United Parcel Service, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

LEASES

LEASES

6 Months Ended

Jun. 30, 2019

NOTE 10. LEASES

We adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019. The standard requires lessees to recognize a right-of-use ("ROU") asset and lease liability for all leases. Some of our leases contain both lease and non-lease components, which we have elected to treat as a single lease component. We have also elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase options, of twelve months or less in our consolidated balance sheets for all classes of underlying assets. Lease costs for short-term leases are recognized on a straight-line basis over the lease term. We elected the package of transition practical expedients for existing contracts, which allowed us to carry forward our historical assessments of whether contracts are or contain leases, lease classification and determination of initial direct costs.

We lease property and equipment under finance and operating leases. We have finance and operating leases for package centers, airport facilities, warehouses, corporate office space, aircraft, aircraft engines, information technology equipment (primarily mainframes, servers and copiers), vehicles and various other equipment used in operating our business. Certain leases for real estate and aircraft contain options to purchase, extend or terminate the lease. Determining the lease term and amount of lease payments to include in the calculation of the ROU asset and lease liability for leases containing options requires the use of judgment to determine whether the exercise of an option is reasonably certain, and if the optional period and payments should be included in the calculation of the associated ROU asset and liability. In making this determination, we consider all relevant economic factors that would compel us to exercise or not exercise an option.

When available, we use the rate implicit in the lease to discount lease payments; however, the rate implicit in the lease is not readily determinable for substantially all of our leases. In such cases, we use an estimate of our incremental borrowing rate to discount lease payments based on information available at lease commencement.

Aircraft

In addition to the aircraft that we own, we have leases for 335 aircraft. Of these leased aircraft, 34 are classified as finance leases, 12 are classified as operating leases and the remaining 289 are classified as short-term leases. A majority of the obligations associated with the aircraft classified as finance leases have been legally defeased. The long-term aircraft operating leases are operated by a third party to handle package and cargo volume in geographic regions where, due to government regulations, we are restricted from operating an airline.

In order to meet customers' needs, we charter aircraft to handle package and cargo volume on certain international trade lanes and domestic routes. Due to the nature of these agreements, primarily being that either party can cancel the agreement with short notice, we have classified these as short-term leases. Additionally, all of the lease payments associated with these charter agreements are variable in nature based on the number of hours flown.

Real Estate

We have operating and finance leases for package centers, airport facilities, warehouses, corporate office space and expansion facilities utilized during peak shipping periods. Many of our leases contain charges for common area maintenance or other miscellaneous expenses that are updated based on landlord estimates. Due to this variability, the cash flows associated with these charges are not included in the minimum lease payments used in determining the ROU asset and associated lease liability.

Some of our real estate leases contain options to renew or extend the lease or terminate the lease before the expiration date. These options are factored into the determination of the lease term and lease payments when their exercise is considered to be reasonably certain.

From time to time, we enter into leases with the intention of purchasing the property, either through purchase options with a fixed price or a purchase agreement negotiated contemporaneously with the lease agreement. We classify these leases as finance leases and include the purchase date and purchase price in the lease term and lease payments, respectively, when the option to exercise or purchase is reasonably certain.

Transportation equipment and other equipment

We enter into both long-term and short-term leases for transportation equipment to supplement our capacity or meet contractual demands. Some of these assets are leased on a month-to-month basis and the leases can be terminated without penalty. The lease term for these types of leases is determined by the length of the underlying customer contract or based on the judgment of the business unit. We also enter into multi-year leases for trailers to increase capacity during periods of high demand, which are typically only used for 90-120 days during the year. These leases are treated as short-term as the cumulative right-of-use is less than 12 months over the term of the contract.

The remainder of our leases are primarily related to equipment used in our air operations, vehicles required to meet capacity needs during periods of higher demand for our shipping services, technology equipment and office equipment used in our facilities.

Some of our transportation and technology equipment leases require us to make additional lease payments based on the underlying usage of the assets. Due to the variable nature of these costs, these are expensed as incurred and are not included in the ROU asset and lease liability.

The components of lease expense for the three and six months ended June 30, 2019 are as follows (in millions):



	Three Months Ended June 30,		Six Months Ended June 30,
	2019		2019
Operating lease costs	$	166	$	323
Finance lease costs:
Amortization of assets	18		$	37
Interest on lease liabilities	4		9
Total finance lease costs	22		46
Variable and short-term lease costs	240		518
Total lease costs	$	428	$	887

Supplemental information and balance sheet location related to leases is as follows (in millions, except lease term and discount rate):




	June 30, 2019
Operating Leases:
Operating lease right-of-use assets	$	2,477

Current maturities of operating leases	$	487
Non-current operating leases	2,026
Total operating lease liabilities	$	2,513

Finance Leases:
Property, plant and equipment, at cost	$	2,513
Accumulated amortization	961
Property, plant and equipment, net	$	1,552

Current maturities of long-term debt, commercial paper and finance leases	$	77
Long-term debt and finance leases	368
Total finance lease liabilities	$	445

Weighted average remaining lease term (in years):
Operating leases	9.2
Finance leases	10.6

Weighted average discount rate:
Operating leases	2.70		%
Finance leases	4.37		%

Supplemental cash flow information related to leases is as follows (in millions):



	Six Months Ended June 30,
	2019
Cash paid for amounts included in measurement of liabilities:
Operating cash flows from operating leases	$	311
Operating cash flows from finance leases	9
Financing cash flows from finance leases	85

Right-of-use assets obtained in exchange for lease liabilities:
Operating leases	$	56

Maturities of lease liabilities as of June 30, 2019 are as follows (in millions):



	Finance Leases			Operating Leases
2019	$	62		$	293
2020	94			522
2021	42			441
2022	38			366
2023	37			292
Thereafter	293			1,077
Total lease payments	566			2,991
Less: Imputed interest	(121		)	(478		)
Total lease obligations	445			2,513
Less: Current obligations	(77		)	(487		)
Long-term lease obligations	$	368		$	2,026

As of June 30, 2019, we have additional leases which have not commenced. These leases will commence when we are granted access to the property, such as when leasehold improvements are completed by the lessor or a certificate of occupancy is obtained. These leases will commence in 2019 and 2020.

Disclosures related to periods prior to adoption of the new lease standard

The following table sets forth the aggregate minimum lease payments under capital and operating leases (in millions) as of December 31, 2018:



	Capital Leases			Operating Leases
2019	$	158		$	578
2020	95			477
2021	42			399
2022	39			325
2023	36			262
After 2023	293			926
Total lease payments	663			2,967
Less: Imputed interest	(129		)
Total lease obligations	534
Less: Current obligations	(140		)
Long-term lease obligations	$	394