Note 4 - Fair Value of Financial Instruments

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of December 31, 2017 and 2016, financial instruments required to be measured at fair value on a recurring basis consisted primarily of acquisition-related contingent consideration, or “earn-out” liabilities, which represents the estimated fair value of future amounts payable for acquisitions of businesses and other interests. Acquisition-related contingent consideration liabilities are based on management estimates and entity-specific assumptions, which are Level 3 inputs, and are evaluated on an ongoing basis. As of December 31, 2017 and 2016, the estimated fair value of the Company’s earn-out liabilities totaled $117.2 million and $45.8 million, respectively, of which $22.6 million and $21.8 million, respectively, was included within other current liabilities. The fair value of the Company’s earn-out liabilities is estimated using income approaches such as discounted cash flows or option pricing models and incorporates significant inputs not observable in the market. Key assumptions include the discount rate and probability-weighted EBITDA projections. Significant changes in any of these assumptions could result in a significantly higher or lower potential earn-out liability. As of December 31, 2017, the range of potential undiscounted earn-out liabilities was estimated to be between $22.0 million and $204.8 million; however, there is no maximum payment amount.

Acquisition-related contingent consideration activity consists primarily of: additions from new business combinations and acquisitions of other interests; payments of acquisition-related contingent consideration; 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 for earn-out liabilities are recorded within other income or expense, as appropriate, and foreign currency translation activity is recorded within other comprehensive income or loss, as appropriate.

For the year ended December 31, 2017, additions from acquisitions of businesses and other interests totaled $102.5 million. Acquisition-related contingent consideration payments totaled approximately $18.8 million, $15.8 million and $40.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. For the years ended December 31, 2017 and 2016, foreign currency translation activity was de minimis, and foreign currency translation gains totaled $8.0 million for the year ended December 31, 2015. In 2017, the Company recognized a reduction in the estimated fair value of future earn-out obligations of $12.3 million for certain acquired businesses in the Communications and Electrical Transmission segments. In 2016, the Company recognized a net increase in the estimated fair value of future earn-out obligations of $2.7 million for certain acquired businesses in the Oil and Gas segment, partially offset by a reduction for certain other acquired businesses in the Oil and Gas and Communications segments upon finalization of the related earn-out arrangements. In 2015, the Company recognized a net reduction of $39.2 million for earn-out obligations in the Oil and Gas, Electrical Transmission and Communications segments, of which $20.1 million related to finalization of earn-out arrangements and adjustments to the expected future earn-out obligations of certain acquired businesses, and of which $19.1 million was offset with a corresponding receivable amount.

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 equity investments, life insurance assets, long-lived assets, goodwill, other intangible assets and debt.

As of both December 31, 2017 and 2016, the gross carrying amount of the Company’s 4.875% Senior Notes totaled $400 million. As of December 31, 2017 and 2016, the estimated fair value of the 4.875% Senior Notes, based on quoted market prices in active markets, a Level 1 input, totaled $410.0 million and $388.0 million, respectively.

Cost and Equity Investees. The Company’s cost and equity investees as of December 31, 2017 include: (i) the Company’s 33% equity interests in Trans-Pecos Pipeline, LLC (“TPP”) and Comanche Trail Pipeline, LLC (“CTP,” and together with TPP, the “Waha JVs”); (ii) a $15 million cost investment in Cross Country Infrastructure Services, Inc. (“CCI,” previously, Cross Country Pipeline Supply, Inc.); (iii) the Company’s interests in its proportionately consolidated non-controlled contractual joint ventures; (iv) the Company’s equity interests in Pensare Acquisition Corp. (“Pensare”); and (v) certain other cost and equity method investments. See below and Note 15 - Related Party Transactions.

The fair values of the Company’s cost and equity method investments are not readily observable. Equity investments are reviewed for impairment by assessing whether there has been a decline in the fair value of the investment below the carrying value, and whether that decline is considered to be other than temporary. In making this determination, factors such as the ability to recover the carrying amount of the investment and the inability of the investee to sustain future earnings capacity are considered. 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 or equity method investments as of December 31, 2017 or 2016. Cumulative undistributed earnings from the Company’s significant equity method investees totaled $16.9 million as of December 31, 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, which interconnect with pipelines in Mexico, commenced operations in 2017. For the years ended December 31, 2017 and 2016, the Company made equity and other contributions to these joint ventures of approximately $73 million and $27 million, respectively, and for the year ended December 31, 2015, the Company made no net contributions. 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 December 31, 2017 and 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 $21.3 million for the year ended December 31, 2017, and for the year ended December 31, 2016, was de minimis. For the year ended December 31, 2015, the Company’s proportionate share of losses totaled $4.4 million and related to the Waha JVs interest rate swaps. The Company’s net investment in the Waha JVs totaled approximately $121 million and $6 million as of December 31, 2017 and 2016, 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. Beginning in 2016, certain subsidiaries of MasTec provided pipeline construction services to the Waha JVs. For the years ended December 31, 2017 and 2016, revenue recognized in connection with work performed for the Waha JVs, including intercompany eliminations, totaled $256.1 million and $245.0 million, respectively. Related receivables, including retainage, net of BIEC, totaled $2.8 million and $71.2 million as of December 31, 2017 and 2016, respectively.

TPP and CTP are party to separate non-recourse financing facilities, which are each secured by pledges of the equity interests in the respective entities, as well as a first lien security interest over virtually all of TPP’s and CTP’s assets. The Waha JVs are also party to certain interest rate swaps, which, beginning in 2016, have been accounted for as qualifying cash flow hedges. The Company reflects its proportionate share of any unrealized fair market value gains or losses from fluctuations in interest rates associated with these swaps within other comprehensive income or loss, as appropriate. For the years ended December 31, 2017 and 2016, the Company’s proportionate share of unrecognized unrealized activity on these interest rate swaps were gains of approximately $0.8 million and $6.4 million, respectively, or $0.5 million and $4.0 million, respectively, net of tax. For the year ended December 31, 2015, the Company’s proportionate share of unrealized losses from these swaps totaling $4.4 million was included within equity in (earnings) losses of unconsolidated affiliates.

Other investments. During the third quarter of 2017, the Company paid $2.0 million for approximately 4% of the common stock of Pensare and warrants to purchase 2.0 million shares of Pensare common stock, which is a special purpose acquisition company focusing on transactions in the telecommunications industry. The shares of common stock purchased by MasTec are not transferable or salable until one year after Pensare successfully completes a business combination transaction, with limited exceptions, as specified in the agreement. The warrants purchased by MasTec are exercisable at a purchase price of $11.50 per share after Pensare successfully completes a business combination. Both the warrants and shares expire and/or are effectively forfeitable if Pensare does not successfully complete a business combination by February 1, 2019. The warrants, which are derivative financial instruments, and the shares, which are a cost method investment, are included within other long-term assets in the Company’s consolidated financial statements as of December 31, 2017. The fair value of the warrants, as determined based on Level 3 inputs, approximated their cost basis as of December 31, 2017. The fair value of the shares is not readily determinable due to the nature of the restrictions. José R. Mas, MasTec’s Chief Executive Officer, is a director of Pensare.

In connection with the 2014 acquisition of Pacer Construction Holdings Corporation and its affiliated operating companies (collectively, “Pacer”), the Company acquired equity interests in two joint ventures. As of March 2016, all related project work had been completed. 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. The Company received $22.5 million of proceeds from the receiver in 2017. The remaining investment, for which the Company has minimal involvement, is reviewed regularly by corporate management for potential changes in expected recovery estimates. For the years ended December 31, 2017 and 2016, the Company recorded $0.4 million of expense and $3.6 million of income, respectively, related to changes in expected recovery amounts. The net carrying value, which is included within other current assets, totaled $9.6 million and $31.4 million as of December 31, 2017 and 2016, respectively. In 2016 and 2015, Pacer performed construction services on behalf of these entities and recognized revenue totaling $0.6 million and $2.9 million, respectively, for the years ended December 31, 2016 and 2015.

Summarized Financial Information of Equity Method Investments

The following presents summarized information for the Company’s significant equity method investments (in millions):



	December 31,
	2017		2016
Current assets	$	136.8	$	89.5
Long-term assets	1,306.3		1,126.5
Total assets	$	1,443.1	$	1,216.0

Current liabilities	$	121.2	$	153.6
Long-term liabilities	976.5		986.0
Total liabilities	$	1,097.7	$	1,139.6



	For the Years Ended December 31,
	2017		2016			2015
Revenue	$	114.5	$	—		$	—
Net income (loss)	$	64.5	$	(0.2	)	$	(13.3	)