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Pepco Holdings DEF 14A 2013

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 (Amendment No. __)

    Filed by the Registrant   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))
Definitive Proxy Statement
Definitive Additional Materials
Soliciting Material Under Rule 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):
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:
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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.
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2013 PROXY STATEMENT AND NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS



  

 

March 27, 2013

Dear Pepco Holdings, Inc. Stockholder:

This year’s proxy statement demonstrates our ongoing commitment to simplify and more effectively communicate the matters to be considered at our upcoming Annual Meeting and the other information included in our proxy statement. This year, you will see several enhancements in how we present information to you about our Board nominees, corporate governance practices and executive compensation policies and practices.

We have attempted to improve the readability of our proxy statement by writing in “plain English” and using easier to read columns and text throughout. We also have presented information in a clearer fashion by using more bulleted lists, tables and graphics, and by grouping and ordering information so that it is easier to find within the proxy statement. In addition, we now include a proxy statement summary which appears immediately after the Notice of 2013 Annual Meeting of Stockholders. This summary serves to highlight important information included elsewhere in the proxy statement. The Board and I believe that these changes reflect our ongoing commitment to make the information you are looking for easier to locate and review.

You will see that we also have continued to enhance the discussion and analysis of our executive compensation programs. Our compensation discussion and analysis section beginning on page 29 of this proxy statement seeks to demonstrate how our executives’ pay is linked to our performance and to clearly explain our executive compensation philosophy and practices. Also, pages 13 through 27 of this proxy statement include detailed information about our director nominees and why we believe they are qualified to serve you.

We trust these enhancements to our proxy statement disclosures will aid your review of this important information. We are committed to maintaining a constructive and open dialogue with all of our stockholders, and we view these improvements to our annual proxy information as an important part of this commitment to you.

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

Sincerely,

 

Joseph M. Rigby
Chairman, President and Chief Executive Officer





 
Notice of 2013 Annual Meeting
of Stockholders

May 17, 2013

10:00 a.m.

To the Stockholders of Pepco Holdings, Inc.:

The 2013 Annual Meeting of Stockholders of Pepco Holdings, Inc., a Delaware corporation, will be held at 10:00 a.m., Eastern time, on Friday, May 17, 2013 (the doors will open to the public at 9:15 a.m.), at the Delmarva Power Conference Center, located at 4100 South Wakefield Drive, Newark, Delaware 19702, for the following purposes:

1.
  To elect 13 director candidates nominated by the Board of Directors, each to serve a one-year term and until his or her successor has been elected and qualified;
2.
  To approve, on an advisory basis, our executive compensation;
3.
  To ratify the appointment, by the Audit Committee of the Board of Directors, of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2013; and
4.
  To transact such other business as may properly be brought before the meeting or any adjournment or postponement of the meeting.

All holders of record of our common stock at the close of business on Wednesday, March 20, 2013, will be entitled to notice of and to vote at the meeting.

If you plan to attend the meeting in person, you must obtain an admission ticket in advance. For more details, please refer to pages 5-6 of the proxy statement.

By order of the Board of Directors,
  

 

Jane K. Storero
Vice President and Secretary

March 27, 2013
Washington, D.C.



Proxy Statement Summary

This summary highlights information contained elsewhere in this proxy statement. This summary does not contain all of the information you should consider, and you should read the entire proxy statement carefully before voting.

Annual Meeting of Stockholders

Date:
           
May 17, 2013
Time:
           
10:00 a.m., Eastern time (the doors will open to the public at 9:15 a.m.)
Place:
           
Delmarva Power Conference Center
4100 South Wakefield Drive
Newark, Delaware 19702
Record Date:
           
March 20, 2013
Agenda:
           
Ø Election of 13 directors each to serve a term of one year
Ø Approval, on an advisory basis, of our executive compensation
Ø Ratification of the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2013
Ø Transaction of any other business that may properly come before the meeting
Voting:
           
Stockholders as of the record date are entitled to vote. Each share of common stock is entitled to one vote for each director nominee and one vote for each of the proposals to be voted on.
Admission to
Meeting
:
           
  
If you plan to attend the meeting in person, you must present an admission ticket and a valid form of government-issued photo identification. If you are a record holder, your admission ticket is:

Ø attached to your proxy card, if you received a full set of materials;
Ø the e-mail you received, if you received materials by e-mail; or
Ø the Notice of Availability, if you did not receive proxy materials.

If you hold your shares in “street name” and you are planning to attend the meeting in person, you must send us a written request for an admission ticket, which we must receive by May 7, 2013. For more information, see “The Pepco Holdings, Inc. Annual Meeting — Attending the Annual Meeting in Person” beginning on page 5.
 

Voting Matters and the Board’s Recommendation

The following table summarizes the items that will be brought for a vote of our stockholders at the meeting, along with the Board’s recommendation as to how stockholders should vote on each item.

Proposal
No.



  
Description of Proposal
  
Board’s
Recommendation

1
           
Election of 13 director candidates nominated by the Board, each to serve a one-year term and until his or her successor has been elected and qualified
   
FOR
2
           
Approval, on an advisory basis, of the Company’s executive compensation (“Say on Pay”)
   
FOR
3
           
The ratification of the appointment, by the Audit Committee of the Board, of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2013
   
FOR
 

In addition to these matters, stockholders may be asked to vote on such other business as may properly be brought before the meeting or any adjournment or postponement of the meeting.

i



Votes Required for Approval

The table below summarizes the votes required for approval of each matter to be brought before the annual meeting, as well as the treatment of abstentions and broker non-votes.

Proposal
Number



  
Description of Proposal
  
Vote Required for
Approval

  
Abstentions
  
Broker Non
Votes

1
           
Election of directors
   
Majority of votes cast
   
Not applicable
   
Not taken into
account
2
           
Say on Pay advisory vote
   
Majority of shares present and entitled to vote
   
Against
   
Not taken into
account
3
           
Ratification of independent registered
public accounting firm
   
Majority of shares present and entitled to vote
   
Against
   
Not applicable
 

Director Nominees

The Board is comprised of 12 independent directors and our Chairman, who is also our President and Chief Executive Officer. The following table provides summary information about each director nominee, including whether the Board considers the nominee to be independent under the New York Stock Exchange’s independence standards and our Corporate Governance Guidelines. Each director is elected annually by a majority of votes cast.

Name


  
Age
  
Director
Since

  
Occupation
  
Independent
  
Positions/Committee
Memberships

Jack B. Dunn, IV
           
62
   
2004
   
President and Chief Executive Officer, FTI Consulting, Inc.
   
Yes
   
C, CG
H. Russell Frisby, Jr.
           
62
   
2012
   
Partner, Stinson Morrison Hecker LLP
   
Yes
   
F
Terence C. Golden
           
68
   
2002
   
Chairman, Bailey Capital Corporation
   
Yes
   
A, AE, F
Patrick T. Harker
           
54
   
2009
   
President, University of Delaware
   
Yes
   
A, C (Chair)
Frank O. Heintz
           
69
   
2006
   
Retired President and Chief Executive Officer, Baltimore Gas and Electric Company
   
Yes
   
LID, C, CG,
E (Chair)
Barbara J. Krumsiek
           
60
   
2007
   
President and Chief Executive Officer, Calvert Investments, Inc.
   
Yes
   
C, F
George F. MacCormack
           
69
   
2002
   
Retired Group Vice President, DuPont
   
Yes
   
CG (Chair), F
Lawrence C. Nussdorf
           
66
   
2002
   
President and Chief Operating Officer, Clark Enterprises, Inc.
   
Yes
   
A, AE, CG, E
Patricia A. Oelrich
           
59
   
2010
   
Retired Vice President, IT Risk Management, GlaxoSmithKline Pharmaceuticals
   
Yes
   
A (Chair), AE, CG
Joseph M. Rigby
           
56
   
2009
   
Chairman, President and Chief Executive Officer, Pepco Holdings, Inc.
   
No
   
E
Frank K. Ross
           
69
   
2004
   
Retired Managing Partner, KPMG LLP
   
Yes
   
A, AE, C
Pauline A. Schneider
           
69
   
2002
   
Partner, Orrick, Herrington & Sutcliffe LLP
   
Yes
   
E, F
Lester P. Silverman
           
66
   
2006
   
Director Emeritus, McKinsey & Company, Inc.
   
Yes
   
C, F (Chair)
 

ii



Key to Committee Memberships:

A
Audit Committee
AE
Audit Committee Financial Expert (as defined under Securities and Exchange Commission regulation)
C
Compensation/Human Resources Committee
CG
Corporate Governance/Nominating Committee
E
Executive Committee
F
Finance Committee
LID
Lead Independent Director
 

PHI Corporate Governance Highlights

Below are a number of PHI’s corporate governance highlights, including policies implemented and other governance achievements.

Ø
  Appropriately Sized Board (13 members)
Ø
  Average Age of Directors is 64
Ø
  Twelve out of 13 Directors are Independent
Ø
  Eight Board Meetings Held During 2012
Ø
  Diverse Board Members (as to Gender, Ethnicity, Experience and Skills)
Ø
  All Directors are Elected Annually
Ø
  Majority Voting for Directors
Ø
  Board Operates with a Lead Independent Director
Ø
  Compensation Committee Engaged Independent Compensation Consultant During 2012
Ø
  Independent Directors Routinely Meet Without Management Present
Ø
  Robust Director Nomination Process to Identify Talented and Diverse Board Members
Ø
  Board and Committees Conduct Annual Self-Evaluations
Ø
  Non-Employee Directors Receive a Portion of Compensation in Equity
Ø
  Significant Portion of Executive Compensation Tied to Our Performance
Ø
  Executive Officers’ and Directors’ Interests Aligned with Stockholders Through Mandatory Stock Ownership Requirements
Ø
  Compensation Recovery Provisions (“Clawbacks”) in Employment Agreements, 2012 Long-Term Incentive Plan and Award Agreements Intended to Comply with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Sarbanes-Oxley Act of 2002.
Ø
  Directors Receive Orientation/Education Programs
Ø
  Code of Business Conduct and Ethics for Directors and Corporate Compliance Program
Ø
  Disclosure Committee For Financial Reporting
Ø
  “Say on Pay” Advisory Vote Conducted Annually
Ø
  Policy and Public Disclosure Related to Corporate Political and Lobbying Expenditures
Ø
  No-Hedging and No-Pledging Policies Adopted

PHI 2012 Business and Executive Compensation Highlights

Business Highlights

For the year ended December 31, 2012, the Company and its subsidiaries reported consolidated net income from continuing operations of $285 million, or $1.24 per diluted share, as compared to $260 million, or $1.15 per basic and diluted share, for the year ended December 31, 2011. The year-over-year increase in earnings primarily reflects higher electric transmission and distribution revenue, due to the positive effects of investments in utility infrastructure. However, this increase in earnings was offset by lower earnings at Pepco Energy Services resulting from the ongoing wind-down of the retail energy supply business and a challenging energy services market.

During 2012, the Company continued to make significant progress on executing its strategic plan to enhance stockholder value while continuing its commitment to focus on reliability enhancement and customer satisfaction across all of our service territories. Key components of this plan effected during 2012 include:

Ø
  an investment of approximately $1.2 billion in infrastructure improvements in 2012 focused on enhancing reliability throughout our service territories, and the approval of a capital expenditure plan for $5.9 billion of additional expenditures over the five-year period from 2013 to 2017;
Ø
  the filing of rate cases in each jurisdiction on an annual basis to align more closely revenue and related cash flow levels with other operation and maintenance spending and capital investments;
Ø
  the continued implementation of a comprehensive plan to improve reliability and customer satisfaction across our utilities’ service territories,

iii




  which resulted in a 24% reduction in the average number of power outages and a 26% decline in the average duration of outages in 2012 as compared to 2011;
Ø
  enhancement of our emergency restoration improvement program to address storm response, which resulted in enabling the utilities to restore power to our customers more quickly after the “derecho” storm in June and Hurricane Sandy in October; and
Ø
  installation and activation of advanced technology, such as smart meters and digital controls on overhead lines, throughout the majority of our utilities’ service territories, providing enhanced energy information and management options to customers and enabling more efficient power restoration.

Executive Compensation Highlights

During 2012, we adopted the following changes to our executive compensation programs to further align executive compensation with the interests of our stockholders and to reinforce good corporate governance practices:

Ø
  We received approval from stockholders of the performance goal criteria under the Company’s Long-Term Incentive Plan, or the LTIP, as required by Section 162(m) of the Internal Revenue Code of 1986, or the Code, in order to permit the deductibility of performance-based compensation paid under the LTIP in excess of $1 million.
Ø
  We received stockholder approval of two new compensation plans (the Company’s 2012 Long-Term Incentive Plan, or the 2012 LTIP, and the Company’s Amended and Restated Executive Incentive Compensation Plan, or the EICP), both of which included performance goal criteria intended to comply with Section 162(m) of the Code.
Ø
  We entered into an employment agreement with our new Executive Vice President and General Counsel, in which he elected to forego his right to an excise tax gross-up payment under the PHI Change-in-Control Severance Plan, and in which his compensation was aligned with specific performance objectives.
Ø
  We continued the practice of using total shareholder return relative to our peer group to determine performance-based awards granted in 2012 under the LTIP and the 2012 LTIP.
Ø
  We granted performance-based retention awards to certain executives under our long-term incentive plans in order to attract and retain these executives and to provide for compensation that is tied to the achievement of specific operational performance goal criteria.
Ø
  We expanded the practice commenced in 2011 of including compensation recovery, or “clawback,” provisions in employment and other compensation agreements, including agreements for the award of RSUs pursuant to the 2012 LTIP. These provisions are intended to satisfy the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, and the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.

iv



Proxy Statement

Table of Contents

Section


  
Page
Number

The Pepco Holdings, Inc. Annual Meeting
                 1   
The Board of Directors and Corporate Governance
                 7    
Proposal 1: Election of Directors
                 13   
Director Independence
                 20    
Director Nominations
                 23   
Director Compensation
                 25    
Proposal 2: Advisory Vote to Approve Executive Compensation
                 28   
Compensation Discussion and Analysis
                 29    
Executive Compensation
                 50    
Comparison of 2012 Realized Pay to Reported Pay
                 52   
Compensation Committee Interlocks and Insider Participation
                 84   
Equity Compensation Plan Information
                 85    
Audit Committee Report
                 86   
Proposal 3: Ratification of the Appointment of the Independent Registered Public Accounting Firm
                 87    
Certain Beneficial Ownership Matters
                 88   
Communications, Stockholder Proposals and Company Information
                 91    
Other Information
                 94   
Annex A — Policy on the Approval of Services Provided By the Independent Auditor
                 A-1    
 


THE PEPCO HOLDINGS, INC. ANNUAL MEETING

Information about this Proxy Statement

The Board of Pepco Holdings is furnishing this proxy statement in connection with the solicitation of proxies to vote on matters to be submitted at our 2013 Annual Meeting of Stockholders and at any adjournment or postponement of the meeting. The Notice of Annual Meeting, this proxy statement, the accompanying proxy card or voting instruction form and our 2012 Annual Report to Stockholders, or the 2012 Annual Report, was first sent or given on or about April 1, 2013 to stockholders of record as of March 20, 2013, which is referred to in this proxy statement as the “record date.”

In this proxy statement, unless the context requires otherwise:

Ø
  references to the “Board” mean the Board of Directors of Pepco Holdings, Inc.;
Ø
  references to “common stock” mean the common stock, $.01 par value per share, of Pepco Holdings, Inc.; and
Ø
  references to “we,” “us,” “our,” the “Company,” “Pepco Holdings” or “PHI” are to Pepco Holdings, Inc. without its subsidiaries.

Location and Time of the Annual Meeting

The meeting will be held at 10:00 a.m., Eastern time, on Friday, May 17, 2013, at the Delmarva Power Conference Center, located at 4100 South Wakefield Drive, Newark, Delaware 19702. The doors will open to the public at 9:15 a.m.

Admission to the Annual Meeting will be limited to our stockholders or their authorized proxies. If you plan to attend the meeting in person, you must have an admission ticket, which for some stockholders must be obtained from us in advance. See “Attending the Annual Meeting in Person” beginning on page 5 of this proxy statement.

Directions to the location of the meeting are available on our Web site at http://www.pepcoholdings.com/
about/services/dpcc.

A webcast of the meeting, including a slide presentation, can be accessed during the meeting via our Web site, http://www.pepcoholdings.com/investors. An audio-only version will also be available. The access information for the webcast and audio-only presentations will be announced on our Web site. The meeting webcast will be archived and available for 30 days after the meeting on our Web site (http://www.pepcoholdings.com) by first clicking on the link “Investor Relations” and then the link “Webcasts and Presentations.”

Shares Entitled to Vote

All stockholders of record as of the record date are entitled to vote at the meeting. As of the close of business on the record date, 248,195,075 shares of our 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 stockholders at the meeting. Unvested awards of our restricted stock are considered shares of common stock outstanding and are entitled to vote at the meeting. However, holders of awards of our restricted stock units, or RSUs, and related dividend equivalents, are not entitled to vote any shares of common stock underlying those awards at the meeting. Also, PHI phantom shares credited to participants under the PHI Executive and Director Deferred Compensation Plan, or the “PHI Deferred Compensation Plan,” are not entitled to vote at the meeting.

Under our bylaws, the holders of a majority of the outstanding shares of our common stock at the close of business on the record date must be present at the meeting, either in person or by proxy, to constitute a quorum and to transact business at the meeting.

1



Matters to be Voted on at the Meeting

The following table describes the items to be brought for a vote of our stockholders at the meeting, along with the Board’s recommendation as to how stockholders should vote on each item:

Proposal No.


  
Description of Proposal
  
Board’s
Recommendation

1
           
Election of 13 director candidates nominated by the Board, each to serve a one-year term and until his or her successor has been elected and qualified
   
FOR
2
           
Approval, on an advisory basis, of the Company’s executive compensation
   
FOR
3
           
The ratification of the appointment, by the Audit Committee of the Board, of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2013
   
FOR
 

In addition to these matters, stockholders may be asked to vote on such other business as may properly be brought before the meeting or any adjournment or postponement of the meeting.

How to Vote Shares Registered in Your Own Name

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

Ø  
  Via Our Internet Voting Site at http://www. voteproxy.com. If you received printed proxy materials, follow the instructions for Internet voting printed on your proxy card. If you received a Notice of Availability, follow the instructions provided in the Notice of Availability. If you vote via the Internet, you also can elect to receive future proxy statements and annual reports electronically rather than receiving printed proxy materials or the Notice of Availability by mail.
Ø  
  By Telephone. Call toll-free 1-800-PROXIES (1-800-776-9437). You also can 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 or Notice of Availability.
Ø  
  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 stockholders of record will close at 5:00 p.m., Eastern time, on May 16, 2013. Your signed proxy card or the proxy you grant via the Internet or by telephone will be voted in accordance with your instructions.

If you own shares that are registered in your own name and return a signed proxy card or grant a proxy via the Internet or by telephone, but do not indicate how you wish your shares to be voted, your shares will be voted:

Ø
  FOR the election of each of the Board’s director nominees;
Ø
  FOR the approval, on an advisory basis, of our executive compensation; and
Ø
  FOR the ratification of the Audit Committee’s appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2013.

In the absence of instructions to the contrary, proxies will be voted in accordance with the judgment of the person exercising the proxy on any other matter properly presented at the meeting.

If you received more than one proxy card or Notice of Availability, your shares are likely registered in different names or with different addresses or are in more than one account. You must separately vote the shares shown on each proxy card or Notice of Availability that you receive in order for all of your shares to be voted at the meeting.

2



How to Vote Shares Held in “Street Name”

If you hold shares through a brokerage firm, trustee, bank, other financial intermediary or nominee (known as shares held in “street name”), you will receive from that broker, trustee, bank or other nominee (the “intermediary”) a voting instruction form which will explain how to direct the voting of your shares through the intermediary, which may include the ability to provide voting instructions via the Internet or by telephone.

If your shares are held in street name through a brokerage firm that is a member of the New York Stock Exchange, or the “NYSE,” and you want to vote on any of the proposals to be submitted to a vote at the meeting (except as to Proposal 3), you MUST indicate how you wish your shares to be voted. The broker will vote shares held by you in street name in accordance with your voting instructions, as indicated on your signed voting instruction form or by the instructions you provide via the Internet or by telephone. Absent such instructions, the proxy submitted by the broker with respect to your shares will indicate that the broker is not able to cast a vote with respect to the matter, which is commonly referred to as a “broker non-vote.” Under NYSE rules, Proposal 3 would be considered a “routine matter,” and thus a broker would be permitted in its discretion to cast a vote on that proposal as to your shares in the event that you do not provide the broker with voting instructions. Accordingly, if your shares are held in street name, it is important that you provide voting instructions to the broker or other intermediary so that your vote will be counted.

If you hold shares in street name and wish to vote your shares in person at the meeting, you must first obtain a valid proxy from the intermediary. To attend the meeting in person (regardless of whether you intend to vote your shares in person at the meeting), you must obtain an admission ticket in advance of the meeting by following the instructions under “Attending the Annual Meeting in Person — Admission Tickets — Holders of Shares in Street Name and Legal Proxies” beginning on page 5 of this proxy statement.

If you received more than one voting instruction form or Notice of Availability, your shares are likely registered in different names or with different addresses or are in more than one account. You must separately follow the foregoing voting procedures for each voting instruction form or Notice of Availability that you receive in order for all of your shares to be voted at the meeting.

The Internet and telephone voting facilities for shares held in street name will close at 11:59 p.m., Eastern time, on May 16, 2013.

Vote Required for Approval

The table below describes the vote required for approval of each matter to be brought before the meeting, as well as the treatment of abstentions and broker non-votes as to each matter.

Proposal No.


  
Vote Required
  
Treatment of
Abstentions

  
Treatment of
Broker Non-Votes

1
           
Each director is elected by a majority of the votes cast “FOR” election
   
Not applicable
   
Not taken into account
2
           
A majority of the shares of common stock present and entitled to vote at the annual meeting must be voted “FOR” approval
   
Against
   
Not taken into account
3
           
A majority of the shares of common stock present and entitled to vote at the annual meeting must be voted “FOR” approval
   
Against
   
Not applicable
 

3



Shares Held Through Certain Plans

Retirement Savings Plan

The Pepco Holdings, Inc. Retirement Savings Plan, referred to in this proxy statement as the 401(k) plan, is the successor plan to:

Ø  
  the Potomac Electric Power Company Savings Plan for Bargaining Unit Employees;
Ø  
  the 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), and which was formerly known as the Potomac Electric Power Company Savings Plan for Exempt Employees;
Ø  
  the Conectiv Savings and Investment Plan and the Conectiv PAYSOP/ESOP; and
Ø  
  the Atlantic Electric 401(k) Savings and Investment Plan-B.

If you are a current or former employee who has allocated contributions in your 401(k) plan account to common stock, you have received a printed copy of this proxy statement and related materials. You may direct the voting of the number of shares allocated to your 401(k) plan account, which is printed on the enclosed voting instruction form. By completing, dating, signing and returning the voting instruction form or transmitting voting instructions via the Internet or by telephone, you will be providing the plan trustee with instructions on how to vote the shares of common stock allocated to your 401(k) plan account.

If you do not provide voting instructions for these plan shares on a matter, the 401(k) plan trustee will vote these shares on that matter in proportion to the voting instructions given by all of the other participants in the 401(k) plan.

You will not be able to vote these plan shares in person at the meeting without a legal proxy from the 401(k) plan trustee. If you wish to attend the meeting in person (regardless of whether you intend to vote your shares in person at the meeting), you must present your admission ticket at the meeting. See “Attending the Annual Meeting in Person — Admission Tickets — Registered Holders” beginning on page 5 of this proxy statement.

The Internet and telephone voting facilities for participants in the 401(k) plan will close at 11:59 p.m., Eastern time, on May 14, 2013.

Shareholder Dividend Reinvestment Plan

We maintain a Shareholder Dividend Reinvestment Plan, referred to in this proxy statement as the DRP, which permits our stockholders to automatically reinvest, in shares of our common stock, cash dividends we pay on our common stock. For purposes of voting shares at the meeting, shares held through the DRP (other than shares allocated to your 401(k) plan account) will be treated as shares that are registered in your name, and will be voted in accordance with your completed, signed and dated proxy card.

If you own shares in the DRP and return a signed proxy card but do not indicate how you wish your shares to be voted as to a particular matter, your shares will be voted “FOR” that matter.

Shares allocated to a participant in the 401(k) plan through the DRP will be voted as set forth above under “Retirement Savings Plan.”

The Internet and telephone voting facilities for participants in the DRP will close at 5:00 p.m., Eastern time, on May 16, 2013.

Revoking or Changing a Proxy

If you own shares in your own name or through the DRP, or with respect to shares allocated to your 401(k) plan account, you may revoke any prior proxy or voting instructions, regardless of how your proxy or voting instructions were originally submitted, by:

Ø
  sending a written statement to that effect to our Corporate Secretary, which must be received by us before the meeting;
Ø
  submitting a properly signed proxy card or voting instruction form dated a later date;

4



Ø  
  submitting a later dated proxy or providing new voting instructions via the Internet or by telephone; or
Ø  
  attending the meeting in person and voting your shares.

If you hold shares in street name, you should contact the intermediary for instructions on how to change your vote.

Attending the Annual Meeting in Person

Admission Procedures

If you plan to attend the meeting in person, you must have an admission ticket. In order to be admitted to the meeting, you must present an admission ticket, along with a valid, government-issued photo identification, such as a driver’s license, that matches your name on the admission ticket, prior to the start of the meeting. We reserve the right to deny admission to any person who does not have an admission ticket and has not completed the appropriate admission process described in this section prior to the start of the meeting.

Attendees will not be permitted to bring cameras, camera phones, cell phones, recording equipment, electronic devices, computers, large bags, briefcases or packages into the meeting. If you bring any of these prohibited items to the meeting, you will be required to leave them outside the meeting room until the meeting has concluded.

To ensure the safety and security of all persons, attendees will be required to pass through a security screening device prior to entering the meeting.

Under our bylaws, the Board or chairman of the meeting may impose additional reasonable restrictions on the conduct of the meeting and the ability of individuals to attend the meeting in person.

Admission Tickets

Registered holders, persons whose shares are held through an intermediary, and persons who have shares allocated to them in their 401(k) plan account, each as of the record date, or their legal proxies, are the only persons eligible to receive admission tickets.

Please note that seating is limited and requests for admission tickets will be accepted on a first-come, first-served basis. Requests for admission tickets will be processed in the order in which they are received and must be received at our corporate headquarters no later than Tuesday, May 7, 2013. For further information on how to contact our transfer agent or the address of our corporate headquarters, see “Communications, Stockholder Proposals and Company Information — Contacting Us or Our Transfer Agent” on page 93 of this proxy statement.

Registered Holders

If your shares are registered in your name or are held through the DRP or through the allocation of shares to your 401(k) plan account, you will receive an admission ticket in one of three different ways:

Ø
  If you received your proxy materials by mail, your admission ticket is attached to your proxy card or 401(k) plan voting instruction form.
Ø
  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 meeting.
Ø
  If you received a Notice of Availability, your admission ticket is the Notice of Availability.

The original admission ticket attached to your proxy card or the original Notice of Availability must be presented. Photocopies of these documents will not be accepted. If you lose your admission ticket, please contact American Stock Transfer & Trust Company to request a replacement.

Holders of Shares in “Street Name” and Legal Proxies

If you hold your shares in street name or you hold a valid legal proxy and you plan to attend the meeting in person, you must send us a written request for an admission ticket. Please include the following information in your request:

  A signed cover letter stating:
 o 
  your name and complete mailing address, including daytime and evening telephone numbers;
 o 
  that you are requesting an admission ticket;

5



 o 
  the number of shares that you own in street name or that are subject to the legal proxy; and
 o 
  the name, address and telephone number of the intermediary or the stockholder who gave the legal proxy, if applicable.
  An originally signed letter from the bank or broker holding your shares (or, in the case of a legal proxy, the shares owned by the stockholder who gave the legal proxy) verifying beneficial ownership of common stock as of the record date. A copy or printout of a brokerage statement (including any statement retrieved through the Internet) WILL NOT be sufficient without an originally signed letter from your bank, broker or other intermediary.
  If you are a holder of a valid legal proxy, a copy of the executed and dated proxy.
  A copy of your valid, government-issued photo identification.

Delivering Proxy Materials Through Electronic Means

Important Notice Regarding the Availability of Proxy Materials
for the Stockholder Meeting To Be Held on May 17, 2013

The Notice of 2013 Annual Meeting of Stockholders, 2013 Proxy Statement and
2012 Annual Report are available at http://www.voteproxy.com.

Under the “Notice and Access” rules approved by the Securities and Exchange Commission, or the SEC, we are permitted to deliver this proxy statement and our 2012 Annual Report by providing access to the documents on the Internet instead of mailing printed copies. Accordingly, certain stockholders have received a “Notice of Availability” instead of printed copies of the proxy materials. The Notice of Availability instructs a stockholder on how to access and review all of the proxy materials on the Internet. The Notice of Availability also has instructions on how a stockholder may vote his or her shares. Although the Notice of Availability identifies the items to be voted on at the meeting, you cannot vote your shares merely by marking the Notice of Availability and returning it.

Beginning on the date of mailing of the Notice of Availability, stockholders 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 (and you have not revoked that request) or if applicable regulations require delivery of printed proxy materials, you will receive a copy of the proxy materials, instead of the Notice of Availability.

To the extent we are not required to mail our proxy materials to you in paper form, you can eliminate all such future paper mailings, including mailing of the Notice of Availability, by electing to receive an e-mail that will provide Internet links to these documents and the online proxy voting Web site. 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, our transfer agent. See “Communications, Stockholder Proposals and Company Information — Contacting Us or Our Transfer Agent” on page 93 of this proxy statement. This election is not available for shares held through the 401(k) plan.

6



THE BOARD OF DIRECTORS AND
CORPORATE GOVERNANCE

The Board of Directors

The Board is comprised of 12 independent directors and Joseph M. Rigby, our President, Chairman of the Board and Chief Executive Officer.

The Board held eight meetings during 2012. 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 our Corporate Governance Guidelines, under which attendance in person is required at all regularly scheduled stockholder, Board and committee meetings (except where scheduled as a conference call) and is the preferred method of attendance at all special meetings. The Chairman of the Board has the authority to waive this requirement and allow participation by telephone if, in the Chairman’s opinion, it is in our best interests to do so. Each of our then current directors attended the 2012 annual meeting of stockholders.

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, whose responsibilities are described under “— Board Leadership Structure.”

Board Committees

The Board has five separately designated standing committees:

Ø
  the Audit Committee;
Ø
  the Compensation/Human Resources Committee, referred to as the Compensation Committee;
Ø
  the Corporate Governance/Nominating Committee, referred to as the Nominating Committee;
Ø
  the Finance Committee; and
Ø
  the Executive Committee.

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

Each of the Board committees (other than the Executive Committee) sets aside time to meet in executive session without management personnel present. The Compensation Committee regularly meets separately with its independent compensation consultant. The Audit Committee regularly meets separately with the Company’s General Auditor and representatives of the Company’s independent registered public accounting firm. The membership and primary responsibilities of each of the standing Board committees are as described below.

7



Board Committee Descriptions

Committee


  
Members
  
Primary Responsibilities
  
Number of
Meetings Held
During 2012

Audit Committee
           
Patricia A. Oelrich
(Chairman)*
Terence C. Golden*
Patrick T. Harker**
Lawrence C. Nussdorf*
Frank K. Ross*
   
• Represents and assists the Board in overseeing:
n the integrity of our financial statements, accounting and financial reporting processes and audits of our financial statements
n our compliance with legal and regulatory requirements
n the independent registered public accounting firm’s qualifications and independence
n the performance of our internal audit function
• Appoints, compensates and oversees the independent auditor
• Reviews guidelines and policies on risk assessment and management
   
9 meetings
Compensation/Human
Resources Committee
           
Patrick T. Harker (Chairman)
Jack B. Dunn, IV
Frank O. Heintz
Barbara J. Krumsiek
Frank K. Ross
Lester P. Silverman
   
• Evaluates annually the performance of our CEO
• Reviews the performance of non-CEO executives
• Approves salaries for executive officers (other than the CEO), Vice Presidents, heads of business units, and other designated employees
• Approves annual salary ranges and merit budget increases for all non-union employees
• Sets target award levels and approves payments under the EICP
• Approves awards under the PHI 2012 Long-Term Incentive Plan, or the 2012 LTIP
• Reviews and assesses applicable risks and risk mitigation strategies associated with compensation
   
6 meetings
Corporate Governance/
Nominating Committee
           
George F. MacCormack
(Chairman)
Jack B. Dunn, IV
Frank O. Heintz
Lawrence C. Nussdorf
Patricia A. Oelrich
   
• Reviews and recommends director candidates to the Board
• Makes recommendations to the Board regarding Board structure, practices, and policies, including director compensation and committee assignments
• Makes recommendations to the Board on corporate governance matters and related person transactions
• Evaluates Board performance and effectiveness
• Oversees development of corporate strategy and structure, including management development, succession and performance criteria
• Oversees corporate and government affairs
• Oversees our technology and systems
• Reviews and assesses applicable risks and risk mitigation strategies associated with its areas of responsibility
   
7 meetings
Finance Committee
           
Lester P. Silverman (Chairman)
H. Russell Frisby, Jr.
Terence C. Golden
Barbara J. Krumsiek
George F. MacCormack
Pauline A. Schneider
   
• Oversees our financial objectives, policies, procedures and activities, including
n debt and equity financings
n dividend policy
n acquisitions and dispositions of assets and businesses
n financial investments
• Considers long-term and short-term strategic plans
• Reviews our risk mitigation profile
• Reviews our insurance program
• Reviews and assesses applicable risks and risk mitigation strategies associated with its areas of responsibility
   
7 meetings

8



Committee


  
Members
  
Primary Responsibilities
  
Number of
Meetings Held
During 2012

Executive Committee
           
Frank O. Heintz (Chairman)
Lawrence C. Nussdorf
Joseph M. Rigby
Pauline A. Schneider
   
When the Board is not in session, the Executive Committee exercises all the powers of the Board in the management of the property, business and affairs of the Company, except as otherwise provided by law.
   
No meetings

*  
  This Audit Committee member is “independent” as defined under our Corporate Governance Guidelines and applicable NYSE listing standards and is an “audit committee financial expert” as defined under SEC regulations.
**  
  This Audit Committee member is “independent” as defined under our Corporate Governance Guidelines and applicable NYSE listing standards.

During 2012, each member of our Board was also a member of our Service Reliability Committee.

Board Review of Transactions with Related Persons

The Board has adopted the Procedure for Evaluating Related Person Transactions, which sets forth the procedure followed by the Board for reviewing and approving or ratifying transactions with related persons to ensure compliance with the Company’s Conflicts of Interest Business Policy, Corporate Governance Guidelines and applicable law. This procedure can be found on the Company’s Web site (http://www.pepcoholdings.com) by first clicking on the link “Corporate Governance” and then the link “Business Policies.”

Under this procedure, related persons include directors, director nominees and certain executives (collectively, “covered persons”), as well as specified immediate family members of covered persons. This procedure generally applies to any current or proposed transaction involving the Company or any subsidiary in which any related person has or will have a direct or indirect interest. This procedure requires 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. Each covered person also must 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 Nominating Committee (excluding any member of such committee who has an interest in the transaction). The disinterested members of the Nominating Committee will review the contemplated transaction and make a recommendation to the disinterested members of the Board. The standards to be considered by the Nominating Committee in evaluating a related person transaction include the following:

Ø
  the related person’s relationship to the Company and interest in the transaction;
Ø
  the material facts of the proposed related transaction, including the proposed aggregate value of the transaction;
Ø
  benefits or advantages to the Company of the proposed transaction;
Ø
  availability of other sources of comparable products or services that are the subject of the transaction;
Ø
  an assessment of whether the proposed transaction is on terms and conditions that are comparable to terms available to an unrelated third party or to employees generally; and
Ø
  any effect on a director’s independence if the transaction involves a director.

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 relating to the transaction.

This procedure generally requires 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 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, this procedure requires that the covered person consult with the Chairman of the 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 Nominating Committee is an interested director, this procedure requires that the covered person consult with the Lead Independent Director to determine the appropriate course of action.

9



Board Leadership Structure

Mr. Rigby serves as President and Chief Executive Officer of the Company and is also Chairman of the Board. 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 Nominating Committee, also annually elect an independent director to serve as the Lead Independent Director. Mr. Heintz currently serves as Lead Independent Director and was first elected to that position in May 2011. 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:

Ø
  chairs all executive sessions of the Board’s non-management directors and has authority to call meetings of the non-management directors;
Ø
  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;
Ø
  presides at Board meetings when the Chairman of the Board is not present;
Ø
  coordinates feedback to the Chief Executive Officer and other members of management;
Ø
  in consultation with the Chairman of the Board, consistent with Board policy, recommends to the 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;
Ø
  oversees the development of appropriate responses to communications from stockholders and other interested persons addressed to the non-management directors as a group;
Ø
  on behalf of the non-management directors, retains such counsel or other advisors deemed appropriate; and
Ø
  performs such other duties as the Board deems appropriate.

In 2009, when Mr. Rigby was elected Chairman of the Board, 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 with the combined roles and to elect a Lead Independent Director annually. The Nominating Committee reviews this matter annually and makes a recommendation regarding the separation of these positions to the Board. In January 2013, the Nominating Committee re-examined the issue of separating the Chairman and Chief Executive Officer roles and concluded that:

Ø
  there was no firm evidence that financial performance of the Company would be improved by splitting the roles;
Ø
  dividing the roles may weaken the Company’s ability to effectively develop and implement strategy; and
Ø
  as a matter of good governance, the Company already has measures in place to strengthen the Board’s independence (for example, the Board has elected a Lead Independent Director and time is set aside at each Board meeting for the directors to meet in executive session without any management director or other management personnel present).

The Nominating Committee recognized the need for oversight by an independent board of directors, but ultimately concluded that the utilization of a Lead Independent Director addresses any concern created by having the same person serve as Chairman and Chief Executive Officer and also provides for a collaborative and effective leadership structure. The Board reviewed and concurred with the Nominating Committee’s conclusions. As a result, the Board determined that there was no need to separate the roles of Chairman and Chief Executive Officer at this time. The Nominating Committee will examine this issue annually, as well as more frequently if changing circumstances warrant further analysis.

Board Role in Risk Oversight

One of the responsibilities of the Board is the oversight of the Company’s risk management activities, which is discharged by the Board as well as through its standing committees. In discharging this responsibility, the Board and its committees, with the assistance of management, monitors 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.

As noted in “Board Committees” above, the 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.

10




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 at least 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.

In 2012, to facilitate the Board’s ability to manage an increasingly diverse set of risks facing the Company, the Board approved revisions to the charters of the Nominating Committee, the Finance Committee and the Compensation Committee. These revisions highlight each committee’s responsibility for reviewing and assessing risks and risk mitigation strategies applicable to its specific areas of primary responsibility. The Audit Committee’s charter already required a review of guidelines and policies on risk assessment and management.

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 also discuss with management the Company’s risk mitigation profile as part of their review of the Company’s strategic and financing plans. This review includes management’s consideration of risk management associated with the Company’s strategic and financing plans, as well as with the implementation of those plans.

Since 2010, management, using a framework provided by the Compensation Committee’s consultant, Pearl Meyer & Partners, referred to as PM&P, has conducted an annual risk assessment of the Company’s compensation policies and practices for all employees, including executives. In February 2013, the results of management’s risk assessment, which included the Company’s 2012 short-term and long-term incentive-based compensation, were reviewed with the Compensation Committee and PM&P. This assessment 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 stockholders, short-term and long-term incentive-based compensation is linked to the achievement of measurable financial and business goals, 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:
 o 
  an incentive compensation mix overly weighted toward annual incentives;
 o 
  payout cliffs that might cause short-term business decisions to be made solely for the purpose of meeting payout thresholds; and
 o 
  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 short-term and long-term incentives;
  performance metrics, not all of which are financial in nature, such as safety, reliability, diversity and customer satisfaction;
  no stock options; and
  share ownership guidelines that are applicable to officers of the Company at the level of vice president and above.

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

11



Governance Policies and Procedures

We have adopted our Corporate Business Policies, which in their totality constitute our code of business conduct and ethics. These policies apply to all of our directors, employees and others working at the Company and its subsidiaries. Current copies of these policies are made available on our Web site at http://www.pepcoholdings.com/services/governance/policies.

The Board also has adopted Corporate Governance Guidelines and charters for the Audit Committee, the Compensation Committee, the Nominating Committee, the Executive Committee and the Finance Committee. Current copies of these documents are available on our Web site at http://www.pepcoholdings.com/governance/index.html and also can be obtained by sending us a written request. See “Communications, Stockholder Proposals and Company Information — Contacting Us or Our Transfer Agent” on page 93 of this proxy statement.

Political Contributions and Expenditures

We believe it is important to participate in the political process, including engaging in substantive discussions with officials whose decisions impact our business and making contributions to candidate campaigns and political committees to support candidates who understand our industry and its issues. Political engagement activities can shape the execution of our core mission of providing safe, reliable and affordable electric and gas service to the communities within our service territories.

We have recently adopted a Political Engagement Policy to provide transparency related to our rigorous process regarding political engagement and to provide public disclosure of our political expenditures. We use corporate funds to make contributions to tax-exempt organizations and trade associations that engage in political activities. In addition, eligible employees may make voluntary contributions to our non-partisan, employee-run political action committees which help ensure that we will have a voice in the political process. This policy is made available on our Web site at http://www.pepcoholdings.com/services/governance/engagement.

12



PROPOSAL 1: ELECTION OF DIRECTORS

Explanation of the Proposal

Pursuant to our Certificate of Incorporation and Bylaws, the number of directors shall be fixed by the Board, but may not be less than six or more than 15. The Board has currently fixed the number of directors at 13. As permitted by our Certificate of Incorporation, in September 2012, the Board increased the number of directors from 12 to 13 and selected H. Russell Frisby, Jr. to fill the vacancy created thereby.

The Board, on the recommendation of the Nominating Committee, has nominated for election at the Annual Meeting the following persons: Jack B. Dunn, IV; H. Russell Frisby, Jr.; 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 these nominees is currently a member of the Board. It is intended that each nominee would hold office for a one-year term, and until his or her successor is elected and qualified.

Each director 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 meeting, become unavailable to serve as a director for any reason, the Board may either reduce the number of directors to be elected or select another nominee recommended by the Nominating Committee. If another nominee is selected, all proxies will be voted for the substitute nominee.

In accordance with our bylaws, any incumbent nominee who does not receive a majority of votes cast “FOR” his or her election is required to resign from the Board no later than 90 days after the date of the certification of the election results.

Director Nominees

Jack B. Dunn, IV


 
           
Mr. Dunn, age 62, since October 1995 has been Chief Executive Officer and since October 2004 has been President of FTI Consulting, Inc., 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 its 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., and then NexCen Brands, Inc., from June 8, 2002 through September 25, 2008. Mr. Dunn is also a limited partner in the Baltimore Orioles and a member of the Board of Trustees of Johns Hopkins Medicine. He has been a director of the Company since May 21, 2004.

Mr. Dunn’s qualifications for election to the 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.
 

13



H. Russell Frisby, Jr.


 
           
Mr. Frisby, age 62, since 2009 has been a partner in the Energy and Telecommunications Group of Stinson Morrison Hecker LLP, a law firm in Washington, D.C. From 1995 to 1998, he served as Chairman of the Maryland Public Service Commission, or MPSC. Mr. Frisby also was the President and Chief Executive Officer of the Competitive Telecommunications Association from 1998 to 2005 and a partner with the law firms of Kirkpatrick & Lockhart Nicholson Graham LLP from 2005 to 2006 and Fleischman and Harding LLP from 2006 to 2008. He has served as a director of PAETEC Holding Corp., a broadband communications provider, from February 2007 until November 2011. Mr. Frisby has been a director of the Company since September 27, 2012.

Mr. Frisby’s qualifications for election to the Board include his experience as a regulatory and corporate lawyer, as well as the regulatory, public policy and governmental affairs knowledge that he gained as a Chairman of the MPSC and chief executive officer of a telecommunications industry organization, as well as his prior service as a public company director. Mr. Frisby also lives, works and serves as a director of several non-profit organizations in the Company’s operating territory, and therefore has significant community ties within the region.
 

Terence C. Golden


 
           
Mr. Golden, age 68, 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 Marriott Corporation. He has been a director of Host Marriott Corporation, the lodging real estate company that includes among its holdings Marriott, Ritz-Carlton, Four Seasons, Hyatt, Hilton, Westin, W, Sheraton and Fairmont hotels, since 1995. He also serves as a trustee and member of the Audit Committee of Washington Real Estate Investment Trust and as a member 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 the 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 Marriott Corporation. 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 also was 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.
 

14



Patrick T. Harker


 
           
Dr. Harker, age 54, since 2007 has been President of the University of Delaware (“UDel”), 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 UDel’s College of Engineering. From 2000 to 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 to 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 also has served as a director of Huntsman Corporation since March 2010. Dr. Harker was elected as a director of the Federal Reserve Bank of Philadelphia in January 2012. Dr. Harker has been a director of the Company since May 15, 2009.

Dr. Harker’s qualifications for election to the Board include his leadership skills and public and government affairs experience. Holding a Ph.D. in engineering and as the former Dean of the Wharton School, Dr. Harker brings to the 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.
 

Frank O. Heintz


 
           
Mr. Heintz, age 69, 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 MPSC. 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. Since May 2011, Mr. Heintz has served as Lead Independent Director.

Mr. Heintz’s qualifications for election to the Board include his perspective and experience as a former President and 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 Group, Inc., the then parent company of Baltimore Gas & Electric Company, 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 MPSC, 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.
 

15



Barbara J. Krumsiek


 
           
Ms. Krumsiek, age 60, since 1997 has been President and Chief Executive Officer and since 2006 Chair of Calvert Investments, Inc., an investment management and research firm based in Bethesda, Maryland. Calvert offers a range of fixed income, money market and equity mutual funds including a full family of socially responsible mutual funds. Ms. Krumsiek serves as a trustee/director for 44 Calvert-sponsored mutual funds. She has been a director of the Company since May 18, 2007.

Ms. Krumsiek’s qualifications for election to the 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 for 15 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 our 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.
 

George F. MacCormack


 
           
Mr. MacCormack, age 69, 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. Mr. MacCormack also serves as a director of Fuel Tech, Inc., a position he has held since August 2011. 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 the 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.
 

16



Lawrence C. Nussdorf


 
           
Mr. Nussdorf, age 66, since 1998 has been President and Chief Operating Officer of Clark Enterprises, Inc. (“Clark Enterprises”), a privately held investment and real estate company based in Bethesda, Maryland, whose interests include 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.

Mr. Nussdorf’s qualifications for election to the Board include his perspectives as a board member of two other NYSE-listed 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, 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.
 

Patricia A. Oelrich


 
           
Ms. Oelrich, age 59, from 2001 to 2009 was Vice President, IT Risk Management for GlaxoSmithKline Pharmaceuticals, 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. She has been a director of the Company since May 21, 2010.

Ms. Oelrich’s qualifications for election to the 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 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 also was lead financial audit partner on various engagements.
 

17



Joseph M. Rigby


 
           
Mr. Rigby, age 56, 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 the Board include his ability to provide unique insights as PHI’s current Chief Executive Officer, as well as his 34 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, was Chairman of the Greater Washington Board of Trade and is Chairman of the United Way of the National Capital Area, 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.
 

Frank K. Ross


 
           
Mr. Ross, age 69, 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 19 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 2004 to 2005. He has been a director of the Company since May 21, 2004.

Mr. Ross’ qualifications for election to the 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 19 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.
 

18



Pauline A. Schneider


 
           
Ms. Schneider, age 69, joined the Washington, D.C. office of the law firm of Orrick, Herrington & Sutcliffe LLP in September 2006 as a partner in its public finance group. From 1985 to September 2006, she was with the law firm of Hunton & Williams LLP. 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 ten 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 the 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, she spent four years in the District of Columbia government, where she was director of the Office of Intergovernmental Relations. Prior to joining the District of Columbia government, Ms. Schneider worked for four years in the Carter White House in the Office of Intergovernmental Affairs/Secretary to the Cabinet. 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.
 

Lester P. Silverman


 
           
Mr. Silverman, age 66, 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. He has been a director of the Company since May 19, 2006.

Mr. Silverman’s qualifications for election to the 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.
 

19



Director Independence

Our Independence Standards

The listing standards of the NYSE require that a majority of our directors be “independent” as defined by the NYSE. Applying these standards, the Board has determined that 12 of our current 13 directors, consisting of Messrs. Dunn, Frisby, 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. Furthermore, the Board also must determine that the director does not otherwise have any direct or indirect material relationship with the Company. The Board of Directors considers all relevant facts and circumstances when assessing the materiality of a director’s relationship with the Company, not only from the standpoint of the director but also from that of persons or organizations with which the director has an affiliation. Material relationships can include, for example, commercial, industrial, banking, consulting, legal, accounting, charitable and familial relationships. To assist the Board in considering these relationships, the Board has adopted, as part of our Corporate Governance Guidelines, non-exclusive guidelines of material director relationships. Our Corporate Governance Guidelines can be found on our Web site (http://www.pepcoholdings.com) under the link “Corporate Governance.” Under these guidelines, which are based in significant part on the disqualifying relationships enumerated by the NYSE listing standards and the SEC’s independence standard for audit committee members, a director is not “independent” if a PHI director has any of the material relationships specified in the table below.

PHI Corporate Governance Guidelines —
Material Director Relationships

Type of Relationship(1)


  
Description of Relationship
Employee or executive officer of PHI(2)
           
Ø A director who is, or has been within the last three years an employee of PHI OR
Ø An immediate family member of a director who is, or has been within the last three years, an executive officer of PHI(3)
Receipt of direct compensation from PHI(2)
           
Receipt by the director or an immediate family member, during any 12-month period within the last three years, of more than $120,000 in direct compensation from PHI, other than director and committee fees and pension benefits or other forms of deferred compensation for prior service (provided pension benefits or deferred compensation are not contingent in any way on continued service)
Receipt of indirect compensation from PHI(2)
           
Another company has made payments to, or received payments from, PHI 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 the other company’s consolidated gross revenues
AND
The other company is a “related entity,” which means that:
Ø A PHI director is a current employee of the other company OR
Ø An immediate family member of the PHI director is a current executive officer of the other company(4)
Relationships with external or internal auditor(2)
           
Any of the following relationships exist:
Ø the director is a current partner or employee of PHI’s internal or external auditor
Ø the director has an immediate family member who is a current partner of the internal or external auditor
Ø the director has an immediate family member who (a) is a current employee of the internal or external auditor and (b) personally works on the Company’s audit
Ø the director or an immediate family member of the director was, within the last three years, (a) a partner or employee of the internal or external auditor and (b) personally worked on the Company’s audit within that time
Compensation committee interlocks(2)
           
The director or an immediate family member of the director is, or has been within the last three years, employed as an executive officer of another company where any of the PHI’s present executive officers at the same time serves or served on that other company’s compensation committee.

20



Type of Relationship(1)


  
Description of Relationship
Relationships attributable to
independence of Audit Committee members
           
A director who is a member of the Audit Committee may not accept directly or indirectly any consulting, advisory, or other compensatory fee from PHI or any subsidiary (other than fees for service as a director), 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).(5)

A director who is an “affiliated person” of PHI or any subsidiary (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. For purposes of this test only, a director who beneficially owns more than 3% of PHI’s common stock will be considered to be an “affiliated person.”
 

(1)
  In addition to the relationships described above, the Board considers all relevant facts and circumstances in assessing whether any material relationship exists. In particular, the Board considers other material relationships between PHI and persons or organizations with which the director has an affiliation. Material relationships may include, for example, those that are commercial, industrial, banking, consulting, legal, accounting, charitable and familial, among others. Under our Corporate Governance Guidelines, for purposes of considering the existence or materiality of a director’s relationship with PHI or the relationship with PHI of a related entity, 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 taken into account.
(2)
  Also a disqualifying relationship under the NYSE listing standards.
(3)
  Generally, under SEC rule, the term “executive officer” is defined to mean a 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. Officers of a subsidiary are deemed to be officers of the parent if they perform such policy-making functions for the parent. A list of PHI’s executive officers as of the date of this proxy statement has been provided in the 2012 Annual Report.
(4)
  Contributions by PHI to a tax exempt organization in which any PHI independent director serves as an executive officer shall not be considered “payments” for purposes of this test, if, within the preceding three years, contributions in any single fiscal year from PHI to the tax-exempt organization exceeded the numerical standards for this test, so long as PHI has disclosed in its proxy statement any such contributions.
(5)
  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 PHI or any subsidiary.

2013 Director Independence Determinations

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

Orrick rendered legal services to certain Company subsidiaries in 2012, 2011 and 2010, and continues to render such legal services in 2013 with respect to certain contract matters. Ms. Schneider, a partner in Orrick, has informed the Board that:

Ø
  she has not worked and will not work on any of these matters;
Ø
  she did not direct Orrick’s work on any of these matters; and
Ø
  Orrick’s representation has had no effect on the compensation she receives from Orrick.

In reviewing this relationship, the Board examined the specific services that Orrick provided to the Company’s subsidiaries during 2012, 2011 and 2010, as well as the nature and substance of their ongoing relationships with Orrick. The Board also noted the fact that the amounts paid by the Company and its subsidiaries to Orrick in 2012, 2011 and 2010 were $699, $95,650, and $131,301, respectively.

Since 2009, Mr. Frisby has been a partner in the law firm of Stinson Morrison Hecker LLP (“Stinson Morrison”). Prior to Mr. Frisby’s appointment to the Board in September 2012, this law firm rendered legal and other services to the Company with respect to two matters, which services had ceased as of January 2012. Since January 2012, the Stinson Morrison firm has not provided, and presently does not provide, services to the Company or any of its subsidiaries.

21



In reviewing this relationship, the Board examined the specific services that Stinson Morrison provided to the Company. The Board also noted the fact that the total amounts paid by the Company to Stinson Morrison in 2012 and 2011 were $45 and $54,886, respectively, and that the services provided by Stinson Morrison were terminated in January 2012.

Dr. Harker is President of UDel. In each of UDel’s fiscal years ending June 2012, 2011 and 2010, Pepco Energy Services supplied natural gas to UDel under a gas master agreement. In each of UDel’s fiscal years ending 2012, 2011 and 2010, Delmarva Power & Light Company, a wholly-owned utility subsidiary of the Company (“DPL”), delivered, and in some cases also supplied, electricity and natural gas to various UDel accounts on terms specified in tariffs approved by the Delaware Public Service Commission. Also, the Company provides tuition assistance payments as a benefit to its employees under a broad-based, non-discriminatory policy, some of whom have used these benefits to attend UDel.

Mr. Nussdorf is President and Chief Operating Officer of Clark Enterprises. Clark Enterprises and its affiliates purchased natural gas from Pepco Energy Services in 2011 and electricity from Pepco in 2012, 2011 and 2010. During 2012, Pepco Energy Services also entered into two teaming agreements with an affiliate of Clark Enterprises with respect to proposed energy services performance contract bids. If Pepco Energy Services wins the bid, Pepco Energy Services would then be required under the teaming agreement to enter into a subcontract with the Clark Enterprises affiliate for specified work. To date, no payments by Pepco Energy Services have been made to the Clark Enterprises affiliate and no contract has been entered into with the proposed customer. The Board is monitoring this relationship, and, if such a contract were to be entered into, the Board would make a determination as to any further action that may be warranted.

With respect to each of the PHI directors discussed above, the Board determined that:

Ø
  the relationship between each respective related entity (or its affiliates) and PHI or a subsidiary thereof was solely a business relationship which did not convey any special benefits upon the PHI director who was affiliated with such related entity;
Ø
  the amounts paid to PHI or its subsidiary under the contract 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 a related entity; and
Ø
  in the case of each director other than Ms. Schneider and Mr. Frisby, the amounts paid by the related entity to PHI or its subsidiary under the contract constituted payment for electricity and/or natural gas made in the normal course of business at prices generally applicable to similarly situated customers.

For these reasons, the Board determined that these business relationships did not serve to disqualify Ms. Schneider, Dr. Harker, and Messrs. Frisby or Nussdorf, respectively, as an independent director.

In making independence determinations under the NYSE listing standards with respect to a PHI director, the Board has, where applicable, reviewed whether, and to what extent, a director or certain related entities have purchased electricity or natural gas from any of the Company’s regulated utility subsidiaries at rates prescribed by applicable law or governmental authority. Where such purchases would not disqualify the director from a determination of independence under the NYSE listing standards, the Board has determined that such relationships do not create a direct or indirect material relationship with the Company which would preclude a determination of independence. Further, the Board reached its conclusions with respect to Ms. Schneider and Mr. Frisby without necessarily concluding that Ms. Schneider’s relationship as a partner of Orrick or Mr. Frisby’s relationship as a partner of Stinson Morrison constituted a relationship covered by the Corporate Governance Guidelines.

22



Director Nominations

Director Criteria, Qualifications, Experience and Diversity

The Board believes that it is important for the Board to include an appropriate blend of independent and management directors, which should result in independent directors being predominant and 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 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:

Ø
  independence, as defined by the NYSE listing standards as then currently in effect;
Ø
  integrity;
Ø
  judgment;
Ø
  credibility;
Ø
  collegiality;
Ø
  professional achievement;
Ø
  constructiveness; and
Ø
  public awareness.

Independent directors should possess, in the aggregate, skill sets that include but are not limited to:

Ø
  financial acumen equivalent to the level of a Chief Financial Officer or senior executive of a capital markets, investment or financial services firm;
Ø
  operational or strategic acumen germane to the energy industry, or other industry with similar characteristics (construction, manufacturing, etc.);
Ø
  public and/or government affairs acumen germane to complex enterprises, especially in regulated industries;
Ø
  customer service acumen germane to a service organization with a large customer base;
Ø
  legal acumen in the field(s) of regulatory or commercial law at the partner or chief legal officer level;
Ø
  technology expertise at the chief technology officer level;
Ø
  salient community ties in areas of operation of Pepco Holdings’ enterprises; and
Ø
  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 Nominating Committee also gives weight to other attributes that it believes contribute to Board effectiveness, including:

Ø
  analytical skills;
Ø
  a willingness and ability to constructively and collaboratively engage with management and each other; and
Ø
  the ability and commitment to devote significant time to service on the Board and its committees.

In accordance with the Corporate Governance Guidelines, the 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 overall business needs, in addition to other generally understood aspects of diversity.

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

23



PHI Director Nomination Process

The Nominating Committee has developed the following process for the identification and evaluation of director nominees, which is set forth in our Corporate Governance Guidelines and is publicly available on our Web site. See “The Board of Directors and Corporate Governance — Governance Policies and Procedures” on page 12 of this proxy statement.

Process Steps


  
Description
Prepare list of potential candidates
           
• Nominating Committee develops and maintains a list of potential candidates for Board membership.
• Potential candidates are recommended by Nominating Committee members and other Board members.
Review of attributes, skill sets and other criteria
           
• Nominating Committee annually reviews attributes, skill sets and other qualifications for potential candidates.
• Modifications may be made from time to time based upon assessment of the needs of the Board and the skill sets required to meet those needs.
Review of candidates
           
• All potential candidates are reviewed against current attributes, skill sets and other qualifications established by the Board to determine suitability for Board membership.
• Suitable candidates receive a more detailed review performed through examination of publicly available information, including:
o compliance with applicable director independence standards;
o the number of other boards on which the candidate already serves;
o the possible applicability of restrictions on director interlocks or other requirements or prohibitions imposed by applicable laws or regulations;
o proxy disclosure requirements; and
o actual, potential or perceived conflicts of interest or other issues.
Prioritization of candidates
           
• Nominating Committee annually determines whether to remove any candidate from consideration as a result of the detailed review.
• As needed, remaining candidates are prioritized by the Nominating Committee for recommendation to and final determination by the Board prior to direct discussion with any candidate.
Candidate contact and nomination
           
• Following the Board’s determination of a priority-ranked list of approved potential candidates, the Chairman of the Nominating Committee or, at his or her discretion, one or more other members 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 PHI’s policies and applicable laws and regulations using information supplied directly by the candidate, the candidate will then be nominated for election or appointment.
 

The process that stockholders must use to nominate directors for election at any future annual meeting of stockholders or for consideration by the Nominating Committee is described in “Communications, Stockholder Proposals and Company Information — Stockholder Proposals and Director Nominations” beginning on page 91 of this proxy statement.

24



Director Compensation

Elements of Director Compensation

Effective May 18, 2012, each non-management director of PHI is eligible to receive an annual Board retainer comprised of $50,000 in cash and $65,000 in common stock. The common stock portion of the Board retainer is to be paid in the form of RSU awards under the 2012 LTIP which are to vest upon the earlier of one year after the date of grant or upon the date of the next annual meeting of stockholders. During 2012, the annual committee chair and Lead Independent Director retainers were $10,000 and $25,000, respectively. The per meeting fee was $2,000.

Under the terms of the PHI Non-Management Directors Compensation Plan (the “Directors Plan”), our non-management directors were permitted during 2012 to elect to receive their cash retainer payments and meeting fees in cash or in shares of common stock. These directors were also permitted to elect to defer the receipt of their cash retainer and meeting fees under the terms of the PHI Deferred Compensation Plan. Credits to the director’s PHI Deferred Compensation Plan account may be made to a prime rate interest account, an investment fund account determined by the Compensation Committee, or a phantom share account that mirrors an investment in shares of common stock. For information on the PHI Deferred Compensation Plan, see “Executive Compensation — Nonqualified Deferred Compensation — Description of Our Nonqualified Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan.”

The Board also may establish rules to permit non-management directors to defer the date upon which the payment or settlement of a director award granted under the 2012 LTIP is to occur. In December 2011, the Board approved a non-management director deferral program that permits such directors to elect to defer the payment of shares of common stock under a director award granted in the form of RSUs, performance shares or performance units, until:

Ø
  the date the director leaves the Board;
Ø
  the January 31 after the director leaves the Board; or
Ø
  another date to be specified by the director in advance, which with respect to 2012 deferrals may not be before January 31, 2015.

We provide non-management directors with travel accident insurance for Company-related travel and directors’ and officers’ liability insurance coverage, and reimburse them for travel, hotel and other out-of-pocket expenses incurred in connection with the performance of their duties as directors.

We also provide non-management directors with free parking at our headquarters. Directors also may use these parking spaces other than in connection with the performance of their duties as directors. In addition, during 2012, Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events were made available to non-management directors for personal use when not being used by us for business purposes. There was no incremental cost to us for providing these benefits to non-management directors.

Review and Oversight of Director Compensation

The compensation of the non-management members of the Board is reviewed periodically by the Nominating Committee, which makes recommendations for changes, if any, to the Board for its approval. In December 2011, upon the recommendation of the Nominating Committee, the Board approved a change in the compensation mix for non-management directors which increased the annual retainer and provided for the payment of a portion of the annual retainer in RSUs, effective as of May 18, 2012. See “— Elements of Director Compensation” for a description of the elements of our director compensation. This change in the compensation mix was intended to more closely align the interests of our non-management directors with those of our stockholders. This change in the director compensation mix was based on a review of director fees paid to other companies in our 2011 Utility Peer Group and was recommended by PM&P, the Nominating Committee’s independent compensation consultant. Prior to December 2011, the compensation of our directors had not changed since December 2007.

As part of its review of director compensation, the Nominating Committee also recommended, and the Board approved, effective as of May 2012, increases in the annual retainer for the committee chairs and the Lead Independent Director, as noted in “— Elements of Director Compensation” above. The $2,000 per meeting fee did not change.

25



Director Compensation Table

The following table sets forth the compensation earned by our non-management directors during 2012. No non-management director received or earned any other compensation from the Company during 2012, other than the compensation described in the table below.

Name


  
Fees
Earned or
Paid in
Cash
($)(1)

  
Stock Awards
($)(2)

  
Total
($)

Jack B. Dunn, IV
                 109,409             65,000             174,409   
H. Russell Frisby, Jr.(3)
                 22,500             41,504             64,004   
Terence C. Golden
                 113,500             65,000             178,500   
Patrick T. Harker
                 119,091             65,000             184,091   
Frank O. Heintz
                 149,000             65,000             214,000   
Barbara J. Krumsiek
                 109,500             65,000             174,500   
George F. MacCormack
                 117,000             65,000             182,000   
Lawrence C. Nussdorf
                 111,500             65,000             176,500   
Patricia A. Oelrich
                 121,386             65,000             186,386   
Frank K. Ross
                 116,364             65,000             181,364   
Pauline A. Schneider
                 97,500             65,000             162,500   
Lester P. Silverman
                 119,000             65,000             184,000   
 
(1)
  Certain of our directors elected to receive all or a portion of their cash 2012 Board and committee retainer and meeting fees in the form of shares of common stock under the Directors Plan, or deferred the receipt of their cash retainer and fees under the PHI Deferred Compensation Plan, as summarized in the following table.

            Compensation Deferred Under the
PHI Deferred Compensation Plan

   
Name


  
Shares of
Common Stock
(#)

  
PHI Phantom
Share Account
($)

  
Interest Rate/Investment
Fund Accounts
($)

Terence C. Golden
                             46,000               
Frank O. Heintz
                 1,739                             
Barbara J. Krumsiek
                 3,479                           
George F. MacCormack
                                           21,000   
Pauline A. Schneider
                             33,750             33,750   
 

The following table sets forth, as of December 31, 2012 and March 20, 2013, the number of phantom shares (each corresponding to one share of common stock) held by non-management directors who participate in the PHI Deferred Compensation Plan and who have elected to have director compensation deferred into the phantom share account. Phantom shares under the PHI Deferred Compensation Plan may be settled only in cash.

        Phantom Shares Credited (#)
   
Name


  
As of December 31,
2012

  
As of March 20,
2013

Terence C. Golden
                 2,434             2,944   
Barbara J. Krumsiek
                 19,258             19,258   
George F. MacCormack
                 6,162             6,162   
Lawrence C. Nussdorf
                 4,442             4,442   
Pauline A. Schneider
                 13,646             13,970   
Lester P. Silverman
                 25,312             25,312   
 
(2)
  The amount shown for 2012 is the aggregate grant date fair value, as determined in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 718 —

26



(continued from prior page)

Compensation — Stock Compensation (excluding the effect of estimated forfeitures), of awards of time-based RSUs granted during that year. For a discussion of the assumptions made in determining the aggregate grant date fair value of these awards, see Note (13), “Stock-Based Compensation, Dividend Restrictions, and Calculations of Earnings Per Share of Common Stock — Stock-Based Compensation” in the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2012 (the “2012 Form 10-K”).

(3)
  Mr. Frisby was appointed to the Board in September 2012.

Director Stock Ownership Requirements

Effective May 18, 2012, non-management directors are required to own a minimum amount of common stock or common stock equivalents (including, without limitation, phantom shares under the PHI Deferred Compensation Plan and restricted stock units or other equity awards made under the 2012 LTIP) with a market value equal to four times the annual board cash retainer. Currently, the annual board cash retainer is $50,000 per year. Non-management directors serving on the Board as of May 18, 2012 have until May 18, 2017 to reach the increased share ownership level. Directors elected or appointed thereafter will have five years after the date of their election or appointment to meet this requirement.



THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION
OF EACH NOMINEE FOR DIRECTOR NAMED IN THIS PROXY STATEMENT.

27



PROPOSAL 2: ADVISORY VOTE TO APPROVE EXECUTIVE COMPENSATION

Under the Exchange Act, we are required to present the compensation paid to our named executive officers as disclosed in this proxy statement to our stockholders for a non-binding, advisory vote. The disclosures related to compensation of our named executive officers include the Compensation Discussion and Analysis, the 2012 Summary Compensation Table, and the other related compensation tables and narrative disclosures in this proxy statement, all of which can be found on pages 29 through 83 of this proxy statement.

The Board believes that our executive compensation program, which is targeted at the 50th percentile of the competitive peer group range for each pay element, aligns compensation with the long-term interests of stockholders. The objective of our executive compensation is to attract, motivate and retain talented executives while promoting our interests and the interests of our customers and stockholders. The Board believes that our executive compensation philosophy and practices have resulted in executive compensation decisions that are appropriate and that have benefitted PHI and its stockholders over time.

As a result, we are asking stockholders to indicate their support for our executive compensation by voting “FOR” the following resolution:

RESOLVED, that the stockholders of Pepco Holdings, Inc. (the “Company”) approve, on an advisory basis, 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, the compensation tables and the narrative discussion in the Company’s 2013 Proxy Statement.”

Because the vote on this proposal is advisory, it will not be binding on us. However, both the Compensation Committee and the Board value the opinions expressed by our stockholders 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.

Compensation/Human Resources Committee Report

The Compensation Committee reviewed and discussed with our management the Compensation Discussion and Analysis (the “CD&A”) required by Item 402(b) of Regulation S-K. Based on such review and discussion, the Compensation Committee recommended to the Board that the CD&A be included in our 2012 Form 10-K and in this proxy statement.

 
           
Patrick T. Harker, Chairman
Jack B. Dunn, IV
Frank O. Heintz
Barbara J. Krumsiek
Frank K. Ross
Lester P. Silverman
 



THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THIS PROPOSAL 2.

28



Compensation Discussion and Analysis

Executive Summary

The following is a brief overview of the more detailed discussion and analysis set forth in this Compensation Discussion and Analysis, which focuses on compensation paid to our named executive officers in 2012.

Named Executive Officers

Our named executive officers for 2012 are as follows:

Name


  
Title
Joseph M. Rigby
           
Chairman, President and Chief Executive Officer
Frederick J. Boyle
           
Senior Vice President and Chief Financial Officer(1)
Anthony J. Kamerick
           
Former Executive Vice President and Chief Regulatory Officer (and Former Senior Vice President and Chief Financial Officer)(2)
David M. Velazquez
           
Executive Vice President, Power Delivery
Kevin C. Fitzgerald
           
Executive Vice President and General Counsel(3)
Kirk J. Emge
           
Senior Vice President and Special Counsel to the Chief Executive Officer(4)

(1)
  Mr. Boyle was appointed Senior Vice President and Chief Financial Officer of PHI effective April 9, 2012.
(2)
  Mr. Kamerick was promoted from Senior Vice President and Chief Financial Officer to Executive Vice President and Chief Regulatory Officer of PHI effective April 9, 2012, and he retired from PHI as of February 1, 2013.
(3)
  Mr. Fitzgerald was appointed Executive Vice President and General Counsel on September 17, 2012.
(4)
  Mr. Emge served as Senior Vice President and General Counsel of PHI until September 17, 2012, at which time he was appointed Senior Vice President and Special Counsel to the Chief Executive Officer of PHI. Mr. Emge has announced that he will retire from PHI effective April 1, 2013.

Compensation Philosophy

Our executive compensation philosophy is straightforward: we reward our executives for their contributions to our performance and stockholder value by tying a significant portion of their total compensation directly to our short-term and long-term performance.

Compensation Components

The primary elements of our named executive officers’ total compensation are base salary, annual cash incentive awards under the EICP, annual grants of RSUs (two-thirds of which are performance-based), and retirement and other employee benefits. In 2012, we also granted time- and performance-based retention awards of RSUs under our long-term incentive plans.

Pay for Performance

We have designed a compensation program that makes a substantial percentage of executive pay variable, subject to payout or increase when corporate targets are achieved or exceeded and forfeiture or reduction when corporate targets are not achieved. In recent years, we have continued to adjust our compensation program to further align compensation received by our named executive officers with the interests of our stockholders and to provide compensation that is tied directly to the continued positive performance of the Company and its named executive officers. See “— 2012 Compensation Actions” and “— Corporate Governance and Pay for Performance” below.

29



Compensation Mix

The following graphs highlight elements of the compensation mix for our Chief Executive Officer, as well as our other named executive officers, on an average basis. These graphs are based on data contained in our 2012 Summary Compensation Table beginning on page 50 of this proxy statement.



 
 

The following charts summarize the relationship of at-risk to fixed compensation with respect to our Chief Executive Officer, as well as our other named executive officers, on an average basis. For purposes of these charts, fixed compensation includes base salary and discretionary cash bonuses, and at-risk compensation includes EICP awards with respect to 2012 and the grant date fair value of awards granted under the LTIP and the 2012 LTIP during 2012, based on data contained in our 2012 Summary Compensation Table.



 
 

30



Say On Pay

In 2012, we submitted an advisory vote to our stockholders on our executive compensation program (a say on pay vote) and it received the support of the holders of approximately 89% of the shares of common stock present and eligible to vote at our 2012 annual meeting of stockholders. We pay careful attention to any feedback we receive from our stockholders regarding our executive compensation, including the say on pay vote. The Compensation Committee considered the results of this stockholder advisory vote in making subsequent compensation decisions in 2012, and, as a result, determined to continue to closely align compensation to Company performance objectives.

In addition, at our 2011 annual meeting of stockholders, our stockholders indicated their preference, on an advisory basis, that the say on pay vote be held annually rather than every two or three years. In response, the Board determined to hold an annual advisory say on pay vote.

2012 Business Results

For the year ended December 31, 2012, PHI reported consolidated net income from continuing operations of $285 million, or $1.24 per diluted share, as compared to $260 million, or $1.15 per basic and diluted share, for the year ended December 31, 2011. The year over year increase in earnings primarily reflects higher electric transmission and distribution revenue, due to the positive effects of the Company’s investments in utility infrastructure. However, this increase in earnings was offset by lower earnings at Pepco Energy Services resulting from the ongoing wind-down of the retail energy supply business and a challenging energy services market.

During 2012, the Company continued to make significant progress on executing its strategic plan to enhance stockholder value while continuing its commitment to focus on reliability enhancement and customer satisfaction across all of our service territories. Key components of this plan effected during 2012 include:

Ø
  investments of approximately $1.2 billion in infrastructure improvements in 2012 focused on enhancing reliability, and the approval of a capital expenditure plan for $5.9 billion of additional expenditures over the five-year period from 2013 to 2017;
Ø
  the filing of rate cases in each jurisdiction on an annual basis to align more closely revenue and related cash flow levels with other operation and maintenance spending and capital investments;
Ø
  the continued implementation of a comprehensive plan to improve reliability and customer satisfaction across our utilities’ service territories, which resulted in a 24% reduction in the average number of power outages and a 26% decline in the average duration of outages in 2012 as compared to 2011;
Ø
  enhancement of our emergency restoration improvement program to address storm response, which resulted in enabling the utilities to restore power to our customers more quickly after the “derecho” storm in June and Hurricane Sandy in October; and
Ø
  installation and activation of advanced technology, such as smart meters and digital controls on overhead lines, throughout the majority of our utilities’ service territories, providing enhanced energy information and management options to customers and enabling more efficient power restoration.

2012 Compensation Actions

Highlights of 2012 Actions

To further align compensation received by our named executive officers with the interests of our stockholders and to reinforce good corporate governance practices, the following actions related to our executive compensation programs were taken in 2012:

Ø
  We received approval from stockholders of the performance goal criteria under the LTIP as required by Section 162(m) of the Code, in order to permit the deductibility of performance-based compensation paid under the LTIP in excess of $1 million.
Ø
  We received stockholder approval of two new compensation plans (the 2012 LTIP and the EICP) both of which included performance goal criteria intended to comply with Section 162(m) of the Code.

31



Ø
  We entered into an employment agreement with our new Executive Vice President and General Counsel, in which he elected to forego his right to an excise tax gross-up payment under the PHI Change-in-Control Severance Plan, and in which his compensation was aligned with specific performance objectives.
Ø
  We continued the practice of granting under our long-term incentive plans performance-based RSU awards, including retention awards which are tied to reliability and customer service achievements, in order to attract and retain our named executive officers.
Ø
  We continued the practice of using total shareholder return relative to our peer group for determining performance-based awards under our long-term incentive plans.
Ø
  We continued the practice of granting awards of time-based RSUs, instead of restricted stock awards, under our long-term incentive plans, together with dividend equivalents accrued in the form of additional RSUs that will not vest except and to the extent the underlying RSUs vest.
Ø
  We expanded the practice commenced in 2011 of including compensation recovery (clawback) provisions in employment and other compensation agreements, including agreements for the award of RSUs pursuant to the Company’s 2012 LTIP, intended to satisfy the requirements of the Dodd-Frank Act and the Sarbanes-Oxley Act.

Base Salary

Messrs. Velazquez, Kamerick and Emge received an increase in base salary of 3.9%, 3.0% and 2.3%, respectively, in 2012 based on each named executive officer’s performance. Mr. Rigby’s and Mr. Fitzgerald’s 2012 base salaries were set in their respective employment agreements with the Company described below under “Employment and Severance Agreements.” Mr. Boyle’s base salary for 2012 was determined when he joined the Company in 2012.

Annual Incentive Plan Compensation and Discretionary Cash Bonuses

As further described below, each of our named executive officers received an award under the EICP based on the Company’s 2012 results. In addition, Mr. Velazquez received a discretionary cash bonus with respect to his performance in 2012, and Mr. Boyle received a cash bonus in connection with joining the Company in April 2012.

Long-Term Incentive Plan Awards

For the 2010 to 2012 LTIP award performance period, the Compensation Committee determined the extent to which performance goal criteria for performance-based awards under our LTIP were met, resulting in the vesting of common stock under these awards for each named executive officer. The Compensation Committee also determined the outcome of each of the performance goals under Mr. Rigby’s 2012 performance-based retention awards, the settlement of which will not occur until after Mr. Rigby’s employment with us terminates.

Corporate Governance and Pay for Performance

Our 2012 compensation program was built upon the Company’s compensation governance framework and pay-for-performance philosophy, which includes the following features:

Ø
  We have 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.
Ø
  Our executive compensation programs continued to focus on both long-term and short-term performance, and to emphasize at-risk over fixed compensation.
Ø
  We determine base salaries and base salary increases by reference to a named executive officer’s performance and position and the salary range for that position, using competitive market survey data.
Ø
  Our Compensation Committee receives advice on pay composition and levels of compensation from an independent compensation consultant.
Ø
  We target compensation levels at approximately the 50th percentile of the competitive range for each pay element, assuming each named executive officer is fully performing in his position.
Ø
  Long-term incentives are designed to align named executive officer focus with stockholders by measuring our stock price performance relative to that of companies in our utility peer group, as well as to serve as a retention mechanism.
Ø
  We use equity-based, long-term incentive compensation as a means to align the interests of our named executive officers with those of our stockholders. To do this, we annually grant RSUs,

32




  two-thirds of which may vest based on performance over a three-year performance period. We have not granted stock options since 2002 and no named executive officer holds any stock options.
Ø
  We have a common stock ownership requirement for our officers, which each named executive officer (other than the named executive officers who joined us in 2012 and are subject to a phase-in period) has satisfied.
Ø
  We incorporate performance goals into our short-term and long-term incentive plans that are intended to balance the interests of our officers with those of our stockholders and customers.
Ø
  We provide our named executive officers with only limited perquisites and personal benefits.
Ø
  We maintain a strong risk management program which includes our Compensation Committee’s ongoing evaluation and oversight of the relationship between our compensation programs and risk.
Ø
  We may recoup certain incentive compensation payments made to our Chief Executive Officer and Chief Financial Officer when required under the Sarbanes-Oxley Act. Employment agreements and award agreements under the 2012 LTIP with our executive officers include compensation recovery (clawback) provisions intended to satisfy the requirements of the Sarbanes-Oxley Act, and, when implemented, the Dodd-Frank Act.
Ø
  We have adopted “no hedging”, “no pledging” and “no margining” policies.

The Compensation Process

The Compensation Committee, the composition and responsibilities of which are described more fully in “The Board of Directors and Corporate Governance — Board Committee Descriptions” on page 8 of this proxy statement, primarily is responsible for all executive compensation decisions with respect to each of the named executive officers, 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 Compensation Committee requests and receives recommendations from the Chief Executive Officer with respect to the compensation packages of the other named executive officers, 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 named executive officers and other executives, the Compensation 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. Since 2007, the Compensation Committee has engaged PM&P as its independent compensation consultant to advise the Compensation Committee on various executive compensation matters. Pursuant to this engagement, PM&P annually:

Ø
  attends Compensation Committee meetings and provides advice to the Compensation Committee, including a review of materials related to the meeting;
Ø
  conducts peer group review and benchmarking analyses for the Compensation Committee;
Ø
  analyzes certain compensation practices of the companies in our peer group;
Ø
  prepares an update on executive compensation trends as requested by the Compensation Committee;
Ø
  provides advice on compensation packages and proposed new salary ranges, to be provided to Company executives, as well as total executive compensation, as requested by the Compensation Committee;
Ø
  conducts pay-for-performance analyses; and
Ø
  provides other various industry and compensation data.

While serving as the compensation consultant to the Compensation 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 compensation matters.

As a result of recent SEC rules and an amendment to the NYSE listing standards relating to the independence of compensation committee advisors, we have adopted policies and procedures to provide for pre-approval of certain compensation-related services by the Compensation Committee and a periodic review of any conflicts of interest involving its advisors. In January 2013, the Compensation Committee determined that PM&P was independent under the NYSE listing standards and that PM&P’s work for the Compensation Committee has not raised any conflict of interest.

33



Compensation Philosophy

The objective of our executive compensation program is to attract, motivate and retain talented executives while promoting the interests of the Company and its customers and stockholders. To achieve this objective, our executive compensation program is designed to:

Ø
  provide executives with salaries, incentive compensation opportunities and other benefits that are competitive with comparable companies in our industry;
Ø
  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;
Ø
  align the financial interests of our named executive officers with those of the stockholders through equity-based, long-term incentive awards, time- and performance-based retention awards, as well as stock ownership requirements which require named executive officers to hold common stock in an amount equal to between one and five times such person’s base salary; and
Ø
  strike a careful balance between risk and compensation so as to not encourage executives to take excessive risk which could have a material adverse impact on our business and financial results.

Compensation Levels and Benchmarking

Compensation levels for our named executive officers 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 Compensation Committee uses Company-prepared tally sheets for each named executive officer to assist it in its annual compensation review process. The tally sheet identifies each material element of the named executive officer’s compensation, including salary, short-term and long-term incentive compensation opportunities, 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 Compensation Committee to review the totality of each named executive officer’s compensation.

Based on a benchmarking survey and analysis that PM&P performs annually, as well as other data sources, the Compensation Committee assesses competitive market compensation practices. One of the primary ways the Compensation 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 Compensation Committee from year to year to reflect corporate transactions or other events that may affect the comparability of one or more of the constituent companies.

For 2012, the Utility Peer Group consisted of the 18 companies listed below (the “2012 Utility Peer Group”). At December 31, 2012, the Company ranked at the 54th percentile in total assets (based on recent quarterly disclosure) and at the 21st percentile in market capitalization relative to the companies that comprised the 2012 Utility Peer Group. Based on the benchmarking survey prepared by PM&P in January 2013, the Compensation Committee has modified the Utility Peer Group for 2013 by removing NSTAR (following its merger with Northeast Utilities, with the combined entity remaining in the Utility Peer Group) and adding DTE Energy Company and Portland General Electric Company to the Utility Peer Group to more closely align the Utility Peer Group with our size and business strategy.

2012 Utility Peer Group

Alliant Energy Corporation
Ameren Corporation
CenterPoint Energy, Inc.
CMS Energy Corporation
Consolidated Edison, Inc.
Great Plains Energy Incorporated
           
Northeast Utilities
NSTAR
NV Energy, Inc.
OGE Energy Corp.
Pinnacle West Capital Corporation
PPL Corporation
   
Public Service Enterprise Group Incorporated
SCANA Corporation
TECO Energy, Inc.
Westar Energy, Inc.
Wisconsin Energy Corporation
Xcel Energy Inc.
 

34



Components of the Executive Compensation Program

The compensation program for the Company’s executives (currently consisting of 56 persons), including the named executive officers, consists of the following components:

Ø
  base salary;
Ø
  annual cash incentive opportunities under the EICP and, where extraordinary efforts or special circumstances warrant, discretionary cash bonuses;
Ø
  significant use of incentive awards of performance-based RSUs, and, to a lesser extent, time-based RSU awards (each with dividend equivalents), granted under the long-term incentive plans;
Ø
  retirement and deferred compensation programs;
Ø
  health and welfare benefits; and
Ø
  limited perquisites and personal benefits.

The following is a discussion of our compensation mix and each component of executive compensation.

Compensation Mix

The following charts highlight elements of the compensation mix for our Chief Executive Officer, as well as our other named executive officers, on an average basis, using data contained in our 2012 Summary Compensation Table beginning on page 50 of this proxy statement.


 

Consistent with our pay for performance strategy, the percentages of each named executive officer’s at-risk compensation as compared to fixed compensation are designed to reflect the Compensation Committee’s view that a significant percentage of each named executive officer’s compensation should be at risk and tied to Company, business unit or individual performance. Furthermore, the Compensation Committee generally believes that, as the level of an executive’s overall responsibility increases, the percentage of the executive’s compensation that is at-risk should likewise increase.

35



The following chart shows the relationship of at-risk to fixed compensation with respect to our Chief Executive Officer and each of our other named executive officers. For purposes of this chart, fixed compensation is comprised of base salary and discretionary cash bonuses, and at-risk compensation is comprised of 2012 EICP awards with respect to 2012 and the grant date fair value of awards granted under the LTIP and the 2012 LTIP during 2012, based on data contained in our 2012 Summary Compensation Table beginning on page 50 of this proxy statement.



 
    

Base Salary

The Compensation Committee considers adjustments to base salary levels annually and also may consider base salary adjustments in connection with promotions and other special circumstances.

Mr. Rigby’s and Mr. Fitzgerald’s employment agreements with the Company provide for a minimum base salary that may be increased, but not subsequently decreased, during the terms of the agreements.

The Compensation Committee, in order to provide consistency within the Company, has developed base salary levels for the named executive officers and assigned a level to each position based primarily on the decision-making responsibility associated with the position. Each base salary level has a 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 named executive officer’s base 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 Compensation Committee annually considers adjustments to the base salary range for each salary level and to individual salaries. The process of setting an executive’s annual base salary begins with a review by the Compensation Committee of available information on salary levels of executives at other companies. If the information shows a change in the base salary range for a particular salary level, the Compensation Committee has the discretion to adjust the Company’s base salary range for that salary level by a corresponding percentage. If the information shows an increase in base salary levels, the Compensation Committee also may approve a percentage increase in the total base salary budget for the Company’s executive group that corresponds to the market increase in salaries as shown by the comparative salary information. These base salary increases may be allocated among the members of the executive group based on the Compensation Committee’s evaluation of an executive’s performance, length of service and any other relevant factors. The Compensation Committee also may consider whether a further base 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.

The Compensation Committee, and in the case of Mr. Rigby, the independent directors, have approved the following base salaries for the named executive officers set forth below:

36



Name


  
2013 Base
Salary Level
($)

  
2012 Base
Salary Level
($)

  
2011 Base
Salary Level
($)

Joseph M. Rigby
                 1,015,000             985,000             880,000   
Frederick J. Boyle
                 470,000             440,000                
Anthony J. Kamerick(1)
                 513,000             513,000             498,000   
David M. Velazquez
                 518,000             503,000             484,000   
Kevin C. Fitzgerald
                 550,000             550,000               
Kirk J. Emge(2)
                 400,000             400,000             391,000   

(1)
  Mr. Kamerick retired from the Company effective as of February 1, 2013.
(2)
  Mr. Emge has announced his retirement from the Company, effective as of April 1, 2013.

2012 Base Salary Actions

To establish base salaries for 2012, the Compensation Committee obtained from PM&P published data, compiled from the same sources as the information used to adjust salary levels, which showed an average base salary budget increase of 3%. Based on this data, the Compensation Committee approved a merit budget increase equal to 3% of total base salaries, which it allocated among the executive group.

Mr. Rigby’s 2012 base salary was determined in December 2011 in the context of the negotiation of his employment agreement. In recommending an increase in the base salary for Mr. Rigby to the independent directors in connection with entering into this employment agreement, the Compensation Committee noted Mr. Rigby’s performance in executing our plans to improve and enhance reliability and customer service, and executing the Company’s business strategy, including regulatory, financing and smart grid plans. The Compensation Committee also recognized that Mr. Rigby’s strong leadership evidenced by his oversight of the Company through the reliability, customer service and reputational issues experienced by the Company has been essential to the progress the Company has made to address these issues. As a result, the Compensation Committee intended to ensure that the implementation of the plans to improve reliability and customer satisfaction continues to progress under Mr. Rigby’s stewardship. The Compensation Committee also reviewed the data related to salary information for Mr. Rigby’s position provided by PM&P in relation to the Company’s 2011 Utility Peer Group and noted that it was below the median salary for his position.

Accordingly, the Compensation Committee recommended to the independent directors an 11.9% increase in Mr. Rigby’s 2011 base salary, which would bring his 2012 base salary to 99.0% of the midpoint of the competitive range for his position. The Compensation Committee also acknowledged that, under his employment agreement, Mr. Rigby was relinquishing (or agreeing to a diminution of) certain significant rights, including severance payments, retirement payments, and rights to Section 280G gross-up payments. The independent directors concurred in this recommendation.

The Compensation Committee increased Mr. Kamerick’s 2011 base salary by 3%. In approving an increase for Mr. Kamerick, the Compensation Committee noted Mr. Kamerick’s strong performance in executing the Company’s strategic, financing and regulatory plans, and the Company’s strong credit and risk profile. The Compensation Committee noted that Mr. Kamerick’s 2011 base salary was slightly above the midpoint of the competitive range for his position. However, in light of Mr. Kamerick’s strong performance in 2011, the Compensation Committee approved setting Mr. Kamerick’s 2012 base salary at 105.8% of the midpoint of the competitive range for his position.

The Compensation Committee also increased Mr. Velazquez’s 2011 base salary by 3.9%. In approving this base salary increase for Mr. Velazquez, the Compensation Committee noted Mr. Velazquez’s work in executing our plans to improve and enhance reliability and customer service, the achievement of key initiatives related to the smart grid, implementing key organizational changes in the Power Delivery business, navigating the Company’s Hurricane Irene restoration efforts, and sound management of the operating utilities budget. It also was noted that Mr. Velazquez played a key role in various regulatory proceedings and public meetings. The Compensation Committee also noted that Mr. Velazquez’s 2011 base salary was slightly above the midpoint of the competitive range for his position. In light of the foregoing, the Compensation Committee recommended an increase in Mr. Velazquez’s 2011 base salary, which is at 103.7% of the midpoint of the competitive range for his position.

37



The Compensation Committee increased Mr. Emge’s 2011 base salary by 2.3%. In approving an increase for Mr. Emge, the Compensation Committee noted Mr. Emge’s achievements during 2011, including development and execution of the Company’s regulatory plan, the filing of rate cases in each jurisdiction where the Company operates, and the continued strong legal department performance against benchmark metrics. The Compensation Committee noted that Mr. Emge’s 2011 salary was slightly above the midpoint of the competitive range for his position. Accordingly, the Compensation Committee approved setting Mr. Emge’s salary at 103.9% of the midpoint of the competitive range for his position.

Two of our named executive officers joined the Company in 2012 and received base salaries approved by the Compensation Committee. For 2012, the base salary for Mr. Fitzgerald was set in the context of his employment agreement with the Company described in “— Employment and Severance Agreements” below. The 2012 salary for Mr. Boyle was established in March 2012 in connection with his joining the Company and reflects a base salary commensurate with a chief financial officer with Mr. Boyle’s level of experience in the energy and utility industries.

2013 Base Salary Actions

To establish base salaries for 2013, the Compensation Committee obtained from PM&P published data, compiled from the same sources as the information used to adjust salary levels, which showed an average base salary budget increase of 3%. Based on this data, the Compensation Committee approved a merit budget increase equal to 3% of total base salaries, which it allocated among the executive group.

In recommending the base salary increase for Mr. Rigby to the independent directors, the Compensation Committee noted Mr. Rigby’s performance in executing plans to improve and enhance reliability and customer service, and executing the Company’s business strategy, including regulatory, financing and smart grid plans. The Compensation Committee also reviewed the benchmarking data for Mr. Rigby’s position provided by PM&P and noted that Mr. Rigby’s 2012 base salary was 97% of the median salary for his position. The Compensation Committee also reviewed chief executive officer compensation data from the Utility Peer Group provided by PM&P. Accordingly, the Compensation Committee recommended to the independent directors a 3% increase in Mr. Rigby’s base salary, which would bring his 2013 base salary to 100% of the midpoint of the competitive range for his position.

The Compensation Committee increased Mr. Boyle’s 2012 base salary by 2.95%, and provided for an additional upward adjustment to bring Mr. Boyle’s 2013 base salary closer to the midpoint of the competitive range for his position. In approving the base salary increase for Mr. Boyle, the Compensation Committee noted Mr. Boyle’s performance in executing the Company’s strategic, financing and regulatory plan. The Compensation Committee noted that Mr. Boyle’s 2012 base salary is slightly below the midpoint of the competitive range for his position. In light of Mr. Boyle’s performance in 2012, the Compensation Committee approved a base salary increase for Mr. Boyle, which brought his base salary to 91.5% of the midpoint of the competitive range for his position. In addition, the Compensation Committee approved a special base salary adjustment of $17,000, which brought his base salary to 94.9% of the midpoint of the competitive range for his position.

The Compensation Committee increased Mr. Velazquez’s 2012 base salary by 2.98%. In approving the base salary increase for Mr. Velazquez, the Compensation Committee noted the following:

Ø
  the execution of plans to improve and enhance reliability and customer service;
Ø
  the achievement of key initiatives related to the smart grid;
Ø
  the implementation of key organization changes in the Power Delivery business;
Ø
  navigation of the Company’s derecho and Hurricane Sandy restoration efforts; and
Ø
  sound management of the operating utilities budget.

It also was noted that Mr. Velazquez played a key role in various regulatory proceedings and public meetings. The Compensation Committee further noted that Mr. Velazquez’s 2012 base salary was slightly above the midpoint of the competitive range for his position. In light of the foregoing, the Compensation Committee recommended an increase that brought Mr. Velazquez’s base salary to 104.7% of the midpoint of the competitive range for his position.

The Compensation Committee did not approve an increase in the base salary for Messrs. Kamerick, Fitzgerald or Emge because Mr. Kamerick retired as of February 1, 2013, Mr. Emge had announced his retirement effective April 1, 2013, and Mr. Fitzgerald only joined us recently, in September 2012.

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Annual Cash Incentive Awards Under the EICP, and Discretionary Cash Bonuses

In 2012, the Company provided its executives, including its named executive officers, with an opportunity to receive an annual cash incentive award under the EICP. For each participating executive, a target short-term incentive opportunity is established which is a percentage of the executive’s annual base salary. Each executive’s EICP opportunity percentage is selected by the Compensation Committee and is intended to place the executive’s total cash compensation opportunity (consisting of annual base salary and target annual incentive compensation) at a level approximating the midpoint of the competitive range. Annual cash incentive awards are made under the EICP to the extent performance goals established by the Compensation Committee are achieved.

The performance goal 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 performance objectives for the Company as a whole or 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 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. Typically, the Compensation Committee determines target award opportunities in January of each year, and approves performance goals and the other components of the annual EICP program in February of each year.

A payment of an award under the EICP may be made only if the performance goals for the award have been satisfied. Except with respect to executives who are covered by Section 162(m) of the Code, the Compensation Committee retains the discretion to adjust awards under the EICP either up or down taking into account such factors and circumstances as it determines to be appropriate. The Compensation Committee may not adjust an award with respect to an executive covered by Section 162(m) of the Code if the adjustment would prevent such payment from being performance-based compensation as defined thereunder. Typically, the Compensation Committee determines EICP award payments in February of each year.

In 2012, each of the named executive officers was granted an opportunity to earn a cash incentive award under the EICP of up to 180% of his target award opportunity. Target award opportunities under the EICP are established by the Compensation Committee and are expressed as a percentage of annual base salary. The target award opportunities granted in 2012 under the EICP for each of the named executive officers were as follows:

Name



  
Target Award
Opportunities as a
Percentage of Annual
Base Salary
(%)

Joseph M. Rigby
                 100 %  
Frederick J. Boyle
                 60 %  
Anthony J. Kamerick
                 60 %  
David M. Velazquez
                 60 %  
Kevin C. Fitzgerald
                 60 %  
Kirk J. Emge
                 60 %  
 

These 2012 award opportunities are shown in the 2012 Grants of Plan-Based Awards table on page 59 of this proxy statement under the heading “Estimated Future Payouts Under Non-Equity Incentive Plan Awards.”

The performance goals in 2012 for Messrs. Rigby, Boyle, Kamerick, Fitzgerald and Emge consisted entirely of corporate performance goals. These goals were:

Corporate Performance Goal



  
Weight
(%)

Company net earnings (excluding mark-to-market gains or losses associated with our retail energy supply business) relative to budgeted net earnings of $229.8 million
                 40 %  
Company free cash flow relative to budgeted free cash flow in the amount of negative $780 million(1)
                 10 %  
Utility customer satisfaction as measured by the results of customer surveys and other performance metrics
                 30 %  
Leadership initiatives, including:
                       
Ø diversity, as measured by the attainment of, or good faith efforts toward the attainment of, established affirmative action goals; and
                       
Ø safety, as measured by the absence of fatalities and the number of recordable injuries and fleet accidents
                 10 %  
Completion of key operational excellence projects
                 10 %  
 

(1)
  Free cash flow is defined to mean net cash from operating activities, plus net cash used by investing activities, plus dividends paid on common stock, minus common stock issued for the DRP.

39



The 2012 goals for Mr. Velazquez consisted entirely of performance goals relating to our Power Delivery business segment. These goals were:

Performance Goal



  
Weight
(%)

Power Delivery net earnings relative to budgeted net earnings of $191.3 million
                 25 %  
Power Delivery capital spending that is at or below the approved budgeted capital spending (less certain estimated storm-related expenditures) and percent of priority projects completed
                 10 %  
Power Delivery operation and maintenance spending that is at or below the budgeted operation and maintenance spending of $859.6 million
                 5 %  
Utility customer satisfaction and reliability as measured by the results of customer surveys and other metrics
                 40 %  
Diversity, as measured by the attainment of, or good faith efforts toward the attainment of, established affirmative action goals, and safety, as measured by the absence of fatalities and the number of recordable injuries and fleet accidents
                 15 %  
Regulatory and compliance as measured by completion of rate cases on an established schedule and compliance with North American Electrical Reliability Corporation requirements
                 5 %  
 

Each award was subject to the condition that, if the Company’s (or Power Delivery’s, in the case of Mr. Velazquez) net earnings relative to the budgeted net earnings (each as described above) goal was not achieved, no award would be made regardless of the extent to which the other performance goals were achieved.

In January 2013, the Compensation Committee received from PM&P an analysis of the Company’s total compensation for its executive officers relative to that of the 2012 Utility Peer Group and the utility industry in general. This analysis concluded that the short-term incentives for each of the named executive officers were within the market median range of practices.

In February 2013 the Compensation Committee made the following award decisions based on 2012 performance with respect to the named executive officers’ 2012 award opportunities under the EICP:

Named Executive
Officer



  
Performance Goal

  
Outcome
Joseph M. Rigby
           
Ø Company adjusted net earnings relative to budgeted adjusted net earnings
         42.0 %  
Frederick J. Boyle
           
Ø Company free cash flow relative to budgeted free cash flow
                 15.0 %  
Anthony J. Kamerick
           
Ø Customer satisfaction and reliability
         40.8 %  
Kevin C. Fitzgerald
           
Ø Leadership initiatives, comprised of safety and diversity goals
         8.2 %  
Kirk J. Emge
           
Ø Completion of key operational excellence projects
         15.0 %  
 
           
Total
         121.0 %  
 
           
 
              
David M. Velazquez
           
Ø Power Delivery adjusted net earnings relative to budgeted adjusted net earnings
         23.8 %  
 
           
Ø Capital spending
         7.2 %  
 
           
Ø O&M spending
           
 
           
Ø Customer satisfaction and reliability
         54.2 %  
 
           
Ø Leadership initiatives, comprised of safety and diversity goals
         13.8 %  
 
           
Ø Regulatory and compliance goals
         6.0 %  
 
           
Total
         105.0 %  
 

These awards are reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 50 of this proxy statement.

In addition, from time to time, the Compensation Committee may award a discretionary cash bonus to a particular named executive officer for extraordinary efforts or where special circumstances warrant such a payment.

Mr. Velazquez received a $100,000 discretionary bonus with respect to his performance in 2012. The Compensation Committee recognized Mr. Velazquez’s strong leadership and efforts in 2012 to improve customer satisfaction and the performance of the power delivery system. Furthermore, the Committee recognized Mr. Velazquez’s efforts in improving the utilities’ emergency restoration practices and storm responsiveness.

Mr. Boyle received a $40,000 hiring bonus in April 2012 as an inducement to join the Company.

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Equity and Incentive Awards Under the LTIP and the 2012 LTIP

Long-term equity and incentive awards (other than retention awards) are made to the named executive officers and other executives under the LTIP and the 2012 LTIP. The Compensation Committee has adopted a target long-term equity and 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 equity and incentive compensation) at a level targeting market median practices.

In December 2011, upon the recommendation of the Compensation Committee and advice from PM&P, the Board approved the 2012 LTIP, which was in turn approved by our stockholders in May 2012. The 2012 LTIP permits the Company to continue to grant stock-based compensation to executives, including named executive officers, in order to align executive compensation with Company performance and increases in stockholder value.

The target level of long-term and incentive compensation as a percentage of salary for each of the named executive officers in 2012 was as follows:

Name



  
Target as a
Percentage
of Salary
(%)

Joseph M. Rigby
                 250 %  
Frederick J. Boyle
                 125 %  
Anthony J. Kamerick
                 125 %  
David M. Velazquez
                 125 %  
Kevin C. Fitzgerald
                 125 %  
Kirk J. Emge
                 100 %  
 

Under the Company’s long-term equity and incentive compensation arrangements (other than retention awards), two-thirds of an executive’s targeted long-term equity and incentive award opportunity is in the form of RSUs that vest to the extent that performance objectives are achieved over a three-year performance period (the “performance-based awards”). One-third of the executive’s long-term equity and incentive award opportunity is in the form of RSUs that vest generally upon the completion by the executive of three years of employment from the date of grant (the “time-based awards”). The primary objectives of the performance-based awards are to retain the executive and to align the financial interests of the executive with the long-term interests of the Company’s stockholders. The primary objective of the time-based awards is executive retention.

Each RSU entitles the holder, beginning on the date of grant, to receive one share of common stock at the end of the restriction or performance period. The time-based awards will generally be subject to forfeiture, subject to certain exceptions, if the employment of the executive terminates before the end of the three-year restriction period. When the Company pays a dividend on its common stock during the three-year vesting period, the participant will be credited with additional RSUs with a fair market value equal to the amount of the dividend on the participant’s outstanding RSUs. These additional RSU credits will vest or be forfeited in proportion to the vesting of the underlying award. Dividend equivalents on the RSUs are treated the same way for performance-based awards. The Compensation Committee decided to credit dividends in this way so that the executive will only receive the benefit of dividends if an award is earned.

During 2012, in accordance with our typical practice, the Compensation Committee generally granted annual performance-based awards under the LTIP during the first 90 days of the year, so that the Company may provide equity awards and establish performance goals at or relatively close to the beginning of the applicable retention period/performance cycle. This timing also permits payments made under performance-based awards to comply with applicable requirements in the LTIP for “performance-based compensation” under Section 162(m) of the Code. The Compensation Committee has granted, and will continue to grant, awards of equity compensation under the 2012 LTIP at other times of the year as it deems necessary or desirable to reflect new hires, promotions and changes in responsibility, as well in other compensatory circumstances as determined by the Compensation Committee.

We also have granted performance-based and time-based retention awards under the LTIP and 2012 LTIP to Mr. Rigby and Mr. Fitzgerald pursuant to their employment agreements. The retention awards for Mr. Rigby were designed to retain his services to the Company over the three-year period of his agreement and to further align Mr. Rigby’s compensation with the attainment of goals of the Company related to, among other things, reliability, customer satisfaction and smart grid development. The retention awards for Mr. Fitzgerald were designed to attract him to the Company and to encourage his efforts to assist the Company in the attainment of its key initiatives.

41



Performance-Based Awards

For performance-based awards granted under the LTIP and the 2012 LTIP for the three-year performance period beginning on January 1, 2012, the Compensation Committee utilized the Company’s total shareholder return relative to that of the 2012 Utility Peer Group, or Relative TSR, as the sole performance goal. Relative TSR is calculated based on the sum of (i) the positive or negative change in the price of the Company’s common stock relative to that of the companies in the 2012 Utility Peer Group (calculated using as a starting price the average daily closing price per share during the fourth quarter of 2011 and as an ending price the average daily closing price per share during the fourth quarter of 2014); 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 a named executive officer based on the Relative TSR:

Percentile of PHI’s
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 compared to the 2012 Utility Peer Group would have allowed an award in excess of 100% of the target.

Awards will be prorated when performance falls between the specified levels. For example, for performance at the 62nd percentile, the award will be 125% of target. If, during the course of the three-year performance period, a significant event occurs, as determined in the sole discretion of the Compensation Committee, that the Compensation 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 2012 Utility Peer Group, the Compensation Committee may revise the performance objective (except with respect to an award to a “covered employee” as defined under Section 162(m) of the Code).

The Compensation Committee believes Relative TSR balances the named executive officer’s overall incentive pay opportunities between goals for Company performance and the Company’s financial performance in relation to the Utility Peer Group and is representative of current compensation design trends and peer group practices. The Compensation Committee typically approves a determination of Relative TSR with respect to a performance period in February of the year after the completion of that period.

Performance-based awards are subject to forfeiture if the employment of the executive terminates before the end of the performance period, subject to certain exceptions described in “Executive Compensation — Termination of Employment and Change in Control Benefits.” When the Company pays a dividend on common stock during the three-year performance period, the participant will be credited with additional RSUs corresponding to the amount of the dividend. These additional RSU credits will be forfeited to the extent that the award does not vest.

Grants of Awards for 2012 to 2014 Performance Period

For further information on the performance-based awards granted to each named executive officer in 2012, see the 2012 Grants of Plan-Based Awards table beginning on page 59 of this proxy statement.

Payout of Awards for 2010 to 2012 Performance Period

Following the end of 2012, the Compensation Committee determined the payouts for the 2010 through 2012 performance period LTIP awards based on the extent to which the performance goal for the award was satisfied. The Compensation Committee determined that payouts would be at 61.0% of target based upon the level of achievement of Relative TSR, which was at the 37th percentile.

For information on the number of shares awarded in 2013 to each named executive officer under LTIP awards for the 2010 to 2012 performance period, see the 2012 Option Exercises and Stock Vested table on page 67 of this proxy statement.

Performance-Based Retention RSU Awards

Pursuant to the terms of his employment agreement with the Company, Mr. Rigby is entitled to receive a series of three annual performance-based retention awards of 36,945 RSUs under the LTIP over the term of his employment agreement. The vesting of each of these awards is contingent upon Mr. Rigby’s continued employment during each annual performance period and achievement of the performance goals established for the performance period covered by the award. The performance goals for each award are established at the beginning of the performance period.

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The first of Mr. Rigby’s performance-based retention awards was granted under the LTIP on January 26, 2012 and covered the performance period of January 1, 2012 through December 31, 2012. For this award, the performance goals were: (i) reliability of electric service to customers; (ii) residential customer satisfaction; (iii) “smart grid” deployment and customer benefits; (iv) improvement of Company reputation within its service territories; and (v) management recruitment and talent development.

In February 2013, the Compensation Committee determined that 85% of this award was earned. The table below explains and analyzes the Compensation Committee’s determinations and outcome with respect to each of the performance goals under this award.

Performance Goal



  
Determination

  
Outcome
Reliability of
electric service to customers
           
Achieved, based on following accomplishments:
Ø completion of reliability enhancement plan and emergency restoration improvement plan milestones
Ø achievement of state-mandated reliability standards
Ø completion of vegetation management and storm restoration projects
         20 %  
Residential
customer satisfaction
           
Exceeded target, based on the results of PHI and utility customer surveys
         20 %  
“Smart grid” deployment and customer benefits
           
Substantially achieved, based on:
Ø percentage of smart meter deployment and activation
Ø creation of automated distribution deployment plan
Ø dynamic pricing achievements
         18 %  
Improvement of Company reputation
           
Satisfied one of three reputational metrics
         7 %  
Management recruitment and talent development
           
Achieved, as a result of the following, among other accomplishments:
Ø Successfully transitioned three executive positions during 2012
Ø Executed development assignment plan
Ø Initiated development plan for high potential executives
Ø Completed corporate communications talent rollout
         20 %  
 
           
Total
         85 %  
 

For further information on the vesting of this retention award, see the 2012 Option Exercises and Stock Vested table on page 67 of this proxy statement.

Pursuant to the terms of his employment agreement with the Company, beginning on January 1, 2013, Mr. Fitzgerald is entitled to receive a series of three annual performance-based retention RSU awards under the 2012 LTIP. See “Executive Compensation — Employment and Retirement Agreements — Kevin C. Fitzgerald” for a summary of the terms of these awards.

The vesting of each of these awards is contingent upon Mr. Fitzgerald’s continued employment during each annual performance period and achievement of the performance goals established for the performance period covered by the award. The performance goals for these awards are established at or near the beginning of the performance period. The first award was granted on January 2, 2013 under the 2012 LTIP in the amount of 8,499 RSUs for the performance period from January 1, 2013 through December 31, 2013. The performance goals established by the Compensation Committee in December 2012 for this award were: (i) reduction of external legal fees; (ii) development and execution of an external stakeholder enrollment plan; (iii) support or leading of grid resiliency initiatives; (iv) development and exploration of strategic growth opportunities; and (v) completion of a leadership development plan.

Time-Based Awards

Grants of Time-Based RSU Awards in 2012

The number of shares of time-based RSUs awarded in 2012 to each of the named executive officers under the LTIP and the 2012 LTIP is shown in the 2012 Grants of Plan-Based Awards table on page 59 of this proxy statement in the column headed “All Other Stock Awards: Number of Shares of Stock or Units.” In each case, these time-based awards are subject to forfeiture if the employment of the executive terminates before January 26, 2015, subject to certain exceptions described in “Executive Compensation — Termination of Employment and Change in Control Benefits.” During the vesting period, an executive does not own any shares of common stock and cannot vote the shares underlying the award. Each quarter, additional RSUs are granted as dividend equivalents, which are settled in shares of common stock if and to the extent the time-based award vests.

In addition to the foregoing RSU grants, pursuant to the terms of his employment agreement, Mr. Rigby

43




received on January 4, 2012 a time-based retention award of 73,891 RSUs, one-third of which vested on January 4, 2013 and the remaining two-thirds vest ratably on a day-to-day basis over the two-year period beginning January 4, 2013, in each case provided that Mr. Rigby remains continually employed by the Company (subject to certain exceptions).

Under the terms of his employment agreement, Mr. Fitzgerald also received a time-based retention award of 39,494 RSUs, four-fifteenths of which vest on each of September 17, 2013 and September 17, 2014, and the balance of which vests on September 17, 2015, in each case provided that Mr. Fitzgerald remains continually employed by the Company (subject to certain exceptions) on each vesting date.

These retention awards were intended to induce the named executive officer to remain in the employ of the Company during the term of the employment agreement.

Vesting of Time-Based Restricted Stock Awards

The number of shares of common stock that vested as of January 22, 2012, February 26, 2012 and June 13, 2012 under the terms of the time-based restricted stock awards originally granted under the LTIP on January 22, 2009, February 26, 2009 and June 13, 2009 are shown in the 2012 Option Exercises and Stock Vested table on page 67 of this proxy statement in the column “Stock Awards — Number of Shares Acquired on Vesting.”

The number of shares of common stock that vested as of January 28, 2013 under the terms of time-based restricted stock awards originally granted under the LTIP on January 28, 2010 are shown in the table below. During the vesting period, each executive had 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.

Named Executive Officer



  
Number of Shares Vested in
2013 Under Time-Based
Awards Granted in 2010
(#)

Joseph M. Rigby
                 34,258 (1)  
Anthony J. Kamerick
                 9,421 (2)  
David M. Velazquez
                 9,421   
Kirk J. Emge
                 6,304   

(1)
  Does not include any shares vested under Mr. Rigby’s time-based retention award granted under his employment agreement, the vesting of which is described above under “— Grants of Time-Based RSU Awards in 2012.”
(2)
  Does not include shares vested under Mr. Kamerick’s 2011 time-based RSU award as a result of his retirement on February 1, 2013, which are described in the section “— 2012 Option Exercises and Stock Vested” on page 67 of this proxy statement.

Retirement Programs

The Company’s retirement plans, consisting of both its tax-qualified retirement plan and supplemental executive retirement plans, are discussed in detail in the section entitled “Executive Compensation — Description of Pension and Other Retirement Plans” beginning on page 69 of this proxy statement. Under the Pepco Holdings Retirement Plan, all employees of the Company and certain subsidiaries with at least five years of service (three years in the case of the Conectiv Cash Balance Sub-Plan) 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 regulations under the Code.

The PHI 2011 Supplemental Executive Retirement Plan, or the 2011 SERP, provides retirement benefits to participating executives in addition to the benefits a participant is entitled to receive under the Pepco Holdings Retirement Plan to supplement benefits which participants forego due to certain limitations on benefit calculations imposed by the Code. 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, the participant in the Pepco Holdings Retirement Plan is entitled to a compensating payment. In addition, a participant in the Pepco Holdings Retirement Plan is entitled to either or both of the following enhancements to the calculation of the participant’s retirement benefit:

Ø
  the inclusion of compensation deferred under the Company’s executive deferred compensation plans; and
Ø
  to the extent not permitted by the Pepco Holdings Retirement Plan, the inclusion of annual cash incentive compensation received by the participant.

The supplemental retirement plan benefits applicable to the named executive officers are described in the section entitled “Executive Compensation — Description of Pension and Other Retirement Plans — Supplemental Executive Retirement Plans” beginning on page 70 of this proxy statement.

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The Compensation Committee believes that the 2011 SERP’s enhancements to the benefits that otherwise would be provided under the Pepco Holdings Retirement Plan are appropriate because they:

Ø
  provide competitive retirement benefits;
Ø
  protect eligible participants against reductions in retirement benefits due to limitations under the Code;
Ø
  attract new employees to the Company and encourage the continued employment of existing employees; and
Ø
  establish a more unified approach to the Company’s retirement programs, consistent with current market practices.

Under the terms of the employment agreement entered into with Mr. Rigby, he is entitled to receive an increase in his benefit so that such benefit would be equal to 1.65% of such final average base pay and bonus multiplied by years of service. See “Executive Compensation — Description of Pension and Other Retirement Plans — Supplemental Executive Retirement Plans — PHI 2011 Supplemental Executive Retirement Plan” for additional information regarding the 2011 SERP.

All employees of the Company, including the named executive officers, are entitled to participate on the same terms as other eligible employees in the Company’s 401(k) plan. To encourage participation in the 401(k) plan, participants in this 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 named executive officers participates in the Company’s health care, life insurance, and disability insurance plans on the same terms as other Company employees. Other than (i) a Company-paid annual executive physical, (ii) under the Company’s Change-in-Control Severance Plan for Certain Executive Employees and (iii) under Mr. Rigby’s employment agreement, the Company has no health or welfare plans, programs or arrangements that are available only to executives.

Pursuant to the terms of the Company’s Change-in-Control Severance Plan, and subject to certain specified conditions and exceptions contained in that plan, upon a change in control, the Company will be required to make available to each named executive officer (other than Mr. Rigby) such medical, dental, group life and disability benefits that are at least at a level (and cost to the executive) substantially similar in the aggregate to the level of such benefits prior to the change in control.

Pursuant to the terms of his employment agreement:

Ø
  Mr. Rigby is entitled to reimbursement from the Company of the cost of purchasing a health insurance policy comparable to the Company-sponsored healthcare plan in which Mr. Rigby is enrolled, for a period equal to the longer of one year following the termination of his employment agreement or the remaining term of the agreement.
Ø
  In the event Mr. Rigby’s employment is terminated without cause or he resigns for good reason, in each case following a change in control, he would be entitled to receive Company-paid healthcare, life insurance and disability benefits no less favorable than those in effect immediately prior to the termination, for a period of 24 months after such termination.

Other Perquisites and Personal Benefits

The Company provides its named executive officers with limited perquisites and other personal benefits on an annual basis, including one or more of the following: (i) a car allowance, (ii) Company-paid parking, (iii) tax preparation, (iv) financial planning services, (v) the cost of an annual executive physical, (vi) payment of certain club dues, (vii) personal use of Company-leased entertainment venues and Company-purchased tickets to sporting and cultural events when not otherwise used for business purposes and (viii) reimbursement for spousal travel. The Company does not provide tax gross-ups to any named executive officers on any of the aforementioned perquisites. These benefits generally are provided to ensure that the Company’s total compensation package is competitive with peer companies and to provide named executive officers with certain limited benefits that are not inconsistent with such practices at other peer group companies. The Compensation Committee believes that the type and amount of perquisites and other personal benefits provided to the named executive officers are reasonable in relation to the amount of their overall compensation. From time to time, as circumstances warrant, the Company may compensate executives for the financial effects of relocating, including under the Code, pursuant to a long-standing, non-discriminatory relocation policy. All perquisites and other personal benefits paid to our named executive officers are more fully described in

45




the Summary Compensation Table beginning on page 50 of this proxy statement.

Deferred Compensation Plan

Under the PHI Deferred Compensation Plan, which is described in greater detail in the section entitled “Executive Compensation — Nonqualified Deferred Compensation — Description of Our Nonqualified Deferred Compensation Plans — PHI Executive and Director Deferred Compensation Plan” on page 73 of this proxy statement, the named executive officers and other executives 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 401(k) plan due to the qualified plan limitations imposed by the Code, the executive is entitled to defer the excluded amount under the PHI Deferred Compensation Plan and receive an additional credit under the PHI Deferred Compensation Plan equal to the matching contribution, if any, that the Company would have made with respect to the excluded amount under the 401(k) plan. Balances under the PHI Deferred Compensation Plan with respect to an executive are credited on a monthly basis with an amount corresponding to, as elected by the executive, any or a combination of:

Ø
  interest at the prime rate;
Ø
  the return that would have been earned had the account balance been invested in any one or a combination of investment funds; or
Ø
  the return the executive would have earned had the account balance been invested in shares of common stock.

The PHI 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 PHI Deferred Compensation Plan through the purchase of Company-owned life insurance policies and other investments.

Employment and Severance Agreements

Employment Agreement with Mr. Rigby

The Company entered into an employment agreement with Mr. Rigby effective January 1, 2012, in order to ensure Mr. Rigby’s continued service to the Company and maintain his strong leadership and oversight of the Company during the three-year term of the employment agreement. The employment agreement also is intended to further align Mr. Rigby’s compensation with the successful achievement of various PHI initiatives and operational goals established by the Compensation Committee. For additional information regarding the terms of the employment agreement with Mr. Rigby, see “Executive Compensation — Employment and Retirement Agreements — Joseph M. Rigby” beginning on page 53 of this proxy statement.

Employment Agreement with Mr. Fitzgerald

Mr. Fitzgerald’s compensation for 2012 was determined in connection with his employment agreement and reflects a compensation package that (i) was commensurate with the extensive utility and energy-related legal and business expertise that he brings to the Company, and (ii) was intended to serve as inducement to Mr. Fitzgerald to become an executive of, and retain his employment with, the Company for the term of the employment agreement. In setting his compensation, the Compensation Committee also considered the fact that Mr. Fitzgerald elected to forego his right to a tax gross-up payment under the Change-in-Control Severance Plan. This employment agreement also provides for performance-based retention awards of RSUs, intended to further align Mr. Fitzgerald’s compensation with the successful achievement of various PHI initiatives. For additional information regarding the terms of the employment agreement with Mr. Fitzgerald, see “Executive Compensation — Employment and Retirement Agreements — Kevin C. Fitzgerald” beginning on page 55 of this proxy statement.

Retirement Agreement with Mr. Emge

In connection with his retirement from the Company effective April 1, 2013 and in appreciation of his more than 26 years of dedicated service to the Company and its predecessors, the Compensation Committee approved the terms of a retirement agreement with Mr. Emge in September 2012. The retirement agreement was intended to provide a smooth executive transition of the General Counsel role from Mr. Emge to Mr. Fitzgerald, especially in light of Mr. Emge’s significant knowledge of and role in regulatory and related matters, and to reflect the Company’s heartfelt appreciation for the many years of dedicated service Mr. Emge provided to the Company.

For further information regarding Mr. Emge’s retirement agreement, see “Executive Compensation — Employment and Retirement Agreements — Kirk J. Emge” beginning on page 57 of this proxy statement.

46



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 “good reason,” 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 agreement provides that the amount of the severance payment declines over the three-year term of the agreement. The specific benefits to which Mr. Rigby is entitled are described in detail under the section entitled “Termination of Employment and Change in Control Benefits.”

The Company also maintains a Change-in-Control Severance Plan in which the named executive officers, other than Mr. Rigby, participated as of December 31, 2012. Under this plan, which is described in “Executive Compensation — Termination of Employment and Change in Control Benefits,” 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 receive, among other things, a severance payment equal to 1.5, two or three times the salary and target annual cash incentive award for the year in which termination occurs, depending upon the executive’s position. See “Executive Compensation — Termination of Employment and Change in Control Benefits — Change-in-Control Severance Plan” on page 76 of this proxy statement for additional information regarding this plan. The purpose of the plan is to ensure that the participating executives are able to remain focused on their responsibilities to the Company in a change in control situation and are not distracted by the uncertainty of their continued employment.

Tax and Accounting Considerations

Tax Considerations

Performance-Based Compensation Under Section 162(m) of the Code

Under Section 162(m) of the Code, a public company is prohibited from deducting for federal income tax purposes compensation in excess of $1.0 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” as defined in regulations adopted under Section 162(m).

The payment of shares of common stock under performance-based awards granted under the LTIP and the 2012 LTIP (including performance-based retention awards) upon the vesting of such awards, if determined solely by reference to the achievement of pre-established performance objectives, would qualify as “performance-based compensation” under Section 162(m) of the Code. Time-based restricted stock and time-based RSU awards under the LTIP and the 2012 LTIP (including time-based retention awards) do not generally qualify as “performance-based compensation” because the awards vest on the basis of continued employment, rather than pre-established performance objectives.

Awards under the EICP will qualify as “performance-based compensation” under Section 162(m) of the Code, so long as the payment of the award under the EICP is based on the achievement of pre-established performance objectives determined in accordance with the EICP’s terms.

The Compensation Committee intends for awards of performance-based compensation under the LTIP, the 2012 LTIP and the EICP to qualify as “performance-based compensation” under Section 162(m) to the greatest extent reasonably possible to maximize the deductibility by the Company of the payment of such compensation for federal income tax purposes.

The Compensation Committee may from time to time provide an executive with a discretionary cash bonus to reward the executive for extraordinary effort or where special circumstances warrant. Depending on the circumstances, such a bonus may or may not qualify as performance-based compensation under Section 162(m).

47



Nonqualified Deferred Compensation Under Section 409A of the Code

Section 409A of the Code provides that amounts deferred under nonqualified deferred compensation plans are includable in an employee’s income when vested unless certain requirements are met. If these requirements are not met, employees are also subject to additional income tax and interest penalties. Our supplemental retirement plans, executive employment agreements, severance arrangements, and other nonqualified deferred compensation arrangements are intended to satisfy the requirements of Section 409A.

Parachute Payments Under Sections 280G and 4999 of the Code

Section 280G of the Code disallows a tax deduction for “excess parachute payments” in connection with the termination of employment related to a change of control (as defined in the Code), and Section 4999 of the Code imposes a 20% excise tax on any person who receives excess parachute payments. As discussed beginning on page 74 of this proxy statement, our named executive officers are entitled to receive certain payments upon termination of their employment, including termination following a change in control. Under the terms of the Company’s Change-in-Control Severance Plan, all named executive officers, except Mr. Rigby and Mr. Fitzgerald, are entitled to receive tax gross-ups for any payments that constitute an excess parachute payment. Not all of the payments to which our named executive officers are entitled are excess parachute payments. See “Executive Compensation — Termination of Employment and Change in Control Benefits.” Accordingly, our tax deduction would be disallowed under Section 280G for all excess parachute payments as well as tax gross-ups.

Accounting Considerations

The RSU awards disclosed in the 2012 Grants of Plan-Based Awards table are accounted for based on their grant date fair value, as determined under FASB ASC Topic 718, which is recognized over the service or vesting period applicable to the grant. Forfeitures are estimated, and the compensation cost of awards will be reversed if the employee does not remain employed by us throughout the service or vesting period.

Stock Ownership Requirements

To further align the financial interests of the Company’s executives with those of our stockholders, the Board 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:

Officer Level



  
Multiple of Salary
(#)

Chief Executive Officer, President
           
5 times
Executive Vice President
           
3 times
Senior Vice President
           
2 times
Vice President
           
1 time
 

Each officer had until the later of December 31, 2010, or five years after the date of the officer’s election as an officer, to attain 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 attain the applicable stock ownership level. Shares of common stock allocated to an executive’s 401(k) plan account, unvested shares of restricted stock, and the number of shares of common stock underlying RSU awards (plus dividend equivalents accrued thereon) are considered owned by the executive for the purpose of meeting the ownership requirement. Each of Messrs. Rigby, Velazquez and Emge meet the stock ownership requirement applicable to him. Because Messrs. Boyle and Fitzgerald joined the Company during 2012, they have until 2017 to comply with these requirements. Mr. Kamerick is no longer subject to the stock ownership requirement following his retirement from the Company effective February 1, 2013.

48



Prohibition on Hedging of Economic Risk and Pledging of Stock

Because hedging transactions can result in the misalignment of the ownership interest of directors, officers and employees relative to that of the Company’s stockholders, the Board has determined that no director, officer or employee of the Company (including executives) may engage in any hedging or similar transactions that have the effect of reducing or eliminating the investment risks associated with any of the Company’s securities owned by such person. This prohibition applies whether the securities have been acquired from the Company or have been purchased by the holder in the market.

Pledging and margining of common stock puts those shares at risk of sale if the loan cannot otherwise be repaid or if securities in a margin account decrease in value. For these reasons, in February 2013, our Board adopted a policy that prohibits our directors, officers and non-union employees from:

Ø
  pledging their PHI common stock to secure indebtedness of any kind;
Ø
  using PHI common stock in a margin account as collateral for investments in other securities; or
Ø
  engaging in any other transaction of a similar nature that has the effect of using PHI securities as collateral.

49



Executive Compensation

The 2012 Summary Compensation Table below sets forth information on compensation paid by us and our subsidiaries for the following named executive officers:

Ø
  our principal executive officer;
Ø
  all persons who served as our principal financial officer at any time during 2012; and
Ø
  the three other most highly compensated executive officers employed as of December 31, 2012, determined on the basis of their total compensation for 2012 (excluding the amounts under the column “Change in Pension Value and Nonqualified Deferred Compensation Earnings” below).

2012 Summary Compensation Table

Name and Principal Position


  
Year
  
Salary
($)

  
Bonus
($)

  
Stock
Awards
($)(1)

  
Non-Equity
Incentive
Plan
Compensation
($)(2)

  
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(3)

  
All Other
Compensation
($)(4)

  
Total
Compensation
($)

Joseph M. Rigby
           
2012
         985,000                         4,749,521             1,191,850             4,234,725             204,737             11,365,833   
Chairman, President and
           
2011
         880,000                         2,322,631             748,000             2,511,103             259,796             6,721,530   
Chief Executive Officer
           
2010
         880,000                         1,941,743                         588,975             140,586             3,551,304   
 
Frederick J. Boyle
           
2012
         320,984             40,000             505,694             233,034             28,159             144,402             1,272,273   
Senior Vice President and
Chief Financial Officer(5)
           
 
                                                                                                        
 
Anthony J. Kamerick
           
2012
         513,000                         653,209             372,438             1,054,393             74,440             2,667,480   
Executive Vice President and
           
2011
         498,000                         657,209             253,980             1,532,675             85,516             3,027,380   
Chief Regulatory Officer
           
2010
         484,000                         533,982             338,026             844,732             69,113             2,269,853   
(Former Senior Vice
President and Chief
Financial Officer)(6)
           
 
                                                                                                 
 
David M. Velazquez
           
2012
         503,000             100,000             640,472             316,890             1,260,208             82,101             2,902,671   
Executive Vice President
           
2011
         484,000             125,000             638,719             198,053             2,517,536             97,546             4,060,854   
 
           
2010
         484,000                          533,982                          118,719             62,091             1,198,792   
 
Kevin C. Fitzgerald
           
2012
         159,280                         1,270,379             115,645             4,276             16,593             1,566,173   
Executive Vice President and
General Counsel
           
 
                                                                                                 
 
Kirk J. Emge
           
2012
         400,000                          407,448             290,400             763,190             71,387             1,932,425   
Senior Vice President and
           
2011
         391,000                          412,791             199,410             789,255             82,639             1,875,095   
Special Counsel to the
           
2010
         381,000                          357,291             266,090             471,012             79,497             1,554,890   
Chief Executive Officer(7)
           
 
                                                                                                        
 
(1)
  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 awards of time-based restricted stock, time-based RSUs and performance-based awards, as applicable, granted during that year. The values shown with respect to each performance-based award (i) assume that such award will vest at 100% of the target level at the end of the performance period and the recipient will remain employed by us through such date; and (ii) reflect that dividends have been factored into the determination of grant date fair value. Furthermore, the values shown assume that each award of time-based restricted stock or time-based RSUs, as applicable, will vest in full at the end of the three-year service period. For a further description of these stock-based awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Equity and Incentive Awards Under the LTIP and the 2012 LTIP.” For a discussion of the other assumptions made in determining the aggregate grant date fair value of these awards, see Note (13), “Stock-Based Compensation, Dividend Restrictions, and Calculations of Earnings Per Share of Common Stock — Stock-Based Compensation” in the Company’s consolidated financial statements included in its 2012 Form 10-K.

50



(continued from prior page)

Two-thirds of an executive’s yearly LTIP (2012 LTIP, with respect to Mr. Fitzgerald) awards were performance-based and one-third was time-based. Assuming vesting of performance-based awards granted in 2012, 2011 and 2010 at the maximum level of 200% of target, the grant date fair value of these performance-based awards would have been as follows:

        Grant Date Fair Value (Maximum Level) of
Performance-Based Awards Granted In:

  
Name



  
2012
  
2011
  
2010
Joseph M. Rigby
              $ 3,407,661          $ 3,135,312          $ 2,751,602   
Frederick J. Boyle
                 697,692                             
Anthony J. Kamerick
                 887,365             887,163             756,694   
David M. Velazquez
                 870,075             862,205             756,694   
Kevin C. Fitzgerald
                 725,643                           
Kirk J. Emge
                 553,514             557,225             506,298   
 
(2)
  Consists of awards under the EICP. For a further description of these awards, see “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Annual Cash Incentive Awards Under the EICP, and Discretionary Cash Bonuses.”
(3)
  Consists of the aggregate annual increase in the actuarial present value of the executive’s accumulated benefit under all defined benefit and actuarial pension plans. None of the named executive officers received “above-market earnings” (as defined by SEC regulation) under any of the Company’s nonqualified deferred compensation plans.
(4)
  The totals shown in this column for 2012 consist of:
Name



  
Dividends Paid
on Unvested
Shares of
Restricted
Stock
($)

  
Market Value
of Dividend
Equivalents
Credited on
Time-Based
RSU Awards
($)(a)

  
Company-
Paid
Premiums
on Term Life
Insurance
($)

  
Company
Matching
Contributions
Under 401(k)
Plan
($)

  
Company
Matching
Contributions
on Deferred
Compensation
($)

  
Perquisites and
Other Personal
Benefits
($)(b)

  
Total
($)

Joseph M. Rigby
                 36,999             90,981             2,281             11,250             29,550             33,676             204,737   
Frederick J. Boyle
                              6,950             742              9,023                          127,687             144,402   
Anthony J. Kamerick
                 11,820             24,746             1,188             11,250             6,150             19,286             74,440   
David M. Velazquez
                 10,175             24,150             1,165             11,250             7,141             28,220             82,101   
Kevin C. Fitzgerald
                             2,378             368             1,375                         12,472             16,593   
Kirk J. Emge
                 6,808             15,492             926              8,670             7,343             32,148             71,387   
 
(a)
  Represents the market value of dividend equivalents credited quarterly during 2012 with respect to unvested time-based RSU awards granted under the LTIP (with respect to Mr. Fitzgerald, the 2012 LTIP). These amounts were computed based upon the closing market price of a share of common stock on the trading day immediately prior to the dividend payment date.
(b)
  The following perquisites and other personal benefits were paid in 2012 (all amounts shown reflect cash payments made by the Company, except as otherwise stated):
Name


  
Automobile
Allowance
($)*

  
Parking
($)

  
Tax
Preparation
Fee
($)

  
Financial
Planning
Fee
($)

  
Executive
Physical
Fee
($)

  
Club
Dues
($)

  
Spousal
Travel
($)

  
Reimbursed
Relocation
Expenses
($)

  
Total
($)

Joseph M. Rigby
                 11,700             2,400             2,500             10,820             800             2,400             3,056                         33,676   
Frederick J. Boyle
                 8,288             1,800             2,500             13,466                          495                           101,138 **            127,687   
Anthony J. Kamerick
                 11,700             2,400             2,500                                     2,386             300                         19,286   
David M. Velazquez
                 11,700             2,400             2,500             10,820             800                                                     28,220   
Kevin C. Fitzgerald
                 3,413             800                         4,489                         3,770                                     12,472   
Kirk J. Emge
                 11,700             2,400             2,500             10,820                          450              4,278                          32,148   
 
*
  Consists of a non-accountable expense allowance to compensate executives for the business use of their automobiles.
**
  Includes a $27,250 adjustment made pursuant to the Company’s longstanding non-discriminatory relocation policy to compensate the named executive officer for the effect of the relocation expense payment under the Code.

51



(continued from prior page)

In addition, in 2012, Company-purchased tickets to attend sporting and cultural events were made available to our named executive officers for personal use when not being used for business purposes. There was no incremental cost to PHI for providing these tickets to our named executive officers.

“All Other Compensation” Information for 2011 as reported in the 2012 Summary Compensation Table has been reduced to reflect (i) the fact that dividend equivalents credited on performance-based awards granted in 2010 and 2011 are not required to be included in this column because they were factored into the reported grant date fair value; and (ii) dividend equivalents credited on time-based awards only during 2011 and not for any prior year.

(5)
  Mr. Boyle was appointed Senior Vice President and Chief Financial Officer of PHI effective April 9, 2012.
(6)
  Mr. Kamerick was promoted to Executive Vice President and Chief Regulatory Officer effective April 9, 2012 and served in that position until his retirement on February 1, 2013.
(7)
  Mr. Emge served as Senior Vice President and General Counsel of PHI until September 17, 2012, when he was appointed as Senior Vice President and Special Counsel to the Chief Executive Officer. Mr. Emge has announced his retirement as an executive officer of PHI, effective April 1, 2013.

Comparison of 2012 Realized Pay to Reported Pay

The calculation of total compensation as reported in the 2012 Summary Compensation Table is based upon rules of the SEC and includes compensation that is not received or realized by our named executive officers during the year. For example, total compensation includes the “grant date fair value” of time-based and performance-based RSU awards that were granted during 2012. These amounts are computed applying specific accounting rules and based on a number of assumptions, and are included in total compensation even though time-based awards do not vest until the end of the restriction period and the named executive officer will not realize shares under performance-based awards until the Compensation Committee has determined whether, and the extent to which, the relevant performance criteria have been satisfied at the end of the performance period. For more information on total compensation as calculated under the SEC’s rules, see the narrative and footnotes accompanying the 2012 Summary Compensation Table.

To supplement this SEC-mandated disclosure, the following table sets forth the “realized pay” of each named executive officer. For purposes of this table, we define “realized pay” to include the following elements of compensation:

Ø
  Base salary, EICP awards and Discretionary Cash Bonuses. We have included the named executive officer’s base salary and awards under the EICP earned based on fiscal year 2012 performance, as well as any discretionary cash bonuses earned with respect to 2012. See “Compensation Discussion and Analysis — Components of the Executive Compensation Program — Annual Cash Incentive Awards Under the EICP, and Discretionary Cash Bonuses” beginning on page 39 of this proxy statement.
Ø
  Vested LTIP Restricted Stock Awards. We have included the value of the vested portion of restricted stock awards that PHI granted in 2009 under the LTIP to certain of the named executive officers, which awards vested in 2012.
Ø
  Vested LTIP Performance-Based Awards. We have included the value of the vested portion of performance-based awards that PHI granted in 2009 under the LTIP to the named executive officers with respect to the 2009 to 2011 performance period, the vesting of which was determined in February 2012. See the 2012 Option Exercises and Stock Vested table on page 67 of this proxy statement.
Ø
  Perquisites to the Extent Includible in Gross Income. We have included the value of all perquisites and other personal benefits, to the extent they were includible in the named executive officer’s gross income or otherwise resulted in imputed income for tax purposes.

52



We calculate realized pay with respect to vested LTIP awards by multiplying (i) the average of the high and low trading prices of our common stock on the NYSE on the vesting date, by (ii) the total number of shares vested, including any shares withheld for tax purposes.

        2012 Realized Pay
  
       
Name



  
Base Salary,
EICP and
Discretionary
Cash Bonuses
($)

  
Vested LTIP
Restricted
Stock
Awards
($)

  
Vested LTIP
Performance-
Based Awards
($)

  
Perquisites and
Other Personal
Benefits
Included on
W-2
($)

  
Total Realized
Pay
($)

  
2012 Total
Compensation
Reported in
Summary
Compensation
Table
($)

  
Realized Pay
as a Percentage
of 2012
Reported Pay
(%)

Joseph M. Rigby
                 2,176,850             581,708             706,776             94,625             3,559,959             11,365,833             31.3   
Frederick J. Boyle
                 594,018                                       125,817             719,835             1,272,273             56.6   
Anthony J. Kamerick
                 885,438             138,174             172,259             32,470             1,228,341             2,667,480             46.0   
David M. Velazquez
                 919,890             156,021             186,233             42,336             1,304,480             2,902,671             44.9   
Kevin C. Fitzgerald
                 274,925                                     7,901             282,826             1,566,173             18.1   
Kirk J. Emge
                 690,400             111,645             135,757             43,449             981,251             1,932,425             50.8   
 

Comparison of Key Elements of Total Compensation

The chart below provides a comparison of the key elements of total compensation for 2012 for each named executive officer, including the percentage of salary and bonus compared to total compensation. This section uses information contained in the 2012 Summary Compensation Table.



 
    

Employment and Retirement Agreements

Joseph M. Rigby

Effective January 1, 2012, the Company entered into an employment agreement with Mr. Rigby, which provides for his employment with us through December 31, 2014. Our independent directors, based upon the recommendation of PM&P, authorized the execution and delivery of the employment agreement with Mr. Rigby. This employment agreement provides for performance-based retention awards of RSUs, which are intended to further align Mr. Rigby’s compensation with the successful achievement of various PHI initiatives and operational goals established by the Compensation Committee. The following table provides a summary of the material terms of the employment agreement with Mr. Rigby.

53



Provision of Employment Agreement


  
Description
Annual salary
           
During 2012, $985,000 ($1,015,000 for 2013), subject to annual review by the Board, and his salary may not be decreased during the remainder of the term of the employment agreement.
Incentive compensation
           
Incentive compensation to be received under plans applicable to our senior executives, if the Board determines in good faith that Mr. Rigby’s performance merits payment of such compensation.
Retirement and other benefit plans
           
Mr. Rigby will participate, in a manner similar to other senior executives, in retirement plans, fringe benefit plans, supplemental benefit plans and other plans and programs (including insurance coverage) provided by us for our executives or employees, except that Mr. Rigby’s annual minimum annuity benefit under the 2011 SERP will be augmented to an amount equal to 1.65% of Mr. Rigby’s five-year average base pay and bonus multiplied by years of service as determined under the PHI Sub-Plan (for all other executives, the 2011 SERP provides for an annual benefit equal to 1.45% of the five-year average base pay and bonus multiplied by years of service).
RSU retention awards
           
Mr. Rigby is entitled to receive three annual performance-based retention awards of 36,945 RSUs each under the LTIP (and, beginning in 2013, the 2012 LTIP) to be granted over the term of the employment agreement. The vesting of each award is contingent upon Mr. Rigby’s continued employment with us during the relevant performance period covered by the award and the achievement of performance goals established for that performance period.

Mr. Rigby has also received a time-based retention award of 73,891 RSUs under the LTIP, one-third of which vested on January 4, 2013 and the remaining two-thirds of which will vest ratably on a day-to-day basis over the two-year period beginning January 4, 2013, provided that Mr. Rigby remains continually employed by us during such period.

Mr. Rigby may not settle vested RSUs under these retention awards until the day after his employment with us terminates, except that he may elect to surrender vested RSUs as permitted by the employment agreement to satisfy applicable tax withholding obligations. Vested RSUs will be credited with dividend equivalents in the form of additional fully-vested RSUs.
Payments upon termination or change in control
           
See “— Termination of Employment and Change in Control Benefits” for a description of various payments and other benefits that Mr. Rigby may be entitled to receive under the employment agreement in connection with the termination of Mr. Rigby’s employment.
Compensation recovery (“clawback”) provisions
           
The employment agreement includes provisions intended to satisfy the compensation recovery provisions of both the Dodd-Frank Act and the Sarbanes-Oxley Act.
 

54



Kevin C. Fitzgerald

Effective September 17, 2012, the Company entered into an employment agreement with Mr. Fitzgerald, which provides for his employment with us through September 16, 2015. Our independent directors, based upon the recommendation of PM&P, authorized the execution and delivery of the employment agreement with Mr. Fitzgerald. This employment agreement provides for performance-based retention awards of RSUs, which are intended to further align Mr. Fitzgerald’s compensation with the successful achievement of various PHI initiatives. The following table provides a summary of the material terms of the employment agreement with Mr. Fitzgerald.

Provision of Employment Agreement


  
Description
Annual salary
           
$550,000, subject to annual review by the Board, with the condition that, if at any time and during the term of the employment agreement his annual base salary is increased, such annual base salary will not be subsequently decreased during the remainder of the term.
Cash incentive compensation
           
Mr. Fitzgerald is entitled to a target incentive opportunity under the EICP equal to 60% of his annual base salary. Any award paid with respect to 2012 will be prorated based upon the number of days he was continuously employed with us in 2012.
Retirement and other benefit plans
           
Mr. Fitzgerald will be eligible to participate (in a manner similar to other senior executives of PHI of comparable rank) in PHI’s retirement, supplemental retirement benefit, savings, deferred compensation, health, welfare and insurance plans, and in other plans and programs provided by PHI from time to time for its senior executives of comparable rank. Mr. Fitzgerald will also be entitled to receive such perquisites and other personal benefits provided by PHI from time to time to its senior executives of comparable rank.
Long-term incentive plan compensation
           
Mr. Fitzgerald is entitled to receive 2012 LTIP awards with aggregate target award opportunities equal to 125% of his base salary. For the 2012 to 2014 performance period, Mr. Fitzgerald received awards (prorated based on his first day of employment) consisting of:

Ø two-thirds performance-based RSUs (including dividend equivalents), which shall vest only if Mr. Fitzgerald remains continuously employed by us until the end of the performance period and the Compensation Committee determines that PHI’s Relative TSR (as determined by the Compensation Committee) for the 2012 to 2014 performance period has exceeded certain established thresholds; and
 
           
Ø one-third time-based RSUs (including dividend equivalents), which will vest in January 2015, provided that Mr. Fitzgerald remains continuously employed by PHI until the vesting date.
 

55



Provision of Employment Agreement


  
Description
RSU retention awards
           
Mr. Fitzgerald is entitled to receive a series of three annual performance-based retention awards under the 2012 LTIP:

Ø to be granted over the term of the employment agreement;
Ø each to consist of such number of RSUs equal to $166,666.67, divided by the closing price of a share of common stock on the last trading day prior to the first day of the calendar year in which the award is executed and delivered; and
Ø the vesting of which shall be contingent upon Mr. Fitzgerald’s continued employment with us during the annual performance period and achievement of the performance goals covered by each award.


Mr. Fitzgerald also received a time-based retention award of 39,494 RSUs under the 2012 LTIP, four-fifteenths of which will vest each on September 17, 2013 and September 17, 2014, and the remainder of which will vest on September 17, 2015, in each case provided that Mr. Fitzgerald remains continually employed by us.

Mr. Fitzgerald may not settle vested RSUs under these retention awards until the day after his employment with us terminates, except that he may elect to surrender vested RSUs as permitted by the employment agreement to satisfy applicable tax withholding obligations. Vested RSUs will be credited with dividend equivalents in the form of additional fully-vested RSUs.
Payments upon termination or change in control
           
PHI may terminate Mr. Fitzgerald’s employment at any time, with or without cause, and Mr. Fitzgerald may resign as an employee at any time and for any reason, in each case without further compensation under the employment agreement.

Mr. Fitzgerald is a participant in the PHI Change-in-Control Severance Plan, at a level that provides for payment in the amount of three times salary and bonus if Mr. Fitzgerald’s employment with PHI terminates under certain circumstances within one year after a change in control of PHI; however, Mr. Fitzgerald elected to forego his right to receive any tax gross-up payment under this plan.
Compensation recovery (“clawback”) provisions
           
The employment agreement includes provisions intended to satisfy the compensation recovery provisions of both the Dodd-Frank Act and the Sarbanes-Oxley Act.
 

56



Kirk J. Emge

On September 6, 2012, the Company entered into a retirement agreement with Mr. Emge which provides him with certain benefits prior to and after his retirement, which is to be effective as of April 1, 2013. The following table provides a summary of the material terms of the retirement agreement with Mr. Emge.

Provision of Retirement Agreement


  
Description
Continued employment with PHI until retirement
           
Until April 1, 2013, Mr. Emge will continue to be employed as our executive at his current annual base salary of $400,000, with such duties and responsibilities as will be assigned to him by PHI’s Chief Executive Officer, and otherwise on the same terms and conditions as were in effect immediately prior to the date of the retirement agreement, including participation in our pension, deferred compensation, health and welfare plans in accordance with the terms thereof.
Severance payment
           
On or about April 1, 2013, Mr. Emge will receive a non-pensionable severance payment in the amount of $706,667, consisting of:

Ø $466,667, which is equal to the amount of salary that Mr. Emge would have earned at his current annual base salary over the period from April 1, 2013 through May 31, 2014, which would have been his normal retirement date under the PHI Retirement Plan; and
Ø $240,000, equal to what Mr. Emge’s potential target award opportunity for 2013 would be if he were eligible to participate in the EICP and assuming no change in the calculation of this award opportunity from 2012.


To receive this payment, Mr. Emge must execute a general release in favor of us and our subsidiaries as required by the retirement agreement.
Annuity payment
           
Mr. Emge will receive an annuity of $547 per month, payable at the same time and in the same form as Mr. Emge’s benefits under the 2011 SERP, to offset lower monthly retirement benefit payments as a result of his early retirement.
Cash incentive compensation
           
Mr. Emge was entitled to receive an award under the EICP for 2012 (which was paid in 2013). Mr. Emge is not entitled to participate in the EICP for 2013.
Long-term incentive plan participation
           
With regard to Mr. Emge’s ongoing participation in the LTIP and the 2012 LTIP through April 1, 2013:

Ø Payments under Mr. Emge’s time-based restricted stock and performance-based awards under the LTIP for the 2010 to 2012 award cycle were not affected by the retirement agreement.
 

57



Provision of Employment Agreement


  
Description
 
           
Ø Payments, if any, under Mr. Emge’s performance-based RSU award under the LTIP for the 2011 to 2013 award cycle (and additional RSUs accrued as dividend equivalents thereupon) will be based on actual performance over the entire three-year performance period relative to the performance goals as determined by the Compensation Committee in accordance with the terms of the award, and will be prorated for the number of full months elapsed over the period beginning on the grant date and ending on April 1, 2013.
Ø Payments under Mr. Emge’s time-based RSU award under the LTIP for the 2011 to 2013 award cycle (and additional RSUs accrued as dividend equivalents thereupon) will be prorated based on the number of full months elapsed over the period beginning on the grant date and ending on April 1, 2013.
Ø Mr. Emge’s time-based and performance-based awards under the LTIP for the 2012 to 2014 award cycle will be forfeited, effective April 1, 2013.
Ø Mr. Emge is not entitled to any awards under the 2012 LTIP with respect to the 2013 to 2015 award cycle.
Transition of responsibilities
           
From September 6, 2012 through April 1, 2013, Mr. Emge has agreed to assist us in the efficient transfer of his responsibilities. Until April 1, 2016, Mr. Emge also has agreed to be available, upon our reasonable request, to consult with us with regard to matters within the scope of his responsibilities while employed with us. As consideration for Mr. Emge’s agreement to provide the foregoing assistance and consultations:

Ø Mr. Emge will receive the non-pensionable severance payment described above;
Ø we will reimburse Mr. Emge for any out-of-pocket expenses he reasonably incurs; and
Ø beginning on June 1, 2014, we will compensate Mr. Emge at the hourly rate of $200.


In addition, Mr. Emge has agreed to a general release of claims involving us and our subsidiaries.
 

58



2012 Grants of Plan-Based Awards

The following table provides certain information regarding plan-based awards, including award opportunities under the EICP, granted to each of the named executive officers in 2012.

                Estimated Future Payouts
Under Non-Equity
Incentive Plan Awards(1)

  
Estimated Future Payouts
Under Equity
Incentive Plan Awards(2)

   All
Other
Stock
Awards:
Number
of
   Grant
Date Fair
Value of
Stock and
Name


  
Grant
Date

  
Approval
Date

  
Threshold
($)(3)

  
Target
($)

  
Maximum
($)

  
Threshold
Number of
Shares
(#)

  
Target
Number of
Shares
(#)

  
Maximum
Number
of Shares
(#)

  
Shares
of Stock
or Units
(#)

  
Option
Awards
($)(4)

Joseph M. Rigby
                                                                                                                                                   
EICP(5)
                 1-26-12              1-26-12              197,000             985,000             1,773,000                                                                    
LTIP—Time-based RSU award(6)
                 1-26-12              1-26-12                                                                                      40,109             804,587   
LTIP—Performance-based RSU award(7)
                 1-26-12              1-26-12                                                     20,055             80,218             160,436                          1,703,830   
LTIP—Time-based RSU retention award pursuant to employment agreement(8)
                 1-4-12              12-15-11                                                                                      73,891             1,499,987   
LTIP—Performance-based RSU retention award pursuant to employment agreement(9)
                 1-26-12              12-15-11                                                                  36,945                                       741,117   
 
Frederick J. Boyle
                                                                                                                                                   
EICP(5)
                 4-9-12              3-26-12              38,518             192,590             346,662                                                                    
LTIP—Time-based RSU award(6)
                 4-9-12              3-26-12                                                                                      8,460             156,848   
LTIP—Performance-based RSU award(7)
                 4-9-12              3-26-12                                                     4,106             16,424             32,848                          348,846   
 
Anthony J. Kamerick
                                                                                                                                                   
EICP(5)
                 1-26-12              1-26-12              61,560             307,800             554,040                                                                    
LTIP—Time-based RSU award(6)(10)
                 1-26-12              1-26-12                                                                                      10,445             209,527   
LTIP—Performance-based RSU award(7)(10)
                 1-26-12              1-26-12