Quarterly report pursuant to Section 13 or 15(d)

Leases

v3.19.2
Leases
6 Months Ended
Jun. 30, 2019
Leases [Abstract]  
LEASES 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 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.