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Leases

6 Months Ended

Jun. 30, 2020

LEASES:

Quanta primarily leases land, buildings, vehicles, construction equipment and office equipment. As of June 30, 2020, the majority of Quanta’s leases had remaining lease terms not exceeding 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 statements of operations are as follows (in thousands):



		Three Months Ended				Six Months Ended
		June 30,				June 30,
Lease cost	Classification	2020		2019		2020		2019
Finance lease cost:
Amortization of lease assets	Depreciation ⁽¹⁾	$	260	$	283	$	462	$	656
Interest on lease liabilities	Interest expense	17		18		34		39
Operating lease cost	Cost of services and Selling, general and administrative expenses	29,975		30,377		59,712		60,735
Short-term and variable lease cost ⁽²⁾	Cost of services and Selling, general and administrative expenses	147,953		194,630		318,318		394,928
Total lease cost		$	178,205	$	225,308	$	378,526	$	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.Variable lease cost is insignificant and primarily relates to real estate leases and consists of common area maintenance charges, real estate taxes, insurance and other variable costs.

Quanta has entered into lease arrangements for real property and facilities with certain related parties, typically an employee of Quanta who is the former owner of a business acquired by Quanta that continues to utilize the leased premises. Quanta utilizes third party market valuations to evaluate rental rates for these properties and facilities, and the lease agreements generally have remaining lease terms of up to five years, subject to renewal options. Related party lease expense was $4.3 million and $4.0 million for the three months ended June 30, 2020 and 2019 and $8.7 million and $8.1 million for the six months ended June 30, 2020 and 2019.

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



Lease type	Classification	June 30, 2020		December 31, 2019
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	275,816	$	284,369
Finance lease assets	Property and equipment, net of accumulated depreciation	1,593		1,043
Total lease assets		$	277,409	$	285,412
Liabilities:
Current:
Operating	Current portion of operating lease liabilities	$	90,358	$	92,475
Finance	Current maturities of long-term debt and short-term debt	489		440

Non-current:
Operating	Operating lease liabilities, net of current portion	192,300		196,521
Finance	Long-term debt, net of current maturities	911		517
Total lease liabilities		$	284,058	$	289,953

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. When rental purchase options are exercised and a substantive benefit is deemed to be transferred to a third-party lessor, the transaction is deemed to be a financing transaction for accounting purposes. This results in the recognition of an asset equal to the purchase price being recorded in “Property, plant and equipment, net of accumulated depreciation,” and the recognition of a corresponding liability in “Current maturities of long-term debt and short-term debt” and “Long-term debt, net of current maturities.” As of June 30, 2020 and December 31, 2019, the assets recorded, net of accumulated depreciation, totaled $21.1 million and $11.8 million.

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



	As of June 30, 2020
	Operating Leases			Finance Leases			Total
Remainder of 2020	$	53,636		$	330		$	53,966
2021	86,556			469			87,025
2022	61,429			343			61,772
2023	41,816			247			42,063
2024	25,036			122			25,158
Thereafter	41,034			—			41,034
Total future minimum operating and finance lease payments	$	309,507		$	1,511		$	311,018
Less imputed interest	(26,849		)	(111		)	(26,960		)
Total lease liabilities	$	282,658		$	1,400		$	284,058

Future minimum lease payments for short-term leases, which are not recorded in the consolidated balance sheets due to Quanta’s accounting policy election, were $21.9 million as of June 30, 2020. Month-to-month rental expense associated primarily with certain equipment rentals is excluded from these amounts because Quanta is unable to accurately predict future rental amounts.

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



	As of June 30, 2020
Weighted average remaining lease term (in years):
Operating leases	4.31
Finance leases	3.14
Weighted average discount rate:
Operating leases	4.2	%
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, 2020, the maximum guaranteed residual value of this equipment was $808.8 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, 2020, Quanta had additional operating lease obligations that had not yet commenced of $8.0 million. These operating leases will commence in 2020 with lease terms of one to ten years.

Leases

LEASES:



		Three Months Ended				Six Months Ended
		June 30,				June 30,
Lease cost	Classification	2020		2019		2020		2019
Finance lease cost:
Amortization of lease assets	Depreciation ⁽¹⁾	$	260	$	283	$	462	$	656
Interest on lease liabilities	Interest expense	17		18		34		39
Operating lease cost	Cost of services and Selling, general and administrative expenses	29,975		30,377		59,712		60,735
Short-term and variable lease cost ⁽²⁾	Cost of services and Selling, general and administrative expenses	147,953		194,630		318,318		394,928
Total lease cost		$	178,205	$	225,308	$	378,526	$	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.Variable lease cost is insignificant and primarily relates to real estate leases and consists of common area maintenance charges, real estate taxes, insurance and other variable costs.

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



Lease type	Classification	June 30, 2020		December 31, 2019
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	275,816	$	284,369
Finance lease assets	Property and equipment, net of accumulated depreciation	1,593		1,043
Total lease assets		$	277,409	$	285,412
Liabilities:
Current:
Operating	Current portion of operating lease liabilities	$	90,358	$	92,475
Finance	Current maturities of long-term debt and short-term debt	489		440

Non-current:
Operating	Operating lease liabilities, net of current portion	192,300		196,521
Finance	Long-term debt, net of current maturities	911		517
Total lease liabilities		$	284,058	$	289,953

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



	As of June 30, 2020
	Operating Leases			Finance Leases			Total
Remainder of 2020	$	53,636		$	330		$	53,966
2021	86,556			469			87,025
2022	61,429			343			61,772
2023	41,816			247			42,063
2024	25,036			122			25,158
Thereafter	41,034			—			41,034
Total future minimum operating and finance lease payments	$	309,507		$	1,511		$	311,018
Less imputed interest	(26,849		)	(111		)	(26,960		)
Total lease liabilities	$	282,658		$	1,400		$	284,058

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



	As of June 30, 2020
Weighted average remaining lease term (in years):
Operating leases	4.31
Finance leases	3.14
Weighted average discount rate:
Operating leases	4.2	%
Finance leases	4.2	%

As of June 30, 2020, Quanta had additional operating lease obligations that had not yet commenced of $8.0 million. These operating leases will commence in 2020 with lease terms of one to ten years.