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.

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.

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.

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.