Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Leases

Adoption of ASC Topic 842 “Leases”

On January 1, 2019, we adopted ASC Topic 842 (“the new lease standard”) by applying the modified retrospective approach to all leases on January 1, 2019. We elected the package of practical expedients upon transition that permits us to not reassess (1) whether any contracts entered into prior to adoption are or contain leases, (2) the lease classification of existing leases and (3) initial direct costs for any leases that existed prior to adoption. We also elected the practical expedient to not evaluate existing or expired land easements that were not accounted for as leases under previous guidance. Generally, we account for term-based land easements where we control the use of the land surface as leases.

Upon adoption on January 1, 2019, we recognized operating lease right-of-use (“ROU”) assets and corresponding lease liabilities of $5 million. As lessor, the accounting for operating leases has not changed and the adoption did not have an impact on our existing transportation and terminaling services agreements that are considered operating leases. As lessee, the accounting for finance leases (capital leases) was substantially unchanged.

Lessee accounting

We determine if an arrangement is or contains a lease at inception. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period and (3) whether we have the right to direct the use of the asset. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. The lease classification affects the expense recognition in the income statement. Operating lease costs are recorded entirely in operating expenses. Finance lease costs are split, where amortization of the ROU asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

Under the new lease standard, operating leases (as lessee) are included in Operating lease right-of-use assets, Accrued liabilities - third parties and Operating lease liabilities in our unaudited consolidated balance sheets. Finance leases (as lessee) are included in Property, plant and equipment, Accrued liabilities – third parties and Finance lease liabilities in our unaudited consolidated balance sheets. ROU assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at transition date in determining the present value of future payments. The ROU asset includes any lease payments made but excludes lease incentives and initial direct costs incurred, if any. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have long-term non-cancelable third-party operating leases for land. Several of the leases provide for renewal terms. We hold cancellable easements or rights-of-way arrangements from landowners permitting the use of land for the construction and operation of our pipeline systems. Obligations under these easements are not material to the results of our operations. In

addition, Odyssey has a third-party operating lease for use of offshore platform space at Main Pass 289C. This lease will continue to be in effect until the continued operation of the platform is uneconomic.

We are also obligated under two finance leases. We have a terminaling services agreement in which we took possession of certain storage tanks located in Port Neches, Texas and a lease of offshore platform space on the Garden Banks 128 “A” platform.

Lease extensions. Many of our leases have options to either extend or terminate the lease. In determining the lease term, we considered all available contract extensions which are reasonably certain of occurring.

Significant assumptions and judgments

Incremental borrowing rate. We are generally not made aware of the interest rate implicit in a lease due to several reasons, including: (1) uncertainty as to the total amount of the costs incurred by the lessor in negotiating the lease or whether certain costs incurred by the lessor would qualify as initial direct costs and (2) uncertainty as to the lessor’s expectation of the residual value of the asset at the end of the lease. Therefore, we use our incremental borrowing rate (“IBR”) at the commencement of the lease and estimate the IBR for each lease agreement taking into consideration lease contract term, collateral and entity credit ratings, and use sensitivity analyses to evaluate the reasonableness of the rates determined.

Lease balances and costs

The following tables summarize balance sheet data related to leases at September 30, 2019 and our lease costs as of and for the three and nine months ended September 30, 2019:

Leases	Classification	September 30, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	5
Finance lease assets	Property, plant and equipment, net (1)	17
Total lease assets		$	22
Liabilities
Current
Finance	Accrued liabilities - third parties	$	1
Noncurrent
Operating	Operating lease liabilities	4
Finance	Finance lease liabilities	25
Total lease liabilities		$	30

⁽¹⁾ Finance lease assets are recorded net of accumulated amortization of $6 million as of September 30, 2019.

		Three Months Ended		Nine Months Ended
Lease cost	Classification	September 30, 2019		September 30, 2019
Operating lease cost (1)	Operations and maintenance - third parties	$	—	$	—
Finance lease cost (cost resulting from lease payments):
Amortization of leased assets	Depreciation and amortization	1		1
Interest on lease liabilities	Interest expense, net	1		3
Total lease cost		$	2	$	4

⁽¹⁾ Amounts for the three and nine months ended September 30, 2019 were less than $1 million.

Other information

	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)	$	—
Operating cash flows from finance leases	(3)
Financing cash flows from finance leases	(1)

⁽¹⁾ Amounts for the nine months ended September 30, 2019 were less than $1 million.

	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	20
Finance leases	12
Weighted-average discount rate
Operating leases	5.8	%
Finance leases	14.3	%

Annual maturity analysis

The future annual maturity of lease payments as of September 30, 2019 for the above lease obligations was:

Maturity of lease liabilities	Operating leases (1)		Finance leases (2)		Total
Remainder of 2019	$	—	$	1	$	1
2020	—		4		4
2021	1		4		5
2022	—		4		4
2023	1		4		5
Remainder	6		36		42
Total lease payments	8		53		61
Less: Interest (3)	(3)		(27)		(30)
Present value of lease liabilities (4)	$	5	$	26	$	31

⁽¹⁾ Operating lease payments include $2 million related to options to extend lease terms that are reasonably certain of being exercised.

⁽²⁾ Includes $26 million in principal and excludes $9 million in executory costs.

⁽³⁾ Calculated using the interest rate for each lease.

⁽⁴⁾ Includes the current portion of $1 million for the finance lease.

Lessor accounting

We have certain transportation and terminaling services agreements with related parties entered into prior to the adoption date of January 1, 2019 that are considered operating leases and include both lease and non-lease components. Certain of these agreements were entered into for terms of ten years with the option to extend for two additional terms of five years each, and we have additional agreements with an initial term of ten years with the option to extend for up to ten additional one year terms. As is the case with certain of our agreements, when the renewal options are reasonably certain to be exercised, the payments are included in the future maturity of lease payments. Our transportation, terminaling and storage services revenue and lease revenue from related parties for both the three and nine months ended September 30, 2019 and September 30, 2018 are disclosed in Note 11 – Revenue Recognition.

Our risk management strategy for the residual assets is mitigated by the long-term nature of the underlying assets and the long-term nature of our lease agreements.

Significant assumptions and judgments

Lease and non-lease components. Certain of our revenues are accounted for under Topic 842, Leases, as the underlying contracts convey the right to control the use of the identified asset for a period of time. We allocate the arrangement consideration between the lease components that fall within the scope of ASC Topic 842 and any non-lease service components within the scope of ASC Topic 606 based on the relative stand-alone selling price of each component. See Note 11 – Revenue Recognition for additional information regarding the allocation of the consideration in a contract between the lease and non-lease components.

Annual maturity analysis

As of September 30, 2019, future annual maturity of lease payments to be received under the contract terms of these operating leases, which includes only the lease components of these leases, was estimated to be:

Maturity of lease payments	Operating leases (1)
Remainder of 2019	$	14
2020	56
2021	56
2022	56
2023	56
Remainder	604
Total lease payments	$	842

⁽¹⁾ Operating lease payments include $411 million related to options to extend lease terms that are reasonably certain of being exercised.

Leases

Leases

Adoption of ASC Topic 842 “Leases”

On January 1, 2019, we adopted ASC Topic 842 (“the new lease standard”) by applying the modified retrospective approach to all leases on January 1, 2019. We elected the package of practical expedients upon transition that permits us to not reassess (1) whether any contracts entered into prior to adoption are or contain leases, (2) the lease classification of existing leases and (3) initial direct costs for any leases that existed prior to adoption. We also elected the practical expedient to not evaluate existing or expired land easements that were not accounted for as leases under previous guidance. Generally, we account for term-based land easements where we control the use of the land surface as leases.

Upon adoption on January 1, 2019, we recognized operating lease right-of-use (“ROU”) assets and corresponding lease liabilities of $5 million. As lessor, the accounting for operating leases has not changed and the adoption did not have an impact on our existing transportation and terminaling services agreements that are considered operating leases. As lessee, the accounting for finance leases (capital leases) was substantially unchanged.

Lessee accounting

We determine if an arrangement is or contains a lease at inception. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period and (3) whether we have the right to direct the use of the asset. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. The lease classification affects the expense recognition in the income statement. Operating lease costs are recorded entirely in operating expenses. Finance lease costs are split, where amortization of the ROU asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

Under the new lease standard, operating leases (as lessee) are included in Operating lease right-of-use assets, Accrued liabilities - third parties and Operating lease liabilities in our unaudited consolidated balance sheets. Finance leases (as lessee) are included in Property, plant and equipment, Accrued liabilities – third parties and Finance lease liabilities in our unaudited consolidated balance sheets. ROU assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at transition date in determining the present value of future payments. The ROU asset includes any lease payments made but excludes lease incentives and initial direct costs incurred, if any. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have long-term non-cancelable third-party operating leases for land. Several of the leases provide for renewal terms. We hold cancellable easements or rights-of-way arrangements from landowners permitting the use of land for the construction and operation of our pipeline systems. Obligations under these easements are not material to the results of our operations. In

addition, Odyssey has a third-party operating lease for use of offshore platform space at Main Pass 289C. This lease will continue to be in effect until the continued operation of the platform is uneconomic.

We are also obligated under two finance leases. We have a terminaling services agreement in which we took possession of certain storage tanks located in Port Neches, Texas and a lease of offshore platform space on the Garden Banks 128 “A” platform.

Lease extensions. Many of our leases have options to either extend or terminate the lease. In determining the lease term, we considered all available contract extensions which are reasonably certain of occurring.

Significant assumptions and judgments

Incremental borrowing rate. We are generally not made aware of the interest rate implicit in a lease due to several reasons, including: (1) uncertainty as to the total amount of the costs incurred by the lessor in negotiating the lease or whether certain costs incurred by the lessor would qualify as initial direct costs and (2) uncertainty as to the lessor’s expectation of the residual value of the asset at the end of the lease. Therefore, we use our incremental borrowing rate (“IBR”) at the commencement of the lease and estimate the IBR for each lease agreement taking into consideration lease contract term, collateral and entity credit ratings, and use sensitivity analyses to evaluate the reasonableness of the rates determined.

Lease balances and costs

The following tables summarize balance sheet data related to leases at September 30, 2019 and our lease costs as of and for the three and nine months ended September 30, 2019:

Leases	Classification	September 30, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	5
Finance lease assets	Property, plant and equipment, net (1)	17
Total lease assets		$	22
Liabilities
Current
Finance	Accrued liabilities - third parties	$	1
Noncurrent
Operating	Operating lease liabilities	4
Finance	Finance lease liabilities	25
Total lease liabilities		$	30

⁽¹⁾ Finance lease assets are recorded net of accumulated amortization of $6 million as of September 30, 2019.

		Three Months Ended		Nine Months Ended
Lease cost	Classification	September 30, 2019		September 30, 2019
Operating lease cost (1)	Operations and maintenance - third parties	$	—	$	—
Finance lease cost (cost resulting from lease payments):
Amortization of leased assets	Depreciation and amortization	1		1
Interest on lease liabilities	Interest expense, net	1		3
Total lease cost		$	2	$	4

⁽¹⁾ Amounts for the three and nine months ended September 30, 2019 were less than $1 million.

Other information

	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)	$	—
Operating cash flows from finance leases	(3)
Financing cash flows from finance leases	(1)

⁽¹⁾ Amounts for the nine months ended September 30, 2019 were less than $1 million.

	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	20
Finance leases	12
Weighted-average discount rate
Operating leases	5.8	%
Finance leases	14.3	%

Annual maturity analysis

The future annual maturity of lease payments as of September 30, 2019 for the above lease obligations was:

Maturity of lease liabilities	Operating leases (1)		Finance leases (2)		Total
Remainder of 2019	$	—	$	1	$	1
2020	—		4		4
2021	1		4		5
2022	—		4		4
2023	1		4		5
Remainder	6		36		42
Total lease payments	8		53		61
Less: Interest (3)	(3)		(27)		(30)
Present value of lease liabilities (4)	$	5	$	26	$	31

⁽¹⁾ Operating lease payments include $2 million related to options to extend lease terms that are reasonably certain of being exercised.

⁽²⁾ Includes $26 million in principal and excludes $9 million in executory costs.

⁽³⁾ Calculated using the interest rate for each lease.

⁽⁴⁾ Includes the current portion of $1 million for the finance lease.

Lessor accounting

We have certain transportation and terminaling services agreements with related parties entered into prior to the adoption date of January 1, 2019 that are considered operating leases and include both lease and non-lease components. Certain of these agreements were entered into for terms of ten years with the option to extend for two additional terms of five years each, and we have additional agreements with an initial term of ten years with the option to extend for up to ten additional one year terms. As is the case with certain of our agreements, when the renewal options are reasonably certain to be exercised, the payments are included in the future maturity of lease payments. Our transportation, terminaling and storage services revenue and lease revenue from related parties for both the three and nine months ended September 30, 2019 and September 30, 2018 are disclosed in Note 11 – Revenue Recognition.

Our risk management strategy for the residual assets is mitigated by the long-term nature of the underlying assets and the long-term nature of our lease agreements.

Significant assumptions and judgments

Lease and non-lease components. Certain of our revenues are accounted for under Topic 842, Leases, as the underlying contracts convey the right to control the use of the identified asset for a period of time. We allocate the arrangement consideration between the lease components that fall within the scope of ASC Topic 842 and any non-lease service components within the scope of ASC Topic 606 based on the relative stand-alone selling price of each component. See Note 11 – Revenue Recognition for additional information regarding the allocation of the consideration in a contract between the lease and non-lease components.

Annual maturity analysis

As of September 30, 2019, future annual maturity of lease payments to be received under the contract terms of these operating leases, which includes only the lease components of these leases, was estimated to be:

Maturity of lease payments	Operating leases (1)
Remainder of 2019	$	14
2020	56
2021	56
2022	56
2023	56
Remainder	604
Total lease payments	$	842

⁽¹⁾ Operating lease payments include $411 million related to options to extend lease terms that are reasonably certain of being exercised.

Leases

Leases

Adoption of ASC Topic 842 “Leases”

On January 1, 2019, we adopted ASC Topic 842 (“the new lease standard”) by applying the modified retrospective approach to all leases on January 1, 2019. We elected the package of practical expedients upon transition that permits us to not reassess (1) whether any contracts entered into prior to adoption are or contain leases, (2) the lease classification of existing leases and (3) initial direct costs for any leases that existed prior to adoption. We also elected the practical expedient to not evaluate existing or expired land easements that were not accounted for as leases under previous guidance. Generally, we account for term-based land easements where we control the use of the land surface as leases.

Upon adoption on January 1, 2019, we recognized operating lease right-of-use (“ROU”) assets and corresponding lease liabilities of $5 million. As lessor, the accounting for operating leases has not changed and the adoption did not have an impact on our existing transportation and terminaling services agreements that are considered operating leases. As lessee, the accounting for finance leases (capital leases) was substantially unchanged.

Lessee accounting

We determine if an arrangement is or contains a lease at inception. Our assessment is based on (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period and (3) whether we have the right to direct the use of the asset. Leases are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified as an operating lease if it does not meet any one of these criteria. The lease classification affects the expense recognition in the income statement. Operating lease costs are recorded entirely in operating expenses. Finance lease costs are split, where amortization of the ROU asset is recorded in operating expenses and an implied interest component is recorded in interest expense.

Under the new lease standard, operating leases (as lessee) are included in Operating lease right-of-use assets, Accrued liabilities - third parties and Operating lease liabilities in our unaudited consolidated balance sheets. Finance leases (as lessee) are included in Property, plant and equipment, Accrued liabilities – third parties and Finance lease liabilities in our unaudited consolidated balance sheets. ROU assets and lease liabilities are recognized at commencement date based on the present value of the future minimum lease payments over the lease term. As most of our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at transition date in determining the present value of future payments. The ROU asset includes any lease payments made but excludes lease incentives and initial direct costs incurred, if any. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

We have long-term non-cancelable third-party operating leases for land. Several of the leases provide for renewal terms. We hold cancellable easements or rights-of-way arrangements from landowners permitting the use of land for the construction and operation of our pipeline systems. Obligations under these easements are not material to the results of our operations. In

addition, Odyssey has a third-party operating lease for use of offshore platform space at Main Pass 289C. This lease will continue to be in effect until the continued operation of the platform is uneconomic.

We are also obligated under two finance leases. We have a terminaling services agreement in which we took possession of certain storage tanks located in Port Neches, Texas and a lease of offshore platform space on the Garden Banks 128 “A” platform.

Lease extensions. Many of our leases have options to either extend or terminate the lease. In determining the lease term, we considered all available contract extensions which are reasonably certain of occurring.

Significant assumptions and judgments

Incremental borrowing rate. We are generally not made aware of the interest rate implicit in a lease due to several reasons, including: (1) uncertainty as to the total amount of the costs incurred by the lessor in negotiating the lease or whether certain costs incurred by the lessor would qualify as initial direct costs and (2) uncertainty as to the lessor’s expectation of the residual value of the asset at the end of the lease. Therefore, we use our incremental borrowing rate (“IBR”) at the commencement of the lease and estimate the IBR for each lease agreement taking into consideration lease contract term, collateral and entity credit ratings, and use sensitivity analyses to evaluate the reasonableness of the rates determined.

Lease balances and costs

The following tables summarize balance sheet data related to leases at September 30, 2019 and our lease costs as of and for the three and nine months ended September 30, 2019:

Leases	Classification	September 30, 2019
Assets
Operating lease assets	Operating lease right-of-use assets	$	5
Finance lease assets	Property, plant and equipment, net (1)	17
Total lease assets		$	22
Liabilities
Current
Finance	Accrued liabilities - third parties	$	1
Noncurrent
Operating	Operating lease liabilities	4
Finance	Finance lease liabilities	25
Total lease liabilities		$	30

⁽¹⁾ Finance lease assets are recorded net of accumulated amortization of $6 million as of September 30, 2019.

		Three Months Ended		Nine Months Ended
Lease cost	Classification	September 30, 2019		September 30, 2019
Operating lease cost (1)	Operations and maintenance - third parties	$	—	$	—
Finance lease cost (cost resulting from lease payments):
Amortization of leased assets	Depreciation and amortization	1		1
Interest on lease liabilities	Interest expense, net	1		3
Total lease cost		$	2	$	4

⁽¹⁾ Amounts for the three and nine months ended September 30, 2019 were less than $1 million.

Other information

	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases (1)	$	—
Operating cash flows from finance leases	(3)
Financing cash flows from finance leases	(1)

⁽¹⁾ Amounts for the nine months ended September 30, 2019 were less than $1 million.

	September 30, 2019
Weighted-average remaining lease term (years)
Operating leases	20
Finance leases	12
Weighted-average discount rate
Operating leases	5.8	%
Finance leases	14.3	%

Annual maturity analysis

The future annual maturity of lease payments as of September 30, 2019 for the above lease obligations was:

Maturity of lease liabilities	Operating leases (1)		Finance leases (2)		Total
Remainder of 2019	$	—	$	1	$	1
2020	—		4		4
2021	1		4		5
2022	—		4		4
2023	1		4		5
Remainder	6		36		42
Total lease payments	8		53		61
Less: Interest (3)	(3)		(27)		(30)
Present value of lease liabilities (4)	$	5	$	26	$	31

⁽¹⁾ Operating lease payments include $2 million related to options to extend lease terms that are reasonably certain of being exercised.

⁽²⁾ Includes $26 million in principal and excludes $9 million in executory costs.

⁽³⁾ Calculated using the interest rate for each lease.

⁽⁴⁾ Includes the current portion of $1 million for the finance lease.

Lessor accounting

We have certain transportation and terminaling services agreements with related parties entered into prior to the adoption date of January 1, 2019 that are considered operating leases and include both lease and non-lease components. Certain of these agreements were entered into for terms of ten years with the option to extend for two additional terms of five years each, and we have additional agreements with an initial term of ten years with the option to extend for up to ten additional one year terms. As is the case with certain of our agreements, when the renewal options are reasonably certain to be exercised, the payments are included in the future maturity of lease payments. Our transportation, terminaling and storage services revenue and lease revenue from related parties for both the three and nine months ended September 30, 2019 and September 30, 2018 are disclosed in Note 11 – Revenue Recognition.

Our risk management strategy for the residual assets is mitigated by the long-term nature of the underlying assets and the long-term nature of our lease agreements.

Significant assumptions and judgments

Lease and non-lease components. Certain of our revenues are accounted for under Topic 842, Leases, as the underlying contracts convey the right to control the use of the identified asset for a period of time. We allocate the arrangement consideration between the lease components that fall within the scope of ASC Topic 842 and any non-lease service components within the scope of ASC Topic 606 based on the relative stand-alone selling price of each component. See Note 11 – Revenue Recognition for additional information regarding the allocation of the consideration in a contract between the lease and non-lease components.

Annual maturity analysis

As of September 30, 2019, future annual maturity of lease payments to be received under the contract terms of these operating leases, which includes only the lease components of these leases, was estimated to be:

Maturity of lease payments	Operating leases (1)
Remainder of 2019	$	14
2020	56
2021	56
2022	56
2023	56
Remainder	604
Total lease payments	$	842

⁽¹⁾ Operating lease payments include $411 million related to options to extend lease terms that are reasonably certain of being exercised.