Leases

3 Months Ended

Mar. 31, 2019

LEASES

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“Update 2016-02”), which seeks to increase transparency and comparability among organizations by, among other things, recognizing lease assets and lease liabilities on the balance sheet for leases classified as operating leases under previous GAAP and disclosing key information about leasing arrangements. The codification was amended through additional ASUs. For public entities, Update 2016-02 became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted ASC 842 with an effective date of January 1, 2019 using the modified retrospective approach for all leases that existed at the date of initial application. The Company elected to apply the transition as of the beginning of the period of adoption. For leases that existed at the period of adoption on January 1, 2019, the incremental borrowing rate as of the application date was used to calculate the present value of remaining lease payments.

The standard provides optional practical expedients to ease the burden of transition. The Company has adopted the following practical expedients through implementation:


•	an election not to apply the recognition requirements in the leases standard to short-term leases and recognize lease payments in the consolidated statement of operations (a lease that at commencement date has an initial term of 12 months or less and does not contain a purchase option that the Company is reasonably certain to exercise);


•	a package of practical expedients to not reassess: whether a contract is or contains a lease, lease classification and initial direct costs;


•	a practical expedient that permits combining lease and non-lease components in a contract and accounting for the combination as a lease (elected by asset class);


•	a practical expedient to not reassess certain land easements in existence prior to January 1, 2019; and


•	an election to adopt the modified retrospective approach for all leases existing at or entered into after the initial date of adoption which does not require a restatement of prior period. No cumulative-effect adjustment to retained earnings was required as a result of the modified retrospective approach.

Upon adoption of ASC 842, the Company recognized a discounted right of use asset and corresponding lease liability with opening balances of approximately $105 million as of January 1, 2019. The adoption of the standard did not materially change the Company’s consolidated statement of operations or its consolidated statement of cash flows.

The Company determines if a contract contains a lease at inception. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (an identified asset) for a period of time in exchange for consideration. A right of use asset and lease liability are recognized on the balance sheet at commencement at an amount based on the present value of the remaining lease payments over the lease term. As the implicit rate of the lease is not always readily determinable, the Company uses the incremental borrowing rate to calculate the present value of the lease payments based on information available at commencement date. Operating right of use assets are included in other long-term assets while operating lease liabilities are included in other current and other long-term liabilities on the consolidated balance sheet. The Company does not have any financing lease type of arrangements as of March 31, 2019. By policy election, leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company recognizes lease expense for these leases on a straight-line basis, and variable lease payments are recognized in the period as incurred. Variable lease costs were immaterial through the first quarter ended March 31, 2019.

Certain leases contain both lease and non-lease components. The Company has chosen to account for most of these leases as a single lease component instead of separating. However, for compression service leases and fleet vehicle leases, the lease and non-lease components are accounted for separately.

The Company leases drilling rigs, pressure pumping equipment, vehicles, office space, certain water transportation lines, an aircraft and other equipment under non-cancelable operating leases expiring through 2032. Certain lease agreements include options to renew the lease, early terminate the lease or purchase the underlying asset(s). The Company determines the lease term at the lease commencement date as the non-cancelable period of the lease, including options to extend or terminate the lease when such an option is reasonably certain to be exercised. The Company’s water transportation lines are the only leases with renewal options that are reasonably certain to be exercised. These renewal options are reflected in the right of use asset and lease liability balances.

The Company’s only material residual value guarantee relates to its headquarters building, which would be due only if, at the end of the lease term, the building is either purchased by the Company or marketed to a third party where the purchase price is less than the residual value guarantee. The Company does not consider the residual value guarantee to be probable of being owed; thus, it is not currently included within the minimum lease payments. The Company’s existing operating leases do not contain any material restrictive covenants.

As of March 31, 2019, the Company has operating leases of less than $1.5 million, primarily for compressor leases that have not yet commenced. These operating leases are planned to commence during 2019 with lease terms expiring through 2022.

The components of lease costs are shown below:



	For the three months ended
	March 31, 2019
(in millions)
Operating lease cost	$	11
Short-term lease cost	12
Variable lease cost	—
Total lease cost	$	23

Supplemental cash flow information related to leases is set forth below:



	For the three months ended
	March 31, 2019
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	11

Right-of use assets obtained in exchange for new operating liabilities:
Operating leases	$	3

Supplemental balance sheet information related to leases is as follows:



	March 31, 2019
Right-of-use asset balance: (in millions)
Operating leases	$	100
Lease liability balance: (in millions)
Short-term operating leases	$	38
Long-term operating leases	62
Total operating leases	$	100

Weighted average remaining lease term: (years)
Operating leases	4.1

Weighted average discount rate:
Operating leases	5.86		%

Maturity analysis of operating lease liabilities:



(in millions)	March 31, 2019
2019	$	33
2020	32
2021	18
2022	9
2023	8
2024	4
Thereafter	9
Total undiscounted lease liability	$	113
Imputed interest	(13		)
Total discounted lease liability	$	100



(in millions)	December 31, 2018
2019	$	38
2020	28
2021	14
2022	6
2023	5
Thereafter	4
Total minimum payments required	$	95