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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Form 10-K


ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2001    Commission file number 1-1072



                        Potomac Electric Power Company                       
  (Exact name of registrant as specified in its charter)


     District of Columbia and Virginia                    53-0127880     
   (State or other jurisdiction of                      (I.R.S. Employer
       incorporation or organization)                     Identification No.)


        701 Ninth Street, N.W.
          Washington, D.C.                               20068       
(Address of principal executive offices)               (Zip Code)


Registrant's telephone number, including area code     (202) 872-2000   


Securities registered pursuant to Section 12(b) of the Act:

                                                  Name of each exchange on
           Title of each class                       which registered      

Common Stock, $1 par value                     New York Stock Exchange, Inc.
Guarantee by Potomac Electric Power
  Company of the 7-3/8% Trust Originated
  Preferred Securities issued by
  Potomac Electric Power Company Trust I

Securities registered pursuant to Section 12(g) of the Act:

     None.

Continued

          Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been subject
to such filing requirements for the past 90 days. Yes X . No    .

          Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.    .

          As of March 25, 2002, Potomac Electric Power Company had
107,125,976 shares of its $1 par value Common Stock outstanding, and the
aggregate market value of these common shares (based upon the closing price
of these shares on the New York Stock Exchange on that date) held by
nonaffiliates was approximately $2.5 billion.


POTOMAC ELECTRIC POWER COMPANY
Form 10-K - 2001


TABLE OF CONTENTS

PART I

    

Page

  Item 1.

-

General . . . . . . . . . . . . . . . . . . . . .

5

  Item 2.

-

Properties . . . . . . . . . . . . . . . . . . .

6

  Item 3.

-

Legal Proceedings . . . . . . . . . . . . . . . .

6

  Item 4.

-

Submission of Matters to a Vote of Security
   Holders . . . . . . . . . . . . . . . . .

7


PART II

      

  Item 5.

-

Market for Registrant's Common Equity and Related
   Stockholder Matters . . . . . . . . . . . . . .

7

  Item 6.

-

Selected Financial Data. . . . . . . . . . . . . .

7

  Item 7.

-

Management's Discussion and Analysis of Financial
   Condition and Results of Operations . . . . . .

8

  Item 7A.

-

Quantitative and Qualitative Disclosures About
   Market Risk. . . . . . . . . . . . . . . . . .

8

  Item 8.

-

Financial Statements and Supplementary Data . . .

8

  Item 9.

-

Changes in and Disagreements with Accountants on
   Accounting and Financial Disclosure. . . . . .

8


PART III

      

  Item 10.

-

Directors and Executive Officers of the Registrant

9

  Item 11.

-

Executive Compensation . . . . . . . . . . . . . .

13

  Item 12.

-

Security Ownership of Certain Beneficial Owners
   and Management. . . . . . . . . . . . . . . . .

20

  Item 13.

-

Certain Relationships and Related Transactions . .

21


PART IV

      

  Item 14.

-

Exhibits, Financial Statement Schedules, and
   Reports on Form 8-K . . . . . . . . . . . . . .

21

    Schedule II  -

Valuation and Qualifying Accounts. . . . . . . . .

29

    Exhibit 11   -

Statements Re. Computation of Earnings Per Common
   Share . . . . . . . . . . . . . . . . . . . . .

30

    Exhibit 12   -

Statements Re. Computation of Ratios . . . . . . .

30

    Exhibit 21   -

Subsidiaries of the Registrant . . . . . . . . . .

32

    Exhibit 23   -

Consent of Independent Accountants . . . . . . . .

34

    Report of Independent Accountants on Consolidated Financial
       Statement Schedule . . . . . . . . . . . . . . . . . . . . . .

35


  Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

36

 





                           PAGE LEFT BLANK
                            INTENTIONALLY





Part I

     Except for historical statements and discussions, statements in this
Form 10-K constitute "forward-looking statements" within the meaning of the
federal securities laws. These statements contain management's beliefs based
on information currently available to management and on various assumptions
concerning future events. Forward-looking statements are not a guarantee of
future performance or events. They are subject to a number of uncertainties
and other factors, many of which are outside the Company's control.
Important factors that could cause actual results to differ materially from
those in the forward-looking statements herein include risks and
uncertainties relating to delays in obtaining or adverse conditions contained
in, related regulatory approvals, changes in economic conditions,
availability and cost of capital, changes in weather patterns, changes in
laws, regulations or regulatory policies, developments in legal or public
policy doctrines, population growth rates and demographic patterns, the
potential negative impact resulting from the economic downturn, growth in
demand, sales and capacity to fill demand, unanticipated changes in operating
expenses and capital expenditures, capital market conditions, and other
presently unknown or unforeseen factors. These uncertainties and factors
could cause actual results to differ materially from such statements. The
Company disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. This information is presented solely to provide
additional information to further understand the Company's results and
prospects.

Item 1.    BUSINESS

GENERAL

     Additional information required by this Item, other than the information
disclosed below, is included in the "Management's Discussion and Analysis of
Consolidated Results of Operations and Financial Condition" section and the
"Notes to Consolidated Financial Statements," which are included in Exhibit
13, and is incorporated by reference herein.

     Potomac Electric Power Company (Pepco or the Company) is engaged in
three principal lines of business. These business lines consist of (1) the
provision of regulated electric utility transmission and distribution
services in the Washington, D.C. (D.C.) metropolitan area, (2) the management
of a diversified financial investments portfolio and (3) the supply of energy
products and services in competitive retail markets. The Company's regulated
electric utility activities are referred to herein as the "Utility" or
"Utility Operations," and its financial investments and competitive energy
activities are referred to herein as its "Competitive Operations."
Additionally, the Company has a wholly owned Delaware statutory business
trust, Potomac Electric Power Company Trust I, and a wholly owned Delaware
Investment Holding Company, Edison Capital Reserves Corporation. At
December 31, 2001, the Company had 2,449 employees.

     During 2001 the Company continued to position its business activities
for the future through the execution of its business plan to respond to the
electric utility industry's transition from a regulatory to a competitive
environment. On February 12, 2001, the Company and Conectiv announced that
each company's board of directors approved an agreement for a strategic
transaction whereby the Company will acquire Conectiv for a combination of
cash and stock valued at approximately $2.2 billion. Also during the first
quarter of 2001 the Company completed its plan to divest its generation
assets when it sold its 9.72 percent interest in a Pennsylvania generating
plant. This sale followed the divestiture of substantially all of the
Company's generation assets in December 2000. Additionally, the Utility's
comprehensive plans to implement customer choice were completed on January 1,
2001, when D.C. customers began to have their choice of electricity
suppliers. Maryland customers received customer choice on July 1, 2000.

     After the closing of the acquisition of Conectiv, Pepco and Conectiv
will become subsidiaries of a new holding company, to be called Pepco
Holdings, Inc. (formerly New RC, Inc.). The Utility Operations of the merged
company will have more than twice the Company's current customer base,
serving more than 1.8 million electric and gas customers in Maryland, the
District of Columbia, Virginia, Delaware and New Jersey. The acquisition
will also create an expanded market serving a 10,000 square-mile service
territory in a growing region with 4 million in population and will deliver
more than 46,000 gigawatt-hours of electricity annually. The new company
will be the largest owner of transmission in the Pennsylvania/New
Jersey/Maryland power pool (PJM). The combination, which will be accounted
for as a purchase, has received approval from both companies' shareholders,
from the Pennsylvania and Virginia Public Service Commissions, and from the
Federal Energy Regulatory Commission. Additionally, the Delaware Public
Service Commission voted on March 19, 2002 to approve the merger and
antitrust clearance has been received under the Hart-Scott-Rodino Antitrust
Improvements Act. Pending the receipt of various other regulatory approvals,
the transaction is expected to close during the second quarter of 2002. At
December 31, 2001, the Company has deferred approximately $11.6 million in
merger acquisition costs.

Item 2.     PROPERTIES

     During January 2001, the Company completed the divestiture of
substantially all of its generating assets. Accordingly, at December 31,
2001, the Company's principal assets are used to engage in the transmission
and distribution of electric energy in the Washington, D.C. metropolitan
area. These assets include 118 substations, 988 circuit miles of
transmission lines, 6 power station switchyards, and approximately 24,000
circuit miles of 69 KV (and below) distribution lines, including services and
street lighting. Additionally, in December 2000, the Company transferred its
Benning Road and Buzzard Point generating plants, which were not divested to
Mirant Corporation (Mirant), to a wholly owned subsidiary of the Company.
These power plants are located in D.C. and have a total installed capacity of
806 megawatts. They are functioning as exempt wholesale generators and are
operated and maintained by Mirant pursuant to an initial three-year contract
with our subsidiary. Additional information is included in the "Management's
Discussion and Analysis of Consolidated Results of Operations and Financial
Condition" section and the "Notes to Consolidated Financial Statements,"
which are included in Exhibit 13, and is incorporated by reference herein.

Item 3.    LEGAL PROCEEDINGS

     The information required by this Item is included in Note 11 to the
"Notes to Consolidated Financial Statements," which is included in Exhibit
13, and is incorporated by reference herein.

Item 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None.

Part II

Item 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
           MATTERS

     The following table presents the dividends per share of Common Stock and
the high and low of the daily Common Stock transaction prices as reported in
The Wall Street Journal during each period. The New York Stock Exchange is
the principal market on which the Company's Common Stock is traded.


        Period           

    Dividends
    Per Share   

     Price Range
   High         Low   

2001:

      

First Quarter . . . . .

$.415      

$24.90

$20.20

Second Quarter . . . .

.250      

 23.84

 20.08

Third Quarter . . . . .

.250      

 22.78

 20.61

Fourth Quarter . . . .

 .250      

 22.95

 20.62
 

$1.165      

    

First Quarter . . . . .

$.415      

$27.69

$19.06

Second Quarter . . . .

.415      

 27.88

 20.94

Third Quarter . . . . .

.415      

 27.44

 23.63

Fourth Quarter . . . .

 .415      

 25.56

 21.50
 

$1.66      

    

The number of record holders of Common Stock was 55,343 at March 25, 2002,
and 56,189 at December 31, 2001.

     There were 107,125,976 shares of the Company's $1 par value Common Stock
outstanding at March 25, 2002, and 107,221,176 outstanding at December 31,
2001. A total of 200 million shares is authorized.

     On February 12, 2001, the Company announced that it would reduce its
annual dividend to $1.00 per share from $1.66 per share, effective with the
June 2001 dividend. In January 2002, a dividend of 25 cents per share was
declared payable March 29, 2002, to shareholders of record of the Company's
common stock on March 11, 2002. The Company's dividend rate on common stock
is determined by the Board of Directors and takes into consideration, among
other factors, current and possible future developments which may affect the
Company's income and cash flows. See Item 7., Management's Discussion and
Analysis of Financial Condition and Results of Operations, for additional
information.

Item 6.    SELECTED FINANCIAL DATA

     The information required by this Item is included in the "Selected
Consolidated Financial Data" section, which is included in Exhibit 13, and is
incorporated by reference herein.

 

Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
           RESULTS OF OPERATIONS

     The information required by this Item is included in the "Management's
Discussion and Analysis of Consolidated Results of Operations and Financial
Condition" section, which is included in Exhibit 13, and is incorporated by
reference herein.

Item 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The information required by this Item is included in the "Management's
Discussion and Analysis of Consolidated Results of Operations and Financial
Condition" section, which is included in Exhibit 13, and is incorporated by
reference herein.

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The consolidated financial statements, together with the report thereon
of PricewaterhouseCoopers LLP dated January 18, 2002, and supplementary data,
are included in Exhibit 13, and is incorporated by reference herein.

Item 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE

     None.

 

Part III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information with regard to the directors and executive officers of the
registrant as of March 29, 2002 is as follows:

Directors

    


Name and Age

Principal Occupation and Business
   Experience for Past Five Years   

Director   Since 

Edmund B. Cronin, Jr.
Age 64 (a)(c)(d)

Since 2000 has been Chairman of the Board, and since 1995 has been President and Chief Executive Officer of Washington Real Estate Investment Trust, based in Rockville, Maryland, which owns income-producing real estate in the mid-Atlantic Region.

1998

John M. Derrick, Jr.
Age 62 (b)

See Executive Officers Below.

1994

Terence C. Golden
Age 57 (a)(c)(e)

Chairman of Bailey Capital Corporation in Washington, D.C. Bailey Capital Corporation is a private investment company. From 1995 until 2000, Mr. Golden was President, Chief Executive Officer and a director of Host Marriott Corporation. He continues to serve as a director of Host Marriott Corporation. He is also a director of Cousins Properties, Inc., American Classic Voyages, Inc. and the Morris & Gwendolyn Cafritz Foundation. He is also Chairman of the Federal City Council.

1998

Judith A. McHale
Age 55 (a)(d)(e)

Since 1995 has been President and Chief Operating Officer of Discovery Communications, Inc. (DCI), parent company of cable television's Discovery Channel, which is based in Bethesda, Maryland. She is a director of John Hancock Financial Services, Inc. and Polo Ralph Lauren Corporation.

1998

Floretta D. McKenzie
Age 66 (a)(b)(d)

Founder and Chairwoman of The McKenzie Group, Inc., a District of Columbia based educational consulting firm. Until 2001, Dr. McKenzie was also Chief Executive Officer of The McKenzie Group, Inc. Dr. McKenzie is a director of Marriott International, Inc.

1988

Edward F. Mitchell
Age 70 (b)(c)(d)

Retired Chairman of the Board of the Company, a position he held from 1992-1999. He was Chief Executive Officer from 1989-1997.

1980

Lawrence C. Nussdorf
Age 55 (a)(c)(e)

Since 1998 has been President and Chief Operating Officer of Clark Enterprises, Inc., a holding company based in Bethesda, Maryland, which includes The Clark Construction Group, a general contracting company, of which Mr. Nussdorf has been Vice President and Treasurer since 1977.

2001

Peter F. O'Malley
Age 63 (c)(d)(e)

Of Counsel to O'Malley, Miles, Nylen & Gilmore, P.A., a law firm headquartered in Calverton, Maryland. Mr. O'Malley currently serves as the President of Aberdeen Creek Corp., a privately held company engaged in investment, business consulting and development activities. Mr. O'Malley is a director of Legg Mason, Inc. and FTI Consulting.

1982

Pauline A. Schneider
Age 58 (a)(d)(e)

Joined the Washington office of the law firm of Hunton & Williams in 1985 and has been a partner there since 1987. In October 2000, Ms. Schneider was elected as Chair of the Board of MedStar Health, Inc., a community-based healthcare organization that includes seven major hospitals in the Washington, D.C./Baltimore area. Also, since 1998, she has chaired the Board of The Access Group, Inc., a not for profit student loan provider headquartered in Wilmington, Delaware.

2001

Dennis R. Wraase
Age 58 (b)

See Executive Officers Below.

1998

A. Thomas Young
Age 63 (a)(b)(e)

Retired Executive Vice President of Lockheed Martin Corporation. From 1990 until 1995, he was President and Chief Operating Officer of Martin Marietta Corporation. He is a director of the B.F. Goodrich Company and Science Applications International Corporation.

1995


(a)

Mr. Cronin is Chairman of the Audit Committee. Messrs. Golden,
Nussdorf and Young, Ms. McHale, Dr. McKenzie and Ms. Schneider are
members of the Committee.

(b)

Dr. McKenzie is Chairman of the Executive Committee. Messrs. Derrick,
Mitchell, Wraase and Young are members of the Committee.

(c)

Mr. Mitchell is Chairman of the Finance Committee. Messrs. Cronin,
Golden, Nussdorf, and O'Malley are members of the Committee.

(d)

Mr. O'Malley is Chairman of the Corporate Governance Committee.

Messrs. Cronin and Mitchell, Ms. McHale, Dr. McKenzie and
Ms. Schneider are members of the Committee.

(e)

Mr. Young is Chairman of the Human Resources Committee. Messrs.
Golden, Nussdorf and O'Malley and Ms. McHale and Ms. Schneider are
members of the Committee.

 

 

Executive Officers

      




Name




Position




Age

Served in such position   since   

John M. Derrick, Jr.

Chairman of the Board and Chief Executive Officer


62


1999 (1)

Dennis R. Wraase

President and Chief Operating Officer and Director


58


2001 (2)

William T. Torgerson

Executive Vice President - External Affairs and General Counsel


57


2001 (3)

Andrew W. Williams

Senior Vice President and Chief Financial Officer


52


2001 (4)

William J. Sim

Senior Vice President - Power Delivery


57


2001 (5)

Robert C. Grantley

Group Vice President - Customer Care


53

 
 1997 (6)

Kenneth P. Cohn

Vice President and Chief Information Officer


54


1999 (7)

Kirk J. Emge

Vice President - Legal Services

52

 1994    

William R. Gee, Jr.

Vice President - Business Performance and Technology

61

 1991    

Anthony J. Kamerick

Vice President, Finance, Treasurer and Comptroller


54


 2002 (8)

Beverly L. Perry

Vice President - Government and Corporate Affairs


54


1999 (9)

James S. Potts

Vice President - Environment

57

 1993    

None of the above persons has a "family relationship" with any other officer listed or with any director.

The term of office for each of the above persons is from July 26, 2001, until the next succeeding Annual Meeting, and until their successors have been elected and qualified.

(1)

Mr. Derrick was elected to the position of Chairman of the Board on April 28, 1999 and Chief Executive Officer on October 23, 1997. From 1992 to May 2000, he also served as President and from 1992 to October 1997, he also served as Chief Operating Officer. Mr. Derrick is a director of Washington Real Estate Investment Trust.

(2)

Mr. Wraase served as President and Chief Financial Officer from May 9, 2000 to December 31, 2000. He served as Executive Vice President and Chief Financial Officer from April 28, 1999 to May 9, 2000. He served as Senior Vice President and Chief Financial Officer from April 24, 1996 to April 28, 1999.

(3)

Mr. Torgerson served as Senior Vice President and General Counsel from April 27, 1994 until December 31, 2000. He served as Secretary from August 22, 1994 to April 24, 1996.

(4)

Mr. Williams held the position of Group Vice President, Transmission and Marketing from 1997 until December 31, 2000. He held the position of Vice President, Energy and Market Policy and Development from 1994 until 1997.

(5)

Mr. Sim held the position of Group Vice President, Generation from 1997 until December 31, 2000. He held the position of Vice President, Power Supply and Delivery from 1994 until 1997.

(6)

Mr. Grantley held the position of Group Vice President, Customer Service and Power Distribution from 1997 until December 31, 2000. He held the position of Vice President, Customers and Community Relations from 1994 until 1997.

(7)

Mr. Cohn held the position of General Manager, Computer Services from March 1, 1997 to April 28, 1999 and Manager - Computer Services from May 1, 1987 to March 1, 1997.

(8)

Mr. Kamerick held the position of Vice President and Treasurer from April 24, 1994 until January 24, 2002.

(9)

Ms. Perry was General Manager - Government Relations from March 1, 1997 to April 28, 1999, and Manager - Government Relations from May 1, 1994 to 1997.


Section 16(a) Beneficial Ownership Reporting Compliance

     The rules of the Securities and Exchange Commission require that the
Company disclose any late filing of the reports of stock ownership (and
changes in stock ownership), and any known failure to file these reports, by
its directors and executive officers. Due to an administrative oversight by
the 401(k) plan administrator, Mr. Mitchell, a director of Pepco, omitted to
disclose on his Form 5 filed in February 2001 an exempt sale of 6,636 shares
of Pepco common stock from his 401(k) plan account. He amended the Form 5 in
April 2001 to reflect the transaction. To the best of the Company's
knowledge, all other filings required to be made by the Company's directors
and executive officers were made on a timely basis in 2001.

 

Item 11. EXECUTIVE COMPENSATION

Director Compensation

     Each of the Company's non-employee directors is paid an annual retainer
of $26,000, plus a fee of $1,250 for each Board and Committee meeting
attended. Each director who is a Chairman of a Committee is paid an
additional retainer of $3,500.

     The Stock Compensation Plan for Directors requires each director who is
not an employee of the Company to receive half of his or her $26,000 annual
retainer either (i) in shares of Common Stock or (ii) as a Common Stock
equivalent deferral under the Company's Deferred Compensation Plan, the value
of which corresponds to the market price of the Company's Common Stock. A
director may elect to receive up to 100% of his or her retainer and meeting
fees in shares of Common Stock or Common Stock equivalents. Common Stock
equivalents are credited with additional amounts equal to the dividend payout
on the corresponding number of shares of Common Stock, which amounts are
deemed reinvested in additional Common Stock equivalents. Common Stock
equivalents have no voting rights. A director alternatively may elect to be
paid in cash or to defer under the Deferred Compensation Plan the portion of
his or her annual retainer and meeting fee payments not required to be
invested in Common Stock or Common Stock equivalents. Such deferrals are
credited, at the election of the director, with a return equal to the prime
rate, a return on a specified group of funds or a combination of both.
Balances under the Deferred Compensation Plan, including Common Stock
equivalent balances, are paid out in cash, in either a lump sum or
installments, commencing at a time selected by the director.

    On May 1 of each year, each non-employee director is granted an option to
purchase 1,000 shares of Common Stock. Each option has an exercise price
equal to the market price of the Common Stock on the date of grant. Options
granted prior to 2000 become exercisable at the earlier of (i) four years
after date of grant or (ii) fifty percent upon attainment of a target price
and the remaining fifty percent upon the attainment of a higher target price.
Options granted in 2000 and thereafter become exercisable at the rate of
twenty-five percent on each of the first four anniversaries of the date of
grant. Upon a "change in control," all options become immediately
exercisable. Options expire ten years after the date of grant or at such
earlier date as specified by the Plan in the event of retirement, death,
disability or after termination of service of the director.

     The Company also provides directors with travel accident insurance for
Company-related travel and directors' and officers' liability insurance
coverage.

 

Executive Compensation

SUMMARY COMPENSATION TABLE

Annual Compensation

Long-Term Incentive Plan Awards

Name and Principal Position

Year

Salary

Bonus

Other Annual
Compensation

Options (#)

Incentive Plan
Payouts

All Other
Compensation

(1)

(2)  

(3)

(4)

John M. Derrick, Jr.
Chairman and Chief
   Executive Officer

2001
2000
1999

$

640,000

541,667

516,667

$

204,329

255,171

191,732

$

26,701

22,630

19,177

119,900

119,900

0

$

635,097

137,165

288,930

$

61,480

57,528

51,235

Dennis R. Wraase
President and Chief
   Operating Officer

2001

2000

1999

$

423,333

366,667

335,000

$

135,156

172,731

124,317

$

6,142

5,341

4,644

48,000

48,000

0

$

283,186

95,924

152,798

$

38,688

36,390

37,711

William T. Torgerson
Executive Vice President
   and General Counsel

2001

2000

1999

$

336,667

298,667

281,667

$

107,486

140,697

104,525

$

5,158

4,485

3,900

30,000

30,000

0

$

220,938

93,527

145,688

$

31,508

30,014

26,359

Andrew W. Williams
Senior Vice President
   and Chief Financial
   Officer

2001

2000

1999

$

266,667

237,333

225,000

$

85,137

91,202

63,108

$

0

0

0

30,000

10,300

0

$

80,686

50,285

63,074

$

24,490

23,598

24,556

William J. Sim
Senior Vice President

2001

2000

1999

$

251,667

222,667

211,000

$

113,250

86,182

59,181

$

0

0

0

30,000

10,300

0

$

79,333

48,481

60,938

$

22,732

21,857

23,261

(1) Other Annual Compensation

Amounts in this column for each year represent above-market earnings on
deferred compensation funded by Pepco-owned life insurance policies held in
trust, assuming the expected retirement at age 65. The amounts are reduced
if the executive terminates employment prior to age 62 for any reason other
than death, total or permanent disability or a change in control of Pepco.
In the event of a change in control and termination of the participant's
employment, a lump sum payment will be made equal to the net present value
of the expected payments at age 65 discounted using the Pension Benefit
Guaranty Corporation immediate payment interest rate plus one-half of one
percent. Pepco has purchased such policies on participating individuals
under a program designed so that if assumptions as to mortality experience,
policy return and other factors are realized, the compensation deferred and
the death benefits payable to Pepco under such insurance policies will cover
all premium payments and benefit payments projected under this program, plus
a factor for the use of Pepco funds.

(2) Options

Amounts in this column represent the stock options granted under the
Long-Term Incentive Plan. The shareholders approved the Long-Term Incentive
Plan in April 1998.

(3) Incentive Plan Payouts

All amounts in this column represent the value of vested Common Stock under
the Company's Performance Restricted Stock Program. The amounts shown for
2001 consist of 33-1/3% of the Common Stock award from the one-year
performance cycle ended December 31, 1999 (the "One-Year 1999 Cycle"), 33-
1/3% of the Common Stock award from the eight-month performance cycle ended
December 31, 1999 (the "Eight-Month 1999 Cycle"), and 100% of the Common
Stock award from the three-year cycle ended December 31, 2001 that vested on
January 1, 2002. The amounts shown for 2000 consist of 33-1/3% of the Common
Stock award from the One-Year 1999 Cycle, 33-1/3% of the Common Stock award
from the Eight-Month 1999 Cycle, and 50% of the Common Stock award from the
performance cycle ended December 31, 1998 (the "1998 Cycle"), that vested on
January 1, 2001. The amounts shown for 1999 consist of 33-1/3% of the Common
Stock award from the Eight-Month 1999 Cycle, 50% of the Common Stock award
from the 1998 Cycle, and 50% of the Common Stock award from the performance
cycle ended December 31, 1997, that vested on January 1, 2000. For 1999,
amounts also include cash awards under the Performance Share Plan, which was
applicable to the years 1997 through 1999. The cash amounts awarded for
Messrs. Derrick, Wraase, Torgerson, Williams and Sim were $119,722, $57,221,
$53,482, $38,355 and $37,940, respectively. The value of the vested Common
Stock was calculated based on the market price of the Common Stock on the
day preceding the vesting date.

(4) All Other Compensation

Amounts in this column for 2001 consist of (i) Company contributions to the
Savings Plan for Exempt Employees of $7,900, $7,876, $7,700, $4,128 and
$7,900 for Messrs. Derrick, Wraase, Torgerson, Williams and Sim,
respectively, (ii) Company contributions to the Executive Deferred
Compensation Plan due to Internal Revenue Service limitations on maximum
contributions to the Savings Plan for Exempt Employees of $16,830, $10,257,
$7,500, $6,683 and $2,769 for Messrs. Derrick, Wraase, Torgerson, Williams
and Sim, respectively, (iii) the term life insurance portion of life
insurance written on a split-dollar basis of $5,184, $2,972, $2,363, $1,256
and $1,767 for Messrs. Derrick, Wraase, Torgerson, Williams and Sim,
respectively, (iv) the interest on employer paid premiums for split-dollar
life insurance of $31,566, $17,583, $13,945, $12,423 and $10,296 for
Messrs. Derrick, Wraase, Torgerson, Williams and Sim, respectively. The
split-dollar life insurance contract provides death benefits to the
executive's beneficiaries of approximately three times the executive's
annual salary. The split-dollar program is designed so that, if the
assumptions made as to mortality experience, policy return and other factors
are realized, the Company will recover all plan costs, including a factor
for the use of Company funds. The split-dollar policy provides a cash
surrender value to each participant in excess of any premiums paid.

 

OPTION GRANTS IN LAST FISCAL YEAR
           

Individual Grants (1)

        Name        

Number of
Securities
Underlying
Options
Granted
   (#)   

Percent of
Total
Options
Granted to
Employees
in Fiscal Year

Exercise
Price
($/Share)

Expiration
   Date   

Grant Date
Present Value
   ($) (2)   

John M. Derrick, Jr.

119,900

31.9%

$24.59

December 31, 2010

$420,849

Dennis R. Wraase

 48,000

12.8%

$24.59

December 31, 2010

$168,480

William T. Torgerson

 30,000

 8.0%

$24.59

December 31, 2010

$105,300

Andrew W. Williams

 30,000

 8.0%

$24.59

December 31, 2010

$105,300

William J. Sim

 30,000

 8.0%

$24.59

December 31, 2010

$105,300

(1) Individual Grants

The exercise price of options is the market price of the Common Stock on the grant date
(January 1, 2001). Twenty-five percent of the options became exercisable on January 1, 2002. The
remaining options will become exercisable at a rate of twenty-five percent on January 1 of each
year until January 1, 2005.

(2) Grant Date Present Value

The values in this column were determined based on the Black-Scholes option pricing model and are
calculated at the time of grant. The following assumptions were used in the calculation: (a)
expected price volatility - 17.7%, (b) options will be exercised in the tenth year, (c) an
interest rate based upon the corresponding yield of a U.S. Treasury note maturing ten years from
the date of grant, (d) dividends at the rate in effect on the date of grant, and (e) no
adjustments for transferability. The fact that the Company used the Black-Scholes model does not
necessarily mean that the Company believes or acknowledges that the model can accurately
determine the value of options. The ultimate value of the option, if any, will depend on the
future market price of the Company's Common Stock and the optionee's individual investment
decisions, neither of which can be predicted with any degree of certainty.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (2001)

Number of
Shares
Acquired
on
Exercise

Value
Realized

Number of Shares Underlying
Unexercised Options at
End of Fiscal Year

Value of Unexercised
In-the-Money Options at
End of Fiscal Year (3)

       Name       

   (#)   

   ($)   

Exercisable

Unexercisable

Exercisable

Unexercisable

John M. Derrick, Jr.

0

0

138,360

209,825

0

0

Dennis R. Wraase

0

0

33,843

84,000

0

0

William T. Torgerson

0

0

29,343

52,500

0

0

Andrew W. Williams

0

0

16,509

37,725

0

0

William J. Sim

0

0

16,509

37,725

0

0

(3) Value of Unexercised In-the-Money Options at End of Fiscal Year

The value of unexercised in-the-money options at December 31, 2001 is calculated by multiplying
the number of shares by the amount by which the fair market value of the Common Stock on the last
trading day of 2001, as reported by the New York Stock Exchange, exceeds the option exercise
price.

LONG-TERM INCENTIVE PLAN-
AWARDS IN LAST FISCAL YEAR
 

Performance or
Other Period Until
Maturation or Payout

Estimated Future Payout under Non Stock Price-Based Plans



Name

Threshold
Number of Shares

Target
Number of Shares

Maximum
Number of Shares

John M. Derrick, Jr.

2002-2004

0

17,500

35,000

Dennis R. Wraase

2002-2004

0

 7,000

14,000

William T. Torgerson

2002-2004

0

 5,000

10,000

Andrew W. Williams

2002-2004

0

 5,000

10,000

William J. Sim

2002-2004

0

 5,000

10,000

     Under the Company's Executive Performance Restricted Stock Program
established under the Company's Long-Term Incentive Plan executives selected
to participate in the Program have the opportunity to receive awards of
Common Stock based on the Company's performance over a three-year performance
cycle commencing January 1 of each year. The Program provides for the earning
of Common Stock based on the Company's total stockholder return compared to
other companies in a peer group comprised of 20 gas and electric distribution
companies. If, during the course of a performance period, a significant event
occurs, as determined in the sole discretion of the Board of Directors, which
the Board of Directors expects to have a substantial effect on total
shareholder performance during the period, the Board of Directors may revise
such measures.

     The preceding table shows the awards made under the Program in 2001.
Each award provides that, following completion of the performance period, the
participant will be eligible to earn a number of shares of Common Stock
ranging from 0% to 200% of the target performance award to the extent that
the performance objectives are achieved. The shares of Common Stock earned by
a participant will vest immediately on the date that the performance award is
earned.

 

 

PENSION PLAN TABLE

Average Annual Salary
in Final Three Years
   of Employment    

                     Annual Retirement Benefits                  
                           Years in Plan                         

   15    

   20   

   25   

   30   

   35   

   40   

$  250,000

$ 66,000

$ 88,000

$109,000

$131,000

$153,000

$175,000

$  350,000

$ 92,000

$123,000

$153,000

$184,000

$214,000

$245,000

$  450,000

$118,000

$158,000

$197,000

$236,000

$276,000

$315,000

$  550,000

$144,000

$193,000

$241,000

$289,000

$337,000

$385,000

$  650,000

$171,000

$228,000

$284,000

$341,000

$398,000

$455,000

$  750,000

$197,000

$263,000

$328,000

$394,000

$459,000

$525,000

$  850,000

$223,000

$298,000

$372,000

$446,000

$521,000

$595,000

$  950,000

$249,000

$333,000

$416,000

$499,000

$582,000

$665,000

$1,050,000

$276,000

$368,000

$459,000

$551,000

$643,000

$735,000

     The Company's General Retirement Plan provides participants benefits
after five years of service based on the average salary (the term salary
being equal to the amounts contained in the Salary column of the Summary
Compensation Table) for the final three years of employment and years of
credited service under the Plan at time of retirement. Normal retirement
under the Plan is at age 65. Plan benefits are subject to an offset for any
Social Security benefits. Benefits under the Plan may be reduced under
certain provisions of the Internal Revenue Code, as amended, and by salary
deferrals under the Company's deferred compensation plans (other than CODA
contributions made under the Savings Plan). Where any such limitations occur,
the Company will pay a supplemental retirement benefit to eligible executives
designed to maintain total retirement benefits at a formula level of the
Plan. In addition, for executives who retire under the terms of the General
Retirement Plan and are at least 59 years of age, their retirement benefit
will be calculated on the basis of average salary, plus the average of the
highest three annual incentive awards in the last five consecutive years. The
annual incentive amounts are equal to the amounts shown in the Bonus column
of the Summary Compensation Table. The current age, years of credited service
and compensation used to determine retirement benefits (including
supplemental benefits) for the above-named officers are as follows:
Mr. Derrick, 62 and 40 years of credit, $783,189; Mr. Wraase, 58 and 32 years
of credit, $519,068; Mr. Torgerson, 57 and 32 years of credit, $423,236;
Mr. Williams, 52 and 27 years of credit, $322,816; and Mr. Sim, 57 and 32
years of credit, $314,649. Annual benefits at age 65 (including the effect of
the Social Security offset) are illustrated in the table above.

Employment Agreements and Severance Agreements

     Messrs. Derrick, Wraase and Torgerson each have entered into employment
agreements with the Company that provide for his employment through
December 10, 2004, and that automatically extend for successive periods of
five years thereafter unless the Company or the executive has given notice
that it shall not be so extended. Each of the employment agreements provides
that the executive (i) will receive an annual base salary in an amount not
less than his salary in effect as of December 10, 1999, and incentive
compensation as determined by the Board of Directors and (ii) will be
entitled to participate in retirement and other benefit plans, and receive
fringe benefits on the same basis as other senior executives of the Company.

     Under each of the employment agreements, the executive is entitled to
certain benefits if his employment is terminated prior to the expiration of
the initial term of the agreement (or as extended) either (i) by the Company
other than for cause, death or disability or (ii) by the executive if his
salary is reduced, he is not in good faith considered for incentive awards,
the Company fails to provide him with retirement benefits and other benefits
provided to similarly situated executives, he is required to relocate by more
than 50 miles from Washington, D.C., or he is demoted from a senior
management position. These benefits include: (i) a lump sum payment in cash
equal to three times (x) the sum of the executive's highest base salary rate
in effect during the three-year period preceding termination and (y) the
higher of (1) the annual target bonus for the year in which the termination
of employment occurs or (2) the highest annual bonus received by the
executive in any of the three preceding calendar years and (ii) the
executive's annual cash incentive award for the year preceding termination of
employment, if not yet paid, and a pro rata portion of the executive's annual
incentive award for the year in which the executive's employment terminates.
In addition, any outstanding shares of restricted stock will become
immediately vested, and the executive will be entitled to receive unpaid
salary through the date of termination, certain supplemental retirement
benefits under existing plans of the Company, and a continuation of premium
payments under the Company's split-dollar life insurance policy. The
agreements also provide that each executive is entitled to receive a gross-up
payment equal to the amount of any federal excise taxes imposed upon
compensation payable upon termination and the additional taxes that result
from such payment.

     Messrs. Williams and Sim have entered into severance agreements with the
Company. Each severance agreement provides for the payment of severance
benefits to the executive if, within two years following a change in control,
which in the case of Mr. Sim includes a sale of all or substantially all of
the generation assets, of the Company, any of the following events occur:
(i) termination of the employment of the executive by the Company (or a
successor company), other than for cause, death, disability or voluntary
normal retirement; (ii) termination of employment by the executive for "good
reason," defined as the assignment of duties materially inconsistent with the
executive's duties prior to the change in control or a material reduction or
alteration of his duties, a reduction in the executive's salary or relocation
of the executive by more than 50 miles; (iii) the failure or refusal by a
successor company to assume the Company's obligations under the agreement; or
(iv) a material breach of the agreement by the Company (or a successor
company). The executive also is entitled to severance benefits upon (i) the
termination of the executive's employment without cause in contemplation of,
but prior to, a change in control or (ii) the occurrence of an event, in
contemplation of, but prior to a change in control, constituting "good
reason" followed by the executive's voluntary termination of employment
within two years after a change in control. The severance benefits consist
of: (i) an amount equal to two times the executive's annual base salary (in
effect at the time of termination) and annual bonus (average of annual target
bonuses during the three years prior to termination) paid in 24 equal monthly
installments and (ii) certain welfare benefits for a three-year period after
the date of termination. The agreements also provide that each executive is
entitled to receive a gross-up payment equal to the amount of any federal
excise taxes imposed upon compensation payable upon termination and the
additional taxes that result from such payment.

Compensation Committee Interlocks and Insider Participation

     Pauline Schneider, a director, is a partner in the law firm of Hunton &
Williams. Hunton & Williams rendered legal services to the Company and its
subsidiaries in 2001 and is expected to render services to the Company and
its subsidiaries in 2002.

 

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth, as of February 1, 2002, for each
director, the five executive officers named in the Summary Compensation Table
under Item 11 and all directors and officers as a group (i) the number of
shares of Common Stock beneficially owned, (ii) the number of shares that
could be acquired within 60 days pursuant to exercise of stock options,
(iii) credited Common Stock equivalents and (iv) the total stock-based
holdings. None of such persons beneficially owns shares of any other class
of equity securities of the Company. Each of the individuals, as well as all
directors and executive officers as a group, beneficially owned less than 1%
of the Company's outstanding Common Stock. The following table also sets
forth, as of February 1, 2002, the number and percentage of shares of Common
Stock owned by all persons known by the Company to own beneficially 5% or
more of the Common Stock.



Name of Beneficial Owner


Shares of
Common Stock Owned (1)

Common Stock
Acquirable
Within 60 Days (2)

Deferred
Common Stock Equivalents (3)

Total
Stock-Based Holdings (4)

Edmund B. Cronin, Jr.

1,185           

1,250      

8,096       

10,531     

John M. Derrick, Jr.

60,656           

198,310      

-       

258,966     

Terence C. Golden

1,942           

250      

7,201       

9,393     

Judith A. McHale

7,073           

250      

-       

7,323     

Floretta D. McKenzie

3,340           

1,250      

-       

4,590     

Edward F. Mitchell

42,314           

1,250      

2,236       

45,800     

Lawrence C. Nussdorf

1,000           

-      

573       

1,573     

Peter F. O'Malley

1,828           

1,250      

2,236       

5,314     

Pauline A. Schneider

1,522           

-      

-       

1,522     

William J. Sim

16,285           

26,584      

-       

42,869     

William T. Torgerson

22,829           

44,343      

-       

67,172     

Andrew W. Williams

25,839           

26,584      

-       

52,423     

Dennis R. Wraase

33,726           

57,843      

-       

91,569     

A. Thomas Young

1,000           

1,250      

8,964       

11,214     

All Directors and
Executive Officers
as a Group (21 Individuals)



305,571           



405,023      



29,306       



739,900     


Name and Address
of Beneficial Owner


Shares of
Common Stock Owned (5)

Percent of
Common Stock Outstanding

    

Franklin Resources, Inc.
One Franklin Parkway
San Mateo, CA 94403

8,621,071

8.0%

    

(1) Includes shares held under the Company's Dividend Reinvestment Plan and
the Employee Savings Plan. Also includes shares awarded under the Company's
Long-Term Incentive Plan which will vest over time.

(2) Consists of Common Stock issuable upon the exercise of stock options.

(3) Consists of Common Stock equivalents acquired under the Directors'
Deferred Compensation Plan.

(4) Consists of the sum of the three preceding columns.

(5) According to a Schedule 13G, dated February 1, 2002, filed with the
Securities and Exchange Commission jointly by Franklin Resources, Inc.,
Templeton Global Advisors Limited, a subsidiary of Franklin Resources, Inc.,
and Charles B. Johnson and Rupert H. Johnson, Jr., each a principal
shareholder of Franklin Resources, Inc., the Common Stock is beneficially
owned by one or more open or closed-end investment companies or other managed
accounts that are advised by direct and indirect advisory subsidiaries of
Franklin Resources, Inc. Sole power to vote or to direct the voting of the
Common Stock and to dispose or to direct the disposition of the Common Stock
is as follows: Templeton Global Advisors Limited: 6,417,815; Franklin
Advisers, Inc.: 2,200,000; and Fiduciary Trust Company International:
3,256.

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None.

Part IV

Item 14.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  Documents List

1.   Financial Statements

     The following documents are included within this document as Exhibit 13
on the pages identified below:

 

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