Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2020

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, equity investments, deferred compensation plan assets and liabilities, accounts payable and other current liabilities, acquisition-related contingent consideration, mandatorily redeemable non-controlling interests and debt obligations.

Fair value is the price that would be received to sell an asset or the amount 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.

Acquisition-Related Contingent Consideration and Other Liabilities

Acquisition-related contingent consideration and other liabilities is composed of Earn-outs, which represent the estimated fair value of future amounts payable for businesses that are contingent upon the acquired business achieving certain levels of earnings in the future. As of March 31, 2020 and December 31, 2019, the estimated fair value of the Company’s Earn-out liabilities totaled $176.0 million and $173.2 million, respectively, of which $52.9 million and $54.1 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, which ranged from 12.0% to 24.7%, with a weighted average rate of 14.0% based on relative fair value, as of March 31, 2020, 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 March 31, 2020, the range of potential undiscounted Earn-out liabilities was estimated to be between $60 million and $256 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.

There were no additions to acquisition-related contingent consideration and other liabilities from new business combinations for the three month period ended March 31, 2020, and for the three month period ended March 31, 2019, additions from new business combinations totaled $15.2 million. Measurement period adjustments for the three month period ended March 31, 2020 totaled an increase of approximately $1.1 million and related to a business in the Company’s Communications segment. There were no measurement period adjustments for the three month period ended March 31, 2019. Fair value adjustments totaled a net increase of approximately $1.8 million for the three month period ended March 31, 2020, and related to 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 $7.2 million for the three month period ended March 31, 2019, and related to businesses in the Company’s Oil and Gas and Communications segments. There were no Earn-out payments in either of the three month periods ended March 31, 2020 or 2019.

Equity Investments

The Company’s equity investments as of March 31, 2020 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 American Virtual Cloud Technologies, Inc. (formerly Pensare Acquisition Corp. (“Pensare”)); and (v) certain other equity investments.

Investment Arrangements. From time to time, the Company may participate in selected investment or strategic arrangements, including equity interests in various business entities and participation in contractual joint ventures, some of which may involve the extension of loans or other types of financing arrangements. As of March 31, 2020, the Company determined that certain of its investment arrangements were variable interest entities (“VIEs”). Except for one individually insignificant VIE, the Company does not have the power to direct the primary activities that most significantly impact the economic performance of its VIEs nor is it the primary beneficiary. Accordingly, except for the previously mentioned VIE, the Company’s VIEs are not consolidated.

Equity investments, other than those accounted for as equity method investments or those that are proportionately consolidated, are measured at fair value if their fair values are readily determinable. Equity investments that do not have readily determinable fair values are measured at cost, adjusted for changes from observable market transactions, less impairment (“adjusted cost basis”). As of March 31, 2020 and December 31, 2019, the aggregate carrying value of the Company’s equity investments totaled approximately $195 million and $196 million, respectively, including approximately $18 million of equity investments measured on an adjusted cost basis as of both March 31, 2020 and December 31, 2019. There were no impairments of, or material changes in, the fair value of these investments during either of the three month periods ended March 31, 2020 or 2019.

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. 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 $7.6 million and $6.3 million for the three month periods ended March 31, 2020 and 2019, respectively. Cumulative undistributed earnings from the Waha JVs, which represents cumulative equity in earnings for the Waha JVs less distributions of earnings, totaled $53.1 million as of March 31, 2020. Distributions of earnings from the Waha JVs, which are included within operating cash flows, totaled $2.6 million and $3.9 million for the three month periods ended March 31, 2020 and 2019, 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 $156 million and $174 million as of March 31, 2020 and December 31, 2019, respectively.

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 three month periods ended March 31, 2020 and 2019, the Company’s proportionate share of unrecognized unrealized activity on these interest rate swaps totaled losses of approximately $30.3 million, or $23.0 million, net of tax, and $7.2 million, or $5.5 million, net of tax, respectively.

Other Investments. During 2017, the Company purchased approximately 4% of the common stock of Pensare, a special purpose acquisition company focusing on transactions in the telecommunications industry, and warrants to purchase an additional 2.0 million shares of Pensare common stock (the “initial warrants”), for $2.0 million. José R. Mas, MasTec’s Chief Executive Officer, was a director of Pensare through the end of March 2020. 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. The initial warrants are exercisable at a purchase price of $11.50 per share beginning thirty days after the first date Pensare successfully completes a business combination transaction. In April 2020, Pensare completed a business combination transaction with Stratos Management Systems, Inc. and its operating companies, which do business as Computex Technology Solutions (collectively, “Computex”), an information technology service provider, and in connection therewith, Pensare changed its name to American Virtual Cloud Technologies, Inc. (“AVCT”). In addition to other investors in a private placement conducted by AVCT contemporaneously with the completion of the business combination transaction in April 2020, MasTec invested $3.0 million in exchange for 3,000 units of AVCT securities, each of which consists of $1,000 in principal amount of AVCT Series A convertible debentures, convertible at $3.45 per share, subject to customary anti-dilution adjustments, and a warrant to purchase 100 shares of AVCT common stock at $0.01 per share (the “AVCT warrants”). The convertible debentures may be converted in whole or in part at any time from April 7, 2020 until full payment thereof, subject to mandatory conversion of the convertible debentures, pursuant to the terms thereof, and the AVCT warrants are exercisable at any time from April 7, 2020 through April 7, 2025. Due to the completion of the Computex business combination, the initial warrants will be exercisable beginning May 7, 2020, until the earlier to occur of April 7, 2025 and the liquidation of AVCT, subject to extension.

Prior to completion of the Computex acquisition, certain holders of AVCT’s redeemable common stock elected to redeem their shares, the effect of which, after giving effect to the additional investment described above, was to increase the Company’s beneficial ownership interest in AVCT common stock to approximately 21%. The Company does not have the ability to exert significant influence over the operating and financial policies of AVCT, therefore, the shares are measured on an adjusted cost basis. The initial warrants, which are derivative financial instruments, and the shares, for which the fair value was not readily determinable as of both March 31, 2020 and December 31, 2019 due to the nature of the restrictions, are included within other long-term assets in the Company’s consolidated financial statements. The fair value of the initial 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 three month periods ended March 31, 2020 and 2019, there were no material changes in the fair value of the Company’s investment in AVCT.

The Company has equity interests in three telecommunications entities that provide certain services to MasTec. Expense recognized in connection with these arrangements totaled $2.7 million for the three month period ended March 31, 2020, and related amounts payable were $2.1 million as of March 31, 2020.

Summarized Financial Information of Equity Method Investments

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



	For the Three Months Ended March 31,
	2020		2019
Revenue	$	39.4	$	37.3
Net income	$	23.0	$	19.2

Senior Notes

As of both March 31, 2020 and December 31, 2019, 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 March 31, 2020 and December 31, 2019, the estimated fair value of the 4.875% Senior Notes, based on Level 1 inputs, totaled $372.0 million and $404.5 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.

+ References + Details