LEASES

9 Months Ended

Sep. 30, 2019

The Company has various lease agreements including leases of plant, facilities, railcar, and equipment. Some leases include options to purchase, terminate or extend for one or more years. These options are included in the lease term when it is reasonably certain that the option will be exercised.

Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as operating or financing leases in our consolidated balance sheet.

Lease assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use secured incremental borrowing rates based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives and initial direct costs incurred. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised.

At inception, the Company determines if an arrangement contains a lease and whether that lease meets the classification criteria of a finance or operating lease. Some of the Company’s lease arrangements contain lease components (e.g. minimum rent payments) and non-lease components (e.g. maintenance, labor charges, etc.). The Company generally does not separate lease and nonlease components for all classes of underlying assets. For certain equipment leases, such as freight car, vehicles and work equipment, the Company accounts for the lease and non-lease components as a single lease component.

Certain of the Company’s lease agreements include rental payments that are adjusted periodically for an index or rate. The leases are initially measured using the projected payments adjusted for the index or rate in effect at the commencement date. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.

Finance Leases

Finance leases are included in finance lease right-of-use lease assets and finance lease liability current and long-term liabilities on the unaudited consolidated balance sheets. The associated amortization expense and interest expense are included in depreciation and amortization and interest expense, respectively, on the unaudited consolidated statements of operations. Total finance lease costs for the three and nine months ended September 30, 2019 were $65,675 and $141,549, respectively. Please see “Note 6. Line of Credit and Long-Term Debt” for more details.

Operating Leases

Operating leases are included in operating lease right-of-use lease assets, and operating current and long-term lease liabilities on the consolidated balance sheets. Lease expense for operating leases is recognized on a straight-line basis over the lease term. Variable lease expense is recognized in the period in which the obligation for those payments is incurred. Lease expense for equipment is included in cost of revenues and other rents are included in selling, general and administrative expense on the consolidated statements of operations and are reported net of lease income. Lease income is not material to the results of operations for the three and nine months ended September 30, 2019. Total operating lease costs for the three and nine months ended September 30, 2019 were $1.6 million and $4.7 million, respectively.

Cash Flows

An initial right-of-use asset of $37.8 million was recognized as a non-cash asset addition with the adoption of the new lease accounting standard. Cash paid for amounts included in operating lease liabilities was $1.6 million during the nine months ended September 30, 2019 and is included in operating cash flows. Cash paid for amounts included in finance lease was $113,241 during the nine months ended September 30, 2019 and is included in financing cash flows.

Maturities of our lease liabilities for all operating leases are as follows as of September 30, 2019:



	Facilities			Equipment			Plant			Railcar			Total
Year 1	$	733,420		$	161,539		$	4,060,417		$	1,050,126		$	6,005,502
Year 2	550,070			161,539			4,060,417			715,076			5,487,102
Year 3	367,770			67,338			4,060,417			97,176			4,592,701
Year 4	315,000			—			4,060,417			5,112			4,380,529
Year 5	300,000			—			4,060,417			—			4,360,417
Thereafter	2,450,000			—			34,540,011			—			36,990,011
Total lease payments	$	4,716,260		$	390,416		$	54,842,096		$	1,867,490		$	61,816,262
Less: interest	(1,716,201		)	(27,868		)	(23,702,742		)	(126,590		)	(25,573,401		)
Present value of lease liabilities	$	3,000,059		$	362,548		$	31,139,354		$	1,740,900		$	36,242,861

The weighted average remaining lease terms and discount rates for all of our operating leases were as follows as of September 30, 2019:



Remaining lease term and discount rate:	September 30, 2019
Weighted average remaining lease terms (years)
Lease facilities	5.35
Lease equipment	2.42
Lease plant	13.51
Lease railcar	1.60
Weighted average discount rate
Lease facilities	9.13	%
Lease equipment	8.00	%
Lease plant	9.37	%
Lease railcar	8.00	%

Significant Judgments

Significant judgments include the discount rates applied, the expected lease terms, lease renewal options and residual value guarantees. There are several leases with renewal options or purchase options. Using the practical expedient, the Company utilized existing lease classifications as of December 31, 2018.

The purchase options are not expected to have a material impact on the lease obligation. There are several facility and plant leases which have lease renewal options from one to twenty years.

The largest facility lease has an initial term through 2032. That lease does not have an extension option. For the two plant leases both have multiple 5-year extension options for a total of 20 years. Two extension options have been included in the lease right to use asset and lease obligation at September 30, 2019.

The Company will reassess the lease terms and purchase options when there is a significant change in circumstances or when the Company elects to exercise an option that had previously been determined that it was not reasonably certain to do so.

LEASES