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. )
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14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
ALLETE, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
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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.
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[PAGE]
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[ALLETE LOGO]
2005
Notice and Proxy Statement
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ANNUAL MEETING OF SHAREHOLDERS
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TUESDAY, MAY 10, 2005 DULUTH, MINNESOTA
[PAGE]
[ALLETE LOGO]
March 22, 2005
Dear Shareholder:
You are cordially invited to ALLETE's 2005 Annual Meeting of
Shareholders to be held on Tuesday, May 10, 2005 at 10:30 a.m. in the auditorium
of the Duluth Entertainment Convention Center (DECC). The DECC is located on the
waterfront of Lake Superior at 350 Harbor Drive in Duluth, Minnesota. Free
parking is available in the adjoining lot. On behalf of the ALLETE Board of
Directors, I encourage you to attend.
At this year's meeting you will be asked to elect nine directors, to
ratify the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm, and to approve the continuation of the ALLETE
Executive Long-Term Incentive Compensation Plan.
David Gartzke, Wynn Bussmann, Dennis Green, Donald Wegmiller and
Deborah Weinstein have resigned from the ALLETE Board and now serve on the
Board of Directors of ADESA, Inc., which was successfully spun off from ALLETE
in September 2004. We appreciate their service to ALLETE and wish ADESA
continued success as an independent public company.
During the past year we have welcomed Roger Peirce, Heidi Eddins,
Madeleine Ludlow and Don Shippar to the Board. The nine directors standing for
election bring a tremendous wealth of experience and offer an impressive set of
skills to ALLETE.
After the Annual Meeting, we invite you to visit with our directors,
officers and employees over lunch in the Lake Superior Ballroom located in the
DECC. If you plan to join us for lunch, please return the enclosed reservation
card.
Your vote is important to us. Whether or not you plan to attend our
Annual Meeting in person, your shares should be represented and voted. After
reading the enclosed Proxy Statement, please vote your shares online, by a
toll-free telephone call or by signing, dating and returning the enclosed Proxy
Card. Specific instructions on how to vote are provided on your Proxy Card.
Thank you for your investment in ALLETE.
Sincerely,
Bruce Stender
Bruce Stender
Chairman
ALLETE, INC.
30 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS -- MAY 10, 2005
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The Annual Meeting of Shareholders of ALLETE, Inc. will be held in the
auditorium of the Duluth Entertainment Convention Center, 350 Harbor Drive,
Duluth, Minnesota, on Tuesday, May 10, 2005 at 10:30 a.m. for the following
purposes:
1. To elect a Board of nine directors to serve for the ensuing year;
2. To ratify the appointment of PricewaterhouseCoopers LLP as ALLETE's
independent registered public accounting firm for 2005;
3. To approve the continuation of the ALLETE Executive Long-Term
Incentive Compensation Plan; and
4. 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 11, 2005 are entitled to notice of and to vote at the Annual Meeting.
All shareholders are cordially invited and encouraged to attend the
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.
If voting by mail, please sign, date and return the enclosed Proxy Card in the
envelope provided. Alternatively, you may follow the instructions on your Proxy
Card to vote your shares online or by a toll-free telephone call.
By order of the Board of Directors,
Deborah A. Amberg
Deborah A. Amberg
Vice President, General Counsel and Secretary
March 22, 2005
Duluth, Minnesota
ALLETE, INC.
30 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802
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PROXY STATEMENT
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SOLICITATION
The Proxy Card accompanying this Proxy Statement is solicited on behalf
of the Board of Directors (Board or individually, Director) of ALLETE, Inc.
(ALLETE or Company) for use at the Annual Meeting of Shareholders to be held on
May 10, 2005 and any adjournments thereof. The purpose of the meeting is to
elect a Board of nine directors to serve for the ensuing year, to ratify the
appointment of PricewaterhouseCoopers LLP (PricewaterhouseCoopers) as ALLETE's
independent registered public accounting firm for 2005, to approve the
continuation of the ALLETE Executive Long-Term Incentive Compensation Plan, and
to transact such other business as may properly come before the meeting. All
properly submitted proxies received at or before the meeting and entitled to
vote will be voted at the meeting.
This Proxy Statement and the enclosed Proxy Card were first mailed on
or about March 22, 2005.
Any shareholder giving a Proxy has the right to revoke it at any time
prior to its exercise by providing notice in writing to the Secretary of ALLETE.
ALLETE expects to solicit proxies primarily by mail. Proxies also may
be solicited at a nominal cost in person and by telephone by employees or
retirees of ALLETE. The expenses of such solicitation are the ordinary ones in
connection with preparing, assembling and mailing the material, and also include
charges and expenses of brokerage houses and other custodians, nominees or other
fiduciaries for communicating with shareholders. Additional solicitation of
proxies will be made by mail, telephone and in person by Georgeson Shareholder
Communications, Inc., a firm specializing in the solicitation of proxies, at a
cost to ALLETE of approximately $15,000 plus expenses. The full amount of such
costs will be paid by ALLETE.
OUTSTANDING SHARES AND VOTING PROCEDURES
As of March 11, 2005 there were $29,818,426 outstanding shares of
capital stock of ALLETE, without par value (Common Stock).
Each share of the Common Stock of record on the books of ALLETE at the
close of business on March 11, 2005 is entitled to notice of the Annual Meeting
and to one vote.
The affirmative vote of a majority of the shares of stock entitled to
vote at the Annual Meeting is required for election of each Director, and the
affirmative vote of a majority of the shares of stock present and entitled to
vote is required for approval of the other items described in the Proxy
Statement to be acted upon by shareholders. An automated system administered by
Wells Fargo Bank, N.A. tabulates the votes. Abstentions are included in
determining the number of shares present and voting, and are treated as votes
against the 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 your broker submits a Proxy Card for your shares
but does not indicate a vote on a particular matter because the broker has not
received voting instructions from you and does not have authority to vote on
that matter without such instructions. Under the rules of the New York Stock
Exchange (NYSE), if your broker holds shares in your name, the broker, in the
absence of voting instructions from you, is entitled to vote your shares on Item
No. 1 and Item No. 2 and other routine matters, but not on Item No. 3.
Unless contrary instructions are indicated on the Proxy, all shares
represented by valid proxies will be voted "FOR" the election of all nominees
for Director named herein, "FOR" ratifying the appointment of
PricewaterhouseCoopers as ALLETE's independent registered public accounting firm
for 2005, and "FOR" approval of the continuation of the ALLETE Executive
Long-Term Incentive Compensation Plan. If any other business is transacted at
the meeting, all shares represented by valid proxies will be voted in accordance
with the judgment of the appointed proxies.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The only person known to ALLETE who as of March 11, 2005 beneficially
owned more than 5 percent of any class of ALLETE's voting securities is American
Express Trust Company, 928 AXP Financial Center, Minneapolis, MN 55474. As of
March 11, 2005 American Express Trust Company held 4,487,553 shares, or 15
percent, of the Common Stock in its capacity as Trustee of the Minnesota Power
and Affiliated Companies Retirement Savings and Stock Ownership Plan (RSOP).
Generally, these shares will be voted in accordance with instructions received
by American Express Trust Company from participants in the RSOP.
The following table shows the shares of Common Stock beneficially owned
by Directors, nominees for Director, executive officers named in the Summary
Compensation Table which appears subsequently in this Proxy Statement, and all
Directors and executive officers of ALLETE as a group, as of March 11, 2005.
Unless otherwise indicated, the persons shown have sole voting and investment
power over the shares listed.
Options Options
Number of Shares Exercisable Number of Shares Exercisable
Name of Beneficially Within 60 Days Name of Beneficially Within 60 Days
Beneficial Owner Owned After March 11, 2005 Beneficial Owner Owned After March 11, 2005
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Heidi J. Eddins 2,003 0 Bruce W. Stender 9,788 6,422
Peter J. Johnson 23,740 647 David G. Gartzke 21,168 0
Madeleine W. Ludlow 1,915 0 James K. Vizanko 12,948 23,534
George L. Mayer 15,002 3,879 Laura A. Holquist 5,538 1,236
Roger D. Peirce 1,134 0 James P. Hallett 0 0
Jack I. Rajala 7,761 10,215 Mark A. Schober 11,637 7,813
Donald J. Shippar 14,006 22,365 Claudia R. Scott Welty 7,440 11,782
Nick Smith 4,178 3,608
All Directors and
executive officers
as a group (20): 150,223 113,506
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Includes (i) shares as to which voting and investment power is shared with the person's spouse: Mr. Johnson - 14,061, Mr.
Schober - 4,189, and Ms. Welty - 4,582; (ii) shares owned by the person's spouse: Mr. Johnson - 111, Mr. Smith - 17, and
Ms. Holquist - 1,135; and (iii) shares held by the person's minor children: all Directors and executive officers as
a group - 70. 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 and executive officers, and persons who own more than 10
percent of a registered class of ALLETE's equity securities, to file reports of
initial ownership of Common Stock and other equity securities, and subsequent
changes in that ownership with the Securities and Exchange Commission (SEC) and
the NYSE. Based on a review of such reports and the written representations of
our Directors and executive officers, ALLETE believes that all such filing
requirements were met during 2004.
PROPOSALS OF SHAREHOLDERS FOR THE 2006 ANNUAL MEETING
All proposals from shareholders to be considered for inclusion in the
Proxy Statement relating to the Annual Meeting scheduled for May 9, 2006 must be
received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN
55802-2093 not later than November 11, 2005. In addition, the persons to be
named as proxies in the Proxy Cards relating to that 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 prior to January 25, 2006, without
discussion of such matter in the Proxy Statement relating to that Annual
Meeting.
2
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ITEM NO. 1 - ELECTION OF DIRECTORS
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It is intended that the shares represented by the Proxy will be voted,
unless authority is withheld, "FOR" the election of the nine nominees for
Director named below and on the next 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 the enclosed Proxy.
NOMINEES FOR DIRECTOR
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[Photo] HEIDI J. EDDINS, 48, St. Augustine, FL. Member of the Corporate
Governance and Nominating Committee. Executive Vice President,
Secretary and General Counsel of Florida East Coast Industries,
Inc., a transportation and real estate company based in St.
Augustine, Florida. Joined Florida East Coast Industries in 1999,
and is responsible for all legal and government affairs of the
corporation in addition to managing a variety of real estate
related transactions. Commissioner, Florida Transportation
Commission. DIRECTOR SINCE 2004.
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[Photo] PETER J. JOHNSON, 68, Tower, MN. Member of the Audit Committee,
and the Corporate Governance and Nominating Committee. Chairman of
Hoover Construction Company, a highway and heavy construction
contractor. Member of the Board of Directors of the Marshall H.
and Nellie Alworth Memorial Fund, which provides college
scholarships to students from northern Minnesota. DIRECTOR SINCE
1994.
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[Photo] MADELEINE W. LUDLOW, 50, Cincinnati, OH. Member of the Audit
Committee. Since January 2005 Principal of Ludlow Ward Capital
Partners, LLC, a Cincinnati-based investment banking firm serving
small and middle market companies. Chairman, CEO and President of
Cadence Network, Inc., a web-based provider of utility expense
management services from 2000 to 2004. Formerly Vice President and
CFO of Cinergy Corp. Trustee of the Darden Graduate School of
Business Administration at the University of Virginia. DIRECTOR
SINCE 2004.
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[Photo] GEORGE L. MAYER, 60, Essex, CT. Chair of the Audit Committee and
member of the Executive Compensation Committee. Founder and
President of Manhattan Realty Group, which manages various
apartment properties. Director of Schwaab, Inc., one of the
nation's largest manufacturers of handheld rubber stamps and
associated products. DIRECTOR SINCE 1996.
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3
NOMINEES FOR DIRECTOR
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[Photo] ROGER D. PEIRCE, 67, Tucson, AZ. Member of the Audit Committee and
the Executive Compensation Committee. Corporate consultant since
his retirement in 1994 from his position as Vice Chair of the
Board and CEO of Super Steel Products Corporation, a contract
manufacturer of fabricated metal products. Director and Chairman
of the Compensation Committee of Journal Communication, Inc., a
diversified media and communications company, Director of Demco,
Inc., which offers a wide variety of products to libraries and
schools, Director of Brady Corporation, a seller of high
performance labels and signs, and Compensation Committee Chairman
for Schwaab, Inc., one of the nation's largest manufacturers of
rubber stamps and associated products. DIRECTOR SINCE 2004.
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[Photo] JACK I. RAJALA, 65, Grand Rapids, MN. Chair of the Executive
Compensation Committee, and member of the Corporate Governance and
Nominating Committee. Chairman and CEO of Rajala Companies, and
Director and President of Rajala Mill Company, both of which
manufacture and trade lumber. Chairman and CEO of Boundary Co., a
forestland investment company, and member of the Board of Regents
of Concordia College in Minnesota. DIRECTOR SINCE 1985.
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[Photo] DONALD J. SHIPPAR, 56, Superior, WI. President and Chief Executive
Officer of ALLETE. Since joining the Company in 1976, has served
as Director of human resources, 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. Was named President and CEO of ALLETE in 2004.
DIRECTOR SINCE 2004.
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[Photo] NICK SMITH, 68, Duluth, MN. Member of the Corporate Governance and
Nominating Committee, and the Executive Compensation Committee.
Chairman of Northeast Ventures Corporation, a venture capital firm
investing in northeastern Minnesota. Director of ADESA, Inc., a
provider of used and salvaged vehicle auctions and related
services. Director of Community Development Venture Capital
Alliance, a national trade association. Director of North Shore
Bank of Commerce in Minnesota. DIRECTOR SINCE 1995.
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[Photo] BRUCE W. STENDER, 63, Duluth, MN. Chairman of ALLETE, and Chair of
the Corporate Governance and Nominating Committee. President and
CEO of Labovitz Enterprises, Inc., which owns and manages hotels
and commercial real estate. Trustee of the C.K. Blandin Foundation
and member of the Chancellor's Advisory Committee for the
University of Minnesota Duluth. DIRECTOR SINCE 1995.
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4
CORPORATE GOVERNANCE
Corporate governance encompasses the internal policies and practices by
which ALLETE 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 it does
business. Because the Company's ultimate goal is to best focus and direct the
resources of the Company, ALLETE views good corporate governance as a source of
competitive advantage.
In 2004 the Board and its committees continued to examine their
processes and strengthen them as appropriate. Corporate Governance Guidelines
that were initially adopted in 2002 and amended in 2003 were further revised in
2004. Committee charters were updated in 2004 and 2005. The Corporate Governance
Guidelines document Board rules and responsibilities, Board selection and
composition policies, Board operating policies, Board committee
responsibilities, Director compensation and other matters. Current copies of
ALLETE's Corporate Governance Guidelines and the charters of the Corporate
Governance and Nominating, Audit and Executive Compensation committees are
available on ALLETE's website at www.allete.com. Shareholders may request free
printed copies of these documents from ALLETE Shareholder Services, 30 West
Superior Street, Duluth, MN 55802-2093.
The Board's evaluation of ALLETE's corporate governance processes is
ongoing. This assures 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 January 2005 the
Board met with Mercer Delta Organizational Consulting and reviewed best
practices for board governance.
CODE OF ETHICS
ALLETE has adopted a written Code of Ethics that applies to all of our
employees, including our chief executive officer, chief financial officer and
controller. A copy of our Code of Ethics is available on our website at
www.allete.com and printed copies are available upon request without charge. Any
amendment to the Code of Ethics or any 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.
DIRECTOR INDEPENDENCE
The Board has adopted independence standards into ALLETE's Corporate
Governance Guidelines that incorporate all of 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 considers a "material
relationship" to exist where the Director, or a member of the Director's
immediate family has (or had during the past three years) a relationship with
the Company as an:
- employee;
- employee or affiliate of a present or former auditor of the Company;
- employee of any other business organization where any of the
Company's executives serve on that business organization's
compensation committee;
- individual who receives more than $100,000 in direct compensation
from the Company (other than Director and committee fees, and
pension and other deferred compensation); or
- executive officer or employee of another company that makes payments
to, or receives payments from the Company in any year which exceeds
the greater of $1 million or 2 percent of the other company's
consolidated gross revenues.
5
The Board has reviewed each of the Directors' relationships with the
Company in conjunction with these standards, and has affirmatively determined
that all of our Directors, other than Mr. Shippar, are independent under the
Board's independence standards and are independent directors under the NYSE's
corporate governance rules.
The Board has established responsibilities for the Chairman, or for the
Lead Director if the Chairman is not "independent," which include, among other
things, coordinating the activities of the Company's independent Directors,
advising the Chairman on Board meeting agendas and on the effectiveness of the
Board meeting processes. The Chairman or the Lead Director will preside over
each executive session of the non-management Directors, which occur at all
regular Board meetings. Any non-management Director may request that an
additional executive session be held.
DIRECTOR NOMINATIONS
The Corporate Governance and Nominating 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 identified
criteria, regardless of the identity of the individual or entity who proposed
the director candidate. A shareholder wishing to propose a candidate should
provide the candidate's name and a detailed background of the candidate's
qualifications to the Corporate Governance and Nominating Committee by
addressing the Secretary of ALLETE, 30 West Superior Street, Duluth, MN
55802-2093.
The selection of director nominees includes consideration of factors
deemed appropriate by the Board. The Board has engaged a search firm to assist
in identifying, evaluating and conducting due diligence on potential director
nominees. Factors may 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 and Nominating Committee will consider the candidate's independence,
as defined in 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 and Nominating 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, and allow time for directors to comment. The Corporate
Governance and Nominating Committee screens, personally interviews and
recommends candidates to the Board. A majority of the committee members will
interview any potential nominee before recommending that candidate to the Board.
The recommendations of the Corporate Governance and Nominating Committee will be
timed so as to allow interested Board members an opportunity to interview the
candidate prior to the nomination of the candidate.
On September 21, 2004 the Board elected Mr. Shippar and Ms. Eddins as
Directors. Mr. Shippar is CEO of ALLETE. Ms. Eddins was identified by Mr.
Shippar. On October 20, 2004 the Board elected Ms. Ludlow as a director. Ms.
Ludlow was identified by a search firm.
BOARD AND COMMITTEE MEETINGS IN 2004
During 2004 the Board held nine meetings. All directors attended 75
percent or more of the aggregate number of meetings of the Board and applicable
committee meetings in 2004. Directors are expected to attend the Annual Meeting
and all directors attended in 2004.
The Corporate Governance and Nominating Committee includes Mr. Stender
(Chair), Ms. Eddins, Mr. Johnson, Mr. Rajala and Mr. Smith, and it held four
meetings during 2004. It 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 and Nominating 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.
6
The Audit Committee includes Mr. Mayer (Chair), Ms. Ludlow, Mr. Johnson
and Mr. Peirce, and it held twelve meetings in 2004. It 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 practices, reviews periodic financial reports
to be provided to the public, and reviews and recommends approval of the annual
audit report.
The Executive Compensation Committee includes Mr. Rajala (Chair), Mr.
Mayer, Mr. Peirce and Mr. Smith, and it held seven meetings in 2004. It
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 corporate objectives.
In 2003 the Board established the Automotive Services Strategy
Committee and the Minnesota Power Strategy Committee to focus on the strategies
of these business units. Each of these committees held four meetings in 2004.
These two committees were dissolved following the spin-off of ADESA, Inc.
(ADESA) in September 2004.
COMMUNICATIONS BETWEEN SHAREHOLDERS AND THE BOARD OF DIRECTORS
Shareholders who wish to communicate directly with the Board or with
the non-management Directors may do so by addressing the Chairman or Lead
Director, c/o Secretary of ALLETE, 30 West Superior Street, Duluth, MN
55802-2093.
DIRECTOR COMPENSATION
Employee Directors receive no additional compensation for their
services as Directors. ALLETE pays each non-employee Director under the terms of
the ALLETE Director Stock Plan an annual cash retainer and an annual equity
retainer fee paid entirely in Common Stock in amounts valued as set forth below:
Annual Retainer Fee Annual Equity Retainer
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Chairman or
Lead Director $73,000 $47,500
Director $20,000 $47,500
In addition, ALLETE pays each non-employee Director, other than the
Lead Director or Chairman, annual cash retainer fees for each committee and
chair assignment as set forth below:
Committee Retainer Fees
Members Chair (Includes Member Fee)
-------------------------------------------
Audit $9,000 $15,000
Executive Compensation $7,500 $12,000
Corporate Governance
and Nominating $7,500 $12,000
In 2004 Directors received an additional cash retainer fee of $3,667 on
the Automotive Services Strategy Committee and/or the Minnesota Power Strategy
Committee.
Directors may elect to defer all or part of the cash portion of their
retainer fees under the terms of the ALLETE Director Compensation Deferral Plan.
7
COMPENSATION OF EXECUTIVE OFFICERS
The following information describes compensation paid in the years
2002, 2003 and 2004 to ALLETE's named executive officers. Included in the table
are two former executive officers, Mr. Gartzke and Mr. Hallett, who held their
positions with ALLETE's automotive services business until September 20, 2004
when ALLETE completed the spin-off of ADESA to our shareholders.
2004 PROXY SUMMARY COMPENSATION TABLE
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Annual Compensation Long-Term Compensation
-------------------------------- ----------------------------------------------
Awards Payouts
----------------------------------- -------
Other Securites All
Annual Restricted Underlying Options Other
Compen- Stock ALLETE ADESA LTIP Compen-
Name and Salary Bonus sation Award ------------------- Payouts sation
Principal Position Year ($) ($) ($) ($) (#) (#) ($) ($)
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DONALD J. SHIPPAR 2004 388,321 452,487 5,309 0 13,905 0 88,508 61,286
President and CEO 2003 263,250 235,639 4,175 0 7,217 0 77,759 26,851
2002 231,041 25,132 3,360 0 7,217 0 52,961 27,896
DAVID G. GARTZKE 2004 519,863 512,431 125,504 1,091,950 0 663,950 251,803 110,347
Retired CEO; Retired President 2003 561,846 544,002 10,913 0 0 121,006 302,962 54,353
and CEO of ALLETE 2002 515,385 0 9,754 0 0 146,194 99,388 67,043
Automotive Services
JAMES K. VIZANKO 2004 282,140 334,437 15,384 0 8,635 0 108,570 43,533
Senior Vice President 2003 261,679 265,825 12,902 0 20,655 0 95,384 24,892
and Chief Financial Officer 2002 240,769 0 10,632 0 20,655 0 87,180 27,464
LAURA A. HOLQUIST 2004 188,193 300,588 9,752 0 3,708 0 37,759 30,816
President of ALLETE 2003 173,462 143,679 7,009 0 3,079 0 33,173 25,158
Properties, Inc. 2002 165,654 135,490 3,352 0 3,079 0 50,152 22,046
JAMES P. HALLETT 2004 325,168 191,366 2,805 464,324 0 265,580 140,632 50,641
Former Executive Vice President 2003 439,808 328,532 7,296 0 0 69,292 169,203 47,104
2002 420,692 153,344 5,724 0 0 69,292 117,912 47,516
MARK A. SCHOBER 2004 200,423 217,508 3,557 0 3,579 0 54,123 28,050
Senior Vice President 2003 189,308 144,663 2,654 0 4,413 0 47,550 17,137
and Controller 2002 179,000 0 1,975 0 4,413 0 66,259 18,916
CLAUDIA R. SCOTT WELTY 2004 203,866 165,661 2,956 0 3,557 0 41,294 30,147
Senior Vice President and 2003 181,000 106,568 2,690 0 3,367 0 36,279 18,377
Chief Administrative Officer 2002 178,231 9,027 1,937 0 3,367 0 51,605 20,013
------------------------------------------------------------------------------------------------------------------------------------
Amounts shown include compensation earned by the named executive officers, as well as amounts earned but deferred at the
election of those officers.
Except as otherwise indicated by footnote, the "Bonus" column is comprised of amounts earned pursuant to ALLETE's Results
Sharing program and Executive Annual Incentive Plan. For bonuses paid in Common Stock, the market value of the stock at the
time of payment is included.
Included in the amount shown for Mr. Gartzke is $100,000 paid as a bonus in connection with the spin-off of ADESA. Also
included in this amount is $386,370, which was paid to Mr. Gartzke under ADESA's executive incentive compensation plan based
on ADESA's 2004 performance. This amount represents a prorated portion of Mr. Gartzke's total annual award to capture that
portion of 2004 during which ADESA was a subsidiary of ALLETE.
Included in the amount shown for Mr. Vizanko is $81,600 paid as a bonus in connection with the spin-off of ADESA.
8
Included in the amount shown for Mr. Vizanko is $100,000 paid as a bonus in connection with the sale of ALLETE's water
services businesses.
The amount shown was paid to Mr. Hallett under ADESA's executive incentive compensation plan based on ADESA's 2004
performance. This amount represents a prorated portion of Mr. Hallett's total annual award to capture that portion of 2004
during which ADESA was a subsidiary of ALLETE.
Included in the amount shown for Mr. Hallett is an annual retention bonus of $102,550 for 2002 and $162,750 for 2003 paid in
a combination of Common Stock and cash.
Included in the amount shown for Mr. Schober is $57,900 paid as a bonus in connection with the spin-off of ADESA.
Included in the amount shown for Mr. Schober is $50,000 paid as a bonus in connection with the sale of ALLETE's water services
businesses.
Amounts shown are comprised of above-market interest on deferred compensation. Also included in the amount shown for Mr.
Gartzke in 2004 is $47,677 for relocation expenses and $36,571 for personal use of Company aircraft.
The amount shown represents the value of 41,497 restricted share units of ADESA common stock granted on June 15, 2004 in
connection with the ADESA initial public offering and 4,304 restricted share units of ADESA granted on February 15, 2005 based
on ADESA's 2004 performance, and which latter amount is a prorated portion of Mr. Gartzke's total restricted share unit award
to capture that portion of 2004 during which ADESA was a subsidiary of ALLETE. On December 31, 2004 the aggregate outstanding
restricted share units were valued at $971,897. Mr. Gartzke receives dividend equivalents on these restricted share units. The
restricted share units will vest 100 percent on the third anniversary of the grant date and are subject to a change-in-control
acceleration provision.
The amount shown represents the value of 16,599 restricted share units of ADESA common stock granted on June 15, 2004 in
connection with the ADESA initial public offering and 2,132 restricted share units of ADESA granted on February 15, 2005 based
on ADESA's 2004 performance, and which latter amount is a prorated portion of Mr. Hallett's total restricted share unit award
to capture that portion of 2004 during which ADESA was a subsidiary of ALLETE. On December 31, 2004 the aggregate outstanding
restricted share units were valued at $397,472. Mr. Hallett receives dividend equivalents on these restricted share units. The
restricted share units will vest 100 percent on the third anniversary of the grant date and are subject to a change-in-control
acceleration provision.
All outstanding ALLETE stock option awards were adjusted in connection with the spin-off of ADESA and the one-for-three
reverse stock split to preserve the economic value of the awards immediately prior to the spin-off and reverse stock split. To
calculate the adjustment, the number of shares underlying the original option award was multiplied by a ratio of .862 and the
original option exercise price was divided by the same ratio.
All ALLETE stock option awards granted to Mr. Gartzke and Mr. Hallett prior to January 1, 2004 were cancelled and replaced in
connection with the spin-off of ADESA. Each outstanding stock option award was replaced with a new award under the ADESA 2004
Equity and Incentive Plan so that the economic value of the award immediately after the spin-off equaled the economic value of
the award prior to the spin-off. To calculate the new award, the number of ALLETE shares underlying the original option award
was multiplied by a ratio of 1.630 and the original option exercise price was divided by the same ratio.
Included in 2004 is (i) ALLETE contributions to the Retirement Savings and Stock Ownership Plan and the Flexible Benefit Plan
(Mr.Shippar $22,262, Mr. Gartzke $19,264, Mr. Vizanko $21,647, Ms. Holquist $18,917, Mr. Hallett $1,230, Mr. Schober $20,585,
Ms. Welty $20,933); (ii) ALLETE contributions to the ALLETE Supplemental Executive Retirement Plan (Mr. Shippar $39,024, Mr.
Gartzke $61,653, Mr. Vizanko $21,886, Ms. Holquist $11,899, Mr. Hallett $28,002, Mr. Schober $7,465, Ms. Welty $9,214); and
(iii) ADESA contributions to the ADESA Supplemental Executive Retirement Plan (Mr. Gartzke $29,430, Mr. Hallett $21,409).
Included in 2003 is (i) ALLETE contributions to the Retirement Savings and Stock Ownership Plan and the Flexible Benefit Plan
(Mr. Shippar $19,342, Mr. Gartzke $21,042, Mr. Vizanko $19,342, Ms. Holquist $15,043, Mr. Hallett $3,100, Mr. Schober $17,137,
Ms. Welty $17,504); and (ii) ALLETE contributions to the ALLETE Supplemental Executive Retirement Plan (Mr. Shippar $7,509,
Mr. Gartzke $33,311, Mr. Vizanko $5,550, Ms. Holquist $10,115, Mr. Hallett $44,004, Mr. Schober $0, Ms. Welty $873).
Included in 2002 is (i) ALLETE contributions to the Retirement Savings and Stock Ownership Plan and the Flexible Benefit Plan
(Mr. Shippar $17,958, Mr. Gartzke $19,800, Mr. Vizanko $17,000, Ms. Holquist $12,814, Mr. Hallett $2,000, Mr. Schober $15,005,
Ms. Welty $15,053); and (ii) ALLETE contributions to the ALLETE Supplemental Executive Retirement Plan (Mr. Shippar $9,938,
Mr. Gartzke $47,243, Mr. Vizanko $10,464, Ms. Holquist $9,232, Mr. Hallett $45,516, Mr. Schober $3,911, Ms. Welty $4,960).
9
OPTION GRANTS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------------------------
Individual Grants Grant Date Value
------------------------------------------------------------------------------------------------------------------------------
Number of % of Total
Securities Options Granted Exercise Grant Date
Underlying to Employees in Price Expiration Present Value
Name Options Granted Fiscal Year ($/Sh) Date ($)
------------------------------------------------------------------------------------------------------------------------------
Donald J. Shippar
ALLETE Options 13,905 13.5 37.76 February 2, 2014 131,249
David G. Gartzke
ALLETE Options 0 0 0 - 0
ADESA Options 663,950 23.1 24.00 June 15, 2010 5,099,136
James K. Vizanko
ALLETE Options 8,635 8.4 37.76 February 2, 2014 81,506
Laura A. Holquist
ALLETE Options 3,708 3.6 37.76 February 2, 2014 35,000
James P. Hallett
ALLETE Options 0 0 0 - 0
ADESA Options 265,580 9.2 24.00 June 15, 2010 2,039,654
Mark A. Schober
ALLETE Options 3,579 3.5 37.76 February 2, 2014 33,782
Claudia R. Scott Welty
ALLETE Options 3,557 3.5 37.76 February 2, 2014 33,575
------------------------------------------------------------------------------------------------------------------------------
Outstanding ALLETE stock option awards were adjusted in connection with the spin-off of ADESA and the one-for-three
reverse stock split of the Common Stock to preserve the economic value of the awards immediately prior to the spin-off
and reverse stock split. To calculate the adjustment, the number of shares underlying the original option award was
multiplied by a ratio of .862 and the original option exercise price was divided by the same ratio. Options vest in three
equal installments, one on each of February 2, 2005, 2006 and 2007. The options are subject to a change-in-control
acceleration provision.
Options vest in three equal installments, one on each of June 15, 2005, 2006 and 2007. Options granted are subject to
a change-in-control acceleration provision.
The grant date dollar value of options is based on ALLETE's binomial ratio (as of February 2, 2004) of .25. The binomial
option valuation method is a mathematical model premised on immediate exercisability and transferability of the options,
which are not features of ALLETE's options granted to executive officers and other employees. The values shown are
theoretical and do not necessarily reflect the actual values the recipients may eventually realize. Any actual value to
the officer or other employee will depend on the extent to which the market value of Common Stock at a future date
exceeds the exercise price. In addition to the option exercise price, the following assumptions for modeling were used to
calculate the values shown for the options granted in 2004: (i) each option remains outstanding for a period of seven
years; (ii) expected dividend yield is 3.47 percent (based on the most recent quarterly dividend); (iii) expected
dividend increase is 2 percent; (iv) expected stock price volatility is .281 (based on 504 trading days previous to
February 2, 2004); and (v) the risk-free rate of return is 3.92 percent (based on Treasury yields).
The grant date dollar value of the stock options is based on ADESA's average Black-Scholes ratio (as of June 15,
2004) of .32. The Black-Scholes option valuation method is a mathematical model premised on immediate exercisability and
transferability of the options, which are not features of ADESA's options granted to executive officers and other
employees. The values shown are theoretical and do not necessarily reflect the actual values the recipients may
eventually realize. Any actual value to the officer or other employee will depend on the extent to which the market value
of the ADESA common stock at a future date exceeds the exercise price. In addition to the option exercise price, the
following assumptions for modeling were used to calculate the values shown in accordance with Statement of Financial
Accounting Standard No. 123: (i) each option remains outstanding for a period of three to five years; (ii) expected
dividend yield is 1.25 percent; (iii) expected stock price volatility is .39 (based on a peer group of companies serving
the automotive industry due to lack of stock price volatility for ADESA common stock); and (iv) the risk-free rate of
return of 3.3 percent to 3.9 percent (based on Treasury yields).
10
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
------------------------------------------------------------------------------------------------------------------------------
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Acquired Value Realized Options at FY-End (#) Options at FY-End ($)
Name on Exercise (#) ($) Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------------------------------------------------------------
Donald J. Shippar 11,444 206,885 20,250 17,514 193,192 46,772
David G. Gartzke 0 0 0 0 0 0
James K. Vizanko 15,382 230,419 20,655 18,963 143,815 133,848
Laura A. Holquist 6,916 56,497 1,539 5,248 19,945 19,958
James P. Hallett 0 0 0 0 0 0
Mark A. Schober 14,344 159,614 4,413 5,786 30,726 28,602
Claudia R. Scott Welty 0 0 22,500 5,241 275,712 21,824
------------------------------------------------------------------------------------------------------------------------------
In the table directly above, the shares acquired and securities
underlying options exerciseable and unexerciseable have been adjusted in
connection with the spin-off of ADESA and one-for-three reverse stock split of
the Common Stock to preserve the economic value of the options immediately prior
to the spin-off and reverse stock split. To calculate the adjustment, the number
of shares underlying the original option award was multiplied by a ratio of .862
and the original option exercise price was divided by the same ratio.
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
------------------------------------------------------------------------------------------------------------
Estimated Future Payouts Under
Number of Shares, Performance Non-Stock Price-Based Plans
Units or Other or Other Period -------------------------------------
Rights Until Maturation Threshold Target Maximum
Name (#) or Payout (#) (#) (#)
------------------------------------------------------------------------------------------------------------
Donald J. Shippar 3,476 1/04-12/05 1,738 3,476 6,952
3,476 1/04-12/06 1,738 3,476 6,952
David G. Gartzke 0 - - - -
James K. Vizanko 2,159 1/04-12/05 1,079 2,159 4,317
2,159 1/04-12/06 1,079 2,159 4,317
Laura A. Holquist 927 1/04-12/05 463 927 1,854
927 1/04-12/06 463 927 1,854
James P. Hallett 0 - - - -
Mark A. Schober 895 1/04-12/05 447 895 1,790
895 1/04-12/06 447 895 1,790
Claudia R. Scott Welty 890 1/04-12/05 445 890 1,779
890 1/04-12/06 445 890 1,779
------------------------------------------------------------------------------------------------------------
The table directly above reflects the number of shares of Common Stock
that can be earned pursuant to the Executive Long-Term Incentive Compensation
Plan for the 2004-2005 and 2004-2006 performance periods, if the Total
Shareholder Return of the Company meets goals established by the Executive
Compensation Committee. The goals are based on the Company's ranking against a
peer group of 16 comparable companies. A threshold performance share award will
be earned if the Company's Total Shareholder Return ranks at least 10th, a
target award will be earned if the Company ranks at least 7th, and a maximum
award will be earned if the Company ranks at least 3rd. For this comparison, the
Total Shareholder Return ranking will be computed over the two-year period from
January 1, 2004 through December 31, 2005, and over the three-year period from
January 1, 2004 through December 31, 2006. Dividend equivalents accrue during
the performance period and are paid in shares 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. Payment is
accelerated upon a change in control
11
of the Company at 200 percent of the target number of performance shares granted
as increased by dividend equivalents for the performance period. All awards
shown in the table have been adjusted to reflect the spin-off of ADESA and the
one-for-three reverse stock split of the Common Stock to preserve the economic
value of the awards immediately prior to the spin-off and reverse stock split.
To calculate the adjustment, the number of shares underlying each of the awards
was multiplied by a ratio of .862.
RETIREMENT PLANS
The following table sets forth examples of the estimated annual
retirement benefits that would be payable to participants in ALLETE's Retirement
Plan and Supplemental Executive Retirement Plan after various periods of
service, assuming no changes to the plans and retirement at the normal
retirement age of 65.
PENSION PLAN
Years of Service
------------------------------------------------------------------------------------------------------------
Remuneration 15 20 25 30 35
------------------------------------------------------------------------------------------------------------
$100,000 $12,000 $16,000 $30,200 $35,200 $40,200
125,000 15,000 20,000 37,750 44,000 50,250
150,000 18,000 24,000 45,300 52,800 60,300
175,000 21,000 28,000 52,850 61,600 70,350
200,000 24,000 32,000 60,400 70,400 80,400
225,000 27,000 36,000 67,950 79,200 90,450
250,000 30,000 40,000 75,500 88,000 100,500
300,000 36,000 48,000 90,600 105,600 120,600
400,000 48,000 64,000 120,800 140,800 160,800
450,000 54,000 72,000 135,900 158,400 180,900
500,000 60,000 80,000 151,000 176,000 201,000
600,000 72,000 96,000 181,200 211,200 241,200
700,000 84,000 112,000 211,400 246,400 281,400
800,000 96,000 128,000 241,600 281,600 321,600
900,000 108,000 144,000 271,800 316,800 361,800
1,000,000 120,000 160,000 302,000 352,000 402,000
------------------------------------------------------------------------------------------------------------
Represents the highest annualized average compensation (salary and Results Sharing and Executive Annual
Incentive bonuses) received for 48 consecutive months during the employee's last 15 years of service
with ALLETE.
Retirement benefit amounts shown are in the form of a straight-life
annuity to the employee and are based on amounts listed in the Summary
Compensation Table under the headings "Salary" and "Bonus." Retirement benefit
amounts shown are not subject to any deduction for Social Security or other
offset amounts. ALLETE's Retirement Plan provides that the benefit amount at
retirement is subject to adjustment in future years to reflect changes in cost
of living to a maximum adjustment of 3 percent per year. As of December 31, 2004
the executive officers named in the Summary Compensation Table had the following
years of credited service under the plans:
Donald J. Shippar 28 years James P. Hallett 10 years
David G. Gartzke 29 years Mark A. Schober 27 years
James K. Vizanko 27 years Claudia R. Scott Welty 26 years
Laura A. Holquist 18 years
With certain exceptions, the Internal Revenue Code of 1986, as amended
(Code), restricts the aggregate amount of annual pension benefits which may be
paid to an employee under ALLETE's Retirement Plan to $165,000 for 2004. This
amount is subject to adjustment in future years to reflect changes in the cost
of living. ALLETE's Supplemental Executive Retirement Plan provides for
supplemental payments by ALLETE to eligible executives (including the executive
officers named in the Summary Compensation Table) in amounts sufficient to
maintain total retirement benefits upon retirement at a level which would have
been provided by ALLETE's Retirement Plan if benefits were not restricted by the
Code.
12
REPORT OF BOARD'S EXECUTIVE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Described below are the compensation policies of the Executive
Compensation Committee of the Board (Compensation Committee) effective for 2004
with respect to the executive officers of ALLETE. Composed entirely of
independent outside directors, the Compensation Committee is responsible for
recommending to the Board policies which govern the executive compensation
program of ALLETE and for administering those policies. The Compensation
Committee has retained the services of outside benefits and compensation
consulting firms to assist the Compensation Committee in connection with the
performance of such responsibilities.
The role of the executive compensation program is to help ALLETE
achieve its corporate goals by motivating performance, rewarding positive
results and enhancing Total Shareholder Return, as discussed below. Recognizing
that the potential impact an individual employee has on the attainment of
corporate goals tends to increase at higher levels of responsibility within
ALLETE, the executive compensation program provides greater visibility in
compensating individuals based on results achieved as their responsibilities
within ALLETE increase. In other words, individuals with the greatest potential
impact on achieving the stated goals have the greatest amount to gain when goals
are achieved and the greatest amount at risk when goals are not achieved.
The program recognizes that, in order to attract and retain the
exceptional executive talent needed to lead and grow ALLETE's businesses,
compensation must be competitive in the national market. To determine market
levels of compensation for executive officers in 2004, the Compensation
Committee relied upon comparative information from general industrial companies
in tandem with available specific industry data (i.e., electric utility, real
estate, etc.), which was provided and reviewed by outside consultants. All data
were analyzed to determine midpoint compensation levels for comparable positions
in comparably sized companies, as measured by revenue. In establishing
individual compensation levels, the Compensation Committee considers the level
of responsibility of the position and the experience and past performance of the
executive.
Code Section 162(m) generally disallows a tax deduction to public
companies for compensation over $1 million paid for any fiscal year to each of
the corporation's CEO and four other most highly compensated executive officers
as of the end of any fiscal year. Qualifying performance-based compensation will
not be subject to the deduction limit if certain requirements are met. The
awards granted to the executive officers under the Executive Long-Term Incentive
Compensation Plan (and for Mr. Gartzke and Mr. Hallet, awards granted under the
ADESA 2004 Equity and Incentive Plan) are intended to qualify as
performance-based compensation within the meaning of Code Section 162(m). The
Compensation Committee generally intends to structure executive compensation
plans so that the Company may deduct all executive compensation, but reserves
the ability to do otherwise if it is determined to be in the best interests of
the Company and its shareholders.
As described below, executive officers of ALLETE receive a compensation
package which consists of three basic elements: base salary, performance-based
compensation and supplemental executive benefits. The compensation of ALLETE's
CEO for the year 2004 is discussed separately in the last section of this
Compensation Committee report.
BASE SALARY
Base salaries are set at a level so that the named executive officers'
total compensation, including amounts paid under each of the performance-based
compensation plans described below, will be near the midpoint of market
compensation if the target level of performance is achieved under the
performance-based compensation plans.
PERFORMANCE-BASED COMPENSATION
The performance-based compensation plans of ALLETE are intended by the
Compensation Committee to reward executives for achieving financial and
non-financial goals that the Compensation Committee determines will be required
to achieve ALLETE's strategic and budgeted goals.
Performance goals under performance-based plans are established in
advance by the Compensation Committee and the Board of Directors. Target
performance levels under the annual performance-based plans are achieved if the
business unit meets or exceeds its budget and, in the case of the long-term
plan, if ALLETE achieves a Total Shareholder Return ranking of 7th or better
compared to a peer group of 16 comparable companies. Total Shareholder Return
includes stock price appreciation plus dividends throughout the relevant
13
performance period. With target performance, it is the Compensation Committee's
intent that executive compensation (including the value of stock options
granted) will be near the midpoint of the relevant market. If no performance
awards are earned and no value is attributed to the stock options granted,
compensation of ALLETE's executive officers would be significantly below the
midpoint market compensation level, while performance at increments above the
target level would result in total compensation above the midpoint of the
market.
ALLETE's performance-based compensation plans include:
- RESULTS SHARING. Approximately 50 percent of the Company's
employees are eligible to participate in ALLETE's Results Sharing
program. The Results Sharing award opportunities for 2004 were
based on corporate operating income from continuing operations
(before interest expense and income taxes) and business unit
operating income. Target level performance is earned if budgeted
goals are met. Target performance will result in an award of 5
percent of base salary, assuming safety, customer service and
reliability, and environmental protection goals established
by the Compensation Committee are also accomplished. The results
shown in the Summary Compensation Table reflect earned awards
averaging 10.4 percent of annual salary.
- EXECUTIVE ANNUAL INCENTIVE PLAN. The Executive Annual Incentive
Plan is intended to focus executive attention on meeting and
exceeding annual financial and non-financial business unit goals
established by the Compensation Committee. For 2004 financial
performance measures were business unit contributions to operating
income from continuing operations (before interest expense and
income taxes) and operating free cash flow. These financial
performance measures were chosen by the Compensation Committee
because of their positive correlation over time with the Total
Shareholder Return achieved by ALLETE for its shareholders. Target
level performance is earned if budgeted financial results are
exceeded. The 2004 financial and non-financial results
substantially exceeded budgeted goals set by the Compensation
Committee. The results shown in the Summary Compensation Table
reflect earned awards ranging from 72.5 percent to 151.3 percent
of December 1, 2004 base salary.
- EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN (LTIP). Under
the LTIP, the executive officers of ALLETE have been awarded stock
options, which are granted annually, and performance shares, which
beginning in 2004 are granted annually. The aggregate target value
of the LTIP award to the executive officers (not including
ALLETE's CEO) ranges from 35 percent to 60 percent of the
executive officer's annual base salary. The target award value has
been allocated 50 percent to stock options and 50 percent to
performance shares. The stock options have value only if the
Common Stock price appreciates above the price on the date of
grant. The performance shares granted for the two-year performance
period ending December 31, 2005 and the three-year performance
period ending December 31, 2006 will have value if the Total
Shareholder Return of ALLETE over the two-year and three-year
periods rank at least 10th in a peer group of 16 comparable
companies adopted by the Compensation Committee as appropriate
comparators. Dividend equivalents accrue on performance shares
during the performance period and are paid in Common Stock only to
the extent performance goals are achieved. The maximum payout is
200 percent of the target award. If earned, the performance shares
will be paid in Common Stock at the end of the performance period.
The LTIP payout for 2004 shown in the Summary Compensation Table
includes payment of the second 50 percent of the award earned for
the performance period ending December 31, 2003, the first 50
percent of which was paid and reported in 2003.
The Compensation Committee has determined that these awards under the
performance-based compensation plans are consistent with its philosophy of
aligning executive officers' interests with those of shareholders and with the
performance of ALLETE.
SUPPLEMENTAL EXECUTIVE BENEFITS
ALLETE has established a Supplemental Executive Retirement Plan (SERP)
to compensate certain employees, including the executive officers, equitably by
replacing benefits not provided by ALLETE's Flexible Benefit Plan and the
Retirement Savings and Stock Ownership Plan due to government-imposed limits,
and to provide retirement benefits that are competitive with those offered by
other businesses with which ALLETE competes for executive talent. The SERP
provides employees whose salary and bonus exceed the salary limitations
14
within tax-qualified plans with additional benefits such that they receive in
aggregate the benefits they would have been entitled to receive had such
limitations not been imposed. The SERP also provides certain executive
employees with a 40 percent supplemental tax benefit if a change in control of
the Company results in the termination of the covered executives' employment and
an immediate distribution in full of the covered executives' SERP account and/or
Executive Investment Plan deferral account. The supplemental tax benefit applies
only if the covered executive employee is not eligible for early retirement at
the time of the change-in-control event.
CHIEF EXECUTIVE OFFICER COMPENSATION
In connection with the spin-off of ADESA, Mr. Gartzke retired from
ALLETE on May 31, 2004 and resigned as Chairman on September 20, 2004. He has
served as chairman, president, and chief executive officer of ALLETE Automotive
Services and ADESA since January 2004 and stayed on with ADESA following its
spin-off from ALLETE on September 20, 2004.
On January 21, 2004 the Board of Directors elected Mr. Shippar
President and Chief Executive Officer of ALLETE. In connection with this action,
the Board increased Mr. Shippar's salary from $270,270 to $350,000. In June 2004
the Board of Directors increased Mr. Shippar's annual base salary 14.3 percent
to $400,000. Both of these salary adjustments were based on the recommendation
of the Compensation Committee. The majority of this increase was to move Mr.
Shippar's base salary toward the midpoint of salaries of chief executive
officers of comparably-sized companies and the remainder related to his
contributions to the performance of the Company. The Compensation Committee
designed the CEO's compensation package to provide substantial incentive to
achieve and exceed the Board's financial performance goals for the Company and
Total Shareholder Return goals for the Company's shareholders.
Under ALLETE's Results Sharing program, Mr. Shippar was awarded
$38,017, or 9.8 percent of his annual salary. This Results Sharing award was
based 25 percent on corporate operating income from continuing operations
(before interest expense and income taxes) and 75 percent on energy services
operating income from continuing operations (before interest expense and income
taxes). Under the Executive Annual Incentive Plan in 2004, Mr. Shippar earned an
award of $414,470, or 103.6 percent of his December 1, 2004 base salary, which
rewarded Mr. Shippar for achieving 2004 corporate operating income from
continuing operations (before interest expense and income taxes) and operating
free cash flow that were significantly above budget, as well as for achievement
of non-financial strategic goals established by the Compensation Committee.
The compensation of the Company's CEO also contains elements which
motivate him to focus on the longer-term performance of the Company. In 2004,
under the LTIP, Mr. Shippar was awarded target opportunity with a value equal to
75 percent of his base salary. This value has been allocated 50 percent to stock
options and 50 percent to performance shares. The stock options and performance
shares have the same characteristics as those issued to other executive officers
as described above. The LTIP payout for 2004 shown in the Summary Compensation
Table includes a payment of the second 50 percent of the award earned for the
performance period ending December 31, 2003, the first 50 percent of which was
paid and reported in 2003.
March 22, 2005
Executive Compensation Committee
Jack I. Rajala, Chair
George L. Mayer
Roger D. Peirce
Nick Smith
15
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the Company securities available for
issuance under ALLETE's equity compensation plans as of December 31, 2004.
EQUITY COMPENSATION PLAN INFORMATION
------------------------------------------------------------------------------------------------------------------------------
Number of Securities Number of Securities
to be Issued Upon Weighted-Average Remaining Available
Exercise of Exercise Price of for Future Issuance
Outstanding Options, Outstanding Options, Under Equity
Plan Category Warrants and Rights Warrants and Rights Compensation Plans
------------------------------------------------------------------------------------------------------------------------------
Equity Compensation 437,965 $28.94 1,682,635
Plans Approved by
Security Holders
Equity Compensation 0 N/A 0
Plans Not Approved
by Security Holders
------------------------------------------------------------------------------------------------------------------------------
Total 437,965 $28.94 1,682,635
------------------------------------------------------------------------------------------------------------------------------
Excludes the number of securities to be issued upon exercise of outstanding options, warrants and rights.
The amount shown includes: (i) 1,396,072 shares available for issuance under the LTIP in the form of options, rights,
restricted stock, performance units and shares, or other grants as approved by the Compensation Committee; (ii) 25,708
shares available for issuance under the Director Long-Term Stock Incentive Plan in the form of options and performance
shares; (iii) 115,272 shares available for issuance under the Director Stock Plan as payment for a portion of the annual
retainer payable to non-employee Directors; and (iv) 145,583 shares available for issuance under the ALLETE and
Affiliated Companies Employee Stock Purchase Plan.
REPORT OF THE AUDIT COMMITTEE
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. Peirce and
Ms. Ludlow are "audit committee financial experts" 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 2005. 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 ALLETE's financial
reports, compliance with legal and regulatory requirements, the qualifications
and independence of the independent registered public accounting firm, the audit
process and internal controls. The Audit Committee reviews and recommends to the
Board that the audited financial statements be included in ALLETE's Annual
Report on Form 10-K.
During 2004 the Audit Committee met and held separate discussions with
members of ALLETE's 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 adequacy of the systems of
internal controls, 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 2005, subject to shareholder ratification. The Company's
independent registered public accounting firm provided to the Audit Committee
the written disclosures required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and the Audit Committee
discussed with the independent auditor the firm's independence.
The Audit Committee has: (i) reviewed and discussed ALLETE's audited
financial statements for the year ending December 31, 2004 with ALLETE's
management and with ALLETE'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 ALLETE's
independent registered public accounting firm the matters required to be
discussed by SAS 61 (Codification of Statements on Auditing Standards) which
include, among other items, matters related to the conduct of the audit of
ALLETE's financial statements. Management
16
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 ALLETE's Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 for filing with the SEC.
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 ALLETE's annual financial
statements for the years ended December 31, 2004 and December 31, 2003, and fees
billed for other services rendered by PricewaterhouseCoopers during those
periods.
All audit and non-audit services and fees for 2004 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.
2004 2003
-------------------------------------
Audit Fees $1,800,000 $1,300,000
Audit-Related Fees 130,000 100,000
Tax Fees 1,040,000 1,000,000
All Other Fees 0 0
-------------------------------------
Total $2,970,000 $2,400,000
Audit fees consisted 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 and security offerings.
Audit-related fees consisted of assurance services, including audits of
employee benefit plans and special procedures related to regulatory filings
in 2003 and 2004.
Tax fees were comprised of tax compliance services, including assistance
with the preparation of tax returns and claims for tax refunds, and tax
consultation and planning services, including assistance with tax audits
and appeals, tax advice relating to the divestiture of ADESA, mergers and
acquisitions, and employee benefit plans, and requests for rulings or
technical advice from taxing authorities. In 2004 tax compliance services
totaled $500,000, and tax consulting and planning services totaled
$540,000. In 2003 tax compliance services totaled $500,000, and tax
consulting and planning services totaled $500,000.
March 22, 2005
Audit Committee
George L. Mayer, Chair
Peter J. Johnson
Madeleine W. Ludlow
Roger D. Peirce
17
--------------------------------------------------------------------------------
ITEM NO. 2 - RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
--------------------------------------------------------------------------------
The Audit Committee of the Board recommends shareholder ratification of
the appointment of PricewaterhouseCoopers as ALLETE's independent registered
public accounting firm for the year 2005. PricewaterhouseCoopers has acted in
this capacity since October 1963.
A representative of PricewaterhouseCoopers will be present at the
Annual Meeting, will have an opportunity to make a statement if he or she so
desires, and will be available to respond to appropriate questions.
In connection with the 2004 audit, PricewaterhouseCoopers read ALLETE's
Annual Report and Form 10-K, audited the related consolidated financial
statements, and performed interim reviews of the consolidated financial
statements and certain filings of ALLETE with the Federal Energy Regulatory
Commission and the SEC.
The Board recommends a vote "FOR" ratifying the appointment of
PricewaterhouseCoopers as ALLETE's independent registered public accounting firm
for 2005.
ALLETE COMMON STOCK PERFORMANCE
The following graph compares ALLETE's cumulative Total Shareholder
Return on its Common Stock with the cumulative return of the S&P 500 Index and
the Philadelphia Stock Exchange Utility Index (Philadelphia Utility Index). The
S&P 500 Index is a capitalization-weighted index of 500 stocks designed to
measure performance of the broad domestic economy through changes in the
aggregate market value of 500 stocks representing all major industries. Because
this composite index has a broad industry base, its performance may not closely
track that of a composite index comprised solely of electric utilities. The
Philadelphia Utility Index is a capitalization-weighted index of 20 utility
companies involved in the production of electrical energy.
The calculations assume a $100 investment on December 31, 1999 and
reinvestment of dividends. The calculations further assume that the shares of
ADESA common stock received in connection with the spin-off of ADESA were
immediately sold and the proceeds invested in additional Common Stock.
[GRAPH OMITTED - TOTAL SHAREHOLDER PERFORMANCE GRAPH]
TOTAL SHAREHOLDER RETURN FOR THE FIVE YEARS ENDING DECEMBER 31, 2004
1999 2000 2001 2002 2003 2004
-------------------------------------------
ALLETE $100 $155 $164 $154 $218 $234
S&P 500 Index $100 $91 $80 $62 $80 $89
Philadelphia Utility Index $100 $150 $131 $107 $133 $168
18
--------------------------------------------------------------------------------
ITEM NO. 3 - APPROVAL OF ALLETE EXECUTIVE LONG-TERM INCENTIVE
COMPENSATION PLAN
--------------------------------------------------------------------------------
Shareholders are asked to approve an amendment to the ALLETE Executive
Long-Term Incentive Compensation Plan (Plan) to become effective on January 1,
2006, which will allow the Plan to continue in effect, subject to the right of
the Board of Directors to terminate the Plan at any time, until all shares
subject to the Plan have been purchased or acquired. There were 1,700,111 shares
available for issuance under the Plan as of March 11, 2005. As amended, no
grants may be made under the Plan on or after January 1, 2016. The Plan
currently provides that no grants may be made after December 31, 2005.
The Plan is integral to ALLETE's ability to attract and retain talented
executives and to more closely align their interests with those of shareholders
and customers. Approximately 58 officers and key employees of ALLETE and its
subsidiaries currently participate in the Plan. The following summary of the
principal provisions of the Plan is not a complete description of all its terms
and provisions. The Plan is included as an Appendix to this Proxy Statement.
The Board of Directors recommends a vote "FOR" the amendment and
continuation of the Plan.
GENERAL DESCRIPTION OF THE PLAN
The purpose of the Plan is to promote the success and enhance the value
of ALLETE by linking participants' personal interest to those of ALLETE
shareholders and customers, and providing participants with an incentive for
outstanding performance. The Plan is further intended to assist ALLETE in its
ability to motivate, attract and retain the services of participants upon whom
the successful conduct of its operations is largely dependent. The Plan
originally became effective on January 1, 1996. Under the original terms of the
Plan, no grants could be made under the Plan after the tenth anniversary of this
original effective date. The proposed amendment sets an effective date of
January 1, 2006 and allows grants to be made under the Plan for a period of ten
years from this new effective date. The Board may, at any time, and from time to
time, alter, amend, suspend, or terminate the Plan in whole or in part;
provided, however, that no amendment which requires shareholder approval in
order for the Plan to continue to comply with Section 422 of the Code, Section
303A.08 of the New York Stock Exchange Listed Company Manual, or any other
applicable law, regulation or rule, will be effective unless approved by the
shareholders. The Plan is administered by the Compensation Committee of the
Board of Directors, which consists exclusively of "non-employee directors" as
contemplated under Section 16(b)-3 of the Securities and Exchange Act of 1934,
"outside Directors" as contemplated by Section 162(m) of the Code, and
"independent directors" as contemplated by Section 303A.02 of the New York Stock
Exchange Listed Company Manual. The Compensation Committee may award only those
types of grants that either comply with the applicable requirements of Section
409A of the Code and related guidance, or do not result in the deferral of
compensation within the meaning of that provision of the Code and related
guidance.
The Common Stock available for issuance under the Plan may be increased
by shares tendered to exercise options or withheld to satisfy tax withholding
requirements in connection with the Plan. If any corporate transaction occurs
that causes a change in the corporate structure of ALLETE, the Compensation
Committee is authorized to make such adjustments to the number and class of
shares of stock delivered, and the number and class and/or price of shares of
Common Stock subject to outstanding grants made under the Plan as it deems
appropriate and equitable to prevent dilution or enlargement of participants'
rights.
Officers and key employees of ALLETE and its subsidiaries are eligible
to participate in the Plan, as determined by the Compensation Committee,
including employees who are members of the Board of Directors, but excluding
Directors who are not employees.
PLAN BENEFITS
During fiscal 2004 stock options to purchase 33,384 shares of Common
Stock were granted to ALLETE's named executive officers, as set forth in the
table captioned "Option Grants in Last Fiscal Year." Stock options were granted
during the year to all executive officers of ALLETE as a group to purchase
44,999 shares of Common Stock at an average weighted exercise price of $37.76
per share. In addition, stock options were granted to all other eligible
executive and key employees of ALLETE as a group to purchase 57,831 shares of
Common Stock at an
19
average weighted exercise price of $37.76 per share. The number of options or
other awards to be granted in the future to ALLETE's executive officers and to
other employees is not determinable at this time. On March 11, 2005 the closing
price on the NYSE of Common Stock was $42.39 per share.
GRANTS UNDER THE PLAN
STOCK OPTIONS. The Compensation Committee may grant incentive stock
options, nonqualified stock options, or a combination thereof under the Plan.
The option price for each such grant will be the fair market value of a share of
Common Stock on the date of grant or such higher price as the Compensation
Committee may determine. Options will expire at such times as the Compensation
Committee determines at the time of grant; provided, however, that no option
will be exercisable later than the tenth anniversary of its grant.
Simultaneously with the grant of an option, a participant may receive dividend
equivalents which entitles the participant to a right to receive amounts equal
to the value of the dividends declared with respect to the number of shares held
under option on all payment dates from the date of grant to the date of
exercise. The Compensation Committee will determine at the time that dividend
equivalents are granted the conditions, if any, to which the payment of such
dividend equivalents is subject.
Options granted under the Plan will be exercisable at such times and
subject to such restrictions and conditions as the Compensation Committee shall
approve; provided that no option may be exercisable prior to six months
following its grant. The option exercise price is payable in cash, by shares of
Common Stock having a fair market value equal to the exercise price, by share
withholding or any combination of the foregoing. The Compensation Committee may
allow, along with other means of exercise, cashless exercise as permitted under
the Federal Reserve Board's Regulation T, subject to the applicable securities
laws. The maximum number of shares of Common Stock subject to options which may
be granted to any single participant during any calendar year is 100,000.
Although the federal income tax rules may change at any time,
generally, a participant does not recognize taxable income, and ALLETE is not
entitled to a deduction upon the grant of an option. Upon the exercise of an
option, the participant recognizes ordinary income equal to the excess of the
fair market value of the shares of Common Stock acquired over the option
exercise price. The amount of such excess is generally determined by reference
to the fair market value of Common Stock on the date of exercise. ALLETE is
generally entitled to a deduction equal to the compensation taxable to the
participant as ordinary income.
STOCK APPRECIATION RIGHTS
Stock appreciation rights (SAR) granted under the Plan may be in the
form of freestanding SARs, tandem SARs, or a combination thereof. The base value
of a freestanding SAR will be equal to the fair market value of a share of
Common Stock on the date of grant. No SAR granted under the Plan may be
exercisable prior to six months following its grant. The term of any SAR granted
under the Plan will be determined by the Compensation Committee, provided that
the term may not exceed ten years. Freestanding SARs may be exercised upon such
terms and conditions as are imposed by the Compensation Committee and set forth
in the SAR grant agreement. The base value of a tandem SAR will be equal to the
option price of the related option. A tandem SAR may be exercised only with
respect to the shares of Common Stock for which its related option is
exercisable. Upon exercise of an SAR, a participant will receive payment from
the Company equal to the excess of the fair market value of a share of Common
Stock on the date of exercise over the base value of the SAR multiplied by the
number of shares with respect to which the SAR is exercised. Payment due to the
participant upon exercise will be made in shares of Common Stock of equivalent
value. The maximum number of SARs which may be granted to any single participant
under the Plan in any calendar year is 100,000.
RESTRICTED STOCK
Restricted stock may be granted in such amounts and subject to such
terms and conditions as determined by the Compensation Committee; provided,
however, the maximum number of shares of restricted stock that may be granted to
any single participant during a calendar year is 20,000. The restriction will
generally lapse on the basis of the passage of time. Participants holding
restricted stock may exercise full voting rights with respect to those shares
during the restricted period and will be credited with cash dividends and other
distributions with respect to the shares.
20
Subject to the Compensation Committee's right to determine otherwise at
the time of grant, dividends or distributions credited during the restricted
period will be subject to the same restrictions on transferability and
forfeitability as the shares of restricted stock with respect to which they were
paid. All dividends credited will be paid promptly following the vesting of the
shares of restricted stock to which the dividends or other distributions relate.
PERFORMANCE UNITS AND PERFORMANCE SHARES
Performance units and performance shares may be granted in the amounts
and subject to the terms and conditions as determined by the Compensation
Committee. The Compensation Committee will set performance goals, which,
depending on the extent to which they are met during the performance periods
established by the Compensation Committee, will determine the number and/or
value of performance units/shares that will be paid out to participants.
Performance periods will, in all cases, be at least six months in length.
Simultaneously with the grant of performance shares, the participant
may be granted dividend equivalents with respect to those performance shares.
Dividend equivalents will constitute rights to be paid amounts equal to the
dividends declared on an equal number of outstanding shares on all payment dates
occurring during the period between the grant date of the performance shares and
the date the performance shares are earned or paid out. Participants will
receive payment on the value of performance units/shares earned after the end of
the performance period. Payment of performance units/shares will be made in cash
or shares of Common Stock or in a combination thereof, which have an aggregate
fair market value equal to the value of the earned performance units/shares at
the end of the applicable performance period, as the Compensation Committee
determines. These shares may be granted subject to any restrictions deemed
appropriate by the Compensation Committee.
Unless and until the Compensation Committee proposes a change in the
goals for shareholder vote or applicable tax and securities laws change to
permit the Compensation Committee discretion to alter the performance goals
without obtaining shareholder approval, the performance goals to be used for
purposes of grants to officers and key employees will be based upon any one or
more of the following: total shareholder return (measured as the sum of share
price appreciation and dividends declared); return on invested capital, assets
or net assets; share earnings/earnings growth; cash flow/cash flow growth; cost
of services to customers; growth in revenue, sales, operating income, net
income, stock price and/or earnings per share; return on shareholders' equity;
economic value created; customer satisfaction and/or customer service quality;
and operating effectiveness.
The maximum award to any single participant with respect to performance
units granted in any calendar year is 200 percent of base salary determined at
the time the performance goals are set by the Compensation Committee but in no
event more than $1 million. The maximum award to any single participant with
respect to performance shares in any calendar year is 20,000.
OTHER GRANTS
The Compensation Committee may make other grants which may include,
without limitation, the grant of shares of Common Stock based on certain
conditions, the payment of cash based upon performance goals or other criteria
established by the Compensation Committee and the payment of shares in lieu of
cash under other ALLETE incentive or bonus programs, in such manner and at such
times as the Compensation Committee determines.
21
--------------------------------------------------------------------------------
OTHER BUSINESS
--------------------------------------------------------------------------------
The Board knows of no other business to be presented at the meeting.
However, if any other matters properly come before the meeting, it is the
intention of the persons named in the accompanying Proxy Card to vote pursuant
to the proxies in accordance with their judgment in such matters.
All shareholders are asked to promptly return their Proxy so that the
necessary vote may be present at the meeting. We respectfully request that you
vote your Proxy at your earliest convenience either by signing and returning the
accompanying Proxy Card by mail, or by following the instructions on the Proxy
Card to vote by a toll-free telephone call or online.
By order of the Board of Directors,
Deborah A. Amberg
Deborah A. Amberg
Vice President, General Counsel and Secretary
March 22, 2005
Duluth, Minnesota
DELIVERY OF PROXY MATERIALS TO HOUSEHOLDS
Only one copy of ALLETE's 2004 Annual Report and Proxy Statement for
the 2005 Annual Meeting of Shareholders will be delivered to an address where
two or more shareholders reside unless ALLETE has received contrary instructions
from a shareholder at the address. A separate Proxy Card and a separate notice
of the Annual Meeting of Shareholders will be delivered to each shareholder at
the shared address.
If you are a shareholder who lives at a shared address and you would
like additional copies of the 2004 Annual Report or this Proxy Statement,
contact ALLETE Shareholder Services, 30 West Superior Street, Duluth, MN
55802-2093, telephone number 1-800-535-3056 or 1-218-723-3974, and we will
promptly mail you copies.
If you share the same address with another ALLETE shareholder 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 1-800-535-3056 or by
writing to ALLETE's stock 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 2004 ALLETE Annual Report, which includes
financial statements, please notify ALLETE Shareholder Services, 30 West
Superior Street, Duluth, MN 55802-2093, telephone number 1-800-535-3056 or
1-218-723-3974, and a copy will be sent to you.
Many brokerage firms and other holders of record have procedures for
the delivery of single copies of company documents to households with multiple
shareholders. If your family has one or more "street name" accounts under which
you beneficially own shares of ALLETE Common Stock, please contact your broker,
financial institution, or other holder of record directly if you require
additional copies of the Proxy Statement or ALLETE's 2004 Annual Report, or if
you have other questions or directions about your "street name" account.
22
APPENDIX
ALLETE
EXECUTIVE LONG-TERM INCENTIVE COMPENSATION PLAN
AS AMENDED AND RESTATED EFFECTIVE JANUARY 1, 2006
ARTICLE 1. ESTABLISHMENT, PURPOSE AND DURATION
1.1 ESTABLISHMENT OF THE PLAN. ALLETE, Inc., a Minnesota
corporation, formerly Minnesota Power & Light Company (hereinafter referred to
as the "Company"), established an incentive compensation plan known as the
"ALLETE Executive Long-Term Incentive Compensation Plan" (hereinafter referred
to as the "Plan"), as set forth in this document. The Plan permits the grant of
nonqualified stock options ("NQSO"), incentive stock options ("ISO"), stock
appreciation rights ("SAR"), restricted stock, performance units, performance
shares and other grants. Capitalized terms are defined in Article 17.
The Plan first became effective as of January 1, 1996, and
shall remain in effect as provided in Section 1.3 herein. This Plan document
reflects the amendment and restatement of the Plan which will become effective
upon shareholder approval as of January 1, 2006 (the "Effective Date"), and
applies to Grants issued on or after January 1, 2006, and Grants exercised on or
after January 1, 2006.
1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to promote
the success and enhance the value of the Company by linking the personal
interests of Participants to those of Company shareholders and customers,
providing Participants with an incentive for outstanding performance.
The Plan is further intended to assist the Company in its
ability to motivate, attract and retain the services of Participants upon whom
the successful conduct of its operations is largely dependent.
1.3 DURATION OF THE PLAN. The Plan shall remain in effect,
subject to the right of the Board of Directors to terminate the Plan at any time
pursuant to Article 13 herein, until all Shares subject to it shall have been
purchased or acquired according to the Plan's provisions; provided, however, in
no event may a Grant be made under the Plan on or after the tenth anniversary of
the Effective Date.
ARTICLE 2. ADMINISTRATION
2.1 THE COMMITTEE. The Plan shall be administered by the
Executive Compensation Committee of the Board consisting of not less than three
(3) Directors. The members of the Committee shall be appointed from time to time
by, and shall serve at the discretion of, the Board of Directors.
The Committee, to the extent necessary, shall be comprised
solely of Directors who are: (a) "non-employee directors" as contemplated by
Rule 16b-3 under the Exchange Act; (b) "outside directors" as contemplated by
Section 162(m) of the Code; and (c) "independent directors" as contemplated by
Section 303A.02 of the New York Stock Exchange Listed Company Manual.
2.2 AUTHORITY OF THE COMMITTEE. The Committee shall have full
power except as limited by law, the Articles of Incorporation and the Bylaws of
the Company, subject to such other restricting limitations or directions as may
be imposed by the Board and subject to the provisions herein, to determine the
size and types of Grants; to determine the terms and conditions of such Grants
in a manner consistent with the Plan; to construe and interpret the Plan and any
agreement or instrument entered into under the Plan; to establish, amend or
waive rules and regulations for the Plan's administration; and (subject to the
provisions of Article 13 herein) to amend the terms and conditions of any
outstanding Grant; provided, however, the Committee may award or grant only
those types of Grants that either comply with the applicable requirements of
Section 409A of the Code and related guidance, or do not result in the deferral
of compensation within the meaning of Section 409A of the Code and related
guidance. Further, the Committee shall make all other determinations which may
be necessary or advisable for the administration of the Plan. As permitted by
law, the Committee may delegate its authorities as identified hereunder.
A-1
2.3 DECISIONS BINDING. All determinations and decisions made
by the Committee pursuant to the provisions of the Plan and all related orders
or resolutions of the Board shall be final, conclusive and binding on all
persons, including the Company, its shareholders, Employees, Participants and
their estates and beneficiaries.
2.4 COSTS. The Company shall pay all costs of administration
of the Plan.
ARTICLE 3. SHARES SUBJECT TO THE PLAN
3.1 NUMBER OF SHARES. Subject to Section 3.2 herein, the total
number of Shares available for grant under the Plan shall not exceed three
million, two hundred thirty three thousand, three hundred thirty three
(3,233,333) Shares as authorized at the time of the annual meeting of
shareholders on May 10, 2005 reduced by the number of Shares as to which Options
or Shares have been granted or exercised. Shares may be (i) authorized but
unissued Shares of common stock, or (ii) Shares purchased on the open market.
Shares underlying lapsed or forfeited Grants, Grants that are not paid in
shares, previously acquired Shares tendered to exercise an Option, or Shares
withheld in accordance with Section 14.2 to satisfy tax withholding obligations
may be re-used for other Grants.
Subject to Section 3.2 herein, to the extent consistent with
Sections 422 and 424 of the Code, not more than an aggregate of three million,
two hundred thirty three thousand, three hundred thirty three (3,233,333) Shares
may be issued under Incentive Stock Options.
3.2 ADJUSTMENTS IN AUTHORIZED SHARES. In the event of any
merger, reorganization, consolidation, recapitalization, separation,
liquidation, stock dividend, split-up, share combination or other change in the
corporate structure of the Company affecting the Shares, such adjustment shall
be made in the number and class of Shares which may be delivered under the Plan,
and in the number and class of and/or price of Shares subject to outstanding
Grants made under the Plan, as may be determined to be appropriate and equitable
by the Committee, in its sole discretion, to prevent dilution or enlargement of
rights; provided, however, that the number of Shares subject to any Grant shall
always be a whole number. Notwithstanding the foregoing or any Plan provision to
the contrary, any substitution of a new Option pursuant to a corporate
transaction for an outstanding Option or the assumption of an outstanding Option
shall meet the requirements of Treasury Regulation Section 1.424-1. The
preceding sentence shall apply to "incentive stock options" as that term is
defined in Section 422 of the Code and nonqualified stock options.
ARTICLE 4. ELIGIBILITY AND PARTICIPATION
4.1 ELIGIBILITY. Persons eligible to participate in the Plan
include all officers and key employees of the Company and its Subsidiaries, as
determined by the Committee, including Employees who are members of the Board,
but excluding Directors who are not Employees.
4.2 ACTUAL PARTICIPATION. Subject to the provisions of the
Plan, the Committee may, from time to time, select from all Eligible Employees
those to whom Grants shall be made and shall determine the nature and amount of
each Grant.
ARTICLE 5. STOCK OPTIONS
5.1 GRANT OF OPTIONS. Subject to the terms and conditions of
the Plan, Options may be granted to an Eligible Employee at any time and from
time to time, as shall be determined by the Committee. The Committee shall have
complete discretion in determining the number of Shares subject to Options
granted to each participant (subject to Article 3 herein) and consistent with
the provisions of the Plan, in determining the terms and conditions pertaining
to such Options; provided, however, the maximum number of Shares subject to
Options which may be granted to any single Participant during any one calendar
year is one hundred thousand (100,000). The Committee may grant ISOs, NQSOs or a
combination thereof.
5.2 OPTION GRANT AGREEMENT. Each Option grant shall be
evidenced by an Option Grant Agreement that shall specify the Option Price, the
duration of the Option, the number of Shares to which the Option pertains, the
Exercise Period and such other provisions as the Committee shall determine. The
Option Grant Agreement also shall specify whether the Option is intended to be
an ISO or a NQSO.
A-2
5.3 OPTION PRICE. The Option Price for each Option granted
under the Plan shall be the Fair Market Value of a Share on the date of grant,
or such higher price as the Committee may determine.
5.4 DURATION OF OPTIONS. Each Option shall expire at such time
as the Committee shall determine at the time of grant; provided, however, that
no Option shall be exercisable later than the tenth (10th) anniversary of its
date of grant.
5.5 DIVIDEND EQUIVALENTS. To the extent permitted by Section
2.2 herein, simultaneously with the grant of an Option, the Participant
receiving the Option may be granted Dividend Equivalents with respect to the
Shares subject to such Option. Dividend Equivalents shall constitute rights to
amounts equal to the dividends declared on equal number of outstanding Shares on
all payment dates occurring during the period between the grant date of an
Option and the date the Option is exercised. The Committee shall determine at
the time Dividend Equivalents are granted the conditions, if any, to which the
payment of such Dividend Equivalents is subject.
5.6 EXERCISE OF AND PAYMENT FOR OPTIONS. Options granted under
the Plan shall be exercisable at such times and be subject to such restrictions
and conditions as the Committee shall in each instance approve, which need not
be the same for each Grant or for each Participant. However, in no event may an
Option granted under the Plan become exercisable prior to six (6) months
following the date of its grant.
A Participant may exercise an Option at any time during the
Exercise Period. Options shall be exercised by the delivery of a written notice
of exercise to the Company or its designated agent, setting forth the number of
Shares with respect to which the Option is to be exercised, accompanied by
provisions for full payment for the Shares.
The Option Price upon exercise of any Option shall be payable
to the Company in full either: (a) in cash or its equivalent, (b) by tendering,
either by actual or constructive delivery, previously acquired Shares having an
aggregate fair market value at the time of exercise equal to the total Option
Price (provided that the Shares which are tendered must have been held by the
Participant for at least six months prior to their tender to satisfy the Option
Price), (c) by Share withholding or (d) by a combination of (a), (b), and/or
(c).
To the extent not prohibited by Section 402 of the
Sarbanes-Oxley Act of 2002, the Committee also may allow cashless exercise as
permitted under Federal Reserve Board's Regulation T, subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification
of exercise of an Option and provisions for full payment therefor, the Company
shall deliver to the Participant, in the Participant's name, Shares in an
appropriate amount based upon the number of Shares purchased under the
Option(s).
5.7 RESTRICTIONS ON SHARE TRANSFERABILITY. The Committee may
impose such restrictions on any Shares acquired pursuant to the exercise of an
Option under the Plan as it may deem advisable, including, without limitation,
restrictions to comply with applicable Federal securities laws, with the
requirements of any stock exchange or market upon which such Shares are then
listed and/or traded and with any blue sky or state securities laws applicable
to such Shares.
5.8 TERMINATION OF EMPLOYMENT. Each Option Grant Agreement
shall set forth the extent to which the Participant shall have the right to
exercise the Option following termination of the Participant's employment with
the Company and its Subsidiaries. Such provisions shall be determined in the
sole discretion of the Committee, shall be included in the Option Grant
Agreement entered into with Participants, need not be uniform among all Options
granted pursuant to the Plan or among Participants and may reflect distinctions
based on the reasons for termination of employment.
5.9 NONTRANSFERABILITY OF OPTIONS. No Option granted under the
Plan may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all Options granted to a Participant under the Plan shall be
exercisable during his or her lifetime only by such Participant or his or her
legal representative.
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ARTICLE 6. STOCK APPRECIATION RIGHTS
6.1 GRANT OF SARs. To the extent permitted by Section 2.2
herein, and subject to the terms and conditions of the Plan, an SAR may be
granted to an Eligible Employee at any time and from time to time, as shall be
determined by the Committee. The Committee may grant Freestanding SARs, Tandem
SARs or any combination of these forms of SARs.
The Committee shall have complete discretion in determining
the number of SARs granted to each Participant (subject to Article 3 herein)
and, consistent with the provisions of the Plan, in determining the terms and
conditions pertaining to such SARs; provided, however, the maximum number of
SARs which may be granted to any single Participant during any one calendar year
is one hundred thousand (100,000).
The Base Value of a Freestanding SAR shall equal the Fair
Market Value of a Share on the date of grant of the SAR. The Base Value of
Tandem SARs shall equal the Option Price of the related Option. In no event
shall any SAR granted hereunder become exercisable within the first six (6)
months of its grant.
6.2 SAR GRANT AGREEMENT. Each SAR grant shall be evidenced by
a SAR Grant Agreement that shall specify the number of SARs granted, the Base
Value, the term of the SAR (not to exceed ten (10) years), the Exercise Period
and such other provisions as the Committee shall determine.
6.3 EXERCISE OF TANDEM SARs. Tandem SARs may be exercised for
all or part of the Shares subject to the related Option upon the surrender of
the right to exercise the equivalent portion of the related Option. A Tandem SAR
may be exercised only with respect to the Shares for which its related Option is
then exercisable.
Notwithstanding any other provision of the Plan to the
contrary, with respect to a Tandem SAR granted in connection with an ISO: (i)
the Tandem SAR will expire no later than the expiration of the underlying ISO;
(ii) the value of the payout with respect to the Tandem SAR may be for no more
than one hundred percent (100%) of the difference between the Option Price of
the underlying ISO and the Fair Market Value of the Shares subject to the
underlying ISO at the time the Tandem SAR is exercised; and (iii) the Tandem SAR
may be exercised only when the Fair Market Value of the Shares subject to the
ISO exceeds the Option Price of the ISO.
6.4 EXERCISE OF FREESTANDING SARs. Freestanding SARs may be
exercised upon whatever terms and conditions the Committee, in its sole
discretion, imposes upon them.
6.5 EXERCISE AND PAYMENT OF SARs. A Participant may exercise
an SAR at any time during the Exercise Period. SARs shall be exercised by the
delivery of a written notice of exercise to the Company or its designated agent,
setting forth the number of SARs being exercised. Upon exercise of an SAR, a
Participant shall be entitled to receive payment from the Company in an amount
equal to the product of:
(a) the excess of (i) the Fair Market Value of a Share on
the date of exercise over (ii) the Base Value of the
SAR, multiplied by
(b) the number of Shares with respect to which the SAR is
exercised.
The payment upon SAR exercise shall be in Shares of equivalent
value.
6.6 TERMINATION OF EMPLOYMENT. Each SAR Grant Agreement shall
set forth the extent to which the Participant shall have the right to exercise
the SAR following termination of the Participant employment with the Company and
its Subsidiaries. Such provisions shall be determined in the sole discretion of
the Committee, shall be included in the SAR Grant Agreement entered into with
Participants, need not be uniform among all SARs granted pursuant to the Plan or
among Participants and may reflect distinctions based on the reasons for
termination of employment.
6.7 NONTRANSFERABILITY OF SARs. No SAR granted under the Plan
may be sold, transferred, pledged, assigned, or otherwise alienated or
hypothecated, other than by will or by the laws of descent and distribution.
Further, all SARs granted to a Participant under the Plan shall be exercisable
during his or her lifetime only by such Participant or his or her legal
representative.
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ARTICLE 7. RESTRICTED STOCK
7.1 GRANT OF RESTRICTED STOCK. To the extent permitted by
Section 2.2 herein, and subject to the terms and conditions of the Plan,
Restricted Stock may be granted to Eligible Employees at any time and from time
to time, as shall be determined by the Committee. The Committee shall have
complete discretion in determining the number of shares of Restricted Stock
granted to each Participant (subject to Article 3 herein) and, consistent with
the provisions of the Plan, in determining the terms and conditions pertaining
to such Restricted Stock; provided, however, the maximum number of shares of
Restricted Stock which may be granted to any single Participant during any one
calendar year is twenty thousand (20,000).
7.2 RESTRICTED STOCK GRANT AGREEMENT. Each Restricted Stock
Grant shall be evidenced by a Restricted Stock Grant Agreement that shall
specify the Period or Periods of Restriction, the number of Restricted Stock
Shares granted and such other provisions as the Committee shall determine. The
Period or Periods of Restriction shall end only on the terms and conditions
determined by the Committee and specified in the Restricted Stock Grant
Agreement, which may include the attainment of one or more Performance Goals or
upon one or more specified dates.
7.3 TRANSFERABILITY. Except as provided in this Article 7,
Restricted Stock granted herein may not be sold, transferred, pledged, assigned,
or otherwise alienated or hypothecated until the end of the applicable Period of
Restriction established by the Committee and specified in the Restricted Stock
Grant Agreement. However, in no event may any Restricted Stock granted under the
Plan become vested in a Participant prior to six (6) months following the date
of its grant. All rights with respect to the Restricted Stock granted to a
Participant under the Plan shall be available during his or her lifetime and
such rights are not assignable or transferable.
7.4 CERTIFICATE LEGEND. Each certificate representing
Restricted Stock granted pursuant to the Plan may bear a legend substantially as
follows:
"The sale or other transfer of the shares of stock represented
by this certificate, whether voluntary, involuntary or by
operation of law, is subject to certain restrictions on
transfer as set forth in the ALLETE, Inc. Executive Long-Term
Incentive Compensation Plan, and in a Restricted Stock Grant
Agreement. A copy of such Plan and such Agreement may be
obtained from ALLETE, Inc."
The Company shall have the right to retain the certificates
representing Restricted Stock in the Company's possession until such time as all
restrictions applicable to such Shares have been satisfied.
7.5 REMOVAL OF RESTRICTIONS. Except as otherwise provided in
this Article 7, Restricted Stock shall become freely transferable by the
Participant after the last day of the Period of Restriction applicable thereto.
Once Restricted Stock is released from the restrictions, the Participant shall
be entitled to have the legend referred to in Section 7.4 removed from his or
her stock certificate.
7.6 VOTING RIGHTS. During the Period of Restriction,
Participants holding Restricted Stock may exercise full voting rights with
respect to those Shares.
7.7 DIVIDENDS AND OTHER DISTRIBUTIONS. During the Period of
Restriction, Participants holding Restricted Stock shall be credited with all
regular cash dividends paid with respect to all Shares while they are so held.
All cash dividends and other distributions paid with respect to Restricted Stock
shall be credited to Participants subject to the same restrictions on
transferability and forfeitability as the Restricted Stock with respect to which
they were paid. If any such dividends or distributions are paid in Shares, such
Shares shall be subject to the same restrictions on transferability and
forfeitability as the Restricted Stock with respect to which they were paid.
Subject to the restrictions on vesting and the forfeiture provisions, all
dividends credited to a Participant shall be paid to the Participant promptly
following the full vesting of the Restricted Stock with respect to which such
dividends were paid. The provisions of this Section 7.7 are subject to the right
of the Committee to determine otherwise at the time of grant.
7.8 TERMINATION OF EMPLOYMENT. Each Restricted Stock Grant
Agreement shall set forth the extent to which the Participant shall have the
right to receive unvested Restricted Shares following termination of the
Participant's employment with the Company and its Subsidiaries. Such provisions
shall be determined in the sole discretion of the Committee, shall be included
in the Restricted Stock Grant Agreement entered into with
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Participants, need not be uniform among all grants of Restricted Stock or among
Participants and may reflect distinctions based on the reasons for termination
of employment.
ARTICLE 8. PERFORMANCE UNITS AND PERFORMANCE SHARES
8.1 GRANT OF PERFORMANCE UNITS AND PERFORMANCE SHARES. To the
extent permitted by Section 2.2, and subject to the terms of the Plan,
Performance Units and/or Performance Shares may be granted to an Eligible
Employee at any time and from time to time, as shall be determined by the
Committee. The Committee shall have complete discretion in determining the
number of Performance Units and/or Performance Shares granted to each
Participant (subject to Article 3 herein) and, consistent with the provisions of
the Plan, in determining the terms and conditions pertaining to such Grants;
provided, however, the maximum award to any single Participant with respect to
Performance Units granted in any one calendar year shall be 200% of base salary
determined at the time the Performance Goals are established by the Committee,
but in no event more than $1,000,000, and with respect to Performance Shares
shall be twenty thousand (20,000) Shares.
8.2 PERFORMANCE UNIT/PERFORMANCE SHARE GRANT AGREEMENT. Each
grant of Performance Units and/or Performance Shares shall be evidenced by a
Performance Unit and/or Performance Share Grant Agreement that shall specify the
number of Performance Units and/or Performance Shares granted, the initial value
(if applicable), the Performance Period, the Performance Goals and such other
provisions as the Committee shall determine, including, but not limited to, any
right to Dividend Equivalents during or after the Performance Period.
8.3 VALUE OF PERFORMANCE UNITS/SHARES. Each Performance Unit
shall have an initial value that is established by the Committee at the time of
grant. The value of a Performance Share shall equal the value of one Share. The
Committee shall set Performance Goals in its discretion which, depending on the
extent to which they are met, will determine the number and/or value of
Performance Units/Shares that will be paid out to the Participants.
8.4 EARNING OF PERFORMANCE UNITS/SHARES. After the applicable
Performance Period has ended, the holder of Performance Units/Shares shall be
entitled to receive payout with respect to the Performance Units/Shares earned
by the Participant over the Performance Period, to be determined as a function
of the extent to which the corresponding Performance Goals have been achieved.
8.5 FORM AND TIMING OF PAYMENT OF PERFORMANCE UNITS/SHARES.
Payment of earned Performance Units/Shares shall be made following the close of
the applicable Performance Period. The Committee, in its sole discretion, may
pay earned Performance Units/Shares in cash or in Shares (or in a combination
thereof), which have an aggregate Fair Market Value equal to the value of the
earned Performance Units/Shares at the close of the applicable Performance
Period. Such Shares may be granted subject to any restrictions deemed
appropriate by the Committee.
8.6 DIVIDEND EQUIVALENTS. To the extent permitted by Section
2.2 herein, simultaneously with the grant of Performance Shares, the Participant
may be granted Dividend Equivalents with respect to such Performance Shares.
Dividend Equivalents shall constitute rights to amounts equal to the dividends
declared on an equal number of outstanding Shares on all payment dates occurring
during the period between the grant date and the date the Performance Shares are
earned or paid out. The Committee shall determine at the time Dividend
Equivalents are granted the conditions, if any, to which the payment of such
Dividend Equivalents is subject.
8.7 TERMINATION OF EMPLOYMENT. Each Grant Agreement shall set
forth the extent to which the Participant shall have the right to receive a
Performance Unit/Share payout following termination of the Participant's
employment with the Company and its Subsidiaries. Such provisions shall be
determined in the sole discretion of the Committee, shall be included in the
Grant Agreement entered into with the Participants, need not be uniform among
all grants of Performance Units/Shares or among Participants and may reflect
distinctions based upon reasons for termination of employment.
8.8 NONTRANSFERABILITY. Performance Units/Shares may not be
sold, transferred, pledged, assigned or otherwise alienated or hypothecated,
other than by will or by the laws of descent and distribution. Further, a
Participant's rights under the Plan shall be exercisable during his or her
lifetime only by such Participant or his or her legal representative.
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ARTICLE 9. OTHER GRANTS
To the extent permitted by Section 2.2 herein and subject to
Article 3 herein, the Committee shall have the right to make other Grants which
may include, without limitation, the grant of Shares based on certain
conditions, the payment of cash based on Performance Goals, or other criteria
established by the Committee, and the payment of Shares in lieu of cash under
other Company incentive or bonus programs. Payment under or settlement of any
such Grants shall be made in such manner and at such times as the Committee may
determine.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name
any beneficiary or beneficiaries (who may be named contingently or successively)
to whom any benefit under the Plan is to be paid in case of his or her death
before he or she receives any or all of such benefit. Each such designation
shall revoke all prior designations by the same Participant, shall be in a form
prescribed by the Committee, and will be effective only when filed by the
Participant in writing with the Committee during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
The spouse of a married Participant domiciled in a community
property jurisdiction shall join any designation of beneficiary or beneficiaries
other than the spouse.
ARTICLE 11. RIGHTS OF EMPLOYEES
11.1 EMPLOYMENT. Nothing in the Plan shall interfere with or
limit in any way the right of the Company to terminate any Participant's
employment at any time, for any reason or no reason in the Company's sole
discretion, nor confer upon any Participant any right to continue in the employ
of the Company.
11.2 PARTICIPATION. No Employee shall have the right to be
selected to receive a Grant under the Plan, or, having been so selected, to be
selected to receive a future Grant.
ARTICLE 12. CHANGE IN CONTROL
Upon the occurrence of a Change in Control, unless otherwise
specifically prohibited by the terms of Article 16 herein or unless the
Committee provides otherwise prior to the Change in Control:
(a) Any and all Options and SARs granted hereunder shall
become immediately exercisable;
(b) Any Period of Restriction and restrictions imposed on
Restricted Stock shall be deemed to have expired;
(c) With respect to all outstanding Grants of Performance
Units, Performance Shares and other performance-based
Grants, the Committee (i) shall determine the greater of
(x) the payout at 100% of the number of Performance Units
or Shares granted for the entire Performance Period and
(y) the payout based upon actual performance for the
Performance Period ending as of the effective date of the
Change in Control in either case after giving effect to
the accumulation of Dividend Equivalents and (ii) shall
pay to the Participants the greater of such amounts,
prorated based upon the number of complete and partial
calendar months within the Performance Period which have
elapsed as of the effective date of the Change in Control
in relation to the number of calendar months in the full
Performance Period. Payment shall be made in cash or in
stock, as determined by the Committee. However, there
shall not be an accelerated payout under this Section
12(c) with respect to Grants of Performance Units,
Performance Shares or other performance-based Grants which
were made less than six (6) months prior to the effective
date of the Change in Control; and
(d) All earned Performance Units, Performance Shares and other
performance-based Grants (as increased by any Dividend
Equivalents to the date of payment) not yet paid out shall
be paid out immediately, in cash or in stock, as
determined by the Committee.
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ARTICLE 13. AMENDMENT, MODIFICATION AND TERMINATION
13.1 AMENDMENT, MODIFICATION AND TERMINATION. The Board may,
at any time and from time to time, alter, amend, suspend or terminate the Plan
in whole or in part; provided, however, that no amendment which requires
shareholder approval in order for the Plan to comply with Section 422 of the
Code, Section 303A.08 of the New York Stock Exchange Listed Company Manual, or
any other applicable law, regulation or rule, shall be effective unless such
amendment shall be approved by the requisite vote of the shareholders of the
Company entitled to vote thereon.
13.2 GRANTS PREVIOUSLY MADE. No termination, amendment or
modification of the Plan shall adversely affect in any material way any Grant
previously made under the Plan, without the written consent of the Participant
holding such Grant unless such termination, modification or amendment is
required by applicable law.
ARTICLE 14. WITHHOLDING
14.1 TAX WITHHOLDING. The Company shall have the power and the
right to deduct or withhold, or require a Participant to remit to the Company,
an amount sufficient to satisfy federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to a
Grant made under the Plan; provided, however, with respect to any Grant that is
subject to Section 409A of the Code, the Company may, to the extent permitted by
Section 409A of the Code, permit the acceleration of the time or schedule of a
payment to pay the FICA Amount, and any related income tax at source imposed by
Section 3401 of the Code on the FICA Amount.
14.2 SHARE WITHHOLDING. With respect to withholding required
upon the exercise of Options or SARs, upon the lapse of restrictions on
Restricted Stock, or upon any other taxable event arising out of or as a result
of Grants made hereunder, Participants may elect, subject to the approval of the
Committee, to satisfy the withholding requirement, in whole or in part, by
having the Company withhold Shares having a Fair Market Value on the date the
tax is to be determined equal to the minimum statutory total tax which could be
imposed on the transaction; provided, however, with respect to any Grant that is
subject to Section 409A of the Code, the Company may, to the extent permitted by
Section 409A of the Code, permit the acceleration of the time or schedule of a
payment to pay the FICA Amount, and any related income tax at source imposed by
Section 3401 of the Code on the FICA Amount. All elections shall be irrevocable,
made in writing and signed by the Participant.
ARTICLE 15. SUCCESSORS
All obligations of the Company under the Plan, with respect to
Grants made hereunder, shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 16. LEGAL CONSTRUCTION
16.1 GENDER AND NUMBER. Except where otherwise indicated by
the context, any masculine term used herein also shall include the feminine, the
plural shall include the singular and the singular shall include the plural.
16.2 SEVERABILITY. In the event any provision of the Plan
shall be held illegal or invalid for any reason, the illegality or invalidity
shall not affect the remaining parts of the Plan, and the Plan shall be
construed and enforced as if the illegal or invalid provision had not been
included.
16.3 REQUIREMENTS OF LAW. The making of Grants and the
issuance of Shares under the Plan shall be subject to all applicable laws, rules
and regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
Notwithstanding any other provision set forth in the Plan, if
required by the then-current Section 16 of the Exchange Act, any "derivative
security" or "equity security" offered pursuant to the Plan to any Insider may
not be sold or transferred within the minimum time limits specified or required
in such rule, except to the extent Rule 16b-3 exempts any such sale or transfer
from the restrictions of Section 16. The terms "equity security" and "derivative
security" shall have the meanings ascribed to them in the then-current Rule
16a-l under the Exchange Act.
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16.4 SECURITIES LAW COMPLIANCE. With respect to Insiders,
transactions under the Plan are intended to comply with all applicable
conditions of the Federal securities laws. To the extent any provision of the
Plan or action by the Committee fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Committee.
16.5 GOVERNING LAW. To the extent not preempted by Federal
law, the Plan, and all agreements hereunder, shall be construed in accordance
with, and governed by, the laws of the State of Minnesota.
ARTICLE 17. DEFINITIONS
Whenever used in the Plan, the following terms shall have the
meanings set forth below and, when such meaning is intended, the initial letter
of the word is capitalized:
"Base Value" of an SAR shall have the meaning set forth in
Section 6.1 herein.
"Board" or "Board of Directors" means the Board of Directors
of the Company.
"Cause" means: (i) willful misconduct on the part of a
Participant that is detrimental to the Company or (ii) the conviction of a
Participant for the commission of a felony or crime involving moral turpitude.
"Cause" under either (i) or (ii) shall be determined in good faith by the
Committee.
"Change in Control" of the Company shall be deemed to have
occurred as of the first day that any one or more of the following conditions
shall have been satisfied:
(a) the dissolution or liquidation of the Company;
(b) a reorganization, merger or consolidation of the
Company with one or more unrelated corporations, as a
result of which the Company is not the surviving
corporation;
(c) the sale, exchange, transfer or other disposition of
shares of the common stock of the Company (or shares
of the stock of any person that is a shareholder of
the Company) in one or more transactions, related or
unrelated, to one or more Persons unrelated to the
Company if, as a result of such transactions, any
Person (or any Person and its affiliates) owns more
than twenty percent (20%) of the voting power of the
outstanding common stock of the Company; or
(d) the sale of all or substantially all the assets of
the Company.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time.
"Committee" means the committee, as specified in Article 2,
appointed by the Board to administer the Plan with respect to Grants.
"Company" means ALLETE, Inc., a Minnesota corporation,
formerly known as Minnesota Power & Light Company, or any successor thereto as
provided in Article 15 herein.
"Director" means any individual who is a member of the Board
of Directors of the Company.
"Dividend Equivalent" means, with respect to Shares subject to
Options or Performance Shares, a right to an amount equal to dividends declared
on an equal number of outstanding Shares.
"Effective Date" means January 1, 2006.
"Eligible Employee" means an Employee who is eligible to
participate in the Plan, as set forth in Section 4.1 herein.
"Employee" means any employee of the Company or any of its
Subsidiaries, who is not covered by any collective bargaining agreement to which
the Company or any of its Subsidiaries is a party. Directors who are not
otherwise employed by the Company shall not be considered Employees under the
Plan. For purposes of the Plan, transfer of employment of a Participant between
the Company and any one of its Subsidiaries (or between Subsidiaries) shall not
be deemed a termination of employment.
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"Exchange Act" means the Securities Exchange Act of 1934, as
amended from time to time, or any successor act thereto.
"Exercise Period" means the period during which an SAR or
Option is exercisable, as set forth in the related Grant Agreement.
"Fair Market Value" means the closing sale price as reported
in the composite reporting system or, if there is no such sale on the relevant
date, then on the last previous day on which a sale was reported.
"FICA Amount" means the FICA tax imposed on any Grant.
"Freestanding SAR" means an SAR that is granted independently
of any Options.
"Grant" means, individually or collectively, a grant under the
Plan of NQSOs, ISOs, SARs, Restricted Stock, Performance Units, Performance
Shares or any other type of grant permitted under Article 9 of the Plan.
"Grant Agreement" means an agreement entered into by each
Participant and the Company, setting forth the terms and provisions applicable
to a Grant made to a Participant under the Plan.
"Incentive Stock Option" or "ISO" means an option to purchase
Shares, granted under Article 5 herein, which is designated as an Incentive
Stock Option and satisfies the requirements of Section 422 of the Code.
"Insider" means an Employee who is, on the relevant date, an
officer, director or ten percent (10%) beneficial owner of the common stock of
the Company, as contemplated by Section 16 of the Exchange Act.
"Nonqualified Stock Option" or "NQSO" means an option to
purchase Shares, granted under Article 5 herein, which is not intended to be an
Incentive Stock Option.
"Option" means an Incentive Stock Option or a Nonqualified
Stock Option.
"Option Price" means the price at which a Share may be
purchased by a Participant pursuant to an Option, as determined by the Committee
and set forth in the Option Grant Agreement.
"Participant" means an Employee who has outstanding a Grant
made under the Plan.
"Performance Goals" means, the general performance objectives,
the attainment of which shall serve as a basis for the determination of the
number or value of Restricted Stock, Performance Units, or Performance Shares
granted under the Plan. Unless and until the Committee proposes for shareholder
vote a change in the Performance Goals to be used for purposes of grants to
Participants, the Performance Goals shall be based upon any one or more of the
following:
(a) Total shareholder return (measured as the sum of Share
price appreciation and dividends declared).
(b) Return on invested capital, assets or net assets.
(c) Share earnings/earnings growth.
(d) Cash flow/cash flow growth.
(e) Cost of services to consumers.
(f) Growth in revenue, sales, operating income, net income,
stock price and/or earnings per share.
(g) Return on shareholders' equity.
(h) Economic value created.
(i) Customer satisfaction and/or customer service quality.
(j) Operating effectiveness.
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If applicable tax and securities laws change to permit
Committee discretion to alter the governing Performance Goals without obtaining
shareholder approval of such changes and without losing any income tax benefits
to the Company, the Committee shall have sole discretion to make such changes
without obtaining shareholder approval.
"Performance Period" means the period of time during which the
Performance Goals will be measured to determine what, if any, Performance
Units/Performance Shares have been earned. A Performance Period shall, in all
cases, be at least six (6) months in length.
"Performance Share" means a Grant made to an Employee, as
described in Article 8 herein.
"Performance Unit" means the right of a Participant to
receive, upon satisfaction of the Performance Goal, an amount of cash or Shares
equal to the difference between the value of the Performance Unit as the date of
grant, which may be zero, and the value of the Performance Unit on the date the
Performance Goals are met. The value of a Performance Unit at the date of grant
is determined by the Committee and may be, but is not required to be, based on
the underlying stock price. In accordance with the Plan, Performance Units may
be paid in cash, shares, or a combination thereof, as determined by the
Committee.
"Period of Restriction" means the period during which the
transfer of Restricted Stock is limited, as provided in Article 7 herein.
"Person" shall have the meaning ascribed to such term in
Section 3(a)(9) of the Exchange Act, as used in Sections 13(d) and 14(d) thereof
including usage in the definition of a "group" in Section 13(d) thereof.
"Restricted Stock" means a Grant of Shares made to a
Participant pursuant to Article 7 herein.
"Retirement" shall, with respect to a Participant, have the
meaning ascribed to such term in the tax qualified retirement plan maintained by
the Company or Subsidiary for the benefit of such Participant. In the event
Participant is eligible for benefits under more than one such tax qualified
retirement plan, the earliest date provided under any of said plans shall be the
meaning ascribed under this Plan.
"Shares" means the shares of common stock of the Company,
without par value.
"Stock Appreciation Right" or "SAR" means a right, granted
alone or in connection with a related Option, designated as an SAR, to receive a
payment on the day the right is exercised, pursuant to the terms of Article 6
herein. Each SAR shall be denominated in terms of one Share.
"Subsidiary" means any corporation that is a "subsidiary
corporation" of the Company as that term is defined in Section 424(f) of the
Code.
"Tandem SAR" means an SAR that is granted in connection with a
related Option, the exercise of which shall require forfeiture of the right to
purchase a Share under the related Option (and when a Share is purchased under
the Option, the Tandem SAR shall be similarly canceled).
A-11
"Printed with soy based inks on recycled paper containing at
least 10 percent fibers from paper recycled by consumers."
[RECYCLE LOGO] [LOGO PRINTED WITH SOY INK]
[ALLETE LOGO]
ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, MAY 10, 2005
10:30 A.M.
DULUTH ENTERTAINMENT
CONVENTION CENTER
350 HARBOR DRIVE
DULUTH, MN
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[ALLETE LOGO] ALLETE, INC.
30 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802-2093 PROXY
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THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL MEETING
ON MAY 10, 2005.
Bruce W. Stender and Deborah A. Amberg, or either of them, with power of
substitution, are hereby appointed Proxies of the undersigned to vote all shares
of ALLETE, Inc. stock owned by the undersigned at the Annual Meeting of
Shareholders to be held in the auditorium of the Duluth Entertainment Convention
Center, 350 Harbor Drive, Duluth, Minnesota, at 10:30 a.m. on Tuesday, May 10,
2005, or any adjournments thereof, with respect to the election of Directors,
ratification of the appointment of an independent registered public accounting
firm, approval of the continuation of the executive long-term incentive
compensation plan and any other matters as may properly come before the meeting.
THIS PROXY CONFERS AUTHORITY TO VOTE EACH PROPOSAL LISTED ON THE OTHER SIDE
UNLESS OTHERWISE INDICATED. If any other business is transacted at said meeting,
this Proxy shall be voted in accordance with the best judgment of the Proxies.
The Board of Directors recommends a vote "FOR" each of the listed proposals.
This Proxy is solicited on behalf of the Board of Directors of ALLETE, Inc., and
may be revoked prior to its exercise. PLEASE MARK, SIGN, DATE AND RETURN THIS
PROXY CARD USING THE ENCLOSED ENVELOPE. ALTERNATIVELY, AUTHORIZE THE ABOVE-NAMED
PROXIES TO VOTE THE SHARES REPRESENTED ON THIS PROXY CARD BY PHONE OR ONLINE AS
DESCRIBED ON THE OTHER SIDE. Shares cannot be voted unless these instructions
are followed, or other specific arrangements are made to have the shares
represented at the meeting. By responding promptly, you may help save the costs
of additional Proxy solicitations.
SEE REVERSE FOR VOTING INSTRUCTIONS.
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COMPANY #
----------
THERE ARE THREE WAYS TO VOTE YOUR PROXY:
YOUR TELEPHONE OR ONLINE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES
IN THE SAME MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD.
VOTE BY PHONE - TOLL FREE - 1-800-560-1965 - QUICK --- EASY --- IMMEDIATE
- Use any touch-tone telephone to vote your Proxy 24 hours a day, 7 days a week,
until 12:00 p.m. (CT) on May 9, 2005.
- Please have your Proxy Card and the last four digits of your Social Security
Number or Tax Identification Number available. Follow the simple instructions
the voice provides you.
VOTE ONLINE - www.eproxy.com/ale/ - QUICK --- EASY --- IMMEDIATE
- Use the Internet to vote your Proxy 24 hours a day, 7 days a week, until 12:00
p.m. (CT) on May 9, 2005.
- Please have your Proxy Card and the last four digits of your Social Security
Number or Tax Identification Number available. Follow the simple instructions
to obtain your records and create an electronic ballot.
VOTE BY MAIL
Mark, sign and date your Proxy Card and return it in the postage-paid envelope
we've provided or return it to ALLETE, Inc., c/o Shareowner Services
(servicemark), P.O. Box 64873, St. Paul, MN 55164-0873.
IF YOU VOTE BY PHONE OR ONLINE, PLEASE DO NOT MAIL YOUR PROXY CARD.
- DETACH BELOW AND RETURN USING THE ENVELOPE PROVIDED -
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 and 3.
1. Election of 01 Eddins 02 Johnson 03 Ludlow 04 Mayer
Directors: 05 Peirce 06 Rajala 07 Shippar 08 Smith
09 Stender
/ / Vote FOR all nominees / / Vote WITHHELD from all nominees
(except as marked)
(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY ----------------------
INDICATED NOMINEE, WRITE THE NUMBER(S) OF THE NOMINEE(S)
IN THE BOX PROVIDED TO THE RIGHT.) ----------------------
2. Ratification of the appointment of PricewaterhouseCoopers LLP as ALLETE's
independent registered public accounting firm.
/ / For / / Against / / Abstain
3. Approval of the continuation of the ALLETE Executive Long-Term Incentive
Compensation Plan.
/ / For / / Against / / Abstain
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED AS DIRECTED OR, IF NO DIRECTION
IS GIVEN, WILL BE VOTED FOR ITEMS 1, 2 and 3.
---
Address Change? Mark Box / / Indicate changes below:
Date
------------------------------
-----------------------------------
-----------------------------------
Signature(s) in Box
Please sign exactly as your name(s)
appears on Proxy. If held in joint
tenancy, all persons should sign.
Trustees, administrators, etc.,
should include title and authority.
Corporations should provide full
name of corporation and title of
authorized officer signing the
Proxy.
[ALLETE LOGO]
YOU'RE INVITED -
ANNUAL MEETING OF SHAREHOLDERS
10:30 A.M. TUESDAY, MAY 10, 2005
DULUTH ENTERTAINMENT CONVENTION CENTER
DULUTH, MINNESOTA
Dear Shareholder:
It's my pleasure to invite you to ALLETE's Annual Meeting of Shareholders at
10:30 A.M. on Tuesday, May 10, in the Duluth Entertainment Convention Center.
Our agenda will include business highlights from 2004 and our outlook for 2005.
Lunch will be served in the DECC's Lake Superior Ballroom after the meeting.
Please make plans to join us May 10. It will be a great opportunity to learn the
latest information about ALLETE and enjoy the camaraderie of your fellow
shareholders.
We look forward to seeing you.
Sincerely,
/s/ Bruce Stender
Bruce Stender
Chairman of the Board
PARKING - Free. Tell gate attendant you're a shareholder. Shuttle service begins
at 9 A.M.
REGISTRATION - Begins at 9 A.M. inside DECC entrance. You'll receive a ticket
for lunch and a ticket for a chance to win shares of ALLETE stock.
SCHEDULE - DECC Auditorium doors will open at 9:30 A.M. and the meeting will
begin promptly at 10:30 A.M.
LUNCH - A box lunch will be served following the meeting in the Lake Superior
Ballroom of the DECC.
QUESTIONS - Call Shareholder Services at 218-723-3974 or, toll-free,
1-800-535-3056.
CANCELLATIONS - If your plans change after you've sent in the reservation and
you can't attend, please notify Shareholder Services.
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PLEASE COMPLETE AND MAIL THIS POSTAGE-PAID RESERVATION CARD AS SOON AS POSSIBLE.
-------------------- ------------------------
Each shareholder / / Yes, I will attend the Do not enclose this
may bring one guest. Annual Meeting and lunch. card with your proxy.
-------------------- ------------------------
Please PRINT
Shareholder's Name
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Address City State ZIP
------------------------- --------------- ------ ----------
Guest's Name
-------------------------------------------------------------------
Shareholder's Name
------------------------------------------------------------
Address City State ZIP
------------------------- --------------- ------ ----------
Guest's Name
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[GRAPHIC OMITTED - Fim Markings]
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NO POSTAGE
NECESSARY
IF MAILED
IN THE
UNITED STATES
-----------------
[GRAPHIC OMITTED - Solid bars
below indicia]
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BUSINESS REPLY MAIL
FIRST CLASS Permit No. 74 Duluth, MN
----------------------------------------
POSTAGE WILL BE PAID BY ADDRESSEE
BERNADETTE NELSON
ALLETE
30 WEST SUPERIOR ST
DULUTH, MN 55802-9986
[GRAPHIC OMITTED - Bar Code]
April __, 2005
Dear Shareholder:
ALLETE has not yet received your vote on issues to come before the 2005
Annual Meeting of Shareholders on May 10, 2005. Proxy materials were sent to you
on or about March 22, 2005. Please take a few moments to review the Proxy
materials and vote your shares using one of the three options available to you:
1. BY MAIL - Complete the enclosed duplicate Proxy Card and return it in
the self-addressed stamped envelope provided;
2. BY TELEPHONE - Call the toll-free number listed on the Proxy Card
and follow the instructions; or
3. ONLINE - Log onto the web site listed on the Proxy Card and follow
the instructions.
On behalf of the Board of Directors, we again extend to you a cordial
invitation to attend ALLETE's Annual Meeting of Shareholders to be held in the
auditorium of the Duluth Entertainment Convention Center, 350 Harbor Drive,
Duluth, Minnesota on Tuesday, May 10, 2005 at 10:30 a.m.
Your prompt response is appreciated.
Sincerely,
Deborah A. Amberg
Vice President, General Counsel
and Secretary
Enclosures