Qurate Retail, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Lease and Transponder Service Agreements

Lease and Transponder Service Agreements

3 Months Ended

Mar. 31, 2019

Leases

The Company has finance lease agreements with transponder and transmitter network suppliers to transmit its signals in the U.S., Germany and France. 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. 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 15 years, some of which may include the option to extend or terminate the leases.

The components of lease cost for the three months ended March 31, 2019 were as follows:



	Three months ended
(in millions)	March 31, 2019
Finance lease cost
Depreciation of leased assets	$	5
Interest on lease liabilities	2
Total finance lease cost	7
Operating lease cost	6
Total lease cost	$	13

For the three months ended March 31, 2018, the Company recorded depreciation expense on finance leases (previously referred to as capital leases) of $4 million and recorded operating lease expenses of $9 million.

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



	March 31, 2019
Weighted-average remaining lease term (years):
Finance leases	9.5
Operating leases	12.2
Weighted-average discount rate:
Finance leases	4.9	%
Operating leases	6.1	%

Supplemental balance sheet information related to leases was as follows:



(in millions)	March 31, 2019
Operating Leases:
Operating lease right-of-use assets	$	157
Accrued liabilities	$	18
Other long-term liabilities	153
Total operating lease liabilities	$	171
Finance Leases:
Property and equipment	$	280
Accumulated depreciation	(125		)
Property and equipment	$	155
Current portion of debt and finance lease obligations	$	20
Long-term portion of debt and finance lease obligations	162
Total finance lease liabilities	$	182

Supplemental cash flow information related to leases was as follows:



	Three months ended
(in millions)	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating lease	$	6
Operating cash flows from finance leases	2
Financing cash flows from finance leases	5
Right-of-use assets obtained in exchange for lease obligations:
Operating leases	68
Finance leases	$	—

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



(in millions)	Finance Leases			Operating leases		Total leases
Remainder of 2019	$	22		21		43
2020	26			27		53
2021	25			20		45
2022	24			19		43
2023	22			17		39
Thereafter	116			156		272
Total lease payments	235			260		495
Less: imputed interest	(53		)	(89	)	(142	)
Total lease liabilities	$	182		171		353

On July 2, 2015, QVC entered into a lease (the “Lease”) for a California distribution center. Pursuant to the Lease, the landlord built an approximately one million square foot rental building in Ontario, California (the “Premises”), and thereafter leased the Premises to QVC as its new California distribution center for an initial term of 15 years. Under the Lease, QVC was required to pay an initial base rent of approximately $6 million per year, increasing to approximately $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 access to a portion of the ECDC Lease during March 2019 and recorded a right of use asset of $68 million and an operating lease liability of $69 million. The Company expects the remaining portion of the lease to commence during the third quarter of 2019. Under the ECDC Lease, QVC is required to pay an initial base rent of approximately $10 million per year, which are expected to begin in the fourth quarter of 2019 and increasing to approximately $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.