Qurate Retail, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Leases and Transponder Service Agreements

Leases and Transponder Service Agreements

12 Months Ended

Dec. 31, 2019

Leases and Transponder Service Agreements [Abstract]

(9) Leases

The Company has finance lease agreements with transponder and transmitter network suppliers for the right to transmit its signals in the U.S. and Germany. The Company is also party to a finance lease agreement for data processing hardware and a warehouse.

QVC also leases data processing equipment, facilities, office space and land. These leases are classified as operating leases. Effective with the adoption of ASC 842 on January 1, 2019, operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Our leases have remaining lease terms of less than 1 year to 14 years, some of which may include the option to extend or terminate the leases.

The components of lease cost for the year ended December 31, 2019, were as follows:



(in millions)	December 31, 2019
Finance lease cost
Depreciation of leased assets	$	20
Interest on lease liabilities	9
Total finance lease cost	29
Operating lease cost	32
Total lease cost	$	61

For the years ended December 31, 2018 and 2017, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) of $14 million and $13 million, respectively, and recorded operating lease expenses of $34 million and $23 million, respectively.

The remaining weighted-average lease term and the weighted-average discount rate were as follows:



	December 31, 2019
Weighted-average remaining lease term (years):
Finance leases	9.2
Operating leases	12.4
Weighted-average discount rate:
Finance leases	5.0	%
Operating leases	6.1	%

Supplemental balance sheet information related to leases was as follows:



(in millions)	December 31, 2019
Operating Leases:
Operating lease right-of-use assets	$	214
Accrued liabilities	$	28
Other long-term liabilities	190
Total operating lease liabilities	$	218
Finance Leases:
Property and equipment	$	282
Accumulated depreciation	(129		)
Property and equipment, net	$	153
Current portion of debt and finance lease obligations	$	18
Long-term portion of debt and finance lease obligations	163
Total finance lease liabilities	$	181

Supplemental cash flow information related to leases for the year ended December 31, 2019 was as follows:



(in millions)	December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating lease	$	35
Operating cash flows from finance leases	9
Financing cash flows from finance leases	22
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	151
Finance leases	$	16

Future payments under noncancelable operating leases and finance leases with initial terms of one year or more as of December 31, 2019 consisted of the following:



(in millions)	Finance leases			Operating leases		Total leases
2020	$	26		38		64
2021	25			26		51
2022	25			23		48
2023	25			21		46
2024	23			20		43
Thereafter	108			186		294
Total lease payments	232			314		546
Less: imputed interest	(51		)	(96	)	(147	)
Total lease liabilities	$	181		218		399

On July 2, 2015, QVC entered into a lease (the “Lease”) for a California distribution center. Pursuant to the Lease, the landlord built a 1 million square foot rental building in Ontario, California (the “Premises”), and thereafter leased the Premises to QVC as its California distribution center for an initial term of 15 years. Under the Lease, QVC was required to pay an initial base rent of $6 million per year, increasing to $8 million per year by the final year of the initial term, as well as all real estate taxes and other building operating costs. QVC also had an option to extend the term of the Lease for up to two consecutive terms of 10 years each.

The Company concluded that it was the deemed owner (for accounting purposes only) of the Premises during the construction period under build to suit lease accounting. Upon opening the distribution center, the Company evaluated whether the Lease met the criteria for "sale-leaseback" treatment under U.S. GAAP and concluded that it did not and therefore treated the Lease as a financing obligation and lease payments were attributed to: (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense representing an imputed cost to lease the underlying land of the Premises.

In August 2018, QVC exercised the right to purchase the Premises and related land from the landlord by entering into an amended and restated agreement ("New Lease"). QVC made an initial payment of $10 million and will make annual payments of $12 million over a term of 13 years. The Company classifies the New Lease within finance lease obligations and lease payments are attributed to: (1) a reduction of the principal obligation and (2) imputed interest expense. In connection with the New Lease, QVC capitalized the related land at fair market value while the building asset is currently being depreciated over its estimated useful life of 20 years

On October 5, 2018, QVC entered into a lease (“ECDC Lease”) for an East Coast distribution center. The 1.7 million square foot rental building is located in Bethlehem, Pennsylvania and will be leased to QVC for an initial term of 15 years. QVC obtained initial access to a portion of the ECDC Lease during March 2019 and obtained access to the remaining portion during September 2019. In total, QVC recorded a right of use asset of $141 million and an operating lease liability of $131 million relating to the ECDC Lease, with the difference attributable to prepaid rent. QVC is required to pay an initial base rent of $10 million per year, with payments that began in the third quarter of 2019 and increasing to $14 million per year, as well as all real estate taxes and other building operating costs. QVC also has the option to extend the term of the ECDC Lease for up to two consecutive terms of 5 years each and one final term of 4 years.