Commitments and Contingencies
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Jun. 30, 2011
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Commitments and Contingencies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COMMITMENTS AND CONTINGENCIES |
Investments
in Affiliates and Other Entities
As described in Note 7, Quanta holds investments in several
joint ventures with third parties for the purpose of providing
infrastructure services under certain customer contracts. Losses
incurred by the joint ventures are shared equally by the joint
venture members. However, each member of the joint venture is
jointly and severally liable for all of the obligations of the
joint venture under the contract with the customer and therefore
can be liable for full
performance of the contract to the customer. Quanta is not aware
of circumstances that would lead to future claims against it for
material amounts in connection this liability.
Certain of the joint ventures in which Quanta participates are
general partnerships, and the joint venture partners each own an
equal equity interest in the joint venture and participate
equally in the profits and losses of the entity. If Quanta has
determined that its investment in the joint venture partnership
represents an undivided 50% interest in the assets, liabilities,
revenues and profits of the joint venture, such amounts are
proportionally consolidated in the accompanying financial
statements. As a general partnership, the joint venture partners
are jointly and severally liable for all of the obligations of
the joint venture, including obligations owed to the customer or
any other person or entity. Quanta is not aware of circumstances
that would lead to future claims against it for material amounts
in connection with these joint and several liabilities.
In the joint venture arrangements entered into by Quanta, each
joint venturer indemnifies the other party for any liabilities
incurred in excess of the liabilities for which such other party
is obligated to bear under the respective joint venture
agreement. It is possible, however, that Quanta could be
required to pay or perform obligations in excess of its share if
the other joint venturer failed or refused to pay or perform its
share of the obligations. Quanta is not aware of circumstances
that would lead to future claims against it for material amounts
that would not be indemnified.
Leases
Quanta leases certain land, buildings and equipment under
non-cancelable lease agreements, including related party leases.
The terms of these agreements vary from lease to lease,
including some with renewal options and escalation clauses. The
following schedule shows the future minimum lease payments under
these leases as of June 30, 2011 (in thousands):
Rent expense related to operating leases was approximately
$29.1 million and $55.2 million for the three and six
months ended June 30, 2011 and approximately
$28.1 million and $54.9 million for the three and six
months ended June 30, 2010.
Quanta has guaranteed the residual value on certain of its
equipment operating leases. Quanta guarantees the difference
between this residual value and the fair market value of the
underlying asset at the date of termination of the leases. At
June 30, 2011, the maximum guaranteed residual value was
approximately $116.8 million. Quanta believes that no
significant payments will be made as a result of the difference
between the fair market value of the leased equipment and the
guaranteed residual value. However, there can be no assurance
that significant payments will not be required in the future.
Committed
Capital Expenditures
Quanta has committed capital for expansion of its fiber optic
network. Quanta typically does not commit capital to new network
expansions until it has a committed licensing arrangement in
place with at least one customer. The amounts of committed
capital expenditures are estimates of costs required to build
the networks under contract. The actual capital expenditures
related to building the networks could vary materially from
these estimates. As of June 30, 2011, Quanta estimates
these committed capital expenditures to be approximately
$25.1 million for the period July 1, 2011 through
December 31, 2011 and $6.8 million thereafter.
Litigation
and Claims
Quanta is from time to time party to various lawsuits, claims
and other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract
and/or
property damages, punitive damages, civil penalties or other
losses, or injunctive or declaratory relief. With respect to all
such lawsuits, claims and proceedings, Quanta records a reserve
when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. In addition, Quanta
discloses matters for which management believes a material loss
is at least reasonably possible. Except as otherwise stated
below, none of these proceedings, separately or in the
aggregate, are expected to have a material adverse effect on
Quanta’s consolidated financial position, results of
operations or cash flows. In all instances, management has
assessed the matter based on current information and made a
judgment concerning their potential outcome, giving due
consideration to the nature of the claim, the amount and nature
of damages sought and the probability of success.
Management’s judgment may prove materially inaccurate, and
such judgment is made subject to the known uncertainty of
litigation.
California Fire Litigation — San Diego
County. On June 18, 2010, PAR Electrical
Contractors, Inc., a wholly owned subsidiary of Quanta (PAR),
was named as a third party defendant in four lawsuits in
California state court in San Diego County, California, all
of which arise out of a wildfire in the San Diego area that
started on October 21, 2007 referred to as the Witch Creek
fire. The California Department of Forestry and Fire Protection
issued a report concluding that the Witch Creek fire was started
when the conductors of a three phase 69kV transmission line,
known as TL 637, owned by San Diego Gas &
Electric (SDG&E) touched each other, dropping sparks on dry
grass. The Witch Creek fire, together with another wildfire
referred to as the Guejito fire that merged with the Witch Creek
fire, burned a reported 198,000 acres, over 1,500 homes and
structures and is alleged to have caused 2 deaths and numerous
personal injuries.
Numerous additional lawsuits were filed directly against
SDG&E and its parent company, Sempra, claiming
SDG&E’s power lines caused the fire. The court ordered
that the claims be organized into the four lawsuits mentioned
above and grouped the matters by type of plaintiff, namely,
insurance subrogation claimants, individual/business claimants,
governmental claimants, and a class action matter, for which
class certification has since been denied. PAR is not named as a
defendant in any of these lawsuits against SDG&E or its
parent. SDG&E has reportedly settled many of the claims. On
June 18, 2010, SDG&E joined PAR to the four lawsuits
as a third party defendant seeking contractual and equitable
indemnification for losses related to the Witch Creek fire,
although a claim for specific damages has not been made.
SDG&E’s claims for indemnity relate to work done by
PAR involving the replacement of one pole on TL 637 about four
months prior to the Witch Creek fire. Quanta does not believe
that the work done by PAR was the cause of the contact between
the conductors. However, PAR has notified its various insurers
of the claims. One insurer is participating in the defense of
the matter, while others have reserved their rights to contest
coverage, not stated their position
and/or
denied coverage. One insurer filed a lawsuit in the
U.S. District Court for the Southern District of Texas,
Houston Division on April 15, 2011 seeking a declaratory
judgment that coverage does not exist. On June 6, 2011 and
June 16, 2011, two other insurers intervened in the lawsuit
making similar claims. PAR is vigorously defending the third
party claims and continues to work to ensure coverage of any
potential liabilities. An amount equal to the deductibles under
certain of Quanta’s applicable insurance policies has been
expensed in connection with these matters. A liability and
corresponding insurance
recovery receivable of $35 million were recorded, with the
liability reserve reduced as expenses are incurred in connection
with these matters and the receivable reduced as these expenses
are reimbursed by the insurance carrier. Additional deductibles
may apply depending upon the availability of coverage under
other insurance policies. Given PAR’s defenses to the
indemnity claims, as well as the potential for insurance
coverage, Quanta cannot estimate the amount of any possible loss
or the range of possible losses that may exceed Quanta’s
applicable insurance coverage. However, due to the nature of
these claims, an adverse result in these proceedings leading to
a significant uninsured loss could have a material adverse
effect on Quanta’s consolidated financial condition,
results of operations and cash flows.
California Fire Claim — Amador
County. In October 2004, a wildfire in Amador
County, California, burned 16,800 acres. The United States
Forest Service alleged that the fire originated as a result of
the activities of a Quanta subsidiary crew performing vegetation
management under a contract with Pacific Gas &
Electric Co. (PG&E). In November 2007, the United States
Department of Agriculture (USDA) sent a written demand to the
Quanta subsidiary for payment of fire suppression costs of
approximately $8.5 million. The USDA recently communicated
verbally that it also intends to seek past and future
restoration and other damages of approximately
$51.3 million. No litigation has been filed. PG&E
tendered defense and indemnification for the matter to Quanta in
2010. The USDA, Quanta, its subsidiary and PG&E have
entered into a tolling agreement with respect to the filing of
any litigation and are exchanging information on an informal
basis.
Quanta and its subsidiary intend to vigorously defend against
any liability and damage allegations. Quanta has notified its
insurers, and two insurers are participating under a reservation
of rights. Other insurers in that policy year have not stated a
position regarding coverage. Quanta has recorded a liability and
corresponding insurance recovery receivable of approximately
$8.5 million associated with this matter. Given
Quanta’s intent to vigorously defend against the
allegations and the potential for insurance coverage, Quanta
cannot estimate the amount of any loss or the range of any
possible losses that might exceed its insurance coverage.
However, due to the nature of these claims, an adverse result
leading to a significant uninsured loss could have a material
adverse effect on Quanta’s consolidated financial
condition, results of operation and cash flows.
Concentration
of Credit Risk
Quanta is subject to concentrations of credit risk related
primarily to its cash and cash equivalents and accounts
receivable, including amounts related to unbilled accounts
receivable and costs and estimated earnings in excess of
billings on uncompleted contracts. Substantially all of
Quanta’s cash investments are managed by what it believes
to be high credit quality financial institutions. In accordance
with Quanta’s investment policies, these institutions are
authorized to invest this cash in a diversified portfolio of
what Quanta believes to be high quality investments, which
consist primarily of interest-bearing demand deposits, money
market mutual funds and investment grade commercial paper with
original maturities of three months or less. Although Quanta
does not currently believe the principal amount of these
investments is subject to any material risk of loss, the
weakness in the economy has significantly impacted the interest
income Quanta receives from these investments and is likely to
continue to do so in the future. In addition, Quanta grants
credit under normal payment terms, generally without collateral,
to its customers, which include electric power, natural gas and
pipeline companies, telecommunications service providers,
governmental entities, general contractors, and builders, owners
and managers of commercial and industrial properties located
primarily in the United States and Canada. Consequently, Quanta
is subject to potential credit risk related to changes in
business and economic factors throughout the United States and
Canada, which may be heightened as a result of depressed
economic and financial market conditions that have existed over
the past two years. However, Quanta generally has certain
statutory lien rights with respect to services provided. Under
certain circumstances, such as foreclosures or negotiated
settlements, Quanta may take title to the underlying assets in
lieu of cash in settlement of receivables. In such
circumstances, extended time frames may be required to liquidate
these assets, causing the amounts realized to differ from the
value of the assumed receivable. Historically, some of
Quanta’s customers have experienced significant financial
difficulties, and others may experience financial difficulties
in the future. These difficulties expose Quanta to increased
risk related to collectability of billed
and unbilled receivables and costs and estimated earnings in
excess of billings on uncompleted contracts for services Quanta
has performed. At December 31, 2010, one customer accounted
for approximately 12% of billed and unbilled receivables.
Revenues from this customer are included in the Natural Gas and
Pipeline Infrastructure Services segment. No customers
represented 10% or more of accounts receivable as of
June 30, 2011, and no customers represented 10% or more of
revenues for the three and six months ended June 30, 2011
or 2010.
Self-Insurance
Quanta is insured for employer’s liability, general
liability, auto liability and workers’ compensation claims.
Since August 1, 2009, all policy deductible levels are
$5.0 million per occurrence, other than employer’s
liability, which is subject to a deductible of
$1.0 million. Quanta also has employee health care benefit
plans for most employees not subject to collective bargaining
agreements, of which the primary domestic plan is subject to a
deductible of $350,000 per claimant per year.
Losses under all of these insurance programs are accrued based
upon Quanta’s estimates of the ultimate liability for
claims reported and an estimate of claims incurred but not
reported, with assistance from third-party actuaries. These
insurance liabilities are difficult to assess and estimate due
to unknown factors, including the severity of an injury, the
extent of damage, the determination of Quanta’s liability
in proportion to other parties and the number of incidents not
reported. The accruals are based upon known facts and historical
trends, and management believes such accruals are adequate. As
of June 30, 2011 and December 31, 2010, the gross
amount accrued for insurance claims totaled $212.0 million
and $216.8 million, with $158.8 million and
$164.3 million considered to be long-term and included in
other non-current liabilities. Related insurance
recoveries/receivables as of June 30, 2011 and
December 31, 2010 were $63.6 million and
$66.3 million, of which $12.7 million and
$9.4 million are included in prepaid expenses and other
current assets and $50.9 million and $56.9 million are
included in other assets, net.
Quanta renews its insurance policies on an annual basis, and
therefore deductibles and levels of insurance coverage may
change in future periods. In addition, insurers may cancel
Quanta’s coverage or determine to exclude certain items
from coverage, or the cost to obtain such coverage may become
unreasonable. In any such event, Quanta’s overall risk
exposure would increase, which could negatively affect its
results of operations, financial condition and cash flows.
Letters
of Credit
Certain of Quanta’s vendors require letters of credit to
ensure reimbursement for amounts they are disbursing on its
behalf, such as to beneficiaries under its self-funded insurance
programs. In addition, from time to time some customers require
Quanta to post letters of credit to ensure payment to its
subcontractors and vendors and to guarantee performance under
its contracts. Such letters of credit are generally issued by a
bank or similar financial institution. The letter of credit
commits the issuer to pay specified amounts to the holder of the
letter of credit if the holder demonstrates that Quanta has
failed to perform specified actions. If this were to occur,
Quanta would be required to reimburse the issuer of the letter
of credit. Depending on the circumstances of such a
reimbursement, Quanta may also have to record a charge to
earnings for the reimbursement. Quanta does not believe that it
is likely that any material claims will be made under a letter
of credit in the foreseeable future.
As of June 30, 2011, Quanta had $187.5 million in
letters of credit outstanding under its credit facility
primarily to secure obligations under its casualty insurance
program. These are irrevocable stand-by letters of credit with
maturities generally expiring at various times throughout 2011
and 2012. Upon maturity, it is expected that the majority of
these letters of credit will be renewed for subsequent one-year
periods. Quanta also had approximately $7.4 million in
letters of credit outstanding under cash-collateralized letter
of credit arrangements in addition to the amounts outstanding
under the credit facility.
Performance
Bonds and Parent Guarantees
In certain circumstances, Quanta is required to provide
performance bonds in connection with its contractual
commitments. Quanta has indemnified its sureties for any
expenses paid out under these performance bonds. As of
June 30, 2011, the total amount of outstanding performance
bonds was approximately $1.6 billion, and the estimated
cost to complete these bonded projects was approximately
$682.3 million.
Quanta, from time to time, guarantees the obligations of its
wholly owned subsidiaries, including obligations under certain
contracts with customers, certain lease obligations, certain
joint venture arrangements and, in some states, obligations in
connection with obtaining contractors’ licenses. Quanta is
not aware of any material obligations for performance or payment
asserted against it under any of these guarantees.
Employment
Agreements
Quanta has various employment agreements with certain executives
and other employees, which provide for compensation and certain
other benefits and for severance payments under certain
circumstances. Certain employment agreements also contain
clauses that become effective upon a change of control of
Quanta. Upon the occurrence of any of the defined events in the
various employment agreements, Quanta will pay certain amounts
to the employee, which vary with the level of the
employee’s responsibility.
Collective
Bargaining Agreements
Several of Quanta’s operating units are parties to various
collective bargaining agreements with certain of their
employees. The agreements require such subsidiaries to pay
specified wages, provide certain benefits to their union
employees and contribute certain amounts to multi-employer
pension plans and employee benefit trusts. Quanta’s
multi-employer pension plan contribution rates are determined
annually and assessed on a “pay-as-you-go” basis based
on its union employee payrolls, which cannot be determined for
future periods because the location and number of union
employees that Quanta employs at any given time and the plans in
which they may participate vary depending on the projects Quanta
has ongoing at any time and the need for union resources in
connection with those projects. The collective bargaining
agreements expire at various times and have typically been
renegotiated and renewed on terms similar to those in the
expiring agreements.
The Employee Retirement Income Security Act of 1974, as amended
by the Multi-Employer Pension Plan Amendments Act of 1980,
imposes certain liabilities upon employers who are contributors
to a multi-employer plan in the event of the employer’s
withdrawal from, or upon termination of, such plan. None of
Quanta’s operating units have any current plans to withdraw
from these plans. In addition, the Pension Protection Act of
2006 added new funding rules generally applicable to plan years
beginning after 2007 for multi-employer plans that are
classified as “endangered,” “seriously
endangered,” or “critical” status. For a plan in
critical status, additional required contributions and benefit
reductions may apply. A number of plans to which Quanta
operating units contribute or may contribute in the future are
in “critical” status. Certain of these plans may
require additional contributions, generally in the form of a
surcharge on future benefit contributions required for future
work performed by union employees covered by the plans. The
amount of additional funds, if any, that Quanta may be obligated
to contribute to these plans in the future cannot be estimated,
as such amounts will likely be based on future work that
requires the specific use of the union employees covered by
these plans, and the amount of that future work and the number
of affected employees that may be needed cannot be estimated.
Indemnities
Quanta has indemnified various parties against specified
liabilities that those parties might incur in the future in
connection with Quanta’s previous acquisitions of certain
companies. The indemnities under acquisition agreements usually
are contingent upon the other party incurring liabilities that
reach specified thresholds. Quanta also generally indemnifies
its customers for the services it provides under its contracts,
as well as other specified
liabilities, which may subject Quanta to indemnity claims and
liabilities and related litigation. As of June 30, 2011,
except as otherwise set forth above in Litigation and
Claims, Quanta does not believe any material liabilities for
asserted claims exist in connection with any of these indemnity
obligations.
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