| LEASES
Our leased assets consist primarily of (1) LNG vessel time charters (“vessel charters”), (2) tug vessels, (3) office space and facilities and (4) land sites, all of which are classified as operating leases except for our tug vessels at the Corpus Christi LNG terminal, which are classified as finance leases.
ASC 842 requires a lessee to recognize leases on its balance sheet by recording a lease liability representing the obligation to make future lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. As our leases generally do not provide an implicit rate, in order to calculate the lease liability, we discounted our expected future lease payments using our relevant subsidiary’s incremental borrowing rate at the later of January 1, 2019 or the commencement date of the lease. The incremental borrowing rate is an estimate of the rate of interest that a given subsidiary would have to pay to borrow on a collateralized basis over a similar term to that of the lease term.
Many of our leases contain renewal options exercisable at our sole discretion. Options to renew a lease are included in the lease term and recognized as part of the right-of-use asset and lease liability only to the extent they are reasonably certain to be exercised, such as when necessary to satisfy obligations that existed at the execution of the lease or when the non-renewal would otherwise result in an economic penalty.
We have elected the practical expedient to omit leases with an initial term of 12 months or less (“short-term lease”) from recognition on the balance sheet. We recognize short-term lease payments on a straight-line basis over the lease term and variable payments under short-term leases in the period in which the obligation is incurred.
Certain of our leases contain non-lease components which are not separated from the lease components when calculating the right-of-use asset and lease liability per our use of the practical expedient to combine both components of an arrangement for all classes of leased assets.
Certain of our leases also contain variable payments, such as inflation, that are not included when calculating the right-of-use asset and lease liability unless the payments are in-substance fixed.
We recognize lease expense for operating leases on a straight-line basis over the lease term. We recognize lease expense for finance leases as the sum of the amortization of the right-of-use assets on a straight-line basis and the interest on lease liabilities using the effective interest method over the lease term.
The following table shows the classification and location of our right-of-use assets and lease liabilities on our Consolidated Balance Sheets (in millions):
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Consolidated Balance Sheet Location |
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March 31, 2019 |
Right-of-use assets—Operating |
Operating lease assets, net |
|
$ |
542 |
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Right-of-use assets—Financing |
Property, plant and equipment, net |
|
58 |
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Total right-of-use assets |
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|
$ |
600 |
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|
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Current operating lease liabilities |
Current operating lease liabilities |
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$ |
325 |
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Current finance lease liabilities |
Other current liabilities |
|
1 |
|
Non-current operating lease liabilities |
Non-current operating lease liabilities |
|
207 |
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Non-current finance lease liabilities |
Non-current finance lease liabilities |
|
58 |
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Total lease liabilities |
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$ |
591 |
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The following table shows the classification and location of our lease cost on our Consolidated Statements of Operations (in millions):
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Consolidated Statement of Operations Location |
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Three Months Ended March 31, 2019 |
Operating lease cost (1) |
Operating costs and expenses (2) |
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$ |
137 |
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Finance lease cost: |
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Amortization of right-of-use assets |
Depreciation and amortization expense |
|
1 |
|
Interest on lease liabilities |
Interest expense, net of capitalized interest |
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2 |
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Total lease cost |
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$ |
140 |
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(1) |
Includes $47 million of short-term lease costs and $5 million of variable lease costs incurred during the three months ended March 31, 2019.
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(2) |
Presented in cost of sales, operating and maintenance expense or selling, general and administrative expense consistent with the nature of the asset under lease. |
Future annual minimum lease payments for operating and finance leases as of March 31, 2019 are as follows (in millions):
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Years Ending December 31, |
Operating Leases (1) |
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Finance Leases |
2019 |
$ |
276 |
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$ |
8 |
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2020 |
138 |
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|
10 |
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2021 |
31 |
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|
10 |
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2022 |
18 |
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|
10 |
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2023 |
18 |
|
|
10 |
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Thereafter |
167 |
|
|
146 |
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Total lease payments |
648 |
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|
194 |
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Less: Interest |
(116 |
) |
|
(135 |
) |
Present value of lease liabilities |
$ |
532 |
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|
$ |
59 |
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(1) |
Does not include $1.6 billion of legally binding minimum lease payments for vessel charters which were previously executed but will commence primarily between 2020 and 2021 and have lease terms of up to seven years.
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Future annual minimum lease payments for operating and capital leases as of December 31, 2018, prepared in accordance with accounting standards prior to the adoption of ASC 842, were as follows (in millions):
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Years Ending December 31, |
Operating Leases (1) |
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Capital Leases (2) |
2019 (3) |
$ |
380 |
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|
$ |
5 |
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2020 |
184 |
|
|
5 |
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2021 |
238 |
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|
5 |
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2022 |
264 |
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|
5 |
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2023 |
264 |
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|
5 |
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Thereafter |
999 |
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|
73 |
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Total lease payments |
2,329 |
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|
98 |
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Less: Interest |
— |
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(39 |
) |
Present value of lease liabilities |
$ |
2,329 |
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$ |
59 |
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(1) |
Includes certain lease option renewals that are reasonably assured and payments for certain non-lease components. Also includes $79 million in payments for short-term leases and $1.6 billion in payments for LNG vessel charters which were previously executed but will commence primarily between 2020 and 2021.
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(2) |
Does not include payments for non-lease components of $98 million.
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(3) |
Does not include $43 million in aggregate payments we will receive from our LNG vessel subcharters.
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The following table shows the weighted-average remaining lease term (in years) and the weighted-average discount rate for our operating leases and finance leases:
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March 31, 2019 |
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Operating Leases |
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Finance Leases |
Weighted-average remaining lease term (in years) |
6.8 |
|
19.5 |
Weighted-average discount rate (1) |
5.4% |
|
16.2% |
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(1) |
The finance leases commenced prior to the adoption of ASC 842. In accordance with previous accounting guidance, the implied rate is based on the fair value of the underlying assets. |
The following table includes other quantitative information for our operating and finance leases (in millions):
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Three Months Ended March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: |
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Operating cash flows from operating leases |
$ |
90 |
|
Operating cash flows from finance leases |
2 |
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Financing cash flows from finance leases |
— |
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Right-of-use assets obtained in exchange for new operating lease liabilities |
64 |
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LNG Vessel Subcharters
From time to time, we sublease certain LNG vessels under charter to third parties while retaining our existing obligation to the original lessor. We have elected the practical expedient for lessors to combine lease and non-lease components and since the lease component is the predominant component of each arrangement, these subleases are accounted for as operating leases. The subleases have lease terms of up to one year and many contain short-term renewal options exercisable at the discretion of the third party. As of March 31, 2019, we had $32 million in future minimum sublease payments to be received from LNG vessel subcharters, which will be recognized entirely within 2019. We recognize fixed sublease income on a straight-line basis over the lease term of the sublease while variable sublease income is recognized when earned. We recognized sublease income of $37 million, including $5 million of variable lease payments, in other revenues on our Consolidated Statements of Operations during the three months ended March 31, 2019.
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