Lease Obligations

9 Months Ended

Sep. 30, 2019

Note 8 – Lease Obligations

See Note 1 - Business, Basis of Presentation and Significant Accounting Policies for information pertaining to the Company’s adoption of ASU 2016-02, Leases (Topic 842).

In the ordinary course of business, the Company enters into agreements that provide financing for machinery and equipment and for other of its facility, vehicle and equipment needs, including related party leases. The Company reviews all agreements to determine if a leasing arrangement exists. When a leasing arrangement is identified, a determination is made at inception as to whether the lease is an operating or a finance lease. A lease exists when a contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. In determining whether a lease exists, the Company considers whether a contract provides both the right to obtain substantially all of the economic benefits from the use of an asset and the right to direct the use of the asset. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the present value of the minimum future lease payments over the expected term of the lease. The Company’s lease assets are primarily concentrated in vehicles, machinery and equipment.

Leases with an initial term of twelve months or less are classified as short-term leases and are not recognized in the consolidated balance sheets unless the lease contains a purchase option that is reasonably certain to be exercised, or unless it is reasonably certain that the equipment will be leased for greater than twelve months. Lease payments for short-term leases are recognized on a straight-line basis over the lease term. About half of the Company’s short-term leases relate to equipment used on construction projects, for which the rentals are based on daily, weekly or monthly rental rates for an unspecified duration, and typically contain termination for convenience provisions. Lease determinations are reassessed in the event of a change in lease terms. The Company has a limited number of sublease arrangements, which are not considered material to the consolidated financial statements.

As of September 30, 2019, the Company’s leases have remaining lease terms of up to ten years. Lease agreements may contain renewal clauses, which, if elected, generally extend the term of the lease for one year for equipment leases, and from one to five years for facility leases. Certain lease agreements may also contain options to purchase the leased property and/or options to terminate the lease. In addition, lease agreements may include periodic adjustments to payment amounts for inflation or other variables, or may require payments for taxes, insurance, maintenance or other expenses, which are generally referred to as non-lease components. The Company elected the practical expedient to account for non-lease components

together with the related lease components for all classes of leased assets. The Company’s lease agreements do not contain significant residual value guarantees or material restrictive covenants.

Lease term, discount rate, variable lease costs and future minimum lease payment determinations require the use of judgment, and are based on the facts and circumstances of each lease. Economic incentives, intent, past history and business need are among the factors considered to determine if renewal and/or purchase options are reasonably certain to be exercised. The majority of the Company’s lease agreements do not explicitly state the discount rate implicit in the lease, therefore, the Company generally uses an incremental borrowing rate to determine the value of its lease obligations. The incremental borrowing rate represents the rate of interest that would be paid to borrow on a collateralized basis over a similar term. The Company determines its incremental borrowing rate using a portfolio approach based on information available as of the lease commencement date, including applicable lease terms and the current economic environment.

Finance Leases

Finance lease assets are recorded within property and equipment, with a corresponding amount recorded within the Company’s debt obligations. Finance lease expense is composed of depreciation expense on the leased asset and interest on the lease liability. Additions to finance leases are included within the supplemental disclosures of non-cash information in the consolidated statements of cash flows. Many of the Company’s finance leases contain purchase options, which the Company frequently exercises, given that the purchase option prices are typically below the estimated fair market values of the related assets. The gross amount of assets held under finance leases as of September 30, 2019 and December 31, 2018 totaled $415.5 million and $337.6 million, respectively. Assets held under finance leases, net of accumulated depreciation, totaled $340.4 million and $246.8 million as of September 30, 2019 and December 31, 2018, respectively. Depreciation expense associated with finance leases totaled $13.1 million and $34.2 million for the three and nine month periods ended September 30, 2019, respectively.

Operating Leases

Operating lease right-of-use assets and liabilities are recognized on the consolidated balance sheets, with the related lease expense recognized over the term of the lease on a straight-line basis. Operating lease expense is recorded as rent expense, primarily within costs of revenue, excluding depreciation and amortization. Fixed costs for operating leases are composed of initial base rent amounts plus any fixed annual increases. Variable costs for operating leases consist primarily of common area maintenance expenses and taxes for facility leases. Certain of the Company’s operating leases contain purchase options, for which the purchase option price is generally considered to be at fair market value. From time to time, the Company may terminate a lease before the end of the lease term. Payments related to such early lease terminations are generally recorded within rent expense.

Operating lease additions for the three and nine month periods ended September 30, 2019, excluding the effect of adoption of approximately $230 million, totaled $20 million and $86 million, respectively. For the three and nine month periods ended September 30, 2019, rent expense for leases that have terms in excess of one year totaled approximately $29.5 million and $84.8 million, respectively, of which $3.1 million and $7.5 million, respectively, represented variable lease costs. The Company also incurred rent expense for leases with terms of one year or less totaling approximately $144.0 million and $352.4 million for the three and nine month periods ended September 30, 2019, respectively. For the three and nine month periods ended September 30, 2018, rent and related expense for operating leases that have non-cancelable terms in excess of one year totaled approximately $33.1 million and $85.4 million, respectively, and rent and related expense for operating leases having original terms of one year or less totaled approximately $142.7 million and $339.4 million, respectively. Rent expense for operating leases is generally consistent with the amount of the related payments, and is included within operating activities in the consolidated statements of cash flows.

Additional Lease Information

Future minimum lease commitments as of September 30, 2019 were as follows (in millions):



	Finance Leases			Operating Leases
2019, remaining three months	$	28.5		$	24.3
2020	107.4			82.7
2021	93.7			59.9
2022	54.9			36.4
2023	15.5			19.7
Thereafter	0.5			40.9
Total minimum lease payments	$	300.5		$	263.9
Less amounts representing interest	(18.3		)	(25.5		)
Total lease obligations, net of interest	$	282.2		$	238.4
Less current portion	99.3			79.2
Long-term portion of lease obligations, net of interest	$	182.9		$	159.3

As of September 30, 2019, finance leases had a weighted average remaining lease term of 3.0 years and a weighted average discount rate of 4.1%. Non-cancelable operating leases had a weighted average remaining lease term of 4.3 years and a weighted average discount rate of 4.2% as of September 30, 2019. As of September 30, 2019, future lease obligations for leases that had not yet commenced totaled approximately $18 million. These leases commence in 2019 with lease terms of one to five years.