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ITC Holdings Corp. Message Board

  • sr71blackbirrd sr71blackbirrd Dec 4, 2010 7:11 PM Flag

    anyone here with knowledge how utilities work?

    pardon my ignorance..the Oxford club is pumping the green power express...but are not ultilities limited to 12-13% return on equity? ...not sure I understand where all the mind blowing profits will come from...I understand they get fees for transmission but I thought these were structured for 12%-14% profit on money put out for maintenance,taxes,etc?(or are they just limited by amount per kilowatt?)...I am not sure what will drive this stock through the roof? it just growth because the profit seems limited by FERC regulations? Can anyone with more knowledge enlighten me?

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    • Regulated utilities are a return on rate base type business. The rate base is made up of assets at their original cost minus accumulated depreciation. So rate base goes up with new additions from either organic growth or acquisitions. So even if the allowed rate of return stays the same, profit increases with an increase in rate base.

      • 1 Reply to re_train
      • FERC allows ITC a 12.45% return on equity at the operating company level. FERC also allows ITC a generous 60% equity ratio in the operating company capital structure. ITC, however, is a holding company with operating company subsidiaries. At the holding company level ITC is levered at 60% of invested capital, i.e. it actually borrows at the parent and injects some of the borrowed funds into the operating company as equity. This is extremely generous and FERC allows this because it wants to incent the separation of transmission from generation and the building of new transmission. The combination of the generous allowed return on equity and the double leverge means that ITC actually can earn a return on consolidated equity in the very high teens.

        Sentiment: Buy

    • nope they can get increases passed on to the rate payers for needed upgrades, but that being said "structured for 12%-14% profit" is not a small amount either. what drives stock is demand, more demand increases stock value....

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