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Leases

6 Months Ended

Jun. 30, 2019

Adoption of ASC 842

In February 2016, the Financial Accounting Standards Board issued Accounting Standards Codification 842, Leases (“ASC 842”), which requires lessees to recognize a right-of-use (“ROU”) asset and a corresponding lease liability for leases with terms longer than twelve months. We adopted the new standard effective January 1, 2019, using a modified retrospective transition method and applied certain optional transitional practical expedients.

We elected an optional transition method that allowed application of the new standard at the adoption date and the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption with no adjustment to previously reported results. In accordance with this approach, our consolidated financial statements for periods prior to January 1, 2019 were not revised to reflect the new lease accounting guidance. We also elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the carry forward of historical lease classification. We did not elect the practical expedient related to hindsight.

ASC 842 changes the way our operating leases are recorded, presented and disclosed in our consolidated financial statements. Upon adoption of ASC 842 on January 1, 2019, we recognized a ROU asset and a corresponding lease liability based on the present value of then existing operating lease obligations of approximately $11.4 million on our consolidated balance sheet. In addition, there are several key accounting policy elections that we made upon adoption of ASC 842 including:

•We did not recognize ROU assets and lease liabilities for short-term leases and instead record them in a manner similar to operating leases under ASC 840, Leases, lease accounting guidelines. A short term lease is one with a maximum lease term of 12 months or less and does not include a purchase option or renewal option the lessee is reasonably certain to exercise.

•We have also elected the non-lease component practical expedient for any asset class where lease and non-lease components are comingled and the non-lease component is determined to be insignificant when compared to the lease component.

Lease Recognition

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, other current liabilities and operating lease liabilities in the condensed consolidated balance sheets. Finance leases are included in property and equipment, other current liabilities and other long-term liabilities in the condensed consolidated balance sheets.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. At adoption, the ROU asset also includes any lease payment made and excludes lease incentives and initial direct costs. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

Our lease agreements do not contain any leases with variable lease payments (i.e., payments that depend on a percentage of sales of a lessee or payments that increase based upon an index such as CPI), residual value guarantees probable of being paid or material restrictive covenants. Lease agreements with lease and non-lease components are generally accounted for separately when practical. For leases where the lease and non-lease component are comingled and the non-lease component is determined to be insignificant when compared to the lease component, the lease and the non-lease components are treated as a single lease component for all asset classes.

We are a lessee in noncancellable (1) operating leases for office space, equipment and lease and terminal access contracts for tank storage and dock access for our crude oil marketing business, and (2) finance leases for tractors and tank storage and throughput for our crude oil marketing business. Leases with an initial term of twelve months or less are not included on the balance sheet.

Some leases include one or more options to renew, with renewal terms that can extend the lease term for generally one year with exercise of lease renewal options being at our sole discretion as lessee.

The following table provides the components of lease expense for the period indicated (in thousands):


	Three Months		Six Months
	Ended		Ended
	June 30,		June 30,
	2019		2019
Finance lease cost:
Amortization of ROU assets	$	456	$	701
Interest on lease liabilities	81		127
Operating lease cost	717		1,579
Short-term lease cost	2,863		4,828


Total lease expense	$	4,117	$	7,235

The following table provides supplemental cash flow and other information related to leases for the period indicated (in thousands):


	Six Months
	Ended
	June 30,
	2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases ⁽¹⁾	$	1,274
Operating cash flows from finance leases	94
Financing cash flows from finance leases	651

ROU assets obtained in exchange for new lease liabilities:
Finance leases	4,148
Operating leases	11,111

______________

(1) Amount is included in Other operating activities on the unaudited condensed consolidated cash flow statement.

The following table provides the lease term and discount rate for the period indicated:


						Six Months
						Ended
						June 30,
						2019
Weighted-average remaining lease term (years):
Finance leases						3.52
Operating leases						5.24

Weighted-average discount rate:
Finance leases						4.9%
Operating leases						5.0%

The following table provides supplemental balance sheet information related to leases at the date indicated (in thousands):


	June 30,
	2019
Assets
Finance lease assets ⁽¹⁾	$	7,490
Operating lease ROU assets	10,093

Liabilities
Current
Finance lease liabilities	2,116
Operating lease liabilities	2,097
Noncurrent
Finance lease liabilities	5,473
Operating lease liabilities	7,999

______________

(1) Amount is included in Property and equipment, net on the unaudited condensed consolidated balance sheet.

The following table provides maturities of undiscounted lease liabilities at June 30, 2019 (in thousands):


	Finance		Operating
	Lease		Lease

Remainder of 2019	$	1,213	$	1,280
2020	2,426		2,498
2021	2,426		2,102
2022	1,492		1,770
2023	642		1,668
Thereafter	37		2,112
Total lease payments	8,236		11,430
Less: Interest	(647)		(1,334)
Present value of lease liabilities	7,589		10,096
Less: Current portion of lease obligation	(2,116)		(2,097)
Total long-term lease obligation	$	5,473	$	7,999

The following table provides maturities of undiscounted lease liabilities at December 31, 2018 (in thousands):


	Finance		Operating
	Lease		Lease

2019	$	1,052	$	4,242
2020	1,052		2,258
2021	1,052		2,107
2022	909		1,782
2023	451		1,495
Thereafter	—		1,488
Total lease payments	4,516		$	13,372
Less: Interest	(424)
Present value of lease liabilities	4,092
Less: Current portion of lease obligation	(883)
Total long-term lease obligation	$	3,209

Leases

Adoption of ASC 842

Lease Recognition

The following table provides the components of lease expense for the period indicated (in thousands):


	Three Months		Six Months
	Ended		Ended
	June 30,		June 30,
	2019		2019
Finance lease cost:
Amortization of ROU assets	$	456	$	701
Interest on lease liabilities	81		127
Operating lease cost	717		1,579
Short-term lease cost	2,863		4,828


Total lease expense	$	4,117	$	7,235

The following table provides supplemental cash flow and other information related to leases for the period indicated (in thousands):


	Six Months
	Ended
	June 30,
	2019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases ⁽¹⁾	$	1,274
Operating cash flows from finance leases	94
Financing cash flows from finance leases	651

ROU assets obtained in exchange for new lease liabilities:
Finance leases	4,148
Operating leases	11,111

______________

(1) Amount is included in Other operating activities on the unaudited condensed consolidated cash flow statement.

The following table provides the lease term and discount rate for the period indicated:


						Six Months
						Ended
						June 30,
						2019
Weighted-average remaining lease term (years):
Finance leases						3.52
Operating leases						5.24

Weighted-average discount rate:
Finance leases						4.9%
Operating leases						5.0%

The following table provides supplemental balance sheet information related to leases at the date indicated (in thousands):


	June 30,
	2019
Assets
Finance lease assets ⁽¹⁾	$	7,490
Operating lease ROU assets	10,093

Liabilities
Current
Finance lease liabilities	2,116
Operating lease liabilities	2,097
Noncurrent
Finance lease liabilities	5,473
Operating lease liabilities	7,999

______________

(1) Amount is included in Property and equipment, net on the unaudited condensed consolidated balance sheet.

The following table provides maturities of undiscounted lease liabilities at June 30, 2019 (in thousands):


	Finance		Operating
	Lease		Lease

Remainder of 2019	$	1,213	$	1,280
2020	2,426		2,498
2021	2,426		2,102
2022	1,492		1,770
2023	642		1,668
Thereafter	37		2,112
Total lease payments	8,236		11,430
Less: Interest	(647)		(1,334)
Present value of lease liabilities	7,589		10,096
Less: Current portion of lease obligation	(2,116)		(2,097)
Total long-term lease obligation	$	5,473	$	7,999

The following table provides maturities of undiscounted lease liabilities at December 31, 2018 (in thousands):


	Finance		Operating
	Lease		Lease

2019	$	1,052	$	4,242
2020	1,052		2,258
2021	1,052		2,107
2022	909		1,782
2023	451		1,495
Thereafter	—		1,488
Total lease payments	4,516		$	13,372
Less: Interest	(424)
Present value of lease liabilities	4,092
Less: Current portion of lease obligation	(883)
Total long-term lease obligation	$	3,209