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InfraREIT reorganization remains on table as company digests tax reform

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InfraREIT reorganization remains on table as company digests tax reform

InfraREIT Inc. is pushing forward with a strategic review of its corporate structure as the real estate investment trust gains more clarity on the financial impact from federal tax reform.

InfraREIT in January said it is considering terminating its REIT status and converting to a traditional C-corporation structure as a result of tax reform, which lowers the corporate income tax rate to 21% from 35%. InfraREIT's net income for 2017 was down about $52 million primarily due to a $56 million noncash regulatory adjustment tied to the new tax law.

InfraREIT's reorganization could entail combining Sharyland Utilities LP and Sharyland Distribution & Transmission Services LLC and terminating the leases between the entities, as well as terminating InfraREIT's operating partnership with Sharyland. Sharyland Distribution & Transmission and its affiliate Sharyland Utilities are majority-owned by InfraREIT.

"In addition to its impacts on 2017 net income, the Tax Cuts and Jobs Act will over time have the effect of decreasing the relative economic benefits of owning utility assets in a REIT structure as compared to a traditional C-corp structure," InfraREIT President and CEO David Campbell said March 1 on the company's earnings call. "As a result of the [new tax law], we have launched a review of our REIT structure including consideration of our lessor-lessee relationship with Sharyland and whether InfraREIT should ultimately revoke its REIT election. The company has not set a specific timeline for completing this review."

InfraREIT generates revenue by leasing its transmission and distribution assets to Sharyland Utilities. The new corporate tax rate will affect Sharyland Utilities revenues and InfraREIT expects Sharyland Utilities to file a request to reduce the lease amount per dollar value to its assets which, in turn, will take a toll on InfraREIT's revenues.

Management, however, noted that Sharyland has informed InfraREIT "that it does not intend to request a renegotiation of 2018 scheduled lease payments to reflect the reduction in its revenue." Instead, Sharyland plans to lower its wholesale transmission service rates instead of booking a regulatory liability.

'Going private'

InfraREIT's potential reorganization also includes negotiations with Dallas-based Hunt Consolidated Inc. and its affiliates, which manage the company, that could involve terminating or renegotiating the management agreement, development agreement or other related agreements.

Hunt Consolidated, InfraREIT's largest shareholder, in a Jan. 16 Schedule 13D filing with the SEC stated its intent to evaluate a "going private" transaction with InfraREIT. "[Hunt Consolidated] further stated that any 'going private' transaction would require [Hunt Consolidated] to obtain outside financing from one or more investors," InfraREIT said in its March 1 earnings release. "[Hunt Consolidated] also stated it does not have a high level of interest in selling its entire investment in InfraREIT."

While indicating a special conflicts committee would consider any proposal from Hunt Consolidated, InfraREIT noted that "no offer has been made" at this time.

"InfraREIT is committed to investing in infrastructure to help ensure safe and reliable transmission and support the growing Texas economy. We will remain focused on that commitment regardless of the outcome of Hunt's [Schedule 13D] work," Campbell said.

The CEO was asked by an analyst whether the company needs any more clarity from a tax perspective in order to make its decision on a potential reorganization.

"I think we have the bulk of the information that we need on hand," Campbell said. "I think every company was digesting the law and the fact that it went into effect in 2018 and then over the last couple months a lot of the review has been around how the Texas regulator would apply the rules ... So, I think at this point, we have the bulk of the information we need from both the federal and state regulatory perspective."