LEASES

3 Months Ended

Sep. 30, 2019

LEASES

LEASES

(14) LEASES

As previously discussed in Note 1, the Company adopted ASC 842 effective July 1, 2019 using the modified retrospective transition method at the adoption date. In addition, the Company elected the package of practical expedients permitted under the transition guidance which permits companies to carry forward the historical lease classification. Adoption of the new standard resulted in $527.6 million of ROU assets and $545.1 million of lease liabilities recorded as of July 1, 2019. The standard did not materially impact the Company’s consolidated net income or cash flows in the three months ended September 30, 2019. The Company’s financial position for reporting periods beginning on or after July 1, 2019 are presented under the new guidance, while prior period amounts are not adjusted for the new guidance and continue to be reported in accordance with previous guidance.

Leases as Lessee

The Company determines if an arrangement is a lease at inception and whether that lease meets the classification criteria of a finance or operating lease in accordance with U.S. GAAP. The Company leases office space, warehouse space, network assets, switching and transport sites, points of presence, components and equipment under non-cancelable operating leases. For leases with an initial term of 12 months or less, the Company recognizes lease expense on a straight-line basis over the lease term but does not recognize a ROU asset or lease liability.

Operating lease assets have been included as right-of-use operating lease assets on the condensed consolidated balance sheets. The associated lease liabilities have been included as operating lease obligations, current or operating lease liabilities, non-current on the condensed consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments consist of non-lease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As the Company’s leases as lessee typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company assessed multiple variables when determining the incremental borrowing rate, such as lease term, payment terms, collateral, economic conditions, and creditworthiness. ROU assets also include any lease payments made and exclude lease incentives. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

Some of the Company’s lease arrangements contain lease components and non-lease components. The Company generally accounts for each component separately based on the estimated standalone price of each component. For colocation leases, the Company accounts for the lease and non-lease components as a single lease component.

Many of the Company’s lease agreements contain renewal options; however, the Company does not recognize ROU assets or lease liabilities for renewal periods unless it is determined the Company is reasonably certain of renewing the lease at inception or when a triggering event occurs. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain to be exercised. The Company’s lease agreements do not contain any material purchase option, material residual value guarantees or material restrictive covenants.

Lease expense consisted of the following:

	Three Months Ended September 30, 2019
		(in millions)
Operating and short-term lease cost	$	57.9
Finance lease cost:
Amortization of right-of-use assets		3.5
Interest on lease liability		2.9
Total finance lease cost		6.4
Total lease cost	$	64.3

Supplemental unaudited condensed consolidated balance sheet information and other information related to leases (in millions unless otherwise stated):

Leases	Classification on the Balance Sheet	As of September 30, 2019
		(in millions)
Assets
Operating lease assets	Right-of-use operating lease assets	$	499.2
Finance lease assets	Property, plant and equipment, net of accumulated depreciation		153.8
Total leased assets			653.0
Liabilities
Current
Operating	Operating lease obligations, current	$	127.2
Finance	Finance lease obligation, current		9.5
Noncurrent
Operating	Operating lease liabilities, non-current		387.4
Finance	Finance lease obligations, non-current		176.0
Total lease liabilities		$	700.1
Weighted-average remaining lease term (years)
Operating leases			7.1
Finance leases			11.9
Weighted-average discount rate
Operating leases			3.95%
Finance leases			5.78%

Supplemental unaudited condensed consolidated cash flow statement information related to leases:

	Three Months Ended September 30, 2019
		(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	37.2
Operating cash flows from finance leases		2.9
Finance cash flows from finance leases		2.1
Total lease cost	$	42.2

As of September 30, 2019, maturities of lease liabilities were as follows:

	Operating Leases		Finance Leases
Year Ended June 30,		(in millions)
2020 (remaining nine months)	$	95.5	$	15.4
2021		111.7		20.1
2022		84.2		20.3
2023		67.2		20.1
2024		53.8		19.3
Thereafter		193.1		180.3
Total lease payments	$	605.5	$	275.5
Less: interest		(90.9)		(90.0)
Total	$	514.6	$	185.5
Less: current portion		(127.2)		(9.5)
Long-term portion	$	387.4	$	176.0

As of September 30, 2019, the Company had no material operating or finance leases that had not yet commenced.

Future contractual payments under the terms of the Company’s finance lease obligations as of June 30, 2019 were as follows:

Year Ended June 30,	(in millions)
2020	$	20.1
2021		20.0
2022		20.3
2023		19.9
2024		19.5
Thereafter		171.0
Total minimum lease payments		270.8
Less amounts representing interest		(88.6)
Less current portion		(10.0)
Finance lease obligations, non-current	$	172.2

Minimum contractual lease payments due under the Company’s long-term operating leases as of June 30, 2019 are as follows:

Year Ended June 30,	(in millions)
2020	$	128.1
2021		107.0
2022		83.7
2023		68.0
2024		55.7
Thereafter		215.8
	$	658.3

Leases as Lessor

As of September 30, 2019, maturities of non-cancellable leases were as follows:

Year Ended June 30,	(in millions)
2020 (remaining nine months)	$	719.3
2021		728.7
2022		598.6
2023		496.4
2024		432.5
Thereafter		399.3
Total lease payments	$	3,374.8

The Company leases dark fiber and circuits (within the Zayo Networks segment) and zColo segments have contract terms that are accounted for as operating leases and are further described in Note 16 – Segment Reporting. Lease income is included in operating revenue in the condensed consolidated statements of operations. The Company’s lease revenue contains both minimum lease payments as well as variable lease payments. See Note 13 – Revenue and Contract Costs for further details on the Company’s disaggregated revenue streams and associated accounting treatment.