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LEASES

12 Months Ended

Dec. 31, 2020

9.	LEASES

The Company adopted the lease accounting standard ASC 842 on January 1, 2019. As part of the adoption, the Company recorded a net adjustment to retained earnings of $4.4 million at January 1, 2019. 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 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 with 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 Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2020 and 2019. The Company did not have any finance leases during the years ended December 31, 2020 and 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:		Term
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 Consolidated Statement of Income and Comprehensive Income for the years ended December 31, 2020 and 2019 consisted of the following:


	Years Ended
	December 31,
(In millions)	2020		2019
Operating lease cost	$	83.1	$	71.4
Short-term lease cost		10.6		5.9
Variable lease cost		0.8		0.4
Total lease cost	$	94.5	$	77.7

Other Lease Information: Other information related to the Company’s operating leases for the years ended December 31, 2020 and 2019 are as follows:


	Years Ended
	December 31,
(In millions)	2020		2019
Cash paid for amounts included in operating lease liabilities	$	83.6	$	71.3
Right of use assets obtained in the exchange for new operating lease liabilities	$	70.1	$	65.3

Maturities of operating lease liabilities at December 31, 2020 are as follows:


	As of
Year (in millions)	December 31, 2020
2021	$	80.5
2022		53.2
2023		47.3
2024		31.8
2025		23.9
Thereafter		65.6
Total lease payments		302.3
Less: Interest		(43.0)
Present value of operating lease liabilities		259.3
Less: Short-term portion		(72.4)
Long-term operating lease liabilities	$	186.9

Sale and Leaseback of Equipment: On March 25, 2020, the Company entered into an agreement for the sale and leaseback of multiple tranches of chassis and container equipment. The net proceeds from the sales were $14.3 million, and the gain on the disposal of the equipment was not material to the Company’s Consolidated Financial Statements. The Company subsequently leased back the equipment under a five-year operating lease agreement, and the obligations under the lease are included in the maturities of operating lease liabilities table above.

Vessel Charter and Buyer-Lessor Guaranty

Vessel Charter: On November 26, 2018, a wholly-owned subsidiary of the Company entered into agreements whereby a vessel, Maunalei, owned by the subsidiary, was sold for $106.0 million and subsequently leased back from the buyer-lessor under a Bareboat Charter Agreement (the “Charter”). The transaction qualified for sale and leaseback treatment under ASC 840, Leases, with the Charter treated as an operating lease for accounting purposes. Lease payments are approximately $3.0 million per quarter, and the base term of the Charter is five years with a two year end-of-term renewal option. Total future minimum lease payments were $36.0 million at December 31, 2020, and the obligations under the lease are included in the maturities of operating lease liabilities table above.

Prior to the expiration of the base term of the Charter, the subsidiary may, at its option, elect to: (i) purchase the vessel at the option price; (ii) exercise the option to renew the Charter for an additional two years; or (iii) remarket the vessel to sell to a third-party on behalf of the buyer-lessor. The purchase option price is $68.9 million after the base term and $58.3 million after the extended term. 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. Proceeds from the sale of the vessel reduces the subsidiary’s residual value guarantee.

Buyer-Lessor Guaranty: Matson, Inc. provided the buyer-lessor with a guaranty of all obligations of the wholly-owned subsidiary related to the Charter as defined in the guaranty agreement.

As of December 31,

Weighted average remaining operating lease term

Weighted average incremental borrowing rate