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


    February 13, 2020 - 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 risks and uncertainties listed in this report under "Item 1A Risk Factors" and in our other reports filed with the SEC from time to time. 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. Statement on Prior Period Comparisons This section of this Form 10-K generally discusses the financial condition, changes in financial condition and results of operations for the years ended December 31, 2019 and 2018 and provides year-to-year comparisons between the years ended December 31, 2019 and 2018. Discussions of such information for the year ended December 31, 2017 and year-to-year comparisons between the years ended December 31, 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition 23

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      and Results of Operations" in Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. 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 ITC Investment Holdings. Through our Regulated Operating Subsidiaries, we own and operate high-voltage electric transmission 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 transmission 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. 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 below under "- Cost-Based Formula Rates with True-Up Mechanism" as well as in Note 6 to the consolidated 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 condition, results of operations and cash flows for the year ended December 31, 2019 or that may affect future results include: • Our capital expenditures of $865 million at our Regulated Operating

      Subsidiaries during the year ended December 31, 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 electric transmission asset acquisitions from

      Consumers Energy of $77 million, of which $34 million is an acquisition

      premium that is excluded from rate base;

      • Debt issuances and repayments as described in Note 11 to the consolidated

      financial statements, including the 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;

      • Issuance of the November 2019 Order related to the MISO ROE Complaints, as

      described in Note 19 to the consolidated financial statements, which

      resulted in a reduction to the base ROE to 9.88% for our MISO Regulated

      Operating Subsidiaries, reversal of the amount previously recorded as an

      estimated current regulatory liability for refunds relating to the Second

      Complaint and recording of a current regulatory liability for our MISO

      Regulated Operating Subsidiaries of $70 million as of December 31, 2019 for

      refunds relating to the Initial Complaint and the period from the date of

      the September 2016 Order to December 31, 2019;

      • The adoption of tax accounting method changes related to bonus depreciation

      and repairs and maintenance deductions during the fourth quarter of 2019,

      which did not have a significant impact on the consolidated financial

      statements as of and for the year ended December 31, 2019 but may impact

      future results; and

      • 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 "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations." 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 24

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      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. 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 6 to the consolidated financial statements for further discussion of our Formula Rates and see "Rate of Return on Equity Complaints" in Note 19 to the consolidated financial statements for detail on ROE matters. 25

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      Illustrative Example of Formula Rate Setting The Formula Rate setting example shown below is for illustrative purposes only and is not based on our actual financial data. Line Item Instructions

      Amount

      1 Rate base (a) $

      1,000,000

      2 Multiply by 13-month weighted average cost

      of capital (b)

      8.38 %

      3 Allowed return on rate base (Line 1 x Line 2) $

      83,800

      4 Recoverable operating expenses (including

      depreciation and amortization) $

      150,000

      5 Income taxes (c)

      37,500

      6 Gross revenue requirement (Line 3 + Line 4 + Line 5) $ 271,300 ____________________________

      (a) Consists primarily of in-service property, plant and equipment, net of

      accumulated depreciation.

      (b) The weighted average cost of capital for purposes of this illustration is

      calculated below. The cost of capital for debt is included at a flat interest

      rate for purposes of this illustration and is not based on our actual cost of

      capital. The cost of capital rate for equity represents the current maximum

      allowed MISO ROE per the November 2019 Order on the Initial Complaint. See

      Note 19 to the consolidated financial statements for detail on ROE matters. Weighted Average Percentage of Cost of Total Capitalization Cost of Capital Capital Debt 40.00% 5.00% = 2.00 % Equity 60.00% 10.63% = 6.38 % 100.00% 8.38 %

      (c) Represents an approximation of the federal and state income tax expense for

      purposes of this illustration and is not based on our actual tax expense.

      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 rate base resulting 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. While we expect increases in rate base to result in a corresponding long-term upward trend in revenues and earnings, our 26

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      revenues and earnings are also impacted by changes in our ROE or required refunds resulting from the resolution of the incentive adders complaints and MISO ROE Complaints, as described in Note 6 and Note 19 to the consolidated financial statements, or other future increases or decreases to our rates for incentive adders and base ROE. 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 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 year ended Expenditures (In millions) December 31, 2019 2020 - 2024 Expenditures for property, plant and equipment (a) $

      865 $ 3,746

      ____________________________

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

      and equipment, as presented in the consolidated statements of cash flows.

      These amounts exclude non-cash additions to property, plant and equipment for

      the AFUDC 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. Refer to "Item 1 Business - Development of Business" for discussion of our development activities. Investments in property, plant and equipment could be lower than expected due to a variety of factors, as described in "Item 1A Risk Factors". 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. Recent Developments Rate of Return on Equity Complaints Two complaints were filed with the FERC by combinations of consumer advocates, consumer groups, municipal parties and other parties challenging the base ROE in MISO. 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. See Note 19 to the consolidated financial statements for a summary of the MISO ROE Complaints and related proceedings. Related FERC Orders In April 2017, the D.C. Circuit Court vacated the precedent-setting FERC orders in the ISO New England matters 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 proposed 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 27

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      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 ROE Complaints, 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. The November 2018 Order included preliminary illustrative calculations for the ROE that could have been established for the Initial Complaint, using the FERC's proposed methodology with financial data from the proceedings related to that complaint. The FERC's preliminary calculations were not binding and could change, as significant changes to the methodology by the FERC were possible as a result of the paper hearing process. The November 2018 Order and our response to the order through briefs and reply briefs did not provide a reasonable basis for a change to the reserve or ROEs utilized for any of the complaint refund periods nor all subsequent periods. On March 21, 2019, the FERC issued a notice of inquiry seeking comments on whether and how policies concerning 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. November 2019 Order On November 21, 2019, the FERC issued an order on the MISO ROE Complaints. The FERC did not adopt the methodology proposed in the November 2018 Order, which had proposed using four financial models to establish the base ROE. Instead, the FERC determined that two financial models should be used to determine the base ROE. The FERC applied that methodology to the Initial Complaint period and determined that the base ROE for the Initial Complaint should be 9.88% and the top of the range of reasonableness for that period should be 12.24%. The FERC determined that this base ROE should apply during the first refund period of November 12, 2013 to February 11, 2015 and from the date of the September 2016 Order prospectively. In the November 2019 Order, the FERC also dismissed the Second Complaint. Therefore, based on the November 2019 Order, for the Second Complaint refund period from February 12, 2015 to May 11, 2016, no refund is due, and the base ROE for that period should be 12.38% plus applicable incentive adders. As a result, we have reversed the aggregate estimated current liability we had previously recorded for the Second Complaint, as noted below in "Financial Statement Impacts". In addition, from May 12, 2016 to September 27, 2016, the base ROE should be 12.38% plus applicable incentive adders, because no complaint had been filed for that period and no refund is due during that period. The FERC ordered refunds to be made in accordance with the November 2019 Order within 30 days, but on December 18, 2019 the FERC granted a request from MISO for an extension until December 23, 2020 for settlement of the refunds. The MISO TOs, including our MISO Regulated Operating Subsidiaries, and several other parties filed requests for rehearing of the November 2019 Order. The MISO TOs filed their request for rehearing primarily on the basis that the methodology applied by the FERC in the November 2019 Order will not allow the MISO TOs to earn a reasonable rate of return on their investment, as required by precedent. On January 21, 2020, the FERC issued an order granting rehearings for further consideration. In January 2020, certain complainants in the MISO ROE dockets filed an appeal of the September 2016 Order and the November 2019 Order at the D.C. Circuit Court. We believe that the appeal was premature and should be dismissed, but if not, we will respond in due course. Financial Statement Impacts As of December 31, 2019, we had recorded a current regulatory liability in the consolidated statements of financial position of $70 million to reflect amounts due to customers under the terms outlined in the November 2019 Order on the Initial Complaint and the period from the date of the September 2016 Order to December 31, 2019. We had recorded an aggregate estimated current regulatory liability in the consolidated statements of financial position of $151 million as of December 31, 2018 for the Second Complaint, which was reversed in November 2019 following the November 2019 Order. Although the November 2019 Order dismissed the Second Complaint with no refunds required, it is possible upon rehearing that our MISO Regulated Operating Subsidiaries will be required to provide refunds related to the Second Complaint and these refunds could be material. It is also possible, upon rehearing of the November 2019 Order, that the outcome may differ materially from the November 2019 Order. 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. Our MISO Regulated Operating Subsidiaries currently record revenues at the base ROE of 9.88% established in the November 2019 Order plus applicable incentive adders. See Note 6 to the consolidated financial statements for a summary of incentive adders for transmission rates. 28

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      The recognition of the obligations associated with the MISO ROE Complaints resulted in the following impacts to the consolidated statements of comprehensive income during each respective period:

      Year Ended December 31, (In millions) 2019 2018 2017 Revenue increase (decrease) $ 69 $ 1 $ - Interest expense increase (decrease) (12 ) 7 6

      Estimated net income increase (decrease) 61 (4 ) (3 )

      As of December 31, 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 6 to the consolidated 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. On December 16, 2019, the D.C. Circuit Court established a briefing schedule for the appeal. Initial briefs were filed on January 27, 2020 and reply briefs are due to be filed in the second quarter of 2020. 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. As of December 31, 2019, we had recorded an estimated current regulatory liability of $2 million related to this complaint. 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 condition. 29

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      Significant Components of Results of Operations Revenues We derive nearly all of our revenues from providing transmission, scheduling, control and dispatch services and other related services over our Regulated Operating Subsidiaries' transmission systems to DTE Electric, Consumers Energy, IP&L and other entities, such as alternative energy suppliers, power marketers and other wholesale customers that provide electricity to end-use consumers, as well as from transaction-based capacity reservations on our transmission systems. MISO and SPP are responsible for billing and collecting the majority of transmission service revenues. As the billing agent for our MISO Regulated Operating Subsidiaries and ITC Great Plains, MISO and SPP collect fees for the use of our transmission systems, invoicing DTE Electric, Consumers Energy, IP&L and other customers on a monthly basis. Network Revenues are generated from network customers for their use of our electric transmission systems and are based on the actual revenue requirements as a result of our accounting under our cost-based Formula Rates that contain a true-up mechanism. Refer below under "- Critical Accounting Policies and Estimates - Revenue Recognition under Cost-Based Formula Rates with True-Up Mechanism" for a discussion of revenue recognition relating to network revenues. Network revenues from ITC Great Plains include the annual revenue requirements specific to projects that are charged exclusively within one pricing zone within SPP or are classified as direct assigned network upgrades under the SPP tariff and contain a true-up mechanism. Regional Cost Sharing Revenues are generated from transmission customers throughout RTO regions for their use of our MISO Regulated Operating Subsidiaries' network upgrade projects that are eligible for regional cost sharing under provisions of the MISO tariff, including MVP projects such as our portion of four MVPs in the ITC Midwest footprint and the Thumb Loop Project in the Michigan footprint. Additionally, certain projects at ITC Great Plains are eligible for recovery through a region-wide charge under provisions of the SPP tariff. Regional cost sharing revenues is treated as a reduction to the net network revenue requirement under our cost-based Formula Rates. Point-to-Point Revenues consist of revenues generated from a type of transmission service for which the customer pays for transmission capacity reserved along a specified path between two points on an hourly, daily, weekly or monthly basis. Point-to-point revenues also include other components pursuant to schedules under the MISO and SPP transmission tariffs. Point-to-point revenues are treated as a revenue credit to network or regional customers and are a reduction to gross revenue requirement when calculating net revenue requirement under our cost-based Formula Rates. Scheduling, Control and Dispatch Revenues are allocated to our MISO Regulated Operating Subsidiaries by MISO as compensation for the services performed in operating the transmission system. Such services include monitoring of reliability data, current and next day analysis, implementation of emergency procedures and outage coordination and switching. Other Revenues consist of rental revenues, easement revenues, revenues relating to utilization of jointly owned assets under our transmission ownership and operating agreements and amounts from providing ancillary services to customers. The majority of other revenues are treated as a revenue credit and taken as a reduction to gross revenue requirement when calculating net revenue requirement under our cost-based Formula Rates. Operating Expenses Operation and Maintenance Expenses consist primarily of the costs for contractors that operate and maintain our transmission systems as well as our personnel involved in operation and maintenance activities. Operation expenses include activities related to control area operations, which involve balancing loads and generation and transmission system operations activities, including monitoring the status of our transmission lines and stations. Rental expenses relating to land easements, including METC's Easement Agreement, are also recorded within operation expenses. Maintenance expenses include preventive or planned maintenance, such as vegetation management, tower painting and equipment inspections, as well as reactive maintenance for equipment failures. 30

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      General and Administrative Expenses consist primarily of costs for personnel in our legal, information technology, finance, regulatory, human resources and business development organizations, general office expenses and fees for professional services. Professional services are principally composed of outside legal, consulting, audit and information technology services. Depreciation and Amortization Expenses consist primarily of depreciation of property, plant and equipment using the straight-line method of accounting. Additionally, this consists of amortization of various regulatory and intangible assets. Taxes Other than Income Taxes consist primarily of property taxes and payroll taxes. Other Items of Income or Expense Interest Expense consists primarily of interest on debt at ITC Holdings and our Regulated Operating Subsidiaries. Additionally, the amortization of debt financing expenses and loss on extinguishment of debt are recorded to interest expense. An allowance for borrowed funds used during construction is included in property, plant and equipment accounts and treated as a reduction to interest expense. The amortization of gains and losses on settled and terminated derivative financial instruments is recorded to interest expense. The interest portion of the refunds relating to the MISO ROE Complaints is also recorded to interest expense. Allowance for Equity Funds Used During Construction ("AFUDC equity") is recorded as an item of other income and is included in property, plant and equipment accounts. The allowance represents a return on equity at our Regulated Operating Subsidiaries used for construction purposes in accordance with the FERC regulations. The capitalization rate applied to the construction work in progress balance is based on the proportion of equity to total capital (which currently includes equity and long-term debt) and the allowed return on equity for our Regulated Operating Subsidiaries. Income Tax Provision Income tax provision consists of current and deferred federal and state income taxes. Results of Operations The following table summarizes historical operating results for the periods indicated: Year Ended Percentage Year Ended Percentage December 31, Increase Increase December 31, Increase Increase (In millions) 2019 2018 (Decrease) (Decrease) 2017 (Decrease) (Decrease) OPERATING REVENUES Transmission and other services $ 1,286 $ 1,192 $ 94 8 % $ 1,226 $ (34 ) (3 )% Formula Rate true-up 41 (36 ) 77 (214 )% (15 ) (21 ) 140 % Total operating revenue 1,327 1,156 171 15 % 1,211 (55 ) (5 )% OPERATING EXPENSES Operation and maintenance 113 109 4 4 % 110 (1 ) (1 )% General and administrative 138 127 11 9 % 121 6 5 % Depreciation and amortization 203 180 23 13 % 169 11 7 % Taxes other than income taxes 118 109 9 8 % 103 6 6 % Other operating (income) and expenses, net - (4 ) 4 (100 )% (2 ) (2 ) 100 % Total operating expenses 572 521 51 10 % 501 20 4 % OPERATING INCOME 755 635 120 19 % 710 (75 ) (11 )% OTHER EXPENSES (INCOME) Interest expense, net 224 224 - - % 224 - - % Allowance for equity funds used during construction (29 ) (33 ) 4 (12 )% (33 ) - - % Other (income) and expenses, net - 3 (3 ) (100 )% 4 (1 ) (25 )% Total other expenses (income) 195 194 1 1 % 195 (1 ) (1 )% INCOME BEFORE INCOME TAXES 560 441 119 27 % 515 (74 ) (14 )% INCOME TAX PROVISION 132 111 21 19 % 196 (85 ) (43 )% NET INCOME $ 428 $ 330 $ 98 30 % $ 319 $ 11 3 % 31

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      Operating Revenues Year ended December 31, 2019 compared to year ended December 31, 2018 The following table sets forth the components of and changes in operating revenues for the year ended December 31, 2019 and 2018 which included revenue accruals and deferrals in Note 6 to the consolidated financial statements: Percentage 2019 2018 Increase Increase (In millions) Amount Percentage Amount Percentage (Decrease) (Decrease) Network revenues (a) $ 836 63 % $ 771 67 % $ 65 8 % Regional cost sharing revenues (a) 371 28 % 334 29 % 37 11 % Point-to-point 13 1 % 14 1 % (1 ) (7 )% Scheduling, control and dispatch (a) 17 1 % 15 1 % 2 13 % Other 21 2 % 21 2 % - - % Recognition of liabilities for MISO ROE Complaints 69 5 % 1 - % 68 6,800 % Total $ 1,327 100 % $ 1,156 100 % $ 171 15 %

      ____________________________

      (a) Includes a portion of the Formula Rate true-up of $41 million and $(36)

      million for the year ended December 31, 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 year ended December 31, 2019 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 year ended December 31, 2019 compared to the same period in 2018. During the year ended December 31, 2019, adjustments were made to the refund liability recorded related to the MISO ROE Complaints, as described in Note 19 to the consolidated financial statements, which resulted in a net increase in operating revenues of $69 million for the year ended December 31, 2019 compared to the same period in 2018. As a result of the November 2019 Order, operating revenues increased $133 million due to the dismissal of the Second Complaint, which was partially offset by a revenue decrease of $64 million for the establishment of an additional refund liability for the Initial Complaint and the period from the date of the September 2016 Order to December 31, 2019. Operating Expenses General and administrative expenses Year ended December 31, 2019 compared to year ended December 31, 2018 General and administrative expenses increased primarily due to higher compensation-related expenses resulting from additional share-based compensation expense of $23 million. This increase was partially offset by lower professional services, such as legal and advisory service fees, related to various development initiatives of $15 million. Depreciation and amortization expenses Year ended December 31, 2019 compared to year ended December 31, 2018 Depreciation and amortization expenses increased primarily due to a higher depreciable base resulting from property, plant and equipment in-service additions. 32

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      Taxes other than income taxes Year ended December 31, 2019 compared to year ended December 31, 2018 Taxes other than income taxes increased due to higher property tax expenses primarily due to our Regulated Operating Subsidiaries' 2018 capital additions, which were included in the assessments for 2019 property taxes. Other Expenses (Income) Interest Expense, Net Year ended December 31, 2019 compared to year ended December 31, 2018 Interest expense, net remained consistent due to higher debt balances offset by the reversal of interest expense previously recorded for the Second Complaint pursuant to the November 2019 Order, as described in Note 19 to the consolidated financial statements. Income Tax Provision Year ended December 31, 2019 compared to year ended December 31, 2018 Our effective tax rates for the years ended December 31, 2019 and 2018 were 23.6% and 25.2%, respectively. Our effective tax rate as of December 31, 2019 exceeded our 21% statutory federal income tax rate primarily due to state income taxes, partially offset by AFUDC equity. During the year ended December 31, 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 Iowa's tax rate, we revalued the Iowa NOLs at ITC Holdings in 2018. As a result, additional income tax expense was recorded for the year ended December 31, 2018 compared to the same period in 2019. 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. See Note 12 to the consolidated financial statements for further discussion regarding our 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 11 to the consolidated 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 could result in

      significant development expenses and capital expenditures incremental to our

      current plan. Refer to Note 19 to the consolidated 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 pending ROE matters.

      In addition to the expected capital requirements above, any adverse determinations or settlements relating to the regulatory matters or contingencies described in Notes 6 and 19 to the consolidated 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 33

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      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, 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 December 31, 2019, we had consolidated indebtedness under our revolving and term loan credit agreements of $499 million, with unused capacity under our revolving credit agreements of $601 million and unused capacity under our term loan credit agreement of $200 million. In January 2020, ITC Holdings drew upon the remaining $200 million under the term loan credit agreement, which was used to repay outstanding commercial paper balances. ITC Holdings had $200 million of commercial paper issued and outstanding, net of discount, as of December 31, 2019, with the ability to issue an additional $200 million under the commercial paper program. See Note 11 to the consolidated financial statements for a detailed discussion of the commercial paper program, our revolving and term loan credit agreements and other debt activity during the years ended December 31, 2019 and 2018. 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. We have material exposure to LIBOR through the revolving credit agreements of ITC Holdings and certain of our Regulated Operating Subsidiaries. It is expected that LIBOR will be discontinued and, while we believe an acceptable replacement rate will be available if LIBOR is discontinued, we cannot reasonably estimate the expected impact, if any, of such a discontinuation. 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. Our current credit ratings are displayed in the following table. An explanation of these ratings may be obtained from the respective rating agency. S&P (a) Moody's Rating Outlook Rating Outlook ITC Holdings Senior Unsecured Notes BBB+ Negative Baa2 Stable Commercial Paper A-2 Negative Prime-2 Stable ITCTransmission First Mortgage Bonds A Negative A1 Stable METC Senior Secured Notes A Negative A1 Stable ITC Midwest First Mortgage Bonds A Negative A1 Stable ITC Great Plains First Mortgage Bonds A Negative A1 Stable

      ____________________________

      (a) 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.

      Covenants

      Our debt instruments contain numerous financial and operating covenants that place significant restrictions on certain transactions, such as incurring additional indebtedness, engaging in sale and lease-back transactions, creating liens or other encumbrances, entering into mergers, consolidations, liquidations or dissolutions, creating or acquiring subsidiaries and selling or otherwise disposing of all or substantially all of our assets. In addition, the 34

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      covenants require us to meet certain financial ratios, such as maintaining certain debt to capitalization ratios and certain funds from operations to debt levels. As of December 31, 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 The following table summarizes cash flows for the periods indicated: Year Ended December 31, (In millions) 2019 2018 2017 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 428 $ 330 $ 319 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization expense 203

      180 169 Recognition, refund and collection of revenue accruals and deferrals - including accrued interest

      (55 ) 17 34 Deferred income tax expense 135 107 195 Other (82 ) 19 (110 ) Net cash provided by operating activities 629 653 607 CASH FLOWS FROM INVESTING ACTIVITIES Expenditures for property, plant and equipment (865 ) (769 ) (755 ) Contributions in aid of construction 10 21 21 Other 1 1 (10 ) Net cash used in investing activities (854 ) (747 ) (744 ) CASH FLOWS FROM FINANCING ACTIVITIES Net issuance/repayment of debt (including commercial paper and revolving and term loan credit agreements) 463 238 511 Dividends to ITC Investment Holdings (250 )

      (200 ) (300 ) Refundable deposits from and repayments to generators for transmission network upgrades, net

      11 3 (12 ) Other (3 ) (5 ) (5 ) Net cash provided by financing activities 221

      36 194 NET (DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH

      (4 )

      (58 ) 57 CASH, CASH EQUIVALENTS AND RESTRICTED CASH - Beginning of period

      10

      68 11 CASH, CASH EQUIVALENTS AND RESTRICTED CASH - End of period

      $ 6 $

      10 $ 68

      Cash Flows From Operating Activities Year ended December 31, 2019 compared to year ended December 31, 2018 Net cash provided by operating activities was $629 million and $653 million for the year ended December 31, 2019 and 2018, respectively. The decrease in cash provided by operating activities was due primarily to lower tax refunds received of $12 million, higher interest payments of $5 million and higher property tax payments of $7 million during the year ended December 31, 2019 compared to the same period in 2018. Cash Flows From Investing Activities Year ended December 31, 2019 compared to year ended December 31, 2018 Net cash used in investing activities was $854 million and $747 million for the year ended December 31, 2019 and 2018, respectively. The increase in cash used in investing activities was primarily due to an increase in capital expenditures of $96 million, including the electric transmission asset acquisition of $76 million from Consumer's Energy, and a decrease in contributions received in aid of construction of $11 million during the year ended December 31, 2019 compared to the same period in 2018. 35

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      Cash Flows From Financing Activities Year ended December 31, 2019 compared to year ended December 31, 2018 Net cash provided by financing activities was $221 million and $36 million for the year ended December 31, 2019 and 2018, respectively. The increase in cash provided by financing activities was due primarily to an increase in net borrowings under our revolving and term loan credit agreements of $353 million and an increase in net issuances of commercial paper of $200 million during the year ended December 31, 2019 compared to the same period in 2018. These increases were partially offset by a decrease in issuances of long-term debt of $225 million, an increase in retirement of long-term debt of $103 million and an increase in dividend payments of $50 million during the year ended December 31, 2019 compared to the same period in 2018. See Note 11 to the consolidated financial statements for detail on the issuances and retirements of debt, borrowings under our term loan credit agreement and a description of our revolving credit agreements and commercial paper program. Contractual Obligations The following table details our contractual obligations as of December 31, 2019: Due within Due in Due in Due after (In millions) Total 1 Year Years 2-3 Years 4-5 5 years Debt: ITC Holdings Senior Notes $ 2,550 $ - $ 500 $ 650 $ 1,400 ITC Holdings revolving credit agreement (a) 34 - 34 - - ITC Holdings commercial paper program 200 200 - - - ITC Holdings term loan credit agreement 200 - 200 - - ITCTransmission First Mortgage Bonds 785 - - - 785 ITCTransmission revolving credit agreement (a) 24 - 24 - - METC Senior Secured Notes 575 - - - 575 METC revolving credit agreement (a) 79 - 79 - - ITC Midwest First Mortgage Bonds 1,085 35 - 75 975 ITC Midwest revolving credit agreement (a) 130 - 130 - - ITC Great Plains First Mortgage Bonds 150 - - - 150 ITC Great Plains revolving credit agreement (a) 32 - 32 - - Interest payments: ITC Holdings Senior Notes 944 97 192 143 512 ITCTransmission First Mortgage Bonds 888 35 70 70 713 METC Senior Secured Notes 622 24 49 49 500 ITC Midwest First Mortgage Bonds 1,106 49 93 92 872 ITC Great Plains First Mortgage Bonds 155 6 12 12 125 Operating leases 4 1 2 1 - Purchase obligations 77 74 1 1 1 Regulatory liabilities - revenue deferrals, including accrued interest 52 51 1 - - Regulatory liabilities - refund related to the MISO ROE Complaints, including accrued interest (b) 70 70 - - - METC Easement Agreement 309 10 20 20 259 Total obligations $ 10,071 $ 652 $ 1,439 $ 1,113 $ 6,867

      ____________________________

      (a) On January 10, 2020 we extended the maturity date of our revolving credit

      agreements from October 21, 2022 to October 20, 2023. Refer to Note 11 to the

      consolidated financial statements for further details on the extension. 36

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      (b) Amount reflects terms outlined in the November 2019 Order related to the MISO

      ROE Complaints, as described in Note 19 to the consolidated financial

      statements.

      Interest payments included above relate only to our fixed-rate long-term debt outstanding at December 31, 2019. We also expect to pay interest and commitment fees under our variable-rate revolving and term loan credit agreements and commercial paper program that have not been included above due to varying amounts of borrowings and interest rates under the facilities. In 2019, we paid $16 million of interest and commitment fees under our revolving and term loan credit agreements and commercial paper program. Operating leases include leases for office space, equipment and storage facilities. Purchase obligations represent commitments primarily for materials, services and equipment that had not been received as of December 31, 2019, primarily for construction and maintenance projects for which we have an executed contract. The majority of the items relate to materials and equipment that have long production lead times. See Note 10 and Note 19 to the consolidated financial statements for more information on our operating leases and purchase obligations, respectively. The revenue deferrals, including accrued interest, in the table above represent the over-recovery of revenues resulting from differences between the amounts billed to customers and actual revenue requirement at each of our Regulated Operating Subsidiaries, as described in Note 6 to the consolidated financial statements. These amounts will offset future revenue requirement for purposes of calculating our Formula Rates as part of the true-up mechanism in our rate construct. The Easement Agreement provides METC with an easement for transmission purposes and rights-of-way, leasehold interests, fee interests and licenses associated with the land over which the transmission lines cross. The cost for use of the rights-of-way is $10 million per year. The term of the Easement Agreement runs through December 31, 2050 and is subject to 10 automatic 50-year renewals thereafter unless METC gives notice of nonrenewal of at least one year in advance. Payments to Consumers Energy under the Easement Agreement are charged to operation and maintenance expense. The contractual obligations table above excludes certain items, including contingent liabilities and other current and long-term liabilities, due to uncertainty regarding the timing and any amount of future cash flows necessary to settle these obligations. Items excluded from the contractual obligations table include: • long-term incentive awards;

      • pension and other postretirement obligations;

      • regulatory liabilities related to asset removal costs and income taxes refundable related to implementation of the TCJA; and

      • liabilities to refund deposits from generators for transmission network

      upgrades.

      Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated 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 judgments regarding future events. These estimates and judgments, in and of themselves, could materially impact the consolidated 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 following is a list of accounting policies that are most significant to the portrayal of our financial condition and results of operations and/or that require management's most difficult, subjective or complex judgments. Regulation Our Regulated Operating Subsidiaries are subject to rate regulation by the FERC. As a result, we apply accounting principles in accordance with the standards set forth by the FASB for accounting for the effects of certain types of regulation. Use of this accounting guidance results in differences in the application of GAAP between regulated and non-regulated businesses and requires the recording of regulatory assets and liabilities for certain transactions that would have been treated as expense or revenue in non-regulated businesses. As described in Note 7 to the consolidated financial statements, we had regulatory assets and liabilities of $241 million 37

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      and $707 million, respectively, as of December 31, 2019. Future changes in the regulatory and competitive environments could result in discontinuing the application of the accounting standards for the effects of certain types of regulations. If we were to discontinue the application of this guidance on the operations of our Regulated Operating Subsidiaries, we may be required to record losses relating to certain regulatory assets or gains relating to certain regulatory liabilities. We also may be required to record losses of $33 million relating to intangible assets at December 31, 2019 that are described in Note 9 to the consolidated financial statements. We believe that currently available facts support the continued applicability of the standards for accounting for the effects of certain types of regulation and that all regulatory assets and liabilities are recoverable or refundable under our current rate environment. Revenue Recognition under Cost-Based Formula Rates with True-Up Mechanism Our Regulated Operating Subsidiaries recover expenses and earn a return on and recover investments in property, plant and equipment on a current basis, under their forward-looking cost-based Formula Rates with a true-up mechanism. Under their Formula Rates, our Regulated Operating Subsidiaries use forecasted expenses, property, plant and equipment, point-to-point revenues and other items for the upcoming calendar year to establish their projected revenue requirement and for the MISO Regulated Operating Subsidiaries, their component of the billed network rates for service on their systems from January 1 to December 31 of that year. The cost-based 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 subsequently collect or refund any over-recovery or under-recovery of revenues, as appropriate. 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. The true-up mechanisms under our Formula Rates meet the GAAP requirements for accounting for rate-regulated utilities and the effects of certain alternative revenue programs. Accordingly, revenue is recognized during each reporting period based on actual revenue requirements calculated using the cost-based Formula Rates. Our 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. The true-up amount is automatically reflected in customer bills within two years under the provisions of the Formula Rates. See Note 7 to the consolidated financial statements for the regulatory assets and liabilities recorded at our Regulated Operating Subsidiaries' as a result of the Formula Rate revenue accruals and deferrals. Valuation of Goodwill We have goodwill resulting from our acquisitions of ITCTransmission and METC and ITC Midwest's acquisition of the IP&L transmission assets. We perform an impairment test annually at the reporting unit level or whenever events or circumstances indicate that the value of goodwill may be impaired. Our reporting units are ITCTransmission, METC and ITC Midwest as each entity represents an individual operating segment to which goodwill has been assigned. In order to perform an impairment assessment, we have the option of performing a qualitative assessment to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount. In performing a qualitative assessment, we assess macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, entity-specific considerations, and industry-specific considerations such as our regulatory environment and rate structure. If, after assessing the totality of events or circumstances, we determine it is more likely than not that

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