<PAGE 1>
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 Rule 14a-11(c) or Rule 14a-12
COMMONWEALTH ENERGY SYSTEM
(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):
[ x ] No fee required
[ ] 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 transactions 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:
_____________________________________________
<PAGE 2>
Commonwealth
Energy System
Notice of 1997
Annual Meeting and
Proxy Statement
Please sign and return your
proxy promptly
<PAGE 3>
COMMONWEALTH ENERGY SYSTEM
Cambridge, Massachusetts
Notice of Annual Meeting of Shareholders
May 1, 1997
To the Shareholders of
COMMONWEALTH ENERGY SYSTEM:
Notice is hereby given that the Annual Meeting of Shareholders of
Commonwealth Energy System will be held at the office of the System, One Main
Street, P.O. Box 9150, Cambridge, Massachusetts 02142-9150, on Thursday,
May 1, 1997, at 10:30 o'clock A.M., Eastern Daylight Time, for the following
purposes:
1. To elect three Trustees to hold office for a three-year term and
until the election and qualification of their respective
successors.
2. To transact such other business as may properly come before the
meeting or any adjournment or adjournments thereof.
Common Shareholders of record at the close of business on March 17, 1997
are entitled to notice of, and to vote at, the meeting.
By order of the Trustees,
Michael P. Sullivan
Vice President, Secretary
and General Counsel
March 28, 1997
IMPORTANT
We cordially invite you to attend the Annual Meeting of Shareholders,
but IF YOU DO NOT EXPECT TO BE PRESENT, PLEASE MAIL YOUR PROXY IN ORDER THAT
THE PRESENCE OF A QUORUM MAY BE ASSURED. Because our shares are widely
distributed over a large number of holders, it is both necessary and desirable
that all Shareholders send in their proxies. Failure to secure a quorum on
the date set would necessitate an adjournment, which would cause the System
considerable and needless expense. To avoid this, please SIGN AND DATE the
accompanying proxy and mail it promptly in the enclosed envelope to
Commonwealth Energy System, P.O. Box 9150, Cambridge, Massachusetts 02142-
9150.
<PAGE 4>
PROXY STATEMENT
This statement is furnished in connection with the solicitation of
proxies by the Board of Trustees of Commonwealth Energy System (hereinafter
called the "System") to be used at the Annual Meeting of Shareholders of the
System to be held on Thursday, May 1, 1997, at the principal executive office
of the System, One Main Street, P.O. Box 9150, Cambridge, Massachusetts 02142-
9150, of which due notice has been given in accordance with the System's
Declaration of Trust dated December 31, 1926, as amended. If the enclosed
form of proxy is executed and returned, it may nevertheless be revoked at any
time insofar as it has not been exercised. A properly executed and returned
proxy will be voted in accordance with the directions contained thereon.
Abstentions shall be voted neither "for" nor "against," but shall be counted
in the determination of a quorum. Broker non-votes shall not be counted
either in calculating the number of shares present for the purpose of
determination of a quorum or for the purpose of determining whether a matter
has received the required number of votes. The giving of a later-dated proxy
revokes all proxies previously given. The approximate date on which this
Proxy Statement and the accompanying proxy card will first be mailed to
Shareholders is March 28, 1997.
FINANCIAL STATEMENTS
The audited financial statements of Commonwealth Energy System and
Subsidiary Companies, which include comparative Balance Sheets as of
December 31, 1996 and 1995, Statements of Income and Statements of Cash Flows
for the three years ended December 31, 1996 and the Report of Independent
Public Accountants, are set forth in the Annual Report to Shareholders.
VOTING SECURITIES
Each Common Share is entitled to one vote. Only Shareholders of record
at the close of business on March 17, 1997 are qualified to vote at the
meeting. There were outstanding as of the record date 21,561,282 Common
Shares.
The Employees Savings Plan of Commonwealth Energy System and Subsidiary
Companies owned beneficially 3,178,045 Common Shares representing 14.7% of the
outstanding Common Shares as of March 17, 1997. Members of the Plan are
entitled to give voting instructions with respect to their interests.
OWNERSHIP BY MANAGEMENT OF VOTING SECURITIES
The following table shows the beneficial ownership, reported to the
System as of March 17, 1997, of Common Shares of the System owned by the Chief
Executive Officer and the four other most highly compensated Executive
Officers and, as a group, all Trustees and Executive Officers of the System.
Total
Common Percent of
Name Shares (1) Class
William G. Poist 19,608 0.1%
Russell D. Wright 11,772 0.1%
James D. Rappoli 6,577 0.1%
Leonard R. Devanna 6,478 0.1%
Michael P. Sullivan 6,315 0.1%
All Trustees and Executive Officers
as a group (14 persons) 73,732 0.3%
<PAGE 5>
(1) Beneficial ownership set forth in this Proxy Statement includes, where
applicable, shares with respect to which voting or investment power is
attributed to an Executive Officer or Trustee because of joint or
fiduciary ownership of the shares or relationship of the Executive Officer
or Trustee to the record owner, such as a spouse, together with shares
held under the Employees Savings Plan of Commonwealth Energy System and
Subsidiary Companies.
MATTERS TO BE BROUGHT BEFORE THE MEETING
1-ELECTION OF TRUSTEES
Three Trustees will be elected at the Annual Meeting of Shareholders to
hold office for the ensuing three years in accordance with the Declaration of
Trust, which provides for staggered terms of Trustees of three years each.
The three Trustees elected at this meeting will hold office for a three-year
term and until the election and qualification of their respective successors.
Under the terms of the Declaration of Trust, Trustees are required to be
elected by a plurality vote of the Shareholders.
The Shares represented by the enclosed form of proxy will be voted, and
the persons named in such form of proxy will, unless otherwise directed in the
proxy, vote shares represented by proxies received for the election of the
following nominees:
Kevin C. Bryant
Franklin M. Hundley
Gerald L. Wilson
Of the three nominees, Mr. Hundley and Dr. Wilson are presently
Trustees. Mr. Bryant was nominated by the Board on February 27, 1997 to fill
the position which will be occasioned by the retirement of Mr. Henry
Dormitzer, who is retiring from the Board of Trustees at the conclusion of his
term effective May 1, 1997.
It is not contemplated that any of the three nominees will be unable to
serve. Should any of the nominees be unable to serve, your proxy will be
voted for the election of a nominee acceptable to the remaining Trustees.
INFORMATION CONCERNING NOMINEES AND TRUSTEES
Common Shares
Year First Beneficially
Became a Owned as of
Name, Principal Occupation and Term of Office Trustee Age March 17, 1997
KEVIN C. BRYANT, Regional President,
BankBoston - Southeastern Region,
Fall River, Massachusetts
(NOMINEE)........................... - 36 200
(C) SHELDON A. BUCKLER, Chairman of the Board
of Commonwealth Energy System; Retired
Vice Chairman of the Board and a
Director, Polaroid Corporation,
Cambridge, Massachusetts (Manufacturer
of photographic equipment and supplies);
Director, Aseco Corp.; Cerion Technologies,
Inc.; Nashua Corporation; Parlex Corp.
and Spectrum Information Technologies, Inc.
TERM EXPIRES IN 1998 ............... (1991) 65 4,432
<PAGE 6>
INFORMATION CONCERNING NOMINEES AND TRUSTEES
Common Shares
Year First Beneficially
Became a Owned as of
Name, Principal Occupation and Term of Office Trustee Age March 17, 1997
(A) PETER H. CRESSY, Chancellor, University of
(E) Massachusetts Dartmouth, North Dartmouth,
Massachusetts; Retired Rear Admiral,
United States Navy
TERM EXPIRES IN 1999 ............... (1994) 55 228
(A) BETTY L. FRANCIS, Executive Vice President
(D) and Chief Credit Officer, HomeSide
Lending, Inc., Jacksonville, Florida
TERM EXPIRES IN 1998 ................... (1991) 50 200
(C) FRANKLIN M. HUNDLEY, Member and a Managing
(D) Director, Rich, May, Bilodeau & Flaherty,
P.C., Boston, Massachusetts (Attorneys);
Director, The Berkshire Gas Company
TERM EXPIRES IN 1997 (NOMINEE)......... (1985) 62 5,056
(B) WILLIAM J. O'BRIEN, Partner, Centre For
(C) Generative Leadership L.L.C., Hamilton,
Massachusetts (Consulting); Retired
President and CEO, The Hanover Insurance
Company
TERM EXPIRES IN 1999 .................. (1994) 64 3,500
WILLIAM G. POIST, President and Chief
Executive Officer of Commonwealth Energy
System and Chairman, Chief Executive Officer
and a Director of its subsidiary companies
TERM EXPIRES IN 1999 ................... (1992) 63 19,608
(B) MICHAEL C. RUETTGERS, President, Chief
(E) Executive Officer and a Director, EMC
Corporation, Hopkinton, Massachusetts
(Data storage technology); Director,
CrossComm Corporation
TERM EXPIRES IN 1998 ................... (1995) 54 1,000
(B) GERALD L. WILSON, Vannevar Bush Professor of
(E) Engineering, Massachusetts Institute of
Technology, Cambridge, Massachusetts;
Director, Analogic Corp. and Aseco Corp.
TERM EXPIRES IN 1997 (NOMINEE)......... (1985) 57 1,304
Each of the persons named above has held his or her present position (or
another executive position with the same employer) for more than the past five
years except for Dr. Wilson, who served as Vice President-Corporate Technology
and Manufacturing at Carrier Corporation during 1991-1992 while on a leave of
absence from Massachusetts Institute of Technology.
During 1996, fees of $329,819 were incurred for legal services rendered
by the firm of Rich, May, Bilodeau & Flaherty, P.C., of which Mr. Hundley is a
Member and a Managing Director. The firm has been employed in the last fiscal
year and the current fiscal year.
Each Trustee, including nominees, owned beneficially less than one-third
of one percent of the outstanding Common Shares.
- - -------------------------
(A) Member of Audit Committee.
(B) Member of Executive Compensation Committee.
(C) Member of Nominating Committee.
(D) Member of Benefit Review Committee.
(E) Member of Strategic Planning Committee.
<PAGE 7>
COMPENSATION OF EXECUTIVE OFFICERS DURING THE YEAR 1996
The following table shows compensation paid by the System and its
subsidiaries to the System's President and Chief Executive Officer and the
four other highest paid Executive Officers of the System whose total
compensation in 1996 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Long-
Options Term
Other Restr- /Stock Incen- All
Annual icted Apprec- tive Other
Compen- Stock iation Plan Compen-
Name and Salary sation Awards Rights (LTIP) sation
Principal Position Year (1) Bonus (2) (3) (SARS) Payouts (4)
William G. Poist 1996 $380,000 $142,142 - $160,000 - - $15,204
President and Chief 1995 350,000 95,645 - - - - 14,004
Executive Officer of 1994 320,000 98,721 - - - - 12,804
the System and Chair-
man and Chief Exec-
utive Officer of its
subsidiary companies
Russell D. Wright 1996 $250,000 $ 97,427 - $100,000 - - $10,020
President and Chief 1995 231,667 66,060 - - - - 9,269
Operating Officer 1994 215,897 60,964 - - - - 8,400
of Cambridge
Electric Light
Company, Canal
Electric Company,
COM/Energy Steam
Company and
Commonwealth
Electric Company
Kenneth M. Margossian(5)1996 $209,330 $ 81,182 - - - - $ 8,375
President and 1995 194,583 56,040 - - - - 7,786
Chief Operating 1994 179,917 52,005 - - - - 7,140
Officer of Common-
wealth Gas Company
and Hopkinton LNG Corp.
James D. Rappoli 1996 $178,167 $60,740 - $ 54,800 - - $ 7,126
Financial Vice 1995 164,583 46,624 - - - - 6,586
President and 1994 151,686 43,196 - - - - 5,880
Treasurer of the
System and its
subsidiary companies
<PAGE 8>
SUMMARY COMPENSATION TABLE (CONT'D)
Long-Term Compensation
Annual Compensation Awards Payouts
Long-
Options Term
Other Restr- /Stock Incen- All
Annual icted Apprec- tive Other
Compen- Stock iation Plan Compen-
Name and Salary sation Awards Rights (LTIP) sation
Principal Position Year (1) Bonus (2) (3) (SARS) Payouts (4)
Leonard R. Devanna 1996 $168,000 $ 56,799 - $ 55,200 - - $ 8,398
President and 1995 154,250 45,511 - - - - 7,714
Chief Operating 1994 142,166 41,745 - - - - 5,912
Officer of
COM/Energy Enterprises,
Inc. and COM/Energy
Resources, Inc.
- - --------------------
<FN>
(1) The amounts in this column represent the aggregate total of cash
compensation received and compensation deferred by the above-named
individuals. Compensation is deferred pursuant to the provisions of the
Employees Savings Plan and the Executive Salary Continuation and Excess
Benefit Plan of Commonwealth Energy System and Subsidiary Companies.
(2) The dollar value of perquisites and other personal benefits, securities
or property totalling either $50,000 or 10% of total annual salary and
bonus, together with various other earnings, amounts reimbursed for the
payment of taxes, and the dollar value of any stock discounts not
generally available are required to be disclosed in this column. In
1996, there were no such perquisites, earnings, reimbursements or
discounts paid or made.
(3) The amounts in this column represent the value of the restricted stock
award, which was calculated by multiplying the average closing market
price of the System's Common Shares during the first week of February,
1997 (the time of grant) by the number of Common Shares awarded. The
restrictions on these shares shall lapse three years from the date of
grant provided that the individual is still in the employ of the System.
Dividends are paid on the restricted Common Shares to the same extent as
they are paid on the System's Common Shares. The aggregate number of
restricted Common Share holdings for the above-named Executive Officers
as of March 1, 1997, is 15,563 Common Shares, having an aggregate value
of $342,386.
(4) The amounts in this column represent the aggregate contributions by the
System and certain subsidiary companies during 1996 on behalf of the
above-named individuals to the Employees Savings Plan and the Executive
Salary Continuation and Excess Benefit Plan of Commonwealth Energy
System and Subsidiary Companies. The Employees Savings Plan of
Commonwealth Energy System and Subsidiary Companies is a defined
contribution plan. The Plan incorporates salary deferral provisions
pursuant to Section 401(k) of the Internal Revenue Code for all
employees who have elected to participate on that basis. The Executive
Salary Continuation and Excess Benefit Plan of Commonwealth Energy
System and Subsidiary Companies is a defined contribution/defined
benefit plan. Unlike the Employees Savings Plan, this Plan is not a
qualified plan under Section 401(a) of the Internal Revenue Code. The
Plan was established to provide an additional benefit to eligible
participants in the Employees Savings Plan whose benefit under that Plan
would be curtailed by limits in effect under the Internal Revenue Code
for qualified plans. Of the amounts set forth in the "All Other
Compensation" column, $6,335, $4,860, $4,775, $2,376 and $2,968
<PAGE 9>
represent the contributions made on behalf of Messrs. Poist, Wright,
Margossian, Rappoli and Devanna, respectively, by the Employees Savings
Plan. Contributions made on behalf of Messrs. Poist, Wright,
Margossian, Rappoli and Devanna by the Executive Salary Continuation and
Excess Benefit Plan in 1996 equalled $8,869, $5,160, $3,600, $4,750 and
$5,430, respectively.
(5) Mr. Margossian resigned as President and Chief Operating Officer of
Commonwealth Gas Company and Hopkinton LNG Corp. effective February 6,
1997.
<PAGE 10>
PENSION PLAN TABLE
The following table shows annual retirement benefits payable to
employees, including Executive Officers, upon retirement at age 65, in various
compensation and years of service classifications, assuming the election of a
retirement allowance payable as a life annuity from the Pension Plan for
Employees of Commonwealth Energy System and Subsidiary Companies and the
Executive Salary Continuation and Excess Benefit Plan of Commonwealth Energy
System and Subsidiary Companies, as of December 31, 1996.
Highest Annual
Consecutive 3-Year
Average Base
Salary of Last Annual Benefit for Years of Service (1)
10 Years 10 Years 15 Years 20 Years 25 Years 30 Years 35 Years
$ 90,000 .... $15,722 $23,583 $ 31,444 $ 39,306 $ 47,167 $ 51,278
120,000 .... 21,222 31,833 42,444 53,056 63,667 69,278
150,000 .... 26,722 40,083 53,444 66,806 80,167 87,278
180,000 .... 32,222 48,333 64,445 80,555 96,667 105,278
210,000 .... 37,722 56,583 75,445 94,305 113,167 123,278
240,000 .... 43,222 64,833 86,445 108,055 129,667 141,278
270,000 .... 48,722 73,083 97,445 121,805 146,167 159,278
300,000 .... 54,222 81,333 108,445 135,555 162,667 177,278
330,000 .... 59,722 89,583 119,445 149,305 179,167 195,278
360,000 .... 65,222 97,833 130,445 163,055 195,667 213,278
390,000 .... 70,722 106,083 141,445 176,805 212,167 231,278
420,000 .... 76,222 114,333 152,445 190,555 228,667 249,278
450,000 .... 81,722 122,583 163,445 204,305 245,167 267,278
- - -------------
<FN>
(1) Federal law places certain limits on the amount of benefits which can be
paid from qualified pension plans. Payments made by the System in
excess of the applicable limitations are made pursuant to the terms of
the Executive Salary Continuation and Excess Benefit Plan of
Commonwealth Energy System and Subsidiary Companies. For 1996, the
maximum annual compensation limit under the Pension Plan for Employees
of Commonwealth Energy System and Subsidiary Companies was $150,000, and
the maximum annual benefit under that Plan was $120,000.
The Pension Plan is a non-contributory defined benefit plan. The Plan
is a final average earnings type plan under which benefits reflect the
employee's years of credited service. The employee receives the higher of
either an integrated or non-integrated formula to realize the maximum
retirement benefit applicable to his or her employment history. Both of the
formulae are based on the average of the three highest consecutive January 1
base salaries during the ten-year period preceding the employee's retirement
or termination. Retirement benefits are available to employees on or after
age fifty-five provided the sum of their age and years of service is at least
seventy-five. Messrs. Poist, Wright, Margossian, Rappoli and Devanna have 32,
29, 27, 22 and 15 credited years of service respectively. For the purposes of
calculating the annual retirement benefits of Messrs. Poist, Wright,
Margossian, Rappoli and Devanna pursuant to the Plan, only the amounts set
forth in the summary compensation table as "Salary" are utilized to determine
each Executive Officer's three highest consecutive January 1 base salaries
during the ten-year period preceding the Executive Officer's retirement or
termination.
Each Executive Officer of the System has elected certain pre-retirement
death benefits and supplemental retirement benefits in exchange for waiving
certain standard life insurance benefits (in excess of $50,000), and the
survivor income benefits generally available to all eligible employees. The
alternative program for Executive Officers provides a pre-retirement death
benefit of either: (i) a lump-sum payment of three times annual base salary;
or (ii) fifty percent of monthly base salary for one hundred and eighty
months. The supplemental retirement benefit provides that an Executive
Officer may retire after the attainment of age fifty-five and completion of
ten years of service. Normal retirement at age sixty-five provides an annual
<PAGE 11>
payment equal to thirty-five percent of final base salary per year for life or
for a period of one hundred and eighty months, whichever is longer. Benefits
are reduced for retirement prior to age sixty-five. The supplemental
retirement benefits are in addition to the amounts shown in the table above
and are not subject to limitation. If termination of employment occurs
following a change in control of the System after the Executive Officer's
completion of ten years of service with the System but before the attainment
of age fifty-five, the Executive Officer shall be entitled to receive upon
attainment of age fifty-five a retirement benefit equal to the amounts that
would have been payable had the Executive Officer remained in the employment
of the System until the date of the Executive Officer's fifty-fifth birthday
and retired on that date. Should the employment of the Executive Officer
terminate for any other reason (other than death) and before completion of ten
years of service and attainment of age fifty-five, there are no benefits
payable under this alternative program for Executive Officers.
The System has entered into Severance Agreements with its Executive
Officers, including Messrs. Poist, Wright, Rappoli and Devanna. The Severance
Agreements provide that in the event of termination of employment following a
change of control of the System, as defined in the Severance Agreements, the
System shall pay to the Executive Officer a lump sum severance benefit
together with certain other benefits. The severance benefit payable to
Mr. Poist is up to three times his annual salary and annual incentive
compensation, and to Messrs. Wright, Devanna and Rappoli two times annual
salary and annual incentive compensation. No benefit would be paid if the
effect of any payment would be to provide benefits above those normally
payable beyond age sixty-five.
<PAGE 12>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Executive Compensation Committee of the Board of Trustees (the
"Committee") is composed of three independent, non-employee Trustees. The
Committee reviews and approves compensation levels for the System's Chief
Executive Officer and oversees the System's executive compensation programs
affecting all Executive Officers. These programs have been designed in order
to attract, retain, motivate and reward those individuals who are most
responsible for the System's growth and profitability. The programs reflect
the Committee's objectives of tying a substantial portion of each Executive
Officer's compensation to both the System's and the individual's success in
meeting designated goals and objectives and in realizing increases in total
shareholder return.
Compensation for Executive Officers consists of base salary and awards
of cash incentive compensation under the System's Annual Incentive Plan and
1996-1997 Strategic Plan Compensation Program. Long-term incentive awards in
the form of restricted stock awards of Common Shares are made under the terms
of the System's Long Term Incentive Plan. Executive Officers also participate
in the Pension Plan and the Employees Savings Plan and receive benefits under
medical and other benefit plans which are available to employees generally.
Base Salary
In setting the base salaries for the Chief Executive Officer and all
other Executive Officers, the Committee evaluates the general responsibilities
of the particular position and the individual's experience in that position
and also applies the data and criteria described in the next paragraph. The
Chief Executive Officer's base salary target is designed generally to match
the market median for the utility reference group described in the next
paragraph. The Committee adjusts the Chief Executive Officer's salary in
relation to the salary range target through the evaluation of the same
objective criteria used to determine the Chief Executive Officer's annual
incentive award set forth below. Less emphasis is placed on base salary
adjustments than on incentive compensation, consistent with the Committee's
objectives of placing increasingly greater emphasis on performance based, at-
risk incentive compensation.
In setting the Chief Executive Officer's base salary for 1996, the
Committee surveyed and reviewed compensation levels and the reference criteria
relating to such compensation levels within the gas and electric utility
industry. Compensation data and comparisons were provided to the Committee by
independent sources and were used by the Committee together with market
compensation data provided by the System's human resources department,
compensation reports contained in proxy materials for companies considered by
the Committee to be similar to the System in size, responsibility and
complexity and utility industry references such as those provided by the
Edison Electric Institute. Among the reference criteria reviewed by the
Committee in developing external market pay norms were business type
(investor-owned utilities), scope (utilities with revenues of approximately
$500 million to $2 billion) and location (utilities headquartered in the
northeast region of the U.S.). This market reference group of companies
represents a subset of Value Line, Inc.'s utility sample.
Annual Incentive Compensation
The Chief Executive Officer is eligible to receive annual cash bonus
compensation under the System's Annual Incentive Plan. In 1996, the Annual
Incentive Plan provided for awards to the Chief Executive Officer of up to a
maximum of 40% of annual base salary. Both individual and System performance
goals and objectives were set. The Chief Executive Officer's award for 1996
was determined on a weighted basis, with two-thirds of the Award potential
attributable to the attainment of System goals and objectives and one-third of
the award potential attributable to individual goals and objectives. For
1996, the System criteria forming the goals and objectives applicable to the
<PAGE 13>
Annual Incentive Plan were: 1) meeting pre-established targets comparing
System actual net income to budgeted net income for 1996; 2) success in
implementing budgetary constraints in the interest of controlling costs; and
3) meeting certain pre-established benchmark measures of operation and
maintenance expenses per customer, as compared to a peer group of 18 utility
companies recommended by the System's independent compensation consultant.
Each of the three System goals and objectives are equally weighted, and awards
are made based on meeting, exceeding or reaching maximum attainment of
targets.
The goal established for actual net income was to meet or exceed the
approved budgeted amounts. The System's 1996 net income exceeded targeted net
income by 11.8%, resulting in a maximum award. The goal established for cost
control was for operation and maintenance expenses in 1996 to be below the
approved budgeted amounts. This goal was exceeded by the System having
reduced actual operation and maintenance expenses to 4.4% below established
budgets. The goal of maintaining operation and maintenance expenses per
customer within the top 50% of the 18 company industry peer group was also
exceeded, as the System was rated the fifth most effective of the 18 companies
in controlling operation and maintenance expenses. In the aggregate, the
goals and objectives applicable to the System component of the Annual
Incentive Plan were rated as 96% achieved.
The individual goals of the Chief Executive Officer for 1996 under the
Annual Incentive Plan included: originating and implementing several projects
and programs designed to maximize System synergies, the development of new
business opportunities and the oversight of COM/Electric's restructuring
compliance filings at the Massachusetts Department of Public Utilities. The
Chief Executive Officer's performance relative to achieving individual goals
was rated as 79% achieved, resulting in an aggregate performance rating of 90%
achievement.
Long-Term Compensation
The System has in place two long term incentive compensation plans, one
which provides for the potential of awards of restricted Common Shares of the
System and the other providing for the potential of cash awards.
The Long-Term Incentive Plan, approved by shareholders in 1994, measures
performance and provides for the potential for awards of Common Shares over a
three-year Plan Period. The Plan provides for awards to the Chief Executive
Officer of up to a maximum of 50% of annual base salary, awarded in the form
of restricted Common Shares. Awards of Common Shares under the Plan are made
if the System's average three-year total return (share appreciation and
dividends), as compared to the peer group index of utility companies as
established by Value Line, Inc., meets or exceeds the achievement standards
set by the Committee at the beginning of a Plan Period. In this way, the
interests of Executive Officers and Shareholders continue to be aligned.
For the three-year Plan Period commencing in 1994, the Threshold, Plan
Target and Maximum Shareholder Return achievement standards were 95% of Index
Average, Index Average, and 120% of Index Average, respectively. During this
Plan Period, the System's average total return was equal to 142% of the peer
group index, resulting in a maximum award in March of 1997 to Mr. Poist equal
to 50% of his January 1, 1994 base salary ($160,000) in restricted Common
Shares. Under the terms of the Long-Term Incentive Plan, the restricted
Common Shares generally vest three years from the date they are issued.
The 1996-1997 Strategic Plan Compensation Program ("Program") provides
Executive Officers the opportunity to receive cash awards up to an amount
which is equivalent to the amount which would be awarded in Grant Shares under
the terms of the Long Term Incentive Plan if a three-year Plan Period ending
in 1997 were in effect (no such Plan Period ending in 1997 was established
under the Long Term Incentive Plan). Unlike the Long Term Incentive Plan,
which uses Shareholder total return as the sole criterion, the Program also
<PAGE 14>
rates both the Executive Officer's contributions to achieving results in
implementing the System's Strategic Plan and the Executive Officer's overall
performance. Awards, if any, under the Program would be made in 1998.
Other Executive Officers
With respect to other Executive Officers, the Chief Executive Officer,
in conjunction with the System's human resources department and an independent
consultant, established salary ranges for each Executive Officer. The salary
ranges were based in part upon salaries provided to executive officers in the
System's industry peer group, as reported by the Edison Electric Institute and
from regional salary surveys, so as to establish salary ranges generally in
the median of the peer group. Specific salary levels were then established
through an evaluation of the responsibilities of the position, the
individual's experience in that position and the Executive Officer's
achievement of goals and performance of duties. The base salary levels, as
recommended by the Chief Executive Officer, were also reviewed and approved by
the Executive Compensation Committee.
In addition to base salary, the named Executive Officers are also
eligible to receive compensation under the Annual Incentive Plan, the Long
Term Incentive Plan and the 1996-1997 Strategic Plan Compensation Program.
The named Executive Officers are eligible to receive compensation of up to a
maximum of 35% (for Vice Presidents) to 40% (for Operating Company Presidents)
of annual base salary under the Annual Incentive Plan and of up to 40% (for
Vice Presidents) to 50% (for Operating Company Presidents) of annual base
salary in restricted Common Shares under the Long Term Incentive Plan and in
cash awards under the 1996-1997 Strategic Plan Compensation Program. In 1996,
the System goals and objectives constituting the annual performance criteria
and the corresponding weightings which determined eligibility for awards to
the named Executive Officers under the Annual Incentive Plan were the same as
those applicable to the Chief Executive Officer. The individual goals and
objectives of the other Executive Officer Annual Incentive Plan participants
included such projects as restructuring the System's existing debt portfolio,
converting Canal Electric's Unit No. 2 so that it can be fueled by both oil
and natural gas, implementing an investor relations program and renegotiating
the lease for the System's Cambridge, Massachusetts headquarters.
The performance criteria applicable to the named Executive Officers
under the Long Term Incentive Plan and the 1996-1997 Strategic Plan
Compensation Program are the same as those applicable to the Chief Executive
Officer.
Policy on Deductibility of Compensation
Pursuant to Section 162(m) of the Internal Revenue Code, the ability of
the System to deduct the compensation paid to any of the five most highly
compensated officers in excess of $1 million is limited by Federal Law. The
compensation of each of the System's Executive Officers, however, is
significantly lower than the $1 million threshold at which tax deductions are
limited. It is therefore not necessary that the Committee formulate a policy
with respect to qualifying compensation for deductibility under the Internal
Revenue Code.
Conclusion
The Committee has taken action over the past three years to link
executive compensation directly to corporate performance and Shareholder total
return. A substantial portion of each Executive Officer's compensation is now
dependent upon measurable individual performance and System Common Share
appreciation.
THE EXECUTIVE COMPENSATION COMMITTEE
Michael C. Ruettgers, Chairperson
William J. O'Brien
Gerald L. Wilson
<PAGE 15>
COMPARATIVE TOTAL SHAREHOLDER RETURN
The line graph below compares the cumulative total shareholder return
for the System's Common Shares to the cumulative total return of the S&P 500
Stock Index and a Peer Group Index which is comprised of 91 utility companies
(including the System) which are followed by Value Line, Inc. The entities
which comprise the Peer Group are also set forth hereinafter.
Comparative Five-Year Total Returns
Commonwealth Energy System, S&P 500 and Value Line Peer Group
(Performance results through 12/31/96)
---------------------------------------------------------------
Line graph illustration of
comparative five-year (1992-1996) cumulative
total returns based on values listed
in chart below.
---------------------------------------------------------------
1991 1992 1993 1994 1995 1996
COM/Energy $100.00 $117.00 $135.25 $114.32 $151.51 $169.98
S&P 500 100.00 107.79 118.66 120.56 165.78 204.30
Peer Group 100.00 107.20 119.27 104.73 137.47 139.57
Assumes $100 invested at the close of trading on the last trading day of
1991 in COM/Energy Common Shares, S&P 500 and the Peer Group. Also
assumes reinvestment of dividends.
Source: Value Line, Inc.
PEER GROUP
Allegheny Power System, Inc. Minnesota Power & Light Co.
American Electric Power Co., Inc. Montana Power Co.
Atlantic Energy Inc. Nevada Power Co.
Baltimore Gas and Electric Company New England Electric System
Boston Edison Company New York State Electric & Gas Corp.
Carolina Power & Light Co. Niagara Mohawk Power Corporation
Centerior Energy Corporation NIPSCO Industries, Inc.
Central Hudson Gas & Electric Corp. Northeast Utilities
Central Louisiana Electric Company Inc. Northern States Power Co.
Central Maine Power Co. Northwestern Public Service Co.
Central & South West Corp. OGE Energy, Inc.
Central Vermont Public Service Corp. Ohio Edison Co.
CILCORP Inc. Orange and Rockland Utilities, Inc.
CINergy Corp. Otter Tail Power Co.
CIPSCO Incorporated PG&E Corporation
CMS Energy Corp. PacifiCorp.
<PAGE 16>
Commonwealth Energy System PECO Energy Company
Consolidated Edison Co. of New York, Inc.Pinnacle West Capital Corp.
DPL Inc. Portland General Electric Co.
Delmarva Power & Light Co. Potomac Electric Power Co.
Dominion Resources, Inc. PP&L Resources, Inc.
DQE Public Service Co. of Colorado
DTE Energy Corporation Public Service Co. of New Mexico
Duke Power Co. Public Service Enterprise Group Inc.
Eastern Utilities Associates Puget Sound Power & Light Co.
Edison International Rochester Gas and Electric Corp.
Empire District Electric Company St. Joseph Light & Power Co.
Enova Corporation SCANA Corp.
Entergy Corporation Sierra Pacific Resources
Florida Progress Corp. SIGCORP
FPL Group, Inc. The Southern Company
GPU, Inc. Southwestern Public Service Co.
Green Mountain Power Corp. TECO Energy, Inc.
Hawaiian Electric Industries, Inc. Texas Utilities Company
Houston Industries, Incorporated TNP Enterprises, Inc.
Idaho Power Co. Tucson Electric Power Co.
IES Industries Unicom Corp.
Illinova Corp. Union Electric Co.
Interstate Power Co. United Illuminating Co.
IPALCO Enterprises, Inc. UtiliCorp. United Inc.
Kansas City Power & Light Co. Washington Water Power Co.
KU Energy Corporation Western Resources, Inc.
LG&E Energy Corp. Wisconsin Energy Corp.
Long Island Lighting Co. WPL Holdings, Inc.
MDU Resources Group, Inc. WPS Resources Corporation
MidAmerican Energy Holdings Company
MEETINGS OF THE BOARD OF TRUSTEES AND COMMITTEES
The System's Board of Trustees held thirteen meetings throughout 1996.
The Board has an Audit Committee, an Executive Compensation Committee, a
Nominating Committee, a Benefit Review Committee and a Strategic Planning
Committee.
The Audit Committee is composed of Betty L. Francis, Chairperson,
Peter H. Cressy and Henry Dormitzer. The Committee held four meetings in
1996. The Committee's functions are to recommend the selection of an
independent public accountant, to review the scope of and approach to audit
work, to review non-audit services provided by the independent public
accountants and to review accounting principles and practices and the adequacy
of internal controls.
The Executive Compensation Committee is composed of Michael C.
Ruettgers, Chairperson, William J. O'Brien and Gerald L. Wilson. During 1996,
the Committee held seven meetings. This Committee reviews and recommends
compensation and promotional adjustments for certain of the System's personnel
and also reviews and recommends adjustments to the compensation of Trustees.
The Nominating Committee is composed of Sheldon A. Buckler, Chairperson,
Franklin M. Hundley and William J. O'Brien. The Committee held one meeting in
1996. The functions of the Committee are to coordinate suggestions or
searches for potential nominees for the position of Trustee, to review and
<PAGE 17>
evaluate qualifications of potential nominees and to recommend to the Board of
Trustees nominees for vacancies occurring from time to time on the Board of
Trustees. The Committee will consider nominees recommended by Shareholders
upon the timely submission of the names of such nominees with their
qualifications and biographical information forwarded to the Nominating
Committee of the Board of Trustees.
The Benefit Review Committee is composed of Franklin M. Hundley,
Chairperson, Henry Dormitzer and Betty L. Francis. During 1996, the Committee
held two meetings. The Committee was organized to consider and recommend to
the Board of Trustees matters associated with the System's major funded
benefit plans. Functions of the Committee include recommending the
composition of benefit plan boards and reviewing investment policy,
objectives, performance or proposed changes related to the plans.
The Strategic Planning Committee is composed of Gerald L. Wilson,
Chairperson, Peter H. Cressy and Michael C. Ruettgers. The Committee held
four meetings during 1996. The functions of this Committee are to attend
strategic planning sessions, provide support and insight to management and
coordinate management planning activities with the Board of Trustees.
Effective February 23, 1996, each Trustee who was not an employee of the
System was compensated for his or her services as Trustee at the rate of
$12,500 per year, plus $1,000 for each Trustee and Committee meeting attended.
The Chairpersons of the Audit, Executive Compensation, Benefit Review and
Strategic Planning Committees each received an additional $1,000 during the
year. In addition, the Chairman of the Board received a retainer of $20,000
per year for his services as Chairman of the Board and of the Nominating
Committee.
Trustees are entitled to defer all or a specified portion of their
compensation pursuant to the terms of the Deferred Compensation Plan for
Trustees of Commonwealth Energy System. An account is established for each
Trustee electing to participate in the Plan, which account is credited with
the amount which would otherwise be payable to the Trustee as compensation for
the Trustee's services. At the end of each month, interest is credited at an
annual rate equivalent to the weighted average prime lending rate. Upon the
Trustee's retirement, the account balance is paid either in a lump sum or in
annual installments according to the election made by the Trustee. The rights
of the Trustee in the account are not assignable and constitute an unsecured
claim against the general assets of the System.
The Retirement Plan for Trustees of Commonwealth Energy System was
adopted to provide retirement benefits to non-management members of the Board
of Trustees in recognition of their services to the System. Members of the
Board of Trustees who have served as Trustees for at least five years are
eligible to participate in the Plan. Each eligible Trustee qualifies for an
annual retirement benefit payment equal to fifty percent of the annual
retainer fee in effect at retirement (excluding retainers for chairing
committees), plus 10% of the annual retainer fee for each year in addition to
five years served, up to 100% of such fee. The annual retirement benefit
payment is adjusted to reflect the first subsequent increase, if any, in the
annual retainer fee for service on the Board following the Trustee's
retirement. The annual retirement benefit payment becomes vested at the time
of eligibility and is payable to Trustees for a period equal to the greater of
ten years or the number of years of service as a Trustee.
<PAGE 18>
2-OTHER BUSINESS
The Board of Trustees of the System knows of no matters other than those
set forth in the Notice of the Annual Meeting which are likely to be brought
before the meeting. If any other matters of which the Board of Trustees is
not aware are appropriately presented for action, however, it is the intention
of the persons named in the proxy to vote in accordance with their judgment on
such matters.
MISCELLANEOUS
The independent public accounting firm selected by the Trustees as
Auditor of the System is Arthur Andersen LLP. It is expected that
representatives of Arthur Andersen LLP will be present at the Annual Meeting
with the opportunity to make a statement if they desire to do so and to
respond to appropriate questions.
The cost of soliciting proxies will be borne by the System. A limited
number of regular employees may solicit proxies by telephone or in person
subsequent to the initial solicitation by mail. In addition, the System has
retained the firm of D. F. King to aid in such solicitation of proxies. The
System expects to pay such firm a fee of $5,500 plus expenses. The System
will reimburse banks, brokerage firms and other custodians, nominees and
fiduciaries for reasonable expenses incurred in sending proxy material to
security owners.
The proxy card for a participant in the System's Dividend Reinvestment
and Common Share Purchase Plan includes the number of shares which are
registered in the participant's name and the number of shares beneficially
owned by the participant that are held in the name of the nominee of the
System for the Plan. A participant's vote with respect to the shares
registered in the participant's name is also an instruction by the participant
to the nominee to vote the shares credited to the participant's account under
the Plan.
In order for Shareholder proposals for the 1998 Annual Meeting of
Shareholders to be eligible for inclusion in the System's Proxy Statement,
they must be received by the System at its principal office in Cambridge,
Massachusetts, prior to December 4, 1997.
It is important that proxies be returned promptly to avoid unnecessary
expense. Therefore, Shareholders are urged, regardless of the number of
shares owned, to SIGN, DATE and RETURN the enclosed proxy promptly.
Michael P. Sullivan
Vice President, Secretary
and General Counsel
Cambridge, Massachusetts 02142-9150
March 28, 1997
<PAGE 19>
APPENDICES
COMMONWEALTH ENERGY SYSTEM
Proxy-Annual Meeting of Shareholders-May 1, 1997
This Proxy is Solicited on Behalf of the Board of Trustees
The undersigned hereby appoints Sheldon A. Buckler, Franklin M. Hundley
and William G. Poist and each or any of them, with power of substitution, as
proxies to attend the Annual Meeting of Shareholders of the System to be held
on Thursday, May 1, 1997 and at any adjournment thereof and to vote the number
of shares which the shareholder(s) would be entitled to vote if personally
present:
To vote your shares for all Trustee nominees, mark the "FOR" box on
item 1. To withhold voting for all nominees, mark the "WITHHELD" box. If you
do not wish your shares voted "FOR" a particular nominee, mark the
"EXCEPTIONS" box and enter the name(s) of the exception(s) in the space
provided.
_____________________________________________________________________________
The Trustees recommend a vote "FOR"
1. Election of Trustees FOR WITHHELD
EXCEPTIONS*
Nominees: K. C. Bryant [ ] [ ] [ ]
F. M. Hundley
G. L. Wilson
*EXCEPTIONS: ____________________
_____________________________________________________________________________
2. Upon any other business that may properly come before the meeting.
_____________________________________________________________________________
This Proxy will be voted as directed above. If no other indication
is made, this proxy will be voted FOR the election of Trustes.
Any proxy or proxies to vote such shares at said meeting
heretofore given by the sharheolder(s) are hereby revoked.
PLEASE SIGN AND DATE ON REVERSE SIDE
____________________________________________________
____________________________________________________
Signature(s)
should agree with name(s) printed below
(When signing as attorney, executor or administrator, trustee or
guardian, etc., please indicate your full title as such.)
Acct. No. No. of Shares
Dated_______________________, 1997
PLEASE SIGN, DATE AND RETURN IN ENCLOSED PREPAID ENVELOPE