NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
1
.
GENERAL
ITC Holdings and its subsidiaries are engaged in the transmission of electricity in the United States. Through our Regulated Operating Subsidiaries, we own and operate high-voltage systems in Michigan’s Lower Peninsula and portions of Iowa, Minnesota, Illinois, Missouri, Kansas and Oklahoma that transmit electricity from generating stations to local distribution facilities connected to our systems. ITC Holdings is a wholly-owned subsidiary of Investment Holdings.
Basis of Presentation
These condensed consolidated interim financial statements should be read in conjunction with the notes to the consolidated financial statements as of and for the year ended
December 31, 2018
included in ITC Holdings’ annual report on Form 10-K for such period.
The accompanying condensed consolidated interim financial statements have been prepared using GAAP and with the instructions to Form 10-Q and Rule 10-01 of SEC Regulation S-X as they apply to interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These accounting principles require us to use estimates and assumptions that impact the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from our estimates.
The condensed consolidated interim financial statements are unaudited, but in our opinion include all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the results for the interim period. The interim financial results are not necessarily indicative of results that may be expected for any other interim period or the fiscal year.
2
.
RECENT ACCOUNTING PRONOUNCEMENTS
Recently Adopted Pronouncements
Accounting for Leases
Effective January 1, 2019, we adopted accounting guidance that requires lessees to recognize a right-of-use asset and lease liability for most leases, along with additional quantitative and qualitative disclosures. We elected to apply transition relief which permitted us to adopt the new guidance on a modified retrospective basis at the adoption date (i.e., January 1, 2019) as opposed to at the beginning of the earliest period presented in the financial statements (i.e., January 1, 2017). Therefore, while we began applying the new guidance as of January 1, 2019, prior period comparative financial statements and disclosures will continue to be presented under previous lease accounting guidance.
In connection with our adoption of the new guidance, we elected various practical expedients and made certain accounting policy elections, including:
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a “package of three” practical expedients that must be taken together and allows us to not reassess:
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•
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whether any expired or existing contract is a lease or contains a lease,
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•
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the lease classification of any expired or existing leases, and
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•
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the initial direct costs for any existing leases;
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•
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a practical expedient that permits entities to not evaluate existing land easements at adoption that were not previously accounted for as leases; and
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•
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an accounting policy election to not apply the recognition requirements to short-term leases (i.e., leases with terms of 12 months or less).
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Our leasing activities primarily relate to office facilities, but we also have limited leasing activity relating to equipment and storage facilities. As of January 1, 2019, adoption of the guidance resulted in recognition of right-of-use lease assets of
$3 million
, current lease liabilities of
$1 million
, and non-current lease liabilities of
$2 million
. The adoption of this guidance did not have any impact on retained earnings or net income. We also added disclosures as a result of our adoption of the guidance; refer to
Note 7
for more information on our leasing activities.
Targeted Improvements to Accounting for Hedging Activities
In August 2017, the FASB issued authoritative guidance to make targeted improvements to hedge accounting to better align with an entity’s risk management objectives and to reduce the complexity of hedge accounting. Among other changes, the new guidance simplifies hedge accounting by (a) allowing more time for entities to complete initial quantitative hedge effectiveness assessments, (b) enabling entities to elect to perform subsequent effectiveness assessments qualitatively, (c) eliminating the concept of recognizing periodic hedge ineffectiveness for cash flow hedges, (d) requiring the change in fair value of a derivative to be recorded in the same consolidated statements of comprehensive income line item as the earnings effect of the hedged item, and (e) permitting additional hedge strategies to qualify for hedge accounting. In addition, the guidance modifies existing disclosure requirements and adds new disclosure requirements. We adopted the guidance as of January 1, 2019; however adoption of the accounting standard did not have a material impact on our financial statements or disclosures.
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, subject to further evaluation, have a material impact on our consolidated financial statements.
Pension and Other Postretirement Plan Disclosures
In August 2018, the FASB issued authoritative guidance modifying the disclosure requirements for defined benefit pension and other postretirement plans. The new guidance requires disclosures including (a) the weighted average interest credit rates used for cash balance pension plans, (b) a narrative description of the reasons for significant gains and losses affecting the benefit obligation for the period, and (c) an explanation of other significant changes in the benefit obligation or plan assets. In addition, the guidance removes currently required disclosures including, among others, the requirement for public entities to disclose the effects of a one-percentage-point change on the assumed health care costs and the effect of the change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits. The new guidance, which is effective for fiscal years ending after December 15, 2020 with early adoption permitted, is required to be adopted on a retrospective basis. We plan to early adopt this guidance in the 2019 annual consolidated financial statements.
Accounting for Cloud Computing Arrangements
In August 2018, the FASB issued authoritative guidance to address the accounting for implementation costs incurred in a cloud computing agreement that is a service contract. The new standard aligns the accounting for implementation costs incurred in a cloud computing arrangement as a service contract with existing guidance on capitalizing costs associated with developing or obtaining internal-use software. In addition, the new guidance requires entities to expense capitalized implementation costs of a cloud computing arrangement that is a service contract over the term of the agreement and to present the expense in the same income statement line item as the hosting fees. The guidance is effective for fiscal years beginning after December 15, 2019 with early adoption permitted. We are still evaluating the impact of the new guidance on our financial statements, including disclosures, as well as whether to early adopt this guidance.
3
.
REVENUE
Our total revenues are comprised of revenues which arise from three classifications including transmission services, other services, and Formula Rate true-up. As other services revenue is immaterial, it is presented in combination with transmission services on the condensed consolidated statements of comprehensive income.
Transmission Services
Through our Regulated Operating Subsidiaries, we generate nearly all our revenue from providing electric transmission services over our transmission systems. As independent transmission companies, our transmission services are provided and revenues are received based on our tariffs, as approved by the FERC. The transmission revenue requirements at our Regulated Operating Subsidiaries are set annually using Formula Rates and remain in effect for a one-year period. By updating the inputs to the formula and resulting rates on an annual basis, the revenues at our Regulated Operating Subsidiaries reflect changing operating 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.
We recognize revenue for transmission services over time as transmission services are provided to customers (generally using an output measure of progress based on transmission load delivered). Customers simultaneously receive and consume the benefits provided by the Regulated Operating Subsidiaries’ services. We recognize revenue in the amount to which we
have the right to invoice because we have a right to consideration in an amount that corresponds directly with the value to the customer of performance completed to date. As billing agents, MISO and SPP independently bill our customers on a monthly basis and collect fees for the use of our transmission systems. No component of the transaction price is allocated to unsatisfied performance obligations.
Transmission service revenue includes an estimate for unbilled revenues from service that has been provided but not billed by the end of an accounting period. Unbilled revenues are dependent upon a number of factors that require management’s judgment including estimates of transmission network load (for the MISO Regulated Operating Subsidiaries) and preliminary information provided by billing agents. Due to the seasonal fluctuations of actual load, the unbilled revenue amount generally increases during the spring and summer and decreases during the fall and winter. See
Note 4
for information on changes in unbilled accounts receivable.
Other
Services
Other services revenue consists of rental revenues, easement revenues, and amounts from providing ancillary services. A portion of other services revenue is treated as a revenue credit and reduces gross revenue requirement when calculating net revenue requirement under our Formula Rates. Total other services revenue for the
three months ended June 30, 2019
and
2018
were
$1 million
and
$2 million
, respectively. Total other services revenue for the
six months ended June 30, 2019
and
2018
were
$4 million
and
$3 million
, respectively.
Formula Rate True-Up
The true-up mechanism under our Formula Rates is considered an alternative revenue program of a rate-regulated utility given it permits our Regulated Operating Subsidiaries to adjust future rates in response to past activities or completed events in order to collect our actual revenue requirements under our Formula Rates. In accordance with our accounting policy, only the current year origination of the true-up is reported as a Formula Rate true-up. See “Cost-based Formula Rates with True-Up Mechanism” in
Note 5
for more information on our Formula Rates.
4
.
ACCOUNTS RECEIVABLE
The following table presents the components of accounts receivable on the balance sheet:
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June 30,
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December 31,
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(in millions)
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2019
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2018
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Trade accounts receivable
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$
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2
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$
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2
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Unbilled accounts receivable
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120
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92
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Due from affiliates
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1
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1
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Other
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10
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7
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Total accounts receivable
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$
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133
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$
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102
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5.
REGULATORY MATTERS
Cost-Based Formula Rates with True-Up Mechanism
The transmission revenue requirements at our Regulated Operating Subsidiaries are set annually using Formula Rates and remain in effect for a
one year
period. By updating the inputs to the formula and resulting 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 used to derive the rates does not require further action or FERC filings each year, although the formula inputs remain subject to legal challenge at the FERC. Our Regulated Operating Subsidiaries will continue to use the formula to calculate their respective annual revenue requirements unless the FERC determines the resulting rates to be unjust and unreasonable and another mechanism is determined by the FERC to be just and reasonable. See “Rate of Return on Equity Complaints” in
Note 14
for detail on ROE matters for our MISO Regulated Operating Subsidiaries and “Incentive Adders for Transmission Rates” discussed in
Note 5
herein.
The cost-based Formula Rates at our Regulated Operating Subsidiaries include a true-up mechanism that compares the actual revenue requirements of our Regulated Operating Subsidiaries 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. 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 our 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
six months ended June 30, 2019
:
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(in millions)
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Total
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Net regulatory liabilities as of December 31, 2018
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$
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(52
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)
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Net refund of 2017 revenue deferrals and accruals, including accrued interest
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8
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Net revenue accrual for the six months ended June 30, 2019
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50
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Net accrued interest payable for the six months ended June 30, 2019
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(2
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)
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Net regulatory assets as of June 30, 2019
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$
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4
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Regulatory assets and liabilities associated with our Regulated Operating Subsidiaries’ Formula Rate revenue accruals and deferrals, including accrued interest, are recorded in the condensed consolidated statements of financial position at
June 30, 2019
and
December 31, 2018
as follows:
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June 30,
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December 31,
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(in millions)
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2019
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2018
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Current regulatory assets
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$
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11
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$
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12
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Non-current regulatory assets
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60
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12
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Current regulatory liabilities
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(38
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)
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(27
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)
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Non-current regulatory liabilities
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(29
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)
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(49
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)
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Net regulatory assets (liabilities)
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$
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4
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$
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(52
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)
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Incentive Adders for Transmission Rates
The FERC has authorized the use of ROE incentives, or adders, that can be applied to the rates of TOs when certain conditions are met. Our MISO Regulated Operating Subsidiaries and ITC Great Plains utilize ROE adders related to independent transmission ownership and RTO participation.
MISO Regulated Operating Subsidiaries
Effective for the period following the September 2016 Order, the authorized ROE used by ITCTransmission, METC and ITC Midwest were
11.35%
,
11.35%
, and
11.32%
, respectively. These were inclusive of adders at ITCTransmission, METC and ITC Midwest of
150
basis points,
150
basis points and
100
basis points, respectively, subject to the maximum ROE limitation in the September 2016 Order of
11.35%
. The adders at each of ITCTransmission and METC included a
100
basis point adder for independent transmission ownership and a
50
basis point adder for RTO participation. The adders at ITC Midwest included a
50
basis point adder for independent transmission ownership and a
50
basis point adder for RTO participation.
On April 20, 2018, Consumers Energy, IP&L, Midwest Municipal Transmission Group, Missouri River Energy Services, Southern Minnesota Municipal Power Agency and WPPI Energy filed a complaint with the FERC under section 206 of the FPA, challenging the adders for independent transmission ownership that are included in transmission rates charged by the MISO Regulated Operating Subsidiaries. The adders for independent transmission ownership allowed up to
50
basis points or
100
basis points
to be added to the MISO Regulated Operating Subsidiaries’ authorized ROE, subject to any ROE cap established by the FERC. On October 18, 2018, the FERC issued an order granting the complaint in part, setting revised adders for independent transmission ownership for each of the MISO Regulated Operating Subsidiaries to
25
basis points, and requiring the MISO Regulated Operating Subsidiaries to include the revised adders, effective April 20, 2018, in their Formula Rates. In addition, the order directed the MISO Regulated Operating Subsidiaries to provide refunds, with interest, for the period from April 20, 2018 through October 18, 2018. The MISO Regulated Operating Subsidiaries sought rehearing of the FERC’s October 18, 2018 order, and on July 18, 2019, FERC denied the rehearing request. The MISO Regulated Operating Subsidiaries began reflecting the
25
basis point adder for independent transmission ownership in transmission rates in November 2018. Refunds of
$7 million
were primarily made in the fourth quarter of 2018 and were completed in the first
quarter of 2019. We do not expect the final resolution of this proceeding to have a material adverse impact on our consolidated results of operations, cash flows or financial condition.
Based on the October 18, 2018 FERC order, the authorized ROE for the MISO Regulated Operating Subsidiaries has been revised to
11.07%
(
10.32%
base ROE with a
25
basis point adder for independent transmission ownership and a
50
basis point adder for RTO participation). See
Note 14
for information regarding the ROE complaints.
ITC Great Plains
On June 11, 2019, KCC filed a complaint with the FERC under section 206 of the FPA, challenging the ROE adder for independent transmission ownership that is included in the transmission rate charged by ITC Great Plains. The complaint argues that because ITC Great Plains is similarly situated to our MISO Regulated Operating Subsidiaries with respect to ownership by Fortis and GIC, the same rationale by which the FERC lowered the MISO Regulated Operating Subsidiaries adders for independent transmission ownership, as discussed above, also applies to ITC Great Plains. The adder for independent transmission ownership allows up to
100
basis points to be added to the ITC Great Plains authorized ROE, subject to any ROE cap established by the FERC. ITC Great Plains filed an answer to the complaint on July 1, 2019 asking FERC to deny the complaint since KCC showed no evidence that ITC Great Plains’ independence or the benefits it provides as an independent TO has been compromised or reduced as a result of the Fortis and GIC acquisition. We do not expect the resolution of this proceeding to have a material adverse impact on our consolidated results of operations, cash flows or financial position.
The authorized ROE used by ITC Great Plains is
12.16%
and is composed of a base ROE of
10.66%
with a
100
basis point adder for independent transmission ownership and a
50
basis point adder for RTO participation.
Calculation of Accumulated Deferred Income Tax Balances in Projected Formula Rates
On June 21, 2018, the FERC issued an order initiating a proceeding and paper hearings, pursuant to Section 206 of the FPA, to examine the methodology used by a group of TOs, including ITCTransmission and ITC Midwest, for calculating balances of ADIT in forward-looking Formula Rates. The order is based on a previous FERC decision for another group of TOs in which the FERC concluded that the two-step averaging methodology for ADIT is no longer necessary to comply with IRS normalization rules in light of IRS guidance issued in 2017. On August 27, 2018, ITCTransmission and ITC Midwest, along with other MISO TOs, filed an initial brief in the paper hearing proceeding. In addition, on August 27, 2018, our MISO Regulated Operating Subsidiaries submitted a filing with the FERC under Section 205 of the FPA to eliminate the use of the two-step averaging methodology in the calculation of ADIT balances for the projected test year and also to modify the manner by which they calculate average ADIT balances in their annual transmission Formula Rate true-up calculation, subject to receiving guidance from the IRS to respond to the FERC order. On December 20, 2018, the FERC issued an order that (1) indicated that it did not believe it was necessary for the MISO Regulated Operating Subsidiaries to delay implementation of the template changes pending IRS approval, (2) ordered ITCTransmission and ITC Midwest to make a compliance filing to implement the changes and (3) formally instituted a proceeding against METC pursuant to Section 206 of the FPA to implement the changes. On May 16, 2019, the FERC issued an order accepting in part and rejecting in part ITCTransmission’s and ITC Midwest’s January 22, 2019 compliance filing and ordered us to make another compliance filing within 30 days of the date of the order. Specifically, the FERC accepted the portion of our compliance filing that removed the two-step averaging methodology, but rejected our compliance filing insofar as it carried proration to our true up because the FERC found that was beyond the scope of its previous orders in the docket. Additionally, on May 16, 2019, the FERC issued an order rejecting the January 22, 2019 METC 205 filing and ordered us to make a compliance filing in the 206 proceeding within 30 days of the date of the order. The FERC rejected the 205 filing because the FERC found that we had impermissibly requested a retroactive effective date of January 1, 2019. The FERC noted in the order that our compliance filing should only remove the two-step averaging methodology and should not carry proration to our true up. On June 17, 2019, our MISO Regulated Operating Subsidiaries made compliance filings consistent with the FERC orders. Additionally, on April 10, 2019, our MISO Regulated Operating Subsidiaries received formal guidance from the IRS, which we believe is consistent with the filings that we have made to date in these proceedings. We do not expect the resolution of these proceedings to have a material adverse impact on our consolidated results of operations, cash flows or financial condition.
Rate of Return on Equity Complaints
See “Rate of Return on Equity Complaints” in
Note 14
for a discussion of the ROE complaints.
6
.
GOODWILL AND INTANGIBLE ASSETS
Goodwill
At
June 30, 2019
and
December 31, 2018
, 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
We have recorded intangible assets as a result of the METC acquisition in 2006. The carrying value of these assets was
$21 million
and
$22 million
(net of accumulated amortization of
$38 million
and
$37 million
) as of
June 30, 2019
and
December 31, 2018
, respectively.
We have also recorded intangible assets for payments made by and obligations of ITC Great Plains to certain TOs to acquire rights, which are required under the SPP tariff to designate ITC Great Plains to build, own and operate projects within the SPP region, including regional cost sharing projects in Kansas. The carrying amount of these intangible assets was
$14 million
(net of accumulated amortization of
$2 million
) at both
June 30, 2019
and
December 31, 2018
.
We recognized less than
$1 million
and
$1 million
of amortization expense of our intangible assets during the
three months ended June 30, 2019
and
2018
, respectively, and recognized
$1 million
and
$2 million
of amortization expense of our intangible assets during the
six months ended June 30, 2019
and
2018
, respectively. For the balance of intangible assets recorded as of
June 30, 2019
, we expect the annual amortization of these assets to be
$3 million
per year for each of the next five years.
7.
LEASES
We enter into operating leases where we are the lessee, primarily for office facilities, equipment, and storage facilities. When a contract contains a lease such that it conveys the right to control the use of an identified asset for a period of time in exchange for consideration, we measure the right-of-use assets and lease liabilities at the present value of future lease payments. We calculate the present value using our incremental borrowing rate, which is a secured interest rate based on the remaining lease term. Our lease payments are substantially all fixed and in some cases escalate according to schedule. Our office facility leases may have lease components and non-lease components which are accounted for as a single lease component. Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize expenses related to our operating lease obligations on a straight-line basis over the term of the lease. Operating lease costs for the three and six months ended
June 30, 2019
were less than
$1 million
.
The following table shows the undiscounted future minimum lease payments under our operating leases at
June 30, 2019
reconciled to the corresponding discounted lease liabilities presented in our condensed consolidated interim financial statements:
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Future Minimum Lease Payments
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(in millions)
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2019 (excluding six months ended 6/30/2019)
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$
|
—
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2020
|
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1
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2021
|
|
1
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2022
|
|
—
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2023
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|
1
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2024 and beyond
|
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—
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Total lease payments
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3
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Difference between undiscounted cash flows and discounted cash flows
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—
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Present value of lease liabilities
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3
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|
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Less: Current operating lease liabilities
|
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(1
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)
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Noncurrent operating lease liabilities
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$
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2
|
|
Leases are presented in the condensed consolidated statements of financial position as follows:
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(in millions)
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Classification
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|
June 30, 2019
|
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Operating Lease Assets
|
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Other assets
|
|
$
|
3
|
|
|
Current Operating Lease Liabilities
|
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Other current liabilities
|
|
1
|
|
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Noncurrent Operating Lease Liabilities
|
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Other liabilities
|
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2
|
|
Disclosures Related to Periods Prior to Adoption of the New Lease Guidance
Operating lease costs for the three and six months ended
June 30, 2018
were less than
$1 million
and
$1 million
, respectively. Undiscounted future minimum lease payments under the operating leases at December 31, 2018 were as follows:
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(in millions)
|
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|
|
2019
|
|
$
|
1
|
|
|
2020
|
|
1
|
|
|
2021
|
|
1
|
|
|
2022
|
|
—
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|
|
2023 and thereafter
|
|
1
|
|
|
Total minimum lease payments
|
|
$
|
4
|
|
Supplementary Lease Information
|
|
|
|
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|
June 30, 2019
|
|
Weighted-average remaining lease term (years)
|
|
4.6
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|
|
Weighted-average discount rate
|
|
4.6
|
%
|
8
.
DEBT
ITC Holdings
Term Loan Credit Agreement
On June 12, 2019, ITC Holdings entered into an unsecured, unguaranteed
$400 million
term loan credit agreement with a maturity date of June 11, 2021, under which ITC Holdings borrowed
$200 million
. The proceeds were used for the early redemption of the
$200 million
5.50%
Senior Notes due January 15, 2020. ITC Holdings has the ability to draw upon the remaining
$200 million
under the term loan credit agreement by March 12, 2020. The weighted-average interest rate on the borrowing outstanding under this agreement was
3.1%
at
June 30, 2019
.
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
June 30, 2019
, ITC Holdings had
$184 million
of commercial paper issued and outstanding under the program, with a weighted-average interest rate of
2.7%
and weighted average remaining days to maturity of
9 days
. The amount outstanding as of
June 30, 2019
was classified as debt maturing within one year in the condensed consolidated statements of financial position. As of
December 31, 2018
, ITC Holdings did not have any commercial paper outstanding.
METC
Senior Secured Notes
On January 15, 2019, METC issued
$50 million
of
4.55%
Senior Secured Notes, due January 15, 2049. On July 10, 2019, METC issued an additional
$50 million
of Senior Secured Notes at
4.65%
with terms and conditions identical to those of the
4.55%
Senior Secured Notes, except the interest rate which includes a 10 basis point premium and the due date which is 30 years from the date of the issuance. The proceeds from both issuances will be used to repay borrowings under the METC revolving credit agreement, to partially fund capital expenditures and for general corporate purposes. All of METC’s Senior Secured Notes are issued under its first mortgage indenture and secured by a first mortgage lien on substantially all of its real property and tangible personal 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. At
June 30, 2019
, ITC Holdings did not have any interest rate swaps outstanding. On July 25, 2019, ITC Holdings entered into a 5-year forward starting interest rate swap agreement with a notional amount of
$50 million
. The interest rate swap manages interest rate risk associated with the refinancing of the
$400 million
term loan at ITC Holdings with a maturity date of June 11, 2021. As of
June 30, 2019
, ITC Holdings had
$200 million
outstanding under the term loan described above.
The 5-year term interest rate swap calls for ITC Holdings to receive interest quarterly at a variable rate equal to LIBOR and to pay interest semi-annually at a fixed rate of
1.816%
effective for the 5-year period beginning November 15, 2020. The agreement includes a mandatory early termination provision and will be terminated no later than the effective date of the interest rate swap of November 15, 2020. The interest rate swap is expected to be highly effective at offsetting changes in the fair value of the forecasted interest cash flows associated with the 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 swap is expected to qualify for cash flow hedge accounting treatment, whereby any gain or loss recognized from the trade date to the effective date 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. The interest rate swap does not contain credit-risk-related contingent features.
Revolving Credit Agreements
At
June 30, 2019
, ITC Holdings and certain of its Regulated Operating Subsidiaries had the following unsecured revolving credit facilities available:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Total
Available
Capacity
|
|
Outstanding
Balance (a)
|
|
Unused
Capacity
|
|
Weighted Average
Interest Rate on
Outstanding Balance (b)
|
|
Commitment
Fee Rate (c)
|
|
ITC Holdings
|
$
|
400
|
|
|
$
|
—
|
|
|
$
|
400
|
|
(d)
|
|
|
0.175
|
%
|
|
ITCTransmission
|
100
|
|
|
76
|
|
|
24
|
|
|
3.4%
|
|
0.10
|
%
|
|
METC
|
100
|
|
|
58
|
|
|
42
|
|
|
3.4%
|
|
0.10
|
%
|
|
ITC Midwest
|
225
|
|
|
88
|
|
|
137
|
|
|
3.4%
|
|
0.10
|
%
|
|
ITC Great Plains
|
75
|
|
|
37
|
|
|
38
|
|
|
3.4%
|
|
0.10
|
%
|
|
Total
|
$
|
900
|
|
|
$
|
259
|
|
|
$
|
641
|
|
|
|
|
|
____________________________
|
|
|
|
(a)
|
Included within long-term debt.
|
|
|
|
|
(b)
|
Interest charged on borrowings depends on the variable rate structure we elected at the time of each borrowing.
|
|
|
|
|
(c)
|
Calculation based on the average daily unused commitments, subject to adjustment based on the borrower’s credit rating.
|
|
|
|
|
(d)
|
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
$216 million
as of
June 30, 2019
.
|
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 and selling or otherwise disposing of all or substantially all of our assets. In addition, the covenants require us to meet certain financial ratios, such as maintaining certain debt to capitalization ratios and certain funds from operations to debt levels. As of
June 30, 2019
, we were not in violation of any debt covenant.
9
.
RETIREMENT BENEFITS AND ASSETS HELD IN TRUST
Pension Plan Benefits
We have a qualified defined benefit pension plan (“retirement plan”) for eligible employees, comprised of a traditional final average pay plan and a cash balance plan. The traditional final average pay plan is noncontributory, covers select employees, and provides retirement benefits based on years of benefit service, average final compensation and age at retirement. The cash balance plan is also noncontributory, covers substantially all employees and provides retirement benefits based on eligible compensation and interest credits. Our funding practice for the retirement plan is generally to fund the annual net pension cost though we may contribute additional amounts or use our available funding balance as necessary to meet the minimum funding requirements of the Employee Retirement Income Security Act of 1974 or as we deem appropriate. During the second quarter of
2019
, we contributed
$4 million
to the retirement plan. We do not expect to make any additional contributions to this plan in
2019
.
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. During the second quarter of
2019
, we contributed
$1 million
to the supplemental benefit plans. We do not expect to make any additional contributions to these plans in
2019
.
Net periodic benefit cost for the pension plans, by component, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
Interest cost
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
Expected return on plan assets
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
Net pension cost
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
4
|
|
|
$
|
4
|
|
The components of net pension cost other than the service cost component are included in Other (income) and expenses, net in the condensed consolidated statements of comprehensive income.
Other Postretirement Benefits
We provide certain postretirement health care, dental and life insurance benefits for eligible employees. During the second quarter of
2019
we contributed
$4 million
to the postretirement benefit plan. We expect to make additional contributions of
$5 million
to the postretirement benefit plan during the second half of
2019
.
Net postretirement benefit plan cost, by component, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
Interest cost
|
1
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
Expected return on plan assets
|
(1
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
Net postretirement cost
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
5
|
|
The components of net postretirement cost other than the service cost component are included in Other (income) and expenses, net in the condensed consolidated statements of comprehensive income.
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
$1 million
for each of the
three months ended June 30, 2019
and
2018
and
$3 million
for each of the
six months ended June 30, 2019
and
2018
.
10
.
FAIR VALUE MEASUREMENTS
The measurement of fair value is based on a three-tier hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another. In such instances, the transfer is reported at the beginning of the reporting period. For the
six months ended June 30, 2019
and the year ended
December 31, 2018
, there were
no
transfers between levels.
Our assets measured at fair value subject to the three-tier hierarchy at
June 30, 2019
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
(in millions)
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual funds — fixed income securities
|
50
|
|
|
—
|
|
|
—
|
|
|
Mutual funds — equity securities
|
7
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
58
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Our assets measured at fair value subject to the three-tier hierarchy at
December 31, 2018
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
|
|
Significant
Other Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
(in millions)
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Financial assets measured on a recurring basis:
|
|
|
|
|
|
|
Cash equivalents
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual funds — fixed income securities
|
49
|
|
|
—
|
|
|
—
|
|
|
Mutual funds — equity securities
|
5
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
55
|
|
|
$
|
—
|
|
|
$
|
—
|
|
As of
June 30, 2019
and
December 31, 2018
, we held certain assets 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 benefit plans described in
Note 9
. The mutual funds we own are publicly traded 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. Gains and losses for all mutual fund investments are recorded in earnings.
We also held non-financial assets that are required to be measured at fair value on a non-recurring basis. These consist of goodwill and intangible assets. We did not record any impairment charges on long-lived assets and no other significant events occurred requiring non-financial assets and liabilities to be measured at fair value (subsequent to initial recognition) during the
six months ended June 30, 2019
and
2018
. See
Note 6
for additional information on our goodwill and intangible assets.
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
$5,418 million
and
$5,186 million
at
June 30, 2019
and
December 31, 2018
, 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
$4,982 million
and
$5,130 million
at
June 30, 2019
and
December 31, 2018
, respectively.
Revolving and Term Loan Credit Agreements
At
June 30, 2019
and
December 31, 2018
, we had a consolidated total of
$459 million
and
$208 million
, respectively, outstanding under our revolving and term loan credit agreements, which are variable rate loans. The fair value of these loans approximates book value based on the borrowing rates currently available for variable rate loans obtained from third party lending institutions. These fair values represent Level 2 under the three-tier hierarchy described above.
Other Financial Instruments
The carrying value of other financial instruments included in current assets and current liabilities, including cash and cash equivalents, special deposits and commercial paper, approximates their fair value due to the short-term nature of these instruments.
11
.
STOCKHOLDER'S EQUITY
Accumulated Other Comprehensive Income
The following table provides the components of changes in AOCI:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Balance at the beginning of period
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
2
|
|
|
Derivative instruments
|
|
|
|
|
|
|
|
|
Reclassification of net loss relating to interest rate cash flow hedges from AOCI to earnings (net of tax, of less than $1 for the three and six months ended June 30, 2019 and 2018) (a)
|
1
|
|
|
1
|
|
|
1
|
|
|
1
|
|
|
Reclassification of deferred tax effects on interest rate cash flow hedges stranded in AOCI, subject to the TCJA, into retained earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Total other comprehensive income, net of tax
|
1
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
Balance at the end of period
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
4
|
|
____________________________
|
|
|
|
(a)
|
The reclassification of the net loss relating to interest rate cash flow hedges is reported in interest expense on a pre-tax basis.
|
The amount of net loss relating to interest rate cash flow hedges to be reclassified from AOCI to earnings for the 12-month period ending
June 30,
2020
is expected to be approximately
$1 million
(net of tax of less than
$1 million
). The reclassification is reported in Interest expense, net in the condensed consolidated statements of comprehensive income on a pre-tax basis.
12
.
SHARE-BASED COMPENSATION AND EMPLOYEE SHARE PURCHASE PLAN
2017 Omnibus Plan
On March 6, 2019, pursuant to the 2017 Omnibus Plan, we granted
348,904
PBUs and
270,505
SBUs. Each PBU and SBU granted will be valued based on one share of Fortis common stock traded on the Toronto Stock Exchange, converted to U.S. dollars and settled only in cash. The awards vest on the date specified in a particular grant agreement, provided the service and performance criteria, as applicable, are satisfied. The PBUs and SBUs earn dividend equivalents which are also re-measured consistent with the target award and settled in cash at the end of the vesting period.
The granted awards and related dividend equivalents have no shareholder rights.
The aggregate fair value of all tranches of PBUs and SBUs as of
June 30, 2019
was
$44 million
and
$29 million
, respectively. At
June 30, 2019
, the total unrecognized compensation cost related to the PBUs and SBUs was
$24 million
and
$15 million
, respectively.
Employee Share Purchase Plan
We have an ESPP plan which enables ITC employees to purchase shares of Fortis common stock. Our cost of the plan is based on the value of our contribution, as additional compensation to a participating employee, equal to
10%
of an employee’s contribution up to a maximum annual contribution of
1%
of an employee’s base pay and an amount equal to
10%
of all dividends paid on the Fortis shares allocated to an employee’s ESPP account. The cost of ITC Holdings’ contribution for each of the
three and six months ended June 30, 2019
and
2018
was less than
$1 million
.
13
.
RELATED PARTY TRANSACTIONS
Intercompany Receivables and Payables
ITC Holdings may incur charges from Fortis and other subsidiaries of Fortis that are not subsidiaries of ITC Holdings for general corporate expenses incurred. In addition, ITC Holdings may perform additional services for, or receive additional services from, Fortis and such subsidiaries. These transactions are in the normal course of business and payments for these services are settled through accounts receivable and accounts payable, as necessary. We had intercompany receivables from Fortis and such subsidiaries of
$1 million
and less than
$1 million
at
June 30, 2019
and
December 31, 2018
, respectively, and intercompany payables to Fortis and such subsidiaries of less than
$1 million
at
June 30, 2019
and
December 31, 2018
.
Related party charges for corporate expenses from Fortis and such subsidiaries are recorded in general and administrative expenses in the condensed consolidated statements of comprehensive income. Such expense for each of the
three months ended June 30, 2019
and
2018
for ITC Holdings was
$3 million
and
$2 million
, respectively, and for each of the six months ended
June 30, 2019
and
2018
was
$6 million
and
$4 million
, respectively. Related party billings for services to Fortis and other subsidiaries, recorded as an offset to general and administrative expenses for ITC Holdings, were less than
$1 million
for each of the
three and six months ended June 30, 2019
and
2018
.
Dividends
During the
six months ended June 30, 2019
and
2018
, we paid dividends of
$145 million
and
$100 million
, respectively, to Investment Holdings. We also paid dividends of
$53 million
to Investment Holdings in July 2019.
Intercompany Tax Sharing Agreement
We are organized as a corporation for tax purposes and subject to a tax sharing agreement as a wholly owned subsidiary of Investment Holdings. Additionally, we record income taxes based on our separate company tax position and make or receive tax-related payments with Investment Holdings. We did not make or receive any tax-related payments during the
six months ended June 30, 2019
.
14
.
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.
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.
Rate of Return on Equity Complaints
Two complaints have been filed with the FERC by combinations of consumer advocates, consumer groups, municipal parties and other parties challenging the base ROE in MISO. The complaints were filed with the FERC under Section 206 of the FPA requesting that the FERC find the MISO regional base ROE rate (the “base ROE”) for all MISO TO’s, including our MISO Regulated Operating Subsidiaries, to no longer be just and reasonable.
A summary of the two complaints is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Complaint
|
|
15-Month Refund Period of Complaint (Beginning as of Complaint Filing Date)
|
|
Original Base ROE Authorized by the FERC at Time of Complaint Filing Date (a)
|
|
Base ROE Subsequently Authorized by the FERC for the Initial Complaint Period and also effective for the period from September 28, 2016 to current (a)
|
|
Reserve (Pre-Tax and Including Interest)
as of June 30, 2019
(in millions)
|
|
|
Initial
|
|
11/12/2013 - 2/11/2015
|
|
12.38%
|
|
10.32%
|
|
$
|
—
|
|
(b)
|
|
Second
|
|
2/12/2015 - 5/11/2016
|
|
12.38%
|
|
N/A
|
|
155
|
|
|
____________________________
|
|
|
|
(a)
|
The ROE collected through the MISO Regulated Operating Subsidiaries’ rates during the period November 12, 2013 through September 27, 2016, a portion of which was later refunded to customers for the period of the Initial Complaint, consisted of a base ROE of
12.38%
plus applicable incentive adders.
|
|
|
|
|
(b)
|
In 2017,
$118 million
, including interest, was refunded to customers of our MISO Regulated Operating Subsidiaries for the Initial Complaint based on the refund liability associated with the September 2016 Order.
|
Initial Complaint
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 the Initial Complaint with the FERC. The complainants sought a FERC order to reduce 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 and terminating the ROE adders approved for certain Regulated Operating Subsidiaries. The FERC set the base ROE for hearing and settlement procedures, while denying all other aspects of the Initial Complaint.
On September 28, 2016, the FERC issued the September 2016 Order that set 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. Additionally, the base ROE established by the September 2016 Order was to be used prospectively from the date of that order until a new approved base ROE was established by the FERC. The September 2016 Order required all MISO TOs, including our MISO Regulated Operating Subsidiaries, to provide refunds, which were completed in 2017. 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 short-term growth projections in the two-step DCF analysis.
Second Complaint
On February 12, 2015, the Second Complaint was filed with the FERC 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 30, 2016, the presiding ALJ issued an initial decision that recommended a base ROE of
9.70%
for the refund period from February 12, 2015 through May 11, 2016, with a maximum ROE of
10.68%
, which also would be applicable going forward from the date of a final FERC order. On September 29, 2017, certain MISO TO’s, including our MISO Regulated Operating Subsidiaries, filed a motion for the FERC to dismiss the Second Complaint. We had recorded an aggregate estimated
current regulatory liability in the condensed consolidated statements of financial position of
$155 million
and
$151 million
as of
June 30, 2019
and
December 31, 2018
, respectively, for the Second Complaint.
The recognition of the obligations associated with the complaints resulted in the following impacts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Revenue increase
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
Interest expense increase
|
2
|
|
|
1
|
|
|
4
|
|
|
3
|
|
|
Estimated net income reduction
|
2
|
|
|
1
|
|
|
3
|
|
|
2
|
|
Prior to the filing of the MISO ROE complaints, complaints were filed with the FERC regarding the regional base ROE rate for ISO New England TOs. In resolving these complaints, the FERC adopted a methodology for establishing base ROE rates based on a two-step DCF analysis. This methodology provided the precedent for the FERC ruling on the Initial Complaint and the ALJ initial decision on the Second Complaint for our MISO Regulated Operating Subsidiaries. In April 2017, the D.C. Circuit Court vacated the precedent-setting FERC orders that established and applied the two-step DCF methodology for the determination of base ROE. The court remanded the orders to the FERC for further justification of its establishment of the new base ROE for the ISO New England TOs. On October 16, 2018, in the New England matters, the FERC issued an order on remand which proposes a new methodology for 1) determining when an existing ROE is no longer just and reasonable; and 2) setting a new just and reasonable ROE if an existing ROE has been found not to be just and reasonable. The FERC established a paper hearing on how the proposed new methodology should apply to the ISO New England TOs ROE complaint proceedings. The FERC issued a similar order, the November 2018 Order, in the MISO TO base ROE complaint proceedings establishing a paper hearing on the application of the proposed new methodology to the proceedings pending before the FERC involving the MISO TOs’ ROE, including our MISO Regulated Operating Subsidiaries. Briefs and reply briefs in the New England proceedings were filed on January 11, 2019 and March 8, 2019, respectively. Briefs and reply briefs in the MISO proceedings were filed on February 13, 2019 and April 10, 2019, respectively.
The November 2018 Order included illustrative calculations for the ROE that may be established for the Initial Complaint, using the FERC's proposed methodology with financial data from the proceedings related to that complaint. If the results of these illustrative calculations are confirmed in a final FERC order, then the application of the base ROE and the maximum ROE would not have a significant adverse impact on our financial condition, results of operations and cash flows.
Although the November 2018 Order provided illustrative calculations, the FERC stated that these calculations are merely preliminary. The FERC’s preliminary calculations are not binding and could change, as significant changes to the methodology by the FERC are possible, as a result of the paper hearing process. Until there is more certainty around the ultimate resolution of these matters, we cannot reasonably update an estimated range of gain or loss for any of the complaint proceedings or estimate a range of gain or loss for the period subsequent to the end of the Second Complaint refund period. The November 2018 Order and our response to the order through briefs and reply briefs filed on February 13, 2019 and April 10, 2019, respectively, do not provide a reasonable basis for a change to the reserve or recognized ROEs for any of the complaint refund periods nor all subsequent periods, and we believe that the risk of additional material loss beyond amounts already accrued is remote.
Our MISO Regulated Operating Subsidiaries currently record revenues at the base ROE of
10.32%
established in the September 2016 Order on the Initial Complaint plus applicable incentive adders. See
Note 5
for a summary of incentive adders for transmission rates.
As of
June 30, 2019
, our MISO Regulated Operating Subsidiaries had a total of approximately
$5 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 change in the authorized ROE would impact annual consolidated net income by approximately
$5 million
.
Development Projects
We are pursuing strategic development projects that may result in payments to developers that are contingent on the projects reaching certain milestones indicating that the projects are financially viable. We believe it is reasonably possible that we will be required to make these contingent development payments up to a maximum amount of
$120 million
for the period from 2019 through 2023. 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.
15
.
SUPPLEMENTAL FINANCIAL INFORMATION
Reconciliation of Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the condensed consolidated statements of financial position that sum to the total of the same such amounts shown in the condensed consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2018
|
|
2017
|
|
Cash and cash equivalents
|
$
|
3
|
|
|
$
|
12
|
|
|
$
|
6
|
|
|
$
|
66
|
|
|
Restricted cash included in:
|
|
|
|
|
|
|
|
|
Other non-current assets
|
2
|
|
|
2
|
|
|
4
|
|
|
2
|
|
|
Total cash, cash equivalents and restricted cash
|
$
|
5
|
|
|
$
|
14
|
|
|
$
|
10
|
|
|
$
|
68
|
|
Restricted cash included in other non-current assets primarily represents cash on deposit to pay for vegetation management, land easements and land purchases for the purpose of transmission line construction.
Supplementary Cash Flows Information
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
Supplementary cash flows information:
|
|
|
|
|
Interest paid (net of interest capitalized)
|
$
|
103
|
|
|
$
|
130
|
|
|
Income tax refunds received
|
1
|
|
|
13
|
|
|
Supplementary non-cash investing and financing activities:
|
|
|
|
|
Additions to property, plant and equipment and other long-lived assets (a)
|
107
|
|
|
101
|
|
|
Allowance for equity funds used during construction
|
16
|
|
|
18
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
3
|
|
|
—
|
|
____________________________
|
|
|
|
(a)
|
Amounts consist of current and accrued liabilities for construction, labor, materials and other costs that have not been included in investing activities. These amounts have not been paid for as of
June 30, 2019
or
2018
, respectively, but will be or have been included as a cash outflow from investing activities for expenditures for property, plant and equipment when paid.
|
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. The following tables show our financial information by reportable segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
OPERATING REVENUES:
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Regulated Operating Subsidiaries
|
$
|
324
|
|
|
$
|
297
|
|
|
$
|
641
|
|
|
$
|
584
|
|
|
Intercompany eliminations
|
(4
|
)
|
|
(7
|
)
|
|
(14
|
)
|
|
(15
|
)
|
|
Total Operating Revenues
|
$
|
320
|
|
|
$
|
290
|
|
|
$
|
627
|
|
|
$
|
569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
INCOME (LOSS) BEFORE INCOME TAXES:
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Regulated Operating Subsidiaries
|
$
|
155
|
|
|
$
|
147
|
|
|
$
|
306
|
|
|
$
|
290
|
|
|
ITC Holdings and other
|
(39
|
)
|
|
(33
|
)
|
|
(75
|
)
|
|
(68
|
)
|
|
Total Income Before Income Taxes
|
$
|
116
|
|
|
$
|
114
|
|
|
$
|
231
|
|
|
$
|
222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
NET INCOME:
|
June 30,
|
|
June 30,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Regulated Operating Subsidiaries
|
$
|
115
|
|
|
$
|
109
|
|
|
$
|
226
|
|
|
$
|
215
|
|
|
ITC Holdings and other
|
87
|
|
|
79
|
|
|
171
|
|
|
161
|
|
|
Intercompany eliminations
|
(115
|
)
|
|
(109
|
)
|
|
(226
|
)
|
|
(215
|
)
|
|
Total Net Income
|
$
|
87
|
|
|
$
|
79
|
|
|
$
|
171
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS:
|
June 30,
|
|
December 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Regulated Operating Subsidiaries
|
$
|
9,625
|
|
|
$
|
9,224
|
|
|
ITC Holdings and other
|
5,164
|
|
|
4,977
|
|
|
Reconciliations / Intercompany eliminations (a)
|
(5,059
|
)
|
|
(4,872
|
)
|
|
Total Assets
|
$
|
9,730
|
|
|
$
|
9,329
|
|
____________________________
|
|
|
|
(a)
|
Reconciliation of total assets results primarily from differences in the netting of deferred tax assets and liabilities in our segments as compared to the classification in our condensed consolidated statements of financial position.
|
