Leases

9 Months Ended

Sep. 30, 2022

Leases [Abstract]

Leases

11. LEASES:

Quanta primarily leases land, buildings, vehicles, construction equipment and office equipment. The components of lease costs in the accompanying condensed consolidated statements of operations are as follows (in thousands):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Lease cost	Classification	2022		2021		2022		2021
Finance lease cost:
Amortization of lease assets	Depreciation (1)	$	301	$	231	$	1,177	$	705
Interest on lease liabilities	Interest and other financing expenses	27		18		82		68
Operating lease cost	Cost of services and Selling, general and administrative expenses	21,957		25,323		71,082		80,046
Short-term and variable lease cost (2)	Cost of services and Selling, general and administrative expenses	250,460		176,605		693,847		494,846
Total lease cost		$	272,745	$	202,177	$	766,188	$	575,665

(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.

During the three months ended June 30, 2022, Quanta recognized a $2.8 million asset impairment charge primarily related to the discontinued use of the right-of-use asset associated with its prior corporate headquarters. This amount is reported as “Asset impairment charges” in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2022.

Quanta has entered into arrangements with certain related parties to lease certain real property and facilities. Typically, the parties are employees of Quanta who are also the former owners of businesses acquired by Quanta, and the real property and facilities continue to be utilized by Quanta subsequent to the acquisitions. 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

10 years, subject to renewal options. Related party lease expense was $4.6 million and $2.4 million for the three months ended September 30, 2022 and 2021 and $12.0 million and $10.4 million for the nine months ended September 30, 2022 and 2021.

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 these purchase options are exercised by a third-party lessor on behalf of Quanta, the transaction is deemed to be a financing transaction for accounting purposes, which results in the recognition of an asset equal to the purchase price in “Property, plant and equipment, net of accumulated depreciation,” and a corresponding liability in “Current maturities of long-term debt and short-term debt” and “Long-term debt, net of current maturities.” As of September 30, 2022 and December 31, 2021, the assets recorded related to these financing transactions, net of accumulated depreciation, totaled $79.6 million and $53.9 million.

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

	As of September 30, 2022
	Operating Leases		Finance Leases		Total
Remainder of 2022	$	22,108	$	417	$	22,525
2023	76,118		1,408		77,526
2024	56,284		859		57,143
2025	41,028		516		41,544
2026	29,157		357		29,514
Thereafter	37,425		58		37,483
Total future minimum operating and finance lease payments	262,120		3,615		265,735
Less imputed interest	(19,357)		(3)		(19,360)
Total lease liabilities	$	242,763	$	3,612	$	246,375

Future minimum lease payments for short-term leases, which are not recorded in the condensed consolidated balance sheets due to Quanta’s accounting policy election, were $16.9 million as of September 30, 2022. Rental expense associated primarily with certain month-to-month equipment rentals is excluded from this amount because Quanta is unable to accurately predict future amounts associated with such rentals.

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

	As of September 30, 2022
Weighted average remaining lease term (in years):
Operating leases	4.34
Finance leases	2.95
Weighted average discount rate:
Operating leases	3.5	%
Finance leases	3.1	%

Quanta has also guaranteed the residual value under certain of its equipment operating leases, agreeing to pay any difference between the residual value and the fair market value of the underlying asset at the date of lease termination. As of September 30, 2022, the maximum guaranteed residual value of this equipment was $969.9 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.

During the three months ended March 31, 2022, Quanta entered into a real estate lease that has not yet commenced. The lease agreement also contains a purchase option in the amount of $53.7 million that can be exercised during 2022.

Leases

11. LEASES:

Quanta primarily leases land, buildings, vehicles, construction equipment and office equipment. The components of lease costs in the accompanying condensed consolidated statements of operations are as follows (in thousands):

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
Lease cost	Classification	2022		2021		2022		2021
Finance lease cost:
Amortization of lease assets	Depreciation (1)	$	301	$	231	$	1,177	$	705
Interest on lease liabilities	Interest and other financing expenses	27		18		82		68
Operating lease cost	Cost of services and Selling, general and administrative expenses	21,957		25,323		71,082		80,046
Short-term and variable lease cost (2)	Cost of services and Selling, general and administrative expenses	250,460		176,605		693,847		494,846
Total lease cost		$	272,745	$	202,177	$	766,188	$	575,665

(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.

During the three months ended June 30, 2022, Quanta recognized a $2.8 million asset impairment charge primarily related to the discontinued use of the right-of-use asset associated with its prior corporate headquarters. This amount is reported as “Asset impairment charges” in the accompanying condensed consolidated statement of operations for the nine months ended September 30, 2022.

Quanta has entered into arrangements with certain related parties to lease certain real property and facilities. Typically, the parties are employees of Quanta who are also the former owners of businesses acquired by Quanta, and the real property and facilities continue to be utilized by Quanta subsequent to the acquisitions. 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

10 years, subject to renewal options. Related party lease expense was $4.6 million and $2.4 million for the three months ended September 30, 2022 and 2021 and $12.0 million and $10.4 million for the nine months ended September 30, 2022 and 2021.

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 these purchase options are exercised by a third-party lessor on behalf of Quanta, the transaction is deemed to be a financing transaction for accounting purposes, which results in the recognition of an asset equal to the purchase price in “Property, plant and equipment, net of accumulated depreciation,” and a corresponding liability in “Current maturities of long-term debt and short-term debt” and “Long-term debt, net of current maturities.” As of September 30, 2022 and December 31, 2021, the assets recorded related to these financing transactions, net of accumulated depreciation, totaled $79.6 million and $53.9 million.

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

	As of September 30, 2022
	Operating Leases		Finance Leases		Total
Remainder of 2022	$	22,108	$	417	$	22,525
2023	76,118		1,408		77,526
2024	56,284		859		57,143
2025	41,028		516		41,544
2026	29,157		357		29,514
Thereafter	37,425		58		37,483
Total future minimum operating and finance lease payments	262,120		3,615		265,735
Less imputed interest	(19,357)		(3)		(19,360)
Total lease liabilities	$	242,763	$	3,612	$	246,375

Future minimum lease payments for short-term leases, which are not recorded in the condensed consolidated balance sheets due to Quanta’s accounting policy election, were $16.9 million as of September 30, 2022. Rental expense associated primarily with certain month-to-month equipment rentals is excluded from this amount because Quanta is unable to accurately predict future amounts associated with such rentals.

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

	As of September 30, 2022
Weighted average remaining lease term (in years):
Operating leases	4.34
Finance leases	2.95
Weighted average discount rate:
Operating leases	3.5	%
Finance leases	3.1	%

Quanta has also guaranteed the residual value under certain of its equipment operating leases, agreeing to pay any difference between the residual value and the fair market value of the underlying asset at the date of lease termination. As of September 30, 2022, the maximum guaranteed residual value of this equipment was $969.9 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.

During the three months ended March 31, 2022, Quanta entered into a real estate lease that has not yet commenced. The lease agreement also contains a purchase option in the amount of $53.7 million that can be exercised during 2022.