##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number: 001-32576
 ITC HOLDINGS CORP.
  Michigan
    
    32-0058047(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification No.)Incorporation or Organization)
 39500 Orchard Hill Place, Suite 200
Novi, Michigan 48375   (248) 374-7100
  þ o
  o þ o
  o þ




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##### 



ITC Holdings Corp.
Form 10-Q for the Quarterly Period Ended September 30, 2007
 INDEX
 PagePart I. Financial Information
    
    
    4Item 1. Financial Statements
    
    
    4Condensed Consolidated Statements of Financial Position (Unaudited)
    
    
    4Condensed Consolidated Statements of Operations (Unaudited)
    
    
    5Condensed Consolidated Statements of Cash Flows (Unaudited)
    
    
    6Notes to Condensed Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    35Part II. Other Information
    
    
    36Item 1A. Risk Factors
    
    
    36Item 5. Other Information
    
    
    36Item 6. Exhibits
    
    
    38Signatures
    
    
    39Exhibit IndexNote Purchase AgreementCertification of Chief Executive Officer pursuant to Rule 13a-14Certification of Chief Financial Officer pursuant to Rule 13a-14Certification pursuant to 18 U.S.C. Section 1350
  2




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DEFINITIONS
  
    
    We, our, us and the Company are references to ITC Holdings Corp., together with all
of its subsidiaries;
 
    
    ITC Holdings are references to ITC Holdings Corp. and not any of its subsidiaries;
 
    
    ITCTransmission are references to International Transmission Company, a wholly-owned
subsidiary of ITC Holdings;
 
    
    METC are references to Michigan Electric Transmission Company, LLC, an indirect
wholly-owned subsidiary of ITC Holdings;
 
    
    ITC Midwest are references to ITC Midwest LLC, a wholly-owned subsidiary of ITC Holdings;
 
    
    ITC Grid Development are references to ITC Grid Development, LLC, a wholly-owned subsidiary
of ITC Holdings;
 
    
    ITC Great Plains are references to ITC Great Plains, LLC, a wholly-owned subsidiary of ITC
Grid Development;
 
    
    the FERC are references to the Federal Energy Regulatory Commission;
 
    
    MISO are references to the Midwest Independent Transmission System Operator, Inc. a
FERC-approved Regional Transmission Organization, which has responsibility for the oversight
and coordination of transmission service for a substantial portion of the midwestern United
States and Manitoba, Canada, and of which ITCTransmission and METC are members;
 
    
    kW are references to kilowatts (one kilowatt equaling 1,000 watts);
 
    
    MW are references to megawatts (one megawatt equaling 1,000,000 watts); and
 
    
    kV are references to kilovolts (one kilovolt equaling 1,000 volts).
 3




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 ITC HOLDINGS CORP. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (UNAUDITED)
 September 30,
    
    
    December 31,(in thousands, except share data)
    
    2007
    
    
    2006ASSETSCurrent assetsCash and cash equivalents
    
    $
    2,362
    
    
    $
    13,426Restricted cash
    
    
    4,776
    
    
    
    4,565Accounts receivable
    
    
    42,442
    
    
    
    35,325Inventory
    
    
    18,331
    
    
    
    25,408Deferred income taxes
    
    
    15,506
    
    
    
    21,023Other
    
    
    4,221
    
    
    
    9,926Total current assets
    
    
    87,638
    
    
    
    109,673Property,
plant and equipment(net of accumulated depreciation and amortization of $642,524 and $608,956, respectively)
    
    
    1,389,648
    
    
    
    1,197,862Other assetsGoodwill
    
    
    628,757
    
    
    
    624,385Intangible assets (net of accumulated amortization of $2,269 and $0, respectively)
    
    
    56,138
    
    
    
    58,407Regulatory assets- acquisition adjustments
    
    
    87,401
    
    
    
    91,443Regulatory assets- Attachment O revenue accrual (including accrued interest of $168)
    
    
    12,810
    
    
    
    Other regulatory assets
    
    
    26,701
    
    
    
    26,183Deferred financing fees (net of accumulated amortization of $4,327 and
$4,817, respectively)
    
    
    13,654
    
    
    
    14,490Other
    
    
    10,525
    
    
    
    6,354Total other assets
    
    
    835,986
    
    
    
    821,262TOTAL ASSETS
    
    $
    2,313,272
    
    
    $
    2,128,797LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilitiesAccounts payable
    
    $
    52,510
    
    
    $
    33,295Accrued payroll
    
    
    6,029
    
    
    
    5,192Accrued interest
    
    
    7,576
    
    
    
    18,915Accrued taxes
    
    
    4,421
    
    
    
    14,152METC rate case accrued liability
    
    
    20,000
    
    
    
    20,000Other
    
    
    5,064
    
    
    
    8,012Total current liabilities
    
    
    95,600
    
    
    
    99,566Accrued pension liability
    
    
    5,161
    
    
    
    7,782Accrued postretirement liability
    
    
    3,923
    
    
    
    3,268Deferred income taxes
    
    
    92,683
    
    
    
    75,730Regulatory liabilities- Attachment O revenue deferral(including accrued interest of $95)
    
    
    2,879
    
    
    
    Other regulatory liabilities
    
    
    142,982
    
    
    
    138,726Asset retirement obligation
    
    
    5,627
    
    
    
    5,346Other
    
    
    4,603
    
    
    
    3,857Long-term debt
    
    
    1,401,687
    
    
    
    1,262,278STOCKHOLDERS EQUITYCommon stock, without par value, 100,000,000 shares authorized, 42,764,859 and
42,395,760 shares issued and outstanding at September 30, 2007 and December 31, 2006,
respectively
    
    
    530,417
    
    
    
    526,485Retained earnings
    
    
    28,617
    
    
    
    6,714Accumulated other comprehensive loss
    
    
    (907
    )
    
    
    (955
    )Total stockholders equity
    
    
    558,127
    
    
    
    532,244TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    2,313,272
    
    
    $
    2,128,797
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ITC HOLDINGS CORP. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands, except share and per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006OPERATING REVENUES
    
    $
    109,272
    
    
    $
    63,004
    
    
    $
    316,850
    
    
    $
    150,548OPERATING EXPENSESOperation and maintenance
    
    
    22,451
    
    
    
    5,542
    
    
    
    62,494
    
    
    
    19,317General and administrative
    
    
    13,376
    
    
    
    9,827
    
    
    
    40,603
    
    
    
    25,292Depreciation and amortization
    
    
    17,060
    
    
    
    9,259
    
    
    
    49,893
    
    
    
    27,213Taxes other than income taxes
    
    
    8,253
    
    
    
    5,409
    
    
    
    25,089
    
    
    
    15,739Total operating expenses
    
    
    61,140
    
    
    
    30,037
    
    
    
    178,079
    
    
    
    87,561OPERATING INCOME
    
    
    48,132
    
    
    
    32,967
    
    
    
    138,771
    
    
    
    62,987OTHER EXPENSES (INCOME)Interest expense
    
    
    20,084
    
    
    
    8,506
    
    
    
    59,156
    
    
    
    23,640Allowance for equity funds used during construction
    
    
    (2,339
    )
    
    
    (1,250
    )
    
    
    (5,192
    )
    
    
    (2,610
    )Loss on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    349
    
    
    
    Other income
    
    
    (1,128
    )
    
    
    (47
    )
    
    
    (2,847
    )
    
    
    (488
    )Other expense
    
    
    175
    
    
    
    256
    
    
    
    844
    
    
    
    408Total other expenses (income)
    
    
    16,792
    
    
    
    7,465
    
    
    
    52,310
    
    
    
    20,950INCOME BEFORE INCOME TAXES
    
    
    31,340
    
    
    
    25,502
    
    
    
    86,461
    
    
    
    42,037INCOME TAX PROVISION
    
    
    10,540
    
    
    
    6,553
    
    
    
    28,807
    
    
    
    12,436INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
    
    
    20,800
    
    
    
    18,949
    
    
    
    57,654
    
    
    
    29,601CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE
(NET OF TAX OF $16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29NET INCOME
    
    $
    20,800
    
    
    $
    18,949
    
    
    $
    57,654
    
    
    $
    29,630Basic earnings per share
    
    $
    0.49
    
    
    $
    0.57
    
    
    $
    1.36
    
    
    $
    0.90Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.55
    
    
    $
    1.33
    
    
    $
    0.87Weighted-average basic shares
    
    
    42,369,352
    
    
    
    33,023,187
    
    
    
    42,244,470
    
    
    
    33,005,068Weighted-average diluted shares
    
    
    43,592,868
    
    
    
    34,386,991
    
    
    
    43,474,222
    
    
    
    34,081,968Dividends declared per common share
    
    $
    0.290
    
    
    $
    0.275
    
    
    $
    0.840
    
    
    $
    0.800
  5




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ITC HOLDINGS CORP. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 Nine months endedSeptember 30,(in thousands)
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIESNet income
    
    $
    57,654
    
    
    $
    29,630Adjustments to reconcile net income to net cash provided by operating activities:Depreciation and amortization expense
    
    
    49,893
    
    
    
    27,213Attachment O revenue accrual- net, including accrued interest
    
    
    (9,931
    )
    
    
    Amortization of deferred financing fees and discount on long-term debt
    
    
    1,226
    
    
    
    990Stock-based compensation expense
    
    
    2,402
    
    
    
    2,212Loss on extinguishment of debt
    
    
    349
    
    
    
    Deferred income taxes
    
    
    31,433
    
    
    
    16,456Other long-term liabilities
    
    
    (1,220
    )
    
    
    2,445Other regulatory assets
    
    
    (620
    )
    
    
    (2,322
    )Allowance for equity funds used during construction
    
    
    (5,192
    )
    
    
    (2,610
    )Other
    
    
    (2,243
    )
    
    
    (3,942
    )Changes in current assets and liabilities, exclusive of changes shown separately (Note 1)
    
    
    (23,111
    )
    
    
    (27,062
    )Net cash provided by operating activities
    
    
    100,640
    
    
    
    43,010CASH FLOWS FROM INVESTING ACTIVITIESExpenditures for property, plant and equipment
    
    
    (214,319
    )
    
    
    (117,422
    )Acquisition-related transaction costs
    
    
    (1,818
    )
    
    
    (624
    )Other
    
    
    926
    
    
    
    Net cash used in investing activities
    
    
    (215,211
    )
    
    
    (118,046
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of long-term debt
    
    
    100,000
    
    
    
    99,890Borrowings under ITC Holdings Term Loan Agreement
    
    
    25,000
    
    
    
    Repayments of ITC Holdings Term Loan Agreement
    
    
    (25,000
    )
    
    
    Borrowings under revolving credit agreements
    
    
    455,400
    
    
    
    91,600Repayments of revolving credit agreements
    
    
    (416,100
    )
    
    
    (104,000
    )Issuance of common stock
    
    
    2,860
    
    
    
    403Common stock issuance costs
    
    
    (5
    )
    
    
    (456
    )Dividends on common stock
    
    
    (35,751
    )
    
    
    (26,648
    )Repurchase and retirement of common stock
    
    
    (1,841
    )
    
    
    Debt issuance costs
    
    
    (1,056
    )
    
    
    (2,328
    )Net cash provided by financing activities
    
    
    103,507
    
    
    
    58,461NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (11,064
    )
    
    
    (16,575
    )CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    13,426
    
    
    
    24,591CASH AND CASH EQUIVALENTS  End of period
    
    $
    2,362
    
    
    $
    8,016
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1. GENERAL
    Condensed Consolidated Statements of Cash Flows
 Nine months endedSeptember 30,(In thousands)
    
    2007
    
    
    2006Change in current assets and liabilities, exclusive of changes shown separately:Accounts receivable
    
    $
    (7,117
    )
    
    $
    (2,680
    )Inventory
    
    
    (13,258
    )
    
    
    (3,196
    )Other current assets
    
    
    5,705
    
    
    
    (5,672
    )Accounts payable
    
    
    15,112
    
    
    
    (4,125
    )Accrued interest
    
    
    (11,339
    )
    
    
    (5,281
    )Accrued taxes
    
    
    (9,083
    )
    
    
    (3,438
    )Other current liabilities
    
    
    (3,131
    )
    
    
    (2,670
    )Total change in current assets and liabilities
    
    $
    (23,111
    )
    
    $
    (27,062
    )Supplementary cash flows information:Interest paid (excluding interest capitalized)
    
    $
    67,606
    
    
    $
    26,482Income taxes paid
    
    
    2,058
    
    
    
    336Supplementary noncash investing and financing activities:Conversion of restricted stock to ITC Holdings common stock
    
    $
    1,205
    
    
    $
    Additions to property, plant and equipment (a)
    
    
    35,865
    
    
    
    18,643Allowance for equity funds used during construction
    
    
    5,192
    
    
    
    2,610
 
 (a)
    
    Amounts consist primarily of current liabilities for
construction labor and materials that have not been included in investing
activities. These amounts have not been paid for as of September 30, 2007
or 2006, respectively, but have been or will be included as a cash outflow
from investing activities for expenditures for property, plant and
equipment when paid. 7




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Comprehensive income
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    20,800
    
    
    $
    18,949
    
    
    $
    57,654
    
    
    $
    29,630Amortization of
interest rate lock
cash flow hedges,
net of tax of $9
and $26 for the
three and nine
months ended
September 30, 2007,
respectively
    
    
    16
    
    
    
    
    
    
    
    48
    
    
    
    Comprehensive income
    
    $
    20,816
    
    
    $
    18,949
    
    
    $
    57,702
    
    
    $
    29,630
 Public Securities Offering
  2. RECENT ACCOUNTING PRONOUNCEMENTS
 Statement of Financial Accounting Standards No. 157, Fair Value Measurements
 Fair Value Measurements
 Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and
132(R)
 Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans  an amendment of FASB Statements No. 87, 88, 106, and
132(R)
 Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities
 The Fair Value Option for Financial
Assets and Financial Liabilities
 8




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Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income
Taxes
 Accounting for Uncertainty in
Income Taxes Accounting for Income Taxes
  3. ACQUISITIONS
 Pending Acquisition of Interstate Power and Light Company Transmission Assets
  Goodwill
 9




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(In thousands)Goodwill balance as of December 31, 2006
    
    $
    624,385Changes to goodwill:METC purchase accounting adjustments
    
    
    5,296ITCTransmission purchase price adjustment
    
    
    (924
    )Goodwill balance as of September 30, 2007
    
    $
    628,757
  4. REGULATORY MATTERS
 Forward-Looking Attachment O
  Accounting by Rate-Regulated Utilities for the Effects of Certain
Alternative Revenue Programs
 10




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METC Rate Case
  Business Combinations.
 Redirected Transmission Service
  11




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MISO Tariff Revisions
 Long Term Pricing
  Elimination of Transmission Rate Discount
 12




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5. PROPERTY, PLANT AND EQUIPMENT
  6. DEBT
 Senior Unsecured Notes, Series A and B
    Term Loan Agreement
  Revolving Credit Agreements
 Revolving Credit Agreements
 13




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Termination of Revolving Credit Agreements
   7. STOCKHOLDERS EQUITY AND STOCK-BASED COMPENSATION
   14




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Share
Based Payment
 8. EARNINGS PER SHARE
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands, except share and per share data)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Basic earnings per share:Net income
    
    $
    20,800
    
    
    $
    18,949
    
    
    $
    57,654
    
    
    $
    29,630Weighted-average shares outstanding
    
    
    42,369,352
    
    
    
    33,023,187
    
    
    
    42,244,470
    
    
    
    33,005,068Basic earnings per share
    
    $
    0.49
    
    
    $
    0.57
    
    
    $
    1.36
    
    
    $
    0.90Diluted earnings per share:Net income
    
    $
    20,800
    
    
    $
    18,949
    
    
    $
    57,654
    
    
    $
    29,630Weighted-average shares outstanding
    
    
    42,369,352
    
    
    
    33,023,187
    
    
    
    42,244,470
    
    
    
    33,005,068Incremental shares of stock-based awards
    
    
    1,223,516
    
    
    
    1,363,804
    
    
    
    1,229,752
    
    
    
    1,076,900Weighted-average dilutive shares outstanding
    
    
    43,592,868
    
    
    
    34,386,991
    
    
    
    43,474,222
    
    
    
    34,081,968Diluted earnings per share
    
    $
    0.48
    
    
    $
    0.55
    
    
    $
    1.33
    
    
    $
    0.87
   9. TAXES
 Michigan Business Tax
 Accounting for Income Taxes
 15




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Income Tax Provision
  10. RETIREMENT BENEFITS AND ASSETS HELD IN TRUST
    Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    373
    
    
    $
    290
    
    
    $
    1,120
    
    
    $
    876Interest cost
    
    
    249
    
    
    
    232
    
    
    
    747
    
    
    
    729Expected return on plan assets
    
    
    (162
    )
    
    
    (106
    )
    
    
    (488
    )
    
    
    (320
    )Amortization of prior service cost
    
    
    (275
    )
    
    
    (98
    )
    
    
    (826
    )
    
    
    74Amortization of unrecognized (gain)/loss
    
    
    488
    
    
    
    459
    
    
    
    1,465
    
    
    
    1,376Net pension cost
    
    $
    673
    
    
    $
    777
    
    
    $
    2,018
    
    
    $
    2,735
 Other Postretirement Benefits
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(In thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service cost
    
    $
    246
    
    
    $
    295
    
    
    $
    737
    
    
    $
    886Interest cost
    
    
    82
    
    
    
    68
    
    
    
    247
    
    
    
    204Expected return on plan assets
    
    
    (23
    )
    
    
    (11
    )
    
    
    (70
    )
    
    
    (32
    )Amortization of prior service cost
    
    
    59
    
    
    
    
    
    
    
    176
    
    
    
    Amortization of actuarial (gain)/loss
    
    
    (24
    )
    
    
    19
    
    
    
    (70
    )
    
    
    57Net postretirement cost
    
    $
    340
    
    
    $
    371
    
    
    $
    1,020
    
    
    $
    1,115
 16




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Defined Contribution Plans
  11. DEFERRED COMPENSATION PLANS
 Special Bonus Plans
   12. CONTINGENCIES
 Litigation
  CSX Transportation, Inc.
  Termination of Contracts for Engineering and Other Services
  17




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Consumers Energy Company Bonus Payments
  Thumb Loop Project
  Property Taxes
  18




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE
HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
  
    
    unless ITC Holdings receives dividends or other payments from ITCTransmission, METC or other
subsidiaries, ITC Holdings will be unable to pay dividends to its shareholders and fulfill its
cash obligations;
 
    
    certain elements of ITCTransmissions and METCs cost recovery through rates 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;
 
    
    ITCTransmissions and METCs actual capital investments may be lower than planned, which
would decrease their respective expected rate bases and therefore our revenues;
 
    
    ITCTransmission and METC are subject to various regulatory 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 results of operations, financial
condition and cash flows.
 
    
    the regulations to which we are subject may limit our ability to raise capital and/or pursue
acquisitions or development opportunities or other transactions or may subject us to
liabilities;
 
    
    changes in federal energy laws, regulations or policies could reduce the dividends we may be
able to pay our shareholders;
 
    
    our network loads are seasonal and may be lower than expected, which would impact the timing
of collection of our revenues;
 
    
    ITCTransmission depends on The Detroit Edison Company (Detroit Edison), its primary
customer, for a substantial portion of its revenues, and any material failure by Detroit
Edison to make payments for transmission services would adversely affect our revenues and our
ability to service ITCTransmissions and our debt obligations;
 
    
    METC depends on Consumers Energy Company (Consumers Energy), its primary customer, for a
substantial portion of its revenues, and any material failure by Consumers Energy to make
payments for transmission services would adversely affect our revenues and our ability to
service METCs and our debt obligations;
 
    
    METC does not own the majority of the land on which its transmission assets are located and,
as a result, it must comply with the provisions of an easement agreement with Consumers
Energy, which may adversely impact METCs ability to complete its construction projects in a
timely manner;
 
    
    deregulation and/or increased competition may adversely affect ITCTransmissions and METCs
customers or Detroit Edisons customers and Consumers Energys customers, which may affect our
ability to collect revenues;
 
    
    hazards associated with high-voltage electricity transmission may result in suspension of
ITCTransmissions or METCs operations or the imposition of civil or criminal penalties;
 19




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##### Table of Contents




    
    ITCTransmission and METC are subject to environmental regulations and to laws that can give
rise to substantial liabilities from environmental contamination;
 
    
    acts of war, terrorist attacks and threats or the escalation of military activity in response
to such attacks or otherwise may negatively affect our business, financial condition and
results of operations;
 
    
    we may encounter difficulties consolidating METC into our business and may not fully attain
or retain, or achieve within a reasonable time frame, expected strategic objectives, cost
savings and other expected benefits of the acquisition;
 
    
    the proposed acquisition of Interstate Power and Light (IP&L) transmission assets may not
occur on a timely basis or at all, and the required governmental approvals may not be obtained
on a timely basis or at all;
 
    
    the purchase price for the IP&L transmission assets is subject to adjustment and, therefore,
the final purchase price cannot be determined at this time;
 
    
    the proposed acquisition of IP&L transmission assets may not be as financially or
operationally successful as originally contemplated;
 
    
    we may encounter difficulties consolidating IP&Ls transmission assets into our business and
may not fully attain or retain, or achieve within a reasonable time frame, expected strategic
objectives, cost savings and other expected benefits of the proposed acquisition;
 
    
    we are highly leveraged and our dependence on debt may limit our ability to pay dividends
and/or obtain additional financing;
 
    
    certain provisions in our debt instruments limit our capital flexibility;
 
    
    adverse changes in our credit ratings may negatively affect us;
 
    
    future transactions may limit our ability to use our federal income tax net operating loss
carryforwards;
 
    
    ITCTransmissions and METCs ability to raise capital may be restricted which may, in turn,
restrict our ability to make capital expenditures or dividend payments to our stockholders;
and
 
    
    other risk factors discussed herein and listed from time to time in our public filings with
the Securities and Exchange Commission (SEC) may have a material adverse effect on our
financial position, results of operations, cash flows and prospects.
  OVERVIEW
  20




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##### Table of Contents




    
    our acquisition of all of the indirect ownership interests in METC in October 2006;
 
    
    ITCTransmissions and METCs capital investment of $155.0 million and $55.4 million,
respectively, for the nine months ended September 30, 2007 resulting from our focus on
improving system reliability;
 
    
    the implementation of Forward-Looking Attachment O effective January 1, 2007, and its effect
on operating revenues for the three and nine months ended September 30, 2007, including
reducing the seasonality of operating revenues and net income;
 
    
    debt issuances in 2006 and 2007, resulting in higher interest expense;
    
    the pending acquisition of the transmission assets of IP&L; and
    
    the settlement of METCs rate case, which resulted in payment to various transmission
customers in the aggregate amount of $20.0 million in October 2007.
  Recent Developments
 Pending Acquisition of Transmission Assets
  21




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22




---



##### Table of Contents



Michigan Business Tax
 Accounting for Income Taxes
  Forward-Looking Attachment O
   Accounting by Rate-Regulated Utilities for the Effects of Certain
Alternative Revenue Programs
 23




---



##### Table of Contents



METC Rate Case Settlement Agreement
   Business Combinations.
 Public Securities Offering
   24




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##### Table of Contents



Trends and Seasonality
 Network Revenues
     25




---



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26




---



##### Table of Contents



Point-to-Point Revenue
  Seasonality
    2007
    
    2006
    
    2005Monthly Peak Load (in MW)
    
    METC
    
    ITCTransmission
    
    METC
    
    ITCTransmission
    
    ITCTransmissionJanuary
    
    
    6,051
    
    
    
    7,876
    
    
    
    
    
    
    
    7,754
    
    
    
    8,090February
    
    
    6,227
    
    
    
    8,170
    
    
    
    
    
    
    
    7,667
    
    
    
    7,672March
    
    
    6,006
    
    
    
    7,739
    
    
    
    
    
    
    
    7,554
    
    
    
    7,562April
    
    
    5,473
    
    
    
    7,141
    
    
    
    
    
    
    
    7,035
    
    
    
    7,299May
    
    
    6,981
    
    
    
    9,927
    
    
    
    
    
    
    
    10,902
    
    
    
    7,678June
    
    
    8,484
    
    
    
    11,761
    
    
    
    
    
    
    
    9,752
    
    
    
    12,108July
    
    
    8,645
    
    
    
    11,706
    
    
    
    
    
    
    
    12,392
    
    
    
    11,822August
    
    
    8,931
    
    
    
    12,087
    
    
    
    
    
    
    
    12,745
    
    
    
    12,308September
    
    
    7,908
    
    
    
    11,033
    
    
    
    
    
    
    
    8,415
    
    
    
    10,675October
    
    
    
    
    
    
    
    
    
    
    5,642
    
    
    
    7,302
    
    
    
    9,356November
    
    
    
    
    
    
    
    
    
    
    6,103
    
    
    
    7,724
    
    
    
    7,943December
    
    
    
    
    
    
    
    
    
    
    6,527
    
    
    
    8,257
    
    
    
    8,344Total
    
    
    
    
    
    
    
    
    
    
    18,272
    
    
    
    107,499
    
    
    
    110,857
 27




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##### Table of Contents



RESULTS OF OPERATIONS
 Results of Operations and Variances
 Three months ended
    
    
    
    
    
    
    
    
    
    
    Nine months endedSeptember 30,
    
    
    
    
    
    
    Percentage
    
    
    September 30,
    
    
    
    
    
    
    Percentage(In thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    Change
    
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOPERATING REVENUES
    
    $
    109,272
    
    
    $
    63,004
    
    
    $
    46,268
    
    
    
    73.4
    %
    
    $
    316,850
    
    
    $
    150,548
    
    
    $
    166,302
    
    
    
    110.5
    %OPERATING EXPENSESOperation and maintenance
    
    
    22,451
    
    
    
    5,542
    
    
    
    16,909
    
    
    
    305.1
    %
    
    
    62,494
    
    
    
    19,317
    
    
    
    43,177
    
    
    
    223.5
    %General and administrative
    
    
    13,376
    
    
    
    9,827
    
    
    
    3,549
    
    
    
    36.1
    %
    
    
    40,603
    
    
    
    25,292
    
    
    
    15,311
    
    
    
    60.5
    %Depreciation and
amortization
    
    
    17,060
    
    
    
    9,259
    
    
    
    7,801
    
    
    
    84.3
    %
    
    
    49,893
    
    
    
    27,213
    
    
    
    22,680
    
    
    
    83.3
    %Taxes other than income
taxes
    
    
    8,253
    
    
    
    5,409
    
    
    
    2,844
    
    
    
    52.6
    %
    
    
    25,089
    
    
    
    15,739
    
    
    
    9,350
    
    
    
    59.4
    %Total operating expenses
    
    
    61,140
    
    
    
    30,037
    
    
    
    31,103
    
    
    
    103.5
    %
    
    
    178,079
    
    
    
    87,561
    
    
    
    90,518
    
    
    
    103.4
    %OPERATING INCOME
    
    
    48,132
    
    
    
    32,967
    
    
    
    15,165
    
    
    
    46.0
    %
    
    
    138,771
    
    
    
    62,987
    
    
    
    75,784
    
    
    
    120.3
    %OTHER EXPENSES(INCOME)Interest expense
    
    
    20,084
    
    
    
    8,506
    
    
    
    11,578
    
    
    
    136.1
    %
    
    
    59,156
    
    
    
    23,640
    
    
    
    35,516
    
    
    
    150.2
    %Allowance for equity funds
used during construction
    
    
    (2,339
    )
    
    
    (1,250
    )
    
    
    (1,089
    )
    
    
    87.1
    %
    
    
    (5,192
    )
    
    
    (2,610
    )
    
    
    (2,582
    )
    
    
    98.9
    %Loss on extinguishment of
debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    349
    
    
    
    
    
    
    
    349
    
    
    
    n/aOther income
    
    
    (1,128
    )
    
    
    (47
    )
    
    
    (1,081
    )
    
    
    2,300.0
    %
    
    
    (2,847
    )
    
    
    (488
    )
    
    
    (2,359
    )
    
    
    483.4
    %Other expense
    
    
    175
    
    
    
    256
    
    
    
    (81
    )
    
    
    (31.6
    )%
    
    
    844
    
    
    
    408
    
    
    
    436
    
    
    
    106.9
    %Total other expenses
(income)
    
    
    16,792
    
    
    
    7,465
    
    
    
    9,327
    
    
    
    124.9
    %
    
    
    52,310
    
    
    
    20,950
    
    
    
    31,360
    
    
    
    149.7
    %INCOME BEFORE INCOME TAXES
    
    
    31,340
    
    
    
    25,502
    
    
    
    5,838
    
    
    
    22.9
    %
    
    
    86,461
    
    
    
    42,037
    
    
    
    44,424
    
    
    
    105.7
    %INCOME TAX PROVISION
    
    
    10,540
    
    
    
    6,553
    
    
    
    3,987
    
    
    
    60.8
    %
    
    
    28,807
    
    
    
    12,436
    
    
    
    16,371
    
    
    
    131.6
    %INCOME BEFORE CUMULATIVE
EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE
    
    
    20,800
    
    
    
    18,949
    
    
    
    1,851
    
    
    
    9.8
    %
    
    
    57,654
    
    
    
    29,601
    
    
    
    28,053
    
    
    
    94.8
    %CUMULATIVE EFFECT OF A
CHANGE IN ACCOUNTING
PRINCIPLE (NET OF TAX OF
$16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    n/a
    
    
    
    
    
    
    
    29
    
    
    
    (29
    )
    
    
    (100.0
    )%NET INCOME
    
    $
    20,800
    
    
    $
    18,949
    
    
    $
    1,851
    
    
    
    9.8
    %
    
    $
    57,654
    
    
    $
    29,630
    
    
    $
    28,024
    
    
    
    94.6
    %
 28




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##### Table of Contents



Operating Revenues
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
  Percentage2007
    
    
    2006
    
    
    Increase
    
    
    Increase(In thousands)
    
    Amount
    
    
    Percentage
    
    
    Amount
    
    
    Percentage
    
    
    (Decrease)
    
    
    (Decrease)Network revenues billed
    
    $
    113,134
    
    
    
    103.5
    %
    
    $
    59,148
    
    
    
    93.9
    %
    
    $
    53,986
    
    
    
    91.3
    %Attachment O revenue accrual
(deferral)- net
    
    
    (13,683
    )
    
    
    (12.5
    )%
    
    
    
    
    
    
    0.0
    %
    
    
    (13,683
    )
    
    
    n/aPoint-to-point
    
    
    5,118
    
    
    
    4.7
    %
    
    
    1,325
    
    
    
    2.1
    %
    
    
    3,793
    
    
    
    286.3
    %Scheduling, control and dispatch
    
    
    4,253
    
    
    
    3.9
    %
    
    
    2,220
    
    
    
    3.5
    %
    
    
    2,033
    
    
    
    91.6
    %Other
    
    
    450
    
    
    
    0.4
    %
    
    
    311
    
    
    
    0.5
    %
    
    
    139
    
    
    
    44.7
    %Total
    
    $
    109,272
    
    
    
    100.0
    %
    
    $
    63,004
    
    
    
    100.0
    %
    
    $
    46,268
    
    
    
    73.4
    %
     Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
  Percentage2007
    
    
    2006
    
    
    Increase
    
    
    Increase(In thousands)
    
    Amount
    
    
    Percentage
    
    
    Amount
    
    
    Percentage
    
    
    (Decrease)
    
    
    (Decrease)Network revenues billed
    
    $
    281,857
    
    
    
    89.0
    %
    
    $
    140,731
    
    
    
    93.5
    %
    
    $
    141,126
    
    
    
    100.3
    %Attachment O revenue accrual
(deferral)- net
    
    
    9,858
    
    
    
    3.1
    %
    
    
    
    
    
    
    0.0
    %
    
    
    9,858
    
    
    
    n/aPoint-to-point
    
    
    12,548
    
    
    
    3.9
    %
    
    
    3,437
    
    
    
    2.3
    %
    
    
    9,111
    
    
    
    265.1
    %Scheduling, control and dispatch
    
    
    11,133
    
    
    
    3.5
    %
    
    
    5,203
    
    
    
    3.4
    %
    
    
    5,930
    
    
    
    114.0
    %Other
    
    
    1,454
    
    
    
    0.5
    %
    
    
    1,177
    
    
    
    0.8
    %
    
    
    277
    
    
    
    23.5
    %Total
    
    $
    316,850
    
    
    
    100.0
    %
    
    $
    150,548
    
    
    
    100.0
    %
    
    $
    166,302
    
    
    
    110.5
    %
  29




---



##### Table of Contents



Attachment O revenue accrual illustration
 (In thousands)
 Total RevenueAccrualLine
    
    Item
    
    ITCTransmission
    
    
    METC
    
    
    (Deferral)- net1
    
    Actual net revenue requirement
    
    $
    180,467
    
    
    $
    111,2482
    
    Network revenues billed (a)
    
    
    183,251
    
    
    
    98,6063
    
    Attachment O revenue accrual (deferral) (line 1 - line 2)
    
    $
    (2,784
    )
    
    $
    12,642
    
    
    $
    9,858
 
 (a)
    
    Network revenues billed is calculated based on the monthly network peak load at
ITCTransmission and METC multiplied by the monthly network rate of $2.099 for
ITCTransmission and $1.524 for METC, adjusted for the actual number of days in the
month.   Operating Expenses
 Operation and maintenance expenses
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
  Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
  30




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##### Table of Contents



General and administrative expenses
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
  Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
  Depreciation and amortization expenses
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
  Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
  Taxes other than income taxes
 Three months ended September 30, 2007 compared to three months ended September 30, 2006
  31




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##### Table of Contents



Nine months ended September 30, 2007 compared to nine months ended September 30, 2006
  Other Expenses (Income)
 Three and nine months ended September 30, 2007 compared to three and nine months ended
September 30, 2006
    Income Tax Provision
 Three and nine months ended September 30, 2007 compared to three and nine months ended
September 30, 2006
  LIQUIDITY AND CAPITAL RESOURCES
  
    
    Fund capital expenditures. We made investments in property, plant and equipment of $155.0
million and $55.4 million during the nine months ended September 30, 2007 at ITCTransmission
and METC, respectively. We expect the total level of investment to be approximately $260.0
million in 2007. Our plans with regard to property, plant and equipment investments are
described in detail above under  Overview and  Trends and Seasonality.
 
    
    Fund working capital requirements.
 
    
    Fund our debt service requirements. During the year ended December 31, 2006, we paid $40.0
million of interest. During the nine months ended September 30, 2007, we paid $69.3 million of
interest expense. We expect the level of borrowings for the remainder of 2007 to continue to
be higher than during 2006.
 
    
    Fund distributions to holders of our common stock. During 2006, we paid dividends of $38.3
million. During the nine months ended September 30, 2007, we paid dividends of $35.8 million.
During the third quarter of 2007, we raised our quarterly cash dividend to $0.290 per share
from $0.275 per share. Our board of directors intends to increase the dividend rate from time
to time as necessary for the yield to remain competitive, subject to prevailing business
conditions, applicable restrictions on dividend payments and the availability of capital
resources.
 32




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##### Table of Contents




    
    Fund contributions to our retirement plans. In 2006, we funded $1.8 million to our pension
retirement plan, $3.6 million to our supplemental pension retirement benefit plans and $0.1
million to our postretirement plan. In 2007, we funded $4.0 million to our pension retirement
plan, $1.1 million to our supplemental pension retirement benefit plans and $0.3 million to
our postretirement plan.
 
    
    Fund the pending acquisition of transmission assets of IP&L and any other future
transactions, as well as any capital expenditures for new property, plant and equipment at
acquired entities. See Recent Developments  Pending Acquisition of Transmission Assets for
a description of the planned financing for the acquisition of the IP&L assets.
 
    
    Fund business development expenses, consisting primarily of forecasted expenses of $3.0
million at ITC Grid Development and ITC Great Plains in 2007. During the nine months ended
September 30, 2007, we incurred $1.5 million of business development expenses at ITC Grid
Development and ITC Great Plains.
    Cash Flows From Operating Activities
  Cash Flows From Investing Activities
  33




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##### Table of Contents



Cash Flows From Financing Activities
  CONTRACTUAL OBLIGATIONS
  CRITICAL ACCOUNTING POLICIES
  RECENT ACCOUNTING PRONOUNCEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Fixed Rate Long-Term Debt
  Revolving Credit Agreements
  34




---



##### Table of Contents



Other
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  35




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##### Table of Contents



PART IIOTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  METC Rate Case
  ITCTransmission and METC are subject to various regulatory 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 results of operations, financial
condition and cash flows.
  
 ITEM 5. OTHER INFORMATION
   36




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##### Table of Contents



37




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##### Table of Contents



ITEM 6. EXHIBITS
  Exhibit No.
    
    Description of Document4.17
    
    Note Purchase Agreement, dated as of September 20, 2007,
between ITC Holdings Corp. and the Purchasers named therein,
and related forms of Series A Notes and Series B Notes31.1
    
    Certification of Chief Executive Officer pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200231.2
    
    Certification of Chief Financial Officer pursuant to
Rule 13a-14 of the Securities Exchange Act of 1934, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
200232
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 38




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##### Table of Contents



SIGNATURES
   ITC HOLDINGS CORP.By:
    /s/ Joseph L. WelchJoseph L. WelchPresident and Chief Executive Officer
(duly authorized officer)By:
    /s/ Edward M. RahillEdward M. Rahill Senior Vice PresidentFinance and Chief Financial Officer
(principal financial officer) 39