DEF 14A 1 ddef14a.htm DEFINITIVE PROXY STATEMENT DEFINITIVE PROXY STATEMENT
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant x

 

Filed by a Party other than the Registrant ¨

 

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

 

 

 

PEPCO HOLDINGS, INC.

 

(Name of Registrant as Specified In Its Charter)

 

 

 

  

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

 

Payment of Filing Fee (Check the appropriate box):

 

x No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

  

 

  (2) Aggregate number of securities to which transaction applies:

 

  

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined.):

 

  

 

  (4) Proposed maximum aggregate value of transaction:

 

  

 

  (5) Total fee paid:

 

  

 

 

 

¨ Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a) (2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

 

  (1) Amount Previously Paid:

 

  

 

  (2) Form, Schedule or Registration Statement No.:

 

  

 

  (3) Filing Party:

 

  

 

  (4) Date Filed:

 

  

 

 

 


Table of Contents

LOGO

Proxy Statement and

2009 Annual Report to Shareholders

 

Dear Shareholders,

 

2009 was a challenging year for Pepco Holdings, Inc. (PHI) and the energy industry. The nationwide economic downturn caused stock values to drop and financial markets to remain volatile. Despite the significance of the challenges, I am pleased that we were able to keep PHI’s growth strategies on track and maintain the dividend.

 

2009 consolidated earnings of $1.06 per share compared to $1.47 per share in 2008 reflected the difficult economy. Increased pension expense and higher interest expense combined with a challenging energy market to drive these results. I am optimistic, however, that an improving economic outlook and our robust regulated infrastructure growth plan together will deliver increased shareholder value.

 

2009 in Review

 

I credit PHI’s sound business model and the forethought and commitment of our employees with enabling the company to manage through 2009 so well. The reduction in spending, deferral of selected capital expenditures and salary and hiring freezes that we implemented were difficult, but necessary, steps to respond to economic conditions. While we expect 2010 will be a return to more normal operating conditions, we plan to continue our focus on managing costs and driving operational efficiencies.

 

The proactive financing plan we completed in late 2008 was pivotal in enabling us to execute our 2009 construction plan. We began installing the first of 430,000 smart meters in Delaware, and are well on our way to building a “smart grid,” a modern electric system that will enable customers to better track and modify their energy use, save money on energy bills and

contribute to reducing carbon emissions that negatively affect environmental quality. In support of this effort, we also are investing in new communications infrastructure and automated distribution systems, which can isolate electrical problems, make automatic power adjustments and speed restoration.

 

Thanks to our successful application for federal smart grid stimulus funds, we are accelerating our regulated delivery system modernization plans. The U.S. Department of Energy awarded us $168 million to help build a smart grid in the Pepco region and implement demand side management programs and install communications infrastructure to serve Atlantic City Electric customers. As a result, we are moving quickly to extend our smart grid work in Delaware that is well under way to these service areas. The number of smart meters that we will install in the Pepco and Delmarva Power-Delaware regions will eventually grow to more than 1.2 million.

 

In January 2010, we requested the Maryland Public Service Commission to delay the procedural schedule for the $1.2 billion Mid-Atlantic Power Pathway (MAPP), a 150-mile, 500-kilovolt transmission line that will originate in Virginia, pass through southern Maryland and then travel under the Chesapeake Bay and onto the Delmarva Peninsula. PJM Interconnection, the independent regional power grid operator, is currently reviewing the region’s overall transmission needs. While awaiting the completion of PJM’s review, we asked the commission to suspend the proceedings. This study is scheduled to be completed this June and will determine any impact on the current 2014 in-service date for the MAPP project. Meanwhile, we are continuing to define the line’s route and complete environmental studies.


 

Letter to Shareholders

   Cover Page

Notice of 2010 Annual Meeting and Proxy Statement

   1

Policy on the Approval of Services Provided by the Independent Auditor

   A-1

2009 Annual Report to Shareholders

   B-1

• Business of the Company

   B-8

• Management’s Discussion and Analysis

   B-21

• Quantitative and Qualitative Disclosures about Market Risk

   B-80

• Consolidated Financial Statements

   B-85

Board of Directors and Officers

   B-162

Investor Information

   B-163


Table of Contents

During the next five years, investments in our regulated power delivery business unrelated to our MAPP and smart grid initiatives will comprise nearly 70 percent of our capital expenditures, providing the primary growth driver for your investment.

 

On the District of Columbia and state regulatory front, we have been very active, filing five electric distribution rate cases over an eight-month period. Through these requests, we are seeking to minimize regulatory lag, improve cash flow and close the gap between actual utility earnings and authorized rates of return. We have received final orders in our two initial cases that resulted in modest distribution rate increases for residential customers in the District of Columbia and our Delmarva Power-Maryland service areas and upheld several important precedents that will help us meet our financial goals.

 

In other regulatory successes, we achieved approval of our smart grid plans in the District of Columbia and an expedited schedule for considering a smart grid in Maryland. In the District of Columbia and Delaware, revenue decoupling mechanisms were approved, which make revenue independent of sales, helping to align the utility’s interest in energy conservation with that of our customers. The District of Columbia decoupling mechanism went into effect in November 2009, and we expect decoupling to be implemented for electric distribution rates in Delaware, once the pending base rate case is completed this summer.

 

Expansion of our Conectiv Energy generation fleet continued. A new dual-fueled combustion turbine in New Jersey became operational in June 2009 and a combined-cycle generating plant in Pennsylvania is on track for commercial operation in mid-2011. These fleet additions, totaling 645 megawatts, further enhance our strategic presence within the PJM market. In addition, we built a four-megawatt solar plant for the Vineland Municipal Electric Utility in New Jersey, which went online in December and increased our renewable energy portfolio.

 

In other developments in 2009, we announced that we will exit Pepco Energy Services’ retail energy supply business by way of an orderly wind down. While retail energy supply has been profitable, its liquidity needs are high and incompatible with the growth under way in our core transmission and distribution business. Looking to the future, we are excited about the opportunity to expand Pepco Energy Services’ very successful energy services offerings, which include energy efficiency, renewable energy, and heating and cooling facilities for large commercial, industrial and government customers.

 

In aggregate, we are planning to invest $5.8 billion in infrastructure over the next five years. We move into this growth period with a sound financing plan and a focus on executing our strategy to build long-term shareholder value.

 

I would like to note that in 2010, we will institute the practice of providing a projection of our earnings for the year within a range to supplement our public financial disclosures. We believe this practice of earnings guidance, which is followed by many other utilities, will provide investors and other interested parties with helpful additional information with which to make investment decisions.

 

Looking to the Future

 

As I complete my first year as your Chairman and CEO, I am optimistic about PHI’s future. Our vision of creating an electric system for the 21st century is becoming a reality. We are expanding our generation fleet and energy services business, and our commitment to renewable energy and energy-efficiency complements both state and federal government policy goals. In the process, we are transforming the way we do business, and are building new relationships with our customers and our communities.

 

 

Our values continue to guide our decisions and actions, and we earned in the past year recognition from numerous sources citing the diversity of our work force, our desirability as an employer and our position as an industry leader.

 

Throughout it all, the safety of our employees and those we serve remains central to our focus. I was gratified during the blizzard and ice conditions of the two back-to-back February 2010 storms that we were able to restore service to more than a half million customers safely and proficiently. I am proud of these achievements and the dedication of our employees and leadership team and the guidance and support from your Board.

 

Thank you for your continued investment in Pepco Holdings, Inc.

 

Sincerely,

 

LOGO

Joseph M. Rigby

Chairman of the Board, President

    and Chief Executive Officer

March 26, 2010


 

ii


Table of Contents

 

YOUR VOTE IS IMPORTANT.

PLEASE VOTE YOUR SHARES PROMPTLY.

YOU CAN VOTE YOUR SHARES ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE OR, IF YOU RECEIVED PRINTED PROXY MATERIALS, BY COMPLETING AND RETURNING THE PROXY CARD. IF YOU RECEIVED PRINTED MATERIALS, THE INSTRUCTIONS ARE PRINTED ON YOUR PROXY CARD. IF YOU RECEIVED THE NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIALS, THE INSTRUCTIONS ARE PROVIDED IN THAT NOTICE OF AVAILABILITY.

 

THANK YOU FOR ACTING PROMPTLY.


Table of Contents

LOGO

 

701 Ninth Street, N.W.

Washington, D.C. 20068

 

Notice of Annual Meeting of Shareholders

 

March 26, 2010

 

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Pepco Holdings, Inc. will be held at 10:00 a.m. local time on Friday, May 21, 2010 (the doors will open at 9:30 a.m.), at the Company’s offices located at 701 Ninth Street, N.W., Edison Place Conference Center (second floor), Washington, D.C. for the following purposes:

 

  1. To elect 12 directors to serve for a term of one year;

 

  2. To ratify the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company for 2010;

 

  3. To transact such other business as may properly be brought before the meeting.

 

All holders of record of the Company’s common stock at the close of business on Monday, March 22, 2010, will be entitled to vote on each matter submitted to a vote of shareholders at the meeting.

 

By order of the Board of Directors,
ELLEN SHERIFF ROGERS
Vice President and Secretary

 

 

 

IMPORTANT

 

You are cordially invited to attend the meeting in person.

 

Even if you plan to be present, you are urged to vote your shares promptly. You can vote your shares electronically via the Internet or by telephone or, if we sent you printed proxy materials, by completing and returning the proxy card. If you received printed materials, the instructions are printed on your proxy card and included in the accompanying Proxy Statement. If you received the Notice of Internet Availability of Proxy Materials, the instructions are provided in that Notice of Availability.

 

If you attend the meeting, you may vote either in person or by proxy.

 

Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting to be held on May 21, 2010. The Company’s 2010 Proxy Statement and 2009 Annual Report to Shareholders are available at www.pepcoholdings.com.


Table of Contents
     PAGE

TABLE OF CONTENTS

  

Election of Directors

   5

Nominees for Election as Directors

   6

Board Meetings

   14

Board Leadership Structure and Role in Risk Oversight

   14

Board Committees

   16

2009 Director Compensation

   20

Security Ownership of Certain Beneficial Owners and Management

   21

Compensation/Human Resources Committee Report

   22

Compensation Discussion and Analysis

   22

Executive Compensation

   35

2009 Summary Compensation Table

   35

2009 Grants of Plan-Based Awards

   40

Outstanding Equity Awards at December 31, 2009

   45

2009 Option Exercises and Stock Vested

   47

Pension Benefits at December 31, 2009

   48

Nonqualified Deferred Compensation at December 31, 2009

   53

Board Review of Transactions with Related Parties

   62

Audit Committee Report

   64

Ratification of the Appointment of the Independent Registered Public Accounting Firm

   65

Shareholder Proposals and Director Nominations

   66

Other Matters Which May Come Before the Meeting

   68

Policy on the Approval of Services Provided By the Independent Auditor

   A-1

2009 Annual Report to Shareholders

   B-1


Table of Contents

PROXY STATEMENT

 

Annual Meeting of Shareholders

 

Pepco Holdings, Inc.

 

March 26, 2010

 

This Proxy Statement is being furnished by the Board of Directors of Pepco Holdings, Inc. (the “Company,” “Pepco Holdings” or “PHI”) in connection with its solicitation of proxies to vote on the matters to be submitted to a vote of shareholders at the 2010 Annual Meeting. Most shareholders will receive a printed copy of this Proxy Statement and a paper proxy card. As described in more detail below, however, certain shareholders will instead receive a Notice of Internet Availability of Proxy Materials (the “Notice of Availability”) in order to access the proxy materials via the Internet rather than receiving a printed copy of this Proxy Statement and a paper proxy card. The Notice of Annual Meeting, this Proxy Statement, any accompanying proxy card and the Company’s 2009 Annual Report to Shareholders, which is attached as Annex B to this Proxy Statement, and the Notice of Availability were first made available to shareholders of record on or about March 26, 2010.

 

The address of the Company’s principal executive offices is 701 Ninth Street, N.W., Washington, D.C. 20068.

 

When and where will the Annual Meeting be held?

 

The Annual Meeting will be held at 10:00 a.m. local time on Friday, May 21, 2010 (the doors will open at 9:30 a.m.), at the Company’s offices located at 701 Ninth Street, N.W., Edison Place Conference Center (second floor), Washington, D.C. To obtain directions to attend the Annual Meeting and, if you wish to do so, vote in person, please contact the Company by sending an e-mail to pepco@amstock.com. Admission to the meeting will be limited to Company shareholders or their authorized proxies. Admission tickets are not required.

 

Will the Annual Meeting be Webcast?

 

The live audio of the meeting, including a slide presentation, can be accessed at the Company’s Web site, www.pepcoholdings.com/investors. An audio-only version will also be available. The dial-in information will be announced in a news release at a later date. The Annual Meeting Webcast will be archived and available on the Company’s Web site (www.pepcoholdings.com) by first clicking on the link: Investor Relations and then the link: Webcasts and Presentations.

 

What matters will be voted on at the Annual Meeting?

 

1. The election of 12 directors, each for a one-year term.

 

The Board recommends a vote FOR each of the 12 candidates nominated by the Board of Directors and identified in Item 1 in this Proxy Statement.

 

2. The ratification of the appointment by the Audit Committee of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2010.

 

The Board recommends a vote FOR this proposal.

 

What is the quorum requirement?

 

In order to hold the Annual Meeting, the holders of a majority of the outstanding shares of common stock must be present at the meeting either in person or by proxy.

 

1


Table of Contents

How do I vote shares registered in my own name?

 

If you own shares that are registered in your own name, you can attend the Annual Meeting and vote in person or you can vote by proxy without attending the meeting. You can vote by proxy in any of the following ways:

 

   

Via Internet: Go to www.voteproxy.com. If you received printed proxy materials, follow the instructions printed on your proxy card. If you received the Notice of Availability, follow the instructions provided in the Notice of Availability. If you vote via the Internet, you also can at that time elect to receive future proxy statements and annual reports electronically via the Internet rather than receiving printed proxy materials or the Notice of Availability by mail.

 

   

By Telephone: Call toll-free 1-800-PROXIES (1-800-776-9437). You can also vote by telephone by following the instructions provided on the Internet voting site or, if you received printed proxy materials, by following the instructions provided on your proxy card.

 

   

In Writing: If we mailed you a printed copy of this Proxy Statement and a paper proxy card, you can vote by completing, signing, dating and returning the proxy card in the postage-paid envelope that was enclosed with your Proxy Statement.

 

The Internet and telephone voting facilities for shareholders of record will close at 5:00 p.m. Eastern time on May 20, 2010. Your signed proxy card or the proxy you grant via the Internet or by telephone will be voted in accordance with your instructions.

 

If you own shares that are registered in your own name and return a signed proxy card or grant a proxy via the Internet or by telephone, but do not indicate how you wish your shares to be voted, your shares will be voted FOR the election of each of the Board’s director nominees and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2010.

 

How do I vote shares held through a brokerage firm, bank or other financial intermediary?

 

If you hold shares through a brokerage firm, bank or other financial intermediary (a practice known as holding shares “in street name”), you will receive from that intermediary directions on how to direct the voting of your shares by the intermediary, which may include the ability to provide voting instructions via the Internet or by telephone. Unlike in previous years, if you own your shares through an account with a brokerage firm that is a member of the New York Stock Exchange (“NYSE”) and you want to vote FOR the election of each of the Board’s director nominees, you MUST indicate how you wish your shares to be voted. It is therefore important that you provide voting instructions to your broker if your shares are held by a broker so that your vote with respect to Directors is counted. If you hold your shares through a brokerage firm, bank or other financial intermediary and wish to vote in person at the Annual Meeting, you must obtain a proxy to vote your shares from the recordholder of the shares.

 

Who is eligible to vote?

 

All shareholders of record at the close of business on Monday, March 22, 2010 (the “record date”) are entitled to vote at the Annual Meeting. As of the close of business on the record date 222,778,235 shares of Pepco Holdings common stock, par value $.01 per share (the “common stock”), were outstanding. Each outstanding share of common stock entitles the holder of record to one vote on each matter submitted to the vote of shareholders at the Annual Meeting.

 

Why did I receive a Notice of Availability in the mail regarding the Internet availability of proxy materials this year instead of a paper copy of the proxy materials?

 

Under the “Notice and Access” rules approved by United States Securities and Exchange Commission (the “SEC”), we are permitted to deliver this Proxy Statement and our 2009 Annual Report to Shareholders by

 

2


Table of Contents

providing access to the documents on the Internet instead of mailing printed copies. Accordingly, certain shareholders have received a Notice of Availability instead of printed copies of the proxy materials. The Notice of Availability instructs how you may access and review all of the proxy materials on the Internet. The Notice of Availability also instructs how you may vote over the Internet. Beginning on the date of mailing of the Notice of Availability, shareholders will be able to access all of the proxy materials on a Web site referred to in the Notice of Availability. If you received a Notice of Availability and would like to receive free of charge a paper or electronic copy of our proxy materials, you may elect to do so by following the instructions in the Notice of Availability for requesting such materials.

 

If you previously requested paper copies of the proxy materials or if applicable regulations require delivery of the proxy materials, you will not receive the Notice of Availability.

 

Can I vote my shares by filling out and returning the Notice of Availability?

 

No. The Notice of Availability identifies the items to be voted on at the Annual Meeting, but you cannot vote by marking the Notice of Availability and returning it. The Notice of Availability provides instructions on how to vote via Internet, by telephone, or by requesting and returning a paper proxy card, or by submitting a ballot in person at the meeting.

 

Why did I receive an e-mail with links to the proxy materials this year instead of a paper copy of the proxy materials?

 

If you previously elected to access your proxy materials over the Internet, you will not receive a Notice of Availability or printed proxy materials in the mail. Instead, you have received an e-mail with links to the proxy materials and the online proxy voting site.

 

If you received a paper copy of the proxy materials or the Notice of Availability, you can eliminate all such future paper mailings by electing to receive an e-mail that will provide Internet links to these documents. Opting to receive all future proxy materials electronically will save us the cost of producing and mailing documents to you and will help us conserve natural resources. To request complete electronic delivery, please contact American Stock Transfer & Trust Company, the Company’s transfer agent, at 1-866-254-6502 (toll-free) or go to www.amstock.com. This election is not available for shares held through the Retirement Savings Plan.

 

What does it mean if I receive more than one Notice of Availability or proxy materials?

 

If you receive more than one Notice of Availability or more than one set of proxy materials, it is because your shares are registered in different names or with different addresses or are in more than one account. You must separately vote the shares shown on each Notice of Availability and proxy card that you receive in order for all of your shares to be voted at the Annual Meeting. To enable us to provide better shareholder service, we encourage shareholders to have all the shares they hold of record registered in the same name and under the same address.

 

How is stock in the Pepco Holdings Dividend Reinvestment Plan voted?

 

Shares held by the Pepco Holdings Dividend Reinvestment Plan will be voted by the plan administrator in accordance with your instructions. Any shares held in the Dividend Reinvestment Plan and for which no voting instructions are received will not be voted.

 

How is stock in the Retirement Savings Plan voted?

 

If you are a current or former employee who is a participant in the Retirement Savings Plan, you have received a printed copy of the proxy materials. The number of shares printed on the enclosed proxy card are the

 

3


Table of Contents

shares of common stock you hold through that plan. By completing, dating, signing and returning the proxy card or granting a proxy via the Internet or by telephone, you will be providing the plan trustee with instructions on how to vote the shares held in your account. If you do not provide voting instructions for your plan shares, the plan trustee will vote your shares on each matter in proportion to the voting instructions given by all of the other participants in the plan. The Retirement Savings Plan is the successor plan to the (i) Potomac Electric Power Company Savings Plan for Bargaining Unit Employees, (ii) Potomac Electric Power Company Retirement Savings Plan for Management Employees (which itself is the successor to the Potomac Electric Power Company Savings Plan for Non-Exempt, Non-Bargaining Unit Employees; the Potomac Electric Power Company Retirement Savings Plan for Management Employees was formerly known as the Potomac Electric Power Company Savings Plan for Exempt Employees), (iii) Conectiv Savings and Investment Plan and the Conectiv PAYSOP/ESOP and (iv) Atlantic Electric 401(k) Savings and Investment Plan-B.

 

How can I change my vote after I have returned my proxy card or granted a proxy via the Internet or by telephone?

If you own your shares in your own name or through the Dividend Reinvestment Plan or Retirement Savings Plan, you may revoke your proxy, regardless of the manner in which it was submitted, by:

 

   

sending a written statement to that effect to the Secretary of the Company before your proxy is voted;

 

   

submitting a properly signed proxy card dated a later date;

 

   

submitting a later dated proxy via the Internet or by telephone; or

 

   

voting in person at the Annual Meeting.

 

If you hold shares through a brokerage firm, bank or other financial intermediary, you should contact that intermediary for instructions on how to change your vote.

 

How can I obtain more information about the Company?

 

The Company’s 2009 Annual Report to Shareholders is included as Annex B after page A-3 of this Proxy Statement. You may also visit the Company’s Web site at www.pepcoholdings.com.

 

4


Table of Contents

1. ELECTION OF DIRECTORS

 

The Company’s Board of Directors currently consists of 11 directors. The Board of Directors has authorized an increase in the size of the Board to 12 members to take effect immediately prior to the commencement of the 2010 Annual Meeting, as permitted by the Bylaws of the Company.

 

The Board of Directors, on the recommendation of the Corporate Governance/Nominating Committee, has nominated for re-election at the 2010 Annual Meeting Jack B. Dunn, IV, Terence C. Golden, Patrick T. Harker, Frank O. Heintz, Barbara J. Krumsiek, George F. MacCormack, Lawrence C. Nussdorf, Joseph M. Rigby, Frank K. Ross, Pauline A. Schneider and Lester P. Silverman, each of whom currently is a member of the Board of Directors, and has nominated for election Patricia A. Oelrich, a new nominee, each to hold office for a one-year term that expires at the 2011 Annual Meeting, and until his or her successor is elected and qualified. Ms. Oelrich was identified for consideration as a nominee with the assistance of the National Association of Corporate Directors.

 

The Board of Directors unanimously recommends a vote FOR each nominee listed on pages 6-11.

 

What vote is required to elect the directors?

 

Each director shall be elected by a majority of the votes cast “for” his or her election.

 

The Company’s Bylaws provide that each director shall be elected by a majority of the votes cast “for” his or her election, except that in a contested election where the number of nominees exceeds the number of directors to be elected, directors shall be elected by a plurality of the votes cast. Accordingly, at the 2010 Annual Meeting, a nominee will be elected as a director only if a majority of the votes cast with respect to the election of that director are cast “for” his or her election. In accordance with the Company’s Bylaws any incumbent nominee who fails to receive a majority of votes cast “for” his or her election is required to resign from the Board no later than 90 days after the date of the certification of the election results.

 

What happens if a nominee is unable to serve as a director?

 

Each nominee identified in this Proxy Statement has confirmed that he or she is willing and able to serve as a director. Should any of the nominees, prior to the Annual Meeting, become unavailable to serve as a director for any reason, the Board of Directors may either reduce the number of directors to be elected or, on the recommendation of the Corporate Governance/Nominating Committee, select another nominee. If another nominee is selected, all proxies will be voted for that nominee.

 

5


Table of Contents

NOMINEES FOR ELECTION AS DIRECTORS

 

LOGO   

Jack B. Dunn, IV, age 59, since October 1995 has been Chief Executive Officer and since October 2004 has been President of FTI Consulting, Inc. (“FTI”), a publicly held multi-disciplined consulting firm with practices in the areas of corporate finance/restructuring, forensic and litigation consulting, economic consulting, technology and strategic and financial communications, located in West Palm Beach, Florida. He has served as a director of FTI since 1992 and served as Chairman of the Board from December 1998 to October 2004. Mr. Dunn served as a director of Aether Systems, Inc., which became Aether Holdings, Inc., from 2002 to 2008. He served as a director of NexCen Brands, Inc. from June 8, 2002 through September 25, 2008. Mr. Dunn is also a limited partner in the Baltimore Orioles. He has been a director of the Company since May 21, 2004.

 

Mr. Dunn’s qualifications for election to PHI’s Board include his broad knowledge of corporate finance and his perspective and experience as an active Chief Executive Officer of a global business advisory firm with a particular emphasis on customer service. Mr. Dunn is Chief Executive Officer and President of FTI, a public company that specializes in assisting public companies in the areas of finance and governance, among others. Prior to joining FTI, Mr. Dunn spent over ten years with Legg Mason, Inc., a major regional investment banking firm, where he was managing director, senior vice president, a member of its broker/dealer’s board of directors and head of its corporate finance group. Prior to his investment banking career, Mr. Dunn practiced corporate and securities law.

LOGO   

Terence C. Golden, age 65, since 2000 has been Chairman of Bailey Capital Corporation in Washington, D.C. Bailey Capital Corporation is a private investment company. From 1995 until May 2000, Mr. Golden was President and Chief Executive Officer of Host Hotels and Resorts, Inc. He has been a director of Host Hotels and Resorts, Inc. since 1995. He also serves as a director of the Washington Real Estate Investment Trust, the Morris & Gwendolyn Cafritz Foundation and as Chairman of the Federal City Council. He has been a director of the Company since August 1, 2002, and was a director of Potomac Electric Power Company (“Pepco”) from 1998 until it merged with Conectiv on August 1, 2002.

 

Mr. Golden’s qualifications for election to PHI’s Board include his extensive accounting and financial management experience, as well as his perspective and experience as an active Chairman and former Chief Financial Officer with responsibility for accounting, cash management, tax and corporate and project financing. Mr. Golden is Chairman of Bailey Capital Corporation, an investment company that also provides real estate related services to institutions and individuals, including market studies, financial analyses, project evaluations, asset and property management and asset dispositions. From 1995 until May 2000, Mr. Golden was President and Chief Executive Officer of Host Hotels and Resorts, Inc., the lodging real estate company that includes among its holdings the Marriott, Ritz-Carlton, Four Seasons, Hyatt, Hilton, Westin, W, Sheraton and Fairmont hotels. Mr. Golden served as the Chief Financial Officer of the Oliver Carr Company, one of the largest real estate companies in the mid-Atlantic region, which provides apartment building management and development services. Mr. Golden was also national managing partner of Trammell Crow Residential Companies, one of the largest residential development companies in the United States. Mr. Golden lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

 

6


Table of Contents
LOGO   

Patrick T. Harker, age 51, since 2007 has been President of the University of Delaware, Newark, Delaware. Concurrent with his appointment as President, Dr. Harker was appointed professor of Business Administration in the Alfred Lerner College of Business and Economics and a professor of Civil and Environmental Engineering in the University of Delaware’s College of Engineering. From 2000-2007, he was Dean of the Wharton School of the University of Pennsylvania and served as a Professor of Electrical and Systems Engineering in the University of Pennsylvania’s School of Engineering and Applied Science. Since 2000, he has served as a Trustee of the Goldman Sachs Trust and Goldman Sachs Variable Insurance Trust; from 2004-2009 he was a Member of the Board of Managers of the Goldman Sachs Hedge Fund Partners Registered Fund LLC. Dr. Harker has been a director of the Company since May 15, 2009.

 

Dr. Harker’s qualifications for election to PHI’s Board include his leadership skills and public and government affairs experience. As a Ph.D. in engineering and the former Dean of the Wharton School, Dr. Harker brings to the PHI Board a unique blend of technical expertise and business knowledge. Through his experience on the Board of Trustees of the Goldman Sachs Trust, Dr. Harker also contributes a strong background in capital markets. Dr. Harker lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

Frank O. Heintz, age 66, is retired President and Chief Executive Officer of Baltimore Gas and Electric Company, the gas and electric utility serving central Maryland, a position he held from 2000 through 2004. From 1982 to 1995, Mr. Heintz was Chairman of the Maryland Public Service Commission, the state agency regulating gas, electric, telephone and certain water and sewerage utilities. Previously he served as agency head of the Maryland Employment Security Administration and was an elected member of the Maryland legislature. He has been a director of the Company since May 19, 2006.

 

Mr. Heintz’s qualifications for election to PHI’s Board include his perspective and experience as a former Chief Executive Officer of a regulated utility company and the regulatory, public policy and governmental affairs knowledge that he gained as a state public utility regulatory official. As President and Chief Executive Officer of Baltimore Gas and Electric Company, Mr. Heintz was responsible for overseeing the operations, finances, planning, and delivery of service to more than one million gas and electric customers. Additionally, as Executive Vice President of Constellation Energy, he participated in executive and board deliberations regarding the holding company’s diverse competitive lines of business. During Mr. Heintz’s 13 years as Chairman of the Maryland Public Service Commission, he became thoroughly knowledgeable about regulatory law, policy and process. As Executive Director of the American Gas Association’s caucus of local distribution companies, Mr. Heintz worked with numerous chief executive officers of gas utilities on matters of federal and state regulation, public policy, cost of capital and federal legislation affecting gas companies and holding companies. During the two decades of his regulatory and utility career, Mr. Heintz participated in many organizations that have broadened his base of knowledge about the energy industry, utility operations, and state and federal regulations, including the National Association of Utility Regulators, the Edison Electric Institute, the American Gas Association, the U.S. Department of Energy’s National Petroleum Council and the Gas Research Institute.

 

7


Table of Contents
LOGO   

Barbara J. Krumsiek, age 57, since 1997 has been President and Chief Executive Officer and since 2006 Chair of Calvert Group, Ltd. Calvert is based in Bethesda, Maryland, and offers a range of fixed income, money market and equity mutual funds including a full family of socially responsible mutual funds. She serves as a trustee or director for 54 Calvert-sponsored mutual funds, including serving as Chair of the Calvert Variable Series of funds. She has been a director of the Company since May 18, 2007.

 

Ms. Krumsiek’s qualifications for election to PHI’s Board include her financial knowledge from an investor standpoint and her insights as a current Chief Executive Officer, including her familiarity with issues of compensation, risk assessment, and technology. Ms. Krumsiek has served as Chief Executive Officer of Calvert Group Ltd., an investment management and research firm, for 13 years, after 23 years of experience with Alliance Capital Management. In her capacity as CEO of Calvert, she has overseen all aspects of corporate operations, including strategic planning, compliance and risk management, financial management, financial statement preparation, and information technology. Ms. Krumsiek also has experience with environmental issues. Ms. Krumsiek lives and works in the Company’s operating territory, is a former Chair of the Greater Washington Board of Trade, and serves as a director for several other local non-profit organizations, and therefore has significant community ties within the region.

LOGO   

George F. MacCormack, age 66, is retired Group Vice President, DuPont, Wilmington, Delaware, a position he held from 1999 through 2003. He was previously Vice President and General Manager (1998), White Pigments & Mineral Products Strategic Business Unit and Vice President and General Manager (1995), Specialty Chemicals Strategic Business Unit for DuPont. He has been a director of the Company since August 1, 2002, and was a director of Conectiv from 2000 until it merged with Pepco on August 1, 2002.

 

Mr. MacCormack’s qualifications for election to PHI’s Board include his insights as a former senior officer who held leadership positions in technology, manufacturing, sales, business and mergers and acquisitions at a large publicly held corporation. As Vice President and General Manager of DuPont, Mr. MacCormack had Strategic Business Unit profit and loss responsibility for approximately 3,000 employees and $1.5 billion in revenue. As Group Vice President, Mr. MacCormack had corporate oversight responsibility for approximately 12,000 employees and a $6 billion revenue portfolio of capital and energy intensive global Strategic Business Units. He also had corporate oversight and governance responsibility as Chairman/Vice Chairman of the Board for four major joint ventures with international partners. Over the last 12 years of his career with DuPont, Mr. MacCormack was the lead executive on the sale of several significant chemical businesses, and was one of the senior executives responsible for the sale of the $5 billion Invista Fibers and Chemicals subsidiary company.

 

8


Table of Contents
LOGO   

Lawrence C. Nussdorf, age 63, since 1998 has been President and Chief Operating Officer of Clark Enterprises, Inc., a privately held investment and real estate company based in Bethesda, Maryland, whose interests include the Clark Construction Group, LLC, a general contracting company, of which Mr. Nussdorf has been Vice President and Treasurer since 1977. He has served as a director of CapitalSource Inc. since March 2007 and will continue to serve until the conclusion of CapitalSource Inc.’s Annual Meeting in May, 2010. He has been a director of the Company since August 1, 2002, and was a director of Pepco from 2001 until it merged with Conectiv on August 1, 2002. He currently serves as Lead Independent Director.

 

Mr. Nussdorf’s qualifications for election to PHI’s Board include his perspectives as a long-serving Chief Operating Officer and former Chief Financial Officer. In addition to being the current President and Chief Operating Officer of Clark Enterprises, Inc., Mr. Nussdorf served for over 30 years as Chief Financial Officer. He has been at the forefront of strategic and long-term planning, as well as all aspects of management, operations, and finance of multiple businesses that involve different asset classes. Mr. Nussdorf lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

Patricia A. Oelrich, age 56, from 2001-2009 was Vice President, IT Risk Management for GlaxoSmithKline Pharmaceuticals (“GlaxoSmithKline”), a Global 100 public company. From 1995 to 2000, Ms. Oelrich served as Vice President, Internal Audit for GlaxoSmithKline. She was employed at Ernst & Young from 1975 to 1994, and was a partner from 1988 to 1994. Ms. Oelrich has been a member of the Fielding Graduate University Board of Trustees since 2000.

 

Ms. Oelrich’s qualifications for election to PHI’s Board include her perspectives on corporate governance, information technology, audit, compliance and finance issues. Ms. Oelrich is a CPA and a Certified Information Systems Auditor. In her roles at GlaxoSmithKline, Ms. Oelrich has directed internal audit activities worldwide, established GlaxoSmithKline’s IT Risk Management Program, and participated in establishing GlaxoSmithKline’s Corporate Compliance and Corporate Risk Management Oversight Programs. As a partner at Ernst & Young, Ms. Oelrich was in charge of the Chicago Office Information Systems Audit and Security practice that provided internal audit services and security consulting to highly regulated industries, including the financial services, insurance and healthcare industries. She was also lead financial audit partner on various engagements.

 

9


Table of Contents
LOGO   

Joseph M. Rigby, age 53, is Chairman, President and Chief Executive Officer of the Company. He has been President and Chief Executive Officer of the Company since March 1, 2009. From March 2008 to March 2009, Mr. Rigby served as President and Chief Operating Officer of the Company and from September 2007 to March 2008, he served as Executive Vice President and Chief Operating Officer of the Company. He was Senior Vice President of the Company from August 2002 and Chief Financial Officer from May 2004 to September 2007. From September 2007 to March 2009, Mr. Rigby was President and Chief Executive Officer of the Company’s utility subsidiaries. He has been Chairman of the Company’s utility subsidiaries since March 1, 2009. Mr. Rigby has been a director and Chairman of the Company since May 15, 2009.

 

Mr. Rigby’s qualifications for election to PHI’s Board include his ability to provide unique insights as PHI’s current Chief Executive Officer, as well as his 31 years of experience with the Company, Company subsidiaries and in the utility industry. Because of the various positions he has held within the Company, Mr. Rigby has broad experience across operations, finance and human resources, including mergers and acquisitions. Mr. Rigby also lives and works in the Company’s operating territory, is a member of the Greater Washington Board of Trade, and serves as a director for several local non-profit organizations and therefore has significant community ties within the region.

LOGO   

Frank K. Ross, age 66, is retired managing partner for the mid-Atlantic Audit and Risk Advisory Services Practice and managing partner of the Washington, D.C. office of the accounting firm KPMG LLP, positions he held from July 1, 1996 to December 31, 2003. He is currently a Visiting Professor of Accounting at Howard University, Washington, D.C. and the Director of its Center for Accounting Education. He is a director of Cohen & Steers Mutual Funds and serves as a director of 18 of these Funds. Mr. Ross serves on The Greater Washington, D.C. Urban League and Howard University Math and Science Middle School boards. Mr. Ross was a director of NCRIC Group, Inc. from 2003 to 2005. He has been a director of the Company since May 21, 2004.

 

Mr. Ross’ qualifications for election to PHI’s Board include his extensive knowledge of accounting and strategy matters gained through his over 40 years of experience as an accountant and as a current director of 18 Cohen & Steers Mutual Funds. Mr. Ross also lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

 

10


Table of Contents
LOGO   

Pauline A. Schneider, age 66, joined the Washington office of the law firm of Orrick, Herrington & Sutcliffe LLP (“Orrick”) in September 2006. From 1985 to September 2006, she was with the law firm of Hunton & Williams. From October 2000 to October 2002, Ms. Schneider served as Chair of the Board of MedStar Health, Inc., a community-based healthcare organization that includes seven major hospitals in the Washington, D.C./Baltimore area. From 1998 to 2002, she chaired the Board of The Access Group, Inc., a not-for-profit student loan provider headquartered in Wilmington, Delaware. She continues her service on the Access Group board. Since 2003, she has been a director of Diamond Management and Technology Consultants. She has been a director of the Company since August 1, 2002, and was a director of Pepco from 2001 until it merged with Conectiv on August 1, 2002.

 

Ms. Schneider’s qualifications for election to PHI’s Board include her experience in government and public affairs, as well as her experience in transactional matters. As a partner at Orrick, Ms. Schneider’s practice focuses on transactional matters, including the representation of state and local governments and governmental instrumentalities on general obligation and revenue bond financings for airports, mass transit, water and sewers, hospitals, educational facilities, convention centers, sports arenas and general government projects. Before joining Hunton & Williams, Ms. Schneider worked for four years in the Carter White House in the Office of Intergovernmental Affairs/Secretary to the Cabinet. Prior to that, she spent four years in the District of Columbia government, where she was director of the Officer of Intergovernmental Relations. Ms. Schneider also lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

Lester P. Silverman, age 63, is Director Emeritus of McKinsey & Company, Inc., having retired from the international management consulting firm in 2005. Mr. Silverman joined McKinsey in 1982 and was head of the firm’s Electric Power and Natural Gas practice from 1991 to 1999. From 2000 to 2004, Mr. Silverman was the leader of McKinsey’s Global Nonprofit Practice. Previous positions included Principal Deputy Assistant Secretary for Policy and Evaluation in the U.S. Department of Energy from 1980 to 1981 and Director of Policy Analysis in the U.S. Department of the Interior from 1978 to 1980. Mr. Silverman is currently an Adjunct Lecturer at Georgetown University, Washington, D.C., and a trustee of several national and Washington, D.C.-area nonprofit organizations. Mr. Silverman also is a member of the board of directors of Logos Energy, Inc., an energy technology start-up company, and Verdeo Group, Inc., which seeks to facilitate green house gas emission reductions in the U.S. He has been a director of the Company since May 19, 2006.

 

Mr. Silverman’s qualifications for election to PHI’s Board include his broad experience with the energy industry and extensive experience in government and public policy. Mr. Silverman was a consultant to electric and gas utilities for 23 years and has public policy experience in the energy field. Mr. Silverman also lives, works and serves as a director for several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

 

11


Table of Contents

Which directors are “independent”?

 

The listing standards of the NYSE require that a majority of the Company’s directors be “independent” as defined by the NYSE listing standards. Applying these standards, the Board has determined that ten of the Company’s current 11 directors, consisting of Messrs. Dunn, Golden, Harker, Heintz, MacCormack, Nussdorf, Ross and Silverman and Mmes. Krumsiek and Schneider, qualify as independent. The Board has also determined that Ms. Oelrich, if elected, will qualify as independent.

 

For a director to be considered independent under the NYSE listing standards, a director cannot have any of the disqualifying relationships enumerated by the NYSE listing standards and the Board must determine that the director does not otherwise have any direct or indirect material relationship with the Company. In accordance with the NYSE listing standards, the Board of Directors has adopted, as part of the Company’s Corporate Governance Guidelines, categorical standards to assist it in determining whether a relationship between a director and the Company is a relationship that would impair the director’s independence. The Company’s Corporate Governance Guidelines can be found on the Company’s Web site (www.pepcoholdings.com) under the link: Corporate Governance. Under these standards, which incorporate the disqualifying relationships enumerated by the NYSE listing standards, a Company director is not “independent” if any of the conditions specified are met.

 

  a. The director is, or has been within the last three years, an employee of the Company, or an immediate family member is, or has been within the last three years, an executive officer of the Company. The executive officers of the Company consist of the president, principal financial officer, controller, any vice-president in charge of a principal business unit, division or function, any other officer who performs a policy-making function, or any other person who performs similar policy-making functions for the Company. Officers of the Company’s subsidiaries are deemed to be officers of the Company if they perform such policy-making functions for the Company.

 

  b. The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $120,000 in direct compensation from the Company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).

 

  c. (A) The director is a current partner or employee of a firm that is the Company’s internal or external auditor; (B) the director has an immediate family member who is a current partner of such a firm; (C) the director has an immediate family member who is a current employee of such a firm and personally works on the Company’s audit; or (D) the director or an immediate family member was within the last three years a partner or employee of such a firm and personally worked on the Company’s audit within that time.

 

  d. The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee.

 

  e. The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the Company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues. Contributions to tax exempt organizations shall not be considered “payments” for purposes of this categorical standard, provided however that the Company shall disclose in its annual proxy statement any such contributions made by the Company to any tax exempt organization in which any independent director serves as an executive officer if, within the preceding three years, contributions in any single fiscal year from the Company to the tax exempt organization exceed the greater of $1 million, or 2% of such tax exempt organization’s consolidated gross revenues.

 

  f.

For purposes of considering the existence or materiality of a director’s relationship with the Company or the relationship with the Company of an organization with which the director is associated,

 

12


Table of Contents
 

payments for electricity, gas or other products or services made in the normal course of business at prices generally applicable to similarly situated customers shall not be included.

 

  g. Additional provisions applicable to members of the Audit Committee.

 

  i. A director who is a member of the Audit Committee may not accept directly or indirectly any consulting, advisory, or other compensatory fee from the Company or any subsidiary of the Company, provided that, unless the rules of the NYSE provide otherwise, compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service (provided that such compensation is not contingent in any way on continued service). The term “indirect acceptance” by a member of the Audit Committee of any consulting, advisory, or other compensatory fee includes acceptance of such fee by a spouse, a minor child or stepchild or a child or stepchild sharing a home with the member or by an entity in which such member is a partner, member, an officer such as a managing director occupying a comparable position or executive officer, or occupies a similar position (except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the entity) and which provides accounting, consulting, legal, investment banking or financial advisory services to the Company or any subsidiary of the Company.

 

  ii. A director who is an “affiliated person” of the Company or its subsidiaries (other than in his or her capacity as a member of the Board or a Board Committee) as defined by the SEC shall not be considered independent for purposes of Audit Committee membership. A director who beneficially owns more than 3% of the Company’s common stock will be considered to be an “affiliated person.”

 

In making independence determinations, the Board considered the following relationships in accordance with its procedures for evaluating related person transactions described below under the heading “Board Review of Transactions with Related Parties.”

 

In October 2006, Ms. Schneider became a partner at Orrick. Orrick rendered legal services to certain Company subsidiaries in 2009 and continues to render services to certain Company subsidiaries in 2010 with respect to certain contract and bankruptcy matters. Ms. Schneider has informed the Board that she has not and will not work on any of these matters, nor did she direct Orrick’s work on any of these matters, and that Orrick’s representation has had no effect on the compensation she receives from that firm.

 

In determining that Ms. Schneider is an independent director, the Board examined the specific transactions that the Company and its subsidiaries had with Orrick and concluded that (1) the relationship between that law firm and the Company and its subsidiaries was solely a business relationship which did not afford Ms. Schneider any special benefits and (2) the amounts paid to that law firm in each of the last three years were below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director is affiliated. For these reasons, the Board determined that this business relationship does not disqualify Ms. Schneider as an independent director.

 

Mr. Dunn is President and Chief Executive Officer of FTI. In February 2008, a Company subsidiary, Pepco Energy Services, Inc. (“Pepco Energy Services”), entered into a contract to supply electricity to FTI for one year commencing in March 2008. The Board determined that (1) the relationship between Pepco Energy Services and FTI was solely a business relationship which did not afford Mr. Dunn any special benefits; (2) the amount to be paid to Pepco Energy Services under the contract is below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director is affiliated; and (3) the amount to be paid to Pepco Energy

 

13


Table of Contents

Services under the contract constitutes payment for electricity made in the normal course of business at prices generally applicable to similarly situated customers. For these reasons, the Board determined that this business relationship does not disqualify Mr. Dunn as an independent director.

 

Dr. Harker is President of the University of Delaware (“UDel”). As described in more detail below, two Company subsidiaries, Pepco Energy Services and Delmarva Power & Light Company (“DPL”), have supplied electricity and gas and, in the case of DPL, delivered electricity and gas, to UDel during each of the last three fiscal years.

 

Pepco Energy Services in 2007 supplied electricity to UDel under an electric master agreement and in 2007, 2008 and 2009, supplied natural gas to UDel under a gas master agreement. In 2007, 2008 and 2009, DPL delivered, and in some cases also supplied, electricity and natural gas to various UDel accounts on terms specified in tariffs approved by the Delaware Public Service Commission. DPL also repaired a gas pipeline for UDel in 2007, for which UDel paid standard rates. After examining the relationships between Pepco Energy Services and UDel and between DPL and UDel, the Board determined that (1) all of the transactions executed under the master agreements were arm’s length, market-based competitive offering transactions; (2) the relationships between Pepco Energy Services and UDel and between DPL and UDel were solely business relationships which did not afford Dr. Harker any special benefits; (3) the amounts UDel paid to Pepco Energy Services and DPL, respectively, are below the numerical threshold set forth in the Corporate Governance Guidelines with respect to payments for property and services between the Company or its subsidiaries and an entity with which the director is affiliated; and (4) the amounts UDel paid to Pepco Energy Services and DPL, respectively, constitute payment for electric and gas made in the normal course of business at prices generally applicable to similarly situated customers. For these reasons, the Board determined that the business relationships between Pepco Energy Services and UDel and between DPL and UDel do not disqualify Dr. Harker as an independent director.

 

BOARD MEETINGS

 

The Board held nine meetings during 2009. Each director attended at least 75% of the combined number of Board meetings and meetings of the Board Committees on which he or she served. The Board has adopted an attendance policy, set forth in the Corporate Governance Guidelines, under which attendance in person is required at all regularly scheduled shareholder, Board and Committee meetings (except where scheduled as a conference call) and is the preferred method of attendance at specially called meetings. The Chairman has the authority to waive this requirement and allow participation by telephone if, in the Chairman’s opinion, it is in the Company’s best interests to do so. Of the Company’s 11 directors at the time, each attended the 2009 Annual Meeting.

 

At each Board meeting, time is set aside for the directors to meet in executive session without any management director or other management personnel present. The executive session of the Board is convened by the Lead Independent Director.

 

BOARD LEADERSHIP STRUCTURE AND ROLE IN RISK OVERSIGHT

 

Board Leadership Structure. Mr. Rigby serves as President and Chief Executive Officer of the Company and is also Chairman of the Board of Directors. Under the Company’s Corporate Governance Guidelines, if the person elected Chairman of the Board is not an independent director as defined in the Corporate Governance Guidelines, then the independent Directors will, upon the recommendation of the Corporate Governance/Nominating Committee, also annually elect an independent Director to serve as the Lead Independent Director. Mr. Nussdorf currently serves as Lead Independent Director. The purpose of the Lead Independent Director is to facilitate communication among the independent directors, the Board and management. The Lead Independent

 

14


Table of Contents

Director has the following responsibilities: (i) chairs executive sessions of the Board’s non-management Directors and has authority to call meetings of the non-management Directors; (ii) determines the agenda for the executive sessions of the Directors, and participates with the Chairman of the Board in establishing the agenda for Board meetings; (iii) presides at Board meetings when the Chairman of the Board is not present; (iv) coordinates feedback to the Chief Executive Officer and other members of management; (v) in consultation with the Chairman of the Board, consistent with Board policy, recommends to the Corporate Governance/Nominating Committee proposed committee assignments and chairmanships to be adopted at the annual organizational meeting of Board, subject to the approval of the Board; (vi) oversees the development of appropriate responses to communications from shareholders and other interested persons addressed to the non-management Directors as a group; (vii) on behalf of the non-management Directors, retains such counsel or other advisors as they deem appropriate in the conduct of their duties and responsibilities; and (viii) performs such other duties as the Board deems appropriate.

 

In 2008, the Board examined the issue of separating the Chairman and Chief Executive Officer roles, and for the following reasons concluded that it was preferable for the Company to continue combining those roles and annually elect a Lead Independent Director: (i) there was no firm evidence that financial performance would be improved by splitting the roles; (ii) the Board was concerned that dividing the roles may weaken the Company’s ability to develop and implement strategy; (iii) as a matter of good governance, the Company already has measures in place to strengthen the Board’s independence (for example, at each Board meeting, time is set aside for the directors to meet in executive session without any management director or other management personnel present); and (iv) the Board recognized that regulations were moving (and continue to move) toward increased oversight by independent boards of directors so that the potential benefits of splitting the roles can be achieved in other ways. The independent directors will examine this issue again, however, if and when changing circumstances warrant further analysis.

 

The Board’s Role in Risk Oversight. One of the responsibilities of the Board of Directors is the oversight of the Company’s risk management activities. In discharging this responsibility, the Board, with the assistance of management, identifies and evaluates the major risks faced by the Company and oversees and monitors the design and implementation of guidelines and programs to manage these risks. The Board discharges its oversight function through its standing Committees.

 

The Audit Committee, as more fully described below under the heading “Board Committees — Audit Committee,” is responsible for assisting the Board in overseeing the Company’s accounting controls and the design and performance of the internal audit function. The Audit Committee also oversees the activities of the Risk Management Committee, the members of which consist of many of the Company’s senior executives and the business unit employees who manage the day-to-day risk management responsibilities for the Company. The Risk Management Committee meets six times a year, with a Risk Working Group meeting monthly which reports to the Risk Management Committee, to identify and assess the Company’s critical risks and management’s risk mitigation strategies. The Risk Management Committee’s areas of focus include competitive, economic, operational, financial (strategic plan, accounting, credit, liquidity, and tax), legal, regulatory, compliance, health, safety and environment, political, and reputational risks. The Audit Committee periodically discusses and reviews with management the Company’s risk assessment and risk management and also considers whether management has provided appropriate disclosure in the Company’s financial statements.

 

The Finance Committee discusses with management the Company’s risk profile as part of its review of the Company’s strategic and financing plans, including management’s consideration of risk management in strategic and financing plans and implementation of those plans.

 

Compensation Programs Risk Assessment. In 2010, management, using a framework provided by the Compensation/Human Resources Committee’s consultant, Pearl Meyer & Partners (“PM&P”), conducted a risk assessment of the Company’s compensation policies and practices for all employees, including executives, which management reviewed with the Committee and PM&P. This assessment sought to identify any features of the Company’s compensation policies and practices that could encourage excessive risk-taking.

 

15


Table of Contents

In order to focus employees on performance objectives that promote the best interests of the Company and its shareholders, short-term and long-term incentive-based compensation is linked to the achievement of measurable financial and business and, in the case of short-term incentives, individual performance goals. The risk assessment conducted by management found that these arrangements are coupled with compensation design elements and other controls that discourage business decision-making that is focused solely on the compensation consequences. These compensation design elements and other controls include:

 

   

Strong enterprise-wide risk management policies and programs, which have undergone third party risk assessments.

 

   

Cash incentives that are earned only if, in addition to the satisfaction of non-financial performance metrics, a corporate or business unit net earnings threshold is exceeded.

 

   

The absence of compensation arrangement features often identified as encouraging excessive risk-taking, such as (i) an incentive compensation mix overly weighted toward annual incentives, (ii) payout cliffs that might cause short-term business decisions to be made solely for the purpose of meeting payout thresholds, and (iii) bonuses awarded upon completion of a task, while the income and risk to the Company from the task extend over a significantly longer period of time.

 

   

Program designs that provide a balanced mix of cash and equity and annual and long-term incentives.

 

   

Performance metrics, not all of which are financial in nature, such as safety, diversity and customer satisfaction.

 

   

No stock options.

 

   

Share ownership guidelines that are applicable to officers of the Company at the level of Vice President and above.

 

On the basis of this review, management concluded, and advised the Compensation/Human Resources Committee, that its compensation policies and practices are not reasonably likely to have a material adverse effect on the Company.

 

BOARD COMMITTEES

 

The Board has five separately designated standing Committees:

 

   

the Audit Committee;

 

   

the Compensation/Human Resources Committee;

 

   

the Corporate Governance/Nominating Committee;

 

   

the Executive Committee; and

 

   

the Finance Committee.

 

Each Committee has a charter, which can be found on the Company’s Web site (www.pepcoholdings.com) under the link: Corporate Governance.

 

Each of the Committees (other than the Executive Committee) sets aside time to meet in executive session without management personnel present. The Compensation/Human Resources Committee regularly meets separately with its compensation consultant. The Audit Committee regularly meets separately with the Company’s Vice President, Internal Audit and the Company’s independent registered public accounting firm.

 

The Audit Committee held seven meetings in 2009. The Committee represents and assists the Board in discharging its responsibility of oversight with respect to the accounting and control functions and financial

 

16


Table of Contents

statement presentation (but the existence of the Committee does not alter the traditional roles and responsibilities of the Company’s management and its independent registered public accounting firm). The Audit Committee is responsible for, among other things, representing and assisting the Board in oversight of (i) the integrity of the Company’s financial statements, accounting and financial reporting processes and audits of the Company’s consolidated financial statements, (ii) the Company’s compliance with legal and regulatory requirements, (iii) the qualifications, independence and the retention, compensation and performance of the Company’s independent registered public accounting firm, and (iv) the design and performance of the Company’s internal audit function. The Audit Committee also reviews the Company’s guidelines and policies with respect to risk assessment, and has full power and authority to obtain advice and assistance from independent legal, accounting or other advisors as it may deem appropriate to carry out its duties.

 

Committee members are Directors Golden, Harker, Krumsiek, Nussdorf and Ross (Chairman). The Board has determined that directors Golden, Krumsiek, Nussdorf and Ross each is an “audit committee financial expert” as defined by the rules of the SEC. The Board has determined that each member of the Audit Committee is independent as defined by the Company’s Corporate Governance Guidelines and the listing standards of the NYSE.

 

The Compensation/Human Resources Committee held six meetings in 2009. The Committee evaluates annually the performance of the Company’s Chief Executive Officer (“CEO”) and, together with the other independent members of the Board of Directors, sets the compensation level of the CEO after taking into account the annual evaluation and such other factors as they deem appropriate. The Committee reviews the performance of elected officers and other executives in the context of the administration of the Company’s executive compensation programs. The Committee, on the recommendation of the CEO, (i) approves the salaries for the executive officers, the heads of the business units, and all Vice Presidents and any other salary that exceeds the approval level of the CEO, (ii) exercises the powers of the Board with respect to the approval of the Company’s annual salary range and merit budget increases for all management employees. The Committee sets target award levels and approves payments for the executive officers and the heads of the business units pursuant to the Executive Incentive Compensation Plan and the shareholder-approved Long-Term Incentive Plan, and reviews other elements of compensation and benefits for management employees and makes recommendations to the Board as appropriate. The Committee makes recommendations to the Board concerning the Company’s retirement and other benefit plans and oversees corporate workforce diversity issues. The Committee receives input on compensation matters from the CEO and from other members of management, as it deems appropriate.

 

In order to assist it in carrying out these responsibilities, the Committee since 2007 has employed PM&P as its independent compensation consultant. Pursuant to this engagement, PM&P annually provides the following services: (i) review of the compensation philosophy; (ii) advice on construction of and determination of a peer group of utility companies; (iii) review of new salary ranges; (iv) review of the Executive Incentive Compensation Plan; (v) review of the Long-Term Incentive Plan; (vi) review of proposed compensation plans or amendments to other existing plans; (vii) review of the total executive compensation structure for the coming year; (viii) attendance at the Compensation/Human Resources Committee meetings dealing with executive compensation, as requested; (ix) presentation of comparative information to assist the Compensation/Human Resources Committee in its deliberations and decision-making concerning executive compensation; (x) advice to senior management, as requested by the Compensation/Human Resources Committee; and (xi) various industry performance and other comparative information.

 

Committee members are Directors Dunn (Chairman), Heintz, Krumsiek and Ross. The Board has determined that each member of the Compensation/Human Resources Committee is independent as defined by the Company’s Corporate Governance Guidelines and the listing standards of the NYSE.

 

The Corporate Governance/Nominating Committee held five meetings in 2009. The Committee’s duties and responsibilities include making recommendations to the Board regarding the governance of the Company and the Board, and helping ensure that the Company is properly managed to protect and enhance shareholder

 

17


Table of Contents

value and to meet the Company’s obligations to shareholders, customers, the industry and under the law. The Committee reviews and recommends to the Board candidates for nomination for election as directors, makes recommendations to the Board regarding Board structure, practices and policies, including Board committee chairmanships and assignments and the compensation of Board members, evaluates Board performance and effectiveness, and oversees the development of corporate strategy and structure, including management development, management succession, management performance criteria, business plans and oversees corporate and government affairs. The Committee also oversees the technology and systems used by the Company with the goal of ensuring that they are adequate to properly run the business and for the Company to remain competitive.

 

Committee members are Directors Dunn, MacCormack (Chairman), Nussdorf and Silverman. The Board has determined that each member of the Corporate Governance/Nominating Committee is independent as defined by the Company’s Corporate Governance Guidelines and the listing standards of the NYSE.

 

The Executive Committee held one meeting in 2009. The Committee has, and may exercise when the Board is not in session, all the powers of the Board in the management of the property, business and affairs of the Company, except as otherwise provided by law. The Committee does not hold regularly scheduled meetings. Committee members are Directors Heintz, Nussdorf (Chairman), Rigby and Schneider.

 

The Finance Committee held seven meetings in 2009. The Committee oversees the financial objectives, policies, procedures and activities of the Company and considers the long- and short-term strategic plans of the Company. The Committee reviews with management the Company’s risk mitigation profile and reviews the Company’s insurance program. Committee members are Directors Golden, Heintz, MacCormack, Schneider and Silverman (Chairman).

 

How do I send a communication to the Board of Directors or to a specific individual director?

 

The Company’s directors encourage interested parties, including employees and shareholders, to contact them directly and, if desired, confidentially or anonymously regarding matters of concern or interest, including concerns regarding questionable accounting or auditing matters. The names of the Company’s directors can be found on pages 6-11 of this Proxy Statement and on the Company’s Web site (www.pepcoholdings.com) under the link: Corporate Governance. The Company’s directors may be contacted by writing to them either individually or as a group or partial group (such as all non-management directors), c/o Corporate Secretary, Pepco Holdings, Inc., 701 Ninth Street, N.W., Room 1300, Washington, D.C. 20068. If you wish your communication to be treated confidentially, please write the word “CONFIDENTIAL” prominently on the envelope and address it to the director by name so that it can be forwarded without being opened. A communication addressed to multiple recipients (such as to “directors,” “all directors,” “all non-management directors,” or “independent directors”) will necessarily have to be opened and copied by the Office of the Corporate Secretary in order to forward it to each director, and hence cannot be transmitted unopened, but will be treated as a confidential communication. If you wish to remain anonymous, do not sign your letter or include a return address on the envelope. Communications from Company employees regarding accounting, internal accounting controls, or auditing matters may be submitted in writing addressed to: Vice President, Internal Audit, Pepco Holdings, Inc., 701 Ninth Street, N.W., Room 8220, Washington, D.C. 20068 or by telephone to 202-872-3524. Such communications will be handled initially by the Internal Audit Group, which will investigate the matter and report to the Audit Committee. If for any reason an employee does not wish to submit a communication to the Vice President, Internal Audit, the communication may be addressed to the Chairman of the Audit Committee using the procedure set forth above, or can be sent via mail, telephone, facsimile or e-mail to the Company’s Ethics Officer who will investigate the matter. Employees may also leave messages on the Company’s Ethics Officer’s hotline.

 

18


Table of Contents

What are the directors paid for their services?

 

Each of the Company’s non-management directors is paid an annual retainer of $85,000, plus a fee of $2,000 for each Board or Committee meeting attended. The Chairman of the Audit Committee receives an additional annual retainer of $7,500 and a non-management director who chairs any one of the other standing Committees of the Board receives an additional annual retainer of $5,000. A director who serves as Lead Independent Director receives an annual retainer of $15,000 for service in that capacity.

 

Each non-management director is required to own at least 7,500 shares of common stock or common stock equivalents (“phantom stock”). Each current non-management director who has been a director for three years has met this requirement. Newly elected or appointed non-management directors are required to reach this ownership level within three years after the date of their election or appointment.

 

Under the Non-Management Director Compensation Plan, each non-management director is entitled to elect to receive his or her retainer payments and meeting fees exclusively in or as a combination of: (i) cash, (ii) shares of common stock, or (iii) a credit to an account for the director established under the PHI Executive and Director Deferred Compensation Plan as described below under the heading “Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan.”

 

The compensation of the non-management members of the Board of Directors is reviewed periodically by the Corporate Governance/Nominating Committee, which makes recommendations for changes, if any, to the Board for its approval.

 

The following table sets forth, as of March 8, 2010, the number of phantom stock units (each corresponding to one share of common stock) held by non-management directors who participate in the PHI Executive and Director Deferred Compensation Plan.

 

Name of Director

   Pepco Holdings
Phantom Stock Units

Barbara J. Krumsiek

   16,203

George F. MacCormack

   5,185

Lawrence C. Nussdorf

   3,737

Pauline A. Schneider

   6,082

Lester P. Silverman

   21,297

 

Although under the terms of the Company’s Long-Term Incentive Plan, each non-management director is entitled to an annual grant of an option to purchase 1,000 shares of common stock, the Board of Directors beginning in 2003 discontinued these grants.

 

19


Table of Contents

The following table sets forth the compensation paid by the Company to its non-management directors for the year ended December 31, 2009.

 

2009 DIRECTOR COMPENSATION

 

Name

  Fees
Earned or
Paid in
Cash (1)
  Stock
Awards
  Option
Awards (2)
  Non-Equity
Incentive Plan
Compensation
  Changes in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings
  All Other
Compensation
  Total

Jack B. Dunn, IV

  $ 134,000   $ 0   $ 0   $ 0   $ 0   $ 0   $ 134,000

Terence C. Golden

    126,882     0     0     0     0     0     126,882

Patrick T. Harker

    75,242     0     0     0     0     0     75,242

Frank O. Heintz

    135,000     0     0     0     0     0     135,000

Barbara J. Krumsiek

    121,000     0     0     0     0     0     121,000

George F. MacCormack

    134,132     0     0     0     0     0     134,132

Lawrence C. Nussdorf

    153,000     0     0     0     0     0     153,000

Frank K. Ross

    138,500     0     0     0     0     0     138,500

Pauline A. Schneider

    135,000     0     0     0     0     0     135,000

Lester P. Silverman

    134,132     0     0     0     0     0     134,132

 

(1) Consists of retainer and meeting fees, which the director may elect to receive in cash or common stock or to defer under the terms of the PHI Executive and Director Deferred Compensation Plan. The directors listed in the table below elected to receive all or a portion of their 2009 retainer and meeting fees in the form of either (i) shares of common stock or (ii) as a credit to the director’s account under the PHI Executive and Director Deferred Compensation Plan. As described below under the heading “Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan,” a director participating in the plan can elect to have his or her account credited with any or a combination of: (i) the interest at the prime rate that would have been paid on an amount equal to the participant’s account balance or (ii) an amount equal to the return that the participant would have earned had his or her account balance been invested in any one or a combination of the investment funds selected by the Compensation/Human Resources Committee or had the account balance been deemed invested in the common stock.

 

          Amount of Deferred Compensation Plan Credit

Name

   Shares of
Common Stock
   Phantom
Stock Credit
   Investment Fund
Credits

Jack B. Dunn, IV

   0    $ 0    $ 134,000

Patrick T. Harker

   2,665      0      0

Frank O. Heintz

   3,216      0      0

Barbara J. Krumsiek

   0      121,000      0

George F. MacCormack

   0      0      67,066

Pauline A. Schneider

   0      42,500      42,500

Lester P. Silverman

   0      134,132      0

 

(2) At December 31, 2009, the following directors held options to purchase the indicated number of shares of common stock: Mr. Golden — 3,000 shares; and Mr. Nussdorf — 2,000 shares.

 

The Company provides directors with travel accident insurance for Company-related travel and directors’ and officers’ liability insurance coverage and reimburses directors for travel, hotel and other out-of-pocket expenses incurred in connection with the performance of their duties as directors.

 

The Company also provides the directors with free parking in the Company’s headquarters building, which is also available for use by the directors other than in connection with the performance of their duties as directors. In addition, in 2009, Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events were made available to one or more directors for personal use when not being used by the Company for business purposes. There was no incremental cost to the Company for providing these benefits.

 

20


Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth, as of March 8, 2010, for each director, each director nominee, each executive officer named in the 2009 Summary Compensation Table below and all directors, director nominees and executive officers of the Company as a group (i) the number of shares of common stock beneficially owned, (ii) the number of shares of common stock that could be purchased through the exercise of stock options then-currently exercisable or scheduled to become exercisable within 60 days thereafter, and (iii) the total number of shares of common stock beneficially owned. Each of the individuals listed, and all directors and executive officers as a group, beneficially owned less than 1% of the outstanding shares of common stock.

 

Name of Beneficial Owner

   Shares of
Common Stock
Owned (3)
   Shares of
Common Stock
Acquirable Within
60 Days
   Total
Beneficial
Ownership (4)

Paul H. Barry

   1,116    0    1,116

Jack B. Dunn, IV

   10,495    0    10,495

Kirk J. Emge (5)

   55,377    5,100    60,477

Terence C. Golden (6)

   44,132    3,000    47,132

Patrick T. Harker

   4,589    0    4,589

Frank O. Heintz (7)

   10,742    0    10,742

John U. Huffman

   26,092    0    26,092

Anthony J. Kamerick

   62,112    5,100    67,212

Barbara J. Krumsiek

   1,000    0    1,000

George F. MacCormack

   11,282    0    11,282

Lawrence C. Nussdorf

   10,000    2,000    12,000

Patricia A. Oelrich

   2,000    0    2,000

Joseph M. Rigby

   149,837    0    149,837

Frank K. Ross

   13,069    0    13,069

Pauline A. Schneider

   7,669    0    7,669

Lester P. Silverman (8)

   7,000    0    7,000

William T. Torgerson

   37,630    30,000    67,630

David M. Velazquez

   40,241    0    40,241

Dennis R. Wraase

   145,247    48,000    193,247

All Directors, Nominees and Executive Officers as a Group
(24 Individuals)

   757,205    96,600    853,805

 

(3) Includes shares held under the Dividend Reinvestment Plan and under the Retirement Savings Plan. Also includes shares awarded under the Long-Term Incentive Plan that vest over time if the executive officer has the right to vote the shares. Unless otherwise noted, each beneficial holder has sole voting power and sole dispositive power with respect to the shares shown as beneficially owned.

 

(4) Consists of the sum of the two adjacent columns.

 

(5) Includes 13 shares owned by Mr. Emge’s spouse. Mr. Emge disclaims beneficial ownership of these shares.

 

(6) Includes 11,600 shares owned by Mr. Golden’s spouse. Mr. Golden disclaims beneficial ownership of these shares.

 

(7) Shares are owned in the Frank O. Heintz Trust of which Mr. Heintz is trustee.

 

(8) Includes 1,000 shares owned by Mr. Silverman’s spouse. Mr. Silverman disclaims beneficial ownership of these shares.

 

21


Table of Contents

The following table sets forth, as of March 8, 2010, the number and percentage of shares of common stock reported as beneficially owned by all persons known by the Company to own beneficially 5% or more of the common stock.

 

Name and Address of Beneficial Owner

   Shares of
Common Stock
Owned
    Percent of
Common Stock
Outstanding
 

BlackRock, Inc.

40 East 52nd Street

New York, NY 10022

   15,767,476 (9)    7.12

 

(9) This disclosure is based on information furnished in Schedule 13G, filed with the SEC on January 29, 2010, by BlackRock, Inc. On December 1, 2009, BlackRock, Inc. acquired Barclays Global Investors, NA and certain of its affiliates.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) requires the Company’s directors and executive officers and any beneficial owner of more than 10% of the common stock to file with the SEC reports of holdings and transactions in the Company’s equity securities. Based on a review of such reports filed for 2009 and on written confirmations provided by its directors and executive officers, the Company believes that during 2009 all of its directors and executive officers filed on a timely basis the reports required by Section 16(a), except that, because of administrative errors, Directors Harker, Krumsiek, McGlynn and Silverman each failed to file one Form 4 on a timely basis. The Company is not aware of any person or entity that beneficially owns more than 10% of the common stock.

 

COMPENSATION/HUMAN RESOURCES COMMITTEE REPORT

 

Among its duties, the Compensation/Human Resources Committee is responsible for reviewing and discussing with the Company’s management the Compensation Discussion and Analysis (the “CD&A”) section of the annual proxy statement. Based on its review and discussion with management of the CD&A that follows this Report, the Committee has recommended to the Board of Directors that it be included in this Proxy Statement.

 

Jack B. Dunn, IV, Chairman

Frank O. Heintz

Barbara J. Krumsiek

Frank K. Ross

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Introduction

 

The Compensation/Human Resources Committee (the “Committee”), the composition and responsibilities of which are described more fully above under the heading “Compensation/Human Resources Committee,” is responsible for all executive compensation decisions with respect to each of the named executive officers (the “NEOs”), except for the annual salary of the Chief Executive Officer, which is approved by all of the independent directors. To assist it in carrying out its responsibilities, the Committee requests and receives recommendations from the Chief Executive Officer with respect to the compensation packages of the other NEOs, including the selection and weighting of the specific performance objectives applicable to short-term and long-term incentive awards.

 

22


Table of Contents

When structuring compensation arrangements for the NEOs and other executives, the Committee typically receives advice from its independent compensation consultant concerning pay mix and levels of compensation, as well as information with respect to the financial costs and tax and accounting consequences associated with the various elements of compensation. Beginning in 2007, the Committee engaged Pearl Meyer & Partners (“PM&P”) as its independent compensation consultant to advise the Committee on various executive compensation matters. In 2009, PM&P advised the Committee on compensation practices generally and on plan and award design matters. PM&P also provided the Committee with survey data and other comparative information to assist it in its executive compensation decisions, as described herein. The services provided by PM&P are described in greater detail under the heading “Compensation/Human Resources Committee.” While serving as the compensation consultant to the Committee, PM&P has not had any other relationships with the Company or any of its executives, nor does it provide services to the Company other than those relating to executive compensation.

 

Executive Summary

 

The following is a brief overview of the more detailed disclosures set forth in this CD&A:

 

   

The objective of the Company’s compensation program is to attract, motivate and retain talented executives while promoting the interests of the Company and its shareholders.

 

   

The Company provides its executive officers with the following types of compensation: salary, cash-based short-term incentives, performance stock, restricted stock and retirement and deferred compensation programs.

 

   

Salaries and any increases to salaries are determined based on an executive’s performance and position and the salary range for that position, as determined with respect to competitive market survey data.

 

   

The Company generally targets compensation levels that are at approximately the 50th percentile of the competitive range for each pay element.

 

   

The Company has established a pay-for-performance environment by linking short-term and long-term incentive-based compensation to the achievement of measurable business and individual performance goals.

 

   

Long-term incentives are designed to serve as a retention mechanism and as a means to focus executives on long-range strategic goals.

 

   

The Company uses equity-based compensation as a means to align the interests of its executives with those of the shareholders.

 

   

The Company incorporates goals into its short-term incentive plan that are intended to balance the interests of the shareholders, customers and employees.

 

   

The Company offers its executive officers only limited perquisites.

 

   

One of the NEOs who was employed at December 31, 2009 is a party to an employment agreement and the other four participate in the Change-in-Control Severance Plan.

 

   

The Company’s executives generally participate in the same group benefit programs and tax-qualified retirement plans available to all employees. In addition, the Company has non-qualified supplemental excess retirement plans in which certain executives participate. These programs are common within the Company’s industry and allow the Company to maintain a competitive program.

 

   

The Company maintains a non-qualified deferred compensation plan.

 

   

In 2009, under the Company’s annual incentive compensation plan:

 

  targets based on the Company’s and Conectiv Energy’s performance were not achieved and accordingly no payouts were made relating to Company or Conectiv Energy performance, whereas

 

  some of the targets relating to the performance of the Power Delivery and Pepco Energy Services business units were achieved resulting in payouts.

 

23


Table of Contents
   

Some of the targets for the 2007 through 2009 performance period under the long-term incentive plan were achieved resulting in payouts.

 

   

The Committee believes its executive compensation program achieves its objectives in an appropriate and reasonable manner, and the Company continues to conduct annual reviews to ensure this remains the case.

 

Compensation Philosophy

 

The objectives of the Company’s executive compensation program are to attract, motivate and retain talented executives and to promote the interests of the Company and its shareholders. To achieve these objectives, the Company’s executive compensation program is designed to:

 

   

provide executives with salaries, incentive compensation opportunities and other benefits that are competitive with comparable companies in the industry;

 

   

reward executives for the achievement by the Company and its business segments of targeted levels of operational excellence and financial performance and for the achievement of individual performance goals; and

 

   

align the financial interests of the executives with those of the shareholders through equity-based incentive awards and stock ownership requirements.

 

Compensation Levels and Benchmarking

 

Compensation levels for executives are determined based on a number of factors, including the individual’s roles and responsibilities within the Company, the individual’s experience, pay levels in the marketplace for similar positions and performance of the individual and the Company as a whole.

 

The Committee assesses competitive market compensation practices using a number of sources. One of the primary ways the Committee evaluates the Company’s executive compensation arrangements relative to other companies is to compare the Company’s practices to a group of companies that are primarily electricity and natural gas distribution companies with a similar market capitalization (the “Utility Peer Group”). The composition of this group of peer companies is reassessed annually and its composition may be changed by the Committee from year to year to reflect corporate transactions or other events that may affect the comparability of one or more of the constituent companies. For 2009, the Utility Peer Group consisted of the 20 companies listed below (the “2009 Utility Peer Group”). At December 31, 2009, the Company ranked at the 59th percentile in total assets and at the 32nd percentile in market capitalization relative to the companies that in 2009 comprised the Utility Peer Group.

 

2009 Utility Peer Group

 

Allegheny Energy Inc.

   Hawaiian Electric Industries, Inc.    PPL Corp.

Alliant Energy Corp.

   NiSource Inc.    SCANA Corp.

Ameren Corp.

   Northeast Utilities    Sempra Energy

Centerpoint Energy Inc.

   NSTAR    Teco Energy Inc.

CMS Energy Corp.

   NV Energy, Inc.    Wisconsin Energy Corp.

Consolidated Edison

   OGE Energy Corp.    Xcel Energy Corp.

DTE Energy Co.

   Pinnacle West Capital Corp.   

 

24


Table of Contents

For 2010, the Committee has modified the peer group by removing DTE Energy Co., Hawaiian Electric, NiSource, SCANA and Sempra, and adding DPL Inc., FirstEnergy Corp., Great Plains Energy Incorporated, PG&E Corporation, Progress Energy, Inc., Public Service Enterprise Group Incorporated and Westar Energy, Inc. (the “2010 Utility Peer Group”). There are 22 companies in the 2010 Utility Peer Group. At December 31, 2009, the Company ranked at the 58th percentile in total assets and at the 39th percentile in market capitalization relative to the companies that comprise the 2010 Utility Peer Group. The Committee last revised the composition of the peer group in 2005.

 

One of the tools the Committee uses to assist it in its annual compensation review process is a tally sheet for each NEO. The tally sheet, which is prepared by the Company, identifies each material element of the executive’s compensation, including salary, short-term and long-term incentive compensation opportunity, pension accruals and other benefits and shows the severance and other payouts to which the executive would be entitled under various employment termination scenarios.

 

Components of the Executive Compensation Program

 

The compensation program for the Company’s executives, including the NEOs, consists of the following components:

 

   

base salary;

 

   

annual cash incentive opportunities under the Executive Incentive Compensation Plan;

 

   

equity incentive awards consisting of performance shares and time-based restricted shares issued under the Long-Term Incentive Plan;

 

   

retirement and deferred compensation programs;

 

   

health and welfare benefits; and

 

   

other perquisites and personal benefits.

 

The following is a discussion of each component of executive compensation.

 

Base Salary.    The Committee considers adjustments to base salary levels annually and also may consider salary adjustments in connection with promotions and other special circumstances. Mr. Rigby has an employment agreement with the Company which provides for a minimum base salary that may be increased, but not subsequently decreased, during the term of the agreement.

 

The Committee, in order to provide consistency within the Company, has developed salary levels for the executives and senior management and assigned a level to each position based primarily on the decision-making responsibility associated with the position. Each salary level has a salary range, with the midpoint of the range fixed at approximately the median of the competitive range as determined by a market survey of salary levels for comparable positions. Each executive’s salary was established within the range based on a combination of factors, including the executive’s level of experience, tenure with the Company in the position and performance.

 

The Committee annually considers adjustments to the salary range for each salary level and to individual salaries. The process begins with a review by the Committee of available information on projected salary levels of other companies. If the data shows a change in the salary range for a particular salary level, the Committee has the discretion to adjust the Company’s salary range for that salary level by up to a corresponding percentage. If the data shows an increase in salary levels, the Committee also may approve a percentage increase in the total salary budget for the Company’s executive group (currently consisting of 58 executives) that corresponds to the market increase in salaries as shown by the data. This increase, which is referred to as a “merit budget,” is available for allocation among the executive group in the form of salary increases based on the Committee’s evaluation of the executive’s performance, length of service and any other factors that the Committee considers relevant. The Committee also may consider whether a further salary adjustment for a particular executive is warranted based on the goal of generally paying an executive at the median of the competitive salary range for the executive’s position.

 

25


Table of Contents

To establish salaries for 2010, the Committee reviewed salary information compiled by PM&P using Utility Peer Group data and other general industry and utility survey data. Based on this data, the Committee, in December 2009, approved, effective for 2010, a 2.4% increase in the minimum and maximum levels in the competitive salary range for each salary level at the senior executive level. To consider adjustments to executive salaries within the revised salary ranges, the Committee obtained from PM&P published data, compiled from the same sources as the salary structure information, which showed an average salary budget increase of 3.2%. Based on this data, the Committee approved a merit budget increase equal to 3.2% of total salaries, which it allocated among the executive group. The Committee also made additional salary increases to certain executives, including Messrs. Rigby, Kamerick, Velazquez and Emge to increase their salaries to be closer to the midpoint of the ranges for their positions, in accordance with the Company’s compensation philosophy.

 

As a consequence of this allocation and decision to bring salaries closer to the midpoint of their ranges, the Committee, and in the case of Mr. Rigby, the independent directors, approved the following 2010 salary increases for the following executives whose employment continued into 2010.

 

Name

   2010 Salary
Level
   Percentage Increase
from 2009
 

Joseph M. Rigby

   $ 880,000    7.3

Anthony J. Kamerick

     484,000    10

David M. Velazquez

     484,000    10

Kirk J. Emge

     381,000    8.86

John U. Huffman

     352,000    3.23

 

In approving the increase for Mr. Rigby, the Committee noted that Mr. Rigby assumed the role of Chairman and Chief Executive Officer during 2009 (at which time his salary increased to $820,000), and noted his strong performance in developing the Company’s strategic direction, and guiding the execution of the Company’s Blueprint for the Future initiative and regulatory and financing plans. The Committee also noted Mr. Rigby’s development of the senior executive team and the smooth transition following the retirement of Dennis Wraase. The Committee noted that Mr. Rigby’s salary is well below the midpoint for the salary range for his position. The Committee also reviewed the data related to salary information for Mr. Rigby’s position provided by PM&P in relation to the Company’s 2009 Utility Peer Group and noted that it was well below the median salary for his position. The Committee recommended, and the independent directors approved, a 7.3% salary increase for Mr. Rigby, which brought his salary to 83.4% of the midpoint of the range for his position.

 

In approving the increase for Mr. Velazquez, the Committee noted that Mr. Velazquez assumed the leadership role of the Power Delivery business unit in March 2009 (at which time his salary was increased to $440,000) and his subsequent achievements in 2009, including financial performance by the operating utilities above targeted levels, continued progress on the Blueprint for the Future initiative, safety performance at or near targeted levels, strong cost management and continued progress on major transmission and distribution infrastructure projects. The Committee also noted that Mr. Velazquez’s salary is well below the midpoint for his position. The Committee approved a 10% salary increase for Mr. Velazquez, which brought his salary to 91.3% of the midpoint of the range for his position.

 

In approving the increase for Mr. Kamerick, the Committee noted that Mr. Kamerick assumed the role of Chief Financial Officer in June 2009 (at which time his salary was increased to $440,000, following an increase to $320,000 in March 2009, when he was elected Senior Vice President), and noted his strong performance in developing the Company’s strategic plan and the development and execution of the Company’s regulatory plan, including serving as lead policy witness in the distribution rate cases. The Committee also noted Mr. Kamerick’s role in leading the execution of the Company’s financing plan, which resulted in significant improvement in the Company’s liquidity position. The Committee noted that Mr. Kamerick’s salary is well below the midpoint for his position. The Committee approved a 10% salary increase for Mr. Kamerick, which brought his salary to 91.3% of the midpoint of the range for his position.

 

26


Table of Contents

In approving the increase for Mr. Emge, the Committee noted Mr. Emge’s achievements during 2009, including development and execution of the Company’s regulatory plan, successful final resolution of the Mirant/Panda settlement, successful transition to the position of General Counsel and strong legal department performance against benchmark metrics. The Committee noted that Mr. Emge’s salary is well below the midpoint for his position. The Committee approved an 8.86% salary increase for Mr. Emge, which brought his salary to 90.7% of the midpoint of the range for his position.

 

In approving the increase for Mr. Huffman, the Committee noted Mr. Huffman’s achievements in 2009, including financial performance for Pepco Energy Services above targeted levels and his leadership in managing the transition of the retail energy supply business to a wind down mode. The Committee noted that Mr. Huffman’s salary is below the midpoint for his current position but that the market pricing for his role will be assessed in 2010 as the wind down of the retail energy supply business progresses and the business of Pepco Energy Services changes its focus to providing energy savings performance contracting services. The Committee approved a 3.23% salary increase for Mr. Huffman, which brought his salary to 83.8% of the midpoint of the range for his position.

 

Annual Cash Incentive Awards.    The Company provides its executives, including its NEOs, with an opportunity to receive an annual cash bonus under the Executive Incentive Compensation Plan (the “EICP”). For each participating executive, a target short-term incentive opportunity is established that is a percentage of the executive’s salary. Each executive’s percentage is selected by the Committee and is intended to place the executive’s total cash compensation (consisting of salary and target annual incentive compensation) at a level approximating the midpoint of the competitive range.

 

The target level of short-term incentive compensation as a percentage of salary for each of the NEOs in 2009 was as follows:

 

Name

   Target as a
Percent of Salary
 

Joseph M. Rigby (10)

   100

Anthony J. Kamerick (11)

   60

David M. Velazquez

   60

Kirk J. Emge

   60

John U. Huffman

   60

Dennis R. Wraase

   100

Paul H. Barry

   60

William. T. Torgerson

   60

 

(10) For the period prior to his election as Chief Executive Officer effective March 1, 2009, Mr. Rigby’s target as a percent of salary was 60%.

 

(11) For the period prior to his election as Chief Financial Officer effective June 13, 2009, Mr. Kamerick’s target as a percent of salary was 50%.

 

Annual cash incentive awards are made under the EICP to the extent performance goals established by the Committee are achieved. The performance criteria used as the basis for awards and the specific targets can vary from year to year. The performance goals can consist entirely, or be a combination, of (i) performance objectives for the Company as a whole or (ii) performance objectives for a particular business unit. Some executives also have individual performance objectives. The performance goals for the Company and the respective business units are selected so as to reward the executive for the achievement of targeted financial results and operational goals. Each executive’s allocation is designed to align the executive’s award opportunity with the executive’s management responsibilities. The Committee retains the discretion, whether or not the established performance objectives are achieved, to adjust awards either up or down taking into account such factors and circumstances as it determines to be appropriate.

 

27


Table of Contents

Generally, the financial targets are based on the Company’s annual financial plan. Other quantitative targets typically are set at levels that exceed the level of performance in prior years. For a discussion of the 2009 awards under the EICP, see the section headed “Executive Incentive Compensation Plan Awards” following the 2009 Grants of Plan-Based Awards table below.

 

In October 2009, the Committee received from PM&P an analysis of the Company’s total cash compensation for its executive officers relative to that of the 2009 Utility Peer Group. This analysis concluded that the salaries and short-term incentives for each of the NEOs was within the market median range of practices, and, accordingly, PM&P recommended no change in the percentage of the total cash compensation relative to salary for 2010 for any of the NEOs.

 

Long-Term Incentive Plan Awards.    Long-term incentive awards are made to the NEOs and other executives under the Long-Term Incentive Plan (the “LTIP”). The Committee has adopted a target long-term incentive opportunity for each executive officer that is a percentage of the executive’s salary and is designed to place the executive’s total direct compensation (consisting of salary, target annual cash incentive compensation and target long-term incentive compensation) at a level approximating the midpoint of the competitive range.

 

The target level of long-term incentive compensation as a percentage of salary for each of the NEOs in 2009 was as follows:

 

Name

   Target as a
Percent of Salary
 

Joseph M. Rigby (12)

   200

Anthony J. Kamerick (13)

   100

David M. Velazquez (14)

   100

Kirk J. Emge

   85

John U. Huffman

   85

Dennis R. Wraase

   200

Paul H. Barry

   100

William T. Torgerson

   100

 

(12) Prior to his election as Chief Executive Officer effective March 1, 2009, Mr. Rigby’s target as a percent of salary was 100%.

 

(13) For the period prior to his election as Chief Financial Officer effective June 13, 2009, Mr. Kamerick’s target as a percent of salary was 50%.

 

(14) For the period prior to his election as Executive Vice President effective March 1, 2009, Mr. Velazquez’s target as a percent of salary was 85%.

 

Under the Company’s long-term incentive compensation arrangements, (i) two-thirds of an executive’s targeted long-term incentive award opportunity is in the form of performance stock that vests to the extent that performance objectives are achieved over a three-year performance period (“Performance Stock”), which the Company refers to as the “Performance Stock Program” and (ii) one-third of the executive’s long-term award opportunity is in the form of restricted stock that vests generally upon the completion by the executive of three years of employment from the date of the grant (“Restricted Stock”), which the Company refers to as the “Restricted Stock Program.” Whereas the Performance Stock Program is designed to focus the executive on the achievement by the Company or a business segment of specific financial or other performance goals or on the achievement of individual performance goals, the primary objective of the Restricted Stock Program is executive retention and the alignment of the financial interests of the executives with the interests of the shareholders. The allocation between the two forms of compensation reflects the Committee’s view that the predominant portion of an executive’s long-term incentive award opportunity should be tied to performance.

 

Performance Stock Program.    Under the Performance Stock Program, as in effect since 2006, performance targets for each year in the three-year performance period typically have been established relative to the

 

28


Table of Contents

performance of the Company in the year immediately preceding the first year of the three-year period, and typically have been set at levels that reflect year-to-year improvement over the three-year period and further the Committee’s goal of rewarding executives only if they deliver results that enhance shareholder value. The objective of the Committee has been to set target levels which, if achieved, would place the Company’s performance at the 75th percentile within the Utility Peer Group.

 

With regard to the selection of performance measures for the vesting of shares of Performance Stock, the Committee has sought to identify measures that further the Committee’s goal of ensuring that executives are rewarded only if they deliver results that enhance shareholder value. The Committee determined that this goal was best achieved by selecting performance measures that were closely tied to the achievement of important objectives under the Company’s financial plan. To achieve this objective, the Committee selected the following performance measures for the vesting of Performance Stock for the three-year performance cycle beginning in 2009: (i) earnings per share or, in the case of business unit performance, earnings (excluding in each instance extraordinary items and other gains and losses relating to matters that are not reflective of the Company’s ongoing business), and (ii) cash flow from operations, each of which serves as a measure of improvement in the Company’s operating results. The performance measure “cash flow from operations” replaces “free cash flow,” which was used as a performance measure for awards under the Performance Stock Program in 2008. The Committee concluded that this change would make this element more transparent to participating executives because “cash flow from operations” is disclosed in the Company’s financial statements and as such is more easily ascertainable by executives.

 

To take into account an executive’s specific responsibilities, the selected performance measures vary and apply in whole or in part to the performance of the Company as a whole or to one or more regulated (consisting of the Power Delivery segment) or unregulated (consisting of Conectiv Energy and Pepco Energy Services segments) business units depending on the executive’s position within the Company, and have been weighted differently between the two performance measures. The extent to which Performance Stock awards are earned depends on actual performance relative to the performance target level, with no award or a reduced award to the extent performance fell below the performance target and an increased award if the performance target is exceeded (with awards interpolated for performance between the threshold and maximum levels). The table below shows the relationship between (i) performance relative to the targeted performance level and (ii) the amount of the award earned as a percentage of the target award.

 

Percentage Performance Relative to
Target Level (Company as a whole and
Power Delivery)

   Percentage Performance Relative to
Target Level (unregulated business units)
 

Amount of Award (as a Percentage of
Target Award)

below 90%

   below 80%   0%

90%

   80%   50%

100%

   100%   100%

115%

   120%   200%

 

The narrower performance range for the Company and Power Delivery performance targets reflects the historically lower volatility of the results from regulated operations as compared to the Company’s unregulated businesses.

 

In January 2009, the Committee established award opportunities pursuant to the Performance Stock Program and made awards of restricted stock pursuant to the Restricted Stock Program to each of the NEOs. For a discussion of the 2009 awards, see the section headed “Long-Term Incentive Plan Awards” following the 2009 Grants of Plan-Based Awards table below and for a discussion of the vesting of awards for the three-year performance period ending December 31, 2009, see the 2009 Option Exercises and Stock Vested table and the accompanying narrative.

 

For the three-year performance cycle beginning in 2010, the Committee selected as the single performance measure for the vesting of shares of Performance Stock for all executive officers participating in the Performance

 

29


Table of Contents

Stock Program, the Company’s total shareholder return (“TSR”) relative to that of the 2010 Utility Peer Group. The Committee believes this performance measure is more representative of current compensation design trends. TSR for the Company and the 2010 Utility Peer Group will consist of the dividends paid over the three-year period, plus the change in the price of the common stock (calculated using as a starting price the average daily closing price per share during the fourth quarter of 2009 and as an ending price the average daily closing price per share during the fourth quarter of 2012). If the Company’s TSR is negative over the three-year performance period, the payout will be capped at 100% of target, even though the Company’s performance versus the 2010 Utility Peer Group would have allowed an award in excess of 100% of the target. The following table shows the percent of the target award earned based on the Company’s performance relative to the 2010 Utility Peer Group:

 

PHI’s Percentile of 3-Year

TSR vs. Peers

   % of Target
Award Earned
 

90th or Above

   200

75th

   150

50th

   100

25th

   25

Below 25th

   0

 

Awards will be pro-rated when performance falls between quartile levels. For example, for performance at the 62nd percentile, the award will be 124% of target.

 

Restricted Stock Program.    The number of shares of Restricted Stock awarded to each of the NEOs under the Restricted Stock Program is shown on the “2009 Grants of Plan-Based Awards” table below under the heading “All Other Stock Awards: Number of Shares of Stock or Units.” In each case, the shares are subject to forfeiture if the employment of the executive terminates before January 22, 2012, subject to certain exceptions described below under the heading “Termination of Employment and Change in Control Benefits.” During the vesting period, the executive has all rights of ownership with respect to the shares, including the right to vote the shares and the right to receive dividends on the shares. The executive is entitled to retain the dividends paid whether or not the shares vest.

 

In October 2009, PM&P, at the request of the Committee, conducted a compensation review of the total direct compensation opportunity of the Company’s executives. PM&P found that the total direct compensation of the NEOs was somewhat below the midpoint of the competitive range. PM&P concluded, however, that the total program of benefits provided to the NEOs, including retirement plans and other benefits, rendered their total compensation opportunity as reasonable, and therefore made no recommendation to increase the long-term incentive payout targets of the NEOs. PM&P advised the Committee to review the long-term incentive payout targets of the NEOs in 2010 particularly relative to the total compensation levels of the 2010 Utility Peer Group.

 

Retirement Programs.    The Company’s retirement plans, including both its general employee retirement plan and its supplemental retirement plans, are discussed in detail in the narrative headed “Retirement Plans” following the Pension Benefits at December 31, 2009 table below. Under the Pepco Holdings Retirement Plan, all employees of the Company with at least five years of service are entitled to receive retirement benefits in accordance with the applicable benefit formula up to the maximum level that a qualified pension plan is permitted to provide consistent with Internal Revenue Code regulations.

 

The Company’s supplemental retirement plans (consisting of the Executive Retirement Plan and the Conectiv Supplemental Executive Retirement Plan (“Conectiv SERP”)) provide retirement benefits in addition to the benefits a participant is entitled to receive under the Pepco Holdings Retirement Plan due to certain benefit calculation features that have the effect of augmenting the individual’s aggregate retirement benefit. If the benefit payment that otherwise would have been available under the applicable benefit formula of the Pepco Holdings Retirement Plan is reduced due to a contribution or benefit limit imposed by law, any participant in the Pepco Holdings Retirement Plan is entitled to a compensating payment under the supplemental retirement plan in which

 

30


Table of Contents

the individual participates. In addition, a participant in the Pepco Holdings Retirement Plan, if designated by the Chief Executive Officer, is entitled to one or more of the following enhancements to the calculation of the participant’s retirement benefit: (i) the inclusion of compensation deferred under the Company’s deferred compensation plans in calculating retirement benefits, (ii) to the extent not permitted by the Pepco Holdings Retirement Plan, the inclusion of annual cash incentive compensation received by the participant in calculating retirement benefits, or (iii) the crediting of the participant with additional years of service. The supplemental retirement plan benefits of each of the NEOs are described in the narrative headed “Retirement Plans” following the Pension Benefits at December 31, 2009 table below.

 

The various components of the Company’s supplemental retirement plans have been in effect for many years. The plans were adopted in order to assist the efforts of the Company to attract and retain executives by offering a total compensation package that is competitive with those offered by other companies, particularly other electric and gas utilities.

 

All employees of the Company, including the NEOs, are entitled to participate on the same terms as other eligible employees in the Company’s 401(k) savings plan (the “Retirement Savings Plan”). Participants in the Retirement Savings Plan receive a 100% Company matching contribution on employee contributions up to 3% of annual salary and a 50% Company matching contribution on employee contributions in excess of 3% of annual salary up to 6% of annual salary.

 

Health and Welfare Benefits.    Each of the NEOs participates in the Company’s health care, life insurance, and disability insurance plans on the same terms as other Company employees. With the exception of Company payment for an annual executive physical, as more fully described in Note 18 to the Summary Compensation Table, the Company has no health or welfare plans, programs, or arrangements that are available only to executives.

 

Other Perquisites and Personal Benefits.    As more fully described in Note 18 to the Summary Compensation Table, the Company provides certain NEOs with perquisites and other personal benefits, including: (i) a Company car or a car allowance, (ii) Company-paid parking, (iii) tax preparation and financial planning fees, (iv) certain club dues, (v) personal use of Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events when not otherwise used for business purposes and (vi) reimbursement for spousal travel. The cost of these benefits is not significant in relation to an executive’s total compensation. These benefits generally are provided to ensure that the Company’s total compensation package is competitive with peer companies. In July 2008, PM&P advised the Committee that the perquisites and other personal benefits provided to executives were modest in comparison to the market.

 

Deferred Compensation Plan.    Under the terms of the Company’s Executive and Director Deferred Compensation Plan (the “Deferred Compensation Plan”), which is described in greater detail in the narrative headed “Deferred Compensation Plans” following the Nonqualified Deferred Compensation table below, the NEOs and other executives of the Company are permitted to defer the receipt of all or any portion of their compensation, including incentive compensation. In addition, to the extent an executive is prevented from making a contribution to the Retirement Savings Plan due to limitations imposed by the Internal Revenue Code, the executive is entitled to defer the excluded amount under the Deferred Compensation Plan and receive an additional credit under the Deferred Compensation Plan equal to the matching contribution, if any, that the Company would have made with respect to the excluded amount under the Retirement Savings Plan. Balances under the Deferred Compensation Plan are credited on a monthly basis with an amount corresponding to, as elected by the participant, any or a combination of: (i) interest at the prime rate or (ii) the return that would have been earned had the account balance been invested in any one or a combination of the investment funds selected by the Committee. The Deferred Compensation Plan is designed to allow participating executives to save for retirement in a tax-effective way. The Company funds its future financial obligations under the Deferred Compensation Plan through the purchase of Company-owned life insurance policies and other investments.

 

31


Table of Contents

Compensation Mix

 

At-Risk versus Fixed Compensation.    The percentages of each NEO’s short-term and long-term incentive compensation opportunities relative to the executive’s salary as established by the Committee are designed to reflect the Committee’s view that, as the level of an executive’s responsibility increases, the percentage of the executive’s compensation that is at risk and tied to company or individual performance likewise should increase. The following table shows the allocation of each NEO’s total salary and short-term and long-term incentive compensation opportunities between fixed and at-risk compensation (at the target level).

 

Name

   Fixed
Compensation
    At-Risk
Compensation
 

Joseph M. Rigby

   25   75

Anthony J. Kamerick

   38   62

David M. Velazquez

   38   62

Kirk J. Emge

   41   59

John U. Huffman

   41   59

Dennis R. Wraase

   25   75

Paul H. Barry

   38   62

William T. Torgerson

   38   62

 

Short-Term versus Long-Term Incentive Compensation.    The Committee also believes that with increasing seniority, a larger percentage of an executive’s compensation opportunity should be in the form of long-term incentive compensation. This reflects the view of the Committee that the senior executives should have a greater focus on developing and implementing the Company’s long-term strategic goals. The following table shows the allocation between each NEO’s target short-term and long-term incentive compensation opportunities (each at the target level).

 

Name

   Short-Term
Incentive

Opportunity
    Long-Term
Incentive

Opportunity
 

Joseph M. Rigby

   33   67

Anthony J. Kamerick

   38   62

David M. Velazquez

   38   62

Kirk J. Emge

   41   59

John U. Huffman

   41   59

Dennis R. Wraase

   33   67

Paul H. Barry

   38   62

William T. Torgerson

   38   62

 

Severance and Change in Control Benefits

 

Mr. Rigby’s employment agreement provides for severance payments and other benefits if his employment is terminated other than for “cause” or he voluntarily terminates his employment for certain specified reasons, whether or not such termination is in connection with a change in control of the Company. These provisions are generally designed to provide assurance to the executive that, if his employment is actually or constructively terminated by the Company, he will receive for a period of time thereafter the compensation and benefits that he would have received had the termination not occurred. These benefits also address the concern that the fear of job loss might influence the executive when considering strategic opportunities that may include a change in control of the Company. The specific benefits to which Mr. Rigby is entitled are described in detail under the heading “Termination of Employment and Change in Control Benefits” below.

 

The Company also maintains a Change-in-Control Severance Plan in which 57 executives currently participate. Under this plan, which is described under the heading “Termination of Employment and Change in

 

32


Table of Contents

Control Benefits” below, if, within one year following a change in control, a participating executive’s employment is terminated by the Company without “cause” or is terminated by the executive for “good reason,” the executive will be entitled to termination benefits similar to those described above for executives with employment agreements, except with a severance payment equal to 1.5, 2 or 3 times the salary of the affected executive depending upon the executive’s position. The purpose of the plan is to ensure that the participating executives are able to stay focused on their responsibilities to the Company in a change in control situation and are not distracted by the uncertainty of their continued employment. Messrs. Kamerick, Velazquez, Emge and Huffman are participants in the Change-in-Control Severance Plan.

 

In connection with his resignation in June 2009, the Company entered into an agreement with Mr. Barry under which he was paid certain severance benefits. See “Termination of Employment and Change in Control Benefits — Barry Resignation Benefits” below.

 

Employment Agreements and Compensation Arrangements

 

In November 2009, the Company entered into an employment agreement with Mr. Huffman which is described in greater detail under the heading “Employment Agreements” below. The employment agreement was entered into to ensure his continued employment as the head of the Pepco Energy Services business unit during the transitional period following the decision to wind down the retail energy supply portion of its business. The employment agreement terminates on December 31, 2010.

 

Deductibility of Executive Compensation Expenses

 

Under Section 162(m) of the Internal Revenue Code, a public company is prohibited from deducting for federal income tax purposes compensation in excess of $1 million paid to the Company’s principal executive officer and the Company’s three highest compensated executive officers (other than the principal executive officer or the principal financial officer), except that this prohibition does not apply to compensation that qualifies as “performance-based compensation.” Under the LTIP, which has been approved by the Company’s shareholders, the vesting of shares of Performance Stock is contingent on the achievement of pre-established performance objectives, and accordingly such awards qualify as performance-based compensation, unless the Committee were to alter the performance objectives after the commencement of the performance period or were to exercise its discretion to pay an award notwithstanding that the specified performance objectives were not satisfied. There may be circumstances where the Committee determines that it is in the best interests of the Company to take either of such actions with respect to one or more awards, even though the result may be a loss of a tax deduction for the compensation.

 

The issuance of shares of Restricted Stock under the LTIP does not qualify as performance-based compensation because the awards vest on the basis of continued employment, rather than pre-established performance objectives. Because the EICP has not been approved by shareholders, awards under the plan cannot qualify as performance-based compensation even when the payment of awards under the plan is based on the achievement of pre-established performance objectives.

 

Stock Ownership Requirements

 

To further align the financial interests of the Company’s executives with those of the shareholders, the Board of Directors in 2005 adopted stock ownership requirements for officers of the Company. The requirements, which are expressed as a multiple of salary, are a function of the executive’s seniority:

 

Chief Executive Officer, President

   5 times salary

Executive Vice President, Vice Chairman

   3 times salary

Senior Vice President

   2 times salary

Vice President

   1 times salary

 

33


Table of Contents

Each officer has until December 31, 2010, or five years from the date of his election as an officer, whichever is later, to achieve the required ownership level. An individual who is appointed as an officer or is promoted to a position with a higher stock ownership requirement has five years from the date of appointment or promotion to achieve the applicable stock ownership level. Shares of common stock owned through the Retirement Savings Plan, unvested shares of Restricted Stock, and the number of shares of common stock corresponding to the target level of the executive’s unearned Performance Stock awards are considered owned by the executive for the purpose of meeting the ownership requirement. The Company does not have a policy with respect to hedging the economic risk of shares that the officer is required to own. Each of Messrs. Rigby, Kamerick, Velazquez and Emge meets the stock ownership requirement applicable to him. Mr. Huffman is not subject to a stock ownership requirement because he is not a Company Vice President; however, he nevertheless meets the stock ownership requirement at the level of three times his salary.

 

Messrs. Wraase, Torgerson and Barry are no longer employed by the Company and are not subject to stock ownership requirements.

 

34


Table of Contents

EXECUTIVE COMPENSATION

 

The following table sets forth compensation information for the Company’s (i) principal executive officer, (ii) principal financial officer and (iii) its three other most highly compensated executive officers employed as of December 31, 2009, determined on the basis of their total compensation for 2009 (excluding the amounts under the heading “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the table below). The table also includes Dennis R. Wraase, who served as Chief Executive Officer until February 28, 2009, Chairman until May 15, 2009 and retired on June 1, 2009, Paul H. Barry, who resigned as Senior Vice President and Chief Financial Officer on June 12, 2009 and William T. Torgerson who retired on June 1, 2009, who would have been one of the three most highly compensated executive officers employed as of December 31, 2009, other than the Chief Executive Officer and Chief Financial Officer, had he not retired prior to that date. The information in this table includes compensation paid by the Company or its subsidiaries.

 

2009 SUMMARY COMPENSATION TABLE

 

Name and Principal Position

  Year   Salary   Bonus   Stock
Awards (15)
    Option
Awards
  Non-Equity
Incentive
Plan
Compen-
sation (16)
  Change in
Pension
Value and
Nonqualified
Deferred
Compen-
sation
Earnings (17)
  All Other
Compen-
sation (18)
  Total
Compen-
sation

Joseph M. Rigby

  2009   $ 796,669   $ 0   $ 1,426,036      0   $ 0   $ 742,945   $ 151,183   $ 3,116,833

Chairman, President and Chief Executive Officer (19)

  2008   $ 659,375   $ 0   $ 515,087      0   $ 356,063   $ 513,827   $ 117,423   $ 2,161,775
  2007   $ 509,044   $ 0   $ 464,186      0   $ 335,500   $ 134,856   $ 103,718   $ 1,547,304

Anthony J. Kamerick

  2009   $ 383,874   $ 0   $ 327,754      0   $ 0   $ 771,948   $ 54,818   $ 1,538,394

Senior Vice President and Chief Financial Officer (20)

  2008   $ 309,000   $ 0   $ 132,633      0   $ 184,010   $ 623,149   $ 49,318   $ 1,298,110
  2007   $ 273,750   $ 200,000   $ 277,866      0   $ 140,083   $ 118,501   $ 47,962   $ 1,058,162

David M. Velazquez

  2009   $ 423,729   $ 0   $ 398,823      0   $ 248,549   $ 131,214   $ 137,771   $ 1,340,086

Executive Vice President (21)

  2008   $ 341,000   $ 0   $ 248,832      0   $ 289,100   $ 83,241   $ 60,377   $ 1,022,550

Kirk J. Emge

  2009   $ 350,000   $ 0   $ 298,936      0   $ 0   $ 386,176   $ 76,251   $ 1,111,363

Senior Vice President and General Counsel (22)

                 

John U. Huffman

  2009   $ 341,000   $ 0   $ 291,246      0   $ 271,913   $ 48,928   $ 71,975   $ 1,025,062

President and Chief Executive Officer, Pepco Energy Services (22)

                 

Dennis R. Wraase

  2009   $ 446,295   $ 0   $ 0 (26)    0   $ 0   $ 1,052,100   $ 358,035   $ 1,856,430

Retired Chairman (23)

  2008   $ 1,076,000   $ 0   $ 1,847,476      0   $ 968,400   $ 4,829,476   $ 351,894   $ 9,073,246
  2007   $ 1,026,941   $ 0   $ 2,003,314      0   $ 1,127,500   $ 4,656,627   $ 284,189   $ 9,098,571

Paul H. Barry

  2009   $ 234,473   $ 0   $ 520,490 (27)    0   $ 0   $ 0   $ 1,011,628   $ 1,766,591

Senior Vice President and Chief Financial Officer (24)

  2008   $ 518,000   $ 0   $ 444,688      0   $ 279,720   $ 23,328   $ 164,166   $ 1,429,902
  2007   $ 161,932   $ 0   $ 390,989      0   $ 106,007   $ 1,944   $ 51,435   $ 712,307

William T. Torgerson

  2009   $ 231,443   $ 0   $ 560,679 (28)    0   $ 0   $ 29,500   $ 131,262   $ 952,884

Vice Chairman and Chief Legal Officer (25)

  2008   $ 558,000   $ 0   $ 479,050      0   $ 301,320   $ 1,889,924   $ 131,910   $ 3,360,204
  2007   $ 538,017   $ 0   $ 524,769      0   $ 579,960   $ 733,283   $ 143,354   $ 2,519,383

 

(15) The amount shown for each year is the aggregate grant date fair value of the Restricted Stock (one-third of the total) and Performance Stock (two-thirds of the total) awarded during that year as determined in accordance with FASB ASC Topic 718. The values shown assume that each Performance Stock award will vest at 100% of the target level at the end of the three-year performance period and that each Restricted Stock award will vest in full at the end of the three-year service period. For a further description of the 2009 Restricted Stock and Performance Stock awards, see the discussion under the heading, “Long-Term Incentive Plan Awards” below.

 

35


Table of Contents

Assuming the vesting of the 2009 Performance Stock awards at the maximum level of 200% of target, the grant date fair value of these awards would have been $1,901,379, $437,007, $531,762, $398,594, $388,316, $693,986 and $747,571 for Messrs. Rigby, Kamerick, Velazquez, Emge, Huffman, Barry and Torgerson, respectively.

 

Assuming the vesting of the 2008 Performance Stock awards at the maximum level of 200% of target, the grant date fair value of these awards would have been $686,800, $176,861, $331,760, $2,463,318, $592,917 and $638,717 for Messrs. Rigby, Kamerick, Velazquez, Wraase, Barry and Torgerson, respectively.

 

Assuming the vesting of the 2007 Performance Stock awards at the maximum level of 200% of target, the grant date fair value of these awards would have been $618,949, $169,417, $2,671,204, $521,356 and $699,726 for Messrs. Rigby, Kamerick, Wraase, Barry and Torgerson, respectively. The actual vesting results with respect to the 2007 Performance Stock awards are described below in and following the “2009 Option Exercises and Stock Vested” table below.

 

These amounts do not include reinvested dividends on the Performance Stock or cash dividends on the Restricted Stock. For a further description of the 2009 Restricted Stock and Performance Stock awards, see the discussion under the heading “Long-Term Incentive Plan Awards” below.

 

(16) Consists of awards under the EICP. For a further description of these awards, see “Executive Incentive Compensation Plan Awards” below.

 

(17) Consists of the sum of (i) the aggregate annual increase in the actuarial present value of the executive’s accumulated benefits under all deferred benefit and actuarial pension plans and (ii) if applicable, “above-market earnings” (as defined by SEC regulations) on non-tax-qualified deferred compensation plans. Of the executives listed in the table, only Mr. Wraase ($18,791, $16,339, and $14,209, for 2009, 2008, and 2007, respectively) and Mr. Torgerson ($15,779, $13,721 and $11,931 for 2009, 2008 and 2007, respectively) received such above market earnings. See the discussion under the heading “Deferred Compensation Plans — Pepco Director and Executive Deferred Compensation Plan” below.

 

(18) The totals shown in this column for 2009 consist of:

 

(a) Dividends paid on unvested shares of Restricted Stock held by the executive: Mr. Rigby — $45,476; Mr. Kamerick — $13,382; Mr. Velazquez — $14,717; Mr. Emge — $11,410; Mr. Huffman — $12,151; Mr. Wraase — $40,854; Mr. Barry — $5,484; and Mr. Torgerson — $11,775. For a further description of these payments, see “Long-Term Incentive Plan Awards — Restricted Stock Program” below.

 

(b) The market value on December 31, 2009, of additional shares of common stock (calculated by multiplying the number of shares by the closing market price on December 31, 2009, the last trading day of the year) issued to the executive equal to the number of shares that the executive would have owned on December 31, 2009 had the number of shares earned by the executive for the 2007-2009 Performance Stock award cycle under the LTIP been issued to the executive on January 1, 2007, the commencement date of the performance cycle, and had the dividends on such shares (and the reinvestment shares) been invested in additional shares of common stock: Mr. Rigby — $41,279; Mr. Kamerick — $11,299; Mr. Velazquez — $17,032; Mr. Emge — $17,518; Mr. Huffman — $17,032; Mr. Wraase — $143,495; Mr. Barry — $0; and Mr. Torgerson — $37,590. For a further description of these payments, see “Long-Term Incentive Plan Awards — Performance Stock Program” below.

 

(c) Company-paid premiums on a term life insurance policy: Mr. Rigby — $1,786; Mr. Kamerick — $871; Mr. Velazquez — $950; Mr. Emge — $785; Mr. Huffman — $765; Mr. Wraase — $1,006; Mr. Barry — $581; and Mr. Torgerson — $522.

 

(d) Company matching contributions under the Retirement Savings Plan: Mr. Rigby — $11,025; Mr. Kamerick — $11,025; Mr. Velazquez — $11,025; Mr. Emge — $8,453; Mr. Huffman — $11,025; Mr. Wraase — $11,025; Mr. Barry — $10,595; and Mr. Torgerson — $10,938.

 

36


Table of Contents

(e) Company matching contributions on deferred compensation: Mr. Rigby — $15,936; Mr. Kamerick — $1,187; Mr. Velazquez — $0; Mr. Emge — $6,038; Mr. Huffman — $681; Mr. Wraase — $5,612; Mr. Barry — $0; and Mr. Torgerson — $0. For a further discussion, see “Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan.”

 

(f) Tax gross-up payments of $27,952 and $23,473 made to Messrs. Velazquez and Barry, respectively, on the amount shown under the heading “Reimbursement of Employment Transition Expenses” in the table to note (g) below.

 

(g) The following perquisites and other personal benefits (all amounts shown reflect cash payments made by the Company, except as otherwise stated)

 

Name

  Company
Car(i)
  Auto
Allowance(ii)
  Parking   Tax
Preparation
Fee
  Financial
Planning
Fee
  Executive
Physical
Fee
  Club
Dues
  Spousal
Travel
  Reimbursement
of Employment
Transition
Expenses(iii)

Joseph M. Rigby

  $ 0   $ 11,700   $ 2,400   $ 2,400   $ 10,005   $ 800   $ 5,450   $ 2,926   $ 0

Anthony J. Kamerick

  $ 0   $ 11,150   $ 2,400   $ 2,400   $ 0   $ 0   $ 1,104   $ 0   $ 0

David M. Velazquez

  $ 0   $ 11,700   $ 2,400   $ 0   $ 9,175   $ 0   $ 0   $ 0   $ 42,820

Kirk J. Emge

  $ 0   $ 11,700   $ 2,400   $ 2,400   $ 11,315   $ 0   $ 400   $ 3,832   $ 0

John U. Huffman

  $ 0   $ 11,700   $ 6,216   $ 2,400   $ 10,005   $ 0   $ 0   $ 0   $ 0

Dennis R. Wraase

  $ 3,144   $ 0   $ 1,000   $ 2,400   $ 10,005   $ 576   $ 13,248   $ 1,520   $ 0

Paul H. Barry

  $ 0   $ 5,850   $ 1,100   $ 1,200   $ 10,005   $ 800   $ 1,358   $ 0   $ 34,959

William T. Torgerson

  $ 3,260   $ 975   $ 1,000   $ 2,400   $ 0   $ 0   $ 9,150   $ 0   $ 0

 

  (i) Consists of lease and registration costs paid by the Company and variable costs, including gasoline, service and parts.

 

  (ii) Consists of a nonaccountable expense allowance to compensate executives who are not provided with a Company car.

 

  (iii) Consists of reimbursement of temporary living and storage expenses incurred by Mr. Velazquez after his promotion to Executive Vice President on March 1, 2009, in accordance with the Company’s relocation policy, and relocation expenses incurred by Mr. Barry following his employment by the Company.

 

In addition, in 2009, Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events were made available to employees, including the executive officers listed in the Summary Compensation Table, for personal use when not being used by the Company for business purposes. There was no incremental cost to the Company for providing these benefits.

 

(19) Mr. Rigby was elected Chief Executive Officer effective March 1, 2009 and was elected Chairman of the Board on May 15, 2009.

 

(20) Mr. Kamerick was elected Senior Vice President effective March 1, 2009 and Chief Financial Officer effective June 13, 2009.

 

(21) Mr. Velazquez did not meet the requirements for inclusion in the Summary Compensation Table in 2007.

 

(22) Neither Mr. Emge nor Mr. Huffman met the requirements for inclusion in the Summary Compensation Table in 2007 or 2008.

 

(23) For Mr. Wraase, the amount shown for 2009 in the column headed “All Other Compensation” includes a payment of $124,150 for unused vacation time accrued at the time of his retirement on June 1, 2009. For a further discussion of the payments and benefits received by Mr. Wraase in connection with his retirement, see “Termination of Employment and Change in Control Benefits — Wraase Retirement Benefits” below.

 

37


Table of Contents
(24) For Mr. Barry, the amount shown for 2009 in the column headed “All Other Compensation” includes the following payments made in connection with his resignation on June 12, 2009: (i) a severance payment of $828,800, (ii) a payment of $29,885 for unused vacation time accrued at the time of his resignation, (iii) a payment of $7,538 in reimbursement for COBRA payments, and (iv) payment of $50,000 in reimbursement for legal fees incurred in the negotiation of his termination arrangement. For a further discussion of the payments and benefits received by Mr. Barry in connection with his retirement, see “Termination of Employment and Change in Control Benefits — Barry Resignation Benefits” below.

 

(25) For Mr. Torgerson, the amount shown for 2009 in the column headed “All Other Compensation” includes a payment of $53,652 for unused vacation time accrued at the time of his retirement on June 1, 2009. For a further discussion of the payments and benefits received by Mr. Torgerson in connection with his retirement see “Termination of Employment and Change in Control Benefits — Torgerson Retirement Benefits” below.

 

(26) When he retired on June 1, 2009, Mr. Wraase forfeited (i) 25,633 of the 48,567 shares of his 2008 Performance Stock award, having a reduction in grant date fair value of $1,300,106, and (ii) 10,172 of the 52,315 shares of his 2007 Performance Stock award, having a reduction in grant date fair value of $519,382.

 

(27) When he resigned on June 12, 2009, Mr. Barry forfeited the entire amount of his 2009, 2008 and 2007 Restricted Stock awards and Performance Stock awards.

 

(28) When he retired on June 1, 2009, Mr. Torgerson forfeited (i) 18,164 of the 21,094 shares of his 2009 Performance Stock award, having a reduction in grant date fair value of $643,732, (ii) 6,646 of the 12,593 shares of his 2008 Performance Stock award, having a reduction in grant date fair value of $337,085, and (iii) 2,665 of the 13,704 shares of his 2007 Performance Stock award, having a reduction in grant date fair value of $136,075.

 

Employment Agreements

 

The Company has an employment agreement with Mr. Rigby, which provides for his employment through August 1, 2011, and automatically extends for one year on each August 1 commencing August 1, 2010, unless either the Company or Mr. Rigby gives notice that it will not be so extended. The terms of this agreement include:

 

   

An annual salary in an amount not less than his base salary in effect as of August 1, 2002, with the condition that, if at any time and during the term of the agreement his annual base salary is increased, it may not subsequently be decreased during the remainder of the term of the agreement.

 

   

Incentive compensation as determined by the Board of Directors under plans applicable to senior executives of the Company.

 

   

Participation, in a manner similar to other senior executives, in retirement plans, fringe benefit plans, supplemental benefit plans and other plans and programs provided by the Company for its executives or employees.

 

   

As more fully described below under the heading “Termination of Employment and Change in Control Benefits,” various payments and other benefits in connection with the termination of his employment.

 

In connection with the decision to wind down the Pepco Energy Services retail energy supply business, the Company in November 2009 entered into the employment agreement with Mr. Huffman which provides for his employment through December 31, 2010, after which he will become an employee at will. The terms of the agreement include:

 

   

An annual salary in an amount not less than his base salary in effect as of November 23, 2009.

 

38


Table of Contents
   

A cash payment in the amount of $100,000 if he remains employed by the Company through December 31, 2010.

 

   

Incentive compensation as determined by the Board of Directors under plans applicable to senior executives of the Company.

 

   

Participation, in a manner similar to other senior executives, in retirement plans, fringe benefit plans, supplemental benefit plans and other plans and programs provided by the Company for its executives or employees.

 

   

As more fully described below under the heading “Termination of Employment and Change in Control Benefits,” various payments and other benefits in connection with the termination of his employment.

 

The Company also had employment agreements with Messrs. Wraase and Torgerson. The benefits each received under the terms of his employment agreement are described below under the respective headings “Termination of Employment and Change in Control Benefits — Wraase Retirement Benefits” and “Termination of Employment and Change in Control Benefits — Torgerson Retirement Benefits.”

 

Relationship of Salary and Bonus to Total Compensation

 

The following table sets forth the 2009 salary of each of the executive officers listed in the Summary Compensation Table as a percentage of the executive’s Total Compensation, as set forth in the Summary Compensation Table:

 

Name

   Salary as a Percentage
of Total Compensation
 

Joseph M. Rigby

   25.6

Anthony J. Kamerick

   25.0

David M. Velazquez

   31.6

Kirk J. Emge

   31.5

John U. Huffman

   33.3

Dennis R. Wraase

   24.0

Paul H. Barry

   13.3

William T. Torgerson

   24.3

 

39


Table of Contents

2009 Incentive Compensation Awards

 

2009 GRANTS OF PLAN-BASED AWARDS

 

         Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards
  Estimated Future Payouts
Under Equity
Incentive Plan Awards
  All
Other
Stock
Awards:
Number
of
Shares
of Stock
or Units
  Grant
Date Fair
Value of
Stock and
Options
Awards
(29)

Name

  Grant
Date
  Threshold   Target   Maximum   Threshold
Number
of Shares
  Target
Number
of
Shares
  Maximum
Number
of Shares
   
        ($)   ($)   ($)                   ($)

Joseph M. Rigby

                 

LTIP—Restricted Stock Program

  2-26-09               16,518   $ 249,257

LTIP—Performance Stock Program

  2-26-09         0   33,037   66,074       498,528

Executive Incentive Compensation Plan

  1-22-09   $ 0   $ 750,833   $ 1,351,499          

LTIP—Restricted Stock Program

  1-22-09               12,759     226,090

LTIP—Performance Stock Program

  1-22-09         0   25,517   51,034       452,161

Anthony J. Kamerick

                 

LTIP—Restricted Stock Program

  6-13-09               3,047     41,226

LTIP—Performance Stock Program

  6-13-09         0   6,094   12,188       82,452

LTIP—Restricted Stock Program

  2-26-09               1,079     16,282

LTIP—Performance Stock Program

  2-26-09         0   2,157   4,314       32,549

Executive Incentive Compensation Plan

  1-22-09     0     213,813     384,863          

LTIP—Restricted Stock Program

  1-22-09               2,920     51,742

LTIP—Performance Stock Program

  1-22-09         0   5,841   11,682       103,503

David M. Velazquez

                 

LTIP—Restricted Stock Program

  2-26-09               2,376     35,854

LTIP—Performance Stock Program

  2-26-09         0   4,753   9,506       71,723

Executive Incentive Compensation Plan

  1-22-09     0     254,100     457,380          

LTIP—Restricted Stock Program

  1-22-09               5,479     97,088

LTIP—Performance Stock Program

  1-22-09         0   10,957   21,914       194,158

Kirk J. Emge

                 

Executive Incentive Compensation Plan

  1-22-09     0     210,000     378,000          

LTIP—Restricted Stock Program

  1-22-09               5,623     99,639

LTIP—Performance Stock Program

  1-22-09         0   11,247   22,494       199,297

John U. Huffman

                 

Executive Incentive Compensation Plan

  1-22-09     0     204,600     368,280          

LTIP—Restricted Stock Program

  1-22-09               5,479     97,088

LTIP—Performance Stock Program

  1-22-09         0   10,957   21,914       194,158

Dennis R. Wraase

                 

Executive Incentive Compensation Plan

  1-22-09     0     1,076,000     1,936,800          

Paul H. Barry

                 

Executive Incentive Compensation Plan

  1-22-09     0     310,800     559,440          

LTIP—Restricted Stock Program

  1-22-09               9,791     173,497

LTIP—Performance Stock Program

  1-22-09         0   19,582   39,164       346,993

William T. Torgerson

                 

Executive Incentive Compensation Plan

  1-22-09     0     334,800     602,640          

LTIP—Restricted Stock Program

  1-22-09               10,547     186,893

LTIP—Performance Stock Program

  1-22-09         0   21,094   42,188       373,786

 

(29) Represents the grant date fair value, as determined in accordance with FASB ASC Topic 718, of shares of Restricted Stock granted under the Restricted Stock Program and Performance Stock awards under the Performance Stock Program. The grant date fair value of each Restricted Stock award has been calculated by multiplying the number of shares granted by the closing price for the common stock on the grant date. The grant date fair value of each Performance Stock award has been calculated by multiplying the target number of shares that the executive is entitled to earn by the closing price for the common stock on the grant date.

 

40


Table of Contents

Executive Incentive Compensation Plan Awards

 

Under the EICP, participating executives are entitled to receive annual cash bonuses to the extent performance goals established by the Compensation/Human Resources Committee are achieved. The performance goals can consist entirely, or be a combination, of (i) performance objectives for the Company as a whole or (ii) performance objectives for a particular business unit. Some executives also have individual performance objectives. In making awards under the EICP, the Compensation/Human Resources Committee takes into account actual performance relative to the performance goals as well as any other factors that the Committee considers relevant. Under the EICP as in effect for 2009, each of the executive officers listed in the Summary Compensation Table had the opportunity to earn a cash bonus of between 0% and 180% of the following percentage of his 2009 base salary: Mr. Rigby: 60% for two months and 100% for ten months; Mr. Kamerick: 50% for five and one-half months and 60% for six and one-half months; Messrs. Velazquez, Emge and Huffman: 60%; Mr. Wraase: 100%; and Messrs. Barry and Torgerson: 60%.

 

The performance goals in 2009 for Messrs. Rigby, Kamerick (for the period June 13, to December 31, 2009), Emge, Wraase, Barry and Torgerson consisted entirely of corporate performance goals (referred to as “EICP Corporate Goals”). These goals were: (i) Company net earnings relative to budgeted net earnings of $255.6 million (40%), (ii) Company cash flow from operations relative to budgeted cash flow in the negative amount of $531.2 million (25%), (iii) utility customer satisfaction as measured by the results of customer surveys and other performance metrics (15%), (iv) diversity as measured by the attainment of, or good faith efforts toward, the attainment of established affirmative action goals (10%) and (v) safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%). Each award was subject to the condition that, if the Company’s net earnings relative to the budgeted net earnings goal was not achieved, no award would be made regardless of the extent to which each other performance goal was achieved.

 

For the period January 1 to February 28, 2009, during which Mr. Velazquez served as head of the Conectiv Energy business unit, his performance goals consisted entirely of Conectiv Energy performance goals (referred to as “EICP Conectiv Energy Goals”). These goals were: (i) Conectiv Energy net earnings relative to budgeted net earnings of $105 million (60%); (ii) capital spending that is within or below the budgeted capital spending of $281 million (10%); (iii) on dispatch performance of the Conectiv Energy power plants relative to the annual plan (10%); (iv) safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%) and (v) diversity as measured by the attainment of, or good faith efforts toward, the attainment of established affirmative action goals (10%). For the period March 1 to December 31, 2009, during which Mr. Velazquez served as the head of the Power Delivery business unit, his performance goals consisted entirely of Power Delivery performance goals (referred to as “EICP Power Delivery Goals”). These goals were: (i) Power Delivery net earnings relative to budgeted net earnings of $160.2 million (as adjusted for rate relief) (30%); (ii) Power Delivery capital spending that is within or below the budgeted capital spending of $714 million (10%); (iii) Power Delivery operation and maintenance spending that is within or below the budgeted operation and maintenance spending of $717.8 million (15%); (iv) utility customer satisfaction as measured by the results of customer surveys and other metrics (25%); (v) diversity as measured by the attainment of, or good faith efforts toward, the attainment of established affirmative action goals (10%); and (vi) safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%).

 

The performance goals for Mr. Huffman consisted entirely of Pepco Energy Services goals (referred to as “EICP Pepco Energy Services Goals”). These goals were: (i) Pepco Energy Services’ net earnings relative to budgeted net earnings of $16.3 million (excluding the Benning Road and Buzzard Point power plants) (75%); (ii) the Benning Road and Buzzard Point power plants’ net income (5%); (iii) diversity as measured by the attainment of, or good faith efforts toward, the attainment of established affirmative action goals (10%); and (iv) safety as measured by the absence of fatalities and the number of recordable injuries and fleet accidents (10%).

 

For the period January 1, 2009 to June 12, 2009, which was prior to Mr. Kamerick’s promotion to Chief Financial Officer, Mr. Kamerick participated in the EICP as a Corporate Services executive, with performance

 

41


Table of Contents

goals that consisted of 80% EICP Power Delivery Goals, 10% EICP Conectiv Energy Goals and 10% EICP Pepco Energy Services Goals (referred to herein as the “EICP Corporate Services Goals). An award to Corporate Services employees under the EICP was further conditioned on the achievement of the EICP Corporate Goal of net earnings relative to budgeted net earnings of $255.6 million.

 

These 2009 award opportunities are shown in the above table under the heading “Estimated Future Payouts Under Non-Equity Incentive Plan Awards,” with the threshold representing overall performance at the 50% level (meaning no award is made if performance is below the 50% level relative to the target), the target amount representing overall performance at the 100% level, and the maximum amount representing overall performance at or above the 180% level.

 

Based on 2009 performance, Messrs. Velazquez and Huffman received the following awards under the EICP:

 

   

Mr. Velazquez received an award at the 112.3% level based on the achievement of EICP Power Delivery Goals prorated for the months he was the head of the Power Delivery business unit head. This was based on the combination of Power Delivery’s earnings relative to budgeted net earnings, operation and maintenance expense and capital spending relative to budgeted capital spending significantly exceeding targets, and customer reliability, safety and diversity all slightly below target.

 

   

Mr. Huffman received an award at the 132.9% level based on the achievement of Pepco Energy Services Goals as the result of a combination of Pepco Energy Services’ earnings relative to budgeted net earnings significantly exceeding target, safety and diversity exceeding targets and net earnings from the power plants significantly below target.

 

None of Messrs. Rigby, Kamerick or Emge, nor Messrs. Wraase or Torgerson, who would have received a pro rata award based on the period prior to their retirement, received an award under the EICP for 2009 because the EICP Corporate Goal with respect to net earnings was not met. When he resigned on June 12, 2009, Mr. Barry forfeited the opportunity to earn a 2009 EICP award.

 

Long-Term Incentive Plan Awards

 

In January 2009, the Compensation/Human Resources Committee established award opportunities pursuant to the Performance Stock Program and made awards of Restricted Stock pursuant to the Restricted Stock Program to each of the executive officers listed in the Summary Compensation Table.

 

Performance Stock Program.    The award opportunities established under the Performance Stock Program, which account for two-thirds of each participant’s aggregate 2009 LTIP award opportunity, relate to performance over a three-year period beginning in 2009 and ending in 2011.

 

   

For Messrs. Rigby, Kamerick (for the period June 13, 2009 to December 31, 2011), Emge, Wraase, Barry and Torgerson, 75% of their award opportunity is based on a Company earnings per share goal and 25% of their award opportunity is based on a Company cash flow from operations per share goal (referred to as “LTIP Corporate Goals”). For a discussion of the impact of the retirements of Messrs. Wraase and Torgerson in 2009 on these awards, see the discussion below under the respective heading “Termination of Employment and Change in Control Benefits—Wraase Retirement Benefits” and “Termination of Employment and Change in Control Benefits—Torgerson Retirement Benefits.”

 

   

For the period January 1, 2009 to February 1, 2009, the period during which Mr. Velazquez served as head of the Conectiv Energy business unit, 37.5% of his award opportunity is based on a Company earnings per share goal, 37.5% is based on Conectiv Energy’s earnings goal, 12.5% is based on a Company cash flow from operations per share goal and 12.5% is based on a Conectiv Energy free cash flow goal (referred to as “LTIP Conectiv Energy Goals”). As the result of his appointment effective March 1, 2009, as the head of the Power Delivery business unit, for the remainder of the three-year

 

42


Table of Contents
 

performance period, 37.5% of his award opportunity is based on a Company earnings per share goal, 37.5% is based on Power Delivery’s earnings goal, 12.5% is based on a Company cash flow from operations per share goal and 12.5% is based on a Power Delivery cash flow from operations goal (the “LTIP Power Delivery Goals”).

 

   

For Mr. Huffman, 37.5% of his award opportunity is based on a Company earnings per share goal, 37.5% is based on Pepco Energy Services’ earnings goal, 12.5% is based on a Company cash flow from operations per share goal and 12.5% is based on a Pepco Energy Services’ cash flow from operations goal (the “LTIP Pepco Energy Services Goals”).

 

   

For the period January 1, 2009 to June 12, 2009, during which Mr. Kamerick participated in the LTIP as a Corporate Services employee, 80% of his award opportunity is based on the LTIP Power Delivery Goals, 10% is based on the LTIP Conectiv Energy Goals and 10% is based on the LTIP Pepco Energy Services Goals (collectively referred to herein as the “LTIP Corporate Services Goals).

 

The following table sets forth the performance targets for each year in the three-year period.

 

     2009    2010    2011

LTIP Corporate Goals

        

Earnings per share

   $ 2.02    $ 2.11    $ 2.20

Cash flow from operations per share

   $ 2.28    $ 2.27    $ 2.51

LTIP Conectiv Energy Goals

        

Earnings (in millions)

   $ 126.4    $ 131.4    $ 136.7

Cash flow from operations (in millions)

   $ 145.6    $ 177.0    $ 168.3

LTIP Power Delivery Goals

        

Earnings (in millions)

   $ 260.1    $ 270.5    $ 281.3

Cash flow from operations (in millions)

   $ 330.2    $ 461.6    $ 585.2

LTIP Pepco Energy Services Goals

        

Earnings (in millions)

   $ 41.1    $ 42.7    $ 44.4

Cash flow from operations (in millions)

   $ 31.0    $ 33.0    $ 26.0

 

The earnings targets exclude extraordinary items and gains or losses relating to matters that are not reflective of the Company’s ongoing business.

 

These award opportunities are shown in the above table under the heading “Estimated Future Payouts Under Equity Incentive Plan Awards,” with the threshold number of shares for Messrs. Rigby, Kamerick, Velazquez (for the period of his service as head of the Power Delivery business unit), Emge, Barry and Torgerson representing performance at 90% of the target level, the target number of shares representing performance at the target level, and the maximum number of shares representing performance at or above 115% of the target level. For Messrs. Velazquez (for the period of his service as head of the Conectiv Energy business unit) and Huffman, the threshold number of shares represents performance at 80% of the target level, the target number of shares represents performance at the target level, and the maximum number of shares represents performance at or above 120% of the target level.

 

The award that the executive will earn at the end of the three-year performance period is equal to the average of the award percentage for each of the three years, with the award percentage for performance below the threshold target level being zero and the maximum award percentage for performance above the target being 200%. If, however, during the course of the three-year performance period, a significant event occurs, as determined in the discretion of the Compensation/Human Resources Committee, that the Committee expects to have a substantial effect on a performance objective during the period, the Committee may revise performance targets. If at the end of the three-year performance period shares are earned, the executive also will be entitled to receive additional shares of common stock equal to the number of shares that the executive would have owned at the end of the performance period had the cash dividends that would have been paid during the performance

 

43


Table of Contents

period on a number of shares equal to the number of shares earned been reinvested in additional shares of common stock.

 

Restricted Stock Program.    Under the Restricted Stock Program, each of the executive officers listed in the Summary Compensation Table, with the exception of Mr. Wraase, received a grant of shares of Restricted Stock, which accounts for one-third of the executive’s aggregate 2009 LTIP award opportunity. The entire award of shares of Restricted Stock, which are shown in the 2009 Grants of Plan-Based awards table above under the heading “All Other Stock Awards: Number of Shares of Stock or Units,” are subject to forfeiture if the employment of the executive terminates before January 22, 2012, except that, unless the Committee determines otherwise, and subject to any contrary provision in the executive officer’s employment agreement (see “Termination of Employment and Change in Control Benefits — Employment Agreements” below), in the event of death, disability or retirement of the executive or if the employment of the executive is terminated or the executive terminates his employment for “good reason” following a “change in control” (see “Termination of Employment and Change in Control Benefits — Long-Term Incentive Plan” below), the award is prorated to the date of termination. During the vesting period, the executive has all rights of ownership with respect to the shares, including the right to vote the shares and the right to receive dividends on the shares. The executive is entitled to retain the dividends paid whether or not the shares vest. For a discussion of the impact of the retirement of Mr. Torgerson on his Restricted Stock award, see below under the heading “Termination of Employment and Change in Control Benefits — Torgerson Retirement Benefits.” Mr. Barry forfeited his award upon his resignation.

 

44


Table of Contents

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2009

 

Name

  Option Awards   Stock Awards
  Number of
Securities
Underlying
Unexercised
Options
(Exercisable)
  Number of
Securities
Underlying
Unexercised
Options
(Unexercisable)
  Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
  Option
Exercise
Price
  Option
Expiration
Date
  Number
of
Shares
or Units
of Stock
That
Have
Not
Vested
(30)
  Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
(31)
  Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(32)
  Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (31)
                            ($)       ($)

Joseph M. Rigby

                 

Awarded 2-26-09

            16,518   $ 278,328   33,037   $ 556,673

Awarded 1-22-09

            12,759     214,989   25,517     429,961

Awarded 1-24-08

            6,770     114,075   13,541     228,166

Awarded 1-25-07

            6,060     102,111   12,122     204,256

Anthony J. Kamerick

                 

Awarded 6-13-09

            3,047     51,342   6,094     102,684

Awarded 2-26-09

            1,079     18,181   2,157     36,345

Awarded 1-22-09

            2,920     49,202   5,841     98,421

Awarded 1-24-08

            1,743     29,370   3,487     58,756

Awarded 1-25-07

            1,659     27,954   3,318     55,908

Awarded 1-1-01

  5,100   0   0   $ 24.59   12-31-10        

David M. Velazquez

                 

Awarded 2-26-09

            2,376     40,036   4,753     80,088

Awarded 1-22-09

            5,479     92,321   10,957     184,625

Awarded 1-24-08

            3,271     55,116   6,541     110,216

Awarded 1-25-07

            2,501     42,142   5,002     84,284

Kirk J. Emge

                 

Awarded 1-22-09

            5,623     94,748   11,247     189,512

Awarded 1-24-08

            2,370     39,935   4,739     79,852

Awarded 1-25-07

            2,572     43,338   5,145     86,693

Awarded 1-1-01

  5,100   0   0     24.59   12-31-10        

John U. Huffman

                 

Awarded 1-22-09

            5,479     92,321   10,957     184,625

Awarded 1-24-08

            3,271     55,116   6,541     110,216

Awarded 1-25-07

            2,501     42,142   5,002     84,284

Dennis R. Wraase

                 

Awarded 1-24-08

            0     0   22,934     386,438

Awarded 1-25-07

            0     0   42,143     710,110

Awarded 1-1-01

  48,000   0   0     24.59   12-31-10        

Paul H. Barry

                 

Awarded 1-22-09

            0     0   0     0

Awarded 1-24-08

            0     0   0     0

Awarded 9-5-07

            0     0   0     0

William T. Torgerson

                 

Awarded 1-22-09

            0     0   2,930     49,371

Awarded 1-24-08

            0     0   5,947     100,207

Awarded 1-25-07

            0     0   11,039     186,007

Awarded 1-1-01

  30,000   0   0     24.59   12-31-10        

 

45


Table of Contents
(30) Consists of awards made pursuant to the Restricted Stock Program under the LTIP. All awards vest on the third anniversary of the grant date, if the employee is employed by the Company on that date, subject to the acceleration of vesting under certain circumstances as described below under the heading “Termination of Employment and Change in Control Benefits.”

 

(31) Calculated by multiplying the number of shares shown in the adjacent preceding column by $16.85, the closing market price on December 31, 2009, the last trading day of the year.

 

(32) Consists of awards made pursuant to Performance Stock Program under the LTIP. For a discussion of the vesting provisions of the 2009 awards, see the description of the Performance Stock Program under the heading “Long-Term Incentive Plan Awards — Performance Stock Program” above. The awards made in 2007, 2008 and 2009 entitle the participating executive to earn shares of common stock to the extent the pre-established performance objectives are satisfied for, as indicated, (i) the three-year performance period beginning on January 1, 2007, and ending on December 31, 2009 (the “2007-2009 cycle”), (ii) the three-year performance period beginning on January 1, 2008, and ending on December 31, 2010 (the “2008-2010 cycle”) or (iii) the three-year performance period beginning on January 1, 2009 and ending on December 31, 2011 (the “2009-2011 cycle”). The performance objectives for Messrs. Rigby, Wraase, Barry and Torgerson are the LTIP Corporate Goals. The number in the table reflects the number of shares that would be earned if the target level of performance is achieved because 2009 performance was below the “target” level. The number of shares in the table do not include shares that each of Messrs. Wrasse and Torgerson forfeited the opportunity to earn as a result of his retirement on June 1, 2009.

 

For Mr. Kamerick, the performance objectives for (i) the 2007-2009 cycle are the LTIP Corporate Services Goals for two years and five-and-one-half months and the LTIP Corporate Goals for six-and-one-half months and (ii) the 2008-2010 cycle are the LTIP Corporate Services Goals for one year and five-and-one-half months and the LTIP Corporate Goals for one year and six-and-one-half months and (iii) the 2009-2011 cycle are the LTIP Corporate Services Goals for five-and-one-half months and the LTIP Corporate Goals for two years and six-and-one-half months.

 

For Mr. Velazquez, the performance objectives for (i) the 2007-2009 cycle are the LTIP Conectiv Energy Goals for two years and two months and the LTIP Power Delivery Goals for ten months, (ii) the 2008-2010 cycle are the LTIP Conectiv Energy Goals for one year and two months and the LTIP Power Delivery Goals for one year and ten months and (iii) the 2009-2011 cycle are the LTIP Conectiv Energy Goals for two months and the LTIP Power Deliver Goals for two years and ten months.

 

For Mr. Emge, the performance objectives for (i) the 2007-2009 cycle are the LTIP Corporate Services Goals for one year and two and one-half months and the LTIP Corporate Goals for one year and nine-and-one-half months, (ii) the 2008-2010 cycle are the LTIP Corporate Services Goals for two and one-half months and the LTIP Corporate Goals for two years and nine and one-half months, and (iii) the 2009-2011 cycle are the LTIP Corporate Goals.

 

For Mr. Huffman, the performance objectives for the 2007-2009 cycle, the 2008-2010 cycle and the 2009-2011 cycle are the LTIP Pepco Energy Services Goals.

 

For each of the cycles a participant is eligible to earn a number of shares of common stock ranging from 0% to 200% of the target performance award depending on the extent to which the performance objective is achieved. The performance objective was fixed at the time the awards were made; however, if during the course of the performance period, a significant event occurs, as determined in the sole discretion of the Compensation/Human Resources Committee, that the Committee expects to have a substantial effect on total shareholder return during the period, the Committee may revise the targeted performance objective. The shares of common stock earned by a participant will be fully vested on the date the performance award is earned.

 

46


Table of Contents

2009 OPTION EXERCISES AND STOCK VESTED

 

Name

   Option Awards    Stock Awards
   Number of
Shares
Acquired on
Exercise
   Value Realized
on Exercise
   Number of
Shares
Acquired on
Vesting (33)
   Value Realized
on Vesting (34)

Joseph M. Rigby

   0    0    17,677    $ 298,211

Anthony J. Kamerick

   0    0    9,670    $ 149,785

David M. Velazquez

   0    0    7,394    $ 124,749

Kirk J. Emge

   0    0    7,061    $ 119,066

John U. Huffman

   0    0    9,717    $ 164,217

Dennis R. Wraase

   0    0    90,820    $ 1,502,934

Paul H. Barry

   0    0    0    $ 0

William T. Torgerson

   0    0    20,537    $ 341,007

 

(33) Consists of shares earned for the 2007 to 2009 Performance Stock award cycle and vested under the Restricted Stock Program under the LTIP.

 

(34) Represents the aggregate market value of the vested shares (calculated by multiplying the vested number of shares by the average of the high and low market prices of the common stock on the day prior to the vesting date).

 

Under the Performance Stock Program of the LTIP, participating executives, including each of the executive officers listed in the Summary Compensation Table (except Mr. Barry who was not employed by the Company until September 5, 2007), received awards of common stock for the three-year performance cycle ending December 31, 2009. In each case the amount of the awards was based on performance relative to target.

 

   

The awards Messrs. Rigby, Wraase and Torgerson were entitled to earn each were based on the LTIP Corporate Goals, in each case relative to annual targets for these measures of performance for each year over the three-year term of the award. Each executive earned 81.7% of the target number of shares of common stock. This was based on Company earnings per share that on average were slightly above target and free cash flow per share that on average was significantly below target. The number of shares earned by Messrs. Wraase and Torgerson were prorated based on their period of service prior to their retirement.

 

   

The award Mr. Kamerick was entitled to earn was based on 81.6% of the LTIP Corporate Services Goals and 18.4% on the LTIP Corporate Goals. He earned 81.7% of the target number of shares of common stock prorated for the time he was Senior Vice President and Chief Financial Officer and 63.5% of the target number of shares of common stock prorated for the time he was Vice President and Treasurer. For the LTIP Corporate Services Goals, this was based on Conectiv Energy and Pepco Energy Services earnings goals that on average were significantly above target and Power Delivery earnings goals that were below target and free cash flow that was on average significantly below target and the LTIP Corporate Goals results described above.

 

   

The award Mr. Emge was entitled to earn was based on 40.1% of the LTIP Corporate Services Goals and 59.9% on the LTIP Corporate Goals. He earned 81.7% of the target number of shares of common stock prorated for the time he was Senior Vice President and General Counsel and 63.5% of the target number of shares of common stock prorated for the time he was Vice President, Legal Services. For the LTIP Corporate Services Goals, this was based on Conectiv Energy and Pepco Energy Services earnings goals that on average were significantly above target and Power Delivery earnings goals that were below target and free cash flow that was on average significantly below target and the LTIP Corporate Goals results described above.

 

   

The award Mr. Velazquez was entitled to earn was based on 72.1% of the LTIP Conectiv Energy Goals and 27.9% on the LTIP Power Delivery Goals. He earned 90.9% of the target number of shares of

 

47


Table of Contents
 

common stock prorated for the time he was the head of the Conectiv Energy business unit and 64% of the target number of shares of common stock prorated for the time he was head of the Power Delivery business unit. This was based on the Company earnings per share and free cash flow per share and the Conectiv Energy and Power Delivery business units earnings and free cash flow results described above.

 

   

The award Mr. Huffman was entitled to earn was based on the LTIP Pepco Energy Services Goals. He earned 123% of the target number of shares of common stock based on the Company earnings per share and free cash flow per share and the Pepco Energy Services results described above.

 

Mr. Barry forfeited his award for the three-year performance cycle ending December 31, 2009, upon his resignation.

 

PENSION BENEFITS

AT DECEMBER 31, 2009

 

Name

 

Plan Name

  

Number of Years
of Credited

Service (35)

   Present
Value of
Accumulated
Benefits (36)
   Payments
During Last
Fiscal Year

Joseph M. Rigby

  Conectiv Cash Balance Subplan    30 yrs., 11 mos.    $ 1,552,585    $ 0
  Conectiv SERP    30 yrs., 11 mos.      2,094,494      0

Anthony J. Kamerick

  Pepco General Retirement Subplan    39 yrs., 2 mos.      1,732,307      0
  Executive Retirement Plan    39 yrs., 2 mos.      1,771,825      0

David M. Velazquez

  Conectiv Cash Balance Subplan    27 yrs., 6 mos.      438,327      0
  Conectiv SERP    27 yrs., 6 mos.      122,225      0

Kirk J. Emge

  Pepco General Retirement Subplan    23 yrs., 2 mos.      742,914      0
  Executive Retirement Plan    23 yrs., 2 mos.      900,468      0

John U. Huffman

  PHI Subplan    4 yrs., 0 mos.      52,453      0
  Executive Retirement Plan    4 yrs., 0 mos.      54,845      0

Dennis R. Wraase

  Pepco General Retirement Subplan    35 yrs., 4 mos.      1,302,650      64,798
  Executive Retirement Plan    40 yrs., 0 mos.(37)      12,063,619      600,079
  Supplemental Retirement Benefit    N/A      4,485,071      170,618

Paul H. Barry

  PHI Subplan    1 yr., 8 mos.      0      0
  Executive Retirement Plan    1 yr., 8 mos.      0      0

William T. Torgerson

  Pepco General Retirement Subplan    26 yrs., 7 mos.(37)      985,334      51,016
  Executive Retirement Plan    40 yrs., 0 mos.      5,475,202      283,479

 

(35) Number of years of service credited at December 31, 2009.

 

(36) Represents for Messrs. Rigby, Kamerick, Velazquez, Emge and Huffman, the actuarial present value of the executive’s accumulated pension benefit calculated as of December 31, 2009, assuming the executive retires at the earliest time he may retire under the applicable plan without any benefit reduction due to age. Represents for each of Messrs. Wraase and Torgerson, the actuarial present value of his accumulated pension benefit calculated as of December 31, 2009, based on his retirement on June 1, 2009. The valuation method and all material assumptions applied in calculating the actuarial present value are set forth in Note 10 to the Company’s consolidated financial statements which are included in the Company’s Annual Report to Shareholders attached as Annex B to this Proxy Statement.

 

(37) The additional years of credited service results in additional benefits with a present value of $827,088 for Mr. Wraase and $1,237,064 for Mr. Torgerson.

 

48


Table of Contents

Retirement Plans

 

The Company’s retirement plans consist of a tax-qualified defined benefit pension plan and two supplemental executive retirement plans.

 

Pepco Holdings Retirement Plan

 

The Pepco Holdings Retirement Plan consists of several subplans. Each of the executives listed in the Summary Compensation Table participates in the Pepco General Retirement Subplan, the Conectiv Cash Balance Subplan or the PHI Subplan.

 

Pepco General Retirement Subplan.    All employees who were employed (i) by Pepco on August 1, 2002, the date of the merger of Pepco and Conectiv or (ii) by the Company in the Pepco service territory prior to December 31, 2004, are eligible to participate in the Pepco General Retirement Subplan. The plan provides participating employees who have at least five years of service with retirement benefits based on the participant’s average salary for the final three years of employment and the number of years of credited service under the plan at the time of retirement. Normal retirement age under the Pepco General Retirement Subplan is 65. Participants who have reached age 55 and have at least 30 years of credited service are eligible for early retirement without any reduction in benefits. Participants who have reached age 55 and who have ten years of credited service are eligible for retirement benefits prior to normal retirement age, at a benefit level that is reduced from the benefit level at normal retirement age by 2% for each year that the early retirement date precedes the normal retirement date. Plan benefits are partially offset by the Social Security benefits received by the participant. Benefits under the plan are paid in the form of a monthly annuity selected by the participant from among several available annuity options. Messrs. Kamerick, Emge, Wraase and Torgerson are participants in the Pepco General Retirement Subplan. Messrs. Wraase and Torgerson each retired on June 1, 2009 under the plan without any reduction in benefits. Mr. Kamerick is eligible for retirement under the plan without any reduction in benefits and Mr. Emge is eligible for early retirement with reduced benefits. If Mr. Emge had retired on December 31, 2009, the actuarial present value of his retirement benefit under the Pepco General Retirement Subplan as of that date would have been $972,516.

 

Conectiv Cash Balance Subplan.    Most non-unionized employees who were employed (i) by Conectiv on August 1, 2002, or (ii) by the Company in the Conectiv service territory prior to December 31, 2004, are eligible to participate in the Conectiv Cash Balance Subplan, including Messrs. Rigby and Velazquez. The Conectiv Cash Balance Subplan is a cash balance pension plan. Under the plan, a record-keeping account in a participant’s name is credited with an amount equal to a percentage, which varies depending on the participant’s age at the end of the plan year, of the participant’s total pay, consisting of base pay, overtime and bonuses. Also, participants in the Atlantic City Electric Retirement Plan, in which Mr. Rigby participated, and the Delmarva Retirement Plan, in which Mr. Velazquez participated, who had at least ten years of credited service as of December 31, 1998, the inception date of the Conectiv Cash Balance Subplan, are eligible to receive additional transition credits until the participant’s combined years of service under the prior plan and the Conectiv Cash Balance Subplan total 35.

 

Participants employed on the inception date of the Conectiv Cash Balance Subplan were credited with an initial cash balance equal to the present value of their annuity benefits as of that date earned under the Atlantic City Electric Retirement Plan or the Delmarva Retirement Plan. Each participant’s account balance is supplemented annually with interest credits equal to the prevailing 30-year U.S. Treasury bond rate. Benefits become vested after five years of service. When a participant terminates employment (regardless of age), the amount credited to his or her account, at the election of the participant, is converted into one of several actuarially equivalent annuities selected by the participant or is paid to the participant in a lump sum (which cannot exceed 6.5 times the participant’s final average compensation). For 2009, Mr. Rigby had a Company credit percentage of 10%, and until December 31, 2013, receives an annual transition credit of 4%, of total pay. For 2009, Mr. Velazquez had a Company credit percentage of 10%, and until December 31, 2016, receives an annual transition credit of 3% of total pay. At December 31, 2009, the present value of Mr. Velazquez’s

 

49


Table of Contents

accumulated benefits under the Conectiv Cash Balance Subplan was $438,327. Had Mr. Velazquez retired on that date, that balance, at his election, would have been converted into one of several actuarially equivalent annuities or would have been paid to him in a lump sum.

 

The Conectiv Cash Balance Subplan also provides for certain “grandfathered” rights that existed under the Delmarva Retirement Plan and under the Atlantic City Electric Retirement Plan, which apply to employees who had either 20 years of credited service or had attained age 50 on or before January 1, 1999. Under these grandfathering provisions, employees who participated in the Delmarva Retirement Plan or the Atlantic City Electric Retirement Plan are assured a minimum retirement benefit calculated for all years of service up to the earlier of December 31, 2008, or retirement, according to their original benefit formula under the applicable plan. There is no Social Security offset under either the Delmarva Retirement Plan or the Atlantic City Electric Retirement Plan. Normal retirement age under both the Delmarva Retirement Plan and the Atlantic City Electric Retirement Plan is 65. Under the Delmarva Retirement Plan, participants who have reached age 55 and have at least 15 years of continuous service are eligible for retirement benefits prior to normal retirement age, at a reduced level of benefit that is a function of retirement age and years of service. Under the Atlantic City Electric Retirement Plan, participants who have reached age 55 and have at least five years of credited service are eligible for retirement without any reduction in the benefits they would be entitled to receive at normal retirement age.

 

Benefits under the Atlantic City Electric Retirement Plan are paid either in the form of a monthly annuity selected by the participant from among several available annuity options or in a lump sum of an actuarial equivalent amount. Benefits under the Delmarva Retirement Plan are payable only in the form of a monthly annuity selected by the participant from several actuarially equivalent annuity options. At the time of an employee’s retirement, the benefit under the Delmarva Retirement Plan or the Atlantic City Electric Retirement Plan is compared to the employee’s cash balance account under the Conectiv Cash Balance Subplan and the employee will receive whichever is greater. On December 31, 2008, the participants’ grandfathered benefits under the Delmarva Retirement Plan or Atlantic City Electric Retirement Plan were frozen, and all future benefit accruals will be exclusively under the cash balance formula of the Conectiv Cash Balance Subplan.

 

In the case of Mr. Rigby, the present value of accumulated benefits under the Conectiv Cash Balance Subplan at December 31, 2009, as shown in the Pension Benefits table above, reflects the value of his grandfathered benefits under the Atlantic City Electric Retirement Plan, which exceeds the value of his accumulated benefits as otherwise calculated under the Conectiv Cash Balance Subplan. Mr. Rigby is not eligible for early retirement under the Atlantic City Electric Retirement Plan formula of the Conectiv Cash Balance Subplan. At December 31, 2009, the amount credited to his account under the Conectiv Cash Balance Subplan was $936,078. Had Mr. Rigby retired on that date, that balance, at his election, would have been converted into one of several actuarially equivalent annuities or would have been paid to him in a lump sum. None of the other NEOs is entitled to grandfathered benefits under either the Delmarva Retirement Plan or the Atlantic City Electric Retirement Plan.

 

PHI Subplan.    Persons who become employees of the Company on or after January 1, 2005 are eligible to qualify to participate in the PHI Subplan. The plan provides participating employees who are 21 years or older and have at least five years of service with retirement benefits based on the participant’s average salary for the final five years of employment and the number of years of credited service under the plan at the time of retirement. Normal retirement age is 65. Participants who have reached age 55 and who have ten years of credited service are eligible for retirement benefits prior to normal retirement age, at a benefit level that is reduced from the benefit level at normal retirement age by 3% for each year that the early retirement date precedes the normal retirement date. A participant may retire with full benefits at age 62 and with 20 years of service. Benefits under the plan are paid in the form of a monthly annuity selected by the participant from among several available annuity options. Mr. Huffman is a participant in the PHI Subplan, but is not currently vested because he has less than five years of service. Mr. Barry was a participant in the PHI Subplan, but was not vested because he had less than five years of service at the date of his resignation.

 

50


Table of Contents

Executive Retirement Plan

 

The Executive Retirement Plan is a non-tax-qualified supplemental retirement plan. Eligibility to participate in the Executive Retirement Plan is determined by the Company’s Chief Executive Officer (and, in the case of the Chief Executive Officer, by the Board of Directors). The following benefit structures make up the Executive Retirement Plan:

 

Supplemental Benefit Structure.    Under provisions of the Internal Revenue Code, the level of a participant’s pension benefit under a tax-qualified pension plan and the amount of compensation that may be taken into account in calculating that benefit are limited (the “Qualified Plan Limitations”). In addition, under the terms of the Pepco Holdings Retirement Plan, salary deferrals elected by the participant under the Company’s deferred compensation plans (other than the participant’s pre-tax contributions made under the Retirement Savings Plan) are not taken into account as compensation for purposes of calculating a participant’s retirement benefit. If applicable, these provisions have the effect of reducing the participant’s retirement benefit under the Pepco Holdings Retirement Plan relative to what the participant otherwise would be entitled to receive under the plan’s benefit formula. If a participant’s retirement benefits under the Pepco Holdings Retirement Plan are reduced by either or both of these limitations, the Company, under the Supplemental Benefit Structure, will pay a supplemental retirement benefit to the participant equal to the difference between (i) the participant’s actual benefit under the Pepco Holdings Retirement Plan and (ii) what the participant would have received under the Pepco Holdings Retirement Plan (A) were the Qualified Plan Limitations not applicable and (B) had the deferred compensation earned by the executive that was excluded from the executive’s compensation base used in determining retirement benefits under the Pepco Holdings Retirement Plan been included in the compensation base. The benefit under the Supplemental Benefit Structure vests under the same terms and conditions as the participant’s retirement benefits under the Pepco Holdings Retirement Plan. Messrs. Kamerick and Emge are participants, and Messrs. Wraase and Torgerson were participants, in the Supplemental Benefit Structure. The purpose of the Supplemental Benefit Structure is to enable participants to receive the full retirement benefits they would be entitled to receive under the Pepco Holdings Retirement Plan were it not for the Qualified Plan Limitations and had the participant not elected to defer the receipt of a portion of the participant’s compensation.

 

Supplemental Executive Retirement Benefit Structure.    Under the Supplemental Executive Retirement Benefit Structure, a participating executive whose employment by the Company terminates on or after age 59 for any reason other than death (or prior to age 59, if such termination follows a change in control of the Company) is entitled to a supplemental retirement benefit equal to the difference between (i) the executive’s actual benefit under the Pepco Holdings Retirement Plan and his supplemental benefits under the Supplemental Benefit Structure and the Executive Performance Supplemental Retirement Benefit Structure (as described below) and (ii) what the executive would have received had the executive been credited with the additional years of service provided for under the Supplemental Executive Retirement Benefit Structure. As of December 31, 2009, the additional years of service credited under the Supplemental Executive Retirement Benefit Structure to the executive officers listed in the Summary Compensation Table were: Mr. Wraase — 4 years, 8 months and Mr. Torgerson — 13 years, 5 months. No years of service credits have been made under the Supplemental Executive Retirement Benefit Structure since 1998. The Company has retained the plan primarily to preserve a mechanism that can be used by the Company, when hiring a new executive, to equate the Company’s pension benefits with those of the executive’s former employer and, if credits are made, to operate as a retention incentive because the benefits under the plan do not vest until age 59.

 

Executive Performance Supplemental Retirement Benefit Structure.    Under the Executive Performance Supplemental Retirement Benefit Structure, a participating executive whose employment by the Company terminates on or after age 59 for any reason other than death (or prior to age 59, if either (i) the executive had been designated as a recipient of this benefit prior to August 1, 2002, or (ii) such termination follows a change in control of the Company) is entitled to a supplemental retirement benefit equal to the difference between (i) the executive’s actual benefit under the Pepco Holdings Retirement Plan and his supplemental retirement benefits under the Supplemental Benefit Structure and the Supplemental Executive Retirement Benefit Structure and (ii) what the executive would have received (A) had the average of the highest three annual incentive awards in

 

51


Table of Contents

the last five consecutive years been added to the executive’s average salary over the final three years of his employment (without regard to any deferral of the receipt of the award by the executive) in calculating the executive’s retirement benefit under the Pepco Holdings Retirement Plan and under the Supplemental Benefit Structure and the Supplemental Executive Retirement Benefit Structure, (B) had the benefits of the executive under the Pepco Holdings Retirement Plan and under the Supplemental Benefit Structure and the Supplemental Executive Retirement Benefit Structure not been reduced by the Qualified Plan Limitations and (C) had the deferred compensation earned by the executive that was excluded from the executive’s compensation base used in determining retirement benefits under the Pepco Holdings Retirement Plan and under the Supplemental Benefit Structure and the Supplemental Executive Retirement Benefit Structure been included in the compensation base. The supplemental benefits provided by the Executive Performance Supplemental Retirement Benefit Structure allow a greater percentage of a participant’s total compensation to be used in the calculation of the executive’s pension benefit, which is advantageous to senior executives who typically receive a larger percentage of their total compensation in the form of incentive compensation. The Executive Performance Supplemental Retirement Benefit Structure also has had the effect of making the retirement benefits for participants in the Pepco General Retirement Subplan more comparable to the retirement benefits received by participants in the Conectiv Cash Balance Subplan, which takes into account bonuses in calculating retirement benefits. Of the executive officers listed in the Summary Compensation Table, only Messrs. Kamerick, Emge, Wraase and Torgerson have been designated as participants in the Executive Performance Supplemental Retirement Benefit Structure.

 

The benefits under the Executive Retirement Plan are payable in the form of a monthly annuity, except that if the employment of a participant terminates before age 59 following a change in control of the Company, the payments due under the Supplemental Executive Retirement Benefit Structure and Executive Performance Supplemental Retirement Benefit Structure will be paid in a lump sum amount equal to the present value of the annuity payments to which the participant otherwise would be entitled. If a participant in the Executive Retirement Plan is discharged by the Company because of misfeasance, malfeasance, dishonestly, fraud, misappropriation of funds, or commission of a felony, the participant’s benefits under the plan will be forfeited.

 

Conectiv Supplemental Executive Retirement Plan

 

Under the Conectiv SERP, a participating executive’s retirement benefit is calculated as it would be under the Conectiv Cash Balance Subplan (i) without giving effect to the Qualified Plan Limitations, (ii) if salary deferrals elected by the participant under the Company’s deferred compensation plans (other than the participant’s pre-tax contributions made under the Retirement Savings Plan) were taken into account as compensation for purposes of calculating a participant’s retirement benefit in the year earned, rather than the year actually paid, and (iii) giving effect to any additional years of service credited to the executive in excess of the executive’s actual years of service. The executive’s benefit under the Conectiv SERP is the amount by which the Conectiv SERP benefit exceeds the executive’s benefit under the Conectiv Cash Balance Subplan, calculated under the cash balance component or based on the executive’s “grandfathered” benefit under the Atlantic City Electric Retirement Plan or the Delmarva Retirement Plan, as applicable. The benefit under the Conectiv SERP is payable at or beginning at the same time as, and in the same manner as, the benefits payable to the participant under the Conectiv Cash Balance Subplan. Only employees who were employed by Conectiv on August 1, 2002, are eligible to participate in the Conectiv SERP. Messrs. Rigby and Velazquez are participants in the Conectiv SERP. The primary purpose of the Conectiv SERP is to enable participating executives to receive the full retirement benefits they are entitled to receive under the Conectiv Cash Balance Plan without reduction due to Internal Revenue Code limits. If Messrs. Rigby and Velazquez had retired on December 31, 2009, the net present value of their retirement benefits as of that date under the Conectiv SERP would have been $1,234,191 and $122,225, respectively.

 

Wraase Supplemental Retirement Benefit

 

In an employment agreement entered into in July 2007, the Company, in consideration for the relinquishment by Mr. Wraase of certain other benefits, agreed to provide Mr. Wraase with a supplemental

 

52


Table of Contents

retirement benefit. Under this arrangement, Mr. Wraase, commencing upon his retirement on June 1, 2009, began to receive a lifetime monthly supplemental retirement benefit, payable in cash, in the amount of $24,374, which is equal to (i) 1/12 of 65% of the sum of (A) his annual base salary rate that was in effect at the time of the termination of his employment and (B) the highest annual bonus received during the four calendar years ended December 31, 2008 (the “Calculation Amount”), less the monthly retirement benefit he receives for that month under the Pepco Holdings Retirement Plan and the Executive Retirement Plan. If Mr. Wraase is survived by his spouse, his spouse is entitled to receive a lifetime monthly supplemental retirement benefit, payable in cash, equal to 75% of the Calculation Amount, less the monthly retirement benefit, if any, payable to her under the Pepco Holdings Retirement Plan and the Executive Retirement Plan.

 

NONQUALIFIED DEFERRED COMPENSATION

AT DECEMBER 31, 2009

 

Name

  Executive
Contributions
in Last Fiscal
Year (38)
  Registrant
Contributions
in Last Fiscal
Year (39)
  Aggregate
Earnings
in Last
Fiscal
Year (40)
  Aggregate
Withdrawals/
Distributions
  Aggregate
Balance at
Last Fiscal
Year
End (41)

Joseph M. Rigby

         

Conectiv Deferred Compensation Plan

  $ 0   $ 0   $ 57,324   $ 0   $ 1,711,936

PHI Executive and Director Deferred Compensation Plan

    140,389     15,936     8,716     0     357,531

Anthony J. Kamerick

         

PHI Executive and Director Deferred Compensation Plan

    39,797     1,187     14,546     0     479,733

David M. Velazquez

         

PHI Executive and Director Deferred Compensation Plan

    0     0     380     0     11,909

Kirk J. Emge

         

PHI Executive and Director Deferred Compensation Plan

    36,050     6,038     53,381     0     236,997

John U. Huffman

         

PHI Executive and Director Deferred Compensation Plan

    936     681     380     0     13,526

Dennis R. Wraase

         

Pepco Director and Executive Deferred Compensation Plan

    0     0     157,676     129,829     1,230,091

PHI Executive and Director Deferred Compensation Plan

    7,923     5,612     22,888     1,367,186     0

Paul H. Barry

         

PHI Executive and Director Deferred Compensation Plan

    65,755     0     40,051     0     142,804

William T. Torgerson

         

Pepco Director and Executive Deferred Compensation Plan

    0     0     123,286     86,925     932,899

PHI Executive and Director Deferred Compensation Plan

    0     0     31,079     47,099     225,634

 

(38) All amounts shown are included in the “Salary” column of the Summary Compensation Table for the year 2009.

 

(39) All amounts shown are included in the “All Other Compensation” column of the Summary Compensation Table for the year 2009.

 

(40) Includes the following amounts previously reported in the Company’s Summary Compensation Table in years prior to 2009 as “above-market” earnings (as defined by Securities and Exchange Commission regulations) on deferred compensation: Mr. Wraase — $119,159 and Mr. Torgerson — $95,372.

 

53


Table of Contents
(41) Includes the following amounts reported as compensation in the Company’s Summary Compensation Table in years prior to 2009:

 

PHI Executive and Director Deferred Compensation Plan: Mr. Rigby — $156,402; Mr. Kamerick — $27,182; Mr. Wraase — $757,595; Mr. Barry — $36,720 and Mr. Torgerson — $157,304.

 

Conectiv Deferred Compensation Plan: Mr. Rigby — $21,468.

 

Deferred Compensation Plans

 

The Company maintains the following deferred compensation plans in which one or more of the executive officers listed in the Summary Compensation Table participate.

 

PHI Executive and Director Deferred Compensation Plan

 

Under the PHI Executive and Director Deferred Compensation Plan participating executives and directors are permitted to defer the receipt of all or any portion of the compensation to which they are entitled for services performed, including, in the case of executives, incentive compensation. In addition, to the extent an executive is precluded from making contributions to the Retirement Savings Plan, a tax-qualified 401(k) plan, due to limitations imposed by the Internal Revenue Code, the executive is entitled to defer under the plan an amount equal to the contribution the executive is prevented from contributing to the Retirement Savings Plan and receive an additional credit under the plan equal to the matching contribution, if any, that the Company would have made to the executive’s account under the Retirement Savings Plan. Under the terms of the Retirement Savings Plan, employees can contribute to the Retirement Savings Plan up to 6% of their annual salary, with the Company matching 100% of the employee’s contribution up to 3% of salary and 50% of any contributions in excess of 3% of salary up to 6% of salary.

 

Under the plan, the Company credits to each participant’s account on a monthly basis an amount corresponding to, as elected by the participant, any or a combination of: (i) the interest at the prime rate that would have been paid on an amount equal to the participant’s account balance, or (ii) an amount equal to the return that the participant would have earned had his or her account balance been invested in any one or a combination of the investment funds selected by the Compensation/Human Resources Committee or, in the case of directors only, had the account balance been deemed invested in the common stock. A participant may reallocate his account balance among these investment choices at any time.

 

The distribution to a participant of accrued balances under the plan commences, at the election of the participant, (i) if an executive, on the date of the commencement of payments under the tax-qualified defined benefit plan in which the executive is a participant, (ii) the calendar year following the year in which the participant reaches retirement age, (iii) when the participant’s employment by the Company or service as a director ceases, (iv) when the participant’s employment by the Company or service as a director ceases and the participant attains an age specified by the participant or (v) the date specified by the participant, which may not be earlier than the second calendar year following the year in which the deferrals occurred to which the distribution relates. Distributions may be made, at the election of the participant, either in a lump sum or in monthly or annual installments over a period of between two and fifteen years.

 

Eligibility of executives to participate in the plan is determined by the Company’s Chief Executive Officer (and, in the case of the Chief Executive Officer, by the Board of Directors). Each of the executive officers listed in the Summary Compensation Table is eligible to participate in the plan. Each of the Company’s non-employee directors also is eligible to participate in the plan.

 

54


Table of Contents

Conectiv Deferred Compensation Plan

 

Prior to the merger of Pepco and Conectiv, Conectiv maintained the Conectiv Deferred Compensation Plan under which a participating executive was permitted to defer the receipt of all or any portion of the compensation to which the executive was entitled for services performed, including incentive compensation, and to receive employer matching credits on deferrals corresponding to contributions the executive was precluded from making to the Conectiv tax-qualified 401(k) plan due to limitations imposed by the Internal Revenue Code. On August 1, 2002, employee deferrals and matching employer credits under the plan were discontinued.

 

Pre-August 1, 2002, participant deferrals and employer matching contributions are credited to a deferred compensation account and are deemed invested, as elected by the executive, in any of the investment options available to participants under the Conectiv tax-qualified 401(k) plan as of August 1, 2002. A participant may reallocate his account balance among these investment choices at any time. Prior to August 1, 2002, employer matching contributions were credited to an employer matching account in the form of Conectiv common stock equivalents, which at the time of the merger were converted into common stock equivalents on which additional credits are made when cash dividends are paid on the common stock based on the number of shares that could be purchased with the cash dividend. Of the executive officers listed in the Summary Compensation Table, only Mr. Rigby maintains an account balance under the plan.

 

Distributions under the plan commence at a time selected by the executive at the time of deferral, provided the date specified by the executive may not be earlier than two years after the year in which a deferral occurs or later than the year in which the executive reaches age 70, and may be made in a lump sum or in equal installments over periods of five, ten or fifteen years, as selected by the executive. In the event of the termination of the executive’s employment following a change in control, the committee responsible for the administration of the plan may in its discretion, after consultation with the executive, elect to distribute the executive’s account balances in a lump sum, rather than in accordance with the distribution elections originally selected by the executive.

 

Pepco Director and Executive Deferred Compensation Plan

 

Of the executive officers listed in the Summary Compensation Table, only Messrs. Wraase and Torgerson are participants in the Pepco Director and Executive Deferred Compensation Plan. None of the Company’s non-employee directors in 2009 are participants in the plan. Under the plan, participating executives were permitted to defer up to 15% of their salary earned between September 1, 1985 and August 31, 1989. In addition, the Board of Directors authorized the deferral by Mr. Wraase, in accordance with the terms of the plan, of his 1985 annual incentive award and his target 1986 annual incentive award. Under the plan, participant account balances attributed to salary are credited annually with an amount corresponding to a fixed interest rate of 15%, and Mr. Wraase’s incentive deferrals are credited annually with an amount corresponding to a fixed interest rate of 12%, which in each case was fixed at the time of deferral. The distribution of the plan balances accumulated by Mr. Wraase and Mr. Torgerson commenced at age 65 and will be paid out over a 15-year period in substantially equal monthly installments.

 

Termination of Employment and Change in Control Benefits

 

The following is a description of the Company’s plans and arrangements that provide for payments to the executive officers listed in the Summary Compensation Table, following or in connection with the termination of the executive’s employment, a change in control of the Company, or a change in the executive’s responsibilities.

 

55


Table of Contents

Employment Agreements

 

Mr. Rigby’s employment agreement provides him with specified benefits if his employment is terminated under various circumstances, as described below:

 

Termination by the Company Other Than for Cause.    If at any time during the term of Mr. Rigby’s employment the Company terminates his employment other than for cause (“cause” is defined as (i) intentional fraud or material misappropriation with respect to the business or assets of the Company, (ii) the persistent refusal or willful failure of Mr. Rigby to perform substantially his duties and responsibilities to the Company after he receives notice of such failure, (iii) conduct that constitutes disloyalty to the Company and that materially damages the property, business or reputation of the Company, or (iv) the conviction of a felony involving moral turpitude), Mr. Rigby will be entitled to:

 

   

A lump sum severance payment equal to three times the sum of (i) his highest annual base salary in effect at any time during the three-year period preceding the termination of employment and (ii) the higher of (A) his annual bonus for the year in which the termination of employment occurs or (B) the highest annual bonus received during the three calendar years preceding the calendar year in which the termination of employment occurs.

 

   

His annual bonus for the year in which the termination occurs, if the Board of Directors, before the termination date, has made a good faith determination of his bonus for the year, and otherwise a prorated portion (based on the number of days the executive was employed during the year) of his target annual bonus for the year.

 

   

Any shares under the Restricted Stock Program the vesting of which is contingent solely on continued employment and that would have become vested had he remained employed for the remainder of the term of the employment agreement will become vested and non-forfeitable on the date his employment terminates.

 

   

Any shares under the Performance Stock Program that are the subject of an award the vesting of which is contingent on the achievement of specified performance goals during a performance period that ends within the term of Mr. Rigby’s employment agreement will become vested at the end of the performance period if and to the extent the performance goals are achieved.

 

In addition to the retirement benefits to which Mr. Rigby is entitled under the Pepco Holdings Retirement Plan and the Company’s supplemental retirement plans in which he participates, as more fully described under the heading “Retirement Plans” above, Mr. Rigby is entitled to receive a lump sum supplemental retirement benefit paid in cash equal to the difference between (i) the present value of his vested retirement benefit accrued at the time of termination under the Pepco Holdings Retirement Plan and any excess or supplemental retirement plan in which he is a participant and (ii) the benefit he would be entitled to receive under the Pepco Holdings Retirement Plan and such excess and supplemental retirement plans assuming that he is three years older than his actual age and is credited with three additional years of service.

 

Voluntary Resignation under Specified Circumstances.    If, at any time during the term of Mr. Rigby’s employment agreement, he terminates his employment under any of the following circumstances, he will receive under his employment agreement the same benefits that he would have received had the Company terminated his employment without cause as described above: (i) his base salary is reduced (other than a reduction consistent and proportional with the overall reduction, due to extraordinary business conditions, in the compensation of all other senior executives of the Company), (ii) he is not in good faith considered for incentive awards under the Company’s plans in which senior executives are eligible to participate, (iii) the Company fails to provide him with retirement, fringe and supplemental benefits in a manner similar to other senior executives, (iv) the Company relocates Mr. Rigby’s place of employment to a location further than 50 miles from Wilmington, Delaware (other than the Washington, D.C. metropolitan area), or (v) he is demoted to a position that is not a senior management position (other than due to his disability).

 

56


Table of Contents

Resignation or Termination Due to Disability or Death.    Upon his resignation (other than under the specified circumstances discussed above) or upon his death or disability (which shall be deemed to have occurred if he becomes entitled to long-term disability benefits under the Company’s disability plan or policy), Mr. Rigby’s employment agreement provides that he will not be entitled to any benefits beyond those provided for under the terms of the Company benefit plans in which he participates.

 

Gross-up Payments.    Mr. Rigby’s employment agreement also provides that, if any payments or benefits provided to him under his employment agreement, or under any other plan, program, agreement or arrangement of the Company, are determined to be payments related to a change in control within the meaning of Section 280G of the Internal Revenue Code, and as a result he incurs an excise tax under Section 4999 of the Internal Revenue Code, he will be entitled to receive a gross-up payment in an amount equal to the amount of all excise taxes imposed on compensation payable upon termination of employment and the additional taxes that result from such payment, such that the aggregate net payments received by him will be the same as they would have been had such excise tax not been imposed.

 

Mr. Huffman’s employment agreement provides that, if at any time prior to December 31, 2010, Mr. Huffman’s employment is terminated by the Company other than for cause (defined the same as under Mr. Rigby’s employment agreement), by Mr. Huffman under specified circumstances that constitute “good reason,” or due to Mr. Huffman’s death or disability, the Company is obligated to pay him a pro-rata portion of the $100,000 payment that is due him if he remains employed through December 31, 2010. If his employment is terminated for cause, no payment is due him under his employment agreement.

 

Change-in-Control Severance Plan

 

Under the Change-in-Control Severance Plan, if, within one year following a change in control, a participating executive’s employment is terminated by the Company without “cause” or the executive terminates his or her employment for “good reason,” the executive will be entitled to the following termination benefits:

 

   

A severance payment equal to the sum of executive’s salary and target annual bonus for the year in which the termination occurs, multiplied by a factor of 1.5, 2 or 3, depending upon the executive’s position (a “Benefit Factor”).

 

   

A prorated portion (based on the number of days the executive was employed during the year) of the executive’s target annual bonus for the year.

 

   

A lump sum supplemental retirement benefit paid in cash equal to the difference between (i) the present value of the executive’s vested retirement benefit accrued at the time of termination under the Pepco Holdings Retirement Plan and any excess or supplemental retirement plan in which the executive is a participant and (ii) the benefit the executive would be entitled to receive under such plans assuming that the executive was the number of years older and had been credited with the number of years of service equal to the executive’s Benefit Factor.

 

   

For a period of time equal to the executive’s Benefit Factor, medical, dental, group life and disability benefits that generally are at least at a level substantially similar to the level in effect prior to the change in control.

 

   

A gross-up payment in an amount equal to the amount of all excise taxes imposed upon compensation payable upon termination of employment and the additional taxes that result from such payment, such that the aggregate net payments received by the executive will be the same as they would have been had such excise tax not been imposed.

 

The receipt of the benefits under the Change-in-Control Severance Plan is contingent upon the execution by the employee of (i) a general release and a non-disparagement agreement and (ii) a covenant agreeing not to compete against the Company or solicit its employees, each in form and substance satisfactory to the Company.

 

57


Table of Contents

Of the executive officers named in the Summary Compensation Table, Messrs. Kamerick and Velazquez (each with a Benefit Factor of 3) and Emge and Huffman (each with a Benefit Factor of 2) are participants in the Change-in-Control Severance Plan.

 

Long-Term Incentive Plan

 

Under the LTIP, if the employment of a recipient of an award is terminated by the Company or the recipient terminates his or her employment for “good reason” within 12 months following a “change in control,” the recipient’s outstanding awards under the LTIP will be affected as follows:

 

   

A pro-rata portion of any Restricted Stock Program or restricted stock unit award that is subject to vesting contingent on the continued employment of the recipient (“service-based vesting”) will become immediately vested based on the number of months of the restricted period that have elapsed as of the termination date.

 

   

A pro-rata portion of any Performance Stock Program or restricted stock unit award that is subject to vesting contingent on the satisfaction of established performance criteria (“performance-based vesting”) will become immediately vested based on the number of months of the restricted period that have elapsed as of the termination date and on the assumption that the target level of performance has been achieved.

 

   

Any stock option or stock appreciation right not then exercisable will become immediately exercisable.

 

A “change in control” will occur under the terms of the LTIP if generally: (i) any person is or becomes the “beneficial owner” (as defined under SEC rules), directly or indirectly, of securities of the Company (excluding any securities acquired directly from the Company) representing 35% or more of the combined voting power of the Company’s then outstanding securities, (ii) during any period of 12 consecutive months, the individuals who, at the beginning of such period, constitute the Company’s Board of Directors cease for any reason other than death to constitute at least a majority of the Board of Directors, (iii) the consummation of a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to the merger or consolidation continuing to represent at least 50% of the combined voting power of the voting securities of the Company or the surviving company, or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets.

 

Under the LTIP, a recipient of an award will have “good reason” to terminate his or her employment if, without the written consent of the recipient, any of the following events occurs following a “change in control”: (i) the assignment to the recipient of any duties inconsistent in any materially adverse respect with his or her position, authority, duties or responsibilities in effect immediately prior to the change in control, (ii) there is a reduction in the recipient’s base salary from that in effect immediately before the change in control, (iii) there is a material reduction in the recipient’s aggregate compensation opportunity, consisting of base salary, bonus opportunity, and long-term or other incentive compensation opportunity, (iv) the Company requires the recipient to be based at any office or location more than 50 miles from that location at which he or she performed his or her services immediately prior to the occurrence of the change in control, or (v) any successor company fails to agree to assume the Company’s obligations to the recipient under the LTIP.

 

If the employment of a recipient of a Restricted Stock Program or Performance Stock Program award terminates because of retirement, early retirement at the Company’s request, death or disability prior to vesting, the payout of the award will be prorated, in the case of an award subject to service-based vesting, for service during the performance period and, in the case of an award subject to performance-based vesting, taking into account factors including, but not limited to, service and the performance of the participant before employment ceases, unless the Compensation/Human Resources Committee determines in either case that special

 

58


Table of Contents

circumstances warrant modification of the payment to which the participant is entitled. If the employment of a recipient of a Restricted Stock Program or Performance Stock Program award terminates for any other reason, the award is forfeited, except in the case of early retirement at the request of the participant, in which case the payout or forfeiture is at the discretion of the Compensation/Human Resources Committee.

 

If employment of the holder of a stock option terminates because of retirement, early retirement, death or disability, the option will remain exercisable for the remainder of its term, unless the Compensation/Human Resources Committee determines that special circumstances warrant modification of this result. Otherwise, the option will lapse on the effective date of the holder’s termination of employment.

 

In the case of Mr. Rigby, the application of the provisions of the LTIP governing the disposition of awards in connection with a termination of employment is superseded by the provisions of the executive’s employment agreement, which are more fully described above under the heading “Termination of Employment and Change in Control Benefits — Employment Agreements.”

 

Executive Incentive Compensation Plan

 

Under the EICP, if a participant retires, dies or becomes disabled prior to the end of a plan year, the participant is entitled to a pro rated portion of the award to which the participant otherwise would be entitled based on the portion of the year that the participant was employed. If the employment of the participant terminates for any other reason during the plan year, the participant will be entitled to an award only to the extent provided for in his employment agreement or under the Change-in-Control Severance Plan. See “Termination of Employment and Change in Control Benefits — Employment Agreements and — Change-in-Control Severance Plan.”

 

Retirement Plan Benefits

 

Messrs. Kamerick and Emge are participants in the Pepco General Retirement Subplan of the Pepco Holdings Retirement Plan and Messrs. Rigby and Velazquez are participants in the Conectiv Cash Balance Subplan of the Pepco Holdings Retirement Plan. Mr. Huffman is a participant in the PHI Subplan of the Pepco Holdings Retirement Plan. For a description of the benefits provided under these defined benefit retirement plans and under the corresponding supplemental retirement plans following termination of employment, see the discussion under the heading “Retirement Plans” above.

 

Deferred Compensation Plans

 

Messrs. Rigby, Kamerick, Velazquez and Emge each is a participant in one or more Company deferred compensation plans. For a discussion of the payments to which they are entitled to under these plans following a termination of employment, see the discussion under the heading, “Deferred Compensation Plans” above.

 

Quantification of Termination of Employment Benefits

 

The following discussion quantifies the benefits that each of Messrs. Rigby, Kamerick, Velazquez, Emge and Huffman would have been entitled to receive under his employment agreement and the Company’s compensation plans and, in the cases of Messrs. Rigby and Huffman, under the terms of their respective employment agreements (other than under the Company’s defined benefit retirement plans and corresponding supplemental retirement plans and arrangements and under the Company’s deferred compensation plans, the benefits under which are described above under the headings “Retirement Plans” and “Deferred Compensation Plans”) if his employment had terminated on December 31, 2009, under specified circumstances:

 

Termination of the Executive’s Employment by the Company Other Than for Cause or Voluntary Resignation by the Executive under Specified Circumstances Following a Change in Control.    If, as of

 

59


Table of Contents

December 31, 2009, the employment of the executive following a change in control had been terminated by the Company other than for cause, or (i) in the case of Mr. Rigby, he had voluntarily terminated his employment under any of the circumstances specified in his employment agreement, and (ii) in the cases of Messrs. Kamerick, Velazquez, Emge and Huffman, he had voluntarily terminated his employment for “good reason” within one year following the change in control in accordance with the terms of the Change-in-Control Severance Plan and the LTIP, the executive would have received the following benefits. The benefit in the column headed “Section 280G Gross-up Payment” is the payment the executive would have received had the executive incurred an excise tax under Section 4999 of the Internal Revenue Code.

 

    Severance
Payment
    EICP Payment
(42)
  Lump Sum
Supplemental
Retirement
Benefit
Payment
  Accelerated
Vesting of
Service-
based
Restricted
Stock (43)
  Target
Performance-
Based
Restricted
Stock (44)
  Welfare
Plan
Benefit
Payment
  Section
280G Gross-
Up Payment
  Total

Joseph M. Rigby

  $ 3,528,189      $ 750,833   $ 5,892,682   $ 114,075   $ 259,220   $ 0   $ 3,528,189   $ 14,073,188

Anthony J. Kamerick

    2,112,000        213,813     1,237,326     59,160     143,832     47,304     1,516,719     5,330,154

David M. Velazquez

    2,112,000        254,100     363,269     80,863     196,185     39,630     1,125,332     4,171,379

Kirk J. Emge

    1,120,000        210,000     577,285     58,200     141,254     22,022     704,115     2,832,876

John U. Huffman

    1,100,853  (45)      204,600     58,095     67,518     163,597     31,050     519,820     2,145,533

 

(42) Represents the target bonus under the EICP for 2009.

 

(43) Represents the market value on December 31, 2009 of unvested shares of common stock issuable pursuant to the Performance Stock Program that would vest and become non-forfeitable (i) in the case of Mr. Rigby, prior to August 1, 2011 (the expiration date of his employment agreement) or (ii) in the case of each other executive, if the termination of the executive’s employment occurred within one year following the change in control (calculated by multiplying the number of shares by $16.85, the closing market price on that day).

 

(44) Represents the market value on December 31, 2009 of shares of common stock issuable pursuant to the Performance Stock Program to which (i) Mr. Rigby would be entitled at the end of the 2007-2009 and 2008-2010 performance cycles in accordance with the terms of his employment agreement and (ii) each of the other executives would be entitled under the terms of the LTIP at the end of the performance cycle periods in which he participates, in each case assuming that the target level of performance is achieved. Includes the following number of additional shares that the executive is entitled under the terms of his award to receive, equal in number to the shares that the executive would have acquired had the cash dividends paid during the performance period on the number of shares of common stock equal to the number of shares of Performance Stock earned been reinvested in shares of common stock: Mr. Kamerick — 1,514 shares; Mr. Velazquez — 2,046 shares; Mr. Emge — 1,475 shares; and Mr. Huffman — 1,696 shares.

 

(45) Includes $9,653, which is a pro rata portion of the $100,000 payment that is due Mr. Huffman if he remains employed through December 31, 2010.

 

Termination of the Executive’s Employment by the Company Other Than For Cause Not Following a Change in Control. If, as of December 31, 2009, the employment of the executive had been terminated by the Company other than for cause and other than following a change in control, other than Messrs. Rigby and Huffman, he would not have been entitled to any benefits other than his retirement benefits and the payment of his deferred compensation and all unvested awards under the Performance Stock Program and Restricted Stock Program of the LTIP and under the EICP would have been forfeited. Mr. Rigby, under the terms of his employment agreement, would have been entitled to receive, in addition to his retirement benefits and the payment of his deferred compensation, each of the benefits shown in the table above, with the exception of the 280G Gross Up Payment. Mr. Huffman, under the terms of his employment agreement, would have been entitled to receive, in addition to his retirement benefits and the payment of his deferred compensation, $9,653, which is a pro rata portion of the $100,000 payment that is due him if he remains employed through December 31, 2010. All of Mr. Huffman’s unvested awards under the Performance Stock Program and the Restricted Stock Program of the LTIP and under the EICP would have been forfeited.

 

60


Table of Contents

Voluntary Resignation by the Executive. If, as of December 31, 2009, an executive had resigned (other than for good reason following a change in control), he would not have been entitled to any benefits, other than his retirement benefits and the payment of his deferred compensation. All unvested awards under the Performance Stock Program and the Restricted Stock Program of the LTIP and under the EICP would have been forfeited.

 

Retirement or Termination of Employment Due to Death or Disability.    If, as of December 31, 2009, an executive had retired (including early retirement at the Company’s request) or his employment had terminated because of his death or disability, the executive (or his estate) would have been entitled to receive his retirement benefits and the payment of his deferred compensation and under the terms of the LTIP, unless otherwise determined by the Compensation/Human Resources Committee, (i) the accelerated vesting of a pro-rata portion of each outstanding time-based Restricted Stock award issued to the executive pursuant to the Restricted Stock Program and (ii) the accelerated vesting of a pro-rata portion of the shares of common stock issuable pursuant to the Performance Stock Program for any then-uncompleted performance periods as determined by the Compensation/Human Resources Committee taking into account factors including, but not limited to, the period of the executive’s service prior to termination and the performance of the executive before his employment ceased. In addition, under the terms of the EICP, the executive is entitled to a pro-rata portion of his award based on the portion of the year for which he was employed. The executive would not have been entitled to any severance payment or supplemental retirement benefit payment.

 

Termination for Cause.    If, as of December 31, 2009, the employment of an executive had been terminated for cause none of the executives would be entitled to any benefits, other than his retirement benefits and the payment of his deferred compensation. All unvested awards under the Performance Stock Program and the Restricted Stock Program of the LTIP and under the EICP would have been forfeited.

 

Wraase Retirement Benefits

 

On June 1, 2009, Mr. Wraase retired as an employee of the Company. In connection with his retirement, Mr. Wraase has received or will be entitled to receive, in accordance with the terms of his employment agreement or under the Company’s employee benefit plans, the following benefits:

 

   

The acceleration to June 1, 2009 of the vesting of 50,437 shares of restricted stock awarded under the Restricted Stock Program, which on that date had an aggregate fair market value of $816,827.

 

   

The receipt on February 25, 2010, of 40,383 shares of common stock under the Performance Stock Program, which on that date had an aggregate fair market value of $686,107, representing an award for the portion of the 2007-2009 performance cycle for which he was employed. In addition, he will be entitled to earn up to 45,868 shares of common stock for the 2008-2010 performance cycle under the Performance Stock Program along with dividend credits on the shares earned, if and to the extent the established performance goals associated with the award opportunity are achieved.

 

   

A pension payment under the Pepco Holdings Retirement Plan in the amount of $111,081 per year.

 

   

A supplemental pension payment under the Executive Retirement Plan in the amount of $1,028,706 per year.

 

   

A supplemental retirement benefit as described above under the heading “Retirement Plans — Wraase Supplemental Retirement Benefit” in the amount of $292,488 per year.

 

   

Distributions under the Company’s deferred compensation plans as described above under the heading “Deferred Compensation Plans.”

 

   

Tax preparation and financial planning services until March 15, 2012 on the same terms and conditions as similarly situated active employees of the Company.

 

61


Table of Contents

Torgerson Retirement Benefits

 

Mr. Torgerson retired as an employee of the Company on June 1, 2009. In connection with his retirement, Mr. Torgerson has received or will be entitled to receive, in accordance with the terms of his employment agreement or under the Company’s employee benefit plans, the following benefits:

 

   

The acceleration to June 1, 2009, of the vesting of 9,958 shares of restricted stock awarded under the Restricted Stock Program, which on that date had an aggregate fair market value of $161,270.

 

   

The receipt on February 25, 2010, of 10,579 shares of common stock under the Performance Stock Program, which on that date had an aggregate fair market value of $179,737, representing an award for the portion of the 2007-2009 performance cycle for which he was employed. In addition, he will be entitled to earn (i) up to 11,894 shares of common stock for the 2009-2010 performance cycle and (ii) up to 5,860 shares of common stock for the 2009-2011 performance cycle under the Performance Stock Program along with dividend credits on the shares earned, if and to the extent the established performance goals associated with the award opportunity are achieved.

 

   

A pension payment under the Pepco Holdings Retirement Plan in the amount of $87,455 per year.

 

   

A supplemental pension payment under the Executive Retirement Plan in the amount of $485,962 per year.

 

   

Distributions under the Company’s deferred compensation plans as described above under the heading “Deferred Compensation Plans.”

 

   

Tax preparation and financial planning services until June 1, 2010, on the same terms and conditions as similarly situated active employees of the Company.

 

Barry Resignation Benefits

 

Mr. Barry resigned as an employee of the Company effective June 12, 2009. In connection with his resignation, Mr. Barry entered into an agreement with the Company which provided for:

 

   

a lump sum severance payment of $828,800;

 

   

a lump sum payment of $29,885 in payment of three weeks of unused vacation;

 

   

reimbursement of COBRA payments for a period ending on the first to occur of his employment with another employer and December 11, 2010;

 

   

reimbursement in the cumulative amount of $50,000 for (i) any legal fees, costs and expenses incurred in connection with the entry into the termination agreement and (ii) the costs of outplacement or relocation services incurred on or before December 31, 2009; and

 

   

reimbursement in an amount not to exceed $15,000 for expenses related to fiscal planning and tax preparation services for calendar years 2009 and 2010.

 

BOARD REVIEW OF TRANSACTIONS WITH RELATED PARTIES

 

The Board of Directors has adopted Procedures for Evaluating Related Person Transactions (the “Procedures”) which set forth the procedures followed by the Board in review and approval or ratification of transactions with related persons to ensure compliance with the Company’s Conflicts of Interest Business Policy, Corporate Governance Guidelines and applicable law. Related persons include directors, nominees for election as a director and specified executives (“covered persons”), as well as the members of such person’s immediate family. The Procedures apply to any situation where a related person serves as a director, officer or partner of, a consultant to, or in any other key role with respect to, any outside enterprise which does or seeks to do business with, or is a competitor of, the Company or any affiliate of the Company. The Procedures can be found on the Company’s Web site (www.pepcoholdings.com) by first clicking on the link: Corporate Governance and then the link: Business Policies.

 

62


Table of Contents

The Procedures require that each covered person provide to the Corporate Secretary annually a completed questionnaire setting forth all business relationships and other affiliations which relate in any way to the business and other activities of the Company and its affiliates. Each covered person should also, throughout the year, update the information provided in the questionnaire as necessary.

 

When a related person transaction is contemplated, all of the material facts regarding the substance of the proposed transaction, including the material facts relating to the related person’s or other party’s relationship or interest, must be fully disclosed to the Corporate Governance/Nominating Committee (excluding any member of the Committee who has an interest in the transaction). The Corporate Governance/Nominating Committee will review the contemplated transaction and will then make a recommendation to the disinterested members of the Board. At a Board meeting, all of the material facts regarding the substance of the proposed transaction, including the facts relating to the related person’s or other party’s relationship or interest and the recommendation of the Corporate Governance/Nominating Committee, must be fully disclosed to the Board. Approval of the transaction requires the affirmative vote of a majority of the disinterested directors voting on the matter.

 

The Procedures generally require that related person transactions be approved in advance. On occasion, however, it may be in the Company’s interest to commence a transaction before the Corporate Governance/Nominating Committee or Board has had an opportunity to meet, or a transaction may commence before it is discovered that a related person is involved with the transaction. In such instances, the Procedures require the covered person to consult with the Chairman of the Corporate Governance/Nominating Committee to determine the appropriate course of action, which may include subsequent ratification by the affirmative vote of a majority of the disinterested directors. If the Chairman of the Corporate Governance/Nominating Committee is an interested director, the Procedures require the covered person to consult with the Lead Independent Director to determine the appropriate course of action.

 

63


Table of Contents

AUDIT COMMITTEE REPORT

 

Among its duties, the Audit Committee is responsible for recommending to the Board of Directors that the Company’s financial statements be included in the Company’s Annual Report on Form 10-K. The Committee took a number of steps as a basis for making this recommendation for 2009. First, the Audit Committee discussed with PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm for 2009, those matters that PricewaterhouseCoopers LLP is required to communicate to and discuss with the Audit Committee under Statement on Auditing Standards No. 61, as amended (Communication with Audit Committees) as adopted by the Public Company Accounting Oversight Board (the “PCAOB”), which included information regarding the scope and results of the audit. These communications and discussions are intended to assist the Audit Committee in overseeing the financial reporting and disclosure process. Second, the Audit Committee discussed with PricewaterhouseCoopers LLP that firm’s independence and received from PricewaterhouseCoopers LLP a letter concerning independence as required by PCAOB Rule 3526 (Communication with Audit Committees Concerning Independence). This discussion and disclosure informed the Audit Committee of PricewaterhouseCoopers LLP’s relationships with the Company and was designed to assist the Audit Committee in considering PricewaterhouseCoopers LLP’s independence. Finally, the Audit Committee reviewed and discussed, with the Company’s management and with PricewaterhouseCoopers LLP, the Company’s audited consolidated balance sheets at December 31, 2009 and 2008, and the Company’s consolidated statements of income, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2009, including the notes thereto. Management is responsible for the consolidated financial statements and reporting process, including the system of internal controls and disclosure controls. The independent registered public accounting firm is responsible for expressing an opinion on the conformity of these consolidated financial statements with accounting principles generally accepted in the United States of America. Based on the discussions with management and PricewaterhouseCoopers LLP concerning the audit, the independence discussions, and the financial statement review and discussions, and such other matters deemed relevant and appropriate by the Audit Committee, the Audit Committee recommended to the Board that the consolidated financial statements be included in the Company’s 2009 Annual Report on Form 10-K.

 

The Audit Committee, in accordance with its charter, conducts an annual evaluation of the performance of its duties. Based on this evaluation, the Committee concluded that it performed effectively in 2009.

 

AUDIT COMMITTEE

Frank K. Ross, Chairman

Terence C. Golden

Patrick T. Harker

Barbara J. Krumsiek

Lawrence C. Nussdorf

 

64


Table of Contents

2. RATIFICATION OF THE APPOINTMENT OF THE

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Audit Committee of the Board of Directors of the Company appointed PricewaterhouseCoopers LLP as independent registered public accounting firm for the Company for the year 2009. The Audit Committee has reappointed the firm for 2010. A representative of PricewaterhouseCoopers LLP is expected to attend the Annual Meeting and will be given the opportunity to make a statement and to respond to appropriate questions.

 

Although the Company is not required to seek shareholder ratification of this appointment, the Board believes it to be sound corporate governance to do so. If the appointment is not ratified, the Audit Committee will take this fact into consideration when selecting the Company’s independent registered public accounting firm for 2011. Even if the selection is ratified, the Audit Committee may in its discretion direct the appointment of a different independent registered public accounting firm at any time during the year if the Committee determines that a change would be in the best interests of the Company and its shareholders.

 

Audit Fees

 

The aggregate fees billed by PricewaterhouseCoopers LLP for professional services rendered for the audit of the annual financial statements of the Company and its subsidiary reporting companies for the 2009 and 2008 fiscal years, reviews of the financial statements included in the 2009 and 2008 Forms 10-Q of the Company and its subsidiary reporting companies, reviews of public filings, comfort letters and other attest services were $6,145,416 and $7,965,978, respectively. The amount for 2008 includes $184,984 for the 2008 audit that was billed after the 2008 amount was disclosed in the Company’s proxy statement for the 2009 Annual Meeting.

 

Audit-Related Fees

 

No fees were billed by PricewaterhouseCoopers LLP for audit-related services for the 2009 or 2008 fiscal years.

 

Tax Fees

 

The aggregate fees billed by PricewaterhouseCoopers LLP for tax services rendered for the 2009 and 2008 fiscal years were $504,814 and $284,678 respectively. These services consisted of tax compliance, tax advice and tax planning.

 

All Other Fees

 

The aggregate fees billed by PricewaterhouseCoopers LLP for all other services other than those covered under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” for the 2009 and 2008 fiscal years were $3,000 and $4,500, respectively, which represented the costs of training and technical materials provided by PricewaterhouseCoopers LLP.

 

All of the services described in “Audit Fees,” “Audit-Related Fees,” “Tax Fees” and “All Other Fees” were approved in advance by the Audit Committee, in accordance with the Audit Committee Policy on the Approval of Services Provided By the Independent Auditor, which is attached to this Proxy Statement as Annex A.

 

What vote is required to ratify the appointment of the independent registered public accounting firm?

 

Ratification of the appointment of the independent registered public accounting firm requires the affirmative vote of the holders of a majority of the common stock present and entitled to vote at the meeting.

 

65


Table of Contents

How are the votes counted?

 

Shares, if any, which are the subject of an abstention with regard to the vote on this proposal will be considered present and entitled to vote, and accordingly will have the same effect as a vote against the proposal. Any shares that are the subject of a “broker non-vote” will not be considered present and entitled to vote and, therefore, will not be included in the denominator when determining whether the requisite percentage of shares has been voted in favor of this matter.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE IN FAVOR OF RATIFICATION OF THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS THE COMPANY’S INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, WHICH IS SET FORTH AS ITEM 2 ON THE PROXY CARD.

 

SHAREHOLDER PROPOSALS AND DIRECTOR NOMINATIONS

 

What is the deadline for submission of shareholder proposals for inclusion in the Company’s proxy statement for the 2011 Annual Meeting?

 

In order to be considered for inclusion in the proxy statement for the 2011 Annual Meeting, shareholder proposals must be received by the Company on or before November 26, 2010.

 

May a shareholder introduce a resolution for a vote at a future annual meeting?

 

Under the Company’s Bylaws, a shareholder may introduce a resolution for consideration at a future Annual Meeting if the shareholder complies with the advance notice provisions set forth in the Bylaws. These provisions require that for a shareholder to properly bring business before an Annual Meeting, the shareholder must give written notice to the Company’s Secretary at 701 Ninth Street, N.W., Washington, D.C. 20068, not less than 100 days nor more than 120 days prior to the date of the meeting (or if the date of the meeting is more than 30 days before or after the anniversary of the Annual Meeting in the prior year, then the written notice must be received no later than the close of business on the tenth day following the earlier of the date on which notice or public announcement of the date of the meeting is given or made by the Company). The shareholder’s notice must set forth a description of the business the shareholder desires to bring before the meeting and the reasons for conducting the business at the Annual Meeting, the name and record address of the shareholder, the class and number of shares owned beneficially and of record by the shareholder, and any material interest of the shareholder in the proposed business. The Company will publicly announce the date of its 2011 Annual Meeting at a later date.

 

May a shareholder nominate or recommend an individual for election as a director of the Company?

 

Under the Company’s Bylaws, a shareholder may nominate an individual for election as a director at a future Annual Meeting by giving written notice of the shareholder’s intention to the Company’s Secretary at 701 Ninth Street, N.W., Washington, D.C. 20068, not less than 100 days nor more than 120 days prior to the date of the meeting (or if the date of the meeting is more than 30 days before or after the anniversary of the Annual Meeting in the prior year, then the written notice must be received no later than the close of business on the tenth day following the earlier of the date on which notice or public announcement of the date of the meeting was first given or made by the Company). The notice provided to the Secretary must set forth the name and record address of the shareholder and the class and number of shares of capital stock of the Company beneficially owned by such shareholder; and, for each nominee, the nominee’s name, age, business address, residence address, principal occupation or employment, the class and number of shares of the Company’s capital stock beneficially owned by the nominee, and any other information concerning the nominee that would be required to be included in a proxy statement. The Company will publicly announce the date of its 2011 Annual Meeting at a later date.

 

66


Table of Contents

A shareholder also may recommend for the consideration of the Corporate Governance/Nominating Committee one or more candidates to serve as a nominee of the Company for election as a director. Any such recommendations for the 2011 Annual Meeting must be submitted in writing to the Secretary of the Company on or before November 26, 2010, accompanied by the information described in the preceding paragraph.

 

What principles has the Board adopted with respect to Board membership? What are the specific qualities or skills that the Corporate Governance/Nominating Committee has determined are necessary for one or more of the directors to possess?

 

The Board has approved the following principles with respect to Board membership:

 

The Board should include an appropriate blend of independent and management directors, which should result in independent directors being predominant and in the views of the Company’s management being effectively represented. Accordingly, the number of independent directors should never be less than seven and the management directors should always include the Chief Executive Officer, there should never be more than three management directors, and any management directors other than the Chief Executive Office should be selected from the Company’s executive leadership team.

 

For independent directors, the Corporate Governance/Nominating Committee seeks the appropriate balance of experience, skills and personal characteristics required of a director. In order to be considered for nomination to the Board, a director candidate should possess most or all of the following attributes: independence, as defined by the NYSE listing standards as currently in effect; integrity; judgment; credibility; collegiality; professional achievement; constructiveness; and public awareness. The independent directors should possess, in aggregate, skill sets that include but are not limited to: financial acumen equivalent to the level of a Chief Financial Officer or senior executive of a capital market, investment or financial services firm; operational or strategic acumen germane to the energy industry, or other industry with similar characteristics (construction, manufacturing, etc.); public and/or government affairs acumen germane to complex enterprises, especially in regulated industries; customer service acumen germane to a service organization with a large customer base; legal acumen in the field(s) of regulatory or commercial law at the partner or chief legal officer level; salient community ties in areas of operation of Pepco Holdings’ enterprises; and corporate governance acumen, gained through service as a senior officer or director of a large publicly held corporation or through comparable academic or other experience.

 

In identifying director candidates, the Corporate Governance/Nominating Committee also gives weight to other attributes that the Committee believes contribute to Board effectiveness, including analytical skills, a willingness and ability to constructively and collaboratively engage with management and each other, and the ability and commitment to devote significant time to service on the Board and its Committees. In accordance with the corporate governance guidelines, the Corporate Governance/Nominating Committee also follows the principle that a board of directors composed of individuals with a broad range of experiences and backgrounds brings diverse perspectives and contributes to the Board’s overall effectiveness. Thus, independent directors are also selected to ensure diversity, in the aggregate, which diversity should include expertise or experience germane to the Company’s total business needs, in addition to other generally understood aspects of diversity.

 

The Board monitors the mix of skills, experience and backgrounds of the Board members to assure that the Board has the necessary composition to effectively perform its oversight function. The Board took these diversity considerations and attributes into account in determining the Director nominees and planning for director succession and believes that, as a group, the nominees bring a diverse range of expertise, experience and perspectives, as well as generally understood aspects of diversity, to the Board.

 

67


Table of Contents

What is the process for identifying and evaluating nominees for director (including nominees recommended by security holders)?

 

The Corporate Governance/Nominating Committee has developed the following process for the identification and evaluation of director nominees which is set forth in the Company’s Corporate Governance Guidelines and can be found on the Company’s Web site (www.pepcoholdings.com) under the link: Corporate Governance:

 

a. List of Potential Candidates.    The Corporate Governance/Nominating Committee develops and maintains a list of potential candidates for Board membership. Potential candidates are recommended by Committee members and other Board members. Shareholders may put forward potential candidates for the Committee’s consideration by following submission requirements published in the Company’s proxy statement for the previous year’s meeting. See the second paragraph of the section headed “May a shareholder nominate or recommend an individual for election as a director of the Company?” above.

 

b. Candidate Attributes, Skill Sets and Other Criteria.    The Committee annually reviews the attributes, skill sets and other qualifications for potential candidates and may modify them from time to time based upon the Committee’s assessment of the needs of the Board and the skill sets required to meet those needs.

 

c. Review of Candidates.    All potential candidates are reviewed by the Committee against the current attributes, skill sets and other qualifications established by the Board to determine if a candidate is suitable for Board membership. If a candidate is deemed suitable based on this review, a more detailed review will be performed through examination of publicly available information. This examination will include consideration of the independence requirement for outside directors, the number of boards on which the candidate serves, the possible applicability of restrictions on director interlocks or other requirements or prohibitions imposed by applicable laws or regulations, proxy disclosure requirements, and any actual or potentially perceived conflicts of interest or other issues raised by applicable laws or regulations or the Company’s policies or practices.

 

d. Prioritization of Candidates.    The Committee (i) annually determines whether any candidate needs to be removed from consideration as a result of the detailed review, and (ii) as needed determines a recommended priority among the remaining candidates for recommendation to and final determination by the Board prior to direct discussion with any candidate.

 

e. Candidate Contact.    Following the Board’s determination of a priority-ranked list of approved potential candidates, the Chairman of the Committee or, at his or her discretion, other member(s) of the Board will contact and interview the potential candidates in priority order. When a potential candidate indicates his or her willingness to accept nomination to the Board, no further candidates will be contacted. Subject to a final review of eligibility under the Company’s policies and applicable laws and regulations using information supplied directly by the candidate, the candidate will then be nominated.

 

3. OTHER MATTERS WHICH MAY COME BEFORE THE MEETING

 

Does the Board of Directors know of any additional matters to be acted upon at the Annual Meeting?

 

The Board of Directors does not know of any other matter to be brought before the meeting.

 

If another matter does come before the meeting, how will my proxy be voted?

 

If any other matter properly comes before the meeting, your signed proxy card, as well as your Internet or telephone proxy, gives the designated proxy holders discretionary authority to vote on such matters in accordance with their best judgment.

 

68


Table of Contents

How are proxies being solicited and who pays for the costs involved?

 

The Company will bear the costs of solicitation of proxies, including the reimbursement of banks and brokers for certain costs incurred in forwarding proxy materials to beneficial owners. The Company has retained Laurel Hill Advisory Group to aid in the solicitation of proxies, at an anticipated cost to the Company of approximately $12,500, plus expenses. In addition to the use of the mails, officers, directors and regular employees of the Company may solicit proxies personally, by telephone or facsimile or via the Internet. These individuals will not receive any additional compensation for these activities.

 

Why was only a single Notice of Availability and/or set of proxy materials mailed to households that have multiple holders of common stock?

 

To reduce the expense of delivering a duplicate Notice of Availability and/or set of proxy materials to multiple shareholders sharing the same address, the Company has adopted a procedure approved by the SEC called “householding.” This procedure saves printing costs and postage fees, and conserves natural resources.

 

Under this procedure, certain shareholders of record who have the same address and last name, and who have not elected to receive delivery of proxy materials electronically, will receive only one copy of the Notice of Availability and/or set of proxy materials, unless they have previously notified the Company that they want to receive separate copies. Each Retirement Savings Plan participant will continue to receive a paper copy of all of the proxy materials.

 

Under these SEC rules, brokers and banks that hold stock for the account of their customers also are permitted to deliver a single copy of the proxy materials or Notice of Availability to two or more shareholders that share the same address. If you and other residents at your mailing address own shares of common stock through a broker or bank, you may have received a notice notifying you that your household will be sent only one copy of the proxy materials or the Notice of Availability. If you did not notify your broker or bank of your objection, you may have been deemed to have consented to the arrangement.

 

If you received a single set of proxy materials or a single Notice of Availability as a result of householding, and one or more shareholders at your address would like to have separate copies with respect to the 2010 Annual Meeting or in the future, please contact American Stock Transfer & Trust Company, the Company’s transfer agent:

 

By Telephone:

  1-866-254-6502 (toll-free)

In Writing:

  American Stock Transfer & Trust Company
  6201 15th Avenue
  Brooklyn, NY 11219-9821

 

If you own your shares through a brokerage firm or a bank, your notification should include the name of your brokerage firm or bank and your account number.

 

If you are a record holder of shares of common stock who is receiving multiple copies of the Company’s shareholder communications at your address and you would like to receive only one copy for your household, please contact American Stock Transfer & Trust Company at the telephone number or address set forth above. If you own your shares through a brokerage firm or a bank, please contact your broker or bank.

 

Where do I find the Company’s Corporate Business Policies, Corporate Governance Guidelines and Committee Charters?

 

The Company has in place Corporate Business Policies, which in their totality constitute its code of business conduct and ethics. These policies apply to all directors, employees and others working at the Company and its subsidiaries. The Company’s Board of Directors has also adopted Corporate Governance Guidelines and charters for the Company’s Audit Committee, Compensation/Human Resources Committee and Corporate Governance/Nominating Committee, which conform to the requirements set forth in the NYSE listing standards. The Board of Directors has also adopted charters for the Company’s Executive Committee and Finance Committee. Copies

 

69


Table of Contents

of these documents are available on the Company Web site at http://www.pepcoholdings.com/governance/index.html and also can be obtained by writing to: Ellen Sheriff Rogers, Vice President, Secretary and Assistant Treasurer, 701 Ninth Street, N.W., Suite 1300, Washington, D.C. 20068.

 

 

 

The Letter to Shareholders which began on the cover page of this document, the sections of this Proxy Statement headed “Compensation/Human Resources Committee Report” and “Audit Committee Report” and the 2009 Annual Report to Shareholders, including the “Five-Year Performance Graph 2005-2009,” attached as Annex B to this Proxy Statement are not deemed to be “soliciting material” or to be “filed” with the SEC under or pursuant to the Securities Act of 1933 or the Securities Exchange Act of 1934 and shall not be incorporated by reference or deemed to be incorporated by reference into any filing by the Company under either such Act, unless otherwise specifically provided for in such filing.

 

70


Table of Contents

ANNEX A

 

PEPCO HOLDINGS, INC.

AUDIT COMMITTEE

 

 

 

Policy on the Approval of Services

Provided By the Independent Auditor

 

I. Overview

 

Under the federal securities laws and the rules of the Securities and Exchange Commission (the “SEC”), the annual consolidated financial statements of Pepco Holdings, Inc. (the “Company”) and each of its subsidiaries that has a reporting obligation (a “Reporting Company”) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), must be audited by an “independent” public accountant. Likewise, the quarterly financial statements of the Company and each Reporting Company must be reviewed by an “independent” public accountant.

 

Under SEC regulations, a public accountant is not “independent” if it provides certain specified non-audit services to an audit client. In addition, a public accountant will not qualify as “independent” unless (i) before the accountant is engaged to provide audit or non-audit services, the engagement is approved by the public company’s audit committee or (ii) the engagement to provide audit or non-audit services is pursuant to pre-approved policies and procedures established by the audit committee.

 

Under the Audit Committee Charter, the Audit Committee of the Company has sole authority (i) to retain and terminate the Company’s independent auditors, (ii) to pre-approve all audit engagement fees and terms and (iii) to pre-approve all significant audit-related relationships with the independent auditor. This Policy sets forth the policies and procedures adopted by the Audit Committee with respect to the engagement of the Company’s independent auditor to provide audit and non-audit services to the Company and its subsidiaries (as defined by Rule 1-02 (x) of SEC Regulation S-X).

 

The Audit Committee also serves as the audit committee for each subsidiary of the Company that is a Reporting Company for the purpose of approving audit and non-audit services to be provided by the independent auditor(s) of such Reporting Companies. In this capacity, the Audit Committee has determined that this Policy also shall govern the engagement of the independent auditor for each such Reporting Company.

 

II. Statement of Principles

 

The Audit Committee recognizes the importance of maintaining the independence of its external auditor both in fact and appearance. In order to ensure that the independence of the Company’s external auditor is not, in the judgment of the Audit Committee, impaired by any other services that the external auditor may provide to the Company and its subsidiaries:

 

   

The Audit Committee shall approve in advance all services — both audit and permitted non-audit services — provided to the Company or any of its subsidiaries by the Company’s independent auditor in accordance with the procedures set forth in this Policy.

 

   

The Audit Committee shall not engage the Company’s independent auditor to provide to the Company or any of its subsidiaries any non-audit services that are unlawful under Section 10A of the Exchange Act or that would impair the independence of the Company’s independent auditor under the standards set forth in Rule 2-01 of SEC Regulation S-X (“Prohibited Non-Audit Services”).

 

A-1


Table of Contents
III. Approval of Annual Audit Services

 

The annual audit services provided to the Company and its subsidiaries by the Company’s independent auditor shall consist of:

 

   

The audit of the annual consolidated financial statements of the Company and each other Reporting Company and the other procedures required to be performed by the independent auditor to be able to form an opinion on the financial statements.

 

   

Review of the quarterly consolidated financial statements of the Company and each Reporting Company.

 

   

The attestation engagement for the independent auditor’s report on management’s statement on the effectiveness of the Company’s internal control over financial reports.

 

   

Services associated with SEC registration statements, periodic reports and other documents filed with the SEC or issued in connection with securities offerings, including consents and comfort letters provided to underwriters, reviews of registration statements and prospectuses, and assistance in responding to SEC comment letters.

 

All such audit services must be approved annually by the Audit Committee following a review by the Audit Committee of the proposed terms and scope of the engagement and the projected fees. Any subsequent change of a material nature in the terms, scope or fees associated with such annual audit services shall be approved in advance by the Audit Committee.

 

Any additional audit services may be pre-approved annually at the meeting at which the annual audit services are approved. If not pre-approved, each additional annual audit service must be approved by the Audit Committee in advance on a case-by-case basis.

 

IV. Approval of Audit-Related Services

 

Audit-related services consist of assurance and related services that are reasonably related to the performance of the audit or review of the financial statements of the Company and each Reporting Company, other than the annual audit services described in Section III above. Audit-related services may include, but are not limited to:

 

   

Employee benefit plan audits.

 

   

Due diligence related to mergers and acquisitions.

 

   

Accounting consultations and audits in connection with acquisitions.

 

   

Internal control reviews.

 

   

Attest services related to financial reporting that are not required by statute or regulation.

 

Audit-related services may be pre-approved annually at the meeting at which the annual audit services are approved. If not pre-approved, each audit-related service must be approved by the Audit Committee in advance on a case-by-case basis.

 

V. Approval of Tax Services

 

Tax services consist of professional services rendered by the independent auditor to the Company or any of its subsidiaries for tax compliance, tax advice and tax planning. Tax services may be pre-approved annually at the meeting of the Audit Committee at which the annual audit services are approved. If not pre-approved, each tax service must be approved by the Audit Committee in advance on a case-by-case basis.

 

A-2


Table of Contents
VI. Approval of All Other Services

 

Any other services to be provided by the Company’s independent auditor, other than Prohibited Non-Audit Services, may be pre-approved annually at the meeting of the Audit Committee at which the annual audit services are approved. If not pre-approved, each such other service must be approved by the Audit Committee in advance on a case-by-case basis.

 

VII. Procedures

 

At the meeting of the Audit Committee to select the independent auditor for the Company and each of the Reporting Companies, the Chief Financial Officer shall submit to the Audit Committee a list of the additional audit services, audit-related services, tax services and other services, if any, that the Company and the Related Companies wish to have pre-approved for the ensuing year. The list shall be accompanied by:

 

   

a written description (which may consist of or include a description furnished to the Company by the independent auditor) of the services to be provided in detail sufficient to enable the Audit Committee to make an informed decision with regard to each proposed service, and, to the extent determinable, an estimate provided by the independent auditor of the fees for each of the services; and

 

   

confirmation of the independent auditor that (i) it would not be unlawful under Section 10A of the Exchange Act for the independent auditor to provide the listed non-audit services to the Company or any of its subsidiaries and (B) none of the services, if provided by the independent auditor to the Company or any of its subsidiaries, would impair the independence of the auditor under the standards set forth in Rule 2-01 of SEC Regulation S-X.

 

If a type of non-audit service is pre-approved by the Audit Committee, and the Company or any of its subsidiaries subsequently engages the independent auditor to provide that service, the Company’s Chief Financial Officer shall report the engagement to the Audit Committee at its next regularly scheduled meeting.

 

VIII. Delegation

 

The Audit Committee hereby delegates to the Chairman of the Audit Committee the authority to approve, upon the receipt of the documentation referred to in Section VII above, on a case-by-case basis any non-audit service of the types referred to in Sections IV, V and VI above (i.e. an audit-related, tax or other service) at any time other than at a meeting of the Audit Committee. The Chairman shall report any services so approved to the Audit Committee at its next regularly scheduled meeting. In no circumstances shall the responsibilities of the Audit Committee under this Policy be delegated to the management of the Company or any of its subsidiaries.

 

A-3


Table of Contents

Annex B

LOGO

    2009 Annual Report to Shareholders    

 

TABLE OF CONTENTS   
     Page

Glossary of Terms

   B-2

Consolidated Financial Highlights

   B-6

Business of the Company

   B-8

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   B-21

Quantitative and Qualitative Disclosures About Market Risk

   B-80

Management’s Report on Internal Control over Financial Reporting

   B-83

Report of Independent Registered Public Accounting Firm

   B-84

Consolidated Statements of Income

   B-85

Consolidated Statements of Comprehensive Income

   B-86

Consolidated Balance Sheets

   B-87

Consolidated Statements of Cash Flows

   B-89

Consolidated Statements of Equity

   B-90

Notes to Consolidated Financial Statements

   B-91

Quarterly Financial Information (unaudited)

   B-160

Five-Year Performance Graph (2005-2009)

   B-161

Board of Directors and Officers

   B-162

Investor Information

   B-163

Forward-Looking Statements:    Except for historical statements and discussions, the statements in this annual report constitute “forward-looking statements” within the meaning of federal securities law. These statements contain management’s beliefs based on information currently available to management and on various assumptions concerning future events. Forward-looking statements are not a guarantee of future performance or events. They are subject to a number of uncertainties and other factors, many of which are outside the company’s control. Factors that could cause actual results to differ materially from those in the forward-looking statements herein include general economic, business and capital and credit market conditions; availability and cost of capital; changes in laws, regulations or regulatory policies; weather conditions; competition; governmental actions; and other presently unknown or unforeseen factors. These uncertainties and factors could cause actual results to differ materially from such statements. Pepco Holdings disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. This information is presented solely to provide additional information to further understand the results and prospects of Pepco Holdings.

 

B-1


Table of Contents

GLOSSARY OF TERMS

 

Term

  

Definition

2007 Maryland Rate Orders

  

The MPSC orders approving new electric service distribution base rates for Pepco and DPL in Maryland, each effective June 16, 2007

ABO

  

Accumulated benefit obligation

ACE

  

Atlantic City Electric Company

ACE Funding

  

Atlantic City Electric Transition Funding LLC

ADITC

  

Accumulated deferred investment tax credits

AFUDC

  

Allowance for Funds Used During Construction

ALJ

  

Administrative Law Judge

Ancillary services

  

Generally, electricity generation reserves and reliability services

AOCL

  

Accumulated other comprehensive loss

April 2007 Order

  

Administrative Order and Notice of Civil Administrative Penalty Assessment concerning Deepwater issued in April 2007 by NJDEP

AMI

  

Advanced metering infrastructure

AROs

  

Asset Retirement Obligations

ASC

  

Accounting Standards Codification

BACT

  

Best available control technology

BART

  

Best available retrofit technology

BGS

  

Basic Generation Service (the supply of electricity by ACE to retail customers in New Jersey who have not elected to purchase electricity from a competitive supplier)

BGS-CIEP

  

BGS-Commercial and Industrial Energy Price

BGS-FP

  

BGS-Fixed Price

Blueprint for the Future

  

PHI’s initiatives combining traditional DSM programs with new technologies and systems to help customers manage their energy use and reduce the total cost of energy

BMPs

  

Best management practices

BSA

  

Bill Stabilization Adjustment mechanism

CAA

  

Federal Clean Air Act

CAIR

  

Clean Air Interstate Rule issued by EPA

CWA

  

Federal Clean Water Act

CERCLA

  

Comprehensive Environmental Response, Compensation, and Liability Act of 1980

Citgo

  

Citgo Asphalt Refining Company

C02

  

Carbon dioxide

Conectiv

  

A wholly owned subsidiary of PHI and the parent of DPL and ACE

Competitive Energy

  

PHI’s Competitive energy generation, marketing and supply business

Conectiv Energy

  

Conectiv Energy Holding Company and its subsidiaries

Cooling Degree Days

  

Daily difference in degrees by which the mean (high and low divided by 2) dry bulb temperature is above a base of 65 degrees Fahrenheit

CSA

  

Credit Support Annex

DA

  

Distribution Automation

Dark spread

  

The difference between the cost of coal required to produce a unit of electricity and the price of that same unit of electricity

DCPSC

  

District of Columbia Public Service Commission

Default Electricity Supply

  

The supply of electricity by PHI’s electric utility subsidiaries at regulated rates to retail customers who do not elect to purchase electricity from a competitive supplier, and which, depending on the jurisdiction, is also known as SOS or BGS service

Default Supply Revenue

  

Revenue received for Default Electricity Supply

 

B-2


Table of Contents

Term

  

Definition

Deepwater

  

Deepwater generating plant

DLC

  

Direct Load Control

DPL

  

Delmarva Power & Light Company

DNREC

  

Delaware Department of Natural Resources and Environmental Control

DOE

  

U.S. Department of Energy

DPSC

  

Delaware Public Service Commission

DRP

  

Shareholder Dividend Reinvestment Plan

DSM

  

Demand-side management

EBITDA

  

Earnings before interest, taxes, depreciation, and amortization

EDIT

  

Excess Deferred Income Taxes

EPA

  

U.S. Environmental Protection Agency

EPS

  

Earnings per share

EQR

  

Conectiv Energy’s Electric Quarterly Report filed with FERC

Exchange Act

  

Securities Exchange Act of 1934, as amended

FASB

  

Financial Accounting Standards Board

FERC

  

Federal Energy Regulatory Commission

FHACA

  

Flood Hazard Area Control Act

FIFO

  

First in first out

FPA

  

Federal Power Act

FWPA

  

NJDEP’s Freshwater Wetlands Protection Act

GAAP

  

Accounting principles generally accepted in the United States of America

GCR

  

Gas Cost Rate

GHG

  

Greenhouse gas under EPA’s rules, including CO2, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and other fluorinated gases

GWh

  

Gigawatt hour

Heating Degree Days

  

Daily difference in degrees by which the mean (high and low divided by 2) dry bulb temperature is below a base of 65 degrees Fahrenheit

HEDD

  

High electric demand day units capable of generating 15 or more megawatts that are operated for 50 percent or less of the time during the ozone season under NJDEP regulations

HPS

  

Hourly Priced Service

IRS

  

Internal Revenue Service

ISDA

  

International Swaps and Derivatives Association

ISONE

  

Independent System Operator—New England

ISOs

  

Independent system operators

ITC

  

Investment tax credit

Line Loss

  

Estimates of electricity and gas expected to be lost in the process of its transmission and distribution to customers

LTIP

  

Long-Term Incentive Plan

MAPP

  

Mid-Atlantic Power Pathway

Market Transition Charge Tax

  

Revenue ACE receives, and pays to ACE Funding to recover income taxes associated with Transition Bond Charge revenue

May 2007 Order

  

The second Administrative Order and Notice of Civil Administrative Penalty Assessment concerning Deepwater issued in May 2007 by NJDEP

MDC

  

MDC Industries, Inc.

Medicare Act

  

Medicare Prescription Drug Improvement and Modernization Act of 2003

Medicare Part D

  

A prescription drug benefit under Medicare

MFVRD

  

Modified fixed variable rate design

Mirant

  

Mirant Corporation

MMBtu

  

One Million British Thermal Units

MSCG

  

Morgan Stanley Capital Group, Inc.

 

B-3


Table of Contents

Term

  

Definition

MPSC

  

Maryland Public Service Commission

MWh

  

Megawatt hour

NAV

  

Net Asset Value

New Jersey Societal Benefit Charge

  

Revenue ACE receives to recover certain costs incurred under various NJBPU—mandated social programs

NFA

  

No Further Action letter issued by the NJDEP

NJBPU

  

New Jersey Board of Public Utilities

NJDEP

  

New Jersey Department of Environmental Protection

Normalization provisions

  

Sections of the Internal Revenue Code and related regulations that dictate how excess deferred income taxes resulting from the corporate income tax rate reduction enacted by the Tax Reform Act of 1986 and accumulated deferred investment tax credits should be treated for ratemaking purposes

NOx

  

Nitrogen oxide

NJPDES

  

New Jersey Pollutant Discharge Elimination System

NPDES

  

National Pollutant Discharge Elimination System

NUGs

  

Non-utility generators

NYDEC

  

New York Department of Environmental Conservation

OAL

  

New Jersey Office of Administrative Law

OPEB

  

Other postretirement benefits

OTTI

  

Other-than-temporary impairment

Panda

  

Panda-Brandywine, L.P.

Panda PPA

  

PPA between Pepco and Panda

PARS

  

Performance accelerated restricted stock

PCBs

  

Polychlorinated biphenyls

PCI

  

Potomac Capital Investment Corporation and its subsidiaries

Pepco

  

Potomac Electric Power Company

Pepco Energy Services

  

Pepco Energy Services, Inc. and its subsidiaries

Pepco Holdings or PHI

  

Pepco Holdings, Inc.

PHI Retirement Plan

  

PHI’s noncontributory retirement plan

PJM

  

PJM Interconnection, LLC

PJM RTO

  

PJM regional transmission organization

PM10

  

Particulate matter less than ten microns in diameter

Power Delivery

  

PHI’s Power Delivery business

PPA

  

Power Purchase Agreement

PRP

  

Potentially responsible party

PSD

  

Prevention of Significant Deterioration under the CAA

PUHCA 2005

  

Public Utility Holding Company Act of 2005, which became effective February 8, 2006

QSPE

  

Qualifying special purpose entity

RBOB

  

Reformulated Gasoline Blendstock for Oxygen Blending

RECs

  

Renewable energy credits

RAR

  

IRS revenue agent’s report

RARM

  

Reasonable Allowance for Retail Margin

RC Cape May

  

RC Cape May Holdings, LLC, an affiliate of Rockland Capital Energy Investments, LLC, and the purchaser of the B.L. England generating plant

Regulated T&D Electric Revenue

  

Revenue from the transmission and the delivery of electricity to PHI’s customers within its service territories at regulated rates

Revenue Decoupling Adjustment

  

An adjustment equal to the amount by which revenue from distribution sales differs from the revenue that Pepco and DPL are entitled to earn based on the approved distribution charge per customer

RGGI

  

Regional Greenhouse Gas Initiative

 

B-4


Table of Contents

Term

  

Definition

ROE

  

Return on equity

RPM

  

Reliability Pricing Model

SEC

  

Securities and Exchange Commission

Sempra

  

Sempra Energy Trading LLC

SGIG

  

Smart Grid Investment Grant

SO6

  

Sulfur hexafloride

SO2

  

Sulfur dioxide

SOS

  

Standard Offer Service (the supply of electricity by Pepco in the District of Columbia, by Pepco and DPL in Maryland and by DPL in Delaware to retail customers who have not elected to purchase electricity from a competitive supplier)

Spark spread

  

The difference between the cost of natural gas or fuel oil required to produce a unit of electricity and the price of that same unit of electricity

SPCC

  

Spill Prevention, Control, and Countermeasure

Spot

  

Commodities market in which goods are sold for cash and delivered immediately

T&D

  

Transmission and distribution

TMDL

  

Total Maximum Daily Load standards issued by the District of Columbia

Title V Permit

  

Title V operating permit issued by NJDEP in December 2005

Title V Appeal

  

Appeal filed by Conectiv Energy in January 2006 with the New Jersey OAL challenging several provisions of the Title V Permit

Transition Bond Charge

  

Revenue ACE receives, and pays to ACE Funding, to fund the principal and interest payments on Transition Bonds and related taxes, expenses and fees

Transition Bonds

  

Transition Bonds issued by ACE Funding

Treasury Rate Locks

  

A hedging transaction that allows a company to “lock in” a specific interest rate corresponding to the rate of a designated Treasury bond for a determined period of time

TSA

  

Contract for terminal services between ACE and Citgo

VaR

  

Value at Risk

VRDBs

  

Variable Rate Demand Bonds

 

B-5


Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

 

     2009     2008     2007     2006     2005  
     (in millions, except per share data)  

Consolidated Operating Results

          

Total Operating Revenue

   $ 9,259     $ 10,700 (c)    $ 9,366     $ 8,363     $ 8,066  

Total Operating Expenses

     8,564 (a)      9,932       8,560 (e)      7,670 (g)      7,160 (i)(j)(k) 

Operating Income

     695       768       806       693       906  

Other Expenses

     350       300       284       283 (h)      286  

Preferred Stock Dividend Requirements of Subsidiaries

     —          —          —          1       3  

Income Before Income Tax Expense and Extraordinary Item

     345       468       522       409       617  

Income Tax Expense

     110 (b)      168 (c)(d)      188 (f)      161       255 (l) 

Income Before Extraordinary Item

     235       300       334       248       362  

Extraordinary Item

     —          —          —          —          9  

Net Income

     235       300       334       248       371  

Earnings Available for Common Stock

     235       300       334       248       371  

Common Stock Information

          

Basic Earnings Per Share of Common Stock Before Extraordinary Item

   $ 1.06     $ 1.47     $ 1.72     $ 1.30     $ 1.91  

Basic—Extraordinary Item Per Share of Common Stock

     —          —          —          —          .05  

Basic Earnings Per Share of Common Stock

     1.06       1.47       1.72       1.30       1.96  

Diluted Earnings Per Share of Common Stock Before Extraordinary Item

     1.06       1.47       1.72       1.30       1.91  

Diluted—Extraordinary Item Per Share of Common Stock

     —          —          —          —          .05  

Diluted Earnings Per Share of Common Stock

     1.06       1.47       1.72       1.30       1.96  

Cash Dividends Per Share of Common Stock

     1.08       1.08       1.04       1.04       1.00  

Year-End Stock Price

     16.85       17.76       29.33       26.01       22.37  

Net Book Value per Common Share

     19.15       19.14       20.04       18.82       18.88  

Weighted Average Shares Outstanding

     221       204       194       191       189  

Other Information

          

Investment in Property, Plant and Equipment

   $ 13,717     $ 12,926     $ 12,307     $ 11,820     $ 11,441   

Net Investment in Property, Plant and Equipment

     8,863       8,314       7,877       7,577       7,369  

Total Assets

     15,779       16,133       15,111       14,244       14,039  

Capitalization

          

Short-term Debt

   $ 530     $ 465     $ 289     $ 350     $ 156  

Long-term Debt

     4,470       4,859       4,175       3,769       4,203  

Current Maturities of Long-Term Debt and Project Funding

     536       85       332       858       470  

Transition Bonds issued by ACE Funding

     368       401       434       464       494  

Capital Lease Obligations due within one year

     7       6       6       6       5  

Capital Lease Obligations

     92       99       105       111       117  

Long-Term Project Funding

     17       19       21       23       26  

Non-controlling Interest

     6       6       6       24       46  

Common Shareholders’ Equity

     4,256       4,190       4,018       3,612       3,584  
                                        

Total Capitalization

   $ 10,282     $ 10,130     $ 9,386     $ 9,217     $ 9,101  
                                        

 

B-6


Table of Contents

 

(a) Includes $40 million ($24 million after-tax) gain related to settlement of Mirant bankruptcy claims.

 

(b) Includes a $13 million state income tax benefit (after Federal tax) related to a change in the state income tax reporting for the disposition of certain assets in prior years and a benefit of $6 million related to additional analysis of current and deferred tax balances completed in 2009.

 

(c) Includes a pre-tax charge of $124 million ($86 million after-tax) related to the adjustment to the equity value of cross-border energy lease investments, and included in Income Taxes is a $7 million after-tax charge for the additional interest accrued on the related tax obligation.

 

(d) Includes $23 million of after-tax net interest income on uncertain and effectively settled tax positions (primarily associated with the reversal of previously accrued interest payable resulting from the final and tentative settlements, respectively, with the IRS on the like-kind exchange and mixed service cost issues and a claim made with the IRS related to the tax reporting for fuel over- and under-recoveries) and a benefit of $8 million (including a $3 million correction of prior period errors) related to additional analysis of deferred tax balances completed in 2008.

 

(e) Includes $33 million ($20 million after-tax) from settlement of Mirant bankruptcy claims.

 

(f) Includes $20 million ($18 million net of fees) benefit related to Maryland income tax settlement.

 

(g) Includes $19 million of impairment losses ($14 million after-tax) related to certain energy services business assets.

 

(h) Includes $12 million gain ($8 million after-tax) on the sale of Conectiv Energy’s equity interest in a joint venture which owns a wood burning cogeneration facility.

 

(i) Includes $68 million ($41 million after-tax) gain from sale of non-utility land owned by Pepco at Buzzard Point.

 

(j) Includes $71 million ($42 million after-tax) gain (net of customer sharing) from settlement of Mirant bankruptcy claims.

 

(k) Includes $13 million ($9 million after-tax) related to PCI’s liquidation of a financial investment that was written off in 2001.

 

(l) Includes $11 million in income tax expense related to the mixed service cost issue under IRS Revenue Ruling 2005-53.

 

B-7


Table of Contents

    BUSINESS OF THE COMPANY    

Overview

Pepco Holdings, Inc. (PHI or Pepco Holdings), a Delaware corporation incorporated in 2001, is a diversified energy company that, through its operating subsidiaries, is engaged primarily in two businesses:

 

   

The distribution, transmission and default supply of electricity and the delivery and supply of natural gas (Power Delivery), conducted through the following regulated public utility companies:

 

   

Potomac Electric Power Company (Pepco), which was incorporated in the District of Columbia in 1896 and became a domestic Virginia corporation in 1949,

 

   

Delmarva Power & Light Company (DPL), which was incorporated in Delaware in 1909 and became a domestic Virginia corporation in 1979, and

 

   

Atlantic City Electric Company (ACE), which was incorporated in New Jersey in 1924.

 

   

Competitive energy generation, marketing and supply (Competitive Energy) conducted through subsidiaries of Conectiv Energy Holding Company (collectively Conectiv Energy) and Pepco Energy Services, Inc. and its subsidiaries (collectively Pepco Energy Services).

The following chart shows, in simplified form, the corporate structure of PHI and its principal subsidiaries.

LOGO

Conectiv is solely a holding company with no business operations. The activities of Potomac Capital Investment Corporation (PCI) are described below under the heading “Other Business Operations.”

PHI Service Company, a subsidiary service company of PHI, provides a variety of support services, including legal, accounting, treasury, tax, purchasing and information technology services to PHI and its operating subsidiaries. These services are provided pursuant to a service agreement among PHI, PHI Service Company, and the participating operating subsidiaries. The expenses of PHI Service Company are charged to PHI and the participating operating subsidiaries in accordance with cost allocation methodologies set forth in the service agreement.

Pepco Holdings’ management has identified its operating segments at December 31, 2009 as Power Delivery, Conectiv Energy, Pepco Energy Services, and Other Non-Regulated. For financial information relating to PHI’s segments, see Note (5), “Segment Information” to the consolidated financial statements herein. Each of Pepco, DPL and ACE has one operating segment.

 

B-8


Table of Contents

Investor Information

Each of PHI, Pepco, DPL and ACE files reports under the Securities Exchange Act of 1934, as amended. The Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports, of each of the companies are made available free of charge on PHI’s internet Web site as soon as reasonably practicable after such documents are electronically filed with or furnished to the Securities and Exchange Commission (SEC). These reports may be found at http://www.pepcoholdings.com/investors.

Description of Business

The following is a description of each of PHI’s two principal business operations.

Power Delivery Business

The largest component of PHI’s business is Power Delivery, which consists of the transmission, distribution and default supply of electricity and the delivery and supply of natural gas. In 2009, 2008 and 2007, respectively, PHI’s Power Delivery operations produced 54%, 51%, and 56% of PHI’s consolidated operating revenues (including revenue from intercompany transactions) and 73%, 72%, and 66% of PHI’s consolidated operating income (including income from intercompany transactions).

Each of Pepco, DPL and ACE is a regulated public utility in the jurisdictions that comprise its service territory. Each company owns and operates a network of wires, substations and other equipment that is classified either as transmission or distribution facilities. Transmission facilities carry wholesale electricity into, or across, the utility’s service territory. Distribution facilities carry electricity to end-use customers in the utility’s service territory.

Delivery of Electricity, Natural Gas and Default Electricity Supply

Each of Pepco, DPL and ACE is responsible for the delivery of electricity and, in the case of DPL, natural gas, in its service territory, for which it is paid tariff rates established by the applicable local public service commission. Each company also supplies electricity at regulated rates to retail customers in its service territory who do not elect to purchase electricity from a competitive energy supplier. The regulatory term for this supply service is Standard Offer Service (SOS) in Delaware, the District of Columbia and Maryland, and Basic Generation Service (BGS) in New Jersey. In this Annual Report, these supply services are referred to generally as Default Electricity Supply.

Effective January 2, 2008, DPL sold its retail electric distribution assets and its wholesale electric transmission assets in Virginia. This sale also terminated DPL’s obligations as a supplier of electricity to retail customers in its Virginia service territory who do not elect to purchase electricity from a competitive supplier.

In the aggregate, the Power Delivery business delivers electricity to more than 1.8 million customers in the mid-Atlantic region and distributes natural gas to approximately 123,000 customers in Delaware.

Transmission of Electricity and Relationship with PJM

The transmission facilities owned by Pepco, DPL and ACE are interconnected with the transmission facilities of contiguous utilities and are part of an interstate power transmission grid over which electricity is transmitted throughout the mid-Atlantic portion of the United States and parts of the Midwest. The Federal Energy Regulatory Commission (FERC) has designated a number of regional transmission organizations to coordinate the operation and planning of portions of the interstate transmission grid. Pepco, DPL and ACE are members of the PJM Regional Transmission Organization (PJM RTO). In 1997, FERC approved PJM Interconnection, LLC (PJM) as the provider of transmission service in the PJM RTO region, which currently

 

B-9


Table of Contents

consists of all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. As the independent grid operator, PJM coordinates the electric power market and the movement of electricity within the PJM RTO region. Any entity that wishes to have electricity delivered at any point in the PJM RTO region must obtain transmission services from PJM, at rates approved by FERC. In accordance with FERC-approved rules, Pepco, DPL, ACE and the other transmission-owning utilities in the region make their transmission facilities available to the PJM RTO and PJM directs and controls the operation of these transmission facilities. Transmission rates are proposed by the transmission owner and approved by FERC. PJM provides billing and settlement services, collects transmission service revenue from transmission service customers and distributes the revenue to the transmission owners. PJM also directs the regional transmission planning process within the PJM RTO region. The PJM Board of Managers reviews and approves each PJM regional transmission expansion plan.

Seasonality

Power Delivery’s operating results historically have been seasonal, generally producing higher revenue and income in the warmest and coldest periods of the year. In Maryland and the District of Columbia, however, the decoupling of distribution revenue for a given reporting period from the amount of power delivered during the period, as the result of the adoption of a bill stabilization adjustment mechanism (BSA) for retail customers, has had the effect of eliminating changes in customer electricity usage due to weather conditions or other reasons as a factor having an impact on distribution revenue and income. The BSA took effect for Pepco and DPL in Maryland in 2007 and for Pepco in the District of Columbia in 2009.

Regulation

The retail operations of PHI’s utility subsidiaries, including the rates they are permitted to charge customers for the delivery and transmission of electricity and, in the case of DPL, the distribution and transportation of natural gas, are subject to regulation by governmental agencies in the jurisdictions in which they provide utility service as follows:

 

   

Pepco’s electricity delivery operations are regulated in Maryland by the Maryland Public Service Commission (MPSC) and in the District of Columbia by the District of Columbia Public Service Commission (DCPSC).

 

   

DPL’s electricity delivery operations are regulated in Maryland by the MPSC and in Delaware by the Delaware Public Service Commission (DPSC).

 

   

DPL’s natural gas distribution and intrastate transportation operations in Delaware are regulated by the DPSC.

 

   

ACE’s electricity delivery operations are regulated by the New Jersey Board of Public Utilities (NJBPU).

 

   

The transmission and wholesale sale of electricity by each of PHI’s utility subsidiaries are regulated by FERC.

 

   

The interstate transportation and wholesale sale of natural gas by DPL are regulated by FERC.

Blueprint for the Future

During 2007, Pepco, DPL and ACE each announced an initiative that they refer to as the “Blueprint for the Future.” This initiative includes installation of smart meters, further automation of the electric distribution system, and enhanced communication infrastructure, and combines traditional demand-side management (DSM) programs with new technologies and systems. Not all of these elements are being pursued in all jurisdictions, or within the same timeframe in all jurisdictions. All of these will help residential and non-residential customers manage their energy use, reduce the total cost of energy and provide other benefits. They also allow each utility to better manage and operate the electrical and gas systems.

 

B-10


Table of Contents

The programs include energy efficiency and conservation efforts, such as rebates or other financial incentives for residential customers to replace inefficient appliances and for business customers to use more energy efficient equipment, such as improved lighting and heating, ventilation and air condition systems. Under another DSM program initiative, the companies are launching new residential demand response programs, under which customers have the option to receive utility-provided smart thermostats or outdoor smart direct load control equipment. The equipment will be used by each utility to reduce residential air conditioner load during times of high wholesale market prices or periods of system constraints. In exchange, customers will receive additional financial incentives through bill credits and or new dynamic pricing rate structures. In the future, the companies anticipate encouraging non-residential customer peak demand reductions through similar rate structures and select demand response enabling technology. Each utility’s ability to establish specific programs in its service territory is dependent upon public service commission approval.

Under the Blueprint for the Future program, Pepco and ACE each plan over time to install smart meters for all electric customers in their service territories, and DPL plans to install smart meters for all electric and natural gas customers in its service territory, as part of an advanced metering infrastructure (AMI) system. The smart meters will provide the utilities with the ability to remotely read meters, identify the location of power outages and provide customers with more detailed information concerning their energy consumption, among other abilities. The communications infrastructure utilized to communicate with the smart meters will be leveraged in the future to also support distribution system automation.

The following is a discussion of the current regulatory status of each utilities Blueprint for the Future initiative:

Pepco

In April 2008, the MPSC approved Pepco’s proposed implementation of a new residential direct load control program for air conditioners. Pepco began installing residential direct load control equipment in Maryland in June 2009. In August 2009, the MPSC approved the implementation by Pepco of four residential and four non-residential DSM programs. On January 22, 2010, the MPSC approved surcharges for Pepco to recover the equipment costs for the direct load control program for air conditioners over a 15 year period and to recover the energy efficiency and conservation program costs over a five-year amortization period, with carrying costs set at the utility’s authorized rate of return. A proposal of Pepco before the MPSC for the implementation of an AMI system for its Maryland service territory is pending.

In March 2009, the DCPSC approved proposed budgets for five Pepco DSM programs. The cost recovery of these programs is through an existing surcharge. On December 17, 2009, the DCPSC issued an order permitting Pepco to implement an AMI system in the District of Columbia and establish a regulatory asset for AMI system costs. Pepco expect to commence AMI system deployment in the District of Columbia during the third quarter of 2010. On January 19, 2010, Pepco filed a revised residential direct load control program in the District of Columbia pursuant to a DCPSC order requesting the revised program proposal. In the filing, Pepco has proposed the recovery of the revised program costs through a new surcharge.

DPL

In April 2008, the MPSC approved DPL’s proposed implementation of a new residential direct load control program for air conditioners. DPL began installing residential direct load control equipment in Maryland in June 2009. In August 2009, the MPSC approved the implementation by DPL of four residential and four non-residential DSM programs. On January 22, 2010, the MPSC approved surcharges for DPL to recover the equipment costs for the direct load control program for air conditioners over a 15 year period and to recover the energy efficiency and conservation program costs over a five-year amortization period, with carrying costs set at the utility’s authorized rate of return.

 

B-11


Table of Contents

In September 2008, the DPSC approved the establishment of a regulatory asset associated with the deployment of an AMI system in Delaware. In November 2009, DPL began full-scale installation of smart meters for all of its Delaware electric and gas customers. A proposal of DPL before the MPSC for the implementation of an AMI system for its Maryland service territory is pending.

ACE

In July 2009, the NJBPU issued an order approving ACE’s implementation of a new residential direct load control program. Cost recovery for the program will be through a surcharge. The NJBPU is not expected to approve ACE’s proposal for the installation of an AMI system in the near-term.

MAPP Project

In October 2007, the PJM Board of Managers approved PHI’s proposal to construct a new 230-mile, 500-kilovolt interstate transmission line as part of PJM’s regional transmission expansion plan to address the reliability objectives of the PJM RTO system. At that time, it was contemplated that the transmission line would originate at Possum Point substation in northern Virginia, connect into three substations across southern Maryland, cross the Chesapeake Bay, tie into two substations across the Delmarva Peninsula and terminate at Salem substation in southern New Jersey and would become operational by June 1, 2013. In December 2008, the PJM Board of Managers approved a direct-current technology for segments of the project including the portion under the Chesapeake Bay.

In May 2009, the PJM Board revised its regional transmission expansion plan and (i) deferred until June 1, 2014, the date as of which the segment of the transmission line from Possum Point substation to the Indian River substation, the second substation on the Delmarva Peninsula, is required to be operational and (ii) determined that the Indian River to Salem portion of the proposed transmission line is not required at the present time. The proposed 150-mile transmission line from the Possum Point substation to the Indian River substation is referred to as the Mid-Atlantic Power Pathway (MAPP) project. The cost of the MAPP project, as currently constituted, is estimated at $1.2 billion.