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

2010 Annual Report to Shareholders

 

 

Dear Shareholders,

 

2010 was a year of transformation that has positioned Pepco Holdings, Inc. (PHI) as a regulated transmission and distribution company, with complementary operations in energy services. A series of strategic moves, discussed below, has set the foundation for significant investment in our power delivery business, which I am confident will result in long-term enhancement of electric system reliability, customer service and shareholder value.

 

Following the 2008-2009 economic down turn, your Board of Directors and executive leadership team reviewed PHI’s wholesale generation and retail energy supply operations and concluded that these businesses were not compatible with the low-risk model we believe best serves our stakeholders’ interests.

 

As a consequence, we embarked on a realignment process, announcing in December 2009 plans to exit the retail energy supply business and, in April 2010, the sale of our wholesale generation assets. We are continuing to profitably wind down the retail supply business as power supply contracts expire, and we used the $1.64 billion in proceeds from the sale of the generation business to pay down PHI parent debt. As expected, the repositioning has produced significant benefits—an improved business risk profile, reduced earnings volatility, lowered capital and collateral requirements and a strengthened credit profile.

 

The sale of our generation business created the need to reduce overhead related to this business and also offered a unique opportunity to streamline the organization. A rigorous internal review has been conducted, and more than 50 initiatives have been identified that will result in a projected net annual savings of approximately $28 million.

 

I am pleased that for the year 2010, PHI reported earnings from continuing operations of $1.24 per share

compared to 85 cents per share in 2009, excluding special items in both periods. Over the course of 2010, PHI delivered a 15 percent total shareholder return (stock price appreciation plus common stock dividend) to our common equity investors.

 

Infrastructure investments, regulatory outcomes, lower interest expense, income tax audit settlement adjustments and higher sales in our service territories (that have yet to adopt distribution revenue decoupling) contributed to the earnings improvement noted above.

 

2010 was a year of significant strategic change and I am very pleased with our progress. PHI is on a sound financial footing and these changes will enable us to focus more sharply on becoming a top-tier transmission and distribution company.

 

Executing the Plan

 

2011 and beyond is about executing our strategic plan, which focuses on investing in electric system reliability, building a smart grid, advancing the Mid-Atlantic Power Pathway transmission project, and growing our energy services business. Achieving constructive regulatory outcomes will be critical to this execution. Below is a progress report on these strategic initiatives.

 

   

Improving Reliability

 

PHI’s top priority is improving electric system reliability. We suffered a series of devastating storms over the past year that highlighted the need to accelerate investment in our infrastructure and improve reliability. We have developed a six-point Reliability Enhancement Plan to address performance gaps. We are implementing our plan in the Pepco service area first before expanding it to our other utility regions. Our plan focuses on replacing aging infrastructure, installing more automated equipment, selective undergrounding of cable and aggressively trimming trees that threaten our electric system equipment.

 

 

 


Table of Contents

Over the next five years, we will invest a total of $1.4 billion in Pepco’s distribution infrastructure. Across PHI’s service territory, we plan to invest $5.2 billion in the distribution and transmission system over the same five-year period.

 

In addition to these significant infrastructure investments, the company is conducting a thorough review of its storm restoration process to identify ways to improve customer communications and more quickly restore power. Our goal is to have recommendations resulting from this review operational by the summer storm season. Executing this plan is our top priority.

 

   

Achieving Constructive Regulatory Outcomes

 

We have been busy on the regulatory front with decisions received in four distribution base rate cases since the end of 2009 and two additional cases filed in 2010. In total, annual increases of $64 million in electric distribution base rates were authorized last year. Going forward, we will be focused on reducing regulatory lag as we expand our investment in reliability and make customer responsiveness improvements.

 

Of note, the Delmarva Power-Maryland electric distribution rate case filed in December 2010 includes two new provisions aimed at reducing regulatory lag. The first is a Reliability Investment Recovery Mechanism, which would provide full and timely recovery of future capital investments related to distribution system reliability. The second is an annual rate review process, which would adjust rates annually using actual financial data and the return on equity adopted in the most recent case to calculate a revenue requirement. We are hopeful that regulators will view these proposals favorably and that their adoption will provide momentum for favorable consideration of similar proposals in our other regulatory jurisdictions.

 

   

Building a Smart Grid

 

We continue to make significant progress installing Advanced Metering Infrastructure technologies as part of our plan to build a smart grid. As of March 1, we had exchanged about 245,000 existing mechanical electric meters for digital “smart” meters in Delaware; we expect to complete installation there in July. I am pleased to report that we have begun activating some of the customer benefits associated with smart meters, which include wireless meter reading, customer and utility access to enhanced energy use information via the Web, and utility notification of outages at a customer’s premise.

 

In the District of Columbia, full-scale installation of smart meters began in October 2010, while in

Pepco’s Maryland service area, we plan to begin installing smart meters in June 2011. The installations will take approximately 15 months to complete.

 

Overall, the smart meter installations have gone smoothly. Combined with our investment in distribution automation technologies, we look forward to offering our customers improved customer service, greater reliability and tools for reducing their energy use and costs.

 

   

Advancing MAPP

 

Building the Mid-Atlantic Power Pathway (MAPP) 500-kilovolt transmission line to improve reliability in the mid-Atlantic region continues to be a high priority. After extensive public input and months of study, we were pleased to announce last spring the proposed route through Dorchester County, Md., which would follow the Choptank River underwater, and make landfall east of Cambridge, Md. We have been successful in acquiring the majority of the necessary rights-of-way, which avoid sensitive sites such as the Blackwater National Wildlife Refuge and the proposed Harriet Tubman Underground Railroad National Historical Park.

 

Last fall, PJM Interconnection, the independent regional transmission planning authority and power grid operator, reaffirmed the need for MAPP with a target in-service date of June 2015. PJM, however, is in the process of reassessing reliability requirements for the region and is expected to complete its assessment this spring, which may result in a change in the target in-service date. Meanwhile, we continue to seek the required regulatory approvals. The estimated total cost of the project remains $1.2 billion. The Federal Energy Regulatory Commission-approved rate of return on these investments is 12.8 percent. In addition to the MAPP project, we expect to spend almost $1 billion on transmission infrastructure over the next five years to improve reliability.

 

   

Growing our Energy Services Business

 

At Pepco Energy Services, the profitable wind down of the retail energy supply business continues on track, and we are making good progress in growing the energy services business. In 2010, Pepco Energy Services signed $169 million in new energy services contracts including large contracts with BWI Thurgood Marshall Airport, the Henderson Hall Marine Corps base in Virginia and Prince George’s County Public Schools in Maryland. Pepco Energy Services also entered into a contract to construct a 2.2 megawatt solar electric generating system for Atlantic Cape Community College in New Jersey.

 

 

ii


Table of Contents

Since 1995, Pepco Energy Services has evolved into a leading provider of energy efficiency and renewable energy services. The benefits of energy efficiency provide long-term growth opportunities for this business, and we believe we can grow Pepco Energy Services in a manner consistent with our lower risk profile.

 

Demonstrating Environmental Sustainability

 

PHI has a long history and established record of environmentally sustainable practices, and we have been recognized for both the strength of our commitment and the transparency with which we do business. In 2010, PHI received high rankings among S&P 500 companies in Newsweek’s “Greenest Big Companies of America” survey and the London-based Carbon Disclosure Project Leadership Index.

 

All three PHI utilities have been named Tree Line USA Utilities by the Arbor Day Foundation and have engaged in successful partnerships with groups such as the New Jersey Audubon Society, the Maryland Green Registry, the Delaware Nature Society, the Anacostia Watershed Society and the Living Classrooms of the National Capital Region. For more information on the company’s environmental progress, I invite you to read Powering a Sustainable Future, PHI’s annual environmental sustainability report, available at pepcoholdings.com.

Moving Forward as a Regulated Transmission and Distribution Company

 

I believe that PHI has emerged from 2010 as a stronger company. We are on solid financial footing, our valuation has improved and our strategic focus on regulated transmission and distribution is clear. With this foundation established, we will move forward focused on our commitment to improving system reliability, increasing customer satisfaction and enhancing shareholder value.

 

I want to thank PHI’s Board of Directors for their active guidance and support as we transformed Pepco Holdings. I also want to sincerely thank all of our employees for their commitment and hard work during this period of tremendous change.

 

I am confident in our company’s strategy, and confident in our future and the value it will bring for customers and shareholders alike. Thank you for your continued investment in PHI.

 

Sincerely,

 

LOGO

Joseph M. Rigby

Chairman of the Board, President

    and Chief Executive Officer

March 31, 2011

 

 

iii


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 31, 2011

 

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 20, 2011 (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 hold an advisory vote on executive compensation;

 

  3. To hold an advisory vote on the frequency of the advisory vote on executive compensation;

 

  4. To ratify the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company for 2011;

 

  5. 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 21, 2011, 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 you received printed proxy materials, by completing and returning the enclosed proxy card. If you received printed materials, the instructions are printed on the 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 20, 2011. The Company’s 2011 Proxy Statement and 2010 Annual Report to Shareholders are available at www.pepcoholdings.com.

 

v


Table of Contents
     PAGE  

TABLE OF CONTENTS

  

Election of Directors

     6   

Nominees for Election as Directors

     7   

Board Review of Transactions with Related Parties

     15   

Board Meetings

     16   

Board Leadership Structure and Role in Risk Oversight

     16   

Board Committees

     18   

2010 Director Compensation

     21   

Security Ownership of Certain Beneficial Owners and Management

     23   

Advisory Vote on Executive Compensation

     24   

Compensation/Human Resources Committee Report

     25   

Compensation Discussion and Analysis

     25   

Executive Compensation

     41   

2010 Summary Compensation Table

     41   

2010 Grants of Plan-Based Awards

     45   

Outstanding Equity Awards at December 31, 2010

     47   

2010 Option Exercises and Stock Vested

     48   

Pension Benefits at December 31, 2010

     49   

Nonqualified Deferred Compensation at December 31, 2010

     53   

Advisory Vote on the Frequency of Holding an Advisory Vote on Executive Compensation

     60   

Audit Committee Report

     62   

Ratification of the Appointment of the Independent Registered Public Accounting Firm

     63   

Shareholder Proposals and Director Nominations

     64   

Other Matters Which May Come Before the Meeting

     66   

Policy on the Approval of Services Provided By the Independent Auditor

     A-1   

2010 Annual Report to Shareholders

     B-1   


Table of Contents

PROXY STATEMENT

 

Annual Meeting of Shareholders

 

Pepco Holdings, Inc.

 

March 31, 2011

 

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 2011 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 2010 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 31, 2011.

 

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 20, 2011 (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.

 

Do I need an admission ticket to attend the Annual Meeting in person?

 

Yes. In order to be admitted to the Annual Meeting, you must present an admission ticket, along with a valid form of government-issued picture identification, such as a driver’s license, that matches your name on the admission ticket.

 

If you received your proxy materials by mail, your admission ticket is attached to your proxy card. If you received your proxy materials by e-mail, your admission ticket is the e-mail, which you must print out and bring with you to the Annual Meeting. If you received a Notice of Availability, your admission ticket is the Notice of Availability. Photocopies will not be accepted. If you lose your ticket, please call American Stock Transfer & Trust Company at 1-866-254-6502 (toll-free) to request a replacement.

 

If you hold your shares through a bank or brokerage firm, then the original copy of your account statement, dated March 31, 2011 or later and showing your ownership of common stock, is your admission ticket. Photocopies will not be accepted. If you lose your original statement, then contact your bank or brokerage firm directly.

 

Cameras, camera phones, cell phones, recording equipment, electronic devices, computers, large bags, briefcases and packages will not be permitted in the meeting room.

 

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

 

1


Table of Contents

announced in a news release at a later date. The Annual Meeting Webcast will be archived and available for 30 days after the Annual Meeting 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. To hold an advisory vote on executive compensation.

 

The Board recommends a vote FOR this proposal.

 

3. To hold an advisory vote on the frequency of the advisory vote on executive compensation.

 

The Board recommends a vote for a frequency of ONE YEAR.

 

4. The ratification of the appointment by the Audit Committee of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2011.

 

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 the Company’s common stock, par value $.01 per share (the “common stock”), must be present at the meeting either in person or by proxy.

 

Who is eligible to vote?

 

All shareholders of record at the close of business on Monday, March 21, 2011 (the “record date”) are entitled to vote at the Annual Meeting. As of the close of business on the record date 225,378,830 shares of 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.

 

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 enclosed postage-paid envelope.

 

The Internet and telephone voting facilities for shareholders of record will close at 5:00 p.m. Eastern time on May 19, 2011. Your signed proxy card or the proxy you grant via the Internet or by telephone will be voted in accordance with your instructions.

 

2


Table of Contents

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; FOR the approval of the Company’s executive compensation; for ONE YEAR as the frequency of the advisory vote on the Company’s executive compensation; and FOR the ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2011.

 

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. 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 on any of the proposals to be presented at the Annual Meeting (except the ratification of the independent auditor), you MUST indicate how you wish your shares to be voted. Absent such instructions, the proxy submitted by the broker with respect to your shares will indicate that the broker is not casting a vote with respect to the matter, which is referred to as a “broker non-vote.” Accordingly it is important that you provide voting instructions to your broker if your shares are held by a broker so that your vote will be 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 intermediary.

 

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 2010 Annual Report to Shareholders by 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 has instructions on how you may vote your shares. 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 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.

 

3


Table of Contents

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 more than one set of 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 is the 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.

 

4


Table of Contents

How can I obtain more information about the Company?

 

The Company’s 2010 Annual Report to Shareholders is included as Annex B after page A-3 of this Proxy Statement. You may also view the Annual Report by visiting the Company’s Web site at www.pepcoholdings.com.

 

5


Table of Contents

1. ELECTION OF DIRECTORS

 

The Company’s Board of Directors currently consists of 12 directors.

 

The Board of Directors, on the recommendation of the Corporate Governance/Nominating Committee, has nominated for re-election at the 2011 Annual Meeting Jack B. Dunn, IV, Terence C. Golden, Patrick T. Harker, Frank O. Heintz, Barbara J. Krumsiek, George F. MacCormack, Lawrence C. Nussdorf, Patricia A. Oelrich, 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, each to hold office for a one-year term that expires at the 2012 Annual Meeting, and until his or her successor is elected and qualified.

 

The Board of Directors unanimously recommends a vote FOR each nominee listed on pages 7-12.

 

What vote is required to elect the directors?

 

The Company’s Bylaws provide that each director shall be elected by a majority of the votes cast “for” his or her election, with the exception 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 2011 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 does not receive a majority vote 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, select another nominee recommended by the Corporate Governance/Nominating Committee. If another nominee is selected, all proxies will be voted for that nominee.

 

6


Table of Contents

NOMINEES FOR ELECTION AS DIRECTORS

 

LOGO   

Jack B. Dunn, IV, age 60, 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 66, 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 a member of the Executive Committee 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 a former CEO and Chief Financial Officer with responsibility for accounting, cash management, tax and corporate and project financing. 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 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. 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.

 

7


Table of Contents
LOGO   

Patrick T. Harker, age 52, 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. Dr. Harker served as a Trustee of the Goldman Sachs Trust and Goldman Sachs Variable Insurance Trust from 2000 through September 2010; 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 member of the Board of Trustees of Howard University since May 2009 and has also served as a director of Huntsman Corporation since March 2010. 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 67, 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.

 

8


Table of Contents
LOGO   

Barbara J. Krumsiek, age 58, since 1997 has been President and Chief Executive Officer and since 2006 Chair of Calvert Investments, 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/director for 49 Calvert-sponsored mutual 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 Investments, 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 non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.

LOGO   

George F. MacCormack, age 67, 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 career leadership roles in technology, manufacturing, sales, business and mergers and acquisitions at a large publicly held corporation. 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.

 

9


Table of Contents
LOGO   

Lawrence C. Nussdorf, age 64, 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 served as a director of CapitalSource Inc. from March 2007 through April 2010. Since September 2010, Mr. Nussdorf has served as a director of SAIC, Inc. 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 board member of two other New York Stock Exchange companies and 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, involving 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 57, 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 and the Music Theatre of Connecticut Board of Directors since August 2010. She has been a director of the Company since May 21, 2010.

 

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.

 

10


Table of Contents
LOGO   

Joseph M. Rigby, age 54, 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 to September 2007 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 32 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 non-profit organizations in the Company’s operating territory and therefore has significant community ties within the region.

LOGO   

Frank K. Ross, age 67, 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 currently teaches accounting at Howard University, Washington, D.C. and provides consulting services to 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.

 

11


Table of Contents
LOGO   

Pauline A. Schneider, age 67, 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 non-profit student loan provider headquartered in Wilmington, Delaware. She continues her service on the Access Group board. From December 2003 to November 2010, she served as 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, in addition to her service on other public company and non-profit boards, include her experience in government and public affairs, as well as her experience as a transactional lawyer. 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 64, 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. He is a trustee of and advisor to several national and Washington, D.C.-area non-profit 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.

 

12


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. Applying these standards, the Board has determined that 11 of the Company’s current 12 directors, consisting of Messrs. Dunn, Golden, Harker, Heintz, MacCormack, Nussdorf, Ross and Silverman and Mmes. Krumsiek, Oelrich and Schneider, 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 such that it 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, 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.

 

13


Table of Contents
  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 2010 and continues to render services to certain Company subsidiaries in 2011 with respect to certain contract 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’s subsidiaries had with Orrick and concluded that (1) the relationship between that law firm and the Company’s subsidiaries was solely a business relationship which did not afford Ms. Schneider any special benefits and (2) the amounts paid to the 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 the period March 2008 through March 2009. There has been no business or other relationship between FTI and the Company or any of its subsidiaries, including Pepco Energy Services, since that time. 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 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.

 

14


Table of Contents

Dr. Harker is President of the University of Delaware (“UDel”). Pepco Energy Services in UDel’s fiscal years ending June 2008, 2009 and 2010 supplied natural gas to UDel under a gas master agreement and in UDel’s fiscal year ending 2008 supplied electricity to UDel under an electric master agreement. Delmarva Power & Light Company (“DPL”) in UDel’s fiscal years ending 2008, 2009 and 2010 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. After examining the relationships between Pepco Energy Services and UDel and between DPL and UDel, the Board determined that (1) 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; (2) the amounts UDel paid to Pepco Energy Services and DPL collectively 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 (3) 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 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.

 

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

 

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. Approval of the transaction requires the affirmative vote of a majority of the disinterested directors voting on the matter after disclosure to the Board of all of the material facts of the transaction.

 

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 have commenced before it is discovered that a related person is involved with the transaction. In such instances, the Procedures require that the covered person 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 that the covered person consult with the Lead Independent Director to determine the appropriate course of action.

 

15


Table of Contents

BOARD MEETINGS

 

The Board held ten meetings during 2010. 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 all special 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 2010 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 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 the 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 2009, when Mr. Rigby was elected Chairman of the Company, the Board examined the issue of separating the Chairman and Chief Executive Officer roles and concluded that it was preferable for the Company to continue combining the roles and continue electing a Lead Independent Director annually. In December 2010, the Board again examined the issue of separating the Chairman and Chief Executive Officer roles and for the following reasons reached the same conclusion: (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.

 

16


Table of Contents

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, which is discharged by the Board of Directors and through its standing Committees. In discharging this responsibility, the Board and its Committees, 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 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. The Risk Management Committee’s areas of focus include competitive, economic, operational, financial (including accounting, credit, liquidity and tax), legal, regulatory, health, safety and environmental, political and reputational risks. The Company also has a Risk Working Group, composed of management employees across the organization, which is responsible for identifying and assessing new and emerging risk issues and developing mitigation strategies. The Risk Working Group reports monthly to the Risk Management Committee. 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 Board and the Finance Committee discuss with management the Company’s risk mitigation profile as part of their review of the Company’s strategic and financing plans, including management’s consideration of risk management associated with 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. In 2011, management conducted a risk assessment of the Company’s short-term and long-term incentive-based compensation which management reviewed with the Committee and PM&P. Each of these assessments sought to identify features of the Company’s compensation policies and practices that could encourage excessive risk-taking.

 

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 assessments 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.

 

17


Table of Contents
   

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 these reviews, management concluded, and advised the Compensation/Human Resources Committee, that the Company’s 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 eight meetings in 2010. The Committee represents and assists the Board in discharging its responsibility of oversight with respect to the accounting and control functions and financial 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, Oelrich and Ross (Chairman). The Board has determined that directors Golden, Krumsiek, Nussdorf, Oelrich 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 five meetings in 2010. 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 CEO’s annual evaluation and such other factors as they deem appropriate. The Committee reviews the

 

18


Table of Contents

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 and (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 also 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) compiles for the Compensation/Human Resources Committee various industry performance and other comparative information.

 

Committee members are Directors Dunn (Chairman), Harker, 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 2010. 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 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, and 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, Heintz, MacCormack (Chairman), Nussdorf, Oelrich 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 does not hold regularly scheduled meetings and did not hold any meetings in 2010. 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. Committee members are Directors Heintz, Nussdorf (Chairman), Rigby and Schneider.

 

The Finance Committee held seven meetings in 2010. The Committee oversees the financial objectives, policies, procedures and activities of the Company and considers the Company’s long-term and short-term

 

19


Table of Contents

strategic plans. 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 7-12 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.

 

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.

 

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.

 

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.

 

20


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, 2010.

 

2010 DIRECTOR COMPENSATION

 

Name

  Fees
Earned or
Paid in
Cash (1)
    Stock
Awards
    Option
Awards
    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

    137,000        0        0        0        0        0        137,000   

Patrick T. Harker

    127,000        0        0        0        0        0        127,000   

Frank O. Heintz

    137,000        0        0        0        0        0        137,000   

Barbara J. Krumsiek

    131,000        0        0        0        0        0        131,000   

George F. MacCormack

    136,000        0        0        0        0        0        136,000   

Lawrence C. Nussdorf

    153,000        0        0        0        0        0        153,000   

Patricia A. Oelrich

    74,074        0        0        0        0        0        74,074   

Frank K. Ross

    137,970        0        0        0        0        0        137,970   

Pauline A. Schneider

    121,000        0        0        0        0        0        121,000   

Lester P. Silverman

    136,000        0        0        0        0        0        136,000   

 

(1) Consists of retainer and meeting fees.

 

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 (the “Deferred Compensation Plan”). As more fully described below under the heading “Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan,” a director participating in the Deferred Compensation Plan can elect to have his or her account balance credited with any or a combination of: (i) the amount of interest rate calculated at the prime rate that would have been paid on an amount equal to the 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. The following table shows, for each director who elected to receive all or a portion of his or her 2010 retainer and meeting fees other than in cash, such director’s allocation among common stock and the investment alternatives under the Deferred Compensation Plan. The number of shares of common stock is calculated by dividing the amount payable by the average of the high and low price of the common stock on the second business day before the payment was earned.

 

            Dollar Amount of Deferred Compensation Plan Credit  

Name

   Shares of
Common Stock
     Phantom
Stock
     Non-Stock Plan
Accounts
 

Jack B. Dunn, IV

     0       $ 0       $ 134,000   

Patrick T. Harker

     3,687         0         0   

Frank O. Heintz

     3,974         0         0   

George F. MacCormack

     0         0         68,000   

Patricia A. Oelrich

     916         0         0   

Frank K. Ross

     2,693         0         0   

Pauline A. Schneider

     0         42,500         42,500   

 

21


Table of Contents

The following table sets forth, as of March 8, 2011, 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

     17,231   

George F. MacCormack

     5,514   

Lawrence C. Nussdorf

     3,975   

Pauline A. Schneider

     8,963   

Lester P. Silverman

     22,649   

 

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 2010, 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.

 

Each non-management director is required to own at least 7,500 shares of common stock or common stock equivalents (“phantom stock”). 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. Each current non-management director who has been a director for three years has met this requirement.

 

22


Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth, as of March 8, 2011, for each director, each director nominee, each executive officer named in the 2010 Summary Compensation Table and all directors and executive officers of the Company as a group (i) the number of shares of common stock beneficially owned, (ii) the number of shares the person has the right to acquire within 60 days, 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 (2)
     Shares of
Common Stock
Acquirable Within
60 Days
    Total
Beneficial
Ownership (3)
 

Jack B. Dunn, IV

     10,495         0        10,495   

Kirk J. Emge (4)

     60,970         0        60,970   

Terence C. Golden (5)

     44,132         2,000 (6)      46,132   

Patrick T. Harker

     8,115         0        8,115   

Frank O. Heintz (7)

     14,372         0        14,372   

John U. Huffman

     30,517         0        30,517   

Anthony J. Kamerick

     64,517         0        64,517   

Barbara J. Krumsiek

     4,000         0        4,000   

George F. MacCormack

     11,282         0        11,282   

Gary J. Morsches

     1,475         0        1,475   

Lawrence C. Nussdorf

     10,000         2,000 (6)      12,000   

Patricia A. Oelrich

     3,262         0        3,262   

Joseph M. Rigby

     152,992         0        152,992   

Frank K. Ross

     15,718         0        15,718   

Pauline A. Schneider

     8,080         0        8,080   

Lester P. Silverman (8)

     7,000         0        7,000   

David M. Velazquez

     40,820         0        40,820   

All Directors and Executive Officers as a Group (22 individuals)

     618,150         4,000        622,159   

 

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

 

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

 

(4) Includes 1,173 shares owned by Mr. Emge’s spouse. Mr. Emge disclaims beneficial ownership of these shares.

 

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

 

(6) Represents the number of shares of common stock that could be purchased through the exercise of stock options, all of which are currently exercisable.

 

(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.

 

23


Table of Contents

The following table sets forth, as of March 8, 2011, 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

     13,935,172 (9)      6.21

The Vanguard Group, Inc.

100 Vanguard Blvd.

Malvern, PA 19355

     11,240,510 (10)      5

 

(9) This disclosure is based on information furnished in Schedule 13G, filed with the SEC on February 2, 2011, by BlackRock, Inc.

 

(10) This disclosure is based on information furnished in Schedule 13G, filed with the SEC on February 10, 2011, by The Vanguard Group, Inc., in which it reports that it has (i) sole dispositive power over 10,959,310 of the shares and (ii) sole voting power over 281,200 of the shares.

 

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 2010 and on written confirmations provided by its directors and executive officers, the Company believes that during 2010 all of its directors and executive officers filed on a timely basis the reports required by Section 16(a), except that Ernest L. Jenkins 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.

 

2. ADVISORY VOTE ON EXECUTIVE COMPENSATION

 

Pursuant to Section 14A of the Exchange Act, the Company is required to submit to an advisory vote of shareholders the approval of the compensation paid to the Company’s named executive officers as disclosed pursuant to Item 402 of Regulation S-K including the Compensation Discussion and Analysis, compensation tables and narrative discussion in this Proxy Statement (pages 25-60).

 

What vote is required on this advisory proposal?

 

You may vote “for” or “against” or “abstain” from voting on this proposal. Because the vote on this proposal is advisory, it will not be binding on the Company. However, the Compensation/Human Resources Committee values the opinions expressed by shareholders in their vote on this matter and will take the outcome of the vote into account when considering the future compensation of the named executive officers. Approval of the proposal requires the affirmative vote of the holders of a majority of the common stock present and entitled to vote at the meeting.

 

How are the votes counted?

 

Shares, if any, that 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.

 

24


Table of Contents

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 FOR THIS PROPOSAL.

 

The Board of Directors believes that the Company’s executive compensation program which is targeted at the 50th percentile of the competitive range for each pay element aligns compensation with the long-term interests of the shareholders. The Company’s program is guided by the philosophy that total executive compensation should vary based on achievement of goals and objectives, both individual and corporate, and should be focused on short-term and long-term strategies that build shareholder value. The Board believes that the Company’s philosophy and practices have resulted in executive compensation decisions that are appropriate and that have benefitted the Company and the shareholders over time.

 

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

Patrick T. Harker

Frank O. Heintz

Barbara J. Krumsiek

Frank K. Ross

 

COMPENSATION DISCUSSION AND ANALYSIS

 

Executive Summary

 

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

 

2010 Committee Actions

 

In 2010, the Compensation/Human Resources Committee made the following updates to the named executive officers’ (the “NEOs”) executive compensation programs:

 

   

In connection with the long-term incentive plan awards, which has both a restricted stock and a performance stock component, changed the performance stock program goals starting with the 2010-2012 performance period to be based solely on total shareholder return over a three-year period (“TSR”);

 

   

Modified the Utility Peer Group for 2010 to more closely reflect the Company’s business model as primarily a transmission and distribution electric utility.

 

   

Modified the Utility Peer Group for 2011 to reflect the Company’s reduced revenue size after the sale of its Conectiv Energy business.

 

   

Eliminated, starting in 2011, the practice of granting of time-based restricted stock under the long-term incentive plan on which dividends have been paid prior to vesting, and, instead, grant time-based restricted stock units on which dividends will accrue, but will not be paid unless the restricted stock units vest.

 

25


Table of Contents
   

Modified the NEO salary structures (i) to reduce the number of tiers and adjust salary ranges, and the corresponding mid-points, to reflect current market pay practices and (ii) to increase the long-term incentive award opportunities to align with the market, including the Company’s Utility Peer Group for 2011.

 

   

Modified the metrics for the 2010 short-term incentive program for the NEOs and for employees in the Corporate Services business unit as a result of the sale of the Conectiv Energy business.

 

   

Determined that the Company will not enter into any new or materially amended agreements with executive officers that provide for any excise tax gross-ups with respect to payments contingent upon a change in control.

 

2011 Board Actions

 

In 2011, the Board of Directors adopted a policy prohibiting the hedging of the economic risk associated with the ownership of the Company’s common stock by directors and any employee.

 

2010 Incentive Compensation Results

 

   

Under the Company’s annual incentive compensation plan:

 

  The annual performance targets were achieved resulting in payouts exceeding the target amounts for Messrs. Kamerick, Emge and Huffman.

 

  Despite exceeding performance targets, in the case of Mr. Rigby, and achieving some performance targets, in the case of Mr. Velazquez, in view of the Company’s ongoing customer reliability issues, the Committee elected not to make any annual incentive payments to Messrs. Rigby and Velazquez.

 

   

Under the Company’s 2008 through 2010 performance period of the long-term incentive plan:

 

  Most of the targets were achieved resulting in awards for Messrs. Kamerick, Emge and Huffman.

 

  Despite achieving most performance targets, in the case of Mr. Rigby, and achieving some performance targets, in the case of Mr. Velazquez, in view of the Company’s ongoing customer reliability issues, the Committee elected not to make awards to Messrs. Rigby and Velazquez.

 

Establishment of 2011 Salaries

 

   

Messrs. Rigby and Velazquez did not receive merit increases for 2011 because of customer reliability issues;

 

   

Messrs. Kamerick and Emge received increases of 2.9% and 2.6%, respectively, based on their performance in 2010;

 

   

Mr. Huffman received an increase of 3.7% based on his 2010 performance and in view of his salary being significantly below the mid-point of the competitive range.

 

General Compensation Principles

 

   

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

 

   

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

 

26


Table of Contents
   

The Company 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 focus executives on long-range strategic goals and serve as a retention mechanism.

 

   

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

 

   

The Company has common stock ownership requirements for its officers which each NEO satisfies.

 

   

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 has not granted stock options since 2003 and none of the NEOs holds any stock options.

 

   

The Company offers its executive officers only limited perquisites.

 

   

One of the NEOs who was employed at December 31, 2010, 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 executive 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. The plan does not pay above-market or preferential earnings on deferred compensation.

 

   

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

 

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 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.

 

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 PM&P as its independent compensation consultant to advise the Committee on various executive compensation matters. In 2010, 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.

 

27


Table of Contents

Compensation Philosophy

 

The objectives of the Company’s executive compensation program are to attract, motivate and retain talented executives while promoting the interests of the Company, its customers and shareholders and fulfilling public service company objectives. 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 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. At the beginning of 2010, the Committee modified the Utility Peer Group to align the Company’s asset size and revenues with the median of the peer group and to remove companies that were primarily gas utilities from the peer group. For 2010, the Utility Peer Group consisted of the 22 companies listed below (the “2010 Utility Peer Group”). At December 31, 2010, the Company ranked at the 52nd percentile in total assets and at the 26th percentile in market capitalization relative to the companies that comprised the 2010 Utility Peer Group.

 

2010 Utility Peer Group

 

Allegheny Energy Inc.

Alliant Energy Corp.

Ameren Corp.

Centerpoint Energy Inc.

CMS Energy Corp.

Consolidated Edison

DPL Inc.

FirstEnergy Corp.

 

Great Plains Energy Incorporated

Northeast Utilities

NSTAR

NV Energy, Inc.

OGE Energy Corp.

PG&E Corporation

Pinnacle West Capital Corp.

PPL Corp.

 

Progress Energy, Inc.

Public Service Enterprise Group Incorporated

Teco Energy Inc.

Westar Energy, Inc.

Wisconsin Energy Corp.

Xcel Energy Corp.

 

In July 2010, the Company sold the Conectiv Energy power generation business to a third party. As a result of the reduction in the Company’s total assets because of the sale, the peer group was re-examined for 2011, which resulted in (i) the removal of two other companies (PG&E Corporation and Progress Energy Inc.) with total assets significantly greater than those of the Company (ii) the removal of two companies that are merging (Allegheny Energy Inc. and FirstEnergy Corp) to form a new company with asset size significantly greater than those of the Company’s and (iii) the addition of SCANA Corporation with total asset size comparable to the

 

28


Table of Contents

Company (the “2011 Utility Peer Group”). At December 31, 2010, the Company ranked at the 61st percentile in total assets and at the 28th percentile in market capitalization relative to the 19 companies that comprise the 2011 Utility Peer Group.

 

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. The tally sheet allows the Committee to review the totality of each NEO’s compensation.

 

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 stock and time-based restricted stock (or commencing in 2011, restricted stock units) 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 is 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. In December 2010, the Committee, in view of the sale of the Conectiv Energy business and the Company’s decrease in asset size, reviewed the executive salary and compensation structure to align it to the 2011 Utility Peer Group and the utility industry in general. In connection with this review, the Committee reduced the number of executive salary levels from eight to six, and lowered the salary ranges for each of the senior executive salary levels, resulting in a lower mid-point for each range. In addition, the Committee increased the long-term incentive targets for each of the NEO positions, as more fully discussed below. The process of setting an executive’s annual salary 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 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 47 executives) that

 

29


Table of Contents

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.

 

To establish salaries for 2011, 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%. Based on this data, the Committee approved a merit budget increase equal to 3% of total salaries, which it allocated among the executive group. Because the reduction in the salary ranges for the senior executive positions has resulted in current salaries above the mid-points of the new ranges, the senior executive salary increases generally were less than the full 3%.

 

The Committee, and in the case of Mr. Rigby, the independent directors, approved the following 2011 salary decisions for the executives whose employment continued into 2011.

 

Name

   2011 Salary
Level
     Percentage Increase
from 2010
 

Joseph M. Rigby

   $ 880,000         0

Anthony J. Kamerick

     498,000         2.9

David M. Velazquez

     484,000         0

Kirk J. Emge

     391,000         2.6

John U. Huffman

     365,000         3.7

 

In reviewing Mr. Rigby’s base salary, the Committee noted Mr. Rigby’s strong performance in executing the Company’s strategic plan to reposition the Company as fundamentally a regulated transmission and distribution company, the delivery of total shareholder return above the median of the Company’s 2010 Utility Peer Group, the improvement in the Company’s credit profile, the execution of the Company’s Blueprint for the Future initiative and its regulatory and financing plans. 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 2010 Utility Peer Group and noted that it was 90.3% of the median salary for his position. The Committee, however, also noted the electric delivery reliability issues that the Company has experienced. For this reason, the Committee did not recommend a base salary increase for 2011. The independent directors concurred in this recommendation.

 

In reviewing the base salary for Mr. Velazquez, the Committee noted Mr. Velazquez’s work which resulted in strong financial performance by the operating utilities, continued progress on the Blueprint for the Future and Mid-Atlantic Power Pathway initiatives, completion of the line of business reorganization, execution of the Company’s labor strategy, and the development of the reliability enhancement plan. The Committee did not increase Mr. Velazquez’s base salary due to the Company electric delivery reliability issues. Accordingly, Mr. Velazquez’s base salary remained at the 2010 level, which is at 101.9% of the midpoint of the range for his position.

 

The Committee increased Mr. Kamerick’s salary by 2.9%. The Committee noted Mr. Kamerick’s strong performance in executing the Company’s strategic, financing and regulatory plans, the delivery of total shareholder return above the median of the Company’s 2010 Utility Peer Group, and the improvement in the Company’s credit and risk profile. The Committee also noted that Mr. Kamerick’s salary was slightly above the midpoint for his position. The increase brought his salary to 104.8% of the midpoint of the range for his position.

 

The Committee increased Mr. Emge’s salary by 2.6%. The Committee noted Mr. Emge’s achievements during 2010, including development and execution of the Company’s regulatory plan, the successful sale of the Conectiv Energy business, and the continued strong legal department performance against benchmark metrics.

 

30


Table of Contents

The Committee also noted that Mr. Emge’s salary was slightly above the midpoint for his position. The increase brought his salary to 104.3% of the midpoint of the range for his position.

 

The Committee increased Mr. Huffman’s salary by 3.7%. The Committee noted Mr. Huffman’s achievements in 2010, including overall financial performance for Pepco Energy Services above targeted levels, his leadership in continuing the transition of the retail energy supply business to a wind down mode and the growth of the energy services component of the business. The Committee also noted that Mr. Huffman’s salary was below the midpoint for his current position. The increase brought his salary to 97.3% 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 opportunity (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 2010, which are the same as in 2009, was as follows:

 

Name

   Target as a
Percent of Salary
 

Joseph M. Rigby

     100

Anthony J. Kamerick

     60

David M. Velazquez

     60

Kirk J. Emge

     60

John U. Huffman

     60

Gary J. Morsches (11)

     60

 

(11) Mr. Morsches’ employment terminated in September 2010, resulting in the forfeiture of his EICP award opportunity.

 

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 goal allocation is designed to align the executive’s award opportunity with the executive’s management responsibilities. 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. 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.

 

Under the EICP as in effect for 2010, 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 his target level of short-term compensation.

 

The performance goals in 2010 for Messrs. Rigby, Kamerick and Emge 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 $255.1 million (40%); (ii) Company cash flow from operations relative to budgeted

 

31


Table of Contents

cash flow in the negative amount of $420.6 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.

 

In December 2010, the Committee modified the budgeted amounts that were the basis for the measurement of performance with respect to the financial EICP Corporate Goals to take account of the sale of the Conectiv Energy business, which was not anticipated when the goals were approved in January 2010. The budgeted net earnings were reduced to $199.2 million and the budgeted cash flow from operations was reduced to a negative $496.6 million. The new budgeted amounts corresponded to the earnings guidance provided by the Company in May 2010, after the sale of the Conectiv Energy business was announced.

 

The 2010 performance goals for Mr. Velazquez 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 $182.4 million (as adjusted for rate relief) (30%); (ii) Power Delivery capital spending that is within or below the budgeted capital spending of $661.5 million and percent of priority projects completed; (10%); (iii) Power Delivery operation and maintenance spending that is within or below the budgeted operation and maintenance spending of $727.0 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 2010 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 $28.8 million (excluding the Benning Road and Buzzard Point power plants) (65%); (ii) the Benning Road and Buzzard Point power plants’ net income (5%); (iii) bad debt write-off (10%); (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%).

 

The 2010 performance goals for Mr. Morsches 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 $75 million (60%); (ii) capital spending that is within or below the budgeted capital spending of $182.7 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%).

 

These 2010 award opportunities are shown in the 2010 Grants of Plan-Based Awards table under the heading “Estimated Future Payouts Under Non-Equity Incentive Plan Awards.”

 

Based on 2010 performance, the NEOs received the following awards under the EICP:

 

   

Messrs. Kamerick and Emge received awards at the 116% level. This was based on the combination of (i) Company net earnings relative to budgeted net earnings and Company cash flow from operations relative to budgeted cash flow significantly in excess of the target levels, (ii) performance with respect to customer satisfaction below the minimum level, (iii) performance with respect to diversity below the target level, and (iv) performance with respect to recordable injuries below the minimum level and fleet accident slightly better than target. Despite performance at this level, in view of the Company’s ongoing customer reliability issues, the Committee elected not to make any annual incentive payment to Mr. Rigby.

 

32


Table of Contents
   

Mr. Huffman received an award at the 114.9% level based on the achievement of Pepco Energy Services Goals as a result of a combination of Pepco Energy Services earnings, earnings from the power plants, bad debt write off and diversity significantly exceeding target and safety significantly below target.

 

   

The Power Delivery Goals were achieved at the 77.2% level based on (i) earnings significantly in excess of target, (ii) customer satisfaction, reliability and recordable injuries significantly below target, (iii) diversity below target, and (iv) preventable fleet accidents slightly better than target. Despite performance at this level, in view of the Company’s ongoing customer reliability issues, the Committee elected not to make any annual incentive payment to Mr. Velazquez.

 

These payments are reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. Because his employment terminated in September 2010, Mr. Morsches did not receive an EICP award for 2010.

 

In December 2010, the Committee received from PM&P an analysis of the Company’s total compensation for its executive officers relative to that of the 2011 Utility Peer Group and the utility industry in general. This analysis concluded that the short-term incentives for each of the NEOs were within the market median range of practices.

 

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 opportunity (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 2010, which are the same as in 2009, was as follows:

 

Name

   Target as a
Percent of Salary
 

Joseph M. Rigby

     200

Anthony J. Kamerick

     100

David M. Velazquez

     100

Kirk J. Emge

     85

John U. Huffman

     85

Gary J. Morsches (12)

     85

 

(12) Mr. Morsches’ employment terminated in September 2010.

 

In December 2010, the Committee received from PM&P an analysis of the Company’s total compensation for its executive officers relative to that of the 2011 Utility Peer Group and the utility industry in general. This analysis concluded that the target amount of the Company’s long-term incentive compensation was below the midpoint of the competitive range. In view of PM&P’s analysis, the Committee increased the NEO’s long-term incentive compensation targets commencing in January 2011 to bring the long-term incentive opportunity to the mid-point of the range, as follows:

 

Name

   Target as a
Percent of Salary
 

Joseph M. Rigby

     250

Anthony J. Kamerick

     125

David M. Velazquez

     125

Kirk J. Emge

     100

John U. Huffman

     100

 

33


Table of Contents

Under the Company’s long-term incentive compensation arrangements as in effect through 2010, (i) two-thirds of an executive’s targeted long-term incentive award opportunity was 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 was 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 total shareholder return, the primary objective of the Restricted Stock Program is executive retention and the alignment of the financial interests of the executive 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.

 

The Committee has decided to replace, beginning in 2011, Restricted Stock awards under the Restricted Stock Program with restricted stock unit (“RSUs”) awards. Each RSU will entitle the holder to receive one share of common stock at the end of the three-year period beginning on the date of the grant. Like the Restricted Stock awards, which are more fully described below, the RSUs will be subject to forfeiture if the employment of the executive terminates before the end of the three-year period, subject to the same exceptions as apply to the Restricted Stock. Unlike the current Restricted Stock awards, however, on which dividends are paid during the three-year vesting period when the Company pays a dividend on the common stock regardless of whether an award vests, in the case of RSUs, when the Company pays a dividend on the common stock during the three-year vesting period, the participant’s account will be credited with additional RSUs corresponding to the amount of the dividend. These additional RSU credits will be forfeited if the award does not vest. The Committee has made this change because it ensures that the executive will only receive the benefit of dividends if an award is earned.

 

Performance Stock Program.    Under the Performance Stock Program as in effect for the three-year performance periods beginning in each of 2006 through 2009, the performance targets for each participating executive were based on annual earnings and cash flow goals established for the Company as a whole and for its business units. The particular performance goals applicable to an executive depended on the executive’s position within the Company. Typically, the performance goals were established relative to the performance of the Company and its business units in the year immediately preceding the first year of the three-year period, and were set at levels that reflected year-to-year improvement over the three-year period. The objective of the Committee was to set target levels which, if achieved, would place the Company’s performance at the 75th percentile within the Utility Peer Group.

 

Following the end of 2010, the Committee determined the payouts for the 2008 through 2010 performance period based on the extent to which the annual performance targets for each year over the term of the award were achieved:

 

   

Mr. Rigby was entitled to earn an award that was based entirely on LTIP Corporate Goals (consisting 75% on a Company earnings goal and 25% on a Company cash flow from operations goal). For the three-year period, the Company earnings were on average below target and the Company cash flow from operations was on average significantly above target. This performance would have entitled Mr. Rigby to earn 100% of the target number of shares of common stock; however, in view of the Company’s ongoing customer reliability issues, the Committee elected not to make any award to Mr. Rigby.

 

   

Mr. Kamerick was entitled to earn an award that was based 52% on the LTIP Corporate Goals and 48% on LTIP Corporate Services Goals (composed 80% of the LTIP Power Delivery Goals, 10% of the LTIP Conectiv Energy Goals and 10% of the LTIP Pepco Energy Services Goals, each as defined below). Based on the Company results, combined with the Power Delivery, Conectiv Energy and Pepco Energy Services results, as more fully described below, Mr. Kamerick earned 110.9% of the target number of shares of common stock.

 

34


Table of Contents
   

Mr. Emge was entitled to earn an award that was based 93.2% on the LTIP Corporate Goals and 6.8% on the LTIP Corporate Services Goals. Based on the Company results, combined with the Power Delivery, Conectiv Energy and Pepco Energy Services results, as more fully described below, Mr. Emge earned 101.5% of the target number of shares of common stock.

 

   

Mr. Huffman was entitled to earn an award that was based entirely on LTIP Pepco Energy Services Goals (consisting 37.5% on a Company earnings goal, 37.5% on a Pepco Energy Services earnings goal, 12.5% on a Company cash flow from operations goal and 12.5% on a Pepco Energy Services cash flow from operations goal). For the three-year period, Pepco Energy Services earnings and cash flow from operations were on average below the targets. Based on these results, combined with the Company results, Mr. Huffman earned 87.9% of the target number of shares of common stock.

 

   

Mr. Velazquez was entitled to earn an award that was based (i) 38.8% on LTIP Conectiv Energy Goals (consisting 37.5% on a Company earnings goal, 37.5% on a Conectiv Energy earnings goal, 12.5% on a Company cash flow from operations goal and 12.5% on a Conectiv Energy cash flow from operations goal) and (ii) 61.2% on LTIP Power Delivery Goals (consisting 37.5% on a Company earnings goal, 37.5% on a Power Delivery earnings goal, 12.5% on a Company cash flow from operations goal and 12.5% on a Power Delivery cash flow from operations goal). For the three-year period, (i) Conectiv Energy earnings were on average below target and Conectiv Energy cash flow from operations was on average significantly above target and (ii) Power Delivery earnings were on average above target and Power Delivery cash flow from operations was on average significantly above target. This performance would have entitled Mr. Velazquez to earn 109.5% of the target number of shares of common stock; however, in view of the Company’s ongoing customer reliability issues, the Committee elected not to make any awards to Mr. Velazquez.

 

   

The termination of Mr. Morsches’ employment resulted in the forfeiture of his Performance Stock Program opportunity.

 

The numbers of shares awarded are shown on the 2010 Option Exercises and Stock Vested table in the column headed “Stock Awards — Number of Shares Acquired on Vesting.”

 

For the three-year performance period beginning in 2010, the Committee revised the Performance Stock Program to use the Company’s total shareholder return relative to that of the 2010 Utility Peer Group as the sole performance goal (“Relative TSR”). The Committee believes this performance measure balances the executives’ overall incentive pay opportunities between goals for Company performance and the Company’s financial performance in relation to the Utility Peer Group and is more representative of current compensation design trends and peer group practices. Total shareholder return for the Company and for the companies in the 2010 Utility Peer Group is the sum of (i) the positive or negative change in the price of the Company’s 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) and (ii) the aggregate amount of dividends paid over the three-year period. The following table shows the percent of the target award that will be earned by an executive 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%

 

In addition, if the Company’s total shareholder return over the three-year period is negative, 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.

 

35


Table of Contents

Awards will be pro-rated when performance falls between the specified levels. For example, for performance at the 62nd percentile, the award will be 124% of target. If, during the course of the three-year performance period, a significant event occurs, as determined in the sole discretion of the Committee, that the Committee expects to have a substantial effect on the Relative TSR performance objective during the period, whether related to the Company or one or more companies in the 2010 Utility Peer Group, the Committee may revise the performance objective.

 

Awards under the Performance Stock Program are subject to forfeiture if the employment of the executive terminates before the end of the performance period, subject to certain exceptions described below under the heading “Executive Compensation — Termination of Employment and Change in Control Benefits.” If shares of Performance Stock 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 time the shares are received had the cash dividends that would have been paid during the performance period on a number of shares equal to the number of shares of Performance Stock earned been reinvested in additional shares of common stock.

 

For further information on the Performance Stock award opportunities established for the NEOs in 2010, see the 2010 Grants of Plan-Based Awards table.

 

Restricted Stock Program.    The number of shares of common stock that vested as of January 24, 2011, pursuant to the 2008 awards under the Restricted Stock Program are shown on the 2010 Option Exercises and Stock Vested table in the column headed “Stock Awards — Number of Shares Acquired on Vesting.” The number of shares of Restricted Stock awarded to each of the NEOs under the Restricted Stock Program in 2010 is shown on the 2010 Grants of Plan-Based Awards table in the column headed “All Other Stock Awards: Number of Shares of Stock or Units.” In each case, the 2010 share awards are subject to forfeiture if the employment of the executive terminates before January 28, 2013, subject to certain exceptions described below under the heading “Executive Compensation — 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.

 

Retirement Programs.    The Company’s retirement plans, consisting of both its general employee retirement plan and supplemental retirement plans, are discussed in detail in the narrative headed “Retirement Plans” following the Pension Benefits at December 31, 2010 table. 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 in which the NEOs participate (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 the individual participates. In addition, a participant in the Pepco Holdings Retirement Plan, if designated by the Chief Executive Officer, is entitled to either or both 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, or (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. The supplemental retirement plan benefits applicable to the NEOs are described in the narrative headed “Retirement Plans” following the Pension Benefits at December 31, 2010 table.

 

36


Table of Contents

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 16 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 16 to the Summary Compensation Table, the Company provides certain NEOs with perquisites and other personal benefits, including: (i) a car allowance, (ii) Company-paid parking, (iii) tax preparation and financial planning services, (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 2010, 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 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, 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.

 

37


Table of Contents

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.

 

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) for 2010.

 

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 %

Gary J. Morsches

       41 %       59 %

 

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) for 2010.

 

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 %

Gary J. Morsches

       41 %       59 %

 

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.”

 

The Company also maintains a Change-in-Control Severance Plan in which 46 executives currently participate. Under this plan, which is described under the heading “Termination of Employment and Change in

 

38


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 termination of employment in September 2010, the Company entered into an agreement with Mr. Morsches under which he was paid certain severance benefits. See “Termination of Employment and Change in Control Benefits — Morsches Termination Benefits.”

 

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 terminated 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 and RSUs 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

     3 times salary   

Senior Vice President

     2 times salary   

Vice President

     1 times salary   

 

39


Table of Contents

Each officer had until December 31, 2010, or if later has five years from the date of his election as an officer, 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 and RSUs are considered owned by the executive for the purpose of meeting the ownership requirement. The Company has a policy prohibiting the hedging of 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.

 

40


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, 2010, determined on the basis of their total compensation for 2010 (excluding the amounts under the heading “Change in Pension Value and Nonqualified Deferred Compensation Earnings” in the table). The table also includes Gary J. Morsches, whose employment terminated in September 2010, who would have been one of the three other most highly compensated executive officers employed as of December 31, 2010, had his employment not terminated prior to that date. The information in this table includes compensation paid by the Company or its subsidiaries.

 

2010 SUMMARY COMPENSATION TABLE

 

Name and Principal Position

  Year     Salary     Bonus     Stock
Awards (13)
    Option
Awards
    Non-Equity
Incentive
Plan
Compen-
sation (14)
    Change in
Pension
Value and
Nonqualified
Deferred
Compen-
sation
Earnings (15)
    All Other
Compen-
sation (16)
    Total
Compen-
sation
 

Joseph M. Rigby

    2010      $ 881,667      $ 0      $ 1,941,743        0      $ 0      $ 588,975      $ 140,586      $ 3,552,971   

Chairman, President and Chief Executive Officer

    2009      $ 796,669      $ 0      $ 1,426,036        0      $ 0      $ 742,945      $ 151,183      $ 3,116,833   
    2008      $ 659,375      $ 0      $ 515,087        0      $ 356,063      $ 513,827      $ 117,423      $ 2,161,775   

Anthony J. Kamerick

    2010      $ 484,917      $ 0      $ 533,982        0      $ 338,026      $ 844,732      $ 69,113      $ 2,270,770   

Senior Vice President and
Chief Financial Officer

    2009      $ 383,874      $ 0      $ 327,754        0      $ 0      $ 771,948      $ 54,818      $ 1,538,394   
    2008      $ 309,000      $ 0      $ 132,633        0      $ 184,010      $ 623,149      $ 49,318      $ 1,298,110   

David M. Velazquez

    2010      $ 484,907      $ 0      $ 533,982        0      $ 0      $ 118,719      $ 62,091      $ 1,199,699   

Executive Vice President

    2009      $ 423,729      $ 0      $ 398,823        0      $ 248,549      $ 131,214      $ 137,771      $ 1,340,086   
    2008      $ 341,000      $ 0      $ 248,832        0      $ 289,100      $ 83,241      $ 60,377      $ 1,022,550   

Kirk J. Emge

    2010      $ 381,722      $ 0      $ 357,291        0      $ 266,090      $ 471,012      $ 79,497      $ 1,555,612   

Senior Vice President and General Counsel (17)

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

John U. Huffman

    2010      $ 352,667      $ 0      $ 330,104        0      $ 242,669      $ 84,705      $ 184,784      $ 1,194,929   

President and Chief Executive Officer, Pepco Energy Services (17, 18)

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

Gary J. Morsches

    2010      $ 245,301      $ 451,000      $ 329,161        0      $ 0      $ 0      $ 184,511      $ 1,209,973   

President and Chief Executive Officer, Conectiv Energy
(17, 19, 20)

                 

 

(13) The amount shown for each year is the aggregate grant date fair value as determined in accordance with FASB ASC Topic 718 (excluding the effect of estimated forfeitures) of the Restricted Stock award opportunities (one-third of the total) and Performance Stock award opportunities (two-thirds of the total) established during that year. 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 2010 Restricted Stock and Performance Stock awards, see the section headed “Components of the Executive Compensation Program — Long-Term Incentive Plan Awards” in the Compensation Discussion and Analysis.

 

Had vesting of the 2010 Performance Stock awards at the maximum level of 200% of target been assumed, the grant date fair value of these awards would have been $2,751,602, $756,694, $756,694, $506,298, $467,784, and $466,458 for Messrs. Rigby, Kamerick, Velazquez, Emge, Huffman and Morsches, respectively.

 

41


Table of Contents

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

 

Had vesting of the 2008 Performance Stock awards at the maximum level of 200% of target been assumed, the grant date fair value of these awards would have been $686,800, $176,861 and $331,760 for Messrs. Rigby, Kamerick and Velazquez, respectively. The actual vesting results with respect to the 2008 Performance Stock awards are described below in and following the 2010 Option Exercises and Stock Vested table.

 

These amounts shown in the table do not include reinvested dividends on the Performance Stock or cash dividends paid on the Restricted Stock.

 

(14) Consists of awards under the EICP. For a further description of these awards, see the section headed “Components of the Executive Incentive Compensation Program — Annual Cash Incentive Awards” in the Compensation Discussion and Analysis.

 

(15) Consists of the aggregate annual increase in the actuarial present value of the executive’s accumulated benefits under all deferred benefit and actuarial pension plans. None of the NEOs received “above-market earnings” (as defined by SEC regulations) under any of the Company’s non tax-qualified deferred compensation plans.

 

(16) The totals shown in this column for 2010 consist of:

 

(a) Dividends paid on unvested shares of Restricted Stock held by the executive: Mr. Rigby — $75,929; Mr. Kamerick — $19,667; Mr. Velazquez — $22,191; Mr. Emge — $15,441; Mr. Huffman — $15,740; and Mr. Morsches — $9,129. For a further description of these payments, see “Long-Term Incentive Plan Awards — Restricted Stock Program.”

 

(b) The market value on December 31, 2010, of additional shares of common stock (calculated by multiplying the number of shares by the closing market price on December 31, 2010) issued to the executive equal to the number of shares that the executive would have owned on December 31, 2010 had the number of shares earned by the executive for the 2008-2010 Performance Stock award period under the LTIP been issued to the executive on January 1, 2008, the commencement date of the performance period, and had the dividends on such shares (and the reinvestment shares) been invested in additional shares of common stock: Mr. Rigby — $0; Mr. Kamerick — $12,903; Mr. Velazquez — $0; Mr. Emge — $17,575; Mr. Huffman — $24,200; and Mr. Morsches — $0. For a further description of these payments, see “Long-Term Incentive Plan Awards — Performance Stock Program.”

 

(c) Company-paid premiums on a term life insurance policy: Mr. Rigby — $1,952; Mr. Kamerick — $1,070; Mr. Velazquez — $1,070; Mr. Emge — $843; Mr. Huffman — $786; and Mr. Morsches — $587.

 

(d) Company matching contributions under the Retirement Savings Plan: Mr. Rigby — $11,025; Mr. Kamerick — $11,025; Mr. Velazquez — $11,025; Mr. Emge — $8,425; Mr. Huffman — $11,025; and Mr. Morsches — $11,025.

 

(e) Company matching contributions on deferred compensation: Mr. Rigby — $19,377; Mr. Kamerick — $5,258; Mr. Velazquez — $0; Mr. Emge — $7,151; Mr. Huffman — $1,532; and Mr. Morsches — $0. For a further discussion, see “Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan.”

 

42


Table of Contents

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

 

Name

   Car
Allowance(i)
     Parking      Tax
Preparation
Fee
     Financial
Planning
Fee
     Executive
Physical
Fee
     Club
Dues
     Spousal
Travel
 

Joseph M. Rigby

   $ 11,700       $ 2,400       $ 2,500       $ 10,405       $ 800       $ 2,268       $ 2,230   

Anthony J. Kamerick

   $ 11,700       $ 2,400       $ 2,500       $ 0       $ 0       $ 2,268       $ 322   

David M. Velazquez

   $ 11,700       $ 2,400       $ 2,500       $ 10,405       $ 800       $ 0       $ 0   

Kirk J. Emge

   $ 11,700       $ 2,400       $ 2,500       $ 10,405       $ 0       $ 430       $ 2,627   

John U. Huffman

   $ 11,700       $ 6,096       $ 2,500       $ 10,405       $ 800       $ 0       $ 0   

Gary J. Morsches

   $ 8,775       $ 0       $ 1,875       $ 20,752       $ 0       $ 0       $ 0   

 

(i) Consists of a nonaccountable expense allowance to compensate executives for business use of their automobiles.

 

In addition, in 2010, 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.

 

(17) Neither Mr. Emge nor Mr. Huffman met the requirements for inclusion in the Summary Compensation Table in 2008. Mr. Morsches did not meet the requirements for inclusion in the Summary Compensation Table in 2008 or 2009.

 

(18) For Mr. Huffman the amount shown for 2010 in the column headed “All Other Compensation” includes a payment in the amount of $100,000 paid in consideration of his agreement to remain an employee through December 31, 2010. See “Employment Agreements” below.

 

(19) For Mr. Morsches, the amount shown for 2010 in the column headed “All Other Compensation” includes a severance payment in the amount of $114,819 and a payment of $17,549 for unused vacation time made in connection with the termination of his employment. For a further discussion of the payments and benefits received by Mr. Morsches in connection with the termination of his employment, see “Termination of Employment and Change in Control Benefits — Morsches Termination Benefits” below.

 

(20) As a result of the termination of his employment in September 2010, Mr. Morsches forfeited the 2010 Restricted Stock awards and Performance Stock awards shown under the “Stock Awards” column.

 

Employment Agreements

 

The Company has an employment agreement with Mr. Rigby, which provides for his employment through August 1, 2012, and automatically extends for one year on each August 1 thereafter, unless either the Company or Mr. Rigby by notice given not later than three months prior to August 1 elects not to extend the agreement. 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.

 

43


Table of Contents
   

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 an employment agreement with Mr. Huffman which provided for his employment through December 31, 2010, after which he became an employee at will. The terms of the agreement included:

 

   

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

 

   

A cash payment in the amount of $100,000 if he remained 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 an employment agreement with Mr. Morsches. The benefits Mr. Morsches received under this agreement in connection with the termination of his employment are described below under the heading “Termination of Employment and Change in Control Benefits — Morsches Retirement Benefits.”

 

Relationship of Salary and Bonus to Total Compensation

 

The following table sets forth the 2010 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

     24.8

Anthony J. Kamerick

     21.4

David M. Velazquez

     40.4

Kirk J. Emge

     24.5

John U. Huffman

     29.5

Gary J. Morsches

     20.3

 

44


Table of Contents

2010 Incentive Compensation Awards

 

2010 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
(21)
 

Name

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

Joseph M. Rigby

                 

Executive Incentive Compensation Plan (22)

    1-28-10      $ 0      $ 880,000      $ 1,584,000             

LTIP—Restricted Stock Program (23)

    1-28-10                    34,258      $ 565,942   

LTIP—Performance Stock Program (24)

    2-25-10              0        68,516        137,032          1,375,801   

Anthony J. Kamerick

                 

Executive Incentive Compensation Plan (22)

    1-28-10        0        290,400        522,720             

LTIP—Restricted Stock Program (23)

    1-28-10                    9,421        155,635   

LTIP—Performance Stock Program (24)

    2-25-10              0        18,842        37,684          378,347   

David M. Velazquez

                 

Executive Incentive Compensation Plan (22)

    1-28-10        0        290,400        522,720             

LTIP—Restricted Stock Program (23)

    1-28-10                    9,421        155,635   

LTIP—Performance Stock Program (24)

    2-25-10              0        18,842        37,684          378,347   

Kirk J. Emge

                 

Executive Incentive Compensation Plan (22)

    1-28-10        0        211,200        380,160             

LTIP—Restricted Stock Program (23)

    1-28-10                    6,304        104,142   

LTIP—Performance Stock Program (24)

    2-25-10              0        12,607        25,214          253,149   

John U. Huffman

                 

Executive Incentive Compensation Plan (22)

    1-28-10        0        228,600        411,480             

LTIP—Restricted Stock Program (23)

    1-28-10                    5,824        96,212   

LTIP—Performance Stock Program (24)

    2-25-10              0        11,648        23,296          233,892   

Gary J. Morsches (25)

                 

Executive Incentive Compensation Plan (22)

    1-28-10        0        310,800        559,440             

LTIP—Restricted Stock Program (23)

    1-28-10                    5,807        95,932   

LTIP—Performance Stock Program (24)

    2-25-10              0        11,615        23,230          233,229   

 

(21) Represents the grant date fair value, as determined in accordance with FASB ASC Topic 718 (excluding the effect of estimated forfeitures), 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.

 

(22) For a further description of these awards, see the section headed “Components of the Executive Compensation Program — Annual Cash Incentive Awards” in the Compensation Discussion and Analysis. The “threshold” amount represents 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 represents overall performance at the 100% level and the “maximum” amount represents overall performance at or above the 180% level.

 

(23)

All awards vest on the third anniversary of the grant date if the executive 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.” For a further discussion of these

 

45


Table of Contents
 

awards, see the section headed “Components of the Executive Compensation Program — Long-Term Incentive Plan Awards — Restricted Stock Program” in the Compensation Discussion and Analysis.

 

(24)

All awards vest on the third anniversary of the grant date if the executive 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.” For a further discussion of these awards, see the section headed “Components of the Executive Compensation Program — Long-Term Incentive Plan Awards — Performance Stock Program” in the Compensation Discussion and Analysis. The “threshold” number of shares represents Relative TSR below the 25th percentile, the “target” number of shares represents Relative TSR at the 50th percentile and the “maximum” number of shares represents Relative TSR at or above the 90th percentile.

 

(25) As a result of termination of his employment in September 2010, Mr. Morsches forfeited each of his 2010 awards.

 

46


Table of Contents

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2010

 

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
(26)
    Market
Value of
Shares or
Units of
Stock
That
Have Not
Vested
(27)
    Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units or
Other
Rights
That
Have Not
Vested
(28)
    Equity
Incentive
Plan
Awards:
Market or
Payout
Value of
Unearned
Shares,
Units or
Other
Rights That
Have Not
Vested (27)
 
                                        ($)           ($)  

Joseph M. Rigby

                 

Awarded 2-25-10

                  68,516      $ 1,250,417   

Awarded 1-28-10

              34,258      $ 625,209       

Awarded 2-26-09

              16,518        301,454        33,037        602,925   

Awarded 1-22-09

              12,759        232,852        25,517        465,685   

Awarded 1-24-08 (29)

              6,770        123,553        13,541        247,123   

Anthony J. Kamerick

                 

Awarded 2-25-10

                  18,842      $ 343,867   

Awarded 1-28-10

              9,421      $ 171,933       

Awarded 6-13-09

              3,047        55,608        6,094        111,216   

Awarded 2-26-09

              1,079        19,692        2,157        39,365   

Awarded 1-22-09

              2,920        53,290        5,841        106,598   

Awarded 1-24-08 (29)

              1,743        31,810        3,487        63,638   

Awarded 1-1-01

    5,100         $ 24.59       12-31-10          

David M. Velazquez

                 

Awarded 2-25-10

                  18,842      $ 343,867   

Awarded 1-28-10

              9,421      $ 171,933       

Awarded 2-26-09

              2,376        43,362        4,753        86,742   

Awarded 1-22-09

              5,479        99,992        10,957        199,965   

Awarded 1-24-08 (29)

              3,271        59,696        6,541        119,373   

Kirk J. Emge

                 

Awarded 2-25-10

                  12,607      $ 230,078   

Awarded 1-28-10

              6,304      $ 115,048       

Awarded 1-22-09

              5,623        102,620        11,247        205,258   

Awarded 1-24-08 (29)

              2,370        43,253        4,739        86,487   

Awarded 1-1-01

    5,100         $ 24.59       12-31-10          

John U. Huffman

                 

Awarded 2-25-10

                  23,296      $ 425,152   

Awarded 1-28-10

              5,824      $ 106,288       

Awarded 1-22-09

              5,479        99,992        21,914        399,930   

Awarded 1-24-08 (29)

              3,271        59,696        13,082        238,746   

Gary J. Morsches

                 

Awarded 2-25-10

              0      $ 0        0      $ 0   

Awarded 1-28-10

              0        0        0        0   

Awarded 1-22-09

              0        0        0        0   

 

(26) 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 executive 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.”

 

(27) Calculated by multiplying the number of shares shown in the adjacent preceding column by $18.25, the closing market price on December 31, 2010, the last trading day of the year.

 

47


Table of Contents
(28) Consists of awards made pursuant to the Performance Stock Program under the LTIP. The awards made in 2008, 2009 and 2010 entitle the participating executive to earn shares of common stock to the extent pre-established performance objectives are satisfied for, respectively, (i) the three-year performance period beginning on January 1, 2008, and ending on December 31, 2010, (ii) the three-year performance period beginning on January 1, 2009, and ending on December 31, 2011, and (iii) the three-year performance period beginning on January 1, 2010, and ending on December 31, 2012. For each of the performance periods 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. For a further description of the 2010 awards, see the section headed “Components of the Executive Compensation Program — Long-Term Incentive Plan Awards — Performance Stock Program” in the Compensation Discussion and Analysis. For Messrs. Rigby, Kamerick, Velazquez and Emge, the number in the table reflects the number of shares that would be earned if the target level of performance is achieved because their 2009 performance awards under the Performance Stock Program were below the “target” level. For Mr. Huffman, the number in the table reflects the number of shares that would be earned if the maximum level of performance is achieved because his 2009 performance award under the Performance Stock Program was above the “target” level.

 

The shares of common stock earned by a participant will be fully vested on the date the performance award is earned as determined by the Committee.

 

If, at the end of the three-year performance period, Performance Stock is 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 period on the number of shares equal to the number of shares of Performance Stock earned been reinvested in additional shares of common stock.

 

(29) The value realized by the executive from the settlement of this award is shown in the 2010 Option Exercises and Stock Vested table.

 

2010 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 (30)
     Value Realized
on Vesting (31)
 

Joseph M. Rigby

     0         0         6,770       $ 125,516   

Anthony J. Kamerick

     0         0         6,392       $ 119,949   

David M. Velazquez

     0         0         3,271       $ 60,644   

Kirk J. Emge

     0         0         8,158       $ 153,044   

John U. Huffman

     0         0         10,186       $ 190,992   

Gary J. Morsches

     0         0         0       $ 0   

 

(30) Consists of both shares earned for the 2008 to 2010 Performance Stock award period under the Performance Stock Program and shares of common stock vested under the Restricted Stock Program of the LTIP.

 

(31) Represents the aggregate market value of the shares acquired (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).

 

48


Table of Contents

PENSION BENEFITS

AT DECEMBER 31, 2010

 

Name

 

Plan Name

  

Number of Years
of Credited

Service (32)

   Present
Value of
Accumulated
Benefits (33)
     Payments
During Last
Fiscal Year
 

Joseph M. Rigby

  Conectiv Cash Balance Subplan    31 yrs., 11 mos.    $ 1,827,089       $ 0   
  Conectiv SERP    31 yrs., 11 mos.      2,408,965         0   

Anthony J. Kamerick

  Pepco General Retirement Subplan    40 yrs., 0 mos.      1,907,430         0   
  Executive Retirement Plan    40 yrs., 0 mos.      2,441,433         0   

David M. Velazquez

  Conectiv Cash Balance Subplan    28 yrs., 6 mos.      488,543         0   
  Conectiv SERP    28 yrs., 6 mos.      190,728         0   

Kirk J. Emge

  Pepco General Retirement Subplan    24 yrs., 2 mos.      924,030         0   
  Executive Retirement Plan    24 yrs., 2 mos.      1,190,365         0   

John U. Huffman

  PHI Subplan    5 yrs., 0 mos.      83,015         0   
  Executive Retirement Plan    5 yrs., 0 mos.      108,988         0   

Gary J. Morsches

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

 

(32) Number of years of service credited at December 31, 2010.

 

(33) Represents the actuarial present value of the executive’s accumulated pension benefit calculated as of December 31, 2010, assuming the executive retires at the earliest time he may retire under the applicable plan without any benefit reduction due to age. 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.

 

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.

 

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.

 

49


Table of Contents

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 three 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 2010, 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 2010, 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, 2010, the present value of Mr. Velazquez’s accumulated benefits under the Conectiv Cash Balance Subplan was $488,543. 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 December 31, 2008, according to their original benefit formula under the applicable plan. Mr. Rigby, who was a participant in the Atlantic City Electric Retirement Plan, is the only NEO eligible to receive these grandfathered benefits. Normal retirement age under the Atlantic City Electric Retirement Plan is 65. Participants who are age 55 or older 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. There is no Social Security offset under the Atlantic City Electric Retirement Plan. 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. At the time of an employee’s retirement, the benefit under 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 Atlantic City Electric Retirement Plan were frozen, and all future benefit accruals are exclusively under the cash balance formula of the Conectiv Cash Balance Subplan.

 

The present value of Mr. Rigby’s accumulated benefits under the Conectiv Cash Balance Subplan at December 31, 2010, as shown in the Pension Benefits table, 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. For retirement dates prior to age 55, Mr. Rigby’s grandfathered benefits under the Atlantic City Electric Retirement Plan would be actuarially reduced. Had Mr. Rigby retired on December 31, 2010 and elected to receive his Conectiv Cash Balance Subplan benefit at that time, he could have received his benefit in one of several actuarially equivalent annuity forms, or he could have elected a lump sum payment. The amount of the lump sum payment would have been $2,332,281.

 

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

 

50


Table of Contents

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 and Emge are participants in the Pepco General Retirement Subplan. 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, 2010, the actuarial present value of his retirement benefit under the Pepco General Retirement Subplan as of that date would have been $1,120,435.

 

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. Mr. Morsches was a participant in the PHI Subplan, but was not vested because he had less than five years of service at the date of the termination of his employment.

 

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 NEOs participate in the following benefit structures under 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 (the “Deferred Compensation Exclusion”). 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 amount of the Deferred Compensation Exclusion 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 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 but for the Qualified Plan Limitations and the Deferred Compensation Exclusion.

 

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

 

51


Table of Contents

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 (ii) what the executive would have received (A) had the average of the highest three annual incentive awards in 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, (B) had the benefits of the executive under the Pepco Holdings Retirement Plan and under the Supplemental Benefit Structure not been reduced by the Qualified Plan Limitations and (C) had the amount of the Deferred Compensation Exclusion 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. Messrs. Kamerick and Emge 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 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, and (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. 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, in the case of Mr. Rigby, based on his “grandfathered” benefit under the Atlantic City Electric Retirement Plan. The benefit under the Conectiv SERP is payable in a lump sum following the termination of a participant’s employment. 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 the Qualified Plan Limitations. If Messrs. Rigby and Velazquez had retired on December 31, 2010, the net present value of their retirement benefits as of that date under the Conectiv SERP would have been $3,075,037 and $190,728, respectively.

 

52


Table of Contents

NONQUALIFIED DEFERRED COMPENSATION

AT DECEMBER 31, 2010

 

Name

  Executive
Contributions
in Last Fiscal
Year (34)
    Registrant
Contributions
in Last Fiscal
Year
    Aggregate
Earnings
in Last
Fiscal
Year
    Aggregate
Withdrawals/
Distributions
    Aggregate
Balance at
Last Fiscal
Year
End(36)
 

Joseph M. Rigby

         

Conectiv Deferred Compensation Plan

  $ 0      $ 0      $ 66,536      $ 0      $ 1,778,472   

PHI Executive and Director Deferred Compensation Plan

    157,735        19,377        20,279        0        554,922   

Anthony J. Kamerick

         

PHI Executive and Director Deferred Compensation Plan

    55,472        5,258        16,634        0        557,097   

David M. Velazquez

         

PHI Executive and Director Deferred Compensation Plan

    0        0        393        0        12,302   

Kirk J. Emge

         

PHI Executive and Director Deferred Compensation Plan

    43,766        7,151        23,897        0        311,812   

John U. Huffman

         

PHI Executive and Director Deferred Compensation Plan

    2,184        1,532        454        0        17,696   

Gary J. Morsches

         

PHI Executive and Director Deferred Compensation Plan

    0        0        0        0        0   

 

(34) All amounts shown are included in the “Salary” column of the Summary Compensation Table for the year 2010.

 

(35) All amounts shown are included in the “All Other Compensation” column of the Summary Compensation Table for the year 2010.

 

(36) Includes the following amounts reported as compensation in the Company’s Summary Compensation Table in years prior to 2010:

 

PHI Executive and Director Deferred Compensation Plan: Mr. Rigby — $296,791; Mr. Kamerick — $66,979; Mr. Emge — $36,050; Mr. Huffman — $936.

 

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.

 

53


Table of Contents

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, but subject to any limitation necessary to comply with the requirements of Section 409A of the Internal Revenue Code, (i) the calendar year following the year in which the participant retires, (ii) when the participant’s employment by the Company or service as a director ceases, (iii) 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 (iv) 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.

 

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 Company 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.

 

54


Table of Contents

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.

 

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 to perform substantially duties and responsibilities to the Company after notice of such failure has been given, (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

 

55


Table of Contents

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).

 

Resignation or Termination Due to Disability or Death.    Upon his resignation (other than under the specified circumstances described 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.

 

The employment agreements of Messrs. Huffman and Morsches each provided that, if at any time prior to December 31, 2010, the executive’s employment was terminated by the Company other than for cause (defined the same as under Mr. Rigby’s employment agreement), by the executive under specified circumstances that constitute “good reason,” or due to the executive’s death or disability, the Company was obligated to pay a pro-rata portion of the $100,000 payment that would have been due if the executive remained employed through December 31, 2010. If the executive’s employment had been terminated for cause, no payment would have been due under the 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.

 

56


Table of Contents
   

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. 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 RSU 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 RSU 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.

 

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.

 

57


Table of Contents

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 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.

 

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 (other than in the case of retirement, death or disability) is superseded by the provisions of his 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, Emge and Huffman each is a participant in the Executive and Director Deferred Compensation Plan. Mr. Rigby also is a participant in the Conectiv Deferred Compensation Plan. 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, 2010, under specified circumstances:

 

58


Table of Contents

Following a Change in Control, the Executive’s Employment is Terminated by the Company Other Than for Cause or the Executive Voluntarily Resigns under Specified Circumstances.    If, as of December 31, 2010, 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
(37)
    Lump Sum
Supplemental
Retirement
Benefit
Payment
    Accelerated
Vesting of
Service-
Based
Restricted
Stock (38)
    Target
Performance-
Based
Restricted
Stock (39)
    Welfare
Plan
Benefit
Payment
    Section
280G Gross-
Up Payment
    Total  

Joseph M. Rigby

  $ 5,280,000      $ 880,000      $ 4,345,972      $ 534,305      $ 1,298,433      $ 0      $ 5,244,436      $ 17,583,146   

Anthony J. Kamerick

    2,323,200        290,400        855,457        143,025        345,418        50,709        1,513,031        5,521,240   

David M. Velazquez

    2,323,200        290,400        386,843        152,880        369,307        45,822        1,306,014        4,874,466   

Kirk J. Emge

    1,219,200        228,600        511,941        106,763        257,964        23,844        775,833        3,124,145   

John U. Huffman

    1,226,400        211,200        326,103        102,091        246,722        32,508        765,681        2,910,705   

 

(37) Represents the target bonus under the EICP for 2010.

 

(38) Represents the market value on December 31, 2010 of unvested shares of common stock issuable pursuant to the Restricted Stock Program that would vest and become non-forfeitable (i) in the case of Mr. Rigby, prior to August 1, 2012 (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.

 

(39) Represents the market value on December 31, 2010 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 2008-2010 and 2009-2011 performance periods in accordance with the terms of his employment agreement assuming that the target level of performance is achieved and (ii) each of the other executives would be entitled under the terms of the LTIP at the end of the performance 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. Rigby — 8,396 shares; Mr. Kamerick — 3,251 shares; Mr. Velazquez — 3,481 shares; Mr. Emge — 2,435 shares; and Mr. Huffman — 2,331 shares.

 

Termination of the Executive’s Employment by the Company Other Than For Cause Not Following a Change in Control.    If, as of December 31, 2010, the employment of the executive had been terminated by the Company other than for cause and not following a change in control, each executive, other than Messrs. Rigby and Huffman, 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, the $100,000 payment that was due him under his employment agreement. 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.

 

59


Table of Contents

Voluntary Resignation by the Executive.    If, as of December 31, 2010, 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, 2010, 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, 2010, 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.

 

Morsches Termination Benefits

 

Mr. Morsches’ employment with the Company terminated in September 2010. In connection with his termination, Mr. Morsches entered into an agreement with the Company under which he received a lump sum payment in the amount of $109,819, which is the sum of the salary Mr. Morsches would have earned had his employment continued until December 31, 2010 and a supplemental payment of $5,000. All unvested awards under the Performance Stock Program and the Restricted Stock Program of the LTIP and under the EICP were forfeited.

 

3. ADVISORY VOTE ON THE FREQUENCY OF HOLDING AN ADVISORY

VOTE ON EXECUTIVE COMPENSATION

 

Pursuant to Section 14A of the Exchange Act, the Company is providing shareholders with the opportunity to recommend to the Board whether the advisory vote on the compensation of the executive officers named in the summary compensation table of the proxy statement should occur every one, two or three years.

 

What vote is required on this advisory proposal?

 

Your choices regarding the frequency of the executive compensation advisory vote are every “one,” “two” or “three” years, or you may “abstain” from voting on the matter. Because the vote on this matter is advisory, it will not be binding upon the Board. However, the Board of Directors values the opinions expressed by shareholders in their vote on this matter and will take the outcome of the vote into account when determining the frequency with which to hold the SEC-required executive compensation advisory vote. The alternative receiving the highest number of votes will indicate the frequency preferred by the Company’s shareholders.

 

60


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, but will not be included in the vote tally. 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 vote tally.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS AN ADVISORY VOTE EVERY YEAR.

 

At this meeting, the Board is recommending an advisory vote every year on executive compensation so that shareholders may annually express their views on the Company’s executive compensation program.

 

61


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 2010. First, the Audit Committee discussed with PricewaterhouseCoopers LLP, the Company’s independent registered public accounting firm for 2010, 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 (AICPA, Professional Standards, Vol. 1. AU Section 380 — 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, 2010 and 2009, 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, 2010, 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 (i) the conformity of these consolidated financial statements with accounting principles generally accepted in the United States of America, and (ii) the Company’s internal control over financial reporting as of December 31, 2010. 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 2010 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 2010.

 

AUDIT COMMITTEE

Frank K. Ross, Chairman

Terence C. Golden

Patrick T. Harker

Barbara J. Krumsiek

Lawrence C. Nussdorf

Patricia A. Oelrich

 

62


Table of Contents

4. 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 2010. The Audit Committee has reappointed the firm for 2011. 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 2012. 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 2010 and 2009 fiscal years, reviews of the financial statements included in the 2010 and 2009 Forms 10-Q of the Company and its subsidiary reporting companies, reviews of public filings, comfort letters and other attest services were $5,470,329 and $6,290,054, respectively. The amount for 2009 includes $144,638 for the 2009 audit that was billed after the 2009 amount was disclosed in the Company’s proxy statement for the 2010 Annual Meeting.

 

Audit-Related Fees

 

The aggregate fees billed by PricewaterhouseCoopers LLP for audit-related services rendered for the 2010 and 2009 fiscal years were $738,843 and $77,522, respectively. The amount for 2009 audit-related services was billed after the 2009 amount was disclosed in the Company’s proxy statement for the 2010 Annual Meeting. These services consisted of the audit of Conectiv Energy’s financial statements and other consultation services fees related to the disposition of Conectiv Energy.

 

Tax Fees

 

The aggregate fees billed by PricewaterhouseCoopers LLP for tax services rendered for the 2010 and 2009 fiscal years were $720,731 and $674,359, respectively. The amount for 2009 includes $169,545 that was billed after the 2009 amount was disclosed in the Company’s proxy statement for the 2010 Annual Meeting. 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 2010 and 2009 fiscal years were $12,500 and $3,000, 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.

 

63


Table of Contents

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.

 

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 4 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 2012 Annual Meeting?

 

In order to be considered for inclusion in the proxy statement for the 2012 Annual Meeting, shareholder proposals must be received by the Company on or before December 2, 2011.

 

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. In accordance with the Bylaws, in order for a shareholder to properly bring business before the 2012 Annual Meeting, the shareholder must give written notice to the Company’s Secretary at 701 Ninth Street, N.W., Washington, D.C. 20068, no earlier than January 21, 2012, and no later than February 10, 2012 (or if the date of the meeting is more than 30 days before or after May 20, 2012, 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 Annual Meeting and the reasons for conducting the business at the meeting, the name and record address of the shareholder, the number of shares of common stock owned beneficially and of record by the shareholder, and any material interest of the shareholder in the proposed business.

 

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 individuals for election as directors at a future Annual Meeting if the shareholder gives advance written notice of that intention. For the 2012 Annual Meeting, such notice must be delivered to the Company’s Secretary at 701 Ninth Street, N.W., Washington, D.C. 20068, no earlier than January 21, 2012, and no later than February 10, 2012 (or if the date of the meeting is more than 30 days before or after May 20, 2012, 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 number of shares of common stock beneficially owned by such shareholder; and, as to each nominee, the nominee’s name, age, business address, residence address, principal

 

64


Table of Contents

occupation or employment, the number of shares of common stock beneficially owned by the nominee, and any other information concerning the nominee that the Company would be required by SEC rules to include in a proxy statement.

 

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 2012 Annual Meeting must be submitted in writing to the Secretary of the Company on or before December 2, 2011, accompanied by the information described in the preceding paragraph. The Corporate Governance/Nominating Committee will take any such recommendations into account when selecting the nominees that it will recommend to the Board of Directors.

 

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 Officer 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 then 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

 

65


Table of Contents

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.

 

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 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 to remove any candidate 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 order of their priority. 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.

 

5. 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 proxy, whether given by signed proxy card, or via the Internet or by telephone proxy, gives the designated proxy holders discretionary authority to vote on such matters in accordance with their best judgment.

 

66


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 Phoenix Advisory Partners 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 duplicate Notices of Availability and sets 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 one or more of the shareholders at that address has previously notified the Company that they want to receive separate copies. Each Retirement Savings Plan participant in any event 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.

 

Regardless of whether you are a record holder or own your shares through a brokerage firm or bank, 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 2011 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

 

67


Table of Contents

subsidiaries. The Company’s Board of Directors has also adopted Corporate Governance Guidelines and charters for the 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 Executive Committee and Finance Committee. Copies 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: Secretary, 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 2010 Annual Report to Shareholders, including the “Five-Year Performance Graph 2006-2010,” 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.

 

68


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 less than $1,000,000 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

    2010 Annual Report to Shareholders    

 

TABLE OF CONTENTS   
     Page  

Glossary of Terms

     B-2   

Consolidated Financial Highlights

     B-5   

Business of the Company

     B-7   

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

     B-18   

Quantitative and Qualitative Disclosures About Market Risk

     B-65   

Management’s Report on Internal Control over Financial Reporting

     B-69   

Report of Independent Registered Public Accounting Firm

     B-70   

Consolidated Statements of Income

     B-71   

Consolidated Statements of Comprehensive Income

     B-72   

Consolidated Balance Sheets

     B-73   

Consolidated Statements of Cash Flows

     B-75   

Consolidated Statements of Equity

     B-76   

Notes to Consolidated Financial Statements

     B-77   

Quarterly Financial Information (unaudited)

     B-146   

Five-Year Performance Graph (2006-2010)

     B-158   

Board of Directors and Officers

     B-159   

Investor Information

     B-160   

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

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

AOCL

  

Accumulated other comprehensive loss

AMI

  

Advanced metering infrastructure

ASC

  

Accounting Standards Codification

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

Calpine

  

Calpine Corporation, the purchaser of Conectiv Energy’s wholesale power generation business

CWA

  

Federal Clean Water Act

CERCLA

  

Comprehensive Environmental Response, Compensation, and Liability Act of 1980

CH4

  

Methane gas

C02

  

Carbon dioxide

Conectiv

  

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

Conectiv Energy

  

Conectiv Energy Holding Company and its subsidiaries

CRMC

  

PHI’s Corporate Risk Management Committee

CSA

  

Credit Support Annex

DCPSC

  

District of Columbia Public Service Commission

DDOE

  

District of Columbia Department of the Environment

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

DPL

  

Delmarva Power & Light Company

DEDA

  

Delaware Economic Development Authority

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

EIS

  

Federal Environmental Impact Statement

 

B-2


Table of Contents

Term

  

Definition

Energy Services

  

Business of Pepco Energy Services that provides energy savings performance contracting services and designing, constructing and operating combined heat and power and central energy plants for customers

EPA

  

U.S. Environmental Protection Agency

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

FPA

  

Federal Power Act

GAAP

  

Accounting principles generally accepted in the United States of America

GCR

  

Gas Cost Rate

GWh

  

Gigawatt hour

HPS

  

Hourly Priced Service

ICR

  

Information Collection Request from the EPA

IRS

  

Internal Revenue Service

ISDA

  

International Swaps and Derivatives Association

ISO

  

Independent system operator

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

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.

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

NYMEX

  

New York Mercantile Exchange

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

NPDES

  

National Pollutant Discharge Elimination System

NUGs

  

Non-utility generators

OPEB

  

Other postretirement benefits

Panda

  

Panda-Brandywine, L.P.

Panda PPA

  

PPA between Pepco and Panda

PARS

  

Performance accelerated restricted stock

PCBs

  

Polychlorinated biphenyls

 

B-3


Table of Contents

Term

  

Definition

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

PUHCA 2005

  

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

QSPE

  

Qualifying special purpose entity

RECs

  

Renewable energy credits

RAR

  

IRS revenue agent’s report

RARM

  

Reasonable Allowance for Retail Margin

Regulated T&D Electric Revenue

  

Revenue from the transmission and the distribution 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

RI/FS

  

Remedial investigation and feasibility study

ROE

  

Return on equity

SEC

  

Securities and Exchange Commission

Sempra

  

Sempra Energy Trading LLC

SF6

  

Sulfur hexafluoride

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)

SPCC

  

Spill Prevention, Control, and Countermeasure

T&D

  

Transmission and distribution

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

VaR

  

Value at Risk

VRDBs

  

Variable Rate Demand Bonds

WACC

  

Weighted average cost of capital

 

B-4


Table of Contents

CONSOLIDATED FINANCIAL HIGHLIGHTS

 

     2010     2009      2008     2007     2006  
     (in millions, except per share data)  

Consolidated Operating Results

           

Total Operating Revenue

   $ 7,039      $ 7,402       $ 8,059 (f)    $ 7,613      $ 6,877   

Total Operating Expenses

     6,415 (a)      6,754 (d)       7,510        6,953 (h)      6,281 (j) 

Operating Income

     624        648         549        660        596   

Other Expenses

     474 (b)      321         276        255        252   

Preferred Stock Dividend Requirements of Subsidiaries

     —          —           —          —          1   

Income from Continuing Operations Before Income Tax Expense

     150        327         273        405        343   

Income Tax Expense Related to Continuing Operations

     11 (c)      104 (e)       90 (f)(g)      141 (i)      133   

Income from Continuing Operations

     139        223         183        264        210   

(Loss) Income from Discontinued Operations, net of Income Taxes

     (107     12         117        70        38 (k) 

Net Income

     32        235         300        334        248   

Earnings Available for Common Stock

     32        235         300        334        248   

Common Stock Information

           

Basic Earnings Per Share of Common Stock from Continuing Operations

   $ 0.62      $ 1.01       $ 0.90      $ 1.36      $ 1.10   

Basic (Loss) Earnings per Share of Common Stock from Discontinued Operations

     (0.48     .05         0.57        0.36        0.20   

Basic Earnings Per Share of Common Stock

     0.14        1.06         1.47        1.72        1.30   

Diluted Earnings Per Share of Common Stock from Continuing Operations

     0.62        1.01         0.90        1.36        1.10   

Diluted (Loss) Earnings per Share of Common Stock from Discontinued Operations

     (0.48     .05         0.57        0.36        0.20   

Diluted Earnings Per Share of Common Stock

     0.14        1.06         1.47        1.72        1.30   

Cash Dividends Per Share of Common Stock

     1.08        1.08         1.08        1.04        1.04   

Year-End Stock Price

     18.25        16.85         17.76        29.33        26.01   

Net Book Value per Common Share

     18.79        19.15         19.14        20.04        18.82   

Weighted Average Shares Outstanding

     224        221         204        194        191   

Other Information

           

Investment in Property, Plant and Equipment

   $ 12,120      $ 11,431       $ 10,860      $ 10,392      $ 10,003   

Net Investment in Property, Plant and Equipment

     7,673        7,241         6,874        6,552        6,317   

Total Assets

     14,480        15,779         16,133        15,111        14,244   

Capitalization

           

Short-term Debt

   $ 534      $ 530       $ 465      $ 289      $ 350   

Long-term Debt

     3,629        4,470         4,859        4,175        3,769   

Current Portion of Long-Term Debt and Project Funding

     75        536         85        332        858   

Transition Bonds issued by ACE Funding

     332        368         401        434        464   

Capital Lease Obligations due within one year

     8        7         6        6        6   

Capital Lease Obligations

     86        92         99        105        111   

Long-Term Project Funding

     15        17         19        21        23   

Non-controlling Interest

     6        6         6        6        24   

Common Shareholders’ Equity

     4,230        4,256         4,190        4,018        3,612   
                                         

Total Capitalization

   $ 8,915      $ 10,282       $ 10,130      $ 9,386      $ 9,217   
                                         

 

B-5


Table of Contents

 

(a) Includes $30 million ($18 million after-tax) related to a restructuring charge and $11 million ($6 million after-tax) related to the effects of Pepco divestiture-related claims.

 

(b) Includes a loss on extinguishment of debt of $189 million ($113 million after-tax).

 

(c) Includes $12 million of net Federal and state income tax benefits primarily related to adjustments of accrued interest on uncertain and effectively settled tax positions, $14 million of state tax benefits resulting from the restructuring of certain PHI subsidiaries and $17 million of state income tax benefits associated with the loss on extinguishment of debt.

 

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

 

(e) 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.

 

(f) 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.

 

(g) Includes $18 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 tentative settlement with the IRS on the mixed service cost issue 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.

 

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

 

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

 

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

 

(k) 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.

 

B-6


Table of Contents

BUSINESS OF THE COMPANY

Overview

Pepco Holdings, Inc. (PHI or Pepco Holdings), a Delaware corporation incorporated in 2001, is a holding company that, through the following regulated public utility subsidiaries, is engaged primarily in the transmission, distribution and default supply of electricity and, to a lesser extent, the distribution and supply of natural gas (Power Delivery):

 

   

Potomac Electric Power Company (Pepco), which was incorporated in Washington, D.C. 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