MINNESOTA POWER CORPORATE
ANNUAL INCENTIVE PLAN
EFFECTIVE JANUARY 1, 1995
TABLE OF CONTENTS
Page
Corporate Annual Incentive Plan 1
Appendix A - Corporate Plan Illustration A-1
Appendix B - Definition of Plan Measurements B-1
Appendix C - Payment/Deferral Options and C-1
Administration
1
I. INTRODUCTION
This amended and restated Minnesota Power & Light Company (Company)
Annual Incentive Plan (Plan) for a select group of management
employees is made effective as of January 1, 1995. This Plan
supersedes and replaces the Minnesota Power and Affiliated Company
Amended and Restated Incentive Compensation Plan dated January 1,
1994.
II. PLAN PURPOSES
. Provide a meaningful and competitive incentive opportunity geared to
the achievement of specified internal and external corporate,
business unit, and strategic goals.
. Vary performance criteria/goals and incentive award amounts to
reflect differences in business unit and individual participant
challenges and accomplishments.
III. CONCEPT
An annual incentive plan for key management employees where the
award opportunity is set at the beginning of each year. Actual
payments are based on the achievement of corporate (both internal
and external), business unit, and strategic goals.
IV. PARTICIPATION
Participation will be limited to those Key individuals whose actions
can have a substantial impact on Minnesota Power's success. This
group will consist of the officer group, directors, and management
employees in salary grades I and above.
V. INCENTIVE OPPORTUNITIES
A threshold, target, and maximum award opportunity will be
established for each salary range grouping. The "target" award will
be earned for achievement of above average performance (60th
percentile) as compared to the specified peer groups and for
achievement of budgeted performance of the electric utility group.
"Threshold" and "maximum" performance award levels then will be
developed in relation to the target performance award levels.
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The following table states the base award opportunity, as a percent
of base salary, for each management group and is exclusive of the
strategic award opportunity available for participants in salary
grades VIII and above. Actual participant awards can vary from 0 to
120 percent of the base award opportunity depending upon actual
corporate and business unit performance.
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Salary Grade Base Award Opportunities<F1>
---------------------------------------------------------------
XI 60%
VIII-IX 40%
VI-VII 30%
IV-V 25%
I-III 15%
<FN>
---------------------------------------------
<F1> As a percent of base salary.
</FN>
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The Chief Executive Officer will suggest, and the Compensation
Committee will determine, the treatment of "extraordinary" gains or
losses and their impact on earnings per share (EPS) and operating
income in the Plan. Where possible, this determination will be made
prior to establishing the annual targets for EPS and operating
income.
VI. PERFORMANCE APPORTIONMENT
Performance will be assessed at two levels - corporate and business
unit. Corporate performance will be divided into internal and
external measures. The Chief Executive Officer will recommend, and
the Compensation Committee will approve, the weighting of incentive
opportunity. This apportionment will be determined by salary grade
and will be the same for each participant within that salary grade.
A participant's total incentive award will be equal to the sum of
the amounts earned from each portion of the incentive opportunity.
The weighting is illustrated below.
3
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Corporate Business
Salary Performance Unit Corporate
Grade Internal External EUO SSU Development*
I-XI 40% 30% 20% 10%
Corporate Development Participants
IV-VIII 40% 30% 30%
---------------
*Those participants in the corporate development area will have
individual acquisition-oriented goals, rather than business unit
goals relating to EUO and SSU.
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VII. INTERNAL CORPORATE PERFORMANCE
Internal corporate performance will be measured based on earnings
per share (EPS). At the beginning of each plan year, a "target" EPS
goal will be established for the Company. "Threshold" and "maximum"
performance levels, for incentive award determination purposes, will
be set up in relation to this performance target.
EPS for the plan year must equal or exceed the "threshold" level of
performance before any incentive award is earned from this
performance measure. The "maximum" performance level, when achieved,
will produce the maximum incentive award opportunity achievable from
the EPS portion, as illustrated below.
---------------------------------------------------------------
Percent of Corporate Internal
Performance EPS Performance Award Earned
---------------------------------------------------------------
Maximum $ 120%
-----
Target $ 60%
-----
Threshold $ 25%
-----
Below Threshold 0%
---------------------------------------------------------------
Straight line interpolation will be used for determining results
between those specified in the table.
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VIII. EXTERNAL CORPORATE PERFORMANCE
External corporate performance will be based upon Minnesota Power's
total shareholder return (TSR), as measured against both a
diversified electric utility peer group consisting of the ten
companies identified in Appendix B (60% weighting) and the S&P 500
(40% weighting). TSR is defined in Appendix B. Minnesota Power's
TSR performance will be determined relative to the two peer groups
based on a ranking illustrated in the following table.
Peer Group
Percentile Ranking
TSR to
S&P 500
(40% Percent of External Corporate
Weighting) Performance Award Earned
> or = 90th percentile 48% 63% 84% 120%
60th percentile 24% 39% 60% 96%
40th percentile 10% 25% 46% 82%
<40th percentile 0% 15% 36% 72%
<4 > or = 4 > or = 6 > or = 9
companies companies companies companies
TSR to Diversified
Utility Peer Group
(60% weighting)
Straight-line interpolation will be used for determining results
between those specified in the table. No payouts will be made if
TSR performance is below the 40th percentile in the S&P 500 and TSR
performance is less than that of 4 companies in the utility peer
group.
IX. BUSINESS UNIT/CORPORATE DEVELOPMENT
Business unit goals will be based one-third on operating income for
the water resource operations group and two-thirds on operating
income for the electric utility operations group. For those
participants in the corporate development area, business unit
performance goals will
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instead be acquisition-oriented goals related to the participants'
area of responsibility.
A matrix has been established to determine award opportunities
based on various levels of achievement for the electric utility and
water resource operations groups, as illustrated in the following
table.
SSU
Operating
Income
(1/3 Percent of Business Unit
weighting) Performance Award Earned
$(Maximum) 40% 57% 80% 120%
$(Target) 20% 37% 60% 100%
$(Threshold) 8% 25% 48% 88%
0% 17% 40% 80%
$(Threshold) $(Target) $(Maximum)
------------ --------- ----------
EUO Operating Income
(2/3 weighting)
Straight-line interpolation will be used for determining results
between those specified in the table. No payouts will be made for
performance below threshold in each performance measure.
X. STRATEGIC AWARD
The purpose of including a strategic award is to recognize
individual performance and to reward those contributions that may
not be adequately reflected by financial measures. The strategic
award will be available to participants in salary grade VIII and
above only and will consist of an additional opportunity of up to 10
percent of base salary for participants in salary grades VIII-IX and
15 percent of base salary for participants in salary grade XI. Base
salary in place at the end of the Plan year in which the award is
earned will be used to calculate the strategic award.
At the beginning of the plan year, the specific strategic goals will
be set forth by the Chief Executive Officer (and by the Compensation
Committee for the Chief Executive Officer). Following year end, the
Chief Executive Officer, with the approval of the Compensation
Committee, shall determine the extent to which the strategic goals
have
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been accomplished. The Compensation Committee shall make this
determination for the Chief Executive Officer.
XI. AWARD DETERMINATION
See Appendix A for an illustrative award calculation.
XII. FORM AND TIMING OF PAYMENT
Cash awards will be paid as soon as practical following approval of
award amounts by the Compensation Committee. No portion of the
award shall be paid in employer stock.
XIII. AWARD DEFERRAL
Each participant may elect to defer receipt of all or a portion of
his or her earned award. The election must be made prior to the
beginning of the year in which the award is earned. The terms
related to such deferrals will correspond to those provisions
specified in Appendix C.
XIV. TERMINATION OF EMPLOYMENT DUE TO RETIREMENT, DEATH, OR DISABILITY
If a participant's employment is terminated due to retirement,
death, or active employment is terminated due to disability during a
plan year, the award earned shall be prorated based on the number of
months of participation within the plan year and be based upon
performance determined at year end.
XV. TERMINATION FOR ANY OTHER REASON
Termination of employment for reasons other than retirement, death,
or disability before the end of a plan year will result in
forfeiture of any associated award opportunity. However, the Chief
Executive Officer, with the approval of the Compensation Committee,
may waive such forfeiture provision.
XVI. TAX TREATMENT
Award payments are taxable to the participant in the year of
receipt.
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XVII. WITHHOLDING TAXES
The Company will have the right to deduct any Federal, state, or
local taxes required by law to be withheld.
XVIII. BENEFICIARY DESIGNATION
A participant may name a beneficiary or beneficiaries to whom any
benefit under this Plan is to be paid in the event of death.
XIX. EFFECT ON EMPLOYEE BENEFIT PLANS
Payments from this Plan shall not be included in calculating the
amount of employee benefits to be paid under the terms of any of the
Company's qualified employee benefit plans. Payments will be
included for calculating benefits under the Supplemental Executive
Retirement Plan (SERP).
XX. PARTICIPANT RIGHTS
Participation in this Plan shall not interfere with the Company's
right to terminate any participant's employment at any time. Rights
or interests of any participants in this Plan are nontransferable.
XXI. PLAN ADMINISTRATION
The Executive Compensation Committee of the Board of Directors will
have responsibility for administration of the Plan in accordance
with the provisions of the Plan, as specified in this Plan document
and these administrative plan specifications.
XXII. PLAN AMENDMENTS
The Compensation Committee may, in its sole discretion, modify,
amend, suspend, or terminate, in whole or in part, any or all of the
provisions of the Plan. However, no modification, amendment,
suspension, or termination may adversely affect a payment or
distribution accrued or credited to a participant.
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XXIII. BINDING AGREEMENT
The provisions of the Plan shall be binding upon the Participant,
his or her heirs, personal representatives and beneficiaries, and
subject to the rights granted to amend or terminate the Plan, the
provisions of the Plan shall also be binding upon the Company, its
successors and assigns.
XXIV. CONTRACTUAL OBLIGATIONS
It is intended that the Company is under a contractual obligation to
make payments to Participants or their beneficiaries from the
general funds and assets of the Company in accordance with the terms
and conditions of the Plan. A Participant or his/her beneficiary
shall have no rights to such payments, other than as a general,
unsecured creditor of the Company.
This Minnesota Power Corporate Annual Incentive Plan has been
approved, and is effective, as of January 1, 1995.
MINNESOTA POWER
By Arend J. Sandbulte
-----------------------------------
Its Chief Executive Officer
Attest:
By Philip R. Halverson
-----------------------------------
Its Secretary
9
Appendix A - Corporate Plan Illustration
The following illustrates application of the Plan.
Assumptions
. Participant (salary grade VI-VII) Vice President
. Salary for 1995 $100,000
. Base award level 30%
. Internal corporate performance (40%) Maximum - 120%
(EPS at $2.60)
. External corporate performance (30%) Target - 60%
(both peer groups
at 60th percentile)
. Overall business unit performance (30%) Threshold - 25%
EUO (20%) (EUO at $ )
----- ----
SSU (10%) (SSU at $ )
----- ----
Calculation of Award
Base Base Performance Performance Award
Salary Award Apportionment Achievement
Internal $100,000 x 30% x 40% x 120% = $14,400
corporate
portion
External $100,000 x 30% x 30% x 60% = $5,400
corporate
portion
Business
Unit
portion $100,000 x 30% x 30% x 25% = $2,250
$22,050
=======
A-1
Appendix B - Definition of Plan Measurements
The diversified electric utility peer group used to compare TSR (60% weighting)
in the external corporate performance measure and to compare annual percentage
change in cost/kwh in the business unit performance measure is:
IES Industries, Inc.
Interstate Power Company
Iowa-Illinois Gas & Electric
Madison Gas & Electric Company
Midwest Resources
Northern States Power Company
Otter Tail Power Company
Wisconsin Energy Corporation
WPL Holdings, Inc.
Performance Measures Definition
. TSR is defined as:
TSR = Stock price appreciation + reinvested dividends
-----------------------------------------------
Initial stock price
The TSR is determined by means of combining the change in stock price over the
plan year with dividends which are assumed to be reinvested on each dividend
date.
- Stock prices for the beginning and end of the one-year period are the
closing prices on the New York Stock Exchange on the last business day of
the period (last business day prior to the start of the period for the
beginning prices).
- Dividends are assumed to be reinvested on the ex-dividend date at the
closing stock prices on that date.
- Calculation of TSR for the S&P 500 group is based on the companies
included in the S&P 500 Index as of the end of the period.
B-1
Appendix C - Payment/Deferral Options
Except as hereinafter specifically provided, participants will be given
the following options to receive their award:
a) current payment of all or a portion of the award
b) payment deferred to a date specified by the participant (at which
time such award shall be paid in full), with the latest deferral date to be the
earlier of (i) six months after the participant's seventieth birthday or (ii)
such date selected by the participant up to five years after the date of the
participant's retirement; or
c) payment deferred to the earlier to occur of the following events:
(i) The retirement of the participant or, if elected up to five
years after retirement, but in no event later than age 70 1/2 (in which
case the participant may also elect to receive the award in equal monthly
installments commencing on the first day of the month following the date
of the participant's retirement or anniversary thereof if so elected, and
continuing thereafter for a period of fifteen (15), ten (10) or five (5)
years, as is elected by the participant).
(ii) the death of the participant,
(iii) the termination of the participant's employment.
The foregoing Elections must be made in writing to the Executive
Compensation Committee prior to the end of the calendar year preceding the year
in which the award is earned. Such election shall be irrevocable.
Participants who elect to receive their awards currently will be paid the
amount of their awards plus interest from January 1 following the Plan year to
the payment date, at the rate of 8 percent per annum.
Participants who elect to defer their awards will have the following three
options available under which their awards can be deferred (with the
irrevocable election of an option being made contemporaneously with the
election to defer):
a) Deferral in accordance with the participant's commitment under
the Company's Executive Investment Plan I or Executive Investment Plan II.
Amounts will be credited to the participant's account under such Plan(s)
effective January 1 following the Plan year.
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b) Deferral with interest paid on all amounts deferred effective
January 1 following the Plan year at a fixed rate of 8 percent per annum.
c) Deferral with interest paid on all amounts deferred effective
January 1 following the Plan year to the award payment date at the rate of
8 percent per annum and thereafter for the deferral period on all amounts
at a rate equivalent to the overall percentage return achieved as if the
deferred amounts had been invested in any of the following Mutual Funds,
which shall serve as a performance reference only:
(i) Nicholas Fund, Inc.
(ii) Fidelity Magellan Fund (Amounts deferred into this Fund
are subject to a 3% upfront sales charge)
(iii) Investment Advisors Incorporated (IAI) Emerging Growth
Fund
(iv) Investment Advisors Incorporated (IAI) International
Developed Market Fund
(v) Fidelity Balanced Fund
(vi) Vanguard Index Trust 500 Portfolio
(vii) Templeton International Emerging Market
Participants who choose deferral under either b) or c) above are permitted
annually to continue the accrual of interest on deferred awards using the
interest rate alternative chosen one year earlier, or to switch to an alternate
method of computing interest on all deferred awards during the succeeding year.
This does not in any way affect the period of the deferral chosen by the
participant.
If payments to a participant are to be made in installments, then the
unpaid amounts due to the participant shall continue to be credited based on
the participant's annual elections.
Notwithstanding anything to the contrary herein, if a participant dies
while employed by the Company, or if a participant who has terminated
employment dies before receiving all payments which such participant is
entitled to receive pursuant to an election hereunder, the amount then standing
to the credit of such participant under this Plan shall be paid in a single sum
within the first 30 days of the calendar year following the date of the
participant's death to the participant's beneficiary.
C-2
In the event of a participant's financial hardship or unforeseen financial
emergency, the Executive Compensation Committee, in its sole and absolute
discretion may alter the timing or manner of payment of any benefits or
deferred amounts to be paid pursuant to the Plan, (provided, however, any such
alteration shall only occur with respect to these amounts reasonably required
to alleviate the participant's financial hardship or unforeseen emergency).
Financial hardship shall be deemed to have occurred in the event of the
participant's impending bankruptcy, a participant's or defendant's long and
serious illness or other events of similar magnitude. An unforeseeable
financial emergency shall mean an unexpected need for cash arising from
illness, casualty loss, sudden financial reversal or other such unforeseeable
occurrence. Normal expenditures for the vocational or college education of a
dependent, the purchase of a house or any similar expense, shall not be
considered a financial hardship or an unforeseeable financial emergency. The
Benefit Plans Committee's decision in passing upon the financial hardship or
unforeseeable financial emergency of the participant, and the manner in which,
if at all, the payment of any amounts pursuant to the Plan shall be altered or
modified, shall be final, conclusive and not subject to appeal. The
participant, the participant's spouse, if any, and the participant's
beneficiary waive all claims against the Benefit Plans Committee for
determinations made by the Benefit Plans Committee under this Section, and the
participant shall have no claim or right to make up any amount distributed or
transferred as a result of a determination of financial hardship or
unforeseeable financial emergency by the Benefit Plans Committee pursuant to
this Section. Any participant for whom the Benefit Plans Committee grants
relief under this Section may not re-enter the Plan, or make any deferral of
compensation under the Plan, until the Plan Year following the second
anniversary of the date on which such relief is granted to such participant.
If a participant's employment with the Company terminates for any reason
other than retirement, death or disability, the balance then standing to the
credit of such participant under this Plan, as of the end of the month
immediately preceding or coincident with the date of termination of employment,
shall be paid to the participant in a single sum upon the date of separation
from service, or within 30 days thereafter. If a participant entitled to a
benefit under this paragraph dies prior to receiving payment, then such payment
shall be made to the participant's beneficiary.
In years where deferred compensation elections are made available under
Executive Investment Plans I & II, each participant shall be entitled to
transfer unpaid awards under this plan as a Rollover Amount to the Minnesota
Power and Affiliated Companies Executive Investment Plan I or the Minnesota
Power and Affiliated Companies Executive Investment Plan II, all subject to the
specific terms and restrictions in said Plans. Provided, however, the transfer
of an unpaid award as a Rollover Amount shall not result in a deferral or
acceleration of the date
C-3
or dates on which such Rollover Amount would have been received had no transfer
occurred.
"Retire" and "retirement" as used in this Plan shall mean a termination of
employment after attaining "Early Retirement Age" as defined in the
Supplemental Retirement Plan.
The administration of the Annual Incentive Plan will be under the overall
responsibility of the Executive Compensation Committee of the Board of
Directors. The Chief Executive Officer will be responsible for administering
the Plan on a routine basis (computing awards, measuring performance of the
comparator group, etc). Any revisions to the Plan will require review by the
Executive Compensation Committee and approval of the Board of Directors. The
Chief Executive Officer will involve those other individuals and departments as
required in the full and complete administration of the Plan, in accordance
with its terms.
In administering the Plan, the Executive Compensation Committee will apply
uniform rules to all participants similarly situated. If any claim for
benefits under the Plan is wholly or partially denied, the claimant shall be
given notice in writing, within a reasonable period of time after receipt of
the claim by the Plan, by registered or certified mail, of such denial, written
in a manner calculated to be understood by the claimant, setting forth the
specific reasons for such denial, specific reference to pertinent Plan
provisions on which the denial is based, a description of any additional
material or information necessary for the claimant to perfect the claim and an
explanation of why such material or information is necessary, and an
explanation of the Plan's claim review procedure. The claimant also shall be
advised that the claimant's duly authorized representative may request a
review, by the Executive Compensation Committee, of the decision denying the
claim by filing with the Executive Compensation Committee, within 65 days after
such notice has been received by the claimant, a written request for such
review, and that the claimant's duly authorized representative may review
pertinent documents, and submit issues and comments in writing within the same
65-day period. If such request is so filed, such review shall be made by the
Executive Compensation Committee within 60 days after receipt of such request;
and the claimant shall be given written notice of the decision resulting from
such review, and shall include specific reasons for the decision, written in a
manner calculated to be understood by the claimant, and specific references to
the pertinent Plan provisions on which the decision is based.
The Executive Compensation Committee may make payment to any participant
or any beneficiary of a participant, of any benefits or deferred amounts to be
paid under the Plan, in advance of the date when otherwise due, if, based on a
change in federal tax law or regulation, published rulings or similar
announcements by the Internal Revenue Service, decision by a court of competent
jurisdiction involving the Plan,
C-4
or a closing agreement made under Section 7121 of the Internal Revenue Code of
1986 that involves the Plan, it determines that a participant or beneficiary
will recognize income for federal income tax purposes with respect to amounts
that are otherwise not then payable under the Plan. The Executive Compensation
Committee may also make such payments to any participant, or beneficiary of a
participant, in advance of the date when otherwise due, if it shall be
determined that the Plan is subject to the requirements of Parts 2 and 3 of
Subtitle B of Title I of the Employee Retirement Income Security Act of 1974,
because such Plan is not maintained primarily for the purpose of providing
deferred compensation for a select group of management or highly compensated
employees.
All payments to be made by the Company under the Plan shall be made to the
participant, if living. Except as otherwise provided herein, in the event of a
participant's death prior to the receipt of all payments hereunder, all
subsequent payments to be made under the Plan shall be made to the beneficiary
designated by the participant, and, unless otherwise specified in the
participant's beneficiary designation, in the event a beneficiary dies before
receiving all payments due to such beneficiary pursuant to this Plan, the then
remaining payments shall be paid to the legal representatives of the
beneficiary's estate. The participant shall designate a beneficiary, or during
the participant's lifetime change such designation, by filing a written notice
of such designation with the Company in such form and subject to such rules and
regulations as the Executive Compensation Committee may prescribe. If the
participant's payments constitute community property, then any beneficiary
designation made by the participant other than a designation of such
participant's spouse shall not be effective if any such beneficiary or
beneficiaries are to receive more than fifty percent (50%) of the aggregate
benefits payable hereunder, unless such spouse shall approve such designation
in writing. If no beneficiary designation shall be in effect at the time when
any benefits payable under this Plan shall become due, the benefit payments
shall be made to the legal representative of the participant's estate.
Notwithstanding any provisions in this Plan to the contrary, the Executive
Compensation Committee may withhold any benefits payable to a beneficiary as a
result of the death of the participant (or the death of any beneficiary
designated by the participant) until such time as (i) the Committee is able to
determine whether a generation-skipping transfer tax, as defined in Chapter 13
of the Internal Revenue Code of 1986, or any substitute provision therefor, is
payable by the Company; and (ii) the Committee has determined the amount of
generation-skipping transfer tax that is due, including interest thereon. If
any such tax is payable, the Executive Compensation Committee shall reduce the
benefits otherwise payable hereunder to such beneficiary by an amount equal to
the generation-skipping transfer tax and any interest thereon that is payable
as a result of the death in question.
C-5
Benefits payable under the Plan are not in any way subject to the debts or
other obligations of the persons entitled to those payments, whether the person
is a participant or a beneficiary. Benefits under the Plan may not voluntarily
or involuntarily be sold, transferred, or assigned.
C-6