Company Quick10K Filing
Infrareit
Price21.21 EPS2
Shares44 P/E11
MCap933 P/FCF13
Net Debt834 EBIT123
TEV1,767 TEV/EBIT14
TTM 2019-03-31, in MM, except price, ratios
10-Q 2019-03-31 Filed 2019-05-02
10-K 2018-12-31 Filed 2019-02-27
10-Q 2018-09-30 Filed 2018-11-01
10-Q 2018-06-30 Filed 2018-08-01
10-Q 2018-03-31 Filed 2018-05-03
10-K 2017-12-31 Filed 2018-03-05
10-Q 2017-09-30 Filed 2017-11-02
10-Q 2017-06-30 Filed 2017-08-02
10-Q 2017-03-31 Filed 2017-05-04
10-K 2016-12-31 Filed 2017-02-28
10-Q 2016-09-30 Filed 2016-11-03
10-Q 2016-06-30 Filed 2016-08-03
10-Q 2016-03-31 Filed 2016-05-05
10-K 2015-12-31 Filed 2016-03-03
10-Q 2015-09-30 Filed 2015-11-06
10-Q 2015-06-30 Filed 2015-08-07
10-Q 2015-03-31 Filed 2015-05-14
10-K 2014-12-31 Filed 2015-03-18
8-K 2019-05-16
8-K 2019-05-02
8-K 2019-04-05
8-K 2019-02-27
8-K 2019-02-07
8-K 2019-01-31
8-K 2018-12-31
8-K 2018-12-21
8-K 2018-12-07
8-K 2018-11-01
8-K 2018-10-18
8-K 2018-10-18
8-K 2018-08-01
8-K 2018-05-16
8-K 2018-05-03
8-K 2018-03-01
8-K 2018-02-14
8-K 2018-01-10
8-K 2017-12-31

HIFR 10Q Quarterly Report

Part I. Financial Information
Item 1. Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31.1 hifr-ex311_9.htm
EX-31.2 hifr-ex312_7.htm
EX-32.1 hifr-ex321_8.htm
EX-32.2 hifr-ex322_6.htm
EX-99.1 hifr-ex991_202.htm

Infrareit Earnings 2019-03-31

Balance SheetIncome StatementCash Flow

10-Q 1 hifr-10q_20190331.htm 10-Q hifr-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission file number: 001-36822

 

InfraREIT, Inc.

(Exact name of Registrant as specified in its charter)

 

 

Maryland

 

75-2952822

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

 

1900 North Akard Street

Dallas, Texas 75201

 

75201

(Address of Principal Executive Offices)

 

(Zip Code)

(214) 855-6700

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

Smaller reporting company

 

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Trading Symbol

 

Name of Each Exchange on Which Registered

Common Stock, $0.01 par value per share

 

HIFR

 

New York Stock Exchange

As of April 29, 2019, the registrant had 44,005,370 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 


 

InfraREIT, Inc.

INDEX

 

 

 

Page

Glossary of Terms

3

Forward-Looking Statements

4

 

PART I.

 

Financial Information

 

6

Item 1.

Consolidated Financial Statements (Unaudited)

6

 

Consolidated Balance Sheets

6

 

Consolidated Statements of Operations

7

 

Consolidated Statements of Stockholders’ Equity

8

 

Consolidated Statements of Cash Flows

9

 

Notes to the Unaudited Consolidated Financial Statements

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33

Item 4.

Controls and Procedures

33

 

PART II.

 

Other Information

 

34

Item 1.

Legal Proceedings

34

Item 1A.

Risk Factors

34

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34

Item 3.

Defaults Upon Senior Securities

34

Item 4.

Mine Safety Disclosures

34

Item 5.

Other Information

34

Item 6.

Exhibits

34

Signatures

36

 

 

 

2


 

GLOSSARY OF TERMS

This glossary highlights some of the industry terms that we use in this Quarterly Report on Form 10-Q and is not a complete list of all defined terms used herein.

 

Abbreviation 

 

Term 

AFUDC

 

allowance for funds used during construction

 

 

 

CREZ

 

competitive renewable energy zones, as defined by a 2005 Texas law establishing the Texas renewable energy program

 

 

 

distribution

 

that portion of a power delivery network consisting of an interconnected group of electric distribution lines, towers, poles, substations, transformers and associated assets over which electric power is distributed from points within the transmission network to end use consumers

 

 

 

distribution service territory

 

a designated area in which a utility is required or has the right to supply electric service to ultimate customers under a regulated utility structure

 

 

 

Footprint Projects

 

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 property that comprise a part of the transmission assets acquired in the 2017 Asset Exchange Transaction (as defined below). Footprint Projects do not include the addition of a new substation on our existing transmission lines or generation interconnects to our existing transmission lines, unless the addition or interconnection occurred within our current or prior distribution service territories

 

 

 

PUCT

 

Public Utility Commission of Texas

 

 

 

rate base

 

calculated as our gross electric plant in service under U.S. GAAP (as defined below), which is the aggregate amount of our total cash expenditures used to construct such assets plus AFUDC, less accumulated depreciation and adjusted for accumulated deferred income taxes, regulatory liabilities and regulatory assets

 

 

 

regulated assets

 

rate-regulated electric transmission and distribution assets, as applicable, such as power lines, substations, transmission towers, distribution poles, transformers and related property and assets

 

 

 

SEC

 

U.S. Securities and Exchange Commission

 

 

 

Sharyland

 

Sharyland Utilities, L.P., a Texas-based regulated electric utility and our sole tenant

 

 

 

transmission

 

that portion of a power delivery network consisting of an interconnected group of electric transmission lines, towers, poles, switchyards, substations, transformers and associated assets over which electric power is transmitted between points of supply or generation and distribution

 

 

 

U.S. GAAP

 

accounting principles generally accepted in the United States of America

 

 

 

3


 

FORWARD-LOOKING STATEMENTS

Some of the information in this Quarterly Report on Form 10-Q may contain forward-looking statements. Forward-looking statements give InfraREIT, Inc.’s (we, Company or InfraREIT) current expectations and include projections of results of operations or financial condition or forecasts of future events. Words such as “could,” “will,” “may,” “assume,” “forecast,” “position,” “predict,” “strategy,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “believe,” “project,” “budget,” “potential” or “continue” and similar expressions are used to identify forward-looking statements. Without limiting the generality of the foregoing, forward-looking statements contained in this document include our expectations regarding our strategies, objectives, growth and anticipated financial and operational performance, including guidance regarding our capital expenditures, infrastructure programs and estimated distributions to our stockholders.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. We believe that we have chosen these assumptions or bases in good faith and that they are reasonable. However, the assumptions and estimates underlying the forward-looking statements included in this document are inherently uncertain and are subject to a wide variety of significant business, economic and competitive risks and uncertainties that could cause actual results to differ materially from those contained in this document. Accordingly, when considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this document, and you are cautioned not to place undue reliance on any forward-looking statements. You should also understand that it is not possible to predict or identify all such factors, and you should not consider the following list to be a complete statement of all potential risks and uncertainties. Factors that could cause our actual results to differ materially from the results contemplated by such forward-looking statements include:

 

delays in achieving, or failure to achieve, the sale of InfraREIT to Oncor Electric Delivery Company LLC (Oncor) or related transactions, including the asset exchange with Sharyland, whether due to the failure to obtain required approvals or to obtain necessary regulatory approvals on favorable terms or due to other unsatisfied closing conditions, including a termination of the sale under circumstances that could require us to pay a termination fee;

 

decisions by regulators or changes in governmental policies or regulations with respect to our organizational structure, lease arrangements, capitalization, acquisitions and dispositions of assets, recovery of investments, authorized rate of return and other regulatory parameters;

 

our current reliance on our tenant for all our lease revenue and, as a result, our dependency on our tenant’s solvency and financial and operating performance;

 

the amount of available investment to grow our rate base;

 

cyber breaches and weather conditions or other natural phenomena;

 

our ability to negotiate future rent payments or renew leases with our tenant;

 

insufficient cash available to meet distribution requirements;

 

the price and availability of debt and equity financing;

 

our level of indebtedness or debt service obligations;

 

the effects of existing and future tax and other laws and governmental regulations;

 

our failure to qualify or maintain our status as a real estate investment trust (REIT) or changes in the tax laws applicable to REITs;

 

the termination of our management agreement or the loss of the services of Hunt Utility Services, LLC (Hunt Manager) or other qualified personnel;

 

adverse economic developments in the electric power industry or in business conditions generally; and

 

certain other factors discussed elsewhere in this Quarterly Report on Form 10-Q.

For the above reasons, there can be no assurance that any forward-looking statements included herein will prove to be indicative of our future performance or that actual results will not differ materially from those presented. In no event should the inclusion of forward-looking information in this document be regarded as a representation by any person that the results contained in such forward-looking information will be achieved.

4


 

Forward-looking statements speak only as of the date on which they are made. While we may update these statements from time to time, we are not required to do so other than pursuant to applicable laws. For a further discussion of these and other factors that could impact our future results and performance, see Part I, Item 1A., Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 27, 2019 (2018 Form 10-K).

 

5


 

PART I.  FINANCIAL INFORMATION

Item 1.

Consolidated Financial Statements

InfraREIT, Inc.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

3,487

 

 

$

1,808

 

Restricted cash

 

 

1,693

 

 

 

1,689

 

Due from affiliates

 

 

33,126

 

 

 

38,174

 

Inventory

 

 

6,862

 

 

 

6,903

 

Prepaids and other current assets

 

 

2,648

 

 

 

1,077

 

Total current assets

 

 

47,816

 

 

 

49,651

 

Electric Plant, net

 

 

1,814,584

 

 

 

1,811,317

 

Goodwill

 

 

138,384

 

 

 

138,384

 

Other Assets

 

 

31,671

 

 

 

31,678

 

Total Assets

 

$

2,032,455

 

 

$

2,031,030

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

20,881

 

 

$

19,657

 

Short-term borrowings

 

 

106,500

 

 

 

112,500

 

Current portion of long-term debt

 

 

8,919

 

 

 

8,792

 

Dividends and distributions payable

 

 

15,182

 

 

 

15,176

 

Accrued taxes

 

 

1,307

 

 

 

1,052

 

Total current liabilities

 

 

152,789

 

 

 

157,177

 

Long-Term Debt, Less Deferred Financing Costs

 

 

830,185

 

 

 

832,455

 

Regulatory Liabilities

 

 

119,362

 

 

 

115,532

 

Long-Term Operating Lease Liabilities

 

 

345

 

 

 

 

Total liabilities

 

 

1,102,681

 

 

 

1,105,164

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 450,000,000 shares authorized; 44,005,370 and

    43,974,998 issued and outstanding as of March 31, 2019 and December 31, 2018,

    respectively

 

 

440

 

 

 

440

 

Additional paid-in capital

 

 

708,519

 

 

 

708,283

 

Accumulated deficit

 

 

(29,278

)

 

 

(32,022

)

Total InfraREIT, Inc. equity

 

 

679,681

 

 

 

676,701

 

Noncontrolling interest

 

 

250,093

 

 

 

249,165

 

Total equity

 

 

929,774

 

 

 

925,866

 

Total Liabilities and Equity

 

$

2,032,455

 

 

$

2,031,030

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

6


 

InfraREIT, Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Lease revenue

 

$

48,574

 

 

$

45,656

 

Operating costs and expenses

 

 

 

 

 

 

 

 

General and administrative expense

 

 

7,087

 

 

 

6,088

 

Depreciation

 

 

12,204

 

 

 

11,577

 

Total operating costs and expenses

 

 

19,291

 

 

 

17,665

 

Income from operations

 

 

29,283

 

 

 

27,991

 

Other (expense) income

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(10,060

)

 

 

(10,674

)

Other income, net

 

 

1

 

 

 

733

 

Total other expense

 

 

(10,059

)

 

 

(9,941

)

Income before income taxes

 

 

19,224

 

 

 

18,050

 

Income tax expense

 

 

255

 

 

 

286

 

Net income

 

 

18,969

 

 

 

17,764

 

Less: Net income attributable to noncontrolling interest

 

 

5,224

 

 

 

4,900

 

Net income attributable to InfraREIT, Inc.

 

$

13,745

 

 

$

12,864

 

Net income attributable to InfraREIT, Inc. common stockholders per share:

 

 

 

 

 

 

 

 

Basic

 

$

0.31

 

 

$

0.29

 

Diluted

 

$

0.31

 

 

$

0.29

 

Cash dividends declared per common share

 

$

0.25

 

 

$

0.25

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

7


 

InfraREIT, Inc.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except share data)

(Unaudited)

 

 

 

Number of

Common

Shares

Outstanding

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Accumulated

Deficit

 

 

Total

InfraREIT, Inc.

Equity

 

 

Noncontrolling

Interest

 

 

Total

Equity

 

Balance December 31, 2018

 

 

43,974,998

 

 

$

440

 

 

$

708,283

 

 

$

(32,022

)

 

$

676,701

 

 

$

249,165

 

 

$

925,866

 

Dividends and distributions

 

 

 

 

 

 

 

 

 

 

 

(11,001

)

 

 

(11,001

)

 

 

(4,180

)

 

 

(15,181

)

Redemption of operating partnership

   units for common stock

 

 

7,698

 

 

 

 

 

 

116

 

 

 

 

 

 

116

 

 

 

(116

)

 

 

 

Common stock issued

 

 

22,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

13,745

 

 

 

13,745

 

 

 

5,224

 

 

 

18,969

 

Equity based compensation

 

 

 

 

 

 

 

 

120

 

 

 

 

 

 

 

120

 

 

 

 

 

 

120

 

Balance March 31, 2019

 

 

44,005,370

 

 

$

440

 

 

$

708,519

 

 

$

(29,278

)

 

$

679,681

 

 

$

250,093

 

 

$

929,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2017

 

 

43,796,915

 

 

$

438

 

 

$

706,357

 

 

$

(49,728

)

 

$

657,067

 

 

$

243,791

 

 

$

900,858

 

Dividends and distributions

 

 

 

 

 

 

 

 

 

 

 

(10,990

)

 

 

(10,990

)

 

 

(4,186

)

 

 

(15,176

)

Redemption of operating partnership

   units for common stock

 

 

163,969

 

 

 

2

 

 

 

3,104

 

 

 

 

 

 

3,106

 

 

 

(3,106

)

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

12,864

 

 

 

12,864

 

 

 

4,900

 

 

 

17,764

 

Equity based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

140

 

 

 

140

 

Balance March 31, 2018

 

 

43,960,884

 

 

$

440

 

 

$

709,461

 

 

$

(47,854

)

 

$

662,047

 

 

$

241,539

 

 

$

903,586

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

8


 

InfraREIT, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

18,969

 

 

$

17,764

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

12,204

 

 

 

11,577

 

Amortization of deferred financing costs

 

 

361

 

 

 

1,071

 

Allowance for funds used during construction - other funds

 

 

 

 

 

(730

)

Equity based compensation

 

 

120

 

 

 

140

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Due from affiliates

 

 

5,048

 

 

 

2,567

 

Inventory

 

 

41

 

 

 

(132

)

Prepaids and other current assets

 

 

(1,553

)

 

 

(573

)

Accounts payable and accrued liabilities

 

 

1,217

 

 

 

3,153

 

Net cash provided by operating activities

 

 

36,407

 

 

 

34,837

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to electric plant

 

 

(11,396

)

 

 

(15,011

)

Proceeds from asset exchange transaction

 

 

 

 

 

1,632

 

Net cash used in investing activities

 

 

(11,396

)

 

 

(13,379

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from short-term borrowings

 

 

22,000

 

 

 

12,000

 

Repayments of short-term borrowings

 

 

(28,000

)

 

 

(17,500

)

Repayments of long-term debt

 

 

(2,152

)

 

 

(2,032

)

Dividends and distributions paid

 

 

(15,176

)

 

 

(15,169

)

Net cash used in financing activities

 

 

(23,328

)

 

 

(22,701

)

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

1,683

 

 

 

(1,243

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

3,497

 

 

 

4,550

 

Cash, cash equivalents and restricted cash at end of period

 

$

5,180

 

 

$

3,307

 

See accompanying notes to the unaudited consolidated financial statements.

 

 

 

9


 

InfraREIT, Inc.

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

Description of Business and Presentation of Financial Statements

Basis of Presentation

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

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

Use of Estimates

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

Recent Accounting Guidance

Recently Adopted Accounting Guidance

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

Recent Accounting Guidance Not Yet Adopted

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

10


 

 

 

2.

Pending Corporate Transactions

Sale and Asset Exchange

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

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

Arrangements with Hunt

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

Closing Conditions and Status

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

 

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

 

o

exchange of assets with Sharyland;

 

o

acquisition of InfraREIT by Oncor; and

 

o

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

 

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

 

stockholder approval;

 

certain lender consents; and

 

other customary closing conditions.

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

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

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

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

 

 

3.

Cash, Cash Equivalents and Restricted Cash

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

 

 

 

March 31,

 

(In thousands)

 

2019

 

 

2018

 

Cash and cash equivalents

 

$

3,487

 

 

$

1,624

 

Restricted cash

 

 

1,693

 

 

 

1,683

 

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

 

$

5,180

 

 

$

3,307

 

 

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

 

 

4.

Related Party Transactions

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

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

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

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

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

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

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

 

(In millions)

 

Base Fee

 

April 1, 2017 - March 31, 2018

 

$

14.2

 

April 1, 2018 - March 31, 2019

 

 

13.5

 

April 1, 2019 - December 31, 2019

 

 

10.4

 

 

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

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

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

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

 

 

5.

Electric Plant and Depreciation

The major classes of electric plant are as follows:

 

 

 

 

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Electric plant:

 

 

 

 

 

 

 

 

Transmission plant

 

$

1,794,442

 

 

$

1,794,438

 

Distribution plant

 

 

151,698

 

 

 

151,698

 

General plant

 

 

3,210

 

 

 

3,023

 

Total plant in service

 

 

1,949,350

 

 

 

1,949,159

 

Construction work in progress

 

 

77,568

 

 

 

66,121

 

Total electric plant

 

 

2,026,918

 

 

 

2,015,280

 

Accumulated depreciation

 

 

(212,334

)

 

 

(203,963

)

Electric plant, net

 

$

1,814,584

 

 

$

1,811,317

 

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

 

 

6.

Goodwill

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

 

 

7.

Other Assets

Other assets are as follows:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

(In thousands)

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

 

Gross

Carrying

Amount

 

 

Accumulated

Amortization

 

 

Net

Carrying

Amount

 

Deferred financing costs on undrawn revolver

 

$

1,025

 

 

$

(811

)

 

$

214

 

 

$

1,025

 

 

$

(779

)

 

$

246

 

Other regulatory assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs

 

 

10,610

 

 

 

(5,810

)

 

 

4,800

 

 

 

10,610

 

 

 

(5,490

)

 

 

5,120

 

Deferred costs recoverable in future years

 

 

23,793

 

 

 

 

 

 

23,793

 

 

 

23,793

 

 

 

 

 

 

23,793

 

Other regulatory assets

 

 

34,403

 

 

 

(5,810

)

 

 

28,593

 

 

 

34,403

 

 

 

(5,490

)

 

 

28,913

 

Operating lease right-of-use asset

 

 

345

 

 

 

 

 

 

345

 

 

 

 

 

 

 

 

 

 

Investments

 

 

2,519

 

 

 

 

 

 

2,519

 

 

 

2,519

 

 

 

 

 

 

2,519

 

Other assets

 

$

38,292

 

 

$

(6,621

)

 

$

31,671

 

 

$

37,947

 

 

$

(6,269

)

 

$

31,678

 

 

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

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

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

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

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

 

 

8.

Borrowings Under Credit Facilities

InfraREIT LP Revolving Credit Facility

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

14


 

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

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

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

SDTS Revolving Credit Facility

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

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

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

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

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

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

 

 

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9.

Long-Term Debt

Long-term debt consisted of the following:

 

 

 

 

 

March 31, 2019

 

 

December 31, 2018

 

(Dollar amounts in thousands)

 

Maturity Date

 

Amount

Outstanding

 

 

Interest

Rate

 

 

Amount

Outstanding

 

 

Interest

Rate

 

TDC

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured notes - $25.0 million

 

December 30, 2020

 

$

14,687

 

 

8.50%

 

 

$

15,000

 

 

8.50%

 

SDTS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured term loan - $200.0 million

 

June 5, 2020

 

 

200,000

 

 

3.74%

 

 

 

200,000

 

 

3.73%

 

Senior secured notes - $400.0 million

 

December 3, 2025

 

 

400,000

 

 

3.86%

 

 

 

400,000

 

 

3.86%

 

Senior secured notes - $100.0 million

 

January 14, 2026

 

 

100,000

 

 

3.86%

 

 

 

100,000

 

 

3.86%

 

Senior secured notes - $53.5 million

 

December 30, 2029

 

 

37,762

 

 

7.25%

 

 

 

38,338

 

 

7.25%

 

Senior secured notes - $110.0 million

 

September 30, 2030

 

 

86,712

 

 

6.47%

 

 

 

87,973

 

 

6.47%

 

Total SDTS debt

 

 

 

 

824,474

 

 

 

 

 

 

 

826,311

 

 

 

 

 

Total long-term debt

 

 

 

 

839,161

 

 

 

 

 

 

 

841,311

 

 

 

 

 

Less unamortized deferred financing costs

 

 

 

 

(57

)

 

 

 

 

 

 

(64

)

 

 

 

 

Total long-term debt, less deferred

    financing costs

 

 

 

 

839,104

 

 

 

 

 

 

 

841,247

 

 

 

 

 

Less current portion of long-term debt

 

 

 

 

(8,919

)

 

 

 

 

 

 

(8,792

)

 

 

 

 

Debt classified as long-term debt, less

    deferred financing costs

 

 

 

$

830,185

 

 

 

 

 

 

$

832,455

 

 

 

 

 

 

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

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

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

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

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

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

16


 

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

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

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

 

 

10.

Fair Value of Financial Instruments

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

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

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

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

 

 

 

Carrying

 

 

Fair Value

 

(In thousands)

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

839,161

 

 

$

 

 

$

882,033

 

 

$

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

841,311

 

 

$

 

 

$

864,281

 

 

$

 

 

 

11.

Regulatory Matters

Regulatory Liability

Regulatory liabilities are as follows:

 

(In thousands)

 

March 31, 2019

 

 

December 31, 2018

 

Cost of removal

 

$

63,583

 

 

$

59,753

 

Excess accumulated deferred federal income tax

 

 

55,779

 

 

 

55,779

 

Regulatory liabilities

 

$

119,362

 

 

$

115,532