Leases

12 Months Ended

Dec. 31, 2019

Leases [Abstract]

Leases

LEASES:

Effective January 1, 2019, Quanta adopted the new lease accounting standard utilizing the transition method that allows recognition of 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 beginning on or 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 primarily leases land, buildings, vehicles, construction equipment and office equipment. As of December 31, 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 seven years and/or options to terminate. The components of lease costs in the accompanying consolidated statements of operations are as follows (in thousands):

		Year Ended
Lease cost	Classification	December 31, 2019
Finance lease cost:
Amortization of lease assets	Depreciation (1)	$	1,393
Interest on lease liabilities	Interest expense	64
Operating lease cost	Cost of services and Selling, general and administrative expenses	121,767
Short-term and variable lease cost (2)	Cost of services and Selling, general and administrative expenses	837,244
Total lease cost		$	960,468

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

For the years ended December 31, 2018 and 2017, rent expense related to operating leases was $309.7 million and $276.2 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 and variable lease cost for the year ended December 31, 2019 in the table above.

Additionally, 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. Lease amounts are analyzed by a third party at the time of acquisition to ensure they are at market rates. These lease agreements generally have remaining lease terms of up to five years and may include renewal options. Related party lease expense was $16.7 million, $14.0 million and $12.3 million for the years ended December 31, 2019, 2018 and 2017.

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

Lease type	Classification	December 31, 2019
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	284,369
Finance lease assets	Property and equipment, net of accumulated depreciation	1,043
Total lease assets		$	285,412
Liabilities:
Current:
Operating	Current portion of operating lease liabilities	$	92,475
Finance	Current maturities of long-term debt and short-term debt	440
Non-current:
Operating	Operating lease liabilities, net of current portion	196,521
Finance	Long-term debt, net of current maturities	517
Total lease liabilities		$	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 December 31, 2019, the assets recorded, net of accumulated depreciation, totaled $11.8 million.

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

	As of December 31, 2019
	Operating Leases			Finance Leases			Total
2020	$	102,848		$	469		$	103,317
2021	75,982			325			76,307
2022	51,295			127			51,422
2023	34,153			60			34,213
2024	17,952			21			17,973
Thereafter	35,019			8			35,027
Total future minimum operating and finance lease payments	317,249			1,010			318,259
Less imputed interest	(28,253		)	(53		)	(28,306		)
Total lease liabilities	$	288,996		$	957		$	289,953

Future minimum lease payments for short-term leases, which are not recorded in the consolidated balance sheets due to our accounting policy election, were $19.9 million as of December 31, 2019. 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.

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 Under Prior Accounting Standard
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 December 31, 2019
Weighted average remaining lease term (in years):
Operating leases	4.35
Finance leases	2.66
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 December 31, 2019, the maximum guaranteed residual value of this equipment was $769.8 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 December 31, 2019, Quanta had additional operating lease obligations that had not yet commenced of $10.3 million. These operating leases will commence in 2020 with lease terms of one year to seven years.

Leases

LEASES:

Effective January 1, 2019, Quanta adopted the new lease accounting standard utilizing the transition method that allows recognition of 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 beginning on or 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 primarily leases land, buildings, vehicles, construction equipment and office equipment. As of December 31, 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 seven years and/or options to terminate. The components of lease costs in the accompanying consolidated statements of operations are as follows (in thousands):

		Year Ended
Lease cost	Classification	December 31, 2019
Finance lease cost:
Amortization of lease assets	Depreciation (1)	$	1,393
Interest on lease liabilities	Interest expense	64
Operating lease cost	Cost of services and Selling, general and administrative expenses	121,767
Short-term and variable lease cost (2)	Cost of services and Selling, general and administrative expenses	837,244
Total lease cost		$	960,468

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

For the years ended December 31, 2018 and 2017, rent expense related to operating leases was $309.7 million and $276.2 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 and variable lease cost for the year ended December 31, 2019 in the table above.

Additionally, 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. Lease amounts are analyzed by a third party at the time of acquisition to ensure they are at market rates. These lease agreements generally have remaining lease terms of up to five years and may include renewal options. Related party lease expense was $16.7 million, $14.0 million and $12.3 million for the years ended December 31, 2019, 2018 and 2017.

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

Lease type	Classification	December 31, 2019
Assets:
Operating lease right-of-use assets	Operating lease right-of-use assets	$	284,369
Finance lease assets	Property and equipment, net of accumulated depreciation	1,043
Total lease assets		$	285,412
Liabilities:
Current:
Operating	Current portion of operating lease liabilities	$	92,475
Finance	Current maturities of long-term debt and short-term debt	440
Non-current:
Operating	Operating lease liabilities, net of current portion	196,521
Finance	Long-term debt, net of current maturities	517
Total lease liabilities		$	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 December 31, 2019, the assets recorded, net of accumulated depreciation, totaled $11.8 million.

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

	As of December 31, 2019
	Operating Leases			Finance Leases			Total
2020	$	102,848		$	469		$	103,317
2021	75,982			325			76,307
2022	51,295			127			51,422
2023	34,153			60			34,213
2024	17,952			21			17,973
Thereafter	35,019			8			35,027
Total future minimum operating and finance lease payments	317,249			1,010			318,259
Less imputed interest	(28,253		)	(53		)	(28,306		)
Total lease liabilities	$	288,996		$	957		$	289,953

Future minimum lease payments for short-term leases, which are not recorded in the consolidated balance sheets due to our accounting policy election, were $19.9 million as of December 31, 2019. 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.

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 Under Prior Accounting Standard
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 December 31, 2019
Weighted average remaining lease term (in years):
Operating leases	4.35
Finance leases	2.66
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 December 31, 2019, the maximum guaranteed residual value of this equipment was $769.8 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 December 31, 2019, Quanta had additional operating lease obligations that had not yet commenced of $10.3 million. These operating leases will commence in 2020 with lease terms of one year to seven years.