Quanta Services, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

3 Months Ended

Mar. 31, 2019

LEASES:

As discussed in Note 3, 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 March 31, 2019, Quanta’s leases had remaining lease terms of up to nine years. Certain leases include options to extend their terms in increments of up to seven years and/or options to terminate. The components of lease costs in the accompanying condensed consolidated statement of operations were as follows (in thousands):



		Three Months Ended
		March 31, 2019
Lease cost	Classification
Finance lease cost:
Amortization of lease assets	Depreciation ⁽¹⁾	$	373
Interest on lease liabilities	Interest expense	21
Operating lease cost	Costs of services and Selling, general and administrative expenses	30,358
Short-term lease cost ⁽²⁾	Costs of services and Selling, general and administrative expenses	195,165
Variable lease cost ⁽³⁾	Costs of services and Selling, general and administrative expenses	5,133
Total lease cost		$	231,050


⁽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 months ended March 31, 2018, rent expense related to operating leases was $76.0 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 in the table above.

Additionally, Quanta has entered into lease arrangements for real property and facilities with related parties, typically 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 5 years and may include renewal options. Related party lease expense for the three months ended March 31, 2019 and 2018 was $4.1 million and $3.2 million.

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



		March 31, 2019
Lease type	Classification
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	285,768
Finance lease assets	Property and equipment, net of accumulated depreciation	2,313
Total lease assets		$	288,081
Liabilities:
Current:
Operating	Current portion of operating lease liabilities	$	92,293
Finance	Current maturities of long-term debt and short-term debt	1,168

Non-current:
Operating	Operating lease liabilities, net of current portion	193,475
Finance	Long-term debt, net of current maturities	578
Total lease liabilities		$	287,514

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 March 31, 2019, the benefit recorded was $2.8 million.

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



	As of March 31, 2019
	Operating Leases			Finance Leases			Total
Remainder of 2019	$	79,484		$	1,130		$	80,614
2020	82,627			291			82,918
2021	56,831			267			57,098
2022	35,537			97			35,634
2023	22,310			33			22,343
Thereafter	37,152			2			37,154
Total future minimum lease payments	$	313,941		$	1,820		$	315,761
Less imputed interest	(28,173		)	(74		)	(28,247		)
Total lease liabilities	$	285,768		$	1,746		$	287,514

Future minimum lease payments for operating leases under the prior standard 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 March 31, 2019
Weighted average remaining lease term (in years):
Operating leases	4.35
Finance leases	1.77
Weighted average discount rate:
Operating leases	4.3	%
Finance leases	4.1	%

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 termination of such leases. At March 31, 2019, the maximum guaranteed residual value was $697.3 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.

From time to time, Quanta has additional obligations related to operating and/or finance leases that have not commenced. These arrangements were not deemed material as of March 31, 2019.

LEASES