SEC Filing | ALLETE, Inc.

View:

Download DOC

Download PDF

Download XLS

Download XBRL

ALE 6-30-2015 10-Q

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 June 30, 2015



¨	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,

48,850,462 shares outstanding

as of June 30, 2015

Index



			Page

Definitions			3

Forward-Looking Statements			5

Part I.	Financial Information

	Item 1.	Consolidated Financial Statements

	Consolidated Balance Sheet -
		June 30, 2015 and December 31, 2014	6

	Consolidated Statement of Income -
		Quarter and Six Months Ended June 30, 2015 and 2014	7

	Consolidated Statement of Comprehensive Income -
		Quarter and Six Months Ended June 30, 2015 and 2014	8

	Consolidated Statement of Cash Flows -
		Six Months Ended June 30, 2015 and 2014	9

	Notes to Consolidated Financial Statements		10

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	44

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	61

	Item 4.	Controls and Procedures	62

Part II.	Other Information

	Item 1.	Legal Proceedings	62

	Item 1A.	Risk Factors	62

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	63

	Item 3.	Defaults Upon Senior Securities	63

	Item 4.	Mine Safety Disclosures	63

	Item 5.	Other Information	63

	Item 6.	Exhibits	63

Signatures			64

ALLETE, Inc. Second Quarter 2015 Form 10-Q

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	Bison Wind Energy Center
BNI Coal	BNI Coal, Ltd.
Boswell	Boswell Energy Center
CO₂	Carbon Dioxide
Company	ALLETE, Inc. and its subsidiaries
CSAPR	Cross-State Air Pollution Rule
DC	Direct Current
EIS	Environmental Impact Statement
Enbridge	Enbridge, Inc.
EPA	United States 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	Generally Accepted Accounting Principles 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(s)
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
Mesabi Nugget	Mesabi Nugget Delaware, LLC
Mining Resources	Mining Resources, LLC
Minnesota Power	An operating division of ALLETE, Inc.
Minnkota Power	Minnkota Power Cooperative, Inc.
MISO	Midcontinent Independent System Operator, Inc.
Montana-Dakota Utilities	Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc.
MPCA	Minnesota Pollution Control Agency

ALLETE, Inc. Second Quarter 2015 Form 10-Q



Abbreviation or Acronym	Term
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
Non-residential	Retail commercial, non-retail commercial, office, industrial, warehouse, storage and institutional
NO₂	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
PolyMet	PolyMet Mining Corp.
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
SO₂	Sulfur Dioxide
Square Butte	Square Butte Electric Cooperative
Steel Dynamics	Steel Dynamics, Inc.
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. Second Quarter 2015 Form 10-Q

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 Part 1, 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 on page 62. 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. Second Quarter 2015 Form 10-Q

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLETE

CONSOLIDATED BALANCE SHEET

Millions – Unaudited



	June 30, 2015			December 31, 2014

Assets
Current Assets
Cash and Cash Equivalents		$60.6			$145.8
Accounts Receivable (Less Allowance of $1.1 and $1.1)	103.9			103.0
Inventories	107.8			80.5
Prepayments and Other	36.5			82.0
Deferred Income Taxes	21.8			7.5
Total Current Assets	330.6			418.8
Property, Plant and Equipment – Net	3,451.5			3,284.8
Regulatory Assets	359.6			357.3
Investment in ATC	124.2			121.1
Other Investments	115.0			114.4
Goodwill and Intangible Assets – Net	213.4			4.8
Other Non-Current Assets	78.7			59.6
Total Assets		$4,673.0			$4,360.8
Liabilities and Equity
Liabilities
Current Liabilities
Accounts Payable		$94.8			$134.1
Accrued Taxes	34.9			38.7
Accrued Interest	17.7			18.0
Long-Term Debt Due Within One Year	118.0			100.7
Notes Payable	—			3.7
Other	135.6			120.8
Total Current Liabilities	401.0			416.0
Long-Term Debt	1,272.4			1,272.8
Deferred Income Taxes	572.5			510.7
Regulatory Liabilities	104.8			94.2
Defined Benefit Pension and Other Postretirement Benefit Plans	190.0			190.9
Other Non-Current Liabilities	353.9			265.0
Total Liabilities	2,894.6			2,749.6
Commitments, Guarantees and Contingencies (Note 16)
Equity
ALLETE’s Equity
Common Stock Without Par Value, 80.0 Shares Authorized, 48.9 and 45.9 Shares Outstanding	1,257.1			1,107.6
Unearned ESOP Shares	(3.3		)	(7.2		)
Accumulated Other Comprehensive Loss	(20.2		)	(21.1		)
Retained Earnings	543.0			530.1
Total ALLETE Equity	1,776.6			1,609.4
Non-Controlling Interest in Subsidiaries	1.8			1.8
Total Equity	1,778.4			1,611.2
Total Liabilities and Equity		$4,673.0			$4,360.8

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF INCOME

Millions Except Per Share Amounts – Unaudited



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015			2014

Operating Revenue		$323.3			$260.7			$643.3			$557.2
Operating Expenses
Fuel and Purchased Power	80.1			83.6			166.1			179.8
Transmission Services	11.3			10.5			26.2			21.3
Cost of Sales	52.3			18.9			83.5			42.4
Operating and Maintenance	85.4			74.3			165.1			148.6
Depreciation and Amortization	41.3			33.9			80.3			66.1
Taxes Other than Income Taxes	13.4			11.3			26.2			22.5
Total Operating Expenses	283.8			232.5			547.4			480.7
Operating Income	39.5			28.2			95.9			76.5
Other Income (Expense)
Interest Expense	(16.2		)	(13.5		)	(31.3		)	(26.3		)
Equity Earnings in ATC	4.7			5.2			8.6			10.3
Other	0.7			1.9			1.8			3.9
Total Other Expense	(10.8		)	(6.4		)	(20.9		)	(12.1		)
Income Before Non-Controlling Interest and Income Taxes	28.7			21.8			75.0			64.4
Income Tax Expense	6.4			4.9			12.6			13.7
Net Income	22.3			16.9			62.4			50.7
Less: Non-Controlling Interest in Subsidiaries	(0.2		)	0.1			—			0.4
Net Income Attributable to ALLETE	$22.5				$16.8			$62.4			$50.3
Average Shares of Common Stock
Basic	48.6			42.1			47.7			41.7
Diluted	48.7			42.3			47.8			41.9
Basic Earnings Per Share of Common Stock	$0.46				$0.40			$1.31			$1.21
Diluted Earnings Per Share of Common Stock	$0.46				$0.40			$1.30			$1.20
Dividends Per Share of Common Stock		$0.505			$0.49			$1.01			$0.98

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

Millions – Unaudited



	Quarter Ended				Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014

Net Income	$22.3			$16.9		$62.4		$50.7
Other Comprehensive Income
Unrealized Gain on Securities
Net of Income Taxes of $–, $0.1, $0.1, and $0.1	—		0.2		0.1		0.2
Unrealized Gain on Derivatives
Net of Income Taxes of $0.1, $–, $0.1, and $0.1	—		—		0.1		—
Defined Benefit Pension and Other Postretirement Benefit Plans
Net of Income Taxes of $0.2, $0.2, $0.4, and $0.4	0.4		0.3		0.7		0.6
Total Other Comprehensive Income	0.4		0.5		0.9		0.8
Total Comprehensive Income	22.7		17.4		63.3		51.5
Less: Non-Controlling Interest in Subsidiaries	(0.2	)	0.1		—		0.4
Comprehensive Income Attributable to ALLETE	$22.9			$17.3		$63.3		$51.1

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

ALLETE

CONSOLIDATED STATEMENT OF CASH FLOWS

Millions – Unaudited



	Six Months Ended
	June 30,
	2015			2014

Operating Activities
Net Income		$62.4			$50.7
Allowance for Funds Used During Construction – Equity	(1.6		)	(3.8		)
Income from Equity Investments – Net of Dividends	(2.3		)	(1.9		)
Gain on Sale of Investments	(0.1		)	(0.2		)
Depreciation Expense	78.7			66.0
Amortization of Intangible Assets and Other Assets	2.9			0.5
Amortization of Power Purchase Agreements	(11.0		)	(6.2		)
Deferred Income Tax Expense	12.3			13.6
Share-Based Compensation Expense	1.3			1.4
ESOP Compensation Expense	4.9			4.5
Defined Benefit Pension and Postretirement Benefit Expense	7.7			6.4
Bad Debt Expense	0.3			0.6
Changes in Operating Assets and Liabilities
Accounts Receivable	17.3			21.0
Inventories	(13.4		)	(12.9		)
Prepayments and Other	4.2			7.0
Accounts Payable	(25.6		)	(11.0		)
Other Current Liabilities	47.4			(9.7		)
Changes in Regulatory and Other Non-Current Assets	(9.6		)	(11.5		)
Changes in Regulatory and Other Non-Current Liabilities	6.5			11.6
Cash from Operating Activities	182.3			126.1
Investing Activities
Proceeds from Sale of Available-for-sale Securities	0.7			2.7
Payments for Purchase of Available-for-sale Securities	(0.8		)	(3.4		)
Acquisitions of Subsidiaries – Net of Cash Acquired	(214.4		)	(23.1		)
Investment in ATC	(0.8		)	(2.3		)
Changes to Other Investments	(0.4		)	30.6
Additions to Property, Plant and Equipment	(140.5		)	(333.9		)
Cash in Escrow for Acquisition	(15.0		)	6.0
Cash for Investing Activities	(371.2		)	(323.4		)
Financing Activities
Proceeds from Issuance of Common Stock	148.2			38.9
Proceeds from Issuance of Long-Term Debt	15.0			215.0
Changes in Restricted Cash	(2.9		)	—
Changes in Notes Payable	(3.7		)	—
Repayments of Long-Term Debt	(3.4		)	(20.8		)
Acquisition of Non-Controlling Interest	—			(6.0		)
Debt Issuance Costs	—			(1.8		)
Dividends on Common Stock	(49.5		)	(41.7		)
Cash from Financing Activities	103.7			183.6
Change in Cash and Cash Equivalents	(85.2		)	(13.7		)
Cash and Cash Equivalents at Beginning of Period	145.8			97.3
Cash and Cash Equivalents at End of Period		$60.6			$83.6

The accompanying notes are an integral part of these statements.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

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. In management’s opinion, these unaudited financial statements include all adjustments necessary for a fair statement of financial results. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Operating results for the six months ended June 30, 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 on 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 $18.9 million from Operating and Maintenance Expenses to Cost of Sales for the quarter ended June 30, 2014 and $42.4 million for the six months ended June 30, 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. 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 on 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, we have reclassified from Operating and Maintenance Expenses $10.5 million of Transmission Services and $11.3 million of Taxes Other than Income Taxes for the quarter ended June 30, 2014, and $21.3 million of Transmission Services and $22.5 million of Taxes Other than Income Taxes for the six months ended June 30, 2014. There was no impact to Operating Income, Net Income, or Net Income Attributable to ALLETE as a result of these reclassifications.

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 $5.6 million from Changes in Regulatory and Other Non-Current Liabilities to Amortization of Power Purchase Agreements for the six months ended June 30, 2014. There was no impact on cash from (for) Operating Activities, Investing Activities, and Financing Activities as a result of the reclassifications.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

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	June 30, 2015			December 31, 2014
Millions
Regulated Operations
Fuel		$43.7			$29.0
Materials and Supplies	34.2			35.2
Total Regulated Operations	77.9			64.2
Investments and Other (a)
Materials and Supplies	16.6			16.3
Raw Materials	2.9			—
Work in Progress	1.5			—
Finished Goods	9.1			—
Reserve for Obsolescence	(0.2		)	—
Total Investments and Other	29.9			16.3
Total Inventories		$107.8			$80.5


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



Prepayments and Other Current Assets	June 30, 2015		December 31, 2014
Millions
Deferred Fuel Adjustment Clause		$11.8		$16.3
Construction Costs for Development Project (a)	—		48.2
Restricted Cash (b)	7.7		2.7
Other	17.0		14.8
Total Prepayments and Other Current Assets		$36.5		$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. As of June 30, 2015, these costs have been netted with contract billings. (See Billings in Excess of Costs and Estimated Earnings in 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 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 cash flow analysis.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 approximately 23 years. We review 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 cash flow analysis.

Other Non-Current Assets.

Restricted Cash. Included in Other Non-Current Assets on the Consolidated Balance Sheet was restricted cash of $20.3 million and $5.3 million as of June 30, 2015 and December 31, 2014, respectively. Restricted cash as of June 30, 2015 consisted of $15.0 million of cash held in escrow pending the closing of the Armenia Mountain wind energy facility acquisition, which occurred on July 1, 2015 (see Note 4. Acquisitions) and $5.3 million related to ALLETE Clean Energy’s wind energy facilities debt service and other requirements. Restricted cash as of December 31, 2014 related primarily to ALLETE Clean Energy’s wind energy facilities debt service and other requirements.



Other Current Liabilities	June 30, 2015		December 31, 2014
Millions
Customer Deposits		$18.5		$19.7
Power Purchase Agreements (a)	24.3		19.4
Construction Deposits Received for Development Project (b)	—		54.3
Billings in Excess of Costs and Estimated Earnings (c)	54.4		—
Other	38.4		27.4
Total Other Current Liabilities		$135.6		$120.8


(a)	Power Purchase Agreements were acquired in conjunction with ALLETE Clean Energy’s wind energy facilities acquisitions. (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. As of June 30, 2015, these deposits have been netted with contract costs and estimated gross profit. (See Billings in Excess of Costs and Estimated Earnings below and Note 4. Acquisitions.)


(c)	Billings in Excess of Costs and Estimated Earnings represents the excess of contract billings over the construction costs incurred and estimated earnings recognized. In the second quarter of 2015, the NDPSC approved the sale agreement ALLETE Clean Energy has with Montana-Dakota Utilities to develop, construct, and sell a wind energy facility in 2015. (See Note 4. Acquisitions.)



Other Non-Current Liabilities	June 30, 2015		December 31, 2014
Millions
Asset Retirement Obligation		$122.4		$109.2
Power Purchase Agreements (a)	149.5		110.7
Contingent Consideration (b)	36.8		—
Other	45.2		45.1
Total Other Non-Current Liabilities		$353.9		$265.0


(a)	Power Purchase Agreements were acquired in conjunction with ALLETE Clean Energy’s wind energy facilities acquisitions. (See Note 4. Acquisitions.)


(b)	Contingent Consideration relates to the estimated fair value of the earnings-based payment resulting from the U.S. Water Services acquisition. (See Note 4. Acquisitions and Note 7. Fair Value.)

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Supplemental Statement of Cash Flows Information.



Six Months Ended June 30,	2015		2014
Millions
Cash Paid During the Period for Interest – Net of Amounts Capitalized		$30.0		$23.7
Cash Paid During the Period for Income Taxes		$1.0		$0.2
Noncash Investing and Financing Activities
Increase (Decrease) in Accounts Payable for Capital Additions to Property, Plant and Equipment	$(25.5)		$3.6
Capitalized Asset Retirement Costs		$7.8		$0.6
AFUDC–Equity		$1.6		$3.8
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.

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 was 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 Statements. We will consider the requirements of this standard if future transactions arise.

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. On July 9, 2015, the FASB decided to defer the effective date of the standard by one year which will make the guidance effective for the Company beginning in the first quarter of 2018. Early adoption is permitted beginning in the first quarter of 2017 for public companies. 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 on the Consolidated 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. Debt issuance costs represent less than 1 percent of total long-term debt.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

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
Quarter Ended June 30, 2015
Operating Revenue		$323.3			$230.0			$93.3
Fuel and Purchased Power	80.1			80.1			—
Transmission Services	11.3			11.3			—
Cost of Sales	52.3			1.0			51.3
Operating and Maintenance	85.4			57.8			27.6
Depreciation and Amortization	41.3			33.7			7.6
Taxes Other than Income Taxes	13.4			12.1			1.3
Operating Income	39.5			34.0			5.5
Interest Expense	(16.2		)	(13.3		)	(2.9		)
Equity Earnings in ATC	4.7			4.7			—
Other Income	0.7			0.7			—
Income Before Non-Controlling Interest and Income Taxes	28.7			26.1			2.6
Income Tax Expense	6.4			2.5			3.9
Net Income (Loss)	22.3			23.6			(1.3		)
Less: Non-Controlling Interest in Subsidiaries	(0.2		)	—			(0.2		)
Net Income (Loss) Attributable to ALLETE	$22.5				$23.6		$(1.1)

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 2. BUSINESS SEGMENTS (Continued)



	Consolidated			Regulated Operations			Investments and Other
Millions
Quarter Ended June 30, 2014
Operating Revenue		$260.7			$229.6			$31.1
Fuel and Purchased Power	83.6			83.6			—
Transmission Services	10.5			10.5			—
Cost of Sales	18.9			4.3			14.6
Operating and Maintenance	74.3			63.6			10.7
Depreciation and Amortization	33.9			29.6			4.3
Taxes Other than Income Taxes	11.3			10.6			0.7
Operating Income	28.2			27.4			0.8
Interest Expense	(13.5		)	(11.4		)	(2.1		)
Equity Earnings in ATC	5.2			5.2			—
Other Income (Expense)	1.9			2.0			(0.1		)
Income (Loss) Before Non-Controlling Interest and Income Taxes	21.8			23.2			(1.4		)
Income Tax Expense (Benefit)	4.9			5.7			(0.8		)
Net Income (Loss)	16.9			17.5			(0.6		)
Less: Non-Controlling Interest in Subsidiaries	0.1			—			0.1
Net Income (Loss) Attributable to ALLETE		$16.8			$17.5		$(0.7)



	Consolidated			Regulated Operations			Investments and Other
Millions
Six Months Ended June 30, 2015
Operating Revenue		$643.3			$492.8			$150.5
Fuel and Purchased Power	166.1			166.1			—
Transmission Services	26.2			26.2			—
Cost of Sales	83.5			5.5			78.0
Operating and Maintenance	165.1			116.5			48.6
Depreciation and Amortization	80.3			65.8			14.5
Taxes Other than Income Taxes	26.2			23.7			2.5
Operating Income	95.9			89.0			6.9
Interest Expense	(31.3		)	(26.3		)	(5.0		)
Equity Earnings in ATC	8.6			8.6			—
Other Income	1.8			1.6			0.2
Income Before Non-Controlling Interest and Income Taxes	75.0			72.9			2.1
Income Tax Expense	12.6			7.9			4.7
Net Income (Loss)	62.4			65.0			(2.6		)
Less: Non-Controlling Interest in Subsidiaries	—			—			—
Net Income (Loss) Attributable to ALLETE		$62.4			$65.0		$(2.6)

As of June 30, 2015
Total Assets		$4,673.0			$3,783.2			$889.8
Property, Plant and Equipment – Net		$3,451.5			$3,056.9			$394.6
Accumulated Depreciation		$1,380.1			$1,294.0			$86.1
Capital Additions		$117.9			$111.7			$6.2

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 2. BUSINESS SEGMENTS (Continued)



	Consolidated			Regulated Operations			Investments and Other
Millions
Six Months Ended June 30, 2014
Operating Revenue		$557.2			$493.8			$63.4
Fuel and Purchased Power	179.8			179.8			—
Transmission Services	21.3			21.3			—
Cost of Sales	42.4			13.0			29.4
Operating and Maintenance	148.6			124.1			24.5
Depreciation and Amortization	66.1			58.4			7.7
Taxes Other than Income Taxes	22.5			20.8			1.7
Operating Income	76.5			76.4			0.1
Interest Expense	(26.3		)	(22.9		)	(3.4		)
Equity Earnings in ATC	10.3			10.3			—
Other Income	3.9			3.8			0.1
Income (Loss) Before Non-Controlling Interest and Income Taxes	64.4			67.6			(3.2		)
Income Tax Expense (Benefit)	13.7			16.2			(2.5		)
Net Income (Loss)	50.7			51.4			(0.7		)
Less: Non-Controlling Interest in Subsidiaries	0.4			—			0.4
Net Income (Loss) Attributable to ALLETE		$50.3			$51.4		$(1.1)

As of June 30, 2014
Total Assets		$3,895.6			$3,424.3			$471.3
Property, Plant and Equipment – Net		$3,020.4			$2,791.7			$228.7
Accumulated Depreciation		$1,288.9			$1,221.1			$67.8
Capital Additions		$341.7			$335.6			$6.1

NOTE 3. INVESTMENTS

Investments. At June 30, 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	June 30, 2015		December 31, 2014
Millions
ALLETE Properties		$88.6		$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		$115.0		$114.4


(a)	As of June 30, 2015, the aggregate amount of available-for-sale corporate debt securities maturing in one year or less was $0.2 million, in one year to less than three years was $1.7 million, in three years to less than five years was $3.1 million, and in five or more years was $6.2 million.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 3. INVESTMENTS (Continued)

ALLETE Properties.

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 quarter and six months ended June 30, 2015 (none for the year ended December 31, 2014).



Available-For-Sale Securities
Millions		Gross Unrealized
	Cost	Gain	Loss	Fair Value
June 30, 2015	$19.8	$0.3	$0.8	$19.3
December 31, 2014	$19.6	$0.2	$0.9	$18.9

		Net	Gross Realized
		Proceeds	Gain	Loss
Quarter Ended June 30,
2015		$0.5	$0.1	—
2014		$2.1	$0.2	—
Six Months Ended June 30,
2015		$0.7	$0.1	—
2014		$2.7	$0.2	—

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 six months ended June 30, 2015, and year ended December 31, 2014.

2015 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 in cash 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 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. Second Quarter 2015 Form 10-Q

NOTE 4. ACQUISITIONS (Continued)

2015 Activity (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 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
Current Liabilities		$18.7
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 progress 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)	For tax purposes, the purchase price allocation resulted in $3.2 million of deductible Goodwill.


(d)	Intangible Assets include customer relationships, patents, non-compete agreements and trademarks and trade names. (See Note 5. Goodwill and Intangible Assets.)

Acquisition-related costs of $3.0 million after-tax were expensed as incurred during the first quarter of 2015, 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 $47.9 million.

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

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 4. ACQUISITIONS (Continued)

2015 Activity (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 property, plant and equipment and PPAs; subsequent adjustments could impact the amount of goodwill recorded. Fair value measurements were valued primarily using the discounted cash flow method.



Millions
Assets Acquired
Current Assets	$4.8
Property, Plant and Equipment	103.0
Other Non-Current Assets (a)	0.8
Total Assets Acquired		$108.6
Liabilities Assumed
Current Liabilities (b)		$6.7
Power Purchase Agreements	48.9
Non-Current Liabilities	5.1
Total Liabilities Assumed	$60.7
Net Identifiable Assets Acquired		$47.9


(a)	Included in Other Non-Current Assets was $0.1 million of goodwill; for tax purposes, the purchase price allocation resulted in no allocation to goodwill.


(b)	Current Liabilities included $5.8 million related to the current portion of Power Purchase Agreements.

Acquisition-related costs of $0.2 million after-tax were expensed as incurred during the six months ended June 30, 2015, and were recorded in Operating and Maintenance on the Consolidated Statement of Income.

Armenia Mountain. On July 1, 2015, ALLETE Clean Energy acquired 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. 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 September 30, 2015.

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

Acquisition-related costs of $0.7 million after-tax were expensed as incurred during the six months ended June 30, 2015, and were recorded in Operating and Maintenance on the Consolidated Statement of 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 was approved to be sold to Montana-Dakota Utilities by the NDPSC on June 30, 2015, for approximately $200 million. Construction is expected to be completed in December 2015.

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 $3.6 million and construction in process of $23.4 million. There were no liabilities assumed and no recognition of goodwill.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 4. ACQUISITIONS (Continued)

2015 Activity (Continued)

As a result of the NDPSC approval of the sale agreement with Montana-Dakota Utilities, ALLETE Clean Energy began accounting for the project under the percentage of completion method of accounting for contracts. The percentage of completion used to recognize revenues and cost of sales is calculated based on the percentage of construction costs incurred at the measurement date compared to the estimated total construction costs, excluding equipment and turbine deposits in each measure. We have selected this method because we consider construction costs, excluding deposits, to be the best available measure of progress on the project. Any adjustments to the estimated percentage of completion or estimated earnings, and the related impacts to operating income, are recorded in the period they become known.

The following table summarizes contract billings, construction costs, and estimated earnings recognized for the wind facility:



	June 30, 2015
Millions
Contract Billings	$141.2
Construction Costs	84.3
Estimated Earnings	2.5
Billings in Excess of Costs and Estimated Earnings (a)		$54.4


(a)	Included in Other Current Liabilities on the Consolidated Balance Sheet.

For the six months ended June 30, 2015, revenue of $20.5 million and cost of sales of $18.0 million were recognized under the percentage of completion method of accounting for contracts and reported on the Consolidated Statement of Income as Operating Revenue and Cost of Sales, respectively. Cash flows related to construction costs incurred, contract billings, and estimated earnings were reported on the Consolidated Statement of Cash Flows as Other Current Liabilities.

As of December 31, 2014, contract billings received were $54.3 million and construction costs incurred (including the construction costs acquired) were $48.2 million and were classified as Other Current Liabilities and Prepayments and Other Current Assets, respectively, on the Consolidated Balance Sheet.

2014 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, Inc. Second Quarter 2015 Form 10-Q

NOTE 4. ACQUISITIONS (Continued)

2014 Activity (Continued)

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
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, and goodwill of $2.9 million; for tax purposes, the purchase price allocation resulted in no allocation to goodwill.


(b)	Current Liabilities included $12.4 million related to the current portion of 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.

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.

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 energy facility began commercial operations in 1999 and has a PPA in place for its entire output which expires in 2018.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 4. ACQUISITIONS (Continued)

2014 Activity (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. 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 quarter 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
Current Liabilities (b)		$8.2
Power Purchase Agreements	23.5
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)	Current Liabilities included $7.5 million related to the current portion of Power Purchase Agreements.

NOTE 5. GOODWILL AND INTANGIBLE ASSETS

The following table summarizes changes to goodwill by business segment for the six months ended June 30, 2015:



	Investments and Other
Millions
Balance as of December 31, 2014		$2.9
Acquired Goodwill	127.2
Balance as of June 30, 2015		$130.1

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 5. GOODWILL AND INTANGIBLE ASSETS (Continued)

Balances of intangible assets, net, excluding goodwill as of June 30, 2015, are as follows:



	December 31, 2014		Additions as a Result of Acquisitions		Amortization		June 30, 2015
Millions
Intangible Assets
Definite-Lived Intangible Assets
Customer Relationships	—			$60.1		$1.3		$58.8
Developed Technology and Other (a)		$1.9	6.3		0.3		7.9
Total Definite-Lived Intangible Assets	1.9		66.4		1.6		66.7
Indefinite-Lived Intangible Assets
Trademarks and Trade Names	—		16.6		n/a		16.6
Total Intangible Assets		$1.9		$83.0		$1.6		$83.3


(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 June 30, 2015 is approximately 21 years.

Amortization expense of intangible assets for the six months ended June 30, 2015, was $1.6 million. The estimated amortization expense for definite-lived intangible assets for the remainder of 2015 is $2.6 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, and $47.5 million thereafter.

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 June 30, 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 six months ended June 30, 2015. As of June 30, 2015, the fair value of the Swap was a $0.1 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.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

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 June 30, 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.



	Fair Value as of June 30, 2015
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	—			$11.2	—		11.2
Cash Equivalents	2.8		—		—		2.8
Total Fair Value of Assets		$10.9		$11.2	—			$22.1

Liabilities:
Deferred Compensation (b)	—			$16.3	—			$16.3
Derivatives – Interest Rate Swap (c)	—		0.1		—		0.1
U.S. Water Services Contingent Consideration (b)	—		—			$36.8	36.8
Total Fair Value of Liabilities	—			$16.4		$36.8		$53.2
Total Net Fair Value of Assets (Liabilities)		$10.9	$(5.2)		$(36.8)		$(31.1)


(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.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 7. FAIR VALUE (Continued)



	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 June 30, 2015. The acquisition contingent consideration was recorded at the acquisition date at its estimated fair value. 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 generally 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, may result in different fair value measurements and expense (or income) in future periods. The acquisition contingent consideration was measured at $36.8 million as of June 30, 2015.



Recurring Fair Value Measures
Activity in Level 3
Millions
Balance as of December 31, 2014	—
Recognition of U.S. Water Services Contingent Consideration		$35.7
Accretion Expense (a)	1.1
Balance as of June 30, 2015		$36.8


(a)	Included in Interest Expense on the Consolidated Statement of Income.

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 six months ended June 30, 2015, and the year ended December 31, 2014, there were no transfers in or out of Levels 1, 2 or 3.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 7. FAIR VALUE (Continued)

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
June 30, 2015	$1,390.4	$1,445.0
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 $124.2 million as of June 30, 2015 ($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 six months ended June 30, 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 $130.1 million and $2.9 million as of June 30, 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 calculates the excess of each reporting unit's fair value over its carrying amount, including goodwill, utilizing a discounted cash flow analysis. As of June 30, 2015, there have been no events or changes in circumstance which would indicate impairment of our goodwill.

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 $83.3 million as of June 30, 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 amount over its undiscounted future cash flows. If the carrying amount is not recoverable, an impairment loss is recorded based on the amount by which the carrying amount 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 June 30, 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 six months ended June 30, 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 allow for the recovery of the remaining book value of retired plant assets. We retired Taconite Harbor Unit 3 and converted 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. On July 9, 2015, we announced the next steps in our EnergyForward plan, which includes the economic idling of Taconite Harbor Units 1 and 2 in the fall of 2016 and the ceasing of coal-fired operations there in 2020. We do not expect to record any impairment charge as a result of the retirement of Taconite Harbor or the conversion of Laskin.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

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.

Energy-Intensive Trade-Exposed Customer Rates. The Minnesota Legislature enacted and the Governor of Minnesota signed Energy-Intensive Trade-Exposed customer ratemaking legislation in June 2015. The intent of this legislation is to enable the MPUC to address elements in rate design to better support the competitiveness of manufacturers with electrically intensive operations which compete in global markets. The Company is working with all stakeholders to develop a rate schedule and contract proposals to be filed with the MPUC. It is expected that any rate design outcomes will be implemented on a revenue neutral basis.

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 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. On May 22, 2015, we filed a transmission factor filing which includes updated costs associated with certain transmission facilities. Upon approval of the filing, we will be authorized to include updated billing rates on customer bills. As a result of the MPUC approval of the Certificate of Need for the GNTL on June 30, 2015, the project is eligible for cost recovery under our existing transmission cost recovery rider. We anticipate including our portion of the investments and expenditures for the GNTL as part of future transmission factor filings to include updated billing rates on customer bills.

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 Wind Energy Center were approved by the MPUC in an order dated May 22, 2015. In November 2014, we filed a renewable resources factor filing which includes updated costs associated with Bison. Upon approval of the filing, 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 underway at Boswell Unit 4, planning for the proposed GNTL, the conversion of Laskin from coal to natural gas completed in June 2015 and the retirement of Taconite Harbor Unit 3 completed in May 2015. On July 9, 2015, Minnesota Power announced the next steps in its EnergyForward plan including the economic idling of Taconite Harbor Units 1 and 2 in the fall of 2016, the ceasing of coal-fired operations there in 2020, and the addition of between 200 MW and 300 MW of natural gas generation in the next decade. We are required to submit our 2015 Integrated Resource Plan with the MPUC no later than September 1, 2015.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 8. REGULATORY MATTERS (Continued)

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 approximately $184 million was spent through June 30, 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 which was approved in an order dated June 30, 2015. Based on this order, our portion of the investments and expenditures for the project are eligible for cost recovery under our existing transmission cost recovery rider and are anticipated to be included in future transmission factor filings. 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. On June 19, 2015, the Minnesota Department of Commerce and the U.S. Department of Energy released the draft EIS for the GNTL. Public hearings on the draft EIS were held in July 2015 and comments are due by August 10, 2015. Hearings on the route permit will be held before an Administrative Law Judge in August 2015 with comments due by September 1, 2015. 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.

MISO Return on Equity Complaints. In November 2013, several customer groups located within the MISO service area filed complaints with the FERC requesting, among other things, a reduction in the base return on equity used by MISO transmission owners, including ALLETE, to 9.15 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. As a result of these complaints filed with the FERC, we have recorded an estimated refund obligation for MISO revenue of $5.6 million and an estimated refund for MISO transmission expense of $3.7 million, resulting in a reserve of $1.9 million as of June 30, 2015; $1.5 million was attributable to prior years.

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. Second Quarter 2015 Form 10-Q

NOTE 8. REGULATORY MATTERS (Continued)



Regulatory Assets and Liabilities	June 30, 2015		December 31, 2014
Millions
Current Regulatory Assets (a)
Deferred Fuel		$11.8		$16.3
Total Current Regulatory Assets	11.8		16.3
Non-Current Regulatory Assets
Defined Benefit Pension and Other Postretirement Benefit Plans (b)	216.1		223.9
Cost Recovery Riders (c)	68.3		59.7
Income Taxes	46.9		46.6
Asset Retirement Obligations	19.2		17.8
PPACA Income Tax Deferral	5.0		5.0
Other	4.1		4.3
Total Non-Current Regulatory Assets	359.6		357.3
Total Regulatory Assets		$371.4		$373.6

Non-Current Regulatory Liabilities
Wholesale and Retail Contra AFUDC		$50.6		$42.9
Plant Removal Obligations	19.6		22.8
Income Taxes	13.7		13.4
Defined Benefit Pension and Other Postretirement Benefit Plans (b)	2.4		3.5
Other	18.5		11.6
Total Non-Current Regulatory Liabilities		$104.8		$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 primarily 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 June 30, 2015, our equity investment in ATC was $124.2 million ($121.1 million at December 31, 2014). In the first six months of 2015, we invested $0.8 million in ATC, and on July 30, 2015, we invested an additional $0.4 million. We expect to make additional investments of approximately $0.7 million in 2015.



ALLETE’s Investment in ATC
Millions
Equity Investment Balance as of December 31, 2014		$121.1
Cash Investments	0.8
Equity in ATC Earnings	8.6
Distributed ATC Earnings	(6.3		)
Equity Investment Balance as of June 30, 2015		$124.2

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 9. INVESTMENT IN ATC (Continued)

ATC’s summarized financial data for the six months ended June 30, 2015 and 2014, is as follows:



	Quarter Ended				Six Months Ended
ATC Summarized Financial Data	June 30,				June 30,
Income Statement Data	2015		2014		2015		2014
Millions
Revenue		$165.2		$160.0		$317.6		$323.3
Operating Expense	80.3		74.4		160.3		153.0
Other Expense	24.3		21.9		48.7		43.5
Net Income		$60.6		$63.7		$108.6		$126.8
ALLETE’s Equity in Net Income		$4.7		$5.2		$8.6		$10.3

Our equity earnings in ATC for the six months ended June 30, 2015, were $8.6 million and reflected a $1.7 million reduction related to complaints filed with the FERC by several customer groups located within the MISO service area; of which $1.1 million was attributable to ATC’s change in estimate of a refund liability relating to prior years. 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 June 30, 2015, total short-term debt outstanding was $118.0 million and consisted of long-term debt due within one year. Short-term debt outstanding as of December 31, 2014 was $104.4 million and consisted of long-term debt due within one year and notes payable.

Long-Term Debt. There were no material issuances of long-term debt in the first six months of 2015. As of June 30, 2015, total long-term debt outstanding was $1,272.4 million ($1,272.8 million as of December 31, 2014).

On July 1, 2015, ALLETE Clean Energy assumed $60.9 million of long-term debt, including $5.9 million due within one year, in conjunction with ALLETE Clean Energy’s acquisition of Armenia Mountain. (See Note 4. Acquisitions.)

On July 14, 2015, we agreed to sell $100.0 million of the Company's first mortgage bonds (Bonds) to certain institutional buyers in the private placement market. The Bonds will be sold in reliance on an exemption from registration under Section 4(a)(2) of the Securities Act of 1933, as amended, to institutional accredited investors. The Bonds will be issued on or about September 24, 2015, in two series as follows:



Maturity Date	Principal Amount	Interest Rate
September 15, 2020	$40 Million	2.80%
September 16, 2030	$60 Million	3.86%

Interest on the Bonds will be payable semi-annually on March 15 and September 15 of each year, commencing on March 15, 2016. The Company will have the option to prepay all or a portion of the Bonds at its discretion, subject to a make-whole provision; however, the September 16, 2030, series of bonds will be redeemable at par, including accrued and unpaid interest, six months prior to the maturity date. The Bonds will be subject to additional terms and conditions which are customary for these types of transactions. The Company intends to use the proceeds from the sale of the Bonds to fund utility capital expenditures and/or for general corporate purposes.

ALLETE, Inc. Second Quarter 2015 Form 10-Q

NOTE 10. SHORT-TERM AND LONG-TERM DEBT (Continued)

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 June 30, 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 June 30, 2015, ALLETE was in compliance with its financial covenants.

NOTE 11. OTHER INCOME (EXPENSE)



	Quarter Ended						Six Months Ended
	June 30,						June 30,
	2015			2014			2015		2014
Millions
AFUDC–Equity		$0.7			$2.0			$1.6		$3.8
Gain on Sale of Available-for-sale Securities	0.1			0.2			0.1		0.2
Investments and Other Income (Expense)	(0.1		)	(0.3		)	0.1		(0.1		)
Total Other Income		$0.7			$1.9			$1.8		$3.9

NOTE 12. INCOME TAX EXPENSE



	Quarter Ended		Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
Millions
Current Tax Expense