SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

ALLETE 2008 Form 10-K

           SECTION 1.       ESTABLISHMENT AND PURPOSE

ALLETE, Inc., formerly MINNESOTA POWER & LIGHT COMPANY (the “Company” and also sometimes “ALLETE”) established, effective as of July 1, 1980, a Supplemental Retirement Plan for eligible executives of the Company, such Plan to be known as the SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (THE “PLAN”). The Plan was established in order to provide supplemental current or retirement benefits payable as provided hereafter solely from the general assets of the Company. The Plan is intended to be exempt from the participation, vesting, funding, and fiduciary requirements of Title 1 of the Employee Retirement Income Security Act of 1974.

Effective as of January 1, 1981, the Plan was amended to include compensation attributable to the Company’s Incentive Compensation Plan in determining benefits under this Plan.

Effective as of January 1, 1982, the Plan was amended to change the manner in which Incentive Awards are accounted for when determining benefits payable at retirement under Section 4.6.

Effective December 1, 1982, the Plan was amended to change the deferral and cash payment options of the Plan.

The Plan was amended including revisions through and including May 10, 1983, and restated in its entirety as of January 1, 1983. The revisions included a provision to provide benefits that are above the limitations under Section 415 of the Internal Revenue Code.

Effective January 1, 1984, the Plan was amended to provide for a predetermined interest rate of 10.5% to be used in determining the value of certain benefits under the Plan.

Effective January 1, 1987, the Plan was amended to provide for two additional investment choices for monies deferred under the Plan and to make other minor changes to the Plan.

Effective August 1, 1987, the Plan has been amended to provide for a fixed rate of return of 8% under Section 4.15 for deferral elections made after that date rather than a return that is the greater of 10.5% or the Company’s actual overall percentage return on capital, and to make a minor change in the Plan name.

Effective May 1, 1988, the Plan was amended so that benefits under Subsections 4.1(c) and (d) of the 1988 Plan document are available only to active Participants who were age 60 or older as of said date.

Effective November 1, 1988, the Plan has been amended to make revisions in certain discretions available to the Company and to eligible Participants.

Effective January 1, 1990, the Plan has been amended to remove Participant choice with respect to the payment of benefits under Subsection 4.1(b). The Plan has also been amended to eliminate the makeup of the 2% CORE benefits, which were eliminated under the Supplemental Retirement Plan (SRP) to account for the Employee Stock Ownership Plan (ESOP), and to provide for a makeup of the Employee Stock Ownership Plan Partnership account allocation contribution. The Plan was also amended to eliminate the benefits previously described in Subsections 4.1(c) and (d) of the 1988 legal plan document.

Effective August 1, 1992, the Plan was amended to change the date Retirement Benefits are due and payable from the last day of the month to the first day of the month.

Effective March 1, 1994, the Plan was amended to calculate the monthly benefit provided under Section 4.6 using a final average earnings calculation which combines Results Sharing with Incentive Compensation.

Effective August 1, 1994, the Plan was amended at Section 3.1 to eliminate the eligibility option of annual compensation in excess of $100,000, to increase voluntary deferrals, to provide for a present value calculation at Subsection 4.1(d), to change options for measuring indexes for monies deferred under the Plan, and to make other minor administrative changes.

Effective January 1, 1995, the Plan was amended to suspend benefit payments when a Participant is re-employed by the Company in a regular, full-time position.

Effective January 1, 1997, the Plan was amended to allow for Participants to change the duration of the distribution period.

Effective June 17, 1997, the Plan was amended to credit accounts during distribution of benefits with the Company’s return on capital fixed rate of 8%.

Effective July 1, 1998, the Plan was amended to combine deferred amounts into a single Executive Deferral Account.

Effective January 1, 1999, the Plan was amended to allow participation by those employees who receive a management salary.

Effective January 1, 2001, the Plan was amended to provide that the Executive Deferral Account be distributed pursuant to the Participant’s election in the event of death, to distribute account balances of less than $10,000 in a lump sum, and to change the name of the Plan to the ALLETE Supplemental Executive Retirement Plan.

Effective January 1, 2002 the Plan was amended to allow the choice of a life or joint and survivor annuity for Retirement Benefits, to eliminate deferrals which exceeded limitations imposed by Code Section 415, to allow unscheduled in-service withdrawals, to remove the limitation on deferrals of annual salary, and to provide a supplemental tax benefit for participants in the event that they are terminated due to a change in control, and to reflect the merger of the Supplemental Retirement Plan and the Employee Stock Ownership Plan into the Retirement Savings and Stock Ownership Plan.

Effective January 20, 2003, deferrals of stock option gains were eliminated.

Effective December 1, 2003, the termination of a Participant is clarified to include the sale of a Participant’s employer, but not the separation of a Participant’s employer from the Company through a stock dividend.

Effective January 1, 2005, the Plan was amended (1) to reflect the cessation of further deferrals thereunder after 2004; (2) to provide Plan Participants with the opportunity to revoke their deferral elections for their 2004 bonuses and 2005 salary and make new deferral elections for their 2005 bonuses; and (3) to the extent that any such deferral elections are not so revoked, to redirect the deferral of 2004 deferred bonuses, 2005 deferred salary, and 2005 deferred bonuses to the ALLETE and Affiliated Companies Supplemental Executive Retirement Plan II.

Effective October 1, 2006, the Plan was amended to eliminate the supplemental tax benefit for Participants in the event that they are terminated due to a change in control.

Effective January 1, 2007, the Plan was amended to identify the interest rate(s) applicable to the calculation of a monthly annuity with respect to Executive Deferral Account distributions.  The Plan was further amended to establish the 15-year monthly annuity as the default form of Retirement Benefit and the life annuity as the optional form of Retirement Benefit.  In addition, a Participant who was eligible for a retirement benefit under both this Plan and SERP II was required to elect the same form of retirement benefit under both this Plan and SERP II.

Effective January 1, 2009, the Plan was amended (1) to eliminate the requirement that a Participant who was eligible for a Retirement Benefit under both this Plan and SERP II was required to elect the same form of Retirement Benefit under both this Plan and SERP II and (2) to conform certain administrative provisions in this Plan to the administrative provisions in SERP II.

It is the purpose of this Plan to provide eligible executives with benefits that will compensate them for limitations which apply to the Minnesota Power and Affiliated Companies Flexible Compensation Plan, Minnesota Power and Affiliated Companies Retirement Savings and Stock Ownership Plan (sometimes hereinafter the “Retirement Savings and Stock Ownership Plan” or “RSOP”), Minnesota Power and Affiliated Companies Retirement Plan A and to provide a benefit which includes compensation attributable to the ALLETE Executive Annual Incentive Plan (sometimes hereinafter the “Annual Incentive Plan”) and Other Awards as though such awards were eligible for benefit plans which are qualified under Section 401(a) and (k) of the Code. The Plan also provides for deferral of salary and annual and long-term incentive compensation awards.

           SECTION 2.          DEFINITIONS

Whenever used in the Plan, the following terms shall have the respective meanings set forth below, unless otherwise expressly provided herein, and when the defined meaning is intended, the term is capitalized:

Except when otherwise indicated by the context, any masculine terminology used herein shall also include the feminine, and the use of any term herein in the singular may also include the plural.

           SECTION 3.           ELIGIBILITY AND PARTICIPATION

Any employee of the Company shall become a Participant as follows:

The following conditions must also be satisfied:

An employee who becomes a Participant shall remain eligible to have an account in the Plan as a Participant hereunder, without regard to Compensation and Annual Incentive Awards or Other Awards received in subsequent years, until the last to occur of (i) the employee’s Retirement or termination from service for any reason or (ii) the date all benefits, if any, to which he or she is entitled hereunder have been distributed. Employees, who were former Participants, who become employed by an ALLETE wholly or partially owned company, shall not be considered as retired or terminated until such time as they become retired or terminated from the new company.  If a Participant is employed by a subsidiary of the Company, and such subsidiary is no longer at least 50% owned by the Company, then such Participant will be considered to be terminated or Retired (as defined in Section 2.1(L)) on such date.  Distribution of the Participant’s benefits under Sections 4.9, 4.10 or 4.13 shall occur as provided therein.  

Notwithstanding the preceding sentence of this Paragraph, in the event that a Participant is employed by a subisidary of the Company which is distributed to shareholders through a stock spin off to shareholders of ALLETE, then the Participant will not be considered to be terminated or Retired (as defined in Section 2.1(L)) for purposes of Section 4.9, 4.10 or 4.13 until their employment at such distributed company terminates for any reason, including Retirement.  For purposes of Section 4.6, the Participant will be considered Retired (as set forth in Section 2.1(L)) if the Participant continues employment at such distributed company until the Participant’s 50 ^th birthday.  Any employment period, salary or other amount earned while employed at such distributed company, however, will not be included in the calculation of the benefit provided under Section 4.6.

An employee who was a Participant, but is not currently eligible for benefits under Sections 4.1, 4.2, 4.3, 4.4, and 4.5, will not receive account additions as described herein.  However, the employee may be eligible for benefits under Section 4.6 if they qualify under the terms provided in that Section.

An employee who is a Participant who dies prior to Retirement is no longer entitled to the benefit described under Section 4.6.

Participation in the Plan does not constitute a guarantee or contract of employment with the Company.  Such participation shall in no way interfere with any rights the Company would have in the absence of such participation to determine the duration of the employee’s employment with the Company.

          SECTION 4.        BENEFITS

For each calendar year ending on or after December 31, 1980, and except as hereinafter specifically provided in this Section 4, the Company shall credit each Participant who qualifies:

If a Participant transfers to an ineligible status, dies or Retires during the year, this calculation will be based on the full Annual Incentive Award and Other Award.  If a Participant’s annual Pay exceeds that amount allowed under IRS qualified plan’s compensation limit, the amount of Participant’s annual Pay will be prorated for the number of months in an eligible status.

Effective through December 31, 2002, the Company shall credit each Participant who qualifies an amount equal to the amount for which a Participant has elected to reduce his or her annual salary pursuant to a Supplemental Salary Reduction Agreement, not to exceed 25% of the Participant’s annual salary less the amount allowable to be deferred under the RSOP.  Effective January 1, 2003, the Company shall credit each Participant who qualifies an amount equal to the amount for which a Participant has elected to reduce his or her annual salary pursuant to a Supplemental Salary Reduction Agreement.

The Company shall credit each Participant who qualifies an amount equal to the amount for which a Participant has elected to defer his or her Annual Incentive Award or Other Award.

The Company shall credit each Participant who qualifies an amount equal to the amount for which a Participant has elected to defer his or her severance benefit as approved for deferral by the Committee.

Effective July 1, 1999 through January 20, 2003, the Company shall credit each Participant who qualifies an amount, equal to the amount for which a Participant has elected to defer receipt of his or her shares of ALLETE stock acquired through an Ownership Retention Option Program provided in the Long Term Incentive Compensation Plan and pursuant to the Stock Option Gain Shares Deferral Election.

At the Retirement of a Participant, the Company shall credit each Participant who qualifies under Subsection 3.1(C) with a Retirement Benefit.  The Retirement Benefit shall be calculated as follows: