7. LEASES

Adoption of ASC 842: The Company adopted ASC 842 on January 1, 2019 and made the following elections:

Applied the transition requirements that resulted in a cumulative-effect adjustment of $4.4 million recorded to retained earnings at January 1, 2019, due to the elimination of deferred gains from the Company’s sale and leaseback transactions recorded in the Consolidated Balance Sheet as of December 31, 2018;

Elected to apply the package of practical expedient permitted under the transition guidance which allows, among other things, the historical lease classification and initial direct costs to be carried forward;

Elected the short-term lease exception which allows the Company to exclude leases with an initial term of one year or less from recognition on the Condensed Consolidated Balance Sheets;

Elected to separate non-lease components by underlying asset class for real estate and terminal leases and operations equipment leases; and

Elected to use a portfolio approach in applying discount rates to leases based upon the lease terms in the following categories: (i) one to five years; (ii) six to ten years; (iii) eleven to fifteen years; and (iv) sixteen years and greater, regardless of the type of underlying asset class.

Upon adoption, the Company recorded a right-of-use asset of approximately $251.4 million, a corresponding operating lease liability of $259.1 million, and de-recognized deferred rent of $7.7 million. The adoption of ASC 842 did not have a significant impact on the Company’s current earnings, liquidity or existing debt covenant requirements. Significant assumptions and judgments made in applying the new lease accounting standard include determining the Company’s incremental borrowing rate and evaluating the probability of exercising lease options.

Description of Operating Leases: The Company has a variety of different types of operating leases, the specific terms and conditions of which vary from lease to lease. Certain operating lease agreements include terms such as: (i) renewal and early termination options; (ii) early buy-out and purchase options; and (iii) rent escalation clauses. The lease agreements also include provisions for the maintenance of the leased asset and payment of lease related costs. The Company reviews the specific terms and conditions of each lease and, as appropriate, notifies the lessor of any intent to exercise any option in accordance with the terms of the lease. In the normal course of business, the Company expects to be able to renew or replace most of its operating leases by other similar leases as they expire. Except for the residual value guarantee described below, the Company’s leases do not contain any other residual value guarantees.

The Company’s sub-lease income was nominal to the Company’s Condensed Consolidated Financial Statements for the three months ended March 31, 2019. The Company did not have any finance leases during the three month period ended March 31, 2019. Certain of the Company’s lease agreements include rental payments that may be adjusted in the future based on economic conditions and others include rental payments adjusted periodically for inflation. Variable lease expense is disclosed for the adjusted portion of such payments.

The lease type by underlying asset class and maximum terms of the Company’s operating leases are as follows:


Lease Type:		Life
Real estate and terminal leases		65 years
Vessel charter leases		10 years
Operations equipment and other leases		8 years

Incremental Borrowing Rate: As most of the Company’s operating leases do not provide an implicit rate, the Company uses an estimated incremental borrowing rate based on information available at the date of adoption and subsequent lease commencement dates in calculating the present value of its operating lease liabilities. The incremental borrowing rate is determined using the U.S. Treasury rate adjusted to account for the Company’s credit rating and the collateralized nature of operating leases.

Components of Lease Cost: Components of lease cost recorded in the Company’s Condensed Consolidated Statement of Income and Comprehensive Income for the three months ended March 31, 2019 consisted of the following:


	Three Months Ended
	March 31,
(In millions)	2019
Operating lease cost	$	16.7
Short-term lease cost		2.4
Variable lease cost		0.1
Total lease cost	$	19.2

Other Lease Information: Other information related to the Company’s operating leases for the three months ended March 31, 2019 is as follows:


	Three Months Ended
	March 31,
(In millions, except lease term and discount rate)	2019
Cash paid for amounts included in operating lease liabilities	$	16.7
Right of use assets obtained in the exchange for new operating lease liabilities	$	5.8
Weighted-average remaining operating lease term		7.9 years
Weighted-average incremental borrowing rate		4.5%

Maturities of operating lease liabilities at March 31, 2019 are as follows:


	As of
Year (in millions)	March 31, 2019
2019	$	48.6
2020		59.8
2021		45.6
2022		35.6
2023		31.4
Thereafter		83.2
Total lease payments		304.2
Less: Interest		(53.2)
Present value of operating lease liabilities		251.0
Less: Short-term portion		(54.3)
Long-term operating lease liabilities	$	196.7

Future minimum payments under operating lease agreements at December 31, 2018 are as follows:


Year (in millions)	Total
2019	$	68.3
2020		59.2
2021		44.8
2022		34.7
2023		30.5
Thereafter		83.6
Total minimum lease payments	$	321.1

Residual Value Guarantee: On November 26, 2018, a wholly-owned subsidiary of the Company entered into a Bareboat Charter Agreement (the “Charter”). Charter lease payments are approximately $3.0 million per quarter and are included in the operating lease liabilities described above. The base term of the Charter is a five year period with a two year end-of-term renewal option. The Charter also includes a maximum residual value guarantee amount of $50.9 million after five years, or $47.7 million after the extended term. The residual value guarantee is excluded from operating lease liabilities described above as the Company determined that it is not probable that any portion of the residual value guarantee will be paid by the Company. The Charter and residual value guarantee are described in Note 9 to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.