Leases

12 Months Ended

Dec. 31, 2020

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequent amendments, which replaced existing lease guidance in GAAP and requires lessees to recognize ROU assets and lease liabilities on the balance sheet for leases greater than twelve months and disclose key information about leasing arrangements. We adopted the standard on January 1, 2019 using the modified retrospective method and used the effective date as our date of initial application. Financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019. Upon adoption of the standard, we recognized ROU assets and corresponding lease liabilities of $586 million on the Consolidated Balance Sheet as of January 1, 2019. There were no adjustments to “Retained income” on adoption.

The standard provides a number of optional practical expedients for transition. We elected the package of practical expedients under the transition guidance which permitted us not to reassess under the new standard our prior conclusions for lease identification and lease classification on expired or existing contracts and whether initial direct costs previously capitalized would qualify for capitalization under FASB ASC 842. We also elected the practical expedient related to land easements, which allowed us to not reassess our current accounting treatment for existing agreements on land easements, which are not accounted for as leases. We did not elect the hindsight practical expedient to determine the reasonably certain lease term for existing leases.

The standard also provides practical expedients and recognition exemptions for an entity’s ongoing accounting policy elections. We elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we do not recognize ROU assets or lease liabilities. We also elected the practical expedient not to separate lease and non-lease components for all of our leases.

We are committed under long-term lease agreements for equipment, lines of road, and other property. Some of these agreements are variable lease agreements that include usage-based payments. These agreements contain payment provisions that depend on an index or rate, initially measured using the index or rate at the lease commencement date, and are therefore not included in our future minimum lease payments. Our long-term lease agreements do not contain any material restrictive covenants.

Our equipment leases have remaining terms of less than 1 year to 5 years and our lines of road and land leases have remaining terms of less than 1 year to 137 years. Some of these leases include options to extend the leases for up to 99 years and some include options to terminate the leases within 30 days. Because we are not reasonably certain to exercise these renewal options, the options are not considered in determining the lease term, and associated payments are excluded from future minimum lease payments.

Leases with an initial term of twelve months or less are not recorded on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

Operating lease amounts included on the Consolidated Balance Sheets are as follows:


		December 31,
		2020		2019
		($ in millions)
	Classification
Assets
ROU assets	Other assets	$	433	$	539

Liabilities
Current lease liabilities	Other current liabilities	$	89	$	97
Non-current lease liabilities	Other liabilities	344		441

Total lease liabilities		$	433	$	538

The components of total lease expense, primarily included in “Purchased services and rents,” are as follows:


	2020		2019
	($ in millions)

Operating lease expense	$	109	$	114
Variable lease expense	42		57
Short-term lease expense	9		5

Total lease expense	$	160	$	176

In March 2019, we entered into a non-cancellable lease for an office building with an estimated construction cost of $550 million. The lease will commence upon completion of the construction (for which we are a construction agent) of the office building which is expected to be in the second half of 2021. The initial lease term is five years

with options to renew, purchase, or sell the office building at the end of the lease term. Upon lease commencement, the ROU asset and lease liability will be determined and recorded. The lease also contains a residual value guarantee of up to ninety percent of the total construction cost.

Other information related to operating leases is as follows:


	December 31,
	2020		2019

Weighted-average remaining lease term (years) on operating leases	8.18		8.25

Weighted-average discount rates on operating leases	3.50	%	3.52	%

As the rates implicit in most of our leases are not readily determinable, we use a collateralized incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future payments. We use the portfolio approach and group leases into short-, medium-, and long-term categories, applying the corresponding incremental borrowing rates to these categories.

During 2020 and 2019, respectively, ROU assets obtained in exchange for new operating lease liabilities were $22 million and $49 million. Cash paid for amounts included in the measurement of lease liabilities was $109 million and $114 million in 2020 and 2019, respectively, and is included in operating cash flows. During 2019, cash proceeds from a sale and leaseback transaction were $82 million and the gain on the transaction was $15 million.

Future minimum lease payments under non-cancellable operating leases are as follows:


	December 31, 2020
	($ in millions)

2021	$	101
2022	76
2023	67
2024	58
2025	57
2026 and subsequent years	145
Total lease payments	504
Less: Interest	71

Present value of lease liabilities	$	433


	December 31, 2019
	($ in millions)

2020	$	110
2021	104
2022	79
2023	70
2024	61
2025 and subsequent years	206
Total lease payments	630
Less: Interest	92

Present value of lease liabilities	$	538

Operating lease expense accounted for under ASC 840 “Leases” in 2018 included $102 million for minimum rents and $102 million for contingent rents. Contingent rents are primarily comprised of usage-based payments for equipment under service contracts.