proxy_09.htm
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 12, 2009
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 12, 2009 at 10:30 a.m. CDT for the following
purposes:
1. To elect
a Board of eleven directors to serve for the ensuing year;
2. To ratify
the appointment of PricewaterhouseCoopers LLP as ALLETE’s independent registered
public accounting firm for 2009;
3. To amend
Article III of ALLETE’s Amended and Restated Articles of Incorporation to
increase the amount of authorized capital stock and common stock;
4. To delete
Article V of ALLETE’s Amended and Restated Articles of Incorporation to remove
the names and places of residence of the Board of Directors named therein;
and
5. To
transact such other business as may properly come before the meeting or any
adjournments thereof.
Shareholders
of record on the books of ALLETE at the close of business on March 13, 2009 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
March 24,
2009
Important Notice Regarding
the Availability of Proxy Materials for the Shareholder Meeting to be held on May
12,
2009: the Company’s Proxy Statement, Annual
Report on Form 10-K, and Profile are available at www.ematerials.com/ale.
PROXY
STATEMENT
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TABLE
OF CONTENTS
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GENERAL
INFORMATION
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1
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Proxy
Solicitation
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1
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Purpose
of
Meeting
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1
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Shareholders
Entitled to
Vote
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1
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Shareholders
of Record; Beneficial
Owners
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1
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Quorum;
Required
Votes
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2
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How
to
Vote
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2
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Revocation
of
Proxies
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3
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Delivery
of Proxy Materials to
Households
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3
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How
to Enroll for Electronic Delivery of Future Proxy
Materials
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3
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OWNERSHIP
OF ALLETE COMMON
STOCK
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4
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Securities
Owned by Certain Beneficial
Owners
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4
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Securities
Owned by Directors and
Management
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4
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Section
16(a) Beneficial Ownership Reporting
Compliance
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5
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ITEM
NO. 1— ELECTION
OF
DIRECTORS
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6
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Nominees
for
Director
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6
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CORPORATE
GOVERNANCE
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8
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Corporate
Governance
Guidelines
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8
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Director
Independence
Standards
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8
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Related
Person Transactions and Director Independence
Determinations
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9
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Director
Nominations
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10
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Committee
Membership, Meetings, and
Functions
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11
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Communications
Between Shareholders and the Board of
Directors
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12
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Common
Stock Ownership
Guidelines
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12
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Code
of
Ethics
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12
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COMPENSATION
DISCUSSION AND
ANALYSIS
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13
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Compensation
Philosophy and
Objectives
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13
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Elements
of Executive
Compensation
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15
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Benefits
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17
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Perquisites
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18
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Employment,
Severance, and Change in Control
Agreements
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18
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Process
for Determining Executive
Compensation
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19
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EXECUTIVE
COMPENSATION COMMITTEE
REPORT
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25
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COMPENSATION
OF DIRECTORS AND EXECUTIVE
OFFICERS
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26
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Summary
Compensation Table―2008
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26
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Grants
of Plan-Based Awards―2008
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28
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Grants
of Plan-Based Awards
Discussion
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29
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Outstanding
Equity Awards at Fiscal
Year-End—2008
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33
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Option
Exercises and Stock
Vested—2008
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34
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Pension
Benefits—2008
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34
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Pension
Benefits
Discussion
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35
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Nonqualified
Deferred
Compensation—2008
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37
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Potential
Payments Upon Termination or Change In
Control
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39
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Director
Compensation—2008
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42
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Equity
Compensation Plan
Information
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43
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AUDIT
COMMITTEE
REPORT
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44
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Audit
Committee Pre-Approval Policies and
Procedures
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44
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Audit
and Non-Audit
Fees
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45
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ITEM
NO. 2—RATIFICATION OF THE APPOINTMENT OF INDEPENDENT
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REGISTERED
PUBLIC ACCOUNTING
FIRM
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46
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ITEM
NO. 3—PROPOSAL TO AMEND ARTICLE III OF THE AMENDED AND
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RESTATED
ARTICLES OF INCORPORATION TO INCREASE THE
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AMOUNT
OF AUTHORIZED CAPITAL STOCK AND COMMON STOCK
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46
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ITEM
NO. 4—PROPOSAL TO DELETE ARTICLE V OF THE AMENDED AND
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RESTATED
ARTICLES OF INCORPORATION TO REMOVE THE NAMES
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AND
PLACES OF RESIDENCE OF THE BOARD OF DIRECTORS NAMED
THEREIN
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47
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OTHER
BUSINESS
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48
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Shareholder
Proposals for the 2010 Annual
Meeting
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48
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APPENDIX
A
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A-1
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PROXY
STATEMENT
ALLETE, Inc.
30
West Superior Street
GENERAL
INFORMATION
Proxy
Solicitation
These
proxy materials are being delivered to shareholders of ALLETE, Inc. (ALLETE or
Company) in connection with the solicitation of proxies by the Board of
Directors to be voted at the Company’s 2009 Annual Meeting of Shareholders. The
Annual Meeting will be held at 10:30 a.m. CDT on Tuesday, May 12, 2009 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
Georgeson Shareholder Communications, 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 March 30,
2009.
Purpose
of the Meeting
The
purpose of the Annual Meeting is to elect a Board of eleven directors to serve
for the ensuing year, to ratify the appointment of PricewaterhouseCoopers LLP
(PricewaterhouseCoopers) as the Company’s independent registered public
accounting firm for 2009, to increase the amount of capital stock and Common
Stock (as defined below) authorized for issuance, to remove the names and places
of residence of the Board of Directors named therein from our
Amended and Restated Articles of Incorporation and to transact such other
business as may properly come before the meeting.
The Board
is not aware of any matter to be presented at the Annual Meeting of Shareholders
other than those set forth in the accompanying notice. 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.
Shareholders
Entitled to Vote
Each
share of common stock of the Company, without par value (Common Stock), of
record on the books of the Company at the close of business on March 13, 2009 is
entitled to notice of and to vote at the Annual Meeting of Shareholders. As of
March 13, 2009, there were
[ ] outstanding
shares of Common Stock, each entitled to one vote.
Shareholders
of Record; Beneficial Owners
If shares
of Common Stock are registered directly in a person’s name with our transfer
agent, Wells Fargo Bank, N.A., that person is considered the “shareholder of
record” with respect to those shares and these proxy materials have been sent
directly to such person by the Company.
If a
person holds shares of Common Stock in a brokerage account or through a bank or
other holder of record, that person is considered the “beneficial owner” of
shares held in "street name." These proxy materials have been forwarded to the
beneficial owners by the broker, bank, or other entity that is considered the
shareholder of record with respect to those shares. A beneficial owner has the
right to direct the broker, bank, or other shareholder of record on how to vote
the beneficially owned shares.
Quorum;
Required Votes
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.
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. The
affirmative vote of a majority of the shares of Common Stock present at the
Annual Meeting and entitled to vote is required for approval of other items
described in the Proxy Statement to be acted upon by shareholders.
Abstentions
are included in the number of shares present and voting, and have the same
effect as votes against a particular proposal.
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 of the shares and the broker does not
have the authority to vote on the matter without such instructions. Under the
rules of the New York Stock Exchange (NYSE), a broker may vote shares on Items
Nos. 1 and 2, and on other routine matters in the absence of timely voting
instructions from the beneficial owner.
An
automated system administered by Wells Fargo Shareowners Services will tabulate
the votes.
How
to Vote
Shareholders
of record may vote their shares by proxy using any of the following
methods:
•
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By Telephone: Vote by
calling 1-800-560-1965 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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•
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Online: You may vote
online 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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•
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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.
|
Telephone
and Internet voting will be available until 12:00 p.m. CDT on May 11,
2009.
If you
received these materials electronically, you did not receive a proxy card. 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.
Unless
contrary instructions are provided, all shares of Common Stock represented by
valid proxies will be voted “FOR” the election of all
nominees for director named herein, “FOR” ratification of the
appointment of PricewaterhouseCoopers as the Company’s independent registered
public accounting firm for 2009, “FOR” amending Article III of
the Company’s Amended and Restated Articles of Incorporation to increase the
amount of authorized capital stock and Common Stock, and “FOR” deleting Article V of
the Company’s Amended and Restated Articles of Incorporation to remove the names
and places of residence of the Board of Directors named therein.
Revocation
of Proxies
A proxy
may be revoked at any time before it is voted by giving written notice of
revocation to ALLETE, Inc., Shareholder Services, 30 West Superior Street,
Duluth, MN 55802-2093, or by delivering a proxy bearing a later date using any
of the voting methods described above.
Delivery
of Proxy Materials to Households
Only one
copy of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2008 as amended (Annual Report), filed with the United States
Securities and Exchange Commission (SEC) and one Proxy Statement for the 2009
Annual Meeting will be delivered to an address where two or more shareholders
reside, if those shareholders previously consented to such delivery, unless we
have received contrary instructions from a shareholder at the address. A
separate Proxy Card will be delivered to each shareholder at the shared address
who has not elected to receive proxy materials electronically.
If you
are a shareholder who lives at a shared address and would like additional copies
of the Annual Report, this Proxy Statement, or any future annual reports or
proxy statements, contact ALLETE Shareholder Services, 30 West Superior Street,
Duluth, MN 55802-2093, telephone number 800-535-3056 or 218-723-3974,
and copies will be mailed to you promptly.
If you
share the same address with another of our shareholders and you currently
receive multiple copies of annual reports or proxy statements, 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.
If you
did not receive the Annual Report, which includes the Company’s audited
Consolidated Financial Statements, please notify ALLETE Shareholder Services, 30
West Superior Street, Duluth, MN 55802-2093, telephone number 800-535-3056 or
218-723-3974, and a copy will be sent to you promptly.
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
to Enroll for Electronic Delivery of Future Proxy Materials
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 SEC and are available for you to
view. The notification would include a link to the website on which you could
view the materials. We would also provide you with a link to allow you to vote
your Common Stock shares online.
To enroll
for electronic receipt of shareholder materials, follow these easy
directions:
1.
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Log
onto the Internet at www.allete.com.
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3.
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Click
on “Shareholder Services.”
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4.
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Click
on “Proxy Electronic Delivery.”
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5.
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Follow
the prompts to submit your electronic
consent.
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The
website 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.
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 13, 2009, the
following shareholders were beneficial owners of more than 5 percent of any
class of the Company’s voting securities.
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class 1
|
Common
Stock
|
Barclays
Global Investors NA 2
400
Howard Street
San
Francisco, CA 94105
|
1,780,546
|
[ ]
|
Common
Stock
|
Wachovia
Bank, N.A. (Wachovia) 3
NC
1156 Wachovia Center
401
South Tryon Street
Charlotte,
NC 28288
|
[ ]
|
[ ]
|
|
2The
information shown in this table for Barclays Global Investors NA (i) is
derived from information filed with the SEC on February 5, 2009 on
Schedule 13G; and (ii) includes Barclays Global Investors NA and certain
of its affiliates.
|
|
3Wachovia
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 13,
2009.
|
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 13, 2009 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 12. Directors are
expected to own 3,000 shares within three years of election—the following
directors have served less than three years: Ms. Brekken,
Mr. Emery, Mr. Hoolihan, and Mr. Neve. As a nominee for Director, Mr.
Rodman is expected to own 500 shares before his election. Common Stock ownership
guidelines applicable to the Named Executive Officers are discussed beginning on
page 13. In July 2008 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.
|
Name
of
Beneficial
Owner
|
Company
Share
Ownership
Guidelines 1
|
Number
of Shares
Beneficially
Owned 2
|
Options
Exercisable
within
60 days
after
March 13, 2009
|
Directors
and Nominees for Director
|
Kathleen
A. Brekken
Heidi
J. Eddins
Sidney
W. Emery, Jr.
James
J. Hoolihan
Madeleine
W. Ludlow
George
L. Mayer
Douglas
C. Neve
Roger
D. Peirce
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
500
3,000
|
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
|
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
[ ]
|
Named
Executive Officers
|
Donald
J. Shippar
Mark
A. Schober
Deborah
A. Amberg
Claudia
Scott Welty
Laura
A. Holquist
|
[ ]
[ ]
[ ]
[ ]
[ ]
|
[ ]
[ ]
[ ]
[ ]
[ ]
|
[ ]
[ ]
[ ]
[ ]
[ ]
|
All
Directors, Nominees for Director, and executive officers as a group
(19):
|
–
|
[ ]
|
[ ]
|
|
1The
amounts in this column for the Named Executive Officers were determined
based on 2008 base salaries and the closing share price of
[$ ] on March 13,
2009.
|
|
2Includes:
(i) shares as to which voting and investment power is shared with the
person’s spouse: Mr.
Hoolihan—[ ],
Mr. Neve—[ ],
Mr.
Rodman—[ ], Mr.
Schober—[ ], and Ms.
Welty—[ ]; (ii)
shares owned by the person’s spouse: Ms.
Holquist—[ ]; and
(iii) shares held by the person’s children: Mr.
Schober—[ ]. 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 also
own less than 1 percent of the Common
Stock.
|
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934, as amended, 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 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 2008, except that two
late reports were filed on behalf of Ms. Holquist, each covering one transaction
whereby shares of Common Stock otherwise payable to her upon the vesting of
restricted stock units were withheld by the Company to satisfy the tax
withholding obligations associated with the vesting event. The transactions
covered by the late reports occurred in February 2007 and February
2008.
ITEM
NO. 1—ELECTION OF DIRECTORS
All
shares represented by the proxy will be voted, unless authority is withheld,
“FOR” the election of
the eleven nominees for Director named below and on the following page.
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.
Nominees
for Director
|
[PHOTO OMITTED]
|
KATHLEEN A. BREKKEN, 59,
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.
|
|
HEIDI J. EDDINS, 52, 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.
|
|
SIDNEY W. EMERY, JR.,
62, 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, and
on the Board of Governors of the University of St. Thomas School of
Engineering in St. Paul, Minnesota.
|
|
JAMES J. HOOLIHAN, 56,
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.
|
|
MADELEINE W. LUDLOW, 54,
of Cincinnati, Ohio, has been a Director since 2004. She is Chair of the
Executive Compensation Committee. Since January 2005, Ms. Ludlow has been
a Principal of LudlowWard Capital Advisors, LLC, a Cincinnati-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.
|
Nominees
for Director
|
|
GEORGE L. MAYER, 64, of
Essex, Connecticut, has been a Director since 1996. He is a member of the
Audit Committee and the Corporate Governance and Nominating Committee. Mr.
Mayer is the founder and President of Manhattan Realty Group, a real
estate investment and management company. Mr. Mayer is also a director of
Schwaab, Inc., one of the nation’s largest manufacturers of rubber stamps
and associated products.
|
|
DOUGLAS C. NEVE, 53, of
Eden Prairie, 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 also is a board
member of Analysts International Corporation (NASDAQ: ANLY) and of Tyndale
House Publishers, Inc.
|
|
JACK I. RAJALA, 69, of
Grand Rapids, Minnesota, has been a Director since 1985. He is a member of
the Executive Compensation Committee and the Corporate Governance and
Nominating Committee. Mr. Rajala is the Chairman and Chief Executive
Officer of Rajala Companies, and Director and President of Rajala Mill
Company, both of which manufacture and trade lumber. Mr. Rajala also
serves as Chairman and Chief Executive Officer of Boundary Company, a
forestland investment company.
|
|
LEONARD C. RODMAN, 60,
of Overland Park, Kansas, is a first-time nominee for Director. 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 was identified as a director nominee with the
assistance of a search firm.
|
|
DONALD J. SHIPPAR, 60,
of Superior, Wisconsin, has been a Director since 2004 and has been
Chairman of ALLETE since January 2006. Mr. Shippar was named President and
Chief Executive Officer of ALLETE in 2004. 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.
|
|
BRUCE W. STENDER, 67, 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.
|
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 2008,
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. As examples, the Board and its committees undertake an
annual self-evaluation process, meet regularly without members of management
present, 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 each year and to share their experiences and
observations with the other Directors. In addition to seminars, Board members
attended educational presentations hosted by the Company during 2008 addressing
regulatory process and ratemaking. In 2009 the Company provided an educational
presentation to the Board about emissions allowances and their
markets.
Corporate
Governance Guidelines
The
Company’s Corporate Governance Guidelines, initially adopted in 2002, were
revised in October 2008. 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 Executive Compensation
Committee Charter was last revised in July 2008, the Audit Committee Charter was
last revised in January 2008, 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 website at www.allete.com.
Shareholders may request free printed copies of these documents from ALLETE
Shareholder Services, by mail addressed to 30 West Superior Street, Duluth, MN
55802-2093, or by calling (800) 535-3056 or (218) 723-3974.
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. 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;
|
•
|
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;
|
•
|
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;
|
•
|
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.
|
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 website 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
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, is
“independent.”
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 2008, Company
purchases from ILCO totaled $567,414.02. After discussion, the Corporate
Governance Committee recommended to the Board that these relationships with the
Company are not material to Mr. Hoolihan, or to any person or organization with
whom he has an affiliation. Based on this, the Board determined that these
relationships do not impair Mr. Hoolihan’s independence.
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 $319,550.25 from the Company in 2008 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 the revenue for Mr. Rajala’s companies in
2008. Based on the recommendation of the Corporate Governance Committee, without
Mr. Rajala’s participation, the Board determined that these transactions do not
impair Mr. Rajala’s independence.
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 $30,537.91 in 2008. The Corporate Governance
Committee, without Mr. Stender’s participation, concluded that the payments were
in the ordinary course of business and relatively small. Based on
this, the Board determined that these transactions do not affect Mr. Stender’s
independence.
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 $862,537.48 in 2008. The
Corporate Governance Committee considered these payments and determined that
they are not material to Mr. Rodman or Black & Veatch. Based on
the recommendation of the Corporate Governance Committee, the Board determined
that these payments will not impair Mr. Rodman’s independence if elected to the
Board.
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, strategic planning, business development, and
community leadership.
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 2008,
the Company paid a third-party search firm a fee to identify, evaluate, or
assist in identifying or evaluating potential nominees for Director, including
Mr. Rodman.
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 2008. 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
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 Mr. Hoolihan, Mr. Mayer, Mr. Neve
(Chair), and Mr. Stender (ex-officio). Until his retirement from the Board in
May 2008, Roger D. Peirce served as Chair of this committee. The Audit Committee
held eight meetings in 2008. 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 reviews, and upon favorable review, recommends
approval of the Consolidated Financial Statements.
The
current members of the Compensation Committee are Ms. Brekken, Mr. Emery, Ms.
Ludlow (Chair), Mr. Rajala, and Mr. Stender (ex-officio). The Compensation
Committee held six meetings in 2008. 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.
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 nonmanagement Directors.
Executive sessions of nonmanagement Directors are regularly scheduled in
connection with Board and committee meetings.
During
2008, the Board held six meetings. All Directors standing for re-election
attended 75 percent or more of the aggregate number of meetings of the
Board and applicable committee meetings in 2008. All Directors standing for
election are expected to attend the Annual Meeting and all except Mr. Emery, who
was out of the country, did attend in 2008.
Communications
Between Shareholders and the Board of Directors
Shareholders
and other interested parties who wish to communicate directly with the Board,
the nonmanagement 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.
Common
Stock Ownership Guidelines
The
Corporate Governance Committee has determined that Directors and executive
officers whose primary job responsibilities affect all business units of the
Company and Presidents of a major affiliated company should have a significant
equity interest in the Company. The Corporate Governance Committee believes that
such equity ownership aligns the interest of Directors and certain executive
management 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 section beginning on page
13.
Code
of Ethics
The
Company has adopted a written 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 Ethics is available on
our website at www.allete.com and printed copies are available upon written
request to ALLETE Shareholder Services, 30 West Superior Street, Duluth, MN
55802-2093. Any amendment to or waiver of the Code of Ethics will be disclosed
on our website at www.allete.com
promptly following the date of such amendment or waiver.
COMPENSATION
DISCUSSION AND ANALYSIS
This
discussion is meant to help you understand how we compensate the Named Executive
Officers. This look at our compensation goals, policies, and practices provides
context for the detailed compensation tables and narrative discussions that
follow starting on page 26.
Compensation
Philosophy and Objectives
Our
executive 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 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 comparison data, as further described in the
section "Process for Determining Executive Compensation" beginning on page 19.
Severance benefits 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 modest basis to facilitate the Named Executive
Officers’ performance of their responsibilities.
We provide fair and competitive pay.
We strive to offer fair and competitive compensation to Named Executive
Officers. We use data, emphasizing energy services and real estate industry
data, to establish a range for executive compensation. 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 to fully perform the duties of his
or her position, 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. The process of how comparison companies are
selected for various purposes is discussed in the section, “Process for
Determining Executive Compensation” beginning on page 19. 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 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 executive
officers who hold the position of President of a major affiliated company of
ALLETE should be ALLETE shareholders. 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 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
|
|
4X
|
|
ALLETE
Senior Vice President
|
|
2X
|
|
ALLETE
Vice President
|
|
1X
|
|
President
of Major Affiliate
|
|
1X
|
We
established the Common Stock ownership guidelines in October 2005. 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 July 2008 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 is
[ ]
compared to a year ago due to recent declines in our share price. Ownership
levels as of March 13, 2009, are shown on the table on page 5.
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 Internal Revenue Code of 1986, as amended
(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 17. 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). 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 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 types and levels.
Elements
of Executive Compensation
Overview. Named Executive
Officers receive total compensation consisting of base salary, annual
incentives, long-term incentives, retirement benefits, health and welfare
benefits, and perquisites. The process for determining executive compensation is
described beginning on page 19. Named Executive Officers’ 2008 compensation
elements are discussed below and also in the compensation tables and narratives
starting on page 26.
Base Salary. Base salary is
designed to attract and retain experienced, qualified leaders.
Annual Incentive Awards.
Annual incentives reward Named Executive Officers for accomplishing
annual goals. We have two annual incentive plans—the Results Sharing program and
the AIP. Annually, the Compensation Committee, in consultation with Mr. Shippar,
approves performance measures, performance targets, and target award
opportunities for both plans. The Compensation Committee, in consultation with
Mr. Shippar, also determines to what extent performance targets have been met
for both plans.
•
|
Results Sharing. Named
Executive Officers, except Ms. Holquist, participate in the Results
Sharing program. Results Sharing, a broad-based profit-sharing program
open to virtually all of our employees, is designed to motivate all
employees to achieve corporate earnings goals and operational performance
goals related to safety, reliability and environmental protection. The
2008 Results Sharing program provided a target-level opportunity equal to
5 percent of base pay.
|
•
|
Annual Incentive Plan.
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, except Ms. Holquist, AIP
awards were designed to reward achievement of corporate earnings and cash
flow goals, and to reward the accomplishment of strategic initiatives as
further described under "Grants of Plan-Based Awards Discussion" beginning
on page 29. Earnings was selected 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, except Ms. Holquist;
in 2008 target-level award opportunities ranged from 30 percent to 50
percent of salary.
|
Ms.
Holquist’s AIP award was designed to create an incentive for her to lead the
effort to secure entitlements for existing real estate assets, to oversee
orderly and profitable sales of real estate assets, and to position ALLETE
Properties for future growth. Her target-level award is expressed as a
percentage of revenue from land sales and net income from real estate
operations.
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 salary ranges established using
comparative benchmarking data.
Long-Term Incentive Awards.
We use long-term incentive compensation to encourage Named Executive
Officers to develop and implement business strategies that grow total
shareholder return (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. The Compensation Committee approves LTIP awards in
January each year, effective as of the first business day in February to allow
for the orderly administration, communication, and reporting of the awards. 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.
For 2008,
the aggregate target value of the LTIP award to Named Executive Officers ranged
from $100,000 to $450,000. LTIP awards granted in 2008 to each Named Executive
Officer, except Ms. Holquist, consisted of nonqualified stock options with a
ten-year term and three-year vesting period, and performance shares with a
three-year performance period. Generally, the Compensation Committee allocates
the target value of the LTIP awards evenly between stock options and performance
shares; the target value of Mr. Shippar’s LTIP award, however, is more heavily
weighted toward performance shares given his position and higher Common Stock
ownership requirement. The target value of Ms. Holquist’s LTIP award is
comprised of restricted stock units and a long-term cash award that vests over
three years. Her cash award is designed to reward her for achieving goals
specific to the Company’s real estate business; both forms of long-term
compensation encourage her retention, which is important given the cyclical
nature of the real estate market. The table below shows the face value of the
LTIP target opportunity for each Named Executive Officer and the allocation of
this opportunity between stock options, performance shares, restricted stock
units and cash awards. Each long-term incentive compensation element is
described below following the table.
|
|
Allocation
of Long-Term Incentive Target Opportunity
(as
a % of Total Opportunity)
|
Name
|
Long-Term
Incentive
Target Opportunity
|
Stock
Options
|
Performance
Shares
|
Restricted
Stock Units
|
Cash
Awards
|
Mr.
Shippar
|
$450,000
|
40%
|
60%
|
–
|
–
|
Mr.
Schober
|
$150,000
|
50%
|
50%
|
–
|
–
|
Ms.
Amberg
|
$100,000
|
50%
|
50%
|
–
|
–
|
Ms.
Welty
|
$100,000
|
50%
|
50%
|
–
|
–
|
Ms.
Holquist
|
$191,000
|
–
|
–
|
50%
|
50%
|
•
|
Stock Options. 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.
|
•
|
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.
|
Mr.
Shippar recommends the TSR peer group based on comparability to the Company 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 Compensation Committee approves the peer group
companies prior to the start of each performance period. The TSR peer group used
for 2008 LTIP awards is as follows:
|
Avista
Corporation
|
MDU
Resources Group, Inc.
|
|
Black
Hills Corporation
|
Nicor
Inc.
|
|
Brookfield
Asset Management Inc.
|
Otter
Tail Corporation
|
|
CH
Energy Group, Inc.
|
TECO
Energy, Inc.
|
|
Consolidated-Tomoka
Land Company
|
The
Empire District Electric Company
|
|
Great
Plains Energy Incorporated
|
The
St. Joe Company
|
|
IDACORP,
Inc.
|
Vectren
Corporation
|
|
Integrys
Energy Group, Inc.
|
Wisconsin
Energy Corporation
|
•
|
Restricted Stock Units.
Restricted stock units are used as a retention incentive. A
restricted stock unit entitles the recipient to one share of Common Stock
after a lapse of time specified in the
award.
|
•
|
Long-Term Incentive Cash
Award. Long-term incentive cash rewards Ms. Holquist for achieving
her AIP goals and, because the amount earned vests over three years,
encourages her retention.
|
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, 2008 of each Named Executive Officer’s pension benefits is
shown in the Pension Benefits Table on page 34. The 2008 increase in the pension
benefits value for each Named Executive Officer is included in column (h) of the
Summary Compensation Table on page 26.
We
contribute to the RSOP accounts of the Named Executive Officers, who each may
also elect to defer his or her salary and/or Results Sharing awards 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 Company contributions of 7.5 to 11.5 percent, dependent on age.
Amounts contributed by the Company under the RSOP to the Named Executive
Officers are included in column (i) of the Summary Compensation Table on page
26.
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 34.
Perquisites
The
Company provides Named Executive Officers with fringe benefits, or perquisites,
but only on a modest basis. The Compensation Committee has reviewed these fringe
benefits and determined that the perquisites provided to the Named Executive
Officers are reasonable and in line with other energy services companies.
However, 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. Perquisites paid in 2008 are included in
column (i) of the Summary Compensation Table on page 26.
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. On February 13, 2008, the Board of Directors approved the
ALLETE and Affiliated Companies Change In Control Severance Plan (Severance
Plan), which provides the Named Executive Officers and other key executives with
severance benefits in connection with a change in control of the Company. The
Company implemented the Severance Plan 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 make an independent evaluation of 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.
In 2008,
the Board of Directors also approved an amendment to SERP II 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 39.
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 Mr.
Shippar’s compensation, which is reviewed and ratified by the Board without
participation by Mr. Shippar. In setting Mr. Shippar’s compensation, the
Compensation Committee reviews and considers the Corporate Governance
Committee’s annual evaluation of Mr. Shippar’s performance, which, among other
things, assesses his performance relative to specific annual objectives
established by the Board. The Compensation Committee also reviews “benchmarking”
data, comparing Mr. Shippar’s compensation to the compensation of senior
executives at other 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 Mr. Shippar's recommendations regarding the
components and amounts of the compensation of the other Named Executive
Officers.
The
Compensation Committee retained Hewitt Associates (Hewitt) to provide custom
survey data comparing total compensation (base pay, target-level annual
incentives, and target-level long-term incentives) for Mr. Shippar’s position in
general industry and 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 2007 and early 2008, the
Compensation Committee reviewed the benchmarking analysis directly with Hewitt
and reached the conclusions that are described below, under “Compensation
Committee’s 2007 Executive Compensation Study.”
In
January of each year, the Compensation Committee, in consultation with Mr.
Shippar, sets annual performance goals for the AIP and the Results Sharing
program. At the same time, the Compensation Committee establishes performance
goals in connection with the LTIP. Specifically, the Compensation Committee sets
multi-year total shareholder return objectives relative to a designated peer
group in connection with performance shares and sets the terms for stock
options, restricted stock units, and long-term cash awards, such as award dates,
vesting periods, expiration dates and forfeiture provisions.
Role of Management. For all
other Named Executive Officers, Mr. Shippar recommends compensation levels to
the Compensation Committee for approval. Recommendations are based on each Named
Executive Officer’s experience and responsibility level, on Mr. Shippar’s
assessment of her or his performance, and on the executive compensation studies
described below. Management also recommends to the Compensation Committee
financial and non-financial goals, tied to our strategy under the Company’s
incentive compensation plans.
Compensation Committee’s 2007
Executive Compensation Study. 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. Hewitt analyzed aggregate compensation, meaning base pay, annual
incentives, and long-term incentives, of our five most-highly compensated
executive officers—namely, Mr. Shippar, Mr. Schober, Ms. Amberg, Ms. Welty,
and Ms. Holquist—as compared to the five most-highly compensated executive
officers among a 15-company peer group. The study used substantially the
same peer group as was used to measure our performance under the LTIP and 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 peer group
were as follows:
|
Avista
Corporation
Black
Hills Corporation
CH
Energy Group, Inc.
Consolidated-Tomoka
Land Company
Great
Plains Energy Incorporated
IDACORP,
Inc.
Integrys
Energy Group, Inc.
MDU
Resources Group, Inc.
|
Nicor
Inc.
Otter
Tail Corporation
TECO
Energy, Inc.
The
Empire District Electric Company
The
St. Joe Company
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
general industry and energy services industry companies.1
|
1The
Hewitt peer group consisted of: AGL Resources, Inc.; Allegheny Energy,
Inc.; Ameren Corporation; American Electric Power, Inc.; Aquila, Inc.;
Black Hills Corporation; CenterPoint Energy, Inc.; Cinergy Corp.; Cleco
Corporation; CMS Energy Corporation; DTE Energy Company; Duquesne Light
Holdings, Inc.; Dynegy Inc.; E.ON U.S. LLC; Edison International; El Paso
Electric Company; Entergy Corporation; Ferrellgas Partners, L.P.;
FirstEnergy Corp.; FPL Group, Inc.; IDACORP, Inc.; Kansas City Power &
Light Company; Kinder Morgan, Inc.; Midwest Independent Transmission
System Operator, Inc.; Mirant Corporation; New York Power Authority;
NiSource Inc.; PacificCorp; Pepco Holdings, Inc.; PG&E Corporation;
Pinnacle West Capital Corporation; PNM Resources, Inc.; Portland General
Electric Company; PPL Corporation; Prisma Energy International Services
LLC; Progress Energy, Inc.; Puget Sound Energy, Inc.; Questar Corporation;
Reliant Energy, Inc.; SCANA Corporation; Sempra Energy; SUEZ Energy North
America, Inc.; Tennessee Valley Authority; TransAlta Corporation;
TransCanada Energy USA Inc.; TXU Corp.; WGL Holdings, Inc.; WPS Resources
Corporation; and Xcel Energy Inc.
|
The
Hewitt Associates study also looked at key 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. In addition, the study compared the value of the accumulated payment
obligations of the Company to the Named 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, long-term incentive cash, and Common Stock owned by each
Named Executive Officer; and the value of potential change in control severance
benefits. Upon review, the Compensation Committee determined that the energy
services industry data was the most relevant reference for evaluating the Named
Executive Officers’ compensation levels, except for Ms. Holquist, whose
compensation was compared to real estate industry market data as described
below.
The 2007
Hewitt study indicated that base salaries for the Named Executive Officers were
near the 50th percentile of the energy services company benchmarks and the
results of the study supported modest annual market adjustments of base salaries
for 2008. The study also indicated that target-level annual incentive
opportunities for the Named Executive Officers fell near the 50th percentile of
energy services company benchmarks, except for Mr. Shippar whose target-level
annual incentive opportunity was below the 50th percentile of the energy
services company benchmarks. The grant-date value of long-term incentive
compensation for the Named Executive Officers was well below the 50th percentile
of the energy services company benchmarks. When these elements of compensation
were considered in total, the Named Executive Officers’ target-level
compensation generally fell below the 50th percentile of the energy services
company benchmarks. These percentiles were determined by adjusting the market
data to account for the Company’s size based on revenue.
The 2007
Hewitt study indicated that the key design elements of the AIP and LTIP were
appropriate, but that our net income and TSR targets are higher than the targets
used by our peer group. Upon review of the study, accumulated retirement
benefits were determined by the Compensation Committee to be fair and
appropriate. Hewitt concluded and the Compensation Committee agreed that
potential payments to the Named Executive Officers upon termination of their
employment in connection with a change in control of the Company, and the
potential value of outstanding long-term incentive awards granted through the
LTIP, were substantially below the benefit values provided by the companies in
the peer group.
Management-Directed 2007 Real Estate
Executive Compensation Study. Unlike other Named Executive Officers, Ms.
Holquist focuses exclusively on leading ALLETE Properties, LLC. Ms. Holquist’s
compensation program is tied directly to ALLETE Properties’ business strategy.
CEL & Associates, Inc. is a real estate business consultant hired by
management to advise the Company on executive compensation practices of the real
estate industry. In early 2007, the consultant prepared a study comparing Ms.
Holquist’s compensation—namely base pay, annual incentives, and long-term
incentives—with the compensation of comparable executive-level positions at a
12-company peer group. The companies were selected by CEL & Associates,
Inc., based on comparability to ALLETE Properties, LLC in terms of industry,
geographic location, and size as measured by net income and revenue. In several
instances operating division-level leadership was a more appropriate position
match for Ms. Holquist, due to the size of the overall company. The companies in
the peer group were as follows:
|
American
Land Lease, Inc.
Biltmore
Farms, LLC
Bonita
Bay Group
Brookfield
Homes Corporation
Carlson
Real Estate Company
Opus
Corporation
|
Ram
Realty Services
Regency
Centers
The
United Properties, Inc.
Watson
Land Company
Woodlands
Operating Company
ZOM,
Inc.
|
The CEL
& Associates, Inc. study concluded that Ms. Holquist’s base pay was near
the 50th percentile, her annual bonus earned in 2006 was above the 50th
percentile, and her long-term incentive compensation target opportunity was
below the 50th percentile. When elements of compensation were considered in
total, Ms. Holquist’s actual compensation was near the 50th
percentile.
Both
compensation benchmarking studies, along with other considerations the
Compensation Committee deemed relevant, such as executive experience, tenure,
and performance, formed the basis for Mr. Shippar’s recommendations, the
Compensation Committee’s deliberations, and compensation decisions for the Named
Executive Officers for 2008.
2008 Executive Compensation Design
Changes. Based on the 2007 reviews, the Compensation Committee determined
that the Named Executive Officers’ compensation included appropriate elements,
but that the total compensation opportunity for 2008 was low compared to market
competitive levels. The Compensation Committee’s analysis of the executive
compensation studies identified opportunities for executive compensation policy
changes to better align our executive compensation programs with our
compensation philosophy and objectives described above beginning on page
13.
In early
2008, the Compensation Committee increased Mr. Shippar’s 2008 target AIP
opportunity from 40 percent of base salary to 50 percent. In addition, the
Compensation Committee awarded Mr. Shippar a discretionary bonus of 1,000 shares
of ALLETE Common Stock. The value of this bonus was approximately equal to the
difference between the AIP award Mr. Shippar earned for 2007 and the award he
would have earned if his AIP target annual incentive opportunity had
been 50 percent of base salary. Named Executive Officers received annual
market-adjustment salary increases, ranging from 3.9 percent to 4.7 percent,
effective June 1, 2008.
The
Committee also decided to place more emphasis on long-term performance,
increased stock ownership, and executive retention—three factors the
Compensation Committee believes better align the Named Executive Officer’s
compensation with shareholders’ interests. To accomplish those objectives, the
Compensation Committee directed the Company to take the following actions in
early 2008:
•
|
The
Company increased the 2008 LTIP target award opportunity for each Named
Executive Officer to provide a fair compensation opportunity while at the
same time placing more emphasis on pay for performance, increased stock
ownership, internal equity and retention. Despite increasing the 2008 LTIP
target award opportunities, they remain below the market-competitive
levels indicated in the benchmarking studies. The table below shows the
specific changes that were
implemented.
|
|
|
Long-Term
Incentive Target Opportunities
|
|
|
2007
|
|
2008
|
Mr.
Shippar
|
|
$365,500
|
|
$450,000
|
Mr.
Schober
|
|
$98,900
|
|
$150,000
|
Ms.
Amberg
|
|
$84,000
|
|
$100,000
|
Ms.
Welty
|
|
$78,300
|
|
$100,000
|
Ms.
Holquist
|
|
$182,900
|
|
$191,000
|
•
|
For
performance periods beginning after 2007, the Company lowered the
performance requirement to earn a threshold-level and target-level
performance share award under the LTIP as measured by the Company’s TSR
relative to the 2008 16–company peer group. A participant will now earn a
target-level award if the Company’s TSR, measured over a three-year
performance period, ranks ninth among the peer group (formerly seventh);
and a threshold-level award is earned if the Company’s three-year TSR
ranks twelfth among the peer group (formerly
tenth).
|
•
|
The
Company implemented the Severance Plan and amended SERP II (both as
discussed above starting on page
18).
|
2008 Executive Compensation
Study. In late 2008, the Compensation Committee directed Hewitt to
perform another 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 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 2008 performance under the LTIP 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
energy services industry companies.2
|
2The
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; 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; Southern Company; WGL Holdings, Inc.; WPS
Resources Corporation; and Xcel Energy
Inc.
|
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, long-term incentive cash, 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.
The study
indicated that base salaries for the executive officers were near the 50th
percentile of the blended market value benchmark. The study also indicated that
target-level annual incentive opportunities for the executive officers fell
below the 50th percentile of the blended market value benchmark. The 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 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 for each
executive officer 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 by 5 percent of salary.
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 because of economic conditions. 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 13. 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. The change requires the achievement of at least
threshold net income performance in order to realize any portion of the
AIP target opportunity that is contingent on achieving the AIP strategic
goals.
|
•
|
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. 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 maintain a strong emphasis on 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.
|
•
|
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. Relative TSR performance is used to
determine the number of performance shares earned under the LTIP. The peer
group approved for the performance periods beginning after 2008 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.
|
The
changes to the peer group that were implemented are as follows:
TSR
Peer Groups |
Performance
Period
2009–2011
|
|
Performance
Periods
2006–2008,
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.
|
NorthWestern
Corporation
|
|
The
Empire District Electric Company
|
NSTAR
|
|
The
St. Joe Company
|
NV
Energy, Inc.
|
|
Vectren
Corporation
|
OGE
Energy Corp.
|
|
Wisconsin
Energy Corporation
|
Otter
Tail Corporation
|
|
|
Pinnacle
West Capital Corporation
|
|
|
PNM
Resources, Inc.
|
|
|
Portland
General Electric Company
|
|
|
Puget
Energy, Inc.
|
|
|
TECO
Energy, Inc.
|
|
|
The
Empire District Electric Company
|
|
|
UIL
Holdings Corporation
|
|
|
UniSource
Energy Corporation
|
|
|
Vectren
Corporation
|
|
|
Westar
Energy, Inc.
|
|
|
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 Proxy Statement to be
delivered to Company shareholders.
March 24,
2009
Executive
Compensation Committee
Madeleine
W. Ludlow, Chair
Kathleen
A. Brekken
Sidney W.
Emery, Jr.
Jack I.
Rajala
Bruce Stender, ex officio
COMPENSATION
OF DIRECTORS AND EXECUTIVE OFFICERS
SUMMARY
COMPENSATION TABLE―2008
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
Name
and
Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards
1
|
Option
Awards
2
|
Non-Equity
Incentive
Plan
Compen
sation 3
|
Change
in
Pension
Value
And
Nonqual
ified
Deferred
Compen
sation
Earnings
4
|
All
Other
Compen-sation
5
|
Total
|
Donald
J. Shippar
Chairman,
President,
and
Chief Executive Officer
|
2008
2007
2006
|
$553,827
$526,577
$499,616
|
$0
$0
$0
|
$318,618
$289,914
$198,893
|
$131,359
$155,869
$147,464
|
$407,550
$176,033
$260,893
|
$689,641
$528,777
$789,804
|
$121,061
$118,697
$130,749
|
$2,222,056
$1,795,867
$2,027,419
|
|
|
|
|
|
|
|
|
|
|
Mark
A. Schober
Senior
Vice President and Chief Financial Officer
|
2008
2007
2006
|
$272,085
$258,562
$225,970
|
$0
$0
$0
|
$74,535
$51,732
$41,158
|
$54,734
$53,057
$38,104
|
$144,331
$77,068
$105,626
|
$164,692
$87,381
$86,648
|
$65,005
$62,624
$56,187
|
$775,382
$590,424
$553,693
|
|
|
|
|
|
|
|
|
|
|
Deborah
A. Amberg
Senior
Vice President,
General
Counsel, and
Secretary
|
2008
2007
2006
|
$254,785
$243,339
$233,643
|
$0
$0
$0
|
$60,811
$48,220
$32,209
|
$41,755
$37,289
$23,260
|
$117,526
$63,522
$94,447
|
$43,029
$17,504
$34,703
|
$53,534
$55,023
$47,268
|
$571,440
$464,897
$465,530
|
|
|
|
|
|
|
|
|
|
|
Claudia
Scott Welty
Senior
Vice President and Chief Administrative Officer
|
2008
2007
2006
|
$236,058
$226,108
$215,223
|
$0
$0
$0
|
$57,942
$48,007
$42,228
|
$36,488
$42,021
$39,618
|
$108,843
$58,915
$87,895
|
$139,739
$69,218
$135,783
|
$65,191
$55,872
$54,911
|
$644,261
$500,141
$575,658
|
|
|
|
|
|
|
|
|
|
|
Laura
A. Holquist
President
of ALLETE
Properties,
LLC
|
2008
2007
2006
|
$253,777
$242,754
$233,508
|
$0
$0
$0
|
$86,102
$62,133
$59,160
|
$0
$9,800
$13,236
|
$76,400
$249,948
$325,248
|
$74,781
$26,032
$69,678
|
$61,724
$66,586
$54,852
|
$552,784
$657,253
$755,682
|
|
1The
amounts shown in column (e) relate to performance share opportunities for
all Named Executive Officers and to restricted stock unit opportunities
for Ms. Holquist. The disclosures reflect the dollar amounts the Company
recognized as compensation expense for financial statement reporting
purposes for the fiscal years ended December 31, 2008, December 31, 2007,
and December 31, 2006 in accordance with Statement of Financial Accounting
Standards No. 123
(Revised 2004), “Share-Based Payment” (SFAS 123R). SFAS 123R
requires the Company to estimate forfeitures when stock awards are granted
and to reduce its estimated compensation expense accordingly. The Summary
Compensation Table was prepared assuming none of the stock awards will be
forfeited. The assumptions used to calculate these amounts are disclosed
in Note 15 to the Company’s Consolidated Financial Statements included in
the Annual Report. The Company recognizes expense for performance shares
over the three-year performance period of each award granted; the cost of
restricted stock units is also spread over the three-year vesting period.
Therefore, the amount shown in column (e) for each Named Executive Officer
reflects the sum of one-third of the expense associated with each of his
or her performance share awards outstanding as of December 31,
2008, December 31, 2007, and December 31,
2006; the amount shown for Ms. Holquist includes 30 percent of the expense
on each of the first and second years of the award and 40 percent of the
expense on the third year of the award associated with her outstanding
restricted stock unit awards outstanding as of December 31, 2008, December
31, 2007 and December 31, 2006. The values shown for stock awards are
theoretical, since the value a Named Executive Officer actually 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 2007 amount shown in column (e)
for Mr. Shippar also reflects the amount the Company recognized as
compensation expense for financial statement reporting purposes in
accordance with SFAS 123R for a discretionary stock bonus of 1,000 shares
of Common Stock earned in 2007 and valued at the February 13, 2008 closing
price of $37.77.
|
|
2The
amounts shown in column (f) reflect the dollar amounts the Company
recognized as compensation expense for financial statement reporting
purposes for the fiscal year ended December 31, 2008, December 31, 2007
and December 31, 2006 in accordance with SFAS 123R. SFAS 123R requires the
Company to estimate forfeitures when option awards are granted and to
reduce estimated compensation expense accordingly. The Summary
Compensation Table was prepared assuming none of the option awards will be
forfeited. The assumptions used to calculate these amounts are disclosed
in Note 15 to the Company’s Consolidated Financial Statements included in
the Annual Report. The amount shown for all Named Executive Officers,
except Ms. Amberg and Ms. Holquist, who are not retirement-eligible under
the Company’s retirement plans, represents the full grant-date fair value
of the stock option award in the year of grant because the stock options
fully vest upon retirement. The amount shown for Ms. Amberg and Ms.
Holquist reflects the sum of one-third of the grant-date fair value of the
stock option awards outstanding as of December 31, 2008, December 31,
2007, and December 31, 2006. The values shown for stock options are
theoretical, since the value a Named Executive Officer actually realizes
will depend on the extent to which the Common Stock’s market value exceeds
the exercise price when the stock options are
exercised.
|
|
3The
amounts shown in column (g) for 2008 are comprised of the
following:
|
|
Annual
Incentive Plan*
|
|
Results
Sharing Program **
|
|
Long-Term
Incentive
Plan
|
Donald
J. Shippar
|
$378,840
|
|
$28,710
|
|
–
|
Mark
A. Schober
|
$130,226
|
|
$14,105
|
|
–
|
Deborah
A. Amberg
|
$104,316
|
|
$13,210
|
|
–
|
Claudia
Scott Welty
|
$96,604
|
|
$12,239
|
|
–
|
Laura
A. Holquist
|
$0
|
|
–
|
|
$76,400
|
|
*The
amounts shown include amounts that were earned, as well as amounts that
were deferred at the election of the Named Executive Officer. By program
design, a portion of Mr. Shippar’s AIP award was contributed to his SERP
II deferral account.
|
|
**The
amounts shown include amounts that were earned, as well as amounts that
were deferred at the election of the Named Executive Officer. By program
design, a portion of Results Sharing awards were paid in the form of
Company contributions to the Named Executive Officers’ RSOP accounts and
SERP II deferral accounts.
|
|
4The
amounts in column (h) for 2008 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
|
$688,758
|
|
$883
|
Mark
A. Schober
|
$164,305
|
|
$387
|
Deborah
A. Amberg
|
$43,029
|
|
$0
|
Claudia
Scott Welty
|
$139,739
|
|
$0
|
Laura
A. Holquist
|
$74,781
|
|
$0
|
|
*Above-market
interest was calculated using a 5.83% rate of return, which exceeds 120%
of the applicable federal long-term rate of
4.45%.
|
|
5The
amounts in column (i) for 2008 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
|
$27,128
|
|
$9,379
|
|
$45,452
|
|
$39,102
|
Mark
A. Schober
|
$17,423
|
|
$2,631
|
|
$36,649
|
|
$8,302
|
Deborah
A. Amberg
|
$15,349
|
|
$890
|
|
$31,625
|
|
$5,670
|
Claudia
Scott Welty
|
$16,300
|
|
$1,248
|
|
$43,333
|
|
$4,310
|
Laura
A. Holquist
|
$14,216
|
|
$0
|
|
$34,270
|
|
$13,238
|
|
*Amounts paid in 2008
include: (1) car allowances: Mr. Shippar—$18,268, Mr. Schober—$14,179, Ms.
Amberg—$14,179, Ms. Welty—$14,179, Ms. Holquist—$13,716; (2) meal and
entertainment expenses for Named Executive Officer’s spouse paid by the
Company: Mr. Shippar—$4,329; and (3) costs associated with an annual
executive physical for Mr. Shippar—$3,163. Amounts also include
reimbursement for financial and tax planning services (up to $1,500
annually), an office parking space, and club memberships having a primary
business purpose (but which may also allow Named Executive Officers
personal use of the facilities or services). The value assigned to each
perquisite given to a Named Executive Officer is based on the aggregate
incremental cost to the Company associated with the fringe benefit. The
amounts reflect the full, actual cost of the fringe benefit in all cases,
except for spouses’ travel and entertainment expenses. The aggregate cost
to the Company for spousal travel, meals, and entertainment was calculated
as the full actual cost of each benefit in excess of the amount the
Company would have paid had the Named Executive Officer been traveling or
eating without his or her spouse. In early 2009, the Compensation
Committee eliminated all car
allowances.
|
|
**The
tax reimbursements relate to imputed income from spousal travel, executive
physicals, and the other above-described
perquisites.
|
GRANTS
OF PLAN-BASED AWARDS―2008
The following Grants of Plan-Based
Awards Table shows the range of each Named Executive Officer’s annual and
long-term incentive award opportunities granted for the fiscal year ended
December 31, 2008. The narrative following the table describes the terms of each
incentive award opportunity.
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
(j)
|
(k)
|
(l)
|
(m)
|
Name
and
Award
Type 1
|
Grant
Date
|
Date
of
Compen sation
Committee
Action
|
Estimated
Future Payouts
Under
Non-Equity
Incentive
Plan Awards 2
|
Estimated
Future Payouts
Under
Equity
Incentive
Plan Awards
|
All
Other
Stock
Awards:
Number
of
Shares
of
Stock
or
Units
(#)
|
All
Other
Option
Awards: Number of
Securities
Underlying
Options
(#)
|
Exercise
or
Base Price of
Option
Awards
($/sh)
|
Grant
Date
Fair
Value
of
Stock
and
Option
Awards
3
|
Threshold
|
Target
|
Maximum
|
Threshold
(#)
|
Target
(#)
|
Maximum
(#)
|
Donald
J. Shippar
Results
Sharing
AIP
Stock
Options
Performance
Shares
|
1/22/08
1/22/08
2/01/08
2/01/08
|
1/22/08
1/22/08
1/22/08
1/22/08
|
$16,468
$105,000
–
–
|
$27,447
$280,000
–
–
|
$82,341
$560,000
–
–
|
–
–
–
4,141
|
–
–
–
8,282
|
–
–
–
16,564
|
–
1,0004
–
–
|
–
–
33,088
–
|
–
–
$39.10
–
|
–
$37,770
$131,359
$398,364
|
Mark
A. Schober
Results
Sharing
AIP
Stock
Options
Performance
Shares
|
1/22/08
1/22/08
2/01/08
2/01/08
|
1/22/08
1/22/08
1/22/08
1/22/08
|
$8,091
$36,094
–
–
|
$13,485
$96,250
–
–
|
$40,454
$192,500
–
–
|
–
–
–
1,151
|
–
–
–
2,301
|
–
–
–
4,602
|
–
–
–
–
|
–
–
13,787
–
|
–
–
$39.10
–
|
–
–
$54,734
$110,678
|
Deborah
A. Amberg
Results
Sharing
AIP
Stock
Options
Performance
Shares
|
1/22/08
1/22/08
2/01/08
2/01/08
|
1/22/08
1/22/08
1/22/08
1/22/08
|
$7,577
$28,913
–
–
|
$12,629
$77,100
–
–
|
$37,887
$154,200
–
–
|
–
–
–
767
|
–
–
–
1,534
|
–
–
–
3,068
|
–
–
–
–
|
–
–
9,191
–
|
–
–
$39.10
–
|
–
–
$36,488
$73,785
|
Claudia
Scott Welty
Results
Sharing
AIP
Stock
Options
Performance
Shares
|
1/22/08
1/22/08
2/01/08
2/01/08
|
1/22/08
1/22/08
1/22/08
1/22/08
|
$7,021
$26,775
–
–
|
$11,701
$71,400
–
–
|
$35,103
$142,800
–
–
|
–
–
–
767
|
–
–
–
1,534
|
–
–
–
3,068
|
–
–
–
–
|
–
–
9,191
–
|
–
–
$39.10
–
|
–
–
$36,488
$73,785
|
Laura
A. Holquist
AIP
LT
Incentive Cash
RSUs
|
1/22/08
1/22/08
2/01/08
|
1/22/08
1/22/08
1/22/08
|
–
$76,400
–
|
$174,353
$95,500
–
|
–
$114,600
–
|
–
–
–
|
–
–
–
|
–
–
–
|
–
–
2,393
|
–
–
–
|
–
–
–
|
–
–
$85,406
|
|
1Results
Sharing awards are made under the Results Sharing program. AIP awards are
made under the AIP. Performance shares and stock options, and for Ms.
Holquist long-term incentive cash and restricted stock units (RSUs), are
awarded under the LTIP.
|
|
2Actual
awards earned are shown in column (g) of the Summary Compensation Table on
page 26. By program design, there is no threshold or maximum target
opportunity for Ms. Holquist's AIP.
|
|
3The
amounts shown in column (m) reflect the full grant-date fair value
calculated in accordance with SFAS 123R, using the same assumptions used
in the valuation of compensation expense for the Company’s Consolidated
Financial Statements contained in the Annual Report, but do not take into
consideration the effect of estimated forfeitures. The full grant-date
fair market value is the total amount that we will recognize as an expense
over the awards vesting period pursuant to SFAS 123R, except that the
amounts shown do not include a reduction for forfeitures. The amounts
shown for stock options, performance shares and restricted stock units are
the values of the awards for accounting purposes; the value a Named
Executive Officer actually realizes from stock options will depend on the
extent to which the Common Stock’s market value exceeds the exercise price
when the stock options are exercised. The value a Named Executive Officer
realizes from performance shares will depend on actual Common Stock
performance relative to the 16-company peer group discussed on page 17,
and market price appreciation and dividend yield. The value Ms. Holquist
realizes from restricted stock units will depend on the market price
appreciation of Common Stock.
|
|
4The
amount reflects a discretionary stock bonus of 1,000 shares of Common
Stock earned for 2007 performance. The grant-date fair value shown in
column (m) is based on $37.77, the closing price of Common Stock on
February 13, 2008.
|
GRANTS
OF PLAN-BASED AWARDS DISCUSSION
The
Company’s 2008 incentive awards for all Named Executive Officers except Ms.
Holquist consisted of two annual incentive opportunities—Results Sharing and the
AIP—and two long-term incentive opportunities—performance shares and stock
options. Ms. Holquist’s 2008 incentive opportunities consisted of the AIP,
long-term incentive cash, and restricted stock units. Each incentive is
discussed below. The annual incentives are presented first, followed by a
description of the long-term incentives.
Results Sharing. The 2008
Results Sharing award was based on the achievement of both financial goals and
operational goals. The target financial goal was net income from continuing
operations of $82.34 million, excluding certain non-operational events (NICO).
The specific operational goals related to safety, reliability, and environmental
protection. Results Sharing awards are adjusted downward by up to 40 percent if
the operational goals are not met. The amounts shown in column (d) in the Grants
of Plan-Based Awards Table above reflect the minimum Results Sharing awards
payable, which were set at 3 percent of salary, and would have been payable if
the financial target had been met but no operational goals were achieved. The
target Results Sharing awards shown in column (e) were set at 5 percent of
salary, and would have been payable if the financial target and all operational
goals were met. The amounts shown in column (f) reflect the maximum Results
Sharing awards payable, which were set at 15 percent of salary, and would have
been earned if the financial results had exceeded the target by 48 percent and
all operational goals were met.
The
amount shown in column (g) of the Summary Compensation Table on page 26 includes
Results Sharing awards earned in 2008 equal to 5.23 percent of base salary for
each Named Executive Officer, except Ms. Holquist who does not participate in
the program. The award amount reflects results of NICO exceeding target by
$530,000 and 100 percent of the operational goals having been met. The Company
contributes half of the Results Sharing award as Common Stock to the Named
Executive Officer’s RSOP account. Named Executive Officers, like all Results
Sharing participants, may elect to receive the remaining portion of the award in
cash or to contribute some or all of it to their RSOP account. A Named Executive
Officer who retires, dies, or becomes disabled during the year remains eligible
to receive a Results Sharing award prorated to reflect the portion of the year
actually worked. The Compensation Committee also has discretion to pay a
prorated Results Sharing award to any Named Executive Officer who terminates
employment for other reasons during the year.
Annual Incentive Plan. For
all the Named Executive Officers, except Ms. Holquist, whose 2008 AIP
opportunity is discussed separately below, the following were the 2008 AIP
performance goals, measures, and goal weighting.
AIP
Performance Goals
|
|
Goal
Measure
(Threshold
Performance)
|
|
Goal
Weighting
|
NICO
|
$79.87
million
|
|
50%
|
Cash
from Operating Activities (CFOA)
|
$106.70
million
|
|
25%
|
Strategic
Goals
|
Various;
See below
|
|
25%
|
Strategic
goals for 2008 were related to the Company’s ability to transition wholesale
electric service agreements from cost of service based rates to formula based
rates and implement initiatives that will allow the Company to increase supplies
of renewable energy, which is discussed in Part I, Item 1 of the Annual Report.
Other strategic goals were related to leadership development and succession
planning.
A
threshold performance level was established for each AIP performance goal and
each goal’s achievement was independently measured. By design, no awards are
earned if both financial goal results fall below their threshold performance
levels and no progress is made on the strategic goals. The amount of the target
award opportunity earned is based on the goal weighting percentage assigned to
the AIP performance goals achieved. The amounts shown in column (d) of the
Grants of Plan-Based Awards Table reflect the minimum AIP award that would be
payable—ranging from 11.25 percent to 18.75 percent of base salary—if both
financial 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 50 percent of base salary—if NICO
and CFOA results exceed the threshold by 3 percent 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 100 percent of base salary—if NICO and
CFOA results exceed the threshold by 14 percent and all strategic goals are
surpassed. Actual 2008 NICO exceeded the threshold by 4 percent, or $3
million; CFOA exceeded threshold by 43 percent, or $45.4
million; and strategic goals, overall, were met. As a result, the amounts shown
in column (g) of the Summary Compensation Table on page 26 include AIP awards
earned at 135.3 percent of target in 2008 ranging from 41 percent to 68 percent
of base salary for the Named Executive Officers, other than Ms.
Holquist.
Ms.
Holquist’s 2008 AIP award opportunity was established based on a stepped
percentage of ALLETE Properties’ revenue from land sales (ranging from 0 percent
if revenue was less than $25.9 million up to 0.36 percent if revenue
was at least $43.2 million) plus a stepped percentage of net income from real
estate operations (ranging from 0 percent if net income from real estate
operations was less than $7.5 million up to 0.15 percent if net income from
real estate operations was at least $12.5 million). Ms. Holquist could have
earned from 0 percent to 120 percent of the award opportunity based on the
achievement of specific goals. Her goals for 2008 included meeting several
strategic goals including: planning, engineering design and permitting for
Ormond Crossings, which are discussed in Part I, Item 1 of the Annual Report.
Other strategic goals related to identifying real estate acquisition
opportunities, achieving net income from real estate operations and leadership
development objectives.
The
amount shown in column (e) of the Grants of Plan-Based Awards Table on page 28
reflects Ms. Holquist’s 2008 AIP target opportunity, which would be payable
if ALLETE Properties’ revenue from land sales was $43.2 million, if net
income from real estate operations was $12.5 million, and if Ms. Holquist
achieved her strategic goals. Ms. Holquist did not earn an AIP award in 2008
because ALLETE Properties did not achieve its revenue from land sales or net
income goals.
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.
Stock Options. The Named
Executive Officers, except Ms. Holquist, received stock option awards in 2008
under the LTIP. The number of stock options granted to the Named Executive
Officers is shown in column (k) of the Grants of Plan-Based Awards Table on page
28. Once vested, each stock option gives the Named Executive Officer the right
to purchase one share of Common Stock at an exercise price equal to the closing
share price of Common Stock on the grant date shown in column (b) of the Grants
of Plan-Based Awards table. The stock options vest in three equal
installments—on the first, second, and third anniversary of the grant date,
respectively. Stock options expire ten years from the grant date. The stock
options vest immediately upon retirement, disability, or death and expire on the
earlier of the original expiration date or three years from the date of
retirement or one year from the date of disability or death; stock options also
vest immediately upon a change in control, without triggering any change in the
expiration date. If the Company terminates a Named Executive Officer’s
employment for cause, outstanding stock options are forfeited. If a Named
Executive Officer's employment is terminated for any other reason, he or she has
90 days in which to exercise vested stock options and unvested stock options are
forfeited. The Company’s compensation expense for 2008, 2007, and 2006 recorded
in its Consolidated Financial Statements included in the Annual Report for stock
option awards to each Named Executive Officer is reported in column (f) of the
Summary Compensation Table on page 26.
Performance Shares. Three
performance share awards, each encompassing a different multi-year performance
period, are reflected in the compensation tables and further described below.
These performance share awards are summarized as follows:
Performance
Period
Beginning
|
Performance
Period
Ending
|
Status of Performance Share Award as of December 31, 2008
|
|
January
1, 2008
|
December
31, 2010
|
Unearned;
Not Vested
|
January
1, 2007
|
December
31, 2009
|
Unearned;
Not Vested
|
January
1, 2006
|
December
31, 2008
|
Not
Earned
|
In 2008,
the Named Executive Officers, except Ms. Holquist, were granted performance
share awards for the three-year performance period beginning on January 1, 2008
and ending on December 31, 2010. The number of shares of Common Stock
earned pursuant to the 2008 performance share awards will be based on the
Company’s TSR ranking relative to a 16-company peer group. A more detailed
discussion of the TSR peer group is contained in the Compensation Discussion and
Analysis section beginning on page 16.
The
amounts shown in column (g) of the Grants of Plan-Based Awards Table reflect the
minimum 2008 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 twelfth 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 ninth 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 third or higher among
the peer group. A performance share award is earned at each ranking from twelfth
to first.
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 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 amount recorded as compensation
expense in the Company’s Consolidated Financial Statements included in the
Annual Report for performance share awards to each Named Executive Officer is
shown in column (e) of the Summary Compensation Table on page 26.
Performance
shares awarded for both the 2008–2010 and the 2007–2009 performance periods
remain unearned. 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 33. An estimated
market value of the unearned and unvested performance shares, assuming maximum
performance in the case of the 2008–2010 performance period and threshold
performance in the case of the 2007–2009 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 2009 and 2010, 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 2006–2008, the Company’s shareholders realized
a TSR of –20.8 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
2006–2008 performance period.
Restricted Stock Units. The
number of restricted stock units awarded to Ms. Holquist in 2008 is shown in
column (j) of the Grants of Plan-Based Awards Table. Each restricted stock unit
entitles her 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 to Ms.
Holquist in 2008 vest in three installments, with 30 percent vesting on each of
the first and second anniversaries of the award date and 40 percent vesting on
the third anniversary of the award date. Ms. Holquist must remain employed by
the Company at the time restricted stock units vest to receive the Common Stock.
Ms. Holquist will receive no dividend equivalents during the vesting period.
Upon her retirement, disability, or death, a prorated number of the restricted
stock units would vest immediately. Upon a change in control, restricted stock
units would vest immediately. The compensation expense recorded on the Company’s
Consolidated Financial Statements for the restricted stock units awarded to Ms.
Holquist is included in the amount shown for her in column (e) of the Summary
Compensation Table on page 26. The number of unvested restricted stock units
outstanding at the end of 2008 is shown in column (f) of the Outstanding Equity
Awards at Fiscal Year-End Table on page 33, while the value of the award is
shown in column (g).
Long-Term Incentive Cash
Award. Payment of the long-term incentive cash opportunity awarded to
Ms. Holquist in 2008 was contingent on her achievement of her 2008 AIP
strategic goals. The amount shown in column (d) of the Grants of Plan-Based
Awards Table in connection with Long-Term Incentive Cash reflects the minimum
long-term incentive cash award payable, set at 80 percent of target, which she
would earn if she made some progress toward her AIP strategic goals as
determined by Mr. Shippar. The amount shown in column (e) of the Grants of
Plan-Based Awards Table in connection with Long-Term Incentive Cash reflects a
target-level award that would be payable if Ms. Holquist met all of her 2008 AIP
strategic goals. The amount shown in column (f) of the Grants of Plan-Based
Awards Table reflects the maximum award payable, set at 120 percent of target,
which Ms. Holquist would earn if she exceeded her 2008 AIP strategic goals.
The long-term incentive cash award earned is payable in three installments, with
30 percent vesting on each of the first and second anniversaries of the award
date, and 40 percent vesting on the third anniversary of the award date. Ms.
Holquist must remain employed by the Company on the vesting dates to receive the
cash payments. The long-term incentive cash award earned would vest immediately
on a prorated basis upon retirement, disability, or death. Upon a change in
control, the long-term incentive cash award would be calculated as if the end of
the performance year had occurred, based on performance through the date of the
change in control. The long-term incentive cash award actually earned by Ms.
Holquist in 2008, equal to 30 percent of her base salary, is shown in column (g)
of the Summary Compensation Table on page 26. The award amount was based on the
fact that Ms. Holquist, overall, met 80 percent of her 2008 AIP strategic
goals.
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END—2008
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
|
Option
Awards
|
Stock
Awards
|
Name
|
Number
ofSecurities
Underlying
Unexercised
Options
|
OptionExercise
Price
|
OptionExpiration
Date
|
Number
of Shares or Units of Stock That Have Not Vested (#) 2
|
Market
Value
of
Shares or
Units
of Stock
That
Have Not
Vested
3
|
Equity
Incentive
Plan Awards:
Number
of
Unearned
Shares,
Units,
or
Other Rights That Have Not
Vested
(#) 4
|
Equity
Incentive Plan Awards:
Market
or
Payout
Value
of
Unearned Shares, Units,
or
Other Rights That Have Not Vested 5
|
Exercisable
(#)
|
Unexercisable
(#)
1
|
Donald
J. Shippar
|
|
|
|
|
0
|
$0.00
|
22,062
|
$711,941
|
|
7,217
|
0
|
$29.79
|
1/02/2012
|
|
|
|
|
|
13,905
|
0
|
$37.76
|
2/02/2014
|
|
|
|
|
|
19,618
|
0
|
$41.35
|
2/01/2015
|
|
|
|
|
|
13,504
|
6,752
|
$44.15
|
2/01/2016
|
|
|
|
|
|
6,375
|
12,750
|
$48.65
|
2/01/2017
|
|
|
|
|
|
0
|
33,088
|
$39.10
|
2/01/2018
|
|
|
|
|
Mark
A. Schober
|
|
|
|
|
0
|
$0.00
|
5,969
|
$192,620
|
|
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
|
|
|
|
|
|
3,489
|
1,745
|
$44.15
|
2/01/2016
|
|
|
|
|
|
2,170
|
4,340
|
$48.65
|
2/01/2017
|
|
|
|
|
|
0
|
13,787
|
$39.10
|
2/01/2018
|
|
|
|
|
Deborah
A. Amberg
|
|
|
|
|
0
|
$0.00
|
4,110
|
$132,630
|
|
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
|
|
|
|
|
|
4,002
|
2,002
|
$44.15
|
2/01/2016
|
|
|
|
|
|
1,843
|
3,688
|
$48.65
|
2/01/2017
|
|
|
|
|
|
0
|
9,191
|
$39.10
|
2/01/2018
|
|
|
|
|
Claudia
Scott Welty
|
|
|
|
|
0
|
$0.00
|
4,068
|
$131,274
|
|
3,862
|
0
|
$27.40
|
1/02/2011
|
|
|
|
|
|
3,367
|
0
|
$29.79
|
1/02/2012
|
|
|
|
|
|
3,367
|
0
|
$23.79
|
2/03/2013
|
|
|
|
|
|
3,557
|
0
|
$37.76
|
2/02/2014
|
|
|
|
|
|
4,338
|
0
|
$41.35
|
2/01/2015
|
|
|
|
|
|
3,628
|
1,814
|
$44.15
|
2/01/2016
|
|
|
|
|
|
1,718
|
3,438
|
$48.65
|
2/01/2017
|
|
|
|
|
|
0
|
9,191
|
$39.10
|
2/01/2018
|
|
|
|
|
Laura
A. Holquist
|
|
|
|
|
4,580
|
$147,797
|
–
|
–
|
|
3,708
|
0
|
$37.76
|
2/02/2014
|
|
|
|
|
|
4,516
|
0
|
$41.35
|
2/01/2015
|
|
|
|
|
|
1Each
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.
|
|
2The
amount shown for Ms. Holquist includes 829 restricted stock units granted
to her in February 2006, 1,358 restricted stock units granted in February
2007, and 2,393 restricted stock units granted in February 2008. Thirty
percent of the restricted stock units vest on the first and second
anniversaries of the grant date, and 40 percent vest on the third
anniversary of the grant date.
|
|
3The
amount shown was calculated by multiplying the number of units in column
(f) by $32.27, the closing price of Common Stock on December 31,
2008.
|
|
4Represents
the Common Stock that would be payable for outstanding performance share
awards if threshold performance were achieved (a TSR ranking of 10th
among the 16-company peer group) for the performance periods 2007–2009 and
if maximum performance was achieved (a TSR ranking of 3rd
or higher among the 16-company peer group) for the performance period
2008–2010.
|
|
5These
amounts were calculated by multiplying the number of shares and units in
column (h) by $32.27, the closing price of Common Stock on December 31,
2008.
|
|
OPTION
EXERCISES AND STOCK VESTED—2008
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
|
Option
Awards
|
Stock
Awards
|
|
Number
of Shares
Acquired
on
Exercise
(#)
|
Value
Realized
on
Exercise
|
Number
of Shares
Acquired
on Vesting (#) 1
|
Value
Realized
on
Vesting
|
Donald
J. Shippar
|
–
|
–
|
1,000
|
$37,770
|
Mark
A. Schober
|
–
|
–
|
–
|
–
|
Deborah
A. Amberg
|
3,830
|
$89,454
|
–
|
–
|
Claudia
Scott Welty
|
–
|
–
|
–
|
–
|
Laura
A. Holquist
|
–
|
–
|
1,204
|
$45,475
|
|
1The
amount shown in column (d) for Mr. Shippar reflects a stock bonus of 1,000
shares of Common Stock valued at the February 13, 2008 closing price of
$37.77, which was reported in column (e) of the Summary Compensation Table
on page 26; and for Ms. Holquist, 622 restricted stock units granted in
February 2006 and 582 restricted stock units granted to her in February
2007, both of which grants vested in
2008.
|
PENSION
BENEFITS—2008
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
Name
|
Plan
Name
|
Number
of
Years
Credited
Service
(#) 1
|
Present
Value of
Accumulated
Benefit 2
|
Payments
During Last
Fiscal
Year
|
Donald
J. Shippar
|
Minnesota
Power and Affiliated Companies Retirement Plan A
|
28.67
|
$824,464
|
$0
|
|
Minnesota
Power and Affiliated Companies Retirement Plan B
|
1.08
|
$113,615
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
28.00
|
$489,427
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
32.00
|
$2,415,032
|
$0
|
Mark
A. Schober
|
Minnesota
Power and Affiliated Companies Retirement Plan A
|
28.67
|
$626,832
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
30.92
|
$430,695
|
$0
|
Deborah
A. Amberg
|
Minnesota
Power and Affiliated Companies Retirement Plan A
|
16.17
|
$133,777
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
18.33
|
$72,551
|
$0
|
Claudia
Scott Welty
|
Minnesota
Power and Affiliated Companies Retirement Plan A
|
27.67
|
$690,589
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
25.92
|
$162,617
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
29.92
|
$267,223
|
$0
|
Laura
A. Holquist
|
Minnesota
Power and Affiliated Companies Retirement Plan A
|
19.58
|
$199,502
|
$0
|
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
21.83
|
$247,132
|
$0
|
|
1The
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's credited service under Retirement Plan B (as defined
below) reflects the actual time that he was an active participant in
Retirement Plan B.
|
|
2The
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 6.12
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.
|
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 is also entitled to a pension benefit under the Minnesota Power and
Affiliated Companies Retirement Plan B (Retirement Plan B) based on a position
he held previously. Retirement Plan B is a tax-qualified defined benefit pension
plan that covers the majority of our union employees. His 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 Ms. Welty are currently eligible to receive early retirement
benefits. Ms. Amberg and Ms. Holquist have a vested Retirement Plan A benefit,
but are not currently eligible to receive early retirement
benefits.
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 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, 2008 of each Named Executive Officer’s SERP pension benefit is
shown in the Pension Benefits Table on page 34. The 2008 increase in the SERP II
pension benefit value for each Named Executive Officer is included in column (h)
of the Summary Compensation Table on page 26.
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 and 10 years
of service after becoming disabled. 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.
NONQUALIFIED
DEFERRED COMPENSATION—2008
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
Name
|
Plan
Name
|
Executive
Contributions
in
2008 1
|
Company
Contributions in 2008 2
|
Aggregate
Earnings
in 2008 3
|
Aggregate
Balance as of December 31, 20084
|
Donald
J. Shippar
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
$0
|
$0
|
($47,122)
|
$380,429
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
$21,958
|
$324,161
|
($90,019)
|
$661,433
|
Minnesota
Power and Affiliated Companies Executive Investment Plan
II
|
$0
|
$0
|
$10,952
|
$199,151
|
Mark
A. Schober
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
$0
|
$0
|
($162,484)
|
$602,041
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
$178,771
|
$8,879
|
$26,667
|
$717,753
|
Minnesota
Power and Affiliated Companies Executive Investment Plan
II
|
$0
|
$0
|
$4,959
|
$90,182
|
Deborah
A. Amberg
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
$0
|
$0
|
($59,076)
|
$205,260
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
$88,669
|
$5,927
|
($46,718)
|
$140,000
|
Claudia
Scott Welty
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
$0
|
$0
|
($121,858)
|
$485,872
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
$199,123
|
$4,310
|
$30,942
|
$860,082
|
Laura
A. Holquist
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement
Plan
|
$0
|
$0
|
($35,160)
|
$866,302
|
ALLETE
and Affiliated Companies Supplemental Executive Retirement Plan
II
|
$13,238
|
$0
|
$18,596
|
$1,107,245
|
|
1The
amounts shown in column (c) include the following amounts (i) salary
earned and deferred in 2008 that was also reported in column (c) of the
Summary Compensation Table: Mr. Shippar—$21,958; Mr. Schober—$48,545;
and Ms. Welty—$117,010; (ii) compensation that was earned and
deferred in 2008 that was also reported in column (g) of the 2008 Summary
Compensation Table: Mr. Schober—$130,226; Ms. Amberg—$88,669; Ms.
Welty—$82,113; (iii) compensation that was earned and deferred in
2008 that was also reported in column (i) of the 2008 Summary Compensation
Table for Ms. Holquist —$13,238.
|
|
2Amounts
shown in column (d) reflect compensation that was earned and deferred in
2008 that was also reported in column (g) of the Summary Compensation
Table for Mr. Shippar —$285,059; Mr. Schober —$577; Ms. Amberg—$258 and in
column (i) of the Summary Compensation Table: Mr. Shippar—$39,102; Mr.
Schober—$8,302; Ms. Amberg —$5,670; and Ms.
Welty—$4,310.
|
|
3The
amounts shown in column (e) represent realized earnings, including
above-market interest earned in 2008 on nonqualified deferral balances,
which was also reported in column (h) of the Summary Compensation Table as
follows: Mr. Shippar—$883 and Mr. Schober—$387. Above-market interest was
calculated using a 5.83% rate of return, which exceeds 120% of the
applicable federal long-term rate of
4.45%.
|
|
4The
aggregate balance shown for the SERP II includes compensation that
was previously earned and reported in 2006 and 2007 on the Summary
Compensation Table as follows: Mr. Shippar—$428,871, Mr. Schober—$338,405,
Ms. Amberg—$136,779, Ms. Welty—$435,813, and Ms. Holquist— $505,641.
These amounts have since been adjusted for investment performance (i.e.,
earnings and losses) and deferrals credited during 2008. 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 prior to 2006 and have since been adjusted
for investment performance (i.e., earnings and
losses).
|
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 2008 SERP II defined contribution benefit received by each Named
Executive Officer is included in column (i) of the Summary Compensation Table.
The aggregate amount each Named Executive Officer elected to defer and the
amount that the Company contributed to the SERP II in 2008 is shown in the
Nonqualified Deferred Compensation Table on page 37.
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 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
On
February 13, 2008 the Board of Directors approved the Severance Plan covering
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;
|
•
|
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, and 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, Ms. Amberg, and Ms. Welty would be
entitled to receive a lump sum severance payment of 2.5 times their annual
compensation. Ms. Holquist would receive a severance payment of 1.5 times her
annual compensation. Annual compensation includes base salary and an amount
representing a target award under the AIP and Results Sharing Program. The
Severance Plan also provides a lump sum benefit continuation payment to Mr.
Shippar, Mr. Schober, Ms. Amberg, and Ms. Welty 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 Ms. Holquist, 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, (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,
restricted stock units, and long term incentive cash would immediately vest;
performance share awards would immediately pay out on a prorated basis at the
target level or the level earned based on then-current actual TSR ranking as
compared to the peer group companies, whichever were greater; and long-term
incentive cash awards would be calculated as if the end of the performance year
had occurred, based on performance through the date of the change in
control.
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 need to 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.
If a
change in control had occurred on December 31, 2008, 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
|
Ms.
Amberg
|
Ms.
Welty
|
Ms.
Holquist
|
Severance
|
$2,170,000
|
$775,377
|
$867,375
|
$702,763
|
$645,529
|
Annual
Incentive Plan 1
|
0
|
0
|
0
|
0
|
0
|
Unvested
Stock Options 2
|
0
|
0
|
0
|
0
|
0
|
Performance
Shares 3
|
454,977
|
97,083
|
87,909
|
82,246
|
0
|
Unvested
Restricted Stock Units 4
|
0
|
0
|
0
|
0
|
147,797
|
Unvested
Long-Term Incentive Cash
|
0
|
0
|
0
|
0
|
193,021
|
SERP
II Pension 5
|
489,726
|
115,747
|
0
|
69,655
|
0
|
SERP
II Defined Contribution 6
|
157,113
|
32,475
|
22,247
|
17,174
|
23,742
|
Benefits
|
42,453
|
40,728
|
38,715
|
42,380
|
23,747
|
Outplacement
Services
|
25,000
|
25,000
|
25,000
|
25,000
|
25,000
|
Excise
Tax & Gross-Up
|
1,340,900
|
0
|
425,283
|
0
|
0
|
Total
Payments
|
$4,680,169
|
$1,086,410
|
$1,466,529
|
$939,218
|
$1,058,836
|
|
1Because
the performance period ended on December 31, 2008, no acceleration of
benefits would have occurred under this
scenario.
|
|
2The
award values for stock options were calculated based on the difference
between the option exercise price and the closing price of Common Stock on
December 31, 2008.
|
|
3Outstanding
performance shares for the performance periods 2006—2008, 2007—2009, and
2008—2010 would be accelerated under this scenario. The amounts shown
assume that target TSR performance would be used to calculate the award
payout for the 2006—2008 and 2007—2009 performance periods, and 116.7
percent of target TSR performance would be used to calculate the award
payout for the 2008—2010 performance period and were calculated based on
the $32.27 closing share price of Common Stock on December 31,
2008.
|
|
4The
award values for restricted stock units were calculated based on the
closing price of Common Stock on December 31,
2008.
|
|
5Ms.
Amberg and Ms. Holquist would not be eligible for retirement benefits even
after being credited with an additional 2.5 and 1.5 years of service,
respectively.
|
|
6The
amounts shown reflect 2.5 years and 1.5 years, as applicable, of SERP II
defined contribution benefits.
|
The LTIP
also provides for immediate accelerated vesting of stock options and, on a
prorated basis, of restricted stock units and long term incentive cash upon the
retirement, disability, or death of a Named Executive Officer. Named Executive
Officers are given 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. 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, 2008, except as to Ms. Amberg and Ms. Holquist, for whom
retirement is not a potential triggering event.
Payments
|
Mr.
Shippar
|
Mr.
Schober
|
Ms.
Amberg
|
Ms.
Welty
|
Ms.
Holquist
|
Unvested
Stock Options 1
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
$ 0
|
Performance
Shares 2
|
108,689
|
30,197
|
20,132
|
20,132
|
0
|
Unvested
Restricted Stock Units 3
|
0
|
0
|
0
|
0
|
81,708
|
Unvested
Long-Term Incentive Cash 4
|
0
|
0
|
0
|
0
|
102,441
|
Total
Payments
|
$108,689
|
$30,197
|
$20,132
|
$20,132
|
$184,149
|
|
1The
award values for stock options were calculated based on the difference
between the option exercise price and the $32.27 closing share price of
Common Stock on December 31, 2008.
|
|
2Outstanding
performance shares for the performance periods 2006—2008, 2007—2009, and
2008—2010 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 2008—2010 performance period based on TSR performance of
116.7 percent of target through December 31, 2008. The amounts shown
assume no performance shares were or would be earned for the 2006—2008 and
2007—2009 performance periods because TSR performance for the applicable
performance periods as calculated through December 31, 2008 were below the
threshold performance level. Award values were based on the closing price
of Common Stock on December 31,
2008.
|
|
3The
award values for restricted stock units were calculated and prorated based
on the closing share price on December 31,
2008.
|
|
4The
award value for long-term incentive cash was prorated as of December 31,
2008 in relation to the three year vesting
period.
|
Typically
our employees, including the Named Executive Officers, remain employed while on
long-term disability and continue to receive retirement benefit contributions as
described on page 36. While on long-term disability, Named Executive Officers
continue to earn credited service for purposes of calculating the SERP II
benefit until the earlier of voluntary resignation or reaching normal retirement
age. To calculate an estimate of the additional SERP II benefit that would have
been earned by each Named Executive Officer if he or she had gone on long-term
disability at December 31, 2008, we compared the discounted net present value of
the accumulated SERP II benefit at December 31, 2008 and at normal retirement
age. The table below illustrates the estimated additional SERP II benefit that
would have been earned.
|
Mr.
Shippar
|
Mr.
Schober
|
Ms.
Amberg
|
Ms.
Welty
|
Ms.
Holquist
|
Additional
SERP II Benefit 1
|
$0
|
$0
|
$126,129
|
$0
|
$353,577
|
|
1The
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, 2008 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, 2008 and remained on disability
until reaching normal retirement age; discount rate of 6.12 percent; cost
of living adjustment of 2.5 percent; and female spouses are assumed to be
three years younger than male spouses. The discounted net present values
of the accumulated SERP II benefit at age 65 for Mr. Shippar, Mr. Schober,
and Ms. Welty is less than the discounted net present value of their
accumulated SERP II benefit at December 31, 2008 and therefore there is no
benefit enhancement. The discounted net present value of Ms.
Amberg's and Ms. Holquist’s SERP II benefit was $0 as of December 31, 2008
because they were not vested in their SERP II benefit on December 31,
2008. Therefore, the amounts shown for Ms. Amberg and Ms. Holquist reflect
the total discounted net present value of their estimated SERP II benefit
at age 65, which is deemed an enhancement for these
purposes.
|
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 35. 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 38.
DIRECTOR
COMPENSATION—2008
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
2008.
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
Name
|
Fees
Earned or Paid in Cash
|
Stock
Awards1
|
Option
Awards2
|
Change
in Pension Value and Nonqualified
Deferred
Compensation
Earnings3
|
All
Other
Compensation4
|
Total
|
Kathleen
A. Brekken
|
$45,000
|
$60,000
|
$0
|
$3
|
$222
|
$105,225
|
Heidi
J. Eddins
|
$42,0005
|
$60,000
|
$0
|
$0
|
$0
|
$102,000
|
Sidney
W. Emery, Jr.
|
$37,500
|
$60,000
|
$0
|
$0
|
$227
|
$97,727
|
James
J. Hoolihan
|
$39,000
|
$60,000
|
$0
|
$0
|
$467
|
$99,467
|
Madeleine
W. Ludlow
|
$43,000
|
$60,000
|
$0
|
$0
|
$0
|
$103,000
|
George
L. Mayer
|
$46,500
|
$60,000
|
$0
|
$0
|
$229
|
$106,729
|
Douglas
C. Neve
|
$44,667
|
$60,000
|
$0
|
$0
|
$0
|
$104,667
|
Roger
D. Peirce
|
$15,833
|
$0
|
$0
|
$0
|
$263
|
$16,096
|
Jack
I. Rajala
|
$45,000
|
$60,000
|
$0
|
$0
|
$0
|
$105,000
|
Bruce
W. Stender
|
$55,000
|
$60,000
|
$0
|
$0
|
$0
|
$115,000
|
|
1This
amount reflects the full grant-date fair value calculated in accordance
with SFAS 123R of the annual stock retainer paid on June 21, 2008; except
as noted below, each Director received 1,373.312 fully-vested shares of
Common Stock valued at the June 21, 2008 closing price of $43.69 per
share. Mr. Peirce, who retired from the Board on May 13, 2008, did not
receive shares.
|
|
2
Mr. Rajala had 3,879 fully-vested stock option awards outstanding as of
December 31, 2008.
|
|
3
The amount shown in column (e) is comprised of above-market interest on
deferred compensation, calculated using a 5.83% rate of return, which
exceeds 120% of the applicable federal long-term rate of
4.45%.
|
|
4
The amounts shown in column (f) reflect tax reimbursement related to
spousal travel. 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.
|
|
5Ms.
Eddins elected to defer all of her Director fees under the ALLETE
Non-Employee Director Compensation Deferral Plan
II.
|
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:
|
2008
Annual Retainer Fees
|
|
Cash
|
Stock
|
Lead
Director
|
|
$55,000
|
$60,000
|
All
Other Directors
|
$30,000
|
$60,000
|
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:
|
2008
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 prove
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.
Annually,
each Director may elect to defer to a Deferral Plan II account some or all of
his or her cash retainer fees. Directors can select among different investment
crediting rates to apply to deferral 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.
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 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 Director who retires from the Board
will receive a fixed 7.5 percent annual interest crediting rate on his or her
Deferral Plan account balance until paid in full.
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,
2008.
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
Plans 1
|
Equity
Compensation
Plans Approved by
Security Holders
|
674,695
|
$39.99
|
939,773
|
Equity
Compensation
Plans Not Approved
by Security
Holders
|
0
|
N/A
|
0
|
Total
|
674,695
|
$39.99
|
939,733
|
|
1Excludes
the number of securities to be issued upon exercise of outstanding
options, warrants, and rights. The amount shown is comprised of: (i)
786,541 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) 68,767
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) 84,465 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 four 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 is 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 amended and restated in January 2008. The
current Audit Committee charter is available on the Company's website 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
2008, 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 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 2009, 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 New York Stock Exchange Listing
Standards.
The Audit
Committee has: (i) reviewed and discussed the Company's Consolidated Financial
Statements for the year ended December 31, 2008 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 (iii) discussed with the Company's
independent registered public accounting firm the matters required to be
discussed by Statement on Auditing Standards 61, as amended (Codification of
Statements on Auditing Standards, AU 380), 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 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, 2008 and December 31, 2007, and fees
billed for other services rendered by PricewaterhouseCoopers during those
periods.
All audit
and non-audit services and fees for 2008 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.
|
2008
|
|
2007
|
Audit
Fees 1
|
$1,317,000
|
|
$1,294,000
|
Audit-Related
Fees 2
|
75,000
|
|
3,000
|
Tax
Fees 3
|
536,000
|
|
104,000
|
All
Other Fees 4
|
3,000
|
|
38,000
|
Total
|
$1,931,000
|
|
$1,439,000
|
|
1Audit
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.
|
|
2Audit-related
fees were comprised of assurance services, including accounting
consultations in 2007 and construction practices and controls review
performed in 2008.
|
|
3Tax
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 2008, tax compliance services
totaled $5,000, and tax consulting and planning services totaled $531,000.
In 2007, tax compliance services totaled $29,000, and tax consulting and
planning services totaled $75,000.
|
|
4Other
fees were comprised of license fees and maintenance fees for internal
audit work paper software and accounting research software, and fees for
attendance in 2007 at training sessions sponsored by
PricewaterhouseCoopers.
|
March 24,
2009
Audit
Committee
Douglas
C. Neve, Chair
James J.
Hoolihan
George L.
Mayer
Bruce Stender, ex officio
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 2009. 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 2009.
ITEM
NO. 3—PROPOSAL TO AMEND ARTICLE III OF THE
AMENDED
AND RESTATED ARTICLES OF INCORPORATION TO
INCREASE
THE AMOUNT OF AUTHORIZED
CAPITAL
STOCK AND COMMON STOCK
The Board
recommends that the shareholders approve an amendment to the Company’s Amended
and Restated Articles of Incorporation (Articles) to increase the number of
authorized shares of Common Stock from 43,333,333 to 80,000,000 (and to
correspondingly increase the total number of authorized shares of capital stock
from 46,949,333 to 83,616,000). The proposed amendment was unanimously approved
by the Board at its meeting on January 20, 2009.
If the
shareholders approve the amendment, the Company will amend Article III of the
Articles to increase the number of authorized shares of capital stock and Common
Stock as described above. If adopted by the shareholders, the increase will
become effective upon the filing of Articles of Amendment with the Secretary of
State of the State of Minnesota. The proposed Articles of Amendment are attached
as Appendix A to this Proxy Statement. The only changes to the Company’s
existing Articles following shareholder approval of this amendment would be
those numeric changes required to reflect the increase of the amount of
authorized capital stock and of Common Stock as proposed above.
As of
December 31, 2008, 32,584,913 shares of the Company’s Common Stock were issued
and outstanding and 10,748,420 were unissued, including 3,333,490 shares
reserved and available for issuance to satisfy the requirements of the Company’s
stock plans. As of December 31, 2008, no shares of the Company’s capital stock
other than Common Stock were issued. The Board will have full authority to issue
the entire amount of additional authorized, but unissued, Common Stock for such
proper corporate purposes and on such terms as it may determine without further
action on the part of the shareholders. However, any such issuance would be
subject to the requirements of applicable law, governmental or regulatory
bodies, and of any exchange on which any securities of the Company may be
listed. The additional shares of Common Stock, if authorized, would have the
same rights and privileges as the shares of Common Stock presently outstanding.
The Articles provide that the shares of Common Stock do not carry preemptive
rights.
The
proposed amendment has been prompted by business and financial considerations
and not by anti-takeover considerations. Nevertheless, we are required by the
Securities Exchange Act of 1934 to make the following disclosures regarding the
potential anti-takeover effect of the proposed increase in the authorized number
of shares of Common Stock. These authorized but unissued shares could (within
the limits imposed by applicable law and NYSE rules) be issued in one or more
transactions that could make a change of control of the Company more difficult,
and therefore more unlikely. The additional authorized shares could be used to
discourage persons from attempting to gain control of the Company by diluting
the voting power of shares then outstanding or increasing the voting power of
persons who would support the Board in a potential takeover situation, including
by preventing or delaying a proposed business combination that is opposed by the
Board although perceived to be desirable by some shareholders. The Board is not
aware of any attempt to take control of the Company.
The Board
believes that the increase in the number of authorized shares of Common Stock
will be advantageous to the Company and its shareholders because it will provide
the Company with added flexibility in effecting financings, acquisitions, stock
splits, stock dividends, stock distributions and other transactions involving
the use of stock. The Company has no present intention to issue any of the newly
authorized shares of Common Stock, except for issuances of the Common Stock
which may be made in connection with the Company’s Equity Issuance Program
described in Note 9 to the Annual Report, Invest Direct® (its direct stock
purchase and dividend reinvestment plan), and employee benefits plans. Except in
relation to such programs and plans, neither the Company nor any of its officers
or directors has entered into any understandings, agreements, plans or
discussions regarding the issuance and sale of additional shares of Common
Stock.
The Board
recommends a vote “FOR”
the proposed amendment.
ITEM
NO. 4—PROPOSAL TO DELETE ARTICLE V OF THE
AMENDED
AND RESTATED ARTICLES OF INCORPORATION TO
REMOVE
THE NAMES AND PLACES OF RESIDENCE OF THE BOARD OF DIRECTORS NAMED
THEREIN
The Board
recommends that the shareholders approve an amendment to the Articles to delete
Article V thereof, effectively removing the names and places of residence of the
Directors named therein. If approved by the shareholders, the deletion will
become effective upon the filing of Articles of Amendment with the Secretary of
State of the State of Minnesota. The proposed Articles of Amendment are attached
as Appendix A to this Proxy Statement.
The
Articles are dated as of May 8, 2001 and reflect the names and places of
residence of the then-current Directors. This information is no longer current
and is not required to be included in the Articles pursuant to the Minnesota
Business Corporation Act. If approved, this amendment will not have the effect
of removing any of the current or newly-elected Directors.
The Board
recommends a vote “FOR”
the proposed amendment.
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 2010 Annual Meeting
All
proposals from shareholders to be considered for inclusion in the Proxy
Statement relating to the Annual Meeting scheduled for May 11, 2010 must be
received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN
55802-2093 not later than November 30, 2009. 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 11,
2010, ALLETE must receive a shareholder’s notice between January 11, 2010 and
February 10, 2010. 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 2010 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, 2010, without discussion of such matter in
the Proxy Statement relating to the 2010 Annual Meeting.
By order
of the Board of Directors,
Deborah A.
Amberg
Deborah
A. Amberg
Senior
Vice President, General Counsel, and Secretary
March 24,
2009
Duluth,
Minnesota
APPENDIX
A
ARTICLES
OF AMENDMENT
OF
ALLETE,
INC.
Amending
paragraph 1, Article III and Deleting Article V
of
ALLETE, Inc.’s Articles of Incorporation
as
Amended and Restated as of May 8, 2001
and as
previously amended as of September 20, 2004
ARTICLE
III
1. The
total authorized number of shares of capital stock of this Corporation shall be
83,616,000 of which 116,000 shares of the par value of $100 each shall be 5%
Preferred Stock, 1,000,000 shares without par value shall be Serial Preferred
Stock, 2,500,000 shares without par value shall be Serial Preferred Stock A and
80,000,000 shares without par value shall be Common Stock. Any of the aforesaid
shares may be issued and disposed of by the Board of Directors at any time and
from time to time, to such persons, firms, corporations, or associations, upon
such terms and for such consideration as the Board of Directors may, in its
discretion, determine, except as may be limited by law or by these Articles of
Incorporation.
ARTICLE
V
[Deleted
and intentionally reserved.]