Note 4. Acquisition of UIL

On December 16, 2015 (acquisition date), we completed our acquisition of UIL, a diversified energy company with its portfolio of regulated utility companies in Connecticut and Massachusetts that is expected to provide us with a greater flexibility to grow the combined regulated businesses through project development and create an enhanced platform to develop transmission and distribution projects in the Northeastern United States. In connection with the consummation of the acquisition, we issued 309,490,839 shares of common stock of AVANGRID, out of which 252,234,989 shares were issued to Iberdrola through a stock dividend, accounted for as a stock split, with no change to par value, at par value of $0.01 per share and 57,255,850 shares (including those held in trust as Treasury Stock) were issued to UIL shareowners in addition to payment of $595 million in cash. Following the completion of the acquisition, former UIL shareowners owned 18.5% of the outstanding shares of common stock of AVANGRID, and Iberdrola owned the remaining shares.

The acquisition was accounted for as a business combination. This method requires, among other things, that assets acquired and liabilities assumed in a business combination, with certain exceptions, be recognized at their fair values as of the acquisition date.

As UIL’s common stock was publicly traded in an active market until the acquisition date, we determined that UIL’s common stock is more reliably measurable than the common stock of AVANGRID to determine the fair value of the consideration transferred in the transaction.

The purchase consideration for UIL under the acquisition method is based on the stock price of UIL on the acquisition date multiplied by the number of shares issued by AVANGRID to the UIL shareowners after applying an equity exchange factor to the shares of vested restricted common stock of UIL (other than those UIL restricted shares that vest by their terms upon the consummation of the acquisition), performance shares and other shares awards under UIL 2008 Stock and Incentive Compensation Plan and the UIL Deferred Compensation Plan. The “equity exchange factor” is the sum of one plus a fraction, (i) the numerator of which is the cash consideration and (ii) the denominator of which is the average of the volume weighted averages of the trading prices of UIL common stock on each of the ten consecutive trading days ending on (and including) the trading day that immediately precedes the closing date of the acquisition minus $10.50. The determination of the purchase price is based on a UIL stock price of $50.10 per share, which represents the closing stock price on the acquisition date.

The fair value of AVANGRID common stock issued to the UIL shareowners in the business combination represents the purchase consideration in the business combination, which was computed as follows:

	(millions, except share and unit data)
Common shares⁽¹⁾		56,629,377
Price per share of UIL common stock as of the acquisition date	$	50.10
Subtotal value of common shares	$	2,837
Restricted stock units⁽²⁾		476,198
Other shares⁽³⁾		12,999
Equity exchange factor		1.2806
Total restricted and other shares⁽³⁾ after applying an equity exchange factor		626,473
Price per share used ⁽⁵⁾	$	39.60
Subtotal value of restricted and other shares	$	25
Total shares of AVANGRID common stock issued to UIL shareowners (including held in trust as Treasury Stock)		57,255,850
Performance shares⁽⁴⁾		211,904
Equity exchange factor		1.2806
Total performance shares after applying an equity exchange factor		271,368
Price per share used ⁽⁵⁾	$	39.60
Subtotal value of performance shares	$	11
Total consideration	$	2,873

(1)	Based on UIL’s common shares outstanding on December 16, 2015.

(2)	Based on UIL’s shares of vested restricted stock.

(3)	Based on UIL’s restricted shares that vested upon the change in control.

(4)	Based on UIL’s vested performance shares award.

(5)

Based on the closing share price of UIL common stock on December 16, 2015 less the cash component of $10.50, which is not applicable to restricted shares (other than those UIL restricted shares that vest by their terms upon the consummation of the acquisition), performance shares and other awards under the UIL 2008 Stock and Incentive Compensation Plan and the UIL Deferred Compensation Plan.

The following is a summary of the components of the consideration transferred to UIL’s shareowners:

	(millions, except share data)
Cash ($10.50 x number of UIL common shares outstanding at the acquisition date - 56,629,377)	$	595
Equity		2,278
Total consideration	$	2,873

UIL’s financial results have been included in our consolidated financial results for the periods subsequent to the December 16, 2015 acquisition date. The following table represents summarized unaudited pro forma financial information as if UIL had been included in our financial results for the nine months ended September 30, 2015. The unaudited pro forma results include: (i) elimination of accrued transaction costs representing non-recurring expenses directly related to the transaction, and (ii) the associated tax impact on this unaudited pro forma adjustment.

The unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies or the effect of the incremental costs incurred in integrating the two companies. Accordingly, these unaudited pro forma results are presented for informational purpose only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the acquisition had occurred at the beginning of the periods presented, nor are they indicative of future results of operations:

	Three Months Ended		Nine Months Ended
	September 30, 2015
	(millions)
Revenue	$	1,378	$	4,440
Net income	$	76	$	279

The fair value of assets acquired and liabilities assumed from our acquisition of UIL was based on a preliminary valuation and our estimates and assumptions are subject to change within the measurement period. For the majority of UIL’s assets and liabilities, primarily property, plant and equipment, fair value was determined to be the respective carrying amounts of the predecessor entity. UIL’s operations are conducted in a regulated environment where the regulatory authority allows an approved rate of return on the carrying amount of the regulated asset base. Management is in the process of finalizing our detailed analysis of various items, predominantly non-rate regulated activities, to reflect the fair value of certain assets and liabilities. The primary areas of the purchase price that are not yet finalized include, but are not limited to the allocation of the purchase price to the following: equity method investments; contracts; debt; contingent liabilities, including those related to certain environmental sites; income taxes; non-regulated property, plant and equipment and goodwill. We will finalize these amounts no later than December 16, 2016. Under U.S. GAAP, the measurement period shall not exceed one year from the acquisition date. Measurement period adjustments that we determine to be material will be recognized in future periods in our consolidated financial statements.

The following is a summary of the preliminary allocation of the purchase price as of the acquisition date:

	(millions)
Current assets, including cash of $48 million	$	500
Other investments		114
Property, plant and equipment, net		3,552
Regulatory assets		966
Other assets		52
Current liabilities		(493	)
Regulatory liabilities		(493	)
Non-current debt		(1,878	)
Other liabilities		(1,201	)
Total net assets acquired at fair value		1,119
Goodwill – consideration transferred in excess of fair value assigned		1,754
Total estimated consideration	$	2,873

Goodwill generated from the acquisition of UIL has been assigned to the reporting units under the Networks reportable segment and is primarily attributable to expected future growth of the combined regulated businesses and enhanced platform to develop transmission and distribution projects in the Northeastern United States. The goodwill generated from this acquisition is not deductible for tax purposes. As part of the preliminary allocation of the purchase price we have determined a fair value of contingent liabilities of approximately $44.0 million relating to certain environmental sites.