UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
SCHEDULE
14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
(Amendment
No. )
Filed by
the Registrant [X]
Filed by
a Party other than the Registrant [ ]
Check the
appropriate box:
[X] Preliminary Proxy
Statement
[
] Confidential, for
use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy
Statement
[
] Definitive Additional Materials
[
] Soliciting Material Pursuant to § 240.14a-12
ALLETE,
Inc.
(Name of
Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment
of Filing Fee (Check the appropriate box):
[X] No fee
required.
[
] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11
(1) Title
of each class of securities to which transaction applies:
(2)
Aggregate number of securities to which transaction applies:
(3) Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined):
(4)
Proposed maximum aggregate value of transaction:
(5) Total
fee paid:
[ ] Fee
paid previously with preliminary materials.
[ ] Check
box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2)
and identify the filing for which the offsetting fee was paid previously.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1)
Amount Previously Paid:
(2) Form,
Schedule or Registration Statement No.:
(3)
Filing Party:
(4) Date
Filed:
NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS—MAY 11, 2010
ALLETE,
Inc.
30
West Superior Street
Duluth,
Minnesota 55802
The
Annual Meeting of Shareholders of ALLETE, Inc. will be held in the Lake Superior
Ballroom of the Duluth Entertainment Convention Center, 350 Harbor Drive,
Duluth, Minnesota, on Tuesday, May 11, 2010, at 10:30 a.m. CDT (doors will open
at 9:00 a.m. CDT) for the following purposes:
1.To elect a Board of twelve directors to
serve for the ensuing year;
2.To ratify the appointment of
PricewaterhouseCoopers LLP as ALLETE’s independent registered public accounting
firm for 2010;
3.To approve an amendment to ALLETE’s
Amended and Restated Articles of Incorporation to change the vote required for
the election of directors and a corresponding amendment to the Company’s
Bylaws;
4.To re-approve the material terms of the
performance goals under the ALLETE Executive Long-Term Incentive Compensation
Plan; and
5.To transact such other business as may
properly come before the meeting or any adjournments or postponements
thereof.
Shareholders
of record on the books of ALLETE at the close of business on March 12, 2010, are
entitled to notice of and to vote at the Annual Meeting.
All
shareholders are invited and encouraged to attend the Annual Meeting in person.
The holders of a majority of the shares entitled to vote at the meeting must be
present in person or by proxy to constitute a quorum.
Your
early response will facilitate an efficient tally of your votes. To vote your
shares online or by a toll-free telephone call, please follow the instructions
on your Proxy Card, or if you received these materials electronically, follow
the instructions in the e-mail message notifying you of the availability of
these materials. To vote by mail, please sign, date, and return your Proxy Card
in the envelope provided.
By order
of the Board of Directors,
Deborah A.
Amberg
Deborah
A. Amberg
Senior
Vice President, General Counsel, and Secretary
_____________,
2010
Duluth,
Minnesota
Important
Notice Regarding the Availability of Proxy Materials for the
Shareholder
Meeting to be held on May 11, 2010:
The
Proxy Statement and 2009 Annual Report on Form 10-K are available
at
www.ematerials.com/ale
1
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PROXY
STATEMENT
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TABLE
OF CONTENTS
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PROXY
SOLICITATION AND COSTS
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4
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QUESTIONS
AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
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4
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OWNERSHIP
OF ALLETE COMMON STOCK
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8
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Securities Owned by Certain
Beneficial Owners
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8
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Securities Owned by Directors and
Management
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8
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Section 16(a) Beneficial
Ownership Reporting Compliance
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9
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ITEM
NO. 1—ELECTION OF DIRECTORS
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10
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Nominees for
Director
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10
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CORPORATE
GOVERNANCE
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13
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Corporate Governance
Guidelines
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13
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Director Independence
Standards
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14
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Related Person Transactions and
Director Independence Determinations
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15
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Director
Nominations
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16
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Committee Membership, Meetings,
and Functions
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16
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Board Leadership and
Structure
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17
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Communications Between
Shareholders and the Board of Directors
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17
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Director Common Stock Ownership
Guidelines
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18
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Code of Business Conduct and
Ethics
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18
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Board’s Oversight of
Risk
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18
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COMPENSATION
DISCUSSION AND ANALYSIS
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18
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Executive Summary
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18
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Compensation Philosophy and
Objectives
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19
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Elements of Executive
Compensation
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21
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Benefits
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24
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Perquisites
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25
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Employment, Severance, and Change
in Control Agreements
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25
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Process for Determining Executive
Compensation
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26
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EXECUTIVE
COMPENSATION COMMITTEE REPORT
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30
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COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
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31
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Summary Compensation
Table―2009
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31
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Grants of Plan-Based
Awards―2009
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33
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Grants of Plan-Based Awards
Discussion
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34
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Outstanding Equity Awards at
Fiscal Year-End—2009
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37
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Option Exercises and Stock
Vested—2009
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38
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Pension
Benefits—2009
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39
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Pension Benefits
Discussion
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40
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Nonqualified Deferred
Compensation—2009
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42
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POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
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43
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Estimated Potential Payments Upon
Termination Associated with a Change in Control
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45
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Estimated Potential Payments Upon
Termination Due to Retirement, Disability, or Death
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45
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Estimated Additional Payments Due
to Long-Term Disability
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46
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DIRECTOR
COMPENSATION—2009
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47
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EQUITY
COMPENSATION PLAN INFORMATION
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49
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AUDIT
COMMITTEE REPORT
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49
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Audit Committee Pre-Approval
Policies and Procedures
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50
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Audit and Non-Audit
Fees
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50
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2
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ITEM
NO. 2—RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
REGISTERED
PUBLIC ACCOUNTING FIRM
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51
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ITEM NO.
3—PROPOSAL TO AMEND THE COMPANY’S AMENDED AND RESTATED
ARTICLES OF
INCORPORATION TO CHANGE THE VOTE REQUIRED FOR
THE
ELECTION OF DIRECTORS AND A CORRESPONDING AMENDMENT
TO
THE COMPANY’S BYLAWS
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51
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Director Resignation
Policy
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52
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Reasons for Approval
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52
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Vote Required
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53
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Effective Time
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53
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ITEM NO.
4—PROPOSAL TO RE-APPROVE THE MATERIAL TERMS OF THE PERFORMANCE
GOALS UNDER THE ALLETE EXECUTIVE LONG-TERM INCENTIVE COMPENSATION
PLAN
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53
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Material Terms of the Performance
Goals
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53
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General Description of the
LTIP
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53
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LTIP Benefits
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54
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Grants Under the
LTIP
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54
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U.S. Federal Income Tax
Consequences
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56
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OTHER
BUSINESS
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58
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Shareholder Proposals for the
2011 Annual Meeting
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58
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APPENDIX
A—Articles of Amendment and Related Amendment to Bylaws
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A-1
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APPENDIX
B—Hewitt Custom Survey Peer Groups
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B-1
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3
PROXY
STATEMENT
ALLETE,
Inc.
30
West Superior Street
Duluth,
Minnesota 55802
PROXY
SOLICITATION AND COSTS
These
proxy materials are being delivered to shareholders of ALLETE, Inc. (ALLETE or
Company) in connection with the solicitation of proxies by the Company to be
voted at the Company’s 2010 Annual Meeting of Shareholders. The Annual Meeting
will be held at 10:30 a.m. CDT on Tuesday, May 11, 2010, in the Lake Superior
Ballroom at the Duluth Entertainment Convention Center, Duluth,
Minnesota.
We expect
to solicit proxies primarily by mail. We will also solicit proxies by e-mail
from the majority of our employee shareholders as well as from shareholders who
previously requested to receive proxy materials electronically. We have retained
The Altman Group, Inc. to assist in the solicitation of proxies. Directors or
Company officers, other employees, or retirees also may solicit proxies in
person or by telephone at a nominal cost. Brokers, and other custodians,
nominees, and fiduciaries will be asked to solicit proxies or authorizations
from beneficial owners and will be reimbursed for their reasonable expenses. The
total fees we expect to pay in connection with the solicitation of proxies are
approximately $10,000 plus expenses. The cost of soliciting proxies will be paid
by the Company.
This
Notice of Annual Meeting, Proxy Statement, form of proxy, and voting
instructions were first sent to shareholders on or about ____________,
2010.
QUESTIONS
AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Why
am I receiving these proxy materials?
You
received these materials because you were a shareholder of the Company at the
close of business on March 12, 2010 (the Record Date) and are entitled to
vote at the Annual Meeting.
Who
is entitled to vote at the Annual Meeting?
Holders
of the Company’s common stock at the close of business on the Record Date are
entitled to vote at the annual meeting. As of the close of business on March 12,
2010, there were ________________ outstanding shares of common stock, each
entitled to one vote.
What
is the purpose of the Annual Meeting?
At the
meeting, our shareholders will be asked to:
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1.
Elect twelve directors to the Company’s Board of Directors. The nominees
for director are: Kathleen A. Brekken, Kathryn W. Dindo, Heidi
J. Eddins, Sidney W. Emery, Jr., James S. Haines, Jr., Alan R. Hodnik,
James J. Hoolihan, Madeleine W. Ludlow, Douglas C. Neve, Leonard C.
Rodman, Donald J. Shippar, and Bruce W.
Stender;
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2.
Ratify the appointment of PricewaterhouseCoopers LLP
(PricewaterhouseCoopers) as the Company’s independent registered
accounting firm for 2010;
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3.
Approve an amendment to ALLETE’s Amended and Restated Articles of
Incorporation to change the vote required for the election of directors
and a corresponding amendment to the Company’s
Bylaws;
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4.
Re-approve the material terms of the performance goals under the ALLETE
Executive Long-Term Incentive Compensation Plan (LTIP); and
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| 5. Transact such other business as may properly come before the meeting. |
4
The Board
is not aware of any other matter to be presented at the Annual Meeting of
Shareholders. If any other matters properly come before the meeting, all shares
represented by valid proxies will be voted in accordance with the judgment of
the appointed proxies.
How
does the Board recommend that I vote?
The Board
recommends that you vote FOR the election of all director nominees, FOR
ratification of PricewaterhouseCoopers as our independent registered public
accounting firm for 2010, FOR amendment of the Company’s Articles of
Incorporation and Bylaws to change the vote required for the election of
directors, FOR re-approval of the material terms of the performance goals under
the LTIP, and in accordance with the discretion of the persons acting under the
proxy concerning such other business as may properly be brought before the
meeting or any adjournments or postponements thereof.
Unless
contrary instructions are provided, all shares of Common Stock represented by
valid proxies will be voted in accordance with the Board’s
recommendations.
What
vote is required to approve each proposal?
Proposal
1: The affirmative vote of a majority of the shares of Common Stock
entitled to vote at the Annual Meeting is required for the election of each
director.
Proposal
2: The affirmative vote of a majority of the shares of Common Stock
present at the Annual Meeting and entitled to vote is required to ratify the
appointment of PricewaterhouseCoopers as our independent registered accounting
firm for 2010.
Proposal
3: The affirmative vote of a majority of the shares of Common Stock
entitled to vote at the Annual Meeting is required to amend the Articles of
Incorporation to change the vote required for the election of directors and to
make a corresponding amendment to the Company’s Bylaws.
Proposal
4: The affirmative vote of a majority of the shares of Common Stock
present at the Annual Meeting and entitled to vote is required to re-approve the
material terms of performance goals under the LTIP.
An
automated system administered by Wells Fargo Shareowners Services will tabulate
the proxy votes.
How
many votes must be present to hold the Annual Meeting?
The
holders of a majority of the shares of Common Stock entitled to vote at the
meeting must be present in person or represented by proxy to constitute a
quorum, which is required to transact business at the Annual
Meeting.
Broker
non-votes are not counted for or against any proposal, but are treated as
present for purposes of determining a quorum. A “broker non-vote” occurs when a
broker submits a proxy card for shares to the Company but does not indicate a
vote on a particular matter because the broker has not received timely voting
instructions from the beneficial owner with respect to that particular matter.
Abstentions
and broker non-votes are included in the number of shares present and voting,
and have the same effect as votes against a particular proposal.
How
do I vote my shares?
Shareholders
of record may vote their shares by proxy using any of the following
methods:
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•
By Telephone:
Vote by calling 800-560-1965 and following the instructions on your
proxy card or, if you received these materials electronically, the
instructions in the e-mail message that you received notifying you of the
availability of these materials. If you vote by phone, do not return your
proxy card.
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5
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•
Online: You may
vote online at www.ematerials.com/ale. Follow the instructions on your
proxy card or, if you received these materials electronically, the
instructions in the e-mail message notifying you of the availability of
these materials. If you vote online, do not return your proxy
card.
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•
By Mail:
Complete, sign, and date each proxy card that you received and
return it in the prepaid envelope provided to ALLETE, Inc., c/o Shareowner
Services, P.O. Box 64873, St. Paul, MN
55164-0873.
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Telephone
and Internet voting will be available until 12:00 p.m. CDT on May 10,
2010.
If your
shares are held in street name, you must vote your shares in the manner
prescribed by your brokerage firm, bank or other nominee. Your brokerage firm,
bank or other nominee should provide a voting instruction form for you to use in
directing it how to vote your shares.
What
is the difference between a shareholder of record and a “street name”
holder?
If your
shares are registered directly in your name with our transfer agent, Wells Fargo
Bank, N.A., you are considered the shareholder of record for those shares. As
the shareholder of record, you have the right to vote your shares by proxy
directly with the Company (by telephone, online, or by mail) or to vote in
person at the Annual Meeting.
If your
shares are held in a stock brokerage account or by a bank or other nominee, you
are considered the beneficial owner of the shares and your shares are said to be
held in “street name.” As the beneficial owner, you have the right to direct
your broker, bank or other nominee on how to vote and are also invited to attend
the Annual Meeting. If you wish to vote your shares in person at the Annual
Meeting, you must bring a legal proxy from your broker, bank or other nominee.
Will
my broker vote my shares for me?
Your
broker may vote your shares without instruction from you as to the ratification
of our independent registered accounting firm for 2010 (Proposal 2) and
re-approval of the material terms of the performance goals under the LTIP
(Proposal 4). As to all other proposals in this Proxy Statement, your broker
will not be able to vote your shares without instructions from you. If you do
not instruct your broker to vote your shares as to these proposals, your vote
will be treated as an abstention. Under our current voting standards, an
abstention has the same effect as a “no” vote. Your vote is important and
we encourage you to instruct your broker to vote your shares, using the
voting instruction form provided by your broker.
Can
I change my vote after I have voted or can I revoke my proxy?
Yes, if
you are a registered shareholder, you can revoke your signed proxy card at any
time before it is voted at the Annual Meeting, either by signing and returning a
proxy card with a later date or by attending the annual meeting in person and
changing your vote prior to the start of the meeting. If you have voted your
shares by telephone or online, you can revoke your prior telephone or online
vote by recording a different vote, or by signing and returning a proxy card
dated as of a date later than your last telephone or online vote.
If your
shares are held in street name, you must contact your broker, bank or other
nominee in order to revoke your proxy.
What
if I receive more than one proxy card?
You will
receive multiple proxy cards if you hold your shares in more than one account.
Please vote all the shares that you own. We encourage you to have all accounts
registered in the same name and address (whenever possible). You can accomplish
this by contacting ALLETE Shareholder Services at 800-535-3056 or 218-723-3974,
or by writing to our transfer agent, Wells Fargo Bank, N.A., Shareowner
Services, Attn: Householding, P.O. Box 64854, St. Paul, MN
55164-0854.
6
I
received more than one complete set of proxy materials. Is it possible to
eliminate duplicates?
If you
hold stock in more than one account or if you are a registered shareholder and
you share the same address with another of our registered shareholders, you may
request delivery of a single copy of future annual reports or proxy statements
at any time by calling ALLETE Shareholder Services at 800-535-3056 or
218-723-3974, or by writing to our transfer agent, Wells Fargo Bank, N.A.,
Shareowner Services, Attn: Householding, P.O. Box 64854, St. Paul, MN
55164-0854.
Many
brokerage firms and other shareholders of record have procedures for the
delivery of single copies of company documents to households with multiple
beneficial shareholders. If your family has one or more “street name” accounts
under which you beneficially own shares of Common Stock, please contact your
broker, financial institution, or other shareholder of record directly if you
require additional copies of this Proxy Statement or the Annual Report, or if
you have other questions or directions concerning your “street name”
account.
How
can I get a proxy card if I received these materials
electronically?
If you
wish to request paper copies of these materials, including a proxy card, you may
do so by calling ALLETE Shareholder Services at 800-535-3056 or
218-723-3974.
How
can I subscribe to electronic delivery of annual reports and proxy
statements?
We are
pleased to offer our shareholders the convenience and benefits of viewing proxy
statements, annual reports, and other shareholder materials online. With your
consent, we can stop sending you paper copies of these documents. Instead,
beginning next year we would send you an e-mail notification that the
shareholder materials have been filed with the Securities and Exchange
Commission (SEC) and are available for you to view. The notification would
include a link to the Web site on which you could view the materials. We would
also provide you with a link to allow you to vote your shares of Common Stock
online.
To enroll
for electronic receipt of shareholder materials, follow these easy
directions:
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1.
Log onto the Internet at www.allete.com.
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2.
Click on “Investors.”
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3.
Click on “Shareholder Services.”
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4.
Click on “Proxy Electronic
Delivery.”
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5.
Follow the prompts to submit your electronic
consent.
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The Web
site for viewing shareholder materials will be available on a 24-hours-a-day,
7-days-a-week basis. You will receive an e-mail confirmation of your enrollment.
Your enrollment will remain in effect for as long as you remain a shareholder
and the e-mail account you provide the Company remains active. However, you may
choose to cancel your enrollment at any time.
Who
can answer my questions?
You are
welcome to contact our Shareholder Services department with any questions you
may have regarding this Proxy Statement:
ALLETE,
Inc.
30 West
Superior Street
Duluth,
Minnesota 55802
Attention: Shareholder
Services
Telephone: 800-535-3056
or 218-723-3974
7
OWNERSHIP
OF ALLETE COMMON STOCK
Securities
Owned by Certain Beneficial Owners
Company
records and other information available from outside sources, including
information filed with the SEC, indicate that, as of March 12, 2010, the
following shareholders were beneficial owners of more than 5 percent of any
class of the Company’s voting securities.
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Title
of Class
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Name
and Address of Beneficial Owner
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Amount
and Nature
of
Beneficial
Ownership
|
Percent
of
Class1
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Common
Stock
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BlackRock,
Inc.2
40
East 52nd
Street
New
York, NY 10022
|
2,479,400
|
______%
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Common
Stock
|
Wachovia
Bank, N.A. (Wachovia)3
NC
1156 Wachovia Center
401
South Tryon Street
Charlotte,
NC 28288
|
_______
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______%
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1
As of March 12, 2010.
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2
The information shown in this table for BlackRock, Inc. (successor
in interest to Barclays Global Investors NA) (i) is derived from
information filed with the SEC on January 29, 2010, on Schedule 13G; (ii)
reflects beneficial ownership as of December 31, 2009; and (iii) includes
BlackRock, Inc. and certain of its
affiliates.
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3
Wachovia is the beneficial owner in its capacity as Trustee of the
Minnesota Power and Affiliated Companies Retirement Savings and Stock
Ownership Plan (RSOP). This information is as of March 12,
2010.
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Generally,
the shares owned by the RSOP will be voted in accordance with instructions
received by Wachovia from participants in the RSOP, and shares for which
Wachovia does not receive instructions from RSOP participants will be voted
proportionately with the instructions it does receive.
Securities
Owned by Directors and Management
The
following table presents the shares of Common Stock beneficially owned as of
March 12, 2010, by directors, nominees for director, executive officers named in
the Summary Compensation Table that appears subsequently in this Proxy
Statement, and all directors, nominees for director, and executive officers of
the Company as a group. Unless otherwise indicated, the persons shown have sole
voting and investment power over the shares listed. Common Stock ownership
guidelines applicable to directors are discussed on page 18. Directors are
expected to own 3,000 shares within three years of election—the following
non-employee directors have served less than three years: Ms. Dindo,
Mr. Emery, Mr. Haines, Mr. Neve, and Mr. Rodman. Despite having served less
than three years, Mr. Emery, Mr. Haines, and Mr. Neve already meet the share
ownership guidelines. Common Stock ownership guidelines applicable to the Named
Executive Officers are discussed beginning on page 20. In October 2009, the
Board determined that the Named Executive Officers had increased the number of
shares owned and progress was being made toward meeting the ownership guidelines
based on then-current share price.
8
SECURITIES
OWNED BY DIRECTORS AND MANAGEMENT
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Other3
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Name
of
Beneficial
Owner
|
Company
Share
Ownership
Guidelines1
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Number
of
Shares
Beneficially
Owned2
|
Options
Exercisable
within
60 days
after
March 12, 2010
|
Restricted
Stock
Units
|
Deferred
Shares
Under
the
Director
Deferred
Stock
Plan
|
|
|
Directors
and
Nominees
For
Director
|
Kathleen
A. Brekken
Kathryn
W. Dindo
Heidi
J. Eddins
Sidney
W. Emery, Jr.
James
S. Haines, Jr.
James
J. Hoolihan
Madeleine
W. Ludlow
George
L. Mayer
Douglas
C. Neve
Jack
I. Rajala
Leonard
C. Rodman
Bruce
W. Stender
|
3,000
3,000
3,000
3,000
3,000
3,000
3,000
3,000
–
3,000
3,000
3,000
|
______
______
______
______
______
______
______
______
______
______
______
______
|
0
0
0
0
0
0
0
0
0
________
0
0
|
______
______
______
______
______
______
______
______
______
______
______
______
|
______
______
______
______
______
______
______
______
______
______
______
______
|
|
Named
Executive
Officers
|
Donald
J. Shippar
Mark
A. Schober
Alan
R. Hodnik
Deborah
A. Amberg
Robert
J. Adams
Claudia
Scott Welty
|
______
______
______
______
______
______
|
______
______
______
______
______
______
|
________
________
________
________
________
________
|
______
______
______
______
______
______
|
______
______
______
______
______
______
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All
directors, nominees for director, and executive officers as a group
___:
|
–
|
|||||
|
|
1
The amounts in this column for the Named Executive Officers were
determined based on 2009 base salaries and the closing share price of
$______________ on March 12, 2010.
|
|
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2
Includes: (i) shares as to which voting and investment power is
shared with the person’s spouse:
______________________________________________________; (ii) shares owned
by the person’s spouse: ______________________________; and (iii) shares
held by the person’s children: __________________________________. Each
director and executive officer owns only a fraction of 1 percent of
the Common Stock, and all directors and executive officers as a group own
__________ percent of the Common
Stock.
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3
While amounts in the “Other” column do not represent a right of the
holder to receive stock within 60 days, these amounts are included
here because management believes they reflect similar objectives of 1)
encouraging directors and officers to have a stake in the Company, and 2)
aligning interests of directors and officers with those of shareholders.
Under the ALLETE Non-Employee Director Compensation Deferral Plan II
(Deferral Plan II), directors are able to defer their stock retainer.
Under the terms of the Deferral Plan II, distributions of deferred shares
will be made in common stock. In our view, restricted stock units and
deferred stock units are equivalent to actual stock ownership because they
take into account both upside and downside risk in our stock
price.
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Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended (Exchange Act),
requires directors, executive officers, and persons who beneficially own more
than 10 percent of a registered class of the Company’s equity securities, to
file reports of initial ownership of Common Stock and other equity securities
and subsequent changes in that ownership with the SEC and the New York Stock
Exchange (NYSE). Based on a review of such reports and the written
representations of our directors and executive officers, the Company believes
that all such filing requirements were met during 2009, except that one report
was filed on behalf of Mr. Hodnik five days late, covering one transaction
whereby he purchased 200 shares.
9
ITEM
NO. 1—ELECTION OF DIRECTORS
All
shares represented by the proxy will be voted, unless authority is withheld,
“FOR” the election of
the twelve nominees for director named below and on the following pages.
Directors are elected to serve until the next annual election of directors and
until a successor is elected and qualified, or until a director’s earlier
resignation or removal. If any nominee should become unavailable, which is not
anticipated, the Board may provide by resolution for a lesser number of
directors, or designate substitute nominees, who would receive the votes
represented by proxies.
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Nominees
for Director
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[PHOTO OMITTED]
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KATHLEEN A. BREKKEN, 60,
of Cannon Falls, Minnesota, has been a Director since 2006. She is a
member of the Executive Compensation Committee and the Corporate
Governance and Nominating Committee. Ms. Brekken is the retired President
and Chief Executive Officer of Midwest of Cannon Falls, Inc., a company
that designs, wholesales, and distributes home accessories and giftware.
She previously served on the ALLETE Board of Directors from 1997 to 2003.
Ms. Brekken is a board member of the Cannon Falls Medical Center—Mayo
Health System.
Ms.
Brekken brings experience as the CEO of a Minnesota-based company, and in
strategic planning, leadership development, and diversified
business.
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[PHOTO OMITTED]
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KATHRYN W. DINDO, 60, of
Akron, Ohio, was added to the Board in July 2009 and is a member of the
Audit Committee. Ms. Dindo is the retired Vice President and Chief Risk
Officer of FirstEnergy Corporation (NYSE: FE), a diversified electric
company. She is a certified public accountant who was a partner at Ernst
& Young and later served as a senior financial executive at Roadway
Services, Inc. before joining FirstEnergy in 1998. Ms. Dindo has also
served on the board of The J.M. Smucker Company (NYSE:SJM) since 1996,
Bush Brothers & Company, and the GAR Foundation.
Ms.
Dindo is a financial expert within the meaning of the rules of the SEC and
brings experience in electric utility risk management. She has broad
public company financial reporting and oversight experience, and a broad
business perspective.
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[PHOTO OMITTED]
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HEIDI J. EDDINS, 53, of
St. Augustine, Florida, has been a Director since 2004. She is Chair of
the Corporate Governance and Nominating Committee. Ms. Eddins is the
former Executive Vice President, Secretary and General Counsel of Florida
East Coast Railway, LLC, a railway company that is a successor to Florida
East Coast Industries, Inc.’s transportation business. Ms. Eddins joined
Florida East Coast Industries, Inc. in 1999 and was responsible for all
legal and governmental affairs of the corporation in addition to managing
a variety of real estate transactions. Ms. Eddins also serves as a
Director of the Flagler Hospital Foundation.
Ms.
Eddins contributes her expertise in corporate governance matters for
public companies, her experience in Florida real estate, and strategic
planning and diversified business knowledge.
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[PHOTO OMITTED]
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SIDNEY W. EMERY, JR.,
63, of Minneapolis, Minnesota, has been a Director since 2007. He is a
member of the Executive Compensation Committee. Mr. Emery is the former
Chief Executive Officer of MTS Systems Corporation (NASDAQ: MTSC), a
global supplier of mechanical testing systems and industrial position
sensors. He also serves as a director of Urologix, Inc., a
Minneapolis-based manufacturer of minimally invasive medical
products.
Mr.
Emery contributes his experience as a public company CEO, knowledge of
executive compensation matters, and strategic planning and diversified
business experience.
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||
10
|
Nominees
for Director
|
|||
|
[PHOTO OMITTED]
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JAMES S. HAINES, JR.,
63, of Lawrence, Kansas, was added to the Board in October 2009 and is on
the Executive Compensation Committee. He is the retired Chief Executive
Officer of Westar Energy, Inc. [NYSE: WR], the largest electric energy
provider in Kansas. Mr. Haines was a director of Westar Energy from 2002
until his retirement in 2007. He has also served as Chief Executive
Officer of El Paso Electric Company. He is a member of the board of
Stormont-Vail HealthCare and is chairman of the board of the Topeka
Community Foundation.
Mr.
Haines brings a long career of public utility experience, having served as
CEO at two public utilities. He brings expertise in regulatory matters,
strategic planning, and executive compensation.
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||
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[PHOTO OMITTED]
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ALAN R. HODNIK, 50, of
Hermantown, Minnesota, was named President of the Company in May 2009 and
has been appointed CEO effective May 1, 2010. Since joining the Company in
1982, Mr. Hodnik has served as Vice President – Generation Operations,
Senior Vice President of Minnesota Power Operations, and Chief Operating
Officer. As Chief Operating Officer, Mr. Hodnik led transmission,
distribution, generation, and engineering for all aspects of the Company.
Mr. Hodnik serves on the Board of Directors of SMDC Health Systems and the
Area Partnership for Economic Expansion (APEX). He was also the elected
mayor of the City of Aurora, Minnesota from 1988 to 1997.
Mr.
Hodnik has served the Company for 28 years, working in a wide variety of
positions of increasing responsibility. He brings utility operations,
strategic planning, leadership, and broader organizational development
experience, as well as a deep understanding of the region served by the
Company.
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||
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[PHOTO OMITTED]
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JAMES J. HOOLIHAN, 57,
of Grand Rapids, Minnesota, has been a Director since 2006. He is a member
of the Audit Committee. Mr. Hoolihan is the President and Chief Executive
Officer of the Blandin Foundation, a private, philanthropic foundation
whose mission is to strengthen communities in rural Minnesota. From 1981
to 2004, Mr. Hoolihan was the President of Industrial Lubricant
Company, which provides industrial supplies and services to logging,
railroad, taconite, and coal mining industries. He serves as the chairman
of the board of directors of Industrial Lubricant Company.
Mr. Hoolihan served as the elected mayor of the City of Grand
Rapids from 1990 to 1995.
Mr.
Hoolihan is a long-time community leader in the Company’s electric utility
service area. He brings his knowledge of the industries and political
issues of the service area, and has operated a business serving these
industries.
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||
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[PHOTO OMITTED]
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MADELEINE W. LUDLOW, 55,
of Cincinnati, Ohio, has been a Director since 2004 and is Chair of the
Executive Compensation Committee. She is currently a Principal of Market
Capital Partners LLC and from 2005 to 2009 was a Principal of LudlowWard
Capital Advisors, LLC, each of which is an Ohio-based investment banking
firm serving middle market companies. She was the Chairman, Chief
Executive Officer, and President of Cadence Network, Inc., a web-based
provider of utility expense management services from 2000 to 2004. Ms.
Ludlow was formerly the Vice President and Chief Financial Officer of
Cinergy Corp. She has also served as a trustee of the Darden Graduate
School of Business Administration at the University of
Virginia.
Ms.
Ludlow brings a sophisticated financial background and is a financial
expert within the meaning of the rules of the SEC. She also has executive
experience at a public utility and has worked with entrepreneurial and
diversified businesses.
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||
11
|
Nominees
for Director
|
|||
|
[PHOTO OMITTED]
|
DOUGLAS C. NEVE, 54, of
Chatfield, Minnesota, has been a Director since July 2007. He is Chair of
the Audit Committee. Mr. Neve is the former Executive Vice President and
Chief Financial Officer of Minneapolis-based Ceridian Corp., a
multinational human resources company, where he worked from February 2005
until March 2007. Prior to February 2005, he was an audit partner with
Deloitte & Touche LLP, a public accounting firm. He has also served as
a director of Analysts International Corporation (NASDAQ: ANLY) since 2008
and is currently its chair.
Mr.
Neve is a financial expert within the meaning of the rules of the SEC, and
brings his knowledge of public accounting, corporate reporting, and risk
management. His financial background includes experience as an executive
for a publicly-traded company.
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||
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[PHOTO OMITTED]
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LEONARD C. RODMAN, 61,
of Overland Park, Kansas, has been a Director since May 2009 and is a
member of the Audit Committee. Mr. Rodman has over 35 years of experience
with Black & Veatch, a major provider of engineering services to the
utility/power generation, water and environmental industries. Since 1998,
Mr. Rodman has been the President and Chief Executive Officer of Black
& Veatch and in 2000 he was also named its Chairman. Mr. Rodman
currently serves on the Board of the United Way of Greater Kansas City and
of the Iowa State University Foundation.
Mr.
Rodman has experience serving the electric utility and other regional
industries for over 30 years. He brings his leadership experience of a
large, international diversified company, and strategic
planning.
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||
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[PHOTO OMITTED]
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DONALD J. SHIPPAR, 61,
of Superior, Wisconsin, has been a Director since 2004 and has been
Chairman of ALLETE since January 2006. Mr. Shippar has been the Company’s
Chief Executive Officer since 2004 and is retiring as CEO effective
April 30, 2010. Since joining the Company in 1976, Mr. Shippar has
served as Vice President of Transmission and Distribution, Senior Vice
President for Customer Service and Delivery, Chief Operating Officer of
Minnesota Power, and President of Minnesota Power. Mr. Shippar also serves
as a trustee of the College of St. Scholastica in Duluth,
Minnesota.
Mr.
Shippar has served the Company for over 30 years. He has significant
connections within the electric utility industry, and has expertise in
utility operations, leadership development and strategic
planning.
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||
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[PHOTO OMITTED]
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BRUCE W. STENDER, 68, of
Duluth, Minnesota, has been a Director since 1995. Mr. Stender, as
Lead Director, is an ex-officio member of each Board committee.
Mr. Stender served as Chairman of ALLETE from September 2004 to
January 2006. He is Vice Chair of Duluth-based Labovitz Enterprises, Inc.,
which owns and manages hotels and commercial real estate. Mr. Stender
serves as a trustee of the Blandin Foundation and as member of the
Chancellor’s Advisory Committee for the University of
Minnesota-Duluth.
Mr.
Stender has significant connections to and understanding of the region
served by the Company. He brings corporate governance knowledge and varied
leadership experience, as well as diversified business
experience.
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||
12
CORPORATE
GOVERNANCE
Corporate
governance refers to the internal policies and practices by which the Company is
operated and controlled on behalf of its shareholders. Sound corporate
governance starts with a strong, independent Board that is accountable to the
Company and its shareholders. The role of the Board is to effectively govern the
affairs of the Company for the benefit of its shareholders and, to the extent
appropriate under Minnesota law, other constituencies, including the Company’s
employees, customers, suppliers, and the communities in which ALLETE does
business. The Company views good corporate governance as a source of competitive
advantage, because the Company’s ultimate goal is to best focus and direct its
resources.
In 2009,
the Board and its committees reviewed and enhanced established corporate
governance practices. This ensures that the Board and its committees have the
necessary authority and practices in place to review and evaluate the Company’s
business operations, as needed, and to make decisions that are independent of
the Company’s management. For example, the Board and its committees undertake an
annual self-evaluation process, and non-management directors meet regularly,
have direct access to and meet individually with members of management, and
retain their own advisors as they deem appropriate.
In an
effort to further develop the Board, directors are asked to attend an
independent educational seminar at least once every two years and to share their
experiences and observations with the other directors. The majority of our
directors have fulfilled this educational commitment. In addition to seminars,
Board members attended educational presentations hosted by the Company during
2009 addressing emissions allowances and their markets, and operations at
Midwest Independent Transmission System Operator, Inc., the regional
transmission operator in which Minnesota Power is a member.
Corporate
Governance Guidelines
The
Company’s Corporate Governance Guidelines, initially adopted in 2002, were most
recently revised in October 2009. The Corporate Governance Guidelines address
the Board’s roles and responsibilities, Board selection and composition
policies, Board operating policies, Board committee responsibilities, director
compensation, director stock ownership, and other matters. Each committee of the
Board also has a charter pursuant to which it operates. The Audit Committee
Charter was last revised in January 2008, the Executive Compensation Committee
Charter was last revised in July 2009, and the Corporate Governance and
Nominating Committee Charter was last revised in October 2008. Current copies of
our Corporate Governance Guidelines and the committee charters are available on
the Company’s Web site at www.allete.com.
Item 3 of
this Proxy Statement is a proposal to amend the Company’s Articles to change the
vote required for the election of directors and to make a corresponding change
to the Bylaws. Under our current Amended and Restated Articles of Incorporation
(Articles) and Bylaws, directors are elected annually by our shareholders by a
majority vote of all of the outstanding Company stock entitled to vote. At the
Annual Meeting we are proposing an amendment to our Articles to adopt “simple”
majority voting for the election of directors, which is the requirement adopted
by many other publicly traded corporations in recent years in uncontested
elections (where the number of nominees does not exceed the number of directors
to be elected); and plurality voting for the election of directors in contested
elections (where the number of nominees exceeds the number of directors to be
elected)(the Articles Amendment).
To
address a “holdover” provision in Minnesota corporate law that allows a director
who has not been re-elected to remain in office until a successor is elected and
qualified, in January 2010 the Board approved amending the Corporate Governance
Guidelines to include a director resignation policy, subject to the
shareholders' approval of Item 3. Under the new guideline, any nominee for
director who receives more votes “against” his or her election than votes “for”
his or her election in an uncontested election will be required to promptly
offer to tender his or her resignation following certification of the
shareholder vote. Our Corporate Governance and Nominating Committee will
consider the resignation offer and recommend to our Board whether to accept it.
The Board will act on the Corporate Governance and Nominating Committee’s
recommendation within 90 days following certification of the shareholder vote
and will promptly disclose its decision whether to accept the director’s
resignation offer (and the reasons for rejecting the resignation offer, if
applicable). Any director who offers to tender his or her resignation as
described above will not participate in the Corporate Governance and
Nominating
13
Committee’s
recommendation or Board action regarding whether to accept the resignation
offer. If the shareholders do not approve the Articles Amendment and the
corresponding Bylaws amendment, the Corporate Governance Guidelines will not be
amended to reflect this proposed director resignation policy.
Director
Independence Standards
The Board
has adopted independence standards into the Company’s Corporate Governance
Guidelines that are consistent with the director independence standards of the
NYSE. These Corporate Governance Guidelines are available on the Company’s Web
site at www.allete.com. An
“independent” director has no material relationship with the Company (either
directly or as a partner, shareholder, or officer of an organization that has a
relationship with the Company). The Board has adopted certain categorical
standards to assist in determining each director’s independence. The Board
considers a “material relationship” with the Company to exist
where:
|
|
•
the director is or has been employed by the Company within the last three
years;
|
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|
• a
member of the director’s immediate family is or has been employed by the
Company as an executive officer within the last three
years;
|
|
|
•
the director is an employee or a partner, or the director’s immediate
family member is a partner, of the Company’s current independent
registered public accounting firm; or an immediate family member is an
employee of the Company’s current independent registered public accounting
firm and personally works on the Company’s audit; or the director or an
immediate family member was within the last three years an employee or
partner of the Company’s current independent registered public accounting
firm and personally worked on the Company’s audit within that
time;
|
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|
•
the director or a member of the director’s immediate family is or has been
employed within the last three years as an executive officer of any
business organization for which any of the Company’s executive officers
concurrently serves or served as a member of that business organization’s
compensation committee;
|
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|
•
the director has received in any of the last three years more than
$120,000 in direct compensation from the Company (other than director and
committee fees, pension, and other deferred
compensation);
|
|
|
• a
member of the director’s immediate family has received in any 12-month
period within the last three years more than $120,000 in direct
compensation from the Company;
|
|
|
•
the director is a current employee, or a member of the director’s
immediate family is a current executive officer, of any business
organization that has made payments to the Company, or received payments
from the Company, for property or services in any of the last three fiscal
years in an amount that exceeds the greater of $1,000,000 or 2 percent of
the other company’s consolidated gross
revenue;
|
|
|
•
the director has been an employee within the last three years, or a member
of the director’s immediate family has been an executive officer within
the last three years, of any business organization to which the Company
was indebted at any time within the last three years in an aggregate
amount in excess of 5 percent of the Company’s total
assets;
|
|
|
•
the director or a member of the director’s immediate family has served
within the last three years as an executive officer or a general partner
of an entity that has received an investment from the Company or any of
its subsidiaries which exceeds the greater of $1,000,000 or 2 percent
of such entity’s total invested capital in any of the last three years;
or
|
|
|
•
the director or a member of the director’s immediate family has been an
executive officer of a foundation, university, non-profit trust or other
charitable organization within the last three years for which
contributions from the Company accounted for more than the greater of
$250,000 or 2 percent of such organization’s consolidated gross revenue in
any of the last three years.
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14
Related
Person Transactions and Director Independence Determinations
The Board
has adopted a policy to review transactions between the Company and related
persons. Related persons include directors, director nominees, executive
officers, and 5 percent shareholders, as well as immediate family members and
any entity controlled by or in which these individuals have a substantial
financial interest. A copy of the policy is available on our Web site at www.allete.com.
The
Related Person Transaction Policy applies to a financial transaction,
arrangement, or a series of similar transactions or arrangements of $25,000 or
more. These transactions generally require advance approval by the Corporate
Governance and Nominating Committee (Corporate Governance Committee). If a new
situation arises where advance approval is not practical, it is discussed with
the Chair of the Corporate Governance Committee, and an appropriate course of
action may include subsequent ratification by the Corporate Governance
Committee.
The
Corporate Governance Committee considers factors it deems relevant in
determining whether to approve a transaction, including but not limited to the
following: whether the terms are comparable to those that could be obtained in
an arm’s-length transaction with an unrelated third party; whether there are
business reasons to enter into the transaction; whether the transaction could
impair the independence of a director; and whether the transaction would present
an improper conflict of interest, taking into account the size of the
transaction, the overall financial position of the related person, the direct or
indirect relationship of the related person, and the ongoing nature of any
proposed relationships. The Corporate Governance Committee will also
periodically review and assess relationships to ensure ongoing fairness to the
Company. Any member of the Corporate Governance Committee who has an interest in
a transaction will abstain from voting, but may participate in the discussion if
invited to do so by the Chair of the Corporate Governance
Committee.
The
Corporate Governance Committee examined all transactions between directors and
the Company and determined that each such transaction was small relative to the
director’s business and that the director was not directly involved in such
transaction. The Board reviewed the Corporate Governance Committee’s
determination in light of the Company’s independence standards and the NYSE’s
corporate governance rules and concluded that each director, except Mr. Shippar
and Mr. Hodnik, is “independent.” There were no transactions in 2009
between the Company and any other related persons that would have required Board
review.
Specifically,
the Corporate Governance Committee considered that Mr. Hoolihan has an ownership
interest in Industrial Lubricant Company (ILCO), which provides lubricant
products to one of the Company’s generating facilities and to one of the
Company’s wholly owned subsidiaries, BNI Coal, Ltd. During 2009, Company
purchases from ILCO totaled $477,335.36. These payments represent a relatively
small percentage of ILCO’s 2009 sales.
The
Corporate Governance Committee considered the sales of wood and wood chips to
the Company by companies in which Mr. Rajala has a material interest. These
companies, Rajala Timber (of which Mr. Rajala is Secretary, Treasurer, and a
director) and Rajala Mill Company (of which Mr. Rajala is President and a
director), received payments totaling $238,149.22 from the Company in 2009 for
the purchase of wood and wood chips that are used as fuel at the Company’s
Rapids Energy Center. The purchases were made through a competitive bid process
and represented a modest amount of revenue for Mr. Rajala’s companies in 2009.
The
Corporate Governance Committee also considered the payments by the Company to
the Holiday Inn in Duluth, Minnesota, in which Mr. Stender has an indirect
ownership interest. The Company made payments to the hotel for lodging, food,
and meeting expenses totaling $33,305.13 in 2009.
Mr.
Rodman is the President, Chairman, and Chief Executive Officer of and has an
ownership interest in Black & Veatch. The Company purchased engineering and
related services from Black & Veatch totaling $2,012,572 in 2009. These
payments represent less than 0.1 percent of Black & Veatch consolidated
gross revenues, which had 2009 revenues in excess of $2.5 billion.
The
Corporate Governance Committee reviewed the above-described transactions with
Mr. Hoolihan, Mr. Rajala, Mr. Stender, and Mr. Rodman (in the case of Mr. Rajala
and Mr. Stender, without their respective participation) and determined that the
cumulative totals were well below the Company’s and the NYSE’s standards for
director
15
independence
and were also not material to the relevant director or to any person or
organization with whom the director has an affiliation. Based on this, the
Corporate Governance Committee recommended to the Board and the Board determined
that these transactions do not impair the independence of the affected
directors.
Director
Nominations
The
Corporate Governance Committee recommends director candidates to the Board and
will consider for such recommendations director candidates proposed by
management, other directors, search firms, and shareholders. All director
candidates will be evaluated based on the criteria identified below, regardless
of the identity of the individual or the entity or person who proposed the
director candidate. A shareholder who wishes to propose a candidate may provide
the candidate’s name and a detailed background of the candidate’s qualifications
to the Corporate Governance and Nominating Committee, c/o the Secretary of
ALLETE, 30 West Superior Street, Duluth, MN 55802-2093.
In
selecting director nominees, the Board considers factors it deems appropriate.
The Board may engage a search firm to assist in identifying, evaluating, and
conducting due diligence on potential director nominees. Factors will include
integrity, achievements, judgment, intelligence, personal character, the
interplay of the candidate’s relevant experience with the experience of other
Board members, the willingness of the candidate to devote adequate time to Board
duties and the likelihood that he or she will be willing and able to serve on
the Board for a sustained period. The Corporate Governance Committee will
consider the candidate’s independence, in accordance with the Corporate
Governance Guidelines, and the rules of the NYSE and SEC. In connection with the
selection, due consideration will be given to the Board’s overall balance of
diversity of perspectives, backgrounds, and experiences. Experience, knowledge,
and skills to be represented on the Board include, among other considerations;
financial expertise (including an “audit committee financial expert” within the
meaning of the SEC’s rules); electric utility and/or real estate knowledge and
contacts; financing experience; human resource and executive compensation
expertise; strategic planning and business development experience; familiarity
with the industries located in the Company’s service area; and community
leadership.
The
Company has sought candidates whose diverse experience, backgrounds, and
perspectives contribute to fulsome, robust discussion in the boardroom. Board
members represent a variety of gender, age, regional, and professional
backgrounds. In late 2009, the Board conducted an evaluation facilitated by an
outside consultant. The evaluation concluded that the portfolio of skills and
backgrounds of the board members, and their different perspectives in
discussions and debates, is considered one of the board’s greatest
strengths.
The
Corporate Governance Committee will review all candidates, and before any
contact is made with a potential candidate, will notify the Board of its intent
to do so, will provide the candidate’s name and background information to the
Board, and will allow time for directors to comment. The Corporate Governance
Committee will screen, personally interview, and recommend candidates to the
Board. A majority of the Corporate Governance Committee members will interview
any candidate before recommending that candidate to the Board. The
recommendations of the Corporate Governance Committee will be timed so as to
allow interested Board members an opportunity to interview the candidate prior
to the nomination of the candidate.
In 2009,
the Company paid a third-party search firm a fee to identify, evaluate, or
assist in identifying or evaluating potential nominees for director, including
Ms. Dindo and Mr. Haines.
Committee
Membership, Meetings, and Functions
The Board
has three standing committees: the Corporate Governance Committee, the Audit
Committee, and the Executive Compensation Committee (Compensation
Committee).
The
current members of the Corporate Governance Committee are Ms. Brekken, Ms.
Eddins (Chair), Mr. Mayer, Mr. Rajala, and Mr. Stender (ex-officio). The
Corporate Governance Committee met four times during 2009. The Corporate
Governance Committee provides recommendations to the Board with respect to Board
organization, membership, function, committee structure and membership,
succession planning for executive management, and the application of corporate
governance principles. The Corporate Governance Committee also performs the
16
functions
of a director nominating committee, leads the Board’s annual evaluation of the
Chief Executive Officer, and is authorized to exercise the authority of the
Board in the intervals between meetings.
The
current members of the Audit Committee are Ms. Dindo, Mr. Hoolihan, Mr. Mayer,
Mr. Neve (Chair), Mr. Rodman, and Mr. Stender (ex-officio). The Audit
Committee held eight meetings in 2009. The Audit Committee recommends the
selection of an independent registered public accounting firm, reviews the
independence and performance of the independent registered public accounting
firm, reviews and evaluates ALLETE’s accounting policies, reviews periodic
financial reports to be provided to the public, and upon favorable review,
recommends approval of the Consolidated Financial Statements.
The
current members of the Compensation Committee are Ms. Brekken, Mr. Emery, Mr.
Haines, Ms. Ludlow (Chair), Mr. Rajala, and Mr. Stender (ex-officio). The
Compensation Committee held seven meetings in 2009. The Compensation Committee
establishes compensation and benefit arrangements for ALLETE’s executive
officers and other key executives that are intended to be equitable, competitive
in the marketplace, and consistent with the Company’s executive compensation
philosophy. All members of the Compensation Committee qualify as “independent
directors” under the rules of the NYSE, “non-employee directors” under Rule
16b-3 of the Exchange Act, and “outside directors” under Section 162(m) of the
Internal Revenue Code of 1986, as amended (Tax Code), except that Mr. Rajala is
not an “outside director.” Mr. Rajala therefore abstains from voting on
decisions relating to compensation that is intended to qualify as
“performance-based” for purposes of Section162(m) of the Tax Code. Mr. Rajala is
retiring from the Board effective at the time of the Annual
Meeting.
Mr.
Stender, as Lead Director, is an ex-officio member of all committees. It is
anticipated that committee chairs will rotate among directors in the future. The
Board recognizes that the practice of chair rotation provides development for
the directors and allows a variety of perspectives in leadership
positions.
Mr.
Stender presides over all executive sessions of the independent directors.
Executive sessions of independent directors are regularly scheduled in
connection with Board and committee meetings.
During
2009, the Board held five meetings. All directors attended 75 percent or more of
the aggregate number of meetings of the Board and applicable committee meetings
in 2009. All directors standing for election are expected to attend the Annual
Meeting and all did attend in 2009.
Board
Leadership Structure
Prior to
and during the first part of 2009, Mr. Shippar served as President, Chairman,
and Chief Executive Officer of the Company. This combined leadership structure
was viewed as the most efficient means of unanimity of focus and reflected Mr.
Shippar’s leadership abilities. As a means of succession planning, Mr. Hodnik
was named President of the Company in May 2009, while Mr. Shippar retained the
positions of Chairman and Chief Executive Officer. In this role, Mr. Hodnik
oversees and directs the ongoing operations of the Company.
Effective
May 1, 2010, Mr. Hodnik has been named to the position of Chief Executive
Officer and President. Mr. Shippar will continue as a director and Chairman
of the Board. The Board has determined that maintaining Mr. Shippar as Board
Chair while Mr. Hodnik assumes his new responsibilities is the best means of
assuring a smooth transition in leadership of the Company.
Mr.
Stender serves as Lead Director. The Board believes that a lead director
provides important coordination and leadership for the independent directors. As
former CEO, Mr. Shippar will not be an “independent” Chairman.
Communications
Between Shareholders and the Board of Directors
Shareholders
and other interested parties who wish to communicate directly with the Board,
the non-management directors, or a particular director, may do so by addressing
the Lead Director, c/o the Secretary of ALLETE, 30 West Superior Street, Duluth,
MN 55802-2093.
17
Director
Common Stock Ownership Guidelines
The
Corporate Governance Committee has determined that directors should have an
equity interest in the Company. The Corporate Governance Committee believes that
such equity ownership aligns the interest of directors with the interests of the
Company’s shareholders. Accordingly, the Board has adopted Common Stock
ownership guidelines. Directors are expected to own at least 500 shares of
Common Stock prior to their election to the Board and to own at least 3,000
shares of Common Stock within three years after election. The Common Stock
ownership guidelines applicable to Named Executive Officers are discussed in the
Compensation Discussion and Analysis below.
Code
of Business Conduct and Ethics
The
Company has adopted a written Code of Business Conduct (which includes our code
of ethics) that applies to directors and all Company employees, including
ALLETE’s Chief Executive Officer, Chief Financial Officer and Controller. A copy
of the Company’s Code of Business Conduct is available on our Web site at www.allete.com. Any
amendment to or waiver of the Code of Business Conduct will be disclosed on our
Web site at www.allete.com
promptly following the date of such amendment or waiver.
Board’s
Oversight of Risk
The
Company views risk oversight as a full Board responsibility. During 2009, the
Company continued its implementation of an enterprise risk management (ERM)
process. The ERM process was discussed with management at Board meetings
throughout 2009. The Board has reviewed the potential events that may affect the
Company, the processes identified by management to manage the risks associated
with such events, and considered risk exposures in making strategic decisions.
Management provides the Board with regular updates of key risk indicators. The
Board’s focus on effective risk oversight has supported management’s
establishment of a tone and culture of effective risk management.
COMPENSATION
DISCUSSION AND ANALYSIS
Executive
Summary
This
Compensation Discussion and Analysis describes our compensation philosophy and
policies, including the rationale and processes used to determine the 2009
compensation of our executive officers. The Compensation Committee establishes
our compensation philosophy and objectives. Our compensation philosophy and
objectives are reflected in the following key design priorities that govern
compensation decisions:
|
|
·
|
Pay
is linked to performance;
|
|
|
·
|
Compensation
elements are balanced;
|
|
|
·
|
We
provide fair and competitive pay;
|
|
|
·
|
Executive
stock ownership is expected;
|
|
|
·
|
We
consider corporate tax deductions and accounting rules;
and
|
|
|
·
|
The
Compensation Committee and the Board exercise independent
judgment.
|
Our
compensation program is designed to attract and retain quality people, and to
reward Named Executive Officers for designing and implementing business
strategies that we believe will result in increased shareholder value over the
long term. Our compensation program includes a mix of pay elements to achieve
varying objectives. Elements of compensation include base salary, annual
incentives, long-term incentives, retirement benefits, health and welfare
benefits, perquisites, and severance benefits.
Market
compensation data obtained from the Compensation Committee’s independent
compensation consultants, along with other considerations the Compensation
Committee deemed relevant, formed the basis for the Compensation Committee’s
deliberations and compensation decisions for the executive officers in 2009. We
took the following actions in early 2009 to better align our annual and
long-term incentive compensation designs with our compensation philosophy and
objectives:
18
|
·
|
The Company changed the annual incentive to place more emphasis on pay-for-performance; |
|
|
·
|
The
Company changed the mix of long-term incentive awards to strike a better
balance between long-term performance and share ownership goals;
and
|
|
|
·
|
The
Company changed the group of companies used to measure total shareholder
return under the long-term incentive plan to place more emphasis on
long-term performance relative to the electric utility industry because
Florida real estate operations have become a much smaller component of the
Company.
|
The
specific design changes and the Compensation Committee’s rationale for the
changes are analyzed below in the section “2009 Executive Compensation Design
Changes” beginning on page 28.
In light
of the broader economic circumstances, there were no market-adjustment salary
increases in 2009 for executive officers and other management–level employees
and all car allowances were eliminated in early 2009 as cost saving
measures.
By
design, a significant portion of our executive officers’ compensation is linked
to performance. Our Named Executive Officers’ total compensation in 2009 was
less than 2008 because we did not achieve all of our financial targets. For
example, Mr. Shippar’s total compensation declined by 17 percent as compared to
2008 (as reported in column (i) of the Summary Compensation Table on page
31).
While we
made good progress developing and implementing business strategies that we
believe will increase shareholder value over the long term, our pursuit of our
financial goals in 2009 achieved mixed results. Our net income of
$63.8 million for 2009 (excluding certain non-operating events for purposes
of the annual incentive) was below the threshold annual incentive goal of $72.6
million. Our cash flow of $158.2 million (excluding pension contributions for
purposes of the annual incentive) was slightly higher than the threshold annual
incentive goal of $157.9 million. As a result, the annual incentive payment was
only 13.3 percent of the target payment for 2009, resulting in annual incentive
payments to Named Executive Officers ranging from 4 percent to 8 percent of base
salary.
During
the three-year performance period 2007–2009, the Company’s shareholders realized
a total shareholder return (TSR) of negative 18.8 percent on their investment in
Common Stock, which fell short of the threshold TSR performance level required
for payment of performance shares. As a result, the Named Executive Officers did
not receive any payment of performance shares for the 2007–2009 performance
period. Stock options granted from 2004 through 2008 were “underwater” as of
December 31, 2009, (with the market price of Common Stock below the stock option
exercise prices ranging from $37.76 to $48.65) and these stock options will not
provide compensation to the Named Executive Officers unless the stock price
increases above the exercise prices. Option exercise prices are shown in the
Outstanding Equity Awards at Fiscal-Year End—2009 Table on page 37.
Our
compensation philosophy and objectives and the elements of compensation are
discussed in detail in the sections to follow. This discussion of our
compensation goals, policies, and practices provides context for the detailed
compensation tables and narrative discussions that follow starting on page
31.
Compensation
Philosophy and Objectives
Our core
values and fundamental principles relating to executive compensation include the
following:
Pay is linked to performance.
Executive pay is linked to Company performance. We reward Named Executive
Officers for achieving annual goals tied to ALLETE’s business strategy.
Long-term incentives promote a stable, experienced executive management team and
reward growth in total shareholder return.
Compensation elements are balanced.
We use a mix of compensation elements to accomplish varying objectives.
Base pay and executive retirement benefits are designed to attract and retain
executive talent. Annual incentives focus Named Executive Officers on achieving
strong annual performance. Long-term incentives encourage executives to enhance
our long-term success and profitability and also provide incentive to remain
employed with the Company. Allocation between annual and long-term compensation
opportunities is based on market
19
comparison
data, as further described in the section “Process for Determining Executive
Compensation” beginning on page 26. Severance benefits minimize the risk that
our executive officers will depart prior to a change in control and encourage
continued dedication and objectivity from Named Executive Officers when
evaluating transactions that could result in the loss of employment in
connection with a change in control of the Company. We provide perquisites, but
only on a very limited basis to facilitate the Named Executive Officers’
performance of their responsibilities. We believe this mix of compensation
elements discourages our executives from taking excessive business risk by (i)
having multiple incentive goals, so that there is not undue pressure to achieve
one measure of success without considering the impacts on other aspects of the
business; and (ii) providing a significant portion of compensation based on
company performance, while still paying a certain amount of fixed compensation
and retirement benefits.
We provide fair and competitive pay.
We strive to offer fair and competitive compensation to all employees
including our Named Executive Officers. We use energy services industry data to
establish a range for executive compensation. While comparisons to compensation
levels within the energy services industry are helpful in establishing a range
for executive compensation, we believe that our executive compensation program
also must be internally consistent and equitable in order for the Company to
achieve our corporate objectives. In setting pay levels, we consider the
individual’s experience in the position, past performance, job responsibilities,
and equity within the executive management group. For a Named Executive Officer
with sufficient experience, we generally set compensation levels so that when
target performance is achieved under each of the Company’s incentive
compensation plans, total compensation is near the midpoint of the pay range
established using market comparison data. When relevant market comparison data
is insufficient to establish a pay range for a specific position, we consider
the internal pay equity among the executive officers in order to maintain
compensation levels that are consistent with the individual contributions and
responsibilities of those executive officers. The process of selecting
comparison companies for various purposes is discussed in the section “Process
for Determining Executive Compensation” beginning on page 26. Consistent with
our pay-for-performance philosophy, Named Executive Officers can earn higher
compensation if actual performance exceeds target performance goals. Conversely,
total compensation to Named Executive Officers in any year, such as 2009, in
which the Company does not meet target performance goals will generally fall
below the midpoint in comparison to other companies. Total compensation
generally increases as position and responsibility increase, but at the same
time, a greater percentage of total compensation is tied to performance—and is
therefore at risk—as position and responsibility increase. This is reflected in
the differences between Named Executive Officers’ opportunities under our annual
and long-term incentive plans.
Executive stock ownership is
expected. We believe all executive officers of ALLETE and any President
of a major affiliated company of ALLETE should be ALLETE shareholders to
encourage our executives to think as owners when they balance the risks and
rewards involved with particular business decisions. We reinforce this
expectation by using Common Stock to fund long-term incentive compensation
awards and Company contributions to its tax-qualified defined-contribution
retirement plan. All Named Executive Officers are expected to hold Common Stock
acquired through these awards and contributions so long as they hold their
executive positions. A Named Executive Officer, however, may sell Common Stock
to the extent that he or she owns Common Stock that is more than 120 percent of
the expected ownership amount. We do not apply this holding policy to Common
Stock acquired through stock option exercises because we believe that the Named
Executive Officers should be able to access a portion of their long-term
incentive compensation and to diversify their investments. Named Executive
Officers are expected to attain Common Stock ownership in accordance with the
following guidelines:
|
Position
|
Stock
Ownership Value as a Multiple of Salary
|
|
|
Chief
Executive Officer
ALLETE
President
ALLETE
Senior Vice President
ALLETE
Vice President
President
of Major Affiliate
|
4X
2X
2X
1X
1X
|
20
We
established the Common Stock ownership guidelines in October 2005. In 2009, the
Corporate Governance Committee established a Common Stock ownership guideline of
two times salary for the position of ALLETE President in connection with Mr.
Hodnik’s promotion to President. Named Executive Officers subject to the
ownership guidelines who held their current positions as of October 2005 have
until October 2010 to meet the guidelines; Named Executive Officers appointed
after October 2005 have seven years from their appointment to meet the
guidelines. Annually, the Board reviews executive officers’ Common Stock
ownership to confirm that the Named Executive Officers are progressing toward
the ownership guidelines. In October 2009, the Board determined that the Named
Executive Officers had increased the number of shares owned and were progressing
towards meeting the ownership guidelines based on the then-current share price.
However, executive officers’ Common Stock ownership value as a multiple of
salary decreased compared to a year ago due to recent declines in our share
price. Ownership levels as of March 12, 2010, are shown on the table on page
9.
We also consider corporate tax
deductions and accounting rules. We generally structure the Named
Executive Officers’ compensation so that all elements of pay are tax deductible
by the Company. Section 162(m) of the Tax Code limits to $1 million the amount
of compensation that we may deduct in any one year for Mr. Shippar and certain
of the next most-highly-compensated executive officers. That limit does not
apply to compensation that qualifies as “performance-based compensation” within
the meaning of Section 162(m). Our Executive Annual Incentive Plan (AIP)
provides that if Section 162(m) would otherwise limit the Company’s deduction
for an AIP award, then the Compensation Committee will defer the nondeductible
portion to our supplemental executive retirement plan, which is described on
page 40. We believe that stock options and performance shares awarded under the
ALLETE Executive Long-Term Incentive Compensation Plan (LTIP) are fully tax
deductible because they meet the “performance-based compensation” standard of
Section 162(m). In Proposal 4 below, we are requesting shareholder re-approval
of the material terms of the performance goals of our LTIP so that compensation
attributable to future plan awards can continue to qualify as deductible,
performance-based compensation. Our restricted stock units do not qualify as
“performance-based compensation.”
Section
280G of the Tax Code limits the amount that we may deduct for payments in
connection with a change of control, commonly referred to as “parachute
payments.” If total payments in connection with a change of control exceed the
limits of Section 280G, the Company’s deduction is limited and the recipient is
subject to an excise tax. Our severance plan provides that if plan payments to a
participant would exceed the Section 280G limits, payments to the participant
will be reduced to the maximum amount that can be paid without causing the
Company to lose its deduction. If, however, after the reduction a participant
would receive less than 85 percent of the amount that otherwise would have been
received, plan payments will not be reduced and the participant will instead
receive an additional gross-up payment to make the participant whole for the
excise tax. We would not receive a tax deduction for any additional gross-up
payment.
We also
consider the accounting implications of each compensation element given to Named
Executive Officers; however, because the primary objectives of our compensation
programs are tied to performance, we may offer compensation regardless of
whether it qualifies for a tax deduction or more favorable accounting treatment
whenever we deem that compensation to be in the Company’s best
interest.
The Compensation Committee and the
Board exercise independent judgment. The Compensation Committee and the
Board ensure on behalf of shareholders that executive compensation is
appropriate and effective. The Compensation Committee and the Board have access
to compensation advisors and consultants, but exercise independent judgment in
determining executive compensation elements and levels.
Elements
of Executive Compensation
Named
Executive Officers’ 2009 compensation elements are discussed below and also in
the compensation tables and narratives starting on page 31.
Base Salary. Base salary is
designed to attract and retain experienced, qualified leaders.
Annual Incentive Award. The
AIP rewards Named
Executive Officers for accomplishing annual goals. Annually, the Compensation
Committee, in consultation with the CEO, approves performance measures,
performance
21
targets,
and target award opportunities for the AIP. The Compensation Committee, in
consultation with the CEO, also determines to what extent performance targets
have been met for the AIP.
Participation
in the AIP is limited to certain management-level employees, including each
Named Executive Officer, because as position and responsibility increase, a
greater percentage of pay is tied to performance. For each Named Executive
Officer AIP awards were designed to reward achievement of corporate earnings and
cash flow goals, and to reward the accomplishment of strategic initiatives which
for 2009 included creating a business venture focused on renewable energy
markets, maintaining a competitive cost position to enable us to sell power to
the wholesale market if not sold to our retail customers, and leadership
development and succession planning. These performance objectives are further
described under “Grants of Plan-Based Awards Discussion” beginning on
page 34. Earnings were selected as a financial measure because it is widely
tracked and reported by external financial analysts and used as a measure to
evaluate the Company’s performance. Cash flow was selected as a financial
measure because it is used to evaluate the Company’s ability to generate funds
from internal operations for capital projects, repayment of debt, and dividend
payments. Earnings and cash flow were also selected because both measures can
impact the Company’s stock price. AIP awards are expressed as a percentage of
salary for Named Executive Officers; 2009 target-level award opportunities
ranged from 30 percent to 60 percent of salary. The Compensation Committee set
the AIP opportunity levels for all Named Executive Officers so that if the
Company achieved target goals, the combination of salary and annual incentives
for the Named Executive Officer would result in total annual compensation near
the midpoint of the ranges established using comparative benchmarking
data.
The
Compensation Committee believes that the AIP provides appropriate incentives and
does not encourage executives to take excessive business risks because it has
multiple goals, provides payment opportunity levels that are market-competitive
and includes a cap on the maximum award amount.
Long-Term Incentive Awards.
We use long-term incentive compensation to encourage Named Executive Officers to
develop and implement business strategies that grow TSR over time, and to reward
executives when TSR goals are achieved. Long-term incentive compensation
programs also encourage executives to stay with the Company because they deliver
rewards over time and contain forfeiture provisions for certain terminations of
employment. The Compensation Committee annually grants the Named Executive
Officers long-term incentive awards under the LTIP. Each year, in January, the
Compensation Committee approves LTIP awards. The target number of shares is
determined by dividing each Named Executive Officer’s target award opportunity
set forth in the table below by the award value, which was calculated for 2009
by Hewitt Associates (Hewitt), an independent compensation consulting firm
retained by the Compensation Committee. The award value calculated by Hewitt
differs from the compensation expense amount shown in column (d) of the Summary
Compensation Table on page 31 in that it also incorporates a discount factor to
adjust each long-term incentive award for (i) the performance characteristics of
our awards versus the awards granted by companies within our peer group and
(ii) the risk of forfeiture over the performance or vesting period. We do
not have any plan or program in place to time equity awards to the release of
material non-public information. The LTIP was most recently amended and approved
by shareholders in May 2005. In Proposal 4 below, we are requesting shareholder
re-approval of the material terms of the performance goals of our LTIP so that
compensation attributable to future plan awards can continue to qualify as
performance-based compensation within the meaning of Section
162(m).
The table
on the following page shows the 2009 LTIP target opportunity for each Named
Executive Officer. The 2009 LTIP target opportunity for each Named Executive
Officer, except for Mr. Shippar, was allocated 67 percent to performance shares
and 33 percent to restricted stock units. Mr. Shippar’s 2009 LTIP target
opportunity was allocated 75 percent to performance shares and 25 percent
to restricted stock units given the responsibility level of his position and to
further tie his compensation to performance. Performance shares and restricted
stock units were valued for 2009 at $26.13 each by Hewitt.
22
|
Allocation
of Long-Term Incentive
Target
Opportunity
|
|||
|
Name
|
Long-Term
Incentive
Target
Opportunity
|
Performance
Shares
|
Restricted
Stock
Units
|
|
Mr.
Shippar
|
$450,000
|
12,916
|
4,305
|
|
Mr.
Schober
|
$150,000
|
3,846
|
1,894
|
|
Mr.
Hodnik*
|
$250,000
|
6,842
|
3,370
|
|
Ms.
Amberg
|
$100,000
|
2,564
|
1,263
|
|
Mr.
Adams
|
$75,000
|
1,923
|
947
|
|
Ms.
Welty
|
$100,000
|
2,564
|
1,263
|
|
|
*
Mr. Hodnik was promoted to President effective May 12, 2009. His 2009 LTIP
incentive opportunity reflects an additional grant that he received in
connection with his promotion and increased
responsibilities.
|
The
following are the elements of long-term incentive compensation:
|
|
•
Performance
Shares. Performance shares reward executives for strong multi-year
performance, measured by TSR relative to a group of peer companies.
Relative TSR was selected by the Compensation Committee because it
measures the benefit our shareholders realize on their investment in
Common Stock compared to investment opportunities available in other
similar companies. Rewarding executives for creating shareholder value
over the long-term is consistent with our compensation philosophy of
linking pay to performance.
|
The CEO
recommends TSR peer groups based on comparability to the Company in terms of
size as measured by market capitalization, industry, and stock-trading
characteristics (i.e., dividend yield and price-earnings ratio). The
Compensation Committee approves the peer group companies prior to the start of
each performance period. The Company changed the TSR peer group for the
2009—2011 performance period for the reasons discussed under “2009 Executive
Compensation Design Changes” on page 28. The TSR peer groups used for
outstanding LTIP awards are as follows:
|
TSR Peer Groups
|
||
|
Performance
Period
2009–2011
|
Performance
Periods
2007–2009 and
2008–2010
|
|
|
Alliant
Energy Corporation
|
Avista
Corporation
|
|
|
Avista
Corporation
|
Black
Hills Corporation
|
|
|
Black
Hills Corporation
|
Brookfield
Asset Management, Inc.
|
|
|
CH
Energy Group, Inc.
|
CH
Energy Group, Inc.
|
|
|
Cleco
Corporation
|
Consolidated-Tomoka
Land Company
|
|
|
CMS
Energy Corporation
|
Great
Plains Energy Incorporated
|
|
|
DPL
Inc.
|
IDACORP,
Inc.
|
|
|
Great
Plains Energy Incorporated
|
Integrys
Energy Group, Inc.
|
|
|
Hawaiian
Electric Industries, Inc.
|
MDU
Resources Group, Inc.
|
|
|
IDACORP,
Inc.
|
Nicor
Inc.
|
|
|
Integrys
Energy Group, Inc.
|
Otter
Tail Corporation
|
|
|
MGE
Energy, Inc.
|
TECO
Energy, Inc.
|
|
|
Northeast
Utilities
|
The
Empire District Electric
Company
|
|
23
|
TSR
Peer Groups (continued)
|
||
|
Performance
Period
2009–2011
|
Performance
Periods
2007–2009 and 2008–2010
|
|
|
NorthWestern
Corporation
|
The
St. Joe Company
|
|
|
NSTAR
|
Vectren
Corporation
|
|
|
NV
Energy, Inc.
|
Wisconsin
Energy Corporation
|
|
|
OGE
Energy Corp.
|
||
|
Otter
Tail Corporation
|
||
|
Pinnacle
West Capital Corporation
|
||
|
PNM
Resources, Inc.
|
||
|
Portland
General Electric Company
|
||
|
TECO
Energy, Inc.
|
||
|
The
Empire District Electric Company
|
||
|
UIL
Holdings Corporation
|
||
|
UniSource
Energy Corporation
|
||
|
Vectren
Corporation
|
||
|
Westar
Energy, Inc.
|
||
|
|
•
Restricted Stock Units.
Restricted stock units are used as a retention incentive and to
encourage stock ownership. A restricted stock unit entitles the recipient
to one share of Common Stock when the unit vests after a period of time
specified in the award.
|
|
|
•
Stock Options.
The Company granted stock options prior to 2009. Stock options reward
Named Executive Officers for increases in the price of Common Stock over
the long term and encourage Named Executive Officers to remain with the
Company. In 2009, the Company did not grant stock options for the reasons
discussed under “2009 Executive Compensation Design Changes” on page
28.
|
Benefits
We offer
benefits, including retirement benefits, to attract and retain Named Executive
Officers; retirement benefits also reward long-term service with the Company.
Named Executive Officers are eligible to participate in a range of broad-based
employee benefits, including vacation pay, sick pay, disability benefits, an
employee stock purchase plan, and both active and post-retirement medical,
dental, and group term life insurance. Named Executive Officers are eligible for
retirement benefits under the same pension and retirement savings plans
available to other eligible employees and under our supplemental executive
retirement plan. Retirement benefits are described in more detail
below.
Tax-Qualified Retirement Benefits.
We provide retirement income benefits to most of our employees, including
the Named Executive Officers, from two primary sources—a tax-qualified defined
contribution retirement savings and stock ownership plan (RSOP) that has
features of both an employee stock ownership plan and a 401(k) savings plan, and
traditional tax-qualified defined benefit pension plans. Since October 2006, we
have emphasized delivering nonunion retirement benefits through the RSOP. Each
Named Executive Officer’s service through September 30, 2006, is counted for
calculating his or her benefit under the nonunion pension plan. The present
value on December 31, 2009, of each Named Executive Officer’s pension benefits
is shown in the Pension Benefits Table on page 39. The 2009 increase in the
pension benefits value for each Named Executive Officer is included in column
(g) of the Summary Compensation Table on page 31.
24
We
contribute to the RSOP accounts of the Named Executive Officers, who each may
also elect to defer his or her salary within RSOP and Tax Code limits. Our
contributions to the Named Executive Officers’ RSOP accounts include a Company
match of elective deferrals up to 4 percent of base salary and annual
Company contributions of 7.5 to 11.5 percent of base salary, dependent on age.
Amounts contributed by the Company under the RSOP to the Named Executive
Officers are included in column (h) of the Summary Compensation Table on page
31.
Supplemental Executive Retirement
Benefits. We provide supplemental retirement benefits to the Named
Executive Officers through non-tax-qualified retirement plans called the ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan (SERP I) and the
ALLETE and Affiliated Companies Supplemental Executive Retirement Plan II (SERP
II). SERP I and SERP II collectively are referred to as the SERP or the SERP
Plans. Generally, the SERP Plans are designed to provide retirement benefits to
the Named Executive Officers that, in aggregate, substantially equal the
benefits they would have been entitled to receive if the Tax Code did not impose
limitations on the types and amounts of compensation that can be included in the
benefit calculations under tax-qualified benefit plans. The SERP Plans have
three components: a supplemental pension benefit, a supplemental defined
contribution benefit, and a deferral account benefit. On December 31, 2004, the
Company froze SERP I with respect to all deferrals and vested accrued retirement
benefits. Effective January 1, 2005, the Company established SERP II to comply
with Section 409A of the Tax Code. SERP II governs all compensation initially
deferred and retirement benefits accrued or vested after December 31, 2004. SERP
benefits are discussed in more detail starting on page 40.
Perquisites
The
Company provides Named Executive Officers with fringe benefits, or perquisites,
but only on a very limited basis. As required by current tax laws, we impute
income to the Named Executive Officers to the extent the Company reimburses the
executive for certain personal expenses. Named Executive Officers receive an
additional tax reimbursement payment for the imputed income taxes. In response
to worsening economic conditions, in early 2009 Mr. Shippar recommended, and the
Compensation Committee approved, the elimination of car allowances for all
executive officers. The Compensation Committee has reviewed the few remaining
perquisites, including the tax reimbursement, and determined that they are a
very small component of total compensation and continue to be appropriate
because they help facilitate the Named Executive Officers’ performance of their
responsibilities. Perquisites paid in 2009 are included in column (h) of the
Summary Compensation Table on page 31.
Employment,
Severance, and Change in Control Agreements
We
currently have no employment agreements with our Named Executive Officers, all
of whom have long tenures with the Company. We have generally promoted senior
executives from within our ranks and attracted strong talent with ties to our
area of operations. The ALLETE and Affiliated Companies Change In Control
Severance Plan (Severance Plan) provides the Named Executive Officers and other
key executives with severance benefits in connection with a change in control of
the Company. The purpose of the Severance Plan is to enable and encourage the
continued dedication and objectivity of members of the Company’s management in
the event of a potential change in control. In the event of a potential change
in control of the Company, the Severance Plan allows the Named Executive
Officers to focus their attention on obtaining the best possible transaction for
the shareholders and to independently evaluate all possible transactions without
being diverted by concerns regarding the impact various transactions may have on
the security of their jobs and benefits.
Under the
Severance Plan, Named Executive Officers are entitled to receive specific
benefits in the event of an involuntary termination of employment (including
resignation by the employee following specified changes in duties, compensation,
or benefits that are treated as involuntary terminations) occurring six months
before and up to two years after a change in control. We think that requiring
two trigger events, both a change in control and termination of employment, is
the most effective way to meet the objectives of the Severance Plan—to allow the
Named Executive Officers to remain neutral and obtain the best deal for the
shareholders and ensures that the Named Executive Officers do not receive
benefits unless they are adversely affected by a change in control.
25
Under the
Severance Plan, Named Executive Officers would be entitled to receive a lump sum
severance payment ranging from 1.5 times to 2.5 times their annual compensation
based on their position plus a lump sum benefit continuation payment. The terms and benefit
levels were established by the Compensation Committee in
2008 after
consultation with Hewitt and a review of benefit
levels provided to senior executives in the energy services industry.
The Compensation Committee reviews the terms of the Severance Plan and benefit
levels annually and has determined that they are consistent with our
compensation philosophy and objectives described above beginning on page
19.
The SERP
II includes a change in control provision that accelerates payment of the
supplemental pension benefits and the deferral account benefits earned after
2004 upon a termination of employment in connection with a change in control.
There are also change in control features in both the AIP and the LTIP. These
change in control features of the AIP, LTIP, and SERP II are designed to prevent
substantial loss of benefits to Named Executive Officers if a change in control
were to occur. The potential value of change in control severance benefits are
discussed in the section titled, “Potential Payments Upon Termination or Change
in Control” starting on page 43.
Process
for Determining Executive Compensation
Role of the Compensation Committee.
The Compensation Committee establishes our compensation philosophy and
policies regarding executive compensation and oversees the administration of our
executive compensation programs. The Compensation Committee sets the CEO’s
compensation, which is reviewed and ratified by the Board without participation
by the CEO. In setting the CEO’s compensation, the Compensation Committee
reviews and considers the Corporate Governance Committee’s annual evaluation of
the CEO’s performance, which, among other things, assesses his performance
relative to specific annual objectives established by the Board. The
Compensation Committee also reviews market data, comparing the CEO’s
compensation to the compensation of senior executives at other energy services
industry companies. Benchmarking data is adjusted to account for the Company’s
size as measured by revenue and provides a broader market context for the
Compensation Committee’s deliberations and decisions. The Compensation Committee
also reviews and approves the CEO’s recommendations regarding the components and
amounts of the compensation of the other Named Executive Officers.
The
Compensation Committee retained Hewitt to provide custom survey data comparing
total compensation (base pay, target-level annual incentives, and target-level
long-term incentives) for the CEO position in energy services industry
companies. The Compensation Committee also directed Hewitt to provide
compensation data from the proxy statements of a peer group of companies. In
connection with Mr. Hodnik’s promotion to President effective May 12, 2009, the
Compensation Committee reviewed benchmarking data comparing his compensation to
the compensation of senior executives at other energy services industry
companies. In 2008 and early 2009, the Compensation Committee reviewed the
benchmarking analysis directly with Hewitt and reached the conclusions that are
described below, under “2008 Executive Compensation Study.” In October 2009, the
Compensation Committee retained Pearl Meyer & Partners (PM&P) to replace
Hewitt. PM&P assisted the Compensation Committee in evaluating executive
compensation for 2010. The Compensation Committee reviewed Hewitt’s 2009
benchmarking analysis directly with PM&P and reached the conclusions that
are described below, under “2009 Executive Compensation Studies” on page
29.
In
January of each year, the Compensation Committee, in consultation with the CEO,
sets annual performance goals for the AIP. At the same time, the Compensation
Committee establishes performance goals in connection with the LTIP.
Specifically, the Compensation Committee sets multi-year TSR objectives relative
to a designated peer group in connection with performance shares and sets the
terms for restricted stock units such as award dates, vesting periods,
expiration dates and forfeiture provisions.
Role of Management. For all
other Named Executive Officers, the CEO recommends compensation levels to the
Compensation Committee for approval. Recommendations are based in part on each
Named Executive Officer’s experience and responsibility level and on the CEO’s
assessment of his or her performance. At the beginning of each year the CEO
works with each Named Executive Officer to identify individual goals that are
aligned with corporate objectives, strategic plan objectives and individual
department objectives that are unique to each Named Executive Officer’s position
and scope of responsibility. Individual goals pertain to meeting financial
targets,
26
leading
and overseeing major projects, operational efficiencies, reliability,
compliance, safety, and leadership succession and effectiveness. The CEO
documents each Named Executive Officer’s performance during the year, detailing
accomplishments, areas of strength, and areas for development. The CEO bases his
evaluation on an individual written self-assessment completed by each Named
Executive Officer, his knowledge of their accomplishments, and discussions with
each Named Executive Officer. In addition to his assessment of the Named
Executive Officer’s performance, the CEO recommends compensation levels based on
the executive compensation studies described below. Management also recommends
to the Compensation Committee financial and non-financial goals to be used as
performance measures under the Company’s incentive compensation
plans.
2008 Executive Compensation Study.
In late 2008, the Compensation Committee directed Hewitt to perform a
comprehensive review of substantially all executive compensation elements to
assist the Compensation Committee in evaluating whether then-current
target-level compensation and pay elements were consistent with our compensation
philosophy and to provide context for the Compensation Committee’s 2009
compensation deliberations and decisions, and Mr. Shippar’s recommendations for
the other executive officers. Hewitt analyzed total aggregate compensation,
meaning base pay, annual incentives, and long-term incentives, of our executive
officers—as compared to the five most-highly compensated executive officers at
each company in a 21-company peer group. The study used the same 16-company peer
group as was used to measure our TSR performance under the LTIP for the
three-year period ending in December 31, 2009, plus five additional diversified
electric utilities, which were added to the peer group to better align the peer
group with our current operations. All of the companies were selected by the
Compensation Committee based on comparability to ALLETE in terms of size (i.e.,
market capitalization and enterprise value), industry, and stock-trading
characteristics (i.e., dividend yield, price-earnings ratio, and market-to-book
value). The companies in the 2008 peer group were as follows:
|
Avista
Corporation
Black Hills
Corporation
Brookfield
Asset Management Inc.
CH Energy
Group, Inc.
Consolidated-Tomoka
Land Company
DPL
Inc.
Great Plains
Energy Incorporated
Hawaiian
Electric Industries, Inc.
IDACORP,
Inc.
Integrys Energy
Group, Inc.
MDU Resources
Group, Inc.
|
Nicor
Inc.
OGE
Energy Corp.
Otter
Tail Corporation
PNM
Resources, Inc.
TECO
Energy, Inc.
The
Empire District Electric Company
The
St. Joe Company
UIL
Holdings Corporation
Vectren
Corporation
Wisconsin
Energy Corporation
|
The study
also included Hewitt’s custom survey data comparing total compensation (base
pay, target-level annual incentives, and target-level long-term incentives) to
the total compensation offered by the 42 energy services industry companies set
forth in Appendix B to this Proxy Statement.
In
addition, the study compared the value of the accumulated payment obligations of
the Company to the executive officers under our tax-qualified and
non-tax-qualified executive retirement plans; the then-current value of
unexercised stock options, performance share awards, unvested restricted stock
units, and Common Stock owned by each executive officer; and the value of
potential change in control severance benefits.
Upon
review, the Compensation Committee determined that a blend of the 21-company
peer group data and the energy services industry data was the most relevant
market value benchmark for evaluating the executive officers’ compensation
levels because it incorporated compensation data from companies to which we
directly compare our long-term performance and the broader energy services
industry.
The study
indicated that the 2008 base salary for each executive officer was near the 50th
percentile of the blended market value benchmark. The study also indicated that
2008 target-level annual incentive opportunity for each executive officer,
except for Mr. Adams, fell below the 50th percentile of the blended market value
benchmark. Mr. Adams’ 2008 target-level annual incentive opportunity fell near
the 50th
percentile of the blended market value benchmark. The 2008 grant-date value of
long-term incentive compensation for the executive officers was well below the
50th percentile of the blended market value benchmark. When these elements of
27
compensation
were considered in total, the executive officers’ target-level compensation
generally fell below the 50th percentile of the blended market value benchmark.
These percentiles were determined by adjusting the market data to account for
the Company’s size based on revenue.
The
Compensation Committee determined that the potential payments to executive
officers upon termination of their employment in connection with a change in
control of the Company were substantially below the values provided by the
companies in the peer group, but were fair and appropriate. The Compensation
Committee also determined that the accumulated retirement benefits were fair and
appropriate. Hewitt concluded and the Compensation Committee agreed that the
potential value of outstanding LTIP awards were substantially below the
comparative values of the peer companies.
This
market data, along with other considerations the Compensation Committee deemed
relevant, such as regional and national economic conditions, and executive
experience, tenure, and performance, formed the basis for the Compensation
Committee’s deliberations and compensation decisions for the executive officers
in early 2009.
2009 Executive Compensation Design
Changes. Based on the review in late 2008, the Compensation Committee
determined that the executive officers’ compensation included appropriate
elements, but that the AIP and LTIP target award opportunities were low compared
to market competitive levels. In early 2009, the Compensation Committee directed
the Company to increase AIP target award opportunities for each executive
officer, except for Mr. Adams, by 5 percent of salary thereby increasing
pay-for-performance. Although LTIP target award opportunities for each executive
officer fell well below the blended market value benchmark, Mr. Shippar
recommended no increases to the 2009 LTIP target award opportunities, except for
Mr. Adams, because of economic conditions. Mr. Shippar recommended increasing
Mr. Adams’ 2009 LTIP target award opportunity from $63,300 to $75,000 to
maintain internal pay equity among the other executive officers while at the
same time placing more emphasis on pay-for-performance. Mr. Shippar also
recommended no annual market-adjustment salary increases for executive officers
and other management-level employees who participate in the AIP and the
elimination of all car allowances as cost saving measures. The Compensation
Committee approved these recommendations.
The
Compensation Committee’s analysis of the executive compensation study did,
however, identify opportunities to better align our AIP and LTIP design with our
compensation philosophy and objectives described above beginning on page 19. To
accomplish those objectives, the Compensation Committee directed the Company to
take the following actions in early 2009:
|
|
•
The Company changed the AIP design to place more emphasis on
pay-for-performance. In order to receive any AIP payout based on achieving
AIP strategic goals, the Company must achieve threshold net income
performance.
|
|
|
•
The Company changed the mix of long-term incentive awards granted to
executive officers in 2009 under the LTIP. Restricted stock units were
granted instead of stock options to place more emphasis on increased stock
ownership and retention. Each restricted stock unit entitles the executive
officer to one share of Common Stock after three years from the award
date. Dividend equivalents accrue during the vesting period and are paid
in shares of Common Stock when the underlying restricted stock units vest.
Executive officers must remain employed by the Company at the time the
restricted stock units and accrued dividend equivalents vest to receive
the full award of Common Stock. The restricted stock units will vest
immediately on a prorated basis upon retirement, disability, death, or a
change in control of the Company.
|
|
|
•
The Company allocated a greater proportion of the target value LTIP awards
to performance shares to further emphasize pay-for-performance. The target
value of the 2009 LTIP awards for all executive officers, except for Mr.
Shippar, were allocated 67 percent to performance shares and 33 percent to
restricted stock units. The target value of Mr. Shippar’s 2009 LTIP award
was allocated 75 percent to performance shares and 25 percent to
restricted stock units given the responsibility level of his position and
to link more pay to performance.
|
28
| • The Company changed the group of companies used to measure TSR performance under the LTIP to place more emphasis on long-term performance relative to the electric utility industry, as our Florida real estate operations have become a much smaller component of the Company. Relative TSR performance is used to determine the number of performance shares earned under the LTIP. The peer group approved for 2009 is comprised of 27 companies selected from the Edison Electric Institute Stock Index based on comparability to the Company in terms of size as measured by market capitalization and payment of a dividend. These changes better align the peer group to our current operations which are focused on the electric utility industry and much less on Florida real estate. The changes to the peer group that were implemented are shown above, beginning on page 23. |
In
connection with Mr. Hodnik’s promotion to President in early 2009, the
Compensation Committee directed Hewitt to perform a review of base pay, annual
incentives, and long-term incentives of senior executives in the energy services
industry. The market data used in the “2008 Executive Compensation Study” as
described on page 27 along with other considerations the Compensation Committee
deemed relevant, such as experience, tenure, and performance, formed the basis
for the Compensation Committee’s deliberations and compensation decisions for
setting Mr. Hodnik’s compensation. Effective May 1, 2009, the Compensation
Committee set Mr. Hodnik’s base salary at $300,000, his 2009 AIP target
award opportunity at 40 percent of his base salary, and his 2009 long-term
incentive target award opportunity to $250,000. On February 8, 2010, the Board
selected Mr. Hodnik to succeed Mr. Shippar as CEO effective May 1, 2010.
The Compensation Committee, in consultation with the Corporate Governance
Committee and PM&P, anticipates they will review Mr. Hodnik’s compensation
in 2010 and set his compensation to reflect the additional responsibilities he
will assume as CEO.
In
mid-2009 Mr. Shippar recommended discontinuing, retroactive to January 1, 2009,
Results Sharing, a broad-based profit-sharing program that was available to
virtually all of our employees. Mr. Shippar made this recommendation because the
Minnesota Public Utilities Commission ruled that if the Company did not pay
Results Sharing awards because it did not achieve the performance goals, the
Company was required to refund customers any amount that had been previously
included in electric rates to fund Results Sharing awards. The Results Sharing
program had previously provided each Named Executive Officer a target-level
opportunity equal to 5 percent of base pay. For the Named Executive Officers,
the full 5 percent target award opportunity under Results Sharing was considered
pay-at-risk. In October 2009, the Compensation Committee approved an increase to
each Named Executive Officer’s AIP target opportunity equal to 5 percent of base
pay retroactive to January 1, 2009, to maintain the overall competitiveness of
the compensation program in a way that maintained the link between pay and
performance.
2009 Executive Compensation
Studies. In mid-2009, the Compensation Committee directed Hewitt to
update the 2008 study using the 27-company peer group shown above, beginning on
page 23. The study also included Hewitt’s custom survey data comparing total
compensation (base pay, target-level annual incentives, and target-level
long-term incentives) to the total compensation offered by the 50 energy
services industry companies set forth in Appendix B to this Proxy
Statement.
In late
2009, the Compensation Committee directed PM&P to review Hewitt’s custom
survey data, the design elements of our AIP and LTIP including financial
performance measures, performance requirements to earn threshold, target, and
maximum awards, and the mix of long-term incentive awards. The Compensation
Committee also directed PM&P to perform a risk assessment of our
compensation programs.
Based on
the 2009 executive compensation studies, PM&P concluded and the Compensation
Committee agreed that executive officers’ compensation included appropriate
elements, the AIP and LTIP target award opportunities for each executive officer
were fair compared to market competitive levels, and the compensation program is
appropriately structured for the Company and does not encourage executives to
take excessive risk.
29
EXECUTIVE
COMPENSATION COMMITTEE REPORT
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis with management. Based upon such review and the related
discussions, the Compensation Committee has recommended to the Board that the
Compensation Discussion and Analysis be included in the 2009 Annual Report on
Form 10-K (Annual Report) and this Proxy Statement to be delivered to Company
shareholders.
__________,
2010
Executive
Compensation Committee
Madeleine
W. Ludlow, Chair
Kathleen
A. Brekken
Sidney W.
Emery, Jr.
James S.
Haines, Jr.
Jack I.
Rajala
Bruce W.
Stender, ex-officio
30
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
The table
below summarizes the compensation paid to, granted to, or earned by each of our
Named Executive Officers for each of the last three fiscal years, except for Mr.
Hodnik and Mr. Adams, each of whom became a Named Executive Officer for the
first time in 2009. The values shown in column (d) for Stock Awards and column
(e) for Option Awards represent the grant-date fair market value, which is the
amount that will be recognized as an expense over the awards' vesting period.
The Stock Award and Option Award values shown do not represent amounts paid to
the Named Executive Officers in the year reported, but represent the theoretical
value of the future payout because the actual value a Named Executive Officer
earns will depend on the extent to which his or her LTIP goals are achieved and
on the market price of our Common Stock. The actual value each Named Executive
Officer realized in 2009 from Stock Awards and Option Awards is shown in the
Option Exercises and Stock Vested Table on page 38. Likewise, the amounts shown
in column (g) were not paid to the Named Executive Officers in the year
reported, but represent the change in the value of retirement benefits earned by
each Named Executive Officer under our retirement programs described beginning
on page 40.
SUMMARY
COMPENSATION TABLE―2009
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
|
Name
and
Principal
Position
|
Year
|
Salary
|
Stock
Awards1
|
Option
Awards2
|
Non-Equity
Incentive
Plan
Compen-
sation3
|
Change
in
Pension
Value
And
Nonqual-
ified
Deferred
Compen-
sation
Earnings4
|
All
Other
Compen-
sation5
|
Total
|
|
Donald
J. Shippar
Chairman
and
Chief
Executive Officer
|
2009
2008
2007
|
$560,000
$553,827
$526,577
|
$578,325
$398,364
$346,295
|
$0
$131,359
$155,869
|
$44,688
$407,550
$176,033
|
$589,544
$689,641
$528,777
|
$149,257
$121,061
$118,697
|
$1,921,814
$2,301,802
$1,852,248
|
|
Mark
A. Schober
Senior
Vice President and Chief Financial Officer
|
2009
2008
2007
|
$275,000
$272,085
$258,562
|
$191,539
$110,678
$70,033
|
$0
$54,734
$53,057
|
$16,459
$144,331
$77,068
|
$198,186
$164,692
$87,381
|
$51,939
$65,005
$62,624
|
$733,123
$811,525
$608,725
|
|
Alan
R. Hodnik
President
|
2009
|
$268,998
|
$331,051
|
$0
|
$17,955
|
$105,382
|
$79,041
|
$802,427
|
|
Deborah
A. Amberg
Senior
Vice President,
General
Counsel, and
Secretary
|
2009
2008
2007
|
$257,000
$254,785
$243,339
|
$127,703
$73,785
$59,460
|
$0
$36,488
$45,078
|
$13,672
$117,526
$63,522
|
$51,696
$43,029
$17,504
|
$42,702
$53,534
$55,023
|
$492,773
$579,147
$483,926
|
|
Robert
J. Adams
Vice
President - Business Development and Chief Risk Officer
|
2009
|
$219,000
|
$95,769
|
$0
|
$8,738
|
$48,239
|
$35,520
|
$407,266
|
|
Claudia Scott Welty6
Retired
Senior Vice President and Chief Administrative Officer
|
2009
2008
2007
|
$238,000
$236,058
$226,108
|
$127,703
$73,785
$55,427
|
$0
$36,488
$42,021
|
$12,662
$108,843
$58,915
|
$152,951
$139,739
$69,218
|
$52,972
$65,191
$55,872
|
$584,288
$660,104
$507,561
|
|
|
1
The amounts shown in column (d) relate to LTIP performance share
opportunities and to restricted stock unit opportunities each year for
each Named Executive Officer. The amounts shown reflect the grant-date
fair value determined in accordance with generally accepted accounting
principles using the same assumptions used in the valuation of
compensation expense disclosed in Note 17 to the Company’s Consolidated
Financial Statements contained in the Annual Report, but based on the
probable outcome of any performance conditions and excluding the effect of
estimated forfeitures. The grant-date fair market value is the total
|
31
|
|
amount
that we will recognize as an expense over the awards' vesting period,
except that the amounts shown do not include a reduction for forfeitures.
|
The
amounts shown in column (d) are comprised of the following:
|
Name
|
Year
|
Restricted Stock
Units
|
Performance
Shares*
|
Discretionary
Stock
Bonus
|
||||
|
Donald
J. Shippar
|
2009
2008
2007
|
$135,952
$0
$0
|
$442,373
$398,364
$308,525
|
$0
$0
$37,770
|
||||
|
Mark
A. Schober
|
2009
2008
2007
|
$59,813
$0
$0
|
$131,726
$110,678
$70,033
|
$0
$0
$0
|
||||
|
Alan
R. Hodnik
|
2009
|
$96,712
|
$234,339
|
$0
|
||||
|
Deborah
A. Amberg
|
2009
2008
2007
|
$39,886
$0
$0
|
$87,817
$73,785
$59,460
|
$0
$0
$0
|
||||
|
Robert
J. Adams
|
2009
|
$29,906
|
$65,863
|
$0
|
||||
|
Claudia
Scott Welty
|
2009
2008
2007
|
$39,886
$0
$0
|
$87,817
$73,785
$55,427
|
$0
$0
$0
|
|
|
*
The maximum grant-date fair value for each Named Executive Officer’s
unearned performance share awards assuming the highest level of
performance is probable: Mr. Shippar—$884,746, Mr.
Schober—$263,451, Mr. Hodnik—$468,677, Ms. Amberg—$175,634, Mr.
Adams—$131,726, and Ms.
Welty—$175,634.
|
|
|
2
The amounts shown in column (e) reflect the grant-date fair value
of the option awards excluding the effect of estimated forfeitures. The
assumptions used to calculate these amounts are disclosed in Note 17 to
the Company’s Consolidated Financial Statements included in the Annual
Report.
|
|
|
3
The amounts shown in column (f) are earned AIP awards, including
any amount that was deferred at the election of the Named Executive
Officer.
|
|
|
4
The amounts in column (g) for 2009 are comprised of the
following:
|
|
Aggregate Change in
Actuarial Present
Value of Accumulated
Defined Benefit
Pensions
During Year
|
Above Market Interest
on
Deferred
Compensation**
|
||
|
Donald
J. Shippar
|
$588,336
|
$1,208
|
|
|
Mark
A. Schober
|
$197,651
|
$535
|
|
|
Alan
R. Hodnik
|
$105,382
|
$0
|
|
|
Deborah
A. Amberg
|
$51,696
|
$0
|
|
|
Robert
J. Adams
|
$48,239
|
$0
|
|
|
Claudia
Scott Welty
|
$152,951
|
$0
|
|
|
**
Above-market interest was calculated using a 5.61 percent rate of return,
which exceeds 120 percent of the applicable federal long-term rate of 4.17
percent.
|
|
|
5
The amounts in column (h) for 2009 are comprised of the
following:
|
|
Perquisites
and
Other
Personal
Benefits*
|
Tax
Reimbursements **
|
Contributions
to
the RSOP and
Flexible Benefit
Plan
|
Contributions to
the
Supplemental
Executive
Retirement Plan
II
|
||||
|
Donald
J. Shippar
|
$25,152
|
$12,367
|
$49,639
|
$62,099
|
|||
|
Mark
A. Schober
|
$0
|
$0
|
$38,961
|
$12,978
|
|||
|
Alan
R. Hodnik
|
$19,285
|
$15,768
|
$36,474
|
$7,514
|
|||
|
Deborah
A. Amberg
|
$0
|
$0
|
$33,687
|
$9,015
|
|||
|
Robert
J. Adams
|
$0
|
$0
|
$32,631
|
$2,889
|
|||
|
Claudia
Scott Welty
|
$0
|
$0
|
$44,857
|
$8,115
|
|
|
* Amounts paid in 2009
include: (1) car allowances that were paid prior to their elimination in
early 2009: Mr. Shippar—$3,610, Mr. Hodnik—$2,755; (2) meal and
entertainment expenses for Named Executive Officer’s spouse paid by the
Company: Mr. Shippar—$3,382; (3) costs associated with an executive
physical for Mr. Shippar—$9,564, Mr. Hodnik—$13,866; and (4) club
memberships for Mr. Shippar—$7,212. Amounts also include reimbursement for
financial and tax planning services (up to $1,500 annually), an office
parking space, and club memberships having a primary business purpose (but
which may also allow Named Executive Officers personal use of the
facilities or services). The value assigned to each perquisite given to a
Named Executive Officer is based on the aggregate incremental cost to the
Company associated with the fringe benefit, except for club memberships,
in which the total cost is reported. The amounts reflect the full, actual
cost of the fringe benefit in all cases, except for spouses’ travel and
entertainment expenses. The aggregate cost to the Company for spousal
travel, meals, and entertainment was calculated as the full actual cost of
each benefit in excess of the amount the Company would have paid had the
Named Executive Officer been traveling or eating without his or her
spouse.
|
32
|
|
**
The tax reimbursements relate to imputed income from spousal travel,
executive physicals, and financial and tax planning services.
|
|
|
6
The amounts shown in column (d) for Ms. Welty were calculated
assuming she remained in the employ of the Company throughout the
applicable vesting periods. Under the terms of the LTIP, Ms. Welty’s stock
awards will be prorated as a result of her retirement. The prorated amount
of performance shares for which she is eligible due to her retirement is
shown in the Outstanding Equity Awards at Fiscal Year-End Table on page
37. The prorated amount of restricted stock units that vested due to her
retirement is shown in the Estimated Potential Payments Upon Termination
Due to Retirement, Disability, or Death Table on page 46.
|
GRANTS
OF PLAN-BASED AWARDS―2009
The
following Grants of Plan-Based Awards Table shows the range of each Named
Executive Officer’s annual and long-term incentive award opportunities granted
for the fiscal year ended December 31, 2009. The narrative following the table
describes the terms of each incentive award opportunity.
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
|
Name
and
Award
Type1
|
Grant
Date
|
Date
of
Compen-
sation
Committee
Action2
|
Estimated
Future Payouts
Under
Non-Equity
Incentive
Plan Awards3
|
Estimated
Future Payouts
Under
Equity
Incentive
Plan Awards
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or Units
|
Grant
Date
Fair
Value
of
Stock
and
Option
Awards4
|
||||
|
Threshold
|
Target
|
Maximum
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
|||||
|
Donald
J. Shippar
AIP
RSUs
Performance
Shares
|
1/19/09
2/02/09
2/02/09
|
1/19/09
1/19/09
1/19/09
|
$126,000
–
–
|
$336,000
–
–
|
$672,000
–
–
|
–
–
6,458
|
–
–
12,916
|
–
–
25,832
|
–
4,305
–
|
–
$135,952
$442,373
|
|
Mark
A. Schober
AIP
RSUs
Performance
Shares
|
1/19/09
2/02/09
2/02/09
|
1/19/09
1/19/09
1/19/09
|
$46,406
–
–
|
$123,750
–
–
|
$247,500
–
–
|
–
–
1,923
|
–
–
3,846
|
–
–
7,692
|
–
1,894
–
|
–
$59,813
$131,726
|
|
Alan
R. Hodnik
AIP
RSUs
RSUs
Performance
Shares
Performance
Shares
|
1/19/09
2/02/09
5/12/09
2/02/09
5/12/09
|
1/19/09
1/19/09
5/11/09
1/19/09
5/11/09
|
$50,625
–
–
–
–
|
$135,000
–
–
–
–
|
$270,000
–
–
–
–
|
–
–
–
1,282
2,139
|
–
–
–
2,564
4,278
|
–
–
–
5,128
8,556
|
–
1,263
2,107
–
–
|
–
$39,886
$56,826
$87,817
$146,522
|
|
Deborah
A. Amberg
AIP
RSUs
Performance
Shares
|
1/19/09
2/02/09
2/02/09
|
1/19/09
1/19/09
1/19/09
|
$38,550
–
–
|
$102,800
–
–
|
$205,600
–
–
|
–
–
1,282
|
–
–
2,564
|
–
–
5,128
|
–
1,263
–
|
–
$39,886
$87,817
|
|
Robert
J. Adams
AIP
RSUs
Performance
Shares
|
1/19/09
2/02/09
2/02/09
|
1/19/09
1/19/09
1/19/09
|
$24,638
–
–
|
$65,700
–
–
|
$131,400
–
–
|
–
–
962
|
–
–
1,923
|
–
–
3,846
|
–
947
–
|
–
$29,906
$65,863
|
|
Claudia
Scott Welty
AIP
RSUs5
Performance
Shares5
|
1/19/09
2/02/09
2/02/09
|
1/19/09
1/19/09
1/19/09
|
$35,700
–
–
|
$95,200
–
–
|
$190,400
–
–
|
–
–
1,282
|
–
–
2,564
|
–
–
5,128
|
–
1,263
–
|
–
$39,886
$87,817
|
|
|
1
AIP Awards are made under the AIP. Performance shares and
restricted stock units (RSUs), are awarded under the LTIP.
|
|
|
2
The restricted stock units and performance shares granted to Mr.
Hodnik on May 12, 2009, were approved by the Board on May 11, 2009, in
connection with his promotion to
President.
|
|
|
3
Actual awards earned
are shown in column (f) of the Summary Compensation Table on page 31.
|
33
|
|
4
The amounts shown in column (k) reflect the grant-date fair value
determined in accordance with generally accepted accounting principles
using the same assumptions used in the valuation of compensation expense
disclosed in Note 17 to the Company’s Consolidated Financial Statements
contained in the Annual Report, but based on the probable outcome of any
performance conditions and excluding the effect of estimated forfeitures.
The amounts shown for performance shares and restricted stock units are
the values of the awards for accounting purposes; the value a Named
Executive Officer realizes from performance shares will depend on actual
Common Stock performance relative to the 27-company peer group discussed
above, beginning on page 23, and market price appreciation and dividend
yield. The value Named Executive Officers realize from restricted stock
units will depend on the market value of Common Stock at the time of
vesting.
|
|
|
5
The amounts shown were calculated assuming Ms. Welty remained in the
employ of the Company throughout the applicable restricted stock unit
vesting periods and performance share performance periods. Under the terms
of the LTIP, Ms. Welty’s restricted stock units and performance shares
will be prorated as a result of her
retirement.
|
|
|
GRANTS
OF PLAN-BASED AWARDS DISCUSSION
|
The
Company’s 2009 incentive awards for all Named Executive Officers, consisted of
one annual incentive opportunity—the AIP, and two long-term incentive
opportunities—performance shares and restricted stock units. Each incentive
award is discussed below.
Annual Incentive Plan. For
all the Named Executive Officers, the following were the 2009 AIP performance
goals, goal weighting, and goal measures.
|
AIP
Performance
Goals
|
Goal
Weighting
|
Goal
Measures
|
||||
|
Threshold
|
Target
|
Superior
|
||||
|
Net
Income (NI)
|
50%
|
$72.6
million
|
$74.8
million
|
$83.1
million
|
||
|
Cash
From Operating Activities (CFOA)
|
25%
|
$157.9
million
|
$162.8
million
|
$180.7
million
|
||
|
Strategic
Goals
|
25%
|
Various;
See Below
|
||||
Strategic
goals for 2009 were related to the Company’s ability to create a business
venture focused on renewable energy markets, maintaining a competitive cost
position to enable the Company to sell power to the wholesale market if not sold
to its retail customers, and leadership development and succession planning.
Each AIP goal’s achievement was independently measured. By design, no awards are
earned if both financial goal results fall below their threshold performance
levels. The amount of the target award opportunity earned is based on the goal
weighting percentage assigned to the AIP performance goals achieved. The amount
of the target award opportunity allocated to the strategic goals is contingent
on achieving NI threshold performance. The amounts shown in column (d) of the
Grants of Plan-Based Awards Table on page 33 reflect the minimum AIP award that
would be payable—ranging from 11.3 percent to 22.5 percent of base salary—if
both NI and CFOA results are at threshold and if there is no progress on
strategic goals. The amounts shown in column (e) reflect the AIP target-level
awards that would be payable—ranging from 30 percent to 60 percent of base
salary—if NI and CFOA results are at target and all strategic goals are
achieved. The amount shown in column (f) reflects maximum AIP awards that would
be payable—ranging from 60 percent to 120 percent of base salary—if NI and CFOA
results are at superior and all strategic goals are surpassed.
The CEO,
with input from senior management, assesses the progress made on achieving the
strategic goals which are subjective in nature and makes a recommendation to the
Compensation Committee as to the degree to which such goals have been achieved.
The Compensation Committee then approves each AIP goal achievement level. Actual
2009 NI fell below the threshold by 12 percent, or $8.8 million; CFOA
exceeded threshold by less than 1 percent, or $0.3 million; and strategic
goals, overall, were met. The resulting total AIP payout for 2009 was calculated
as follows:
34
|
Goal
|
Goal
Weighting
|
%
of Goal
Achievement
|
%
of Target
Opportunity
Payout
|
|||
|
NI
|
50%
|
0.0%
|
0.0%
|
|||
|
CFOA
|
25%
|
53.2%
|
13.3%
|
|||
|
Strategic
Goals
|
25%
|
112.0%
|
0.0%*
|
|||
|
Total
|
100%
|
13.3%
|
|
|
*While each strategic goal was
achieved, there was no associated payout because 2009 NI fell below
threshold.
|
As a
result, the amounts shown in column (f) of the Summary Compensation Table on
page 31 include AIP
awards earned at 13.3 percent of target in 2009, which ranged from 4 percent to
8 percent of base salary for the Named Executive Officers.
Named
Executive Officers may elect to receive their AIP award in cash, or to defer
some or all of it in accordance with SERP II. Named Executive Officers who
retire, die, or become disabled during the year remain eligible to receive a
prorated AIP award if the applicable performance goals are achieved. Named
Executive Officers who terminate employment for any other reason forfeit the AIP
award.
Performance Shares. Three
performance share awards, each encompassing a different three-year performance
period, are reflected in the Summary Compensation Table on page 31 in the year
that the performance period commenced and the performance share awards for the
performance period beginning in 2009 are reflected in the Grants of Plan-Based
Awards Table on page 33. These performance share awards are summarized as
follows:
|
Performance
Period
Beginning
|
Performance
Period
Ending
|
Status
of Performance Share
Award
as of December 31, 2009
|
||
|
January
1, 2009
|
December
31, 2011
|
Performance
Period Not Complete; Not Vested
|
||
|
January
1, 2008
|
December
31, 2010
|
Performance
Period Not Complete; Not Vested
|
||
|
January
1, 2007
|
December
31, 2009
|
Unearned;
Forfeited
|
In 2009,
the Named Executive Officers were granted performance share awards for the
three-year performance period beginning on January 1, 2009 and ending on
December 31, 2011. The number of shares of Common Stock earned pursuant to the
2009 performance share awards will be based on the Company’s TSR ranking
relative to a 27-company peer group. A more detailed discussion of the TSR peer
group is provided above, beginning on page 23.
The
amounts shown in column (g) of the Grants of Plan-Based Awards Table on page 33
reflect the minimum 2009 performance share award payable, set at 50 percent of
the target amount shown in column (h), which will be earned if ALLETE’s TSR for
the three-year performance period ranks nineteenth among the peer group. The
amounts shown in column (h) reflect the target performance share award payable
if ALLETE’s TSR for the three-year performance period ranks fourteenth among the
peer group. The amount shown in column (i) reflects the maximum performance
share award payable, set at 200 percent of the target amount, which will be
earned if ALLETE’s TSR for the three-year performance period ranks fourth or
higher among the peer group. A performance share award is earned at each ranking
from nineteenth to first. Performance share awards earned at TSR rankings that
fall between nineteenth, fourteenth and fourth are interpolated on a
straight-line basis.
Dividend
equivalents accrue during the performance period and are paid in shares, but
only to the extent performance goals are achieved. If earned, 100 percent of the
performance shares will be paid in Common Stock after the end of the performance
period. A Named Executive Officer who retires, dies, or becomes disabled during
the performance period remains eligible to receive a payment of performance
shares if the applicable performance goals are achieved. The actual number of
performance shares will be prorated to reflect the portion of the performance
period actually worked. Upon a change in control, performance share awards would
immediately pay out on a prorated basis, including dividend equivalents, at the
greater of the target level or the level earned based on then-current actual TSR
ranking as compared to the peer group companies. The grant-date fair value for
performance shares awarded to each Named Executive Officer is included in the
amount shown in column (d) of the Summary Compensation Table on page
31.
35
Performance
shares awarded for both the 2009–2011 and the 2008–2010 performance periods
remain unearned unless and until the performance goals are achieved at the end
of the respective performance periods. The number of performance shares awarded
to each Named Executive Officer in each of those periods is shown in column
(h) of the Outstanding Equity Awards at Fiscal Year-End Table on page 37.
An estimated market value of the unearned and unvested performance shares,
assuming threshold performance in the case of the 2009–2011 performance period
and target performance in the case of the 2008–2010 performance period is shown
in column (i) of that table. The actual value, if any, to the Named Executive
Officers will be determined at the end of 2010 and 2011, respectively, based on
the Company’s actual TSR ranking for the three-year performance period relative
to the peer group.
During
the three-year performance period 2007–2009, the Company’s shareholders realized
a TSR of negative 18.8 percent on their investment in Common Stock, ranking
the Company thirteenth among the peer group of 16 comparable companies. As
a result, the Named Executive Officers did not earn a performance share payout
for the 2007–2009 performance period and those performance shares were
forfeited.
Restricted Stock Units. The
number of restricted stock units awarded to the Named Executive Officers in 2009
is shown in column (j) of the Grants of Plan-Based Awards Table on page 33. Each
restricted stock unit entitles the Named Executive Officer to receive one share
of Common Stock when the unit vests after the period of time specified in the
award. The restricted stock units granted in 2009 vest on the third anniversary
of the award date. The Named Executive Officers must remain employed by the
Company at the time restricted stock units vest to receive the Common Stock.
Dividend equivalents accrue during the vesting period and are paid in shares,
but only to the extent that the restricted stock units actually vest. Upon the
Named Executive Officer’s retirement, disability, or death, or upon a change in
control of the Company, a prorated number of the restricted stock units would
vest immediately. The full grant-date fair value for restricted stock units
awarded to each Named Executive Officer is included in the amount shown in
column (d) of the Summary Compensation Table on page 31. The number of unvested
restricted stock units outstanding at the end of 2009, including dividend
equivalents, is shown in column (f) of the Outstanding Equity Awards at Fiscal
Year-End Table on page 37, while the value of the award as of December 31,
2009, is shown in column (g).
Subject
to the relevant plan documents, the Compensation Committee has full discretion
to determine the terms and conditions of awards under the AIP and LTIP programs.
This discretion includes the ability to increase, reduce, or eliminate awards
regardless of whether applicable performance goals have been achieved.
Outstanding LTIP awards, however, may not be adversely affected without the
consent of the Named Executive Officer. The Compensation Committee did not
exercise discretion to increase, reduce or eliminate awards during
2009.
36
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END—2009
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
|
|
Option
Awards
|
Stock
Awards
|
||||||||
|
Name
|
Number
of Securities
Underlying
Unexercised
Options
|
Option
Exercise
Price
|
Option
Expiration
Date
|
Number
of
Shares
or
Units
of
Stock
That
Have
Not
Vested3
|
Market
Value
of
Shares or
Units
of Stock
That
Have Not
Vested4
|
Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units,
or
Other Rights That Have Not
Vested5
|
Equity
Incentive
Plan
Awards:
Market
or
Payout
Value of
Unearned
Shares,
Units,
or
Other Rights
That
Have Not
Vested6
|
||
|
Exercisable
|
Unexercisable1
|
||||||||
|
Donald
J. Shippar
|
5,090
|
$166,341
|
17,095
|
$558,665
|
|||||
|
7,217
|
0
|
$29.79
|
1/02/2012
|
||||||
|
13,905
|
0
|
$37.76
|
2/02/2014
|
||||||
|
19,618
|
0
|
$41.35
|
2/01/2015
|
||||||
|
20,256
|
0
|
$44.15
|
2/01/2016
|
||||||
|
12,750
|
6,375
|
$48.65
|
2/01/2017
|
||||||
|
11,029
|
22,059
|
$39.10
|
2/01/2018
|
||||||
|
Mark
A. Schober
|
2,239
|
$73,171
|
4,902
|
$160,197
|
|||||
|
4,413
|
0
|
$29.79
|
1/02/2012
|
||||||
|
2,207
|
0
|
$23.79
|
2/03/2013
|
||||||
|
3,579
|
0
|
$37.76
|
2/02/2014
|
||||||
|
4,167
|
0
|
$41.35
|
2/01/2015
|
||||||
|
5,234
|
0
|
$44.15
|
2/01/2016
|
||||||
|
4,340
|
2,170
|
$48.65
|
2/01/2017
|
||||||
|
4,595
|
9,192
|
$39.10
|
2/01/2018
|
||||||
|
Alan
R. Hodnik
|
3,984
|
$130,197
|
5,312
|
$173,596
|
|||||
|
1,366
|
0
|
$37.76
|
2/02/2014
|
||||||
|
1,655
|
0
|
$41.35
|
2/01/2015
|
||||||
|
2,165
|
0
|
$44.15
|
2/01/2016
|
||||||
|
1,874
|
938
|
$48.65
|
2/01/2017
|
||||||
|
2,214
|
4,429
|
$39.10
|
2/01/2018
|
||||||
|
Deborah
A. Amberg
|
1,493
|
$48,791
|
3,268
|
$106,798
|
|||||
|
1,360
|
0
|
$27.40
|
1/02/2011
|
||||||
|
1,209
|
0
|
$29.79
|
1/02/2012
|
||||||
|
1,209
|
0
|
$23.79
|
2/03/2013
|
||||||
|
1,070
|
0
|
$37.76
|
2/02/2014
|
||||||
|
3,549
|
0
|
$41.35
|
2/01/2015
|
||||||
|
6,004
|
0
|
$44.15
|
2/01/2016
|
||||||
|
3,687
|
1,844
|
$48.65
|
2/01/2017
|
||||||
|
3,063
|
6,128
|
$39.10
|
2/01/2018
|
||||||
|
Robert
J. Adams
|
1,120
|
$36,602
|
2,246
|
$73,399
|
|||||
|
2,889
|
0
|
$37.76
|
2/02/2014
|
||||||
|
3,492
|
0
|
$41.35
|
2/01/2015
|
||||||
|
3,411
|
0
|
$44.15
|
2/01/2016
|
||||||
|
2,114
|
1,058
|
$48.65
|
2/01/2017
|
||||||
|
1,939
|
3,879
|
$39.10
|
2/01/2018
|
||||||
|
Claudia
Scott Welty2
|
0
|
$0
|
1,673
|
$54,674
|
|||||
|
3,862
|
0
|
$27.40
|
1/02/2011
|
||||||
|
3,367
|
0
|
$29.79
|
1/02/2012
|
||||||
|
3,367
|
0
|
$23.79
|
12/31/2012
|
||||||
|
3,557
|
0
|
$37.76
|
12/31/2012
|
||||||
|
4,338
|
0
|
$41.35
|
12/31/2012
|
||||||
|
5,442
|
0
|
$44.15
|
12/31/2012
|
||||||
|
5,156
|
0
|
$48.65
|
12/31/2012
|
||||||
|
9,191
|
0
|
$39.10
|
12/31/2012
|
||||||
|
|
1
Each option award has a ten-year term. Therefore, the grant date
for each award is the date ten years prior to the date shown in column
(e). Options vest in three equal installments on each of the first,
second, and third anniversaries of the grant date.
|
|
|
2
Ms. Welty retired on
December 31, 2009. Her options then unexercisable became fully vested as
of her retirement date. She has until the earlier of the original
expiration date or three years from her retirement date to exercise all
her outstanding options.
|
|
|
3
The amounts shown include the restricted stock units granted on
February 2, 2009, to each Named Executive Officer and to Mr. Hodnik on May
12, 2009, plus dividend equivalents. Restricted stock units vest three
years after the grant date provided the Named Executive Officer continues
to be employed by the Company. The restricted stock units granted to Ms.
Welty on
|
37
February
2, 2009 are shown in column (d) of the Option Exercises and Stock Vested Table
below because the restricted stock units vested on a prorated basis due to her
retirement on December 31, 2009.
|
|
4
The amount shown was calculated by multiplying the number of units
in column (f) by $32.68, the closing price of Common Stock on
December 31, 2009.
|
|
|
5
Represents the Common Stock that would be payable for outstanding
performance share awards if target performance were achieved (a TSR
ranking of ninth among the 16-company peer group) for the performance
period 2008–2010 and if threshold performance was achieved (a TSR ranking
of nineteenth among the 27-company peer group) for the performance period
2009–2011. The amounts shown for Ms. Welty reflect the prorated amounts
for which she is eligible due to her December 31, 2009 retirement. The
Named Executive Officers did not earn a performance share payout for the
2007–2009 performance period. As a result, those performance shares are
not shown because they were
forfeited.
|
|
|
6
These amounts were calculated by multiplying the number of shares
and units in column (h) by $32.68, the closing price of Common Stock on
December 31, 2009.
|
|
|
OPTION
EXERCISES AND STOCK VESTED—2009
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
Option
Awards
|
Stock
Awards
|
|||
|
Number
of Shares
Acquired
on
Exercise
|
Value
Realized
on
Exercise
|
Number
of Shares
Acquired
on Vesting1
|
Value
Realized
on
Vesting
|
|
|
Donald
J. Shippar
|
–
|
–
|
–
|
–
|
|
Mark
A. Schober
|
–
|
–
|
–
|
–
|
|
Alan
R. Hodnik
|
–
|
–
|
–
|
–
|
|
Deborah
A. Amberg
|
–
|
–
|
–
|
–
|
|
Robert
J. Adams
|
–
|
–
|
–
|
–
|
|
Claudia
Scott Welty
|
–
|
–
|
335
|
$11,167
|
|
|
1Pursuant to the LTIP terms, Ms.
Welty will not receive the Common Stock until six months after her
separation from service.
|
38
PENSION
BENEFITS—2009
|
(a)
|
(b)
|
(c)
|
(d)
|
|
|
Name
|
Plan
Name
|
Number
of
Years
Credited
Service1
|
Present
Value of
Accumulated
Benefit2
|
|
|
Donald
J. Shippar
|
Minnesota
Power and Affiliated Companies
Retirement
Plan A
|
28.67
|
$941,571
|
|
|
Minnesota
Power and Affiliated Companies
Retirement
Plan B
|
1.08
|
$129,753
|
||
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan
|
28.00
|
$514,140
|
||
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan II
|
33.00
|
$2,845,412
|
||
|
Mark
A. Schober
|
Minnesota
Power and Affiliated Companies
Retirement
Plan A
|
28.67
|
$729,077
|
|
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan II
|
31.92
|
$526,101
|
||
|
Alan
R. Hodnik
|
Minnesota
Power and Affiliated Companies
Retirement
Plan A
|
11.75
|
$151,167
|
|
|
Minnesota
Power and Affiliated Companies
Retirement
Plan B
|
12.75
|
$365,855
|
||
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan II
|
27.75
|
$203,942
|
||
|
Deborah
A. Amberg
|
Minnesota
Power and Affiliated Companies
Retirement
Plan A
|
16.17
|
$160,021
|
|
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan II
|
19.33
|
$98,003
|
||
|
Robert
J. Adams
|
Minnesota
Power and Affiliated Companies
Retirement
Plan A
|
19.67
|
$217,320
|
|
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan II
|
22.92
|
$97,554
|
||
|
Claudia
Scott Welty
|
Minnesota
Power and Affiliated Companies
Retirement
Plan A
|
27.67
|
$797,336
|
|
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan
|
25.92
|
$173,041
|
||
|
ALLETE
and Affiliated Companies
Supplemental
Executive Retirement Plan II
|
30.75
|
$303,003
|
||
|
|
1
The amounts in column (c) for SERP II reflect actual years of
service with the Company. Credited service under Retirement Plan A (as
defined below) stopped on September 30, 2006 and under SERP I stopped on
December 31, 2004. Mr. Shippar and Mr. Hodnik’s credited service under
Retirement Plan B (as defined below) reflects the actual time that they
were active participants in Retirement Plan
B.
|
|
|
2
The amounts shown in column (d) represent the discounted net
present values of the annual annuity payments to which the Named Executive
Officers would be entitled at retirement assuming they retire at age 62,
the earliest age at which Named Executive Officers may receive unreduced
pension benefits. In addition to retirement age, the following assumptions
were used to calculate the present value of accumulated benefits: discount
rate of 5.81 percent; cost of living adjustment of 2.5 percent; and
female spouses are assumed to be three years younger than male spouses.
The amounts reflect the accumulated pension benefits over the years of
credited service shown for each
plan.
|
39
PENSION
BENEFITS DISCUSSION
Minnesota
Power and Affiliated Companies Retirement Plan A (Retirement Plan A) is a
tax-qualified defined benefit pension plan that covers the majority of our
nonunion employees, including the Named Executive Officers. Pension benefits are
based on the employee’s years of service and the employee’s final average
earnings. Final average earnings covered by Retirement Plan A include the
highest consecutive 48 months of salary and Results Sharing awards in the last
15 years of service. As the result of a Company-wide nonunion benefit change,
Named Executive Officers have not accrued additional credited service under
Retirement Plan A since September 30, 2006. The pension benefit is
calculated as a life annuity using the following formula:
|
[
|
0.8%
|
×
|
years
of credited service from July 1, 1980
through
September 30, 2006
|
]
|
×
|
final
average earnings
|
|
|
plus
(for Named Executive Officers hired before July 1,
1980)
|
|||||||
|
[
|
10%
|
+
|
(1%
× years of credited service
prior
to July 1, 1980)
|
]
|
×
|
final
average earnings
|
|
Mr.
Shippar and Mr. Hodnik are also entitled to a pension benefit under the
Minnesota Power and Affiliated Companies Retirement Plan B (Retirement Plan B)
based on positions each held previously. Retirement Plan B is a tax-qualified
defined benefit pension plan that covers the majority of our union employees.
The Retirement Plan B pension benefit is calculated as a life annuity using the
following formula:
|
[
|
10%
|
+
|
(1%
× years of credited service)
|
]
|
×
|
final
average earnings
|
The 10
percent portion of the formulas is prorated, based on years of service, between
Retirement Plan A and Retirement Plan B for Mr. Shippar. Final average earnings
covered by Retirement Plan B include the highest consecutive 48 months of salary
and Results Sharing awards in the last 10 years of service. The remaining terms
of Retirement Plan B are substantially the same as Retirement Plan A (Retirement
Plan A and Retirement Plan B are collectively referred to as the Retirement
Plans).
Normal
retirement age under the Retirement Plans is age 65 with at least five years of
continuous service with the Company. Named Executive Officers become eligible
for an unreduced early retirement benefit at age 62 if they have at least 10
years of continuous service, or at age 58 if they have at least 40 years of
continuous service. Named Executive Officers are first eligible for a reduced
early-retirement benefit at age 50 with at least 10 years of continuous service.
Early retirement benefits are calculated by reducing the retirement benefit by
4 percent for each year and partial year between age 62 and the early
retirement benefit commencement age. Mr. Shippar, Mr. Schober and Mr.
Hodnik are currently eligible to receive early retirement benefits. Ms. Amberg
and Mr. Adams have a vested Retirement Plan A benefit, but are not
currently eligible to receive early retirement benefits. Ms. Welty retired on
December 31, 2009, elected the normal form of benefit, and began receiving her
Retirement Plan benefit on January 31, 2010.
Each
Named Executive Officer is married. The normal form of Retirement Plan A benefit
payment for married participants is a life annuity with a 60 percent surviving
spouse benefit. The normal form of Retirement Plan B benefit payment for married
participants is a life annuity with a 50 percent surviving spouse benefit. At
normal retirement age, each optional form of benefit payment is the actuarial
equivalent of the normal form of benefit payment for both Retirement Plans. The
Retirement Plans do not provide for lump sum distributions. Once pension benefit
payments have commenced, the benefit adjusts in future years to reflect changes
in cost of living, with a maximum adjustment of 3 percent per year.
Both the
annual earnings that may be considered in calculating benefits under the
Retirement Plans and the annual benefit amount that the Retirement Plans may
deliver to a Named Executive Officer are limited by the Tax Code. The SERP Plans
are designed to provide supplemental pension benefits, paid out of general
Company assets, to
40
eligible
executives including the Named Executive Officers, in amounts sufficient to
maintain total pension benefits upon retirement at the level which would have
been provided by our Retirement Plans if benefits were not restricted by the Tax
Code. The SERP formula is calculated as follows:
|
[
|
0.8%
|
×
|
years
of credited service from July 1, 1980
through
retirement or termination date
|
]
|
×
|
SERP
final average earnings
|
|
|
plus
(for Named Executive Officers hired before July 1,
1980)
|
|||||||
|
[
|
10%
|
+
|
(1%
× years of credited service
prior
to July 1, 1980)
|
]
|
×
|
SERP
final average earnings
|
|
The
compensation generally used to calculate SERP benefits is the sum of a
participant’s (i) annual salary and Results Sharing awards in excess of the Tax
Code limits imposed on Retirement Plan A and (ii) AIP awards. The earnings used
for purposes of calculating SERP benefits are equal to the highest consecutive
48 months of such SERP compensation. The highest-consecutive 48-month salary and
AIP awards can result from different periods; however, both the salary and the
AIP awards must fall within the last 15 years of service. The present value on
December 31, 2009, of each Named Executive Officer’s SERP pension benefit is
shown in the Pension Benefits Table on page 39. The 2009 increase in the SERP II
pension benefit value for each Named Executive Officer is included in column (g)
of the Summary Compensation Table on page 31.
Each
Named Executive Officer has elected a date when SERP benefit payments will
commence and has elected the form of benefit payment. The normal form of payment
for SERP I benefits is a 15-year annuity. The optional form of payment for the
SERP I benefits is a life annuity, which is the actuarial equivalent of the
normal form of payment. The normal form of payment for SERP II is a 15-year
annuity. The optional forms of payment for SERP II benefits are a life annuity
or a lump sum, each of which is actuarially equivalent to the normal form of
payment.
SERP I
benefits vest and become payable only if the Named Executive Officer retires
after reaching age 50 with 10 years of service. SERP I payments commence upon
retirement.
SERP II
benefits vest and become payable only if the Named Executive Officer (i) retires
after reaching age 50 with 10 years service, (ii) becomes disabled after
reaching age 50 with 10 years of service, or (iii) reaches age 50 after becoming
disabled with 10 years of service. Vested SERP II benefit payments commence upon
the earlier of retirement or disability, or if a disability occurs prior to
vesting, the earlier of attaining age 65 or the date of death. The SERP II
benefits accrued after December 31, 2004, are accelerated upon a termination in
connection with a change in control under the Severance Plan.
In all
other respects, the eligibility requirements for SERP retirement benefits and
the calculation of SERP early retirement benefits mirror Retirement Plan A’s
eligibility requirements and early retirement benefits discussed
above.
41
NONQUALIFIED
DEFERRED COMPENSATION—2009
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|
|
Name
|
Plan
Name
|
Executive
Contributions
in
20091
|
Company
Contributions
in
20092
|
Aggregate
Earnings
in
20093
|
Aggregate
Balance as of
December
31,
20094
|
|
|
Donald
J.
Shippar
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan
|
$0
|
$0
|
$33,849
|
$414,279
|
|
| ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan II
|
$16,800
|
$70,046
|
$57,441
|
$729,119
|
||
|
Minnesota
Power and Affiliated Companies
Executive
Investment Plan II
|
$0
|
$0
|
$12,414
|
$201,357
|
||
|
Mark
A.
Schober
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan
|
$0
|
$0
|
$118,751
|
$720,791
|
|
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan II
|
$71,459
|
$13,624
|
$15,199
|
$927,057
|
||
| Minnesota
Power and Affiliated Companies
Executive
Investment Plan II
|
$0
|
$0 |
$5,609
|
$95,257
|
||
|
Alan
R.
Hodnik
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan
|
$0
|
$0
|
$32,780
|
$173,064
|
|
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan II
|
$0
|
$7,514
|
$10,624
|
$72,695
|
||
|
Deborah
A.
Amberg
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan
|
$0
|
$0
|
$19,010
|
$224,270
|
|
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan II
|
$6,836
|
$9,213
|
$50,062
|
$278,731
|
||
|
Robert
J.
Adams
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan
|
$0
|
$0
|
$14,417
|
$60,508
|
|
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan II
|
$0
|
$0
|
$5,750
|
$28,311
|
||
|
Claudia
Scott
Welty
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan
|
$0
|
$0
|
$85,442
|
$571,314
|
|
|
ALLETE
and Affiliated Companies Supplemental
Executive
Retirement Plan II
|
$0
|
$0
|
$16,607
|
$963,112
|
|
|
1The
amounts shown in column (c) include the following amounts: (i) salary
earned and deferred in 2009 that was also reported in column (c) of the
Summary Compensation Table on page 31: Mr. Shippar—$16,800 and Mr.
Schober—$55,000; and (ii) compensation that was earned and deferred in
2009 that was also reported in column (f) of the 2009 Summary Compensation
Table: Mr. Schober—$16,459 and Ms.
Amberg—$6,836.
|
|
|
2Amounts
shown in column (d) reflect compensation that was earned and deferred in
2009 that was also reported in column (h) of the Summary Compensation
Table.
|
|
|
3The
amounts shown in column (e) represent unrealized and realized earnings,
including above-market interest earned in 2009 on nonqualified deferral
balances, which was also reported in column (g) of the Summary
Compensation Table as follows: Mr. Shippar—$1,208 and Mr. Schober—$535.
Above-market interest was calculated using a 5.61 percent rate of return,
which exceeds 120 percent of the applicable federal long-term rate of 4.17
percent.
|
|
|
4
The aggregate balance shown for the SERP II includes
compensation that was previously earned and reported in 2007 and 2008
on the Summary Compensation Table as follows: Mr. Shippar—$223,979, Mr.
Schober—$267,832, Ms. Amberg—$105,071, and Ms. Welty—$360,941.
These amounts have since been adjusted for investment performance (i.e.,
earnings and losses) and deferrals credited during 2009. The aggregate
balances shown for the SERP I and the Minnesota Power and Affiliated
Companies Executive Investment Plan II include compensation that was
previously earned and reported in the Summary Compensation Table prior to
2007 and have since been adjusted for investment performance (i.e.,
earnings and losses).
|
42
The SERP
also provides a supplemental defined contribution benefit and a deferral account
benefit. The SERP supplemental defined contribution benefit is designed to
provide Named Executive Officers a benefit that is substantially equal to the
benefit they would have been entitled to receive if the Tax Code did not impose
limitations on the types and amounts of compensation that can be included in the
benefit calculations under the Flexible Benefit Plan and RSOP. Annually, each
Named Executive Officer may elect to defer to a SERP II deferral account, on a
before-tax basis, some or all of his or her salary and AIP award. Named
Executive Officers whose base salary is below the tax-qualified benefit plan’s
annual compensation limits may also elect to defer some or all of the SERP II
defined contribution benefit. Named Executive Officers can select among
different crediting rates to apply to deferral balances under the SERP Plans,
which match the investment options available to all employees under the RSOP.
These investment options include mutual funds and similar investments. The Named
Executive Officers may change their investment elections at any time. The amount
of the 2009 SERP II defined contribution benefit received by each Named
Executive Officer is included in column (h) of the Summary Compensation Table on
page 31. The aggregate amount each Named Executive Officer elected to defer and
the amount that the Company contributed to the SERP II in 2009 is shown in the
Nonqualified Deferred Compensation Table on page 42.
Each
Named Executive Officer has elected a date when benefit payments from his or her
SERP I and SERP II deferral accounts will commence and has elected the form of
benefit payment. Generally, SERP I and SERP II deferral account benefit payments
will not begin earlier than the elected commencement date. However, for
contributions made prior to January 1, 2005, the full SERP I deferral account
balance will be paid prior to the scheduled commencement date to any Named
Executive Officer who is not eligible to retire at the time he or she terminates
employment with the Company. In addition, a Named Executive Officer may request
an early distribution of some or all of his or her SERP I deferral account
balance upon a demonstrated severe financial need, or at any time prior to the
first scheduled payment date, may elect an early withdrawal of contributions
made to his or her account prior to January 1, 2005, subject to a 10 percent
early withdrawal penalty.
A Named
Executive Officer is not allowed to elect to receive an early withdrawal of
amounts contributed after January 1, 2005, to his or her SERP II deferral
account, except that he or she may request early withdrawal in the event of an
unforeseen emergency, which request is subject to the approval of the
Compensation Committee. Contributions made to a SERP II deferral account after
December 31, 2004, will be paid in full upon a termination of employment in
connection with a change in control.
A Named
Executive Officer may elect to receive his or her SERP deferral account balance
in the form of either a lump sum payment or monthly installments over a 5-, 10-,
or 15-year period, or a combination of both. A Named Executive Officer who
retires will receive a fixed 7.5 percent annual interest crediting rate on his
or her deferral account balance until paid in full.
Prior to
1996, the Company also provided executives an opportunity to elect to defer
salary and AIP awards under the Minnesota Power and Affiliated Companies
Executive Investment Plan II (EIP II), a nonqualified deferred compensation
plan. Deferrals pursuant to such opportunity ended in 2002 and EIP II has been
closed to new contributions since then. The Company resets the crediting rate
under the EIP II annually at 120 percent of the rolling average of the 10-year
Treasury Note. The EIP II benefits become payable upon retirement in the form of
monthly annuity payments over a 5-, 10-, or 15-year period as elected by the
executive. Generally, EIP II benefit payments will not begin earlier than the
elected commencement date. However, the Named Executive Officer may request an
early distribution of some or all of his EIP II account balance upon a
demonstrated severe financial need, or at any time prior to the first scheduled
payment date, he or she may elect an early withdrawal of his account balance
subject to a 10 percent early withdrawal penalty.
POTENTIAL
PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
The
Severance Plan covers each Named Executive Officer as well as other key
executives (collectively, Participants). Under the Severance Plan, a change in
control of ALLETE generally means any one of the following events:
|
|
•
Acquisition by any person, entity, or group acting together of more than
50 percent of the total fair market value or total voting power of the
Company’s Common Stock;
|
|
|
•
Acquisition in any 12-month period of 40 percent or more of the Company’s
assets by any person, entity, or group acting
together;
|
43
•
Acquisition in any 12-month period of 30 percent or more of the total
voting power of the Company’s Common Stock by any person, entity, or group
acting together; or
|
|
• A
majority of members of the Board of Directors is replaced during any
12-month period.
|
Each
Named Executive Officer is entitled to receive specified benefits in the event
his or her employment is involuntarily terminated six months before or up to two
years after a change in control. An involuntary termination is deemed to occur
if (i) the Company terminates the employment of the Named Executive Officer
other than for cause, or (ii) the Named Executive Officer resigns from his or
her employment with good reason. Cause generally includes reasons such as
failure to perform duties, willful misconduct, or felony convictions. Good
reason generally means a material reduction in the Named Executive Officer’s
responsibilities or authority; a material reduction in his or her supervisor’s
responsibilities or authority; a material reduction in base salary, incentive
compensation, or other benefits; a material breach by the Company of an
agreement under which a Named Executive Officer provides services; or
reassignment to another geographic location more than 50 miles from the Named
Executive Officer’s current job location.
Under the
Severance Plan, Mr. Shippar, Mr. Schober, Mr. Hodnik and Ms. Amberg would be
entitled to receive a lump sum severance payment of 2.5 times their annual
compensation. Mr. Adams would receive a severance payment of 1.5 times his
annual compensation. Ms. Welty’s participation in the Severance Plan ended upon
her retirement; therefore, she would not be entitled to receive a lump sum
severance payment. Annual compensation includes base salary and an amount
representing a target award under the AIP in effect for the year of termination.
The Severance Plan also provides a lump sum benefit continuation payment to Mr.
Shippar, Mr. Schober, Mr. Hodnik and Ms. Amberg approximately equal in
value to the benefits (as specified below) that they would have received had
they remained in the employ of the Company after their termination for an
additional 2.5 years, and in the case of Mr. Adams, an additional
1.5 years. The lump sum benefit continuation payment includes the value of
the following benefits: (i) premiums for medical, dental, and basic group term
life insurance benefits; (ii) Company contributions under the Flexible Benefit
Plan; and (iii) the present value of additional SERP II benefits the Participant
would have received under the SERP II had employment continued for 2.5 or 1.5
years after the later of the change in control or termination, as
applicable.
As a
condition of receiving the payments under the Severance Plan, Participants must
sign a waiver of potential claims against the Company, and must agree not to
disclose confidential information, engage in any business in competition with
the Company for a period of one year, recruit any employee or director of the
Company for employment for a period of two years, or publicly criticize the
Company.
Upon a
change in control, awards under the AIP would be calculated as if the end of the
performance year had occurred, based on the Company’s performance through the
date of the change in control. AIP awards could range from zero to 200 percent
of the target award opportunity depending on actual goal results. The SERP II
also provides for a lump sum payment of benefits earned after December 31, 2004,
through the termination of employment in connection with a change in control.
Under the LTIP, if a change in control were to occur, unvested stock options
would immediately vest, restricted stock units would immediately vest on a
prorated basis, and performance share awards would immediately pay out on a
prorated basis at the greater of target level or the level earned based on
then-current actual TSR ranking as compared to the peer group companies.
The total
amount of severance payments due under the Severance Plan plus any payments
accelerated under the AIP, LTIP, and SERP II, due to a change in control, will
be limited to an amount which would result in no portion of such amount being
subject to excise tax under Section 4999 of the Tax Code, unless the payment
would have to be reduced to an amount less than 85 percent of the amount the
Named Executive Officer would otherwise have received, absent the imposition of
the excise tax. If payments to a Named Executive Officer would be reduced to an
amount less than 85 percent of the amount the Named Executive Officer would
otherwise have received, total payments would not be reduced and the Named
Executive Officer would instead receive an additional gross-up payment that
would provide the Named Executive Officer with the same net after-tax payment
the Named Executive Officer would have received if the excise tax had not
applied to any of the payments.
44
Estimated
Potential Payments Upon Termination Associated with a Change in
Control
If a
change in control had occurred on December 31, 2009, and if, as a result, a
Named Executive Officer’s employment was terminated, the following table
illustrates the value that the Named Executive Officer would have
received.
|
Payments
|
Mr.
Shippar
|
Mr.
Schober
|
Mr.
Hodnik
|
Ms.
Amberg
|
Mr.
Adams
|
Ms.
Welty10
|
|
Severance
|
$2,240,000
|
$996,875
|
$1,087,500
|
$792,582
|
$427,050
|
$0
|
|
Annual
Incentive Plan1
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Unvested
Stock Options2
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Performance
Shares3
|
561,212
|
148,098
|
126,564
|
107,524
|
69,102
|
0
|
|
Unvested
Restricted Stock Units4
|
45,552
|
20,056
|
30,779
|
13,371
|
10,012
|
0
|
|
SERP
II Pension5
|
400,328
|
129,494
|
63,821
|
0
|
0
|
0
|
|
SERP
II Defined Contribution6
|
175,117
|
34,060
|
18,784
|
23,032
|
4,334
|
0
|
|
Benefits7
|
46,909
|
41,703
|
39,704
|
39,559
|
23,022
|
0
|
|
Outplacement
Services8
|
25,000
|
25,000
|
25,000
|
25,000
|
25,000
|
0
|
|
Excise
Tax & Gross-Up9
|
1,307,398
|
552,169
|
584,425
|
0
|
0
|
0
|
|
Total
Payments
|
$4,801,516
|
$1,947,455
|
$1,976,577
|
$1,001,068
|
$558,520
|
$0
|
|
|
1
Because the performance period ended on December 31, 2009, no
acceleration of benefits would have occurred under this
scenario.
|
|
|
2
The award values for stock options were calculated based on the
difference between the option exercise price and the $32.68 closing price
of Common Stock on December 31,
2009.
|
|
|
3
Outstanding performance shares for the performance periods
2007—2009, 2008—2010, and 2009—2011 would be accelerated under this
scenario. The amounts shown assume that target TSR performance would be
used to calculate the award payout for the 2007—2009, 2008—2010, and
2009—2011 performance periods; all amounts were calculated based on the
$32.68 closing share price of Common Stock on December 31,
2009.
|
|
|
4
The award values for restricted stock units were calculated based
on the $32.68 closing price of Common Stock on December 31,
2009.
|
|
|
5
Ms. Amberg and Mr. Adams would not be eligible for retirement
benefits even after being credited with an additional 2.5 and 1.5 years of
service, respectively.
|
|
|
6
The amounts shown reflect 2.5 years and 1.5 years, as applicable,
of SERP II defined contribution
benefits.
|
|
|
7
The amounts shown reflects the value of (i) medical, dental, and basic
group term life insurance benefit premiums, (ii) Company
contributions under the Flexible Benefit Plan that the Named Executive
Officers would have received had they remained in the employ of the
Company after their termination for an additional 2.5 years or, in the
case of Mr. Adams, an additional 1.5
years.
|
|
|
8
The Company will pay outplacement service providers directly up to
the amount shown for the cost of outplacement services provided to the
Named Executive Officers. No amount will be paid unless the Named
Executive Officers choose to utilize outplacement services within the time
frame specified in the Severance
Plan.
|
|
|
9
Mr. Shippar, Mr. Schober, and Mr. Hodnik would be subject to the
excise tax and eligible for a gross-up payment. The gross-up payment would
cover (i) the amount of federal excise taxes, and (ii) the additional
income taxes resulting from payment of the
gross-up.
|
|
|
10
Because Ms. Welty retired, she was not eligible to receive
any payments upon a change in control on December 31,
2009.
|
Estimated
Potential Payments Upon Termination Due to Retirement, Disability or
Death
The LTIP
also provides for immediate accelerated vesting of stock options and, on a
prorated basis, of restricted stock units upon the retirement, disability, or
death of a Named Executive Officer. Named Executive Officers have three years
from retirement, and one year from disability or death, to exercise all
outstanding stock options. Named Executive Officers may be entitled to a
prorated performance share award upon retirement, disability, or death if TSR
performance goals are achieved at the conclusion of the three-year performance
period.
45
The
following table illustrates the value Named Executive Officers would have
received solely in connection with accelerated vesting triggered by a
retirement, disability or death, had the event occurred on December 31, 2009,
except as to Ms. Amberg and Mr. Adams, for whom retirement is not a potential
triggering event.
|
Payments
|
Mr.
Shippar
|
Mr.
Schober
|
Mr.
Hodnik
|
Ms.
Amberg
|
Mr.
Adams
|
Ms.
Welty
|
|
Annual
Incentive Plan1
|
$0
|
$0
|
$0
|
$0
|
$0
|
$0
|
|
Unvested
Stock Options2
|
0
|
0
|
0
|
0
|
0
|
0
|
|
Performance
Shares3
|
166,323
|
46,218
|
22,277
|
30,812
|
19,494
|
30,808
|
|
Unvested
Restricted Stock Units4
|
45,552
|
20,056
|
30,779
|
13,371
|
10,012
|
10,938
|
|
Total
Payments
|
$211,875
|
$66,274
|
$53,056
|
$44,183
|
$29,506
|
$41,746
|
|
|
1Because
the performance period ended on December 31, 2009, no acceleration of
benefits would have occurred under this
scenario.
|
|
|
2
The award values for stock options were calculated based on the
difference between the option exercise price and the $32.68 closing share
price of Common Stock on December 31,
2009.
|
|
|
3
Outstanding performance shares for the performance periods
2007—2009, 2008—2010, and 2009—2011 would be earned on a prorated basis
under this scenario if TSR performance goals are achieved at the
conclusion of the three-year performance period. The amounts shown assume
performance shares would be earned for the 2009—2011 performance period
based on TSR performance of 83.3 percent of target through December 31,
2009. The amounts shown assume no performance shares were or would be
earned for the 2008—2010 performance period because TSR performance for
this performance period as calculated through December 31, 2009 was below
the threshold performance level. The amounts shown reflect no performance
share amount for the performance period 2007—2009 because TSR performance
was below the threshold performance level and as a result, the performance
shares were forfeited. Award values were based on the $32.68 closing price
of Common Stock on December 31,
2009.
|
|
|
4
The award values for restricted stock units were calculated and
prorated based on the $32.68 closing share price on December 31,
2009.
|
Estimated
Additional Payments Due to Long-Term Disability
Typically
ALLETE employees, including the Named Executive Officers, who become disabled
may, while on long-term disability, continue to be treated as employees for
certain purposes, including remaining eligible to earn retirement plan
contributions and credited service for purposes of calculating the SERP II
benefit until the earlier of voluntary resignation or reaching normal retirement
age. The table below illustrates the estimated additional SERP II benefit that
would have been earned by each Named Executive Officer if he or she had gone on
long-term disability on December 31, 2009.
|
Mr.
Shippar
|
Mr.
Schober
|
Mr.
Hodnik
|
Ms.
Amberg
|
Mr.
Adams
|
Ms.
Welty2
|
|
|
Additional
SERP II Benefit1
|
$0
|
$0
|
$11,150
|
$158,901
|
$138,486
|
$0
|
|
|
1 The
amounts shown represent the difference between the discounted net present
values of the annual annuity payments to which the Named Executive
Officers would be entitled upon a termination of employment occurring on
December 31, 2009, and at normal retirement age. The following assumptions
were used to calculate the amounts shown above: Each Named Executive
Officer became disabled on December 31, 2009, and remained on disability
until reaching normal retirement age; discount rate of 5.81 percent; cost
of living adjustment of 2.5 percent; and female spouses are assumed to be
three years younger than male spouses.
|
|
|
2
Because Ms. Welty retired, she was not eligible to receive any
additional SERP II benefit.
|
Named
Executive Officers do not receive any other enhancements to their retirement
benefits upon termination of employment other than in connection with a change
in control or becoming disabled as described above. Vested retirement benefits
become payable upon termination of employment as discussed in the Pension
Benefits Discussion starting on page 40. The SERP and EIP II deferral account
benefits become payable upon termination of employment as described following
the Nonqualified Deferred Compensation Table beginning on page 42.
46
DIRECTOR
COMPENSATION—2009
The
Compensation Committee has primary responsibility for the process of developing
and evaluating the non-employee director compensation programs. The Board
approves the non-employee director compensation programs.
The
following table sets forth the non-employee director compensation earned in
2009.
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
|
Name
|
Fees Earned
or
Paid in
Cash1
|
Stock
Awards1,
2
|
Option
Awards3
|
All
Other
Compensation4
|
Total
|
|
Kathleen
A. Brekken
|
$45,020
|
$59,980
|
$0
|
$0
|
$105,000
|
|
Kathryn
W. Dindo
|
$19,503
|
$59,997
|
$0
|
$10,000
|
$89,500
|
|
Heidi
J. Eddins
|
$42,020
|
$59,980
|
$0
|
$0
|
$102,000
|
|
Sidney
W. Emery, Jr.
|
$37,520
|
$59,980
|
$0
|
$322
|
$97,822
|
|
James
S. Haines, Jr.
|
$9,375
|
$60,000
|
$0
|
$7,500
|
$76,875
|
|
James
J. Hoolihan
|
$39,020
|
$59,980
|
$0
|
$1,000
|
$100,000
|
|
Madeleine
W. Ludlow
|
$43,020
|
$59,980
|
$0
|
$0
|
$103,000
|
|
George
L. Mayer
|
$46,520
|
$59,980
|
$0
|
$0
|
$106,500
|
|
Douglas
C. Neve
|
$47,520
|
$59,980
|
$0
|
$0
|
$107,500
|
|
Jack
I. Rajala
|
$45,020
|
$59,980
|
$0
|
$0
|
$105,000
|
|
Leonard
C. Rodman
|
$24,500
|
$60,000
|
$0
|
$35,000
|
$119,500
|
|
Bruce
W. Stender
|
$55,020
|
$59,980
|
$0
|
$1,691
|
$116,691
|
|
|
1Mr.
Haines and Mr. Rodman elected to defer all of their eligible director fees
under the ALLETE Non-Employee Director Compensation Deferral Plan
II.
|
|
|
2This
amount reflects the grant-date fair value of the annual stock retainer
paid on June 1, 2009, at which time each director, except Ms. Dindo and
Mr. Haines, received 2,260 fully-vested shares of Common Stock valued at
$26.54. Due to mid-year appointments to the Board, Ms. Dindo received
2,054 shares valued at $29.21 and Mr. Haines received 1,815 shares valued
at $33.06.
|
|
|
3Mr.
Rajala had 3,879 fully-vested stock option awards outstanding as of
December 31, 2009.
|
|
|
4The
amounts shown in column (e) for Ms. Dindo, Mr. Haines, and Mr. Rodman
include compensation paid to them in 2009 for the period during which each
was a nominee and during which each attended Board Meetings and performed
services comparable to that of a director. The total paid for such
services equaled the compensation that each would have received if they
had been a director. The amounts shown in column (e) also reflect tax
reimbursement related to spousal travel for Mr. Emery, Mr. Hoolihan,
and Mr. Stender. The aggregate cost to the Company for spousal travel was
calculated as the full actual cost of each benefit in excess of the amount
the Company would have paid had the director been traveling or eating
without his or her spouse and, in each case, was less than
$10,000.
|
Employee
directors receive no additional compensation for their services as directors.
The Company pays each non-employee director under the terms of the ALLETE
Director Stock Plan an annual retainer fee, a portion of which is paid in cash
and a portion of which is paid in Common Stock as set forth below:
|
2009
Annual Retainer Fees
|
|||
|
Cash
|
Stock
|
||
|
Lead
Director
|
$55,000
|
$60,000
|
|
|
All
Other Directors
|
$30,000
|
$60,000
|
|
47
In
addition, the Company pays each non-employee director, other than the Lead
Director, annual cash retainer fees for each committee and chair assignment as
set forth below:
|
2009
Committee Retainer Fees
|
|||
|
Member Fee
|
Chair
(Includes Member Fee)
|
||
|
Audit
Committee
|
$9,000
|
$17,500
|
|
|
Compensation
Committee
|
$7,500
|
$13,000
|
|
|
Corporate
Governance Committee
|
$7,500
|
$12,000
|
|
Retainer
fees are prorated based on the actual term of service per year.
The Lead
Director receives the Lead Director cash retainer and the director stock
retainer fee, but does not receive any other committee or chair retainers.
Directors may elect to receive all or part of the cash portions of their
retainer fees in Common Stock.
We
provide a deferral account benefit to the directors under the terms of the
ALLETE Director Compensation Deferral Plan (Deferral Plan I) and the ALLETE
Non-Employee Director Compensation Deferral Plan II (Deferral Plan II). Deferral
Plan I and Deferral Plan II collectively are referred to as the Deferral Plans.
On December 31, 2004, the Company froze Deferral Plan I with respect to all
deferrals. Effective January 1, 2005, the Company established Deferral Plan II
to comply with Section 409A of the Tax Code. Deferral Plan II governs all cash
retainers initially deferred after December 31, 2004. On May 1, 2009, the Board
amended the Deferral Plan II to permit directors to elect to defer their stock
retainers.
Annually,
each director may elect to defer to a Deferral Plan II cash account some or all
of his or her cash retainer fees. Directors can select among different
investment crediting rates to apply to deferral cash account balances under the
Deferral Plans. These investment options include mutual funds and similar
investments. The directors may change their investment elections at any time.
Annually, each director may elect to defer to a Deferral Plan II stock account
some or all of his or her stock retainer fees. Deferred stock retainer fees are
credited to a director’s stock account that mirrors the performance of our
Common Stock and is credited with dividend equivalents equal to cash dividends
that are declared and paid on our Common Stock.
Each
director elects a date when benefit payments from his or her Deferral Plan I and
Deferral Plan II accounts will commence and the form of benefit payment.
Generally, Deferral Plan I and Deferral Plan II account benefit payments will
not begin earlier than the elected commencement date. Directors may, however,
request an early distribution of some or all contributions made prior to January
1, 2005, to his or her Deferral Plan I account subject to a 10 percent early
withdrawal penalty.
A
director is not allowed to elect to receive an early withdrawal of amounts
contributed after January 1, 2005, to his or her Deferral Plan II account,
except that he or she may request early withdrawal in the event of an unforeseen
emergency, which request is subject to the approval of the Compensation
Committee.
A
director may elect to receive his or her Deferral Plan cash and stock account
balances in the form of either a lump sum payment or annual installments over a
5-, 10-, or 15-year period, or a combination of both. A director who retires
from the Board will receive a fixed 7.5 percent annual interest crediting rate
on his or her Deferral Plan cash account balance and will receive dividend
equivalents on his or her Deferral Plan II stock account balance until paid in
full.
48
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth the shares of Common Stock available for issuance
under the Company’s equity compensation plans as of December 31,
2009.
|
Plan
Category
|
Number
of Securities
to
be Issued Upon
Exercise
of
Outstanding
Options,
Warrants,
and Rights
|
Weighted-Average
Exercise
Price of
Outstanding
Options,
Warrants,
and Rights
|
Number
of Securities
Remaining
Available
for
Future Issuance
Under
Equity
Compensation
Plans1
|
|
Equity
Compensation Plans
Approved by Security
Holders
|
646,235
|
$40.05
|
915,293
|
|
Equity
Compensation Plans
Not Approved by Security
Holders
|
0
|
N/A
|
0
|
|
Total
|
646,235
|
$40.05
|
915,293
|
|
|
1 Excludes
the number of securities to be issued upon exercise of outstanding
options, warrants, and rights. The amount shown is comprised of: (i)
806,188 shares available for issuance under the LTIP in the form of
options, rights, restricted stock, performance units, shares, and other
grants as approved by the Compensation Committee of the Board;
(ii) 46,373 shares available for issuance under the Director
Stock Plan as payment for a portion of the annual retainer payable to
non-employee directors; and (iii) 62,732 shares available for issuance
under the ALLETE and Affiliated Companies Employee Stock Purchase
Plan.
|
AUDIT
COMMITTEE REPORT
The Audit
Committee of the Board is comprised of six non-employee directors, each of whom
has been determined by the Board to be “independent” under ALLETE’s Corporate
Governance Guidelines, and within the meaning of the rules of both the NYSE and
the SEC. The Board has also determined that each member of the Audit Committee
is financially literate and that Mr. Neve and Ms. Dindo are each an “audit
committee financial expert” within the meaning of the rules of the SEC. The
Audit Committee operates pursuant to a written charter that was reviewed and
reaffirmed in January 2009. The current Audit Committee charter is available on
the Company’s Web site at www.allete.com. The
Audit Committee assists the Board’s oversight of the integrity of the Company’s
financial reports, compliance with legal and regulatory requirements, the
qualifications and independence of the independent registered public accounting
firm, both the internal and external audit process, and internal controls over
financial reporting. The Audit Committee reviews and recommends to the Board
that the audited financial statements be included in the Annual
Report.
During
2009, the Audit Committee met and held separate discussions with members of
management and the Company’s independent registered public accounting firm,
PricewaterhouseCoopers, regarding certain audit activities and with the Director
of Internal Audit regarding the plans for and results of selected internal
audits. The Audit Committee reviewed the quarterly financial statements. It
reviewed with management and the independent registered public accounting firm
the effectiveness of internal controls over financial reporting, and the
Company’s compliance with laws and regulations. It also reviewed the Company’s
process for communicating its code of business conduct and ethics. The Audit
Committee approved the appointment of PricewaterhouseCoopers as the Company’s
independent registered public accounting firm for the year 2010, subject to
shareholder ratification. The Audit Committee received and reviewed the written
disclosures and letter from PricewaterhouseCoopers required by applicable
requirements of the Public Company Accounting Oversight Board (PCAOB) regarding
the independent registered public accounting firm’s communications with the
Audit Committee concerning independence and discussed with the independent
registered public accounting firm the firm’s independence. The Audit Committee
has received written material addressing PricewaterhouseCoopers’ internal
quality control procedures and other matters, as required by the NYSE Listing
Standards.
The Audit
Committee has: (i) reviewed and discussed the Company’s Consolidated Financial
Statements for the year ended December 31, 2009, with the Company’s management
and with the Company’s independent registered public accounting firm; (ii) met
with management to discuss all financial statements prior to their issuance and
to discuss significant accounting issues and management judgments; and (iii)
discussed with the Company’s independent registered public accounting firm the
matters required to be discussed by the statement on auditing standards No. 61,
as amended (as adopted by the PCAOB in rule 3200T) which include, among other
items, matters related to the conduct of the audit of the Company’s financial
statements. Management represented
49
to the
Audit Committee that the Company’s Consolidated Financial Statements were
prepared in accordance with accounting principles generally accepted in the
United States of America.
Based on
the above-mentioned review and discussions, the Audit Committee recommended to
the Board that the audited financial statements be included in the Annual
Report.
Audit
Committee Pre-Approval Policies and Procedures
The Audit
Committee has pre-approval policies and procedures related to the provision of
audit and non-audit services by the independent registered public accounting
firm. Under these procedures, the Audit Committee pre-approves both the type of
services to be provided by the independent registered public accounting firm and
the estimated fees related to these services. During the pre-approval process,
the Audit Committee considers the impact of the types of services and the
related fees on the independence of the independent registered public accounting
firm. The services and fees must be deemed compatible with the maintenance of
the independence of the independent registered public accounting firm, including
compliance with the SEC’s rules and regulations.
The Audit
Committee will, as necessary, consider and, if appropriate, pre-approve the
provision of additional audit and non-audit services by the independent
registered public accounting firm that were not encompassed by the Audit
Committee’s annual pre-approval and that are not prohibited by law. The Audit
Committee has delegated to the Chair of the Audit Committee the authority to
pre-approve, on a case-by-case basis, these additional audit and non-audit
services, provided that the Chair shall promptly report any decisions to
pre-approve such services to the Audit Committee.
Audit
and Non-Audit Fees
The
following table presents fees for professional audit services rendered by
PricewaterhouseCoopers for the audit of the Company’s annual financial
statements for the years ended December 31, 2009, and December 31, 2008, and
fees billed for other services rendered by PricewaterhouseCoopers during those
periods.
All audit
and non-audit services and fees for 2009 were pre-approved by the Audit
Committee. We have considered and determined that the provision of the non-audit
services noted below is compatible with maintaining PricewaterhouseCoopers’
independence.
|
2009
|
2008
|
||
|
Audit
Fees1
|
$1,173,500
|
$1,337,000
|
|
|
Audit-Related
Fees2
|
–
|
75,000
|
|
|
Tax
Fees3
|
7,885
|
536,000
|
|
|
All
Other Fees4
|
3,000
|
3,000
|
|
|
Total
|
$1,184,385
|
$1,951,000
|
|
|
1
Audit fees were comprised of audit work performed on the integrated
audit of the Consolidated Financial Statements, as well as work generally
only the independent registered public accounting firm can reasonably be
expected to provide, such as statutory audits, subsidiary audits, and
security offerings.
|
|
|
2
Audit-related fees were comprised of a construction practices and
controls review performed in 2008.
|
|
|
3
Tax fees were comprised of tax compliance services, including
assistance with the preparation of tax returns and claims for tax refunds,
and tax consultation and planning services, including assistance with tax
audits and appeals and employee benefit plans, and requests for rulings or
technical advice from taxing authorities. In 2009, fees were for tax
consultation. In 2008, tax compliance services totaled $5,000, and tax
consulting and planning services totaled $531,000.
|
|
|
4
Other fees were comprised of license and maintenance fees for
accounting research software.
|
___________,
2010
Audit
Committee
|
Douglas
C. Neve, Chair
|
Kathryn
W. Dindo
|
|
James
J. Hoolihan
|
Leonard
C. Rodman
|
|
George
L. Mayer
|
Bruce
W. Stender, ex-officio
|
50
ITEM
NO. 2—RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit
Committee of the Board recommends shareholder ratification of the appointment of
PricewaterhouseCoopers as the Company’s independent registered public accounting
firm for the year 2010. PricewaterhouseCoopers has acted in this capacity since
October 1963.
A
representative of PricewaterhouseCoopers will be present at the Annual Meeting
of Shareholders, will have an opportunity to make a statement if he or she so
desires, and will be available to respond to appropriate questions.
The Board
recommends a vote “FOR”
ratifying the appointment of PricewaterhouseCoopers as the Company’s independent
registered public accounting firm for 2010.
ITEM
NO. 3—PROPOSAL TO AMEND THE COMPANY’S AMENDED AND RESTATED ARTICLES OF
INCORPORATION TO CHANGE THE VOTE REQUIRED FOR THE ELECTION OF DIRECTORS AND A
CORRESPONDING AMENDMENT TO THE COMPANY’S BYLAWS
Under our
current Articles and Bylaws, directors are elected annually by the shareholders
by a majority vote of all of the outstanding stock entitled to vote (the
“existing vote requirement”). We are proposing to change the existing vote
requirement by amending our Articles to adopt:
|
|
•“simple”
majority voting for the election of directors in uncontested elections
(where the number of nominees does not exceed the number of directors to
be elected), meaning that each director nominee will be elected by a vote
of a majority of the votes cast with respect to such director; and
|
|
|
•plurality
voting for the election of directors in contested elections (where the
number of nominees exceeds the number of directors to be elected), meaning
that the director nominees who receive the most votes “for” their election
will be elected (together, the Articles Amendment).
|
Under the
existing vote requirement, to be elected a director must receive the vote of a
majority of all shares outstanding that are entitled to vote at a shareholders’
meeting—not merely a majority of votes cast at a shareholders’ meeting at which
a quorum is present. The existing vote requirement is significantly more
burdensome than the default voting standard provided for under Minnesota
corporate law which provides that, in the absence of provisions to the contrary
in a company’s articles of incorporation, directors are elected by a plurality
vote. The default voting standard provided for under Minnesota corporate law is
consistent with that provided for under the corporate laws of many other states,
including Delaware, the state in which more than half of the publicly-traded
companies in the U.S. are incorporated.
The
Company’s Corporate Governance Committee and Board have reviewed the voting
requirements of other public companies as well as recommendations of
organizations that advise institutional shareholders, such as RiskMetrics Group,
and have determined that many public companies either elect their directors by a
plurality vote or, consistent with a recent trend in corporate “best practices,”
by a “simple” majority vote in uncontested elections, as described
above.
The
existing vote requirement is even more burdensome than the standard encouraged
by institutional investors and advocates of corporate “best practices” who, in
recent years, have encouraged public companies to provide for the election of
directors by the vote of a majority of the votes cast with respect to such
director, rather than just plurality voting. The Company’s Corporate Governance
Committee and Board believe that the existing vote requirement, when combined
with recent NYSE rule changes preventing brokers from voting shares of stock
that are held in “street name” in the absence of an instruction by the
beneficial owner, imposes a significant burden on the Company without providing
our shareholders with a corresponding benefit. The Articles Amendment is
intended to provide our shareholders with a strong voice in the Company’s
affairs, without making it unduly burdensome to elect directors.
Therefore,
our Corporate Governance Committee has recommended, and our Board has adopted,
subject to approval by the Company’s shareholders, an amendment to the Articles
providing that directors be elected by a simple majority of the votes cast in
uncontested elections.
51
This
proposal includes an amendment to Section 9 of our Bylaws deleting an
inconsistent provision that provides that directors will be elected by a
majority of all the outstanding stock entitled to vote. The purpose of this
amendment is to avoid any inconsistency in the voting standard for the election
of directors between the Bylaws and the Articles. In light of the overlap
between the Articles Amendment and the Bylaw provision proposed to be amended,
the Company believes it is appropriate for the shareholders to consider and vote
upon the changes to the Articles and the Bylaws together.
The
foregoing is a summary of the Articles Amendment and the action to be taken with
respect to our Bylaws. The complete text of the amendment to Article VI of the
Articles and Section 9 of the Bylaws that has been approved by our Board, and
recommended by our disinterested directors, is set forth in Appendix A to this
Proxy Statement and the above summary and following discussion is qualified in
its entirety by reference to Appendix A.
If the
Company’s shareholders approve the change in voting standards, then in future
uncontested elections our directors will be elected by a vote of a majority of
the votes cast at a meeting at which a quorum is present, rather than by a vote
of a majority of the outstanding stock entitled to vote, subject to the rights,
if any, of the holders of any preferred stock of the Company, none of which is
currently outstanding. The term “a majority of the votes cast” means that the
number of votes cast “for” the election of a director must exceed the number of
votes cast “against” the election of that director. If, however, an election is
contested, so that the number of nominees (other than nominees withdrawn on or
before the 60th day before the first anniversary of the preceding year’s annual
shareholder meeting) exceeds the number of directors to be elected, directors
will be elected by a plurality of the votes present in person or by proxy and
entitled to vote, again subject to the rights, if any, of the holders of any
preferred stock of the Company, none of which is currently outstanding. The term
“plurality of the votes present” means that the director nominees with the most
“for” votes will be elected, regardless of the number of “against” votes for
those directors.
Director
Resignation Policy
ALLETE is
a Minnesota corporation and under Minnesota corporate law, if an incumbent
director is not elected, that director continues to serve as a “holdover
director” until a successor is elected and qualified. To address this potential
outcome, our Board has approved amending our Corporate Governance Guidelines to
include a director resignation policy, subject to shareholder approval of this
Item 3. Specifically, the policy will provide that in an uncontested election,
any nominee for director who receives more votes “against” his or her election
than votes “for” his or her election, will be required to promptly offer to
tender his or her resignation following certification of the shareholder vote.
Our Corporate Governance Committee will consider the resignation offer and
recommend to the Company’s Board whether to accept it. The Board will promptly
disclose its decision whether to accept the director’s resignation offer
(including the reasons for rejecting a resignation offer, if applicable). Any
director who offers to tender his or her resignation as described above will not
participate in the Corporate Governance Committee’s recommendation or Board
action regarding whether to accept the resignation offer.
If the
shareholders do not approve the Articles Amendment and corresponding Bylaws
amendment, the Corporate Governance Guidelines will not be amended to reflect
this proposed director resignation policy.
Reasons
for Approval
The
Company’s Corporate Governance Committee and Board have carefully considered the
merits of the Articles Amendment and corresponding Bylaws amendment as compared
to the Company’s existing vote requirement. For the reasons stated above, the
Board, including our disinterested directors, accordingly recommends that
shareholders approve the Articles Amendment and the related amendment to the
Bylaws.
If the
shareholders do not approve the Articles Amendment, then directors will continue
to be elected by a majority vote of all outstanding stock entitled to
vote.
52
Vote
Required
Minnesota
law requires that the Articles Amendment and the corresponding Bylaws amendment
be approved by a majority of the Company’s outstanding shares entitled to vote.
The Board has unanimously recommended the Articles Amendment and Bylaws
amendment to the shareholders.
Effective
Time
If
approved, the Articles Amendment will become effective upon its filing with the
Minnesota Secretary of State, which will occur promptly after the Company's
annual meeting. As a result, the new simple majority voting standard would be
applicable to the election of directors beginning at our 2011 annual
meeting.
The Board
recommends a vote “FOR”
approval of this proposal to amend our Articles and Bylaws.
ITEM
NO. 4—PROPOSAL TO RE-APPROVE THE MATERIAL TERMS OF THE
PERFORMANCE GOALS UNDER THE ALLETE EXECUTIVE LONG-TERM INCENTIVE
COMPENSATION PLAN
Shareholders
are asked to re-approve the material terms of the performance goals under the
ALLETE Executive Long-Term Incentive Compensation Plan (LTIP or Plan). This
re-approval is required under Internal Revenue Service regulations in order to
preserve the Company’s federal income tax deduction when payments related to
these awards are made to certain executive officers. In particular,
Section 162(m) of the Tax Code generally prevents a publicly-held
corporation from claiming federal income tax deductions for compensation in
excess of $1 million paid to certain of its executive officers.
Compensation, if it qualifies as “performance-based compensation,” is exempt
from this limitation. In order to qualify as performance-based compensation,
among other conditions, the shareholders must re-approve the material terms of
the performance goals every five years. The LTIP was last approved by
shareholders in May 2005. We are not seeking approval for any changes to the
LTIP and re-approval does not represent an enhancement to executive
compensation.
Material
Terms of the Performance Goals
The
material terms of the performance goals under the LTIP consist of (i) the class
of employees eligible to receive these awards; (ii) the types of business
criteria on which the payouts or vesting for performance-based awards are based;
and (iii) the maximum amounts of cash or shares that can be provided during a
specified period to any employee for these types of awards under the LTIP. Each
of these material terms is described in the general description of the LTIP
below.
The LTIP
has been filed as Exhibit 10 to the Company’s Current Report on Form 8-K dated
May 16, 2005 (File No. 1-3548) and is available on the SEC’s Web site
(www.sec.gov)
or by written request to:
ALLETE,
Inc.
Attn:
Employee Benefits
30 West
Superior Street
Duluth,
Minnesota 55802
General
Description of the LTIP
The
purpose of the LTIP is to promote the success and enhance the value of ALLETE by
linking participants’ personal interest to those of ALLETE shareholders and
customers, and providing participants with an incentive for outstanding
performance. The Plan is further intended to assist ALLETE in its ability to
motivate, attract and retain the services of participants upon whom the
successful conduct of its operations is largely dependent. The Plan originally
became effective on January 1, 1996, and it allows grants to be made through
December 31, 2015. The Board may, at any time, and from time to time, alter,
amend, suspend, or terminate the Plan in whole or in part; provided that no
amendment which requires shareholder approval in order for the Plan to continue
to comply with Section 422 of the Tax Code, Section 303A.08 of the NYSE Listed
Company Manual, or any other applicable law, regulation or rule, will be
effective unless approved by the shareholders. The Plan is administered by the
Compensation Committee.
53
The
Common Stock available for issuance under the Plan may be increased by shares
tendered to exercise options or withheld to satisfy tax withholding requirements
in connection with the Plan. If any corporate transaction occurs that causes a
change in the corporate structure of ALLETE, the Compensation Committee is
authorized to make such adjustments to the number and class of shares of stock
delivered, and the number and class and/or price of shares of Common Stock
subject to outstanding grants made under the Plan as it deems appropriate and
equitable to prevent dilution or enlargement of participants’
rights.
Officers
and key employees of ALLETE and its subsidiaries are eligible to participate in
the Plan, as determined by the Compensation Committee, including employees who
are members of the Board of Directors, but excluding directors who are not
employees.
LTIP
Benefits
The
number of options or other awards to be granted in the future to ALLETE’s
executive officers and to other employees pursuant to the LTIP will be
determined at the discretion of the Compensation Committee and is not
determinable at this time. Information regarding LTIP awards to the Company’s
Named Executive Officers in 2009 and equity held by such officers at December
31, 2009, is provided in the 2009 Grants of Plan-Based Awards Table on page 33
and the Outstanding Equity Awards at Fiscal Year-End table on page 37 above. As
of _____________, 2010, the market value of shares underlying the Plan awards
was $_____________ per share.
Grants
Under the LTIP
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Stock Options. The
Compensation Committee may grant incentive stock options, nonqualified
stock options, or a combination thereof under the Plan. The option price
for each such grant will be the fair market value of a share of Common
Stock on the date of grant or such higher price as the Compensation
Committee may determine. Options will expire at such times as the
Compensation Committee determines at the time of grant; provided that no
option will be exercisable later than the tenth anniversary of its grant.
Simultaneously with the grant of an option, a participant may receive
dividend equivalents which entitle the participant to receive amounts
equal to the value of the dividends declared with respect to the number of
shares held under option on all payment dates from the date of grant to
the date of exercise. The Compensation Committee will determine at the
time that dividend equivalents are granted the conditions, if any, to
which the payment of such dividend equivalents is
subject.
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Options
granted under the Plan will be exercisable at such times and subject to such
restrictions and conditions as the Compensation Committee shall approve;
provided that no option will be exercisable prior to six months following its
grant. The option exercise price is payable in cash, by shares of Common Stock
having a fair market value equal to the exercise price, by share withholding or
any combination of the foregoing. The Compensation Committee may allow, along
with other means of exercise, cashless exercise as permitted under the Federal
Reserve Board’s Regulation T, subject to the applicable securities laws. The
maximum number of shares of Common Stock subject to options which may be granted
to any single participant during any calendar year is 100,000.
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Stock Appreciation
Rights. Stock appreciation rights (SAR) granted under the Plan may
be in the form of freestanding SARs, tandem SARs, or a combination
thereof. The base value of a freestanding SAR will be equal to the fair
market value of a share of Common Stock on the date of grant. No SAR
granted under the Plan may be exercisable prior to six months following
its grant. The term of any SAR granted under the Plan will be determined
by the Compensation Committee, provided that the term may not exceed ten
years. Freestanding SARs may be exercised upon such terms and conditions
as are imposed by the Compensation Committee and set forth in the SAR
grant agreement. The base value of a tandem SAR will be equal to the
option price of the related option. A tandem SAR may be exercised only
with respect to the shares of Common Stock for which its related option is
exercisable. Upon exercise of an SAR, a participant will receive payment
from the Company equal to the excess of the fair market value of a share
of Common Stock on the date of exercise over the base value of the SAR
multiplied by the number of shares with respect to which the SAR is
exercised. Payment due to the participant upon exercise will
be
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54
made in
shares of Common Stock of equivalent value. The maximum number of SARs which may
be granted to any single participant under the Plan in any calendar year is
100,000.
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Restricted Stock.
Restricted stock may be granted in such amounts and subject to such terms
and conditions as determined by the Compensation Committee; provided that
the maximum number of shares of restricted stock that may be granted to
any single participant during a calendar year is 20,000. The restriction
will generally lapse on the basis of the passage of time. Participants
holding restricted stock may exercise full voting rights with respect to
those shares during the restricted period and will be credited with cash
dividends and other distributions with respect to the
shares.
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Subject
to the Compensation Committee’s right to determine otherwise at the time of
grant, dividends or distributions credited during the restricted period will be
subject to the same restrictions on transferability and forfeitability as the
shares of restricted stock with respect to which they were paid. All dividends
credited will be paid promptly following the vesting of the shares of restricted
stock to which the dividends or other distributions relate.
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Restricted Stock Units.
Restricted stock units may be granted in the amounts and subject to the
terms and conditions as determined by the Compensation Committee.
Restricted stock units may be subject to vesting requirements,
restrictions and conditions to payment as the Compensation Committee
determines are appropriate. Such vesting requirements may be based on the
continued employment of the participant for a specified time period or on
the attainment of specified performance goals established by the
Compensation Committee. Restricted stock units are payable in shares of
Common Stock.
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Performance Units and
Performance Shares. Performance units and performance shares may be
granted in the amounts and subject to the terms and conditions as
determined by the Compensation Committee. The Compensation Committee will
set performance goals, which, depending on the extent to which they are
met during the performance periods established by the Compensation
Committee, will determine the number and/or value of performance
units/performance shares that will be paid out to participants.
Performance periods will, in all cases, be at least six months in
length.
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Simultaneously
with the grant of performance shares, the participant may be granted dividend
equivalents with respect to those performance shares. Dividend equivalents will
constitute rights to be paid amounts equal to the dividends declared on an equal
number of outstanding shares on all payment dates occurring during the period
between the grant date of the performance shares and the date the performance
shares are earned or paid out. Participants will receive payment on the value of
performance units/shares earned after the end of the performance period. Payment
of performance units/shares will be made in cash or shares of Common Stock or in
a combination thereof, which have an aggregate fair market value equal to the
value of the earned performance units/shares at the end of the applicable
performance period, as the Compensation Committee determines. These shares may
be granted subject to any restrictions deemed appropriate by the Compensation
Committee.
Unless
and until the Compensation Committee proposes a change in the goals for
shareholder vote or applicable tax and securities laws change to permit the
Compensation Committee discretion to alter the performance goals without
obtaining shareholder approval, the performance goals to be used for purposes of
grants to officers and key employees will be based upon the attainment of
specified levels of one or more of the following measures as applied to the
Company as a whole or to any subsidiary, division, or other unit of the
Company:
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Total
shareholder return (measured as the sum of share price appreciation and
dividends declared);
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Return
on invested capital, assets or net
assets;
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Share
earnings/earnings growth;
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Cash
flow/cash flow growth;
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Cost
of services to consumers;
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Growth
in revenue, sales, operating income, net income, stock price and/or
earnings per share;
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55
| · | Return on shareholders’ equity; |
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Economic
value created;
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Customer
satisfaction and/or customer service quality;
and
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Operating
effectiveness.
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The
maximum award to any single participant with respect to performance units
granted in any calendar year is 200 percent of base salary determined at the
time the performance goals are set by the Compensation Committee but in no event
more than $1 million. The maximum award to any single participant with respect
to performance shares in any calendar year is 20,000 shares.
The
Compensation Committee may exercise its discretion to reduce the amount of the
award that is earned, vested or payable to a participant below the amount
determined in accordance with the applicable performance goals, but it may not
increase the amount so earned, vested or payable above the amount determined in
accordance with the applicable performance goals.
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Other Grants. The Compensation
Committee may make other grants which may include, without limitation, the
grant of shares of Common Stock based on certain conditions, the payment
of cash based upon performance goals or other criteria established by the
Compensation Committee and the payment of shares in lieu of cash under
other ALLETE incentive or bonus programs, in such manner and at such times
as the Compensation Committee
determines.
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Although
the intent is generally to qualify for federal income tax deduction, if the
Compensation Committee determines that it is advisable to grant awards that do
not qualify as performance-based compensation, then the Compensation Committee
may make such grants in its discretion.
U.S.
Federal Income Tax Consequences
The
following is a general summary, as of the date of this Proxy Statement, of the
federal income tax consequences to participants who may receive awards pursuant
to the Plan and to the Company arising out of the granting of awards pursuant to
the Plan. This summary is intended for the information of shareholders
considering how to vote at the Annual Meeting and not as tax guidance to
participants in the Plan because the consequences may vary with the award types,
the identity of the participants and the payment or settlement method. The
summary does not address the effects of other federal taxes or taxes imposed by
state, local, or foreign tax laws. Each participant is encouraged to seek the
advice of a qualified tax advisor regarding the tax consequences of
participation in the Plan.
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Nonqualified Stock
Options. The grant of a nonqualified stock option will not cause a
participant to recognize ordinary income or entitle the Company to a
deduction for federal income tax purposes. Upon the participant’s exercise
of a nonqualified option, the participant will recognize ordinary income
in an amount equal to the difference between the exercise price and the
fair market value on the exercise date of the shares purchased by the
participant, and the Company will be entitled to a corresponding deduction
in an amount equal to the ordinary income recognized by the participant,
assuming that a deduction is allowed pursuant to Section 162(m) of the Tax
Code. If restrictions regarding forfeiture and transferability apply to
the shares upon exercise, the time of recognition and the amount of
ordinary income and the availability of a tax deduction to the Company
generally will be determined when the restrictions cease to apply. Upon
disposition of the shares acquired by exercise of the option, the optionee
will recognize long-term or short-term capital gain or loss depending upon
the sale price and holding period of the
shares.
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Incentive Stock Options.
In general, neither the grant nor exercise of an incentive stock
option (ISO) will cause the recognition of ordinary income by the
participant, provided the participant does not dispose of the underlying
shares until the later of two years from the grant date or one year after
the exercise date. The amount by which the fair market value of the shares
at the time of exercise exceeds the exercise price is includable in the
tax base upon which an “alternative minimum tax” may be imposed. In
general, neither the grant nor the exercise of an ISO will produce a tax
deduction for the Company.
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If the
optionee holds the stock received upon exercise of an ISO for the required
period, described above, the gain or loss on the sale, based upon the difference
between the amount realized and the exercise price, will constitute long-term
capital gain or loss. If the optionee sells the stock received upon exercise
prior to the expiration of such periods (a “disqualifying disposition”), the
optionee will recognize ordinary income in the year of the disqualifying
disposition equal to the excess of the fair market value of such stock on the
exercise date over the exercise price (or, if less, the excess of the amount
realized upon disposition over the exercise price). The excess, if any, of the
sale price over the fair market value on the exercise date will be capital
gain.
The
Company is not entitled to a tax deduction as a result of the grant or exercise
of an ISO. If the optionee recognizes ordinary income as a result of a
disqualifying disposition, the Company is entitled to a corresponding deduction
in an amount equal to the ordinary income recognized by the participant,
assuming that a deduction is allowed pursuant to Section 162(m) of the Tax Code.
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Stock Appreciation
Rights. The grant of a stock appreciation right (SAR) will not
cause a participant to recognize ordinary income or entitle the Company to
a deduction for federal income tax purposes. Upon the exercise of a SAR,
the participant will recognize ordinary income in the amount of the value
of shares payable to the participant (before reduction for any withholding
taxes), and the Company will receive a corresponding deduction in an
amount equal to the ordinary income recognized by the participant,
assuming that a deduction is allowed pursuant to Section 162(m) of the Tax
Code. Upon disposition of any shares acquired by exercise of a stock
appreciation right, the participant will recognize long-term or short-term
capital gain or loss depending upon the sale price and holding period of
the shares.
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Performance Units, Performance
Shares, Restricted Stock Units and Restricted Stock. The federal
income tax consequences with respect to performance units, performance
shares, restricted stock units and restricted stock depend on the facts
and circumstances of each award, including, in particular, the nature of
any restrictions imposed with respect to the awards. In general, if awards
granted to a participant are subject to a “substantial risk of forfeiture”
(e.g., the awards are conditioned upon the future performance of
substantial services by the participant or the attainment of specified
performance goals) and are nontransferable, a taxable event occurs when
the risk of forfeiture ceases or the awards become transferable, whichever
first occurs. At such time, the participant will recognize ordinary income
to the extent of the excess of the fair market value of the awards on such
date over the participant’s cost for such awards, if any, and the Company
will be entitled to a corresponding deduction in an amount equal to the
ordinary income recognized by the participant. Under certain
circumstances, a participant may elect pursuant to Section 83(b) of
the Tax Code to accelerate federal income tax recognition with respect to
stock awards that are subject to a substantial risk of forfeiture and
transferability restrictions, in which event the participant will
recognize ordinary income at the time of grant in an amount equal to the
excess of the fair market value of the shares at such time over the
amount, if any, paid for the shares and the Company will be entitled to a
corresponding deduction in an amount equal to the ordinary income
recognized by the participant. If the awards granted to a participant are
not subject to a substantial risk of forfeiture or transferability
restrictions, the participant will recognize ordinary income with respect
to the awards to the extent of the excess of the fair market value of the
awards at the time of grant over the participant’s cost, if any, and the
Company will be entitled to a corresponding deduction in an amount equal
to the ordinary income recognized by the participant. If an award is
granted but no stock is actually issued to the participant at the time the
award is granted, the participant will recognize ordinary income at the
time the participant receives stock free of any substantial risk of
forfeiture and the amount of ordinary income will be equal to the fair
market value of the stock at such time over the participant’s cost, if
any, and the Company will be entitled to a corresponding deduction in an
amount equal to the ordinary income recognized by the participant. In each
case, the Company’s deduction may be subject to compliance with Section
162(m) of the Tax Code. Upon disposition of any shares acquired through
awards, the participant will recognize long-term or short-term capital
gain or loss depending upon the sale price and holding period of the
shares.
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Withholding Obligations.
The Company may require a participant to pay to the Company an
amount necessary for the Company to satisfy its federal, state or local
tax withholding obligations with respect
to
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57
awards
granted pursuant to the Plan. As permitted by applicable law, the Company may
withhold from other amounts payable to a participant an amount necessary to
satisfy these obligations, and the Compensation Committee may permit a
participant to satisfy the Company’s withholding obligation by electing to have
the Company withhold shares of Common Stock in an amount equal to the tax
obligation.
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Section 409A of the Tax
Code. The Compensation Committee may only grant awards that either
comply with the applicable requirements of Section 409A of the Tax Code,
or do not result in the deferral of compensation within the meaning of
Section 409A of the Tax Code. If an award constitutes deferred
compensation under Section 409A of the Tax Code and fails to comply with
the requirements of Section 409A of the Tax Code, at the time the award
becomes vested the award may be subject to ordinary income tax, an
additional 20 percent tax, plus
interest.
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Section 162(m) of the Tax
Code. Pursuant to Section 162(m) of the Tax Code, the annual
compensation paid to certain executive officers may not be deductible to
the extent that it exceeds $1 million unless the compensation qualifies as
“performance-based” pursuant to Section 162(m) of the Tax Code. The Plan
has been designed to permit the awards to qualify as “performance-based”
for purposes of Section 162(m) of the Tax
Code.
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The Board
recommends a vote “FOR”
the re-approval of the material terms of the performance goals under the
LTIP.
OTHER
BUSINESS
The Board
knows of no other business to be presented at the Annual Meeting. However, if
any other matters properly come before the Annual Meeting, it is the intention
of the persons named in the proxy form to vote pursuant to the proxies in
accordance with their judgment in such matters.
All
shareholders are respectfully asked to vote their proxies promptly so that the
necessary vote may be present at the Annual Meeting.
Shareholder
Proposals for the 2011 Annual Meeting
All
proposals from shareholders to be considered for inclusion in the Proxy
Statement relating to the Annual Meeting scheduled for May 10, 2011, must be
received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN
55802-2093 not later than ____________________. The Company’s Bylaws provide
that for business to be properly brought before an annual meeting by a
shareholder, the shareholder must have delivered timely notice to the Company’s
Secretary. To be timely, advance notice generally must be received not less than
90 days nor more than 120 days prior to the anniversary of the immediately
preceding annual meeting of shareholders. Therefore, for the Annual Meeting
scheduled for May 10, 2011, ALLETE must receive a shareholder’s notice between
January 11, 2011, and February 10, 2011. A shareholder’s notice must also comply
with informational and other requirements set forth in the Company’s Bylaws. The
persons to be named as proxies in the proxy cards relating to the 2011 Annual
Meeting may have the discretion to vote their proxies in accordance with their
judgment on any matter as to which ALLETE did not have notice in accordance with
the advance notice process prior to February 10, 2011, without discussion of
such matter in the Proxy Statement relating to the 2011 Annual
Meeting.
By order
of the Board of Directors,
Deborah A.
Amberg
Deborah
A. Amberg
Senior
Vice President, General Counsel, and Secretary
___________,
2010
Duluth,
Minnesota
58
APPENDIX
A
ARTICLES
OF AMENDMENT
TO
ALLETE,
INC.'S
AMENDED
AND RESTATED ARTICLES OF INCORPORATION
Amending
paragraph 1, Article VI of ALLETE, Inc.’s Amended and Restated Articles of
Incorporation as follows:
ARTICLE
VI
1.Subject to the provisions of Article
III hereof, (1) the management of this Corporation shall be vested in a Board of
Directors, the number of which shall be fixed from time to time exclusively by
the Board of Directors pursuant to a resolution adopted by affirmative vote of
the majority of the Disinterested Directors, as defined in Article VII, but the
number of Directors shall be no less than nine (9) and no greater than fifteen
(15), but no decrease shall have the effect of shortening the term of any
incumbent Director.
Directors shall be elected annually by the stockholders by ballot by a majority
vote of all the outstanding stock entitled to vote, to hold office until their
successors are elected and qualify; Subject
to the rights, if any, of the holders of one or more series of preferred stock,
voting separately by a series to elect directors in accordance with the terms of
such preferred stock:
(a) Each
director shall be elected by the vote of a majority of the votes cast with
respect to the director at a meeting of shareholders called for such purpose at
which a quorum is present. For purposes of this paragraph, "a majority of the
votes cast" means that the number of votes cast "for" a director must exceed the
number of votes "against" the election of that director.
(b) Notwithstanding
the foregoing provisions of this Article VI, at any such meeting for which the
number of nominees (other than nominees withdrawn on or before the sixtieth
(60th)
day before the first anniversary of the preceding year's annual shareholder
meeting) exceeds the number of directors to be elected, directors shall be
elected by a plurality of the votes present and entitled to vote on the election
of directors.
(2)
subject to any rights then existing by applicable law with respect to cumulative
voting, the stockholders at any meeting by a majority vote of all the
outstanding stock entitled to vote, at an election of directors, may remove any
director and fill the vacancy; (3) subject to the rights of the holders of any
class or series of the then outstanding shares of voting capital stock of this
Corporation, newly created directorships resulting from any increase in the
authorized number of Directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by the shareholders or by the
affirmative vote of a majority of the Disinterested Directors then in office,
although less than a quorum. Directors so elected shall hold office for a term
expiring at the time of the next annual election of Directors by the
stockholders and until their successors are duly elected and
qualify.
A-1
RELATED
AMENDMENT TO BYLAWS OF ALLETE, INC.
Amending
the first paragraph of Section 9 of ALLETE, Inc.'s Bylaws as
follows:
Section
9. Subject to the provisions of Article III of the Articles of Incorporation of
this Corporation, (1) the management of this Corporation shall be vested in a
Board of Directors, the number of which shall be fixed from time to time
exclusively by the Board of Directors pursuant to a resolution adopted by
affirmative vote of the majority of the Disinterested Directors, as defined in
Article VII of the Articles of Incorporation, but the number of directors shall
be no less than nine (9) and no greater than fifteen (15), but no decrease shall
have the effect of shortening the term of any incumbent director. Directors
shall be elected annually by the shareholders by ballot by a majority of all the
outstanding stock entitled to vote, to hold office until their successors
are elected and qualify; (2) subject to any rights then existing by applicable
law with respect to cumulative voting, the shareholders at any meeting by a
majority vote of all the outstanding stock entitled to vote, at an election of
Directors, may remove any Director and fill the vacancy; (3) subject to the
rights of the holders of any class or series of the then outstanding shares of
voting capital stock of this Corporation, newly created directorships resulting
from an increase in the authorized number of Directors or any vacancies in the
Board of Directors resulting from death, resignation, retirement,
disqualification, removal from office or other cause may be filled only by the
shareholders or by the affirmative vote of a majority of the Disinterested
Directors then in office, although less than a quorum. Directors so elected
shall hold office for a term expiring at the time of the next annual election of
Directors by the shareholders and until their successors are duly elected and
qualify.
A-2
APPENDIX
B
Hewitt Custom Survey Peer
Group—Used In the 2008 Executive Compensation Study
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The
2008 Hewitt custom survey peer group consisted of: AEI Services LLC; AGL
Resources, Inc.; Allegheny Energy, Inc.; Ameren Corporation; American
Electric Power Company, Inc.; Aquila, Inc.; Black Hills Corporation;
CenterPoint Energy, Inc.; Cleco Corporation; CMS Energy Corporation;
Constellation Energy Group, Inc.; Dominion Resources, Inc.; DTE Energy
Company; Duke Energy Corporation; Dynegy Inc.; Edison International; El
Paso Electric Company; Energy Future Holdings Corp.; Entergy Corporation;
FirstEnergy Corp.; FPL Group, Inc.; IDACORP, Inc.; Kansas City Power &
Light Company; Kinder Morgan, Inc.; Mirant Corporation; NiSource Inc.;
Pepco Holdings, Inc.; PG&E Corporation; Pinnacle West Capital
Corporation; PNM Resources, Inc.; Portland General Electric Company; PPL
Corporation; Progress Energy, Inc.; Puget Sound Energy, Inc.; Questar
Corporation; Reliant Energy, Inc.; SCANA Corporation; Sempra Energy; The
Southern Company; WGL Holdings, Inc.; WPS Resources Corporation; and Xcel
Energy Inc.
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Hewitt Custom Survey Peer
Group—Used In the 2009 Executive Compensation Study
The 2009
Hewitt peer group consisted of: AEI Services LLC; AGL Resources, Inc.; Allegheny
Energy, Inc.; Ameren Corporation; American Electric Power, Inc.; Aquila, Inc.;
Black Hills Corporation; CenterPoint Energy, Inc.; Cleco Corporation; CMS Energy
Corporation; Consolidated Edison, Inc.; Constellation Energy Group, Inc.;
Covanta Energy Corporation; CPS Energy; Dominion Resources, Inc.; DTE Energy
Company; Duke Energy Corporation; Dynegy Inc.; Edison International; El Paso
Electric Company; Entegra Power Group, LLC; Entergy Corporation; Ferrellgas
Partners, L.P.; FirstEnergy Corp.; Garland Power & Light; Idaho Power
Company; Kinder Morgan, Inc.; Mirant Corporation; New York Power Authority;
NextEra Energy Resources, LLC; NiSource Inc.; NRG Energy, Inc.; Oglethorpe Power
Corporation; OGE Energy Corp.; Pacificorp; PG&E Corporation; Pinnacle West
Capital Corporation; Portland General Electric Company; PowerSouth Energy
Cooperative; PPL Corporation; Progress Energy, Inc.; Puget Sound Energy, Inc.;
Reliant Energy, Inc.; SCANA Corporation; Seminole Electric Cooperative Inc.;
Sempra Energy; The Southern Company; SUEZ Energy North America, Inc.; WGL
Holdings, Inc.; and Xcel Energy Inc.
B-1
Shareowner
ServicesSM
P.O. Box
64945
St. Paul,
MN 55164-0945
COMPANY
# ___________________
Vote
by Internet, Telephone or Mail
24
Hours a Day, 7 Days a Week
Your
phone or Internet vote authorizes the named
proxies
to vote your shares in the same manner as if you marked, signed and returned
your proxy card.
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:
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INTERNET –
www.ematerials.com/ale
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Use
the Internet to vote your proxy until 12:00 p.m. (CT) on May 10,
2010.
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(
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PHONE –
1-800-560-1965
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Use
a touch-tone telephone to vote your proxy until 12:00 p.m. (CT) on May 10,
2010.
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*
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MAIL – Mark, sign and
date your proxy card and return it in the postage-paid envelope
provided.
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If
you vote your proxy by Internet or by Telephone, you do NOT need to mail back
your Proxy Card.
TO
VOTE BY MAIL AS THE BOARD OF DIRECTORS RECOMMENDS ON ALL ITEMS
BELOW,
SIMPLY
SIGN, DATE, AND RETURN THIS PROXY CARD.
The
Board of Directors Recommends a Vote FOR Items 1, 2, 3 and 4.
1. Election of
directors:
01 Brekken 05 Haines
0; 09 Neve □ Vote FOR □ Vote WITHHELD
02 Dindo 06 Hodnik <
/font> 10 Rodman all nominees from all
nominees
03
Eddins 07 Hoolihan 11
Shippar (except as marked)
04
Emery
08 Ludlow 12
Stender
(Instructions:
To withhold authority to vote for any indicated nominee,
write
the number(s) of the nominee(s) in the box provided to the right.)
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2.
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Ratification
of the appointment of PricewaterhouseCoopers LLP as ALLETE’s independent
registered public accounting firm for 2010.
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□
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For
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□
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Against
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□
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Abstain
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3.
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Approval of an amendment to
ALLETE’s Amended and Restated Articles of Incorporation
to change the vote required for the election of directors
and a corresponding
amendment to ALLETE’s
Bylaws.
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□
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For
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□
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Against
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□
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Abstain
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4.
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Re-approval
of the material terms of the performance goals under the ALLETE Executive
Long-Term Incentive Compensation Plan.
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□
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For
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□
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Against
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□
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Abstain
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THIS
PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION IS
GIVEN, WILL BE VOTED FOR EACH
PROPOSAL.
Address Change? Mark box, sign, and
indicate changes below: □ Date
_____________________________________
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Signature(s)
in Box
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Please
sign exactly as your name(s) appears on Proxy. If held in
joint
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tenancy,
all persons should sign. Trustees, administrators,
etc.,
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should
include title and authority. Corporations should provide
full
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name
of corporation and title of authorized officer signing the
Proxy.
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ALLETE
INC.
ANNUAL
MEETING OF SHAREHOLDERS
Tuesday,
May 11, 2010
10:30
a.m.
DULUTH
ENTERTAINMENT
CONVENTION
CENTER
Lake
Superior Ballroom
350
Harbor Drive
Duluth,
MN
ALLETE,
Inc.
30
West Superior Street
Duluth, Minnesota
55802-2093
proxy
This
proxy is solicited by the Board of Directors for use at the Annual Meeting on
May 11, 2010.
Donald J.
Shippar and Deborah A. Amberg, or either of them, with power of substitution,
are hereby appointed Proxies of the undersigned to vote all shares of ALLETE,
Inc. stock owned by the undersigned at the Annual Meeting of Shareholders to be
held in the Lake Superior Ballroom of the Duluth Entertainment Convention
Center, 350 Harbor Drive, Duluth, Minnesota, at 10:30 a.m. on Tuesday, May 11,
2010, or any adjournments thereof, with respect to the election of Directors,
ratification of the appointment of an independent registered public accounting
firm, approval of an amendment to ALLETE’s Amended and Restated Articles of
Incorporation to change the vote required for the election of directors and a
corresponding amendment to ALLETE’s Bylaws, re-approval of the material terms of
the performance goals under the ALLETE Executive Long-Term Incentive
Compensation Plan, and any other matters as may properly come before the
meeting.
This Proxy confers authority to vote
each proposal listed on the other side unless otherwise indicated. If any
other business is transacted at said meeting, this Proxy shall be voted in
accordance with the best judgment of the Proxies. The Board of Directors
recommends a vote “FOR” each of the listed proposals. This Proxy is solicited on
behalf of ALLETE, Inc., and may be revoked prior to its exercise. Please mark, sign, date and return
this Proxy Card using the enclosed envelope. Alternatively, authorize the
above-named Proxies to vote the shares represented on this Proxy Card by phone
or online as described on the other side. Shares cannot be voted unless
these instructions are followed, or other specific arrangements are made to have
the shares represented at the meeting. By responding promptly, you may help save
the costs of additional Proxy solicitations.
See
reverse for voting instructions.
ALLETE
EXECUTIVE
LONG-TERM
INCENTIVE
COMPENSATION PLAN
As
Amended and Restated
Effective
January 1, 2006
ALLETE
EXECUTIVE
LONG-TERM INCENTIVE COMPENSATION PLAN
As
Amended and Restated Effective January 1, 2006
Article
1.Establishment, Purpose and
Duration
1.1Establishment of the Plan.
ALLETE, Inc., a Minnesota corporation, formerly Minnesota Power & Light
Company (hereinafter referred to as the “Company”), established an incentive
compensation plan known as the “ALLETE Executive Long-Term Incentive
Compensation Plan” (hereinafter referred to as the “Plan”), as set forth in this
document. The Plan permits the grant of nonqualified stock options (“NQSO”),
incentive stock options (“ISO”), stock appreciation rights (“SAR”), restricted
stock, performance units, performance shares and other grants. Capitalized terms
are defined in Article 17.
The Plan first became effective as of
January 1, 1996, and shall remain in effect as provided in Section 1.3 herein.
This Plan document reflects the amendment and restatement of the Plan which will
become effective upon shareholder approval as of January 1, 2006 (the “Effective
Date”), and applies to Grants issued on or after January 1, 2006, and Grants
exercised on or after January 1, 2006.
1.2Purpose of the Plan. The
purpose of the Plan is to promote the success and enhance the value of the
Company by linking the personal interests of Participants to those of Company
shareholders and customers, providing Participants with an incentive for
outstanding performance.
The Plan is further intended to
assist the Company in its ability to motivate, attract and retain the services
of Participants upon whom the successful conduct of its operations is largely
dependent.
1.3Duration of the Plan. The
Plan shall remain in effect, subject to the right of the Board of Directors to
terminate the Plan at any time pursuant to Article 13 herein, until all Shares
subject to it shall have been purchased or acquired according to the Plan’s
provisions; provided, however, in no event may a Grant be made under the Plan on
or after the tenth anniversary of the Effective Date.
Article
2.Administration
2.1The Committee. The Plan shall
be administered by the Executive Compensation Committee of the Board consisting
of not less than three (3) Directors. The members of the Committee shall be
appointed from time to time by, and shall serve at the discretion of, the Board
of Directors.
The Committee, to the extent necessary,
shall be comprised solely of Directors who are: (a) “non-employee directors” as
contemplated by Rule 16b-3 under the Exchange Act; (b) “outside directors” as
contemplated by Section 162(m) of the Code; and (c) “independent directors” as
contemplated by Section 303A.02 of the New York Stock Exchange Listed Company
Manual.
2.2Authority of the Committee.
The Committee shall have full power except as limited by law, the Articles of
Incorporation and the Bylaws of the Company, subject to such other restricting
limitations or directions as may be imposed by the Board and subject to the
provisions herein, to determine the size and types of Grants; to determine the
terms and conditions of such Grants in a manner consistent with the Plan; to
construe and interpret the Plan and any agreement or instrument entered into
under the Plan; to establish, amend or waive rules and regulations for the
Plan’s administration; and (subject to the provisions of Article 13 herein) to
amend the terms and conditions of any outstanding Grant; provided, however, the
Committee may award or grant only those types of Grants that either comply with
the applicable requirements of Section 409A of the Code and related guidance, or
do not result in the deferral of compensation within the meaning of Section 409A
of the Code and related guidance. Further, the Committee shall make all other
determinations which may be necessary or advisable for the administration of the
Plan. As permitted by law, the Committee may delegate its authorities as
identified hereunder.
2.3Decisions Binding. All
determinations and decisions made by the Committee pursuant to the provisions of
the Plan and all related orders or resolutions of the Board shall be final,
conclusive and binding on all persons, including the Company, its shareholders,
Employees, Participants and their estates and beneficiaries.
2.4Costs. The Company shall pay
all costs of administration of the Plan.
Article
3.Shares Subject to the
Plan
3.1Number of Shares. Subject to
Section 3.2 herein, the total number of Shares available for grant under the
Plan shall not exceed three million, two hundred thirty three thousand, three
hundred thirty three (3,233,333) Shares as authorized at the time of the annual
meeting of shareholders on May 10, 2005 reduced by the number of Shares as to
which Options or Shares have been granted or exercised. Shares may be (i)
authorized but unissued Shares of common stock, or (ii) Shares purchased on the
open market. Shares underlying lapsed or forfeited Grants, Grants that are not
paid in shares, previously acquired Shares tendered to exercise an Option, or
Shares withheld in accordance with Section 14.2 to satisfy tax withholding
obligations may be re-used for other Grants.
Subject to Section 3.2 herein, to the
extent consistent with Sections 422 and 424 of the Code, not more than an
aggregate of three million, two hundred thirty three thousand, three hundred
thirty three (3,233,333) Shares may be issued under Incentive Stock
Options.
3.2Adjustments in Authorized
Shares. In the event of any merger, reorganization, consolidation,
recapitalization, separation, liquidation, stock dividend, split-up, share
combination or other change in the corporate structure of the Company affecting
the Shares, such adjustment shall be made in the number and class of Shares
which may be delivered under the Plan, and in the number and class of and/or
price of Shares subject to outstanding Grants made under the Plan, as may be
determined to be appropriate and equitable by the Committee, in its sole
discretion, to prevent dilution or enlargement of rights; provided, however,
that the number of Shares subject to any Grant shall always be a whole number.
Notwithstanding the foregoing or any Plan provision to the contrary, any
substitution of a new Option pursuant to a corporate transaction for an
outstanding Option or the assumption of an outstanding Option shall meet the
requirements of Treasury Regulation Section 1.424-1. The preceding sentence
shall apply to “incentive stock options” as that term is defined in Section 422
of the Code and nonqualified stock options.
Article
4.Eligibility and
Participation
4.1Eligibility. Persons eligible
to participate in the Plan include all officers and key employees of the Company
and its Subsidiaries, as determined by the Committee, including Employees who
are members of the Board, but excluding Directors who are not
Employees.
4.2Actual Participation. Subject
to the provisions of the Plan, the Committee may, from time to time, select from
all Eligible Employees those to whom Grants shall be made and shall determine
the nature and amount of each Grant.
Article
5.Stock Options
5.1Grant of Options. Subject to
the terms and conditions of the Plan, Options may be granted to an Eligible
Employee at any time and from time to time, as shall be determined by the
Committee. The Committee shall have complete discretion in determining the
number of Shares subject to Options granted to each participant (subject to
Article 3 herein) and consistent with the provisions of the Plan, in determining
the terms and conditions pertaining to such Options; provided, however, the
maximum number of Shares subject to Options which may be granted to any single
Participant during any one calendar year is one hundred thousand (100,000). The
Committee may grant ISOs, NQSOs or a combination thereof.
5.2Option Grant Agreement. Each
Option grant shall be evidenced by an Option Grant Agreement that shall specify
the Option Price, the duration of the Option, the number of Shares to which the
Option pertains, the Exercise Period and such other provisions as the Committee
shall determine. The Option Grant Agreement also shall specify
whether the Option is intended to be an ISO or a NQSO.
5.3Option Price. The Option
Price for each Option granted under the Plan shall be the Fair Market Value of a
Share on the date of grant, or such higher price as the Committee may
determine.
5.4Duration of Options. Each
Option shall expire at such time as the Committee shall determine at the time of
grant; provided, however, that no Option shall be exercisable later than the
tenth (10th) anniversary of its date of grant.
5.5Dividend Equivalents. To the
extent permitted by Section 2.2 herein, simultaneously with the grant of an
Option, the Participant receiving the Option may be granted Dividend Equivalents
with respect to the Shares subject to such Option. Dividend Equivalents shall
constitute rights to amounts equal to the dividends declared on equal number of
outstanding Shares on all payment dates occurring during the period between the
grant date of an Option and the date the Option is exercised. The Committee
shall determine at the time Dividend Equivalents are granted the conditions, if
any, to which the payment of such Dividend Equivalents is subject.
5.6Exercise of and Payment for Options.
Options granted under the Plan shall be exercisable at such times and be
subject to such restrictions and conditions as the Committee shall in each
instance approve, which need not be the same for each Grant or for each
Participant. However, in no event may an Option granted under the Plan become
exercisable prior to six (6) months following the date of its
grant.
A Participant may exercise an Option at
any time during the Exercise Period. Options shall be exercised by the delivery
of a written notice of exercise to the Company or its designated agent, setting
forth the number of Shares with respect to which the Option is to be exercised,
accompanied by provisions for full payment for the Shares.
The Option Price upon exercise of any
Option shall be payable to the Company in full either: (a) in cash or its
equivalent, (b) by tendering, either by actual or constructive delivery,
previously acquired Shares having an aggregate fair market value at the time of
exercise equal to the total Option Price (provided that the Shares which are
tendered must have been held by the Participant for at least six months prior to
their tender to satisfy the Option Price), (c) by Share withholding or (d) by a
combination of (a), (b), and/or (c).
To the extent not prohibited by Section
402 of the Sarbanes-Oxley Act of 2002, the Committee also may allow cashless
exercise as permitted under Federal Reserve Board’s Regulation T, subject to
applicable securities law restrictions, or by any other means which the
Committee determines to be consistent with the Plan’s purpose and applicable
law.
As soon as practicable after receipt of
a written notification of exercise of an Option and provisions for full payment
therefor, the Company shall deliver to the Participant, in the Participant’s
name, Shares in an appropriate amount based upon the number of Shares purchased
under the Option(s).
5.7Restrictions on Share
Transferability. The Committee may impose such restrictions on any Shares
acquired pursuant to the exercise of an Option under the Plan as it may deem
advisable, including, without limitation, restrictions to comply with applicable
Federal securities laws, with the requirements of any stock exchange or market
upon which such Shares are then listed and/or traded and with any blue sky or
state securities laws applicable to such Shares.
5.8Termination of Employment.
Each Option Grant Agreement shall set forth the extent to which the
Participant shall have the right to exercise the Option following termination of
the Participant’s employment with the Company and its Subsidiaries. Such
provisions shall be determined in the sole discretion of the Committee, shall be
included in the Option Grant Agreement entered into with Participants, need not
be uniform among all Options granted pursuant to the Plan or among Participants
and may reflect distinctions based on the reasons for termination of
employment.
5.9Nontransferability of Options.
No Option granted under the Plan may be sold, transferred, pledged,
assigned, or otherwise alienated or hypothecated, other than by will or by the
laws of descent and distribution. Further, all Options granted to a
Participant under the Plan shall be exercisable during his or her lifetime only
by such Participant or his or her legal representative.
Article
6.Stock Appreciation
Rights
6.1Grant of SARs. To the extent
permitted by Section 2.2 herein, and subject to the terms and conditions of the
Plan, an SAR may be granted to an Eligible Employee at any time and from time to
time, as shall be determined by the Committee. The Committee may grant
Freestanding SARs, Tandem SARs or any combination of these forms of
SARs.
The Committee shall have complete
discretion in determining the number of SARs granted to each Participant
(subject to Article 3 herein) and, consistent with the provisions of the Plan,
in determining the terms and conditions pertaining to such SARs; provided,
however, the maximum number of SARs which may be granted to any single
Participant during any one calendar year is one hundred thousand
(100,000).
The Base Value of a Freestanding SAR
shall equal the Fair Market Value of a Share on the date of grant of the SAR.
The Base Value of Tandem SARs shall equal the Option Price of the related
Option. In no event shall any SAR granted hereunder become exercisable within
the first six (6) months of its grant.
6.2SAR Grant Agreement. Each SAR
grant shall be evidenced by a SAR Grant Agreement that shall specify the number
of SARs granted, the Base Value, the term of the SAR (not to exceed ten (10)
years), the Exercise Period and such other provisions as the Committee shall
determine.
6.3Exercise of Tandem SARs.
Tandem SARs may be exercised for all or part of the Shares subject to the
related Option upon the surrender of the right to exercise the equivalent
portion of the related Option. A Tandem SAR may be exercised only with respect
to the Shares for which its related Option is then exercisable.
Notwithstanding any other provision of
the Plan to the contrary, with respect to a Tandem SAR granted in connection
with an ISO: (i) the Tandem SAR will expire no later than the expiration of the
underlying ISO; (ii) the value of the payout with respect to the Tandem SAR may
be for no more than one hundred percent (100%) of the difference between the
Option Price of the underlying ISO and the Fair Market Value of the Shares
subject to the underlying ISO at the time the Tandem SAR is exercised; and (iii)
the Tandem SAR may be exercised only when the Fair Market Value of the Shares
subject to the ISO exceeds the Option Price of the ISO.
6.4Exercise of Freestanding SARs.
Freestanding SARs may be exercised upon whatever terms and conditions the
Committee, in its sole discretion, imposes upon them.
6.5Exercise and Payment of SARs.
A Participant may exercise an SAR at any time during the Exercise Period.
SARs shall be exercised by the delivery of a written notice of exercise to the
Company or its designated agent, setting forth the number of SARs being
exercised. Upon exercise of an SAR, a Participant shall be entitled to receive
payment from the Company in an amount equal to the product of:
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(a)
the excess of (i) the Fair Market Value of a Share on the date of exercise
over (ii) the Base Value of the SAR, multiplied
by
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(b)
the number of Shares with respect to which the SAR is
exercised.
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The
payment upon SAR exercise shall be in Shares of equivalent
value.
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6.6Termination of Employment.
Each SAR Grant Agreement shall set forth the extent to which the Participant
shall have the right to exercise the SAR following termination of the
Participant employment with the Company and its Subsidiaries. Such provisions
shall be determined in the sole discretion of the Committee, shall be included
in the SAR Grant Agreement entered into with Participants, need not be uniform
among all SARs granted pursuant to the Plan or among Participants and may
reflect distinctions based on the reasons for termination of
employment.
6.7Nontransferability of SARs.
No SAR granted under the Plan may be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution. Further, all SARs granted to a Participant
under the Plan shall be exercisable during his or her lifetime only by such
Participant or his or her legal representative.
Article
7.Restricted Stock
7.1Grant of Restricted Stock. To
the extent permitted by Section 2.2 herein, and subject to the terms and
conditions of the Plan, Restricted Stock may be granted to Eligible Employees at
any time and from time to time, as shall be determined by the Committee. The
Committee shall have complete discretion in determining the number of shares of
Restricted Stock granted to each Participant (subject to Article 3 herein) and,
consistent with the provisions of the Plan, in determining the terms and
conditions pertaining to such Restricted Stock; provided, however, the maximum
number of shares of Restricted Stock which may be granted to any single
Participant during any one calendar year is twenty thousand
(20,000).
7.2Restricted Stock Grant
Agreement. Each Restricted Stock Grant shall be evidenced by a Restricted
Stock Grant Agreement that shall specify the Period or Periods of Restriction,
the number of Restricted Stock Shares granted and such other provisions as the
Committee shall determine. The Period or Periods of Restriction shall end only
on the terms and conditions determined by the Committee and specified in the
Restricted Stock Grant Agreement, which may include the attainment of one or
more Performance Goals or upon one or more specified dates.
7.3Transferability. Except as
provided in this Article 7, Restricted Stock granted herein may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until the
end of the applicable Period of Restriction established by the Committee and
specified in the Restricted Stock Grant Agreement. However, in no event may any
Restricted Stock granted under the Plan become vested in a Participant prior to
six (6) months following the date of its grant. All rights with respect to the
Restricted Stock granted to a Participant under the Plan shall be available
during his or her lifetime and such rights are not assignable or
transferable.
7.4Certificate Legend. Each
certificate representing Restricted Stock granted pursuant to the Plan may bear
a legend substantially as follows:
“The sale
or other transfer of the shares of stock represented by this certificate,
whether voluntary, involuntary or by operation of law, is subject to certain
restrictions on transfer as set forth in the ALLETE, Inc. Executive Long-Term
Incentive Compensation Plan, and in a Restricted Stock Grant Agreement. A copy
of such Plan and such Agreement may be obtained from ALLETE, Inc.”
The Company shall have the right to
retain the certificates representing Restricted Stock in the Company’s
possession until such time as all restrictions applicable to such Shares have
been satisfied.
7.5Removal of Restrictions.
Except as otherwise provided in this Article 7, Restricted Stock shall become
freely transferable by the Participant after the last day of the Period of
Restriction applicable thereto. Once Restricted Stock is released from the
restrictions, the Participant shall be entitled to have the legend referred to
in Section 7.4 removed from his or her stock certificate.
7.6Voting Rights. During the
Period of Restriction, Participants holding Restricted Stock may exercise full
voting rights with respect to those Shares.
7.7Dividends and Other
Distributions. During the Period of Restriction, Participants holding
Restricted Stock shall be credited with all regular cash dividends paid with
respect to all Shares while they are so held. All cash dividends and other
distributions paid with respect to Restricted Stock shall be credited to
Participants subject to the same restrictions on transferability and
forfeitability as the Restricted Stock with respect to which they were paid. If
any such dividends or distributions are paid in Shares, such Shares shall be
subject to the same restrictions on transferability and forfeitability as the
Restricted Stock with respect to which they were paid. Subject to the
restrictions on vesting and the forfeiture provisions, all dividends credited to
a Participant shall be paid to the Participant promptly following the full
vesting of the Restricted Stock with respect to which such dividends were paid.
The provisions of this Section 7.7 are subject to the right of the Committee to
determine otherwise at the time of grant.
7.8Termination of Employment.
Each Restricted Stock Grant Agreement shall set forth the extent to which
the Participant shall have the right to receive unvested Restricted Shares
following termination of the Participant’s employment with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the Restricted Stock Grant Agreement entered
into with Participants, need not be uniform among all grants of Restricted Stock
or among Participants and may reflect distinctions based on the reasons for
termination of employment.
Article
8.Performance Units and
Performance Shares
8.1Grant of Performance Units and
Performance Shares. To the extent permitted by Section 2.2, and subject
to the terms of the Plan, Performance Units and/or Performance Shares may be
granted to an Eligible Employee at any time and from time to time, as shall be
determined by the Committee. The Committee shall have complete discretion in
determining the number of Performance Units and/or Performance Shares granted to
each Participant (subject to Article 3 herein) and, consistent with the
provisions of the Plan, in determining the terms and conditions pertaining to
such Grants; provided, however, the maximum award to any single Participant with
respect to Performance Units granted in any one calendar year shall be 200% of
base salary determined at the time the Performance Goals are established by the
Committee, but in no event more than $1,000,000, and with respect to Performance
Shares shall be twenty thousand (20,000) Shares.
8.2Performance Unit/Performance Share
Grant Agreement. Each grant of Performance Units and/or Performance
Shares shall be evidenced by a Performance Unit and/or Performance Share Grant
Agreement that shall specify the number of Performance Units and/or Performance
Shares granted, the initial value (if applicable), the Performance Period, the
Performance Goals and such other provisions as the Committee shall determine,
including, but not limited to, any right to Dividend Equivalents during or after
the Performance Period.
8.3Value of Performance
Units/Shares. Each Performance Unit shall have an initial value that is
established by the Committee at the time of grant. The value of a Performance
Share shall equal the value of one Share. The Committee shall set Performance
Goals in its discretion which, depending on the extent to which they are met,
will determine the number and/or value of Performance Units/Shares that will be
paid out to the Participants.
8.4Earning of Performance
Units/Shares. After the applicable Performance Period has ended, the
holder of Performance Units/Shares shall be entitled to receive payout with
respect to the Performance Units/Shares earned by the Participant over the
Performance Period, to be determined as a function of the extent to which the
corresponding Performance Goals have been achieved.
8.5Form and Timing of Payment of
Performance Units/Shares. Payment of earned Performance Units/Shares
shall be made following the close of the applicable Performance Period. The
Committee, in its sole discretion, may pay earned Performance Units/Shares in
cash or in Shares (or in a combination thereof), which have an aggregate Fair
Market Value equal to the value of the earned Performance Units/Shares at the
close of the applicable Performance Period. Such Shares may be
granted subject to any restrictions deemed appropriate by the
Committee.
8.6Dividend Equivalents. To the
extent permitted by Section 2.2 herein, simultaneously with the grant of
Performance Shares, the Participant may be granted Dividend Equivalents with
respect to such Performance Shares. Dividend Equivalents shall constitute rights
to amounts equal to the dividends declared on an equal number of outstanding
Shares on all payment dates occurring during the period between the grant date
and the date the Performance Shares are earned or paid out. The Committee shall
determine at the time Dividend Equivalents are granted the conditions, if any,
to which the payment of such Dividend Equivalents is subject.
8.7Termination of Employment.
Each Grant Agreement shall set forth the extent to which the Participant
shall have the right to receive a Performance Unit/Share payout following
termination of the Participant’s employment with the Company and its
Subsidiaries. Such provisions shall be determined in the sole discretion of the
Committee, shall be included in the Grant Agreement entered into with the
Participants, need not be uniform among all grants of Performance Units/Shares
or among Participants and may reflect distinctions based upon reasons for
termination of employment.
8.8Nontransferability.
Performance Units/Shares may not be sold, transferred, pledged, assigned or
otherwise alienated or hypothecated, other than by will or by the laws of
descent and distribution. Further, a Participant’s rights under the Plan shall
be exercisable during the his or her lifetime only by such Participant or his or
her legal representative.
Article
9.Other Grants
To the extent permitted by Section 2.2
herein and subject to Article 3 herein, the Committee shall have the right to
make other Grants which may include, without limitation, the grant of Shares
based on certain conditions, the payment of cash based on Performance Goals, or
other criteria established by the Committee, and the payment of Shares in lieu
of cash under other Company incentive or bonus programs. Payment under or
settlement of any such Grants shall be made in such manner and at such times as
the Committee may determine.
Article
10.Beneficiary
Designation
Each Participant under the Plan may,
from time to time, name any beneficiary or beneficiaries (who may be named
contingently or successively) to whom any benefit under the Plan is to be paid
in case of his or her death before he or she receives any or all of such
benefit. Each such designation shall revoke all prior designations by the same
Participant, shall be in a form prescribed by the Committee, and will be
effective only when filed by the Participant in writing with the Committee
during the Participant’s lifetime. In the absence of any such designation,
benefits remaining unpaid at the Participant’s death shall be paid to the
Participant’s estate.
The spouse of a married Participant
domiciled in a community property jurisdiction shall join any designation of
beneficiary or beneficiaries other than the spouse.
Article
11.Rights of
Employees
11.1Employment. Nothing in the
Plan shall interfere with or limit in any way the right of the Company to
terminate any Participant’s employment at any time, for any reason or no reason
in the Company’s sole discretion, nor confer upon any Participant any right to
continue in the employ of the Company.
11.2Participation. No Employee
shall have the right to be selected to receive a Grant under the Plan, or,
having been so selected, to be selected to receive a future Grant.
Article
12.Change in Control
Upon the occurrence of a Change in
Control, unless otherwise specifically prohibited by the terms of Article 16
herein or unless the Committee provides otherwise prior to the Change in
Control:
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(a)
Any and all Options and SARs granted hereunder shall become immediately
exercisable;
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(b)
Any Period of Restriction and restrictions imposed on Restricted Stock
shall be deemed to have expired;
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(c)
With respect to all outstanding Grants of Performance Units, Performance
Shares and other performance-based Grants, the Committee (i) shall
determine the greater of (x) the payout at 100% of the number of
Performance Units or Shares granted for the entire Performance Period and
(y) the payout based upon actual performance for the Performance Period
ending as of the effective date of the Change in Control in either case
after giving effect to the accumulation of Dividend Equivalents and (ii)
shall pay to the Participants the greater of such amounts, prorated based
upon the number of complete and partial calendar months within the
Performance Period which have elapsed as of the effective date of the
Change in Control in relation to the number of calendar months in the full
Performance Period. Payment shall be made in cash or in stock, as
determined by the Committee. However, there shall not be an
accelerated payout under this Section 12(c) with respect to Grants of
Performance Units, Performance Shares or other performance-based Grants
which were made less than six (6) months prior to the effective date of
the Change in Control; and
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(d)
All earned Performance Units, Performance Shares and other
performance-based Grants (as increased by any Dividend Equivalents to the
date of payment) not yet paid out shall be paid out immediately, in cash
or in stock, as determined by the
Committee.
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Article
13.Amendment, Modification and
Termination
13.1Amendment, Modification and
Termination. The Board may, at any time and from time to time, alter,
amend, suspend or terminate the Plan in whole or in part; provided, however,
that no amendment which requires shareholder approval in order for the Plan to
comply with Section 422 of the Code, Section 303A.08 of the New York Stock
Exchange Listed Company Manual, or any other applicable law, regulation or rule,
shall be effective unless such amendment shall be approved by the requisite vote
of the shareholders of the Company entitled to vote thereon.
13.2Grants Previously Made. No
termination, amendment or modification of the Plan shall adversely affect in any
material way any Grant previously made under the Plan, without the written
consent of the Participant holding such Grant unless such termination,
modification or amendment is required by applicable law.
Article
14.Withholding
14.1Tax Withholding. The Company
shall have the power and the right to deduct or withhold, or require a
Participant to remit to the Company, an amount sufficient to satisfy federal,
state and local taxes (including the Participant’s FICA obligation) required by
law to be withheld with respect to a Grant made under the Plan; provided,
however, with respect to any Grant that is subject to Section 409A of the Code,
the Company may, to the extent permitted by Section 409A of the Code, permit the
acceleration of the time or schedule of a payment to pay the FICA Amount, and
any related income tax at source imposed by Section 3401 of the Code on the FICA
Amount.
14.2Share Withholding. With
respect to withholding required upon the exercise of Options or SARs, upon the
lapse of restrictions on Restricted Stock, or upon any other taxable event
arising out of or as a result of Grants made hereunder, Participants may elect,
subject to the approval of the Committee, to satisfy the withholding
requirement, in whole or in part, by having the Company withhold Shares having a
Fair Market Value on the date the tax is to be determined equal to the minimum
statutory total tax which could be imposed on the transaction; provided,
however, with respect to any Grant that is subject to Section 409A of the Code,
the Company may, to the extent permitted by Section 409A of the Code, permit the
acceleration of the time or schedule of a payment to pay the FICA Amount, and
any related income tax at source imposed by Section 3401 of the Code on the FICA
Amount. All elections shall be irrevocable, made in writing and signed by the
Participant.
Article
15.Successors
All obligations of the Company under
the Plan, with respect to Grants made hereunder, shall be binding on any
successor to the Company, whether the existence of such successor is the result
of a direct or indirect purchase, merger, consolidation or otherwise, of all or
substantially all of the business and/or assets of the Company.
Article
16.Legal
Construction
16.1Gender and Number. Except
where otherwise indicated by the context, any masculine term used herein also
shall include the feminine, the plural shall include the singular and the
singular shall include the plural.
16.2Severability. In the event
any provision of the Plan shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
16.3Requirements of Law. The
making of Grants and the issuance of Shares under the Plan shall be subject to
all applicable laws, rules and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be
required.
Notwithstanding any other provision set
forth in the Plan, if required by the then-current Section 16 of the Exchange
Act, any “derivative security” or “equity security” offered pursuant to the Plan
to any Insider may not be sold or transferred within the minimum time limits
specified or required in such rule, except to the extent Rule 16b-3 exempts any
such sale or transfer from the restrictions of Section 16. The terms “equity
security” and “derivative security” shall have the meanings ascribed to them in
the then-current Rule 16a-l under the Exchange Act.
16.4Securities Law Compliance.
With respect to Insiders, transactions under the Plan are intended to comply
with all applicable conditions of the Federal securities laws. To the extent any
provision of the Plan or action by the Committee fails to so comply, it shall be
deemed null and void, to the extent permitted by law and deemed advisable by the
Committee.
16.5Governing Law. To the extent
not preempted by Federal law, the Plan, and all agreements hereunder, shall be
construed in accordance with, and governed by, the laws of the State of
Minnesota.
Article
17.Definitions
Whenever used in the Plan, the
following terms shall have the meanings set forth below and, when such meaning
is intended, the initial letter of the word is capitalized:
“Base Value” of an SAR shall have the
meaning set forth in Section 6.1 herein.
“Board” or “Board of Directors” means
the Board of Directors of the Company.
“Cause” means: (i) willful misconduct
on the part of a Participant that is detrimental to the Company or (ii) the
conviction of a Participant for the commission of a felony or crime involving
moral turpitude. “Cause” under either (i) or (ii) shall be determined in good
faith by the Committee.
“Change in Control” of the Company
shall be deemed to have occurred as of the first day that any one or more of the
following conditions shall have been satisfied:
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(a)the
dissolution or liquidation of the
Company;
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(b)a
reorganization, merger or consolidation of the Company with one or more
unrelated corporations, as a result of which the Company is not the
surviving corporation;
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(c)the
sale, exchange, transfer or other disposition of shares of the common
stock of the Company (or shares of the stock of any person that is a
shareholder of the Company) in one or more transactions, related or
unrelated, to one or more Persons unrelated to the Company if, as a result
of such transactions, any Person (or any Person and its affiliates) owns
more than twenty percent (20%) of the voting power of the outstanding
common stock of the Company; or
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(d)the
sale of all or substantially all the assets of the
Company.
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“Code” means the Internal Revenue Code
of 1986, as amended from time to time.
“Committee” means the committee, as
specified in Article 2, appointed by the Board to administer the Plan with
respect to Grants.
“Company” means ALLETE, Inc., a
Minnesota corporation, formerly known as Minnesota Power & Light Company, or
any successor thereto as provided in Article 15 herein.
“Director” means any individual who is
a member of the Board of Directors of the Company.
“Dividend Equivalent” means, with
respect to Shares subject to Options or Performance Shares, a right to an amount
equal to dividends declared on an equal number of outstanding
Shares.
“Effective Date” means January 1, 2006.
“Eligible Employee” means an Employee
who is eligible to participate in the Plan, as set forth in Section 4.1
herein.
“Employee” means any employee of the
Company or any of its Subsidiaries, who is not covered by any collective
bargaining agreement to which the Company or any of its Subsidiaries is a party.
Directors who are not otherwise employed by the Company shall not be considered
Employees under the Plan. For purposes of the Plan, transfer of employment of a
Participant between the Company and any one of its Subsidiaries (or between
Subsidiaries) shall not be deemed a termination of employment.
“Exchange Act” means the Securities
Exchange Act of 1934, as amended from time to time, or any successor act
thereto.
“Exercise Period” means the period
during which an SAR or Option is exercisable, as set forth in the related Grant
Agreement.
“Fair Market Value” means the closing
sale price as reported in the composite reporting system or, if there is no such
sale on the relevant date, then on the last previous day on which a sale was
reported.
“FICA Amount” means the FICA tax
imposed on any Grant.
“Freestanding SAR” means an SAR that is
granted independently of any Options.
“Grant” means, individually or
collectively, a grant under the Plan of NQSOs, ISOs, SARs, Restricted Stock,
Performance Units, Performance Shares or any other type of grant permitted under
Article 9 of the Plan.
“Grant Agreement” means an agreement
entered into by each Participant and the Company, setting forth the terms and
provisions applicable to a Grant made to a Participant under the
Plan.
“Incentive Stock Option” or “ISO” means
an option to purchase Shares, granted under Article 5 herein, which is
designated as an Incentive Stock Option and satisfies the requirements of
Section 422 of the Code.
“Insider” means an Employee who is, on
the relevant date, an officer, director or ten percent (10%) beneficial owner of
the common stock of the Company, as contemplated by Section 16 of the Exchange
Act.
“Nonqualified Stock Option” or “NQSO”
means an option to purchase Shares, granted under Article 5 herein, which is not
intended to be an Incentive Stock Option.
“Option” means an Incentive Stock
Option or a Nonqualified Stock Option.
“Option Price” means the price at which
a Share may be purchased by a Participant pursuant to an Option, as determined
by the Committee and set forth in the Option Grant Agreement.
“Participant” means an Employee who has
outstanding a Grant made under the Plan.
“Performance Goals” means, the general
performance objectives, the attainment of which shall serve as a basis for the
determination of the number or value of Restricted Stock, Performance Units, or
Performance Shares granted under the Plan. Unless and until the Committee
proposes for shareholder vote a change in the Performance Goals to be used for
purposes of grants to Participants, the Performance Goals shall be based upon
any one or more of the following:
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(a)
Total shareholder return (measured as the sum of Share price appreciation
and dividends declared).
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(b)
Return on invested capital, assets or net
assets.
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(c)
Share earnings/earnings growth.
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(d)
Cash flow/cash flow growth.
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(e)
Cost of services to consumers.
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(f)
Growth in revenue, sales, operating income, net income, stock price and/or
earnings per share.
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(g)
Return on shareholders’ equity.
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(h)
Economic value created.
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(i)
Customer satisfaction and/or customer service
quality.
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(j)
Operating effectiveness.
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If applicable tax and securities laws
change to permit Committee discretion to alter the governing Performance Goals
without obtaining shareholder approval of such changes and without losing any
income tax benefits to the Company, the Committee shall have sole discretion to
make such changes without obtaining shareholder approval.
“Performance Period” means the period
of time during which the Performance Goals will be measured to determine what,
if any, Performance Units/Performance Shares have been earned. A Performance
Period shall, in all cases, be at least six (6) months in length.
“Performance Share” means a Grant made
to an Employee, as described in Article 8 herein.
“Performance Unit” means the right of a
Participant to receive, upon satisfaction of the Performance Goal, an amount of
cash or Shares equal to the difference between the value of the Performance Unit
as the date of grant, which may be zero, and the value of the Performance Unit
on the date the Performance Goals are met. The value of a Performance Unit at
the date of grant is determined by the Committee and may be, but is not required
to be, based on the underlying stock price. In accordance with the plan,
Performance Units may be paid in cash, shares, or a combination thereof, as
determined by Committee.
“Period of Restriction” means the
period during which the transfer of Restricted Stock is limited, as provided in
Article 7 herein.
“Person” shall have the meaning
ascribed to such term in Section 3(a)(9) of the Exchange Act, as used in
Sections 13(d) and 14(d) thereof including usage in the definition of a “group”
in Section 13(d) thereof.
“Restricted Stock” means a Grant of
Shares made to a Participant pursuant to Article 7 herein.
“Retirement” shall, with respect to a
Participant, have the meaning ascribed to such term in the tax qualified
retirement plan maintained by the Company or Subsidiary for the benefit of such
Participant. In the event Participant is eligible for benefits under more than
one such tax qualified retirement plan, the earliest date provided under any of
said plans shall be the meaning ascribed under this Plan.
“Shares” means the shares of common
stock of the Company, without par value.
“Stock Appreciation Right” or “SAR”
means a right, granted alone or in connection with a related Option, designated
as an SAR, to receive a payment on the day the right is exercised, pursuant to
the terms of Article 6 herein. Each SAR shall be denominated in terms of one
Share.
“Subsidiary” means any corporation that
is a “subsidiary corporation” of the Company as that term is defined in Section
424(f) of the Code.
“Tandem SAR” means an SAR that is
granted in connection with a related Option, the exercise of which shall require
forfeiture of the right to purchase a Share under the related Option (and when a
Share is purchased under the Option, the Tandem SAR shall be similarly
canceled).
ALLETE,
Inc.
By:/s/ Donald J.
Shippar
Donald J.
Shippar
President and Chief
Executive Officer
Attest:/s/ Deborah A.
Amberg
Deborah A. Amberg
Vice President
General Counsel &
Secretary