Business Acquisitions

9 Months Ended

Sep. 30, 2021

Business Combination and Asset Acquisition [Abstract]

Note 8 - Business Acquisitions

On August 27, 2021, the Company, through its subsidiaries, led principally by Centuri, completed the acquisition of a privately held regional infrastructure services business, Drum Parent, Inc. (“Drum”), for $830.4 million in cash consideration, and also assumed a long-term financing lease obligation. Drum, and its primary subsidiary Riggs Distler & Company, Inc. (“Riggs Distler”), are now wholly owned subsidiaries of the Company.

The acquisition extended the utility services operations in the northeastern region of the U.S. and provides additional opportunities for expansion of the amount of work Centuri performs for electric and gas utilities. Funding for the acquisition was provided by proceeds from Centuri’s new term loan facility, as described in Note 5 – Debt.

The Company is currently performing a detailed valuation analysis of the assets and liabilities of the acquired company, which was substantially completed during the third quarter of 2021. Certain payments were estimated as of the acquisition date and will be adjusted when paid. The necessary analysis will consider acquired intangibles (including customer relationships, trademarks, and backlog). Based on preliminary results, a substantial portion of the purchase price will be allocated to goodwill and other finite-lived intangible assets.

Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values. Transaction costs associated with the acquisition were expensed as incurred. The Company’s allocation of the purchase price was based on an evaluation of the appropriate fair values and represented management’s best estimate based on available data (including market data, data regarding customers of the acquired businesses, terms of acquisition-related agreements, analysis of historical and projected results, and other types of data). The analysis included consideration of types of intangibles that were acquired, including those indicated above. The gross contractual receivable is $81 million, exclusive of $12 million representing specific customer accounts that were deemed uncollectible. Of the $12 million, any amounts subsequently collected prior to December 31, 2021 would pass to the sellers. Due to the estimations made, the final purchase accounting has not yet been completed. Further refinement is expected to occur, including potential changes to income taxes, fixed assets, and intangibles.

The preliminary estimated fair values of assets acquired and liabilities assumed as of August 27, 2021, are as follows (in millions of dollars):


Cash and cash equivalents	$	1.9
Accounts receivable	69.1
Contract assets	40.1
Income taxes receivable, net	0.7
Right of use assets under operating leases	1.5
Prepaid expenses	5.2
Property and equipment	118.1
Intangible assets	335.0
Goodwill	446.8
Total assets acquired	1,018.4

Trade and other payables	46.2
Finance lease obligations	27.5
Contract liabilities	12.7
Operating lease obligations	1.5
Other liabilities	5.3
Deferred tax liabilities	94.8
Total liabilities assumed	188.0
Net assets acquired	$	830.4

The amounts allocated to major classes of intangibles are as follows:


(Thousands of dollars)	Estimated fair Value		Estimated Weighted Average Useful Life in Years
Backlog	$	5,000	1
Trade names	60,000		15
Customer relationships	270,000		19
	$	335,000

The Company incurred and expensed acquisition costs of $14 million which were included in Utility infrastructure services expenses on the Company’s Condensed Consolidated Statement of Income. Acquisition-related costs of $13.2 million and $14 million were incurred during the three and nine months ended September 30, 2021, respectively.

The preliminary allocation of the purchase price of Drum was accounted for in accordance with applicable accounting guidance. Goodwill consists of the value associated with the assembled workforce, consolidation of operations, and the estimated economic value attributable to future opportunities related to the transaction. As the business of Drum was deemed a stock purchase for tax purposes, only pre-acquisition goodwill of $76 million that was historically tax-deductible by Riggs will continue to be deductible for tax purposes by the Company.

The following unaudited pro forma financial information reflects the consolidated results of operations of the Company assuming the acquisition had taken place on January 1, 2020. The most significant pro forma adjustments relate to: (i) reflecting approximately $30 million in transaction costs (incurred by Centuri and Riggs Distler) in the nine months ended September 30, 2020, and excluding such costs from the three and nine month periods ended September 30, 2021, and (ii) reflecting incremental interest expense related to the new loan facility of $7 million and $27 million in the three and nine month periods, respectively, ended September 30, 2021, and approximately $9 million and $24.5 million in the comparable periods in 2020. This information is preliminary in nature and subject to change based upon final purchase price adjustments. Amounts are in thousands of dollars, except per share amounts.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Total operating revenues	$	956,120	$	907,512	$	2,903,658	$	2,702,062
Net income (loss) attributable to Southwest Gas Holdings, Inc.	$	(8,918)	$	12,688	$	120,828	$	84,049
Basic earnings (loss) per share	$	(0.15)	$	0.23	$	2.06	$	1.51
Diluted earnings (loss) per share	$	(0.15)	$	0.23	$	2.06	$	1.51

Actual results from operations for Riggs Distler, excluding transaction costs and interest expense on acquisition related debt incurred by Centuri, included in the Consolidated Statements of Income since the date of acquisition are as follows (in thousands of dollars):


	Nine Months Ended September 30, 2021
Utility infrastructure services revenues	$	49,520
Net income attributable to Southwest Gas Holdings, Inc.	$	1,646