Business Acquisitions

6 Months Ended

Jun. 30, 2014

Business Acquisitions [Abstract]

Business Combination Disclosure

BUSINESS ACQUISITIONS

Alaska Energy and Resources Company

On July 1, 2014, the Company completed its acquisition of Alaska Energy and Resources Company (AERC), based in Juneau, Alaska. As of July 1, 2014 AERC is a wholly-owned subsidiary of Avista Corp.

The primary subsidiary of AERC is Alaska Electric Light and Power Company (AEL&P), a regulated utility which provides electric services to approximately 16,000 customers in the City and Borough of Juneau, Alaska. In 2013, AEL&P had 60 full-time employees. Its rate base, based on the 2013 test year was $109 million. The utility has a firm retail peak load of approximately 68 MW. AEL&P owns four hydroelectric generating facilities, having a total present capacity of 24.7 MW, and has a power purchase commitment for the output of the Snettisham hydroelectric project, having a present capacity of 78 MW, for a total hydroelectric capacity of 102.7 MW. AEL&P is not interconnected to any other electric system. The utility also has 93.9 MW of diesel generating capacity to provide back-up service to firm customers when necessary.

In addition to the regulated utility, AERC owns AJT Mining Properties, Inc. (AJT Mining), which is an inactive mining company holding certain properties.

The purpose of this acquisition is to expand and diversify Avista Corp.'s energy assets and deliver long-term value to its customers, communities and investors.

In connection with the closing, Avista Corp. issued 4.5 million new shares of common stock to the shareholders of AERC at a price of $32.46 per share, which reflects a purchase price of $170 million, plus acquired cash, less outstanding debt and other closing adjustments.

The $32.46 price per share of Avista Corp. common stock was determined based on the average closing stock price of Avista Corp. common stock for the 10 consecutive trading days immediately preceding, but not including, the trading day prior to July 1, 2014. This value was used solely for determining the number of shares to issue based on the adjusted contract closing price (see reconciliation below). For determining the fair value of the consideration transferred, the Company used the closing stock price of Avista Corp. common stock on July 1, 2014, which was $33.35 per share. The difference between the adjusted contract price and the fair value of the consideration transferred was recorded to goodwill.

The contract acquisition price and the fair value of consideration transferred for AERC as of July 1, 2014 were as follows (in thousands):

	July 1, 2014
Contract acquisition price (using $32.46 per share stock price)
Gross contract price	$	170,000
Acquired cash	19,704
Acquired debt (excluding capital lease obligation)	(38,832		)
Other closing adjustments	(104		)
Total adjusted contract price	$	150,768
Fair value of consideration transferred
Avista Corp. common stock (4,500,014 shares at $33.35 per share)	$	150,075
Cash	4,697
Fair value of total consideration transferred	$	154,772

The preliminary estimated fair value of assets acquired and liabilities assumed as of July 1, 2014 were as follows (in thousands):

	July 1, 2014
Assets acquired:
Current Assets:
Cash	$	19,704
Accounts receivable-less allowance of $77	3,851
Materials and supplies	2,017
Other current assets	999
Total current assets	26,571
Utility Property:
Utility plant in service	113,964
Utility property under long-term capital lease	71,007
Construction work in progress	3,440
Total utility property	188,411
Other Non-current Assets:
Non-utility property	6,660
Electric plant held for future use	3,711
Goodwill	50,629
Other deferred charges and non-current assets	5,368
Total other non-current assets	66,368
Total assets	$	281,350

	July 1, 2014
Liabilities Assumed:
Current Liabilities:
Accounts payable	$	700
Current portion of long-term debt and capital lease obligations	3,773
Other current liabilities	2,901
Total current liabilities	7,374
Long-term debt	37,227
Capital lease obligations	68,840
Other non-current liabilities and deferred credits	13,137
Total liabilities	$	126,578
Total identifiable net assets acquired	$	154,772

The majority of AERC’s operations are subject to the rate-setting authority of the Regulatory Commission of Alaska and are accounted for pursuant to U.S. GAAP, including the accounting guidance for regulated operations. The rate-setting and cost recovery provisions currently in place for AERC’s regulated operations provide revenues derived from costs, including a return on investment, of assets and liabilities included in rate base. Due to this regulation, the fair values of AERC’s assets and liabilities subject to these rate-setting provisions approximate their carrying values. There were not any identifiable intangible assets associated with this acquisition. The excess of the purchase consideration over the estimated fair values of the assets acquired and liabilities assumed was recognized as goodwill at the acquisition date.

The following table summarizes the supplemental pro forma revenue, net income and earnings per share information for the three and six months ended June 30 related to the acquisition of AERC as if the acquisition had occurred on January 1, 2013 (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2014		2013		2014		2013
Actual Avista Corp. revenues from continuing operations	$	312,580	$	307,488	$	759,158	$	747,987
Actual Avista Corp. revenues from discontinued operations	43,150		44,560		87,534		86,967
Supplemental pro forma AERC revenues (1)	11,782		10,651		24,546		23,303
Total supplemental pro forma revenues	367,512		362,699		871,238		858,257
Actual Avista Corp. net income from continuing operations attributable to Avista Corp. shareholders	31,254		24,212		78,730		65,432
Actual Avista Corp. net income from discontinued operations attributable to Avista Corp. shareholders	69,617		1,445		70,640		2,566
Acquisition costs removed from Avista Corp.'s net income (2)	219		—		672		—
Supplemental pro forma AERC net income (1) (5)	2,371		1,810		5,627		7,435
Total supplemental pro forma net income	$	103,461	$	27,467	$	155,669	$	75,433
Pro forma weighted-average common shares outstanding (thousands), basic (3)	64,684		64,437		64,653		64,426
Pro forma weighted-average common shares outstanding (thousands), diluted (3)	64,963		64,462		64,816		64,454
Pro forma earnings per common share attributable to Avista Corp. shareholders
Total pro forma earnings per common share attributable to Avista Corp. shareholders, basic	$	1.60	$	0.43	$	2.41	$	1.17
Total pro forma earnings per common share attributable to Avista Corp. shareholders, diluted (4)	$	1.59	$	0.43	$	2.40	$	1.17

(1) Since AERC was acquired on July 1, 2014, none of the supplemental revenues and net income have been included in the actual results of Avista Corp. for the three and six months ended June 30.

(2) The transaction costs have been expensed and presented in the Condensed Consolidated Statements of Income in other operating expenses within utility operating expenses. Since the start of the planned transaction through June 30, 2014, Avista Corp. has expensed $2.3 million (pre-tax) in total transaction fees associated with the transaction. All of the transaction expenses in 2013 were incurred during the second half of 2013. In addition to the amounts expensed, Avista Corp. has included $0.4 million in fees through June 30, 2014 associated with the issuance of common stock for the transaction as a reduction to common stock. These fees do not impact the supplemental pro forma information above.

(3) The 4.5 million shares issued on July 1, 2014 for the acquisition of AERC were assumed to be issued on January 1, 2013 for purposes of calculating the pro forma weighted average shares outstanding.

(4) The pro forma diluted earnings per share calculation ignores the impact of the subsidiary earnings adjustment for dilutive securities for discontinued operations as disclosed at Note 11. Earnings per Common Share Attributable to Avista Corp. Shareholders. Including this dilutive impact would not change the diluted pro forma earnings per share amount disclosed above.

(5) The net income for the six months ended June 30, 2013 at AERC includes a gain on the sale of property of approximately $2.3 million that does not occur every year.