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LEASES

12 Months Ended

Dec. 31, 2019

On January 1, 2019, we adopted ASC 842 using the modified retrospective approach that required us to determine our lease balances as of that date. Prior periods continue to be reported under accounting standards in effect for those periods. We elected to carry forward our accounting treatment for land easements on existing agreements. Mineral leases, including oil and natural gas leases, are not included within the scope of ASC 842.

We have long-term operating leases for commercial office space, drilling rigs, fleet vehicles and certain facilities. In considering whether a contract contains a lease, we first considered whether there was an identifiable asset and then considered how and for what purpose the asset would be used over the contract term.

Our lease liability was determined by measuring the present value of the remaining fixed minimum lease payments as of the date of adoption discounted using our incremental borrowing rate (IBR). In determining our IBR, we considered the average cost of borrowing for publicly traded corporate bond yields, which were adjusted to reflect our credit rating, the remaining lease term for each class of our leases and frequency of payments.

We elected to combine lease and non-lease components in determining fixed minimum lease payments for our drilling rigs and commercial office space. If applicable, fixed minimum lease payments were reduced by lease incentives for our commercial buildings and increased by mobilization and demobilization fees related to our drilling rigs. Certain of our lease agreements include options to renew, which we exercise at our sole discretion, and we did not include these options in determining our fixed minimum lease payments over the lease term. Our lease liability does not include options to extend or terminate our leases. Our leases do not include options to purchase the leased property. Lease agreements for our fleet vehicles include residual value guarantees, none of which are recognized in our financial statements until the underlying contingency is resolved.

For all of our asset classes, we elected to keep leases with an initial term of 12 months or less off the balance sheet and have included costs related to these contracts in our short-term lease cost disclosure below. Contracts with terms of one month or less are excluded from our disclosure of short-term lease costs.

For our long-term contracts, variable lease costs were not included in the measurement of our lease balances. Variable lease costs for our drilling rigs included costs to operate, move and repair the rigs. Variable lease costs for certain of our commercial office buildings included utilities and common area maintenance charges. Variable lease costs for our fleet vehicles included other-than-routine maintenance and other various amounts in excess of our fixed minimum rental fee.

Our operating lease costs, including amounts capitalized to PP&E, for the year ended December 31, 2019 were as follows:



	2019
	(in millions)
Operating lease cost	$	52
Short-term lease cost	74
Variable lease cost^(a)	21
Total operating lease costs	$	147


(a)	Includes $19 million related to drilling rigs, which are capitalized to PP&E.

During the second quarter of 2019, we entered into contracts treated as finance leases, which were not material to our consolidated results of operations.

We sublease certain commercial office space to third parties where we are the primary obligor under the head lease. The lease terms on those subleases never extend past the term of the head lease and the subleases contain no extension options or residual value guarantees. Sublease income is recognized based on the contract terms and included as a reduction of operating lease cost under our head lease. For the year ended December 31, 2019, sublease income was not material to our consolidated financial statements.

Cash flows related to our operating leases for the year ended December 31, 2019 were as follows:



	2019
	(in millions)
Operating cash flows	$	14
Investing cash flows	$	40

Our cash flows related to finance leases were not significant for the year ended December 31, 2019.

Other information related to our operating and finance leases as of December 31, 2019 was as follows:



	2019
Operating Leases
ROU asset obtained in exchange for lease obligations (in millions)	$	122
Weighted-average remaining lease term (in years)	4.75
Weighted-average discount rate	12.2		%

Finance Leases
ROU asset obtained in exchange for lease obligations (in millions)	$	2
Weighted-average remaining lease term (in years)	2.33
Weighted-average discount rate	8.5		%

The difference in the weighted-average discount rate between operating leases and finance leases primarily relates to lease term.

Balance sheet information related to our operating and finance leases as of December 31, 2019 was as follows:



	Balance Sheet Location	2019
Assets		(in millions)
Operating lease, net	Other assets	$	59
Finance lease, net	PP&E	2
Total lease assets		$	61

Liabilities
Current
Operating lease	Accrued liabilities	$	27
Finance lease	Accrued liabilities	1
Long-term
Operating lease	Other long-term liabilities	37
Finance lease	Other long-term liabilities	1
Total lease liabilities		$	66

As part of our company-wide consolidation of office space, we vacated certain office space in 2019, some of which we subleased. When we enter into a sublease agreement, we evaluate the carrying value of our ROU asset (including the carrying value of related tenant improvements) for impairment based on future identifiable cash flows. For the year ended December 31, 2019, we recognized impairment charges of $3 million related to our leases and $6 million related to abandoned tenant improvements. We may terminate leases for vacated office space before the expiration of the lease term. In cases where we decided not to sublease vacated commercial office space, we shortened the useful life of the ROU assets and related tenant improvements to recover our remaining costs over our expected period of use. Once the leased office space is vacated, lease costs will be classified as other non-operating expenses on our consolidated statements of operations.

Maturities of our operating and finance lease liabilities at December 31, 2019 are as follows:



	Operating			Finance
	Leases			Leases
	(in millions)
2020	$	32		$	1
2021	11			1
2022	9			—
2023	9			—
2024	6			—
Thereafter	23			—
Less: Interest	(26		)	—
Present value of lease liabilities	$	64		$	2

We entered into a contract for a facility that is under construction as of December 31, 2019. This lease is not included in our lease population at December 31, 2019 because the lease term has not commenced, and we do not control the asset during construction. We will apply the new lease standard when the asset is placed in service by us, which is expected to be in June 2020.

At December 31, 2018, future minimum lease payments for noncancelable operating leases under ASC 840 (excluding oil and natural gas and other mineral leases, utilities, taxes, insurance and common area maintenance expenses) were:



	December 31,
	2018
	(in millions)
2019	$	12
2020	8
2021	7
2022	7
2023	6
Thereafter	28
Total	$	68

Rent expense for operating leases under ASC 840 was $11 million in 2018 and $13 million in 2017. Rental income from subleases for the years ended December 31, 2018 and 2017 was not significant.

LEASES