sheet. This change was adopted retrospectively by us in 2016. Refer to
Notes 3
for more information.
|
|
|
(d)
|
All amounts presented reflect the change in the authoritative guidance issued by FASB to net all deferred income tax assets and liabilities and present as a single line item within non-current assets or liabilities on the balance sheet. This change was adopted retrospectively by us in 2015.
|
17
.
SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
|
(In millions)
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Quarter
|
|
Year
|
2016
|
|
|
|
|
|
|
|
|
|
Operating revenues (a)
|
$
|
280
|
|
|
$
|
298
|
|
|
$
|
253
|
|
|
$
|
294
|
|
|
$
|
1,125
|
|
Operating income (a)
|
148
|
|
|
160
|
|
|
125
|
|
|
89
|
|
|
522
|
|
Net income (a)
|
64
|
|
|
71
|
|
|
50
|
|
|
61
|
|
|
246
|
|
2015
|
|
|
|
|
|
|
|
|
|
Operating revenues (a)(b)
|
$
|
273
|
|
|
$
|
275
|
|
|
$
|
273
|
|
|
$
|
224
|
|
|
$
|
1,045
|
|
Operating income (a)(b)
|
150
|
|
|
158
|
|
|
150
|
|
|
103
|
|
|
561
|
|
Net income (a)(b)
|
67
|
|
|
72
|
|
|
66
|
|
|
37
|
|
|
242
|
|
____________________________
|
|
(a)
|
During the years ended
December 31, 2016
and
2015
, we recognized an aggregate estimated regulatory liability for the refund and potential refunds relating to the ROE complaints as described in
Note 15
, which resulted in a reduction in operating revenues and operating income of
$80 million
and
$115 million
and an estimated
$55 million
and
$73 million
reduction to net income for the years ended
December 31, 2016
and
2015
, respectively.
|
|
|
(b)
|
During the third and fourth quarters of 2015, we recognized an aggregate regulatory liability for the refund relating to the formula rate template modifications filing as described in
Note 5
, which resulted in a reduction in operating revenues and operating income of
$10 million
and an estimated
$6 million
reduction to net income for the year ended December 31, 2015.
|