<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:
[ x ] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[ ] 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 1998
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 7, 1998
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 7, 1998, 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 take action on a proposal by the Board of Trustees to
amend Section 22 of the System's Declaration of Trust, as
amended, to revise the conditions under which presently
authorized but unissued Common Shares of the System might
be issued.
3. To approve the Restricted Common Share Plan for Trustees
of Commonwealth Energy System.
4. To consider and vote upon a shareholder proposal, if presented
at the meeting, as described herein.
5. 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, 1998
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 30, 1998
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 7, 1998, 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 30, 1998.
FINANCIAL STATEMENTS
The audited financial statements of Commonwealth Energy System and
Subsidiary Companies, which include comparative Consolidated Balance Sheets as
of December 31, 1997 and 1996, Consolidated Statements of Income and
Consolidated Statements of Cash Flows for the three years ended December 31,
1997 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, 1998 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 2,617,000 Common Shares representing 12% of the
outstanding Common Shares as of February 28, 1998. 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 February 28, 1998, of Common Shares of the System owned by the
Chief Executive Officer and the four other most highly paid 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 20,472 0.1%
Russell D. Wright 12,055 0.1%
James D. Rappoli 8,256 0.1%
Michael P. Sullivan 6,946 0.1%
John R. Williams 6,013 0.1%
All Trustees and Executive Officers
as a group (13 persons) 71,968 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 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:
Sheldon A. Buckler
Betty L. Francis
Michael C. Ruettgers
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
Beneficially
Year First Owned as of
Became a February 28,
Name, Principal Occupation and Term of Office Trustee Age 1998
(A) KEVIN C. BRYANT, Regional President,
(D) BankBoston - South Region, Fall River,
Massachusetts
TERM EXPIRES IN 2000................. (1997) 37 200
(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 (NOMINEE)....... (1991) 66 6,260
<PAGE 6>
INFORMATION CONCERNING NOMINEES AND TRUSTEES
Common Shares
Beneficially
Year First Owned as of
Became a February 28,
Name, Principal Occupation and Term of Office Trustee Age 1998
(A) PETER H. CRESSY, Chancellor, University of
(E) Massachusetts Dartmouth, North Dartmouth,
Massachusetts; Retired Rear Admiral,
United States Navy
TERM EXPIRES IN 1999 ............... (1994) 56 337
(A) BETTY L. FRANCIS, Executive Vice President
(D) and Chief Credit Officer, HomeSide
Lending, Inc., Jacksonville, Florida
TERM EXPIRES IN 1998(NOMINEE) ...... (1991) 51 200
(C) FRANKLIN M. HUNDLEY, Of Counsel,
(D) Rich, May, Bilodeau & Flaherty,
P.C., Boston, Massachusetts (Attorneys);
Director, The Berkshire Gas Company
TERM EXPIRES IN 2000................ (1985) 63 5,108
(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) 65 3,500
WILLIAM G. POIST, President and Chief
Executive Officer of Commonwealth Energy
System and Chairman and a Director of
its subsidiary companies
TERM EXPIRES IN 1999 ................... (1992) 64 20,472
(B) MICHAEL C. RUETTGERS, President, Chief
(E) Executive Officer and a Director, EMC
Corporation, Hopkinton, Massachusetts
(Data storage technology); Director,
EG&G Inc.
TERM EXPIRES IN 1998(NOMINEE) ......... (1995) 55 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 2000.................... (1985) 58 1,618
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.
During 1997, fees of $308,174 were incurred for legal services rendered
by the firm of Rich, May, Bilodeau & Flaherty, P.C., of which Mr. Hundley is
Of Counsel. 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.
<PAGE 7>
(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 8>
COMPENSATION OF EXECUTIVE OFFICERS DURING THE YEAR 1997
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 1997 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term Compensation
Annual Compensation Awards Payouts
Long-
Term
Options Incen-
Other Restr- /Stock tive All
Annual icted Apprec- Plan Other
Compen- Stock iation (LTIP) Compen-
Name and Salary sation Awards Rights Payouts sation
Principal Position Year (1) Bonus (2) (3) (SARS) (4) (5)
William G. Poist 1997 $388,200 $160,290 - - - $134,900 $15,528
President and Chief 1996 380,000 142,142 - $160,000 - - 15,204
Executive Officer of 1995 350,000 95,645 - - - - 14,004
the System and Chair-
man of its subsidiary
companies
Russell D. Wright 1997 $276,333 $118,825 - - - $100,800 $10,977
Chief Executive 1996 250,000 97,427 - $100,000 - - 10,020
Officer of Utility 1995 231,667 66,060 - - - - 9,269
Operations
James D. Rappoli 1997 $194,967 $ 75,370 - - - $ 53,040 $ 7,797
Financial Vice 1996 178,167 60,740 - $ 54,800 - - 7,126
President and 1995 164,583 46,624 - - - - 6,586
Treasurer of the
System and its
subsidiary companies
Michael P. Sullivan 1997 $173,667 $ 66,154 - - - $ 48,360 $ 6,944
Vice President, 1996 161,666 55,121 - $ 54,000 - - 6,229
Secretary and General 1995 151,000 43,278 - - - - 6,044
Counsel of the System
and its subsidiary
companies
John R. Williams 1997 $154,858 $ 58,219 - - - $ 51,991 $ 6,191
Vice President - 1996 149,883 50,790 - $ 58,000 - - 5,796
Corporate Services 1995 149,400 35,812 - - - - 5,976
of COM/Energy
Services Company
- --------------------
<PAGE 9>
(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 of Commonwealth
Energy System and Subsidiary Companies and the Executive Salary
Continuation and Excess Benefit Plan for Employees of
Commonwealth Energy System and Subsidiary Companies.
(2) The dollar value of perquisites and other personal benefits,
securities or property totaling 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 1997, 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 made in 1997 which was calculated by multiplying the
average closing market price of the System's Common Shares at the
time of the 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 February 28, 1998 is
17,952 Common Shares, having an aggregate value of $647,394.
(4) The amounts in this column represent the cash awards made in 1998
under the terms of the 1996-1997 Strategic Plan Compensation
Program. The Program measured System Common Share performance,
(requiring System Common Share appreciation of at least 95% of
industry average for award consideration), together with both the
Executive Officer's contributions to the System's Strategic Plan
over the two-year period and each Executive Officer's general
performance.
(5) The amounts in this column represent the aggregate contributions or
account credits made by the System and certain subsidiary companies
during 1997 on behalf of the above-named individuals to the Employees
Savings Plan of Commonwealth Energy System and Subsidiary Companies and
the Executive Salary Continuation and Excess Benefit Plan for Employees
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 for Employees of
Commonwealth Energy System and Subsidiary Companies is a defined
distribution/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, $6,333, $2,375, $2,374,
$2,375 and $4,692 represent the contributions made on behalf of Messrs.
Poist, Wright, Rappoli, Sullivan and Williams, respectively, by the
Employees Savings Plan. Amounts credited to the accounts of Messrs.
Poist, Wright, Rappoli, Sullivan and Williams by the Executive Salary
Continuation and Excess Benefit Plan in 1997 equaled $9,195, $8,602,
$5,423, $4,569 and $1,499, respectively.
<PAGE 8>
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 for Employees of
Commonwealth Energy System and Subsidiary Companies, as of December 31, 1997.
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 .... $ 15,673 $ 23,509 $ 31,345 $ 39,181 $ 47,018 $ 51,104
120,000 .... 21,173 31,759 42,345 52,931 63,518 69,104
150,000 .... 26,673 40,009 53,345 66,681 80,018 87,104
180,000 .... 32,173 48,259 64,345 80,431 96,518 105,104
210,000 .... 37,673 56,509 75,345 94,181 113,018 123,104
240,000 .... 43,173 64,759 86,345 107,931 129,518 141,104
270,000 .... 48,673 73,009 97,345 121,681 146,018 159,104
300,000 .... 54,173 81,259 108,345 135,431 162,518 177,104
330,000 .... 59,672 89,509 119,345 149,181 179,018 195,104
360,000 .... 65,172 97,759 130,345 162,931 195,518 213,104
390,000 .... 70,672 106,009 141,345 176,681 212,018 231,104
420,000 .... 76,172 114,259 152,345 190,431 228,518 249,104
450,000 .... 81,672 122,509 163,345 204,181 245,018 267,104
- -------------
<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 for Employees
of Commonwealth Energy System and Subsidiary Companies. For 1997, the
maximum annual compensation limit under the Pension Plan for Employees
of Commonwealth Energy System and Subsidiary Companies was $160,000, and
the maximum annual benefit under that Plan was $125,000.
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 a
Social Security 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, Rappoli, Sullivan and Williams have 33,
30, 23, 22 and 23 credited years of service respectively. For the purposes of
calculating the annual retirement benefits of Messrs. Poist, Wright, Rappoli,
Sullivan and Williams 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.
<PAGE 10>
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
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, Sullivan and Williams.
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, Rappoli, Sullivan and Williams
up to 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 11>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires Trustees, Executive Officers and persons who beneficially own more
than ten percent (10%) of the System's Common Shares to file initial reports
of ownership on Form 3 and reports of changes in ownership on Form 4 and/or
Form 5 with the Securities and Exchange Commission (the "Commission") and any
national securities exchange on which the System's securities are registered.
Trustees, Executive Officers and greater than ten percent (10%) beneficial
owners are required by the Commission's regulations to furnish the System with
copies of all Section 16(a) forms they file.
Based on a review of the copies of such forms furnished to the System and
written representations from the Trustees and Executive Officers, the System
believes that all Section 16(a) filing requirements applicable to its
Trustees, Executive Officers and greater than ten percent (10%) beneficial
owners were complied with for 1997.
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.
<PAGE 12>
In setting the Chief Executive Officer's base salary for 1997, 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 1997, the Annual
Incentive Plan provided for awards to the Chief Executive Officer of up to a
maximum of 43.5% of annual base salary. Both individual and System
performance goals and objectives were set. The Chief Executive Officer's
award for 1997 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 1997, the System criteria forming the goals and objectives
applicable to the Annual Incentive Plan were: 1) meeting pre-established
targets comparing System actual net income to budgeted net income for 1997; 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 1997 net income exceeded targeted net
income by 9.8%, just below the 10% maximum award standard. The goal
established for cost control was for operation and maintenance expenses in
1997 to be below the approved budgeted amounts. This goal was exceeded by the
System having reduced actual operation and maintenance expenses to 3.8% 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 1997 under the
Annual Incentive Plan included: the Chief Executive Officer's contributions in
creating a value-added organization; implementation of the System's Strategic
Plan; oversight of the consolidation of gas and electric operations; and the
effective continuance and expansion of the System's investor relations
program. Performance relative to achieving individual goals was rated as 85%
achieved, resulting in an aggregate performance rating of 92% achievement.
<PAGE 13>
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.
Under the terms of the Plan, no three year Plan Period was in effect for
1995-1997, and as a result no award was made.
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 as if a three-year Plan Period
ending in 1997 was in effect. Unlike the Long Term Incentive Plan, which uses
Shareholder total return as the sole criterion, the Program rates System
Common Share performance, the Executive Officer's specific contributions to
achieving results in implementing the System's Strategic Plan, and the Chief
Executive Officer's general and overall performance. During the program
period, the System's Common Shares appreciated by 228% as compared to the
Value Line peer group, which under the terms of the Program provided for a
maximum potential award to the Chief Executive Officer of up to 50% of 1996
annual base salary. The individual performance of the Chief Executive Officer
under the Plan was rated at 71% achieved, resulting in a cash award pursuant
to the terms of the Program of 35.5% of his 1996 annual base salary.
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 38% (for Vice Presidents) to 43.5% (for the Operating Companies'
President) of annual base salary under the Annual Incentive Plan and of up to
40% (for Vice Presidents) to 50% (for the Operating Companies' President) 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
<PAGE 14>
Program. In 1997, 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: negotiating critical contracts
relating to System electric generation plants; overseeing important state
legislation affecting the System's electric operations; and continuing and
expanding the System's investor relations program.
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 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 continues to take action 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 87 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 12/31/97)
---------------------------------------------------------------
Line graph illustration of
comparative five-year (1993-1997) cumulative
total returns based on values listed
in chart below.
---------------------------------------------------------------
1992 1993 1994 1995 1996 1997
COM/Energy $100 $116 $ 98 $130 $145 $220
S&P 500 100 110 112 154 190 253
Peer Group 100 112 98 129 130 166
Assumes $100 invested at the close of trading on the last trading day of
1992 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. MDU Resources Group, Inc.
Ameren Corp. MidAmerican Energy Holdings Company
American Electric Power Co., Inc. Minnesota Power & Light Co.
Atlantic Energy Inc. Montana Power Co.
Baltimore Gas and Electric Company Nevada Power Co.
Boston Edison Company New Century Energies, Inc.
Carolina Power & Light Co. New England Electric System
Central Hudson Gas & Electric Corp. New York State Electric & Gas Corp.
Central Louisiana Electric Company Inc. Niagara Mohawk Power Corporation
Central Maine Power Co. NIPSCO Industries, Inc.
Central & South West Corp. Northeast Utilities
Central Vermont Public Service Corp. Northern States Power Co.
CILCORP Inc. Northwestern Public Service Co.
CINergy Corp. OGE Energy, Inc
CMS Energy Corp. Orange and Rockland Utilities, Inc.
Commonwealth Energy System Otter Tail Power Co.
<PAGE 16>
Consolidated Edison Co. of New York, Inc. PG&E Corporation
DPL, Inc. PacifiCorp.
Delmarva Power & Light Co. PECO Energy Company
Dominion Resources, Inc. Pinnacle West Capital Corp.
DQE Potomac Electric Power Co.
DTE Energy Corporation PP&L Resources, Inc.
Duke Power Co. Public Service Co. of New Mexico
Eastern Utilities Associates Public Service Enterprise Group Inc.
Edison International Puget Sound Power & Light Co.
Empire District Electric Company Rochester Gas and Electric Corp.
Enova Corporation St. Joseph Light & Power Co.
Entergy Corporation SCANA Corp.
FirstEnergy Corp. Sierra Pacific Resources
Florida Progress Corp. SIGCORP
FPL Group, Inc. The Southern Company
GPU, Inc. TECO Energy, Inc.
Green Mountain Power Corp. Texas Utilities Company
Hawaiian Electric Industries, Inc. TNP Enterprises, Inc.
Houston Industries, Incorporated Unicom Corp.
Idaho Power Co. Unisource Energy Corp.
IES Industries United Illuminating Co.
Illinova Corp. UtiliCorp. United Inc.
Interstate Power Co. Washington Water Power Co.
IPALCO Enterprises, Inc. Western Resources, Inc.
Kansas City Power & Light Co. Wisconsin Energy Corp.
KU Energy Corporation WPL Holdings, Inc.
LG&E Energy Corp. WPS Resources Corporation
Long Island Lighting Co.
MEETINGS OF THE BOARD OF TRUSTEES AND COMMITTEES
The System's Board of Trustees held thirteen meetings throughout 1997.
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, Kevin
C. Bryant and Peter H. Cressy. The Committee held four meetings in 1997. 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 1997, the
Committee held five 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 four meetings
in 1997. The functions of the Committee are to coordinate suggestions or
searches for potential nominees for the position of Trustee, to review and
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.
<PAGE 17>
The Benefit Review Committee is composed of Franklin M. Hundley,
Chairperson, Kevin C. Bryant and Betty L. Francis. During 1997, the Committee
held one meeting. 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
seven meetings during 1997. 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 January 1, 1998, each Trustee who was not an employee of the
System is compensated for his or her services as Trustee at the rate of
$17,500 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 receive an additional $1,500 during the
year. In addition, the Chairman of the Board receives 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. Provided that
Common Shareholders approve the Restricted Common Share Plan for Trustees of
Commonwealth Energy System, the Board will take action to amend the Plan by
limiting the number of years following retirement during which benefits are
paid to a Trustee to the Trustee's number of years of service on the Board as
of June 1, 1998.
<PAGE 18>
2-AMENDMENT TO SECTION 22 OF THE DECLARATION OF TRUST
There will be presented to Shareholders by the Board of Trustees a
proposal to consent to an amendment to Section 22 of the System's Declaration
of Trust, which Section sets forth the conditions under which presently
authorized but unissued Common Shares of the System may be issued by the
Trustees without the vote or written consent of a majority of the Common
Shares outstanding at the time. The purposes of the amendment are to expand
the conditions under which such presently authorized but unissued Common
Shares may be issued without such vote or written consent of a majority of the
Common Shares outstanding at the time. The text of the proposed amendment to
Section 22 is annexed as Appendix A to this Proxy Statement.
The proposed amendment to Section 22 would allow for the issuance of
Common Shares to fund the Restricted Common Share Plan for Trustees of
Commonwealth Energy System, which Shareholders are being requested to approve
at the 1998 Annual Meeting of Shareholders. The Trustees believe that such
amendment will be in the interest of Shareholders, as it will both enable the
System to continue to attract and retain qualified Trustees and will provide
further incentive to Trustees to maximize shareholder value for the benefit of
Shareholders. The annual Common Share payment amount is projected to be most
representative of the value of retirement benefits which will no longer be
provided under the terms of the Retirement Program for Trustees of
Commonwealth Energy System if the Restricted Common Share Plan is approved.
The Board of Trustees believes that the Restricted Common Share Plan will
provide greater incentives for Trustees and will better align the interests of
Trustees with the interests of Shareholders.
The required approval by Shareholders to the proposed amendment and the
subsequent enactment of the Restricted Common Share Plan for Trustees of
Commonwealth Energy System will allow the System to continue to attract and
maintain valuable Trustees who will continue to advance the interests of
Shareholders.
Upon the consent of the holders of a majority of the outstanding Common
Shares present at the meeting and entitled to vote on the proposed amendment,
the Trustees of the System will on May 7, 1998 vote to amend the Declaration
of Trust and will file said Declaration of Trust, as amended, as required by
the terms of the Declaration of Trust and the laws of the Commonwealth
of Massachusetts.
<PAGE 19>
3-RESTRICTED COMMON SHARE PLAN FOR TRUSTEES
OF COMMONWEALTH ENERGY SYSTEM
On February 26, 1998, the Board of Trustees approved and adopted,
effective as of June 1, 1998, the Restricted Common Share Plan for Trustees of
Commonwealth Energy System (the "Plan"). Since Plan payments are to be made
in the form of System Common Shares, the Board of Trustees is seeking
Shareholder approval of the Plan and has conditioned the adoption of the
Plan on Shareholder approval.
The purpose of the Plan is to increase non-employee Trustee ownership
interest in the System by providing compensation for service on the Board of
Trustees in the form of Common Shares, thus further aligning the interests of
the members of the Board with those of Shareholders of the System. A summary
description of the Plan follows. This description is qualified in its
entirety by reference to the full text of the Plan, which is attached to this
proxy statement as Appendix B.
Eligible participants under the Plan are members of the Board of Trustees
who are not full time employees of the System or any of its subsidiaries. The
Plan provides for issuance annually of a number of Common Shares equal in
value to $7,000 in payment of a portion of the annual Trustee retainer fee for
services on the Board of Trustees. The number of Common Shares issuable is
determined by dividing the dollar amount of $7,000 to be distributed in the
form of Common Shares by the fair market value of a share of the Common Shares
on the date the fee is payable. For this purpose fair market value means the
average closing price of the Common Shares in consolidated trading on the
first five trading days of the month that the Common Shares are issued, as
reported by the New York Stock Exchange. Pro-rata partial issuances of Common
Shares will be made whenever a Trustee has served on the Board for a portion
of a calendar year.
The annual amount of $7,000 to be paid in Common Shares is equivalent to
the projected additional average retirement benefit which would otherwise be
provided to Trustees under the terms of the Retirement Program for Trustees of
Commonwealth Energy System. Upon the approval of the Plan, the Board intends
to limit the number of years during which benefits will be paid to a Trustee
upon the Trustee's retirement to the Trustee's number of years of service on
the Board as of June 1, 1998. As a result, no increase in overall Trustee
compensation shall result. Common Shares issued under the Plan are subject to
restrictions that they may not be sold or transferred until the restrictions
lapse. Restrictions lapse upon (a) death, (b) disability, (c) retirement in
accordance with the policy on retirement of non-employee Trustees, (d)
termination of service with the consent of a majority of the members of the
Board of Trustees, other than the participant, (e) five years passing from the
date of issuance of the Common Shares, or (f) a change in control, as defined
in the Plan. If a participant ceases to be a Trustee for any other reason,
the restricted unvested shares are forfeited and revert to the System. The
certificates representing restricted Common Shares are to be held by the
System until the lapse of restrictions, but the participant is entitled to all
voting, dividend and distribution rights of such Common Shares.
On March 17, 1998 the closing price per share of the Common Shares on the
New York Stock Exchange was $___________.
The adoption of the Plan will require the affirmative votes of the
holders of a majority of the Shares present at the meeting and entitled to
vote.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" APPROVAL OF THE RESTRICTED
COMMON SHARE PLAN FOR TRUSTEES OF COMMONWEALTH ENERGY SYSTEM.
<PAGE 20>
4-SHAREHOLDER PROPOSAL
The System has been advised that Mr. John Jennings Crapo, Porter Square
Branch, P.O. Box 151, Cambridge, Massachusetts, 02140-0002, holder of 450
Common Shares, proposes to submit the following proposal at the 1998 Annual
Meeting:
RESOLVED: That the shareholders of Commonwealth Energy System assembled
in Annual Meeting of Shareholders balloting in person and by proxy hereby
request that the Board of Trustees present to shareholders at the next Annual
Meeting of Shareholders an appropriate amendment to the Declaration of Trust
dated December 31, 1926, as amended, to provide that any elections following
the adoption of the said amendment, Trustees whose terms have expired
be elected annually and not by classes as is now provided. But this amendment
shall not apply to any person holding the office of Trustee when this
amendment is presented to stockholders for ratification at the Annual Meeting
of Shareholders in question.
SUPPORTING STATEMENT: This proposal to de-classify the Board of Trustees
has received considerable support. Proponent believes the proposal will
receive more support now that he has modified it to have the amendment to the
Declaration of Trust not go into effect until Trustees who serve at time as
Trustees no longer serve as Trustee/Trustees. The Trustees make
commitments to serve three years each term as is presently allowed and this
dedication is to be acknowledged by not rudely terminating devoted service to
the Commonwealth Energy System.
BOARD OF TRUSTEES RECOMMENDATION:
The Board of Trustees recommends a vote AGAINST this proposal for the
following reasons:
This proposal has been submitted at various Annual Meetings since 1991.
It requests that the Board of Trustees submit a proposal to Shareholders at
the 1999 Annual Meeting, calling for the repeal of the classified Board, so
that all Trustees would be elected on an annual basis. The classified board
was adopted at the 1987 Annual Meeting, when Shareholders voted to amend the
System's Declaration of Trust to create three classes of Trustees with an
equal number of Trustees in each class, and to provide that the Trustees would
serve three-year staggered terms, such that three Trustees are eligible for
election each year. The classified board is intended to help to ensure
continued familiarity of Board members with the business, management and
policies of the System, since a majority of the Trustees at any given time
would have prior experience as Board members. These amendments are also
designed to encourage persons seeking to acquire control of the System to
initiate an acquisition through arms-length negotiations with the System's
Board of Trustees and management, by making it more difficult to
change the composition of the Board. Also, the amendments may allow the
System's management to obtain more time and information for evaluating a
takeover proposal, in order to fully protect the interests of the System and
its Shareholders.
The Board continues to believe that each Trustee is fully accountable to
Shareholders throughout each term of office, whether that term is three years
or one year. The Board further notes that the classified board system was
determined to be of sufficient merit such that the Massachusetts legislature
has codified that system in its 1990 amendments to the laws pertaining
to Massachusetts business corporations (however, the System, as a
Massachusetts Trust, is not affected by this legislation).
<PAGE 21>
Repeal of the classified Board (which, if the present proposal is
adopted, would actually be pursuant to the acceptance of a proposed Amendment
to the Declaration of Trust to be offered at the 1999 Annual Meeting of
Shareholders) requires the affirmative vote or written consent of
three-quarters of the shares entitled to vote, in accordance with the terms of
the System's Declaration of Trust.
ACCORDINGLY, A VOTE "AGAINST" THE PROPOSAL IS RECOMMENDED.
5-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 1999 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 3, 1998.
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 30, 1998
<PAGE 22>
APPENDIX A
PROPOSED AMENDMENT TO
SECTION 22 OF THE DECLARATION OF TRUST
Section 22 of the System's Declaration of Trust would be amended by
adding the words "and to fund compensation plans applicable to the Board of
Trustees for services as a Trustee" in subparagraph (c) of Section 22,
so that the third paragraph of Section 22 reads in its entirety, as
follows:
(A) To provide the System with Funds
(1) To acquire additional stock of any subsidiary of the
System which is authorized for its proper corporate purposes;
(2) To acquire common stock of any Massachusetts gas or
electric company if as a result of such transaction the System
will own 51% or more of such stock;
(3) To acquire debt securities maturing more than one year
from the date of issue thereof of any subsidiary of the System; or
(4) To retire temporary indebtedness of the System incurred
by it for the purchase of such stock or debt securities; or
(5) To make temporary advances to any subsidiary of the
System; or
(B) In Exchange
(1) For publicly held stock of any subsidiary of the System;
or
(2) For stock of any Massachusetts gas or electric company
if as a result of such exchange the System will own 51% or more
of such stock; or
(C) To provide shares to fund long-term incentive compensation
plans that may be adopted from time to time and to fund compensation
plans applicable to the Board of Trustees for services as a
Trustee.
<PAGE 23>
APPENDIX B
COMMONWEALTH ENERGY SYSTEM
RESTRICTED COMMON SHARE PLAN FOR TRUSTEES
1. Name of Plan. This plan shall be known as the "Commonwealth Energy
System Restricted Common Share Plan for Trustees" and is hereinafter referred
to as the "Plan".
2. Purpose. The purpose of the Plan is to advance the interests of
Commonwealth Energy System (the "System") by providing long-term financial
incentives to Trustees in the form of System Common Shares. By encouraging
such share ownership, the System seeks to attract, retain and motivate
Trustees of experience, ability and quality and to strengthen the mutuality of
interests between the Board of Trustees and the System's Common Shareholders.
3. Effective Date and Term. The Plan was adopted on February 26, 1998, to
be effective as of June 1, 1998, provided the Plan is approved by the System's
Common Shareholders at the next Annual Meeting of Shareholders of the System
following adoption. The Plan shall remain in effect until amended or
terminated by action of the Board of Trustees of the System.
4. Eligible Participants. Each member of the Board of Trustees from time
to time who is not a full time employee of the System or any of its
subsidiaries shall be eligible to participate in the Plan (the
"Participants").
5. Automatic Receipt of Restricted Shares. In accordance with the votes
taken by the Board of Trustees on February 26, 1998, until further action by
the Board of Trustees and commencing with the month following approval of the
Plan by the System's Common Shareholders, in addition to the cash retainer fee
compensation established by the Board of Trustees, each Participant shall be
paid annual retainer fees at the rate of $7,000 for service on the Board of
Trustees, payable in Common Shares, par value $2 per share of the System,
subject to the restrictions set forth in Section 6 hereof. Such fee shall be
payable annually on the date of the Board of Trustees' first regularly
scheduled meeting in a calendar year. The number of Common Shares to be issued
to each Participant on each payment date shall be determined by dividing the
annual retainer fee which is to be paid in Common Shares by the Fair Market
Value of such Common Shares, as hereinafter defined. A pro-rata issuance of
Common Shares will be made for 1998 and for any period during which a
Participant is entitled to payment for less than a full year. The Board of
Trustees shall have the authority to revise the amount of annual retainer fees
for service on the Board of Trustees payable in Common Shares under this
Section 5 not more frequently than annually.
6. Restrictions on Shares. The Common Shares issued under Section 5 shall
be restricted and may not be sold, hypothecated or transferred (including,
without limitation, transfer by gift or donation), except that such
restrictions shall lapse upon:
(a) Death of the Participant;
(b) Disability of the Participant preventing continued service on the
Board;
(c) Retirement of the Participant from service as a Trustee of the
System in accordance with the policy on retirement of non-employee
Trustees then in effect;
(d) Termination of service as a Trustee with the consent of a majority
of the members of the Board other than the Participant;
(e) The passage of five years from the date of issue of any such Common
Shares; or
(f) A Change in Control, as hereinafter defined.
If a Participant ceases to be a Trustee of the System for any other
reason, the unvested Common Shares issued to such Trustee subject to this
Section shall be forfeited and shall revert to the System.
<PAGE 24>
The certificates for Common Shares which are subject to this Section
shall be held by the System until the lapse of restrictions as provided in
this Section; provided, however, the Participant shall be entitled to all
voting, dividend and distribution rights for such Common Shares.
Participants shall have the right to direct in writing, on forms
provided by the System, that upon the lapse of restrictions in accordance with
subsections (a) through (f) above, the Common Shares held by such Participant
under the Plan shall be transferred and delivered by the System to the
individuals or entities as specified by the Participant on such form.
7. Fair Market Value. The term "Fair Market Value" shall mean the average
closing price of the Common Shares in consolidated trading on the first five
trading days of the month that the Common Shares are issued, as reported on
the principal national securities exchange on which the Common Shares are
listed or admitted to trading.
8. Fractions of Shares. Whenever under the terms of the Plan a fractional
share would be required to be issued, the number of shares shall be rounded up
to the next highest whole number of shares.
9. Change in Control. For the purposes of this Plan, a "change in control"
shall mean the occurrence of any of the following:
(1) The System receives a report on Schedule 13D filed with the
Securities and Exchange Commission disclosing that any person
(as such term is defined in Section 13(d) of the Exchange Act),
group, partnership, association, corporation or other entity
is the beneficial owner, directly or indirectly, of 20% or
more of the outstanding voting Common Shares of the System
(other than: 1) a registered investment company which has
expressly stated that it has no intention to acquire control
of the System or which the Board of Trustees has determined
that such registered investment company has no intention to
acquire control of the System and 2) the Employees Savings Plan
of Commonwealth Energy System and Subsidiary Companies);
provided that if the Board of Trustees subsequently determines
that such registered investment company does intend to acquire
control of the System or the registered investment company
expresses this intent, the beneficial ownership of 20% or more
of the outstanding voting Common Shares of the System shall be
considered to be a "change in control" event described in this
clause (1);
(2) Any person (as such term is defined in Section 13(d) of the
Exchange Act), group, partnership, association, corporation or
other entity other than the System or a wholly-owned subsidiary of
the System,
purchases shares pursuant to a tender offer or exchange offer to
acquire voting shares (or securities convertible into shares) for
cash, securities or any other consideration, provided that after
consummation of the offer, the person, group, partnership,
association, corporation or other entity in question is the
beneficial owner (as defined in Rule 13(d)-3 under the Exchange
Act)
directly or indirectly, of 20% or more of the then outstanding
voting Common Shares of the System (calculated as directed in
paragraph (d)of Rule 13(d)-3 under the Exchange Act in the case of
rights to acquire Common Shares);
(3) The Board of Trustees of the System approves: (a) any
consolidation
or merger of the System in which the System is not the continuing
or surviving entity or pursuant to which Common Shares of the
System would be converted into cash, securities or other
property; or (b) any transaction or series of related
transactions the result of which all or substantially all the
assets of the System are sold;
<PAGE 25>
(4) The System ceases to be a reporting company pursuant to
Section 13(a) of the Securities Exchange Act of 1934 or any
similar successor provision; or
(5) During any period of two consecutive years (24-month period),
individuals who at the beginning of such period constituted the
Board of Trustees of the System cease for any reason (other than
retirements or resignations in the normal course of business) to
constitute a majority thereof; provided, however, that any
Trustee who is not in office at the beginning of such 24-month
period, but whose election by the Board of Trustees or whose
nomination for election by the System's Common Shareholders was
to fill a vacancy caused by death or retirement and was approved
by a vote of at least two-thirds of the Trustees then still in
office and who either were Trustees at the beginning of such
period or whose election or nomination for election was previously
so approved, shall be deemed to have been in office at the
beginning of such period for purposes of this definition.
10. Information Reporting. At the time the interest of a Participant in the
Common Shares vests, the System will deliver a certificate for such Common
Shares to the Participant and will, in accordance with Internal Revenue
Service regulations, provide to the Participant a Form 1099, reporting the
taxable value of the vested Common Shares, which value shall be based upon the
fair market value of the Common Shares on the date they vest. If the
Participant shall elect under Section 83 of the Internal Revenue Code of 1986,
as amended, to accelerate the recognition of income attributable to the
receipt of Common Shares, the Participant shall furnish the System with a copy
of such election concurrently with its filing with the Internal Revenue
Service, in which case the System will provide a Form 1099 reporting the
taxable value of the granted Common Shares as of the grant date.
11. General Restriction. The issuance of Common Shares or the delivery of
certificates for such Common Shares to Participants hereunder shall be subject
to the requirement that, if at any time the Chief Financial Officer of the
System shall reasonably determine, in his discretion, that the listing,
registration or qualification of such Common Shares upon any securities
exchange or under any state or federal law, or the consent or approval of any
government regulatory body, is necessary or desirable as a condition of, or in
connection with, such issuance or delivery thereunder, such issuance or
delivery shall not take place unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free
of any conditions not reasonably acceptable to the Chief Financial Officer.
12. Rule 16b-3. It is the intention that the Plan and the operation thereof
qualify for the exemption provisions contained in Rule 16b-3 adopted by the
Securities and Exchange Commission under the Securities Exchange Act of 1934,
as amended, as in effect from time to time or any successor rule ("Rule"). To
the extent that the implementation or operation of any provision hereof does
not comply with the requirements of the Rule as applicable to the Plan, such
provision shall be inoperative or shall be interpreted, to the extent
practicable, to apply in a manner not inconsistent with the requirements of
the Rule.
13. Share Dividends; Share Splits; Share Combinations; Recapitalization.
The Board of Trustees of the System may make appropriate adjustments in the
maximum number of Common Shares subject to the Plan to give effect to any
share dividends, share splits, share combinations, recapitalizations and other
similar changes in the capital structure of the System. The provisions
contained in the Plan shall apply to any other capital shares of the System,
and any other securities which may be acquired by the Participant as a result
of a share dividend, share split, share combination, or exchange for other
securities resulting from any recapitalization, reorganization or any other
transaction affecting the Common Shares subject to the Plan.
<PAGE 26>
14. Termination or Amendment of Plan.
(a) Except as provided in paragraph 14(b), the Board of Trustees
may at any time suspend, reinstate, or terminate the Plan or
make such changes in or additions to the Plan as it deems
advisable without further action on the part of the Common
Shareholders of the System, provided;
(i) that no such termination or amendment shall
adversely affect or impair any then issued and
outstanding Common Shares without the consent
of the Participant holding such Common Shares; and
(ii) that no such amendment which (a) materially
increases the maximum number of Common Shares
subject to this Plan; (b) materially increases
the benefits accruing to Participants under
the Plan (except as is provided in Section 4);
or (c) materially modifies the requirement as
to eligibility for participation in the Plan may
be made without first obtaining shareholder
approval, if independent legal counsel advises
that such approval is necessary.
(b) In the event of a change in control (as defined in
Section 9), the System may neither terminate
the Plan nor reduce benefits under the Plan with
respect to those individuals who are Participants as
of the date of the change in control.
15. Shares Subject to the Plan. The maximum number of Common Shares which
may be cumulatively granted under the Plan, subject to adjustment as provided
in Paragraph 13 of the Plan, shall be one percent (1%) of the total issued and
outstanding Common Shares of the System. Any Common Shares which are
forfeited pursuant to Section 6 shall again be eligible for issuance.
16. Governing Law. This Plan shall be subject to and construed in
accordance with the laws of the Commonwealth of Massachusetts.
<PAGE 27>
Appendices
COMMONWEALTH ENERGY SYSTEM
Proxy-Annual Meeting of Shareholders-May 7, 1998
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 7, 1998 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 "EXCEPTION"
box and enter name(s) of the exception(s) in the space provided.
_____________________________________________________________________________
The Trustees recommend a vote "FOR" #1, 2 and #3
1. Election of Trustees
Nominees: S. A. Buckler, B. L. Francis, M. C. Ruettgers
[ ] FOR [ ] WITHHELD [ ] EXCEPTION(S)
EXCEPTION(S): ____________________
2. Amendment to Declaration of Trust
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Restricted Common Share Plan for Trustees
[ ] FOR [ ] AGAINST [ ] ABSTAIN
_____________________________________________________________________________
The Trustees recommend a vote "AGAINST" #4
4. Shareholder Proposal
[ ] FOR [ ] AGAINST [ ] ABSTAIN
_____________________________________________________________________________
5. 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 proposals #1, 2 AND 3,
and AGAINST proposal #4.
Any proxy or proxies to vote such shares at said meeting
heretofore given by the shareholder(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_______________________, 1998
PLEASE SIGN, DATE AND RETURN IN ENCLOSED PREPAID ENVELOPE