INFRAREIT, INC., 10-Q filed on 5/2/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 29, 2019
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Trading Symbol HIFR  
Entity Registrant Name InfraREIT, Inc.  
Entity Central Index Key 0001506401  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Common Stock, Shares Outstanding   44,005,370
v3.19.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Mar. 31, 2019
Dec. 31, 2018
Current Assets    
Cash and cash equivalents $ 3,487 $ 1,808
Restricted cash 1,693 1,689
Due from affiliates 33,126 38,174
Inventory 6,862 6,903
Prepaids and other current assets 2,648 1,077
Total current assets 47,816 49,651
Electric Plant, net 1,814,584 1,811,317
Goodwill 138,384 138,384
Other Assets 31,671 31,678
Total Assets 2,032,455 2,031,030
Current Liabilities    
Accounts payable and accrued liabilities 20,881 19,657
Short-term borrowings 106,500 112,500
Current portion of long-term debt 8,919 8,792
Dividends and distributions payable 15,182 15,176
Accrued taxes 1,307 1,052
Total current liabilities 152,789 157,177
Long-Term Debt, Less Deferred Financing Costs 830,185 832,455
Regulatory Liabilities 119,362 115,532
Long-Term Operating Lease Liabilities 345  
Total liabilities 1,102,681 1,105,164
Commitments and Contingencies
Equity    
Common stock, $0.01 par value; 450,000,000 shares authorized; 44,005,370 and 43,974,998 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively 440 440
Additional paid-in capital 708,519 708,283
Accumulated deficit (29,278) (32,022)
Total InfraREIT, Inc. equity 679,681 676,701
Noncontrolling interest 250,093 249,165
Total equity 929,774 925,866
Total Liabilities and Equity $ 2,032,455 $ 2,031,030
v3.19.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Mar. 31, 2019
Dec. 31, 2018
Statement Of Financial Position [Abstract]    
Common stock, par or stated value per share $ 0.01 $ 0.01
Common stock, shares authorized 450,000,000 450,000,000
Common stock, shares issued 44,005,370 43,974,998
Common stock, shares, outstanding 44,005,370 43,974,998
v3.19.1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Income Statement [Abstract]    
Lease revenue $ 48,574 $ 45,656
Operating costs and expenses    
General and administrative expense 7,087 6,088
Depreciation 12,204 11,577
Total operating costs and expenses 19,291 17,665
Income from operations 29,283 27,991
Other (expense) income    
Interest expense, net (10,060) (10,674)
Other income, net 1 733
Total other expense (10,059) (9,941)
Income before income taxes 19,224 18,050
Income tax expense 255 286
Net income 18,969 17,764
Less: Net income attributable to noncontrolling interest 5,224 4,900
Net income attributable to InfraREIT, Inc. $ 13,745 $ 12,864
Net income attributable to InfraREIT, Inc. common stockholders per share:    
Basic $ 0.31 $ 0.29
Diluted 0.31 0.29
Cash dividends declared per common share $ 0.25 $ 0.25
v3.19.1
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Total InfraREIT, Inc. Equity
Noncontrolling Interest
Balance at Dec. 31, 2017 $ 900,858 $ 438 $ 706,357 $ (49,728) $ 657,067 $ 243,791
Balance, shares at Dec. 31, 2017   43,796,915        
Dividends and distributions $ (15,176)     (10,990) (10,990) (4,186)
Redemption of operating partnership units for common stock   $ 2 3,104   3,106 (3,106)
Redemption of operating partnership units for common stock, shares 163,969 163,969        
Net income $ 17,764     12,864 12,864 4,900
Equity based compensation 140         140
Balance at Mar. 31, 2018 903,586 $ 440 709,461 (47,854) 662,047 241,539
Balance, shares at Mar. 31, 2018   43,960,884        
Balance at Dec. 31, 2018 925,866 $ 440 708,283 (32,022) 676,701 249,165
Balance, shares at Dec. 31, 2018   43,974,998        
Dividends and distributions $ (15,181)     (11,001) (11,001) (4,180)
Redemption of operating partnership units for common stock     116   116 (116)
Redemption of operating partnership units for common stock, shares 7,698 7,698        
Common stock issued, shares   22,674        
Net income $ 18,969     13,745 13,745 5,224
Equity based compensation 120   120   120  
Balance at Mar. 31, 2019 $ 929,774 $ 440 $ 708,519 $ (29,278) $ 679,681 $ 250,093
Balance, shares at Mar. 31, 2019   44,005,370        
v3.19.1
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Cash flows from operating activities    
Net income $ 18,969 $ 17,764
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation 12,204 11,577
Amortization of deferred financing costs 361 1,071
Allowance for funds used during construction - other funds   (730)
Equity based compensation 120 140
Changes in assets and liabilities:    
Due from affiliates 5,048 2,567
Inventory 41 (132)
Prepaids and other current assets (1,553) (573)
Accounts payable and accrued liabilities 1,217 3,153
Net cash provided by operating activities 36,407 34,837
Cash flows from investing activities    
Additions to electric plant (11,396) (15,011)
Proceeds from asset exchange transaction   1,632
Net cash used in investing activities (11,396) (13,379)
Cash flows from financing activities    
Proceeds from short-term borrowings 22,000 12,000
Repayments of short-term borrowings (28,000) (17,500)
Repayments of long-term debt (2,152) (2,032)
Dividends and distributions paid (15,176) (15,169)
Net cash used in financing activities (23,328) (22,701)
Net increase (decrease) in cash, cash equivalents and restricted cash 1,683 (1,243)
Cash, cash equivalents and restricted cash at beginning of period 3,497 4,550
Cash, cash equivalents and restricted cash at end of period $ 5,180 $ 3,307
v3.19.1
Description of Business and Presentation of Financial Statements
3 Months Ended
Mar. 31, 2019
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Description of Business and Presentation of Financial Statements

1.

Description of Business and Presentation of Financial Statements

Basis of Presentation

InfraREIT, Inc. is a Maryland corporation, which may be referred to in these financial statements as the “Company,” “InfraREIT,” “we,” “us” and “our.” These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (SEC) on February 27, 2019 (2018 Form 10-K).

We hold 72.5% of the outstanding partnership units (OP Units) in InfraREIT Partners, LP (Operating Partnership or InfraREIT LP) as of March 31, 2019 and are its general partner. We include the accounts of the Operating Partnership and its subsidiaries in our consolidated financial statements. Affiliates and current or former employees of Hunt Consolidated, Inc. (Hunt) and members of our board of directors hold the other 27.5% of the outstanding OP Units as of March 31, 2019.

Use of Estimates

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 amended the existing accounting standard for lease accounting, including requiring lessees to recognize all leases on their balance sheets with terms of more than 12 months and making targeted changes to lessor accounting. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 permits an entity to elect not to evaluate land easements under ASU 2016-02 that exist or expired before the entity’s adoption of ASU 2016-02 and that were not previously considered leases. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, which permits an entity to elect not to evaluate whether certain sales taxes and other similar taxes are lessor or lessee costs, giving the entity the ability to exclude costs paid on behalf of the lessor by the lessee directly to third parties from the lessor’s income statement. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional transition method. This transition method allows an entity to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted the new guidance using this transition method and the other guidance discussed herein as of January 1, 2019. The adoption of the new guidance resulted in the recognition of $0.4 million in right-of-use assets and operating lease liabilities related to land leases in which we are the lessee and additional disclosures related to all of our leases. See Note 16, Leases for additional information.

Recent Accounting Guidance Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the guidance and delay adoption of the additional disclosures until their effective date. The Company is currently assessing the timing and impact of adopting the new guidance but does not expect it to have a material impact on the Company’s financial position or results of operations.

v3.19.1
Pending Corporate Transactions
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Pending Corporate Transactions

2.

Pending Corporate Transactions

Sale and Asset Exchange

On October 18, 2018, InfraREIT and InfraREIT LP entered into a definitive agreement to be acquired by Oncor Electric Delivery Company LLC (Oncor) for $21.00 per share or OP Unit, as applicable, in cash, valued at approximately $1.275 billion, plus the assumption of InfraREIT’s net debt of approximately $940 million as of March 31, 2019. As a condition to Oncor’s acquisition of InfraREIT, Sharyland Distribution & Transmission, L.L.C. (SDTS) and Oncor also signed a definitive agreement with Sharyland Utilities, L.P. (Sharyland) to exchange, immediately prior to Oncor’s acquisition, SDTS’s South Texas assets for Sharyland’s Golden Spread Electric Cooperative interconnection located in the Texas Panhandle, along with certain development projects in the Texas Panhandle and South Plains regions, including the Lubbock Power & Light interconnection. The difference between the net book value of the exchanged assets will be paid in cash at closing. SDTS and Sharyland have agreed to terminate their existing leases in connection with the asset exchange.

The asset exchange with Sharyland and merger with Oncor are mutually dependent on one another, and neither will become effective without the closing of the other.

Arrangements with Hunt

Under the management agreement with Hunt Utility Services, LLC (Hunt Manager), which will be terminated upon the closing of the sale and asset exchange transaction described above, Hunt Manager is entitled to the payment of a termination fee upon the termination or non-renewal of the management agreement. The termination of the management agreement automatically triggers the termination of the development agreement between InfraREIT and Hunt. InfraREIT has agreed to pay Hunt approximately $40.5 million at the closing of the transactions to terminate the management agreement, development agreement, leases with Sharyland, and all other existing agreements between InfraREIT or its subsidiaries and Hunt, Sharyland or their affiliates. This amount is consistent with the termination fee, as calculated at the time the Company entered into the omnibus termination agreement, contractually required under the management agreement.

Closing Conditions and Status

The closing of the transactions is dependent upon and subject to several closing conditions, including:

 

Public Utility Commission of Texas (PUCT) approval of the transactions, including:

 

o

exchange of assets with Sharyland;

 

o

acquisition of InfraREIT by Oncor; and

 

o

Sempra Energy’s 50% ownership of Sharyland Holdings LP;

 

other necessary regulatory approvals, including approval by the Federal Energy Regulatory Commission (FERC), the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (HSR Act) and clearance by the Committee on Foreign Investment in the United States (CFIUS);

 

stockholder approval;

 

certain lender consents; and

 

other customary closing conditions.

Early termination of the 30-day waiting period required by the HSR Act was received in December 2018. In December 2018, the Operating Partnership’s wholly-owned subsidiary, Transmission and Distribution Company, L.L.C. (TDC) and SDTS entered into amendments that, effective as of the closing, will satisfy the closing condition with respect to the lender consents. Additionally, a special meeting of InfraREIT’s stockholders was held on February 7, 2019, at which time the stockholders voted to approve the transaction. Furthermore, in March 2019, CFIUS clearance was received for the transactions and FERC issued an order approving the transactions.

SDTS, Sharyland, Oncor and Sempra Energy filed a Sale-Transfer-Merger (STM) application with the PUCT on November 30, 2018. In April 2019, the parties to the STM proceeding filed a Stipulation (Settlement) with the PUCT, which is subject to review and approval by the PUCT. A hearing on the merits was held on April 10, 2019. The 180-day deadline for the STM is May 29, 2019, although the PUCT is permitted to extend that deadline for an additional 60 days if necessary.

During the three months ended March 31, 2019, we incurred expenses of $1.7 million for the sale of InfraREIT and related transactions which are included in general and administrative expense on our Consolidated Statements of Operations. We did not have these expenses during the three months ended March 31, 2018 as the definitive agreements with respect to the transactions were not executed until October 2018.

We continue to expect the transactions to close by mid-2019, subject to obtaining the PUCT approval and satisfaction of other customary closing conditions. See Note 20, Subsequent Events for additional information.

v3.19.1
Cash, Cash Equivalents and Restricted Cash
3 Months Ended
Mar. 31, 2019
Cash And Cash Equivalents [Abstract]  
Cash, Cash Equivalents and Restricted Cash

3.

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash within the Consolidated Balance Sheets that sum to the total of the same such amounts shown on the Consolidated Statements of Cash Flows:

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

3,487

 

 

$

1,624

 

Restricted cash

 

 

1,693

 

 

 

1,683

 

Total cash, cash equivalents and restricted cash shown on the Statement of Cash Flows

 

$

5,180

 

 

$

3,307

 

 

Amounts included in restricted cash represent the principal and interest payable for two consecutive periods associated with the $25.0 million senior secured notes of TDC, as described in Note 9, Long-Term Debt.

v3.19.1
Related Party Transactions
3 Months Ended
Mar. 31, 2019
Related Party Transactions [Abstract]  
Related Party Transactions

4.

Related Party Transactions

We lease, through SDTS, all our regulated assets to Sharyland through several lease agreements. Under the leases, we have agreed to fund capital expenditures for footprint projects. Our leases define “footprint projects” to be transmission or, if applicable, distribution projects that (1) are primarily situated within our current or previous distribution service territory, as applicable, (2) physically hang from our existing transmission assets, such as the addition of another circuit to our existing transmission lines, or that are physically located within one of our substations or (3) connect or are otherwise added to transmission lines or other properties that comprise a part of the transmission assets acquired from Oncor in 2017 when SDTS exchanged all of its retail distribution assets for a group of Oncor’s transmission assets located near Wichita Falls, Abilene and Brownwood, Texas (2017 Asset Exchange Transaction). Footprint Projects do not include the addition of a new substation on our existing transmission lines or generation interconnections to our existing transmission lines, unless the addition or interconnection occurred within our current or prior distribution service territories.

We earned lease revenue from Sharyland under these agreements of $48.6 million and $45.7 million during the three months ended March 31, 2019 and 2018, respectively. In connection with our leases with Sharyland, we had a deferred rent liability of $9.8 million and $11.1 million as of March 31, 2019 and December 31, 2018, respectively, which is included in accounts payable and accrued liabilities on the Consolidated Balance Sheets.

In addition to rent payments that Sharyland makes to us, we and Sharyland also make payments to each other under the leases that primarily consist of payments to reimburse Sharyland for the costs of gross plant and equipment added to our regulated assets. For the three months ended March 31, 2019 and 2018, the net amount of payments we made to Sharyland was $9.9 million and $15.0 million, respectively.

As of March 31, 2019 and December 31, 2018, accounts payable and accrued liabilities on the Consolidated Balance Sheets included $3.2 million and $2.9 million, respectively, related to amounts owed to Sharyland for construction costs incurred and property taxes paid on our behalf. As of March 31, 2019 and December 31, 2018, amounts due from affiliates on the Consolidated Balance Sheets included $33.1 million and $38.2 million, respectively, related to amounts owed by Sharyland primarily associated with our leases.

The management fee paid to Hunt Manager for the three months ended March 31, 2019 and 2018 was $3.4 million and $3.5 million, respectively. There were no prepaid or accrued amounts associated with the management fees on the Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. Additionally, during the three months ended March 31, 2019 and 2018, we paid Hunt Manager less than $0.1 million for reimbursement of annual software license and maintenance fees and other expenses in accordance with our management agreement.

The management agreement with Hunt Manager provides for an annual base fee, or management fee. The base fee for each 12-month period beginning each April 1 will equal 1.50% of our total equity as of December 31 of the immediately preceding year, subject to a $30.0 million cap. We must notify Hunt Manager no later than September 30, 2019 if we intend not to renew the management agreement at the end of its current term, which expires December 31, 2019. Otherwise, the management agreement will automatically renew for successive five-year terms unless a majority of our independent directors decides to terminate the agreement.

The base fees through December 31, 2019 are as follows:

 

(In millions)

 

Base Fee

 

April 1, 2017 - March 31, 2018

 

$

14.2

 

April 1, 2018 - March 31, 2019

 

 

13.5

 

April 1, 2019 - December 31, 2019

 

 

10.4

 

 

If the management agreement is renewed under its current terms, we would owe $3.5 million for the first quarter of 2020, and the management fee owed for the subsequent 12-month period would be calculated as described above. If, instead, the management agreement is terminated, we would owe Hunt Manager a termination fee equal to three times the sum of the management fee paid during the four quarters prior to when the termination notice was given with payment due December 31, 2019. Assuming a termination notice of September 30, 2019, the termination fee would be approximately $41.1 million. For information related to the pending sale of InfraREIT and asset exchange with Sharyland, including the proposed termination of the leases and management agreement, see Note 2, Pending Corporate Transactions.

In July 2017, SDTS and Sharyland entered into a letter agreement (Side Letter) in which they agreed to certain terms and conditions to address the actual or potential conflicts of interest arising between SDTS and Sharyland in connection with the 2017 Asset Exchange Transaction. Specifically, the Side Letter includes, among other things, certain representations and warranties from Sharyland that correspond to representations and warranties of SDTS under the 2017 Asset Exchange Agreement relating to certain matters for which SDTS relies, in whole or in part, upon Sharyland under the leases and as operator of the assets and an allocation of expenses incurred in connection with the transactions.

As a condition to Oncor’s acquisition of InfraREIT, in October 2018 SDTS entered into a definitive agreement to exchange certain assets with Sharyland. See Note 2, Pending Corporate Transactions for additional information. The difference between the net book value of the exchanged assets will be paid in cash at closing.

In connection with the sale of InfraREIT and related transactions, in October 2018 we entered into an omnibus termination agreement pursuant to which the management agreement, development agreement, leases and all other existing agreements between us and Hunt, Sharyland or their affiliates will be terminated upon the closing. Under the omnibus termination agreement, we have agreed to pay Hunt approximately $40.5 million upon the closing of the sale. This amount is consistent with the termination fee, as calculated at the time we entered into the omnibus termination agreement, contractually required under the management agreement. For additional information, see Note 2, Pending Corporate Transactions.

v3.19.1
Electric Plant and Depreciation
3 Months Ended
Mar. 31, 2019
Public Utilities Property Plant And Equipment [Abstract]  
Electric Plant and Depreciation

5.

Electric Plant and Depreciation

The major classes of electric plant are as follows:

 

 

 

 

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Electric plant:

 

 

 

 

 

 

 

 

Transmission plant

 

$

1,794,442

 

 

$

1,794,438

 

Distribution plant

 

 

151,698

 

 

 

151,698

 

General plant

 

 

3,210

 

 

 

3,023

 

Total plant in service

 

 

1,949,350

 

 

 

1,949,159

 

Construction work in progress

 

 

77,568

 

 

 

66,121

 

Total electric plant

 

 

2,026,918

 

 

 

2,015,280

 

Accumulated depreciation

 

 

(212,334

)

 

 

(203,963

)

Electric plant, net

 

$

1,814,584

 

 

$

1,811,317

 

 

General plant consists primarily of a warehouse, buildings and associated assets. Construction work in progress (CWIP) reflects the regulated asset projects in various stages of construction prior to being placed in service. The capitalized amounts of CWIP consist primarily of route development expenditures, labor and materials expenditures, right of way acquisitions, engineering services and legal fees. Electric plant, net includes plant acquisition adjustments of $28.2 million and $28.5 million as of March 31, 2019 and December 31, 2018, respectively.

 

v3.19.1
Goodwill
3 Months Ended
Mar. 31, 2019
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill

6.

Goodwill

Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less liabilities assumed. We conduct an impairment test of goodwill at least annually. As of March 31, 2019 and December 31, 2018, $138.4 million was recorded as goodwill on the Consolidated Balance Sheets.

v3.19.1
Other Assets
3 Months Ended
Mar. 31, 2019
Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]  
Other Assets

7.

Other Assets

Other assets are as follows:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

(In thousands)

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Deferred financing costs on undrawn revolver

 

$

1,025

 

 

$

(811

)

 

$

214

 

 

$

1,025

 

 

$

(779

)

 

$

246

 

Other regulatory assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

10,610

 

 

 

(5,810

)

 

 

4,800

 

 

 

10,610

 

 

 

(5,490

)

 

 

5,120

 

Deferred costs recoverable in future years

 

 

23,793

 

 

 

 

 

 

23,793

 

 

 

23,793

 

 

 

 

 

 

23,793

 

Other regulatory assets

 

 

34,403

 

 

 

(5,810

)

 

 

28,593

 

 

 

34,403

 

 

 

(5,490

)

 

 

28,913

 

Operating lease right-of-use asset

 

 

345

 

 

 

 

 

 

345

 

 

 

 

 

 

 

 

 

 

Investments

 

 

2,519

 

 

 

 

 

 

2,519

 

 

 

2,519

 

 

 

 

 

 

2,519

 

Other assets

 

$

38,292

 

 

$

(6,621

)

 

$

31,671

 

 

$

37,947

 

 

$

(6,269

)

 

$

31,678

 

 

Deferred financing costs on undrawn revolver consist of costs incurred in connection with the establishment of the InfraREIT LP revolving credit facility. See Note 8, Borrowings Under Credit Facilities.

Other regulatory assets consist of deferred financing costs within our regulated subsidiary, SDTS. The deferred financing costs primarily consist of debt issuance costs incurred in connection with the construction of SDTS’s regulated assets or the refinancing of related debt. These assets are classified as regulatory assets and amortized over the length of the related loan. These costs are recovered through rates established in rate cases.

Deferred costs recoverable in future years of $23.8 million at March 31, 2019 and December 31, 2018 represent operating costs incurred from the inception of Sharyland through 2007. We have determined that these costs are probable of recovery through future rates based on orders of the PUCT in Sharyland’s prior rate cases and regulatory precedent.

Operating lease right-of-use asset represents the asset associated with two land leases in which we are the lessee. For additional information see Note 16, Leases.

In connection with the acquisition of Cap Rock Holding Corporation, we received a participation in the National Rural Utilities Cooperative Finance Corporation. We account for this investment under the cost method of accounting. We believe that the investment is not impaired as of March 31, 2019 and December 31, 2018.

 

v3.19.1
Borrowings Under Credit Facilities
3 Months Ended
Mar. 31, 2019
Debt Disclosure [Abstract]  
Borrowings Under Credit Facilities

8.

Borrowings Under Credit Facilities

InfraREIT LP Revolving Credit Facility

In 2014, InfraREIT LP entered into a $75.0 million revolving credit facility, led by Bank of America, N.A., as administrative agent, with up to $15.0 million available for issuance of letters of credit and a maturity date of December 10, 2019. In December 2018, InfraREIT LP entered into an amendment to its revolving credit facility that extended the maturity date with respect to $67.0 million of the available revolving credit facility to December 10, 2020. The remaining $8.0 million of the available revolving credit facility will continue to mature on December 10, 2019.

The revolving credit facility is secured by certain assets of InfraREIT LP, including accounts and other personal property, and is guaranteed by us and TDC, with the TDC guarantee secured by the assets of, and InfraREIT LP’s equity interests in, TDC on materially the same basis as TDC’s senior secured notes described below in Note 9, Long-Term Debt.

Borrowings and other extensions of credit under the revolving credit facility bear interest, at InfraREIT LP’s election, at a rate equal to (1) the one, two, three or six month London Interbank Offered Rate (LIBOR) plus 2.5%, or (2) a base rate (equal to the highest of (a) the Federal Funds Rate plus ½ of 1%, (b) the administrative agent’s prime rate and (c) LIBOR plus 1%) plus 1.5%. Letters of credit are subject to a letter of credit fee equal to the daily amount available to be drawn times 2.5%. InfraREIT LP is also required to pay a commitment fee and other customary fees under the revolving credit facility. InfraREIT LP may prepay amounts outstanding under the revolving credit facility in whole or in part without premium or penalty.

As of March 31, 2019 and December 31, 2018, there were no borrowings or letters of credit outstanding, and there was $75.0 million of borrowing capacity available under the revolving credit facility. As of March 31, 2019 and December 31, 2018, InfraREIT LP was in compliance with all debt covenants under the credit agreement.

SDTS Revolving Credit Facility

In 2014, SDTS entered into a third amended and restated credit agreement led by Royal Bank of Canada, as administrative agent. In December 2018, SDTS entered into an amendment to its revolving credit agreement that extended the maturity date from December 10, 2019 to December 10, 2020.

The credit agreement contains a revolving credit facility with a borrowing capacity up to $250.0 million with up to $25.0 million of the revolving credit facility available for issuance of letters of credit and up to $5.0 million of the revolving credit facility available for swingline loans. The revolving credit facility is secured by certain of SDTS’s regulated assets, the leases, certain accounts and TDC’s equity interests in SDTS on the same basis as SDTS’s various senior secured note obligations described below in Note 9, Long-Term Debt.

The interest rate for the revolving credit facility is based, at SDTS’s option, at a rate equal to either (1) a base rate, determined as the greatest of (a) the administrative agent’s prime rate, (b) the federal funds effective rate plus ½ of 1% and (c) LIBOR plus 1.00% per annum, plus a margin of either 0.75% or 1.00% per annum, depending on the total debt to capitalization ratio of SDTS on a consolidated basis or (2) LIBOR plus a margin of either 1.75% or 2.00% per annum, depending on the total debt to capitalization ratio of SDTS on a consolidated basis. SDTS is also required to pay a commitment fee and other customary fees under its revolving credit facility. SDTS is entitled to prepay amounts outstanding under the revolving credit facility with no prepayment penalty.

As of March 31, 2019, SDTS had $106.5 million of borrowings outstanding at a weighted average interest rate of 4.49%, no letters of credit outstanding and $143.5 million of borrowing capacity available under this revolving credit facility. As of December 31, 2018, SDTS had $112.5 million of borrowings outstanding at a weighted average interest rate of 4.59% with no letters of credit outstanding and $137.5 million of borrowing capacity available under this revolving credit facility. As of March 31, 2019 and December 31, 2018, SDTS was in compliance with all debt covenants under the credit agreement.

The credit agreements require InfraREIT LP and SDTS to comply with customary covenants for facilities of this type, including: debt to capitalization ratios; debt service coverage ratios; limitations on additional debt, liens, investments, mergers, acquisitions, dispositions or entry into any line of business other than the business of the transmission and distribution of electric power and the provision of ancillary services; and certain restrictions on the payment of dividends. The debt to capitalization ratio on the SDTS credit facility is calculated on a combined basis with Sharyland. The credit agreements also contain restrictions on the amount of Sharyland’s indebtedness and other restrictions on, and covenants applicable to, Sharyland.

The revolving credit facilities of InfraREIT LP and SDTS are subject to customary events of default. If an event of default occurs under either facility and is continuing, the lenders may accelerate amounts due under such revolving credit facility.

v3.19.1
Long-Term Debt
3 Months Ended
Mar. 31, 2019
Debt Instruments [Abstract]  
Long-Term Debt

9.

Long-Term Debt

Long-term debt consisted of the following:

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

(Dollar amounts in thousands)

 

Maturity Date

 

Amount

Outstanding

 

 

Interest

Rate

 

 

Amount

Outstanding

 

 

Interest

Rate

 

TDC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - $25.0 million

 

December 30, 2020

 

$

14,687

 

 

8.50%

 

 

$

15,000

 

 

8.50%

 

SDTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured term loan - $200.0 million

 

June 5, 2020

 

 

200,000

 

 

3.74%

 

 

 

200,000

 

 

3.73%

 

Senior secured notes - $400.0 million

 

December 3, 2025

 

 

400,000

 

 

3.86%

 

 

 

400,000

 

 

3.86%

 

Senior secured notes - $100.0 million

 

January 14, 2026

 

 

100,000

 

 

3.86%

 

 

 

100,000

 

 

3.86%

 

Senior secured notes - $53.5 million

 

December 30, 2029

 

 

37,762

 

 

7.25%

 

 

 

38,338

 

 

7.25%

 

Senior secured notes - $110.0 million

 

September 30, 2030

 

 

86,712

 

 

6.47%

 

 

 

87,973

 

 

6.47%

 

Total SDTS debt

 

 

 

 

824,474

 

 

 

 

 

 

 

826,311

 

 

 

 

 

Total long-term debt

 

 

 

 

839,161

 

 

 

 

 

 

 

841,311

 

 

 

 

 

Less unamortized deferred financing costs

 

 

 

 

(57

)

 

 

 

 

 

 

(64

)

 

 

 

 

Total long-term debt, less deferred

    financing costs

 

 

 

 

839,104

 

 

 

 

 

 

 

841,247

 

 

 

 

 

Less current portion of long-term debt

 

 

 

 

(8,919

)

 

 

 

 

 

 

(8,792

)

 

 

 

 

Debt classified as long-term debt, less

    deferred financing costs

 

 

 

$

830,185

 

 

 

 

 

 

$

832,455

 

 

 

 

 

 

In 2010, TDC issued $25.0 million aggregate principal amount of 8.50% per annum senior secured notes to The Prudential Insurance Company of America and affiliates (TDC Notes). Principal and interest on the TDC Notes are payable quarterly, and the TDC Notes are secured by the assets of, and InfraREIT LP’s equity interest in, TDC on materially the same basis as with lenders under InfraREIT LP’s revolving credit facility described above in Note 8, Borrowings Under Credit Facilities. In connection with the issuance of the TDC Notes, TDC incurred deferred financing costs, which are shown as a reduction of the senior secured notes balance. The amount of unamortized deferred financing costs associated with the TDC Notes was $0.1 million as of March 31, 2019 and December 31, 2018.

In 2017, SDTS entered into a $200.0 million senior secured term loan credit facility (2017 Term Loan) with Canadian Imperial Bank of Commerce, New York Branch (CIBC) and Mizuho Bank, Ltd., as lenders, and CIBC as administrative agent. The interest rate for the 2017 Term Loan is based, at SDTS’s option, at a rate equal to either (1) a base rate, determined as the greatest of (a) the administrative agent’s prime rate, (b) the federal funds effective rate plus 0.5% and (c) LIBOR plus 1.00% per annum, plus a margin of 0.25% per annum or (2) LIBOR plus a margin of 1.25% per annum. The LIBOR interest period may be one, two, three or six months, but interest is payable no less frequently than quarterly.

In 2015, SDTS issued $400.0 million series A senior secured notes (Series A Notes), and in 2016 issued an additional $100.0 million series B senior secured notes (Series B Notes). These senior secured notes are due at maturity and bear interest at a rate of 3.86% per annum, payable semi-annually. The outstanding accrued interest payable on the Series A Notes is due each June and December while the accrued interest payable on the Series B Notes is due each January and July.

In 2009, SDTS issued $53.5 million aggregate principal amount of 7.25% per annum senior secured notes to The Prudential Insurance Company of America and affiliates (2009 Notes). Principal and interest on the 2009 Notes are payable quarterly.

In 2010, SDTS issued $110.0 million aggregate principal amount of 6.47% per annum senior secured notes to The Prudential Insurance Company of America (2010 Notes). Principal and interest on the 2010 Notes are payable quarterly.

SDTS and TDC are entitled to prepay amounts outstanding under their senior secured notes, subject to a prepayment penalty equal to the excess of the discounted value of the remaining scheduled payments with respect to such notes over the amount of the prepaid notes. SDTS is entitled to prepay amounts outstanding under the 2017 Term Loan with no prepayment penalty. The 2017 Term Loan is also subject to required prepayments upon the occurrence of certain events.

The agreements governing the senior secured notes and 2017 Term Loan contain customary covenants, such as debt to capitalization ratios, debt service coverage ratios, limitations on liens, dispositions, mergers, entry into other lines of business, investments and the incurrence of additional indebtedness. The debt to capitalization ratios are calculated on a combined basis with Sharyland. SDTS’s Series A Notes and Series B Notes are not required to maintain a debt service coverage ratio. As of March 31, 2019 and December 31, 2018, SDTS and TDC were in compliance with all debt covenants under the applicable agreements. See Note 2, Pending Corporate Transactions for information related to the pending sale of InfraREIT and asset exchange with Sharyland.

SDTS’s Series A Notes, Series B Notes, 2009 Notes, 2010 Notes and 2017 Term Loan are secured by certain of SDTS’s regulated assets, the leases, certain accounts and TDC’s equity interests in SDTS on the same basis as SDTS’s revolving credit facility described above in Note 8, Borrowings Under Credit Facilities.

The senior secured notes of TDC and SDTS and 2017 Term Loan are subject to customary events of default. If an event of default occurs with respect to the notes and is continuing, the lenders may accelerate the applicable amounts due.

 

v3.19.1
Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

10.

Fair Value of Financial Instruments

The carrying amounts of our cash and cash equivalents, restricted cash, due from affiliates and accounts payable approximate fair value due to the short-term nature of these assets and liabilities.

We had fixed interest rate borrowings totaling $639.2 million and $641.3 million under our senior secured notes with a weighted average interest rate of 4.5% per annum as of March 31, 2019 and December 31, 2018. The fair value of these borrowings was estimated using discounted cash flow analysis based on current market rates.

As of March 31, 2019 and December 31, 2018, we had $200.0 million of borrowings under our 2017 Term Loan that accrues interest under a floating interest rate structure, which is typically repriced every month or three months. Accordingly, the carrying value of such indebtedness approximated its fair value for the amounts outstanding.

Financial instruments, measured at fair value, by level within the fair value hierarchy were as follows:

 

 

 

Carrying

 

 

Fair Value

 

(In thousands)

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

839,161

 

 

$

 

 

$

882,033

 

 

$

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

841,311

 

 

$

 

 

$

864,281

 

 

$

 

v3.19.1
Regulatory Matters
3 Months Ended
Mar. 31, 2019
Public Utilities Rate Matters [Abstract]  
Regulatory Matters

11.

Regulatory Matters

Regulatory Liability

Regulatory liabilities are as follows:

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Cost of removal

 

$

63,583

 

 

$

59,753

 

Excess accumulated deferred federal income tax

 

 

55,779

 

 

 

55,779

 

Regulatory liabilities

 

$

119,362

 

 

$

115,532

 

 

Our regulatory liability related to cost of removal is established through depreciation rates and represents amounts that we expect to incur in the future. The regulatory liability is recorded as a long-term liability net of actual removal costs incurred.

As an owner of regulated utility assets, we established an accumulated deferred federal income tax (ADFIT) balance for regulatory purposes primarily associated with the difference between U.S. GAAP and federal income tax depreciation on our assets. Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, this ADFIT was calculated based on a 35% corporate federal income tax rate but was not recorded on our consolidated balance sheets or income statements due to the expectation that we would not pay corporate federal income taxes as a result of our real estate investment trust (REIT) structure. With the passage of the TCJA, the corporate federal income tax rate was reduced to 21% effective for tax years beginning on or after January 1, 2018. Regulatory accounting rules require utilities to revalue their ADFIT balances based on a change in corporate federal income tax rates, to remove the difference from ADFIT and to create a regulatory liability for the reduction in ADFIT. Therefore, we reduced the ADFIT by $55.8 million and created a regulatory liability for regulatory purposes. Additionally, in accordance with Accounting Standards Codification Topic 980, Regulated Operations, Section 405, Liabilities, we recorded the $55.8 million regulatory liability on our Consolidated Balance Sheet as of December 31, 2017 with a corresponding reduction to our revenue as deferred tax liabilities had not previously been recorded on our Consolidated Balance Sheets. The regulatory liability will be amortized as an increase to revenue over a future period to be determined in a future rate proceeding. The amount and expected amortization of the regulatory liability could be adjusted in the future due to new laws, regulations or regulatory actions.

Rate Setting

We have separated, between Sharyland and SDTS, the functionality that is typically combined under one commonly owned group in an integrated utility. SDTS is generally responsible for financing and funding asset additions, while Sharyland is responsible for construction management, operation and maintenance of our regulated assets. Accordingly, the PUCT’s order approving our restructuring into a REIT structure required Sharyland and SDTS to be regulated on a combined basis, and Sharyland, as the holder of the certificate of convenience and necessity (CCN) required to operate our regulated assets, historically has made all regulatory filings related to our assets with the PUCT. As part of the rate case in Docket No. 45414 related to SDTS’s assets (2016 Rate Case), the PUCT raised certain questions indicating that this regulatory construct might change in the future, including the potential regulation of the leases between Sharyland and SDTS as tariffs. In November 2017, the 2016 Rate Case was dismissed upon the completion of the 2017 Asset Exchange Transaction (Rate Case Dismissal), but the dismissal preserved the right of the parties to the 2016 Rate Case to address in a future proceeding all issues not mooted by the Rate Case Dismissal. Additionally, as part of the PUCT order approving the 2017 Asset Exchange Transaction, SDTS was granted a separate CCN to continue to own and lease its assets to Sharyland.

The regulatory parameters in Sharyland’s rates and applicable to our regulated assets provide for a capital structure consisting of 55% debt and 45% equity, a cost of debt of 6.73%, a return on equity of 9.70% and a return on invested capital of 8.06% in calculating rates. Additionally, Sharyland’s rates also reflect the recovery of an income tax allowance, with respect to our transmission assets, at the 21% corporate federal income tax rate and, with respect to our wholesale distribution assets, at the prior 35% corporate federal income tax rate. Under existing PUCT orders, SDTS and Sharyland are required to file a new rate case by July 1, 2020 using the test year ending December 31, 2019. If the sale of InfraREIT is not completed and we are required to move forward with the 2020 rate case, the outcome of that rate case will result in an adjustment to many of the current parameters applicable to our regulated assets.

v3.19.1
Commitments and Contingencies
3 Months Ended
Mar. 31, 2019
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

12.

Commitments and Contingencies

From time to time, we are a party to various legal proceedings arising in the ordinary course of business. Although we cannot predict the outcome of any such legal proceedings, we do not believe the resolution of these proceedings, individually or in the aggregate, will have a material impact on our business, financial condition or results of operations, liquidity or cash flows.

 

v3.19.1
Equity
3 Months Ended
Mar. 31, 2019
Equity [Abstract]  
Equity

13.

Equity

We and the Operating Partnership declared cash dividends on common stock and distributions on OP Units of $0.25 per share or unit, as applicable, during each of the three months ended March 31, 2019 and 2018. We paid a total of $15.2 million in dividends and distributions during each of the three months ended March 31, 2019 and 2018.

v3.19.1
Noncontrolling Interest
3 Months Ended
Mar. 31, 2019
Noncontrolling Interest [Abstract]  
Noncontrolling Interest

14.

Noncontrolling Interest

We present as a noncontrolling interest the portion of any equity in entities that we control and consolidate but do not own. Generally, OP Units of the Operating Partnership participate in net income allocations and distributions and entitle their holder to the right, subject to the terms set forth in the partnership agreement, to require the Operating Partnership to redeem all or a portion of the OP Units held by such limited partner. At our option, we may satisfy this redemption requirement with cash or by exchanging shares of our common stock on a one-for-one basis. As of March 31, 2019 and December 31, 2018, there were a total of 16.7 million OP Units held by the limited partners of the Operating Partnership.

During the three months ended March 31, 2018, an aggregate of 28,952 long-term incentive units (LTIP Units) were issued by the Operating Partnership to members of our board of directors. There were no LTIP Units issued during the three months ended March 31, 2019. For additional information, refer to Note 17, Share-Based Compensation.

We follow the guidance issued by the FASB regarding the classification and measurement of redeemable securities. Accordingly, we have determined that the OP Units meet the requirements to be classified as permanent equity. During the three months ended March 31, 2019, we redeemed 7,698 OP Units with the issuance of 7,698 shares of common stock. We redeemed 163,969 OP Units with the issuance of 163,969 shares of common stock during the three months ended March 31, 2018.

v3.19.1
Earnings Per Share
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Earnings Per Share

15.

Earnings Per Share

Basic earnings per share is calculated by dividing net earnings after noncontrolling interest by the weighted average shares outstanding. Diluted earnings per share is calculated similarly, except that it includes the dilutive effect of the assumed redemption of OP Units for shares of our common stock, if such redemption were dilutive. The redemption of OP Units would have been anti-dilutive during the three months ended March 31, 2019 and 2018.

Earnings per share are calculated as follows:

 

 

 

Three Months Ended March 31,

 

(In thousands, except per share data)

 

2019

 

 

2018

 

Basic net income per share:

 

 

 

 

 

 

 

 

Net income attributable to InfraREIT, Inc.

 

$

13,745

 

 

$

12,864

 

Weighted average common shares outstanding

 

 

43,998

 

 

 

43,832

 

Basic net income per share

 

$

0.31

 

 

$

0.29

 

Diluted net income per share:

 

 

 

 

 

 

 

 

Net income attributable to InfraREIT, Inc.

 

$

13,745

 

 

$

12,864

 

Weighted average common shares outstanding

 

 

43,998

 

 

 

43,832

 

Redemption of Operating Partnership units

 

 

 

 

 

 

Weighted average dilutive shares outstanding

 

 

43,998

 

 

 

43,832

 

Diluted net income per share

 

$

0.31

 

 

$

0.29

 

Due to the anti-dilutive effect, the computation of diluted earnings per share

    does not reflect the following adjustments:

 

 

 

 

 

 

 

 

Net income attributable to noncontrolling interest

 

$

5,224

 

 

$

4,900

 

Redemption of Operating Partnership units

 

 

16,729

 

 

 

16,872

 

 

v3.19.1
Leases
3 Months Ended
Mar. 31, 2019
Leases [Abstract]  
Leases

16.

Leases

Leases with SDTS as Lessor

As part of the adoption of Topic 842, we elected to not reassess the lease classification for any expired or existing leases; therefore, all of the leases for our regulated assets will continue to be classified as operating leases. Additionally, we have elected to exclude lessor costs paid directly by Sharyland to third parties on our behalf from consideration in the contracts and from variable payments.

The following table shows the composition of our lease revenue:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2019

 

 

2018

 

Base rent (straight-line)

 

$

48,574

 

 

$

45,656

 

Percentage rent

 

 

 

 

 

 

Total lease revenue

 

$

48,574

 

 

$

45,656

 

 

SDTS has entered into various leases with Sharyland for all our placed in service regulated assets. The master lease agreements, as amended, expire at various dates from December 31, 2019 through December 31, 2022. Our leases primarily consist of base rent, but certain lease supplements contain percentage rent as well. All of the rent with respect to the capital expenditures to be placed in service in 2019 consist only of base rent.

Percentage rent under our leases is based on a percentage of Sharyland’s annual gross revenue, as defined in the applicable lease, in excess of an annual breakpoint specified in each lease, which are at least equal to the base rent under each lease. The rate used for percentage rent for the reported time periods varies by lease and ranges from 26% to 30%. Because an annual specified breakpoint must be met under our leases before we can recognize any percentage rent, we anticipate that revenue will grow over the year with little to no percentage rent recognized in the first and second quarters of each year, with the largest amounts recognized during the third and fourth quarters of each year.

Future minimum rent revenue expected in accordance with these lease agreements is as follows for the years ending December 31:

 

(In thousands)

 

Total

 

2019

 

$

194,068

 

2020

 

 

184,438

 

2021

 

 

9,089

 

2022

 

 

4,954

 

2023

 

 

 

Thereafter

 

 

 

Total

 

$

392,549

 

 

See Note 2, Pending Corporate Transactions for information related to the pending sale of InfraREIT, Inc. and asset exchange with Sharyland, including the proposed termination of the leases.

Leases with SDTS as Lessee

As part of the adoption of Topic 842, we elected not to reassess existing or expired land easements that were not previously treated as leases; therefore, our existing land easements as of January 1, 2019 will continue to be treated as land and not land leases and will be included in electric plant, net on our Consolidated Balance Sheets. Land easements entered into or modified after January 1, 2019 will be evaluated under Topic 842 to determine if they meet the definition of a lease.

We are the lessee under two land leases that are subleased to Sharyland under the master lease agreements described above under the caption Leases with SDTS as Lessor. Sharyland does not make any sublease payments specific to these land leases but pays all rent and other expenses under the land leases. Sharyland’s use of the applicable land is included as part of our five master lease agreements discussed above.

Both land leases are surface leases where the lessor retains the mineral rights. There were no initial direct costs incurred or residual value guarantees provided. The weighted-average remaining lease term is 43.2 years. The following table describes the main attributes of the land leases:

 

Name of Lease

 

Expiration Date

 

Renewal Periods

 

Rent Escalations

 

Initial Annual Rent

(In dollars)

 

Brownsville

 

November 1, 2067

 

None

 

None

 

$

10,435

 

Scottish Rite-Rocky Road

 

January 12, 2035

 

Four 5-year terms

 

5% increase every 5 years

after initial term

 

 

8,000

 

 

We have recorded the operating lease right-of-use assets in prepaids and other current assets and other assets, and the lease liabilities in accounts payable and accrued liabilities and long-term operating lease liabilities on our Consolidated Balance Sheets as follows:

 

(In thousands)

 

March 31, 2019

 

Prepaid and other current assets

 

$

18

 

Other assets

 

 

345

 

Total right-of-use asset

 

$

363

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

18

 

Long-term operating lease liabilities

 

345

 

Total operating lease liabilities

 

$

363

 

 

See Note 7, Other Assets for additional information.

In determining the right-of-use assets and operating lease liabilities, we used a discount rate of 4.25%, which is our incremental borrowing rate, and assumed that we would exercise all four five-year term extensions related to the Scottish Rite-Rocky Road lease.

Rent expense for these operating leases is recognized on a straight-line basis over the lease term and is included in general and administrative expense on our Consolidated Statements of Operations.

 

v3.19.1
Share Based Compensation
3 Months Ended
Mar. 31, 2019
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Share-Based Compensation

17.

Share-Based Compensation

We currently utilize the InfraREIT, Inc. 2015 Equity Incentive Plan primarily for the annual compensation of the non-executive directors for their service on our board of directors.

The following table shows the aggregate common stock issued to members of our board of directors for the three months ended March 31, 2019:

 

Grant Date

 

Shares of

Common Stock

 

 

Grant Date

Value

per Share

 

 

Aggregate

Fair Value

(in thousands)

 

 

Vesting Date

January 2019

 

 

22,674

 

 

$

21.15

 

 

$

480

 

 

January 2020

 

There was no common stock issued to our directors during the three months ended March 31, 2018.

The following table shows the aggregate LTIP Units issued to members of our board of directors for the three months ended March 31, 2018:

 

Grant Date

 

LTIP Units

 

 

Grant Date

Fair Value

per LTIP Unit

 

 

Aggregate

Fair Value

(in thousands)

 

 

Vesting Date

January 2018

 

 

28,952

 

 

$

18.61

 

 

$

539

 

 

January 2019

 

There were no LTIP Units issued to our directors during the three months ended March 31, 2019.

As part of our board of directors’ quarterly compensation, each non-executive director can, subject to certain exceptions, elect to receive part of his or her compensation in our common stock instead of cash with full vesting upon issuance. During 2019 and 2018, all directors received their quarterly compensation in cash. The compensation expense, which represents the fair value of the common stock or LTIP Unit measured at market price at the date of grant, is recognized on a straight-line basis over the vesting period. For each of the three months ended March 31, 2019 and 2018, $0.1 million was recognized as compensation expense related to these grants and is included in general and administrative expense on the Consolidated Statements of Operations. The unamortized compensation expense related to these grants was $0.4 million as of March 31, 2019.

v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes

18.

Income Taxes

Franchise Taxes

Effective January 1, 2018, we began accruing and paying Texas franchise tax on our gross lease revenues. The accrued franchise tax is recorded in accrued taxes on our Consolidated Balance Sheets, while the expense is recognized in income tax expense on our Consolidated Statements of Operations. For each of the three months ended March 31, 2019 and 2018, $0.3 million was recognized related to Texas franchise tax on our gross lease revenues.

Tax Cuts and Jobs Act

In 2017, the TCJA was signed into law reducing the corporate federal income tax rate from 35% to 21%, effective for taxable years beginning on or after January 1, 2018. As a result of the reduction in the corporate federal income tax rate, we recorded $55.8 million as a regulatory liability on our Consolidated Balance Sheets as of December 31, 2017 related to the creation of excess ADFIT, related to our assets. See Note 11, Regulatory Matters for additional information.

v3.19.1
Supplemental Cash Flow Information
3 Months Ended
Mar. 31, 2019
Supplemental Cash Flow Information [Abstract]  
Supplemental Cash Flow Information

19.

Supplemental Cash Flow Information

Supplemental cash flow information and non-cash investing and financing activities are as follows:

 

 

 

Three Months Ended March 31,

 

(In thousands)

 

2019

 

 

2018

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

7,832

 

 

$

7,469

 

Establishment of operating lease right-of-use assets and liabilities

 

 

363

 

 

 

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Change in accrued additions to electric plant

 

 

(242

)

 

 

(2,902

)

Allowance for funds used during construction - debt

 

 

988

 

 

 

820

 

Redemption of operating partnership units for common stock

 

 

116

 

 

 

3,106

 

Dividends and distributions payable

 

 

15,182

 

 

 

15,176

 

 

v3.19.1
Subsequent Events
3 Months Ended
Mar. 31, 2019
Subsequent Events [Abstract]  
Subsequent Events

20.

Subsequent Events

Pending Corporate Transactions

In April 2019, the parties to the STM proceeding filed the Settlement with the PUCT reflecting an agreement to settle all outstanding issues in our STM in Docket No. 48929. The Settlement is supported or unopposed by all parties to the STM. The Settlement is subject to review and approval by the PUCT. A hearing on the merits was held on April 10, 2019.

We continue to expect the transactions to close by mid-2019, subject to obtaining the PUCT approval and satisfaction of other customary closing conditions.

v3.19.1
Description of Business and Presentation of Financial Statements (Policies)
3 Months Ended
Mar. 31, 2019
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Basis of Presentation

Basis of Presentation

InfraREIT, Inc. is a Maryland corporation, which may be referred to in these financial statements as the “Company,” “InfraREIT,” “we,” “us” and “our.” These unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the U.S. Securities and Exchange Commission (SEC) on February 27, 2019 (2018 Form 10-K).

We hold 72.5% of the outstanding partnership units (OP Units) in InfraREIT Partners, LP (Operating Partnership or InfraREIT LP) as of March 31, 2019 and are its general partner. We include the accounts of the Operating Partnership and its subsidiaries in our consolidated financial statements. Affiliates and current or former employees of Hunt Consolidated, Inc. (Hunt) and members of our board of directors hold the other 27.5% of the outstanding OP Units as of March 31, 2019.

Use of Estimates

Use of Estimates

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Recent Accounting Guidance

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 amended the existing accounting standard for lease accounting, including requiring lessees to recognize all leases on their balance sheets with terms of more than 12 months and making targeted changes to lessor accounting. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842. ASU 2018-01 permits an entity to elect not to evaluate land easements under ASU 2016-02 that exist or expired before the entity’s adoption of ASU 2016-02 and that were not previously considered leases. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842), Narrow-Scope Improvements for Lessors, which permits an entity to elect not to evaluate whether certain sales taxes and other similar taxes are lessor or lessee costs, giving the entity the ability to exclude costs paid on behalf of the lessor by the lessee directly to third parties from the lessor’s income statement. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional transition method. This transition method allows an entity to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We adopted the new guidance using this transition method and the other guidance discussed herein as of January 1, 2019. The adoption of the new guidance resulted in the recognition of $0.4 million in right-of-use assets and operating lease liabilities related to land leases in which we are the lessee and additional disclosures related to all of our leases. See Note 16, Leases for additional information.

Recent Accounting Guidance Not Yet Adopted

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, modifies and adds disclosure requirements for fair value measurements. The amendments are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the guidance and delay adoption of the additional disclosures until their effective date. The Company is currently assessing the timing and impact of adopting the new guidance but does not expect it to have a material impact on the Company’s financial position or results of operations.

v3.19.1
Cash, Cash Equivalents and Restricted Cash (Tables)
3 Months Ended
Mar. 31, 2019
Cash And Cash Equivalents [Abstract]  
Schedule of Reconciliation of Cash, Cash Equivalents and Restricted Cash within Consolidated Balance Sheets

The following table provides a reconciliation of cash, cash equivalents and restricted cash within the Consolidated Balance Sheets that sum to the total of the same such amounts shown on the Consolidated Statements of Cash Flows:

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

3,487

 

 

$

1,624

 

Restricted cash

 

 

1,693

 

 

 

1,683

 

Total cash, cash equivalents and restricted cash shown on the Statement of Cash Flows

 

$

5,180

 

 

$

3,307

 

v3.19.1
Related Party Transactions (Tables)
3 Months Ended
Mar. 31, 2019
Related Party Transactions [Abstract]  
Schedule of Annual Base Fees

The base fees through December 31, 2019 are as follows:

 

(In millions)

 

Base Fee

 

April 1, 2017 - March 31, 2018

 

$

14.2

 

April 1, 2018 - March 31, 2019

 

 

13.5

 

April 1, 2019 - December 31, 2019

 

 

10.4

 

v3.19.1
Electric Plant and Depreciation (Tables)
3 Months Ended
Mar. 31, 2019
Public Utilities Property Plant And Equipment [Abstract]  
Schedule of Major Classes of Electric Plant

The major classes of electric plant are as follows:

 

 

 

 

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Electric plant:

 

 

 

 

 

 

 

 

Transmission plant

 

$

1,794,442

 

 

$

1,794,438

 

Distribution plant

 

 

151,698

 

 

 

151,698

 

General plant

 

 

3,210

 

 

 

3,023

 

Total plant in service

 

 

1,949,350

 

 

 

1,949,159

 

Construction work in progress

 

 

77,568

 

 

 

66,121

 

Total electric plant

 

 

2,026,918

 

 

 

2,015,280

 

Accumulated depreciation

 

 

(212,334

)

 

 

(203,963

)

Electric plant, net

 

$

1,814,584

 

 

$

1,811,317

 

v3.19.1
Other Assets (Tables)
3 Months Ended
Mar. 31, 2019
Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]  
Summary of Other Assets

Other assets are as follows:

 

<

 

 

March 31, 2019

 

 

December 31, 2018

 

(In thousands)

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Deferred financing costs on undrawn revolver

 

$

1,025

 

 

$

(811

)

 

$

214

 

 

$

1,025

 

 

$

(779

)

 

$

246

 

Other regulatory assets: