EMPLOYEE STOCK AND INCENTIVE PLANS

Employee Stock Ownership Plan. We sponsor a leveraged ESOP within the RSOP. Eligible employees may contribute to the RSOP plan as of their date of hire. In 1990, the ESOP issued a $75.0 million note (term not to exceed 25 years at 10.25 percent) to use as consideration for 2.8 million shares (1.9 million shares adjusted for stock splits) of our newly issued common stock. The note was refinanced in 2006 at 6 percent. We make annual contributions to the ESOP equal to the ESOP’s debt service less available dividends received by the ESOP. The majority of dividends received by the ESOP are used to pay debt service, with the balance distributed to participants. The ESOP shares were initially pledged as collateral for the debt. As the debt is repaid, shares are released from collateral and allocated to participants based on the proportion of debt service paid in the year. As shares are released from collateral, we report compensation expense equal to the current market price of the shares less dividends on allocated shares. Dividends on allocated ESOP shares are recorded as a reduction of retained earnings; available dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense was $9.1 million in 2014 ($8.4 million in 2013; $7.7 million in 2012).

According to the accounting standards for stock compensation, unallocated shares of ALLETE common stock currently held and purchased by the ESOP will be treated as unearned ESOP shares and not considered outstanding for earnings per share computations. ESOP shares are included in earnings per share computations after they are allocated to participants.



As of December 31	2014		2013		2012
Millions
ESOP Shares
Allocated	1.9		2.0		2.2
Unallocated	0.3		0.5		0.7
Total	2.2		2.5		2.9
Fair Value of Unallocated Shares		$13.2		$24.1		$28.7

Stock-Based Compensation. Stock Incentive Plan. Under our Executive Long-Term Incentive Compensation Plan (Executive Plan), share-based awards may be issued to key employees through a broad range of methods, including non-qualified and incentive stock options, performance shares, performance units, restricted stock, stock appreciation rights and other awards. There are 0.8 million shares of common stock reserved for issuance under the Executive Plan, with 0.6 million of these shares available for issuance as of December 31, 2014.

NOTE 18. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)

We currently have the following types of share-based awards outstanding:

Non-Qualified Stock Options. These options allow for the purchase of shares of common stock at a price equal to the market value of our common stock at the date of grant. Options become exercisable beginning one year after the grant date, with one-third vesting each year over three years. Options may be exercised up to ten years following the date of grant. In the case of qualified retirement, death or disability, options vest immediately and the period over which the options can be exercised is three years. Employees have up to three months to exercise vested options upon voluntary termination or involuntary termination without cause. All options are canceled upon termination for cause. All options vest immediately upon retirement, death, disability or a change of control, as defined in the award agreement. We determine the fair value of options using the Black-Scholes option-pricing model. The estimated fair value of options, including the effect of estimated forfeitures, is recognized as expense on the straight-line basis over the options’ vesting periods, or the accelerated vesting period if the employee is retirement eligible. Stock options have not been granted under our Executive Plan since 2008.

The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date. Expected volatility is estimated based on the historic volatility of our stock and the stock of our peer group companies. We utilize historical option exercise and employee pre-vesting termination data to estimate the option life. The dividend growth rate is based upon historical growth rates in our dividends.

Performance Shares. Under the performance share awards plan, the number of shares earned is contingent upon attaining specific market goals over a three-year performance period. Market goals are measured by total shareholder return relative to a group of peer companies. In the case of qualified retirement, death or disability during a performance period, a pro rata portion of the award will be earned at the conclusion of the performance period based on the market goals achieved. In the case of termination of employment for any reason other than qualified retirement, death or disability, no award will be earned. If there is a change in control, a pro rata portion of the award will be paid based on the greater of actual performance up to the date of the change in control or target performance. The fair value of these awards is determined by the probability of meeting the total shareholder return goals. Compensation cost is recognized over the three-year performance period based on our estimate of the number of shares which will be earned by the award recipients.

Restricted Stock Units. Under the restricted stock units plan, shares for retirement eligible participants vest monthly over a three-year period. For non-retirement eligible participants, shares vest at the end of the three-year period. In the case of qualified retirement, death or disability, a pro rata portion of the award will be earned. In the case of termination of employment for any reason other than qualified retirement, death or disability, no award will be earned. If there is a change in control, a pro rata portion of the award will be earned. The fair value of these awards is equal to the grant date fair value. Compensation cost is recognized over the three-year vesting period based on our estimate of the number of shares which will be earned by the award recipients.

Employee Stock Purchase Plan (ESPP). Under our ESPP, eligible employees may purchase ALLETE common stock at a 5 percent discount from the market price. Because the discount is not greater than 5 percent, we are not required to apply fair value accounting to these awards.

RSOP. The RSOP is a contributory defined contribution plan subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended, and qualifies as an employee stock ownership plan and profit sharing plan. The RSOP provides eligible employees an opportunity to save for retirement.

The following share-based compensation expense amounts were recognized in our Consolidated Statement of Income for the periods presented.



Share-Based Compensation Expense
Year Ended December 31	2014		2013		2012
Millions
Performance Shares		$1.6		$1.7		$1.4
Restricted Stock Units	0.7		0.7		0.7
Total Share-Based Compensation Expense		$2.3		$2.4		$2.1
Income Tax Benefit		$1.0		$1.0		$0.9

NOTE 18. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)

There were no capitalized share-based compensation costs during the years ended December 31, 2014, 2013 or 2012.

As of December 31, 2014, the total unrecognized compensation cost for the performance share awards and restricted stock units not yet recognized in our Consolidated Statements of Income was $1.8 million and $0.7 million, respectively. These amounts are expected to be recognized over a weighted-average period of 1.6 years for performance share awards and 1.7 years for restricted stock units.

Non-Qualified Stock Options. The following table presents information regarding our outstanding stock options as of December 31, 2014, 2013 and 2012.



	2014				2013				2012
	Number of Options		Weighted-Average Exercise Price		Number of Options		Weighted-Average Exercise Price		Number of Options		Weighted-Average Exercise Price
Outstanding as of January 1,	108,299			$44.10	395,678			$42.28	460,234			$41.68
Granted (a)	—		—		—		—		—		—
Exercised	(42,020	)		$43.65	(287,379	)		$41.60	(49,075	)		$35.84
Forfeited	—		—		—		—		(15,481	)		$44.86
Outstanding as of December 31,	66,279			$44.39	108,299			$44.10	395,678			$42.28
Exercisable as of December 31,	66,279			$44.39	108,299			$43.17	395,678			$41.71


(a)	Stock options have not been granted since 2008. The weighted-average grant-date intrinsic value of options granted in 2008 was $6.18.

Cash received from non-qualified stock options exercised was approximately $1.8 million in 2014. The intrinsic value of a stock award is the amount by which the fair value of the underlying stock exceeds the exercise price of the award. The total intrinsic value of options exercised was $0.4 million during 2014 ($2.2 million in 2013; $0.3 million in 2012).



	Range of Exercise Price
As of December 31, 2014	$39.10 to $41.35		$44.15 to $48.65
Options Outstanding and Exercisable:
Number Outstanding and Exercisable	21,849		44,430
Weighted Average Remaining Contractual Life (Years)	2.9		1.7
Weighted Average Exercise Price		$39.27		$46.90
Aggregate Intrinsic Value (Millions)		$0.3		$0.4

Performance Shares. The following table presents information regarding our non-vested performance shares as of December 31, 2014, 2013 and 2012.



	2014				2013				2012
	Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value
Non-vested as of January 1,	114,765			$47.02	107,899			$40.73	128,333			$36.54
Granted (a)	47,992			$46.47	45,830			$52.15	38,764			$44.70
Awarded	(36,515	)		$42.01	(18,605	)		$35.10	(41,009	)		$34.25
Unearned Grant Award	—		—		(18,606	)		$35.10	(17,575	)		$34.25
Forfeited	(6,607	)		$48.29	(1,753	)		$47.26	(614	)		$34.49
Non-vested as of December 31,	119,635			$48.26	114,765			$47.02	107,899			$40.73

(a) Shares granted include accrued dividends.

NOTE 18. EMPLOYEE STOCK AND INCENTIVE PLANS (Continued)

There were 43,081 and 38,344 performance shares granted in January 2014 and 2015, for the three-year performance periods ending in 2016 and 2017, respectively. The ultimate issuance is contingent upon the attainment of certain future market goals of ALLETE during the performance periods. The grant date fair value of the performance shares granted was $2.0 million and $2.3 million, respectively.

There were 36,515 performance shares awarded in February 2014 for the three-year performance period ending in 2013. There were no performance shares awarded in February 2015 for the three-year performance period ending in 2014. The grant date fair value of the shares awarded was $1.5 million and zero, respectively.

Restricted Stock Units. The following table presents information regarding our available restricted stock units as of December 31, 2014, 2013 and 2012.



	2014				2013				2012
	Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value		Number of Shares		Weighted- Average Grant Date Fair Value
Available as of January 1,	55,982			$40.85	56,415			$36.61	63,464			$32.57
Granted (a)	19,645			$48.44	21,440			$43.41	18,162			$40.83
Awarded	(18,860	)		$37.64	(20,939	)		$32.03	(24,707	)		$29.43
Forfeited	(2,879	)		$45.92	(934	)		$41.02	(504	)		$31.80
Available as of December 31,	53,888			$44.47	55,982			$40.85	56,415			$36.61

(a) Shares granted include accrued dividends.

There were 17,491 and 15,633 restricted stock units granted in January 2014 and 2015, for the vesting periods ending in 2016 and 2017, respectively. The grant date fair value of the restricted stock units granted was $0.9 million and $0.9 million, respectively.

There were 18,860 restricted stock units awarded in 2014. The grant date fair value of the shares awarded was $0.7 million.

There were 17,815 restricted stock units awarded in February 2015. The grant date fair value of the shares awarded was $0.7 million.