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Lease Accounting

9 Months Ended

Sep. 30, 2019

(7) Lease Accounting

Lessee Accounting

We maintain both finance leases and operating leases, primarily related to office space, warehouse facilities and certain corporate equipment. Our leases have remaining lease terms of up to ten years, some of which include options that permit renewals for additional periods.

We determine if an arrangement is a lease at inception. Operating leases are included in other assets, accrued liabilities and other liabilities in our unaudited condensed consolidated balance sheets. Finance leases are included in property and equipment, accrued liabilities and other liabilities in our unaudited condensed consolidated balance sheets.

ROU lease 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 lease assets and liabilities are recognized at the 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 on the commencement date in determining the present value of lease payments. ROU lease assets also include any lease payments made and exclude lease incentives. 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. Variable costs such as our proportionate share of actual costs for utilities, common area maintenance, property taxes and insurance are not included in the lease liability and are recognized in the period in which they are incurred.

For short-term leases (leases that have terms of twelve months or less upon commencement), lease payments are recognized on a straight line basis and no ROU assets are recorded. For certain equipment leases, such as office equipment, we account for the lease and non-lease components as a single lease component.

Components of lease expense consisted of the following (in thousands):


		Three Months Ended		Nine Months Ended
	Income Statement Line Item	September 30, 2019		September 30, 2019
Operating lease costs:
Operating lease cost	Cost of operations, exclusive of depreciation and amortization	$	563	$	1,218
Operating lease cost	Selling, general and administrative		312		787
Total operating lease costs			875		2,005
Finance lease costs:
Amortization of lease assets	Depreciation and amortization		116		1,526
Short-term lease costs:
Short-term lease cost	Cost of operations, exclusive of depreciation and amortization		89		233
Short-term lease cost	Selling, general and administrative		11		21
Total short-term lease costs			100		254
Variable lease costs:
Variable lease cost	Cost of operations, exclusive of depreciation and amortization		8		155
Variable lease cost	Selling, general and administrative		293		1,008
Total variable lease costs			301		1,163
Total lease costs		$	1,392	$	4,948

Supplemental balance sheet information related to leases consisted of the following (in thousands):


Operating Leases
Assets (liabilities)	Balance Sheet Line Item	September 30, 2019		December 31, 2018
Operating lease ROU assets	Other assets	$	13,531	$	—
Operating lease liabilities, current	Accrued liabilities		(2,259)		—
Operating lease liabilities, long-term	Other liabilities		(11,529)		—


Finance Leases
Assets (liabilities)	September 30, 2019		December 31, 2018
Property and equipment, gross	$	7,268	$	7,683
Accumulated depreciation		(5,733)		(4,882)
Property and equipment, net		1,535		2,801
Accrued liabilities		(883)		(1,085)
Other liabilities		(1,687)		(2,114)

Other supplemental information related to leases was as follows:


Weighted Average Remaining Lease Term	September 30, 2019
Operating leases		7 years
Finance leases		4 years


Weighted Average Discount Rate	September 30, 2019
Operating leases		5.0%
Finance leases		2.6%

Supplemental cash flow information related to leases consisted of the following (in thousands):


	Nine Months Ended
	September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	(2,117)
Operating cash flows from finance leases		(673)
Financing cash flows from finance leases		(788)
ROU assets obtained in exchange for lease obligations:
Operating leases	$	11,784
Finance leases		259

Maturities of lease liabilities consisted of the following (in thousands):


	Operating Leases		Finance Leases		Total
2019 (remainder)	$	846	$	259	$	1,105
2020		2,586		814		3,400
2021		2,255		567		2,822
2022		2,039		398		2,437
2023		1,908		369		2,277
Thereafter		6,867		284		7,151
Total lease payments		16,501		2,691		19,192
Less: present value discount		(2,713)		(121)		(2,834)
Present value of lease liabilities	$	13,788	$	2,570	$	16,358

As of September 30, 2019, we have entered into additional operating leases that have not yet commenced with an estimated present value of $13.7 million. These operating leases will be commencing over the fourth quarter of 2019 through the first quarter of 2020 and each with terms of ten years.

Lessor Accounting

We granted a bargain purchase option to a customer with respect to certain compressor packages leased to the customer. The bargain purchase option provides the customer with an option to acquire the equipment at a value significantly less than the fair market value at the end of the lease term in 2021.

We accounted for this option as a sales type lease resulting in a current installment receivable included in other accounts receivable of $3.9 million and $3.7 million, and a long-term installment receivable of $4.0 million and $6.9 million as of September 30, 2019 and December 31, 2018, respectively.

Revenue and interest income related to the lease is recognized over the lease term. We recognize maintenance revenue within contract operations revenue and interest income within interest expense, net. Maintenance revenue was $0.4 million and $1.0 million for the three and nine months ended September 30, 2019, respectively, and $0.3 million and $0.6 million for the three and nine months ended September 30, 2018, respectively. Interest income was $0.1 million and $0.5 million for the three and nine months ended September 30, 2019, respectively, and $0.2 million and $0.5 million for the three and nine months ended September 30, 2018, respectively.

Lease payments expected to be received subsequent to September 30, 2019 are as follows (in thousands):


	Lease Payments
2019 (remainder)	$	1,418
2020		5,673
2021		3,356
Total installment receivables		10,447
Less: present value discount		(2,569)
Present value of installment receivables	$	7,878

ASC Topic 842 provides lessors with a practical expedient to not separate non-lease components from the associated lease components and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under ASC Topic 606 Revenue from Contracts with Customers (“ASC Topic 606”) and certain conditions are met. Our contract operations services agreements meet these conditions and we consider the predominant component to be the non-lease components, resulting in the ongoing recognition of revenue following ASC Topic 606 guidance.