Quanta Services, 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

LEASES:

Effective January 1, 2019, Quanta adopted the new lease accounting standard utilizing the transition method that allows entities to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption, if applicable. Quanta’s financial results for reporting periods after January 1, 2019 are presented under the new standard, while financial results for prior periods continue to be reported in accordance with the prior standard and Quanta’s historical accounting policy.

Quanta’s leases primarily include leases of land, buildings, vehicles, construction equipment and office equipment. As of June 30, 2019, Quanta’s leases had remaining lease terms of up to ten years. Certain leases include options to extend their terms in increments of up to five years and/or options to terminate. The components of lease costs in the accompanying condensed consolidated statement of operations are as follows (in thousands):



		Three Months Ended		Six Months Ended
		June 30, 2019		June 30, 2019
Lease cost	Classification
Finance lease cost:
Amortization of lease assets	Depreciation ⁽¹⁾	$	283	$	656
Interest on lease liabilities	Interest expense	18		39
Operating lease cost	Costs of services and Selling, general and administrative expenses	30,377		60,735
Short-term lease cost ⁽²⁾	Costs of services and Selling, general and administrative expenses	188,360		383,525
Variable lease cost ⁽³⁾	Costs of services and Selling, general and administrative expenses	6,270		11,403
Total lease cost		$	225,308	$	456,358


⁽¹⁾	Depreciation is included within “Cost of services” and “Selling, general and administrative expenses” in the accompanying condensed consolidated statements of operations.


⁽²⁾	Short-term lease cost includes both leases and rentals with initial terms of one year or less.


⁽³⁾	Variable lease cost primarily relates to real estate leases and consists of common area maintenance charges, real estate taxes, insurance and other variable costs.

For the three and six months ended June 30, 2018, rent expense related to operating leases was $75.8 million and $151.8 million; however, this amount did not include rent expense related to certain equipment under month-to-month rental periods, which is included in short-term lease cost for the three and six months ended June 30, 2019 in the table above.

Additionally, Quanta has entered into lease arrangements for real property and facilities with related parties, typically employees or former employees of Quanta who are the former owners of acquired businesses that utilize the leased premises. These lease agreements generally have lease terms of up to five years and may include renewal options. Related party lease expense

was $4.0 million and $3.4 million for the three months ended June 30, 2019 and 2018 and $8.1 million and $6.6 million for the six months ended June 30, 2019 and 2018.

The components of leases in the accompanying condensed consolidated balance sheet were as follows (in thousands):



		June 30, 2019
Lease type	Classification
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	284,962
Finance lease assets	Property and equipment, net of accumulated depreciation	2,109
Total lease assets		$	287,071
Liabilities:
Current:
Operating	Current portion of operating lease liabilities	$	92,765
Finance	Current maturities of long-term debt and short-term debt	1,491

Non-current:
Operating	Operating lease liabilities, net of current portion	192,197
Finance	Long-term debt, net of current maturities	683
Total lease liabilities		$	287,136

Certain of Quanta’s equipment rental agreements contain purchase options pursuant to which the purchase price is offset by a portion of the rental payments. For rental purchase options exercised through a third-party lessor and for which a substantive benefit is deemed to be transferred to the lessor, such benefit is recorded in “Property, plant and equipment, net of accumulated depreciation,” with a corresponding increase in “Current maturities of long-term debt and short-term debt” and “Long-term debt, net of current maturities.” As of June 30, 2019, the benefit recorded was $7.2 million.

Future minimum lease payments for operating and finance leases were as follows (in thousands):



	As of June 30, 2019
	Operating Leases			Finance Leases			Total
Remainder of 2019	$	54,850		$	1,012		$	55,862
2020	89,084			707			89,791
2021	62,724			342			63,066
2022	40,366			117			40,483
2023	25,394			48			25,442
Thereafter	40,329			25			40,354
Total future minimum lease payments	$	312,747		$	2,251		$	314,998
Less imputed interest	(27,785		)	(77		)	(27,862		)
Total lease liabilities	$	284,962		$	2,174		$	287,136

Future minimum lease payments for operating leases under the prior standard and Quanta’s historical accounting policy were as follows (in thousands):



	As of December 31, 2018
	Operating Leases
2019	$	124,530
2020	81,189
2021	55,827
2022	34,337
2023	21,450
Thereafter	37,217
Total minimum lease payments	$	354,550

The weighted average remaining lease terms and discount rates were as follows:



	As of June 30, 2019
Weighted average remaining lease term (in years):
Operating leases	4.32
Finance leases	2.16
Weighted average discount rate:
Operating leases	4.3	%
Finance leases	4.2	%

Quanta has also guaranteed the residual value on certain of its equipment operating leases, agreeing to pay any difference between this residual value and the fair market value of the underlying asset at the date of lease termination. At June 30, 2019, the maximum guaranteed residual value of this equipment was $718.7 million. While Quanta believes that no significant payments will be made as a result of these residual value guarantees, there can be no assurance that significant payments will not be required in the future.

As of June 30, 2019, Quanta had additional operating lease obligations that had not yet commenced of $7.1 million. These operating leases will commence in 2019 and 2020 with lease terms of two to 10 years.

LEASES