Leases

As of January 1, 2019, we adopted ASU 2016-02, Leases (Topic 842) using the modified retrospective method of adoption. We elected to use the transition option that allows us to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment (if any) to the opening balance of retained earnings in the year of adoption. Comparable periods continue to be presented under the guidance of the previous standard, ASC 840. ASC 842 requires lessees to recognize a lease liability and right-of-use asset on the balance sheet for operating leases. For lessors, the new accounting model remains largely the same, although some changes have been made to align it with the new lessee model and the new revenue recognition guidance, ASC 606, Revenue from Contracts with Customers. Our adoption of ASC 842 did not result in any material adjustments to retained earnings, changes in the timing or amounts of lease costs or changes to our leverage ratio as defined in our credit agreement.

We have both lessee and lessor arrangements. Our leases are evaluated at inception or at any subsequent modification. Depending on the terms, leases are classified as either operating or finance leases if we are the lessee, or as operating, sales-type or direct financing leases if we are the lessor, as appropriate under ASC 842. Our lessee arrangements primarily include a terminalling and storage contract where we have exclusive use of dedicated tankage, leased pipelines and office buildings. Our lessor arrangements include pipeline capacity and storage contracts and our condensate splitter tolling agreement that qualify as operating leases under ASC 842. In addition, we have a long-term throughput and deficiency agreement with a customer that is being accounted for as a sales-type lease under ASC 842.

In accordance with ASC 842, we have made an accounting policy election to not apply the new standard to lessee arrangements with a term of one year or less and no purchase option that is reasonably certain of exercise. We will continue to account for these short-term arrangements by recognizing payments and expenses as incurred, without recording a lease liability and right-of-use asset.

We have also made an accounting policy election for both our lessee and lessor arrangements to combine lease and non-lease components. This election is applied to all of our lease arrangements as our non-lease components are not material and do not result in significant timing differences in the recognition of rental expenses or income.

Operating Leases – Lessee

We recognize a lease liability for each lease based on the present value of remaining minimum fixed rental payments (which includes payments under any renewal option that we are reasonably certain to exercise), using a discount rate that approximates the rate of interest we would have to pay to borrow on a collateralized basis over a similar term. We also recognize a right-of-use asset for each lease, valued at the lease liability, adjusted for prepaid or accrued rent balances existing at the time of initial recognition. The lease liability and right-of-use asset are reduced over the term of the lease as payments are made and the assets are used.

Related Party Operating Lease. In third quarter 2018, we entered into a long-term terminalling and storage contract with our equity investee, Seabrook, where we have exclusive use of dedicated tankage that is utilized to provide our customers with crude oil storage capacity and dock access for crude oil imports and exports on the Texas Gulf Coast. This arrangement meets the definition of an operating lease, and our lease liability includes renewal options necessary to maintain control of the assets for a time period sufficient to meet our performance obligations to our third-party customers.

Minimum fixed rental payments are recognized on a straight-line basis over the life of the lease as costs and expenses on our consolidated statements of income. Variable and short-term rental payments are recognized as costs and expenses as they are incurred. Variable payments consist of amounts that exceed the contractual minimum rental payment (for example, incremental payment increases tied to a change in a market index). Future minimum rental payments under operating leases with initial terms greater than one year as of March 31, 2019, are as follows (in thousands):



	Third Party Leases		Seabrook Lease		All Leases
2019	$	15,889	$	8,266	$	24,155
2020	18,948		11,021		29,969
2021	18,994		9,368		28,362
2022	18,868		6,612		25,480
2023	18,419		6,612		25,031
Thereafter	29,867		37,471		67,338
Total future minimum rental payments	120,985		79,350		200,335
Present value discount	14,691		13,777		28,468
Total operating lease liability	$	106,294	$	65,573	$	171,867

The following table provides further information about our operating leases as of and for the three months ended March 31, 2019 (dollars in thousands):



	Third Party Leases		Seabrook Lease		All Leases
Current lease liability	$	14,828	$	8,436	$	23,264
Long-term lease liability	$	91,466	$	57,137	$	148,603
Right-of-use asset	$	106,532	$	65,573	$	172,105

Fixed lease cost	$	4,821	$	2,755	$	7,576
Short-term lease cost	457		—		457
Variable lease cost	371		—		371
Total lease cost	$	5,649	$	2,755	$	8,404

Operating cash flows from operating leases	$	3,226	2,755		$	5,981
Weighted average remaining lease term (years)	7		9		8
Weighted-average discount rate	4.1%		4.3%		4.2%

Rent expense was $9.0 million for first quarter 2018 and was recognized in accordance with ASC 840.

Operating Leases – Lessor

We recognize fixed rental income on a straight-line basis over the life of the lease as revenue on our consolidated statements of income. Variable rental payments are recognized as revenue in the period in which the changes in facts and circumstances on which the variable lease payments are based occur.

Future minimum payments receivable under operating leases with terms greater than one year as of March 31, 2019 are estimated as follows (in thousands):



2019	$	30,892
2020	33,770
2021	33,583
2022	23,486
2023	7,699
Thereafter	16,019
Total	$	145,449

We recognized variable lease revenue of $13.7 million in first quarter 2019, primarily related to our condensate splitter in Corpus Christi, Texas.

Property, plant and equipment utilized by our customers in operating lease arrangements consisted of: $229.6 million of processing equipment; $74.5 million of storage tanks; $44.3 million of pipeline and station equipment; and $27.9 million of other assets. The processing equipment primarily relates to our condensate splitter.

Sales-Type Lease - Lessor

We entered into a long-term throughput and deficiency agreement with a customer on a pipeline and related assets that we constructed in Texas and New Mexico, which contains minimum payment commitments. Our customer has the option to purchase this pipeline and related assets at the end of the lease term for a nominal amount. This agreement was previously accounted for as a direct-financing lease under ASC 840 and is now being accounted for as a sales-type lease under ASC 842. The net investment under this arrangement as of December 31, 2018 and March 31, 2019 was as follows (in thousands):



	December 31, 2018		March 31, 2019
Total minimum lease payments receivable	$	17,468	$	17,031
Less: Unearned income	3,422		3,265
Recorded net investment in sales-type lease	$	14,046	$	13,766

The net investment in sales-type leases was classified in the consolidated balance sheets as follows (in thousands):



	December 31, 2018		March 31, 2019
Other accounts receivable	$	1,138	$	1,151
Long-term receivables	12,908		12,615
Total	$	14,046	$	13,766

Future minimum payments receivable under this lease are $1.3 million in 2019, $1.7 million in 2020, $1.7 million in 2021, $1.7 million in 2022, $1.7 million in 2023 and $8.7 million thereafter.