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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ALLETE, INC.
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(Name of Registrant as Specified in its Charter)
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[PHOTO OF WIND TURBINS][PHOTO OF TREES]
2007
Notice and Proxy Statement
Annual Meeting of Shareholders
Tuesday, May 8, 2007
Duluth, Minnesota
[ALLETE LOGO]
[ALLETE LOGO]
March 21, 2007
Dear Fellow Shareholder:
You are cordially invited to the 2007 Annual Meeting of Shareholders of
ALLETE, Inc. to be held on Tuesday, May 8, 2007 at 10:30 a.m. CST in the Duluth
Entertainment Convention Center (DECC) auditorium. The DECC is located on the
waterfront of Lake Superior at 350 Harbor Drive in Duluth, Minnesota. On behalf
of the ALLETE Board of Directors, I encourage you to attend.
At this year's meeting, you will be asked to elect ten directors and to
ratify the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm.
Standing for election to the Board of Directors for the first time this
year is Sidney W. Emery, Jr. As the current board chairman, chief executive
officer, and president of a publicly traded company, "Chip" Emery has
significant executive and management experience. I think you will agree that he
will be an asset to the ALLETE Board.
Two directors will not stand for election this year due to retirement
from the Board. Peter Johnson and Nick Smith have both contributed a wealth of
experience to the Board. We have particularly benefited from their deep ties to
northeastern Minnesota. I want to take this opportunity to thank them for their
many years of service and commitment to ALLETE.
After the Annual Meeting, you are invited to visit with our directors,
officers, and employees over lunch in the Lake Superior Ballroom located in the
DECC.
Your vote is important. Whether or not you plan to attend the Annual
Meeting, 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,
Donald J. Shippar
Donald J. Shippar
Chairman, President, and Chief Executive
Officer
[GRAPHIC OMITTED]
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ANNUAL MEETING OF SHAREHOLDERS
TUESDAY, MAY 8, 2007 AT 10:30 A.M. (DOORS OPEN AT 9:00 A.M.)
DULUTH ENTERTAINMENT CONVENTION CENTER - DULUTH, MINNESOTA
- FREE PARKING - LUNCH PROVIDED
QUESTIONS? CALL ALLETE SHAREHOLDER SERVICES 218-723-3974 OR 800-535-3056
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS--MAY 8, 2007
ALLETE, INC.
30 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802
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 8, 2007 at 10:30 a.m. CST for the following
purposes:
1. To elect a Board of ten directors to serve for the ensuing year;
2. To ratify the appointment of PricewaterhouseCoopers LLP as ALLETE's
independent registered public accounting firm for 2007; and
3. 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 9, 2007 are entitled to notice of and to vote at the Annual Meeting.
All shareholders are invited and encouraged to attend the Annual
Meeting in person. The holders of a majority of the shares entitled to vote at
the meeting must be present in person or by proxy to constitute a quorum.
Your early response will facilitate an efficient tally of your votes.
Please follow the instructions on your Proxy Card to vote your shares online or
by a toll-free telephone call. To vote by mail, please sign, date, and return
the enclosed Proxy Card in the envelope provided.
By order of the Board of Directors,
Deborah A. Amberg
Deborah A. Amberg
Senior Vice President, General Counsel, and Secretary
March 21, 2007
Duluth, Minnesota
PROXY STATEMENT
TABLE OF CONTENTS
GENERAL INFORMATION ......................................................... 1
Proxy Solicitation ........................................................ 1
Purpose of the Meeting..................................................... 1
Shareholders Entitled to Vote ............................................. 1
Shareholders of Record; Beneficial Owners.................................. 1
Quorum; Required Votes..................................................... 2
How to Vote................................................................ 2
Revocation of Proxies ..................................................... 2
Delivery of Proxy Materials to Households ................................. 2
How to Enroll for Electronic Delivery of Proxy Materials .................. 3
OWNERSHIP OF ALLETE COMMON STOCK ............................................ 4
Securities Owned by Certain Beneficial Owners ............................. 4
Securities Owned by Directors and Management .............................. 4
Section 16(a) Beneficial Ownership Reporting Compliance ................... 4
ITEM NO. 1--ELECTION OF DIRECTORS ........................................... 5
Nominees for Director ..................................................... 5
CORPORATE GOVERNANCE ........................................................ 7
Corporate Governance Guidelines ........................................... 7
Director Independence ..................................................... 7
Related Person Transactions ............................................... 8
Director Nominations ...................................................... 9
Committee Membership, Meetings, and Functions ............................. 10
Communications Between Shareholders and the Board of Directors ............ 10
Common Stock Ownership Guidelines.......................................... 10
Code of Ethics............................................................. 11
DIRECTOR COMPENSATION--2006 ................................................. 11
COMPENSATION DISCUSSION AND ANALYSIS ........................................ 13
Compensation Philosophy and Objectives .................................... 13
Process for Determining Executive Compensation ............................ 14
Elements of Executive Compensation ........................................ 18
Benefits .................................................................. 20
Perquisites ............................................................... 21
Employment, Severance, and Change-in-Control Agreements ................... 22
EXECUTIVE COMPENSATION COMMITTEE REPORT ..................................... 22
SUMMARY COMPENSATION TABLE--2006 ............................................ 23
GRANTS OF PLAN-BASED AWARDS--2006 ........................................... 25
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END--2006 .......................... 30
OPTION EXERCISES AND STOCK VESTED--2006 ..................................... 31
PENSION BENEFITS--2006 ...................................................... 31
NONQUALIFIED DEFERRED COMPENSATION--2006 .................................... 33
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL .................... 34
EQUITY COMPENSATION PLAN INFORMATION ........................................ 35
AUDIT COMMITTEE REPORT ...................................................... 36
Audit Committee Pre-Approval Policies and Procedures ...................... 36
Audit and Non-Audit Fees .................................................. 37
ITEM NO. 2--RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM .................................................... 38
OTHER BUSINESS .............................................................. 38
Shareholder Proposals for the 2008 Annual Meeting.......................... 38
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PROXY STATEMENT
ALLETE, INC.
30 WEST SUPERIOR STREET
DULUTH, MINNESOTA 55802
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GENERAL INFORMATION
PROXY SOLICITATION
These proxy materials are being delivered to shareholders of ALLETE,
Inc. (ALLETE or Company) in connection with the solicitation of proxies by the
Board of Directors to be voted at the Company's 2007 Annual Meeting of
Shareholders to be held at 10:30 a.m. CST on Tuesday, May 8, 2007 at the Duluth
Entertainment Convention Center, Duluth, Minnesota.
The Company expects to solicit proxies primarily by mail. Directors or
Company officers, other employees or retirees also may solicit proxies in person
or by telephone at a nominal cost. Brokers, and other custodians, nominees, and
fiduciaries will be asked to solicit proxies or authorizations from beneficial
owners and will be reimbursed for their reasonable expenses. The Company has
retained Georgeson Shareholder Communications, Inc. to assist in the
solicitation of proxies. The total fees the Company expects to pay in connection
with the solicitation of proxies are approximately $11,000 plus expenses. The
cost of soliciting proxies will be paid by the Company.
This Notice of Annual Meeting, Proxy Statement, form of proxy, and
voting instructions were first mailed to shareholders on or about March 21,
2007.
PURPOSE OF THE MEETING
The purpose of the Annual Meeting is to elect a Board of ten directors
to serve for the ensuing year, to ratify the appointment of
PricewaterhouseCoopers LLP (PricewaterhouseCoopers) as the Company's independent
registered public accounting firm for 2007, and to transact such other business
as may properly come before the meeting.
The Board is not aware of any matter to be presented at the Annual
Meeting of Shareholders other than those set forth in the accompanying notice.
If any other matters properly come before the meeting, all shares represented by
valid proxies will be voted in accordance with the judgment of the appointed
proxies.
SHAREHOLDERS ENTITLED TO VOTE
Each share of common stock of the Company, without par value (Common
Stock), of record on the books of the Company at the close of business on March
9, 2007 is entitled to notice of and to vote at the Annual Meeting of
Shareholders. As of March 9, 2007 there were 30,472,359 outstanding shares of
Common Stock, each entitled to one vote.
SHAREHOLDERS OF RECORD; BENEFICIAL OWNERS
If shares of Common Stock are registered directly in a person's name
with the Company's transfer agent, Wells Fargo Bank, N.A., that person is
considered the "shareholder of record" with respect to those shares and these
proxy materials have been sent directly to such person by the Company.
If a person holds shares of Common Stock in a brokerage account or
through a bank or other holder of record, that person is considered the
"beneficial owner" of shares held in street name. These proxy materials have
been forwarded to the beneficial owners by the broker, bank, or other holder of
record who is considered the shareholder of record with respect to those shares.
A beneficial owner has the right to direct the broker, bank, or other holder of
record on how to vote the beneficially owned shares.
1
QUORUM; REQUIRED VOTES
The holders of a majority of the shares of Common Stock entitled to
vote at the meeting must be present in person or represented by proxy to
constitute a quorum.
The affirmative vote of a majority of the shares of Common Stock
entitled to vote at the Annual Meeting is required for the election of each
director. The affirmative vote of a majority of the shares of Common Stock
present at the Annual Meeting and entitled to vote is required for ratification
of the appointment of PricewaterhouseCoopers as the Company's independent
registered public accounting firm for 2007.
Abstentions are included in the number of shares present and voting,
and have the same effect as votes against a particular proposal.
Broker non-votes are not counted for or against any proposal, but are
treated as present for purposes of determining a quorum. A "broker non-vote"
occurs when a broker submits a proxy card for shares to the Company but does not
indicate a vote on a particular matter because the broker has not received
timely voting instructions from the beneficial owner of the shares and the
broker does not have the authority to vote on the matter without such
instructions. Under the rules of the New York Stock Exchange (NYSE), a broker
may vote shares on Items Nos. 1 and 2, and on other routine matters in the
absence of timely voting instructions from the beneficial owner.
An automated system administered by ADP Investor Communications
Services (ADP) will tabulate the votes.
HOW TO VOTE
Shareholders of record may vote their shares by proxy using any of the
following methods:
- BY TELEPHONE: Vote by calling 1-800-690-6903, the toll-free telephone
number printed on your Proxy Card. Your Proxy Card should be in hand
when making the call. Easy-to-follow voice prompts will allow you to
authenticate your identity, vote your shares, and confirm that your
instructions have been properly recorded.
- ON THE INTERNET: The website for Internet voting is
WWW.PROXYVOTE.COM. Your Proxy Card should be in hand when voting
online. As with telephone voting, simple instructions allow you, the
shareholder of record, to authenticate your identity, vote your
shares, and confirm that your instructions have been properly
recorded.
- BY MAIL: Complete, sign, and date the Proxy Card and return it in the
prepaid envelope provided to ALLETE, Inc., c/o ADP Investor
Communications Services, 51 Mercedes Way, Edgewood, NY 11717-8368.
Unless contrary instructions are provided, all shares of Common Stock
represented by valid proxies will be voted "FOR" the election of all nominees
for director named herein and "FOR" ratification of the appointment of
PricewaterhouseCoopers as the Company's independent registered public accounting
firm for 2007.
REVOCATION OF PROXIES
A proxy may be revoked at any time before it is voted by giving written
notice of revocation to ALLETE, Inc., c/o ADP Investor Communications Services,
Registered Issuer Client Services, 51 Mercedes Way, Edgewood, NY 11717-8368, or
by delivering a proxy bearing a later date using any of the voting methods
described above.
DELIVERY OF PROXY MATERIALS TO HOUSEHOLDS
Only one copy of the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 (Annual Report), filed with the United
States Securities and Exchange Commission (SEC), and one Proxy Statement for the
2007 Annual Meeting will be delivered to an address where two or more
shareholders reside unless the Company has received contrary instructions from a
shareholder at the address. A separate Proxy Card will be delivered to each
shareholder at the shared address.
2
If you are a shareholder who lives at a shared address and would like
additional copies of the Annual Report, this Proxy Statement, or any future
annual reports or proxy statements, contact ALLETE Shareholder Services, 30 West
Superior Street, Duluth, MN 55802-2093, telephone number 800-535-3056 or
218-723-3974, and copies will be mailed to you promptly.
If you share the same address with another Company 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 800-535-3056 or
218-723-3974, or by writing to the Company's transfer agent, Wells Fargo Bank,
N.A., Shareowner Services, Attn: Householding, P.O. Box 64854, St. Paul, MN
55164-0854.
If you did not receive the Annual Report, which includes the Company's
audited Consolidated Financial Statements, please notify ALLETE Shareholder
Services, 30 West Superior Street, Duluth, MN 55802-2093, telephone number
800-535-3056 or 218-723-3974, and a copy will be sent to you promptly.
Many brokerage firms and other shareholders of record have procedures
for the delivery of single copies of company documents to households with
multiple beneficial shareholders. If your family has one or more "street name"
accounts under which you beneficially own shares of Common Stock, please contact
your broker, financial institution, or other shareholder of record directly if
you require additional copies of this Proxy Statement or ALLETE's 2006 Annual
Report, or if you have other questions or directions concerning your "street
name" account.
HOW TO ENROLL FOR ELECTRONIC DELIVERY OF PROXY MATERIALS
The Company is pleased to offer its shareholders the convenience and
benefits of viewing proxy statements, annual reports, and other shareholder
materials online. With your consent, we can stop sending you paper copies of
these documents beginning next year. Instead, we will send you email
notification that the shareholder materials have been filed with the SEC and are
available for you to view. The notification will include a link to the website
on which you can view the materials. We will also provide you with a link to
allow you to vote your Common Stock shares online.
To enroll for electronic receipt of shareholder materials, follow these
easy directions:
1. Log onto the Internet at WWW.ALLETE.COM.
2. Click on "Investors."
3. Click on the "Electronic Delivery" link under the "Shareholder
Services" menu.
4. Follow the prompts to submit your electronic consent.
The website for viewing shareholder materials will be available on a
24-hour-a-day, 7-day-a-week basis. You will receive an e-mail confirmation of
your enrollment. Your enrollment will remain in effect for as long as you remain
a shareholder and the e-mail account you provide the Company remains active.
However, you may choose to cancel your enrollment at any time.
3
OWNERSHIP OF ALLETE COMMON STOCK
SECURITIES OWNED BY CERTAIN BENEFICIAL OWNERS
Company records and other information available from outside sources,
including information filed with the SEC, indicate that, as of March 9, 2007,
the following shareholders were beneficial owners of more than 5 percent of any
class of the Company's voting securities. As of March 9, 2007, Ameriprise Trust
Company (Ameriprise), 145 Ameriprise Financial Center, Minneapolis, MN 55474
held 4,778,728 shares, or 16 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 Ameriprise from participants in the RSOP. Based on
information filed on January 9, 2007 with the SEC on Schedule 13G, Barclays
Global Investors, NA, 45 Fremont Street, San Francisco, CA 94105, together with
other of its affiliated companies, held 2,274,977 shares, or 7.5 percent, of the
Common Stock as of December 31, 2006.
SECURITIES OWNED BY DIRECTORS AND MANAGEMENT
The following table presents the shares of Common Stock beneficially
owned as of March 9, 2007 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 the Company as
a group. 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 9, 2007 Beneficial Owner Owned after March 9, 2007
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Kathleen A. Brekken 2,360 0 Donald J. Shippar 21,805 40,952
Heidi J. Eddins 4,216 0 Nick Smith 4,873 0
Sidney W. Emery, Jr. 500 0 Bruce W. Stender 12,216 0
James J. Hoolihan 1,667 0 Mark A. Schober 14,737 14,721
Peter J. Johnson 27,181 0 Laura A. Holquist 11,570 6,718
Madeleine W. Ludlow 5,778 0 Claudia Scott Welty 12,062 18,859
George L. Mayer 17,284 3,879 Deborah A. Amberg 5,536 14,038
Roger D. Peirce 3,292 0 James K. Vizanko 2,210 30,061
Jack I. Rajala 10,362 3,879
All Directors and
executive officers
as a group (20): 169,934 146,107
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Includes: (i) shares as to which voting and investment power is shared with the person's spouse: Mr. Johnson--15,484, Mr.
Schober--4,290, and Ms. Welty--6,030; (ii) shares owned by the person's spouse: Ms. Holquist--103, Mr. Smith--16, and Mr.
Vizanko--1,885; (iii) shares held by the person's minor children: all Directors and executive officers as a group--182; and
(iv) shares held by the person's spouse as custodian for the person's minor grandchildren: Mr. Johnson--1,348. Each Director
and executive officer owns only a fraction of 1 percent of the Common Stock, and all Directors and executive officers as a
group also own less than 1 percent of the Common Stock.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Directors, executive officers, and persons who beneficially own more
than 10 percent of a registered class of the Company's equity securities, to
file reports of initial ownership of Common Stock and other equity securities,
and subsequent changes in that ownership with the SEC and the NYSE. Based on a
review of such reports and the written representations of our Directors and
executive officers, the Company believes that all such filing requirements were
met during 2006.
4
ITEM NO. 1--ELECTION OF DIRECTORS
All shares represented by the proxy will be voted, unless authority is
withheld, "FOR" the election of the ten nominees for Director named below and on
the following page. Directors are elected to serve until the next annual
election of Directors and until a successor is elected and qualified, or until a
Director's earlier resignation or removal. If any nominee should become
unavailable, which is not anticipated, the Board may provide by resolution for a
lesser number of Directors, or designate substitute nominees, who would receive
the votes represented by proxies.
NOMINEES FOR DIRECTOR
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[PHOTO OMITTED] KATHLEEN A. BREKKEN, 57, of Cannon Falls, Minnesota, has
been a Director since July 2006 and is a member of the
Executive Compensation Committee and the Corporate Governance
and Nominating Committee. Ms. Brekken is the retired President
and Chief Executive Officer of Midwest of Cannon Falls, Inc., a
company that designs, wholesales, and distributes home
accessories and giftware. She previously served on the ALLETE
Board of Directors from 1997 to 2003. Ms. Brekken is a member
of the St. Olaf College Board of Regents and a board member of
the Cannon Falls Medical Center--Mayo Health System.
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[PHOTO OMITTED] HEIDI J. EDDINS, 50, of St. Augustine, Florida, has been a
Director since 2004 and is the Chair of the Corporate
Governance and Nominating Committee. Ms. Eddins is the
Executive Vice President, Secretary and General Counsel of
Florida East Coast Industries, Inc., a transportation and real
estate company. Ms. Eddins joined Florida East Coast
Industries, Inc. in 1999 and is responsible for all legal and
governmental affairs of the corporation in addition to managing
a variety of real estate transactions. Ms. Eddins also serves
on the Board of Governors of the Florida Chamber of Commerce
and as a director of the Flagler Hospital Foundation.
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[PHOTO OMITTED] SIDNEY W. EMERY, JR., 60, of Minneapolis, Minnesota, is a
first-time nominee for Director. Since 1998, Mr. Emery has been
Chairman of the Board and Chief Executive Officer of MTS
Systems Corporation (NASDAQ: MTSC), a global supplier of
mechanical testing systems and industrial position sensors. He
also serves as a director of Urologix, Inc., a
Minneapolis-based manufacturer of minimally invasive medical
products, and chairs the Board of Governors of the University
of St. Thomas School of Engineering in St. Paul, Minnesota. Mr.
Emery became known to the Company through the efforts of a
search firm.
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[PHOTO OMITTED] JAMES J. HOOLIHAN, 54, of Grand Rapids, Minnesota, has been
a Director since 2006 and is a member of the Audit Committee.
Mr. Hoolihan is the President and Chief Executive Officer of
the Blandin Foundation, a private, philanthropic foundation
whose mission is to strengthen communities in rural Minnesota.
From 1981 to 2004, Mr. Hoolihan was the President of Industrial
Lubricant Company, which provides industrial supplies and
services to logging, railroad, taconite, and coal mining
industries. He serves as the Chairman of the Board of Directors
of Industrial Lubricant Company and as a trustee of the College
of St. Scholastica in Duluth, Minnesota. Mr. Hoolihan served as
the elected Mayor of the City of Grand Rapids from 1990 to
1995.
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[PHOTO OMITTED] MADELEINE W. LUDLOW, 52, of Cincinnati, Ohio, has been a
Director since 2004 and is the Chair of the Executive
Compensation Committee. Since January 2005, Ms. Ludlow has been
a Principal of LudlowWard Capital Advisors, a Cincinnati-based
investment banking firm serving small and middle market
companies. She was the Chairman, Chief Executive Officer, and
President of Cadence Network, Inc., a web-based provider of
utility expense management services from 2000 to 2004. Ms.
Ludlow was formerly the Vice President and Chief Financial
Officer of Cinergy Corp. She also serves as a trustee of the
Darden Graduate School of Business Administration at the
University of Virginia.
5
NOMINEES FOR DIRECTOR
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[PHOTO OMITTED] GEORGE L. MAYER, 62, of Essex, Connecticut, has been a Director
since 1996. Mr. Mayer is a member of the Audit Committee. Mr.
Mayer is the founder and President of Manhattan Realty Group, a
real estate investment and management company. Mr. Mayer is
also a director of Schwaab, Inc., one of the nation's largest
manufacturers of rubber stamps and associated products.
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[PHOTO OMITTED] ROGER D. PEIRCE, 69, of Tucson, Arizona, has been a Director
since 2004 and is the Chair of the Audit Committee. Mr. Peirce
has been a corporate consultant since 1994. Mr. Peirce serves
as: director, compensation committee chairman, and audit
committee member of Journal Communication, Inc., a diversified
media and communications company; chairman of the board of
directors of Demco, Inc., which offers a wide variety of
products to libraries and schools; director, compensation
committee member and audit committee member of Brady
Corporation, a seller of high performance labels and signs;
compensation committee chairman for Schwaab, Inc.; and director
and compensation committee member of The Wisconsin Cheeseman,
Inc., a mail order gift food company.
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[PHOTO OMITTED] JACK I. RAJALA, 67, of Grand Rapids, Minnesota, has been a
Director since 1985. Mr. Rajala is a member of the Executive
Compensation Committee. He is the Chairman and Chief Executive
Officer of Rajala Companies, and Director and President of
Rajala Mill Company, both of which manufacture and trade
lumber. Mr. Rajala also serves as chairman and chief executive
officer of Boundary Company, a forestland investment company.
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[PHOTO OMITTED] DONALD J. SHIPPAR, 58, of Superior, Wisconsin, has been a
Director since 2004 and has been Chairman of ALLETE since
January 2006. Mr. Shippar was named President and Chief
Executive Officer of ALLETE in 2004. Since joining the Company
in 1976, Mr. Shippar has served as 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.
Mr. Shippar also serves as a trustee of the College of St.
Scholastica in Duluth, Minnesota.
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[PHOTO OMITTED] BRUCE W. STENDER, 65, of Duluth, Minnesota, has been a Director
since 1995. Mr. Stender, as Lead Director, is an ex-officio
member of all the Board committees. Mr. Stender served as
Chairman of ALLETE from September 2004 to January 2006. He is
Vice Chair of Duluth-based Labovitz Enterprises, Inc., which
owns and manages hotels and commercial real estate. Mr. Stender
serves as a trustee of the Blandin Foundation and as member of
the Chancellor's Advisory Committee for the University of
Minnesota-Duluth.
6
CORPORATE GOVERNANCE
Corporate governance refers to the internal policies and practices by
which the Company is operated and controlled on behalf of its shareholders.
Sound corporate governance starts with a strong, independent Board that is
accountable to the Company and its shareholders. The role of the Board is to
effectively govern the affairs of the Company for the benefit of its
shareholders, and to the extent appropriate under Minnesota law, other
constituencies, including the Company's employees, customers, suppliers, and the
communities in which it does business. Because the Company's ultimate goal is to
best focus and direct its resources, the Company views good corporate governance
as a source of competitive advantage.
In 2006, the Board and its committees continued to review and enhance
its corporate governance practices. This ensures that the Board and its
committees have the necessary authority and practices in place to review and
evaluate the Company's business operations, as needed, and to make decisions
that are independent of the Company's management. As examples, the Board and its
committees undertake an annual self-evaluation process, meet regularly without
members of management present, have direct access to and meet individually with
members of management, and retain their own advisors as they deem appropriate.
In an effort to further develop the Board, Directors are asked to
attend an educational seminar each year and to share their experiences and
observations with the other Directors. In addition to seminars, Board members
attended an educational presentation during 2006 addressing energy regulatory
developments.
CORPORATE GOVERNANCE GUIDELINES
The Company's Corporate Governance Guidelines, initially adopted in
2002, were revised in 2006. In 2006, the charters of each of the committees of
the Board were also updated. The Corporate Governance Guidelines address the
Board's roles and responsibilities, Board selection and composition policies,
Board operating policies, Board committee responsibilities, Director
compensation, Director stock ownership, and other matters. Our Corporate
Governance Guidelines and the committee charters are available on the Company's
website at WWW.ALLETE.COM. Shareholders may request free printed copies of these
documents from ALLETE Shareholder Services, 30 West Superior Street, Duluth, MN
55802-2093.
DIRECTOR INDEPENDENCE
The Board has adopted independence standards into the Company's
Corporate Governance Guidelines that are consistent with the director
independence standards of the NYSE. An "independent" Director has no material
relationship with the Company (either directly or as a partner, shareholder, or
officer of an organization that has a relationship with the Company). The Board
has adopted certain categorical standards to assist in its determination of each
Director's independence. The Board considers a "material relationship" with the
Company to exist where:
- the Director has been employed by the Company within the last three
years;
- a member of the Director's immediate family has been employed by the
Company as an executive officer within the last three years;
- the Director is an employee or a partner, or the Director's
immediate family member is a partner, of the Company's current
independent registered public accounting firm; or an immediate
family member is an employee of the Company's current independent
registered public accounting firm and participates in the firm's
audit, assurance or tax compliance (but not tax planning) practice;
or the Director or an immediate family member was within the last
three years (but is no longer) an employee or partner of the
Company's current independent registered public accounting firm and
personally worked on the Company's audit within that time.
- the Director or a member of the Director's immediate family has been
employed within the last three years as an executive officer of any
business organization for which any of the Company's executive
officers currently serves as a member of that business
organization's compensation committee;
- the Director has received in any of the last three years more than
$100,000 in direct compensation from the Company (other than
Director and committee fees, pension, and other deferred
compensation);
- a member of the Director's immediate family has received in any 12-
month period within the last three years more than $100,000 in
direct compensation from the Company;
7
- the Director is a current employee, or a member of the Director's
immediate family is a current executive officer, of any business
organization that has made payments to the Company, or received
payments from the Company, for property or services in any of the
last three fiscal years in an amount that exceeds the greater of
$1,000,000, or 2 percent of the other company's consolidated gross
revenue;
- the Director has been an employee within the last three years, or a
member of the Director's immediate family has been an executive
officer within the last three years, of any business organization to
which the Company was indebted at any time within the last three
years of an aggregate amount in excess of 5 percent of the Company's
total assets;
- the Director or a member of the Director's immediate family has
served within the last three years as an executive officer or a
general partner of an entity that has received an investment from
the Company or any of its subsidiaries which exceeds the greater of
$1,000,000, or 2 percent of such entity's total invested capital, in
any of the last three years; or
- the Director or a member of the Director's immediate family has been
an executive officer of a foundation, university, non-profit trust
or other charitable organization within the last three years for
which contributions from the Company accounted for more than the
greater of $250,000, or 2 percent of such organization's
consolidated gross revenue, in any of the last three years.
RELATED PERSON TRANSACTIONS
The Board has adopted a policy to review transactions between the
Company and related persons. Related persons include Directors, Director
nominees, executive officers, and 5 percent shareholders and their immediate
family, or any entity controlled by or in which these individuals have a
substantial financial interest. A copy of the policy is available on our website
at WWW.ALLETE.COM.
The Related Person Transaction Policy applies to a financial
transaction, arrangement, or a series of similar transactions or arrangements of
$25,000 or more. These transactions generally are required to be approved in
advance by the Corporate Governance and Nominating Committee (Corporate
Governance Committee). If a new situation arises where advance approval is not
practical, it is discussed with the Chair of the Corporate Governance Committee,
and an appropriate course of action may include subsequent ratification by the
Corporate Governance Committee.
The Corporate Governance Committee considers factors it deems relevant
in determining whether to approve a transaction, including but not limited to
the following: whether the terms are comparable to those that could be obtained
in an arms-length transaction with an unrelated third party, whether there are
business reasons to enter into the transaction, whether the transaction could
impair the independence of a Director, and whether the transaction would present
an improper conflict of interest, taking into account the size of the
transaction, the overall financial position of the related person, the direct or
indirect relationship of the related person, and the ongoing nature of any
proposed relationships. The Corporate Governance Committee will also
periodically review and assess relationships to ensure ongoing fairness to the
Company. Any member of the Corporate Governance Committee who has an interest in
a transaction will abstain from voting, but may participate in the discussion if
invited to do so by the Chair of the Committee.
The Corporate Governance Committee examined all transactions between
Directors, and nominees for Director, and the Company in light of the Company's
independence standards and the NYSE's corporate governance rules in reaching its
determination that each Director, except Mr. Shippar, and each nominee for
Director is "independent."
Specifically, the Corporate Governance considered that Mr. Hoolihan has
an ownership interest in Industrial Lubricant Company (ILCO), which provides
lubricant products to one of the Company's generating facilities and to one of
the Company's wholly owned subsidiaries, BNI Coal, Ltd. During 2006, Company
purchases from ILCO totaled $544,994. Mr. Hoolihan also has an ownership
interest in ILCO Ground Technologies LLC, which provides equipment to the mining
industry. In 2006, BNI Coal made payments of $255,844 to ILCO Ground
Technologies. These payments represent a large number of small purchases of
goods and services, which ranged from a few hundred dollars to $28,000. After
discussion, the Corporate Governance Committee recommended to the Board that
these relationships with the Company are not material to Mr. Hoolihan, nor to
any person or organization with whom he has an affiliation.
8
The Corporate Governance Committee reviewed the payments made to Hoover
Construction, in which Mr. Johnson's son has an ownership interest. The
Corporate Governance Committee reviewed two 2006 contracts that were awarded on
a competitive bid basis for construction site work for the Company. The
Corporate Governance Committee also reviewed a third contract for similar work
which was not competitively bid but was for a modest amount. The Committee
concluded that the payments were in the ordinary course of business and of a
nature that would not affect Mr. Johnson's independence.
The Corporate Governance Committee considered the sales of wood and
wood chips by companies in which Mr. Rajala has a material interest. These
companies, Rajala Timber (of which Mr. Rajala is Secretary, Treasurer and a
director) and Rajala Mill Company (of which Mr. Rajala is President and a
director), received payments from the Company for the purchase of wood and wood
chips that are used as fuel at the Company's Rapids Energy Center. The purchases
were made through a competitive bid process, and represented approximately 2
percent of the revenue for Mr. Rajala's companies. The Corporate Governance
Committee determined that these transactions do not impair Mr. Rajala's
independence.
The Corporate Governance Committee also considered the payments by the
Company to the Holiday Inn in Duluth, Minnesota, which is owned by Labovitz
Enterprises where Mr. Stender was an executive officer, and in which he has an
ownership interest. The Company made payments to the hotel for lodging, food,
and meeting expenses in a modest amount. The Committee concluded that the
payments were in the ordinary course of business, small, and of a nature that
would not affect Mr. Stender's independence.
DIRECTOR NOMINATIONS
The Corporate Governance Committee recommends director candidates to
the Board and will consider for such recommendations director candidates
proposed by management, other Directors, search firms and shareholders. All
director candidates will be evaluated based on the criteria identified below,
regardless of the identity of the individual or the entity or person who
proposed the director candidate. A shareholder who wishes to propose a candidate
should provide the candidate's name and a detailed background of the candidate's
qualifications to the Corporate Governance and Nominating Committee, c/o the
Secretary of ALLETE, 30 West Superior Street, Duluth, MN 55802-2093.
The selection of director nominees includes consideration of factors
deemed appropriate by the Board. The Board may engage a search firm to assist in
identifying, evaluating, and conducting due diligence on potential director
nominees. Factors will include integrity, achievements, judgment, intelligence,
personal character, the interplay of the candidate's relevant experience with
the experience of other Board members, the willingness of the candidate to
devote adequate time to Board duties and the likelihood that he or she will be
willing and able to serve on the Board for a sustained period. The Corporate
Governance Committee will consider the candidate's independence, 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 Committee will review all candidates, and
before any contact is made with a potential candidate, will notify the Board of
its intent to do so, will provide the candidate's name and background
information to the Board, and will allow time for Directors to comment. The
Corporate Governance Committee will screen, personally interview, and recommend
candidates to the Board. A majority of the Corporate Governance Committee
members will interview any potential nominee before recommending that candidate
to the Board. The recommendations of the Corporate Governance Committee will be
timed so as to allow interested Board members an opportunity to interview the
candidate prior to the nomination of the candidate.
In 2006, the Board engaged a search firm to assist it in identifying
potential nominees for Director. The search firm identified candidates,
conducted due diligence on potential director nominees, and pre-screened
director candidates.
9
COMMITTEE MEMBERSHIP, MEETINGS, AND FUNCTIONS
The Board has three standing committees: the Corporate Governance
Committee, the Audit Committee, and the Executive Compensation Committee
(Compensation Committee).
The current members of the Corporate Governance Committee are Ms.
Brekken, Ms. Eddins (Chair), Mr. Johnson, and Mr. Smith. Mr. Stender was a
member (and served as Chair) of this committee during 2006; Mr. Rajala was a
member for a portion of 2006. The Corporate Governance Committee met five times
during 2006. The Corporate Governance Committee provides recommendations to the
Board with respect to Board organization, membership, function, committee
structure and membership, succession planning for executive management, and the
application of corporate governance principles. The Corporate Governance
Committee also performs the functions of a director nominating committee, leads
the Board's annual evaluation of the chief executive officer, and is authorized
to exercise the authority of the Board in the intervals between meetings.
The current members of the Audit Committee are Mr. Hoolihan, Mr.
Johnson, Mr. Mayer, and Mr. Peirce (Chair). Ms. Ludlow was a member of this
committee in 2006 and Mr. Mayer served as Chair during 2006; Mr. Hoolihan became
a member upon his election to the Board in May 2006. The Audit Committee held
eight meetings in 2006. The Audit Committee recommends the selection of an
independent registered public accounting firm, reviews the independence and
performance of the independent registered public accounting firm, reviews and
evaluates ALLETE's accounting policies, reviews periodic financial reports to be
provided to the public, and reviews and recommends approval of the consolidated
financial statements.
The current members of the Compensation Committee are Ms. Brekken, Ms.
Ludlow (Chair), Mr. Rajala, and Mr. Smith. Mr. Peirce was a member of this
committee during 2006; Mr. Rajala served as Chair during 2006; Ms. Brekken
joined the Compensation Committee when she became a Director in July 2006; Ms.
Eddins was also a member for a portion of 2006. The Compensation Committee held
six meetings in 2006. 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 the Company's
executive compensation philosophy.
Mr. Stender, as Lead Director, is an ex-officio member of all
committees. It is anticipated that committee chairs will rotate among Directors
in the future. The Board recognizes that the practice of chair rotation provides
development for the Directors and allows a variety of perspectives in leadership
positions.
During 2006, the Board held eight meetings. All incumbent Directors
attended 75 percent or more of the aggregate number of meetings of the Board and
applicable committee meetings in 2006. All Directors are expected to attend the
Annual Meeting and all Directors attended in 2006.
Mr. Stender presides over all executive sessions of the nonmanagement
Directors. Executive sessions of non-management Directors are regularly
scheduled in connection with Board and committee meetings.
COMMUNICATIONS BETWEEN SHAREHOLDERS AND THE BOARD OF DIRECTORS
Shareholders and other interested parties who wish to communicate
directly with the Board or with the non-management Directors may do so by
addressing the Lead Director, c/o the Secretary of ALLETE, 30 West Superior
Street, Duluth, MN 55802-2093.
COMMON STOCK OWNERSHIP GUIDELINES
The Corporate Governance Committee has determined that Directors and
certain executive officers whose primary job responsibilities affect all
business units of the Company should have a significant equity interest in the
Company. The Corporate Governance Committee believes that such equity ownership
aligns the interest of Directors and executive management with the interests of
the Company's shareholders. Accordingly, the Board adopted Common Stock
ownership guidelines effective October 2005. Directors are expected to own 500
shares of Common Stock prior to their election to the Board and 3,000 shares of
Common Stock within three years after their election. The Common Stock ownership
guidelines applicable to Named Executive Officers is discussed in the
Compensation Discussion and Analysis section on page 13.
10
CODE OF ETHICS
The Company has adopted a written Code of Ethics that applies to
Directors and all Company 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 or waiver of the Code of Ethics will be
disclosed on our website at WWW.ALLETE.COM promptly following the date of such
amendment or waiver.
DIRECTOR COMPENSATION--2006
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g)
Change in
Pension Value and
Nonqualified
Deferred
Fees Earned or Stock Option Compensation All Other
Name Paid in Cash Awards Awards Earnings Compensation Total
------------------------------------------------------------------------------------------------------------------------------------
Kathleen A. Brekken $15,500 $47,500 $0 $188 $0 $63,188
Heidi J. Eddins $32,250 $47,500 $0 $830 $0 $80,580
James J. Hoolihan $21,667 $47,500 $0 $0 $351 $69,518
Peter J. Johnson $40,000 $47,500 $0 $0 $0 $87,500
Madeleine W. Ludlow $0 $87,500 $0 $0 $0 $87,500
George L. Mayer $42,250 $47,500 $0 $0 $146 $89,896
Roger D. Peirce $40,000 $47,500 $0 $0 $0 $87,500
Jack I. Rajala $37,750 $47,500 $0 $0 $0 $85,250
Nick Smith $38,500 $47,500 $0 $0 $299 $86,299
Bruce W. Stender $73,000 $47,500 $0 $5,145 $276 $125,921
------------------------------------------------------------------------------------------------------------------------------------
Ms. Eddins elected to defer all of her Director fees under the ALLETE Director Compensation Deferral Plan.
Ms. Ludlow elected to receive her Director cash retainer fees in the form of ALLETE Common Stock. Accordingly, an additional
438.404 shares were allocated on June 1, 2006 at a price of $45.62 per share and 431.034 shares were allocated on December 1,
2006 at a price of $46.40 per share. Because Director cash retainer fees are paid in arrears, the additional allocations were
for fees earned between November 2005 and April 2006, and between May 2006 and October 2006.
For all Directors, except Ms. Brekken, the annual stock retainer was paid on June 1, 2006 when 1,041.210 shares of Common
Stock were allocated at a price of $45.62. Ms. Brekken, who joined the Board in July 2006, was awarded her 2006 stock retainer
on September 1, 2006, receiving 1,031.712 shares of Common Stock with a $46.04 allocation price.
The following Directors had fully-vested stock option awards outstanding as of December 31, 2006: Mr. Johnson--647; Mr. Mayer
--3,879; and Mr. Rajala--3,879.
The amounts shown in column (e) are comprised of above-market interest on deferred compensation.
The amounts shown in column (f) are comprised of tax reimbursement related to spousal travel.
Employee Directors receive no additional compensation for their
services as Directors. The Company pays each non-employee Director under the
terms of the ALLETE Director Stock Plan an annual retainer fee, a portion of
which is paid in cash and a portion of which is paid in Common Stock as set
forth below:
2006 Annual Retainer Fees
Cash Stock
---------------------------------------
Lead Director $73,000 $47,500
All Other Directors $23,500 $47,500
11
In addition, the Company pays each non-employee Director, other than the Lead
Director, annual cash retainer fees for each committee and chair assignments as
set forth below:
2006 Committee Retainer Fees
Member Fee Chair (Includes Member Fee)
------------------------------------------------
Audit Committee $9,000 $17,500
Compensation Committee $7,500 $13,000
Corporate Governance Committee $7,500 $12,000
Directors may elect to defer all or part of the cash portion of the
retainer fees under the terms of the ALLETE Director Compensation Deferral Plan.
Directors may also elect to receive all or part of the cash portions of their
retainer fees in Common Stock. The Lead Director receives the Lead Director cash
retainer and the Director stock retainer fee, but does not receive any other
committee or chair retainers.
On January 24, 2007, pursuant to the recommendation of the Compensation
Committee, the Board of Directors approved increases to certain director
compensation annual retainer fees and a change to the Lead Director retainer.
Effective February 15, 2007, pursuant to the terms of the ALLETE Director Stock
Plan, the cash portion of the Directors' annual retainer fee increased from
$23,500 to $30,000, and the stock portion of the annual retainer fee increased
from $47,500 to $60,000. The Lead Director's total cash retainer changed from
$73,000 to $55,000, reflecting the new $30,000 cash retainer fee plus a $25,000
Lead Director cash retainer fee. The committee retainer fees were unchanged.
12
COMPENSATION DISCUSSION AND ANALYSIS
This discussion is meant to help you understand how the Company
compensates the Named Executive Officers. This look at our compensation goals,
policies, and practices provides context for the detailed compensation tables
and narrative discussions that follow starting on page 23.
COMPENSATION PHILOSOPHY AND OBJECTIVES
The Company's executive compensation is designed to attract and retain
quality people, and to reward Named Executive Officers for designing and
implementing business strategies that the Company believes will result in
increased shareholder value over the long term. The Company's core values and
fundamental principles relating to executive compensation include the following:
- PAY IS LINKED TO PERFORMANCE. Executive pay is linked to Company
performance. Named Executive Officers are rewarded for achieving annual goals
tied to the Company's business strategy. Long-term incentives promote a stable,
experienced executive management team and reward growth in total shareholder
return.
- COMPENSATION ELEMENTS ARE BALANCED. The Company uses a mix of
compensation elements to accomplish varying objectives. Base pay and executive
retirement benefits are designed to attract and retain executive talent. Annual
incentives focus the Named Executive Officers on achieving strong annual
performance. Long-term incentives encourage executives to enhance the Company's
long-term success and profitability and also provide an incentive for executives
to remain employed with the Company. Perquisites are offered on a modest basis
to facilitate the Named Executive Officers' performance of their
responsibilities for the Company.
- THE COMPANY PROVIDES FAIR AND COMPETITIVE PAY. The Company strives
to offer fair and competitive compensation to Named Executive Officers. The
Company uses market data to establish a range for executive compensation. In
setting pay levels, the Company considers the individual's experience in the
position, past performance, job responsibilities, and equity within the
executive management group. For a Named Executive Officer with sufficient
experience to be fully performing the duties of his or her position, the Company
generally sets compensation levels so that when target performance is achieved
under each of its incentive compensation plans, total compensation will be near
the midpoint of the pay range established using market comparison data. How
comparison companies are selected for various purposes is discussed on the next
page in the section about the process for determining executive compensation.
Consistent with the Company's pay-for-performance philosophy, Named Executive
Officers can earn higher compensation if actual performance exceeds target
performance goals. Conversely, total compensation to Named Executive Officers in
any year in which the Company does not meet target performance goals will
generally fall below the midpoint in comparison to other companies. Total
compensation generally increases as position and responsibility increase. At the
same time, a greater percentage of total compensation is tied to
performance--and is therefore at risk--as position and responsibility increase.
- EXECUTIVE STOCK OWNERSHIP IS EXPECTED. The Company believes all
executive officers of ALLETE should be ALLETE shareholders. The Company
facilitates executive stock ownership by using Common Stock to fund long-term
incentive compensation awards and Company contributions to its tax-qualified
defined-contribution retirement plan. All Named Executive Officers are expected
to hold this Common Stock so long as they hold their executive positions. Common
Stock acquired through stock option exercises is not subject to this policy.
Named Executive Officers (except Mr. Vizanko who is now retired and Ms. Holquist
who is not an ALLETE officer) are expected to maintain Common Stock ownership in
accordance with the following guidelines:
Position Stock Ownership Value as a Multiple of Salary
---------------------------- ---------------------------------------------
Chief Executive Officer 4X
ALLETE Senior Vice President 2X
ALLETE Vice President 1X
The Common Stock ownership guidelines were put in place in October 2005. Named
Executive Officers subject to the ownership guidelines who held their current
positions as of October 2005 have until October 2010 to meet the guidelines;
Named Executive Officers appointed after the imposition of the ownership
guidelines are given seven years from their appointment to meet the guidelines.
The Board reviews executive officers' Common Stock ownership on an annual basis.
13
- THE COMPANY GIVES CONSIDERATION TO CORPORATE TAX DEDUCTIONS AND
ACCOUNTING RULES. The Company generally structures the Named Executive Officers'
compensation so that all elements of pay are tax deductible by the Company.
Section 162(m) of the Internal Revenue Code of 1986, as amended (Tax Code),
limits the amount of compensation that the Company may deduct in any one year
for Mr. Shippar and each of the next four most-highly-compensated executive
officers to $1 million. Stock options and performance shares awarded under the
ALLETE and Affiliated Companies Executive Long-Term Incentive Compensation Plan
(LTIP) are fully tax deductible despite Section 162(m) limits because
shareholders have approved the LTIP and because stock options and performance
shares are considered "performance-based" compensation. Moreover, the Company's
Executive Annual Incentive Plan (AIP) provides that if the Company would
otherwise be limited in its ability to deduct any portion of an AIP award due to
the limits imposed by Section 162(m), then the Compensation Committee may delay
payment of that amount until the Company can deduct the expense for corporate
income tax purposes. The Company also considers the accounting implications of
each compensation element given to Named Executive Officers. Because the primary
objectives of the Company's compensation programs are tied to performance, the
Company may offer compensation regardless of whether it qualifies for a tax
deduction or more favorable accounting treatment whenever it deems that
compensation to be in the Company's best interest.
- THE COMPENSATION COMMITTEE AND THE BOARD EXERCISE INDEPENDENT
JUDGMENT. The Compensation Committee and the Board ensure on behalf of
shareholders that executive compensation is appropriate and effective. The
Compensation Committee and the Board have access to compensation advisors and
consultants, but exercise independent judgment in determining executive
compensation types and levels.
PROCESS FOR DETERMINING EXECUTIVE COMPENSATION
ROLE OF THE COMPENSATION COMMITTEE. The Compensation Committee
establishes the Company's compensation philosophy and policies regarding
executive compensation, and oversees the administration of the Company's
executive compensation programs. The Compensation Committee sets Mr. Shippar's
compensation, which is reviewed by the Board without participation by Mr.
Shippar each May. Mr. Shippar's annual salary increase takes effect on June 1
each year. The Compensation Committee also reviews and approves the individual
pay elements and amounts of the other Named Executive Officers. In setting Mr.
Shippar's compensation, the Compensation Committee reviews and considers the
Corporate Governance Committee's annual evaluation of Mr. Shippar's performance,
which, among other things, assesses his performance relative to specific annual
objectives established by the Board. The Compensation Committee also reviews
"benchmarking" data, comparing Mr. Shippar's compensation to the compensation of
top-level executives at other companies. Benchmarking data provides a broader
market context for the Compensation Committee's deliberations and decisions. In
early 2006, the Company's Human Resources department provided the Compensation
Committee with the results of its analysis of Mr. Shippar's base pay and annual
incentives paid in 2005 as compared to survey data from utilities and general
industry companies. Survey sources were as follows: Towers Perrin, Watson Wyatt
Worldwide, and Hewitt Associates, which provided custom survey data comparing
senior-level positions in general industry companies. The Compensation Committee
reviews the Company's benchmarking analysis directly with Hewitt Associates, the
Compensation Committee's independent compensation consultant. When the Chief
Executive Officer's responsibilities change during a calendar year, as was the
case effective January 1, 2006 when Mr. Shippar became Chairman of the Board,
the Compensation Committee establishes a new base salary consistent with the
expanded role.
In January of each year, the Compensation Committee, in consultation
with Mr. Shippar and Mr. Schober, sets annual performance goals for the AIP and
the Results Sharing program, which is a company-wide profit-sharing opportunity.
At the same time, the Compensation Committee establishes performance goals in
connection with the LTIP. Specifically, the Compensation Committee sets
multi-year total shareholder return (TSR) objectives relative to a designated
peer group in connection with performance shares and sets the terms for stock
options, restricted stock units, and long-term cash awards, such as award dates,
vesting periods, expiration dates and forfeiture provisions.
ROLE OF MANAGEMENT. For all other Named Executive Officers, Mr. Shippar
recommends compensation levels to the Compensation Committee for its approval.
Recommendations are based, in part, on each Named Executive Officer's experience
and responsibility level, and on Mr. Shippar's assessment of her or his
performance. In early 2006, the Company's Human Resources department provided
Mr. Shippar with its analysis comparing each Named Executive Officer's base pay
and annual incentives paid in 2005 to survey data from electric utilities
14
and general industry companies, except Ms. Holquist, whose compensation was
compared to real estate company compensation survey data. The survey sources
were the same as was provided to the Compensation Committee for consideration in
connection with setting Mr. Shippar's salary plus data from CEL & Associates,
Inc., which specializes in real estate companies, American Compensation
Resources, Inc., and CompAnalyst from Salary.com. This survey data provides
context for Mr. Shippar's recommendations for the other Named Executive
Officers' annual base salary increases and incentive compensation. Perquisites
are reviewed periodically against similar comparison data compiled by Hewitt
Associates.
Approximately once every three years, management hires a compensation
consultant to conduct a broader review of base salary, annual incentives and
long-term incentives for the Company's executive officers. Management also
recommends to the Compensation Committee financial and non-financial goals, tied
to the Company's strategy under its incentive compensation plans.
COMPENSATION COMMITTEE'S 2005 EXECUTIVE COMPENSATION STUDY. In 2005,
the Compensation Committee directed Hewitt Associates to perform a comprehensive
review of all executive compensation elements to assist the Compensation
Committee in evaluating whether then-current executive compensation levels and
pay elements were consistent with the Company's philosophy. Hewitt Associates
analyzed aggregate compensation, meaning base pay, annual incentives, and
long-term incentives, of the Company's five most-highly compensated executives
in 2005--namely, Mr. Shippar, Mr. Vizanko, Mr. Schober, Ms. Holquist, and Ms.
Welty--as compared to the five most-highly compensated executives of a
16-company peer group. The study used the same peer group as was used to measure
the Company's 2005 performance under the LTIP and the companies were selected by
the Compensation Committee based on comparability to the Company in terms of
size (i.e., market capitalization), industry, and stock-trading characteristics
(i.e., dividend yield, price-earnings ratio, and market-to-book value).
The companies in the peer group were as follows:
Alliant Energy Corporation MGE Energy, Inc.
Avista Corporation OGE Energy Corp.
Black Hills Corporation Otter Tail Corporation
Central Vermont Public Service The Empire District Electric
Corporation Company
CH Energy Group, Inc. UIL Holdings Corporation
Cleco Corporation UniSource Energy Corporation
Great Plains Energy Incorporated Westar Energy, Inc.
IDACORP, Inc. WPS Resources Corporation
The Hewitt Associates study also looked at how target and actual
compensation (base pay, annual incentives, and long-term incentives) paid to the
Named Executive Officers compared to compensation survey data for similar
positions. The survey data reflected both general and energy-services
industries. Market data was adjusted to account for size differences between the
Company and the peer group companies.
In addition, the study compared the value of the Company's executive
benefits to the benefit value provided by a five-company utility peer group
comprised of Allegheny Energy, Inc., Ameren Corporation, Black Hills
Corporation, SCANA Corporation, and Washington Gas Light Company. Because
benefits data was not available for a larger utility peer group, Hewitt
Associates also compared the Company's health and welfare benefits and its
retirement benefits for its executives to a group of 13 general industry
companies selected because size, industry, and benefit structure was
sufficiently similar to the Company's. The general industry comparison companies
were as follows:
Brady Corporation Milacron Inc.
Briggs & Stratton Corporation Rayonier Inc.
Cameron International Corporation Sauer-Danfoss Inc.
Donaldson Company, Inc. Valmont Industries, Inc.
Flowserve Corporation Walter Industries, Inc.
GATX Corporation Woodward Governor Company
Joy Global Inc.
15
Finally, Hewitt Associates conducted an analysis of the perquisites
received by the Company's executive officers.
The Hewitt Associates study indicated that the aggregate base salaries
for the Named Executive Officers were near the 25th percentile of the general
industry benchmarks and slightly below the 50th percentile of utility company
benchmarks. The study also indicated that target-level annual incentive
opportunities for the Named Executive Officers fell below the 50th percentile of
general industry benchmarks and near the 75th percentile of utility company
benchmarks; actual bonuses were above the 75th percentile of both comparison
groups. The grant-date value of long-term incentive compensation for the Named
Executive Officers was near the 25th percentile of the general industry
benchmarks and at the 50th percentile of the utility company benchmarks. The
study showed that benefits were above average, while perquisites were in line
with market survey data. When elements of compensation were considered in total,
the Named Executive Officers' actual compensation generally fell within a range
from below the 50th percentile of the general industry benchmarks to near the
75th percentile of the utility company benchmarks.
This market data, along with other considerations the Compensation
Committee deemed relevant, such as executive experience, tenure, and
performance, formed the basis for the Compensation Committee's deliberations and
compensation decisions for the Named Executive Officers, except Ms. Holquist, in
2006.
MANAGEMENT'S 2005 REAL ESTATE EXECUTIVE COMPENSATION STUDY. Unlike
other Named Executive Officers, Ms. Holquist is focused exclusively on leading
ALLETE Properties, LLC. Ms. Holquist's compensation program is tied directly to
ALLETE Properties' business strategy. CEL & Associates, Inc. is a real estate
business consultant hired by management to advise the Company on executive
compensation practices of the real estate industry. The consultant prepared a
study comparing Ms. Holquist's compensation--namely, base pay, annual
incentives, and long-term incentives--with the compensation of comparable
executive-level positions at the following group of 22 real estate companies:
Biltmore Farms, LLC Regency Centers Corporation
Bonita Bay Holdings, Inc. Shea Development Corp.
Brookfield Homes Corporation The Ben Tobin Companies, Ltd.
Colima Group The St. Joe Company
Combined Properties, Inc. Toll Brothers, Inc.
CSX Corporation Trammell Crow Company
Dominion Homes, Inc. TREC Investment Realty
Edens & Avant WCI Communities, Inc.
Lennar Corporation The Weitzman Group, Inc.
LNR Property Corporation William Lyon Homes, Inc.
Madison Marquette Realty Services L.P. Woodlands Operating Company
The CEL & Associates, Inc. study concluded that Ms. Holquist's base pay was
below the 50th percentile, her annual bonus earned in 2005 was above the 75th
percentile, and her long-term incentive compensation target opportunity was
below the 50th percentile.
"TALLY SHEETS." In 2005, the Compensation Committee used compensation
"tally sheets," which provide a detailed description of the Named Executive
Officers' compensation and projected wealth accumulation from this compensation.
The tally sheets included the dollar amounts of base salary, annual and
long-term incentive opportunities, health and welfare benefits, and perquisites.
The tally sheets also showed the then-current value of unexercised stock options
and performance share awards, and the then-current accumulated payment
obligations of the Company to the Named Executive Officers under the Company's
qualified and nonqualified executive retirement plans. Further, the tally sheets
contained projections, which enabled the Compensation Committee to look at the
unrealized potential value of outstanding stock option and performance share
awards projected out to age 62. Age 62 is the earliest age at which Named
Executive Officers can retire from the Company and receive an unreduced pension
benefit. The tally sheets also calculated future Company payment obligations
under the Company's qualified and nonqualified executive retirement plans
assuming each of the Named Executive Officers retires at the age of 62. Finally,
the Compensation Committee reviewed the Company's payment obligations to
16
Named Executive Officers under various employment-termination scenarios
including involuntary separation, voluntary resignation, retirement, and a
change in control of the Company. The Compensation Committee concluded that the
amounts represented by the tally sheet analysis were fair and reasonable.
2006 EXECUTIVE COMPENSATION DESIGN CHANGES. Based on these 2005
reviews, the Compensation Committee determined that the Named Executive
Officers' compensation included appropriate elements and that the total
compensation amount awarded to each Named Executive Officer was fair and
competitive for 2005. While total compensation was appropriate, the Compensation
Committee decided to rebalance the compensation elements as a result of the 2005
reviews. The Compensation Committee decided to place more emphasis on long-term
performance, increased stock ownership, and executive retention, three factors
the Compensation Committee believes better align the Named Executive Officers'
compensation with shareholders' interest in long-term Company performance. The
reviews also identified opportunities for executive compensation policy changes
to better align the Company's executive compensation programs with the Company's
philosophy. The Compensation Committee took the following actions in 2006:
- The Company lowered the AIP target opportunity and increased the
LTIP target opportunity for each Named Executive Officer, except
for Ms. Holquist. The result was an overall five percent increase
in combined AIP and LTIP target opportunities for each Named
Executive Officer, except for Ms. Holquist. Although the formula
for calculating Ms. Holquist's AIP award changed, the value of her
target AIP opportunity remained the same; Ms. Holquist's LTIP
target opportunity increased 37.5 percent. The table below shows
the specific changes that were implemented:
------------------------------------------------------------------------------------------------------------------------------
Annual Incentive Long-Term Incentive
Target Opportunity Target Opportunity
(as a % of Annual Salary) (as a % of Annual Salary)
2005 2006 2005 2006
------------------------------------------------------------------ ----------------------------
Mr. Shippar 50% 40% 75% 90%
Mr. Schober 35% 30% 35% 45%
Ms. Holquist Greater of 40% of base 0.15% of net income from 40% 77.5%
pay or 0.8% of real estate operations, plus
revenue from specific 0.36% of revenue from
land sales land sales
Ms. Welty 35% 30% 35% 45%
Ms. Amberg 25% 30% 30% 45%
Mr. Vizanko 40% 35% 60% 70%
------------------------------------------------------------------------------------------------------------------------------
Mr. Schober was promoted to Chief Financial Officer effective July 1, 2006. Reflecting his increased responsibilities,
Mr. Schober's target opportunity was increased to 35 percent as applied to the period July 1 through December 31, 2006.
Ms. Amberg was promoted to Senior Vice President effective January 1, 2006. Her 2006 AIP and LTIP incentive opportunities
reflect both the overall increased incentive compensation opportunities in connection with the promotion and increased
responsibilities, and the decreased AIP opportunity proportionate to the increased LTIP opportunity.
- The Company strengthened the link between annual pay for
performance and long-term success by making 25 percent of the AIP
awards contingent on achieving strategic business objectives for
all Named Executive Officers, except Ms. Holquist, for whom 80
percent of her AIP award is contingent on achieving strategic
business objectives.
- The Company lowered the AIP threshold payout level from 50 percent
of target opportunity to 37.5 percent, and lowered the AIP maximum
payout opportunity from 240 percent of target to 200 percent of
target for all Named Executive Officers, except Ms. Holquist.
- To better reflect its diversified business operations, the Company
revised its peer group under the LTIP for the performance period
starting in 2006.
17
- The Company amended the AIP to protect the Company's continued
ability to fully deduct AIP awards consistent with Section 162(m)
of the Tax Code.
- The Company eliminated a change-in-control tax-gross-up benefit on
nonqualified deferred compensation.
- The Company replaced an "above-market" deferred compensation
crediting rate with a "market-based" crediting rate within the
Company's executive nonqualified deferred compensation plans.
ELEMENTS OF EXECUTIVE COMPENSATION
OVERVIEW. Named Executive Officers receive total compensation
consisting of base salary, annual incentives, long-term incentives, retirement
benefits, and health and welfare benefits. Named Executive Officers' 2006
compensation elements are discussed below and also in the narrative following
the Summary Compensation Table and Grants of Plan-Based Awards Table that begins
on page 25.
BASE SALARY. Base salary is designed to attract and retain experienced,
qualified leaders. Named Executive Officers received annual market-adjustment
salary increases, ranging from 2.6 percent to 5.5 percent, effective June 1,
2006. In addition to annual raises, several Named Executive Officers received
other salary increases due to their particular circumstances. Mr. Shippar's base
salary was increased in January 2006 by 5.4 percent upon assuming the duties of
Chairman. Ms. Holquist received a salary increase of 15 percent in January 2006
to recognize her past performance and to bring her salary closer to the midpoint
of the peer group companies in the 2005 real estate compensation study. Ms.
Amberg received a 10.8 percent increase in base salary in January 2006 in
connection with her promotion to Senior Vice President. Mr. Schober received a
salary increase on July 1, 2006 of 19.6 percent as a result of his promotion to
Chief Financial Officer.
ANNUAL INCENTIVE AWARDS. Annual incentives reward Named Executive
Officers for accomplishing annual goals. ALLETE has two annual incentive
plans--the Results Sharing program and the AIP. Annually, the Compensation
Committee, in consultation with Mr. Shippar and Mr. Schober, approves goal
measures. The Compensation Committee, in consultation with Mr. Shippar, also
reviews and approves target award opportunities under these plans.
RESULTS SHARING. Named Executive Officers, except Ms. Holquist,
participate in the Results Sharing program. Results Sharing, a profit-sharing
program open to virtually all Company employees, is designed to motivate
employees to achieve and exceed financial and operational performance goals. The
2006 Results Sharing program provided a target-level opportunity equal to 5
percent of base pay if the Company achieved targeted net income from continuing
operations, excluding gains and losses from emerging technology investments
(NICO), and met specific operational goals pertaining to safety, customer
service and reliability, and environmental protection.
ANNUAL INCENTIVE PLAN. Participation in the AIP is limited to certain
management-level employees, including each Named Executive Officer. The
Compensation Committee approves the AIP goals. For each Named Executive Officer,
except Ms. Holquist, AIP awards were designed to reward year-over-year growth in
corporate earnings and cash flow, and to reward the accomplishment of strategic
initiatives. AIP awards are expressed as a percentage of salary for Named
Executive Officers, except Ms. Holquist; target AIP opportunities ranged from 30
percent to 40 percent of salary.
Ms. Holquist's AIP award was designed to create an incentive for her to
lead the effort to secure entitlements for existing real estate assets, to
oversee orderly and profitable sales of real estate assets, and to position
ALLETE Properties for future growth. Ms. Holquist's AIP award was expressed as a
percentage of revenue from land sales and net income from real estate operations
that could be earned based on the accomplishment of her goals.
The AIP opportunity levels for all Named Executive Officers were
established so that if target goals were achieved, the combination of salary and
annual incentives for the Named Executive Officer would result in total annual
compensation near the midpoint of the salary ranges established by the Company
using comparative company data.
18
Mr. Shippar, in consultation with the Compensation Committee,
determines to what extent AIP strategic goals have been met.
LONG-TERM INCENTIVE AWARDS. Long-term incentive compensation is used to
encourage Named Executive Officers to develop and implement business strategies
to grow TSR over time, and to reward executives when TSR goals are achieved.
Long-term incentive compensation programs also encourage executives to stay with
the Company because they deliver rewards over time. Long-term incentive awards
are granted annually to the Named Executive Officers by the Compensation
Committee under the LTIP. The Compensation Committee approves LTIP awards in
January each year and dates the awards as of the first business day in February
to allow for the orderly administration, communication, and reporting of the
awards. The LTIP was most recently amended and approved by shareholders in May
2005.
For 2006, the aggregate target value of the LTIP award to Named
Executive Officers ranged from 45 percent to 90 percent of annual base salary.
LTIP awards granted in 2006 to each Named Executive Officer, except Ms.
Holquist, consisted of nonqualified stock options with a ten-year term and
three-year vesting period, and performance shares with a three-year performance
period. Generally, the target value of the LTIP awards are allocated evenly
between stock options and performance shares; Mr. Shippar's LTIP award, however,
is more heavily weighted toward performance shares to help him achieve Common
Stock ownership consistent with Company guidelines. Ms. Holquist's LTIP award
was comprised of restricted stock units and a long-term cash award that vests
over three years. Her cash award was designed to reward her for achieving goals
specific to the Company's real estate business; both forms of long-term
compensation encourage her retention. The table below shows the LTIP target
opportunity for each Named Executive Officer and the allocation of this
opportunity between stock options, performance shares, restricted stock units
and cash awards. Each long-term incentive compensation element is described
below following the table.
----------------------------------------------------------------------------------------------------------------------------
Allocation of Long-Term Incentive Target Opportunity
(as a % of Total Opportunity)
Long-Term Incentive
Target Opportunity Stock Performance Restricted
Name (as a % of Base Pay) Options Shares Stock Units Cash Awards
------------- --------------------- --------- ------------- ------------- -------------
Mr. Shippar 90% 40% 60% - -
Mr. Schober 45% 50% 50% - -
Ms. Holquist 77.5% - - 52% 48%
Ms. Welty 45% 50% 50% - -
Ms. Amberg 45% 50% 50% - -
Mr. Vizanko 70% 50% 50% - -
----------------------------------------------------------------------------------------------------------------------------
STOCK OPTIONS. Stock options reward Named Executive Officers for
increases in the price of Common Stock over the long term and encourage Named
Executive Officers to remain with the Company. The Named Executive Officers,
except Ms. Holquist, received stock option awards in 2006. Once vested, each
stock option provides the Named Executive Officer the right to purchase one
share of Common Stock at an exercise price equal to the closing price of Common
Stock on the grant date.
PERFORMANCE SHARES. Performance shares reward executives for strong
multi-year performance, measured by TSR relative to a group of peer companies.
Relative total shareholder return was selected by the Compensation Committee
because it measures the benefit Company shareholders realize on their investment
in Common Stock compared to investment opportunities available in other similar
companies. Target performance is achieved if TSR over a multiple-year
performance period ranks seventh among a peer group of 16 comparable companies
shown in the table below under the heading "TSR Peer Groups." At target
performance, the Named Executive Officer will receive one share of Common Stock
for each performance share granted. Actual performance share payouts can range
from 0 percent of the target award (if the Company ranks 11th or lower among the
peer group) to 200 percent of the target award (if the Company ranks third or
higher among the peer group). Performance share payouts are earned at each
ranking from 10th to first.
19
The Compensation Committee, in consultation with Mr. Shippar and Mr.
Schober, selects the peer group based on comparability to the Company in terms
of size (i.e., market capitalization), industry, and stock-trading
characteristics (i.e., dividend yield, price-earnings ratio, and market-to-book
value). The Compensation Committee approves the peer group companies prior to
the start of each performance period. The peer group approved for the 2006-2008
performance period was changed to include utilities that have diversified
operations and companies whose primary business is real estate operations. These
changes better align the peer group to the Company's current operations. The
applicable peer groups are as follows:
TSR PEER GROUPS
Performance Period Performance Periods
2006-2008 2004-2005, 2004-2006, and 2005-2007
------------------------------------------- --------------------------------------------------
AVISTA Corporation Alliant Energy Corporation
Black Hills Corporation AVISTA Corporation
Brookfield Asset Management Inc. Black Hills Corporation
CH Energy Group, Inc. Central Vermont Public Service Corporation
Consolidated Tomoka Land Company-Florida CH Energy Group, Inc.
Great Plains Energy Incorporated Cleco Corporation
IDACORP, Inc. Great Plains Energy Incorporated
MDU Resources Group, Inc. IDACORP, Inc.
NICOR Inc. MGE Energy, Inc.
Otter Tail Corporation OGE Energy Corp.
TECO Energy, Inc. Otter Tail Corporation
The Empire District Electric Company The Empire District Electric Company
The St. Joe Company UIL Holdings Corporation
Vectren Corporation UniSource Energy Corporation
Wisconsin Energy Corporation Westar Energy, Inc.
WPS Resources Corporation WPS Resources Corporation
RESTRICTED STOCK UNITS. Restricted stock units are used as a retention
incentive. A restricted stock unit entitles the recipient to one share of Common
Stock after a lapse of time specified in the award. Ms. Holquist received
restricted stock units in 2006 that vest in three installments, with 30 percent
vesting on each of the first and second anniversary of the award date and 40
percent vesting on the third anniversary of the award date. Ms. Holquist must
remain employed by the Company at the time restricted stock units vest to
receive the Common Stock shares.
LONG-TERM INCENTIVE CASH AWARD. Long-term incentive cash rewards Ms.
Holquist for achieving her AIP goals, and because the amount earned vests over
three years, encourages her retention. Payment of the long-term incentive cash
opportunity awarded to Ms. Holquist in 2006 was contingent on her achievement of
her 2006 AIP strategic goals. The cash award earned is payable in three
installments, with 30 percent vesting on each of the first and second
anniversary of the award date, and 40 percent vesting on the third anniversary
of the award date. Ms. Holquist must remain employed by the Company on the
vesting dates to receive the cash payments.
BENEFITS
The Company offers benefits, including retirement benefits, to attract
and retain Named Executive Officers; retirement benefits also reward long-term
service with the Company. Named Executive Officers are eligible to participate
in a range of broad-based employee benefits, including vacation pay, sick pay,
disability benefits, group term life insurance, an employee stock purchase plan,
and both active and post-retirement medical and dental coverage. Named Executive
Officers are eligible for retirement benefits under the same pension and
retirement savings plans available to other eligible nonunion employees and
under the Company's supplemental executive retirement plan. Retirement benefits
are described in more detail below.
20
TAX-QUALIFIED RETIREMENT BENEFITS. The Company provides retirement
income benefits to most of its nonunion employees, including the Named Executive
Officers, from two primary sources--a tax-qualified defined contribution
retirement saving and stock ownership plan (RSOP) that has features of both an
employee stock ownership plan and a 401(k) savings plan, and a traditional
tax-qualified defined benefit pension plan (Pension Plan). Effective October 1,
2006, the Company changed its retirement benefit plans with an increased
emphasis on delivering retirement benefits through the RSOP, the Company's
defined contribution retirement plan. Service with the Company after September
30, 2006 will not count for calculating the retirement benefit under the Pension
Plan. At the same time, annual Company contributions under the RSOP were
enhanced to provide a total retirement benefit designed to be substantially
similar in value.
The Company makes contributions to the RSOP accounts of all Named
Executive Officers and each may also elect to defer his or her salary and/or
Results Sharing awards within RSOP and Tax Code limits. Amounts contributed by
the Company under the RSOP to the Named Executive Officers are included in
column (h) of the Summary Compensation Table on page 23.
The Pension Plan will provide Named Executive Officers with a
retirement income benefit based on a formula that takes into account years of
service through September 30, 2006 and their final average earnings, meaning the
highest consecutive 48 months of base pay and Results Sharing awards (up to Tax
Code limits) in their last 15 years of service. The present value on December
31, 2006 of each Named Executive Officers' Pension Plan benefit is shown in the
Pension Benefits Table on page 31. The amount received by Mr. Vizanko in 2006 in
Pension Plan benefit payments is also shown in the same table. The 2006 increase
in the Pension Plan benefit value for each Named Executive Officer is shown in
column (g) of the Summary Compensation Table.
SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS. Supplemental retirement
benefits are provided to the Named Executive Officers through a
non-tax-qualified retirement plan called the ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan (SERP). Generally, the SERP is designed
to provide retirement benefits to the Named Executive Officers that, in
aggregate, substantially equal the benefits they would have been entitled to
receive if the Tax Code did not impose limitations on the types and amounts of
compensation that can be included in the benefit calculations under qualified
benefit plans. The compensation generally used to calculate SERP benefits is AIP
awards and the sum of annual salary and Results Sharing award amounts in excess
of the compensation limits imposed on the Company's tax-qualified benefit plans.
The SERP has three components: a supplemental pension benefit, a
supplemental defined contribution benefit, and a deferral account benefit. The
present value on December 31, 2006 of each Named Executive Officer's SERP
pension benefit is shown in the Pension Benefits Table on page 31. The amount of
SERP pension benefits received by Mr. Vizanko in 2006 is also shown in the same
table. The 2006 increase in the SERP pension benefit value for each Named
Executive Officer is shown in column (g) of the Summary Compensation Table on
page 23. The amount of the 2006 SERP defined contribution benefit received by
each Named Executive Officer is included in column (h) of the Summary
Compensation Table.
Under the SERP, each named Executive Officer can also elect to defer,
on a before-tax basis, some or all of his or her salary, annual incentive award,
and SERP defined contribution benefit. The aggregate amount each Named Executive
Officer elected to defer under the SERP in 2006 is shown in the Non-Qualified
Deferred Compensation Table on page 33. Named Executive Officers can select
among different crediting rates, which generally match the investment options
available under the RSOP, to "invest" deferral balances under the SERP. Prior to
October 1, 2006, the SERP offered an above-market fixed eight-percent crediting
rate. Above-market interest credited to Named Executive Officers under the SERP
in 2006 is included in the totals shown in column (g) of the Summary
Compensation Table. Effective October 1, 2006, the Compensation Committee
replaced the fixed eight-percent crediting rate under the SERP with a
market-based fixed-income mutual-fund crediting rate.
PERQUISITES
The Company provides Named Executive Officers with fringe benefits, or
perquisites. The 2006 fringe benefit program for all Named Executive Officers
consists of a monthly car allowance ranging from $1,100 to $1,400, reimbursement
of up to $1,500 annually for financial and tax planning services, and an office
parking space. The Company also pays the expenses associated with travel and
accommodations for Named Executive Officers' spouses who accompany the Named
Executive Officers to business meetings and pays for club
21
memberships with a primary business purpose that also entitle Named Executive
Officers personal use of the facilities and services. In addition, the Company
reimburses its Chief Executive Officer and Chief Financial Officer for the cost
of an annual executive physical examination.
The Compensation Committee has reviewed executive fringe benefits and
determined that the perquisites provided to the Named Executive Officers are
reasonable and in line with other utility and general industry companies.
EMPLOYMENT, SEVERANCE, AND CHANGE-IN-CONTROL AGREEMENTS
The Company currently has no employment, severance, or "golden
parachute" agreements with its Named Executive Officers, all of whom have long
tenures with the Company. The Company has generally promoted senior executives
from within its ranks and attracted strong talent with ties to the area of its
operations. There are no change-in-control agreements with the Named Executive
Officers other than change-in-control features in both the AIP and the LTIP,
which are discussed in the section titled, "Potential Payments Upon Termination
or Change in Control" starting on page 34.
EXECUTIVE COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation
Discussion and Analysis with management. Based upon such review, the related
discussions, and such other matters deemed relevant and appropriate by the
Compensation Committee, the Compensation Committee has recommended to the Board
that the Compensation Discussion and Analysis be included in the proxy statement
to be delivered to Company shareholders.
March 21, 2007
Executive Compensation Committee
Madeleine W. Ludlow, Chair
Kathleen A. Brekken
Jack I. Rajala
Nick Smith
22
SUMMARY COMPENSATION TABLE--2006
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Change in
Pension
Value
and
Nonqual-
Non-Equity ified
Incentive Deferred
Plan Compen- All Other
Name and Stock Option Compen- sation Compen-
Principal Position Year Salary Awards Awards sation Earnings sation Total
------------------------------------------------------------------------------------------------------------------------------------
DONALD J. SHIPPAR 2006 $499,616 $198,893 $147,464 $260,893 $789,804 $130,749 $2,027,419
Chairman, President,
and Chief Executive Officer
MARK A. SCHOBER 2006 $225,970 $41,158 $38,104 $105,626 $86,648 $56,187 $553,693
Senior Vice President and
Chief Financial Officer
LAURA A. HOLQUIST 2006 $233,508 $59,160 $13,236 $325,248 $69,678 $54,852 $755,682
President of ALLETE
Properties, LLC
CLAUDIA SCOTT WELTY 2006 $215,223 $42,228 $39,618 $87,895 $135,783 $54,911 $575,658
Senior Vice President and
Chief Administrative Officer
DEBORAH A. AMBERG 2006 $233,643 $32,209 $23,260 $94,447 $34,703 $47,268 $465,530
Senior Vice President,
General Counsel, and
Secretary
JAMES K. VIZANKO 2006 $202,488 $43,643 $82,766 $99,067 $530,837 $60,178 $1,018,979
Retired Senior Vice
President and Chief
Financial Officer
------------------------------------------------------------------------------------------------------------------------------------
The amounts shown in column (d) relate to performance shares for all Named Executive Officers and to restricted stock units for
Ms. Holquist. The disclosures reflect the dollar amounts the Company recognized as compensation expense for financial statement
reporting purposes for the fiscal year ended December 31, 2006 in accordance with Statement of Financial Accounting Standards
No. 123 (Revised 2004), "Share-Based Payment" (SFAS 123R), but do not take into consideration the effect of estimated
forfeitures. SFAS 123R requires the Company to estimate forfeitures when stock awards are granted and to reduce its estimated
compensation expense accordingly. The Summary Compensation Table was prepared assuming none of the stock awards will be
forfeited. The assumptions used to calculate these amounts are disclosed in Note 17 to the Company's Consolidated Financial
Statements included in the Annual Report, which was filed with the SEC on February 16, 2007. The Company recognizes expense for
performance shares over the three-year performance period of each award granted; the cost of restricted stock units is also
spread over the three-year vesting period. Therefore, the amount shown in column (d) for each Named Executive Officer reflects
the sum of one-third of the expense associated with each of his or her performance share awards outstanding as of December
31, 2006; the amount shown for Ms. Holquist also includes one-third of the expense associated with her outstanding restricted
stock unit award.
The amounts shown in column (e) reflect the dollar amounts the Company recognized as compensation expense for financial
statement reporting purposes for the fiscal year ended December 31, 2006 in accordance with SFAS 123R, but does not take into
consideration the effect of estimated forfeitures. SFAS 123R requires the Company to estimate forfeitures when option awards
are granted and to reduce estimated compensation expense accordingly. The Summary Compensation Table was prepared assuming none
of the option awards will be forfeited. The assumptions used to calculate these amounts are disclosed in Note 17 to the
Consolidated Financial Statements included in the Company's Annual Report. For all Named Executive Officers, except Ms.
Holquist and Ms. Amberg who are not retirement eligible under the Company's retirement plans, the amount shown represents the
grant-date fair value of the stock option award granted in 2006. The amount shown for Ms. Holquist reflects the sum of
one-third of the grant-date fair value of the stock option award granted to her in each of the years 2004 and 2005. The amount
shown for Ms. Amberg reflects the sum of one-third of the grant-date fair value of the stock option award granted to her in
each of the years 2004, 2005, and 2006. The values shown for stock options are theoretical. The value a Named Executive Officer
actually realizes will depend on the extent to which the Common Stock's market value exceeds the exercise price when the
stock options are exercised.
23
The amounts shown in column (f) include amounts that were earned, as well as amounts that were earned and deferred at the
election of the Named Executive Officer, pursuant to the AIP and the long-term cash award earned by Ms. Holquist under the
LTIP. Also included for all Named Executive Officers, except Ms. Holquist, are amounts that were earned, as well as amounts
that were earned and deferred at the election of the Named Executive Officer, under the Results Sharing program. By program
design, a portion of Results Sharing awards were paid in the form of a Company contribution to the Named Executive Officer's
RSOP account.
The amounts in column (g) are comprised of the following:
Aggregate Change in
Actuarial Present Value of
Accumulated Defined Above-Market Interest on
Benefit Pensions During Year Deferred Compensation
---------------------------- ------------------------
Donald J. Shippar $777,463 $12,341
Mark A. Schober $77,215 $9,433
Laura A. Holquist $48,982 $20,696
Claudia Scott Welty $126,790 $8,993
Deborah A. Amberg $32,947 $1,756
James K. Vizanko $503,547 $27,290
The amounts in column (h) are comprised of the following:
Contributions to Amounts Earned Under the
Perquisites and Other Tax the RSOP and Supplemental Executive
Personal Benefits * Reimbursements ** Flexible Benefit Plan Retirement Plan
--------------------- ----------------- --------------------- ------------------------
Donald J. Shippar $26,514 $10,140 $29,687 $64,408
Mark A. Schober $16,262 $1,500 $25,759 $12,666
Laura A. Holquist $13,051 $800 $23,922 $17,079
Claudia Scott Welty $17,339 $0 $24,920 $12,652
Deborah A. Amberg $14,669 $0 $23,240 $9,359
James K. Vizanko $15,292 $3,852 $16,310 $24,724
* A description of all fringe benefits, or perquisites, offered to the Named Executive Officers is provided in the
Compensation Discussion and Analysis on page 21. Amounts include: (1) monthly car allowances: Mr. Shippar--$16,728, Mr.
Schober--$13,546, Ms. Holquist--$12,940, Ms. Welty--$13,546, Ms. Amberg--$13,680, and Mr. Vizanko--$10,366; (2) meal and
entertainment expenses for Named Executive Officer's spouse paid by the Company: Ms. Welty--$2,918; and (3) costs associated
with an annual executive physical: Mr. Shippar--$6,183 and Mr. Vizanko--$3,681. The value assigned to each perquisite given to a
Named Executive Officer is based on the aggregate incremental cost to the Company associated with the fringe benefit. The
amounts reflect the full, actual cost of the fringe benefit in all cases, except for spouses' travel and entertainment expenses.
The aggregate cost to the Company for spousal travel, meals, and entertainment was calculated as the full actual cost of each
benefit in excess of the amount the Company would have paid had the Named Executive Officer been traveling or eating without his
or her spouse.
** The tax reimbursements relate to imputed income from spousal travel, executive physicals, and/or miscellaneous perquisites.
24
GRANTS OF PLAN-BASED AWARDS--2006
The following Grants of Plan-Based Awards Table shows the range of each
Named Executive Officer's annual and long-term incentive award opportunities
granted for the fiscal year ended December 31, 2006. The narrative following the
table describes the terms of each incentive award opportunity.
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i) (j) (k) (l) (m)
All All Grant
Other Other Date
Estimated Future Estimated Future Stock Option Fair
Payouts Payouts Awards: Awards: Exercise Value
Date of Under Non-Equity Under Equity Number of Number of or Base of
Compen- Incentive Plan Awards Incentive Plan Awards Shares Securities Price of Stock
sation -------------------------- -------------------------- of Stock Underlying Option and
Name and Grant Committee Threshold Target Maximum or Units Options Awards Option
Award Type Date Action Theshold Target Maximum (#) (#) (#) (#) (#) ($/sh) Awards
------------------------------------------------------------------------------------------------------------------------------------
DONALD J. SHIPPAR
Results Sharing - - $14,960 $24,933 $74,798 - - - - - - -
AIP - - $76,500 $204,000 $408,000 - - - - - - -
Stock Options 2/01/06 1/24/06 - - - - - - - 20,256 $44.15 $147,464
Performance
Shares 2/01/06 1/24/06 - - - 2,966 5,932 11,864 - - - $248,966
MARK A. SCHOBER
Results Sharing - - $6,751 $11,251 $33,753 - - - - - - -
AIP - - $30,469 $81,250 $162,500 - - - - - - -
Stock Options 2/01/06 1/24/06 - - - - - - - 5,234 $44.15 $38,104
Performance
Shares 2/01/06 1/24/06 - - - 511 1,022 2,044 - - - $42,893
LAURA A. HOLQUIST
AIP - - - $213,281 - - - - - - - -
Long-Term
Incentive Cash - - $69,000 $86,250 $103,500 - - - - - - -
Restricted
Stock Units 2/01/06 1/24/06 - - - - - - 2,073 - - $85,325
ClAUDIA SCOTT
WELTY
Results Sharing - - $6,450 $10,750 $32,250 - - - - - - -
AIP - - $24,750 $66,000 $132,000 - - - - - - -
Stock Options 2/01/06 1/24/06 - - - - - - - 5,442 $44.15 $39,618
Performance
Shares 2/01/06 1/24/06 - - - 532 1,063 2,126 - - - $44,614
DEBORAH A. AMBERG
Results Sharing - - $6,993 $11,655 $34,964 - - - - - - -
AIP - - $26,550 $70,800 $141,600 - - - - - - -
Stock Options 2/01/06 1/24/06 - - - - - - - 6,004 $44.15 $43,709
Performance
Shares 2/01/06 1/24/06 - - - 586 1,172 2,344 - - - $49,189
JAMES K. VIZANKO
Results
Sharing - - $8,587 $14,311 $42,933 - - - - - - -
AIP - - $38,194 $101,850 $203,700 - - - - - - -
Stock Options 2/01/06 1/24/06 - - - - - - - 11,369 $44.15 $82,766
Performance
Shares 2/01/06 1/24/06 - - - 1,110 2,220 4,440 - - - $93,173
------------------------------------------------------------------------------------------------------------------------------------
Results sharing awards are made under the Results Sharing program. The AIP bonus is awarded under the AIP. Performance shares
and stock options, and for Ms. Holquist long-term incentive cash and restricted stock units, are awarded under the LTIP.
The number of stock options awarded in 2006 was calculated by dividing the dollar value of the Named Executive Officers'
long-term incentive target opportunity allocated to stock options by the estimated $8.62 stock option value. The estimated
stock option value is the product of the $44.15 grant date Common Stock price and the 0.195 binomial ratio as of February 1,
2006. The binomial option valuation method is a mathematical model premised on the ability to immediately exercise and transfer
the stock options, which are not actual features of the stock options granted to the Named Executive Officers. In addition to
the option exercise price, the following assumptions for modeling were used to calculate the binomial value: (i) each option
remains outstanding for a period of seven years; (ii) dividend yield of 3.28 percent (based on the most recent quarterly
dividend paid prior to the date of grant); (iii) dividend increase of 5 percent; (iv) stock price volatility of 0.20 (based on
estimate of peer group analysis and historic volatility since the 2004 spin-off of ADESA, Inc.); and (v) a risk-free rate of
return of 4.61 percent (based on Treasury yields).
25
The amounts shown in column (m) were calculated in accordance with SFAS 123R, using the same assumptions used in the valuation
of compensation expense for the Company's Consolidated Financial Statements contained in the Annual Report including the
assumptions for estimated forfeitures. Neither performance shares nor stock options are subject to forfeiture if the Named
Executive Officer is retirement eligible; therefore the amounts shown in column (m) for Mr. Shippar, Mr. Schober, and Ms. Welty
reflect the entire grant-date fair value of those awards for each of them. Neither Ms. Holquist nor Ms. Amberg was retirement
eligible as of December 31, 2006. The amount shown in column (m) for Ms. Holquist's restricted stock units reflects the
reduction due to the estimated-forfeiture assumption. The amounts shown in column (m) for Ms. Amberg's performance share award
and stock option award reflect the reduction due to the estimated-forfeiture assumption. The values shown for stock options,
performance shares and restricted stock units are theoretical. The value a Named Executive Officer actually realizes from stock
options will depend on the extent to which the Common Stock's market value exceeds the exercise price when the stock options
are exercised. The value a Named Executive Officer realizes from performance shares will depend on actual Common Stock
performance relative to the peer group, and market price appreciation and dividend yield. The value Ms. Holquist realizes from
restricted stock units will depend on the market price appreciation of Common Stock.
The amounts shown are calculated assuming employment throughout the applicable performance periods. Mr. Vizanko retired
September 30, 2006. Under the terms of the Results Sharing program and the AIP, he received a prorated award equal to
approximately 9/12ths of the amounts he would have earned had he been employed through December 31, 2006. Under the terms of
the LTIP, he will receive a prorated payment of any performance shares earned after the completion of the performance period,
plus dividend equivalents. The award will be prorated based on the number of elapsed whole calendar months in the performance
period as of his retirement date in relation to the number of whole calendar months in the full three-year performance period,
or 9/36ths of the amounts shown in columns (g), (h), and (i).
The Company's 2006 incentive awards for all Named Executive Officers
except Ms. Holquist consisted of two annual incentive opportunities--Results
Sharing and the AIP--and two long-term incentive opportunities--performance
shares and stock options. Ms. Holquist's 2006 incentive opportunities consisted
of the AIP, long-term incentive cash, which, when earned, will vest over a
three-year period, and restricted stock units. Each incentive is discussed
below. The annual incentives are presented first, followed by a description of
the long-term incentives.
RESULTS SHARING. The 2006 target-level Results Sharing financial goal
was to achieve net income from continuing operations (NICO) of $74.6 million,
excluding gains and losses from emerging technology investments because the
Company has no plans to make additional investments in emerging technologies
beyond its outstanding commitments. The 2006 Results Sharing program also had
specific operational goals related to safety, customer service and reliability,
and environmental protection. Results Sharing awards are adjusted downward by up
to 40 percent if the operational goals are not met. The amounts shown in column
(d) in the Grants of Plan-Based Awards Table above reflect the minimum Results
Sharing awards payable, which was set at 3 percent of salary, and would have
resulted if the financial target had been met but no operational goals were
achieved. The target Results Sharing awards shown in column (e) was set at 5
percent of salary, and would have been payable if the financial target and all
operational goals were met. The amounts shown in column (f) reflect the maximum
Results Sharing awards payable, which were set at 15 percent of salary, and
would have been earned if the financial results had exceeded the target by 50
percent and all operational goals were met.
The amount shown in column (f) of the Summary Compensation Table
includes Results Sharing awards earned in 2006 equal to 6.5 percent of base
salary for each Named Executive Officer, except Ms. Holquist who does not
participate in the program. The award amount reflects results of NICO exceeding
target by $2.6 million and each operational goal having been met. The Company
contributes half of the Results Sharing award as Common Stock to the Named
Executive Officer's RSOP account. Named Executive Officers, like all Results
Sharing participants, may elect to receive the remaining portion of the award in
cash or to contribute some or all of it to their RSOP account. Named Executive
Officers who retire, die or become disabled during the year remain eligible to
receive a Results Sharing award on a prorated basis. Subject to the Compensation
Committee's discretion, Named Executive Officers who terminate employment for
other reasons may be eligible for a prorated Results Sharing award.
26
ANNUAL INCENTIVE PLAN (AIP). For all the Named Executive Officers,
except Ms. Holquist whose 2006 AIP opportunity is discussed separately below,
the following were the 2006 AIP performance goals, measures, and goal weighting:
Goal Measure
AIP Performance Goals (Threshold Performance) Goal Weighting
--------------------- ----------------------- --------------
Net Income from Continuing Operations (NICO),
Excluding Gains and Losses From Emerging
Technology Investments $74.6 million 37.5%
Operating Free Cash Flow (OFCF) $23.9 million 37.5%
Stategic Goals Various; See below 25.0%
The NICO goal excludes gains and losses from emerging technology
investments. Operating free cash flow (OFCF) is calculated as the sum of NICO
plus depreciation and deferred tax expense, cost basis of real estate assets
sold in Minnesota, changes in working capital, and capital expenditures.
Strategic goals related to the Company's ability to recover certain expenses
from its regulated utility customers and to obtaining regulatory approval of
certain environmental initiatives and implementing those initiatives, which is
discussed in Part I, Item 1 of the Annual Report. Other strategic goals related
to leadership development and succession planning.
A threshold performance level was established for each AIP performance
goal and each goal's achievement was independently measured. By design, no
awards are earned if both financial goal results fall below their threshold
performance levels and no progress is made on the strategic goals. The amounts
shown in column (d) of the Grants of Plan-Based Awards Table reflect the minimum
AIP award that would be payable--ranging from 11.3 percent to 15 percent of base
salary--if both financial results are at threshold and if there is no progress
on strategic goals. The amounts shown in column (e) reflect the AIP target-level
awards that would be payable--ranging from 30 percent to 40 percent of base
salary--if NICO results exceed the threshold by 10 percent, OFCF results exceed
the threshold by 24 percent, and all strategic goals are achieved. The amount
shown in column (f) reflect maximum AIP awards that would be payable--ranging
from 60 percent to 80 percent of base salary--if NICO results exceed the
threshold by 15 percent, OFCF results exceed the threshold by 173 percent, and
all strategic goals are exceeded. Actual 2006 NICO exceeded the threshold by 3.5
percent, or $2.6 million; OFCF exceeded the threshold by 44 percent, or $10.5
million; and strategic goals, overall, were met. As a result, the amounts shown
in column (f) of the Summary Compensation Table include near-target AIP awards
earned in 2006 ranging from 29 percent to 45 percent of base salary for the
Named Executive Officers, other than Ms. Holquist.
Ms. Holquist's 2006 AIP award opportunity was established based on a
stepped percentage of ALLETE Properties' revenue from land sales (ranging from 0
percent if revenue was less than $32 million up to 0.84 percent if revenue
exceeded $71 million) plus a stepped percentage of net income from real estate
operations (ranging from 0 percent if net income from real estate operations was
less than $14 million up to 0.35 percent if net income from real estate
operations exceeded $28.3 million). Ms. Holquist could have earned from 0
percent to 120 percent of the award opportunity based on the achievement of
specific goals. Her goals for 2006 were meeting net income of $21.1 million from
real estate operations land sales (20% weighting) and several strategic goals
(combined 80% weighting), including: completing infrastructure construction of
Town Center, a property located in the city of Palm Coast, Florida, obtaining
approval of a development order for Ormond Crossings, and identifying real
estate acquisition opportunities, all of which are discussed in Part I, Item 1
of the Annual Report. Other strategic goals related primarily to operational
improvements.
The amount shown in column (e) of the Grants of Plan-Based Awards Table
on page 25 reflects Ms. Holquist's 2006 AIP target opportunity, which would be
payable if ALLETE Properties' revenue from land sales was $50.4 million, if net
income from real estate operations was $21.1 million, and if Ms. Holquist
achieved her strategic goals. The amount shown for Ms. Holquist in column (f) of
the Summary Compensation Table on page 23 includes the AIP award she earned in
2006, which was calculated on the basis of ALLETE Properties
27
having realized $50.2 million of revenue from land sales (after the deduction of
minority interests) and having earned $22.9 million of net income from real
estate operations, and the fact that, overall, Ms. Holquist exceeded her
strategic goals.
Named Executive Officers may elect to receive their AIP award in cash,
or to defer some or all of it to an account under the SERP. Named Executive
Officers who retire, die or become disabled during the year remain eligible to
receive a prorated AIP award. Named Executive Officers who terminate employment
for any other reason forfeit the AIP award.
STOCK OPTIONS. The Named Executive Officers, except Ms. Holquist,
received stock option awards in 2006 under the LTIP. The number of stock options
granted to the Named Executive Officers is shown in column (k) of the Grant of
Plan-Based Awards Table on page 25. Once vested, each stock option gives the
Named Executive Officer the right to purchase one share of Common Stock at an
exercise price. The exercise price shown in column (l) is equal to the closing
share price of Common Stock on the grant date. The stock options vest in three
equal installments--on the first, second, and third anniversary of the grant
date, respectively. Stock options expire ten years from the grant date. The
stock options vest immediately upon retirement, disability, or death and expire
on the earlier of the original expiration date or three years from the
accelerated vesting (in the case of retirement) or one year from the accelerated
vesting (in the case of disability or death); stock options also vest
immediately upon a change-in-control event, without triggering any change in the
expiration date. If a Named Executive Officer terminates his or her employment
for any other reason, he or she has 90 days in which to exercise vested stock
options and unvested stock options are forfeited. The Company's compensation
expense recorded in its Consolidated Financial Statements included in the Annual
Report for stock option awards to each Named Executive Officer is reported in
column (e) of the Summary Compensation Table on page 23.
PERFORMANCE SHARES. Four performance share awards, each encompassing a
different multi-year performance period, are reflected in the compensation
tables. These performance share awards are summarized as follows:
Status of Performance
Performance Period Performance Period Share Award as of
Beginnning Ending December 31, 2006
------------------ ------------------ ---------------------
January 1, 2006 December 31, 2008 Unearned; Not Vested
January 1, 2005 December 31, 2007 Unearned; Not Vested
January 1, 2004 December 31, 2006 Earned; Not Vested
January 1, 2004 December 31, 2005 Earned; Vested
In 2006, the Named Executive Officers, except Ms. Holquist, were
granted performance share awards for the three-year performance period beginning
on January 1, 2006 and ending on December 31, 2008. The number of shares of
Common Stock earned pursuant to the 2006 performance share awards will be based
on the Company's TSR ranking relative to a 16-company peer group. A more
detailed discussion of the TSR peer group is contained in the Compensation
Discussion and Analysis section on page 20.
The amounts shown in column (g) of the Grants of Plan-Based Awards
Table reflect the minimum 2006 performance share award payable, set at 50
percent of the target amount shown in column (h), which will be earned if
ALLETE's TSR for the three-year performance period ranks 10th among the peer
group. The amounts shown in column (h) reflect the target performance share
award payable if ALLETE's TSR for the three-year performance period ranks 7th
among the peer group. The amount shown in column (i) reflects the maximum
performance share award payable, set at 200 percent of the target amount, which
will be earned if ALLETE's TSR ranks 3rd or higher among the peer group. A
performance share award is earned at each ranking from 10th to first.
Dividend equivalents accrue during the performance period and are paid
in shares, but only to the extent performance goals are achieved. If earned, 100
percent of the performance shares will be paid in Common Stock after the end of
the performance period. If a change-in-control event were to occur, performance
share awards would immediately pay out on a prorated basis, including dividend
equivalents, at the greater of the target level or the level earned based on
then-current actual TSR ranking as compared to the peer group companies. The
amount recorded as compensation expense for performance share awards to each
Named Executive Officer in the
28
Company's Consolidated Financial Statements included in the Annual Report is
shown in column (d) of the Summary Compensation Table on page 23.
Performance shares awarded for both the 2006-2008 and the 2005-2007
performance periods remain unearned. The number of performance shares awarded to
each Named Executive Officer in each of those periods is shown in column (h) of
the Outstanding Equity Awards at Fiscal Year-End Table on page 30. An estimated
market value of the unearned and unvested performance shares, assuming threshold
performance in the case of the 2006-2008 performance period and target
performance in the case of the 2005-2007 performance period, is shown in column
(i) of that table. The actual value, if any, to the Named Executive Officers
will be determined at the end of 2007 and 2008, respectively, based on the
Company's actual TSR ranking for the three-year performance period relative to
the peer group.
During the three-year performance period 2004-2006, the Company's
shareholders realized a TSR of 45 percent on their investment in Common Stock,
ranking the Company ninth among the peer group of 16 comparable companies. As a
result, the Named Executive Officers earned a performance share payout for the
2004-2006 performance period equal to 66.7 percent of the target award. The
number and value of performance shares earned for this three-year performance
period are shown in column (f) and (g), respectively, of the Outstanding Equity
Awards at Fiscal Year-End Table. The Common Stock earned in connection with the
2004- 2006 performance share award was paid to Named Executive Officers on
February 2, 2007.
The Named Executive Officers received a payout in 2006 associated with
performance share awards for the 2004-2005 performance period. The Company's TSR
during the two-year performance period was 34 percent, ranking the Company
number one among its peer group and resulting in a payout that was 200 percent
of target. The performance share payout for each Named Executive Officer is
shown in column (d) and (e), respectively, of the Option Exercises and Stock
Vested Table on page 31.
RESTRICTED STOCK UNITS. The number of restricted stock units awarded to
Ms. Holquist in 2006 is shown in column (j) of the Grants of Plan-Based Awards
Table. Each restricted stock unit entitles her to receive one share of Common
Stock after the time lapse specified in the award. The restricted stock units
granted to Ms. Holquist in 2006 vest in three installments, with 30 percent
vesting on each of the first and second anniversary of the award date and 40
percent vesting on the third anniversary of the award date. Ms. Holquist must
remain employed by the Company at the time restricted stock units vest to
receive the Common Stock. Ms. Holquist will receive no dividend equivalents
during the vesting period. The restricted stock units would vest immediately
upon retirement, disability, or death. The compensation expense recorded on the
Company's Consolidated Financial Statement for the restricted stock units
awarded to Ms. Holquist is included in the amount shown for her in column (d) of
the Summary Compensation Table on page 23. The number of restricted stock units
awarded to Ms. Holquist is shown in column (f) of the Outstanding Equity Awards
at Fiscal Year-End Table, while the value of the award is shown in column (g).
LONG-TERM INCENTIVE CASH AWARD. Payment of the long-term incentive cash
opportunity awarded to Ms. Holquist in 2006 was contingent on her achievement of
her 2006 AIP strategic goals. The amount shown in column (d) of the Grants of
Plan-Based Awards Table in connection with Long-Term Incentive Cash reflects the
minimum long-term incentive cash award payable, set at 80 percent of target,
which she would earn if ALLETE Properties achieved net income from real estate
operations of $21.1 million and if she made some progress toward her AIP
strategic goals. The amount shown in column (e) of the Grants of Plan-Based
Awards Table in connection with Long-Term Incentive Cash reflects a target-level
award that would be payable if Ms. Holquist met all of her 2006 AIP financial
and strategic goals. The amount shown in column (f) of the Grants of Plan-Based
Awards Table on page 25 reflects the maximum award payable, set at 120 percent
of target, which Ms. Holquist would earn if ALLETE Properties achieved net
income from real estate operations of $21.1 million and if she exceeded her 2006
AIP strategic goals. The long-term incentive cash award earned is payable in
three installments, with 30 percent vesting on each of the first and second
anniversary of the award date, and 40 percent vesting on the third anniversary
of the award date. Ms. Holquist must remain employed by the Company on the
vesting dates to receive the cash payments. The full long-term incentive cash
award actually earned by Ms. Holquist in 2006, equal to 38 percent of her base
salary, is shown in column (f) of the Summary Compensation Table on page 23. The
award amount was based on the fact that Ms. Holquist, overall, exceeded her 2006
AIP strategic goals.
29
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END--2006
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Option Awards Stock Awards
------------------------------------------------ --------------------------------------------------------------
Equity Equity
Incentive Plan Incentive Plan
Awards: Awards:
Number of Number of Number of Market or
Securities Shares Unearned Payout Value
Underlying or Units Market Value Shares, Units of Unearned
Unexercised Options of Stock of Shares or or Other Rights Shares, Units
-------------------------- Option Option That Have Units of Stock That Have Not or Other Rights
Exercisable Unexercisable Exercise Expiration Not Vested That Have Not Vested That Have Not
Name (#) (#) Price Date (#) Vested (#) Vested
------------------------------------------------------------------------------------------------------------------------------------
Donald J. Shippar 7,217 0 $29.79 1/02/2012 2,547 $118,542 7,490 $348,585
9,270 4,635 $37.76 2/02/2014
6,539 13,079 $41.35 2/01/2015
0 20,256 $44.15 2/01/2016
Mark A. Schober 4,413 0 $29.79 1/02/2012 656 $30,517 1,460 $67,949
2,207 0 $23.79 2/03/2013
2,386 1,193 $37.76 2/02/2014
1,389 2,778 $41.35 2/01/2015
0 5,234 $44.15 2/01/2016
Laura A. Holquist 2,472 1,236 $37.76 2/02/2014 2,752 $128,082 968 $45,051
1,505 3,011 $41.35 2/01/2015
Claudia Scott
Welty 3,862 0 $27.40 1/02/2011 652 $30,341 1,518 $70,648
3,367 0 $29.79 1/02/2012
3,367 0 $23.79 2/03/2013
2,371 1,186 $37.76 2/02/2014
1,446 2,892 $41.35 2/01/2015
0 5,442 $44.15 2/01/2016
Deborah A. Amberg 993 0 $25.08 1/02/2008 196 $9,114 1,411 $65,667
1,819 0 $25.45 1/04/2009
2,011 0 $18.85 1/03/2010
1,360 0 $27.40 1/02/2011
1,209 0 $29.79 1/02/2012
1,209 0 $23.79 2/03/2013
713 357 $37.76 2/02/2014
1,183 2,366 $41.35 2/01/2015
0 6,004 $44.15 2/01/2016
James K. Vizanko 8,635 0 $37.76 9/30/2009 1,450 $67,483 1,565 $72,835
10,057 0 $41.35 9/30/2009
11,369 0 $44.15 9/30/2009
------------------------------------------------------------------------------------------------------------------------------------
Each option award has a ten-year term. Therefore, the grant date for each award is the date ten years prior to the date shown
in column (e). Options vest in three equal installments on each of the first, second and third anniversaries of the grant date.
Mr. Vizanko retired on September 30, 2006. His options then unexercisable became fully vested as of his retirement date. He has
three years from his retirement date in which to exercise all his outstanding options.
The amounts shown in column (f) are comprised of the following: (1) the performance shares earned for the 2004-2006 performance
period, which amount for Mr. Vizanko was prorated to reflect the 33/36ths months of the performance period during which he was
employed by the Company, and which for all Named Executive Officers was paid in Common Stock on February 2, 2007; and (2) for
Ms. Holquist, 2,073 restricted stock units granted to her in 2006, 30 percent of which vested on the first anniversary of the
February 1, 2006 grant date, 30 percent of which will vest on the second anniversary of the grant date, and the remainder of
which will vest on the third anniversary of the grant date.
These amounts were calculated by multiplying the number of shares and units in column (f) by the closing price of Common Stock
on December 31, 2006.
Represents the Common Stock that would be payable for outstanding performance share awards if target performance were achieved
for the performance period 2005-2007 and if threshold performance were achieved for the performance period 2006-2008. The
amounts shown for Mr. Vizanko reflect the prorated amounts for which he is eligible due to his September 30, 2006 retirement.
These amounts were calculated by multiplying the number of shares and units in column (h) by the closing price of Common Stock
on December 31, 2006.
30
OPTION EXERCISES AND STOCK VESTED--2006
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Option Awards Stock Awards
-------------------------------------------- -------------------------------------------------
Number of Shares
Acquired on Number of Shares
Exercise Value Realized Acquired on Vesting Value Realized
Name (#) on Exercise (#) on Vesting
------------------------------------------------------------------------------------------------------------------------------------
Donald J. Shippar 10,513 $205,787 7,403 $327,874
Mark A. Schober 0 $0 1,906 $84,408
Laura A. Holquist 0 $0 1,974 $87,417
Claudia Scott Welty 0 $0 1,895 $83,920
Deborah A. Amberg 0 $0 569 $25,208
James K. Vizanko 0 $0 4,597 $203,620
------------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS--2006
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Number of
Years
Credited
Service Present Value of Payments During Last
Name Plan Name (#) Accumulated Benefit Last Fiscal Year
------------------------------------------------------------------------------------------------------------------------------------
Donald J. Shippar Minnesota Power and Affiliated Companies
Retirement Plan A 29.75 $796,754 $0
ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan 29.75 $1,828,803 $0
Mark A. Schober Minnesota Power and Affiliated Companies
Retirement Plan A 28.67 $535,775 $0
ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan 28.67 $270,316 $0
Laura A. Holquist Minnesota Power and Affiliated Companies
Retirement Plan A 19.58 $173,949 $0
ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan 19.58 $171,871 $0
Claudia Scott Welty Minnesota Power and Affiliated Companies
Retirement Plan A 27.67 $580,366 $0
ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan 27.67 $325,262 $0
Deborah A. Amberg Minnesota Power and Affiliated Companies
Retirement Plan A 16.08 $104,967 $0
ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan 16.08 $40,076 $0
James K. Vizanko Minnesota Power and Affiliated Companies
Retirement Plan A 29.00 $769,211 $11,346
ALLETE and Affiliated Companies
Supplemental Executive Retirement Plan 29.00 $887,182 $7,427
------------------------------------------------------------------------------------------------------------------------------------
For the Named Executive Officers, except Mr. Vizanko, the amounts shown represent the discounted net present values of the
annual annuity payments to which the Named Executive Officers would be entitled at retirement assuming they retire at age 62,
the earliest age at which Named Executive Officers may receive unreduced pension benefits. Mr. Vizanko retired on September 30,
2006. The amounts shown for him represent the discounted net present value of the annuity payments he is receiving. In addition
to retirement age, the following assumptions were used to calculate the present value of accumulated benefits: discount rate of
5.75 percent; cost of living adjustment of 2.5 percent; and female spouses are assumed to be three years younger than male
spouses, except for Mr. Vizanko for whom the calculation took into account his and his spouse's actual ages. The amounts
reflect the accumulated pension benefits over the entire career of the Named Executive Officers.
31
Minnesota Power and Affiliated Companies Retirement Plan A (Retirement
Plan) is a tax-qualified defined benefit pension plan that covers the majority
of our nonunion employees, including the Named Executive Officers. Pension
benefits are based on the employee's years of service and the employee's final
average earnings. Final average earnings covered by the Retirement Plan include
the highest consecutive 48 months of salary and Results Sharing awards in the
last 15 years of service. As the result of a Company-wide nonunion benefit
change, Named Executive Officers have not accrued additional credited service
under the Retirement Plan since September 30, 2006. The pension benefit is
calculated as a life annuity using the following formula:
[ .8% X years of service from July 1, 1980 ] X final average earnings
through September 30, 2006
PLUS (for Named Executive Officers hired before July 1, 1980)
[ 10% + (1% x credited service ] X final average earnings
prior to July 1, 1980)
Normal retirement age under the Retirement Plan is age 65 with at least
five years of continuous service with the Company. Named Executive Officers
become eligible for an unreduced early retirement benefit at age 62 if they have
at least 10 years of continuous service, or at age 58 if they have at least 40
years of continuous service. Named Executive Officers are first eligible for a
reduced early-retirement benefit at age 50 with at least 10 years of continuous
service. Early retirement benefits are calculated by applying a 4 percent
reduction factor to the benefit for each year and partial year between age 62
and the early retirement benefit commencement age. Mr. Shippar, Mr. Schober, and
Ms. Welty are currently eligible to receive early retirement benefits. Ms.
Holquist and Ms. Amberg have a vested Retirement Plan benefit, but are not
currently eligible to receive early retirement benefits. Mr. Vizanko retired on
September 30, 2006, elected the normal form of benefit, and began receiving his
Retirement Plan benefit on October 31, 2006.
Each Named Executive Officer is married. The normal form of Retirement
Plan benefit payment for married participants is a life annuity with a 60
percent surviving spouse benefit. Lump sum distributions are not offered. Once
pension benefit payments have commenced, the benefit adjusts in future years to
reflect changes in cost of living, with a maximum adjustment of 3 percent per
year.
Both the annual earnings that may be considered in calculating benefits
under the Retirement Plan and the annual benefit amount that the Retirement Plan
may deliver to a Named Executive Officer are limited by the Tax Code. The SERP
is designed to provide supplemental pension benefits, paid out of general
Company assets, to eligible executives including the Named Executive Officers,
in amounts sufficient to maintain total pension benefits upon retirement at a
level which would have been provided by our Retirement Plan if benefits were not
restricted by the Tax Code. The SERP plan formula is calculated as follows:
[ .8% X years of service from July 1, 1980 ] X SERP final average earnings
through retirement or termination date
PLUS (for Named Executive Officers hired before July 1, 1980)
[ 10% + (1% x credited service ] X SERP final average earnings
prior to July 1, 1980)
32
The compensation generally used to calculate SERP benefits is the sum
of annual salary and Results Sharing awards in excess of the Tax Code limits
imposed on the Retirement Plan and AIP awards. Final average earnings for SERP
are equal to the highest consecutive 48 months of this SERP compensation. The
highest-consecutive-48-month salary and AIP awards can result from different
periods; however, both the salary and the AIP awards must fall within the last
15 years of service.
The normal form of payment for SERP benefits is a 15-year annuity. The
optional form of payment is a life annuity. Payments commence upon retirement.
SERP benefits are only payable if the Named Executive Officer retires
after reaching age 50 with 10 years of service. In all other respects, the
eligibility requirements for SERP retirement benefits and the calculation of
SERP early retirement benefits mirror the Retirement Plan eligibility
requirements and early retirement benefits discussed above.
Mr. Vizanko retired on September 30, 2006, elected to receive his SERP
retirement benefit as a life annuity with a 60 percent surviving spouse benefit,
and began receiving the portion of his SERP benefit related to service prior to
January 1, 2005 on October 31, 2006. Beginning April 2007, Mr. Vizanko's SERP
monthly benefit payment will be increased to reflect his service from January 1,
2005 through his retirement date. The 6-month delay on this portion of his SERP
payment resulted from Mr. Vizanko's status as a key employee and the application
of Treasury Regulation 409(A).
NONQUALIFIED DEFERRED COMPENSATION--2006
------------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
Executive Aggregate
Contributions Aggregate Earnings Aggregate Balance as of
Name in 2006 in 2006 Withdrawals/Distributions December 31,2006
------------------------------------------------------------------------------------------------------------------------------------
Donald J. Shippar $279,437 $53,970 $0 $1,078,684
Mark A. Schober $194,990 $62,593 $0 $1,189,416
Laura A. Holquist $275,658 $78,857 $0 $1,511,299
Claudia Scott Welty $247,267 $48,077 $0 $998,884
Deborah A. Amberg $65,855 $13,103 $0 $316,548
James K. Vizanko $131,321 $106,916 $34,156 $1,474,885
------------------------------------------------------------------------------------------------------------------------------------
The amounts shown in column (b) include the following amounts of salary earned and deferred in 2006 that were also reported in
column (c) of the Summary Compensation Table: Mr. Shippar--$49,865; Mr. Schober--$27,002; and Ms. Welty--$107,501. The
remaining amounts shown in column (b) reflect compensation that was earned in 2005 and deferred in 2006, which, therefore, are
not reported in the 2006 Summary Compensation Table.
The amounts shown in column (c) include above-market interest earned in 2006 on non-qualified deferral balances, which is also
reported in column (g) of the Summary Compensation Table, as follows: Mr. Shippar--$12,341; Mr. Schober--$9,433; Ms. Holquist--
$20,696; Ms. Welty--$8,993; Ms. Amberg--$1,739; and Mr. Vizanko--$27,290.
Annually, each Named Executive Officer may elect to defer to a SERP
deferral account, on a before-tax basis, some or all of his or her salary, AIP
award, and SERP defined contribution benefit. Named Executive Officers can
select among different crediting rates, which generally match the investment
options available to all employees under the RSOP to "invest" deferral balances
under the SERP. The Named Executive Officers may change their investment
elections at any time. Prior to October 1, 2006, the SERP offered an
above-market fixed eight-percent crediting rate. Effective October 1, 2006, the
Compensation Committee replaced the fixed eight-percent crediting rate under the
SERP with a market-based fixed-income mutual fund crediting rate.
Each Named Executive Officer has elected a date when payments from her
or his SERP deferral account will commence and has elected the form of benefit
payment. Generally, SERP deferral account benefit payments will not begin
earlier than the elected commencement date. However, the full SERP deferral
account balance will be paid prior to the scheduled commencement date to any
Named Executive Officer who is not eligible to retire at the time he or
33
she terminates employment with the Company. In addition, a Named Executive
Officer may request an early distribution of some or all of his or her SERP
deferral account balance upon a demonstrated severe financial need, or at any
time prior to the first scheduled payment date, may elect an early withdrawal of
contributions made to his or her account prior to January 1, 2005 subject to a
10 percent early withdrawal penalty. A Named Executive Officer is not allowed to
elect to receive an early withdrawal of amounts contributed after January 1,
2005 to his or her SERP deferral account.
A Named Executive Officer may elect to receive his or her SERP deferral
account balance in the form of either a lump sum payment or monthly installments
over a 5-, 10-, or 15-year period, or a combination of both. A Named Executive
Officer who retires before April 1, 2007 will receive a fixed eight-percent
annual interest crediting rate on his or her deferral account balance until paid
in full. A Named Executive Officer who retires on or after April 1, 2007 will
receive a fixed seven-and-one-half percent annual interest crediting rate on her
or his deferral account balance until paid in full.
Prior to 1996, the Company also provided executives an opportunity to
elect to defer salary and AIP awards under the Minnesota Power and Affiliated
Companies Executive Investment Plan II (EIP II), a nonqualified deferred
compensation plan. EIP II has been closed to new contributions since 2002. The
amount shown in column (e) for Mr. Shippar, Mr. Schober, and Mr. Vizanko
includes amounts deferred under the EIP II as follows: Mr. Shippar--$177,562;
Mr. Schober--$80,406; and Mr. Vizanko--$218,701. The Company resets the
crediting rate under the EIP II annually at 120 percent of the rolling average
of the 10-year Treasury Note. The EIP II benefits become payable upon retirement
in the form of monthly annuity payments over a 5-, 10-, or 15-year period as
elected by the executive. Generally, EIP II benefit payments will not begin
earlier than the elected commencement date. However, the Named Executive Officer
may request an early distribution of some or all of his EIP II account balance
upon a demonstrated severe financial need, or at any time prior to the first
scheduled payment date, he may elect an early withdrawal of his account balance
subject to a 10 percent early withdrawal penalty.
Mr. Vizanko, who retired on September 30, 2006, elected to receive his
SERP deferral account benefit and his EIP II benefit as a monthly annuity for 15
years. He began receiving his EIP II benefit and the portion of his SERP
deferral account benefit related to elective contributions made prior to January
1, 2005 on October 31, 2006. Beginning April 2007, Mr. Vizanko's SERP deferral
account monthly benefit payment will be increased to reflect payment of elective
contributions made from January 1, 2005 through his retirement date. The 6-month
delay on this portion of his SERP deferral account benefit payment resulted from
Mr. Vizanko's status as a key employee and the application of Treasury
Regulation 409(A). Commencement of his EIP II benefit was not subject to the
6-month delay.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE IN CONTROL
Upon the occurrence of a change-in-control event, awards under the AIP
would be calculated as if the end of the performance year had occurred, based on
the Company's performance through the change-in-control event date. AIP awards
could range from zero to 200 percent of the target award opportunity depending
on actual goal results. Under the LTIP, if a change-in-control event were to
occur, unvested stock options would immediately vest and performance share
awards would immediately pay out on a prorated basis at the target level or the
level earned based on then-current actual TSR ranking as compared to the peer
group companies, whichever were greater. These change-in-control features of the
AIP and LTIP are designed to prevent substantial losses to Named Executive
Officers if a change-in-control event were to occur. The table on the following
page illustrates the value Named Executive Officers would have received solely
in connection with accelerations due to change-in-control provisions of the AIP
and the LTIP had a change-in-control event occurred on December 31, 2006.
34
POTENTIAL CHANGE-IN-CONTROL VALUES
------------------------------------------------------------------------------------------------
AIP LTIP
---------------- -------------------------------------------
Stock Options Performance Shares
Mr. Shippar $0 $157,006 $232,405
Mr. Schober $0 $37,406 $45,284
Ms. Holquist $0 $26,484 $30,034
Ms. Welty $0 $38,433 $47,114
Ms. Amberg $0 $29,766 $43,763
Mr. Vizanko Not Applicable Not Applicable Not Applicable
------------------------------------------------------------------------------------------------
Because the performance period ended on December 31, 2006, no acceleration of benefits
would have occurred under this scenario.
Outstanding performance shares for the periods January 1, 2005-December 31, 2007 and
January 1, 2006-December 31, 2008 would be accelerated under this scenario; performance
shares for the period January 1, 2004-December 31, 2006 have been earned, and therefore
would not be accelerated under this scenario. The amounts shown assume that target
TSR performance would be used to calculate each award payout.
The award values for stock options and performance shares shown above were
calculated based on the closing share price on December 31, 2006.
The LTIP also provides for immediate accelerated vesting of stock
options and restricted stock units upon the retirement, disability, or death of
the Named Executive Officer. Named Executive Officers are given three years from
retirement, and one year from the disability or death, to exercise all
outstanding stock options. The value Named Executive Officers, except Ms.
Holquist, would have received solely in connection with accelerated stock option
vesting triggered by a retirement, disability, or death had such event occurred
on December 31, 2006 would have been the same as is shown in the table above in
connection with a change-in-control event; however, because Ms. Amberg was not
retirement eligible on December 31, 2006, the amount shown for her could only be
triggered by disability or death. Had Ms. Holquist, who is also not retirement
eligible, become disabled or died on December 31, 2006, she would have received
$26,484 in connection with an accelerated stock option vesting, $32,159 in
connection with an accelerated restricted stock unit vesting.
Until September 30, 2006, the SERP provided a 40 percent tax-gross-up
benefit on SERP deferral account balances upon a change-in-control event to
Named Executive Officers who were not retirement eligible. This feature was
eliminated effective October 1, 2006.
EQUITY COMPENSATION PLAN INFORMATION
The following table sets forth the shares of Common Stock available for
issuance under the Company's equity compensation plans as of December 31,
2006.
------------------------------------------------------------------------------------------------------------------------------------
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 438,351 $37.35 1,305,526
Plans Approved by
Security Holders
Equity Compensation 0 N/A 0
Plans Not Approved
by Security Holders
------------------------------------------------------------------------------------------------------------------------------------
Total 438,351 $37.35 1,305,526
------------------------------------------------------------------------------------------------------------------------------------
Excludes the number of securities to be issued upon exercise of outstanding options, warrants, and rights. The amount shown is
comprised of: (i) 1,090,525 shares available for issuance under the LTIP in the form of options, rights, restricted stock,
performance units, shares, and other grants as approved by the Compensation Committee of the Board; (ii) 94,892 shares
available for issuance under the Director Stock Plan as payment for a portion of the annual retainer payable to non-employee
Directors; and (iii) 120,109 shares available for issuance under the ALLETE and Affiliated Companies Employee Stock Purchase
Plan.
35
AUDIT COMMITTEE REPORT
The Audit Committee of the Board is comprised of four non-employee
Directors, each of whom has been determined by the Board to be "independent"
under ALLETE's Corporate Governance Guidelines, and within the meaning of the
rules of both the NYSE and the SEC. The Board has also determined that each
member of the Audit Committee is financially literate and that Mr. Peirce is an
"audit committee financial expert" within the meaning of the rules of the SEC.
The Audit Committee operates pursuant to a written charter that was amended and
restated in January 2007. The current Audit Committee Charter is available on
the Company's website at WWW.ALLETE.COM. The Audit Committee assists the Board's
oversight of the integrity of the Company's financial reports, compliance with
legal and regulatory requirements, the qualifications and independence of the
independent registered public accounting firm, the audit process and internal
controls. The Audit Committee reviews and recommends to the Board that the
audited financial statements be included in the Annual Report.
During 2006, the Audit Committee met and held separate discussions with
members of management and the Company's independent registered public accounting
firm, PricewaterhouseCoopers, regarding certain audit activities and the plans
for and results of selected internal audits. The Audit Committee reviewed the
quarterly financial statements. It reviewed with management and the independent
registered public accounting firm the effectiveness of internal controls over
financial reporting, and the Company's compliance with laws and regulations. It
also reviewed the Company's process for communicating its code of business
conduct and ethics. The Audit Committee approved the appointment of
PricewaterhouseCoopers as the Company's independent registered public accounting
firm for the year 2007, 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 registered public accounting firm, the firm's
independence.
The Audit Committee has: (i) reviewed and discussed the Company's
Consolidated Financial Statements for the year ended December 31, 2006 with the
Company's management and with the Company's independent registered public
accounting firm; (ii) met with management to discuss all financial statements
prior to their issuance and to discuss significant accounting issues; and (iii)
discussed with the Company's independent registered public accounting firm the
matters required to be discussed by SAS 61 (Codification of Statements on
Auditing Standards), as may be modified or supplemented, which include, among
other items, matters related to the conduct of the audit of the Company's
financial statements. Management represented to the Audit Committee that the
Company's Consolidated Financial Statements were prepared in accordance with
accounting principles generally accepted in the United States of America.
Based on the above-mentioned review and discussions, the Audit
Committee recommended to the Board that the audited financial statements be
included in the Annual Report.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee has pre-approval policies and procedures related to
the provision of audit and non-audit services by the independent registered
public accounting firm. Under these procedures, the Audit Committee pre-approves
both the type of services to be provided by the independent registered public
accounting firm and the estimated fees related to these services. During the
pre-approval process, the Audit Committee considers the impact of the types of
services and the related fees on the independence of the independent registered
public accounting firm. The services and fees must be deemed compatible with the
maintenance of the independence of the independent registered public accounting
firm, including compliance with the SEC's rules and regulations.
The Audit Committee will, as necessary, consider and, if appropriate,
pre-approve the provision of additional audit and non-audit services by the
independent registered public accounting firm that were not encompassed by the
Audit Committee's annual pre-approval and that are not prohibited by law. The
Audit Committee has delegated to the Chair of the Audit Committee the authority
to pre-approve, on a case-by-case basis, these additional audit and non-audit
services, provided that the Chair shall promptly report any decisions to
pre-approve such services to the Audit Committee.
36
AUDIT AND NON-AUDIT FEES
The following table presents fees for professional audit services
rendered by PricewaterhouseCoopers for the audit of the Company's annual
financial statements for the years ended December 31, 2006 and December 31,
2005, and fees billed for other services rendered by PricewaterhouseCoopers
during those periods.
All audit and non-audit services and fees for 2006 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.
2006 2005
------------------------------------------
Audit Fees $1,298,000 $1,550,000
Audit-Related Fees 54,000 0
Tax Fees 211,000 80,000
All Other Fees 12,000 10,000
------------------------------------------
Total $1,575,000 $1,640,000
Audit fees were comprised of audit work performed on the integrated audit
of the consolidated financial statements, as well as work generally only
the independent registered public accounting firm can reasonably be
expected to provide, such as statutory audits, subsidiary audits, and
security offerings.
Audit-related fees in 2006 were comprised of assurance services, including
accounting consultations.
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, mergers and acquisitions, and employee benefit plans, and
requests for rulings or technical advice from taxing authorities. In 2006,
tax compliance services totaled $173,000, and tax consulting and planning
services totaled $38,000. In 2005, tax compliance services totaled $20,000,
and tax consulting and planning services totaled $60,000.
Other fees were comprised of license fees and maintenance fees for internal
audit work paper software and accounting research software, and fees for
attendance at training sessions sponsored by PricewaterhouseCoopers.
March 21, 2007
Audit Committee
Roger D. Peirce, Chair
James J. Hoolihan
Peter J. Johnson
George L. Mayer
37
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 the Company's independent
registered public accounting firm for the year 2007. PricewaterhouseCoopers has
acted in this capacity since October 1963.
A representative of PricewaterhouseCoopers will be present at the
Annual Meeting of Shareholders, will have an opportunity to make a statement if
he or she so desires, and will be available to respond to appropriate questions.
The Board recommends a vote "FOR" ratifying the appointment of
PricewaterhouseCoopers as the Company's independent registered public accounting
firm for 2007.
OTHER BUSINESS
The Board knows of no other business to be presented at the Annual
Meeting. However, if any other matters properly come before the Annual Meeting,
it is the intention of the persons named in the accompanying Proxy Card to vote
pursuant to the proxies in accordance with their judgment in such matters.
All shareholders are respectfully asked to vote their proxies promptly
so that the necessary vote may be present at the Annual Meeting.
SHAREHOLDER PROPOSALS FOR THE 2008 ANNUAL MEETING
All proposals from shareholders to be considered for inclusion in the
proxy statement relating to the annual meeting scheduled for May 6, 2008 must be
received by the Secretary of ALLETE at 30 West Superior Street, Duluth, MN
55802-2093 not later than November 22, 2007. The Company's Bylaws provide that
for business to be properly brought before an annual meeting by a shareholder,
the shareholder must have delivered timely notice to the Company's Secretary. To
be timely, advance notice generally must be received not less than 90 days nor
more than 120 days prior to the anniversary of the immediately preceding annual
meeting of shareholders. Therefore, for the annual meeting scheduled for May 6,
2008, ALLETE must receive a shareholder's notice between January 8, 2007 and
February 7, 2008. A shareholder's notice must also comply with informational and
other requirements set forth in the Company's Bylaws. The persons to be named as
proxies in the proxy cards relating to the 2008 annual meeting may have the
discretion to vote their proxies in accordance with their judgment on any matter
as to which ALLETE did not have notice in accordance with the advance notice
process prior to February 7, 2008, without discussion of such matter in the
proxy statement relating to the 2008 annual meeting.
By order of the Board of Directors,
Deborah A. Amberg
Deborah A. Amberg
Senior Vice President, General Counsel, and Secretary
March 21, 2007
Duluth, Minnesota
38
"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 8, 2007
10:30 A.M.
DULUTH ENTERTAINMENT
CONVENTION CENTER
350 HARBOR DRIVE
DULUTH, MN
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ALLETE, INC.
[ALLETE LOGO] 30 WEST SUPERIOR STREET PROXY
DULUTH, MINNESOTA 55802-2093
-----------------------------------------------------------
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR USE AT THE ANNUAL
MEETING ON MAY 8, 2007.
Donald J. Shippar and Deborah A. Amberg, or either of them, with power of
substitution, are hereby appointed Proxies of the undersigned to vote all
shares of ALLETE, Inc. stock owned by the undersigned at the Annual
Meeting of Shareholders to be held in the auditorium of the Duluth
Entertainment Convention Center, 350 Harbor Drive, Duluth, Minnesota, at
10:30 a.m. on Tuesday, May 8, 2007, or any adjournments thereof, with
respect to the election of Directors, ratification of the appointment of
an independent registered public accounting firm, 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. In 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.
--------------------------------------------------------------------------
ADDRESS CHANGES/COMMENTS:
-------------------------------------------
--------------------------------------------------------------------
--------------------------------------------------------------------------
(If you noted any Address Changes/Comments above,
please mark corresponding box on the reverse side.)
See Reverse for voting instructions.
--------------------------------------------------------------------------------
[ALLETE LOGO] VOTE BY INTERNET - www.proxyvote.com
ATTN: SHAREHOLDER SERVICES -----------------
30 WEST SUPERIOR STREET Use the Internet to transmit your voting
DULUTH, MN 55802-2093 instructions and for electronic delivery
of information up until 12:00 p.m. (CT)
on May 7, 2007. Have your proxy card in
hand when you access the web site and
follow the instructions to obtain your
records and to create an electronic
voting instruction form.
ELECTRONIC DELIVERY OF FUTURE
SHAREHOLDER COMMUNICATIONS
If you would like to reduce the costs
incurred by ALLETE, Inc. in mailing
proxy materials, you can consent to
receiving all future proxy statements,
proxy cards and annual reports
electronically via e-mail or the
Internet. To sign up for electronic
delivery, please follow the instructions
above to vote using the Internet and,
when prompted, indicate that you agree
to receive or access shareholder
communications electronically in future
years.
VOTE BY PHONE - 1-800-690-6903
Use any touch-tone telephone to transmit
your voting instructions up until 12:00
p.m. (CT) on May 7, 2007. Have your
proxy card in hand when you call and
then follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and
return it in the postage-paid envelope
we have provided or return it to ALLETE,
Inc., c/o ADP, 51 Mercedes Way,
Edgewood, NY 11717.
TO VOTE, MARK BLOCKS BELOW IN KEEP THIS PORTION
BLUE OR BLACK INK AS FOLLOWS: ALLET1 FOR YOUR RECORDS
--------------------------------------------------------------------------------
DETACH AND RETURN
THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY
WHEN SIGNED AND DATED.
--------------------------------------------------------------------------------
ALLETE, INC.
THE BOARD OF DIRECTORS [GRAPHIC OMITTED]
RECOMMENDS A VOTE FOR
ITEMS 1 AND 2.
VOTE ON DIRECTORS FOR WITHHOLD FOR ALL To withhold authority
ALL ALL EXCEPT to vote for any
individual nominee(s),
1. Election of Directors [ ] [ ] [ ] mark "For All Except"
01) Brekken 06) Mayer and write the number(s)
02) Eddins 07) Peirce of the nominee(s) on
03) Emery 08) Rajala the line below.
04) Hoolihan 09) Shippar
05) Ludlow 10) Stender
-----------------------
VOTE ON PROPOSAL FOR AGAINST ABSTAIN
2. Ratification of the appointment of [ ] [ ] [ ]
PricewaterhouseCoopers LLP as ALLETE's
independent registered public accounting firm.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED
AS DIRECTED OR, IF NO DIRECTION IS GIVEN, WILL BE
VOTED FOR ITEMS 1 AND 2.
Please sign exactly as your name(s) appear(s)
on Proxy. If held in joint tenancy, all persons
must sign. Trustees, administrators, etc., should
include title and authority. Corporations should
provide full name of corporation and title of
authorized officer signing the Proxy.
IF YOU VOTE BY PHONE OR ONLINE, PLEASE DO NOT MAIL YOUR PROXY CARD
For address changes and/or comments, please check this [ ]
box and write them on the reverse side where indicated.
Please indicate if you plan to attend this meeting. [ ] [ ]
YES NO
---------------------------------------- ----------------------------------
| |
---------------------------------------- ----------------------------------
Signature [PLEASE SIGN WITHIN BOX] Date Signature (Joint Owners) Date
--------------------------------------------------------------------------------
April __, 2007
Dear Shareholder:
ALLETE has not yet received your vote on issues to come before the 2007
Annual Meeting of Shareholders on May 8, 2007. Proxy materials were sent to you
on or about March 21, 2007. 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 website 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 8, 2007 at 10:30 a.m.
Your prompt response is appreciated.
Sincerely,
Deborah A. Amberg
Senior Vice President, General Counsel
and Secretary
Enclosures