CONOCOPHILLIPS

In April 2019, we entered into an agreement to sell two ConocoPhillips U.K. subsidiaries to Chrysaor E&P Limited for $2.675 billion plus interest and customary adjustments. Together the subsidiaries indirectly hold the company’s exploration and production assets in the U.K. As of March 31, 2019, the net carrying value was approximately $0.8 billion, with $1.6 billion of PP&E, $0.5 billion of working capital, $0.4 billion of cumulative foreign currency translation adjustments, and deferred tax assets of $0.3 billion, offset by $2.0 billion of ARO. As part of the transaction, we expect to recognize a U.S. tax benefit of $0.2 billion in the second quarter of 2019 related to a previously unrecognizable U.S. tax basis in the subsidiaries to be sold. Depending on the timing of regulatory approval and other specific conditions precedent, we anticipate recognizing a gain of approximately $2 billion before- and after-tax on completion of the sale in the second half of 2019, subject to customary adjustments and foreign exchange impacts. The subsidiaries met held for sale criteria in April 2019. Results of operations for the U.K. are reported within our Europe and North Africa segment.

Leases are evaluated for classification as operating or finance leases at the commencement date of the lease and right-of-use assets and corresponding liabilities are recognized on our consolidated balance sheet based on the present value of future lease payments relating to the use of the underlying asset during the lease term. Future lease payments include variable lease payments that depend upon an index or rate using the index or rate at the commencement date and probable amounts owed under residual value guarantees. The amount of future lease payments may be increased to include additional payments related to lease extension, termination, and/or purchase options when the company has determined, at or subsequent to lease commencement, generally due to limited asset availability or operating commitments, it is reasonably certain of exercising such options. We use our incremental borrowing rate as the discount rate in determining the present value of future lease payments, unless the interest rate implicit in the lease arrangement is readily determinable. Lease payments that vary subsequent to the commencement date based on future usage levels, the nature of leased asset activities, or certain other contingencies are not included in the measurement of lease right-of-use assets and corresponding liabilities. We have elected not to record assets and liabilities on our consolidated balance sheet for lease arrangements with terms of 12 months or less.

We often enter into leasing arrangements acting in the capacity as operator for and/or on behalf of certain oil and gas joint ventures of undivided interests. If the lease arrangement can be legally enforced only against us as operator and there is no separate arrangement to sublease the underlying leased asset to our coventurers, we recognize at lease commencement a right-of-use asset and corresponding lease liability on our consolidated balance sheet on a gross basis. While we record lease costs on a gross basis in our consolidated income statement and statement of cash flows, such costs are offset by the reimbursement we receive from our coventurers for their share of the lease cost as the underlying leased asset is utilized in joint venture activities. As a result, lease cost is presented in our consolidated income statement and statement of cash flows on a proportional basis. If we are a nonoperating coventurer, we recognize a right-of-use asset and corresponding lease liability only if we were a specified contractual party to the lease arrangement and the arrangement could be legally enforced against us. In this circumstance, we would recognize both the right-of-use asset and corresponding lease liability on our consolidated balance sheet on a proportional basis consistent with our undivided interest ownership in the related joint venture.

The company has historically recorded certain finance leases executed by investee companies accounted for under the proportionate consolidation method of accounting on its consolidated balance sheet on a proportional basis consistent with its ownership interest in the investee company. In addition, the company has historically recorded finance lease assets and liabilities associated with certain oil and gas joint ventures on a proportional basis pursuant to accounting guidance applicable prior to January 1, 2019. As of December 31, 2018, $420 million of finance lease assets (net of accumulated depreciation, depletion and amortization) and $688 million of finance lease liabilities were recorded on our consolidated balance sheet associated with these leases. In accordance with the transition provisions of ASC Topic 842, and since we have elected to adopt the package of optional transition-related practical expedients, the historical accounting treatment for these leases has been carried forward and is subject to reconsideration upon the modification or other required reassessment of the arrangements prior to lease term expiration.

In connection with our adoption of ASC Topic 842, we have recorded on our consolidated balance sheet $57 million of operating leases executed by investee companies accounted for under the proportionate consolidation method of accounting on a proportional basis consistent with our ownership interest in the investee company.

In April 2019, we entered into an agreement to sell two ConocoPhillips U.K. subsidiaries to Chrysaor E&P Limited for $2.675 billion plus interest and customary adjustments. Together the subsidiaries indirectly hold the company’s exploration and production assets in the U.K. As part of the transaction, we expect to recognize a U.S. tax benefit of $0.2 billion in the second quarter of 2019 related to a previously unrecognizable U.S. tax basis in the subsidiaries to be sold. Depending on the timing of regulatory approval and other specific conditions precedent, we anticipate recognizing a gain of approximately $2 billion before- and after-tax on completion of the sale in the second half of 2019, subject to customary adjustments and foreign exchange impacts. Full-year 2018 production and year-end 2018 proved reserves associated with the U.K. assets being sold were approximately 72 MBOED and approximately 99 MMBOE, respectively. Results of operations for the U.K. are reported within our Europe and North Africa segment. See Note 5—Assets Sold and Planned Dispositions in the Notes to Consolidated Financial Statements, for additional information.