Target: Michigan Electric Transmission Co. LLC
Sale Price: $865M
Sellers: Evercore Capital Partners, Macquarie Essential Assets Partnership, GFI Energy Ventures
Buyer: ITC Holdings Corp. (NYSE:ITC)
Financial Advisors: Sellers: Macquarie Securities (USA) Inc., Morgan Stanley, JPMorgan and Bear Stearns; Buyer: Credit Suisse, Lehman Brothers
Legal Counsel: Sellers: Winston & Strawn LLP and Dickstein Shapiro LLP; Buyer: Simpson Thacher & Bartlett LLP, Stuntz Davis & Staffier PC
New York-based Evercore walked away from the sale with proceeds of $214 million for the 45% stake in Michigan Electric that it acquired for $68.8 million in December 2003, our source says. The transaction represents a complete exit for Evercore, as well as for
Per terms of the agreement, ITC paid $484 million in cash and 2.2 million shares of ITC Holdings common stock ($70 million) to the Evercore-led group. The remaining $311 million comes in the form of the assumption of Michigan Electric’s debt.
Other than for its gaudy ROI, the deal is noteworthy for it being the first time the Federal Energy Regulatory Commission (FERC) has ever authorized the acquisition of one stand-alone independent transmission company by another independent transmission company, according to the FERC. Ultimately it was the FERC that paved the way for this deal to happen.
Historically, high-high voltage transmission lines in the U.S. were out of the realm of independent ownership and were trusted instead to the stewardship of large, integrated, public utilities. This consolidated ownership model led to a very cumbersome U.S. power grid whose lack of competition resulted in abandoned upkeep.
It wasn’t until December 1999 that the FERC moved to break up the market through its approval of “Order No. 2000,” which made it possible—for the first time—for transmission assets to be owned and controlled by independent regional transmission operators. The goal of Order No. 2000 was to attract much-needed investments in the U.S.’s power grid and to promote and improve efficiency and liquidity in what had become a relatively neglected market segment.
Despite a doubling of electricity demand from 1975 to 2001, investment in transmission assets declined by $12.8 billion in the decade from 1992 to 2001, compared with the decade between 1975 and 1984, according to a research note by Lehman Brothers Analyst Daniel Ford. That underinvestment caused major deterioration in the grid, particularly in the Midwestern states.
Even after the order was passed, the utilities were not eager to sell their transmission assets and private equity was slow to move into the space, says the source close to the deal. Indeed, the first independent transmission company was not created until December 2002, when KKR and Trimaran acquired the ITC transmission assets from DTE Energy Co. for $610 million. Those firms took ITC public in a 2005 IPO.
Meanwhile, the Northeast blackout of August 2003 created even more momentum at the political and regulatory levels to entice independent operators to invest in the transmission grid. FERC became especially supportive of the separation of Midwestern transmission assets from the vertically integrated utilities. New incentives were created, including the guarantee that the more money an independent operator invested in infrastructure repair, the higher the rate of return on the investment would be, our source says.
It was in this favorable atmosphere that the Evercore-led consortium acquired Michigan Electric. And throughout its investment, the group invested an additional $100 million to upgrade Michigan Electric’s switching architecture and electric load monitors. Some of that capital also went to building new lines and repairing existing ones, our source says.
With approximately 90 employees, Michigan Electric serves Michigan’s Lower Peninsula and has the ability to transport a peak load of 9,771 megawatts of electricity from generating stations to local electricity distribution facilities. The company generates about $150 million in annual revenues and between $75 million and $80 million in cash flow, according to our source.
ITC Holdings, meanwhile, through its wholly owned operating subsidiary ITCTransmission, has about 250 employees and serves 13 southeastern Michigan counties, including the Detroit metropolitan area. It has a peak load of 12,302 megawatts.
Combined, the two businesses make up the largest independent electricity transmission company and the 10th largest electricity transmission-serving entity in the country, according to ITC.—A.N.