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Lease Accounting

9 Months Ended

Sep. 30, 2019

Lessee Arrangements

We lease a variety of transportation equipment (including trucks, trailers, and railcars), terminals, land and facilities, and office space and equipment. Lease terms vary and can range from short term (under 12 months) to long term (greater than 12 months). A majority of our leases contain options to extend the life of the lease at our sole discretion. We considered these options when determining the lease terms used to derive our right of use asset and associated lease liability. Leases with a term of less than 12 months are not recorded on our consolidated balance sheet and we recognize lease expense for these leases on a straight line basis over the lease term.

Certain lease agreements include lease and non-lease components. We have elected to combine lease and non-lease components for all of our underlying assets for the purpose of deriving our right of use asset and lease liability. Additionally, certain lease payments are driven by variable factors, such as plant production or indexing rates. Variable costs are expensed as incurred and are not included in our determination for our lease liability and right of use asset.

As a lessee, we do not have any finance leases and none of our leases contain material residual value guarantees or material restrictive covenants. In addition, most of our leases do not provide an implicit rate, and as such, we determined our incremental borrowing rate based on the information available at January 1, 2019 in determining the present value of lease payments.

Our lease portfolio consists of operating leases within three major categories:



Leases	Classification	Financial Statement Caption	September 30, 2019		January 1, 2019
Assets
	Transportation Equipment	Right of Use Assets, net	103,396		117,727
	Office Space & Equipment	Right of Use Assets, net	11,914		14,194
	Facilities and Equipment	Right of Use Assets, net	69,413		77,008
Total Right of Use Assets, net			184,723		208,929
Liabilities
Current		Accrued liabilities	29,572		33,016
Non-Current		Other long-term liabilities	151,680		171,348
Total Lease Liability			$	181,252	$	204,364

Our Right of Use Assets, net balance above includes our unamortized initial direct costs associated with certain of our transportation equipment leases. Additionally, it includes our unamortized prepaid rents, our deferred rents, and our previously classified intangible asset associated with a favorable lease (Note 8). Our lease liability includes our remaining provision for each period presented for our cease-use provision for railcars no longer in use.

We recorded total operating lease costs of $13.0 million and $39.2 million during the three and nine months ended September 30, 2019. The total operating cost includes the amounts associated with our existing lease liabilities, along with both short term and variable lease costs incurred during the period which are not significant to the operating lease cost individually, or in the aggregate.

The maturities of our operating lease liabilities as of September 30, 2019 on an undiscounted cash flow basis reconciled to the present value recorded on our Unaudited Condensed Consolidated Balance Sheet:



Maturity of Lease Liabilities	Transportation Equipment			Office Space and Equipment			Facilities and Equipment			Operating Leases
Remainder of 2019	$	7,208		$	1,037		$	2,754		$	10,999
2020	26,386			4,107			9,383			39,876
2021	20,313			3,151			6,720			30,184
2022	18,060			2,441			5,410			25,911
2023	17,077			667			5,349			23,093
Thereafter	43,619			2,402			129,085			175,106
Total Lease Payments	132,663			13,805			158,701			305,169
Less: Interest	(25,391		)	(1,792		)	(96,734		)	(123,917		)
Present value of operating lease liabilities	$	107,272		$	12,013		$	61,967		$	181,252

The following table presents the weighted average remaining term and discount rate related to our right of use assets:



Lease Term and Discount Rate	September 30, 2019
Weighted-average remaining lease term	12.38 years
Weighted-average discount rate	7.58%

The following table provides information regarding the cash paid and right of use assets obtained related to our operating leases:



Cash Flows Information	Nine Months Ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities	$	33,740
Leased assets obtained in exchange for new operating lease liabilities	198,758

Lessor Arrangements

We have the following contracts in which we act as a lessor. We also, from time to time, sublease certain of our transportation and facilities equipment to third parties.

Operating Leases

We act as a lessor in our revenue contract associated with the M/T American Phoenix, within the marine transportation segment. The M/T American Phoenix ocean tanker is currently under charter along the Gulf Coast until 2020 with a large refining customer. We recorded lease revenue of $6.8 million and $20.2 million for the three and nine months ended September 30, 2019 and $6.8 million and $20.2 million for the three and nine months ended September 30, 2018 , respectively, which is recorded in marine transportation revenues on the Unaudited Condensed Consolidated Statements of Operations.

Additionally, we act as a lessor on our Free State pipeline system, which is included in the onshore and facilities transportation segment. The Free State pipeline is an 86 mile pipeline in Eastern Mississippi used to transport CO₂ that is recovered in the area downstream to several delivery points in and around the Mississippi region. Our Free State pipeline is currently under lease through 2028 to an affiliate of an independent crude oil company. We receive fixed installments through the life of the lease as well as variable consideration that is determined by average daily volumes of throughput. We recorded total revenue of $1.3 million and $4.2 million for the three and nine months ended September 30, 2019 and $1.6 million and $4.7 million for the three and nine months ended September 30, 2018, respectively, which is recorded in onshore facilities and transportation revenues on the Unaudited Condensed Consolidated Statements of Operations.

Direct Finance Lease

Our direct finance lease includes a lease of the Northeast Jackson Dome ("NEJD") Pipeline. Under the terms of the agreement, we are paid a quarterly payment, which commenced in August 2008. These payments are fixed at approximately $5.2 million per quarter during the lease term at an interest rate of 10.25%. At the end of the lease term in 2028, we will convey all of our interest in the NEJD Pipeline to the lessee for a nominal payment.

The following table details the fixed lease payments we will receive for our lessor arrangements as of September 30, 2019:



	Operating Leases				Direct Financing Lease
Maturity of Lessor Receipts	Marine Transportation		Onshore Facilities and Transportation		Onshore Facilities and Transportation
Remainder of 2019	$	6,808	$	300	$	5,166
2020	20,128		1,200		20,668
2021	—		1,200		20,668
2022	—		1,200		20,668
2023	—		1,200		20,668
Thereafter	—		5,300		93,005
Total Lease Receipts	26,936		10,400		180,843
Less: Interest	—		—		(61,682		)
Total Net Lease Receipts	$	26,936	$	10,400	$	119,161

The present value of our lease receivables for our direct finance lease includes a current portion of $9.1 million, which is recorded in other current assets on the Unaudited Condensed Consolidated Balance Sheet as of September 30, 2019.

Lease Accounting