INFRAREIT, INC., 10-Q filed on 11/1/2018
Quarterly Report
v3.10.0.1
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2018
Oct. 29, 2018
Document And Entity Information [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Sep. 30, 2018  
Document Fiscal Year Focus 2018  
Document Fiscal Period Focus Q3  
Trading Symbol HIFR  
Entity Registrant Name InfraREIT, Inc.  
Entity Central Index Key 0001506401  
Current Fiscal Year End Date --12-31  
Entity Filer Category Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Common Stock, Shares Outstanding   43,962,167
v3.10.0.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Sep. 30, 2018
Dec. 31, 2017
Current Assets    
Cash and cash equivalents $ 3,223 $ 2,867
Restricted cash 1,687 1,683
Due from affiliates 33,401 35,172
Inventory 7,592 6,759
Prepaids and other current assets 1,041 2,460
Total current assets 46,944 48,941
Electric Plant, net 1,800,517 1,772,229
Goodwill 138,384 138,384
Other Assets 31,771 34,314
Total Assets 2,017,616 1,993,868
Current Liabilities    
Accounts payable and accrued liabilities 28,345 21,230
Short-term borrowings 101,000 41,000
Current portion of long-term debt 8,667 68,305
Dividends and distributions payable 15,176 15,169
Accrued taxes 748 5,633
Total current liabilities 153,936 151,337
Long-Term Debt, Less Deferred Financing Costs 834,693 841,215
Regulatory Liabilities 111,811 100,458
Total liabilities 1,100,440 1,093,010
Commitments and Contingencies
Equity    
Common stock, $0.01 par value; 450,000,000 shares authorized; 43,962,167 and 43,796,915 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively 440 438
Additional paid-in capital 709,488 706,357
Accumulated deficit (38,229) (49,728)
Total InfraREIT, Inc. equity 671,699 657,067
Noncontrolling interest 245,477 243,791
Total equity 917,176 900,858
Total Liabilities and Equity $ 2,017,616 $ 1,993,868
v3.10.0.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Sep. 30, 2018
Dec. 31, 2017
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 43,962,167 43,796,915
Common stock, shares, outstanding 43,962,167 43,796,915
v3.10.0.1
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended 9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Sep. 30, 2018
Sep. 30, 2017
Income Statement [Abstract]        
Lease revenue $ 48,926 $ 51,618 $ 142,409 $ 131,664
Operating costs and expenses        
General and administrative expense 6,787 6,718 19,506 19,565
Depreciation 12,063 13,328 35,632 38,997
Total operating costs and expenses 18,850 20,046 55,138 58,562
Income from operations 30,076 31,572 87,271 73,102
Other (expense) income        
Interest expense, net (10,120) (10,357) (31,864) (30,196)
Other income, net 7 331 1,114 351
Total other expense (10,113) (10,026) (30,750) (29,845)
Income before income taxes 19,963 21,546 56,521 43,257
Income tax expense (benefit) 257 308 (4,885) 873
Net income 19,706 21,238 61,406 42,384
Less: Net income attributable to noncontrolling interest 5,435 5,908 16,937 11,797
Net income attributable to InfraREIT, Inc. $ 14,271 $ 15,330 $ 44,469 $ 30,587
Net income attributable to InfraREIT, Inc. common stockholders per share:        
Basic $ 0.32 $ 0.35 $ 1.01 $ 0.70
Diluted 0.32 0.35 1.01 0.70
Cash dividends declared per common share $ 0.25 $ 0.25 $ 0.75 $ 0.75
v3.10.0.1
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, 2016 $ 943,911 $ 438 $ 705,845 $ (18,243) $ 688,040 $ 255,871
Balance, shares at Dec. 31, 2016   43,772,283        
Dividends and distributions (15,169)     (10,944) (10,944) (4,225)
Redemption of operating partnership units for common stock     55   55 (55)
Redemption of operating partnership units for common stock, shares   3,100        
Net income 11,017     7,949 7,949 3,068
Equity based compensation 140         140
Balance at Mar. 31, 2017 939,899 $ 438 705,900 (21,238) 685,100 254,799
Balance, shares at Mar. 31, 2017   43,775,383        
Balance at Dec. 31, 2016 $ 943,911 $ 438 705,845 (18,243) 688,040 255,871
Balance, shares at Dec. 31, 2016   43,772,283        
Redemption of operating partnership units for common stock, shares 23,349          
Net income $ 42,384          
Balance at Sep. 30, 2017 941,216 $ 438 706,337 (20,494) 686,281 254,935
Balance, shares at Sep. 30, 2017   43,795,632        
Balance at Mar. 31, 2017 939,899 $ 438 705,900 (21,238) 685,100 254,799
Balance, shares at Mar. 31, 2017   43,775,383        
Dividends and distributions (15,169)     (10,944) (10,944) (4,225)
Redemption of operating partnership units for common stock     55   55 (55)
Redemption of operating partnership units for common stock, shares   3,107        
Net income 10,129     7,308 7,308 2,821
Equity based compensation 145         145
Balance at Jun. 30, 2017 935,004 $ 438 705,955 (24,874) 681,519 253,485
Balance, shares at Jun. 30, 2017   43,778,490        
Dividends and distributions (15,169)     (10,950) (10,950) (4,219)
Redemption of operating partnership units for common stock     382   382 (382)
Redemption of operating partnership units for common stock, shares   17,142        
Net income 21,238     15,330 15,330 5,908
Equity based compensation 143         143
Balance at Sep. 30, 2017 941,216 $ 438 706,337 (20,494) 686,281 254,935
Balance, shares at Sep. 30, 2017   43,795,632        
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        
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, 2017 $ 900,858 $ 438 706,357 (49,728) 657,067 243,791
Balance, shares at Dec. 31, 2017   43,796,915        
Redemption of operating partnership units for common stock, shares 165,252          
Net income $ 61,406          
Balance at Sep. 30, 2018 917,176 $ 440 709,488 (38,229) 671,699 245,477
Balance, shares at Sep. 30, 2018   43,962,167        
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        
Dividends and distributions (15,176)     (10,990) (10,990) (4,186)
Redemption of operating partnership units for common stock     27   27 (27)
Redemption of operating partnership units for common stock, shares   1,283        
Net income 23,936     17,334 17,334 6,602
Equity based compensation 180         180
Balance at Jun. 30, 2018 912,526 $ 440 709,488 (41,510) 668,418 244,108
Balance, shares at Jun. 30, 2018   43,962,167        
Dividends and distributions (15,176)     (10,990) (10,990) (4,186)
Net income 19,706     14,271 14,271 5,435
Equity based compensation 120         120
Balance at Sep. 30, 2018 $ 917,176 $ 440 $ 709,488 $ (38,229) $ 671,699 $ 245,477
Balance, shares at Sep. 30, 2018   43,962,167        
v3.10.0.1
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
9 Months Ended
Sep. 30, 2018
Sep. 30, 2017
Cash flows from operating activities    
Net income $ 61,406 $ 42,384
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation 35,632 38,997
Amortization of deferred financing costs 2,568 3,101
Allowance for funds used during construction - other funds (1,094) (318)
Equity based compensation 440 428
Changes in assets and liabilities:    
Due from affiliates 1,624 4,036
Inventory (833) 95
Prepaids and other current assets (66) (27)
Accounts payable and accrued liabilities (590) 334
Net cash provided by operating activities 99,087 89,030
Cash flows from investing activities    
Additions to electric plant (48,653) (147,803)
Proceeds from asset exchange transaction 1,632  
Net cash used in investing activities (47,021) (147,803)
Cash flows from financing activities    
Proceeds from short-term borrowings 118,000 110,500
Repayments of short-term borrowings (58,000) (213,000)
Proceeds from borrowings of long-term debt   200,000
Repayments of long-term debt (66,185) (5,845)
Deferred financing costs   (809)
Dividends and distributions paid (45,521) (45,499)
Net cash (used in) provided by financing activities (51,706) 45,347
Net increase (decrease) in cash, cash equivalents and restricted cash 360 (13,426)
Cash, cash equivalents and restricted cash at beginning of period 4,550 19,294
Cash, cash equivalents and restricted cash at end of period $ 4,910 $ 5,868
v3.10.0.1
Description of Business and Presentation of Financial Statements
9 Months Ended
Sep. 30, 2018
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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017 filed with the U.S. Securities and Exchange Commission (SEC) on March 5, 2018 (2017 Form 10-K).

We held 72.4% of the outstanding partnership units (OP Units) in InfraREIT Partners, LP (Operating Partnership or InfraREIT LP) as of September 30, 2018 and are its general partner. We include the accounts of the Operating Partnership and its subsidiaries in our consolidated financial statements. Hunt Consolidated, Inc. (Hunt) affiliates, current or former employees and members of our board of directors held the other 27.6% of the outstanding OP Units as of September 30, 2018.

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 May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods and services. As part of this guidance, lease transactions have been excluded from the requirements of this standard. We adopted this guidance on January 1, 2018, and it had no impact on our financial position, results of operations and cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments. The objective of ASU 2016-15 is to eliminate the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. The new standard should be applied retrospectively to all periods presented, unless deemed impracticable, in which case prospective application is permitted. We adopted the new guidance on January 1, 2018, and the new guidance did not impact our Consolidated Statement of Cash Flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 203): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force). ASU 2016-18 adds to or clarifies current guidance on the classification and presentation of restricted cash in the statement of cash flows. The new guidance requires entities to include in their cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. We adopted the guidance on January 1, 2018 and have adjusted all periods presented for the change in presentation of restricted cash on our Consolidated Statement of Cash Flows.

Recent Accounting Guidance Not Yet Adopted

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 to not 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. The guidance under these standards is effective for periods beginning after December 15, 2018, with early adoption permitted. 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 will adopt the new guidance using this transition method as of January 1, 2019. We believe the adoption of new guidance will have a minimal impact on our financial position, results of operations and cash flows due to the limited changes related to lessor transactions. However, additional disclosures are required, and full annual disclosures are required for each interim period of 2019.

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.

v3.10.0.1
2017 Asset Exchange Transaction
9 Months Ended
Sep. 30, 2018
Nonmonetary Transactions [Abstract]  
2017 Asset Exchange Transaction

2.

2017 Asset Exchange Transaction

In July 2017, our regulated subsidiary, Sharyland Distribution & Transmission Services, L.L.C. (SDTS), and our sole tenant, Sharyland Utilities, L.P. (Sharyland), signed a definitive agreement (2017 Asset Exchange Agreement) with Oncor Electric Delivery Company LLC (Oncor) to exchange SDTS’s retail distribution assets and certain transmission assets for a group of Oncor’s transmission assets located in Northwest and Central Texas (2017 Asset Exchange Transaction). The 2017 Asset Exchange Transaction closed in November 2017 and, among other things, resulted in SDTS exchanging $403 million of net assets for $383 million of transmission assets owned by Oncor, $18 million of net cash and a $2 million receivable from Oncor as of December 31, 2017. The transaction resulted in a gain of $0.3 million for SDTS. The receivable from Oncor was included in prepaids and other current assets in the Consolidated Balance Sheets at December 31, 2017 and was collected during the first quarter of 2018. These transactions were structured to qualify, in part, as a simultaneous tax deferred like-kind exchange of assets to the extent that the assets are of “like kind” (within the meaning of Section 1031 of the Internal Revenue Code of 1986, as amended).

v3.10.0.1
Cash, Cash Equivalents and Restricted Cash
9 Months Ended
Sep. 30, 2018
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:

 

 

 

September 30,

 

(In thousands)

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

3,223

 

 

$

4,186

 

Restricted cash

 

 

1,687

 

 

 

1,682

 

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

 

$

4,910

 

 

$

5,868

 

 

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 the Operating Partnership’s wholly-owned subsidiary, Transmission and Distribution Company, L.L.C. (TDC), as described in Note 9, Long-Term Debt.

v3.10.0.1
Related Party Transactions
9 Months Ended
Sep. 30, 2018
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 in the 2017 Asset Exchange Transaction.

We earned lease revenue from Sharyland under these agreements of $48.9 million and $51.6 million during the three months ended September 30, 2018 and 2017, respectively. We earned lease revenue of $142.4 million and $131.7 million from Sharyland during the nine months ended September 30, 2018 and 2017, respectively. In connection with our leases with Sharyland, we had a deferred rent liability of $14.6 million and $14.7 million as of September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017, the net amount of payments we made to Sharyland was $48.3 million and $151.2 million, respectively.

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. For information related to the 2017 Asset Exchange Transaction, see Note 2, 2017 Asset Exchange Transaction.

As of September 30, 2018 and December 31, 2017, accounts payable and accrued liabilities on the Consolidated Balance Sheets included $5.0 million and $2.1 million, respectively, related to amounts owed to Sharyland for construction costs incurred and property taxes paid on our behalf. As of September 30, 2018 and December 31, 2017, amounts due from affiliates on the Consolidated Balance Sheets included $33.4 million and $35.2 million, respectively, related to amounts owed by Sharyland primarily associated with our leases.

The management fee paid to Hunt Utility Services, LLC (Hunt Manager) for the nine months ended September 30, 2018 and 2017 was $10.3 million and $14.1 million, respectively. There were no prepaid or accrued amounts associated with the management fees on the Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017. As of December 31, 2016, there was $3.5 million accrued associated with management fees on the Consolidated Balance Sheets. Additionally, during the nine months ended September 30, 2018 and 2017, we paid Hunt Manager $0.1 million and $0.2 million, respectively, for reimbursement of annual software license and maintenance fees and other expenses in accordance with our management agreement.

Our 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. The term of the management agreement expires December 31, 2019 and will automatically renew for successive five year terms unless a majority of our independent directors decides to terminate the agreement.

The annual base fees through March 31, 2019 are as follows:

 

(In millions)

 

Base Fee

 

April 1, 2016 - March 31, 2017

 

$

14.0

 

April 1, 2017 - March 31, 2018

 

 

14.2

 

April 1, 2018 - March 31, 2019

 

 

13.5

 

 

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 20, Subsequent Events.

v3.10.0.1
Electric Plant and Depreciation
9 Months Ended
Sep. 30, 2018
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)

 

September 30, 2018

 

 

December 31, 2017

 

Electric plant:

 

 

 

 

 

 

 

 

Transmission plant

 

$

1,784,175

 

 

$

1,685,466

 

Distribution plant

 

 

151,458

 

 

 

143,865

 

General plant

 

 

3,023

 

 

 

3,023

 

Total plant in service

 

 

1,938,656

 

 

 

1,832,354

 

Construction work in progress

 

 

60,027

 

 

 

113,643

 

Total electric plant

 

 

1,998,683

 

 

 

1,945,997

 

Accumulated depreciation

 

 

(198,166

)

 

 

(173,768

)

Electric plant, net

 

$

1,800,517

 

 

$

1,772,229

 

 

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 $28.6 million and $29.4 million as of September 30, 2018 and December 31, 2017, respectively.

 

v3.10.0.1
Goodwill
9 Months Ended
Sep. 30, 2018
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 September 30, 2018 and December 31, 2017, $138.4 million was recorded as goodwill on the Consolidated Balance Sheets.

v3.10.0.1
Other Assets
9 Months Ended
Sep. 30, 2018
Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]  
Other Assets

7.

Other Assets

Other assets are as follows:

 

 

 

September 30, 2018

 

 

December 31, 2017

 

(In thousands)

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Deferred financing costs on undrawn revolver

 

$

967

 

 

$

(736

)

 

$

231

 

 

$

967

 

 

$

(591

)

 

$

376

 

Other regulatory assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

10,365

 

 

 

(5,137

)

 

 

5,228

 

 

 

28,570

 

 

 

(20,944

)

 

 

7,626

 

Deferred costs recoverable in future years

 

 

23,793

 

 

 

 

 

 

23,793

 

 

 

23,793

 

 

 

 

 

 

23,793

 

Other regulatory assets

 

 

34,158

 

 

 

(5,137

)

 

 

29,021

 

 

 

52,363

 

 

 

(20,944

)

 

 

31,419

 

Investments

 

 

2,519

 

 

 

 

 

 

2,519

 

 

 

2,519

 

 

 

 

 

 

2,519

 

Other assets

 

$

37,644

 

 

$

(5,873

)

 

$

31,771

 

 

$

55,849

 

 

$

(21,535

)

 

$

34,314

 

 

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.

The $18.2 million gross deferred financing costs associated with our 2011 Notes (defined below) were fully amortized in June 2018 and removed from our Consolidated Balance Sheets when the 2011 Notes were repaid at maturity. See Note 9, Long-Term Debt.

Deferred costs recoverable in future years of $23.8 million as of September 30, 2018 and December 31, 2017 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 Public Utility Commission of Texas (PUCT) in Sharyland’s prior rate cases and regulatory precedent.

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 September 30, 2018 and December 31, 2017.

 

v3.10.0.1
Borrowings Under Credit Facilities
9 Months Ended
Sep. 30, 2018
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. 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 September 30, 2018 and December 31, 2017, 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 September 30, 2018 and December 31, 2017, InfraREIT LP was in compliance with all debt covenants under the credit agreement.

SDTS Revolving Credit Facility

In 2014, SDTS entered into the third amended and restated credit agreement led by Royal Bank of Canada, as administrative agent, with a maturity date of December 10, 2019. 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 September 30, 2018, SDTS had $101.0 million of borrowings outstanding at a weighted average interest rate of 4.21%, no letters of credit outstanding and $149.0 million of borrowing capacity available under this revolving credit facility. As of December 31, 2017, SDTS had $41.0 million of borrowings outstanding at a weighted average interest rate of 3.12% with no letters of credit outstanding and $209.0 million of borrowing capacity available under this revolving credit facility. As of September 30, 2018 and December 31, 2017, 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.

v3.10.0.1
Long-Term Debt
9 Months Ended
Sep. 30, 2018
Debt Instruments [Abstract]  
Long-Term Debt

9.

Long-Term Debt

Long-term debt consisted of the following:

 

 

 

 

 

September 30, 2018

 

 

December 31, 2017

 

(Dollar amounts in thousands)

 

Maturity Date

 

Amount

Outstanding

 

 

Interest

Rate

 

 

Amount

Outstanding

 

 

Interest

Rate

 

TDC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - $25.0 million

 

December 30, 2020

 

$

15,313

 

 

8.50%

 

 

$

16,250

 

 

8.50%

 

SDTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - $60.0 million

 

June 20, 2018

 

 

 

 

n/a

 

 

 

60,000

 

 

5.04%

 

Senior secured term loan - $200.0 million

 

June 5, 2020

 

 

200,000

 

 

3.42%

 

 

 

200,000

 

 

2.71%

 

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

 

 

38,905

 

 

7.25%

 

 

 

40,546

 

 

7.25%

 

Senior secured notes - $110.0 million

 

September 30, 2030

 

 

89,214

 

 

6.47%

 

 

 

92,821

 

 

6.47%

 

Total SDTS debt

 

 

 

 

828,119

 

 

 

 

 

 

 

893,367

 

 

 

 

 

Total long-term debt

 

 

 

 

843,432

 

 

 

 

 

 

 

909,617

 

 

 

 

 

Less unamortized deferred financing costs

 

 

 

 

(72

)

 

 

 

 

 

 

(97

)

 

 

 

 

Total long-term debt, less deferred

    financing costs

 

 

 

 

843,360

 

 

 

 

 

 

 

909,520

 

 

 

 

 

Less current portion of long-term debt

 

 

 

 

(8,667

)

 

 

 

 

 

 

(68,305

)

 

 

 

 

Debt classified as long-term debt, less

    deferred financing costs

 

 

 

$

834,693

 

 

 

 

 

 

$

841,215

 

 

 

 

 

 

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 7, 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 September 30, 2018 and December 31, 2017.

SDTS had $60.0 million aggregate principal amount of 5.04% per annum senior secured notes that were issued to The Prudential Insurance Company of America and affiliates in 2011 (2011 Notes). Interest was payable quarterly while no principal payments were due until maturity. These notes were paid in full at maturity during June 2018 with proceeds from SDTS’s revolving credit facility.

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 September 30, 2018 and December 31, 2017, SDTS and TDC were in compliance with all debt covenants under the applicable agreements. See Note 20, Subsequent Events 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, and the 2011 Notes were, 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.

 

v3.10.0.1
Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2018
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 $643.4 million and $709.6 million under our senior secured notes with a weighted average interest rate of 4.5% and 4.6% per annum as of September 30, 2018 and December 31, 2017, respectively. The fair value of these borrowings was estimated using discounted cash flow analysis based on current market rates.

As of September 30, 2018 and December 31, 2017, 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

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

843,432

 

 

$

 

 

$

859,303

 

 

$

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

909,617

 

 

$

 

 

$

950,522

 

 

$

 

 

v3.10.0.1
Regulatory Matters
9 Months Ended
Sep. 30, 2018
Public Utilities Rate Matters [Abstract]  
Regulatory Matters

11.

Regulatory Matters

Regulatory Liability

Regulatory liabilities are as follows:

 

(In thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Cost of removal

 

$

56,032

 

 

$

44,679

 

Excess ADFIT

 

 

55,779

 

 

 

55,779

 

Regulatory liabilities

 

$

111,811

 

 

$

100,458

 

 

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. 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 REIT structure. With the passage of the Tax Cuts and Jobs Act (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 (ASC) 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 Case Filing

In January 2014, the PUCT approved a rate case (2013 Rate Case) filed by Sharyland applicable to our regulated assets providing 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. The new rates became effective May 1, 2014. Under the order approving the 2013 Rate Case, Sharyland was required to file its next rate case in 2016 (2016 Rate Case). In November 2017, the 2016 Rate Case was dismissed resulting in the 2013 Rate Case regulatory parameters remaining in place. As part of the PUCT order approving the 2017 Asset Exchange Transaction, the PUCT also granted SDTS a CCN to continue to own and lease its assets to Sharyland. 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.

v3.10.0.1
Commitments and Contingencies
9 Months Ended
Sep. 30, 2018
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.

 

v3.10.0.1
Equity
9 Months Ended
Sep. 30, 2018
Equity [Abstract]  
Equity

13.

Equity

We and the Operating Partnership declared cash dividends on common stock and distributions on OP Units of $0.75 per share or unit, as applicable, during each of the nine months ended September 30, 2018 and 2017. We paid a total of $45.5 million in dividends and distributions during each of the nine months ended September 30, 2018 and 2017.

v3.10.0.1
Noncontrolling Interest
9 Months Ended
Sep. 30, 2018
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 our 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 InfraREIT, Inc. common stock on a one-for-one basis. As of September 30, 2018 and December 31, 2017, there were a total of 16.7 million and 16.9 million OP Units, respectively, held by the limited partners of the Operating Partnership.

During the nine months ended September 30, 2018 and 2017, an aggregate of 28,952 and 31,633 long-term incentive units (LTIP Units), respectively, were issued by the Operating Partnership to members of our board of directors. 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 nine months ended September 30, 2018, we redeemed 165,252 OP Units with the issuance of 165,252 shares of common stock. We redeemed 23,349 OP Units with the issuance of 23,349 shares of common stock during the nine months ended September 30, 2017.

v3.10.0.1
Earnings Per Share
9 Months Ended
Sep. 30, 2018
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 and nine months ended September 30, 2018 and 2017.

Earnings per share are calculated as follows:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(In thousands, except per share data)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to InfraREIT, Inc.

 

$

14,271

 

 

$

15,330

 

 

$

44,469

 

 

$

30,587

 

Weighted average common shares outstanding

 

 

43,962

 

 

 

43,784

 

 

 

43,919

 

 

 

43,779

 

Basic net income per share

 

$

0.32

 

 

$

0.35

 

 

$

1.01

 

 

$

0.70

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to InfraREIT, Inc.

 

$

14,271

 

 

$

15,330

 

 

$

44,469

 

 

$

30,587

 

Weighted average common shares outstanding

 

 

43,962

 

 

 

43,784

 

 

 

43,919

 

 

 

43,779

 

Redemption of Operating Partnership units

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average dilutive shares outstanding

 

 

43,962

 

 

 

43,784

 

 

 

43,919

 

 

 

43,779

 

Diluted net income per share

 

$

0.32

 

 

$

0.35

 

 

$

1.01

 

 

$

0.70

 

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

 

$

5,435

 

 

$

5,908

 

 

$

16,937

 

 

$

11,797

 

Redemption of Operating Partnership units

 

 

16,742

 

 

 

16,891

 

 

 

16,785

 

 

 

16,896

 

 

v3.10.0.1
Leases
9 Months Ended
Sep. 30, 2018
Leases [Abstract]  
Leases

16.

Leases

The following table shows the composition of our lease revenue:

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Base rent (straight-line)

 

$

48,390

 

 

$

42,336

 

 

$

141,873

 

 

$

122,382

 

Percentage rent

 

 

536

 

 

 

9,282

 

 

 

536

 

 

 

9,282

 

Total lease revenue

 

$

48,926

 

 

$

51,618

 

 

$

142,409

 

 

$

131,664

 

 

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. The lease supplements governing the Stanton Transmission Loop, Permian Basin assets and assets acquired in the 2017 Asset Exchange Transaction, which are part of the competitive renewable energy zones (CREZ) assets, only provide for base rent. Rent for the assets in McAllen and the CREZ assets not acquired in the 2017 Asset Exchange Transaction is comprised primarily of base rent but also includes percentage rent. Prior to its termination on December 31, 2017, the lease that previously covered the Permian Basin assets as well as the assets in Brady and Celeste, Texas that were transferred to Oncor in the 2017 Asset Exchange Transaction also included a percentage rent component. 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 annual specified breakpoints, 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 a high of 31% to a low of 23%. Because an annual specified breakpoint must be met under our leases before we can recognize any percentage rent, we anticipate that little to no percentage rent will be recognized in the first and second quarters of each year, with the largest amounts of percentage rent recognized during the third and fourth quarters of each year.

See Note 20, Subsequent Events for information related to the pending sale of InfraREIT and asset exchange with Sharyland, including the proposed termination of the leases.

v3.10.0.1
Share Based Compensation
9 Months Ended
Sep. 30, 2018
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 LTIP Units issued to members of our board of directors during the nine months ended September 30, 2018 and 2017:

 

Grant Date

 

LTIP Units

 

 

Grant Date

Fair Value

per LTIP Unit

 

 

Aggregate

Fair Value

(in thousands)

 

 

Vesting Date

January 2017

 

 

31,633

 

 

$

18.02

 

 

$

570

 

 

January 2018

January 2018

 

 

28,952

 

 

 

18.61

 

 

 

539

 

 

January 2019

 

As part of our board of directors’ quarterly compensation, each non-executive director can, subject to certain exceptions, elect to receive part of their compensation in our common stock instead of cash with full vesting upon issuance. During 2017 and 2018, all directors elected to receive their quarterly compensation in cash. The compensation expense, which represents the fair value of the 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 September 30, 2018 and 2017, $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. We recognized $0.4 million of compensation expense during each of the nine months ended September 30, 2018 and 2017. The unamortized compensation expense related to these grants was $0.1 million as of September 30, 2018.

v3.10.0.1
Income Taxes
9 Months Ended
Sep. 30, 2018
Income Tax Disclosure [Abstract]  
Income Taxes

18.

Income Taxes

Historically, we have accrued for potential taxes, penalties and interest related to Texas state franchise taxes on our rental income on our Consolidated Balance Sheets. However, during the second quarter of 2018, we reached a settlement with the state of Texas in which no franchise taxes were owed on lease revenue for all tax years through 2017. As a result, the accrued liability for these potential taxes of $4.9 million and penalties and interest of $0.7 million were removed from our Consolidated Balance Sheets and recognized as an income tax benefit on our Consolidated Statements of Operations during the second quarter of 2018.

The tax portion of the liability represented unrecognized tax benefits that, if recognized, would have impacted our effective tax rate. A reconciliation of the beginning and ending amount of unrecognized tax benefits follows:

 

(In thousands)

 

September 30, 2018

 

 

December 31, 2017

 

Balance at beginning of period

 

$

4,864

 

 

$

3,827

 

Additions based on tax positions related to the current year

 

 

 

 

 

1,037

 

Settlements

 

 

(4,864

)

 

 

 

Balance at end of period

 

$

 

 

$

4,864

 

 

As a result of the Texas franchise tax settlement, we began accruing and paying Texas franchise tax on our gross lease revenues effective January 1, 2018.

v3.10.0.1
Supplemental Cash Flow Information
9 Months Ended
Sep. 30, 2018
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:

 

 

 

Nine Months Ended September 30,

 

(In thousands)

 

2018

 

 

2017

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

28,317

 

 

$

26,004

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

 

Change in accrued additions to electric plant

 

 

(2,943

)

 

 

8,901

 

Allowance for funds used during construction - debt

 

 

1,971

 

 

 

2,261

 

Redemption of operating partnership units for common stock

 

 

3,133

 

 

 

492

 

Dividends and distributions payable

 

 

15,176

 

 

 

15,169

 

 

v3.10.0.1
Subsequent Events
9 Months Ended
Sep. 30, 2018
Subsequent Events [Abstract]  
Subsequent Events

20.

Subsequent Events

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 for $21.00 per share or OP Unit, as applicable, in cash, valued at approximately $1.275 billion, plus the assumption of our net debt of approximately $940 million as of September 30, 2018. As a condition to Oncor’s acquisition of InfraREIT, SDTS and Oncor also signed a definitive agreement with 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 our management agreement with Hunt Manager, which will be terminated upon the closing of the transactions, 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 us and Hunt.  We have 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 our subsidiaries and Hunt, Sharyland or their affiliates. This amount is consistent with the termination fee that is contractually required under the management agreement.

Closing Conditions

The closing of the transactions is dependent upon and will be subject to several closing conditions, including: PUCT approval of the transactions; other regulatory approvals; stockholder approval; certain lender consents; the substantially concurrent closing of the acquisition by an affiliate of Sempra Energy of a 50% limited partnership interest in Sharyland Holdings, LP, which will own a 100% interest in Sharyland; and other customary closing conditions.

Timeline

Under the definitive agreements, SDTS, Sharyland and Oncor are required to file a Sale-Transfer-Merger application with the PUCT no later than November 30, 2018. A special meeting of our stockholders will be held following the filing of the definitive proxy statement with the SEC and subsequent mailing to our stockholders, which is expected to be filed by December 10, 2018. The transactions are expected to close by mid-2019.

v3.10.0.1
Description of Business and Presentation of Financial Statements (Policies)
9 Months Ended
Sep. 30, 2018
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 nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. 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, 2017 filed with the U.S. Securities and Exchange Commission (SEC) on March 5, 2018 (2017 Form 10-K).

We held 72.4% of the outstanding partnership units (OP Units) in InfraREIT Partners, LP (Operating Partnership or InfraREIT LP) as of September 30, 2018 and are its general partner. We include the accounts of the Operating Partnership and its subsidiaries in our consolidated financial statements. Hunt Consolidated, Inc. (Hunt) affiliates, current or former employees and members of our board of directors held the other 27.6% of the outstanding OP Units as of September 30, 2018.

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 May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 requires revenue to be recognized when promised goods or services are transferred to customers in an amount that reflects the expected consideration for these goods and services. As part of this guidance, lease transactions have been excluded from the requirements of this standard. We adopted this guidance on January 1, 2018, and it had no impact on our financial position, results of operations and cash flows.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments. The objective of ASU 2016-15 is to eliminate the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows by adding or clarifying guidance on eight specific cash flow issues. The new standard should be applied retrospectively to all periods presented, unless deemed impracticable, in which case prospective application is permitted. We adopted the new guidance on January 1, 2018, and the new guidance did not impact our Consolidated Statement of Cash Flows.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 203): Restricted Cash (A Consensus of the FASB Emerging Issues Task Force). ASU 2016-18 adds to or clarifies current guidance on the classification and presentation of restricted cash in the statement of cash flows. The new guidance requires entities to include in their cash and cash equivalent balances in the statement of cash flows those amounts that are deemed to be restricted cash and restricted cash equivalents. We adopted the guidance on January 1, 2018 and have adjusted all periods presented for the change in presentation of restricted cash on our Consolidated Statement of Cash Flows.

Recent Accounting Guidance Not Yet Adopted

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 to not 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. The guidance under these standards is effective for periods beginning after December 15, 2018, with early adoption permitted. 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 will adopt the new guidance using this transition method as of January 1, 2019. We believe the adoption of new guidance will have a minimal impact on our financial position, results of operations and cash flows due to the limited changes related to lessor transactions. However, additional disclosures are required, and full annual disclosures are required for each interim period of 2019.

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.

v3.10.0.1
Cash, Cash Equivalents and Restricted Cash (Tables)
9 Months Ended
Sep. 30, 2018
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:

 

 

 

September 30,

 

(In thousands)

 

2018

 

 

2017

 

Cash and cash equivalents

 

$

3,223

 

 

$

4,186

 

Restricted cash

 

 

1,687

 

 

 

1,682

 

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

 

$

4,910

 

 

$

5,868

 

 

v3.10.0.1
Related Party Transactions (Tables)
9 Months Ended
Sep. 30, 2018
Related Party Transactions [Abstract]  
Schedule of Annual Base Fees

The annual base fees through March 31, 2019 are as follows:

 

(In millions)

 

Base Fee

 

April 1, 2016 - March 31, 2017

 

$

14.0

 

April 1, 2017 - March 31, 2018

 

 

14.2

 

April 1, 2018 - March 31, 2019

 

 

13.5

 

 

v3.10.0.1
Electric Plant and Depreciation (Tables)
9 Months Ended
Sep. 30, 2018
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)

 

September 30, 2018

 

 

December 31, 2017

 

Electric plant:

 

 

 

 

 

 

 

 

Transmission plant

 

$

1,784,175

 

 

$

1,685,466

 

Distribution plant

 

 

151,458

 

 

 

143,865

 

General plant

 

 

3,023

 

 

 

3,023

 

Total plant in service

 

 

1,938,656

 

 

 

1,832,354

 

Construction work in progress

 

 

60,027

 

 

 

113,643

 

Total electric plant

 

 

1,998,683

 

 

 

1,945,997

 

Accumulated depreciation

 

 

(198,166

)

 

 

(173,768

)

Electric plant, net

 

$

1,800,517

 

 

$

1,772,229