Matson, Inc.

Capital Construction Fund:    The Company’s Capital Construction Fund (“CCF”) is described in Note 7 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.  As of March 31, 2019 and December 31, 2018, $1.7 million and $1.0 million of eligible accounts receivable were assigned to the CCF, respectively.  Due to the nature of the assignment of eligible accounts receivable into the CCF, such assigned amounts are classified as part of accounts receivable in the Condensed Consolidated Balance Sheets.  Cash on deposit in the CCF is held in a money market account and classified as a long-term asset in the Company’s Condensed Consolidated Balance Sheets, as the Company intends to use qualified cash withdrawals to fund long-term investment in the construction of new vessels.  During the three months ended March 31, 2019, the Company deposited $13.4 million into the CCF, and made qualifying cash withdrawals of $13.4 million from the CCF.  The balance of cash on deposit at March 31, 2019 and December 31, 2018 was nominal.

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.

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.

Income tax expense was $1.0 million or 7.4 percent of income before income taxes for the three months ended March 31, 2019, compared to $10.3 million or 42.0 percent of income before income taxes for the three months ended March 31, 2018.  In connection with the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), the Company recorded a non-cash tax adjustment of $3.3 million that increased income taxes for the three months ended March 31, 2018.  This adjustment related to the application of an estimated 6.2 percent sequestration on alternative minimum tax (AMT) refunds due to the Company for the years 2018 to 2021, and was based on guidance issued by the Internal Revenue Service (IRS) and emerging interpretations of the Tax Act during that period.  On January 19, 2019, the IRS issued new guidance indicating that sequestration would not apply to refundable AMT credits.  In accordance with this new guidance, the Company recorded a non-cash tax adjustment of $2.9 million that decreased income taxes for the three months ended March 31, 2019. 

The decrease in equity income and distributions from Terminal Joint Venture results from a decrease in the Company’s share of income from the Terminal Joint Venture to $8.5 million during the three months ended March 31, 2019, compared to $10.5 million for the three months ended March 31, 2018 while distributions from the Terminal Joint Venture decreased to $4.2 million for the three months ended March 31, 2019, compared to $7.0 million for the three months ended March 31, 2018.  The decrease in equity income and distributions from Terminal Joint Venture was primarily attributed to the absence of favorable one-time items in the prior year period, and the timing of distributions.  Deferred dry-docking payments decreased to $3.2 million for the three months ended March 31, 2019, compared to $4.6 million for the three months ended March 31, 2018, primarily due to fewer vessels in dry-docking during the current year period.  Changes in accounts receivable were primarily due to decreased receivables resulting from the timing of billings and collections associated with those receivables.  The decrease in prepaid expenses and other assets primarily related to an income tax refund received during the three months ended March 31, 2019, and the timing of prepayments and other assets.  Changes in accounts payable, accruals and other liabilities were due to decrease in accounts payables

and accrued costs resulting from operations during the three months ended March 31, 2019, compared to the same prior year period, and the timing of payments associated with those liabilities.