INFRAREIT, INC., 10-K filed on 2/27/2019
Annual Report
v3.10.0.1
Document and Entity Information - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2018
Feb. 20, 2019
Jun. 29, 2018
Document And Entity Information [Abstract]      
Document Type 10-K    
Amendment Flag false    
Document Period End Date Dec. 31, 2018    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
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 Shell Company false    
Entity Well-known Seasoned Issuer Yes    
Entity Current Reporting Status Yes    
Entity Voluntary Filers No    
Entity Public Float     $ 868.1
Entity Common Stock, Shares Outstanding   43,997,672  
v3.10.0.1
CONSOLIDATED BALANCE SHEETS - USD ($)
$ in Thousands
Dec. 31, 2018
Dec. 31, 2017
Current Assets    
Cash and cash equivalents $ 1,808 $ 2,867
Restricted cash 1,689 1,683
Due from affiliates 38,174 35,172
Inventory 6,903 6,759
Prepaids and other current assets 1,077 2,460
Total current assets 49,651 48,941
Electric Plant, net 1,811,317 1,772,229
Goodwill 138,384 138,384
Other Assets 31,678 34,314
Total Assets 2,031,030 1,993,868
Current Liabilities    
Accounts payable and accrued liabilities 19,657 21,230
Short-term borrowings 112,500 41,000
Current portion of long-term debt 8,792 68,305
Dividends and distributions payable 15,176 15,169
Accrued taxes 1,052 5,633
Total current liabilities 157,177 151,337
Long-Term Debt, Less Deferred Financing Costs 832,455 841,215
Regulatory Liabilities 115,532 100,458
Total liabilities 1,105,164 1,093,010
Commitments and Contingencies
Equity    
Common stock, $0.01 par value; 450,000,000 shares authorized; 43,974,998 and 43,796,915 issued and outstanding as of December 31, 2018 and 2017, respectively 440 438
Additional paid-in capital 708,283 706,357
Accumulated deficit (32,022) (49,728)
Total InfraREIT, Inc. equity 676,701 657,067
Noncontrolling interest 249,165 243,791
Total equity 925,866 900,858
Total Liabilities and Equity $ 2,031,030 $ 1,993,868
v3.10.0.1
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares
Dec. 31, 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 43,974,998 43,796,915
Common stock, shares, outstanding 43,974,998 43,796,915
v3.10.0.1
CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Income Statement [Abstract]      
Lease revenue $ 200,354 $ 190,341 $ 172,099
Tax Cuts and Jobs Act regulatory adjustment   (55,779)  
Net revenues 200,354 134,562 172,099
Operating costs and expenses      
General and administrative expense 30,965 25,388 21,852
Depreciation 47,813 51,207 46,704
Gain on 2017 asset exchange transaction   (257)  
Total operating costs and expenses 78,778 76,338 68,556
Income from operations 121,576 58,224 103,543
Other (expense) income      
Interest expense, net (42,122) (40,671) (36,920)
Other income, net 1,117 718 3,781
Total other expense (41,005) (39,953) (33,139)
Income before income taxes 80,571 18,271 70,404
Income tax (benefit) expense (4,581) 1,218 1,103
Net income 85,152 17,053 69,301
Less: Net income attributable to noncontrolling interest 23,482 4,751 19,347
Net income attributable to InfraREIT, Inc. $ 61,670 $ 12,302 $ 49,954
Net income attributable to InfraREIT, Inc. common stockholders per share:      
Basic $ 1.40 $ 0.28 $ 1.14
Diluted 1.40 0.28 1.14
Cash dividends declared per common share $ 1.00 $ 1.00 $ 1.00
v3.10.0.1
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - USD ($)
$ in Thousands
Total
Common Stock
Additional Paid-In Capital
Accumulated Deficit
Total InfraREIT, Inc. Equity
Noncontrolling Interest
Balance at Dec. 31, 2015 $ 934,268 $ 436 $ 702,213 $ (24,526) $ 678,123 $ 256,145
Balance, shares at Dec. 31, 2015   43,565,495        
Dividends and distributions $ (60,636)     (43,671) (43,671) (16,965)
Redemption of operating partnership units for common stock   $ 2 3,275   3,277 (3,277)
Redemption of operating partnership units for common stock, shares 186,496 186,496        
Net income $ 69,301     49,954 49,954 19,347
Equity based compensation 978   357   357 621
Equity based compensation, shares   20,292        
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 $ (60,676)     (43,787) (43,787) (16,889)
Redemption of operating partnership units for common stock     512   512 (512)
Redemption of operating partnership units for common stock, shares 24,632 24,632        
Net income $ 17,053     12,302 12,302 4,751
Equity based compensation 570         570
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 $ (60,704)     (43,964) (43,964) (16,740)
Redemption of operating partnership units for common stock   $ 2 1,926   1,928 (1,928)
Redemption of operating partnership units for common stock, shares 178,083 178,083        
Net income $ 85,152     61,670 61,670 23,482
Equity based compensation 560         560
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        
v3.10.0.1
CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($)
$ in Thousands
12 Months Ended
Dec. 31, 2018
Dec. 31, 2017
Dec. 31, 2016
Cash flows from operating activities      
Net income $ 85,152 $ 17,053 $ 69,301
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation 47,813 51,207 46,704
Amortization of deferred financing costs 2,971 4,173 4,014
Allowance for funds used during construction - other funds (1,094) (681) (3,728)
Tax Cuts and Jobs Act regulatory adjustment   55,779  
Gain on asset exchange transaction   (257)  
Loss on inventory disposition 316    
Equity based compensation 560 570 978
Changes in assets and liabilities:      
Due from affiliates (3,149) (2,618) (1,382)
Inventory (460) 479 (545)
Prepaids and other current assets (102) (102) (166)
Accounts payable and accrued liabilities (7,037) (8,021) 7,958
Net cash provided by operating activities 124,970 117,582 123,134
Cash flows from investing activities      
Additions to electric plant (69,850) (184,435) (231,312)
Proceeds from asset exchange transaction 1,632 17,935  
Net cash used in investing activities (68,218) (166,500) (231,312)
Cash flows from financing activities      
Proceeds from short-term borrowings 162,500 138,500 139,500
Repayments of short-term borrowings (91,000) (235,000) (56,000)
Proceeds from borrowings of long-term debt   200,000 100,000
Repayments of long-term debt (68,305) (7,849) (7,423)
Deferred financing costs (303) (809) (649)
Dividends and distributions paid (60,697) (60,668) (59,109)
Net cash (used in) provided by financing activities (57,805) 34,174 116,319
Net (decrease) increase in cash, cash equivalents and restricted cash (1,053) (14,744) 8,141
Cash, cash equivalents and restricted cash at beginning of year 4,550 19,294 11,153
Cash, cash equivalents and restricted cash at end of year $ 3,497 $ 4,550 $ 19,294
v3.10.0.1
Description of Business and Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2018
Organization Consolidation And Presentation Of Financial Statements [Abstract]  
Description of Business and Summary of Significant Accounting Policies

1.

Description of Business and Summary of Significant Accounting Policies

Description of Business

InfraREIT, Inc. (Company or InfraREIT) is a Maryland corporation that is engaged in owning and leasing rate-regulated assets in Texas. The Company is structured as a real estate investment trust (REIT) for federal income tax purposes. The Company’s subsidiaries include InfraREIT Partners, LP (Operating Partnership or InfraREIT LP), a Delaware limited partnership, of which InfraREIT is the general partner; Transmission and Distribution Company, L.L.C. (TDC); and Sharyland Distribution & Transmission Services, L.L.C. (SDTS), the Company’s regulated subsidiary.

The Company has elected to be taxed as a REIT for federal income tax purposes. The Company is externally managed and advised by Hunt Utility Services, LLC (Hunt Manager), a Delaware limited liability company. Hunt Manager is responsible for managing the Company’s day-to-day affairs, subject to the oversight of the Company’s board of directors. All of the Company’s officers, including the Company’s President and Chief Executive Officer, David A. Campbell, are employees of Hunt Manager. Mr. Campbell also serves as President and Chief Executive Officer of Sharyland Utilities, L.P. (Sharyland), a Texas-based utility and the Company’s sole tenant.

The Company holds 72.4% of the outstanding partnership units (OP Units) in the Operating Partnership as of December 31, 2018. The Company includes the accounts of the Operating Partnership and its subsidiaries in the consolidated financial statements. Affiliates and current or former employees of Hunt Consolidated, Inc. (Hunt) and members of the Company’s board of directors hold the other 27.6% of the outstanding OP Units as of December 31, 2018.

SDTS’s assets are located in the Texas Panhandle; near Wichita Falls, Abilene and Brownwood; in the Permian Basin; and in South Texas. SDTS leases all its regulated assets under several lease agreements to Sharyland, which operates and maintains the regulated assets. SDTS and Sharyland are each subject to regulation as an electric utility by the Public Utility Commission of Texas (PUCT). SDTS is authorized to own and lease its assets to Sharyland under a certificate of convenience and necessity (CCN) granted by the PUCT.

Principles of Consolidation and Presentation

The consolidated financial statements include the Company’s accounts and the accounts of all other entities in which the Company has a controlling financial interest with noncontrolling interest of consolidated subsidiaries reported separately. All significant intercompany balances and transactions have been eliminated. SDTS maintains accounting records in accordance with the uniform system of accounts, as prescribed by the Federal Energy Regulatory Commission (FERC). In accordance with the applicable consolidation guidance, the Company’s consolidated financial statements reflect the effects of the different rate making principles mandated by the FERC and PUCT which regulate its subsidiaries’ operations.

The accompanying historical consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. The historical financial information is not necessarily indicative of the Company’s future results of operations, financial position and cash flows.

Use of Estimates

The preparation of the Company’s 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.

Regulation

As the owner of rate-regulated assets, regulatory principles applicable to the utility industry also apply to SDTS. The financial statements reflect regulatory assets and liabilities under cost-based rate regulation in accordance with accounting standards related to the effect of certain types of regulation. Regulatory decisions can have an impact on the recovery of costs, the rate earned on invested capital and the timing and amount of assets to be recovered by rates. See Note 8, Other Assets.

SDTS capitalizes allowance for funds used during construction (AFUDC) during the construction of its regulated assets, and SDTS’s lease agreements with Sharyland rely on FERC definitions and accepted standards regarding capitalization of expense to define key terms in the lease such as footprint projects, which are the expenditures SDTS is obligated to fund pursuant to the leases. The amounts funded for these footprint projects include allocations of Sharyland employees’ time and overhead allocations consistent with FERC policies and U.S. GAAP. The leases define “footprint projects” to be transmission or, if applicable, distribution projects that (1) are primarily situated within the Company’s current or previous distribution service territory, as applicable; (2) physically hang from the Company’s existing transmission assets, such as the addition of another circuit to the Company’s existing transmission lines or that are physically located within one of its substations or (3) connect or are otherwise added to transmission lines or other properties that comprise a part of the 2017 Asset Exchange Transaction (as defined below).

Sharyland cannot be removed as lessee without prior approval from the PUCT. SDTS transacts with Sharyland through several lease arrangements covering all the regulated assets. These lease agreements include provisions for additions and retirements of the regulated assets in the form of new construction or other capitalized projects.

Cash and Cash Equivalents

The Company considers all short-term, highly liquid investments with original maturities of three months or less to be cash equivalents. The Company’s account balances at one or more institutions periodically exceed the Federal Deposit Insurance Corporation (FDIC) insurance coverage and, as a result, there could be a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. The Company has not experienced any losses and believes the risk is not significant.

Restricted Cash

Restricted cash represents the principal and interest payable for two consecutive periods associated with TDC’s senior secured notes described in Note 10, Long-Term Debt.

Concentration of Credit Risk

Sharyland is the Company’s sole tenant and all the Company’s revenue is driven by the leases with Sharyland.

Inventory

Inventory consists primarily of transmission and distribution parts and materials used in the construction of electric plant. Inventory is valued at average cost when it is acquired and used.

Electric Plant, net

Electric plant equipment is stated at the original cost of acquisition or construction, which includes the cost of contracted services, direct labor, materials, acquisition adjustments and overhead items. In accordance with the FERC uniform system of accounts guidance, SDTS recognizes, as a cost to construction work in progress (CWIP), AFUDC on other funds classified as other income (expense), net and AFUDC on borrowed funds classified as a reduction of the interest expense, net on the Consolidated Statements of Operations.

The AFUDC blended rate utilized was 6.3%, 4.0% and 6.7% for the years ended December 31, 2018, 2017 and 2016, respectively.

Depreciation of property, plant and equipment is calculated on a straight-line basis over the estimated service lives of the properties based on depreciation rates approved by the PUCT. Depreciation rates include plant removal costs as a component of depreciation expense, consistent with regulatory treatment. Actual removal costs incurred are charged to accumulated depreciation. When accrued removal costs exceed incurred removal costs, the difference is reclassified as a regulatory liability to retire assets in the future. The regulatory liability will be relieved as cost of removal charges are incurred upon asset retirement.

Repairs are the responsibility of Sharyland as the lessee under the lease agreements. Betterments and improvements generally are the responsibility of SDTS and are capitalized.

Provision for depreciation of electric plant is computed using composite straight-line rates as follows for each of the years ended December 31, 2018, 2017 and 2016:

 

 

 

Rates

Transmission plant

 

1.69% - 3.15%

Distribution plant

 

1.74% - 5.96%

General plant

 

0.80% - 5.12%

 

Impairment of Long-Lived Assets

The Company evaluates impairment of its long-lived assets annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized only if the carrying amount of a long-lived asset is not recoverable through expected future cash flows. Regulatory assets are charged to expense in the period in which they are no longer probable of future recovery.

Goodwill

Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less liabilities assumed. Goodwill is not amortized and is tested for impairment annually or more frequently if events or changes in circumstances arise.

Accounting Standard Update (ASU) 2011-08, Testing of Goodwill for Impairment allows entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of a reporting unit (i.e. the first step of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more-likely-than-not greater than the carrying amount, a quantitative calculation would not be needed.

The Company’s annual goodwill impairment analysis, which was performed qualitatively during the fourth quarter of 2018, did not result in an impairment charge. As of December 31, 2018 and 2017, $138.4 million was recorded as goodwill on the Consolidated Balance Sheets.

Investments

An investment is considered impaired if the fair value of the investment is less than its cost. Generally, an impairment is considered other-than-temporary unless (1) the Company has the ability and intent to hold an investment for a reasonable period of time sufficient for an anticipated recovery of fair value up to (or beyond) the cost of the investment; and (2) evidence indicating that the cost of the investment is recoverable within a reasonable period of time outweighs evidence to the contrary. If impairment is determined to be other than temporary, then an impairment loss is recognized equal to the difference between the investment’s cost and its fair value.

Deferred Financing Costs

Amortization of deferred financing costs associated with the issuance of TDC’s $25.0 million senior secured notes and the revolving credit facilities is computed using the straight-line method over the life of the loan which approximates the effective interest method. Amortization of deferred financing costs associated with SDTS is computed using the straight-line method over the life of the loan in accordance with applicable regulatory guidance.

Derivative Instruments

The Company may use derivatives from time to time to hedge against changes in cash flows related to interest rate risk (cash flow hedging instrument). Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging requires all derivatives be recorded on the Consolidated Balance Sheets at fair value. The Company determines the fair value of the cash flow hedging instrument based on the difference between the cash flow hedging instrument’s fixed contract price and the underlying market price at the determination date. The asset or liability related to the cash flow hedging instrument is recorded on the Consolidated Balance Sheets at its fair value.

Unrealized gains and losses on the effective cash flow hedging instrument are recorded as components of accumulated other comprehensive income. Realized gains and losses on the cash flow hedging instrument are recorded as adjustments to interest expense. Settlements of derivatives are included within operating activities on the Consolidated Statements of Cash Flows. Any ineffectiveness in the cash flow hedging instrument is recorded as an adjustment to interest expense in the current period. The Company did not have any derivative financial instruments during 2018, 2017 or 2016.

Income Taxes

The Company elected to be treated as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2010. As a result, the Company generally will not be subject to federal income tax on its taxable income that is distributed to its stockholders. A REIT is subject to a number of other organizational and operational requirements, including a requirement that it currently distribute at least 90% of its annual taxable income (with certain adjustments). As a REIT, the Company expects to distribute at least 100% of its taxable income. Accordingly, there is no provision for federal income taxes in the accompanying consolidated financial statements. Even if the Company maintains its qualification for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, including excise taxes, and federal corporate income taxes on any undistributed income.

The Company recognizes the impact of tax return positions that are more-likely-than-not to be sustained upon audit. Significant judgment is required to evaluate uncertain tax positions. The evaluation of uncertain tax positions is based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues.

In December 2017, the Tax Cuts and Job Acts (TCJA) was signed into law resulting in significant changes to federal tax laws effective for taxable years beginning on or after January 1, 2018. See Note 19, Income Taxes for additional information.

Revenue Recognition

The Company, through its subsidiaries, is the owner of regulated assets and recognizes lease revenue over the term of lease agreements with Sharyland. The Company’s lease revenue includes annual payments and additional rents based upon a percentage of revenue earned by Sharyland on the leased assets in excess of annual specified breakpoints. In accordance with the lease agreements, Sharyland, the lessee and operator of the regulated assets, is responsible for the maintenance and operation of the regulated assets and primarily responsible for compliance with all regulatory requirements of the PUCT, the FERC or any other regulatory entity with jurisdiction over the regulated assets on the Company’s behalf and with the Company’s cooperation. Each of the lease agreements with Sharyland is a net lease that obligates the lessee to pay all property related expenses, including maintenance, repairs, taxes and insurance, and to comply with the terms of the SDTS secured credit facilities and note purchase agreements. The Company recognizes base rent under these leases on a straight-line basis over the applicable lease term.

The current lease agreements provide for periodic supplemental adjustments of base rent based upon capital expenditures made by SDTS. The Company recognizes supplemental adjustments of base rent as a modification under these leases on a prospective straight-line basis over the applicable lease term. The Company recognizes percentage rent under these leases once the revenue earned by Sharyland on the leased assets exceeds the annual specified breakpoints.

Asset Retirement Obligations

The Company has identified, but not recognized, asset retirement obligation liabilities related to the regulated assets as a result of certain easements on property on which the Company has assets. Generally, such easements are perpetual and require only the retirement and removal of the assets upon cessation of the property’s use. Management has not estimated and recorded a retirement liability for such easements because the Company plans to use the facilities indefinitely.

Interest Expense, net

The Company’s interest expense, net primarily consists of interest expense from the senior secured notes, senior secured term loan and credit facilities, see Note 9, Borrowings Under Credit Facilities and Note 10, Long-Term Debt. AFUDC on borrowed funds of $2.8 million, $3.0 million and $3.1 million was recognized as a reduction of the Company’s interest expense during the years ended December 31, 2018, 2017 and 2016, respectively.

Other Income, net

AFUDC on other funds of $1.1 million, $0.7 million and $3.7 million was recognized in other income, net during the years ended December 31, 2018, 2017 and 2016, respectively.

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements and Disclosures sets forth a framework for measuring fair value and required disclosures about fair value measurements of assets and liabilities in accordance with U.S. GAAP.

Level 1 — Quoted prices in active markets for identical assets and liabilities.

Level 2 — Valuations based on one or more quoted prices in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs that are observable other than quoted prices for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Recent Accounting Guidance

Recently Adopted Accounting Guidance

In May 2014, the Financial Accounting Standards Board (FASB) issued 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 230): 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 twelve 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 will adopt the new guidance using this transition method and other guidance discussed herein as of January 1, 2019. 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.

Reportable Segments

U.S. GAAP establishes standards for reporting financial and descriptive information about a company’s reportable segments. Management has determined that the Company has one reportable segment, with activities related to ownership and leasing of rate-regulated assets.

 

v3.10.0.1
Pending Corporate transactions
12 Months Ended
Dec. 31, 2018
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 $950 million as of December 31, 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 the management agreement with 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:

 

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 in Sharyland Holdings, LP;

 

other necessary regulatory approvals, including approval by 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 December 14, 2018. On December 21, 2018, 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.

In accordance with the definitive agreements, SDTS, Sharyland and Oncor filed a Sale-Transfer-Merger application (STM) with the PUCT on November 30, 2018, and a hearing on the merits is scheduled for April 10-12, 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.

Subject to obtaining the required regulatory approvals, the transactions are expected to close by mid-2019.

v3.10.0.1
2017 Asset Exchange Transaction
12 Months Ended
Dec. 31, 2018
Nonmonetary Transactions [Abstract]  
2017 Asset Exchange Transaction

3.

2017 Asset Exchange Transaction

In July 2017, SDTS and Sharyland signed a definitive agreement (2017 Asset Exchange Agreement) with 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).

The table below reflects the details of the Asset Exchange Transaction:

 

(in thousands)

 

December 31, 2017

 

Net assets transferred to Oncor

 

 

 

 

Gross transmission plant

 

$

2,675

 

Gross distribution plant

 

 

499,381

 

Gross general plant

 

 

13,013

 

Construction work in progress

 

 

22,076

 

Total electric plant

 

 

537,145

 

Accumulated depreciation

 

 

(130,712

)

Electric plant, net

 

 

406,433

 

Inventory

 

 

37

 

Regulatory liability

 

 

(3,870

)

Net assets transferred to Oncor

 

$

402,600

 

 

 

 

 

 

Net transmission assets acquired from Oncor

 

 

 

 

Gross transmission plant

 

$

432,560

 

Construction work in progress

 

 

48

 

Total transmission plant

 

 

432,608

 

Accumulated depreciation

 

 

(32,778

)

Transmission plant, net

 

 

399,830

 

Regulatory liability

 

 

(16,540

)

Net assets acquired from Oncor

 

$

383,290

 

 

 

 

 

 

Cash portion of purchase price from Oncor

 

 

 

 

Cash

 

$

17,935

 

Receivable from Oncor

 

 

1,632

 

Cash portion of purchase price from Oncor

 

$

19,567

 

 

 

 

 

 

Gain on asset exchange transaction

 

$

257

 

 

Upon closing of the 2017 Asset Exchange Transaction, Sharyland leased the newly acquired assets from SDTS and began operating them under an amended CCN. SDTS continues to own and lease to Sharyland certain substations related to its wholesale distribution assets. Sharyland exited the retail distribution business when the transaction closed. Additionally, SDTS and Sharyland amended certain of their lease agreements to remove the assets that were transferred to Oncor. See Note 17, Leases for additional information regarding the amended leases.

v3.10.0.1
Cash, Cash Equivalents and Restricted Cash
12 Months Ended
Dec. 31, 2018
Cash And Cash Equivalents [Abstract]  
Cash, Cash Equivalents and Restricted Cash

4.

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:

 

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

 

2016

 

Cash and cash equivalents

 

$

1,808

 

 

$

2,867

 

 

$

17,612

 

Restricted cash

 

 

1,689

 

 

 

1,683

 

 

 

1,682

 

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

    Cash Flows

 

$

3,497

 

 

$

4,550

 

 

$

19,294

 

 

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, TDC, as described in Note 10, Long-Term Debt.

v3.10.0.1
Related Party Transactions
12 Months Ended
Dec. 31, 2018
Related Party Transactions [Abstract]  
Related Party Transactions

5.

Related Party Transactions

The Company, through SDTS, leases all its regulated assets to Sharyland through several lease agreements. Under the leases, the Company has agreed to fund capital expenditures for footprint projects.

The Company earned lease revenues from Sharyland under these agreements of $200.4 million, $190.3 million and $172.1 million during the years ended December 31, 2018, 2017 and 2016, respectively. In connection with the Company’s leases with Sharyland, the Company had a deferred rent liability of $11.1 million and $14.7 million as of December 31, 2018 and 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 the Company, the Company 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 the Company’s regulated assets. For the years ended December 31, 2018 and 2017, the net amount of the payments the Company made to Sharyland was $68.1 million and $187.1 million, respectively.

As of December 31, 2018 and 2017, accounts payable and accrued liabilities on the Consolidated Balance Sheets included $2.9 million and $2.1 million, respectively, related to amounts owed to Sharyland for construction costs incurred and property taxes paid on behalf of the Company. As of December 31, 2018 and 2017, amounts due from affiliates on the Consolidated Balance Sheets included $38.2 million and $35.2 million, respectively, related to amounts owed by Sharyland primarily associated with the Company’s leases.

The management fee paid to Hunt Manager for the years ended December 31, 2018, 2017 and 2016 was $13.7 million, $17.6 million and $10.3 million, respectively. As of December 31, 2018 and 2017, there were no prepaid or accrued amounts associated with management fees on the Consolidated Balance Sheets. As of December 31, 2016, there was $3.5 million accrued for management fees on the Consolidated Balance Sheets. Additionally, during the years ended December 31, 2018, 2017 and 2016, the Company paid Hunt Manager $0.1 million, $0.3 million and $0.5 million, respectively, for reimbursement of annual software license and maintenance fees and other expenses in accordance with the 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 the Company’s total equity as of December 31 of the immediately preceding year, subject to a $30.0 million cap. The Company must notify Hunt Manager no later than September 30, 2019 if it intends 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 the Company’s independent directors decides to terminate the agreement.

The base fees through December 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

 

April 1, 2019 - December 31, 2019

 

 

10.4

 

 

If the management agreement is renewed under its current terms, the Company 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, the Company would owe Hunt Manager a termination fee equal to three times the current annual management fee or approximately $41.7 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 2017 Asset Exchange Transaction. For information related to the 2017 Asset Exchange Transaction, see Note 3, 2017 Asset Exchange Transaction.

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 the Company entered into an omnibus termination agreement pursuant to which the management agreement, development agreement, leases and all other existing agreements between the Company, and Hunt, Sharyland or their affiliates will be terminated upon the closing. Under the omnibus termination agreement, the Company has agreed to pay Hunt approximately $40.5 million upon the closing. 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. For additional information, see Note 2, Pending Corporate Transactions.

v3.10.0.1
Electric Plant and Depreciation
12 Months Ended
Dec. 31, 2018
Public Utilities Property Plant And Equipment [Abstract]  
Electric Plant and Depreciation

6.

Electric Plant and Depreciation

The major classes of electric plant are as follows:

 

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Electric plant:

 

 

 

 

 

 

 

 

Transmission plant

 

$

1,794,438

 

 

$

1,685,466

 

Distribution plant

 

 

151,698

 

 

 

143,865

 

General plant

 

 

3,023

 

 

 

3,023

 

Total plant in service

 

 

1,949,159

 

 

 

1,832,354

 

Construction work in progress

 

 

66,121

 

 

 

113,643

 

Total electric plant

 

 

2,015,280

 

 

 

1,945,997

 

Accumulated depreciation

 

 

(203,963

)

 

 

(173,768

)

Electric plant, net

 

$

1,811,317

 

 

$

1,772,229

 

 

General plant consists primarily of a warehouse, buildings and associated assets. 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 $28.5 million and $29.4 million at December 31, 2018 and 2017, respectively.

 

v3.10.0.1
Goodwill
12 Months Ended
Dec. 31, 2018
Goodwill And Intangible Assets Disclosure [Abstract]  
Goodwill

7.

Goodwill

Goodwill represents the excess of costs of an acquired business over the fair value of the assets acquired, less liabilities assumed. The Company conducts an impairment test of goodwill at least annually. The Company’s 2018 impairment test did not result in an impairment charge. As of December 31, 2018 and 2017, $138.4 million was recorded as goodwill on the Consolidated Balance Sheets.

 

v3.10.0.1
Other Assets
12 Months Ended
Dec. 31, 2018
Deferred Costs Capitalized Prepaid And Other Assets Disclosure [Abstract]  
Other Assets

8.

Other Assets

Other assets are as follows:

 

 

 

December 31, 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

 

$

1,025

 

 

$

(779

)

 

$

246

 

 

$

967

 

 

$

(591

)

 

$

376

 

Other regulatory assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

10,610

 

 

 

(5,490

)

 

 

5,120

 

 

 

28,570

 

 

 

(20,944

)

 

 

7,626

 

Deferred costs recoverable in future years

 

 

23,793

 

 

 

 

 

 

23,793

 

 

 

23,793

 

 

 

 

 

 

23,793

 

Other regulatory assets

 

 

34,403

 

 

 

(5,490

)

 

 

28,913

 

 

 

52,363

 

 

 

(20,944

)

 

 

31,419

 

Investments

 

 

2,519

 

 

 

 

 

 

2,519

 

 

 

2,519

 

 

 

 

 

 

2,519

 

Other assets

 

$

37,947

 

 

$

(6,269

)

 

$

31,678

 

 

$

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 9, Borrowings Under Credit Facilities.

Other regulatory assets consist of deferred financing costs within the Company’s regulated subsidiary, SDTS. These 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 SDTS’s 2011 Notes (defined below) were fully amortized in June 2018 and removed from the Company’s Consolidated Balance Sheets when the 2011 Notes were repaid at maturity. See Note 10, Long-Term Debt.

Deferred costs recoverable in future years of $23.8 million at December 31, 2018 and 2017 represent operating costs incurred from inception of Sharyland through 2007. The Company has 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.

In connection with the acquisition of Cap Rock Holding Corporation, the Company received a participation in the National Rural Utilities Cooperative Finance Corporation. The Company accounts for this investment under the cost method of accounting. The Company believes that the investment is not impaired as of December 31, 2018 and 2017.

 

v3.10.0.1
Borrowings Under Credit Facilities
12 Months Ended
Dec. 31, 2018
Debt Disclosure [Abstract]  
Borrowings Under Credit Facilities

9.

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 the Company 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 10, 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 also is 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 December 31, 2018 and 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 December 31, 2018 and 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. 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 in Note 10, 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 also is 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 December 31, 2018, SDTS had $112.5 million of borrowings outstanding at a weighted average interest rate of 4.59%, no letters of credit outstanding and $137.5 million of remaining 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 December 31, 2018 and 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
12 Months Ended
Dec. 31, 2018
Debt Instruments [Abstract]  
Long-Term Debt

10.

Long-Term Debt

Long-term debt consisted of the following:

 

 

 

 

 

December 31, 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

 

$

15,000

 

 

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

 

 

3.73%

 

 

 

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

 

 

38,338

 

 

7.25%

 

 

 

40,546

 

 

7.25%

 

Senior secured notes - $110.0 million

 

September 30, 2030

 

 

87,973

 

 

6.47%

 

 

 

92,821

 

 

6.47%

 

Total SDTS debt

 

 

 

 

826,311

 

 

 

 

 

 

 

893,367

 

 

 

 

 

Total long-term debt

 

 

 

 

841,311

 

 

 

 

 

 

 

909,617

 

 

 

 

 

Less unamortized deferred financing costs

 

 

 

 

(64

)

 

 

 

 

 

 

(97

)

 

 

 

 

Total long-term debt, less deferred

    financing costs

 

 

 

 

841,247

 

 

 

 

 

 

 

909,520

 

 

 

 

 

Less current portion of long-term debt

 

 

 

 

(8,792

)

 

 

 

 

 

 

(68,305

)

 

 

 

 

Debt classified as long-term debt, less

    deferred financing costs

 

 

 

$

832,455

 

 

 

 

 

 

$

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 9, 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 December 31, 2018 and 2017.

SDTS had $60.0 million aggregate principal amount of 5.04% per annum senior secured notes 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, limitation 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 December 31, 2018 and 2017, SDTS and TDC were in compliance with all debt covenants under the applicable agreements. See Note 2, Pending Corporate Transaction 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 9, 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.

Future maturities of long-term debt are as follows for the years ending December 31:

 

(In thousands)

 

Total

 

2019

 

$

8,792

 

2020

 

 

221,813

 

2021

 

 

8,621

 

2022

 

 

9,216

 

2023

 

 

9,853

 

Thereafter

 

 

583,016

 

Total

 

$

841,311

 

 

v3.10.0.1
Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2018
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments

11.

Fair Value of Financial Instruments

The carrying amounts of the Company’s 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.

The Company had fixed rate borrowings totaling $641.3 million and $709.6 million under senior secured notes with a weighted average interest rate of 4.5% and 4.6% per annum as of December 31, 2018 and 2017, respectively. The fair value of these borrowings was estimated using discounted cash flow analysis based on current market rates.

As of December 31, 2018 and 2017, the Company had $200.0 million of borrowings under the 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

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

841,311

 

 

$

 

 

$

864,281

 

 

$

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

909,617

 

 

$

 

 

$

950,522

 

 

$

 

 

v3.10.0.1
Regulatory Matters
12 Months Ended
Dec. 31, 2018
Public Utilities Rate Matters [Abstract]  
Regulatory Matters

12.

Regulatory Matters

Regulatory Liabilities

Regulatory liabilities are as follows:

 

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Cost of removal

 

$

59,753

 

 

$

44,679

 

Excess accumulated deferred federal income tax

 

 

55,779

 

 

 

55,779

 

Regulatory liabilities

 

$

115,532

 

 

$

100,458

 

 

The Company’s regulatory liability related to cost of removal is established through depreciation rates and represents amounts that the Company expects 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, the Company 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 its assets. Prior to the enactment of the TCJA in December 2017, this ADFIT was calculated based on a 35% corporate federal income tax rate but was not recorded on its consolidated balance sheets or income statements due to the expectation that the Company would not pay corporate federal income taxes as a result of its 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, during the fourth quarter of 2017, the Company reduced the ADFIT by $55.8 million and created a regulatory liability for regulatory purposes. Additionally, in accordance with ASC Topic 980, Regulated Operations, Section 405, Liabilities, the Company recorded the $55.8 million regulatory liability on its Consolidated Balance Sheet as of December 31, 2017 with a corresponding reduction to its revenue as deferred tax liabilities had not previously been recorded on its 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

The Company has 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 the Company’s regulated assets. Accordingly, the PUCT’s order approving the restructuring of the Company into a REIT structure required Sharyland and SDTS to be regulated on a combined basis, and Sharyland, as the holder of the CCN required to operate the Company’s regulated assets, historically has made all regulatory filings related to the Company’s 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 the Company’s 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 the Company’s transmission assets, at the 21% corporate federal income tax rate and, with respect to the Company’s 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 a test year ending December 31, 2019. If the sale of InfraREIT is not completed and the Company is 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 the Company’s regulated assets.

v3.10.0.1
Commitments and Contingencies
12 Months Ended
Dec. 31, 2018
Commitments And Contingencies Disclosure [Abstract]  
Commitments and Contingencies

13.

Commitments and Contingencies

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

 

v3.10.0.1
Equity
12 Months Ended
Dec. 31, 2018
Equity [Abstract]  
Equity

14.

Equity

The Company and the Operating Partnership declared cash dividends on common stock and distributions on OP Units of $1.00 per share during each of the years ended December 31, 2018, 2017 and 2016. The Company paid a total of $60.7 million, $60.7 million and $59.1 million in dividends and distributions during the years ended December 31, 2018, 2017 and 2016, respectively.

For federal income tax purposes, the dividends declared in 2018, 2017 and 2016 were classified as ordinary income.

The Company is required to distribute at least 90% of its taxable income (excluding net capital gains) to maintain its status as a REIT. Management believes that the Company has distributed at least 100% of its taxable income.

v3.10.0.1
Noncontrolling Interest
12 Months Ended
Dec. 31, 2018
Noncontrolling Interest [Abstract]  
Noncontrolling Interest

15.

Noncontrolling Interest

The Company presents as a noncontrolling interest the portion of any equity in entities that it controls and consolidates but does 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 the Company’s option, it may satisfy this redemption with cash or by exchanging shares of the Company’s common stock on a one-for-one basis. As of December 31, 2018 and 2017, there were a total of 16.7 million and 16.9 million, respectively, OP Units held by the limited partners of the Operating Partnership.

During the years ended December 31, 2018, 2017 and 2016, an aggregate of 28,952, 31,633 and 29,722 long-term incentive units (LTIP Units), respectively, were issued by the Operating Partnership to members of the Company’s board of directors. For additional information, refer to Note 18, Share-Based Compensation.

The Company follows the guidance issued by the FASB regarding the classification and measurement of redeemable securities. Accordingly, the Company has determined that the OP Units meet the requirements to be classified as permanent equity. During the year ended December 31, 2018, the Company redeemed 178,083 OP Units with the issuance of 178,083 shares of common stock. The Company redeemed 24,632 OP Units with the issuance of 24,632 shares of common stock during the year ended December 31, 2017. During the year ended December 31, 2016, the Company redeemed 186,496 OP Units with the issuance of 186,496 shares of common stock.

 

v3.10.0.1
Earnings Per Share
12 Months Ended
Dec. 31, 2018
Earnings Per Share [Abstract]  
Earnings Per Share

16.

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 the Company’s common stock, if such redemption were dilutive. The redemption of OP Units would have been anti-dilutive during the years ended December 31, 2018, 2017 and 2016.

Earnings per share are calculated as follows:

 

 

 

Years Ended December 31,

 

(In thousands, except per share data)

 

2018

 

 

2017

 

 

2016

 

Basic net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to InfraREIT, Inc.

 

$

61,670

 

 

$

12,302

 

 

$

49,954

 

Weighted average common shares outstanding

 

 

43,930

 

 

 

43,783

 

 

 

43,668

 

Basic net income per share

 

$

1.40

 

 

$

0.28

 

 

$

1.14

 

Diluted net income per share:

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to InfraREIT, Inc.

 

$

61,670

 

 

$

12,302

 

 

$

49,954

 

Weighted average common shares outstanding

 

 

43,930

 

 

 

43,783

 

 

 

43,668

 

Redemption of Operating Partnership units

 

 

 

 

 

 

 

 

 

Weighted average dilutive shares outstanding

 

 

43,930

 

 

 

43,783

 

 

 

43,668

 

Diluted net income per share

 

$

1.40

 

 

$

0.28

 

 

$

1.14

 

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

 

$

23,482

 

 

$

4,751

 

 

$

19,347

 

Redemption of Operating Partnership units

 

 

16,774

 

 

 

16,892

 

 

 

16,968

 

v3.10.0.1
Leases
12 Months Ended
Dec. 31, 2018
Leases [Abstract]  
Leases

17.

Leases

The following table shows the composition of the Company’s lease revenue:

 

 

 

Years Ended December 31,

 

(In thousands)

 

2018

 

 

2017

 

 

2016

 

Base rent (straight-line)

 

$

191,319

 

 

$

165,264

 

 

$

145,030

 

Percentage rent

 

 

9,035

 

 

 

25,077

 

 

 

27,069

 

Total lease revenue

 

$

200,354

 

 

$

190,341

 

 

$

172,099

 

 

SDTS has entered into various leases with Sharyland for all of the Company’s placed in service regulated assets. The master lease agreements, as amended, expire at various dates from December 31, 2019 through December 31, 2022. The Company’s 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. All of the rent with respect to the capital expenditures to be placed in service in 2019 consists only of base rent. Percentage rent under the Company’s leases is based on a percentage of Sharyland’s annual gross revenues, as defined in the applicable lease, in excess of an annual breakpoint specified in each lease, which is 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 32% to a low of 23%. The percentage rent rates for 2019 through the expiration of the leases range from 24% to 30%. Because an annual specified breakpoint must be met under the leases before the Company can recognize any percentage rent, the Company anticipates 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.

 

v3.10.0.1
Share Based Compensation
12 Months Ended
Dec. 31, 2018
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]  
Share-Based Compensation

18.

Share-Based Compensation

InfraREIT, Inc. 2015 Equity Incentive Plan

The InfraREIT, Inc. 2015 Equity Incentive Plan (2015 Equity Incentive Plan) permits the Company to provide equity based compensation to certain personnel who provide services to the Company, Hunt Manager or an affiliate of either, in the form of stock options, stock appreciation rights, dividend equivalent rights, restricted stock, stock units, performance based awards, unrestricted stock, LTIP Units and other equity based awards up to an aggregate of 375,000 shares. The 2015 Equity Incentive Plan provides that no participant in the plan will be permitted to acquire, or will have any right to acquire, shares if such acquisition would be prohibited by the ownership limits contained in the Company’s charter or bylaws or would impair the Company’s status as a REIT. As of December 31, 2018, 236,401 shares were reserved for issuance under the 2015 Equity Incentive Plan.

The Company currently utilizes the 2015 Equity Incentive Plan primarily for annual compensation to the non-executive directors for their service on the Company’s board of directors. The following table shows the aggregate LTIP Units issued to members of the Company’s board of directors for the years ended December 31, 2018, 2017 and 2016:

 

Grant Date

 

LTIP Units

 

 

Grant Date

Fair Value

per LTIP Unit

 

 

Aggregate

Fair Value

(in thousands)

 

 

Vesting Date

January 2016

 

 

29,722

 

 

$

18.58

 

 

$

552

 

 

January 2017

January 2017

 

 

31,633

 

 

 

18.02

 

 

 

570

 

 

January 2018

January 2018

 

 

28,952

 

 

 

18.61

 

 

 

539

 

 

January 2019

 

See Note 22, Subsequent Events for details on the common stock issued to the non-executive directors in January 2019.

As part of the Company’s board of directors’ quarterly compensation, each non-executive director can, subject to certain exceptions, elect to receive part of their compensation in the Company’s common stock instead of cash with full vesting upon issuance. During 2017 and 2018, all directors received their quarterly compensation in cash. During 2016, certain directors elected to receive their quarterly compensation in the Company’s common stock. The following table shows the shares of common stock issued to members of the board of directors during the year ended December 31, 2016:

 

Grant Date

 

Shares of

Common Stock

 

 

Grant Date

Value

per Share

 

 

Aggregate

Fair Value

(in thousands)

 

January 2016

 

 

4,735

 

 

$

18.58

 

 

$

88

 

April 2016

 

 

5,497

 

 

 

16.81

 

 

 

92

 

July 2016

 

 

5,248

 

 

 

17.58

 

 

 

92

 

October 2016

 

 

4,812

 

 

 

17.84

 

 

 

86

 

 

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 the years ended December 31, 2018, 2017 and 2016, $0.6 million, $0.6 million and $1.0 million, respectively, was recognized as compensation expense related to these grants and is included in general and administrative expense on the Consolidated Statements of Operations. There was no unamortized compensation expense related to these grants at December 31, 2018.

InfraREIT, Inc. Non-Qualified 2015 Employee Stock Purchase Plan

The InfraREIT, Inc. 2015 Non-Qualified Employee Stock Purchase Plan (ESPP) allows employees of Hunt Manager or its affiliates whose principal duties include the management and operation of the Company’s business to purchase shares of the Company’s common stock at a discount. Pursuant to the management agreement, Hunt Manager is obligated to fund all the costs associated with the ESPP, including the funds necessary to purchase shares of the Company’s common stock in the open market pursuant to the plan. A total of 250,000 shares of common stock are reserved for sale and authorized for issuance under the ESPP. As of December 31, 2018, no shares have been purchased or offered for purchase under the ESPP.