<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
COMMISSION ONLY (AS PERMITTED
BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
POTOMAC ELECTRIC POWER COMPANY
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
item 22(a)(2) of Schedule 14A.
[_] $500 per each party to the controversy pursuant to Exchange Act
Rule 14a-6(i)(3).
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
------------------------------------------------------------------------
(5) Total fee paid:
------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
-----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
(3) Filing Party:
-----------------------------------------------------------------------
(4) Date Filed:
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Notes:
<PAGE>
[PEPCO LOGO APPEARS HERE]
POTOMAC ELECTRIC POWER COMPANY
1900 PENNSYLVANIA AVENUE, N. W.
WASHINGTON, D. C. 20068
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
----------------------------------------
September 8, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Potomac
Electric Power Company will be held at 10:00 a.m. on Thursday, October 23,
1997, at the Sheraton Washington Hotel, Cotillion Ballroom, 2660 Woodley Road,
N. W., Washington, D. C. for the following purposes:
1. To elect four directors to serve for three years;
2. To consider and take action with respect to a shareholder proposal
relating to the election of directors, if such proposal is brought before
the meeting; and
3. To transact such other business as may properly be brought before the
meeting.
The holders of the Common Stock of the Company of record at the close of
business on Wednesday, September 3, 1997, will be entitled to vote on each of
the above matters.
By order of the Board of Directors,
ELLEN SHERIFF ROGERS
Secretary
----------------
IMPORTANT
---------
YOU ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
EVEN IF YOU PLAN TO BE PRESENT, YOU ARE URGED TO SIGN, DATE AND MAIL THE
------------------------------------------------------------------------
ENCLOSED PROXY PROMPTLY.
- ------------------------
IF YOU ATTEND THE MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE>
PLEASE DATE AND SIGN YOUR
PROXY AND RETURN IT IN
THE ENVELOPE PROVIDED
THANK YOU FOR ACTING PROMPTLY
<PAGE>
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS
POTOMAC ELECTRIC POWER COMPANY
September 8, 1997
This statement is furnished in connection with a solicitation of proxies by
the Board of Directors of Potomac Electric Power Company (the "Company"), 1900
Pennsylvania Avenue, N. W., Washington, D. C. 20068, to be used at the Annual
Meeting of Shareholders of the Company to be held at 10:00 a.m. on Thursday,
October 23, 1997, at the Sheraton Washington Hotel, Cotillion Ballroom, 2660
Woodley Road, N.W., Washington, D. C., and at any adjournment thereof, for the
purposes set forth in the foregoing notice of meeting. Properly executed
proxies received prior to closing of the polls during the meeting will be
voted in the manner set forth on the proxy unless specifically otherwise
directed by the shareholder, in which case they will be voted as directed. If
the enclosed form of proxy is executed and returned, it may nevertheless be
revoked by delivering notice of revocation or a duly executed proxy bearing a
later date to the Secretary of the Company before the proxy is voted, and
shareholders who are present at the meeting may revoke their proxies and vote
in person.
At the close of business on Wednesday, September 3, 1997 (the "Record
Date"), the Company had outstanding 118,500,648 shares of Common Stock of the
par value of $1 per share (the "Common Stock"), and the then holders of record
thereof will be entitled to one vote for each share so held by them on each of
the matters to be considered at the meeting.
This proxy statement and the form of proxy are first being mailed to
shareholders on or about September 8, 1997. The Annual Report to Shareholders
for the fiscal year ended December 31, 1996, including financial statements,
was mailed on or about February 18, 1997 to all shareholders. In view of the
delayed date of the Annual Meeting, the Company on or about September 4, 1997,
mailed the Annual Report to all persons who since the original mailing have
become holders of record on or prior to the Record Date and also is furnishing
the Annual Report to banks and brokers for delivery to beneficial owners. The
Annual Report is not part of the proxy soliciting material. Persons who
previously were mailed the Annual Report may obtain another copy by contacting
the Shareholder Service Department at 1-800-527-3726 or, in the Washington,
D.C. area, at 202-872-3183.
1. ELECTION OF DIRECTORS
At the meeting, four directors are to be elected to hold office until the
earlier of (a) the expiration of a three-year term, and until their respective
successors shall have been elected and qualified, or (b) the effective date of
the proposed merger of the Company and Baltimore Gas and Electric Company.
Twelve directors constitute the entire Board of Directors.
It is the intention of the persons named in the enclosed proxy to vote such
proxy for the election of the nominees named below, unless such authority is
withheld. The Company does not contemplate that any of such nominees will
become unavailable for any reason, but if that should occur before the
meeting, proxies will be voted for another nominee, or other nominees, to be
selected by the Board of Directors. Nominees receiving the greatest number of
votes shall be elected.
1
<PAGE>
NOMINEES FOR ELECTION AS DIRECTORS
FOR TERM EXPIRING IN 2000
PHOTO APPEARS RICHARD E. MARRIOTT, age 58, since October 1993, has
HERE been Chairman of the Board of Host Marriott
Corporation, a company based in Bethesda, Maryland,
which owns lodging properties throughout the world.
From 1986 to October 1993 he served as Vice Chairman
and Executive Vice President of the Marriott
Corporation, a hotel and hospitality company. Mr.
Marriott has been a director of the Company since 1993
and is a member of the Human Resources Committee and
the Nominating Committee. Mr. Marriott is a director
of Marriott International, Inc. and Host Marriott
Services Corporation. He owns 100 shares of the Common
Stock of the Company.
PHOTO APPEARS DAVID O. MAXWELL, age 67, is retired Chairman of the
HERE Board and Chief Executive Officer of Fannie Mae, a
position he held from 1981-1991. Mr. Maxwell has been
a director of the Company since 1993 and is a member
of the Audit Committee and the Human Resources
Committee. He is a director of Financial Security
Assurance Holdings Ltd., Salomon Inc and SunAmerica
Inc. He owns 500 shares of the Common Stock of the
Company.
PHOTO APPEARS FLORETTA D. MCKENZIE, age 62, was the founder in 1987
HERE and is the President of The McKenzie Group, Inc.
(educational consulting firm). Dr. McKenzie has been a
director of the Company since 1988 and is a member of
the Audit Committee and the Executive Committee. Dr.
McKenzie is a director of Marriott International, Inc.
She owns 934 shares of the Common Stock of the
Company.
PHOTO APPEARS EDWARD F. MITCHELL, age 65, has been Chairman of the
HERE Board of the Company since December 1992. He has been
Chief Executive Officer since September 1989. From
1983 to December 1992, he served as President of the
Company. He has been a director of the Company since
1980, and is Chairman of the Executive Committee. He
owns 60,211 shares of the Common Stock of the Company.
2
<PAGE>
DIRECTORS CONTINUING IN OFFICE
TERM EXPIRES IN 1998
PHOTO APPEARS H. LOWELL DAVIS, age 64, was Vice Chairman of the
HERE Company from 1983 until 1997 and was also the Chief
Financial Officer from 1983 until 1996. He has been a
director of the Company since 1973 and is a member of
the Executive Committee. He owns 62,616 shares of the
Common Stock of the Company.
PHOTO APPEARS JOHN M. DERRICK, JR., age 57, has been President of
HERE the Company since December 1992. He has been Chief
Operating Officer since 1989. From 1989 to December
1992 he served as Executive Vice President of the
Company. Mr. Derrick has been a director of the
Company since 1994 and is a member of the Executive
Committee. Mr. Derrick is a director of Washington
Real Estate Investment Trust. He owns 22,178 shares of
the Common Stock of the Company.
PHOTO APPEARS PETER F. O'MALLEY, age 58, is Of Counsel to O'Malley,
HERE Miles, Nylen & Gilmore, P.A., a law firm in Calverton,
Maryland. He has served as Of Counsel since 1989. Mr.
O'Malley currently serves as the President of Aberdeen
Creek Corp., a privately-held company engaged in
investment, business consulting and development
activities. He has been a director of the Company
since 1982 and is Chairman of the Finance Committee
and a member of the Chairman's Advisory Committee and
the Human Resources Committee. Mr. O'Malley is a
director of Giant Food Inc., Legg Mason, Inc. and
Forensic Technologies International Corp. He owns
1,828 shares of the Common Stock of the Company.
PHOTO APPEARS LOUIS A. SIMPSON, age 60, has been President and Chief
HERE Executive Officer of Capital Operations (investments),
GEICO Corporation, Washington, D. C. since May 1993.
From 1985 to May 1993 he served as Vice Chairman of
GEICO Corporation. He has been a director of the
Company since December 1990, and is a member of the
Audit Committee, Chairman's Advisory Committee and
Finance Committee. Mr. Simpson is a director of Cohr,
Inc., Pacific American Income Shares, Inc., Salomon
Inc and Thompson BPE, Inc. He owns 2,000 shares of the
Common Stock of the Company.
3
<PAGE>
DIRECTORS CONTINUING IN OFFICE
TERM EXPIRES IN 1999
PHOTO APPEARS ROGER R. BLUNT, SR., age 66, is Chairman of the Board,
HERE President and Chief Executive Officer of Blunt
Enterprises, LLC (general contracting and construction
management), a Washington-based holding company, that
includes Essex Construction, LLC, of which he is
Chairman of the Board and Chief Executive Officer, and
Tyroc Construction, LLC, of which he is Chairman of
the Board, President and Chief Executive Officer. Mr.
Blunt has been a director of the Company since 1984
and is Chairman of the Audit Committee and a member of
the Executive Committee and Nominating Committee. He
owns 341 shares of the Common Stock of the Company.
PHOTO APPEARS A. JAMES CLARK, age 69, is Chairman of the Board and
HERE President of Clark Enterprises, Inc., a holding
company based in Bethesda, Maryland that includes The
Clark Construction Group, Inc. (formerly The George
Hyman Construction Company and OMNI Construction
Group, Inc.). He serves as Chairman of the Executive
Committee for The Clark Construction Group. He has
been a director of PEPCO since 1977 and is Chairman of
the Human Resources Committee and a member of the
Chairman's Advisory Committee and Finance Committee.
Mr. Clark is a director of CarrAmerica Realty
Corporation. Mr. Clark owns 9,604 shares of the Common
Stock of the Company. Clark Enterprises, Inc., of
which he is the major owner, owns 92,733 shares of the
Common Stock of the Company. Mr. Clark has sole voting
and investment power with respect to the shares held
by that company.
PHOTO APPEARS ANN D. MCLAUGHLIN, age 55, is former United States
HERE Secretary of Labor. She was President of the Federal
City Council from 1990 until 1995. She is presently
Chairman of The Aspen Institute and served as Vice
Chairman of The Aspen Institute from 1993 to 1996. Ms.
McLaughlin was President and Chief Executive Officer
of the New American Schools Development Corporation
from July 1992 to 1993. She has been a director of the
Company since January 1991, and is Chairman of the
Nominating Committee and a member of the
Human Resources Committee. Ms. McLaughlin is a
director of AMR Corporation/American Airlines, Inc.,
Donna Karan International Inc., Fannie Mae, General
Motors Corporation, Harman International Industries,
Inc., Host Marriott Corporation, Kellogg Company,
Nordstrom, Inc., Sedgwick Group plc, Union Camp
Corporation and Vulcan Materials Company. She owns 526
shares of the Common Stock of the Company.
PHOTO APPEARS A. THOMAS YOUNG, age 59, is retired Executive Vice
HERE President of Lockheed Martin Corporation. From 1990-
1995, he was President and Chief Operating Officer of
Martin Marietta Corporation. He is a director of The
B.F. Goodrich Company, The Dial Corp., Memotec
Communications, Inc., Science Applications
International Corporation and Salomon Inc. Mr. Young
has been a director of the Company since 1995 and is a
member of the Audit Committee, Chairman's Advisory
Committee and the Finance Committee. He owns 1,000
shares of the Common Stock of the Company.
4
<PAGE>
As of August 29, 1997, Mr. Dennis R. Wraase and Mr. William T. Torgerson,
non-director officers, each of whom is listed in the Summary Compensation
Table, owned 16,654 and 8,300 shares, respectively, and all directors,
nominees, and executive officers as a group, owned 386,548 shares of the
Common Stock of the Company, representing less than 1% of the shares
outstanding.
The Board of Directors held six meetings in 1996. The Company has standing
Audit, Human Resources and Nominating Committees of the Board of Directors.
The Company also has Executive, Finance and Chairman's Advisory Committees of
the Board of Directors.
The Audit Committee, composed entirely of independent, non-employee
directors, held four meetings in 1996. The Committee's duties and
responsibilities include recommending to the Board the engagement of the
independent accountant, approving the plan and scope of the audit and the fee
before the audit begins and, following the audit, reviewing the results with
the independent accountant and its comments on the Company's system of
internal accounting controls. The Committee also reviews with the Company's
General Auditor the plan, scope and results of internal audits and his
comments on the Company's system of internal accounting controls. It further
reviews with management, the independent accountant and the General Auditor
the accounting principles applied in financial reporting and the reports
relating to compliance with the Company's statements of policy relating to
conflicts of interest. The Committee reports its activities to the Board
periodically and makes such recommendations and findings concerning any audit
or related matter as it deems appropriate.
In carrying out these functions, the Audit Committee represents the Board in
discharging its responsibility of oversight, but the existence of the
Committee does not alter the traditional roles and responsibilities of the
Company's management and the independent accountant with respect to the
accounting and control functions and financial statement presentation.
The Nominating Committee, composed entirely of independent, non-employee
directors, held one meeting in 1996. The Committee recommends to the Board
candidates for nomination for election as directors. The Committee will
consider nominees recommended by shareholders upon the receipt, no later than
the deadline for receipt of shareholder proposals, of information concerning
the name, business address, occupation, qualifications and share holdings of
the proposed nominee.
The Human Resources Committee, composed entirely of independent, non-
employee directors, held five meetings in 1996. The Committee recommends to
the Board the annual salary administration program for all exempt employees,
including specific salary recommendations for senior officers and employees,
and administers the executive compensation plans. The Committee also makes
recommendations to the Board with respect to the Company's General Retirement
Plan, other benefit plans, and officer and senior management succession.
Each of the Company's directors, except directors who are employees of the
Company, 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 Chairman of a
committee is paid an additional annual retainer of $3,500. As of August 1,
1997, the Company terminated its Retirement Plan for non-employee directors.
Directors who had completed 10 or more years of Board service received a lump
sum payment of the actuarial present value of a life annuity commencing at age
65, in an amount equal to the annual retainer. Directors who had completed
less than 10 years of service received in a lump sum the actuarial present
value of a reduced annuity benefit based on the actual number of years of
service. The Company also has a Stock Compensation Plan for the Board of
Directors under which directors may elect to receive up to 100% of their
retainers in shares of the Company's Common Stock and a deferred compensation
plan which permits directors to defer annual retainer and meeting fee payments
and the lump sum payments made under the Retirement Plan. Deferred amounts are
credited, at the election of the director, based on the prime rate or a return
on a specified group of funds or a combination of both.
5
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------- LONG-TERM
OTHER ANNUAL INCENTIVE PLAN ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION/1/ PAYOUTS/2/ COMPENSATION/3/,/4/
- --------------------------- ---- -------- -------- --------------- -------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Edward F. Mitchell 1996 $600,000 $263,340 $115,861 $ 79,670 $55,513
Chairman of the Board and 1995 560,000 206,599 96,100 136,201 56,479
Chief Executive Officer 1994 553,333 0 79,716 95,568 58,800
H. Lowell Davis 1996 $418,667 $183,752 $ 72,718 $ 59,015 $38,702
Vice Chairman 1995 412,000 151,998 62,248 103,650 40,388
1994 408,000 0 56,192 72,710 44,354
John M. Derrick, Jr. 1996 $373,333 $152,152 $ 11,672 $ 44,261 $36,867
President 1995 350,000 190,612 10,423 59,236 37,111
1994 333,333 0 9,970 41,546 37,674
Dennis R. Wraase 1996 $222,667 $ 84,350 $ 3,054 $ 21,953 $24,568
Senior Vice President and 1995 203,000 130,642 2,972 38,627 24,455
Chief Financial Officer 1994 190,667 26,693 3,004 27,085 24,609
William T. Torgerson 1996 $210,667 $ 74,300 $ 2,565 $ 0 $23,030
Senior Vice President and 1995 197,667 123,263 2,572 0 22,703
General Counsel 1994 187,000 23,375 2,536 0 22,464
</TABLE>
- --------------------
/1/Other Annual Compensation
Amounts in this column for each year represent above-market earnings on
deferred compensation funded by Company 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 the Company. 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. The
Company 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 the Company under such insurance policies will cover all
premium payments and benefit payments projected under this program, plus a
factor for the use of Company funds.
/2/Long-Term Incentive Plan Payouts
Amounts in this column for 1996 represent the value of the vested long-term
restricted stock granted under the terms of the Company's Executive Restricted
Stock Performance Award Program for the three-year performance cycle ended
December 31, 1995. Under the terms of the plan, fifty percent of the
restricted stock awards for the performance cycle ended December 31, 1995
vested on January 1, 1997 and the remaining fifty percent will vest on January
1, 1998, subject to the participant's continued Company employment. Amounts
shown for 1996, 1995 and 1994 reflect the value of the shares which vested
January 1, 1997, January 1, 1996 and January 1, 1995, respectively, based on
the average of the high and low stock price on the New York Stock Exchange on
December 31, 1996, December 29, 1995 and December 30, 1994, respectively.
/3/Restricted Stock
The number and market value of the non-vested restricted shareholdings at
December 31, 1996 for the five named executive officers are: 3,131 shares or
$79,645 for Mr. Mitchell, 2,319 shares or $58,990 for Mr. Davis, 1,739 shares
or $44,236 for Mr. Derrick, and 863 shares or $21,953 for Mr. Wraase. In the
event of change of control and subsequent termination or diminution of duties,
the balance of the restricted shareholdings becomes vested immediately.
/4/All Other Compensation
Amounts in this column for 1996 consist of (i) Company contributions to the
Savings Plan for Exempt Employees of $7,000 for Messrs. Mitchell, Derrick,
Wraase and Torgerson, respectively, and $7,225 for Mr. Davis, (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 $16,200, $5,496, $7,386, $2,769 and $2,730 for Messrs.
Mitchell, Davis, Derrick, Wraase and Torgerson, respectively, (iii) the term
life insurance portion of life insurance written on a split-dollar basis of
$8,394, $4,979, $1,731, $947 and $963 for Messrs. Mitchell, Davis, Derrick,
Wraase and Torgerson, respectively, and (iv) the interest on employer paid
premiums for split-dollar life insurance of $23,918, $21,002, $20,750, $13,852
and $12,337 for Messrs. Mitchell, Davis, Derrick, Wraase and Torgerson,
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.
6
<PAGE>
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR
OTHER PERIOD THRESHOLD
UNTIL MATURATION MINIMUM NUMBER MAXIMUM
NAME OR PAYOUT NUMBER OF SHARES OF SHARES NUMBER OF SHARES
- ---- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Edward F. Mitchell...... January 1, 2000 0 1,072 8,042
January 1, 2001 0 1,072 8,041
H. Lowell Davis......... January 1, 2000 0 786 5,900
January 1, 2001 0 786 5,900
John M. Derrick, Jr. ... January 1, 2000 0 668 5,012
January 1, 2001 0 668 5,012
Dennis R. Wraase........ January 1, 2000 0 428 3,208
January 1, 2001 0 427 3,207
William T. Torgerson.... January 1, 2000 0 386 2,893
January 1, 2001 0 386 2,892
</TABLE>
The above table reflects the share awards available under the Company's
Executive Restricted Stock Performance Award Program for the three-year
performance cycle beginning January 1, 1996. The Plan provides for the award
of restricted stock based on comparisons of Company performance to the Salomon
Brothers Electric Utilities index. The awards are based on total return to
shareholders over the three-year performance cycle and market-to-book ratios
for the same periods. Each of these two performance measures is given equal
weight. For a participant to receive the maximum award, the Company must have
the highest total return to shareholders and market-to-book ratio as compared
to the companies contained in the Salomon Brothers Electric Utilities index.
Generally, the Company results must be above the median of the companies
contained in the index for a participant to receive any award. Actual grants,
if any, will not be determined until the end of the performance cycle and the
shares earned based on performance will vest in two equal installments on
January 1 of each of the two years commencing one year after the end of the
performance cycle. No dividends are paid on awards until actual grants are
made. Total shares granted will reflect reinvested dividends during the
performance cycle.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
ANNUAL RETIREMENT BENEFITS
-----------------------------------------------------
AVERAGE ANNUAL SALARY YEARS IN PLAN
IN FINAL THREE YEARS -----------------------------------------------------
OF EMPLOYMENT 15 20 25 30 35 40
- --------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
$150,000................. $ 39,000 $ 53,000 $ 66,000 $ 79,000 $ 92,000 $105,000
$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
</TABLE>
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
7
<PAGE>
Compensation Table) for the final three years of employment and years in 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 (as an
operating expense) a retirement supplement to eligible executives designed to
maintain total retirement benefits at a formula level of the Plan. In order to
attract and retain executives, the Company provides supplemental retirement
benefits for executives who retire under the terms of the General Retirement
Plan and are at least 59 years of age, which increase the average salary by
the average of the highest three annual incentive awards out of 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 for
the above-named officers are as follows: Mr. Mitchell, 65 and 40 years of
credit, $826,213; Mr. Derrick, 57 and 36 years of credit, $525,310; Mr. Davis,
64 and 39 years of credit, $578,806; Mr. Wraase, 53 and 28 years of credit,
$301,338; and Mr. Torgerson, 53 and 28 years of credit, $280,710. Annual
benefits at age 65 (including the effect of the Social Security offset) are
illustrated in the table above.
EMPLOYMENT AGREEMENTS
An employment agreement between the Company and Mr. Mitchell provides for
his continued employment as Chief Executive Officer of the Company until the
effective date of the proposed merger with Baltimore Gas and Electric Company
or the termination of the merger agreement at an annual salary determined by
the Board of Directors. The agreement provides for a supplemental retirement
benefit payable to Mr. Mitchell (or his surviving spouse) for a period of not
less than ten years in an amount equal to the excess of 65% of his final
average annual compensation (based upon salary paid or deferred during his
final 12 months of employment and the target annual award during his last year
of employment) over the benefits to which he is entitled under the Company's
General Retirement Plan. The employment agreement also provides for certain
additional spouse benefits, and for the provision by the Company of
supplemental life insurance for Mr. Mitchell following his retirement. If the
proposed merger with Baltimore Gas and Electric Company is completed, Mr.
Mitchell's employment agreement will be superseded by an employment agreement
that he has entered into with Constellation Energy Corporation.
Mr. Davis was employed as Vice Chairman of the Company through March 31,
1997. Under the terms of his employment agreement, Mr. Davis was paid at an
annual rate which was no less than his base salary in effect on August 1,
1995. Upon retirement, Mr. Davis became entitled to amounts due him under the
Company's General Retirement Plan, the Supplemental Benefit Plan, the
Executive Performance Supplemental Retirement Plan, and the Supplemental
Executive Retirement Plan.
Messrs. Derrick, Torgerson and Wraase have entered into employment
agreements with the Company that provide for each executive's employment
through August 1, 2000, and that automatically extend for successive periods
of five years thereafter unless the Company or the executive has given one
year's prior 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 August 1, 1995, and
incentive compensation as determined by the Company's Board 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 with Messrs. Derrick, Torgerson and
Wraase, the executive is entitled to certain benefits if his employment is
terminated prior to the expiration of the initial term of the agreement
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(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, other benefit plans and fringe benefits provided to other
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 a lump sum payment in cash equal to the sum
of (i) the greater of (A) the present value of the executive's annual base
salary (the highest base salary in effect during the three-year period
preceding termination) and annual cash incentive awards (calculated based on
the highest annual incentive target award during the three-year period
preceding termination) through the remainder of the agreement (not to exceed
three years) or (B) two times the executive's annual salary and target annual
incentive award as in effect at the time of termination, (ii) the executive's
annual cash incentive award for the year preceding termination of employment,
if not yet paid, and (iii) a pro rata portion of the executive's annual cash
incentive award for the year in which the executive's employment terminates.
In addition, the executive will be entitled to receive certain supplemental
retirement benefits under existing plans of the Company, the same benefits
that a retiree who has attained age 55 and has completed 30 years of service
would be entitled, and a continuation of premium payments under the Company's
split dollar life insurance policy. If the proposed merger with Baltimore Gas
and Electric Company is completed, Mr. Derrick's employment agreement will be
superseded by an employment agreement that he has entered into with
Constellation Energy Corporation, and Messrs. Torgerson and Wraase's
employment agreements will be assumed by Constellation.
HUMAN RESOURCES COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Human Resources Committee of the Board of Directors is composed entirely
of independent, non-employee directors. The Committee's role includes review
of the performance of elected officers and other executives in connection with
executive compensation programs designed to provide a strong and direct link
between compensation, executive performance and the current and long-term
level of Company performance. The Committee recommends specific officer
salaries to the Board of Directors. The Committee also establishes and
recommends to the Board performance guidelines under the Executive Incentive
Compensation Plan, approves payments made pursuant to that Plan and recommends
the structure of compensation and amounts of awards under the Long-Term
Incentive Plan approved by the shareholders effective July 1, 1986. The
Committee also reviews other elements of compensation and benefits, making
recommendations to the Board as appropriate. The Committee carries out these
responsibilities with assistance from consulting firms and with such input
from the Chief Executive Officer and management as it deems appropriate.
Officer Compensation Philosophy
The Company's compensation philosophy reflects a commitment to attract and
retain key executives with a program which compensates executive officers
competitively with other companies in the industry while rewarding executives
for achieving levels of operational excellence and financial results which
result in growth in shareholder value. The Company's compensation policy is to
provide a total compensation opportunity comparable to the median compensation
levels of the companies in the Salomon Brothers Electric Utilities index. The
relationship between pay and performance is reinforced by aligning the peer
group used for compensation comparison purposes with the same industry peer
group used for purposes of comparing total shareholder return.
The compensation program for officers consists of base salary, annual
incentive and, for senior officers, long-term incentive components. The
combination of these three elements balances short- and long-term business
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performance goals and aligns officer financial rewards with company operating
results and shareholder return. Total compensation for any specific year may,
of course, be above the median for the peer group in the event performance
exceeds goals, or below the median if performance falls short of goals.
Annual incentive awards are earned based on the Company's financial and
operational plans and results, including annual earnings and relative industry
ranking in total return to shareholders. Long-term incentive awards are in the
form of shares of Company stock (Restricted Shares) which are awarded at the
end of each three-year cycle based upon meeting pre-established goals based on
relative shareholder return. Restricted Shares, if any, awarded under the
long-term incentive program will vest on the basis of continued service (with
provision for immediate vesting in the event of death, disability or
retirement). The officer compensation program is structured so that between 36
and 48 percent of the total compensation opportunity is composed of incentive
compensation.
The Omnibus Budget Reconciliation Act of 1993 included a provision limiting
the deductibility of certain executive compensation. For 1996, all
compensation earned by the Company's five highest paid officers was completely
deductible. In the future the Committee will, considering the best interest of
the Company and its shareholders, use its best judgment to continue the
complete tax deductibility of the compensation paid to its officers.
Officer Salaries
The Committee determines base salary ranges for executive officers based
upon competitive pay practices. Officer salaries correspond to approximately
the median of the companies in the Salomon Brothers Electric Utilities index.
The Chief Executive Officer received a 3.7% base salary increase effective May
1, 1994 and no salary increase in 1995. (In the case of Messrs. Mitchell,
Davis and Derrick, the increases from 1994 salaries shown for the year 1995 in
the accompanying Summary Compensation Table result from annualization of
increases which became effective May 1, 1994.) In recognition of the absence
of a salary increase in 1995, the effort of the Chief Executive Officer in the
announced merger with BGE and the Committee's compensation assessment within
the philosophy and framework outlined above, the Chief Executive Officer was
awarded a 10.7% salary increase effective May 1, 1996.
Executive Incentive Compensation Plan
In 1983, the Board of Directors established the Executive Incentive
Compensation Plan for Company officers and senior executives. Under the plan
guidelines, awards for the Chairman, Vice Chairman and President are based
upon the Company's progress in achieving plan goals; awards for other officers
are based on a combination of corporate goals and individual goals established
at the beginning of the year. For awards paid in January 1997 for performance
during 1996, the equally weighted corporate goals were (1) earnings relative
to corporate plan, (2) total return to shareholders in comparison with the
Salomon Brothers Electric Utilities index, and (3) achieving corporate goals
for operating and capital cost containment and customer service.
Application of the plan formula for executives subject to utility earnings
goals resulted in an incentive award level of 115% of the target award level
(compared to maximum award level of 180% of the target); based upon (1)
utility earnings (which exceeded threshold plan awards levels), (2) total
return to shareholders (22nd highest out of 64 companies), and (3) specific
corporate goals (100 percent achieved). The Committee increased the incentive
award level to 130% of target award in recognition of the Company's high
ranking in total return to shareholders. For 1994 awards paid in early 1995
the Committee reduced the award level determined pursuant to the formula by
20% in view of the Company's low rank in total return to shareholders and no
incentive awards were made to the
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Chairman, Vice Chairman and President. For 1995 awards paid in early 1996 the
Committee increased the award level by 20% to reflect the Company's high 1995
ranking in total return to shareholders (4th highest out of the 64 index
companies).
Under the plan guidelines, the 1996 corporate earnings goals for the Chief
Executive Officer were based upon consolidated earnings (rather than utility
earnings), and the award paid to the Chief Executive Officer in January 1997
was based upon 140% of target award level. (The incentive award for the Vice
Chairman was also based upon 140% of target award level.)
Long-Term Incentive Plan
In 1991 the Board of Directors adopted an Executive Restricted Stock
Performance Award Program pursuant to the Long-Term Incentive Plan approved by
the Company's shareholders effective July 1, 1986. The initial three-year
performance period covered the period from 1991 through 1993. At the start of
the cycle, each participant became eligible for the award of Performance
Shares, with the maximum amounts based upon the participant's salary and the
price of Company stock at that date. As previously reported, the initial award
(Cycle 1) under the long-term plan was made in February 1994 and the second
award (Cycle 2) in January 1996. Amounts shown in the Long-Term Incentive Plan
Payout column contained in the Summary Compensation Table for 1994 and 1995
reflect the vesting of 50% of the shares awarded under Cycle 1 for the
performance years 1991 through 1993 (awards were 62% of the total potential)
and amounts for 1996 reflect the vesting of 50% of the shares awarded under
Cycle 2 for the performance years 1992 through 1994 (awards were 30% of the
total potential). For the Chief Executive Officer the award was 10,402 shares
for the 1991 through 1993 performance period and 6,263 shares for the 1992
through 1994 performance cycle. (These restricted stock awards are shares of
common stock subject to limitations on their sale, transfer or pledge until
the expiration of the restriction period determined by the Committee at the
time of the grant.)
The third performance cycle under the Executive Restricted Stock Performance
Award Program covered the three-year period 1994 through 1996. The maximum
shares available for award were determined at the beginning of the cycle,
based upon the year-end 1993 market price of Company stock and each
participant's salary at that date, and provision was made for increasing such
maximum available shares by the addition of shares for the reinvestment of
dividends on Company stock. In January 1997 the Performance Cycle 3 award
formula was applied and awards were made to eligible participants. Pursuant to
the formula, shares awarded were based upon two equally weighted measures of
the Company's relative ranking among the companies comprising the Salomon
Brothers Electric Utilities index over the three-year cycle: (1) total
shareholder return and (2) market-to-book ratio. For the three-year cycle, the
total shareholder return for the Company ranked 36th in shareholder return for
the 64 companies comprising the index, resulting in 30% of the maximum award
for this measure. For the three-year cycle, the Company's average market-to-
book ratio rank was 35th compared to the 64 companies comprising the index,
resulting in 32% of the maximum award for this measurement. As a result,
pursuant to the plan formula, the Chief Executive Officer was awarded 8,208
shares, or 41% of his total award potential of 19,875 shares. Subject to the
participants' continued employment, 50% of the shares earned for the 1994
through 1996 cycle will vest on January 1, 1998 and the remaining 50% will
vest on January 1, 1999. As reported on page 7 herein, a performance cycle
covering the years 1996 through 1998 was approved during 1996 with awards, if
any, to be determined in the Spring of 1999.
HUMAN RESOURCES COMMITTEE
A. James Clark, Chairman
Richard E. Marriott
David O. Maxwell
Ann D. McLaughlin
Peter F. O'Malley
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PERFORMANCE PRESENTATION
The following chart compares PEPCO's five year cumulative total return to
shareholders consisting of the change in stock price and reinvestment of
dividends with the five year cumulative total return on the Salomon Brothers
Electric Utilities index and the Dow Jones Utilities index.
[PERFORMANCE CHART APPEARS HERE]
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
PEPCO $100 $102 $121 $ 91 $139 $145
Salomon Brothers Electrics $100 $106 $118 $104 $138 $138
Dow Jones Utilities $100 $102 $112 $ 95 $124 $125
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors of the Company appointed Price Waterhouse LLP as
Independent Public Accountants for the Company for the year 1996 and, upon
recommendation of the Audit Committee of the Board, has reappointed the firm
for 1997. A representative of Price Waterhouse LLP is expected to attend the
Annual Meeting and will be given the opportunity to make a statement and to
respond to appropriate questions.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Anthony S. Macerollo, Vice President, Corporate Administration and Services,
purchased 152 shares of Common Stock of the Company in March 1996 and
inadvertently failed to file a Form 4 by the April 10, 1996 deadline. He filed
the form on May 9, 1996.
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2. SHAREHOLDER PROPOSAL
THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST ITEM 2.
Mrs. Evelyn Y. Davis, Watergate Office Building, Suite 215, 2600 Virginia
Avenue, N. W., Washington, D.C. 20037, who on the Record Date was the record
holder of 100 shares of the Company's Common Stock, has notified the Company
of her intention to present the following proposal for action at the meeting:
"RESOLVED: That the shareholders of PEPCO recommend that the Board of
Directors take the necessary steps to reinstate the election of directors
ANNUALLY, instead of the staggered system which was recently adopted."
The following statement has been supplied by the shareholder submitting this
proposal:
"REASONS: Until recently, directors of PEPCO were elected annually by all
shareholders."
"The great majority of New York Stock Exchange listed corporations elect all
their directors each year.
"This insures that ALL directors will be more accountable to ALL
shareholders each year and to a certain extent prevents the self-perpetuation
of the Board.
"Last year the owners of 15,254,044 shares, representing 21.3% of shares
voting, voted FOR this proposal.
"If you AGREE, please mark your proxy FOR this resolution."
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE AGAINST THE ADOPTION OF
THIS PROPOSAL, SET FORTH AS ITEM 2 ON THE PROXY.
The Board of Directors believes that this proposal is not in the best
interests of the Company and its shareholders. The Board believes that the
present system, providing for the election of directors for three-year terms
on a staggered basis rather than one-year terms, enhances the likelihood of
continuity and stability in the composition of and in the policies formulated
by the Company's Board of Directors. The Board also believes that this, in
turn, permits it to represent more effectively the interests of all
shareholders.
In order to be adopted, the shareholder proposal requires the vote of the
holders of a majority of the stock present and entitled to vote at a meeting
of shareholders at which a quorum is present. Abstentions and broker non-votes
will be deemed present and entitled to vote but will not be counted as a vote
either for or against this proposal. If no voting instructions are given, a
properly executed proxy will be voted against the shareholder proposal.
RECEIPT OF SHAREHOLDER PROPOSALS
Shareholder proposals must be received by the Company by November 3, 1997
for inclusion in the proxy material for next year's Annual Meeting.
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3. OTHER MATTERS WHICH MAY COME BEFORE THE MEETING
The Board of Directors knows of no other matters which are likely to be
brought before the meeting. However, if any other matter should properly come
before the meeting, it is the intention of the individuals named in the
enclosed proxy to exercise the power conferred by the proxy to vote it in
accordance with their judgment on such matter.
----------------
The Company will bear the cost of solicitation of proxies. In addition to
the use of the mails, proxies may be solicited by officers, directors and
regular employees of the Company personally, by telephone or by facsimile. The
Company will reimburse banks and brokers for certain costs incurred in
forwarding proxy materials to beneficial owners.
[LOGO OF PRINTED ON RECYCLED PAPER
APPEARS HERE]
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POTOMAC ELECTRIC POWER COMPANY
1900 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20068
[LOGO OF PEPCO
APPEARS HERE] ANNUAL MEETING OF SHAREHOLDERS -- OCTOBER 23, 1997 PROXY
The undersigned hereby appoints EDWARD F. MITCHELL, JOHN M. DERRICK, JR. and
DENNIS R. WRAASE and each of them, proxies of the undersigned, with power of
substitution, to attend the above Annual Meeting to be held on Thursday,
October 23, 1997 at 10 a.m. at the Sheraton Washington Hotel, 2660 Woodley
Road, N.W., Washington, D.C., and all adjournments thereof, and thereat to vote
all shares of Common Stock of the Company that the undersigned would be
entitled to vote if personally present on matters set forth in the Proxy
Statement and upon such other matters as may properly come before the meeting.
UNLESS INDICATED TO THE CONTRARY, THIS PROXY SHALL BE DEEMED TO GRANT AUTHORITY
TO VOTE FOR ITEM 1 AND AGAINST ITEM 2.
--- -------
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF POTOMAC ELECTRIC POWER COMPANY
CONTINUED ON REVERSE SIDE
<PAGE>
[PEPCO LOGO APPEARS HERE]
PROXY
-------------------------------------------------------------------------
1.ELECTION OF DIRECTORS
FOR all nominees listed below WITHHOLD AUTHORITY
(except as marked to the contrary to vote for all nominees
below)[_] listed below[_]
(TO WITHHOLD AUTHORITY FOR ANY INDIVIDUAL NOMINEE STRIKE A LINE THROUGH
THE NOMINEE'S NAME IN THE LIST BELOW.)
Four to serve for three years
Richard E. Marriott David O. Maxwell Floretta D. McKenzie
Edward F. Mitchell
-------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" ITEM 2 BELOW
2. Shareholder proposal relating to FOR AGAINST ABSTAIN
the election of Directors............ [_] [_] [_]
Sign here X (L.S.)
as name ------------------------------------
appears X (L.S.) Date , 1997
above ------------------------------------ ------
Attorneys, executors, administrators, trustees and corporate officials
should indicate the capacity in which they are signing. Shares held in
the Shareholder Dividend Reinvestment Plan are voted on this Proxy.
