BUSINESS ACQUISITIONS

Alaska Energy and Resources Company

On July 1, 2014, the Company completed its acquisition of 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 AEL&P, a regulated utility which provides electric services to approximately 16,000 customers in the City and Borough of Juneau (CBJ), Alaska. As of July 1, 2014, AEL&P had 60 full-time employees. Its rate base for 2013 was $109.0 million. AEL&P 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. AEL&P 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 the acquisition was 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 4,500,014 new shares of common stock to the shareholders of AERC based on a contractual price formula which was $32.46 per share. The exchange for AERC shares for Avista Corp. shares reflects a purchase price of $170.0 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). The fair value of the consideration transferred was based on the closing stock price of Avista Corp. common stock on July 1, 2014, which was $33.35 per share.

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 the calculated $32.46 per share common 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 - gross totals $3,928	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	50,631
Other deferred charges and non-current assets	5,368
Total other non-current assets	66,370
Total assets	$	281,352



Liabilities Assumed:
Current Liabilities:
Accounts payable	$	700
Current portion of long-term debt and capital lease obligations	3,773
Other current liabilities	2,902
Total current liabilities	7,375
Long-term debt	37,227
Capital lease obligations	68,840
Other non-current liabilities and deferred credits	13,138
Total liabilities	$	126,580

Total identifiable net assets acquired	$	154,772

The goodwill associated with this acquisition is not deductible for tax purposes.

The majority of AERC’s operations are subject to the rate-setting authority of the Regulatory Commission of Alaska (RCA) 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 are assumed to 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 goodwill reflects the value paid for the expected continued growth of a rate-regulated business located in a defined service area with a constructive regulatory environment, the attractiveness of stable, growing cash flows, as well as providing a platform for potential future growth outside of the rate-regulated electric utility in Alaska.

The following table summarizes the supplemental pro forma revenue, net income and earnings per share information for the three and nine months ended September 30 related to the acquisition of AERC as if the acquisition had occurred on January 1, 2013. The revenues and net income for AERC for the three months ended September 30, 2014 are actual results and the results for the first nine months of 2013 and the first six months of 2014 are pro forma results (dollars in thousands):



	Three months ended September 30,					Nine months ended September 30,
	2014			2013		2014		2013
Actual Avista Corp. revenues from continuing operations (excluding AERC)	$	292,334		$	289,477	$	1,051,492	$	1,037,464
Supplemental pro forma AERC revenues (1)	9,224			9,309		35,319		31,243
Total supplemental pro forma revenues	301,558			298,786		1,086,811		1,068,707

Actual AERC revenues included in Avista Corp. revenues (1)	9,224			—		9,224		—

Actual Avista Corp. net income from continuing operations attributable to Avista Corp. shareholders (excluding AERC)	9,982			8,450		88,712		73,882
Actual Avista Corp. net income from discontinued operations attributable to Avista Corp. shareholders	(55		)	2,963		70,585		5,529
Adjustment to Avista Corp.'s net income for acquisition costs (net of tax) (2)	401			66		838		(1,828		)
Supplemental pro forma AERC net income (1) (5)	524			199		6,151		7,634
Total supplemental pro forma net income	10,852			11,678		166,286		85,217

Actual AERC net income included in Avista Corp. net income (1)	$	524		$	—	$	524	$	—
Pro forma weighted-average common shares outstanding (thousands), basic (3)	63,934			64,494		64,413		64,433
Pro forma weighted-average common shares outstanding (thousands), diluted (3)	64,244			64,532		64,625		64,464
Pro forma earnings per common share attributable to Avista Corp. shareholders
Total pro forma earnings per common share attributable to Avista Corp. shareholders, basic	$	0.17		$	0.18	$	2.58	$	1.32
Total pro forma earnings per common share attributable to Avista Corp. shareholders, diluted (4)	$	0.17		$	0.18	$	2.57	$	1.32


(1)	AERC was acquired on July 1, 2014 and only the supplemental revenues and net income from the third quarter of 2014 were included in the actual results of Avista Corp. for the three and nine months ended September 30.

(2)

This adjustment is to treat all transaction costs incurred since the beginning of the transaction to January 1, 2013 as if the acquisition occurred on that date and to remove them from the periods in which they actually occurred. The transaction costs were 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 September 30, 2014, Avista Corp. has expensed $2.9 million (pre-tax) in total transaction fees associated with the transaction. In addition to the amounts expensed, Avista Corp. has included $0.4 million in fees through September 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 nine months ended September 30, 2013 at AERC includes a gain on the sale of property of approximately $2.3 million that does not occur every year.