Pension And Other Postretirement Benefits

9 Months Ended

Sep. 30, 2011

Pension And Other Postretirement Benefits

(8) PENSION AND OTHER POSTRETIREMENT BENEFITS

The following Pepco Holdings information is for the three months ended September 30, 2011 and 2010:

	Pension Benefits						Other  Postretirement Benefits
	2011			2010			2011			2010
	(millions of dollars)
Service cost	$	10		$	8		$	1		$	1
Interest cost		27			28			10			10
Expected return on plan assets		(32	)		(30	)		(5	)		(4	)
Amortization of prior service cost		—			—			(1	)		(1	)
Amortization of net actuarial loss		11			11			3			3
Net periodic benefit cost	$	16		$	17		$	8		$	9

The following Pepco Holdings information is for the nine months ended September 30, 2011 and 2010:

	Pension Benefits						Other  Postretirement Benefits
	2011			2010			2011			2010
	(millions of dollars)
Service cost	$	27		$	26		$	4		$	4
Interest cost		80			83			28			29
Expected return on plan assets		(96	)		(88	)		(14	)		(12	)
Amortization of prior service cost		(1	)		—			(3	)		(3	)
Amortization of net actuarial loss		35			32			9			9
Plan amendment		—			1			—			—
Termination benefits		—			—			1			5
Net periodic benefit cost	$	45		$	54		$	25		$	32

Pension and Other Postretirement Benefits

Net periodic benefit cost related to continuing operations is included in "Other operation and maintenance" expense, net of the portion of the net periodic benefit cost that is capitalized as part of the cost of labor for internal construction projects. PHI's pension and other postretirement net periodic benefits cost for the three and nine months ended September 30, 2010, includes one-time charges in the aggregate amount of $6 million related to the sale of Conectiv Energy. After intercompany allocations, the three utility subsidiaries are responsible for substantially all of the total PHI net periodic pension and other postretirement benefit costs related to continuing operations.

Pension Contributions

PHI's funding policy with regard to PHI's non-contributory retirement plan (the PHI Retirement Plan) is to maintain a funding level that is at least equal to the funding target level under the Pension Protection Act of 2006. Under the Pension Protection Act, if a plan incurs a funding shortfall in the preceding plan year, there can be required minimum quarterly contributions in the current and following plan years. Although PHI had no minimum funding requirement under the Pension Protection Act guidelines, Pepco, ACE and DPL, in the first quarter of 2011, made discretionary tax-deductible contributions to the PHI Retirement Plan in the amounts of $40 million, $30 million and $40 million, respectively. The $110 million in contributions brought the PHI Retirement Plan assets to the funding target level for 2011 under the Pension Protection Act. During 2010, PHI Service Company made discretionary tax-deductible contributions totaling $100 million to the PHI Retirement Plan, which brought plan assets to the funding target level for 2010 under the Pension Protection Act. Pepco, ACE and DPL did not make contributions to the PHI Retirement Plan in 2010.

Investment Policies and Strategies

In PHI's December 31, 2010 Form 10-K, PHI reported asset allocations for the PHI Retirement Plan at December 31, 2010 of 53% in equity investments, 40% in fixed income investments and 7% in Other investments (real estate, private equity).

In the first quarter of 2011, PHI modified its pension investment policy and strategy to reduce the effects of future volatility of the fair value of its pension assets relative to its pension liabilities. The new strategy was implemented during the second quarter of 2011 and is commonly referred to as a Liability-Driven Investment (LDI) strategy. Under the new LDI strategy, the plan's allocation to fixed income investments, primarily high quality, longer-maturity fixed income securities was increased, with a reduction in the allocation to equity investments. PHI anticipates further increases in the allocation to fixed income investments, with a corresponding reduction in the allocation to equity investments, as the funded status of its plan increases.

Benefit Plan Modifications

On July 28, 2011, PHI's Board of Directors approved revisions to certain of PHI's existing benefit programs, including the PHI Retirement Plan. The changes to the PHI Retirement Plan were effected by PHI in order to establish a more unified approach to PHI's retirement programs and to further align the benefits offered under PHI's retirement programs. The changes to the PHI Retirement Plan will be effective on or after January 1, 2012 and will affect the retirement benefits payable to approximately 750 of PHI's employees. On September 22, 2011, the PHI Administrative Board approved another amendment revising the effective date to July 1, 2011. All full time employees of PHI and certain subsidiaries are eligible to participate in the PHI Retirement Plan. Retirement benefits for all other employees remain unchanged.

On July 28, 2011, PHI's Board also approved a new, non-tax-qualified Supplemental Executive Retirement Plan (SERP) which will replace PHI's two pre-existing supplemental retirement plans, effective August 1, 2011. As of the effective date of the new SERP, the Conectiv SERP and the PHI Combined SERP were closed to new participants. The establishment of the new SERP is consistent with PHI's efforts to align retirement benefits for PHI and its subsidiaries with current market practices and to provide similarly situated participants with retirement benefits that are the same or similar in value as compared to the benefits provided under the prior SERPs.

The benefit plan modifications did not have a material impact on PHI's overall financial condition, results of operations, or cash flows.

Potomac Electric Power Co [Member]

Pension And Other Postretirement Benefits

(6) PENSION AND OTHER POSTRETIREMENT BENEFITS

Pepco accounts for its participation in its parent's single-employer plans, the Pepco Holdings, Inc. Retirement Plan (the PHI Retirement Plan) and the Pepco Holdings, Inc. Welfare Plan for Retirees, as participation in multiemployer plans. PHI's pension and other postretirement net periodic benefit cost for the three months ended September 30, 2011 and 2010, before intercompany allocations from the PHI Service Company, were $24 million and $26 million, respectively. Pepco's allocated share was $15 million and $10 million, respectively, for the three months ended September 30, 2011 and 2010. PHI's pension and other postretirement net periodic benefit cost for the nine months ended September 30, 2011 and 2010, before intercompany allocations from the PHI Service Company, were $70 million and $86 million, respectively. Pepco's allocated share was $32 million and $30 million, respectively, for the nine months ended September 30, 2011 and 2010.

On March 14, 2011, Pepco made a discretionary tax-deductible contribution to the non-contributory PHI Retirement Plan of $40 million. Pepco did not make a contribution to the PHI Retirement Plan in 2010.

Delmarva Power & Light Co/De [Member]

Pension And Other Postretirement Benefits

(7) PENSION AND OTHER POSTRETIREMENT BENEFITS

DPL accounts for its participation in its parent's single-employer plans, the Pepco Holdings, Inc. Retirement Plan (the PHI Retirement Plan) and the Pepco Holdings, Inc. Welfare Plan for Retirees, as participation in multiemployer plans. PHI's pension and other postretirement net periodic benefit cost for the three months ended September 30, 2011 and 2010, before intercompany allocations from the PHI Service Company, were $24 million and $26 million, respectively. DPL's allocated share was $6 million and $7 million, respectively, for the three months ended September 30, 2011 and 2010. PHI's pension and other postretirement net periodic benefit cost for the nine months ended September 30, 2011 and 2010, before intercompany allocations from the PHI Service Company, were $70 million and $86 million, respectively. DPL's allocated share was $18 million and $21 million, respectively, for the nine months ended September 30, 2011 and 2010.

On March 14, 2011, DPL made a discretionary tax-deductible contribution to the non-contributory PHI Retirement Plan of $40 million. DPL did not make a contribution to the PHI Retirement Plan in 2010.

Atlantic City Electric Co [Member]

Pension And Other Postretirement Benefits

(6) PENSION AND OTHER POSTRETIREMENT BENEFITS

ACE accounts for its participation in its parent's single-employer plans, the Pepco Holdings, Inc. Retirement Plan (the PHI Retirement Plan) and the Pepco Holdings, Inc. Welfare Plan for Retirees, as participation in multiemployer plans. PHI's pension and other postretirement net periodic benefit cost for the three months ended September 30, 2011 and 2010, before intercompany allocations from the PHI Service Company, were $24 million and $26 million, respectively. ACE's allocated share was $5 million and $6 million, respectively, for the three months ended September 30, 2011 and 2010. PHI's pension and other postretirement net periodic benefit cost for the nine months ended September 30, 2011 and 2010, before intercompany allocations from the PHI Service Company, were $70 million and $86 million, respectively. ACE's allocated share was $15 million and $17 million, respectively, for the nine months ended September 30, 2011 and 2010.

On March 14, 2011, ACE made a discretionary tax-deductible contribution to the non-contributory PHI Retirement Plan of $30 million. ACE did not make a contribution to the PHI Retirement Plan in 2010.