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Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2017
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
Note 4 – Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts and notes receivable, cash collateral deposited with insurance carriers, life insurance assets, cost and equity method investments, deferred compensation plan assets and liabilities, accounts payable and other current liabilities, acquisition-related contingent consideration, certain intangible assets and liabilities, including off-market contracts, and debt obligations.
Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value guidance establishes a valuation hierarchy, which requires maximizing the use of observable inputs when measuring fair value. The three levels of inputs that may be used are: (i) Level 1 - quoted market prices in active markets for identical assets or liabilities; (ii) Level 2 - observable market-based inputs or other observable inputs; and (iii) Level 3 - significant unobservable inputs that cannot be corroborated by observable market data, which are generally determined using valuation models incorporating management estimates of market participant assumptions. In instances in which the inputs used to measure fair value fall into different levels of the fair value hierarchy, the fair value measurement classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Management’s assessment of the significance of a particular item to the fair value measurement in its entirety requires judgment, including the consideration of inputs specific to the asset or liability.
Fair values of financial instruments are estimated using public market prices, quotes from financial institutions and other available information. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities approximate their fair values. Management believes the carrying values of notes and other receivables, cash collateral deposited with insurance carriers, deferred compensation plan assets and liabilities and outstanding balances on its credit facilities approximate their fair values.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of June 30, 2017 and December 31, 2016, financial instruments required to be measured at fair value on a recurring basis consisted primarily of acquisition-related contingent consideration, which represents the estimated fair value of future earn-outs payable for acquisitions of businesses (“ASC 805 contingent consideration”). ASC 805 contingent consideration is based on management estimates and entity-specific assumptions and is evaluated on an ongoing basis. As of June 30, 2017 and December 31, 2016, the fair value of the Company’s ASC 805 contingent consideration totaled $43.3 million and $45.8 million, respectively, of which $19.1 million and $21.8 million, respectively, was included within other current liabilities. The fair value of the Company’s ASC 805 contingent consideration is estimated using an income approach and incorporates significant inputs not observable in the market. These assumptions include the discount rate and probability-weighted earnings before interest, taxes, depreciation and amortization (“EBITDA”) projections. Significant changes in any of these assumptions could result in a significantly higher or lower potential earn-out liability. As of June 30, 2017, the range of potential undiscounted earn-out liabilities was estimated to be between $9 million and $69 million; however, there is no maximum payment amount.
ASC 805 contingent consideration activity consists primarily of additions from new business combinations, payments of earn-out liabilities, changes in the expected fair value of future earn-out obligations, and, for earn-out liabilities denominated in foreign currencies, translation gains or losses. Fair value adjustments are recorded within other income or expense, and foreign currency translation activity is recorded within other comprehensive income or loss, as appropriate. For both the three and six month periods ended June 30, 2017, additions from new business combinations totaled $25.0 million. Payments in connection with ASC 805 contingent consideration totaled $18.8 million for both the three and six month periods ended June 30, 2017, and totaled $10.6 million for both the three and six month periods ended June 30, 2016. Foreign currency translation losses were de minimis for the three month period ended June 30, 2016, and totaled $0.6 million for the six month period ended June 30, 2016. During the second quarter of 2017, the Company recognized a decrease in the expected fair value of future earn-out obligations of $8.6 million for a business in the Company’s Communications segment, and during the first quarter of 2016, the Company recognized a net reduction in the expected fair value of future earn-out obligations of $2.3 million for certain of the Company’s western Canadian oil and gas businesses due to finalization of completed earn-out arrangements and adjustments to expected future period earn-out obligations.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
Assets and liabilities recognized or disclosed at fair value on a non-recurring basis, for which remeasurement occurs in the event of an impairment or other measurement event, if applicable, include items such as cost and equity method investments, life insurance assets, long-lived assets, goodwill, other intangible assets and liabilities and debt.
As of both June 30, 2017 and December 31, 2016, the gross carrying amount of the Company’s 4.875% senior notes due 2023 (the “4.875% Senior Notes”) totaled $400 million. As of June 30, 2017 and December 31, 2016, the estimated fair value of the Company’s 4.875% Senior Notes, based on quoted market prices in active markets, a Level 1 input, totaled $398.0 million and $388.0 million, respectively.
Cost and Equity Investees. The Company’s cost and equity investees as of June 30, 2017 are primarily composed of: (i) the Company’s equity interests in Trans-Pecos Pipeline, LLC (“TPP”) and Comanche Trail Pipeline, LLC (“CTP,” and together with TPP, the “Waha JVs”); (ii) the Company’s interests in a pre-acquisition equity method investment of Pacer Construction Holdings Corporation and its affiliated operating companies (collectively, “Pacer”); (iii) a $15 million cost investment in Cross Country Infrastructure Services, Inc. (“CCI,” previously, Cross Country Pipeline Supply, Inc.); (iv) the Company’s interests in certain proportionately consolidated non-controlled contractual joint ventures; and (v) certain other cost and equity method investments. See Note 15 - Related Party Transactions.
The fair values of the Company’s cost and equity method investments are not readily observable. The Company is not aware of events or changes in circumstances that would have a significant adverse effect on the carrying values of its cost and/or equity investments as of June 30, 2017 or December 31, 2016. Cumulative undistributed earnings from equity method investees totaled $3.3 million as of June 30, 2017.
The Waha JVs. The Waha JVs own and operate two pipelines and a header system that transport natural gas to the Mexican border for export. These pipelines commenced operations in the first half of 2017. For the three and six month periods ended June 30, 2017, the Company made equity and other contributions to these joint ventures of approximately $19.9 million and $73.3 million, respectively. As collateral for its equity commitments in the Waha JVs, the Company has issued letters of credit (the “Equity LC Amount”), of which $19 million and $91 million, respectively, were outstanding as of June 30, 2017 and December 31, 2016. Equity in earnings related to the Company’s proportionate share of income from the Waha JVs, which is included within the Company’s Other segment, totaled approximately $6.1 million and $7.7 million for the three and six month periods ended June 30, 2017, respectively, and totaled $0.5 million for the three month period ended June 30, 2016. Equity in earnings from the Waha JVs for the six month period ended June 30, 2016 was de minimis.
The Waha JVs are party to certain interest rate swaps. The Company reflects its proportionate share of any unrealized fair market value gains or losses from fluctuations in interest rates associated with these swaps in its financial statements. For the three and six month periods ended June 30, 2017, the Company’s proportionate share of unrecognized unrealized activity on these interest rate swaps was a loss of approximately $4.4 million and $3.4 million, respectively, or $2.7 million and $2.1 million, net of tax, respectively, which amounts are included within other comprehensive income or loss, as appropriate. For the three and six month periods ended June 30, 2016, the Company’s proportionate share of unrecognized unrealized activity on these interest rate swaps was a loss of approximately $7.5 million and $20.5 million, respectively, or $4.6 million and $12.6 million, net of tax, respectively.
Certain subsidiaries of MasTec have provided pipeline construction services to the Waha JVs. For the three and six month periods ended June 30, 2017, revenue recognized in connection with work performed for the Waha JVs, including intercompany eliminations, totaled $100.2 million and $251.6 million, respectively, and for the three and six month periods ended June 30, 2016, totaled $51.6 million and $61.9 million, respectively. As of June 30, 2017 and December 31, 2016, related receivables, including retainage, net of BIEC, totaled $54.1 million and $71.2 million, respectively. As of June 30, 2017 and December 31, 2016, the Company’s net investment in the Waha JVs represented an asset totaling approximately $107 million and $6 million, respectively. The Company’s net investment in the Waha JVs differs from its proportionate share of the net assets of the Waha JVs due to capitalized investment costs as well as the effect of intercompany eliminations.
Other investments. In connection with the 2014 acquisition of Pacer, the Company acquired equity interests in two joint ventures. There are no remaining amounts expected to be advanced in connection with these investments, and as of March 2016, all related project work had been completed. In the first quarter of 2016, revenue recognized by Pacer on behalf of these entities totaled $0.6 million. One of these entities was liquidated in 2016, and the second, which is in the final stages of liquidation, is being managed by a receiver to assist with the orderly wind-down of its operations. In the first quarter of 2016, $3.6 million of income was recognized related to changes in expected recoveries from these investments. The Company received $12.1 million of proceeds from the receiver in the first quarter of 2017. The remaining investment, for which the Company now has minimal involvement, is reviewed regularly by corporate management for potential changes in expected recovery estimates, and, during the second quarter of 2017, the Company recorded $5.8 million of expense related to changes in expected recovery amounts from this investment. The aggregate net carrying value of this investment, which represents expected recoveries under the receivership arrangement, totaled $14.3 million and $31.4 million as of June 30, 2017 and December 31, 2016, respectively, which amounts are included within other current assets.