Entergy 2012 Annual Report Download - page 32

Entergy Corporation and Subsidiaries 2012
MANAGEMENT’S FINANCIAL DISCUSSION AND ANALYSIS continued
capital structure and improve cash flow and credit metrics. Upon the
consummation of a successful exchange offer by the Exchange Trust,
there would be fewer outstanding shares of Entergy common stock, as
those shares would have been exchanged for the shares of ITC com-
mon stock held by the Exchange Trust. Consequently, a successful
delayed exchange offer would permit Entergy to reduce its common
shares outstanding and aggregate cash dividends paid and as a result
could improve Entergy’s available cash flow and credit metrics.
The Merger Agreement contains certain customary representations
and warranties. The Merger Agreement may be terminated: (i) by
mutual consent of Entergy and ITC, (ii) by either Entergy or ITC
if the Merger has not been completed by June 30, 2013, subject to
an up to six month extension by either Entergy or ITC in certain
circumstances, (iii) by either Entergy or ITC if the transactions are
enjoined or otherwise prohibited by applicable law, (iv) by Entergy,
on the one hand, or ITC, on the other hand, upon a material breach
of the Merger Agreement by the other party that has not been cured
by the cure period specified in the Merger Agreement, (v) by either
Entergy or ITC if ITC’s shareholders fail to approve the ITC share-
holder proposals, (vi) by Entergy if the ITC Board of Directors with-
draws or changes its recommendation of the ITC shareholder propos-
als in a manner adverse to Entergy, (vii) by Entergy if ITC willfully
breaches in any material respect its non-solicitation covenant and the
breach has not been cured by the cure period specified in the Merger
Agreement, (viii) by Entergy if there is a law or order that enjoins
the transactions or imposes a burdensome condition on Entergy, (ix)
by either Entergy or ITC if there is a law or order that enjoins the
transactions or imposes a burdensome condition on ITC, (x) by ITC,
prior to ITC shareholder approval, to enter into a transaction for a
superior proposal, provided that ITC complies with its notice and
other obligations in the non-solicitation provision and pays Entergy
the termination fee concurrently with termination or (xi) by ITC if
Entergy takes certain actions with respect to the migration of the
Transmission Business to a regional transmission organization if such
actions could reasonably be expected to have certain adverse effects
on TransCo or ITC after the Merger. In the event that (i) ITC ter-
minates the Merger Agreement to accept a superior acquisition pro-
posal, (ii) Entergy terminates the Merger Agreement because the ITC
Board of Directors has withdrawn its recommendation of the ITC
shareholder proposals, approves or recommends another acquisition
proposal, fails to reaffirm its recommendation or materially breaches
the non-solicitation provisions, (iii) either of the parties terminates
the Merger Agreement because the approval of ITC’s shareholders
is not obtained or (iv) Entergy terminates because of ITC’s uncured
willful breach of the Merger Agreement, and in the case of clauses (iii)
and (iv) an ITC takeover transaction was publicly announced and not
withdrawn prior to termination and within 12 months of termination
ITC agrees to or consummates a takeover transaction, then ITC must
pay Entergy a $113,570,800 termination fee.
Consummation of the Merger is subject to the satisfaction of
customary closing conditions for a transaction such as the Merger,
including, among others, (i) consummation of the Separation, the
Distribution, the Financings and the Special Dividend, (ii) the approval
of the ITC shareholder proposals by the shareholders of ITC, (iii)
the authorization for listing on the New York Stock Exchange of
ITC common stock to be issued in the Merger, (iv) the receipt by
Entergy of regulatory approvals necessary to become a member of
an acceptable regional transmission organization, (v) the receipt of
regulatory approvals necessary to consummate the transaction and
no such regulatory approvals impose a burdensome condition on ITC
or Entergy, (vi) the expiration of the applicable waiting period under
the Hart-Scott-Rodino Act (which has occurred), (vii) the absence of
a material adverse effect on the Transmission Business or ITC, (viii)
the receipt by Entergy of a solvency opinion and (ix) the receipt of
a private letter ruling from the IRS substantially to the effect that
certain requirements for the tax-free treatment of the distribution of
TransCo are met and an opinion that the Distribution and the Merger
will be treated as tax-free reorganizations for U.S. federal income tax
purposes. The Merger and the other transactions contemplated by
the Merger Agreement and the Separation Agreement are planned for
completion in 2013.
Pursuant to the Separation Agreement, and subject to the terms
and conditions set forth therein, Entergy will engage in a series of
preliminary restructuring transactions that result in the transfer to
TransCo’s subsidiaries of the assets relating to the Transmission
Business (the Separation). TransCo and its subsidiaries will consum-
mate certain financing transactions (the TransCo Financing) totaling
approximately $1.775 billion (as may be adjusted pursuant to the
Merger Agreement and the Separation Agreement) pursuant to which
(i) TransCo’s subsidiaries will borrow through a funded bridge facil-
ity with a term of 366 days and (ii) TransCo will issue senior securi-
ties of TransCo to Entergy (the TransCo Securities). Neither Entergy
nor the Utility operating companies will guarantee or otherwise be
liable for the payment of the TransCo Securities after the Separation
occurs. Entergy will issue new debt or enter into agreements under
which certain unrelated creditors will agree to purchase existing cor-
porate debt of Entergy, which will be exchangeable into the TransCo
Securities at closing (the Exchangeable Debt Financing). Entergy
intends to contribute some or all of the proceeds from the new debt
to the Utility operating companies. In addition, prior to the closing
TransCo and/or the TransCo subsidiaries may obtain a working capi-
tal revolving credit facility in a principal amount agreed to by Entergy
and ITC (such financing, together with the TransCo Financing and
the Exchangeable Debt Financing, the Financings).
Under the terms of the Separation Agreement, immediately prior to
the closing, each Utility operating company will contribute its respec-
tive transmission assets to a subsidiary that will become a TransCo
subsidiary in the Separation in exchange for the equity interest in
that subsidiary and the net proceeds received by that subsidiary from
the funded bridge facility described above. Each Utility operating
company will distribute the equity interests in the subsidiaries hold-
ing the transmission assets to Entergy, which will then contribute
such interests to TransCo. The Utility operating companies intend to
apply all of the amounts received by them from the subsidiaries and
from Entergy to the prepayment or redemption of outstanding pre-
ferred and debt securities, with the goal, following completion of the
Separation, of maintaining their capitalization generally consistent
with their capitalization prior to the Separation. Although the aggre-
gate amount and particular series of preferred and debt securities of
each Utility operating company to be redeemed as well as the redemp-
tion dates are uncertain at this time and are expected to remain sub-
ject to change, each Utility operating company currently anticipates
that all of its outstanding preferred securities, if any are outstand-
ing, will be redeemed or otherwise retired prior to the Separation
and that debt securities in the following approximate aggregate
amounts will be redeemed prior to or following the Separation: $.45
billion for Entergy Arkansas, $.25 billion for Entergy Gulf States
Louisiana, $.33 billion for Entergy Louisiana, $.24 billion for Entergy
Mississippi, $2.5 million for Entergy New Orleans, and $.28 billion
for Entergy Texas. Entergy and the Utility operating companies may,
subject to certain conditions, modify or supplement the manner in
which the Separation is consummated. As of December 31, 2012, net
transmission plant in service, which does not include transmission-
related construction work in progress or general or intangible plant,
for the Utility operating companies was $1.03 billion for Entergy
Arkansas, $.57 billion for Entergy Gulf States Louisiana, $.73 bil-
lion for Entergy Louisiana, $.58 billion for Entergy Mississippi, $.03
billion for Entergy New Orleans, and $.64 billion for Entergy Texas.
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