EX-99.1 6 hifr-ex991_216.htm EX-99.1 hifr-ex991_216.htm

Exhibit 99.1

 

 

 

 

 

 

 

 

 

SHARYLAND UTILITIES, L.P.

Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

 

 


SHARYLAND UTILITIES, L.P.

 

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

June 30,

 

 

December 31,

 

Assets

 

2018

 

 

2017

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

14,733

 

 

$

25,503

 

Accounts receivable, net

 

 

41,722

 

 

 

55,885

 

Due from affiliates

 

 

15,419

 

 

 

7,096

 

Inventory

 

 

1,844

 

 

 

1,844

 

Prepayments and other current assets

 

 

2,750

 

 

 

3,321

 

Total current assets

 

 

76,468

 

 

 

93,649

 

Property, Plant and Equipment - net

 

 

1,957,877

 

 

 

1,942,393

 

Goodwill

 

 

1,100

 

 

 

1,100

 

Deferred Charges – Regulatory Assets, net

 

 

47,045

 

 

 

44,055

 

Total Assets

 

$

2,082,490

 

 

$

2,081,197

 

 

 

 

 

 

 

 

 

 

Liabilities and Partners' Capital

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

29,161

 

 

$

46,515

 

Short-term borrowing

 

 

6,000

 

 

 

 

Current portion of long-term debt

 

 

3,493

 

 

 

3,493

 

Current portion of financing obligation

 

 

32,917

 

 

 

29,611

 

Due to affiliates

 

 

28,879

 

 

 

31,615

 

State margin tax payable

 

 

995

 

 

 

1,915

 

Total current liabilities

 

 

101,445

 

 

 

113,149

 

Long-Term Financing Obligation

 

 

1,680,960

 

 

 

1,668,904

 

Long-Term Debt

 

 

153,596

 

 

 

155,342

 

Regulatory Liabilities

 

 

14,875

 

 

 

13,563

 

OPEB and Other Liabilities

 

 

1,889

 

 

 

1,889

 

Total Liabilities

 

 

1,952,765

 

 

 

1,952,847

 

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

Partners' Capital

 

 

 

 

 

 

 

 

General partner

 

 

1,246

 

 

 

1,232

 

Limited partner

 

 

128,479

 

 

 

127,118

 

Total partners' capital

 

 

129,725

 

 

 

128,350

 

Total Liabilities and Partners' Capital

 

$

2,082,490

 

 

$

2,081,197

 

 

See accompanying notes to the consolidated financial statements.


SHARYLAND UTILITIES, L.P.

 

Consolidated Statements of Operations

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues - net

 

$

66,160

 

 

$

82,260

 

 

$

132,502

 

 

$

162,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution expense

 

 

2

 

 

 

6,426

 

 

 

83

 

 

 

12,846

 

Transmission expense

 

 

3,942

 

 

 

7,903

 

 

 

7,930

 

 

 

15,873

 

Administrative and general expense

 

 

8,592

 

 

 

11,716

 

 

 

18,038

 

 

 

24,492

 

Depreciation and amortization

 

 

11,686

 

 

 

11,096

 

 

 

23,142

 

 

 

22,328

 

Total operating expenses

 

 

24,222

 

 

 

37,141

 

 

 

49,193

 

 

 

75,539

 

Operating Income

 

 

41,938

 

 

 

45,119

 

 

 

83,309

 

 

 

87,259

 

Other Expense - net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense - net

 

 

(42,136

)

 

 

(38,390

)

 

 

(81,319

)

 

 

(75,583

)

Other income - net

 

 

48

 

 

 

13

 

 

 

80

 

 

 

26

 

Tax reimbursements for contribution in aid of

   construction

 

 

 

 

 

115

 

 

 

 

 

 

188

 

Total other expense - net

 

 

(42,088

)

 

 

(38,262

)

 

 

(81,239

)

 

 

(75,369

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income Before Income Taxes

 

 

(150

)

 

 

6,857

 

 

 

2,070

 

 

 

11,890

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

 

347

 

 

 

430

 

 

 

695

 

 

 

856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (Loss) Income

 

$

(497

)

 

$

6,427

 

 

$

1,375

 

 

$

11,034

 

 

See accompanying notes to the consolidated financial statements.


SHARYLAND UTILITIES, L.P.

 

Consolidated Statements of Partners’ Capital

Six Months Ended June 30, 2018

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

General

 

 

Limited

 

 

Partners'

 

 

 

Partner

 

 

Partner

 

 

Capital

 

Balance at December 31, 2017

 

$

1,232

 

 

$

127,118

 

 

$

128,350

 

Net income

 

 

14

 

 

 

1,361

 

 

 

1,375

 

Balance at June 30, 2018

 

$

1,246

 

 

$

128,479

 

 

$

129,725

 

 

See accompanying notes to the consolidated financial statements.


SHARYLAND UTILITIES, L.P.

 

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

Cash flows from Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

1,375

 

 

$

11,034

 

Adjustments to reconcile net income to net cash

 

 

 

 

 

 

 

 

provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

18,807

 

 

 

21,261

 

Amortization of deferred costs

 

 

4,937

 

 

 

1,670

 

Allowance for funds used during construction - equity

 

 

(58

)

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

14,163

 

 

 

(9,022

)

Due from affiliates

 

 

(8,323

)

 

 

634

 

Inventory

 

 

 

 

 

(464

)

Prepayments and other current assets

 

 

571

 

 

 

1,986

 

Deferred charges - regulatory assets and liabilities

 

 

(6,296

)

 

 

1,653

 

Accounts payable, accrued liabilities and other

 

 

(16,231

)

 

 

4,142

 

Due to affiliates

 

 

(2,736

)

 

 

(1,314

)

State margin tax payable

 

 

(920

)

 

 

(684

)

Net cash provided by operating activities

 

 

5,289

 

 

 

30,896

 

 

 

 

 

 

 

 

 

 

Cash flows from Investing Activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(4,930

)

 

 

(3,234

)

Net cash used in investing activities

 

 

(4,930

)

 

 

(3,234

)

 

 

 

 

 

 

 

 

 

Cash flows from Financing Activities

 

 

 

 

 

 

 

 

Proceeds from notes payable

 

 

 

 

 

997

 

Proceeds from short-term borrowing

 

 

16,000

 

 

 

5,000

 

Proceeds from short-term borrowing from affiliates

 

 

 

 

 

10,000

 

Repayments of notes payable

 

 

(299

)

 

 

(98

)

Repayments of short-term borrowing

 

 

(10,000

)

 

 

 

Repayments of short-term borrowing to affiliates

 

 

 

 

 

(10,000

)

Repayments of long-term debt

 

 

(1,746

)

 

 

(1,746

)

Repayments of financing obligation

 

 

(15,084

)

 

 

(20,078

)

Net cash used in financing activities

 

 

(11,129

)

 

 

(15,925

)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(10,770

)

 

 

11,737

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

25,503

 

 

 

12,263

 

Cash and cash equivalents at end of period

 

$

14,733

 

 

$

24,000

 

 

 

See accompanying notes to the consolidated financial statements.


SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

June 30, 2018

(Unaudited)

 

(1)

Description of Business and Summary of Significant Accounting Policies

 

(a)

Description of Business

Sharyland Utilities, L.P. (the Partnership or SULP) is a partnership engaged in providing transmission of electricity throughout Texas. Those transmission activities include the operation and maintenance of: 138 Kilovolt (kV) looped system of transmission lines and connected substations near Stanton; 138 kV direct current transmission interconnection between Texas and Mexico (Railroad DC Tie); 138 kV transmission lines located in South Texas; 345 kV transmission lines and connected substations in the Texas Panhandle; 345 kV transmission lines near Wichita Falls, Abilene and Brownwood, Texas; and a 345 kV transmission line from the eastern half of the North Edinburg substation to the Palmito substation in South Texas.

The Partnership was organized as a Texas limited partnership on November 3, 1998, as an electrical distribution utility located in Hidalgo County, Texas. On March 24, 2016, the Partnership transferred its ownership in SU FERC, L.L.C., a subsidiary of the Partnership, to its General Partner.

On March 18, 2016, Hunt Power, L.P. (HP), an affiliate of the Partnership, contributed GS Project Entity, L.L.C. (GSPE) to the partners of the Partnership (Partners). The Partners contributed their interests in GSPE to the Partnership. GSPE became a wholly owned subsidiary of the Partnership. On May 6, 2016, HP also contributed CV Project Entity, L.L.C. (CVPE) to the Partners. The Partners contributed their interests in CVPE to the Partnership. CVPE became a wholly owned subsidiary of the Partnership.

The Partnership leases most of its transmission and distribution assets from a related party, Sharyland Distribution & Transmission Services, L.L.C. (SDTS) under Master Lease Agreements. See Note 3.

 

(b)

Principles of Consolidation and Presentation

All significant intercompany balances and transactions have been eliminated. The Partnership maintains accounting records in accordance with the uniform system of accounts, as prescribed by the Federal Energy Regulatory Commission (FERC). The Partnership’s consolidated financial statements reflect the effects of the different rate making principles mandated by FERC and the Public Utility Counsel of Texas (PUCT) regulating its operations.

 

(c)

Use of Estimates

The preparation of the Partnership’s consolidated financial statements in accordance with accounting principles generally accepted in the United States (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.

 

 

(Continued)


2

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

 

(d)

Recent Accounting Guidance

Recently Adopted Accounting Guidance

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 with no impact on our presentation of our cash flows.

In March 2017, the FASB issued ASU No. 2017-07, Compensation – Retirement Benefits (Topic 715), the amendments of ASU No. 2017-07 require an entity to report the service cost component of net benefit costs in the same line item as other compensation costs arising from services rendered by the related employees during the applicable service period. The other components of net benefit cost are required to be presented separately from the service cost component and outside the subtotal of income from operations. Further, ASU No. 2017-07 prescribes that only the service cost component of net benefit costs is eligible for capitalization. The Partnership adopted the new guidance on January 1, 2018 with minimal impact on its financial position, results of operations or cash flows.

Recent Accounting Guidance Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amended the existing accounting standard for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. ASU 2016-02 is effective for periods beginning after December 15, 2019 with early adoption permitted. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. The Partnership is currently evaluating the new guidance and the extent of the impact this standard may have on its financial position, results of operations or cash flows.

In May 2014, the 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 theses goods and services. The guidance supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. ASU 2014-09 is effective for periods beginning after December 15, 2018. The Partnership’s revenues from customers are tariff-based and are designed to recover the cost of providing electric delivery service to customers including a reasonable rate of return on invested capital. Revenues are generally recognized when the underlying service has been provided in an amount prescribed by the related tariff. The new guidance does not change this pattern of recognition and therefore the adoption will not have an effect on the Partnership’s financial position, results of operations or cash flows.

(Continued)


3

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

(2)

Asset Exchange Transaction

On July 21, 2017, the Partnership and SDTS signed a definitive agreement (Definitive Agreement) with Oncor Electric Delivery Company LLC (Oncor) to exchange SDTS’s retail distribution assets and the Partnership’s general plant used in distribution operations for a group of Oncor’s transmission assets located in West and Central Texas and cash (the Asset Exchange Transaction). The Asset Exchange Transaction closed in November 2017 and, among other things, resulted in the Partnership exchanging $6.1 million of general plant and regulatory assets used for the retail distribution business net of liabilities at its carrying value with Oncor for approximately $6.1 million in cash. On November 9, 2017 Oncor paid Sharyland $6.9 million based on an estimate, and on February 24, 2018, Sharyland repaid $832,000.

SDTS exchanged approximately $403.0 million of net distribution assets for $383 million of transmission assets located in West and Central Texas, $18 million of net cash and a $2 million receivable from Oncor as of December 31, 2017.

The Partnership leases these transmission assets from SDTS and operates them under an amended certificate of convenience and necessity (CCN). The Partnership no longer leases the distribution assets transferred to Oncor. SDTS will continue to own and lease to the Partnership certain substations related to its distribution assets, but the Partnership exited the retail distribution business. On October 13, 2017, the PUCT issued an order under Docket No. 47469 approving the Partnership, SDTS and Oncor’s joint Sale-Transfer-Merger application (STM).

Concurrently with the execution of the Definitive Agreement, the Partnership and SDTS entered into an agreement (Rate Case Dismissal Agreement) with certain parties to their pending rate case under Docket No 45414 (Rate Case), which resulted in the dismissal of the Rate Case upon the completion of the asset exchange transaction with Oncor. On September 29, 2017, the PUCT issued an order dismissing the Rate Case contingent on PUCT approval of the STM and the closing of the Asset Exchange Transaction. For further information related to the Rate Case and the dismissal, see Note 13, Commitments and Contingencies - regulatory proceedings.

(3)

Leases

The Partnership leases most of its Transmission and all of its Distribution Substation (T&D) assets from SDTS, a related party, under five Master Lease Agreements (MLA). See Regulatory Proceedings on Note 13, Commitment and Contingencies, leases. Also under these same MLAs, SDTS is responsible for funding all prudently incurred electric plant capital expenditures deemed necessary to serve customers by the Partnership. In accordance with the MLAs, the Partnership is responsible for the maintenance and the operation of the T&D assets and for compliance with all regulatory requirements of the PUCT, FERC, and any other regulatory entity with jurisdiction over the T&D assets. The MLAs obligate the Partnership to pay all property-related expenses, including maintenance, repairs, taxes on equipment in service, insurance, and to comply with the terms of the secured credit facilities and secured-term loan, if any, affecting the leased assets. The MLAs are subject to failed sale-leaseback accounting. See Note 4.

The MLAs, as amended, expire at various dates from December 31, 2019 through December 31, 2022. Each agreement includes annual base payments while all but two agreements include additional payments, based on an agreed upon percentage of revenue earned by the Partnership, as defined in the MLAs, in excess of annual specified breakpoints. The rate used to calculate additional payments varies by lease and ranges from a high of 37% to a low of 23% over the term of the agreements.

(Continued)


4

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Partnership made fixed lease payments during the periods presented as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Fixed Lease Payments

 

$

45,807

 

 

$

40,764

 

 

$

91,201

 

 

$

81,345

 

 

The Partnership’s MLAs include a rent validation mechanism after year end to true up lease payments for the difference between actual and estimated incremental capital expenditures placed in service. As a result of the rent validation, the Partnership made additional fixed payments of approximately $346,000 and $334,000 on March 28, 2018 and March 22, 2017, respectively, associated with the years ended December 31, 2017 and 2016, respectively.

The Partnership is also subject to certain restrictive covenants, including indebtedness limits, contained in the MLAs. The Partnership was in compliance with all such covenants as of June 30, 2018 and December 31, 2017.

Future minimum lease payments in accordance with these MLAs are as follows:

 

(In thousands)

 

Total

 

Year Ending December 31:

 

 

 

 

2018 - Q3 and Q4

 

 

95,259

 

2019

 

 

193,655

 

2020

 

 

182,099

 

2021

 

 

8,576

 

2022 and Thereafter

 

 

4,460

 

Total future minimum lease payments

 

$

484,049

 

 

(4)

Failed Sale-Leaseback – Financing Obligation

The Partnership leases most of its T&D assets from SDTS, a related party. SDTS has legal title to such T&D assets under lease. The Partnership, as a managing member of SDTS, has the exclusive power and authority on behalf of SDTS to manage, control, administer, and operate the T&D assets and business affairs of SDTS in accordance with the limited liability company agreement governing SDTS. These rights and obligations constitute continuing involvement, which results in failed sale-leaseback (financing) accounting. Under failed sale-leaseback accounting, the Partnership is deemed owner of the assets under all MLAs, including assets currently under construction. Consequently, the T&D assets, including assets currently under construction and corresponding financial obligations, are included in the Partnership’s Consolidated Balance Sheets. The leases are considered a failed sale-leaseback (financing) due to the Partnership’s continuing involvement in SDTS and due to the ongoing involvement in the construction of the T&D assets as defined by ASC Topic 840, Accounting for Leases.

Approximately $1.7 billion is included in long-term financing obligation liabilities related to the failed sale-leaseback (financing), as of June 30, 2018 and December 31, 2017, respectively. Approximately $32.9 million and $29.6 million of the failed sale-leaseback (financing) obligation are included in current liabilities as of June 30, 2018 and December 31, 2017, respectively.

(Continued)


5

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The Partnership recorded interest on failed sale-leaseback (financing) in interest expense, net as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Failed sale-lease back interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed portion of failed-leaseback interest

 

$

38,524

 

 

$

30,224

 

 

$

74,134

 

 

$

59,798

 

Variable portion of failed-leaseback interest

 

 

1,836

 

 

 

6,564

 

 

 

3,761

 

 

 

12,692

 

Failed sale-lease back interest expense

 

$

40,360

 

 

$

36,788

 

 

$

77,895

 

 

$

72,490

 

 

As a result of the failed sale-leaseback (financing) transaction, the Partnership accounted for lease payments to the lessor as a reduction of its financing obligation. Payments made on the long-term financing obligation were as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Payments on long-term financing obligation

 

$

7,186

 

 

$

10,303

 

 

$

15,084

 

 

$

20,078

 

 

Future payments of the financing obligation as of June 30, 2018 are as follows:

 

 

 

Total

 

Year Ending December 31:

 

 

 

 

2018 - Q3 and Q4

 

$

16,161

 

2019

 

 

33,360

 

2020

 

 

28,540

 

2021

 

 

6,982

 

2022

 

 

1,264

 

Thereafter

 

 

1,560,137

 

Total financing obligation

 

 

1,646,444

 

Less: current portion of financing obligation

 

 

(32,917

)

Leased system under construction obligation

 

 

43,640

 

Lease deferral (Note 7)

 

 

23,793

 

Long-term lease obligation

 

$

1,680,960

 

 

The Partnership recorded depreciation expense related to the assets accounted for in accordance with failed sale-leaseback as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Failed sale-lease back depreciation expense

 

$

7,889

 

 

$

8,821

 

 

$

15,479

 

 

$

17,449

 

 

(Continued)


6

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

(5)

Property, Plant and Equipment - net

The major classes of property, plant and equipment at June 30, 2018 and December 31, 2017 are as follows:

 

 

 

June 30,

 

 

December 31,

 

(In thousands)

 

2018

 

 

2017

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Leased system

 

$

1,853,830

 

 

$

1,757,327

 

Transmission plant

 

 

262,399

 

 

 

262,465

 

General plant

 

 

8,531

 

 

 

10,977

 

 

 

 

2,124,760

 

 

 

2,030,769

 

 

 

 

 

 

 

 

 

 

Construction Work in Progress:

 

 

 

 

 

 

 

 

Leased system under construction

 

 

43,640

 

 

 

109,697

 

Transmission plant under construction

 

 

6,178

 

 

 

2,231

 

General plant under construction

 

 

645

 

 

 

1,162

 

 

 

 

50,463

 

 

 

113,090

 

Other

 

 

293

 

 

 

293

 

Total Property, plant and equipment

 

 

2,175,516

 

 

 

2,144,152

 

Accumulated Depreciation - Leased system

 

 

(209,621

)

 

 

(194,142

)

Accumulated Depreciation - Transmission plant

 

 

(6,449

)

 

 

(4,903

)

Accumulated Depreciation - General plant

 

 

(1,569

)

 

 

(2,714

)

Property, Plant, and Equipment - net

 

$

1,957,877

 

 

$

1,942,393

 

 

See Note 2 in regards to the asset exchange transaction.

See Note 4 in regards to leased system and leased system under construction.

General plant consists of a warehouse, furniture, fixtures, equipment, computer hardware, software, and vehicles.

(6)

Deferred Charges – Regulatory Assets - Liabilities

Deferred Charges – Regulatory Assets, Net

Regulatory assets represent probable future recovery of costs from customers through the regulatory ratemaking process. The table below provides detail of deferred charges that are included on the Partnership’s Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017.

 

 

 

 

June 30, 2018

 

 

December 31, 2017

 

 

 

 

 

Gross

 

 

 

 

 

 

Net

 

 

Gross

 

 

 

 

 

 

Net

 

 

 

Amortization

 

Carrying

 

 

Accumulated

 

 

Carrying

 

 

Carrying

 

 

Accumulated

 

 

Carrying

 

(In thousands)

 

Period

 

Amount

 

 

Amortization

 

 

Amount

 

 

Amount

 

 

Amortization

 

 

Amount

 

Deferred costs recoverable in future years

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deferred financing costs

 

(a)

 

$

5,763

 

 

$

(4,106

)

 

$

1,657

 

 

$

5,763

 

 

$

(3,504

)

 

$

2,259

 

Inception operating costs

 

(b)

 

 

23,793

 

 

 

 

 

 

23,793

 

 

 

23,793

 

 

 

 

 

 

23,793

 

Rate case costs

 

(c)

 

 

13,417

 

 

 

(4,998

)

 

 

8,419

 

 

 

13,324

 

 

 

(4,998

)

 

 

8,326

 

Study costs/Transition to competition

 

(d)

 

 

5,918

 

 

 

(2,707

)

 

 

3,211

 

 

 

5,918

 

 

 

(2,610

)

 

 

3,308

 

Transition cost

 

(e)

 

 

14,100

 

 

 

(4,238

)

 

 

9,862

 

 

 

6,369

 

 

 

 

 

 

6,369

 

Deferred Overhead

 

 

 

 

104

 

 

 

 

 

 

104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Deferred Charges - Regulatory Assets

 

 

 

$

63,095

 

 

$

(16,049

)

 

$

47,046

 

 

$

55,167

 

 

$

(11,112

)

 

$

44,055

 

 

 

(a)

Amortized over the length of the related loan.

 

(b)

Amortization period is anticipated to be established in a future rate case.

(Continued)


7

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

 

(c)

$5.0 million was recovered through May 2017. The recovery period for the $8.4 million is anticipated to be established in 2018 in rate case expense Docket No. 45979.

 

(d)

$2.0 million was recovered through December 2017. $0.9 million will be recovered through April 2019 and the Partnership anticipates establishing the recovery period for the remaining $3.0 million in a future rate case.

 

(e)

This amount began to be recovered in January 2018 and is expected to be fully receoverd in 2019.

Deferred financing costs included in net deferred charges – regulatory assets consist of debt issuance costs incurred in connection with the construction credit agreements associated with GSPE and CVPE. These assets are classified as regulatory assets and amortized over the length of the related loan. These costs will be included in the costs of debt in connection with a future rate case.

The inception operating costs of approximately $23.8 million at June 30, 2018 and December 31, 2017 represent operating costs incurred from inception through December 31, 2007. The 2013 rate case settlement established that the Partnership may seek recovery in a future rate case, pursuant to the mechanism established in Docket Nos. 21591 and 27556, of the inception operating costs plus related return on rate base. The right to benefit from the inception operating costs was transferred to SDTS. Consequently, due to the failed sale-leaseback accounting treatment, the Partnership has recorded a corresponding liability in financing obligation.

See Note 13, Commitments and Contingencies – Regulatory proceedings for information regarding the the rate case Docket.

Regulatory Liabilities

Regulatory liabilities represent probable future reduction in rates due to the over-recovery of costs from customers through the regulatory ratemaking process.

The Partnership’s regulatory liability related to cost of removal is established through depreciation rates and represents the amount that the Partnership expects to incur in the future. The regulatory liability is recorded as long-term liability net of actual removal costs incurred.

With the passage of the Tax Cuts and Jobs Act (TCJA), the PUCT ordered electric utilities in Texas to record a regulatory liability for the balance of excess accumulated deferred income taxes (Excess ADFIT) that now exists because of the decrease in the Federal Income Tax rate from 35% to 21%. The Partnership will continue to assess the amount of the regulatory liability and expects that amortization of the regulatory liability will be determined in the Partnership’s next base rate proceeding to be filed in 2020. The regulatory liability is expected to lower future customer rates over a future period to be determined by the PUCT.

The carrying amount of the regulatory liabilities as of June 30, 2018 and December 31, 2017 are as follows:

 

 

 

Amortization

 

 

 

 

 

 

 

 

 

 

period

 

June 30,

 

 

December 31,

 

(In thousands)

 

Ends

 

2018

 

 

2017

 

Postretirement benefits costs

 

(a)

 

$

2,701

 

 

$

2,701

 

Postretirement benefits collections

 

(b)

 

 

5,806

 

 

 

5,765

 

Estimated net removal costs

 

(c)

 

 

5,163

 

 

 

3,892

 

Provision in lieu of Excess ADFIT

 

(b)

 

 

1,205

 

 

 

1,205

 

Regulatory liabilities

 

 

 

$

14,875

 

 

$

13,563

 

 

 

(a)

This item represents liabilities recorded in accordance with postretirement benefits accounting standards.

 

(b)

The amortization of this item is anticipated to be established in a future rate case.

(Continued)


8

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

 

(c)

For regulatory purposes, this balance will be part of accumulated depreciation. In future rate cases, this balance will be taken into account when determing the appropriate rates.

(7)

Related-Party Transactions

The Partnership made payments associated with the lease of some of its T&D assets to SDTS as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Lease payments

 

$

47,346

 

 

$

46,709

 

 

$

96,309

 

 

$

92,880

 

 

The Partnership received payments throughout the period related to the acquisition of gross property plant and equipment, contracted services, direct labor, materials and supervision associated with its existing asset build out on the T&D assets from SDTS as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Asset build out payments received

 

$

18,775

 

 

$

43,630

 

 

$

31,560

 

 

$

93,824

 

 

Asset build out costs are included on the Consolidated Balance Sheets under property, plant and equipment - net.

On February 12, 2015, the Partnership entered into a subordinated and unsecured loan agreement of $10.0 million with Loyal Trust No. 1 (LT1), a related party, as amended on, February 16, 2018. The promissory note matures on December 31, 2019. The revolving promissory note accrues interest at the floating JP Morgan Chase Prime Rate with all interest compounded semiannually. As of June 30, 2018 and December 31, 2017, the Partnership had no amount outstanding on the subordinated note.

No interest expense was incurred on the subordinated note during the three and six month periods ended June 30, 2018. The interest expense and fees on the subordinated note were approximately $60,000 and $100,000 during the three and six months ended June 30, 2017, respectively.

The Partnership leases office space for its Dallas location from an affiliate through a contractually agreed upon lease amount. Charges for the lease are included in general and administrative expense in the accompanying Consolidated Statements of Operations as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Lease office expense

 

$

41

 

 

$

87

 

 

$

85

 

 

$

172

 

 

An affiliate of the Partnership provides services to the Partnership at contractually agreed upon hourly rates and set amounts for infrastructure support. Charges for such services are included in general and administrative expense in the accompanying Consolidated Statements of Operations as follows:

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

(In thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Infrastructure support services

 

$

1,387

 

 

$

498

 

 

$

1,992

 

 

$

1,232

 

 

(Continued)


9

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

Accrued fees related to these charges are included in due to affiliates on the Partnership’s Consolidated Balance Sheets and were approximately $1.3 million and $763,000 as of June 30, 2018 and December 31, 2017, respectively.

(8)

Allocation of Partners’ Capital

Revenues, income, gains, losses, expenditures, deductions, credits and distributions, as defined in the partnership agreement, are allocated 1 percent to the general partner and 99 percent to the limited partner.

(9)

Credit Facility

On May 15, 2014, the Partnership entered into an unsecured revolving credit facility of $5.0 million with Amegy Bank, as amended on, December 10, 2014. On August 11, 2017, the credit facility was amended and extended to increase the commitment to $10.0 million and extend the term. The credit facility accrues interest on the outstanding balance at the Prime Rate. At June 30, 2018, the Prime Rate was at 5.0%. In addition to the interest on the outstanding balance, commitment fees accrue at 0.35% for the unused portion of the credit facility. The revolving credit facility expires on August 11, 2019.

As of June 30, 2018 the Partnership had $6.0 million on the revolving credit facility. As of December 31, 2017, the Partnership had no amount outstanding on the revolving credit facility. The interest expense and fees for the revolving credit facility were approximately $38,000 and $57,000 during the three and six months ended June 30, 2018, respectively. The interest expense and fees for the revolving credit facility were approximately $51,000 and $86,000 during the three and six months ended June 30, 2017, respectively.

The agreement requires maintenance of certain financial ratios and imposes certain restricted covenants. The Partnership was in compliance with all covenants as of June 30, 2018 and December 31, 2017, respectively.

(10)

Long-Term Debt

 

(In thousands)

 

Maturity Date

 

June 30, 2018

 

 

 

December 31, 2017

 

 

CVPE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate Notes - $23.5 million

 

January 15, 2020

 

$

23,500

 

 

 

3.58

%

 

 

$

23,500

 

 

 

3.58

%

 

Term Loan - $82.5 million

 

January 15, 2020

 

 

78,891

 

 

 

3.73

%

*

 

 

79,922

 

 

 

3.32

%

*

GSPE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term Loan - $57.2 million

 

October 31, 2019

 

 

54,698

 

 

 

3.73

%

*

 

 

55,413

 

 

 

3.32

%

*

Total long-term debt

 

 

 

 

157,089

 

 

 

 

 

 

 

 

158,835

 

 

 

 

 

 

Less: current portion of long-term

   debt

 

 

 

 

3,493

 

 

 

 

 

 

 

 

3,493

 

 

 

 

 

 

Long-term debt

 

 

 

$

153,596

 

 

 

 

 

 

 

$

155,342

 

 

 

 

 

 

 

 

*

Interest based on LIBOR plus an applicable margin

Senior Secured Credit Facilities – On January 15, 2015, in conjunction with the acquisition, CVPE entered into a construction-term loan agreement consisting of a $106.5 million construction term loan syndicated to five banks and a $23.5 million senior secured note issued to Prudential Insurance Company of America and affiliates (Fixed Rate Notes). The senior secured credit facilities and Fixed Rate Notes are collateralized by the CVPE assets.

(Continued)


10

SHARYLAND UTILITIES, L.P.

Notes to the Consolidated Financial Statements

(Unaudited)

 

The CV Project was placed in service June 10, 2016 and the new transmission cost of service (TCOS) rate that included the CVPE assets was approved on September 22, 2016 by the PUCT. On November 30, 2016, the amount outstanding on the construction-term loan was converted into a term loan with a balance of $82.5 million. After this conversion, interest accrues at LIBOR plus 1.75%. Interest is payable the last day of the selected interest period for interest periods of three months or less, and every three months for interest periods greater than three months. Amortized principal amounts of the term loan are payable quarterly after the conversion. The outstanding borrowing under the term loan at June 30, 2018 and December 31, 2017 was $78.9 million and $79.9 million, respectively.

As of June 30, 2018 and December 31, 2017, the Fixed Rate Notes had a principal balance of $23.5 million, respectively. Interest is payable quarterly at a rate of 3.58% per annum. The Fixed Rate Notes and the term loan mature on January 15, 2020 and do not provide for any principal payments.

The construction-term loan agreement and senior secured notes contain certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. CVPE was in compliance with all debt covenants for the construction-term loan agreement at June 30, 2018 and December 31, 2017.

On March 31, 2015, GSPE entered into a construction-term loan agreement of $84.0 million syndicated to three banks. The senior secured credit facilities are collateralized by GSPE’s assets.

The GS Project was placed in service in March 29, 2016 and the new TCOS rate that included the GSPE assets was approved on June 13, 2016 by the PUCT. On October 31, 2016, the amount outstanding on the construction-term loan was converted into a term loan with a balance of $57.2 million. After this conversion, interest accrues at LIBOR plus 1.75%. Interest is payable the last day of the selected interest period for interest periods of three months or less, and every three months for interest periods greater than three months. Amortized principal amounts of the term loan are payable quarterly after the conversion. The term loan will mature on October 31, 2019. The outstanding borrowing under the term loan at June 30, 2018 and December 31, 2017 was $54.7 million and $55.4 million, respectively.

The construction-term loan agreement contains certain default triggers, including without limitation: failure to maintain compliance with financial and other covenants contained in the agreement, limitation on liens, investments and the incurrence of additional indebtedness. GSPE was in compliance with all debt covenants for the construction-term loan agreement at March 31, 2018 and December 31, 2017.

Future maturities of the total long-term debt as of June 30, 2018 are as follows: