16 credit profiles provide consistent access to capital markets at better rates than

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1 1 requirements will empower Entergy to address opportunities and issues impacting 2 its broader business more efficiently. In addition, not only does ITC's rate 3 construct better support efficiently capitalizing the known investment 4 requirements of the transmission business, but it is also better suited to address the 5 inevitable unplanned capital investment needs, including storm restoration 6 requirements. Additional near-term benefits associated with ITC's independence 7 are explained by ITC witness Joseph Welch. 8 Long-term, in addition to the operational benefits highlighted by ITC 9 witnesses Jon Jipping, Thomas Vitez, and Mr. Welch, separating and merging 10 Entergy's transmission assets into ITC will bring greater focus and financial 11 strength to the transmission business, as well as the generation and distribution 12 functions that will remain under the Entergy Operating Companies' ownership. 13 ITC is better equipped than Entergy to meet the sustained and significant 14 transmission investment requirements that are projected because of ITC's rate 15 construct and higher credit quality. ITC's existing operating subsidiaries' solid 16 credit profiles provide consistent access to capital markets at better rates than 17 would be available absent ITC ownership, which creates savings that will be 18 passed on to customers in the form of reduced interest expense. Further, as 19 explained by Mr. Lewis, the Transaction also reduces the risk of financial distress 20 to ETI and the other existing Entergy Operating Companies. 21 As noted above, many of the financial benefits resulting from the 22 Transaction, including enhanced credit quality and associated interest savings,

2 1 greater access to capital, and improved liquidity, are directly attributable to ITC's 2 rate construct. I will expand on these specific benefits. 3 4 A. Enhanced Credit Ouality and Debt Savings 5 Q23. WHY ARE SOLID INVESTMENT GRADE CREDIT RATINGS 6 IMPORTANT TO CUSTOMERS? 7 A. Solid investment grade credit ratings enable consistent and predictable access to 8 cost-effective capital and ultimately lower debt financing costs. ITC's strong 9 ratings attract a large pool of investors who are willing to invest in ITC and in its 10 existing operating subsidiaries' debt. Given the capital intensive nature of 11 transmission investment, solid investment grade ratings are critical to ITC and its 12 operating subsidiaries as these ratings enable ITC to regularly access the capital 13 markets at lower costs, which are ultimately reflected in our transmission rates Q24. PLEASE DESCRIBE HOW CREDIT QUALITY IS MEASURED BY THE 16 RATING AGENCIES. 17 A. As referenced in ETI witness Michael Tennican's prior referenced testimony, the 18 rating agencies evaluate credit quality and assign credit ratings based on a variety 19 of qualitative and quantitative factors that address business risk and financial risk, 20 including regulatory risk, which is a critical factor for utility company credit 21 ratings. For example, Moody's rating methodology for regulated utilities includes 22 two key factors that consider regulatory risk. The first factor, "Regulatory 23 Framework," considers regulatory consistency, predictability and supportiveness

3 1 The second factor, "Ability to Recover Costs & Earn Returns," considers the rate 2 and tariff review process, including the outcomes and timeliness. Each of these 3 factors is assigned a weight of 25% in Moody's ratings. The rating agencies also 4 consider a variety of quantitative factors, typically referred to as credit ratios or 5 metrics, such as the ratio of funds from operations ("FFO") to cash interest, FFO 6 as a percentage of total debt, and total debt as a percentage of the total 7 capitalization of an enterprise. Additionally, a weight of 10% is attributable to 8 diversification, which measures the diversity of markets or locations in which a 9 company operates. The credit ratings assigned to entities range from investment 10 grade to non-investment grade ratings (also referred to as speculative or "junk"), 11 with higher credit quality entities receiving investment grade ratings. Please see 12 Exhibits CMB-3 and CMB-4 that show the credit ratings scales for Moody's and 13 S&P and an overview for Moody's key rating factors, respectively Q25. PLEASE EXPLAIN THE CREDIT QUALITY OF ITC'S OPERATING 16 COMPANIES AS COMPARED TO THAT OF THE ENTERGY 17 OPERATING COMPANIES. 18 A. The ITC Operating Companies are deemed to be of higher credit quality than the 19 EOCs, as well as most vertically-integrated utilities, primarily for two reasons. 20 First, the ITC Operating Companies have predictable cost recovery mechanisms 21 that ensure timely recovery, of and on, capital investment in the business and an 22 ability to earn authorized returns. Second, ITC's operating companies are more 23 conservatively capitalized than the Entergy Operating Companies with equity

4 1 ratios of up to sixty percent as a percentage of total capitalization versus 2 approximately fifty percent for the Entergy Operating Companies. 3 4 Q26. DO YOU EXPECT LOWER DEBT COSTS FOR THE NEW ITC 5 OPERATING COMPANIES COMPARED TO THE DEBT COSTS FOR 6 THE ENTERGY OPERATING COMPANIES? 7 A. Yes. In order to calculate expected savings, ITC has made a comparison of ITC's 8 existing operating subsidiaries that are members of MISO and the EOCs' current 9 senior secured credit ratings that have a direct impact on the cost of debt for the 10 regulated entities (included in the charts below) and determined a range of debt 11 savings. Senior Secured ITC's Opcos S&P Moody's ITCTransmission A Al METC A Al ITC Midwest A Al Senior Secured Enter s Opcos S&P Moody's Entergy Arkansas A- A3 Entergy Louisiana A- A3 Entergy Gulf States BBB+ A3 Entergy New Orleans BBB+ Baa3 Entergy Mississippi A- Baal Entergy Texas BBB+ Baa2 12 Based on indicative pricing for both sets of operating companies from JP Morgan, 13 one of ITC's financial advisors in the Transaction, we believe that the interest

5 1 expense savings will be meaningful - in both the near-term and the long-term for 2 the New ITC Operating Companies Q27. WHAT ARE THE EXPECTED DEBT COST SAVINGS ASSOCIATED 5 WITH HIGHER CREDIT QUALITY? 6 A. We estimate debt cost savings in the range of $24 million to $27 million in 2014, 7 in aggregate, for the New ITC Operating Companies in their first full year under 8 ITC ownership as a result of enhanced credit quality. These savings estimates are 9 measured in comparison to the forecasted interest expense for the transmission 10 business under Entergy ownership over the same time period and are a direct 11 result of the difference in credit quality between what is anticipated for the New 12 ITC Operating Companies and the current Entergy Operating Companies. Over a 13 five-year period, we estimate the debt cost savings for the New ITC Operating 14 Companies to range from approximately $125 million to $156 million (in nominal 15 dollars) or $99 million to $123 million on a NPV8 basis.9 The savings attributable 16 to ITC Texas over a five-year period are $33 million to $44 million on a nominal 17 basis and $26 million to $35 million on a NPV basis. The breakdown of these 18 anticipated debt cost savings under ITC ownership are shown in the 19 following table. ' The term "New ITC Operating Companies" refers to the newly created operating companies that will own electric transmission assets as part of the ITC Holdings Corp. corporate structure. The New ITC Operating Companies will be direct subsidiaries of ITC Midsouth LLC, which in turn will be a direct subsidiary of ITC Holdings Corp. 8 Assumes 8% discount rate as utilized in Entergy Transfer of Functional Control Application. See note 3, above. 9 A breakdown of the savings by jurisdiction is presented in Exhibit CMB

6 ($ in millions) YR NPV 1) Refinanced Debt $23 $113 $90 2) Future Debt a) Low End of the Range b) High End of the Range ) + 2) = Total Savings a) Low End of the Range $24 $125 $99 b) High End of the Range $27 $156 $123 1 Q28. PLEASE EXPLAIN THE SAVINGS CLASSIFIED AS "REFINANCED 2 DEBT" IN THE TABLE ABOVE AND HOW THESE SAVINGS WERE 3 QUANTIFIED. 4 A. The anticipated interest expense savings classified as "refinanced debt" in the 5 table above relate to the $1.2 billion of new long-term debt to be issued by the 6 New ITC Operating Companies subsequent to the close of the Transaction. As I 7 described earlier, this debt transaction would be part of ITC's plan to refinance 8 the $1.2 billion unsecured bridge facility post-closing. ITC assumes that this long 9 term debt would be issued at market rates of approximately 3.5%10 compared to 10 the forecasted weighted average interest rate of approximately 6% for the 11 transmission business under Entergy Corporation ownership (6.73% for ETI), as 12 referenced in Exhibit JAL-2 to ETI witness Jay Lewis's testimony, which 10 Source: JP Morgan. Note: Indicative spreads as of February 29, Indicative rates are based on market conditions during the stated period and are subject to change

7 1 develops the interest rate savings noted in the previous table. The estimated rate 2 ascribed to the New ITC Operating Companies' debt has been estimated by 3 JPMorgan, one of ITC's financial advisors in the Transaction. Exhibit CMB-5 4 details these calculations. 5 6 Q29. PLEASE EXPLAIN THE SAVINGS CLASSIFIED AS "FUTURE DEBT" 7 IN THE TABLE ABOVE AND HOW THESE SAVINGS WERE 8 QUANTIFIED. 9 A. In addition to the near-term savings resulting from the EOC debt refinancing, we 10 also anticipate that incremental interest expense savings would be realized over 11 time as the New ITC Operating Companies issue incremental debt to fund future 12 capital investments. These interest savings were quantified by multiplying all 13 projected new debt issuances over a five-year period by the estimated difference 14 in debt financing rates between ITC's existing operating subsidiaries that are 15 members of MISO, as a proxy for the New ITC Operating Companies, and the 16 Entergy Operating Companies Q30. HOW DID YOU ESTIMATE THE DIFFERENCE IN FUNDING RATES 19 BETWEEN ITC'S EXISTING OPERATING SUBSIDIARIES THAT ARE 20 MEMBERS OF MISO AND ENTERGY'S OPERATING COMPANIES 21 OVER THE FORECASTED PERIOD? 22 A. Given the dynamic nature of the capital markets, it is difficult to precisely predict 23 funding rates for a single issuer over a forecasted period, let alone for multiple

8 1 operating companies. As such, we established a range for the potential difference 2 in debt financing rates between ITC's existing operating subsidiaries and the 3 Entergy Operating Companies over a five-year period. The low end of the range 4 reflects the difference in debt financing rates between the entities for 10-year 5 bonds based on prevailing market conditions. We believe the current market is a 6 suitable proxy for the low end of the range because debt rates are presently at 7 record lows and investors have been willing to accept lower yields on bonds for 8 higher risk companies, which has consequently compressed the difference in debt 9 financing rates for solid investment grade companies such as ITC's existing 10 operating subsidiaries that are members of MISO and lower investment grade 11 companies such as the Entergy Operating Companies. This methodology yields a 12 debt rate differential of 45 to 65 basis points (or 0.45% to 0.65%),11 depending on 13 the Entergy Operating Company. For ETI, this rate differential is approximately basis points (or 0.65 /a).12 To approximate the high end of the range, we 15 observed the historical difference between the implied debt financing rates (or 16 yields) for high investment grade utilities as a proxy for ITC's existing operating 17 subsidiaries that are members of MISO and lower investment grade utilities as a 18 proxy for the Entergy Operating Companies over a five-year period. Our analysis 19 yielded a debt rate differential of 185 to 205 basis points (1.85% to 2.05%), 12 Source: JP Morgan. Indicative spreads as of February 29, Indicative rates are based on market conditions during the stated period and are subject to change. Source: JP Morgan. Indicative spreads as of February 29, Indicative rates are based on market conditions during the stated period and are subject to change

9 1 depending on the Entergy Operating Company, for the high end of the range.13 2 For ETI, this rate differential is approximately 205 basis points (or 2.05%).14 For 3 detail on these assumptions and other supporting details, see Exhibit CMB-5: 4 Overview of Credit Quality Enhancement Benefits. 5 6 Q31. CAN YOU EXPLAIN THE BASIS FOR ITC'S EXISTING OPERATING 7 SUBSIDIARIES' HIGH CREDIT RATINGS? 8 A. Yes. The rating agencies' favorable view of the credit quality of the ITC 9 operating companies is directly related to our rate construct, as detailed below, 10 and our resulting ability to generate steady and predictable cash flows. The 11 comments of various rating agencies reinforce the points I have made (the full 12 reports are located in Exhibit CMB-6). 13 Moody's, April 20, "[ITC Operating Companies'] supportive 14 regulatory framework provides a robust set of recovery mechanisms and 15 healthy returns resulting in strong credit metrics... [ITC Operating 16 Companies'] credit metrics continue to be stronger than other electric 17 utilities with an A3 Issuer Rating." 18 S&P, January 10, 2011, upon putting ITC's rating on positive outlook for 19 a ratings upgrade. "The company has been able to improve its cash flow 20 measures... benefiting from the FERC's constructive regulation." " Source: Barclays. Barclays' indices comprised of utility bonds above $250M, tenors> 1 year and varying levels of contractual and structural subordination. Data since 4/25/ Source: Barclays. Barclays' indices comprised of utility bonds above $250M, tenors> 1 year and varying levels of contractual and structural subordination. Data since 4/25/

10 1 Q32. HAS THERE BEEN ANY ADJUSTMENT BY THE RATING AGENCIES 2 TO ITC'S CREDIT RATING IN RESPONSE TO THE TRANSACTION? 3 A. Yes. On December 5, 2011, subsequent to the announcement of the Transaction, 4 S&P upgraded the credit ratings of ITC and its operating subsidiaries. The 5 following are excerpts from S&P's Research Update (the entire report is located 6 in Exhibit CMB-6): 7 "The recently announced Entergy transaction in which Holdings 8 will acquire all of Entergy's transmission assets will double 9 Holdings' size, diversify its cash flow and broaden its customer 10 base. These credit-enhancements will improve Holdings' excellent 11 business profile...the excellent business risk profile reflects 12 Holdings lower operating risk, pure electric transmission business 13 and its effective management of regulatory risk." 14 As evidenced above, ITC's credit rating benefits from its unique 15 independent transmission business model and rate construct. In addition, S&P 16 noted that the Transaction is credit enhancing to ITC due to ITC's increased size 17 and geographic diversity, which also creates revenue diversity, after the 18 Transaction closes. The Transaction was specifically designed to preserve ITC's 19 excellent credit quality at current levels and to afford the same credit benefits to 20 ITC Texas

11 1 Q33. DO YOU EXPECT ITC TEXAS AND THE OTHER NEW ITC 2 OPERATING COMPANIES CREATED BY THE TRANSACTION TO 3 RECEIVE THE SAME CREDIT RATINGS AND ACCESS TO CAPITAL 4 EXPERIENCED BY ITC'S EXISTING OPERATING SUBSIDIARIES? 5 A. Yes. Though we have not received any confirmation from the credit rating 6 agencies, we intend to seek from FERC a rate construct for the New ITC 7 Operating Companies, including ITC Texas, that is comparable to that of our 8 existing operating subsidiaries. We also plan to implement similar financing 9 strategies. As such, we believe the credit ratings agencies, as well as investors 10 and lenders, will view the credit quality of ITC Texas and the other New ITC 11 Operating Companies favorably. Our expectations are predicated on the fact that 12 our rate construct has led to Al/A senior secured ratings at Moody's and S&P, 13 respectively, for each of the ITC Operating Companies that are members of MISO 14 (i.e., ITCT, METC and ITCMW) B. Greater Access to Capital 17 Q34. PLEASE DISCUSS ITC'S ABILITY TO ACCESS THE CAPITAL 18 MARKETS. 19 A. ITC has a very strong history of accessing the capital markets to support ongoing 20 capital investments and growth. ITC's historical debt and equity offerings at the 21 holding company and operating companies (debt only) have been well received 22 by the investment community as a result of ITC's strong financial platform that is 23 supported by its rate construct. From a debt financing perspective, prospective

12 1 lenders and bond investors have consistently provided liquidity in a cost-efficient 2 manner to support the funding of our capital programs, which I expand on later in 3 my testimony. 4 From an equity financing perspective, ITC has cultivated a broad base of 5 shareholders who are attracted to ITC's value proposition. ITC's investors 6 understand and accept the fact that ITC, unlike most utilities, has a relatively low 7 dividend payout ratio (defined as annual dividends paid as a percentage of annual 8 net income) and preserves most of its earnings and cash flow to efficiently 9 capitalize investments in needed transmission infrastructure. Given ITC's stock 10 performance over the past several years, I am confident that there would be 11 significant demand for an additional offering of ITC stock if it was necessary for 12 us to access the market to support investment Q35. PLEASE ELABORATE ON ITC'S EXISTING OPERATING 15 SUBSIDIARIES' ACCESS TO THE CAPITAL MARKETS. 16 A. While ITC has consistently had a solid track record of accessing the capital 17 markets, this ability was best demonstrated during the credit crisis experienced in 18 late 2008 and early During this period, two of its operating companies, 19 METC and ITCMW, were successful in completing debt financings at relatively 20 favorable rates. Comparatively, a number of other companies could not access 21 the market during this period or were forced to issue debt at exorbitant rates. In 22 fact, the credit spreads, which denote the difference between treasury rates (the 23 presumed risk-free rate) and the interest rate ascribed to a debt security, for bonds

13 1 issued during this period for lower investment grade utilities were in some cases 2 roughly 250 basis points (or 2.50%) higher than those of solid investment grade 3 rated utilities like ITC's existing operating subsidiaries. To put this in context, a basis-point differential in a $500 million bond issuance equates to 5 $12.5 million of incremental interest expense per year. As such, given their solid 6 investment grade ratings, ITC's operating companies have been able to issue debt 7 with less pricing volatility, to the benefit of customers. See Exhibit CMB-5: 8 Overview of Credit Quality Enhancement Benefits for supporting details. 9 In addition, S&P upgraded METC's credit ratings applicable to its Senior 10 Secured Notes to from BBB to A- during the credit crisis, which further illustrates 11 ITC's strong financial platform Q36. HAS ITC'S CREDIT QUALITY AND ACCESS TO CAPITAL MARKETS 14 SUPPORTED NEEDED TRANSMISSION INVESTMENT? 15 A. Yes. ITC's capital investments across all operating companies totaled 16 approximately $3.0 billion from the Company's inception in early 2003 through 17 June 30, To put this number in a more meaningful context, consider that 18 ITC's annual capital investments have averaged nearly 2.0 times its operating 19 cash flow over the past five years, with a peak of 2.7 times. ITC has consistently 20 been able to invest in its systems, in excess of cash flows generated, because of its 21 rate construct

14 1 Q37. WHY IS CASH FROM OPERATIONS AN IMPORTANT METRIC FOR 2 CAPITAL INVESTMENTS? 3 A. Cash from operations, or cash flow generation, is an important factor in 4 determining the need to access external capital, and is particularly relevant in the 5 context of this Transaction as the capital needs in the New ITC Operating 6 Companies' footprint are expected to significantly outpace cash flow generated by 7 the transmission business. 8 ITC's sole focus on transmission inherently avoids internal capital 9 allocation challenges and competition for capital. Capital challenges are expected 10 to become more difficult for Entergy to manage in light of pending regulations 11 and federal policies, as explained by ETI witnesses Theodore Bunting, 12 Sallie Rainer, Michael Tennican, and Jay Lewis. In addition, ITC's efforts have 13 established an investor base that recognizes the ITC's requirement to invest in 14 needed transmission infrastructure for the benefit of customers. This has allowed 15 ITC to attract the capital needed to support these investments in an efficient 16 manner. ITC's historic investment levels attest to its ability to support large 17 transmission capital demands over sustained periods, particularly when that need 18 may not be sufficiently supported by cash from operations

15 1 C. Improved Liguidity 2 Q38. HOW DOES ITC MANAGE ITS LIQUIDITY TO SUPPORT THE 3 CAPITAL-INTENSIVE NATURE OF THE TRANSMISSION BUSINESS? 4 A. ITC's existing operating subsidiaries have debt profiles that include a mixture of 5 long-term debt and revolving credit facilities ("revolvers"), which are lines of 6 credit that can be repaid and then re-borrowed prior to their maturity. ITC 7 annually establishes near and long-term financing plans to ensure it has sufficient 8 levels of liquidity in the form of revolvers. These revolvers are regularly 9 refinanced with long-term debt instruments (bonds) once these facilities reach a 10 high level of utilization. The size of the revolvers (the credit limit) depends on a 11 variety of factors, including the capital investment needs of the company to which 12 they relate and the risk and magnitude of potential unexpected capital needs that 13 would be partially funded by these revolvers. In addition, ITC's current operating 14 subsidiaries produce steady and predictable cash flows that are used to reinvest in 15 transmission system improvement and maintenance Q39. DO YOU EXPECT THAT ITC WILL BE ABLE TO MAINTAIN 18 SUFFICIENT LIQUIDITY FOR ITC TEXAS? 19 A. Yes. Similar to the capitalization and financing plans employed by each of our 20 existing operating subsidiaries, ITC Texas will have a debt profile that includes a 21 mixture of bonds and revolvers. In addition, as I previously noted, we anticipate 22 that ITC Texas will also have a rate construct comparable to that of the ITC 23 existing operating subsidiaries that are members of MISO that will produce strong

16 1 and predicable cash flows. As such, we anticipate that ITC Texas will have 2 sufficient liquidity and financial flexibility to fund expected and unexpected 3 transmission investments, including those that may result from storm damage. 4 5 Q40. WHY IS LIQUIDITY IMPORTANT FOR REPAIRING STORM 6 DAMAGE? 7 A. From a financial perspective, the challenge with storm response is that entities 8 must be able to make repairs and investments (in some cases in material amounts) 9 in the systems immediately to support restoration efforts. Proactive liquidity 10 planning and unwavering access to cost-efficient capital are critical to fund these 11 repairs successfully given the unexpected nature of these costs. Our rate construct 12 and financing strategy support these needs in addressing significant levels of 13 unplanned capital investments, whether they are storm related or driven by other 14 factors Q41. IS ITC CAPABLE OF FINANCIALLY RESPONDING TO THE UNIQUE 17 CHALLENGES POSED BY THE LEVEL OF STORM ACTIVITY TEXAS 18 HAS EXPERIENCED? 19 A. As testified to by ITC witnesses Jon Jipping and Douglas Collins, ITC has 20 experienced storm damage in the past and had no difficulty meeting these 21 challenges financially, thereby building the confidence of our stakeholders in the 22 financial strength of the organization. ITC recognizes that the nature of storms 23 experienced in Texas and the region presents challenges. However, ITC's rate

17 1 construct is structured to maintain sufficient liquidity and cost-effective access to 2 capital to fund needed investments while also providing the ability to meet 3 unforeseen investment needs. ITC's financing strategy specifically incorporates 4 liquidity planning to ensure the Company can finance unexpected restoration 5 activities, and the revolvers established for ITC Texas at the time of the 6 Transaction close will also be sized accordingly. 7 8 Q42. HOW DOES THE TRANSACTION AFFECT THE PARTIES' ABILITIES 9 TO ADDRESS POTENTIAL STORM DAMAGE? 10 A. The Transaction places Entergy Operating Companies' transmission assets in a 11 stronger and more resilient ownership model while also mitigating the financial 12 challenges presented by storm activity by dividing restoration responsibilities 13 between separate companies with separate balance sheets to support needed 14 investment. Upon the close of the Transaction, stakeholders can have confidence 15 in ITC's ability to meet its financial commitments and avoid the financial 16 challenges and supply chain issues that can arise during emergency situations VI. RATE CONSTRUCT 19 Q43. PLEASE DESCRIBE THE KEY ATTRIBUTES OF THE ITC RATE 20 CONSTRUCT. 21 A. The key elements of ITC's rate construct, all of which are regulated by FERC, 22 include: a formula-based rate tariff contained in Attachment 0 within the MISO 23 Open Access Transmission, Energy and Operating Reserve Markets Tariff

18 1 ("Attachment 0"), which ITC applies on a forward looking basis with an annual 2 true-up mechanism; and FERC-approved ROE levels and capital structures. 3 This rate construct promotes and facilitates significant needed investment 4 in transmission infrastructure. The construct is predicated on providing a 5 predictable and transparent cost recovery mechanism with sufficient investment 6 returns to attract capital to support transmission investment through stable cash 7 flow generation and consistent access to cost-efficient capital. As a result, our 8 rate construct is ideally suited for transmission systems that require significant 9 capital investment but which are not expected to provide sufficient cash flows to 10 support these investments, such as the situation presented by the Mid South 11 Operating Companies. This cash flow situation is discussed in the testimony of 12 ETI's Mr. Lewis. ITC intends to seek this same rate construct for the New ITC 13 Operating Companies, including ITC Texas and, assuming all of the elements of 14 the proposed rate construct are approved by FERC, the New ITC Operating 15 Companies will be well positioned to make the necessary capital investments for 16 the benefit of their customers Q44. IS ATTACHMENT 0 SPECIFIC TO ITC OR IS IT AVAILABLE TO 19 OTHER TRANSMISSION OWNERS WITHIN MISO? 20 A. Attachment 0 is a formula rate tariff mechanism available to all Transmission 21 Owner Members ("TO") of MISO, including certain of ITC's existing operating 22 subsidiaries. Attachment 0 was originally implemented by MISO TOs on an 23 historic test year basis (with no annual true-up mechanism), but over time some

19 1 TOs have obtained FERC approval to use a projected test year period (with an 2 annual true-up mechanism) under Attachment O. 3 ITC's existing operating subsidiaries have elected to utilize a forward 4 looking test period which has an annual true-up mechanism incorporated to 5 ensure there is no over-or under-collection of the actual revenue requirements 6 from customers. The true-up process and implementation details of Attachment 0 7 are discussed in ITC witness Thomas Wrenbeck's testimony. 8 This cost recovery mechanism is a traditional cost of service model and 9 has been determined to be just and reasonable by FERC. It provides for a simple 10 and transparent rate implementation process through its formulaic nature and 11 facilitates predictable recovery of capital investments. Customers and 12 stakeholders have access to information about the formula inputs under tariff 13 protocols and have the right to file a complaint with FERC if they feel a rate is 14 unjust or unreasonable. The ability to implement this Attachment 0 on a forward 15 looking basis with an annual true-up provides timely recovery of investments 16 while also protecting customers from any over-recovery via the annual true-up 17 mechanism. Once again, the testimony of Mr. Wrenbeck further describes the 18 details of this Attachment 0 formula rate template Q45. IS ITC PROPOSING TO USE A FORWARD LOOKING TEST PERIOD 21 ATTACHMENT 0 WITH A TRUE-UP FOR ITC TEXAS? 22 A. Yes. ITC will file with FERC for approval to use a forward looking 23 Attachment 0 rate with an annual true-up for ITC Texas, similar to ITC's other

20 1 operating subsidiaries within MISO, which is also discussed by ITC witness 2 Thomas Wrenbeck. 3 4 Q46. IN ADDITION TO THE USE OF ATTACHMENT 0 ON A FORWARD 5 LOOKING BASIS WITH A TRUE-UP, WHAT ARE THE OTHER KEY 6 ELEMENTS OF THE ITC RATE CONSTRUCT? 7 A. The other key components of the ITC rate construct are the use of a FERC- 8 approved return on equity ("ROE") and capital structure. The FERC-approved 9 ROEs in effect at ITC's existing operating subsidiaries provide levels of returns 10 sufficient to support our capital investments and credit quality. The FERC- 11 approved ROEs for ITC operating companies vary, but the FERC-approved 12 capital structures for all of ITC's subsidiaries are sixty percent equity and forty 13 percent debt. The combination of these rate elements in the cost of service model 14 employed by ITC's operating companies supports significant investment in 15 needed transmission infrastructure by maintaining cash flows necessary to support 16 those investments while also providing efficient access to the capital markets Q47. WHAT ROE AND CAPITAL STRUCTURE WILL ITC SEEK AT FERC 19 FOR ITC TEXAS? 20 A. ITC will seek the standard MISO regional ROE of 12.38% that is available to all 21 TOs belonging to MISO and comparable to that of the ITC operating subsidiaries 22 that are members of MISO. ITC will also seek approval for ITC Texas to use an 23 actual capital structure of 60 percent equity and 40 percent debt, which is

21 1 consistent with both ITC's existing operating subsidiaries and with capital 2 structure levels approved by FERC for other transmission entities Q48. PLEASE DISCUSS THE RELEVANCE OF CREDIT QUALITY, COST OF 5 DEBT AND ACCESS TO CAPITAL IN THE CONTEXT OF THE RATE 6 CONSTRUCT. 7 A. Credit quality, lower cost of debt and access to capital are important benefits of 8 the ITC rate construct. Credit quality heavily influences the cost of debt for 9 regulated entities and this cost is typically passed on to customers through the 10 overall recoverable cost of capital. As a result, the higher the credit quality of an 11 entity, the lower the cost of debt, which translates into lower debt financing costs 12 for customers. Additionally, maintaining access to capital in a cost-efficient 13 manner is critical since it enables ITC to implement large-scale capital 14 investments under any market condition or emergency situations, such as storms. 15 In fact, ITC's capital investments grew by 48% on a consolidated basis during the 16 fourth quarter of 2008 in comparison to the same period in the prior year. This 17 time period is significant because it overlaps with the credit crisis, a period in 18 which the capital markets were effectively closed for many companies. ITC's 19 existing operating subsidiaries not only continued to invest significantly but also 15 FERC has approved a 60% equity and 40% capital structure for the AWC Companies (Atlantic Grid Operations A LLC, et al., 135 FERC 61,144 (2011)), for Prairie Wind Transmission, LLC (Tallgrass Transmission, LLC, et al., 132 FERC 61,114 (2010)), and for Startrans 70, L.L.C., 122 FERC 61,306 (2008). In addition, within MISO, based on the Attachment 0 tariffs on file with MISO as of June 2012 ( ibrary/pages/managedfileset.aspx?setid=259), Northern Indiana Public Service Company and Ameren Illinois Company use capital structures comprised of 60% equity and 58% equity, respectively

22 1 managed to fund their respective capital plans with multiple bond issuances 2 during challenging market conditions as I discussed earlier. 3 4 Q49. HOW HAS ITC'S RATE CONSTRUCT SUPPORTED ITS ABILITY TO 5 MAKE SIGNIFICANT CAPITAL INVESTMENTS WHILE ALSO 6 MAINTAINING STRONG CREDIT QUALITY? 7 A. ITC's rate construct enables its operating companies to sustain significant levels 8 of needed capital investments over long durations. This rate construct reduces 9 regulatory lag, on account of the forward looking formula rates, which more 10 closely align cost incurrence with cost recovery. The rate construct also features 11 ROEs and capital structures that facilitate ITC's ability to attract cost effective 12 capital to enable long-term investment in the grid. The rate construct optimizes 13 liquidity and reduces cash flow volatility, thereby enhancing the credit quality of 14 ITC's operating subsidiaries. As a result, prospective lenders and investors have 15 consistently viewed ITC's credit quality favorably irrespective of broader market 16 conditions and have been willing to supply capital at reasonable rates to support 17 investment in and maintenance of ITC's transmission systems Q50. GIVEN THE FERC REGULATORY MODEL, WHAT ACCOUNTING 20 POLICIES AND PROCEDURES WILL ITC TEXAS USE FOR ITS 21 TRANSMISSION ASSETS? 22 A. As a FERC-jurisdictional electric transmission company, ITC Texas will maintain 23 its books and records in accordance with the FERC promulgated version of the

23 1 Uniform System of Accounts ("USOA"), as published in the Code of Federal 2 Regulations ("CFR"). 18 C.F.R. Part 101, et. seq. Accounting policies and 3 procedures will also be maintained in compliance with the regulations and USOA 4 set forth in the CFR. In addition, as a consolidated subsidiary of a publicly traded 5 entity, ITC Texas will comply with Generally Accepted Accounting Principles 6 and other regulations and reporting requirements established by the Securities and 7 Exchange Commission. 8 9 VII. MODELED EFFECT ON TRANSMISSION REVENUE 10 REQUIREMENTS ATTRIBUTABLE TO RETAIL CUSTOMERS 11 Q51. WILL THERE BE CHANGES TO TRANSMISSION REVENUE 12 REQUIREMENTS ATTRIBUTABLE TO RETAIL CUSTOMERS AS A 13 RESULT OF THE TRANSACTION? 14 A. Yes. As a result of the Transaction, ETI's former transmission assets will be 15 owned by ITC Texas under the ITC rate construct. This will modify the 16 transmission revenue requirements attributable to retail customers ("transmission 17 retail revenue requirement") associated with these assets, including changes 18 related to the weighted average cost of capital utilized in determining the return 19 component of the revenue requirement. We estimate that these modifications will 20 have impacts on the transmission retail revenue requirement, which in turn will 21 have a modest impact on retail rates. These modest effects on retail rates are 22 expected to be offset by the benefits of the Transaction

24 1 Q52. WHAT ARE THE BENEFITS RESULTING FROM THE TRANSACTION 2 THAT WILL OFFSET THESE ESTIMATED CHANGES IN 3 TRANSMISSION RETAIL REVENUE REQUIREMENTS? 4 A. As discussed above, my analysis is solely focused on certain financial impacts of 5 moving the transmission assets to the ITC rate construct. Other benefits of the 6 Transaction are expected to offset these projected increases in the transmission 7 retail revenue requirements. These benefits, as discussed by ITC witness Joseph Welch and other ITC and ETI witnesses, include: i. increased financial flexibility at a time when significant capital investments are required for Entergy's transmission system, including the ETI system; ii. iii. iv. a singular focus on transmission which eliminates the risk of ITC's planned capital investments being affected by capital requirements in other lines of business; mitigating the risk of potential deterioration in the Entergy Operating Companies' credit metrics and subsequent increases in interest costs as discussed in the testimony of ETI witness Jay Lewis; transmission ownership by a company, including its Board of Directors and management team, completely independent from all market participants, thus eliminating the need for significant regulation and oversight to mitigate perceived bias in the provision of transmission services (see direct testimony of Mr. Welch);

25 1 v. lower energy costs resulting from greater access to competitive 2 markets (see testimony of Mr. Welch and ITC witness 3 Johannes Pfeifenberger); 4 vi. improved reliability resulting from ITC's proven commitment to 5 operational excellence and ability to invest in needed transmission 6 infrastructure for the benefit of customers (see direct testimony of 7 ITC witnesses Jon Jipping and Thomas Vitez). 8 9 Q53. HAVE THE ESTIMATED EFFECTS ON TRANSMISSION RETAIL 10 REVENUE REQUIREMENTS FOR THE ENTERGY OPERATING 11 COMPANIES BEEN MODELED? 12 A. Yes. ITC and Entergy Corporation have modeled the estimated effect on 13 transmission retail revenue requirements resulting from expected changes in the 14 weighted average cost of capital, including the benefits of the improved credit 15 quality, for the transmission assets of ETI after they are spun-off from Entergy 16 Corporation and merged into ITC. Over the five-year period from January 1, through December 31, 2018, the NPV of the increase in transmission retail 18 revenue requirements is anticipated to be approximately $60 million for ETI. The 19 supporting calculations for this analysis are provided in my Exhibit CMB

26 1 Q54. HOW IS THE TRANSMISSION RETAIL REVENUE REQUIREMENT 2 EFFECT CALCULATED? 3 A. The current weighted average cost of capital for ETI is compared to the 4 anticipated weighted average cost of capital for ITC Texas, which includes the 5 anticipated changes in ROE, capital structure and debt costs. This difference was 6 then applied to the projected annual average rate base balances to derive the 7 change in total transmission revenue requirement. The rate base balances used in 8 the analysis represent the net book value of the transmission facilities expected to 9 be transferred to ITC Texas at the closing of the Transaction along with future 10 rate base growth as a result of projected capital investments by ETI over the five- 11 year forecast period. As described in the testimony of ETI witness Jay Lewis, he 12 provided the additional necessary information to calculate the change in total 13 transmission revenue requirements that would be attributable to retail customers, 14 resulting solely from ITC Texas's anticipated weighted average cost of capital. 15 This five-year change in transmission retail revenue requirement was then 16 discounted back to January 1, 2014 using a discount rate of 8%. 16 It. Assumes 8% discount rate as utilized in Entergy Transfer of Functional Control Application. note 3, above. See

27 1 Q55. WHY WAS A FIVE-YEAR PERIOD ( ) SELECTED FOR YOUR 2 ANALYSIS OF TRANSMISSION RETAIL REVENUE REQUIREMENT 3 IMPACT? 4 A. A five-year period was selected because it aligns with ITC's internal and external 5 planning periods. Further, although the Transaction is expected to close in 2013, 6 the analysis began in 2014 to avoid the complexity of modeling partial years. 7 8 Q56. HOW DO THESE TRANSMISSION RETAIL REVENUE 9 REQUIREMENTS EFFECTS TRANSLATE INTO RETAIL CUSTOMER 10 RATE EFFECTS? 11 A. According to the testimony of ETI witness Jay Lewis, the transmission retail 12 revenue requirement effects, combined with the Transaction's elimination of the 13 Entergy System Agreement Schedule MSS-2, would translate into a modest 14 decrease in retail rates of $0.22 per month or 0.2% for ETI for 2014, not including 15 the timing effects discussed later in my testimony. As discussed in the Lewis 16 Testimony, these retail rate impacts include other effects in addition to the change 17 in total transmission revenue requirements that would be attributable to retail 18 customers resulting solely from ITC Texas's anticipated weighted average cost of 19 capital that I calculated. Mr. Lewis's testimony provides details regarding the 20 calculation of the 2014 retail rate effects

28 1 Q57. PLEASE DESCRIBE ITC TEXAS'S PLAN TO IMPLEMENT ITS RATE 2 UPON CLOSING IN A. ITC Texas's transmission rate will become effective on close of the Transaction 4 in However, during the period between the date of close of the Transaction 5 and December 31, 2013, ITC will continue to bill the charges that otherwise 6 would have applied to the ETI pricing zone under ETI's ownership of its former 7 transmission assets. Any differences between actual revenues collected and ITC 8 Texas's revenue requirement will be measured through the 2013 true-up and 9 reflected in the 2015 rate for ITC Texas, as discussed in the testimony of ITC 10 witness Thomas Wrenbeck Q58. PLEASE SUMMARIZE THE ASSUMPTIONS USED IN THE 13 TRANSMISSION RETAIL REVENUE REQUIREMENT MODELING. 14 A. I have prepared the following table to assist in comparing the main assumptions 15 used in the analysis:

29 REVENUE REQUIREMENT ITC Texas ETI COMPONENT Return on Equity 12.38% (MISO base rate) 10.13% 117 Capital Structure Cost of Debt for Refinancing Transaction 60% Equity and 40% Debt 3.5% for ITC Texas Approximately ^ % Equity and 6.73%18 Interest Rate on Future Debt 65 to 205 basis points lower than ETI forecast ETI Forecast Capital Expenditures19 Entergy Capital Investment Entergy Capital Investment Plan Plan A & G Expenses and O& M Entergy Forecast Entergy Forecast Expenses Book Depreciation Periods All Other Assumptions Entergy Forecast Entergy Forecast Entergy Forecast Entergy Forecast 17 '$ Based on analysis at the time of the Transaction agreements. Represents embedded cost of debt. 19 For purposes of the modeling, ITC Texas assumed the same level of capital expenditures as ETI; however ITC Texas will need to undertake its own independent analysis of the level of capital investments needed for these systems

30 1 Q59. WHAT IS THE BASIS FOR THE ASSUMPTIONS UNDER ITC 2 OWNERSHIP? 3 A. The assumptions under ITC ownership are: 4 ROE and Capital Structure: These ratemaking components are those that 5 will be sought for approval by FERC in ITC Texas's formula rate. As I 6 highlighted earlier in my testimony, the 12.38% ROE is the standard 7 MISO regional ROE that is available to all TOs belonging to MISO. The 8 capital structure of 60% equity and 40% debt is consistent with that of 9 ITC's existing operating subsidiaries and other transmission owners, 10 including certain MISO transmission owners; 11 Cost of Debt for the Initial Refinancing and Cost of Future Debt: The cost 12 of debt reflects the expected enhanced credit quality for ITC Texas and 13 indicative pricing by ITC's financial advisors for the Initial Refinancing. 14 Future debt costs are based on an extrapolation of historic trends as 15 explained in Section IV of my testimony; 16 Level of Investment: It is not possible to know at this time what level of 17 transmission investment will be needed in ITC Texas. For purposes of 18 this analysis, however, we have assumed the same level of expected 19 capital investments as ETI has forecasted over the five-year period. See 20 the testimony of ITC witness Thomas Vitez for a discussion ITC's plans 21 for future projects. 22 O&M and A&G: For modeling purposes, we have assumed the same level 23 of transmission-related operations and maintenance and administrative and

31 1 general expenses as ETI forecasts over a five-year period. While the 2 historical O&M levels for ETI are roughly in line with those of ITC's 3 existing operating subsidiaries, at this point in time, it is not possible for 4 ITC to know what levels of O&M or A&G will be required for ITC Texas. 5 It should be noted that the Transaction introduces the opportunity for 6 certain economies of scale and more efficient operations, including the 7 ability to leverage support services and resources across a broader 8 footprint. As a result of the formula rate mechanism utilized by ITC, any 9 benefits associated with this will accrue to the benefit of customers. 10 However, ITC will not know the appropriate levels of O&M and A&G 11 until it has some experience in owning and operating its transmission 12 system. 13 Book Depreciation Periods: We have assumed the same book depreciation 14 periods as ETI over the five-year period for purposes of the analysis Q60. ARE THERE DIFFERENCES THAT WERE NOT CONSIDERED IN THE 17 TRANSMISSION RETAIL REVENUE REQUIREMENT ANALYSIS? 18 A. Yes. ETI currently uses a transmission rate that is based on historical data and not 19 forward looking. The movement to a forward looking formula rate that ITC will 20 propose as part of its rate construct will have the effect of accelerating recovery of 21 the revenue requirement for the next year. While there will be differences in the 22 timing of the recovery of ITC Texas's revenue requirement, ITC Texas will 23 recover only its actual revenue requirement. As a result, over time, the change

32 1 from a historical to a forward looking formula rate will have no effect on the 2 amount of charges paid by retail customers for transmission service and simply 3 represents a timing difference. As reflected in Mr. Lewis's testimony, the one- 4 time impact of this timing difference is estimated to be $0.37 per month for a 5 typical ETI residential customer. 6 7 Q61. WERE TRANSACTION-RELATED COSTS INCLUDED IN YOUR 8 ANALYSIS OF THE TRANSMISSION RETAIL REVENUE 9 REQUIREMENT IMPACT? 10 A. No. Consistent with FERC policy, ITC Texas will not recover in transmission 11 rates any Transaction-related costs for a period of five years, unless ITC Texas 12 obtains FERC approval by demonstrating that those costs are exceeded by 13 Transaction-related savings. As a result of this commitment, we have not 14 included recovery of any Transaction-related costs in the modeling Q62. DID YOUR ANALYSIS ASSUME ANY ADJUSTMENT TO THE INITIAL 17 RATE BASE BALANCES AT ETI AS A RESULT OF ACQUISITION 18 PREMIUM OR GOODWILL FROM THE TRANSACTION? 19 A. No. ITC is also making the commitment as part of its FERC filing not to seek 20 recovery of any acquisition premium or goodwill resulting from the Transaction. 21 Accordingly, those effects are not included in the rate base balances under ITC 22 ownership

33 1 Q63. PLEASE EXPLAIN THE ACCOUNTING FOR GOODWILL WHICH ITC 2 WILL PROPOSE TO FERC FOR THIS TRANSACTION. 3 A. To give effect to ITC's commitment, goodwill associated with the Transaction 4 under Generally Accepted Accounting Principles will be removed from the FERC 5 financial statements of ITC Texas. 6 7 Q64. BASED ON YOUR ANALYSIS AND FINANCIAL BACKGROUND, DO 8 YOU BELIEVE THIS TRANSACTION WILL BENEFIT CUSTOMERS? 9 A. Yes. Looking ahead, there is little doubt that significant investment will need to 10 be made in the Texas transmission system. As previously noted, these capital 11 demands are anticipated to be multiples of the cash flow generated by the existing 12 transmission assets under ETI's ownership. Recognizing this reality, one must 13 ask if the needed capital to support these investments can be attracted and at what 14 cost to customers. 15 The Transaction establishes a new owner of the ETI transmission assets 16 whose sole focus is to plan and execute to meet transmission system needs. As 17 explained earlier in my testimony, ITC's rate construct and business model 18 facilitate a high credit quality among our operating companies which has enabled 19 regular access to the capital markets at reasonable rates. While ITC's revenue 20 requirement analysis shows an increase in transmission retail revenue 21 requirements as a result of the Transaction, which has a modest effect on retail 22 rates, those effects are expected to be offset by the benefits of the Transaction

34 1 In addition, the Parties have gone to great lengths to structure a transaction 2 that will allow customers to realize the benefits of the rate construct to the fullest 3 possible extent. As previously discussed, the RMT structure results in a tax free 4 transaction which eliminates the potential rate increases that would otherwise 5 exist in a taxable transaction resulting from the re-measurement of ADIT. 6 Importantly, the timing of this Transaction is opportune as the relative equity 7 values of ITC and the Entergy transmission business are similar enough to be able 8 to utilize the RMT structure. This may not be the case in the future, which makes 9 it important to proceed with this Transaction now. 10 The Transaction as structured serves to protect ETI's financial health, 11 better positioning ETI to face the capital challenges ahead and focus its efforts on 12 its generation fleet and distribution system. In addition, it will increase the scale 13 of ITC which will further enhance its financial strength and ability to continue to 14 efficiently and effectively capitalize the needed investment in transmission 15 infrastructure in Texas. I am confident that by approving this Transaction the 16 Commission will allow for the benefits I have described to be realized by 17 customers Q65. DOES THIS CONCLUDE YOUR DIRECT TESTIMONY? 20 A. Yes