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Leases

9 Months Ended

Sep. 30, 2019

We adopted ASC 842 effective January 1, 2019, and elected to adopt using the modified retrospective transition method and practical expedients, both of which are provided as options by the standard and further defined in Note 1.

Lessee Accounting

At inception, we determine if an arrangement is or contains a lease. Right-of-use assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our payment obligation under the leasing arrangement. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. We use our estimated incremental borrowing rate (“IBR”) to determine the present value of lease payments as most of our leases do not contain an implicit rate. Our IBR represents the interest rate which we would pay to borrow, on a collateralized basis, an amount equal to the lease payments over a similar term in a similar economic environment. We use the implicit rate when readily determinable.

As a lessee, we lease land, buildings, pipelines, transportation and other equipment to support our operations. These leases can be categorized into operating and finance leases. Operating leases are recorded in operating lease right-of-use assets and current and noncurrent operating lease liabilities on our consolidated balance sheet. Finance leases are included in properties and equipment, current finance lease liabilities and noncurrent finance lease liabilities on our consolidated balance sheet.

When renewal options are defined in a lease, our lease term includes an option to extend the lease when it is reasonably certain we will exercise that option. Leases with a term of 12 months or less are not recorded on our balance sheet, and lease expense is accounted for on a straight-line basis. In addition, as a lessee, we separate non-lease components that are identifiable and exclude them from the determination of net present value of lease payment obligations.

Our leases have remaining terms of 1 to 26 years, some of which include options to extend the leases for up to 10 years.

Finance Lease Obligations

We have finance lease obligations related to vehicle leases with initial terms of 33 to 48 months. The total cost of assets under finance leases was $6.7 million and $5.8 million as of September 30, 2019 and December 31, 2018, respectively, with accumulated depreciation of $4.9 million and $4.3 million as of September 30, 2019 and December 31, 2018, respectively. We include depreciation of finance leases in depreciation and amortization in our consolidated statements of income.

In addition, we have a finance lease obligation related to a pipeline lease with an initial term of 10 years with one remaining subsequent renewal option for an additional 10 years. The right of use asset associated with this obligation was derecognized as discussed under the lessor accounting disclosures below.

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):



	September 30, 2019

Operating leases:
Operating lease right-of-use assets, net	$	3,454

Current operating lease liabilities	807
Noncurrent operating lease liabilities	2,995
Total operating lease liabilities	$	3,802

Finance leases:
Properties and equipment	$	6,741
Accumulated amortization	(4,858		)
Properties and equipment, net	$	1,883

Current finance lease liabilities	$	5,426
Noncurrent finance lease liabilities	69,168
Total finance lease liabilities	$	74,594

Weighted average remaining lease term (in years)
Operating leases	6.6
Finance leases	17.4

Weighted average discount rate
Operating leases	5%
Finance leases	6%

Supplemental cash flow and other information related to leases were as follows:



	Nine Months Ended September 30, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	5,467
Operating cash flows on finance leases	$	75
Financing cash flows on finance leases	$	780

Maturities of lease liabilities were as follows:



	September 30, 2019
	Operating			Finance
	(In thousands)
2019	$	237		$	1,856
2020	897			7,305
2021	853			6,856
2022	509			6,711
2023	423			6,755
2024 and thereafter	1,534			86,738
Total lease payments	4,453			116,221
Less: Imputed interest	(651		)	(41,627		)
Total lease obligations	3,802			74,594
Less: Current obligations	(807		)	(5,426		)
Long-term lease obligations	$	2,995		$	69,168

The components of lease expense were as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands)
Operating lease costs	$	1,852	$	5,420
Finance lease costs
Amortization of assets	213		711
Interest on lease liabilities	24		75
Variable lease cost	41		112
Total net lease cost	$	2,130	$	6,318

Lessor Accounting

As discussed in Note 2, the majority of our contracts with customers meet the definition of a lease. See Note 2 for further discussion of the impact of adoption of this standard on our activities as a lessor.

Customer contracts that contain leases are generally classified as either operating leases, direct finance leases or sales-type leases. We consider inputs such as the lease term, fair value of the underlying asset and residual value of the underlying assets when assessing the classification.

Substantially all of the assets supporting contracts meeting the definition of a lease have long useful lives, and we believe these assets will continue to have value when the current agreements expire due to our risk management strategy for protecting the residual fair value of the underlying assets by performing ongoing maintenance during the lease term. HFC generally has the option to purchase assets located within HFC refinery boundaries, including refinery tankage, truck racks and refinery processing units, at fair market value when the related agreements expire.

One of our throughput agreements with HFC was renewed during the three months ending September 30, 2019. Certain components of this agreement met the criteria of sales-type leases since the underlying assets are not expected to have an alternative use at the end of the lease term to anyone besides HFC. Under sales-type lease accounting, at the commencement date, the lessor recognizes a net investment in the lease and derecognizes the underlying assets with the difference recorded as selling profit or loss arising from the lease. Therefore, we recognized a gain on sales-type leases during the three months ending September 30, 2019 composed of the following:



	(In thousands)

Net investment in leases	$	122,800
Properties and equipment, net	(15,031		)
Operating lease right-of-use assets, net	(72,603		)
Gain on sales-type leases	$	35,166

This sales-type lease transaction, including the related gain, was a non-cash transaction.

Lease income recognized was as follows:



	Three Months Ended September 30, 2019				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Operating lease revenues	$	94,459	$	71,297	$	282,747	$	209,850
Direct financing lease interest income	$	539	$	510	$	1,558	$	1,513
Gain on sales-type leases	$	35,166	$	—	$	35,166	$	—
Sales-type lease interest income	$	1,675	$	—	$	1,675	$	—
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	$	3,075	$	—	$	3,075	$	—

For our sales-type leases, we included customer obligations related to minimum volume requirements in guaranteed minimum lease payments. Portions of our minimum guaranteed pipeline tariffs for assets subject to sales-type lease accounting are recorded as interest income with the remaining amounts recorded as a reduction in net investment in leases. We recognized any billings for throughput volumes in excess of minimum volume requirements as variable lease payments, and these variable lease payments were recorded in lease revenues.

As discussed in Note 2, prior to the adoption of ASC 842, contract consideration was bifurcated between operating lease and service revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of September 30, 2019:



	Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)
Remainder of 2019	$	81,025	$	526	$	2,375
2020	309,604		2,112		9,501
2021	304,857		2,128		9,501
2022	303,454		2,145		9,501
2023	272,954		2,162		9,501
Thereafter	963,783		42,966		52,255
Total	$	2,235,677	$	52,039	$	92,634

Net investments in leases recorded on our balance sheet were composed of the following:



	September 30, 2019				December 31, 2018
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables⁽¹⁾	$	70,426	$	16,522	$	—	$	16,549
Unguaranteed residual assets	51,674		—		—		—
Net investment in leases	$	122,100	$	16,522	$	—	$	16,549

(1)

Current portion of lease receivables included in prepaid and other current assets on the balance sheet.

Leases

Lessee Accounting

Our leases have remaining terms of 1 to 26 years, some of which include options to extend the leases for up to 10 years.

Finance Lease Obligations

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):



	September 30, 2019

Operating leases:
Operating lease right-of-use assets, net	$	3,454

Current operating lease liabilities	807
Noncurrent operating lease liabilities	2,995
Total operating lease liabilities	$	3,802

Finance leases:
Properties and equipment	$	6,741
Accumulated amortization	(4,858		)
Properties and equipment, net	$	1,883

Current finance lease liabilities	$	5,426
Noncurrent finance lease liabilities	69,168
Total finance lease liabilities	$	74,594

Weighted average remaining lease term (in years)
Operating leases	6.6
Finance leases	17.4

Weighted average discount rate
Operating leases	5%
Finance leases	6%

Supplemental cash flow and other information related to leases were as follows:



	Nine Months Ended September 30, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	5,467
Operating cash flows on finance leases	$	75
Financing cash flows on finance leases	$	780

Maturities of lease liabilities were as follows:



	September 30, 2019
	Operating			Finance
	(In thousands)
2019	$	237		$	1,856
2020	897			7,305
2021	853			6,856
2022	509			6,711
2023	423			6,755
2024 and thereafter	1,534			86,738
Total lease payments	4,453			116,221
Less: Imputed interest	(651		)	(41,627		)
Total lease obligations	3,802			74,594
Less: Current obligations	(807		)	(5,426		)
Long-term lease obligations	$	2,995		$	69,168

The components of lease expense were as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands)
Operating lease costs	$	1,852	$	5,420
Finance lease costs
Amortization of assets	213		711
Interest on lease liabilities	24		75
Variable lease cost	41		112
Total net lease cost	$	2,130	$	6,318

Lessor Accounting



	(In thousands)

Net investment in leases	$	122,800
Properties and equipment, net	(15,031		)
Operating lease right-of-use assets, net	(72,603		)
Gain on sales-type leases	$	35,166

This sales-type lease transaction, including the related gain, was a non-cash transaction.

Lease income recognized was as follows:



	Three Months Ended September 30, 2019				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Operating lease revenues	$	94,459	$	71,297	$	282,747	$	209,850
Direct financing lease interest income	$	539	$	510	$	1,558	$	1,513
Gain on sales-type leases	$	35,166	$	—	$	35,166	$	—
Sales-type lease interest income	$	1,675	$	—	$	1,675	$	—
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	$	3,075	$	—	$	3,075	$	—

As discussed in Note 2, prior to the adoption of ASC 842, contract consideration was bifurcated between operating lease and service revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of September 30, 2019:



	Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)
Remainder of 2019	$	81,025	$	526	$	2,375
2020	309,604		2,112		9,501
2021	304,857		2,128		9,501
2022	303,454		2,145		9,501
2023	272,954		2,162		9,501
Thereafter	963,783		42,966		52,255
Total	$	2,235,677	$	52,039	$	92,634

Net investments in leases recorded on our balance sheet were composed of the following:



	September 30, 2019				December 31, 2018
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables⁽¹⁾	$	70,426	$	16,522	$	—	$	16,549
Unguaranteed residual assets	51,674		—		—		—
Net investment in leases	$	122,100	$	16,522	$	—	$	16,549

(1)

Current portion of lease receivables included in prepaid and other current assets on the balance sheet.

Leases

Lessee Accounting

Our leases have remaining terms of 1 to 26 years, some of which include options to extend the leases for up to 10 years.

Finance Lease Obligations

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):



	September 30, 2019

Operating leases:
Operating lease right-of-use assets, net	$	3,454

Current operating lease liabilities	807
Noncurrent operating lease liabilities	2,995
Total operating lease liabilities	$	3,802

Finance leases:
Properties and equipment	$	6,741
Accumulated amortization	(4,858		)
Properties and equipment, net	$	1,883

Current finance lease liabilities	$	5,426
Noncurrent finance lease liabilities	69,168
Total finance lease liabilities	$	74,594

Weighted average remaining lease term (in years)
Operating leases	6.6
Finance leases	17.4

Weighted average discount rate
Operating leases	5%
Finance leases	6%

Supplemental cash flow and other information related to leases were as follows:



	Nine Months Ended September 30, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	5,467
Operating cash flows on finance leases	$	75
Financing cash flows on finance leases	$	780

Maturities of lease liabilities were as follows:



	September 30, 2019
	Operating			Finance
	(In thousands)
2019	$	237		$	1,856
2020	897			7,305
2021	853			6,856
2022	509			6,711
2023	423			6,755
2024 and thereafter	1,534			86,738
Total lease payments	4,453			116,221
Less: Imputed interest	(651		)	(41,627		)
Total lease obligations	3,802			74,594
Less: Current obligations	(807		)	(5,426		)
Long-term lease obligations	$	2,995		$	69,168

The components of lease expense were as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands)
Operating lease costs	$	1,852	$	5,420
Finance lease costs
Amortization of assets	213		711
Interest on lease liabilities	24		75
Variable lease cost	41		112
Total net lease cost	$	2,130	$	6,318

Lessor Accounting



	(In thousands)

Net investment in leases	$	122,800
Properties and equipment, net	(15,031		)
Operating lease right-of-use assets, net	(72,603		)
Gain on sales-type leases	$	35,166

This sales-type lease transaction, including the related gain, was a non-cash transaction.

Lease income recognized was as follows:



	Three Months Ended September 30, 2019				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Operating lease revenues	$	94,459	$	71,297	$	282,747	$	209,850
Direct financing lease interest income	$	539	$	510	$	1,558	$	1,513
Gain on sales-type leases	$	35,166	$	—	$	35,166	$	—
Sales-type lease interest income	$	1,675	$	—	$	1,675	$	—
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	$	3,075	$	—	$	3,075	$	—

As discussed in Note 2, prior to the adoption of ASC 842, contract consideration was bifurcated between operating lease and service revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of September 30, 2019:



	Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)
Remainder of 2019	$	81,025	$	526	$	2,375
2020	309,604		2,112		9,501
2021	304,857		2,128		9,501
2022	303,454		2,145		9,501
2023	272,954		2,162		9,501
Thereafter	963,783		42,966		52,255
Total	$	2,235,677	$	52,039	$	92,634

Net investments in leases recorded on our balance sheet were composed of the following:



	September 30, 2019				December 31, 2018
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables⁽¹⁾	$	70,426	$	16,522	$	—	$	16,549
Unguaranteed residual assets	51,674		—		—		—
Net investment in leases	$	122,100	$	16,522	$	—	$	16,549

(1)

Current portion of lease receivables included in prepaid and other current assets on the balance sheet.

Leases

Lessee Accounting

Our leases have remaining terms of 1 to 26 years, some of which include options to extend the leases for up to 10 years.

Finance Lease Obligations

Supplemental balance sheet information related to leases was as follows (in thousands, except for lease term and discount rate):



	September 30, 2019

Operating leases:
Operating lease right-of-use assets, net	$	3,454

Current operating lease liabilities	807
Noncurrent operating lease liabilities	2,995
Total operating lease liabilities	$	3,802

Finance leases:
Properties and equipment	$	6,741
Accumulated amortization	(4,858		)
Properties and equipment, net	$	1,883

Current finance lease liabilities	$	5,426
Noncurrent finance lease liabilities	69,168
Total finance lease liabilities	$	74,594

Weighted average remaining lease term (in years)
Operating leases	6.6
Finance leases	17.4

Weighted average discount rate
Operating leases	5%
Finance leases	6%

Supplemental cash flow and other information related to leases were as follows:



	Nine Months Ended September 30, 2019
	(In thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows on operating leases	$	5,467
Operating cash flows on finance leases	$	75
Financing cash flows on finance leases	$	780

Maturities of lease liabilities were as follows:



	September 30, 2019
	Operating			Finance
	(In thousands)
2019	$	237		$	1,856
2020	897			7,305
2021	853			6,856
2022	509			6,711
2023	423			6,755
2024 and thereafter	1,534			86,738
Total lease payments	4,453			116,221
Less: Imputed interest	(651		)	(41,627		)
Total lease obligations	3,802			74,594
Less: Current obligations	(807		)	(5,426		)
Long-term lease obligations	$	2,995		$	69,168

The components of lease expense were as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
	(In thousands)
Operating lease costs	$	1,852	$	5,420
Finance lease costs
Amortization of assets	213		711
Interest on lease liabilities	24		75
Variable lease cost	41		112
Total net lease cost	$	2,130	$	6,318

Lessor Accounting



	(In thousands)

Net investment in leases	$	122,800
Properties and equipment, net	(15,031		)
Operating lease right-of-use assets, net	(72,603		)
Gain on sales-type leases	$	35,166

This sales-type lease transaction, including the related gain, was a non-cash transaction.

Lease income recognized was as follows:



	Three Months Ended September 30, 2019				Nine Months Ended September 30,
	2019		2018		2019		2018
	(In thousands)
Operating lease revenues	$	94,459	$	71,297	$	282,747	$	209,850
Direct financing lease interest income	$	539	$	510	$	1,558	$	1,513
Gain on sales-type leases	$	35,166	$	—	$	35,166	$	—
Sales-type lease interest income	$	1,675	$	—	$	1,675	$	—
Lease revenues relating to variable lease payments not included in measurement of the sales-type lease receivable	$	3,075	$	—	$	3,075	$	—

As discussed in Note 2, prior to the adoption of ASC 842, contract consideration was bifurcated between operating lease and service revenues.

Annual minimum undiscounted lease payments under our leases were as follows as of September 30, 2019:



	Operating		Finance		Sales-type
Years Ending December 31,	(In thousands)
Remainder of 2019	$	81,025	$	526	$	2,375
2020	309,604		2,112		9,501
2021	304,857		2,128		9,501
2022	303,454		2,145		9,501
2023	272,954		2,162		9,501
Thereafter	963,783		42,966		52,255
Total	$	2,235,677	$	52,039	$	92,634

Net investments in leases recorded on our balance sheet were composed of the following:



	September 30, 2019				December 31, 2018
	Sales-type Leases		Direct Financing Leases		Sales-type Leases		Direct Financing Leases
	(In thousands)				(In thousands)
Lease receivables⁽¹⁾	$	70,426	$	16,522	$	—	$	16,549
Unguaranteed residual assets	51,674		—		—		—
Net investment in leases	$	122,100	$	16,522	$	—	$	16,549

(1)

Current portion of lease receivables included in prepaid and other current assets on the balance sheet.