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    ITC HOLDINGS CORP. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS


    November 1, 2019 - Edgar Glimpses

     

      SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Our reports, filings and other public announcements contain certain statements that describe our management's beliefs concerning future business conditions, plans and prospects, growth opportunities, the outlook for our business and the electric transmission industry, and expectations with respect to various legal and regulatory proceedings based upon information currently available. Such statements are "forward-looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995. Wherever possible, we have identified these forward-looking statements by words such as "will," "may," "anticipates," "believes," "intends," "estimates," "expects," "forecasted," "projects," "likely" and similar phrases. These forward-looking statements are based upon assumptions our management believes are reasonable. Such forward-looking statements are based on estimates and assumptions and subject to significant risks and uncertainties which could cause our actual results, performance and achievements to differ materially from those expressed in, or implied by, these statements, including, among others, the following risks and uncertainties listed in "Item 1A Risk Factors" of our Form 10-K for the year ended December 31, 2018: • Certain elements of our Regulated Operating Subsidiaries' Formula Rates have

      been and can be challenged, which could result in lowered rates and/or

      refunds of amounts previously collected and thus have an adverse effect on

      our business, financial condition, results of operations and cash flows.

      • Our actual capital investment may be lower than planned, which would cause a

      lower than anticipated rate base and would therefore result in lower

      revenues, earnings and associated cash flows compared to our current

      expectations. In addition, we expect to incur expenses related to the

      pursuit of development opportunities, which may be higher than forecasted.

      • The regulations to which we are subject may limit our ability to raise

      capital and/or pursue acquisitions, development opportunities or other transactions or may subject us to liabilities.

      • The TCJA and any future changes in tax laws or regulations may negatively

      affect our results of operations, net income, financial condition, cash

      flows and credit metrics.

      • Changes in energy laws, regulations or policies could impact our business,

      financial condition, results of operations and cash flows.

      • Each of our MISO Regulated Operating Subsidiaries depends on its primary

      customer for a substantial portion of its revenues, and any material failure

      by those primary customers to make payments for transmission services could

      have a material adverse effect on our business, financial condition, results

      of operations and cash flows.

      • A significant amount of the land on which our assets are located is subject

      to easements, mineral rights and other similar encumbrances. As a result, we

      must comply with the provisions of various easements, mineral rights and other similar encumbrances, which may adversely impact our ability to complete construction projects in a timely manner.

      • We contract with third parties to provide services for certain aspects of

      our business. If any of these agreements are terminated, we may face a shortage of labor or replacement contractors to provide the services formerly provided by these third parties.

      • Hazards associated with high-voltage electricity transmission may result in

      suspension of our operations, costly litigation or the imposition of civil

      or criminal penalties.

      • We are subject to environmental regulations and to laws that can give rise

      to substantial liabilities from environmental contamination.

      • If amounts billed for transmission service for our Regulated Operating

      Subsidiaries' transmission systems are lower than expected, or our actual

      revenue requirements are higher than expected, the timing of actual collection of our total revenues would be delayed.

      • We are subject to various regulatory requirements, including reliability

      standards; contract filing requirements; reporting, recordkeeping and

      accounting requirements; and transaction approval requirements. Violations

      of these requirements, whether intentional or unintentional, may result in

      penalties that, under some circumstances, could have a material adverse

      effect on our business, financial condition, results of operations and cash

      flows. 26

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      • Acts of war, terrorist attacks, natural disasters, severe weather and other

      catastrophic events may have a material adverse effect on our business,

      financial condition, results of operations and cash flows. • A cyber attack or incident could have a material adverse effect on our business, financial condition, results of operations and cash flows.

      • ITC Holdings is a holding company with no operations, and unless we receive

      dividends or other payments from our subsidiaries, we may be unable to fulfill our cash obligations.

      • We have a considerable amount of debt and our reliance on debt financing may

      limit our ability to fulfill our debt obligations and/or to obtain

      additional financing.

      • Adverse changes in our credit ratings may negatively affect us.

      • Certain provisions in our debt instruments limit our financial and operating

      flexibility.

      Forward-looking statements speak only as of the date made and can be affected by assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Consequently, we cannot assure you that our expectations or forecasts expressed in such forward-looking statements will be achieved. Except as required by law, we undertake no obligation to publicly update any of our forward-looking or other statements, whether as a result of new information, future events or otherwise. OVERVIEW ITC Holdings and its subsidiaries are engaged in the transmission of electricity in the United States. ITC Holdings is a wholly-owned subsidiary of Investment Holdings. 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. Our business strategy is to own, operate, maintain and invest in transmission infrastructure in order to enhance system integrity and reliability, reduce transmission constraints and support new generating resources to interconnect to our transmission systems. We also are pursuing development projects outside our existing systems. As electric transmission utilities with rates regulated by the FERC, our Regulated Operating Subsidiaries earn revenues for the use of their electric transmission systems by our customers, which include investor-owned utilities, municipalities, cooperatives, power marketers and alternative energy suppliers. As independent transmission companies, our Regulated Operating Subsidiaries are subject to rate regulation only by the FERC, and our cost-based rates are discussed in Note 5 to the condensed consolidated interim financial statements. Our Regulated Operating Subsidiaries' primary operating responsibilities include maintaining, improving and expanding their transmission systems to meet their customers' ongoing needs, scheduling outages on system elements to allow for maintenance and construction, maintaining appropriate system voltages and monitoring flows over transmission lines and other facilities to ensure physical limits are not exceeded. Significant recent matters that influenced our financial position, results of operations and cash flows for the nine months ended September 30, 2019 or that may affect future results include: • Our capital expenditures of $682 million at our Regulated Operating

      Subsidiaries during the nine months ended September 30, 2019 as described

      below under " - Capital Investment and Operating Results Trends," resulting

      primarily from our focus on improving system reliability, increasing system

      capacity and upgrading the transmission network to support new generating

      resources, which includes an asset acquisition from Consumers Energy of $76

      million, of which $34 million is an acquisition premium that is excluded

      from rate base;

      • Debt issuances and repayments as described in Note 8 to the condensed

      consolidated interim financial statements, including issuance of Senior

      Secured Notes by METC, First Mortgage Bonds by ITCTransmission and borrowings under our revolving and term loan credit agreements and commercial paper program to fund capital investment at our Regulated Operating Subsidiaries as well as for general corporate purposes;

      • An estimated current regulatory liability for our MISO Regulated Operating

      Subsidiaries of $157 million as of September 30, 2019 for the potential

      refund relating to the Second Complaint, as described in Note 14 to the condensed consolidated interim financial statements; and 27

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      • Two notices of inquiry issued by the FERC on March 21, 2019 seeking comments

      on (1) whether and how policies concerning the determination of the base ROE

      for electric utilities should be modified, and (2) its electric transmission

      incentives policy.

      These items are discussed in more detail throughout Management's Discussion and Analysis of Financial Condition and Results of Operations. Recent Developments 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 ROEs in MISO. See Note 14 to the condensed consolidated interim financial statements for a summary of the complaints and related proceedings. 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. As of September 30, 2019 we had recorded an aggregate estimated current regulatory liability in the condensed consolidated statements of financial position of $157 million for the Second Complaint. The recognition of the obligations associated with the complaints resulted in the following impacts: Three months ended Nine months ended September 30, September 30, (in millions) 2019 2018 2019 2018 Revenue increase $ - $ - $ - $ (1 ) Interest expense increase 2 2 6 5 Estimated net income reduction 2 1 5 3 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. On March 21, 2019, the FERC issued a notice of inquiry seeking comments on whether and how policies concerning 28

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      the determination of the base ROE for electric utilities should be modified, which is still pending. The FERC's consideration of responses to this notice of inquiry may impact our future base ROE. 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 to the condensed consolidated interim financial statements for a summary of incentive adders for transmission rates. As of September 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. Challenges to Incentive Adders for Transmission Rates On March 21, 2019, the FERC issued a notice of inquiry seeking comments on its electric transmission incentives policy, which is still pending. The FERC's consideration of responses to this inquiry may impact the incentive adders that our Regulated Operating Subsidiaries are authorized to apply to their base ROEs. See Note 5 to the condensed consolidated interim financial statements for a summary of incentive adders for transmission rates. MISO Regulated Operating Subsidiaries 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 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. The MISO Regulated Operating Subsidiaries sought rehearing of the FERC's October 18, 2018 order, and on July 18, 2019, the FERC denied the rehearing request. On September 11, 2019, the MISO Regulated Operating Subsidiaries filed an appeal of the FERC's order in the D.C. Circuit Court. 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. 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 the 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. Cost-Based Formula Rates with True-Up Mechanism Our Regulated Operating Subsidiaries calculate their revenue requirements using cost-based Formula Rates that are effective without the need to file rate cases with the FERC, although the rates are subject to legal challenge at the FERC. Under their cost-based formula, each of our Regulated Operating Subsidiaries separately calculates a revenue requirement based on financial information specific to each company. The calculation of projected revenue requirement for a future period is used to establish the transmission rate used for billing purposes. The calculation of actual revenue requirements for a historic period is used to calculate the amount of revenues recognized in that period and determine the over-or under-collection for that period. 29

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      Under these Formula Rates, our Regulated Operating Subsidiaries recover expenses and earn a return on and recover investments in property, plant and equipment on a current basis. The Formula Rates for a given year reflect forecasted expenses, property, plant and equipment, point-to-point revenues, network load at our MISO Regulated Operating Subsidiaries and other items for the upcoming calendar year to establish projected revenue requirements for each of our Regulated Operating Subsidiaries that are used as the basis for billing for service on their systems from January 1 to December 31 of that year. Our Formula Rates include a true-up mechanism, whereby our Regulated Operating Subsidiaries compare their actual revenue requirements to their billed revenues for each year to determine any over- or under-collection of revenue. The over- or under-collection typically results from differences between the projected revenue requirement used as the basis for billing and actual revenue requirement at each of our Regulated Operating Subsidiaries, or from differences between actual and projected monthly peak loads at our MISO Regulated Operating Subsidiaries. In the event billed revenues in a given year are more or less than actual revenue requirements, which are calculated primarily using information from that year's FERC Form No. 1, our Regulated Operating Subsidiaries will refund or collect additional revenues, with interest, within a two-year period such that customers pay only the amounts that correspond to actual revenue requirements for that given period. This annual true-up ensures that our Regulated Operating Subsidiaries recover their allowed costs and earn their allowed returns. See "Cost-Based Formula Rates with True-Up Mechanism" in Note 5 to the condensed consolidated interim financial statements for further discussion of our Formula Rates and see "Rate of Return on Equity Complaints" in Note 14 to the condensed consolidated interim financial statements for detail on ROE matters. Revenue Accruals and Deferrals - Effects of Monthly Peak Loads For our MISO Regulated Operating Subsidiaries, monthly peak loads are used for billing network revenues, which currently is the largest component of our operating revenues. One of the primary factors that impacts the revenue accruals and deferrals at our MISO Regulated Operating Subsidiaries is actual monthly peak loads experienced as compared to those forecasted in establishing the annual network transmission rate. Under their cost-based Formula Rates that contain a true-up mechanism, our MISO Regulated Operating Subsidiaries accrue or defer revenues to the extent that their actual revenue requirement for the reporting period is higher or lower, respectively, than the amounts billed relating to that reporting period. Although monthly peak loads do not impact operating revenues recognized, network load affects the timing of our cash flows from transmission service. The monthly peak load of our MISO Regulated Operating Subsidiaries is generally impacted by weather and economic conditions and seasonally shaped with higher load in the summer months when cooling demand is higher. ITC Great Plains does not receive revenue based on a peak load or a dollar amount per kW each month therefore, peak load does not have a seasonal effect on operating cash flows. The SPP tariff applicable to ITC Great Plains is billed ratably each month based on its annual projected revenue requirement posted annually by SPP. Capital Investment and Operating Results Trends We expect a long-term upward trend in revenues and earnings, subject to the impact of any rate changes and required refunds resulting from the resolution of the ROE complaints as described in Note 14 to the condensed consolidated interim financial statements. The primary factor that is expected to continue to increase our revenues and earnings in future years is increased rate base that would result from our anticipated capital investment, in excess of depreciation and any acquisition premiums, from our Regulated Operating Subsidiaries' long-term capital investment programs to improve reliability, increase system capacity and upgrade the transmission network to support new generating resources. Investments in property, plant and equipment, when placed in-service upon completion of a capital project, are added to the rate base of our Regulated Operating Subsidiaries. Our Regulated Operating Subsidiaries strive for high reliability of their systems and improvement in system accessibility for all generation resources. The FERC requires compliance with certain reliability standards and may take enforcement actions against violators, including the imposition of substantial fines. NERC is responsible for developing and enforcing these mandatory reliability standards. We continually assess our transmission systems against standards established by NERC, as well as the standards of applicable regional entities under NERC that have been delegated certain authority for the purpose of proposing and enforcing reliability standards. We believe that we meet the applicable standards in all material respects, although further investment in our transmission systems and an increase in maintenance activities will likely be needed to maintain compliance, improve reliability and address any new standards that may be promulgated. We also assess our transmission systems against our own planning criteria that are filed annually with the FERC. Based on our planning studies, we see needs to make capital investments to: (1) maintain and replace the current transmission infrastructure; (2) enhance system integrity and reliability and accommodate load growth; (3) upgrade physical and technological grid security; and (4) develop and build regional transmission infrastructure, including additional transmission 30

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      facilities that will provide interconnection opportunities for generating facilities. The following table shows our actual and expected capital expenditures at our Regulated Operating Subsidiaries:

      Actual Capital Forecasted Expenditures for the Capital Nine Months Ended Expenditures (in millions) September 30, 2019 2020 - 2024 Expenditures for property, plant and equipment (a) $

      682 $ 3,746

      ____________________________

      (a) Amounts represent the cash payments to acquire or construct property, plant

      and equipment, as presented in the condensed consolidated statements of cash

      flows. These amounts exclude non-cash additions to property, plant and equipment for the AFDUC equity as well as accrued liabilities for construction, labor and materials that have not yet been paid. We are pursuing development projects that could result in a significant amount of capital investment, but we are not able to estimate the amounts we ultimately expect to invest or the timing of such investments. Our capital investment efforts relating to development initiatives are based on establishing an ongoing pipeline of projects that would position us for long-term growth. Refer to "Item 1 Business - Development of Business" in our Form 10-K for the year ended December 31, 2018 for a discussion of our development activities. Investments in property, plant and equipment could vary due to, among other things, the impact of actual loads, forecasted loads, regional economic conditions, weather conditions, union strikes, labor shortages, material and equipment prices and availability, our ability to obtain any necessary financing for such expenditures, limitations on the amount of construction that can be undertaken on our systems at any one time, regulatory approvals for reasons relating to rate construct, environmental, siting, regional planning, cost recovery or other issues or as a result of legal proceedings, variances between estimated and actual costs of construction contracts awarded and the potential for greater competition for new development projects. In addition, investments in transmission network upgrades for generator interconnection projects could change from prior estimates significantly due to changes in the MISO queue for generation projects and other factors beyond our control. 31

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      RESULTS OF OPERATIONS Results of Operations and Variances Three months ended Percentage Nine months ended Percentage September 30, Increase increase September 30, Increase increase (in millions) 2019 2018 (decrease) (decrease) 2019 2018 (decrease) (decrease) OPERATING REVENUES Transmission and other services $ 354 $ 350 $ 4 1 % $ 931 $ 932 $ (1 ) - % Formula Rate true-up (33 ) (55 ) 22 (40 )% 17 (68 ) 85 (125 )% Total operating revenues 321 295 26 9 % 948 864 84 10 % OPERATING EXPENSES Operation and maintenance 31 29 2 7 % 88 80 8 10 % General and administrative 35 32 3 9 % 111 91 20 22 % Depreciation and amortization 51 45 6 13 % 149 133 16 12 % Taxes other than income taxes 30 27 3 11 % 89 82 7 9 % Other operating (income) and expenses, net - (1 ) 1 (100 )% - (2 ) 2 (100 )% Total operating expenses 147 132 15 11 % 437 384 53 14 % OPERATING INCOME 174 163 11 7 % 511 480 31 7 % OTHER EXPENSES (INCOME) Interest expense, net 60 56 4 7 % 183 167 16 10 % Allowance for equity funds used during construction (7 ) (8 ) 1 (13 )% (23 ) (26 ) 3 (12 )% Other (income) and expenses, net - - - - % (1 ) 2 (3 ) (150 )% Total other expenses (income) 53 48 5 10 % 159 143 16 11 % INCOME BEFORE INCOME TAXES 121 115 6 5 % 352 337 15 5 % INCOME TAX PROVISION 23 26 (3 ) (12 )% 83 87 (4 ) (5 )% NET INCOME $ 98 $ 89 $ 9 10 % $ 269 $ 250 $ 19 8 % Operating Revenues Three and nine months ended September 30, 2019 compared to three and nine months ended September 30, 2018 The following table sets forth the components of and changes in operating revenues for the three months ended September 30, 2019 and 2018 which included revenue accruals and deferrals as described in Note 5 to the condensed consolidated interim financial statements: Percentage 2019 2018 Increase increase (in millions) Amount Percentage Amount Percentage (decrease) (decrease) Network revenues (a) $ 214 67 % $ 198 67 % $ 16 8 % Regional cost sharing revenues (a) 96 30 % 86 29 % 10 12 % Point-to-point 3 1 % 3 1 % - - % Scheduling, control and dispatch (a) 5 1 % 3 1 % 2 67 % Other 3 1 % 5 2 % (2 ) (40 )% Total $ 321 100 % $ 295 100 % $ 26 9 %

      ____________________________

      (a) Includes a portion of the Formula Rate true-up of $(33) million and $(55)

      million for the three months ended September 30, 2019 and 2018, respectively.

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      The following table sets forth the components of and changes in operating revenues for the nine months ended September 30, 2019 and 2018 which included revenue accruals and deferrals as described in Note 5 to the condensed consolidated interim financial statements:

      Percentage 2019 2018 Increase increase (in millions) Amount Percentage Amount Percentage (decrease) (decrease) Network revenues (a) $ 630 67 % $ 577 67 % $ 53 9 % Regional cost sharing revenues (a) 279 29 % 247 29 % 32 13 % Point-to-point 9 1 % 10 1 % (1 ) (10 )% Scheduling, control and dispatch (a) 12 1 % 11 1 % 1 9 % Other 18 2 % 19 2 % (1 ) (5 )% Total $ 948 100 % $ 864 100 % $ 84 10 %

      ____________________________

      (a) Includes a portion of the Formula Rate true-up of $17 million and $(68)

      million for the nine months ended September 30, 2019 and 2018, respectively.

      Network revenues increased primarily due to higher net network revenue requirements at our Regulated Operating Subsidiaries, partially offset by an increase in revenue credits resulting from higher regional cost sharing revenue requirements, during the three and nine months ended September 30, 2019 as compared to the same period in 2018. Higher net network revenue requirements were due primarily to a higher rate base associated with higher balances of property, plant and equipment in-service. Regional cost sharing revenues increased primarily due to additional capital projects eligible for regional cost sharing and these projects being placed into service, in addition to higher accumulated investment for existing regional cost sharing projects for the three and nine months ended September 30, 2019 as compared to the same period in 2018. Operating Expenses Operation and maintenance expenses Nine months ended September 30, 2019 compared to nine months ended September 30, 2018 Operation and maintenance expenses increased primarily due to higher expenses associated with substation maintenance activities and vegetation management requirements, as well as an increase in vehicle and equipment expenses. General and administrative expenses Three and nine months ended September 30, 2019 compared to three and nine months ended September 30, 2018 General and administrative expenses increased due to higher compensation-related expenses primarily due to additional share-based compensation expenses and personnel additions. This increase was partially offset by lower professional services, such as legal and advisory service fees, related to various development initiatives. Depreciation and amortization expense Three and nine months ended September 30, 2019 compared to three and nine months ended September 30, 2018 Depreciation and amortization expenses increased primarily due to a higher depreciable base resulting from property, plant and equipment in-service additions. 33

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      Other Expenses (Income) Interest expense, net Three and nine months ended September 30, 2019 compared to three and nine months ended September 30, 2018 Interest expense, net increased primarily due to long-term debt issuances subsequent to September 30, 2018 which resulted in overall higher carrying balances of long-term debt. In addition, we recorded accelerated interest as a result of the make-whole premium associated with the early redemption of long-term debt. Income Tax Provision Three months ended September 30, 2019 compared to three months ended September 30, 2018 Our effective tax rates for the three months ended September 30, 2019 and 2018 were 19% and 23%, respectively. Our effective tax rate for the three months ended September 30, 2019 is below our 21% statutory federal income tax rate primarily due to state income tax benefits and AFUDC equity during the period. The amount of income tax expense relating to AFUDC equity was recognized as a regulatory asset and is not included in the income tax provision. Nine months ended September 30, 2019 compared to nine months ended September 30, 2018 Our effective tax rates for the nine months ended September 30, 2019 and 2018 were 24% and 26%, respectively. Our effective tax rate for the nine months ended September 30, 2019 exceeded our 21% statutory federal income tax rate primarily due to state income taxes, partially offset by AFUDC equity. During the nine months ended September 30, 2018, Iowa enacted a reduction in corporate statutory income tax rates from 12.0% to 9.8%, effective January 1, 2021. Based upon the future change in rate, we revalued the Iowa NOL at ITC Holdings. As a result, additional income tax expense was recorded in 2018. The amount of income tax expense relating to AFUDC equity was recognized as a regulatory asset and is not included in the income tax provision. LIQUIDITY AND CAPITAL RESOURCES We expect to maintain our approach of funding our future capital requirements with cash from operations at our Regulated Operating Subsidiaries, our existing cash and cash equivalents, future issuances under our commercial paper program and amounts available under our revolving and term loan credit agreements (the terms of which are described in Note 8 to the condensed consolidated interim financial statements). In addition, we may from time to time secure debt funding in the capital markets, although we can provide no assurance that we will be able to obtain financing on favorable terms or at all. As market conditions warrant, we may also from time to time repurchase debt securities issued by us, in the open market, in privately negotiated transactions, by tender offer or otherwise. We expect that our capital requirements will arise principally from our need to: • Fund capital expenditures at our Regulated Operating Subsidiaries. Our plans

      with regard to property, plant and equipment investments are described in

      detail above under " - Capital Investment and Operating Results Trends."

      • Fund business development expenses and related capital expenditures. We are

      pursuing development activities for projects that will continue to result in

      the incurrence of development expenses and could result in significant

      capital expenditures incremental to our current plan. Refer to Note 14 to

      the condensed consolidated interim financial statements for a discussion of

      contingent payments related to development projects.

      • Fund working capital requirements.

      • Fund our debt service requirements, including principal repayments and

      periodic interest payments, which are further described in detail below

      under "- Contractual Obligations."

      • Fund any refund obligation in connection with the Second Complaint.

      In addition to the expected capital requirements above, any adverse determinations or settlements relating to the regulatory matters or contingencies described in Notes 5 and 14 to the condensed consolidated interim financial statements would result in additional capital requirements. We believe that we have sufficient capital resources to meet our currently anticipated short-term needs. We rely on both internal and external sources of liquidity to provide working capital and fund capital investments. ITC Holdings' sources of cash are dividends and other payments received by us from our Regulated Operating Subsidiaries and any of our other subsidiaries as well as the proceeds raised from the sale of our debt securities. Each of our Regulated Operating Subsidiaries, 34

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      while wholly owned by ITC Holdings, is legally distinct from ITC Holdings and has no obligation, contingent or otherwise, to make funds available to us. We expect to continue to utilize our commercial paper program and revolving and term loan credit agreements as well as our cash and cash equivalents as needed to meet our short-term cash requirements. As of September 30, 2019, we had consolidated indebtedness under our revolving and term loan credit agreements of $409 million, with unused capacity under our revolving credit agreements of $691 million and unused capacity under the term loan credit agreement of $200 million. Additionally, ITC Holdings had $242 million of commercial paper issued and outstanding, net of discount, as of September 30, 2019, with the ability to issue an additional $157 million under the commercial paper program. See Note 8 to the condensed consolidated interim financial statements for a detailed discussion of the commercial paper program, our revolving and term loan credit agreements and other debt activity during 2019. To address our long-term capital requirements, we expect that we will need to obtain additional debt financing. Certain of our capital projects could be delayed if we experience difficulties in accessing capital. We expect to be able to obtain such additional financing as needed, in amounts and upon terms that will be reasonably satisfactory to us due to our strong credit ratings and our historical ability to obtain financing. Credit Ratings Credit ratings by nationally recognized statistical rating agencies are an important component of our liquidity profile. Credit ratings relate to our ability to issue debt securities and the cost to borrow money, and should not be viewed as a recommendation to buy, sell or hold securities. Ratings are subject to revision or withdrawal at any time and each rating should be evaluated independently of any other rating. An explanation of these ratings may be obtained from the respective rating agency. On September 26, 2019, S&P revised the ratings of senior unsecured notes at ITC Holdings from A- to BBB+, reflecting expected increases in the ratio of debt at our Regulated Operating Subsidiaries relative to amounts at ITC Holdings. All other ratings were reaffirmed and the outlook remains unchanged. Additional information related to our credit ratings and outlook reported by rating agencies is included in "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operation - Credit Rating" of our Form 10-K for the year ended December 31, 2018. Covenants Our debt instruments contain numerous financial and operating covenants that place significant restrictions on certain transactions as well as require us to meet certain financial ratios, which are described in Note 8 to the condensed consolidated interim financial statements. As of September 30, 2019, we were not in violation of any debt covenant. In the event of a downgrade in our credit ratings, none of the covenants would be directly impacted, although the borrowing costs under our revolving credit agreements may increase. Cash Flows From Operating Activities Net cash provided by operating activities was $450 million and $494 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease in cash provided by operating activities was primarily due to lower receipts from operating revenues of $17 million, lower tax refunds received of $12 million, higher property tax payments of $6 million and an increase in payments for operation and maintenance expenses during the nine months ended September 30, 2019 compared to the same period in 2018. Cash Flows From Investing Activities Net cash used in investing activities was $676 million and $533 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in cash used in investing activities was primarily due to an increase in capital expenditures of $126 million, including the asset acquisition of $76 million from Consumer's Energy, and a decrease in contributions received in aid of construction of $18 million during the nine months ended September 30, 2019 compared to the same period in 2018. Cash Flows From Financing Activities Net cash provided by financing activities was $222 million for the nine months ended September 30, 2019 and net cash used in financing activities was $7 million for the nine months ended September 30, 2018. The increase in cash provided by financing activities was primarily due to an increase in net borrowings under our revolving and term loan credit agreements of $181 million and an increase in net issuances of commercial paper of $243 million during the nine months ended September 30, 2019 compared to the same period in 2018. These increases were partially offset by a decrease in issuances of long-term debt of $50 million, an increase in retirement of long-term debt of $103 million and an increase in dividend payments of $47 million during the nine months ended September 30, 2019 compared to the same period in 2018. See Note 8 to the condensed 35

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      consolidated interim financial statements for detail on the issuances and a description of our revolving credit agreements and our commercial paper program. CONTRACTUAL OBLIGATIONS Our contractual obligations are described in our Form 10-K for the year ended December 31, 2018. There have been no material changes to that information since December 31, 2018, other than the items listed below and described in Note 8 to the condensed consolidated interim financial statements: • Changes in amounts borrowed under our unsecured, unguaranteed revolving

      credit agreements;

      • Changes in commercial paper issued under the commercial paper program for

      ITC Holdings;

      • The issuance of $75 million of 3.30% First Mortgage Bonds, Series H, due

      August 28, 2049, by ITCTransmission;

      • The issuance of $50 million of 4.55% Senior Secured Notes, due January 15,

      2049, by METC; and an additional $50 million of 4.65% Senior Secured

      Notes, due July 10, 2049, 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; and

      • The borrowing of $200 million under the unsecured, unguaranteed term loan

      credit agreement due June 11, 2021 by ITC Holdings, the proceeds of which were used for the early redemption of the $200 million 5.50% Senior Notes due January 15, 2020. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our condensed consolidated interim financial statements are prepared in accordance with GAAP. The preparation of these condensed consolidated interim financial statements requires the application of appropriate technical accounting rules and guidance, as well as the use of estimates. The application of these policies requires judgment regarding future events. These estimates and judgments, in and of themselves, could materially impact the condensed consolidated interim financial statements and disclosures based on varying assumptions, as future events rarely develop exactly as forecasted, and even the best estimates routinely require adjustment. The accounting policies discussed in "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" of our Form 10-K for the year ended December 31, 2018 are considered by management to be the most important to an understanding of the consolidated financial statements because of their significance to the portrayal of our financial condition and results of operations or because their application places the most significant demands on management's judgment and estimates about the effect of matters that are inherently uncertain. There have been no material changes to that information during the nine months ended September 30, 2019. RECENT ACCOUNTING PRONOUNCEMENTS See Note 2 to the condensed consolidated interim financial statements.

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