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Fair Value of Financial Instruments
3 Months Ended
Mar. 31, 2016
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 receivable, cash collateral deposited with insurance carriers, deferred compensation plan assets and liabilities and outstanding balances on its credit facilities approximate their fair values. Cost and equity method investments are initially recorded at their cost basis.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
As of March 31, 2016 and December 31, 2015, financial instruments required to be measured at fair value on a recurring basis consisted primarily of acquisition-related contingent consideration liabilities, which represent the estimated fair value of additional future earn-outs payable for acquisitions of businesses (“ASC 805 contingent consideration”), in accordance with U.S. GAAP. The fair value of ASC 805 contingent consideration is based on management estimates and entity-specific assumptions, which are Level 3 inputs, and is evaluated on an ongoing basis. As of March 31, 2016 and December 31, 2015, the fair value of the Company’s ASC 805 contingent consideration totaled $56.7 million and $58.4 million, respectively.
There were no additions to ASC 805 contingent consideration from new business combinations for the three month periods ended March 31, 2016 or 2015, and the Company made no payments in connection with ASC 805 contingent consideration in either of the three month periods ended March 31, 2016 or 2015. For the three month period ended March 31, 2016, the Company recognized a net reduction of $2.3 million of ASC 805 contingent consideration related to certain of the Company’s western Canadian oil and gas businesses due to the combination of finalization of completed earn-out arrangements and adjustments to expected future period earn-out obligations. These adjustments were recorded within other income, net, in the condensed unaudited consolidated statements of operations. Foreign currency translation losses associated with ASC 805 contingent consideration, which are included within other comprehensive income, totaled $0.6 million for the three month period ended March 31, 2016, and for the three month period ended March 31, 2015, foreign currency translation gains totaled $4.6 million.
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, including off-market contracts, and debt.
As of both March 31, 2016 and December 31, 2015, the carrying amount of the Company’s 4.875% senior notes due 2023 (the “4.875% Senior Notes”) totaled $400 million. As of March 31, 2016 and December 31, 2015, 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 $354.0 million and $344.0 million, respectively.
Cost and Equity Method Investments. The aggregate carrying value of the Company’s cost and equity method investment assets totaled approximately $20.4 million and $16.7 million as of March 31, 2016 and December 31, 2015, respectively. The Company’s cost and equity method investments as of March 31, 2016 include: (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”), for which a subsidiary of MasTec has commenced construction of the related pipelines; (ii) the Company’s equity interests in two joint ventures, which are in final stages of liquidation, resulting from the acquisition of Pacer Construction Holdings Corporation and its affiliated operating companies (collectively, “Pacer”), as discussed below, and; (iii) a $15 million cost investment in Cross Country Pipeline Supply, Inc. (“CCP”), which is a related party, as discussed in Note 15 - Related Party Transactions.
For the three month period ended March 31, 2016, revenue recognized by the Company in connection with work performed for the Waha JVs totaled $10.3 million, for which the corresponding pipeline construction intercompany profit was eliminated. As of March 31, 2016, receivables from the Waha JVs totaled $8.3 million. The Company has issued letters of credit as collateral for its equity commitments to the Waha JVs, and to collateralize the Company’s share of the Waha JVs borrowings, totaling $155 million and $86 million as of March 31, 2016 and December 31, 2015, respectively, which amounts include $78 million as collateral for its equity commitments to the joint ventures (the “Equity LC Amount”). During April 2016, the Company increased the face amount of the letters of credit by approximately $10 million to $165 million. The Company expects the face amount of the letters of credit to be reduced in the second quarter of 2016 after the Waha JVs obtain certain required regulatory approvals, leaving only the Equity LC Amount outstanding. In addition, TPP and CTP are party to certain interest rate swaps, which are guaranteed by TPP and CTP’s equity investors, including MasTec, for their proportionate share of any potential losses associated with early termination of the swaps until TPP and CTP obtain certain required regulatory approvals. The Company is subject to its proportionate share of any unrealized fair market value gains or losses from fluctuations in interest rates associated with these swaps. For the three month period ended March 31, 2016, the Company’s proportionate share of unrecognized unrealized fair market value losses on interest rate swaps totaled approximately $13.0 million, or $8.0 million, net of tax, which proportionate share was included within other comprehensive loss. As of March 31, 2016 and December 31, 2015, the Company’s investment in the Waha JVs represented a net liability position within the Company’s consolidated balance sheets, totaling $18.0 million and $4.4 million, respectively, related primarily to unrealized fair market value losses on the Waha JVs interest rate swaps.
In connection with the Pacer acquisition, the Company acquired equity interests in two joint ventures. As of March 31, 2016, outstanding receivables from these entities for work performed by Pacer totaled $4.0 million. These entities are in the final stages of liquidation, and have entered into receivership arrangements to assist with the orderly wind-down of their operations. During the first quarter of 2016, the Company recorded $3.6 million of earnings related to increases in expected recoveries from these investments. Pacer has provided $39.9 million of receiver financing, of which $12.8 million has been repaid as of March 31, 2016. The remaining amount paid to the receiver, which Pacer believes will be repaid within the next twelve months, is recorded within other current assets in the consolidated balance sheet as of March 31, 2016. There are no financial guarantees associated with, or remaining amounts expected to be advanced to, these entities as of March 31, 2016. All jobs related to these entities were complete as of March 31, 2016 and the Company believes any remaining exposure to be insignificant. The obligations and guarantees associated with these entities represent variable interests, however, Pacer does not have the power to control the primary activities of these entities.
The fair values of the Company’s cost and equity method investments are not readily available. 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 method investments as of March 31, 2016 or December 31, 2015.