UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 11-K
FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS
AND SIMILAR PLANS PURSUANT TO SECTION 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the fiscal year ended December 31, 2011
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File No. 001-31403
Pepco Holdings, Inc. Retirement Savings Plan
(Full title of the plan)
Pepco Holdings, Inc.
(Name of issuer)
701 Ninth Street, N.W.
Washington, D.C. 20068
(Address of issuer’s principal executive office)
Pepco Holdings, Inc. Retirement Savings Plan
Financial Statements and Supplemental Schedules
as of December 31, 2011 and 2010
and for the Years Ended December 31, 2011 and 2010,
and
Report of Independent Registered Public Accounting Firm
Pepco Holdings, Inc. Retirement Savings Plan
Table of Contents
| * | Other supplemental schedules required by 29 CFR 2520.103-10 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 (ERISA), have been omitted because they are not applicable. |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Plan Administrator of the
Pepco Holdings, Inc. Retirement Savings Plan:
We have audited the accompanying statements of net assets available for benefits of the Pepco Holdings, Inc. Retirement Savings Plan (the Plan) as of December 31, 2011 and 2010, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Plan’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Plan’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Plan at December 31, 2011 and 2010, and the changes in its net assets available for benefits for the years then ended, in conformity with U.S. generally accepted accounting principles.
Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a whole. The accompanying supplemental schedules of assets (held at end of year) as of December 31, 2011 and reportable transactions for the year then ended are presented for purposes of additional analysis and are not a required part of the financial statements but are supplementary information required by the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. Such information is the responsibility of the Plan’s management. The information has been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, are fairly stated in all material respects in relation to the financial statements taken as a whole.
| | | | |
| | | | /s/ Mitchell & Titus LLP |
| | |
Washington, DC June 28, 2012 | | | | |
1
Pepco Holdings, Inc. Retirement Savings Plan
Statements of Net Assets Available for Benefits
| | | | | | | | |
| | | As of
December 31,
2011 | | | As of
December 31,
2010 | |
Assets | | | | | | | | |
Investments, at fair value | | | | | | | | |
Registered investment companies | | $ | 518,030,918 | | | $ | 545,866,281 | |
Common/Collective trust | | | 166,072,513 | | | | 158,444,030 | |
Pepco Holdings, Inc. common stock | | | 122,788,240 | | | | 111,111,833 | |
| | | | | | | | |
Total investments | | | 806,891,671 | | | | 815,422,144 | |
| | |
Receivables | | | | | | | | |
Notes receivable from participants | | | 25,284,841 | | | | 25,747,531 | |
| | | | | | | | |
| | |
Net assets available for benefits, at fair value | | | 832,176,512 | | | | 841,169,675 | |
| | |
Adjustments from fair value to contract value for fully benefit-responsive investment contracts | | | (7,315,522 | ) | | | (5,976,719 | ) |
| | | | | | | | |
Net assets available for benefits | | $ | 824,860,990 | | | $ | 835,192,956 | |
| | | | | | | | |
The accompanying Notes are an integral part of these financial statements.
2
Pepco Holdings, Inc. Retirement Savings Plan
Statements of Changes in Net Assets Available for Benefits
| | | | | | | | |
| | | For the year
ended
December 31, 2011 | | | For the year
ended
December 31, 2010 | |
| | |
Investment income: | | | | | | | | |
Interest and dividend income – investments | | $ | 24,413,403 | | | $ | 23,218,677 | |
Interest income – notes receivable from participants | | | 991,032 | | | | 1,220,289 | |
Net (depreciation) appreciation in fair value of investments | | | (3,083,917 | ) | | | 62,913,398 | |
| | | | | | | | |
Net investment income | | | 22,320,518 | | | | 87,352,364 | |
| | | | | | | | |
| | |
Contributions: | | | | | | | | |
Employer | | | 10,942,715 | | | | 11,333,807 | |
Participants | | | 31,337,758 | | | | 32,997,719 | |
Rollovers | | | 1,387,787 | | | | 998,089 | |
| | | | | | | | |
Total contributions | | | 43,668,260 | | | | 45,329,615 | |
| | | | | | | | |
| | |
Other Additions | | | 527,208 | | | | 43,271 | |
| | | | | | | | |
Total additions | | | 66,515,986 | | | | 132,725,250 | |
| | | | | | | | |
| | |
Deductions: | | | | | | | | |
Payments of benefits to participants | | | 76,497,957 | | | | 75,546,209 | |
Other deductions | | | 349,995 | | | | 352,335 | |
| | | | | | | | |
Total deductions | | | 76,847,952 | | | | 75,898,544 | |
| | | | | | | | |
| | |
Net (decrease) increase in net assets available for benefits | | | (10,331,966 | ) | | | 56,826,706 | |
| | |
Net assets available for benefits at beginning of year | | | 835,192,956 | | | | 778,366,250 | |
| | | | | | | | |
| | |
Net assets available for benefits at end of year | | $ | 824,860,990 | | | $ | 835,192,956 | |
| | | | | | | | |
The accompanying Notes are an integral part of these financial statements.
3
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 1 – Description of Plan
The following description of the Pepco Holdings, Inc. (PHI or the Company) Retirement Savings Plan (the Plan), provides only general information. Participants should refer to the Plan Document for a more comprehensive description of the Plan’s provisions.
General
The Plan is a defined contribution plan that consists of eight Sub Plans: 1) the Management Sub Plan, 2) the Local 1900 Sub Plan, 3) the Local 1307 Sub Plan, 4) the Local 1238 Sub Plan, 5) the Local 210 Sub Plan, 6) the Local 210-5 Sub Plan, 7) the PHI Operating Services Company (POSC) Sub Plan, and 8) the Petron Sub Plan. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 (ERISA).
In 2010, PHI sold the wholesale power generation business of its wholly-owned subsidiary, Conectiv Energy Holding Company (Conectiv Energy), and liquidated substantially all of Conectiv Energy’s load service supply contracts, energy hedging portfolio, certain tolling agreements and other non-core assets. In addition, PHI is winding down the retail electric and natural gas supply business, which it conducts through its wholly owned subsidiary Pepco Energy Services, Inc. The remaining Energy Services business will not be affected by the wind down of the retail energy supply business. In connection with these disposition activities and a restructuring plan entered into in 2010, many participants in the Plan have separated from the Company and are no longer active participants in the Plan. As further discussed below under the heading Distributions and Withdrawals, requests for distributions for reasons of retirement or termination will be made online or by phone. Employees who separated from the Company in 2010 are able to leave balances of $5,000 or more in the Plan.
As part of its sale of the wholesale generation business, PHI no longer owns Petron or POSC. Therefore these sub plans are frozen and accepting no new participants. In addition, existing participants may have an account balance but are unable to make contributions.
Plan Amendments
Effective September 1, 2010, the PHI Administrative Board amended the Local 1238 Sub Plan and the Local 1307 Sub Plan to increase the employer match from fifty cents on each dollar contributed up to 5% of base pay to fifty cents on each dollar contributed up to 6% of base pay for employees hired on or after September 1, 2010. The PHI Administrative Board amended the Plan in June 2009 to allow for Roth 401(k) contributions and the amendment became effective April 1, 2010. In addition, the PHI Administrative Board amended the Plan to implement Automatic Enrollment and Automatic Escalation which became effective in January 2010, for the Management Sub Plan, the Local 1900 Sub Plan, the Local 1238 Sub Plan, and the Local 1307 Sub Plan. New hires for Local 210 are eligible for this provision as of July 1, 2011 and Local 210-5 new hires are eligible as of August 1, 2011.
Designation of Trustee
The Plan’s trustee is Vanguard Fiduciary Trust Company of Malvern, Pennsylvania (the Plan Trustee). The Plan’s investments are held in a trust account at The Vanguard Group (Vanguard) and consist of a specific interest in the Pepco Retirement Savings Plan Master Trust (the Trust).
Designation of Recordkeeper
Vanguard serves as the Plan’s recordkeeper.
4
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 1 – Description of Plan (continued)
Participation
Management employees (non-bargaining unit, full-time and part-time with more than 20 hours per week) of PHI’s wholly-owned subsidiaries (PHI Service Company, Potomac Electric Power Company, Pepco Energy Services, Inc., Delmarva Power & Light Company, and Atlantic City Electric Company) are eligible to participate in the Management Sub Plan upon their date of hire (or as soon as administratively feasible). Employees of POSC participate in the POSC Sub Plan and are eligible to participate upon their date of hire (or as soon as administratively feasible). Employees of Conectiv Energy Supply, Inc., participate in the Petron Sub Plan and are eligible to participate upon their date of hire (or as soon as administratively feasible). Employees represented by Local 1900 participate in the Local 1900 Sub Plan and are eligible to participate upon their date of hire (or as soon as administratively feasible). Employees represented by Local 1238 participate in the Local 1238 Sub Plan and are eligible to participate once they have completed six months of service. Employees represented by Local 1307 participate in the Local 1307 Sub Plan and are eligible to participate once they have completed six months of service. Employees represented by Local 210 participate in the Local 210 Sub Plan and are eligible to participate on their date of hire (or as soon as administratively feasible) if they are scheduled to work at least 1,000 hours of service in the first 12 consecutive month period. Employees represented by Local 210-5 participate in the Local 210-5 Sub Plan and are eligible to participate upon their date of hire (or as soon as administratively feasible).
Contributions
In all Sub Plans, participants may contribute from 1% to 65% of their base pay on a before- or after-tax basis, not to exceed the maximum allowable under the Internal Revenue Code of 1986, as amended (IRC).
For participants in the Management Sub Plan and the Local 210-5 Sub Plan, the Company provides matching contributions in Company stock equal to 100% on the first 3% of base pay and 50% on the next 3% of base pay contributed by the employee. For participants in the POSC Sub Plan and the Petron Sub Plan, the Company provided matching contributions in cash or Company stock equal to 100% on the first 3% of base pay and 50% on the next 3% of base pay contributed by the employee, however, eligible employees also received discretionary contributions depending on the success of the respective company. For participants in the Local 210-5 Sub Plan hired after August 1, 2011, the Company provided matching contributions in Company stock equal to 50% up to 5% of the base pay contributed. For participants in the Local 1238 Sub Plan and the Local 1307 Sub Plan, the Company provides matching contributions in Company stock equal to 50% up to 5% of the base pay contributed. For participants in the Local 1900 Sub Plan, the Company provides matching contributions in Company stock equal to 50% up to 6% of the base pay contributed. For participants in the Local 210 Sub Plan, the Company provides matching contributions in Company stock equal to 50% up to 6% of the base pay contributed.
The Company’s matching contributions, made in Company common stock, are paid to the Plan Trustee in the form of authorized and previously unissued shares or in cash for the purchase of Company common stock on the open market.
Participants age 50 and older (by year end) and meeting one of the Internal Revenue Service (IRS) pre-tax contribution limits are eligible to make catch-up contributions. The catch-up contribution limits for 2011 and 2010 were $5,500.
The sum of the elected percentages of before- and after-tax contributions and the Company matching contributions may not exceed 65% of a participant’s annual salary. A participant is prohibited from making elective contributions to the Plan for six months following a hardship withdrawal. Eligible rollover contributions are permitted from other employer-sponsored plans into the Plan.
Vesting
Participants are 100% vested and have a nonforfeitable interest, in their own contributions, and in the Company matching contributions, including any earnings or losses thereon.
5
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 1 – Description of Plan (continued)
The Plan allows participants to diversify their vested Company matching contributions regardless of age or years of participation in the Plan.
Participant Accounts
Each participant’s account is credited with the participant’s contribution, the Company’s matching contribution, and earnings (losses) attributable to the participant’s investments. Participant accounts are impacted by expenses charged by the investment options in which they invest, as disclosed in each investment option’s prospectus. Also, certain investment options charge redemption fees that are also paid directly by the participant from his or her account. All other administrative fees related to participant accounts are paid by the Company.
Participants may elect to have their contributions invested, in multiples of 1%, in one or more of the available investment options. The Plan’s investment options were selected by the PHI Investment Committee and are intended to provide diversified categories of investments with different risk and return characteristics that will enable participants to create an investment portfolio to meet their individual goals, depending on the level of risk they are willing to accept. The investment options available to participants of the Plan are reviewed periodically and can be changed at the discretion of the PHI Investment Committee pursuant to the Plan Document.
Participants can transfer all or part of their investment account balance and related earnings in any existing investment option to any other investment option offered in the Plan with the exception of any limitation expressed in the prospectus of a specific investment option that prohibits such transfer, and subject to limitations under applicable securities laws for transfers involving Company common stock. Participants may change the allocation of their future contributions among the investment options at any time.
Distributions and Withdrawals
If a participant retires, dies, becomes permanently disabled, or otherwise separates from the Company, the participant or participant’s beneficiary is entitled to the entire account balance as valued on the withdrawal date. In the event of a participant’s death, distribution of the participant’s account balance will be made as soon as administratively practicable upon the receipt of appropriate documentation from the designated beneficiary. Distributions for reasons of retirement, disability retirement, permanent disability or termination will be made online or by phone. Distributions of a participant’s account balance may be made in (1) a lump sum cash payment, (2) in regular installments for a period not exceeding the joint and survivor life expectancy of the participant and his or her spouse or other beneficiary or, (3) partial lump sums upon the request of the participant, with certain limitations stated in the Plan Document. Distributions from the Pepco Holdings, Inc. common stock fund (Stock Fund) may be made in PHI common stock or cash based on the election of the participant. Distributions cannot be deferred beyond age 70 1/2. Distributions from the remaining investment options are made in cash.
While employed, a participant may make certain withdrawals of vested contributions online or by phone. Pre-tax employee contributions can only be withdrawn for the reason of financial hardship, as defined in the Plan Document. At the age of 59 1/2, the participant may withdraw any portion of his or her account balance.
After making a hardship withdrawal of pre-tax contributions, a participant is prohibited from making contributions or receiving Company matching contributions for a period of six months. A participant with less than 60 months of Plan participation will incur a six-month suspension period upon making any withdrawal of his or her after-tax contributions. During this suspension period, no matching contributions will be credited to the participant’s account.
Loans to Participants
Loans are available to participants from amounts attributable to pre-tax and/or after-tax contributions, subject to U.S. Department of Labor and IRS limitations. The Plan requires that a minimum of $1,000 be borrowed by a participant. A one-time fee per loan is deducted from the participant’s account at the time of each loan distribution. The fee is $50 for loans processed on the Vanguard website and $100 for loans processed via a paper loan application. The number and amount of loans allowed to a participant are
6
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 1 – Description of Plan (continued)
restricted by the Sub Plans and are consistent with IRS regulations. A participant can have up to four loans outstanding at any time with maximum term lengths of five years, or 30 years for a primary residence. The prevailing prime rate (quoted by Reuters at the end of the month prior to the month of the loan) is applied as the fixed interest rate for the loan. Loan repayments are made through payroll deductions or by prepayment in a lump sum. If an active participant has four outstanding loans and pays off one loan, they will not be eligible for another loan until 30 days after the loan pay-off date. Upon termination from the Company, a participant can elect to continue to make loan repayments. If the loan repayments are not made, the loan will be in default and is converted to a distribution at the end of the calendar quarter following the calendar quarter in which the first payment amount was missed, or approximately 90 days.
Plan Administration and Termination
The Plan is administered by the PHI Administrative Board, which is appointed by the Company’s Chief Executive Officer. All contributions to the Plan are held in trust by the Plan Trustee for the exclusive benefit of the participants. The Company generally pays the Plan Trustee fees and certain other administrative expenses of the Plan, while the participants pay expenses charged by the investment options as disclosed in the investment options’ prospectuses.
The Plan is a defined contribution plan. Interests in the Plan are not insured by the Company and are not guaranteed by the Pension Benefit Guaranty Corporation, an agency of the United States government.
Although the Company intends to continue the Plan indefinitely, it reserves the right to terminate or amend the Plan at any time subject to the provisions of ERISA. In the event of the termination of the Plan, all Company contributions become immediately vested to Plan participants.
NOTE 2 – Significant Accounting Policies
Basis of Presentation
The financial statements of the Plan are prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes and supplemental schedules. Although the Plan believes that its estimates and assumptions are reasonable, they are based upon information available to management at the time the estimates are made. Actual results could differ from those estimates.
Valuation of Investments and Income Recognition
The Plan provides for various investment options. Investment securities are exposed to various risks, such as interest, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the Statements of Net Assets Available for Benefits and Statements of Changes in Net Assets Available for Benefits.
The Plan presents in the Statement of Changes in Net Assets Available for Benefits, the Plan’s interest in the net investment income in the Trust, which consists of the realized gains or losses and the unrealized depreciation and appreciation on those Trust investments.
7
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 2 – Significant Accounting Policies (continued)
The Plan’s investments are stated at fair value using the framework established by Financial Accounting Standards Board (FASB) guidance on Fair Value Measurements and Disclosures (Accounting Standards Codification (ASC) 820). Purchases and sales of securities are recorded on a trade date basis.
Dividends are recorded on the ex-dividend date. Interest on interest-bearing cash, money market accounts and participant loans is recorded when earned. Participants with investments in the Stock Fund have an option to receive a payout of any dividends paid on PHI stock held in the Stock Fund and allocated to units within the Stock Fund or reinvest those dividends to purchase additional units in the Stock Fund.
Notes Receivable from Participants
In September 2010, the FASB issued authoritative guidance that amends the classification, measurement and disclosure requirements for loans to participants by defined contribution pension plans. The revised guidance requires participant loans to be classified as notes receivable from participants which are segregated from plan investments and measured at their unpaid principal balance plus any accrued but unpaid interest. Additionally, fair value disclosures are no longer required for notes receivable from participants. Interest income on notes receivable from participants is recorded when it is earned. Related fees are recorded as administrative expenses and are expensed when they are incurred. No allowance for credit losses has been recorded as of December 31, 2011 or 2010.
Benefit Payments
Benefit payments to participants are recorded when paid.
Forfeitures
At December 31, 2011 and 2010, plan year forfeiture amounts were zero and $1,383, respectively. These amounts were used to reduce future employer contributions or fund administrative expenses by the Plan.
Plan Expenses
Certain expenses incurred in the administration of the Plan are paid by the Company, excluding those expenses associated with participant accounts.
Reclassifications and Adjustments
Certain prior year amounts within the Statements of Changes in Net Assets Available for Benefits and within Note (5), “Fair Value Disclosures,” have been reclassified to conform to the current year presentation.
NOTE 3 – Newly Adopted Accounting Standards
Fair Value Measurements and Disclosures (ASC 820)
The FASB issued new disclosure requirements that require significant items within the reconciliation of the level 3 valuation category to be presented in separate categories for purchases, sales, issuances and settlements. The guidance was effective beginning with the Plan’s December 31, 2011 financial statements. The Plan did not have any investments categorized as level 3 as of December 31, 2011, and accordingly, the new disclosure requirements did not change the information included in Note (5), “Fair Value Disclosures,” of its financial statements.
8
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 4 – Recently Issued Accounting Standards, Not Yet Adopted
Fair Value Measurements and Disclosures (ASC 820)
In May 2011, the FASB issued new guidance on fair value measurement and disclosures that will be effective beginning with the Plan’s December 31, 2012 financial statements. The new guidance will change how fair value is measured in specific instances and expand disclosures about fair value measurements. The Plan is evaluating the impact of the new guidance on its financial statements.
NOTE 5 – Fair Value Disclosures
FASB guidance on fair value measurement and disclosures (ASC 820) established a framework for measuring fair value and expanded disclosures about fair value measurements. As defined in the guidance, fair value is the price that would be received from a sold asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). PHI utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable.
Accordingly, PHI utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The guidance establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). The asset’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.
The three levels of the fair value hierarchy are as follows:
Level 1
Level 1 asset fair values are based on unadjusted quoted prices for identical assets in active markets that the Plan has the ability to access. Assets in this category include the investments in registered investment companies – mutual funds.
Level 2
Level 2 asset fair values are based on quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets, inputs other than quoted prices that are observable for the asset and, inputs that are derived principally from or corroborated by observable market data by correlation or other means. If the asset has a specified (contractual) term, the level 2 input must be observable for substantially the full term of the asset. Assets in this category include investments in a common/collective trust and the Stock Fund.
Level 3
Level 3 asset fair values are based on significant inputs that are generally less observable than those from objective sources. The Plan currently holds no investments that are categorized as level 3.
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Plan believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different measurement at the reporting date.
9
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 5 – Fair Value Disclosures (continued)
The following tables present the fair values of Plan assets by asset category within the fair value hierarchy levels, as of December 31, 2011 and 2010:
| | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2011 | |
Asset Category | | Level 1 | | | Level 2 | | | Total | |
Registered investment companies – Mutual Funds | | | | | | | | | | | | |
Equity | | | | | | | | | | | | |
Domestic | | $ | 282,329,274 | | | $ | — | | | $ | 282,329,274 | |
International | | | 53,313,959 | | | | — | | | | 53,313,959 | |
Fixed income | | | 106,871,766 | | | | — | | | | 106,871,766 | |
Balanced | | | 75,515,919 | | | | — | | | | 75,515,919 | |
Common/Collective trust (a) | | | — | | | | 166,072,513 | | | | 166,072,513 | |
Pepco Holdings, Inc. common stock fund (b) | | | — | | | | 122,788,240 | | | | 122,788,240 | |
| | | | | | | | | | | | |
Total assets at fair value | | $ | 518,030,918 | | | $ | 288,860,753 | | | $ | 806,891,671 | |
| | | | | | | | | | | | |
(a) This category represents investments in a stable value fund.
(b) Represents interests in a stock fund whose underlying investments are solely shares of PHI common stock.
| | | | | | | | | | | | |
| | | Fair Value Measurements at December 31, 2010 | |
Asset Category | | Level 1 | | | Level 2 | | | Total | |
Registered investment companies – Mutual Funds | | | | | | | | | | | | |
Equity | | | | | | | | | | | | |
Domestic | | $ | 295,080,402 | | | $ | — | | | $ | 295,080,402 | |
International | | | 69,955,553 | | | | — | | | | 69,955,553 | |
Fixed income | | | 107,021,078 | | | | — | | | | 107,021,078 | |
Balanced | | | 73,809,248 | | | | — | | | | 73,809,248 | |
Common/Collective trust (a) | | | — | | | | 158,444,030 | | | | 158,444,030 | |
Pepco Holdings, Inc. common stock fund (b) | | | — | | | | 111,111,833 | | | | 111,111,833 | |
| | | | | | | | | | | | |
Total assets at fair value | | $ | 545,866,281 | | | $ | 269,555,863 | | | $ | 815,422,144 | |
| | | | | | | | | | | | |
(a) This category represents investments in a stable value fund.
(b) Represents interests in a stock fund whose underlying investments are solely shares of PHI common stock. The Stock Fund was reclassified to level 2 to conform to the current year classification.
Valuation Techniques Used to Determine Fair Value
The following methods and assumptions were used to estimate the fair value of each class of financial instrument.
Registered Investment Companies – Mutual Funds
Equity
Equity assets included in mutual funds are primarily comprised of securities issued by public companies in domestic and foreign markets, which are valued on a daily basis. The fair values of the Plan’s interests in mutual funds are based on publicly quoted Net Asset Values (NAV). These funds have ongoing subscription and redemption activities and are classified as level 1.
10
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 5 – Fair Value Disclosures (continued)
Fixed income
Fixed income assets included in mutual funds are comprised of fixed income securities primarily issued by corporations, governments and government agencies. The fair values of the Plan’s interests in mutual funds are based on publicly quoted NAVs. These funds have ongoing subscription and redemption activities and are classified as level 1.
Balanced
Balanced assets included in mutual funds are primarily comprised of investments in other equity and fixed income mutual funds. Equity mutual fund assets are primarily comprised of securities issued by public companies in domestic and foreign markets which are valued on a daily basis. Fixed income mutual fund assets are comprised of fixed income securities primarily issued by corporations, governments and government agencies. The fair values of the Plan’s interests in mutual funds are based on publicly quoted NAVs. These funds have ongoing subscription and redemption activities and are classified as level 1.
Common/Collective Trust
The common/collective trust fund represents an investment in the Vanguard Retirement Savings Trust which is a stable value fund. The trust fund is valued using the NAV provided by the trustee of the trust fund based on the value of the underlying assets divided by the number of units outstanding. The fair value of the trust fund’s underlying assets is determined by pricing agents using observable inputs on a daily basis plus the total wrap contract rebid value, which is calculated by discounting the annual rebid fee over the duration of the contract’s assets. The only restriction is that the Plan is required to provide a one year redemption notice to liquidate its entire share in the trust fund. The fair value of the fund is classified as level 2.
Pepco Holdings, Inc. Common Stock Fund
This category represents PHI common stock held in the Stock Fund. Participants’ holdings in the Stock Fund are represented by units in the Stock Fund and do not represent direct ownership of PHI common stock. The fund’s unit value is determined by dividing the total current fair value of the investments in the fund by the total number of units owned. The value of such units in the Stock Fund was $8.78 per unit and $7.90 per unit at December 31, 2011 and 2010, respectively, as compared to PHI common stock, which had a fair value of $20.30 per share and $18.25 per share at December 31, 2011 and 2010, respectively, equal to the closing price of one share of PHI common stock on the New York Stock Exchange. The fair value of the fund is classified as level 2.
NOTE 6 – Investment Contracts
The ASC guidance requires investment contracts held by a defined contribution plan to be reported at fair value. However, contract value is the relevant measurement attribute for that portion of the net assets available for benefits of a defined contribution plan attributable to a fully benefit-responsive investment contract because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the Plan.
The Plan invests in investment contracts through a common/collective trust (the Vanguard Retirement Savings Master Trust). The Statement of Net Assets Available for Benefits presents the fair value of the Vanguard Retirement Savings Master Trust and the adjustment from fair value to contract value. The fair value of the Plan’s interest in the Vanguard Retirement Savings Master Trust is based on information reported by the issuer of the common/collective trust at year end. The contract value of the Vanguard Retirement Savings Master Trust represents contributions plus earnings, less participant withdrawals and administrative expenses.
11
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 7 – Non-Participant-Directed Investments
Information about the components of and the significant changes in net assets relating to the Plan’s non-participant-directed investments are as follows:
| | | | | | | | |
| Pepco Holdings, Inc. Common Stock Fund: | | 2011 | | | 2010 | |
Net Assets at Beginning of Year | | $ | 111,111,833 | | | $ | 100,675,415 | |
Contributions | | | 12,327,491 | | | | 12,782,321 | |
Interest and dividend income | | | 6,357,297 | | | | 6,466,908 | |
Net appreciation in fair value of investments | | | 12,088,501 | | | | 8,506,870 | |
Benefits paid to participants | | | (9,749,037 | ) | | | (9,648,584 | ) |
Transfers | | | (9,979,874 | ) | | | (8,386,754 | ) |
Other | | | 632,029 | | | | 715,657 | |
| | | | | | | | |
| | | | | | | | |
Net Assets at End of Year | | $ | 122,788,240 | | | $ | 111,111,833 | |
| | | | | | | | |
NOTE 8 – Investments
Investments at December 31, which exceed five percent of the Plan’s net assets are as follows:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Vanguard Institutional Index Fund | | $ | 119,147,915 | | | $ | 125,983,800 | |
Vanguard Retirement Savings Trust (at contract value) | | | 158,756,991 | | | | 152,467,311 | |
Pepco Holdings, Inc. Common Stock Fund | | | 122,788,240 | | | | 111,111,833 | |
During the years ended December 31, 2011 and 2010, the Plan’s investments (including gains and losses on investments bought, sold and transferred during the period) (depreciated) appreciated in value as follows:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Registered Investment Companies — Mutual Funds | | $ | (15,172,418 | ) | | $ | 54,406,528 | |
Pepco Holdings, Inc. Common Stock Fund | | | 12,088,501 | | | | 8,506,870 | |
| | | | | | | | |
Net (depreciation) appreciation in fair value of investments | | $ | (3,083,917 | ) | | $ | 62,913,398 | |
| | | | | | | | |
NOTE 9 – Related Party Transactions
Certain Plan investments are shares of mutual funds managed by Vanguard. Vanguard is affiliated with the Plan Trustee and, therefore, these transactions qualify as party-in-interest transactions.
The Company as Plan sponsor is a related party. At December 31, 2011 and 2010, the Plan held investments of 6,048,682 shares and 6,088,320 shares of Pepco Holdings, Inc. common stock, respectively. These shares are indirectly held by participants through the ownership of 13,984,993 units and 14,064,789 units of the Stock Fund at December 31, 2011 and 2010, respectively. The fair value of the common stock at December 31, 2011 and 2010 was $122,788,240 and $111,111,833, respectively. Purchases of $25,474,151 and $26,393,088 and sales of $25,886,931 and $24,465,713 of Company common stock were made during 2011 and 2010, respectively.
12
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 10 – Tax Status of the Plan
On January 29, 2010, Pepco Holdings, Inc. filed an application for determination of qualification of the Plan that is currently under review by the IRS. Previously, the IRS had determined, on the dates indicated, that all plans that were merged into the Plan at January 13, 2006 (Conectiv Savings and Investment Plan – October 9, 2003; Atlantic Electric 401k Savings and Investment Plan – B – October 9, 2003; Potomac Electric Power Company Savings Plan for Management Employees – December 1, 2003; PHI Operating Services Company 401k Savings Plan – August 7, 2001; and Potomac Electric Power Company Savings Plan for Bargaining Unit Employees – December 1, 2003; Conectiv Energy Supply, Inc. Safe Harbor 401(k) Profit Sharing Plan – August 7, 2001, the POSC Sub Plan – June 25, 2007, and the Petron Sub Plan – September 12, 2008) are qualified employee benefit plans under Section 401(a) of the IRC, and that the Trust is a qualified tax exempt employee benefit trust under Section 501(a) of the IRC. Although the plans have been amended since receiving their determination letters, the plan administrator believes that the plans are designed and currently being operated in compliance with the applicable requirements of the IRC. Participants are not taxed on the income allocated to contributions made for their account until such time as they or their beneficiaries receive distributions from the Plan.
Plan management is required by GAAP to evaluate uncertain tax positions taken by the Plan. The financial statement effects of a tax position are recognized when the position is more likely than not, based on the technical merits, to be sustained upon examination by the IRS. The Plan administrator has analyzed the tax positions taken by the Plan, and has concluded that as of December 31, 2011, there are no uncertain positions taken or expected to be taken. The Plan has recognized no interest or penalties related to uncertain tax positions. The Plan is subject to audits; however, there are currently no audits for any tax periods in progress. The Plan administrator believes it is no longer subject to examinations for years prior to the date of the determinations stated above.
NOTE 11 – Risks and Uncertainties
The Plan invests in various investment securities. Investment securities are exposed to various risks such as interest rate, market and credit risks. Due to the level of risk associated with certain investment securities, it is at least reasonably possible that changes in the values of investment securities will occur in the near term and that such changes could materially affect participants’ account balances and the amounts reported in the statement of net assets available for benefits.
NOTE 12 – Reconciliation of Financial Statements to IRS Form 5500
The following is a reconciliation of net assets available for benefits per the accompanying financial statements to the IRS Form 5500 as of December 31:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Net Assets available for benefits: | | | | | | | | |
Net assets available for benefits per financial statements at end of year | | $ | 824,860,990 | | | $ | 835,192,956 | |
Adjustment from fair value to contract value for fully benefit-responsive investment contracts | | | 7,315,522 | | | | 5,976,719 | |
Notes receivable from participants deemed distributed | | | (674,640 | ) | | | (734,109 | ) |
| | | | | | | | |
Net assets available for benefits per the IRS Form 5500 | | $ | 831,501,872 | | | $ | 840,435,566 | |
| | | | | | | | |
| | |
| | | 2011 | | | 2010 | |
Notes receivable from participants: | | | | | | | | |
Notes receivable from participants per financial statements at end of year | | $ | 25,284,841 | | | $ | 25,747,531 | |
Notes receivable from participants deemed distributed | | | (674,640 | ) | | | (734,109 | ) |
| | | | | | | | |
Net notes receivable from participants per the IRS Form 5500 | | $ | 24,610,201 | | | $ | 25,013,422 | |
| | | | | | | | |
13
Pepco Holdings, Inc. Retirement Savings Plan
Notes to Financial Statements
For the Years Ended December 31, 2011 and 2010
NOTE 12 – Reconciliation of Financial Statements to IRS Form 5500 (continued)
The following is a reconciliation of the change in net assets for benefits paid to participants and other additions per the accompanying financial statements to the IRS Form 5500 as of December 31:
| | | | | | | | |
| | | 2011 | | | 2010 | |
Benefit payments and provided benefits: | | | | | | | | |
Payments of benefits to participants per financial statements at end of year | | $ | 76,497,957 | | | $ | 75,546,209 | |
Prior year deemed distributions | | | (92,199 | ) | | | — | |
Other | | | 17,482 | | | | (12,136 | ) |
| | | | | | | | |
Net benefit payments per the IRS Form 5500 | | $ | 76,423,240 | | | $ | 75,534,073 | |
| | | | | | | | |
14
PEPCO HOLDINGS, INC. RETIREMENT SAVINGS PLAN
Schedule H - Line 4(i)
Schedule of Assets (Held at End of Year)
Year Ended December 31, 2011
Pepco Holdings, Inc. Retirement Savings Plan, EIN 52-2297449, PN 017
Attachment to Form 5500, Schedule H, Line 4(i):
| | | | | | | | | | | | |
| | | Identity of issue, borrower, lessor, or
similar party | | Description of investment including
maturity date, rate of interest, collateral,
par, or maturity value | | Cost | | | Current value | |
| | Neuberger Soc Resp;Tr | | Registered Investment Company | | $ | 224,285 | | | $ | 229,183 | |
| | Allianz CCM Mid-Cap; Admn | | Registered Investment Company | | | 18,025,053 | | | | 18,550,115 | |
| | Allianz:NFJ SCV;Inst | | Registered Investment Company | | | 6,615,784 | | | | 6,797,854 | |
| | Baron Growth | | Registered Investment Company | | | 2,726,359 | | | | 3,029,802 | |
| | CRM Md Cp Val;Inv | | Registered Investment Company | | | 1,547,872 | | | | 1,530,501 | |
| | Cambiar Small Cap Inst | | Registered Investment Company | | | 168,189 | | | | 171,566 | |
| | Columbia Small Cap Fd Class Z | | Registered Investment Company | | | 1,020,207 | | | | 1,032,033 | |
| | Conestoga Small Cap | | Registered Investment Company | | | 5,464,170 | | | | 6,572,123 | |
| | Dodge & Cox Intl Stock | | Registered Investment Company | | | 20,095,182 | | | | 16,530,950 | |
| | Fidelity Contrafund | | Registered Investment Company | | | 10,433,034 | | | | 11,067,879 | |
| | FT Mutual Discovery; A | | Registered Investment Company | | | 2,622,680 | | | | 2,567,582 | |
| | Lord Abbett Mid Cap Value Fund | | Registered Investment Company | | | 2,936,776 | | | | 2,702,212 | |
| | MFS Utilities Fund Cl A | | Registered Investment Company | | | 3,696,865 | | | | 4,076,539 | |
| | MSIFT Midcap Growth A | | Registered Investment Company | | | 4,557,201 | | | | 4,696,639 | |
| | MSIF US Real Estate Class I | | Registered Investment Company | | | 6,641,937 | | | | 6,686,990 | |
| | N&B Genesis Trust | | Registered Investment Company | | | 4,633,832 | | | | 4,859,755 | |
| | Oakmark Eqty & Inc;I | | Registered Investment Company | | | 5,221,268 | | | | 5,454,632 | |
| | PIMCO Total Return Fd, Instit | | Registered Investment Company | | | 24,848,775 | | | | 24,632,322 | |
| | T. Rowe Price Emerging Mkt St | | Registered Investment Company | | | 10,531,339 | | | | 9,799,323 | |
| | T. Rowe Price New Horizons Ret | | Registered Investment Company | | | 3,626,233 | | | | 3,506,906 | |
| | TRP Growth Stock Fund | | Registered Investment Company | | | 26,219,926 | | | | 28,900,363 | |
| | TRP Spectrum Growth | | Registered Investment Company | | | 3,108,409 | | | | 3,064,685 | |
| | TRP Spectrum Income Fund | | Registered Investment Company | | | 4,504,966 | | | | 4,598,197 | |
| | Templeton Inc:GB;A | | Registered Investment Company | | | 9,715,786 | | | | 9,587,358 | |
| * | | Vanguard Explorer Fund Inv | | Registered Investment Company | | | 2,996,208 | | | | 3,274,638 | |
| * | | Vanguard GNMA Investor Shares | | Registered Investment Company | | | 18,492,416 | | | | 19,098,593 | |
| * | | Vanguard Inst Index Fund | | Registered Investment Company | | | 116,456,587 | | | | 119,147,915 | |
| * | | Vanguard IT Treasury Inv | | Registered Investment Company | | | 10,105,131 | | | | 10,157,800 | |
| * | | Vanguard PRIMECAP Fund Inv | | Registered Investment Company | | | 27,778,769 | | | | 27,240,296 | |
| * | | Vanguard Prime Money Mkt | | Registered Investment Company | | | 600,923 | | | | 600,923 | |
| * | | Vanguard Tgt Retirement 2005 | | Registered Investment Company | | | 2,024,746 | | | | 2,096,846 | |
| * | | Vanguard Tgt Retirement 2010 | | Registered Investment Company | | | 3,391,843 | | | | 3,506,555 | |
| * | | Vanguard Tgt Retirement 2015 | | Registered Investment Company | | | 14,520,250 | | | | 15,043,070 | |
| * | | Vanguard Tgt Retirement 2020 | | Registered Investment Company | | | 6,553,481 | | | | 6,665,191 | |
| * | | Vanguard Tgt Retirement 2025 | | Registered Investment Company | | | 17,892,110 | | | | 18,224,600 | |
| * | | Vanguard Tgt Retirement 2030 | | Registered Investment Company | | | 2,727,174 | | | | 2,823,371 | |
| * | | Vanguard Tgt Retirement 2035 | | Registered Investment Company | | | 7,370,574 | | | | 7,470,662 | |
| * | | Vanguard Tgt Retirement 2040 | | Registered Investment Company | | | 1,885,778 | | | | 1,938,191 | |
| * | | Vanguard Tgt Retirement 2045 | | Registered Investment Company | | | 7,715,611 | | | | 7,735,628 | |
| * | | Vanguard Tgt Retirement 2050 | | Registered Investment Company | | | 1,274,017 | | | | 1,278,129 | |
| * | | Vanguard Tgt Retirement 2055 | | Registered Investment Company | | | 35,041 | | | | 34,407 | |
| * | | Vanguard Target Retirement Inc | | Registered Investment Company | | | 3,105,891 | | | | 3,244,636 | |
| * | | Vanguard Total Bd Mkt Indx Inv | | Registered Investment Company | | | 36,225,444 | | | | 38,797,497 | |
| * | | Vanguard Total Int’l Stock Idx | | Registered Investment Company | | | 28,853,452 | | | | 24,416,103 | |
| * | | Vanguard Windsor II Fund Inv | | Registered Investment Company | | | 27,026,880 | | | | 24,590,358 | |
| * | | Vanguard Retirement Savings Trust** | | Common/Collective Trust | | | 166,072,513 | | | | 166,072,513 | |
| | | | |
| * | | Party in interest | | | | | | | | | | |
| ** | | Fair value | | | | | | | | | | |
15
PEPCO HOLDINGS, INC. RETIREMENT SAVINGS PLAN
Schedule H - Line 4(i) (continued)
Schedule of Assets (Held at End of Year)
Year Ended December 31, 2011
Pepco Holdings, Inc. Retirement Savings Plan, EIN 52-2297449, PN 017
Attachment to Form 5500, Schedule H, Line 4(i) (continued):
| | | | | | | | | | | | |
| | | Identity of issue, borrower, lessor, or
similar party | | Description of investment including
maturity date, rate of interest, collateral, par, or maturity value | | Cost | | | Current value | |
| * | | Pepco Holdings, Inc. Common Stock Fund | | Company Stock Fund | | | 118,200,328 | | | | 122,788,240 | |
| | Notes receivable from participants | | Varying maturity dates with interest rates ranging from 3.25% - 11% | | | — | | | | 25,284,841 | |
| | | | | | | | | | | | |
| | Total | | | | $ | 800,491,295 | | | $ | 832,176,512 | |
| | | | | | | | | | | | |
| | | | |
| * | | Party in interest | | | | | | | | | | |
16
PEPCO HOLDINGS, INC. RETIREMENT SAVINGS PLAN
Schedule H - Line 4(j)
Schedule of Reportable Transactions
Year Ended December 31, 2011
Pepco Holdings, Inc. Retirement Savings Plan, EIN 52-2297449, PN 017
Attachment to Form 5500, Schedule H, Line 4(j)—Series of Transactions in Excess of Five Percent of Current Value of Plan Assets:
| | | | | | | | | | | | | | | | | | | | | | |
Identity of Party Involved | | Description of Asset | | Purchase
Price | | | Selling
Price | | | Historical
Cost
of Asset | | | Current
Value
of Asset on
Transaction
Date | | | Historical
Gain
(Loss) | |
| | | | | | |
Vanguard | | Pepco Holdings Common Stock Fd | | $ | 25,474,151 | | | $ | — | | | $ | — | | | $ | 25,474,151 | | | $ | — | |
Vanguard | | Pepco Holdings Common Stock Fd | | | — | | | | 25,886,931 | | | | 25,862,759 | | | | 25,886,931 | | | | 24,172 | |
17
PEPCO HOLDINGS, INC. RETIREMENT SAVINGS PLAN
| | |
Exhibits: | | |
| |
| Exhibit 23 | | Consent of Independent Registered Public Accounting Firm |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Administrative Board has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| PEPCO HOLDINGS, INC. RETIREMENT SAVINGS PLAN |
| |
| By: | | /s/ JOSEPH M. RIGBY |
| | Joseph M. Rigby, Chairman Administrative Board |
Date: June 28, 2012
18
PEPCO HOLDINGS, INC. RETIREMENT SAVINGS PLAN
INDEX TO EXHIBITS FILED HEREWITH
| | |
Exhibit No. | | Description of Exhibit |
| |
| 23 | | Consent of Independent Registered Public Accounting Firm |
19
