Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2019

Note 4 – Fair Value of Financial Instruments

Acquisition-Related Contingent Consideration and Other Liabilities

Acquisition-related contingent consideration and other liabilities is composed of Earn-outs. As of December 31, 2019 and 2018, the estimated fair value of the Company’s Earn-out liabilities totaled $173.2 million and $118.1 million, respectively, of which $54.1 million and $29.6 million, respectively, was included within other current liabilities. The fair values of the Company’s Earn-out liabilities are estimated using income approaches such as discounted cash flows or option pricing models, both of which incorporate significant inputs not observable in the market (Level 3 inputs), including management’s estimates and entity-specific assumptions, and are evaluated on an ongoing basis. Key assumptions include the discount rate and probability-weighted projections of earnings before interest, taxes, depreciation and amortization (“EBITDA”). Significant changes in any of these assumptions could result in significantly higher or lower potential Earn-out liabilities. As of December 31, 2019, the range of potential undiscounted Earn-out liabilities was estimated to be between $54 million and $274 million; however, there is no maximum payment amount.

Earn-out activity consists primarily of additions from new business combinations; changes in the expected fair value of future payment obligations; and payments. Measurement period adjustments for Earn-out liabilities, which are fair value adjustments relating to new information obtained about the facts and circumstances existing as of the date of acquisition for a period of up to one year, are recorded to goodwill. Other revisions to the expected fair values of the Company’s traditional earn-out liabilities are reflected as income or expense, as appropriate, and, for the mandatorily redeemable non-controlling interest, are recorded as interest expense, net. Earn-out payments, to the extent they relate to estimated liabilities as of the date of acquisition, are reflected within financing activities in the consolidated statements of cash flows. Payments in excess of acquisition date liabilities are classified within operating activities.

For the years ended December 31, 2019, 2018 and 2017, additions to acquisition-related contingent consideration and other liabilities from new business combinations totaled approximately $45.2 million, $1.5 million and $102.5 million, respectively. For the year ended December 31, 2019, fair value adjustments totaled a net increase of approximately $51.0 million, and primarily related to earn-outs for businesses in the Company’s Oil and Gas and Communications segments. Fair value adjustments, including those related to finalization of completed earn-out arrangements, totaled a net increase of approximately $17.5 million for the year ended December 31, 2018, primarily for businesses in the Company’s Oil and Gas and Communications segments, and for the year ended December 31, 2017, totaled a decrease of $12.3 million for businesses in the Company’s Communications and Electrical Transmission segments. Measurement period adjustments totaled a decrease of approximately $6.1 million for the year ended December 31, 2019 and related primarily to businesses in the Company’s Oil and Gas and Communications segments. Measurement period adjustments totaled a net increase of approximately $5.0 million for the year ended December 31, 2018 and related primarily to a business in the Company’s Oil and Gas segment. Earn-out payments totaled $35.0 million, $23.1 million and $18.8 million for the years ended December 31, 2019, 2018 and 2017, respectively.

Equity Investments

The Company’s equity investments as of December 31, 2019 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”), which are accounted for as equity method investments; (ii) a $15 million investment in Cross Country Infrastructure Services, Inc. (“CCI”); (iii) the Company’s interests in certain proportionately consolidated non-controlled contractual joint ventures; (iv) the Company’s equity interests in Pensare Acquisition Corp. (“Pensare”); and (v) certain other equity investments.

As of December 31, 2019 and 2018, the aggregate carrying value of the Company’s equity investments totaled approximately $196 million and $197 million, respectively, including approximately $18 million of equity investments measured on an adjusted cost basis as of both December 31, 2019 and 2018. There were no impairments of, or material changes in, the fair value of these investments during either of the years then ended.

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. For the years ended December 31, 2019, 2018 and 2017, the Company made equity contributions to these joint ventures of approximately $1 million, $28 million and $73 million, respectively.

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 $27.3 million, $23.9 million and $21.3 million for the years ended December 31, 2019, 2018 and 2017, respectively. Cumulative undistributed earnings from the Waha JVs, which represents cumulative equity in earnings for the Waha JVs less distributions of earnings, totaled $48.0 million as of December 31, 2019. Distributions of earnings from the Waha JVs, which are included within operating cash flows, totaled $9.1 million and $10.9 million for the years ended December 31, 2019 and 2018, respectively. The Company’s net investment in the Waha JVs, which differs from its proportionate share of the net assets of the Waha JVs, due primarily to capitalized investment costs, totaled approximately $174 million and $168 million as of December 31, 2019 and 2018, respectively. In the past, certain subsidiaries of MasTec have provided pipeline construction

services to the Waha JVs. Revenue recognized in connection with work performed for the Waha JVs, including intercompany eliminations, totaled $256.1 million for the year ended December 31, 2017.

The Waha JVs are party to separate non-recourse financing facilities, each of which are secured by pledges of the equity interests in the respective entities, as well as a first lien security interest over virtually all of their assets. The Waha JVs are also party to certain interest rate swaps, which are 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 year ended December 31, 2019, the Company’s proportionate share of unrecognized unrealized activity on these interest rate swaps totaled losses of approximately $19.9 million, or $15.0 million, net of tax, and for the years ended December 31, 2018 and 2017, totaled gains of approximately $7.7 million and $0.8 million, respectively, or $5.9 million and $0.5 million, net of tax, respectively.

Other Investments. During 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. José R. Mas, MasTec’s Chief Executive Officer, is a director of Pensare. 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 are exercisable at a purchase price of $11.50 per share after Pensare successfully completes a business combination transaction. Both the warrants and the shares contain an expiration and/or forfeiture clause without the successful completion of a business combination transaction, for which the completion date was extended in the fourth quarter of 2019 from December 1, 2019 to April 1, 2020. On July 25, 2019, Pensare entered into a business combination agreement with Stratos Management Systems, Inc. and its operating companies, which do business as Computex Technology Solutions (collectively, “Computex”), an information technology service provider, the completion of which is pending. During the year ended December 31, 2019, certain holders of Pensare’s redeemable common stock elected to redeem their shares, the effect of which was to increase the Company’s ownership interest in Pensare to approximately 21%. The Company does not have the ability to exert significant influence over the operating and financial policies of Pensare, therefore, the shares are measured on an adjusted cost basis.

The warrants, which are derivative financial instruments, and the shares are included within other long-term assets in the Company’s consolidated financial statements as of both December 31, 2019 and 2018. Due to the nature of the restrictions, the fair value of the shares is not readily determinable. The fair value of the warrants is determined based on observable and unobservable Level 3 inputs, including market volatility and the rights and obligations of the warrants. For both the years ended December 31, 2019 and 2018, there were no material changes in the fair value of the Company’s investment in Pensare.

The Company has equity interests in two telecommunications entities that provide certain services to MasTec. Expense recognized in connection with these arrangements totaled $7.0 million for the year ended December 31, 2019, and related amounts payable were de minimis as of December 31, 2019.

During 2018, the Company invested $10.0 million for an equity interest of approximately 40% in LifeShield, LLC (“LifeShield”), a home security company, which was measured under the fair value option. As of December 31, 2018, the fair value of this investment was determined to approximate its purchase price. In February 2019, the Company sold its equity interest in LifeShield for approximately $11 million, subject to customary escrow arrangements.

In connection with a 2014 acquisition, the Company acquired an investment that was subsequently managed by a receiver, and in 2019, was liquidated. The Company received $3.9 million, $5.4 million and $22.5 million of proceeds from the receiver during the years ended December 31, 2019, 2018, and 2017, respectively.

Summarized Financial Information of Equity Method Investments

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



	December 31,
	2019		2018
Current assets	$	144.5	$	137.3
Long-term assets	1,359.9		1,352.1
Total assets	$	1,504.4	$	1,489.4

Current liabilities	$	34.9	$	31.3
Long-term liabilities	978.6		966.1
Total liabilities	$	1,013.5	$	997.4



	For the Years Ended December 31,
	2019		2018		2017
Revenue	$	152.4	$	145.8	$	114.5
Net income	$	82.8	$	72.4	$	64.5

Senior Notes

As of both December 31, 2019 and 2018, the gross carrying amount of the Company’s 4.875% senior notes due March 15, 2023 (the “4.875% Senior Notes”), which are measured at fair value on a non-recurring basis, totaled $400 million. As of December 31, 2019 and 2018, the estimated fair value of the 4.875% Senior Notes, based on Level 1 inputs, totaled $404.5 million and $392.0 million, respectively.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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