ALLETE
ALLETE INC (Form: 10-Q, Received: 05/07/2015 08:02:52)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2015

or
 
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ______________ to ______________

Commission File Number 1-3548

ALLETE, Inc.
(Exact name of registrant as specified in its charter)

Minnesota
 
41-0418150
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)

30 West Superior Street
Duluth, Minnesota 55802-2093
(Address of principal executive offices)
(Zip Code)

(218) 279-5000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x Yes    ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x Yes    ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer x
Accelerated Filer ¨
 
Non-Accelerated Filer ¨
Smaller Reporting Company  ¨
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   ¨ Yes    x No

Common Stock, without par value,
48,751,109 shares outstanding
as of March 31, 2015



Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2015 and December 31, 2014
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

ALLETE, Inc. First Quarter 2015 Form 10-Q
2


Definitions

The following abbreviations or acronyms are used in the text. References in this report to “we,” “us” and “our” are to ALLETE, Inc., and its subsidiaries, collectively.
Abbreviation or Acronym
Term
AFUDC
Allowance for Funds Used During Construction – the cost of both debt and equity funds used to finance utility plant additions during construction periods
ALLETE
ALLETE, Inc.
ALLETE Clean Energy
ALLETE Clean Energy, Inc. and its subsidiaries
ALLETE Properties
ALLETE Properties, LLC, and its subsidiaries
ATC
American Transmission Company LLC
Bison Wind Energy Center
Bison 1, 2, 3 & 4 Wind Facilities
BNI Coal
BNI Coal, Ltd.
Boswell
Boswell Energy Center
CO 2
Carbon Dioxide
Company
ALLETE, Inc., and its subsidiaries
CSAPR
Cross-State Air Pollution Rule
DC
Direct Current
EPA
Environmental Protection Agency
ESOP
Employee Stock Ownership Plan
FASB
Financial Accounting Standards Board
FERC
Federal Energy Regulatory Commission
Form 10-K
ALLETE Annual Report on Form 10-K
Form 10-Q
ALLETE Quarterly Report on Form 10-Q
GAAP
Accounting Principles Generally Accepted in the United States of America

GHG
Greenhouse Gases
GNTL
Great Northern Transmission Line
IBEW
International Brotherhood of Electrical Workers
Invest Direct
ALLETE’s Direct Stock Purchase and Dividend Reinvestment Plan
Item ___
Item ___ of this Form 10-Q
kV
Kilovolt(s)
kWh
Kilowatt-hour
Laskin
Laskin Energy Center
LIBOR
London Interbank Offered Rate
MACT
Maximum Achievable Control Technology
Magnetation
Magnetation, LLC
Manitoba Hydro
Manitoba Hydro-Electric Board
MATS
Mercury and Air Toxics Standards
Minnesota Power
An operating division of ALLETE, Inc.
Minnkota Power
Minnkota Power Cooperative, Inc.
MISO
Midcontinent Independent System Operator, Inc.
MPCA
Minnesota Pollution Control Agency
MPUC
Minnesota Public Utilities Commission
MW / MWh
Megawatt(s) / Megawatt-hour(s)
NAAQS
National Ambient Air Quality Standards
NDPSC

North Dakota Public Service Commission

NOL
Net Operating Loss

ALLETE, Inc. First Quarter 2015 Form 10-Q
3


Abbreviation or Acronym
Term
Non-residential
Retail commercial, non-retail commercial, office, industrial, warehouse, storage and institutional
NO 2
Nitrogen Dioxide
NO X
Nitrogen Oxides
Note ___
Note ___ to the Consolidated Financial Statements in this Form 10-Q
NPDES
National Pollutant Discharge Elimination System
Oliver Wind I
Oliver Wind I Energy Center
Oliver Wind II
Oliver Wind II Energy Center
Palm Coast Park
Palm Coast Park development project in Florida
Palm Coast Park District
Palm Coast Park Community Development District
PPA
Power Purchase Agreement
PPACA
Patient Protection and Affordable Care Act of 2010
PSCW
Public Service Commission of Wisconsin
Rainy River Energy
Rainy River Energy Corporation - Wisconsin
SEC
Securities and Exchange Commission
SIP
State Implementation Plan
SO 2
Sulfur Dioxide
Square Butte
Square Butte Electric Cooperative
SWL&P
Superior Water, Light and Power Company
Taconite Harbor
Taconite Harbor Energy Center
Thomson
Thomson Energy Center
Town Center
Town Center at Palm Coast development project in Florida
Town Center District
Town Center at Palm Coast Community Development District
U.S.
United States of America
U.S. Water Services
U.S. Water Services, Inc.
USS Corporation
United States Steel Corporation



ALLETE, Inc. First Quarter 2015 Form 10-Q
4


Forward-Looking Statements

Statements in this report that are not statements of historical facts are considered “forward-looking” and, accordingly, involve risks and uncertainties that could cause actual results to differ materially from those discussed. Although such forward-looking statements have been made in good faith and are based on reasonable assumptions, there can be no assurance that the expected results will be achieved. Any statements that express, or involve discussions as to, future expectations, risks, beliefs, plans, objectives, assumptions, events, uncertainties, financial performance, or growth strategies (often, but not always, through the use of words or phrases such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “projects,” “likely,” “will continue,” “could,” “may,” “potential,” “target,” “outlook” or words of similar meaning) are not statements of historical facts and may be forward-looking.

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we are providing this cautionary statement to identify important factors that could cause our actual results to differ materially from those indicated in forward-looking statements made by or on behalf of ALLETE in this Form 10-Q, in presentations, on our website, in response to questions or otherwise. These statements are qualified in their entirety by reference to, and are accompanied by, the following important factors, in addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements that could cause our actual results to differ materially from those indicated in the forward-looking statements:

our ability to successfully implement our strategic objectives;
global and domestic economic conditions affecting us or our customers;
wholesale power market conditions;
federal and state regulatory and legislative actions that impact regulated utility economics, including our allowed rates of return, capital structure, ability to secure financing, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities and utility infrastructure, recovery of purchased power, capital investments and other expenses, including present or prospective environmental matters;
changes in and compliance with laws and regulations;
effects of competition, including competition for retail and wholesale customers;
effects of restructuring initiatives in the electric industry;
changes in tax rates or policies or in rates of inflation;
the impacts on our Regulated Operations segment of climate change and future regulation to restrict the emissions of greenhouse gases;
the impacts of laws and regulations related to renewable and distributed generation;
the outcome of legal and administrative proceedings (whether civil or criminal) and settlements;
weather conditions, natural disasters and pandemic diseases;
our ability to access capital markets and bank financing;
changes in interest rates and the performance of the financial markets;
project delays or changes in project costs;
availability and management   of construction materials and skilled construction labor for capital projects;
changes in operating expenses and capital expenditures and our ability to recover these costs;
pricing, availability and transportation of fuel and other commodities and the ability to recover the costs of such commodities;
our ability to replace a mature workforce and retain qualified, skilled and experienced personnel;
effects of emerging technology;
war, acts of terrorism and cyber attacks;
our ability to manage expansion and integrate acquisitions;
our current and potential industrial and municipal customers’ ability to execute announced expansion plans;
population growth rates and demographic patterns; and
zoning and permitting of land held for resale, real estate development or changes in the real estate market.

Additional disclosures regarding factors that could cause our results or performance to differ from those anticipated by this report are discussed in Item 1A under the heading “Risk Factors” beginning on page 29 of ALLETE’s Annual Report on Form 10-K for the year ended December 31, 2014 and in “Item 1A. Risk Factors” in this Form 10-Q beginning on page 54. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which that statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for management to predict all of these factors, nor can we assess the impact of each of these factors on our businesses or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. Readers are urged to carefully review and consider the various disclosures made by us in this Form 10-Q and in our other reports filed with the SEC that attempt to identify the risks and uncertainties that may affect our business.

ALLETE, Inc. First Quarter 2015 Form 10-Q
5


PART I.  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
ALLETE
CONSOLIDATED BALANCE SHEET
Millions – Unaudited
 
March 31,
2015
 
December 31,
2014
 
 
 
 
Assets
 
 
 
Current Assets
 
 
 
Cash and Cash Equivalents

$72.1

 

$145.8

Accounts Receivable (Less Allowance of $1.1 and $1.1)
111.8

 
103.0

Inventories
102.7

 
80.5

Prepayments and Other
88.5

 
82.0

Deferred Income Taxes
14.9

 
7.5

Total Current Assets
390.0

 
418.8

Property, Plant and Equipment – Net
3,319.2

 
3,284.8

Regulatory Assets
358.0

 
357.3

Investment in ATC
122.3

 
121.1

Other Investments
114.7

 
114.4

Goodwill and Intangible Assets – Net
214.3

 
4.8

Other Non-Current Assets
61.6

 
59.6

Total Assets

$4,580.1

 

$4,360.8

Liabilities and Equity
 
 
 
Liabilities
 
 
 
Current Liabilities
 
 
 
Accounts Payable

$98.9

 

$134.1

Accrued Taxes
47.4

 
38.7

Accrued Interest
14.5

 
18.0

Long-Term Debt Due Within One Year
122.3

 
100.7

Notes Payable
0.3

 
3.7

Other
118.6

 
120.8

Total Current Liabilities
402.0

 
416.0

Long-Term Debt
1,253.8

 
1,272.8

Deferred Income Taxes
559.5

 
510.7

Regulatory Liabilities
101.2

 
94.2

Defined Benefit Pension and Other Postretirement Benefit Plans
190.4

 
190.9

Other Non-Current Liabilities
302.3

 
265.0

Total Liabilities
2,809.2

 
2,749.6

Commitments, Guarantees and Contingencies (Note 16)

 

Equity
 
 
 
ALLETE’s Equity
 
 
 
Common Stock Without Par Value, 80.0 Shares Authorized, 48.8 and 45.9 Shares Outstanding
1,249.7

 
1,107.6

Unearned ESOP Shares
(5.3
)
 
(7.2
)
Accumulated Other Comprehensive Loss
(20.6
)
 
(21.1
)
Retained Earnings
545.1

 
530.1

Total ALLETE Equity
1,768.9

 
1,609.4

Non-Controlling Interest in Subsidiaries
2.0

 
1.8

Total Equity
1,770.9

 
1,611.2

Total Liabilities and Equity

$4,580.1

 

$4,360.8

The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2015 Form 10-Q
6


ALLETE
CONSOLIDATED STATEMENT OF INCOME
Millions Except Per Share Amounts – Unaudited
 
Three Months Ended
 
March 31,
 
2015
2014
 
 
 
Operating Revenue

$320.0


$296.5

Operating Expenses
 
 
Fuel and Purchased Power
86.0

96.2

Transmission Services
14.9

10.8

Cost of Sales
31.2

23.5

Operating and Maintenance
79.7

74.3

Depreciation and Amortization
39.0

32.2

Taxes Other than Income Taxes
12.8

11.2

Total Operating Expenses
263.6

248.2

Operating Income
56.4

48.3

Other Income (Expense)
 
 
Interest Expense
(15.1
)
(12.8
)
Equity Earnings in ATC
3.9

5.1

Other
1.1

2.0

Total Other Expense
(10.1
)
(5.7
)
Income Before Non-Controlling Interest and Income Taxes
46.3

42.6

Income Tax Expense
6.2

8.8

Net Income
40.1

33.8

Less: Non-Controlling Interest in Subsidiaries
0.2

0.3

Net Income Attributable to ALLETE

$39.9


$33.5

Average Shares of Common Stock
 
 
Basic
46.9

41.4

Diluted
47.1

41.6

Basic Earnings Per Share of Common Stock

$0.85


$0.81

Diluted Earnings Per Share of Common Stock

$0.85


$0.80

Dividends Per Share of Common Stock

$0.505


$0.49

The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2015 Form 10-Q
7


ALLETE
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Millions – Unaudited


 
Three Months Ended
 
March 31,
Comprehensive Income
2015
 
2014
 
 
 
 
Net Income

$40.1

 

$33.8

Other Comprehensive Income
 
 
 
Unrealized Gain on Securities
 
 
 
Net of Income Taxes of $0.1 and $–
0.1

 

Unrealized Gain on Derivatives


 


Net of Income Taxes of $– and $0.1
0.1

 

Defined Benefit Pension and Other Postretirement Benefit Plans
 
 
 
 Net of Income Taxes of $0.2 and $0.2
0.3

 
0.3

Total Other Comprehensive Income
0.5

 
0.3

Total Comprehensive Income
40.6

 
34.1

Less: Non-Controlling Interest in Subsidiaries
0.2

 
0.3

Comprehensive Income Attributable to ALLETE

$40.4

 

$33.8

The accompanying notes are an integral part of these statements.


ALLETE, Inc. First Quarter 2015 Form 10-Q
8


ALLETE
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions – Unaudited
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
 
 
 
Operating Activities
 
 
 
Net Income

$40.1

 

$33.8

Allowance for Funds Used During Construction – Equity
(0.9
)
 
(1.8
)
Income from Equity Investments, Net of Dividends
(0.8
)
 
(0.8
)
Depreciation Expense
38.4

 
32.2

Amortization of Intangible Assets and Other Assets
0.8

 
0.3

Amortization of Power Purchase Agreements
(4.9
)
 
(2.3
)
Deferred Income Tax Expense
6.1

 
8.8

Share-Based Compensation Expense
0.6

 
0.8

ESOP Compensation Expense
2.4

 
2.2

Defined Benefit Pension and Postretirement Benefit Expense
3.8

 
3.2

Bad Debt Expense
0.2

 
0.2

Changes in Operating Assets and Liabilities
 
 
 
Accounts Receivable
7.8

 
2.9

Inventories
(8.8
)
 
(6.5
)
Prepayments and Other
(0.7
)
 
2.2

Accounts Payable
(14.0
)
 
0.1

Other Current Liabilities
(1.7
)
 
1.6

Changes in Regulatory and Other Non-Current Assets
(4.1
)
 
(4.0
)
Changes in Regulatory and Other Non-Current Liabilities
7.5

 
2.0

Cash from Operating Activities
71.8

 
74.9

Investing Activities
 
 
 
Proceeds from Sale of Available-for-sale Securities
0.2

 
0.6

Payments for Purchase of Available-for-sale Securities
(0.4
)
 
(0.7
)
Acquisitions of Subsidiaries – Net of Cash Acquired
(166.9
)
 
(23.1
)
Investment in ATC
(0.4
)
 
(1.2
)
Changes to Other Investments

 
30.0

Additions to Property, Plant and Equipment
(88.2
)
 
(216.2
)
Construction Costs for Development Project
(0.2
)
 

Cash in Escrow for Acquisition

 
6.0

Cash for Investing Activities
(255.9
)
 
(204.6
)
Financing Activities
 
 
 
Proceeds from Issuance of Common Stock
141.5

 
24.8

Proceeds from Issuance of Long-Term Debt

 
100.0

Changes in Restricted Cash
(0.8
)
 

Changes in Notes Payable
(3.4
)
 

Reductions of Long-Term Debt
(2.0
)
 
(19.8
)
Acquisition of Non-Controlling Interest

 
(6.0
)
Debt Issuance Costs

 
(0.9
)
Dividends on Common Stock
(24.9
)
 
(21.1
)
Cash from Financing Activities
110.4

 
77.0

Change in Cash and Cash Equivalents
(73.7
)
 
(52.7
)
Cash and Cash Equivalents at Beginning of Period
145.8

 
97.3

Cash and Cash Equivalents at End of Period

$72.1

 

$44.6

The accompanying notes are an integral part of these statements.

ALLETE, Inc. First Quarter 2015 Form 10-Q
9


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all of the information and notes required by GAAP for complete financial statements. Similarly, the December 31, 2014 , Consolidated Balance Sheet was derived from audited financial statements, but does not include all disclosures required by GAAP. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the three months ended March 31, 2015 , are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2015 . For further information, refer to the Consolidated Financial Statements and notes included in our 2014 Form 10-K.


NOTE 1.  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES

Reclassifications. As a result of recent acquisitions, certain financial statement captions have been added and as a result we have reclassified certain prior-period amounts in our Consolidated Balance Sheet, Consolidated Statement of Income, and Consolidated Statement of Cash Flows to conform to the presentation for the current period.

Consolidated Balance Sheet. In conformity with the current presentation of Goodwill and Intangible Assets - Net on the Consolidated Balance Sheet, we have reclassified our December 31, 2014 Consolidated Balance Sheet to include $1.6 million and $3.2 million of goodwill and intangible assets previously disclosed in Property, Plant and Equipment - Net and Other Non-Current Assets, respectively, under Goodwill and Intangible Assets - Net. There was no impact to Total Assets as a result of the reclassification.

Consolidated Statement of Income. In conformity with the current presentation of Cost of Sales on the Consolidated Statement of Income, we have reclassified $23.5 million from Operating and Maintenance Expenses to Cost of Sales for the three months ended March 31, 2014. Cost of Sales includes purchased gas at SWL&P, expenses incurred to deliver coal at BNI Coal, and the cost of land and other sales at ALLETE Properties. There was no impact to Operating Income, Net Income, or Net Income Attributable to ALLETE as a result of the reclassification. Cost of Sales also includes costs associated with the manufacture and delivery of inventories at U.S. Water Services, our integrated water management company which was acquired February 10, 2015. (See Note 4. Acquisitions.) In addition to the presentation of Cost of Sales, we have created new captions on the Consolidated Statement of Income to provide additional detail for Transmission Services and Taxes Other than Income Taxes. Transmission Services are MISO-related costs incurred for the transmission of electricity. In conformity with the current presentation, $10.8 million of Transmission Services and $11.2 million of Taxes Other than Income Taxes have been reclassified from Operating and Maintenance Expenses for the three months ended March 31, 2014.

Consolidated Statement of Cash Flows. In conformity with the current presentation of the Amortization of Power Purchase Agreements on the Consolidated Statement of Cash Flows, we have reclassified $2.3 million from Changes in Regulatory and Other Non-Current Liabilities to Amortization of Power Purchase Agreements for the three months ended March 31, 2014. There was no impact on cash from (for) Operating Activities, Investing Activities, and Financing Activities as a result of the reclassifications.


ALLETE, Inc. First Quarter 2015 Form 10-Q
10


NOTE 1.  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories. Inventories are stated at the lower of cost or market. Amounts removed from inventories in our Regulated Operations segment are recorded on an average cost basis. Amounts removed from inventories in our Investments and Other segment are recorded on an average cost, first-in, first-out or specific identification basis.
Inventories
March 31,
2015

 
December 31,
2014

Millions
 
 
 
Regulated Operations Inventories
 
 
 
Fuel

$38.0

 

$29.0

Materials and Supplies
34.6

 
35.2

Total Regulated Operations Inventories
72.6

 
64.2

Investments and Other Inventories (a)
 
 
 
Materials and Supplies
16.3

 
16.3

Raw Materials
3.1

 

Work in Progress
1.0

 

Finished Goods
10.2

 

Reserve for Obsolescence
(0.5
)
 

Total Investments and Other Inventories
30.1

 
16.3

Total Inventories

$102.7

 

$80.5

(a)
Raw materials, Work in Progress, Finished Goods, and Reserve for Obsolescence presented are attributable to U.S. Water Services which was acquired February 10, 2015.

Prepayments and Other Current Assets
March 31,
2015

 
December 31,
2014

Millions
 
 
 
Deferred Fuel Adjustment Clause

$15.6

 

$16.3

Construction Costs for Development Project (a)
48.4

 
48.2

Restricted Cash (b)
5.6

 
2.7

Other
18.9

 
14.8

Total Prepayments and Other Current Assets

$88.5

 

$82.0

(a)
Construction Costs for Development Project relate to ALLETE Clean Energy’s acquisition in November 2014 of a project to develop and construct a wind energy facility in 2015. (See Other Current Liabilities table and Note 4. Acquisitions.)
(b)
Restricted Cash related to ALLETE Clean Energy’s wind energy facilities operating expense and capital distribution reserve requirements and cash pledged as collateral by U.S. Water Services for stand-by letters of credit.

Goodwill and Intangible Assets.

Goodwill. Goodwill is the excess of the purchase price (consideration transferred) over the estimated fair value of net assets of acquired businesses. In accordance with U.S. GAAP, goodwill is not amortized. The Company assesses whether there has been an impairment of goodwill annually in the third quarter and whenever an event occurs or circumstances change that would indicate the carrying amount may be impaired. Impairment testing for goodwill is done at the reporting unit level. An impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The estimated fair value is generally determined using a discounted future cash flow analysis.

Intangible Assets. Intangible assets include customer relationships, patents, non-compete agreements and trademarks and trade names. Intangible assets with definite lives consist of customer relationships, patents and non-compete agreements, which are amortized on a straight-line or accelerated basis with estimated useful lives ranging from less than 1 year to 23 years. We review other definite-lived intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Indefinite-lived intangible assets consist of trademarks and trade names, which are tested for impairment annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Impairment is calculated as the excess of the asset’s carrying amount over its fair value. Fair value is generally determined using a discounted future cash flow analysis.

ALLETE, Inc. First Quarter 2015 Form 10-Q
11


NOTE 1.  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Other Non-Current Assets.

Restricted Cash. Included in Other Non-Current Assets on the Consolidated Balance Sheet was restricted cash of $5.3 million as of March 31, 2015 and December 31, 2014 , related to ALLETE Clean Energy’s wind energy facilities debt service and other requirements.

Other Current Liabilities
March 31,
2015

 
December 31,
2014

Millions
 
 
 
Customer Deposits

$20.0

 

$19.7

Power Purchase Agreements (a)
18.9

 
19.4

Construction Deposits Received for Development Project (b)
54.3

 
54.3

Other
25.4

 
27.4

Total Other Current Liabilities

$118.6

 

$120.8

(a)
Power Purchase Agreements were acquired in conjunction with the ALLETE Clean Energy wind energy facilities acquisitions in 2014. (See Note 4. Acquisitions.)
(b)
Construction Deposits Received for Development Project relate to ALLETE Clean Energy’s project to develop and construct a wind energy facility in 2015. (See Prepayments and Other Current Assets table and Note 4. Acquisitions.)

Other Non-Current Liabilities
March 31,
2015

 
December 31,
2014

Millions
 
 
 
Asset Retirement Obligation

$111.6

 

$109.2

Power Purchase Agreements (a)
106.3

 
110.7

Contingent Consideration (b)
35.8

 

Other
48.6

 
45.1

Total Other Non-Current Liabilities

$302.3

 

$265.0

(a)
Power Purchase Agreements were acquired in conjunction with the ALLETE Clean Energy wind energy facilities acquisitions in 2014. (See Note 4. Acquisitions.)
(b)
Contingent Consideration relates to the estimated fair value of the earnings-based payment to acquire the remaining ownership interest in U.S. Water Services. (See Note 4. Acquisitions and Note 7. Fair Value.)


Supplemental Statement of Cash Flows Information.
Three Months Ended March 31,
2015

 
2014

Millions
 
 
 
Cash Paid During the Period for Interest – Net of Amounts Capitalized

$15.3

 

$12.4

Cash Paid During the Period for Income Taxes

$0.1

 

$0.2

Noncash Investing and Financing Activities
 

 
 

Decrease in Accounts Payable for Capital Additions to Property, Plant and Equipment
$(32.2)
 
$(22.6)
Capitalized Asset Retirement Costs

$1.2

 

$0.6

AFUDC–Equity

$0.9

 

$1.8

ALLETE Common Stock Contributed to the Pension Plan

 

$19.5

Contingent Consideration

$35.7

 


Subsequent Events. The Company performed an evaluation of subsequent events for potential recognition and disclosure through the time of the financial statements issuance.


ALLETE, Inc. First Quarter 2015 Form 10-Q
12


NOTE 1.  OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

New Accounting Standards.

Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity . In April 2014, the FASB issued an accounting standard update modifying the criteria for determining which disposals should be presented as discontinued operations and modifying the related disclosure requirements. Additionally, the new guidance requires that a business which qualifies as held for sale upon acquisition should be reported as discontinued operations. The new guidance is effective beginning in the first quarter of 2015, and applies prospectively to new disposals and new classifications of disposal groups as held for sale. This guidance is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

Revenue from Contracts with Customers. In May 2014, the FASB issued amended revenue recognition guidance to clarify the principles for recognizing revenue from contracts with customers. The guidance requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. The guidance also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required regarding customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. This accounting guidance was to have been effective for the Company beginning in the first quarter of 2017 using one of two prescribed retrospective methods. Early adoption is not permitted for public companies. On April 1, 2015, the FASB voted to propose a deferral of the effective date of the standard by one year which would make the guidance effective for the Company beginning in the first quarter of 2018. The FASB is expected to issue updated accounting guidance regarding the deferred effective date, subject to a 30-day comment period, in the second quarter of 2015. The Company is evaluating the impact of the amended revenue recognition guidance on the Company’s consolidated financial statements.

Presentation of Debt Issuance Costs. In April 2015, the FASB issued revised guidance addressing the presentation requirements for debt issuance costs. Under the revised guidance, all costs incurred to issue debt are to be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The revised guidance is effective for interim and annual reporting periods beginning after December 15, 2015. We are evaluating the impact of the adoption of this standard.

ALLETE, Inc. First Quarter 2015 Form 10-Q
13


NOTE 2.  BUSINESS SEGMENTS

Regulated Operations includes our regulated utilities, Minnesota Power and SWL&P, as well as our investment in ATC, a Wisconsin-based regulated utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. Investments and Other is comprised primarily of our Energy Infrastructure and Related Services businesses: ALLETE Clean Energy, our business aimed at acquiring or developing capital projects that create energy solutions by way of wind, solar, biomass, hydro, natural gas, shale resources, clean coal technology and other emerging energy innovations, U.S. Water Services, our integrated water management company which was acquired on February 10, 2015 , and BNI Coal, our coal mining operations in North Dakota. Investments and Other also includes ALLETE Properties, our Florida real estate investment, and other business development and corporate expenditures, unallocated interest expense, a small amount of non-rate base generation, approximately 5,000 acres of land in Minnesota, and earnings on cash and investments. Future acquisitions or growth may impact segment reporting.

 
Consolidated

Regulated Operations

Investments and Other

Millions
 
 
 
Three Months Ended March 31, 2015
 
 
 
Operating Revenue

$320.0


$262.8


$57.2

Fuel and Purchased Power
86.0

86.0


Transmission Services
14.9

14.9


Cost of Sales
31.2

4.5

26.7

Operating and Maintenance
79.7

58.7

21.0

Depreciation and Amortization
39.0

32.1

6.9

Taxes Other than Income Taxes
12.8

11.6

1.2

Operating Income
56.4

55.0

1.4

Interest Expense
(15.1
)
(13.0
)
(2.1
)
Equity Earnings in ATC
3.9

3.9


Other Income
1.1

0.9

0.2

Income (Loss) Before Non-Controlling Interest and Income Taxes
46.3

46.8

(0.5
)
Income Tax Expense
6.2

5.4

0.8

Net Income (Loss)
40.1

41.4

(1.3
)
Less: Non-Controlling Interest in Subsidiaries
0.2


0.2

Net Income (Loss) Attributable to ALLETE

$39.9


$41.4

$(1.5)
 
 
 
 
As of March 31, 2015
 
 
 
Total Assets

$4,580.1


$3,748.4


$831.7

Property, Plant and Equipment – Net

$3,319.2


$3,025.3


$293.9

Accumulated Depreciation

$1,367.0


$1,286.9


$80.1

Capital Additions

$57.3


$54.9


$2.4


ALLETE, Inc. First Quarter 2015 Form 10-Q
14


NOTE 2.  BUSINESS SEGMENTS (Continued)

 
Consolidated

Regulated Operations

Investments and Other

Millions
 
 
 
Three Months Ended March 31, 2014
 
 
 
Operating Revenue

$296.5


$264.2


$32.3

Fuel and Purchased Power
96.2

96.2


Transmission Services
10.8

10.8


Cost of Sales
23.5

8.7

14.8

Operating and Maintenance
74.3

60.5

13.8

Depreciation and Amortization
32.2

28.8

3.4

Taxes Other than Income Taxes
11.2

10.2

1.0

Operating Income (Loss)
48.3

49.0

(0.7
)
Interest Expense
(12.8
)
(11.5
)
(1.3
)
Equity Earnings in ATC
5.1

5.1


Other Income
2.0

1.8

0.2

Income (Loss) Before Non-Controlling Interest and Income Taxes
42.6

44.4

(1.8
)
Income Tax Expense (Benefit)
8.8

10.5

(1.7
)
Net Income (Loss)
33.8

33.9

(0.1
)
Less: Non-Controlling Interest in Subsidiaries
0.3


0.3

Net Income (Loss) Attributable to ALLETE

$33.5


$33.9

$(0.4)
 
 
 
 
As of March 31, 2014
 

 

 

Total Assets

$3,749.2


$3,335.5


$413.7

Property, Plant and Equipment – Net

$2,905.1


$2,671.3


$233.8

Accumulated Depreciation

$1,266.7


$1,202.9


$63.8

Capital Additions

$195.2


$193.5


$1.7



NOTE 3.  INVESTMENTS

Investments. At March 31, 2015 , our investment portfolio included the real estate assets of ALLETE Properties, debt and equity securities consisting primarily of securities held in other postretirement plans to fund employee benefits, the cash equivalents within these plans, and other assets consisting primarily of land in Minnesota.

Other Investments
March 31,
2015

 
December 31,
2014

Millions
 
 
 
ALLETE Properties

$88.3

 

$88.2

Available-for-sale Securities (a)
19.3

 
18.9

Cash Equivalents
2.8

 
2.9

Other
4.3

 
4.4

Total Other Investments

$114.7

 

$114.4

(a)
As of March 31, 2015 , the aggregate amount of available-for-sale corporate debt securities maturing in one year or less was $0.4 million , in one year to less than three years was $1.7 million , in three years to less than five years was $3.0 million , and in five or more years was $5.9 million .


ALLETE, Inc. First Quarter 2015 Form 10-Q
15


NOTE 3.  INVESTMENTS (Continued)

ALLETE Properties
March 31,
2015

 
December 31,
2014

Millions
 
 
 
Land Inventory Beginning Balance

$83.8

 

$85.4

Cost of Sales

 
(2.2
)
Other
0.1

 
0.6

Land Inventory Ending Balance
83.9

 
83.8

Long-Term Finance Receivables (net of allowances of $0.6 and $0.6)
1.2

 
1.2

Other
3.2

 
3.2

Total Real Estate Assets

$88.3

 

$88.2


Land Inventory.  Land inventory is accounted for as held for use and is recorded at cost, unless the carrying value is determined not to be recoverable in accordance with the accounting standards for property, plant and equipment, in which case the land inventory is written down to fair value. Land values are reviewed for indicators of impairment on a quarterly basis and no impairments were recorded for the three months ended March 31, 2015 ( none for the year ended December 31, 2014 ).

Long-Term Finance Receivables. As of March 31, 2015 , long-term finance receivables were $1.2 million net of an allowance ( $1.2 million net of an allowance as of December 31, 2014 ). Long-term finance receivables are collateralized by property sold, accrue interest at market-based rates and are net of an allowance for doubtful accounts. As of March 31, 2015 , the allowance for doubtful accounts amounted to $0.6 million ( $0.6 million as of December 31, 2014 ).

Available-For-Sale Securities
 
 
 
 
Millions
 
Gross Unrealized
 
 
Cost
Gain
Loss
Fair Value
March 31, 2015
$19.8
$0.3
$0.8
$19.3
December 31, 2014
$19.6
$0.2
$0.9
$18.9


NOTE 4.  ACQUISITIONS

The acquisitions below are consistent with ALLETE’s stated strategy of investing in energy infrastructure and related services businesses to complement its core regulated utility, balance exposure to business cycles and changing demand, and provide potential long-term earnings growth. The pro forma impact of the following acquisitions was not significant either individually or in the aggregate, to the results of the Company for the three months ended March 31, 2015 and year ended December 31, 2014.

2015 Acquisition Activity.

U.S. Water Services. On February 10, 2015 , ALLETE acquired U.S. Water Services . Total consideration for the transaction was $202.3 million , which included payment of $166.6 million for an 87 percent ownership interest in the company, and an estimated fair value of earnings-based contingent consideration of $35.7 million to be paid in 2019. The contingent consideration is presented within Other Non-Current Liabilities on the Consolidated Balance Sheet. The Consolidated Statement of Income reflects 100  percent of the results of operations of U.S. Water Services since the acquisition date as the Company has effectively acquired 100  percent of U.S. Water Services. U.S. Water Services, an integrated industrial water management company headquartered in St. Michael, Minnesota, provides integrated water management for industry by combining chemical, equipment, engineering and service for customized solutions to reduce water and energy usage and improve efficiency. U.S. Water Services helps customers achieve efficient and sustainable use of their energy systems, is a leading provider to the biofuels industry, and has a growing presence in the power generation and midstream oil and gas industries.


ALLETE, Inc. First Quarter 2015 Form 10-Q
16


NOTE 4.  ACQUISITIONS (Continued)

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. The allocation of the purchase price is subject to judgment and the preliminary estimated fair value of the assets acquired and the liabilities assumed may be adjusted when the valuation analysis is completed in subsequent periods. Preliminary estimates subject to adjustment in subsequent periods relate primarily to customer relationships, developed technologies, trademarks and trade names, and current and deferred income taxes; subsequent adjustments could impact the amount of goodwill recorded. Fair value measurements were valued primarily using the discounted cash flow method.

Millions
 
Assets Acquired
 
Cash and Cash Equivalents

$0.9

Accounts Receivable
16.8

Inventories (a)
13.4

Other Current Assets (b)
5.3

Property, Plant and Equipment
10.6

Goodwill (c)
127.1

Intangible Assets (d)
83.0

Other Non-Current Assets
0.2

Total Assets Acquired

$257.3

Liabilities Assumed
 
Other Current Liabilities

$18.7

Other Non-Current Liabilities
36.3

Total Liabilities Assumed

$55.0

Net Identifiable Assets Acquired

$202.3

(a)
Included in Inventories was $2.7 million of fair value adjustments relating to work in process and finished goods inventories which will be recognized as Cost of Sales within one year from the acquisition date.
(b)
Included in Other Current Assets was $1.6 million relating to the fair value of sales backlog. Sales backlog will be recognized as Cost of Sales within one year from the acquisition date. Also included in Other Current Assets was restricted cash of $2.1 million relating to cash pledged as collateral for stand-by letters of credit.
(c)
Goodwill is largely attributable to strategic opportunities for growing U.S. Water Services and the benefits of the existing workforce. Goodwill of $3.2 million is deductible for tax purposes.
(d)
Intangible Assets include customer relationships, patents, non-compete agreements and trademarks and trade names. (See Note 5. Goodwill and Intangible Assets.)

ALLETE incurred a $3.0 million after-tax expense of acquisition-related costs during the three months ended March 31, 2015, which were expensed when incurred and were recorded in Operating and Maintenance on the Consolidated Statement of Income.

Chanarambie/Viking. On April 15, 2015 , ALLETE Clean Energy acquired wind energy facilities in southern Minnesota ( Chanarambie/Viking ) from EDF Energy Holdings Limited for $47.5 million , subject to a working capital adjustment. We are currently in the process of accounting for the acquisition, therefore, certain disclosures, including the allocation of the purchase price, will be included in the Form 10-Q for the period ending June 30, 2015.

The facilities have 97.5 MW of generating capability and are located near our Lake Benton facility. The wind facilities began commercial operations in 2003 and have PPAs in place for the entire output, which expire in 2018 ( 12 MW) and 2023 ( 85.5  MW).

Armenia Mountain. On April 30, 2015, ALLETE Clean Energy signed purchase agreements to acquire 100 percent of a wind energy facility located near Troy, Pennsylvania ( Armenia Mountain ) from The AES Corporation (AES) and a non-controlling interest from a minority shareholder for $108.0 million , plus the assumption of existing debt. The agreement with AES is subject to a purchase price adjustment. The acquisition is expected to close in July 2015.

The facility has 100.5 MW of generating capability, began commercial operations in 2009, and has PPAs in place for the entire output, which expire in 2025.


ALLETE, Inc. First Quarter 2015 Form 10-Q
17


NOTE 4.  ACQUISITIONS (Continued)

2014 Acquisition Activity.

ACE Wind Acquisition. In January 2014 , ALLETE Clean Energy acquired wind energy facilities located in Lake Benton, Minnesota ( Lake Benton ), Storm Lake, Iowa ( Storm Lake II ) and Condon, Oregon ( Condon ) from AES for $ 26.9  million.

Lake Benton, Storm Lake II and Condon have 104 MW, 77 MW and 50 MW of generating capability, respectively. Lake Benton and Storm Lake II began commercial operations in 1998, while Condon began operations in 2002. All three wind energy facilities have PPAs in place for their entire output, which expire in various years between 2019 and 2032.

ALLETE Clean Energy acquired a controlling interest in the limited liability company (LLC) which owns Lake Benton and Storm Lake II, and a controlling interest in the LLC that owns Condon. The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. Fair value measurements were valued primarily using the discounted cash flow method.

Millions
 
Assets Acquired
 
Cash and Cash Equivalents

$3.8

Other Current Assets
14.3

Property, Plant and Equipment
156.9

Other Non-Current Assets (a)
7.5

Total Assets Acquired

$182.5

Liabilities Assumed
 
Other Current Liabilities (b)

$15.2

Long-Term Debt Due Within One Year
2.2

Long-Term Debt
21.1

Power Purchase Agreements
99.4

Other Non-Current Liabilities
10.6

Non-Controlling Interest (c)
7.1

Total Liabilities and Non-Controlling Interest Assumed

$155.6

Net Identifiable Assets Acquired

$26.9

(a)
Included in Other Non-Current Assets was $0.3 million for the option to purchase Armenia Mountain in 2015, and goodwill of $2.9 million; for tax purposes, the purchase price allocation resulted in no allocation to goodwill.
(b)
Other Current Liabilities included $12.4 million related to the current liabilities portion of the Power Purchase Agreements.
(c)
The purchase price accounting valued the non-controlling interest relating to Lake Benton, Storm Lake II and Condon at fair value using the discounted cash flow method. The non-controlling interest related to Lake Benton and Storm Lake II was subsequently purchased by ALLETE Clean Energy.

In February 2014, ALLETE Clean Energy purchased the non-controlling interest related to Lake Benton and Storm Lake II for $6.0 million. This was accounted for as an equity transaction, and no gain or loss was recognized in net income or other comprehensive income.

Montana-Dakota Utilities. In November 2014 , ALLETE Clean Energy acquired a business for $27.0 million to develop a wind facility near Hettinger, North Dakota. ALLETE Clean Energy is developing and constructing a 107 MW wind facility consisting of 43 turbines, which will be sold to Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc., for approximately $200 million . Construction is expected to be completed in December 2015, and the sale is subject to regulatory approval from the NDPSC. If regulatory approval is not obtained for the sale of the wind facility, ALLETE Clean Energy would then own and operate the facility and sell the entire output to Montana-Dakota Utilities Co. under a long-term PPA.

ALLETE, Inc. First Quarter 2015 Form 10-Q
18


NOTE 4. ACQUISITIONS (Continued)

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition. Fair value measurements were valued primarily using the replacement cost method and determined that the assets acquired amounted to cash of approximately $3.6 million and construction in process of approximately $23.4 million . There were no liabilities assumed and no recognition of goodwill.

As of March 31, 2015, $48.4 million of construction costs incurred (including the construction costs acquired) and $54.3 million of construction deposits received from Montana-Dakota Utilities Co. have been classified on the Consolidated Balance Sheet as Prepayments and Other Current Assets and Other Current Liabilities, respectively ( $48.2 million and $54.3 million of costs incurred and deposits received as of December 31, 2014, respectively). ALLETE expects revenue to be recognized under the percentage of completion method of accounting as progress toward completion of the project is achieved. Until it becomes probable that regulatory approval from the NDPSC for the sale of the facility will be obtained, we expect no impact from the project on the Consolidated Statement of Income. Costs to construct the wind facility and deposits received from Montana-Dakota Utilities Co. are reported as Construction Costs for Development Project in investing activities and Construction Deposits Received for Development Project in financing activities on the Consolidated Statement of Cash Flows, respectively. On April 15, 2015, we received an additional construction deposit from Montana-Dakota Utilities Co. of approximately $50 million .

Storm Lake I Acquisition. In December 2014 , ALLETE Clean Energy acquired a wind energy facility in Storm Lake, Iowa ( Storm Lake I ) from NRG Energy, Inc. for $15.1 million .

Storm Lake I has 108 MW of generating capability and is located adjacent to Storm Lake II. The wind generation facility began commercial operations in 1999 and has a PPA in place for its entire output which expires in 2018.

The acquisition was accounted for as a business combination and the purchase price was allocated based on the estimated fair values of the assets acquired and the liabilities assumed at the date of acquisition. In connection with finalizing purchase price accounting, the Company recorded minor adjustments during the first quarter of 2015 to certain assets and liabilities, which are reflected in the table below. The result of these adjustments had no impact on the results of operations for the period ended March 31, 2015. Fair value measurements were valued primarily using the discounted cash flow method.

Millions

Assets Acquired

Cash and Cash Equivalents

$0.4

Other Current Assets
4.7

Property, Plant and Equipment
47.3

Other Non-Current Assets (a)
11.4

Total Assets Acquired

$63.8

Liabilities Assumed

Other Current Liabilities (b)

$8.2

Power Purchase Agreements
23.5

Other Non-Current Liabilities
17.0

Total Liabilities Assumed
$48.7
Net Identifiable Assets Acquired

$15.1

(a)
Included in Other Non-Current Assets was $0.4 million of restricted cash and an immaterial amount of goodwill; for tax purposes, the purchase price allocation resulted in no allocation to goodwill.
(b)
Other Current Liabilities included $7.5 million related to the current liabilities portion of the Power Purchase Agreements.




ALLETE, Inc. First Quarter 2015 Form 10-Q
19


NOTE 5.  GOODWILL AND INTANGIBLE ASSETS

The following table summarizes changes to goodwill by business segment for the three months ended March 31, 2015 :
 
 
 
Investments and Other

Millions
 
Balance as of December 31, 2014

$2.9

Acquired Goodwill
127.1

Balance as of March 31, 2015

$130.0


Balances of intangible assets, net, excluding goodwill as of March 31, 2015 are as follows:
 
December 31,
2014

 
Additions as a Result of Acquisitions
 
 Amortization
 
March 31,
2015

Millions
 
 
 
 
 
 
 
Intangible Assets
 
 
 
 
 
 
 
Definite-Lived Intangible Assets
 
 
 
 
 
 
 
Customer Relationships

 

$60.1

 

$0.5

 

$59.6

Developed Technology and Other (a)

$1.9

 
6.3

 
0.1

 
8.1

Total Definite-Lived Intangible Assets
1.9

 
66.4

 
0.6

 
67.7

Indefinite-Lived Intangible Assets
 
 
 
 
 
 
 
Trademarks and Trade Names

 
16.6

 
n/a

 
16.6

Total Intangible Assets

$1.9

 

$83.0

 

$0.6

 

$84.3

(a)
Developed Technology and Other includes patents, non-compete agreements, and land easements.

Customer relationships have a useful life of approximately 23 years and developed technology and other have useful lives ranging from less than 1 year to approximately 14 years (weighted average of approximately 9 years). The weighted average useful life of all definite-lived intangible assets as of March 31, 2015 is approximately 21 years.

Amortization expense of intangible assets for the three months ended March 31, 2015 was $0.6 million .

The estimated amortization expense for definite-lived intangible assets for the remainder of 2015 is $3.6 million . Estimated annual amortization expense for definite-lived intangible assets is $4.3 million in 2016 , $4.2 million in 2017 , $4.1 million in 2018 , $4.0 million in 2019 , $3.9 million in 2020 and $43.6 million thereafter.


ALLETE, Inc. First Quarter 2015 Form 10-Q
20


NOTE 6. DERIVATIVES

We have one variable-to-fixed interest rate swap (Swap), designated as a cash flow hedge, in order to manage the interest rate risk associated with a $75.0 million term loan which represents approximately 5 percent of the Company’s outstanding long-term debt, including long-term debt due within one year, as of March 31, 2015 . (See Note 10. Short-Term and Long-Term Debt.) The Swap has an effective date of August 26, 2014, and matures on August 25, 2015. The Swap involves the receipt of the one-month LIBOR in exchange for fixed interest payments over the life of the agreement at 0.75 percent without an exchange of the underlying notional amount. Cash flows from the Swap are expected to be highly effective. If it is determined that the Swap ceases to be effective, we will prospectively discontinue hedge accounting. When applicable, we use the shortcut method to assess hedge effectiveness. If the shortcut method is not applicable, we assess effectiveness using the “change-in-variable-cash-flows” method. Our assessment of hedge effectiveness resulted in no ineffectiveness recorded for the three months ended March 31, 2015. As of March 31, 2015 , the fair value of the Swap was a $0.2 million liability ( $0.3 million liability as of December 31, 2014 ) which was included in Other Current Liabilities on the Consolidated Balance Sheet. Changes in the fair value of the Swap were recorded in Accumulated Other Comprehensive Loss on the Consolidated Balance Sheet. Cash flows from the Swap are presented in the same category as the hedged item on the Consolidated Statement of Cash Flows. Amounts recorded in Other Comprehensive Income related to the Swap will be recorded in earnings when the hedged transaction occurs or when it is probable it will not occur. Gains or losses on the interest rate hedging transaction are reflected as a component of Interest Expense on the Consolidated Statement of Income.


NOTE 7. FAIR VALUE

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). We utilize market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and endeavor to utilize the best available information. Accordingly, we utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs, which are used to measure fair value, are prioritized through the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement). Descriptions of the three levels of the fair value hierarchy are discussed in Note 10. Fair Value to the Consolidated Financial Statements in our 2014 Form 10-K.

The following tables set forth by level within the fair value hierarchy our assets and liabilities that were accounted for at fair value on a recurring basis as of March 31, 2015 , and December 31, 2014 . Each asset and liability is classified based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of these assets and liabilities and their placement within the fair value hierarchy levels. The estimated fair value of Cash and Cash Equivalents listed on the Consolidated Balance Sheet approximates the carrying amount and therefore is excluded from the recurring fair value measures in the tables below.

ALLETE, Inc. First Quarter 2015 Form 10-Q
21


NOTE 7. FAIR VALUE (Continued)

 
Fair Value as of March 31, 2015
Recurring Fair Value Measures
Level 1

 
Level 2

 
Level 3

 
Total

Millions
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments (a)
 
 
 
 
 
 
 
Available-for-sale – Equity Securities

$8.3

 

 

 

$8.3

Available-for-sale – Corporate Debt Securities

 

$11.0

 

 
11.0

Cash Equivalents
2.8

 

 

 
2.8

Total Fair Value of Assets

$11.1

 

$11.0

 

 

$22.1

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred Compensation (b)

 

$15.4

 

 

$15.4

Derivatives – Interest Rate Swap (c)

 
0.2

 

 
0.2

U.S. Water Services Contingent Consideration (b)

 

 

$35.8

 
35.8

Total Fair Value of Liabilities

 

$15.6

 

$35.8

 

$51.4

Total Net Fair Value of Assets (Liabilities)

$11.1

 
$(4.6)
 
$(35.8)
 
$(29.3)
(a)
Included in Other Investments on the Consolidated Balance Sheet.
(b)
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
(c)
Included in Current Liabilities - Other on the Consolidated Balance Sheet.

 
Fair Value as of December 31, 2014
Recurring Fair Value Measures
Level 1

 
Level 2

 
Level 3

 
Total

Millions
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investments (a)
 
 
 
 
 
 
 
Available-for-sale – Equity Securities

$8.1

 

 

 

$8.1

Available-for-sale – Corporate Debt Securities

 

$10.8

 

 
10.8

Cash Equivalents
2.9

 

 

 
2.9

Total Fair Value of Assets

$11.0

 

$10.8

 

 

$21.8

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred Compensation (b)

 

$16.2

 

 

$16.2

Derivatives – Interest Rate Swap (c)

 
0.3

 

 
0.3

Total Fair Value of Liabilities

 

$16.5

 

 

$16.5

Total Net Fair Value of Assets (Liabilities)

$11.0

 
$(5.7)
 

 

$5.3

(a)
Included in Other Investments on the Consolidated Balance Sheet.
(b)
Included in Other Non-Current Liabilities on the Consolidated Balance Sheet.
(c)
Included in Current Liabilities - Other on the Consolidated Balance Sheet.

The following table provides a reconciliation of the beginning and ending balances of the U.S. Water Services Contingent Consideration measured at fair value using Level 3 measurements as of March 31, 2015 . The acquisition contingent consideration is recorded at the acquisition date at the estimated fair value of the acquisition contingent consideration. The acquisition date fair value is measured based on the consideration expected to be transferred, discounted to present value. The discount rate is determined at the time of measurement in accordance with accepted valuation methods. The fair value of the acquisition contingent consideration is remeasured to arrive at estimated fair value each reporting period with the change in fair value recognized as income or expense in our Consolidated Statement of Income. Changes to the fair value of the acquisition contingent consideration can result from changes in discount rates, or in the timing and amount of earnings estimates. Using different valuation assumptions including earnings projections or discount rates result in different fair value measurements and expense (or income) in the current or future periods. The acquisition contingent consideration was measured at $35.8 million as of March 31, 2015 .



ALLETE, Inc. First Quarter 2015 Form 10-Q
22


NOTE 7. FAIR VALUE (Continued)

Recurring Fair Value Measures
 
Activity in Level 3
 
Millions
 
Balance at December 31, 2014

Recognition of U.S. Water Services Contingent Consideration

$35.7

Accretion Expense
0.1

Balance at March 31, 2015

$35.8


The Level 3 activity above is the result of the February 10, 2015 acquisition of U.S. Water Services; there was no activity in Level 3 during the year ended December 31, 2014 .

For the three months ended March 31, 2015 and the year ended December 31, 2014 , there were no transfers in or out of Levels 1, 2 or 3.

Fair Value of Financial Instruments. With the exception of the item listed in the table below, the estimated fair value of all financial instruments approximates the carrying amount. The fair value for the item listed below was based on quoted market prices for the same or similar instruments (Level 2).

Financial Instruments
Carrying Amount
 
Fair Value
Millions
 
 
 
Long-Term Debt, Including Current Portion
 
 
 
March 31, 2015
$1,376.1
 
$1,525.4
December 31, 2014
$1,373.5
 
$1,484.5

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis. Non-financial assets such as equity method investments, goodwill, intangible assets, and property, plant and equipment are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized.

Equity Method Investment. Our wholly-owned subsidiary, Rainy River Energy, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. (See Note 9. Investment in ATC.) The aggregate carrying amount of the investment was $122.3 million as of March 31, 2015 and $121.1 million as of December 31, 2014 . The Company assesses our investment in ATC for impairment whenever events or changes in circumstances indicate that the carrying amount of our investment in ATC may not be recoverable. For the three months ended March 31, 2015 and the year ended December 31, 2014 , there were no indicators of impairment.

Goodwill. The Company assesses the impairment of goodwill annually in the third quarter and whenever an event occurs or circumstances change that would indicate that the carrying amount may be impaired. Substantially all of the Company’s goodwill is a result of the U.S. Water Services acquisition on February 10, 2015. The aggregate carrying amount of goodwill was $130.0 million and $2.9 million as of March 31, 2015 and December 31, 2014 , respectively.

Impairment testing for goodwill is done at the reporting unit level. An impairment loss is recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The test for impairment requires us to make several estimates about fair value, most of which are based on projected future cash flows. The Company calculated the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. As of March 31, 2015 , there have been no events or changes in circumstance which would indicate impairment of our goodwill.


ALLETE, Inc. First Quarter 2015 Form 10-Q
23


NOTE 7. FAIR VALUE (Continued)

Intangible Assets. The Company assesses indefinite-lived intangible assets for impairment annually in the third quarter. The Company also assesses indefinite-lived and definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. Substantially all of the Company’s intangible assets are a result of the U.S. Water Services acquisition on February 10, 2015. The aggregate carrying amount of intangible assets was $84.3 million as of March 31, 2015 ( $1.9 million as of December 31, 2014 ). When events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable, the Company calculates the excess of an intangible asset's carrying value over its undiscounted future cash flows. If the carrying value is not recoverable, an impairment loss is recorded based on the amount by which the carrying value exceeds the fair value. The inputs used in the fair value analysis fall within Level 3 of the fair value hierarchy due to the use of significant unobservable inputs to determine fair value. As of March 31, 2015 , there have been no events or changes in circumstance which would indicate impairment of our intangible assets.

Property, Plant and Equipment. The Company assesses the impairment of property, plant, and equipment whenever events or changes in circumstances indicate that the carrying amount of property, plant, and equipment assets may not be recoverable. For the three months ended March 31, 2015 and the year ended December 31, 2014 , there were no indicators of impairment.

We believe that long-standing ratemaking practices approved by applicable state and federal regulatory commissions allows for the recovery of the remaining book value of retired plant assets. We will retire Taconite Harbor Unit 3 and convert Laskin to natural gas in the second quarter of 2015, which actions were included in our 2013 Integrated Resource Plan approved by the MPUC in a November 2013 order. Accordingly, we do not expect to record any impairment charge as a result of the retirement of Taconite Harbor Unit 3 or conversion of Laskin.


NOTE 8.  REGULATORY MATTERS

Electric Rates. Entities within our Regulated Operations segment file for periodic rate revisions with the MPUC, the FERC or the PSCW.

2010 Minnesota Rate Case. Minnesota Power’s current retail rates are based on a 2011 MPUC retail rate order, effective June 1, 2011, that allows for a 10.38 percent return on common equity and a 54.29 percent equity ratio.

FERC-Approved Wholesale Rates. Minnesota Power has 16 non-affiliated municipal customers in Minnesota. SWL&P is a Wisconsin utility and a customer of Minnesota Power. On April 21, 2015, Minnesota Power amended its formula-based wholesale electric sales contract with the Nashwauk Public Utilities Commission, extending the term through June 30, 2028. The electric service agreements with the remaining 15 Minnesota municipal customers and SWL&P are effective through June 30, 2019. The rates included in these contracts are set each July 1 based on a cost-based formula methodology, using estimated costs and a rate of return that is equal to our authorized rate of return for Minnesota retail customers (currently 10.38 percent ). The formula-based rate methodology also provides for a yearly true-up calculation for actual costs incurred. The contract terms include a termination clause requiring a three -year notice to terminate. Under the Nashwauk Public Utilities Commission agreement, no termination notice may be given prior to June 30, 2025. Under the agreements with the remaining 15 municipal customers and SWL&P, no termination notices may be given prior to June 30, 2016.

2012 Wisconsin Rate Case.   SWL&P’s current retail rates are based on a 2012 PSCW retail rate order, effective January 1, 2013, that allows for a 10.9 percent return on common equity.

Transmission Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for certain transmission investments and expenditures. In an order dated February 23, 2015, the MPUC approved Minnesota Power’s updated billing factor which allows Minnesota Power to charge retail customers on a current basis for the costs of constructing certain transmission facilities plus a return on the capital invested.

ALLETE, Inc. First Quarter 2015 Form 10-Q
24


NOTE 8. REGULATORY MATTERS (Continued)

Renewable Cost Recovery Rider. Minnesota Power has an approved cost recovery rider in place for investments and expenditures related to the 497 MW Bison Wind Energy Center in North Dakota. Customer billing rates for our Bison 1, 2, & 3 wind facilities were approved by the MPUC in a December 2013 order. In April 2014 and November 2014, we filed renewable resources factor filings which include updated costs associated with the Bison Wind Energy Center. Upon approval of the filings, we will be authorized to include updated billing rates on customer bills.

On February 13, 2015, Minnesota Power supplemented its November 2014 renewable resources factor filing to include costs associated with the restoration and repair of Thomson. In an order dated March 5, 2015, the MPUC approved our petition seeking cost recovery for investments and expenditures related to the restoration and repair of Thomson through a renewable resources rider.

Integrated Resource Plan. In a November 2013 order, the MPUC approved Minnesota Power’s 2013 Integrated Resource Plan which details our “EnergyForward” strategic plan and includes an analysis of a variety of existing and future energy resource alternatives and a projection of customer cost impact by class. Significant elements of the “EnergyForward” plan include major wind investments in North Dakota which were completed in the fourth quarter of 2014, installation of emissions control technology at Boswell Unit 4, planning for the proposed GNTL, conversion of Laskin from coal to natural gas in the second quarter of 2015 and retiring Taconite Harbor Unit 3 in the second quarter of 2015. We are required to submit our 2015 Integrated Resource Plan with the MPUC no later than September 1, 2015.

Boswell Mercury Emissions Reduction Plan. Minnesota Power is implementing a mercury emissions reduction project for Boswell Unit 4 in order to comply with the Minnesota Mercury Emissions Reduction Act and the Federal MATS rule. In August 2012, Minnesota Power filed its mercury emissions reduction plan for Boswell Unit 4 with the MPUC and the MPCA. Costs to implement the Boswell Unit 4 mercury emissions reduction plan are included in the estimated capital expenditures required for compliance with the MATS rule and are estimated to be approximately $260 million of which $162 million was spent through March 31, 2015 . In a November 2013 order, the MPUC approved the Boswell Unit 4 mercury emissions reduction plan and cost recovery, establishing an environmental improvement rider. Customer billing rates for the environmental improvement rider were approved by the MPUC in a July 2014 order. In November 2014, we filed an updated environmental improvement factor filing which included updated costs associated with Boswell Unit 4. Upon approval of this filing, we will be authorized to include updated billing rates on customer bills.

Great Northern Transmission Line (GNTL) . Minnesota Power and Manitoba Hydro have proposed construction of the GNTL, an approximately 220 -mile 500  kV transmission line, between Manitoba and Minnesota’s Iron Range. The GNTL is subject to various federal and state regulatory approvals. In October 2013, a Certificate of Need application was filed with the MPUC with respect to the GNTL. In a January 2014 order, the MPUC determined the Certificate of Need application was complete and referred the docket to an administrative law judge for a contested case proceeding. On March 16, 2015, the administrative law judge recommended the MPUC grant a Certificate of Need for construction of the GNTL. In April 2014, Minnesota Power filed a route permit application with the MPUC and a request for a presidential permit to cross the U.S.-Canadian border with the U.S. Department of Energy. In a July 2014 order, the MPUC determined the route permit application to be complete. Manitoba Hydro must also obtain regulatory and governmental approvals related to a new transmission line in Canada. Construction of Manitoba Hydro’s hydroelectric generation facility commenced in the third quarter of 2014. Upon receipt of all applicable permits and approvals, construction of the GNTL is anticipated to begin in 2016 and to be completed in 2020.

Regulatory Assets and Liabilities. Our regulated utility operations are subject to accounting guidance for the effect of certain types of regulation. Regulatory assets represent incurred costs that have been deferred as they are probable for recovery in customer rates. Regulatory liabilities represent obligations to make refunds to customers and amounts collected in rates for which the related costs have not yet been incurred. The Company assesses quarterly whether regulatory assets and liabilities meet the criteria for probability of future recovery or deferral. No regulatory assets or liabilities are currently earning a return. The recovery, refund or credit to rates for these regulatory assets and liabilities will occur over the periods either specified by the applicable regulatory authority or over the corresponding period related to the asset or liability.






ALLETE, Inc. First Quarter 2015 Form 10-Q
25


NOTE 8. REGULATORY MATTERS (Continued)

Regulatory Assets and Liabilities
March 31,
2015

 
December 31,
2014

Millions
 
 
 
Current Regulatory Assets (a)
 
 
 
Deferred Fuel

$15.6

 

$16.3

Total Current Regulatory Assets
15.6

 
16.3

Non-Current Regulatory Assets
 
 
 
Defined Benefit Pension and Other Postretirement Benefit Plans (b)
220.0

 
223.9

Cost Recovery Riders (c)
63.4

 
59.7

Income Taxes
46.8

 
46.6

Asset Retirement Obligations
18.6

 
17.8

PPACA Income Tax Deferral
5.0

 
5.0

Other
4.2

 
4.3

Total Non-Current Regulatory Assets
358.0

 
357.3

Total Regulatory Assets

$373.6

 

$373.6

 
 
 
 
Non-Current Regulatory Liabilities
 
 
 
Wholesale and Retail Contra AFUDC

$46.9

 

$42.9

Plant Removal Obligations
22.0

 
22.8

Income Taxes
13.5

 
13.4

Defined Benefit Pension and Other Postretirement Benefit Plans (b)
2.9

 
3.5

Other
15.9

 
11.6

Total Non-Current Regulatory Liabilities

$101.2

 

$94.2

(a)
Current regulatory assets are included in Prepayments and Other on the Consolidated Balance Sheet.
(b)
Defined benefit pension and other postretirement items included in our Regulated Operations, which are otherwise required to be recognized in accumulated other comprehensive income, are recognized as regulatory assets or regulatory liabilities on the Consolidated Balance Sheet. (See Note 15. Pension and Other Postretirement Benefit Plans.)
(c)
The cost recovery rider regulatory assets are due to capital expenditures related to our Bison Wind Energy Center, investment in CapX2020 projects, and the Boswell Unit 4 environmental upgrade and are recognized in accordance with the accounting standards for alternative revenue programs.


NOTE 9.  INVESTMENT IN ATC

Our wholly-owned subsidiary, Rainy River Energy, owns approximately 8 percent of ATC, a Wisconsin-based utility that owns and maintains electric transmission assets in parts of Wisconsin, Michigan, Minnesota and Illinois. ATC rates are based on a FERC-approved 12.2 percent return on common equity dedicated to utility plant. We account for our investment in ATC under the equity method of accounting. As of March 31, 2015 , our equity investment in ATC was $122.3 million ( $121.1 million at December 31, 2014 ). In the first three months of 2015 , we invested $0.4 million in ATC, and on April 29, 2015 , we invested an additional $0.4 million . We expect to make additional investments of approximately $1.1 million in 2015 .

ALLETE’s Investment in ATC
 
Millions
 
Equity Investment Balance as of December 31, 2014

$121.1

Cash Investments
0.4

Equity in ATC Earnings
3.9

Distributed ATC Earnings
(3.1
)
Equity Investment Balance as of March 31, 2015

$122.3



ALLETE, Inc. First Quarter 2015 Form 10-Q
26


NOTE 9.  INVESTMENT IN ATC (Continued)

ATC’s summarized financial data for the three months ended March 31, 2015 and 2014 , is as follows:
 
Three Months Ended
ATC Summarized Financial Data
March 31,
Income Statement Data
2015
 
2014
Millions
 
 
 
Revenue

$152.4

 

$163.3

Operating Expense
80.0

 
78.6

Other Expense
24.4

 
21.6

Net Income

$48.0

 

$63.1

ALLETE’s Equity in Net Income

$3.9

 

$5.1


Our equity earnings in ATC for the three months ended March 31, 2015 were $3.9 million and reflected a $1.4 million reduction related to complaints filed with the FERC by several customer groups located within the MISO service area; of the $1.4 million reduction, $1.1 million was attributable to ATC’s change in estimate of a refund liability recorded in a previous period. The groups requested, among other things, a reduction in the base return on equity used by MISO transmission owners, including ATC, to 9.15 percent . ATC's current authorized return on equity is 12.2 percent . On February 12, 2015, an additional complaint was filed with the FERC seeking an order to further reduce the base return on equity to 8.67 percent . We own approximately 8 percent of ATC and estimate that for every 50  basis point reduction in ATC’s allowed return on equity our equity earnings in ATC would be impacted annually by approximately $0.5 million on an after-tax basis ( $0.9 million pre-tax).


NOTE 10.  SHORT-TERM AND LONG-TERM DEBT

Short-Term Debt. As of March 31, 2015 , total short-term debt outstanding was $122.6 million ( $104.4 million as of December 31, 2014 ) and consisted of long-term debt due within one year and notes payable.

Long-Term Debt. No long-term debt was issued in the first three months of 2015. As of March 31, 2015 , total long-term debt outstanding was $1,253.8 million ( $1,272.8 million as of December 31, 2014 ).

Financial Covenants. Our long-term debt arrangements contain customary covenants. In addition, our lines of credit and letters of credit supporting certain long-term debt arrangements contain financial covenants. Our compliance with financial covenants is not dependent on debt ratings. The most restrictive financial covenant requires ALLETE to maintain a ratio of indebtedness to total capitalization (as the amounts are calculated in accordance with the respective long-term debt arrangements) of less than or equal to 0.65 to 1.00 , measured quarterly. As of March 31, 2015 , our ratio was approximately 0.44 to 1.00 . Failure to meet this covenant would give rise to an event of default if not cured after notice from the lender, in which event ALLETE may need to pursue alternative sources of funding. Some of ALLETE’s debt arrangements contain “cross-default” provisions that would result in an event of default if there is a failure under other financing arrangements to meet payment terms or to observe other covenants that would result in an acceleration of payments due. As of March 31, 2015 , ALLETE was in compliance with its financial covenants.


NOTE 11.  OTHER INCOME (EXPENSE)
 
 
Three Months Ended
 
 
March 31,
 
 
2015

 
2014

Millions
 
 
 
 
AFUDC–Equity
 

$0.9

 

$1.8

Investments and Other Income
 
0.2

 
0.2

Total Other Income
 

$1.1

 

$2.0




ALLETE, Inc. First Quarter 2015 Form 10-Q
27


NOTE 12.  INCOME TAX EXPENSE
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
Millions
 
 
 
 
Current Tax Expense
 
 
 
 
Federal (a)
 

 

State (a)
 

$0.1

 

Total Current Tax Expense
 

$0.1

 

Deferred Tax Expense
 
 
 
 
Federal
 

$4.8

 

$6.3

State
 
1.5

 
2.7

Investment Tax Credit Amortization
 
(0.2
)
 
(0.2
)
Total Deferred Tax Expense
 
6.1

 
8.8

Total Income Tax Expense
 

$6.2

 

$8.8

(a)
For the three months ended March 31, 2015 and 2014 , the federal and state current tax expense was minimal due to the utilization of NOL carryforwards from prior periods. The NOL carryforwards resulted from the bonus depreciation provisions of the Tax Increase Prevention Act of 2014 and the American Taxpayer Relief Act of 2012.

For the three months ended March 31, 2015 , the effective tax rate was 13.4 percent ( 20.7 percent for the three months ended March 31, 2014 ). The decrease in the effective tax rate from March 31, 2014, was primarily due to increased production tax credits. The effective rate deviated from the statutory rate of approximately 41 percent primarily due to deductions for AFUDC–Equity, investment tax credits, production tax credits and depletion.

Uncertain Tax Positions. As of March 31, 2015 , we had gross unrecognized tax benefits of $2.0 million ( $2.0 million as of December 31, 2014 ). Of the total gross unrecognized tax benefits, $0.3 million represents the amount of unrecognized tax benefits included in the Consolidated Balance Sheet that, if recognized, would favorably impact the effective income tax rate. The unrecognized tax benefit amounts have been presented as reductions to the tax benefits associated with NOL and tax credit carryforwards on the Consolidated Balance Sheet.

ALLETE and its subsidiaries file a consolidated federal income tax return as well as combined and separate state income tax returns in various jurisdictions. ALLETE is no longer subject to federal examination for years before 2011, or state examination for years before 2010.





ALLETE, Inc. First Quarter 2015 Form 10-Q
28


NOTE 13. RECLASSIFICATIONS OUT OF ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2015 and 2014 , were as follows:
 
Unrealized Gains and Losses on Available-for-sale Securities
Defined Benefit Pension, Other Postretirement Items
Gains and Losses on Cash Flow Hedge
Total
Millions
 
 
 
 
Three Months Ended March 31, 2015
 
 
 
 
Beginning Accumulated Other Comprehensive Loss
$(0.3)
$(20.7)
$(0.1)
$(21.1)
Other Comprehensive Income Before Reclassifications
0.2


0.1

0.3

Amounts Reclassified From Accumulated Other Comprehensive Loss
(0.1
)
0.3


0.2

Net Other Comprehensive Income
0.1

0.3

0.1

0.5

Ending Accumulated Other Comprehensive Loss
$(0.2)
$(20.4)

$(20.6)
 
 
 
 
 
Three Months Ended March 31, 2014
 
 
 
 
Beginning Accumulated Other Comprehensive Loss
$(0.1)
$(16.7)
$(0.3)
$(17.1)
Other Comprehensive Income Before Reclassifications




Amounts Reclassified From Accumulated Other Comprehensive Loss

0.3


0.3

Net Other Comprehensive Income

0.3


0.3

Ending Accumulated Other Comprehensive Loss
$(0.1)
$(16.4)
$(0.3)
$(16.8)

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2015 and 2014 , were as follows:
 
Three Months Ended
Amount Reclassified from Accumulated Other Comprehensive Loss
March 31,
March 31,
2015
2014
Millions
 
 
Unrealized Gains on Available-for-sale Securities


Income Taxes (a)

$0.1


Total, Net of Income Taxes

$0.1


 
 
 
Amortization of Defined Benefit Pension and Other Postretirement Items
 
 
Prior Service Costs (b)
$0.1
$0.1
Actuarial Gains and Losses (b)
(0.6
)
(0.6
)
Total
(0.5
)
(0.5
)
Income Taxes (a)
0.2

0.2

Total, Net of Income Taxes
$(0.3)
$(0.3)
Total Reclassifications
$(0.2)
$(0.3)
(a)
Included in Income Tax Expense on our Consolidated Statement of Income.
(b)
Defined benefit pension and other postretirement items excluded from our Regulated Operations are recognized in accumulated other comprehensive loss and are subsequently reclassified out of accumulated other comprehensive loss as components of net periodic pension and other postretirement benefit expense. (See Note 15. Pension and Other Postretirement Benefit Plans.)





ALLETE, Inc. First Quarter 2015 Form 10-Q
29


NOTE 14.  EARNINGS PER SHARE AND COMMON STOCK

We compute basic earnings per share using the weighted average number of shares of common stock outstanding during each period. The difference between basic and diluted earnings per share, if any, arises from outstanding stock options, non-vested restricted stock units, performance share awards granted under our Executive Long-Term Incentive Compensation Plan and common shares under the forward sale agreement (described below). For the three months ended March 31, 2015 and 2014 , no options to purchase shares of common stock were excluded from the computation of diluted earnings per share.

 
 
 
2015
 
 
 
 
 
2014
 
 
Reconciliation of Basic and Diluted
 
 
Dilutive
 
 
 
 
 
Dilutive
 
 
Earnings Per Share
Basic
 
Securities
 
Diluted
 
Basic
 
Securities
 
Diluted
Millions Except Per Share Amounts
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31,
 

 
 
 
 

 
 
 
 
 
 
Net Income Attributable to ALLETE

$39.9

 
 
 

$39.9

 

$33.5

 
 
 

$33.5

Average Common Shares
46.9

 
0.2

 
47.1

 
41.4

 
0.2

 
41.6

Earnings Per Share

$0.85

 
 
 

$0.85

 

$0.81

 
 
 

$0.80


Forward Sale Agreement and Issuance of Common Stock . In February 2014, ALLETE entered into a confirmation of forward sale agreement (Agreement) with a forward counterparty in connection with a public offering of 2.8 million shares of ALLETE common stock.

Pursuant to the Agreement, the forward counterparty (or its affiliate) borrowed 2.8 million shares of ALLETE common stock from third parties and sold them to the underwriters. The forward sale price was $48.01 per share, subject to adjustment as provided in the Agreement. In September 2014, ALLETE physically settled a portion of its obligations under the Agreement by delivering approximately 1.4 million shares of common stock in exchange for cash proceeds of $65.0 million and on February 4, 2015, ALLETE physically settled the remaining portion of its obligation under the Agreement by delivering approximately 1.4 million shares of common stock in exchange for cash proceeds of $65.4 million .

In connection with the public offering of the 2.8 million shares, ALLETE granted the underwriters an option to purchase up to an additional 0.4 million shares of ALLETE common stock (the option shares). The underwriters exercised the option in full and in March 2014, the Company issued and sold the option shares to the underwriters at a price to ALLETE equal to the initial forward sale price for proceeds of $20.2 million .

Contributions to Pension. No contributions were made to the pension plan for the three months ended March 31, 2015 . For the three months ended March 31, 2014 , ALLETE contributed 0.4 million shares of ALLETE common stock to its pension plan. These shares of ALLETE common stock were contributed in reliance upon an exemption available pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and had an aggregate value of $19.5 million when contributed.


NOTE 15.  PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS

 
Pension
 
Other
Postretirement
Components of Net Periodic Benefit Expense (Income)
2015
 
2014
 
2015
 
2014
Millions
 
 
 
 
 
 
 
Three months ended March 31,
 
 
 
 
 
 
 
Service Cost

$2.5

 

$2.1

 

$1.1

 

$0.9

Interest Cost
7.5

 
7.4

 
1.8

 
1.8

Expected Return on Plan Assets
(10.2
)
 
(9.6
)
 
(2.7
)
 
(2.6
)
Amortization of Prior Service Costs (Credits)

 
0.1

 
(0.8
)
 
(0.6
)
Amortization of Net Loss
4.5

 
3.6

 
0.1

 
0.1

Net Periodic Benefit Expense (Income)

$4.3

 

$3.6

 
$(0.5)
 
$(0.4)

Employer Contributions. For the three months ended March 31, 2015 , no contributions were made to our defined benefit pension plan ( $19.5 million for the three months ended March 31, 2014 ); we do not expect to make any contributions to our defined benefit pension plan in 2015 . For the three months ended March 31, 2015 and 2014 , we made no contributions to our other postretirement benefit plan; we do not expect to make any contributions to our other postretirement benefit plan in 2015 .

ALLETE, Inc. First Quarter 2015 Form 10-Q
30


NOTE 16.  COMMITMENTS, GUARANTEES AND CONTINGENCIES

Power Purchase Agreements. Our long-term PPAs have been evaluated under the accounting guidance for variable interest entities. We have determined that either we have no variable interest in the PPAs or, where we do have variable interests, we are not the primary beneficiary; therefore, consolidation is not required. These conclusions are based on the fact that we do not have both control over activities that are most significant to the entity and an obligation to absorb losses or receive benefits from the entity’s performance. Our financial exposure relating to these PPAs is limited to our capacity and energy payments.

Square Butte PPA. Minnesota Power has a PPA with Square Butte that extends through 2026 (Agreement). It provides a long-term supply of energy to customers in our electric service territory and enables Minnesota Power to meet reserve requirements. Square Butte, a North Dakota cooperative corporation, owns a 455 MW coal-fired generating unit (Unit) near Center, North Dakota. The Unit is adjacent to a generating unit owned by Minnkota Power, a North Dakota cooperative corporation whose Class A members are also members of Square Butte. Minnkota Power serves as the operator of the Unit and also purchases power from Square Butte.

Minnesota Power is obligated to pay its pro rata share of Square Butte’s costs based on Minnesota Power’s entitlement to Unit output. Our output entitlement under the Agreement is 50 percent for the remainder of the Agreement, subject to the provisions of the Minnkota Power sales agreement described below. Minnesota Power’s payment obligation will be suspended if Square Butte fails to deliver any power, whether produced or purchased, for a period of one year. Square Butte’s costs consist primarily of debt service, operating and maintenance, depreciation and fuel expenses. As of March 31, 2015 , Square Butte had total debt outstanding of $390.9 million . Annual debt service for Square Butte is expected to be approximately $45 million in each of the next five years, 2015 through 2019 , of which Minnesota Power’s obligation is 50 percent . Fuel expenses are recoverable through our fuel adjustment clause and include the cost of coal purchased from BNI Coal, under a long-term contract.

Minnesota Power’s cost of power purchased from Square Butte during the three months ended March 31, 2015 , was $19.2 million ( $16.8 million for the three months ended March 31, 2014 ). This reflects Minnesota Power’s pro rata share of total Square Butte costs based on the 50  percent output entitlement. Included in this amount was Minnesota Power’s pro rata share of interest expense of $2.5 million during the three months ended March 31, 2015 ( $2.5 million for the three months ended March 31, 2014 ). Minnesota Power’s payments to Square Butte are approved as a purchased power expense for ratemaking purposes by both the MPUC and the FERC.