<PAGE 1> UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549-1004 Form 10-K/A Amendment No. 1 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission file number 1-7316 COMMONWEALTH ENERGY SYSTEM (Exact name of registrant as specified in its Declaration of Trust) Massachusetts 04-1662010 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Main Street, Cambridge, Massachusetts 02142-9150 (Address of principal executive offices) (Zip Code) (617) 225-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Shares of Beneficial New York Stock Exchange, Inc. Interest $2 par value Pacific Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: Title of Class None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [ x ] NO [ ] Aggregate market value of the voting stock held by non-affiliates of the registrant as of March 16, 1998: $789,947,326 Common Shares outstanding at March 16, 1998: 21,531,784 shares Document Incorporated by Reference Part in Form 10-K Notice of 1998 Annual Meeting and Proxy Statement, dated March 30, 1998 (pages as specified herein) Part III <PAGE 2> COMMONWEALTH ENERGY SYSTEM The undersigned registrant hereby amends the following item of its Annual Report for 1997 on Form 10-K as set forth on page 3. Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K Exhibit 10. Material Agreements: Filed herewith as Exhibit 1: 10.3.2.4 Fourth Amendment to the Employees Savings Plan of Commonwealth Energy System and Subsidiary Companies, as amended and restated January 1, 1993, effective January 1, 1998. Exhibit 99. Additional Exhibit: Pursuant to Rule 15(d)-21 of the Securities Exchange Act of 1934, information, financial statements and exhibits required in Form 11-K with respect to: (1) Employees Savings Plan of Commonwealth Energy System and Subsidiary Companies Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. COMMONWEALTH ENERGY SYSTEM (Registrant) By JAMES D. RAPPOLI James D. Rappoli, Financial Vice President and Treasurer Date: April 29, 1998 <PAGE 3> INFORMATION REQUIRED BY FORM 11-K ANNUAL REPORT For the Fiscal Year Ended December 31, 1997 A. Full title of plan: Employees Savings Plan of Commonwealth Energy System and Subsidiary Companies (hereinafter referred to as the "Plan"). B. Name of issuer of the securities held pursuant to the Plan and the address of its principal executive office: Commonwealth Energy System One Main Street Cambridge, Massachusetts 02142-9150 Item 1. Financial Statements and Exhibits (a) Financial Statements and Schedules attached hereto: Page Report of Independent Public Accountants 4 Statements of Net Assets Available for Benefits at December 31, 1997 and 1996 5 - 14 Statements of Changes in Net Assets Available for Benefits for the Years Ended December 31, 1997, 1996 and 1995 15 - 27 Notes to Financial Statements 28 - 36 Schedule I - Item 27a: Schedule of Investments at December 31, 1997 37 Schedule II - Item 27d: Schedule of Reportable Transactions for the Year Ended December 31, 1997 38 (b) Exhibits filed herewith: Number in SEC Exhibit Exhibit Table Description Number 10 Fourth Amendment to the Employees Savings Plan 1 of Commonwealth Energy System and Subsidiary Companies, as amended and restated January 1, 1993, effective January 1, 1998. <PAGE 4> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES Report of Independent Public Accountants To the Savings Plan Board of the Employees Savings Plan of Commonwealth Energy System and Subsidiary Companies: We have audited the accompanying statements of net assets available for benefits of the EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES as of December 31, 1997 and 1996, and the related statements of changes in net assets available for benefits for each of the three years in the period ended December 31, 1997. These financial statements and the supplemental schedules referred to below are the responsibility of the plan administrator. Our responsibility is to express an opinion on these financial statements and supplemental schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Employees Savings Plan of Commonwealth Energy System and Subsidiary Companies as of December 31, 1997 and 1996, and its changes in net assets available for benefits for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. Supplemental Schedules I and II are presented for purposes of additional analysis and are not a required part of the basic financial statements, but are supplemental information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The Fund Information in the statement of net assets available for benefits and the statement of changes in net assets available for benefits is presented for purposes of additional analysis rather than to present the net assets available for benefits and changes in net assets available for benefits of each fund. The supplemental schedules and Fund Information have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Boston, Massachusetts April 17, 1998 <PAGE 5> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 1 of 5) Commonwealth Vanguard Energy System Money Market Common Share Reserves-Prime Total Fund Portfolio Assets Investments, at quoted market value (Schedule I): Common Shares of Commonwealth Energy System $ 88,626,418 $88,626,418 $ - Mutual funds 210,721,055 - 25,809,453 Total investments 299,347,473 88,626,418 25,809,453 Other assets: Loans to participants 8,939,289 - - Receivables - Contributions 128,326 29,668 12,629 Loan repayments 99,893 12,701 6,259 Interest 2,064 2,064 - Exchanges in 3,037 3,037 - Total other assets 9,172,609 47,470 18,888 Total assets 308,520,082 88,673,888 25,828,341 Liability: Accounts payable 303,986 303,986 - Net assets available for benefits $308,216,096 $88,369,902 $25,828,341 The accompanying notes are an integral part of these financial statements. <PAGE 6> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 2 of 5) Vanguard Fixed Income Securities Fund- Vanguard Short-Term Vanguard Windsor II Corporate Wellington Fund Portfolio Fund Assets Investments, at quoted market value (Schedule I): Common Shares of Commonwealth Energy System $ - $ - $ - Mutual funds 110,334,177 5,367,919 45,097,834 Total investments 110,334,177 5,367,919 45,097,834 Other assets: Loans to participants - - - Receivables - Contributions 43,755 2,384 25,318 Loan repayments 41,578 788 34,598 Interest - - - Exchanges in - - - Total other assets 85,333 3,172 59,916 Total assets 110,419,510 5,371,091 45,157,750 Liability: Accounts payable - - - Net assets available for benefits $110,419,510 $ 5,371,091 $45,157,750 The accompanying notes are an integral part of these financial statements. <PAGE 7> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 3 of 5) Vanguard Vanguard Index Trust- International Extended Vanguard Growth Market Explorer Portfolio Portfolio Fund Assets Investments, at quoted market value (Schedule I): Common Shares of Commonwealth Energy System $ - $ - $ - Mutual funds 9,471,899 6,914,193 2,940,817 Total investments 9,471,899 6,914,193 2,940,817 Other assets: Loans to participants - - - Receivables - Contributions 6,669 3,593 1,927 Loan repayments 2,294 841 427 Interest - - - Exchanges in - - - Total other assets 8,963 4,434 2,354 Total assets 9,480,862 6,918,627 2,943,171 Liability: Accounts payable - - - Net assets available for benefits $ 9,480,862 $ 6,918,627 $ 2,943,171 The accompanying notes are an integral part of these financial statements. <PAGE 8> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 4 of 5) Vanguard LIFEStrategy Funds- Conservative Moderate Income Growth Growth Portfolio Portfolio Portfilio Assets Investments, at quoted market value (Schedule I): Common Shares of Commonwealth Energy System $ - $ - $ - Mutual funds 455,415 841,499 1,836,746 Total investments 455,415 841,499 1,836,746 Other assets: Loans to participants - - - Receivables - Contributions 5 91 897 Loan repayments 5 4 125 Interest - - - Exchanges in - - - Total other assets 10 95 1,022 Total assets 455,425 841,594 1,837,768 Liability: Accounts payable - - - Net assets available for benefits $ 455,425 $ 841,594 $ 1,837,768 The accompanying notes are an integral part of these financial statements. <PAGE 9> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 5 of 5) Vanguard LIFEStrategy Funds- Growth Loan Portfolio Fund Assets Investments, at quoted market value (Schedule I): Common Shares of Commonwealth Energy System $ - $ - Mutual funds 1,651,103 - Total investments 1,651,103 - Other assets: Loans to participants - 8,939,289 Receivables - Contributions 1,390 - Loan repayments 273 - Interest - - Exchanges in - - Total other assets 1,663 8,939,289 Total assets 1,652,766 8,939,289 Liability: Accounts payable - - Net assets available for benefits $ 1,652,766 $ 8,939,289 The accompanying notes are an integral part of these financial statements. <PAGE 10> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 1 of 5) Commonwealth Vanguard Energy System Money Market Common Share Reserves-Prime Total Fund Portfolio Assets Investments, at quoted market value: Common Shares of Commonwealth Energy System $ 74,929,586 $74,929,586 $ - Mutual funds 175,881,535 131,517 28,548,919 Total investments 250,811,121 75,061,103 28,548,919 Other assets: Loans to participants 9,548,801 - - Receivables - Loan repayments 47,821 14,099 6,400 Interest 1,548 1,548 - Contributions 151,177 40,134 16,505 Total other assets 9,749,347 55,781 22,905 Total assets 260,560,468 75,116,884 28,571,824 Liability: Accounts payable 30,255 30,255 - Net assets available for benefits $260,530,213 $75,086,629 $28,571,824 The accompanying notes are an integral part of these financial statements. <PAGE 11> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 2 of 5) Vanguard Fixed Income Securities Fund- Vanguard Short-Term Vanguard Windsor II Corporate Wellington Fund Portfolio Fund Assets Investments, at quoted market value: Common Shares of Commonwealth Energy System $ - $ - $ - Mutual funds 86,105,135 5,726,307 37,062,570 Total investments 86,105,135 5,726,307 37,062,570 Other assets: Loans to participants - - - Receivables - Loan repayments 14,263 934 7,907 Interest - - - Contributions 46,950 3,701 28,500 Total other assets 61,213 4,635 36,407 Total assets 86,166,348 5,730,942 37,098,977 Liability: Accounts payable - - - Net assets available for benefits $ 86,166,348 $ 5,730,942 $37,098,977 The accompanying notes are an integral part of these financial statements. <PAGE 12> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 3 of 5) Vanguard Vanguard Index Trust- International Extended Vanguard Growth Market Explorer Portfolio Portfolio Fund Assets Investments, at quoted market value: Common Shares of Commonwealth Energy System $ - $ - $ - Mutual funds 9,243,462 5,029,383 2,312,633 Total investments 9,243,462 5,029,383 2,312,633 Other assets: Loans to participants - - - Receivables - Loan repayments 2,784 913 299 Interest - - - Contributions 8,282 4,021 1,854 Total other assets 11,066 4,934 2,153 Total assets 9,254,528 5,034,317 2,314,786 Liability: Accounts payable - - - Net assets available for benefits $ 9,254,528 $ 5,034,317 $ 2,314,786 The accompanying notes are an integral part of these financial statements. <PAGE 13> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 4 of 5) Vanguard LIFEStrategy Funds- Conservative Moderate Income Growth Growth Portfolio Portfolio Portfilio Assets Investments, at quoted market value: Common Shares of Commonwealth Energy System $ - $ - $ - Mutual funds 264,846 179,641 688,642 Total investments 264,846 179,641 688,642 Other assets: Loans to participants - - - Receivables - Loan repayments 5 - 96 Interest - - - Contributions 3 86 409 Total other assets 8 86 505 Total assets 264,854 179,727 689,147 Liability: Accounts payable - - - Net assets available for benefits $ 264,854 $ 179,727 $ 689,147 The accompanying notes are an integral part of these financial statements. <PAGE 14> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 5 of 5) Vanguard LIFEStrategy Funds- Growth Loan Portfolio Fund Assets Investments, at quoted market value: Common Shares of Commonwealth Energy System $ - $ - Mutual funds 588,480 - Total investments 588,480 - Other assets: Loans to participants - 9,548,801 Receivables - Loan repayments 121 - Interest - - Contributions 732 - Total other assets 853 9,548,801 Total assets 589,333 9,548,801 Liability: Accounts payable - - Net assets available for benefits $ 589,333 $ 9,548,801 The accompanying notes are an integral part of these financial statements. <PAGE 15> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 1 of 5) Commonwealth Vanguard Energy System Money Market Common Share Reserves-Prime Total Fund Portfolio Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ 4,791,915 $ 4,791,915 $ - Registered investment company shares 17,162,911 - 1,518,535 Interest on loans 820,039 - - 22,774,865 4,791,915 1,518,535 Realized and unrealized gain (loss) on investments 50,188,782 26,962,004 - Contributions: Employees 8,727,513 1,844,576 793,610 Employers 4,172,439 963,411 429,025 12,899,952 2,807,987 1,222,635 Total additions, net 85,863,599 34,561,906 2,741,170 Deductions Deductions from net assets attributed to: Benefits paid to participants 38,166,213 6,463,039 11,399,265 Purchase fees 11,503 - - Total deductions 38,177,716 6,463,039 11,399,265 Net increase (decrease) prior to interfund transfers 47,685,883 28,098,867 (8,658,095) Interfund transfers - (14,815,594) 5,914,612 Net increase (decrease) 47,685,883 13,283,273 (2,743,483) Net assets available for benefits: Beginning of year 260,530,213 75,086,629 28,571,824 End of year $308,216,096 $ 88,369,902 $25,828,341 The accompanying notes are an integral part of these financial statements. <PAGE 16> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 2 of 5) Vanguard Fixed Income Securities Fund- Vanguard Short-Term Vanguard Windsor II Corporate Wellington Fund Portfolio Fund Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 10,063,826 345,842 3,866,494 Interest on loans - - - 10,063,826 345,842 3,866,494 Realized and unrealized gain (loss) on investments 17,438,941 30,754 4,616,872 Contributions: Employees 2,951,932 186,801 1,793,160 Employers 1,350,142 96,666 818,282 4,302,074 283,467 2,611,442 Total additions, net 31,804,841 660,063 11,094,808 Deductions Deductions from net assets attributed to: Benefits paid to participants 11,275,388 1,134,527 5,474,381 Purchase fees - - - Total deductions 11,275,388 1,134,527 5,474,381 Net increase (decrease) prior to interfund transfers 20,529,453 (474,464) 5,620,427 Interfund transfers 3,723,709 114,613 2,438,346 Net increase (decrease) 24,253,162 (359,851) 8,058,773 Net assets available for benefits: Beginning of year 86,166,348 5,730,942 37,098,977 End of year $110,419,510 $ 5,371,091 $45,157,750 The accompanying notes are an integral part of these financial statements. <PAGE 17> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 3 of 5) Vanguard Vanguard Index Trust- International Extended Vanguard Growth Market Explorer Portfolio Portfolio Fund Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 410,854 467,053 283,422 Interest on loans - - - 410,854 467,053 283,422 Realized and unrealized gain (loss) on investments (96,346) 839,872 40,357 Contributions: Employees 588,069 289,009 156,631 Employers 264,637 129,120 65,369 852,706 418,129 222,000 Total additions, net 1,167,214 1,725,054 545,779 Deductions Deductions from net assets attributed to: Benefits paid to participants 1,142,796 507,308 198,883 Purchase fees - 11,503 - Total deductions 1,142,796 518,811 198,883 Net increase (decrease) prior to interfund transfers 24,418 1,206,243 346,896 Interfund transfers 201,916 678,067 281,489 Net increase (decrease) 226,334 1,884,310 628,385 Net assets available for benefits: Beginning of year 9,254,528 5,034,317 2,314,786 End of year $ 9,480,862 $ 6,918,627 $ 2,943,171 The accompanying notes are an integral part of these financial statements. <PAGE 18> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 4 of 5) Vanguard LIFEStrategy Funds- Conservative Moderate Income Growth Growth Portfolio Portfolio Portfolio Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 21,161 41,796 81,732 Interest on loans - - - 21,161 41,796 81,732 Realized and unrealized gain (loss) on investments 25,332 47,936 151,357 Contributions: Employees 4,166 7,215 36,734 Employers 1,921 2,716 18,573 6,087 9,931 55,307 Total additions, net 52,580 99,663 288,396 Deductions Deductions from net assets attributed to: Benefits paid to participants 13,499 18,190 87,658 Purchase fees - - - Total deductions 13,499 18,190 87,658 Net increase (decrease) prior to interfund transfers 39,081 81,473 200,738 Interfund transfers 151,490 580,394 947,883 Net increase (decrease) 190,571 661,867 1,148,621 Net assets available for benefits: Beginning of year 264,854 179,727 689,147 End of year $ 455,425 $ 841,594 $ 1,837,768 The accompanying notes are an integral part of these financial statements. <PAGE 19> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1997 (Page 5 of 5) Vanguard LIFEStrategy Funds- Growth Loan Portfolio Fund Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - Registered investment company shares 62,196 - Interest on loans - 820,039 62,196 820,039 Realized and unrealized gain (loss) on investments 131,703 - Contributions: Employees 75,610 - Employers 32,577 - 108,187 - Total additions, net 302,086 820,039 Deductions Deductions from net assets attributed to: Benefits paid to participants 52,688 398,591 Purchase fees - - Total deductions 52,688 398,591 Net increase (decrease) prior to interfund transfers 249,398 421,448 Interfund transfers 814,035 (1,030,960) Net increase (decrease) 1,063,433 (609,512) Net assets available for benefits: Beginning of year 589,333 9,548,801 End of year $ 1,652,766 $ 8,939,289 The accompanying notes are an integral part of these financial statements. <PAGE 20> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 1 of 5) Commonwealth Vanguard Energy System Money Market Common Share Reserves-Prime Total Fund Portfolio Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ 5,113,157 $ 5,113,157 $ - Registered investment company shares 11,654,177 - 1,408,836 Interest on loans 675,349 - - 17,442,683 5,113,157 1,408,836 Realized and unrealized gain (loss) on investments 17,828,551 3,951,273 - Contributions: Employees 8,294,889 1,975,041 761,184 Employers 4,053,049 1,039,431 442,636 12,347,938 3,014,472 1,203,820 Total additions, net 47,619,172 12,078,902 2,612,656 Deductions Deductions from net assets attributed to: Benefits paid to participants 15,766,572 3,979,714 4,672,998 Purchase fees 9,498 - - Total deductions 15,776,070 3,979,714 4,672,998 Net increase (decrease) prior to interfund transfers 31,843,102 8,099,188 (2,060,342) Interfund transfers - (8,751,780) 3,267,792 Net increase (decrease) 31,843,102 (652,592) 1,207,450 Net assets available for benefits: Beginning of year 228,687,111 75,739,221 27,364,374 End of year $260,530,213 $ 75,086,629 $28,571,824 The accompanying notes are an integral part of these financial statements. <PAGE 21> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 2 of 5) Vanguard Fixed Income Securities Fund- Vanguard Short-Term Vanguard Windsor II Corporate Wellington Fund Portfolio Fund Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 6,056,337 346,159 2,893,328 Interest on loans - - - 6,056,337 346,159 2,893,328 Realized and unrealized gain (loss) on investments 10,665,917 (92,444) 2,215,457 Contributions: Employees 2,678,605 228,352 1,688,196 Employers 1,247,197 116,897 783,045 3,925,802 345,249 2,471,241 Total additions, net 20,648,056 598,964 7,580,026 Deductions Deductions from net assets attributed to: Benefits paid to participants 3,941,035 277,681 1,872,076 Purchase fees - - - Total deductions 3,941,035 277,681 1,872,076 Net increase (decrease) prior to interfund transfers 16,707,021 321,283 5,707,950 Interfund transfers 701,540 (469,744) 172,531 Net increase (decrease) 17,408,561 (148,461) 5,880,481 Net assets available for benefits: Beginning of year 68,757,787 5,879,403 31,218,496 End of year $ 86,166,348 $ 5,730,942 $37,098,977 The accompanying notes are an integral part of these financial statements. <PAGE 22> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 3 of 5) Vanguard Vanguard Index Trust- International Extended Vanguard Growth Market Explorer Portfolio Portfolio Fund Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 396,605 369,401 116,347 Interest on loans - - - 396,605 369,401 116,347 Realized and unrealized gain (loss) on investments 787,700 345,278 (57,811) Contributions: Employees 569,446 277,279 85,954 Employers 255,699 119,339 36,125 825,145 396,618 122,079 Total additions, net 2,009,450 1,111,297 180,615 Deductions Deductions from net assets attributed to: Benefits paid to participants 289,952 363,550 77,579 Purchase fees - 9,498 - Total deductions 289,952 373,048 77,579 Net increase (decrease) prior to interfund transfers 1,719,498 738,249 103,036 Interfund transfers 225,557 435,349 2,211,750 Net increase (decrease) 1,945,055 1,173,598 2,314,786 Net assets available for benefits: Beginning of year 7,309,473 3,860,719 - End of year $ 9,254,528 $ 5,034,317 $ 2,314,786 The accompanying notes are an integral part of these financial statements. <PAGE 23> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 4 of 5) Vanguard LIFEStrategy Funds- Conservative Moderate Income Growth Growth Portfolio Portfolio Portfolio Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 10,885 8,159 26,245 Interest on loans - - - 10,885 8,159 26,245 Realized and unrealized gain (loss) on investments (3,056) 767 (3,545) Contributions: Employees 800 1,867 7,950 Employers 333 645 3,681 1,133 2,512 11,631 Total additions, net 8,962 11,438 34,331 Deductions Deductions from net assets attributed to: Benefits paid to participants - - - Purchase fees - - - Total deductions - - - Net increase (decrease) prior to interfund transfers 8,962 11,438 34,331 Interfund transfers 255,892 168,289 654,816 Net increase (decrease) 264,854 179,727 689,147 Net assets available for benefits: Beginning of year - - - End of year $ 264,854 $ 179,727 $ 689,147 The accompanying notes are an integral part of these financial statements. <PAGE 24> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1996 (Page 5 of 5) Vanguard LIFEStrategy Funds- Growth Loan Portfolio Fund Assets Additions to net assets attributed to: Net investment income Dividends - Common Shares of Commonwealth Energy System $ - $ - Registered investment company shares 21,875 - Interest on loans - 675,349 21,875 675,349 Realized and unrealized gain (loss) on investments 19,015 - Contributions: Employees 20,215 - Employers 8,021 - 28,236 - Total additions, net 69,126 675,349 Deductions Deductions from net assets attributed to: Benefits paid to participants 79 291,908 Purchase fees - - Total deductions 79 291,908 Net increase (decrease) prior to interfund transfers 69,047 383,441 Interfund transfers 520,286 607,722 Net increase (decrease) 589,333 991,163 Net assets available for benefits: Beginning of year - 8,557,638 End of year $ 589,333 $ 9,548,801 The accompanying notes are an integral part of these financial statements. <PAGE 25> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 (Page 1 of 3) Commonwealth Vanguard Energy System Money Market Common Share Reserves-Prime Total Fund Portfolio Assets Additions to net assets attributed to: Net investment income: Dividends - Common Shares of Commonwealth Energy System $ 5,219,181 $ 5,219,181 $ - Registered investment company shares 7,757,823 - 1,569,762 Interest on loans 647,206 - - 13,624,210 5,219,181 1,569,762 Realized and unrealized gain on investments 36,861,646 14,531,777 - Contributions: Employees 8,679,077 2,397,221 1,082,525 Employers 4,392,730 1,270,786 618,671 13,071,807 3,668,007 1,701,196 Total additions, net 63,557,663 23,418,965 3,270,958 Deductions Deductions from net assets attributed to: Benefits paid to participants 16,118,786 3,733,426 6,012,404 Purchase fees 9,949 - - Total deductions 16,128,735 3,733,426 6,012,404 Net increase (decrease) prior to interfund transfers 47,428,928 19,685,539 (2,741,446) Interfund transfers - (6,736,395) 3,354,465 Net increase (decrease) 47,428,928 12,949,144 613,019 Net assets available for benefits: Beginning of year 181,258,183 62,790,077 26,751,355 End of year $228,687,111 $ 75,739,221 $27,364,374 The accompanying notes are an integral part of these financial statements. <PAGE 26> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 (Page 2 of 3) Vanguard Fixed Income Securities Fund- Vanguard Short-term Vanguard Windsor II Corporate Wellington Fund Portfolio Fund Assets Additions to net assets attributed to: Net investment income: Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 4,014,071 352,866 1,517,817 Interest on loans - - - 4,014,071 352,866 1,517,817 Realized and unrealized gain on investments 14,943,396 316,587 5,839,233 Contributions: Employees 2,585,284 263,787 1,628,304 Employers 1,248,079 141,641 791,068 3,833,363 405,428 2,419,372 Total additions, net 22,790,830 1,074,881 9,776,422 Deductions Deductions from net assets attributed to: Benefits paid to participants 3,000,179 761,498 1,916,861 Purchase fees - - - Total deductions 3,000,179 761,498 1,916,861 Net increase (decrease) prior to interfund transfers 19,790,651 313,383 7,859,561 Interfund transfers 216,246 669,127 2,255,071 Net increase (decrease) 20,006,897 982,510 10,114,632 Net assets available for benefits: Beginning of year 48,750,890 4,896,893 21,103,864 End of year $ 68,757,787 $ 5,879,403 $31,218,496 The accompanying notes are an integral part of these financial statements. <PAGE 27> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 (Page 3 of 3) Vanguard Vanguard Index Trust- International Extended Growth Market Loan Portfolio Portfolio Fund Assets Additions to net assets attributed to: Net investment income: Dividends - Common Shares of Commonwealth Energy System $ - $ - $ - Registered investment company shares 194,489 108,818 - Interest on loans - - 647,206 194,489 108,818 647,206 Realized and unrealized gain on investments 682,362 548,291 - Contributions: Employees 533,713 188,243 - Employers 238,129 84,356 - 771,842 272,599 - Total additions, net 1,648,693 929,708 647,206 Deductions Deductions from net assets attributed to: Benefits paid to participants 337,375 96,424 260,619 Purchase fees - 9,949 - Total deductions 337,375 106,373 260,619 Net increase (decrease) prior to interfund transfers 1,311,318 823,335 386,587 Interfund transfers (645,280) 1,377,434 (490,668) Net increase (decrease) 666,038 2,200,769 (104,081) Net assets available for benefits: Beginning of year 6,643,435 1,659,950 8,661,719 End of year $ 7,309,473 $ 3,860,719 $ 8,557,638 The accompanying notes are an integral part of these financial statements. <PAGE 28> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (1) General Information The Employees Savings Plan of Commonwealth Energy System and Subsidiary Companies (the Plan) was originally created in 1962 by Commonwealth Energy System (the System) and its subsidiary companies to assist employees in adopting a regular savings program and to help employees by providing additional security for their retirement. The Plan has been amended or restated from time to time thereafter. The latest Plan amendments became effective as of January 1, 1998 and relate to changes in eligibility requirements and allowance of rollovers from another qualified plan or Individual Retirement Account to the Plan. Vanguard Fiduciary Trust Company of Valley Forge, Pennsylvania, has acted as Trustee for the Plan (Plan Trustee) since January 1, 1989. The Trustee retains the Plan assets and provides records of Plan activity to a Plan Agent designated by a three-member Savings Plan Board (the Board) that is appointed by the Trustees of the System and by the directors of its subsidiary companies. The Board is responsible (except for the duties specifically vested in the Plan Trustee) for the administration of the Plan. The term "Participant" as used in this report shall be deemed to include Members, Inactive Members or Former Members, all as defined in the Plan. The Employers participating in the Plan consist of certain, wholly-owned subsidiary companies of the System, as follows: Cambridge Electric Light Company, Canal Electric Company, Commonwealth Gas Company, COM/Energy Services Company, Commonwealth Electric Company, Advanced Energy Systems, Inc. (effective December 1996), COM/Energy Marketing, Inc. (effective May 1997) and COM/Energy Technologies, Inc. (effective September 1997) (Employers). Each eligible employee, upon joining the Plan, shall specify in one percent (1%) increments his or her contributions and the applicable Employer contributions to be invested in each of twelve separate Investment Funds (Fund(s)) that are collectively referred to as the Trust Fund (Trust Fund). The Trust Fund is described in Note 4. Participants may change their Fund allocation contribution daily by contacting Vanguard Participant Services. However, not more than fifty percent (50%) of a Participant's contributions and the applicable Employer contributions may be allocated to the Commonwealth Energy System Common Share Fund. The Plan is subject to provisions of the Employee Retirement Income Security Act of 1974 (ERISA), the Retirement Equity Act of 1984, the Tax Reform Act of 1986, the Omnibus Budget Reconciliation Act of 1993, and the Taxpayer Relief Act of 1997 relating to plans of this type. <PAGE 29> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (2) Significant Accounting Policies (a) Principles of Accounting The financial statements of the Plan are prepared under the accrual method of accounting. Shares in Funds of the Plan Trustee are valued at quoted market prices that represent the net asset value of shares held by the Plan at year-end. The Commonwealth Energy System Common Share Fund is valued at its year-end closing market price. Participant loans are valued at cost that approximates fair value. In addition, certain prior period amounts are reclassified from time to time to conform with the presentation used in the current year's financial statements. (b) Federal Income Taxes The Plan is subject to certain provisions of the Internal Revenue Code (IRC) and qualifies under Section 401(a) and 401(k) of the IRC. The Internal Revenue Service has issued a favorable determination letter, applicable to Plan years beginning after January 1, 1993 and for amendments adopted on January 15, 1993, which indicates that the Plan was designed in accordance with applicable IRC requirements. Management believes that the Plan is currently designed and operated in accordance with applicable IRC require- ments. As a result, the Plan has not provided for Federal income taxes. Generally, Participants are not subject to taxes on contributions or the earned income until such time as distributions are made. (c) Expenses Brokerage fees, commissions, stock transfer taxes and other expenses in connection with the purchase, sale or distribution of securities for each Fund may be charged to such Fund. Any expense of litigation may be paid by the Plan Trustee and charged to the Trust Fund or to the Fund or Funds to which the litigation relates. Expenses and charges incurred in the administration of the Plan are generally paid by the Employers. An administrative fee relating to the issuance of Plan loans under the Loan Fund is paid by Plan Participants. (d) Realized Gain (Loss) on Investments Sold or Distributed Pursuant to rules issued by the Department of Labor (DOL), realized gain (loss) was computed by comparing the market value of the investment distributed or sold with the market value of said investment at the beginning of the Plan year. The Commonwealth Energy System Common Share Fund realized gains of $1,021,874, $675,475 and $1,027,097 on the distribution or sale of 721,145, 453,158 and 414,822 System Common Shares in 1997, 1996 and 1995, respectively. <PAGE 30> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS A summary of realized gains (losses) on investments sold or distributed during the years ended December 31, 1997, 1996 and 1995 is set forth below: Quoted Quoted Market Price Market Price Beginning of Gain Investment Funds or Proceeds Year (Loss) 1997 Commonwealth Energy System Common Share Fund $ 18,230,242 $17,208,368 $1,021,874 Vanguard Money Market Reserves- Prime Portfolio 33,208,060 33,208,060 - Vanguard Windsor II Fund 25,137,370 22,581,557 2,555,813 Vanguard Fixed Income Securities Fund- Short-Term Corporate Portfolio 2,916,407 2,916,225 182 Vanguard Wellington Fund 10,592,884 9,795,887 796,997 Vanguard International Growth Portfolio 6,890,708 6,741,905 148,803 Vanguard Index Trust- Extended Market Portfolio 1,949,014 1,845,648 103,366 Vanguard Explorer Fund 2,060,790 1,997,985 62,805 Vanguard LIFEStrategy Funds (1) 1,404,036 1,353,771 50,265 $102,389,511 $97,649,406 $4,740,105 1996 Commonwealth Energy System Common Share Fund $ 10,814,896 $10,139,421 $ 675,475 Vanguard Money Market Reserves- Prime Portfolio 17,818,107 17,818,107 - Vanguard Windsor II Fund 12,205,764 11,313,017 892,747 Vanguard Fixed Income Securities Fund- Short-Term Corporate Portfolio 2,170,370 2,196,757 (26,387) Vanguard Wellington Fund 6,174,856 5,962,417 212,439 Vanguard International Growth Portfolio 3,791,405 3,632,606 158,799 Vanguard Index Trust- Extended Market Portfolio 1,433,320 1,371,491 61,829 Vanguard Explorer Fund 1,210,006 1,220,007 (10,001) Vanguard LIFEStrategy Funds (1) 116,672 114,869 1,803 $ 55,735,396 $53,768,692 $1,966,704 1995 Commonwealth Energy System Common Share Fund $ 8,320,160 $ 7,293,063 $1,027,097 Vanguard Money Market Reserves- Prime Portfolio 13,863,305 13,863,305 - Vanguard Windsor II Fund 8,895,459 7,758,707 1,136,752 Vanguard Fixed Income Securities Fund- Short-Term Corporate Portfolio 1,708,442 1,664,677 43,765 Vanguard Wellington Fund 4,213,461 3,690,865 522,596 Vanguard International Growth Portfolio 3,897,722 3,816,016 81,706 Vanguard Index Trust- Extended Market Portfolio 450,953 412,569 38,384 $ 41,349,502 $38,499,202 $2,850,300 (1) Consists of four portfolios - Income, Conservative Growth, Moderate Growth, and Growth <PAGE 31> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (e) Unrealized Appreciation (Depreciation) of Investments The Plan provides that the market value of each Fund shall be determined by the Trustee on the last day of each month. Pursuant to the rules issued by the DOL, unrealized appreciation (depreciation) is the difference between the market value of a Fund at the beginning of the Plan year and the quoted market price of the Fund at the applicable valuation date. The change in unrealized appreciation (depreciation) during the years ended December 31, 1997, 1996 and 1995 is set forth below: Unrealized Beginning Appreciation Investment Funds of Year End of Year (Depreciation) 1997 Commonwealth Energy System Common Share Fund $45,274,263 $ 71,214,393 $25,940,130 Vanguard Windsor II Fund 28,788,085 43,671,213 14,883,128 Vanguard Fixed Income Securities Fund- Short-Term Corporate Portfolio 11,114 41,686 30,572 Vanguard Wellington Fund 7,700,785 11,520,660 3,819,875 Vanguard International Growth Portfolio 1,245,488 1,000,339 (245,149) Vanguard Index Trust- Extended Market Portfolio 717,547 1,454,053 736,506 Vanguard Explorer Fund (47,810) (70,258) (22,448) Vanguard LIFEStrategy Funds (1) 11,378 317,441 306,063 $83,700,850 $129,149,527 $45,448,677 1996 Commonwealth Energy System Common Share Fund $41,998,465 $ 45,274,263 $ 3,275,798 Vanguard Windsor II Fund 19,014,915 28,788,085 9,773,170 Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio 77,171 11,114 (66,057) Vanguard Wellington Fund 5,697,767 7,700,785 2,003,018 Vanguard International Growth Portfolio 616,587 1,245,488 628,901 Vanguard Index Trust- Extended Market Portfolio 434,098 717,547 283,449 Vanguard Explorer Fund - (47,810) (47,810) Vanguard LIFEStrategy Funds (1) - 11,378 11,378 $67,839,003 $ 83,700,850 $15,861,847 1995 Commonwealth Energy System Common Share Fund $28,493,785 $41,998,465 $13,504,680 Vanguard Windsor II Fund 5,208,271 19,014,915 13,806,644 Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio (195,651) 77,171 272,822 Vanguard Wellington Fund 381,130 5,697,767 5,316,637 Vanguard International Growth Portfolio 15,931 616,587 600,656 Vanguard Index Trust- Extended Market Portfolio (75,809) 434,098 509,907 $33,827,657 $ 67,839,003 $34,011,346 (1) Consists of four portfolios - Income, Conservative Growth, Moderate Growth, and Growth <PAGE 32> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (f) Income Recognition Income of the Commonwealth Energy System Common Share Fund consists primarily of dividends on its Common Shares. The allocation of each Fund's earnings to a Participant's account is based on the percent of the Participant's units in the Funds and is allocated daily. Purchases and sales of investments are recorded on a trade-date basis. Interest income is accrued when earned. Dividend income is recorded on the ex-dividend date. Capital gain distributions are included in dividend income. (3) Participating Companies and Contributions Generally, Participants in the Plan are required to make contributions of at least one percent (1%) but not more than sixteen (16%) of their compensation as defined in the Plan. Effective January 1, 1998, the maximum amount a Participant may defer annually was increased to $10,000 from $9,500 previously. This amount is increased from time to time by the Secretary of the Treasury in accordance with the cost of living adjustment factor prescribed in Section 402(g)(1) of the IRC. Compensation is defined to be an employee's authorized basic salary (including any "lump sum payment" under the authorized basic compensation pay program), except that in the case of sales personnel compensated in whole or in part by commissions, compensation shall be considered to equal ninety percent (90%) of the average compensation earned by such employee in the preceding four calendar quarters but not less than each employee's authorized basic compensation. Salary deferral contributions by employees are made to the Plan by payroll deduction. The Employer contributes an additional amount equal to each employee's contribution, up to a maximum of four percent (4%) of each employee's basic compensation rate, as previously defined, and up to five percent (5%) for those employees no longer eligible for postretirement health benefits. Effective January 1, 1998, a regular employee, who was not a Member of the Plan as of December 31, 1997, is eligible to participate in the Plan on January 1, 1998. A regular employee who is hired after December 31, 1997 will become eligible to participate in the Plan on the first day of the second month following his or her initial date of employment. The employer matching contribution will not begin until the first day of the month that follows the employee's completion of one full year of eligibility service (completion of one-thousand (1,000) hours of service in a twelve-month period). Previously, employees were eligible to join the Plan upon completion of their eligibility service. A Participant is fully vested in and has a nonforfeitable right to the value of his or her Member, Pay Deferral and Company Accounts at all times. Any eligible employee may change his or her contribution percentage as of the first day of any month by contacting Vanguard Participant Services by the fifteenth day of the preceding month. <PAGE 33> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS The participating system companies and contributions for the years ended December 31, 1997, 1996 and 1995 are summarized below: Employee Contributions 1997 1996 1995 Cambridge Electric Light Company $ 654,877 $ 658,553 $ 654,474 Canal Electric Company 661,950 684,476 642,435 Commonwealth Electric Company 3,693,090 3,814,155 3,687,316 Commonwealth Gas Company 2,682,350 2,134,806 2,749,403 COM/Energy Services Company 998,047 1,002,899 945,449 Advanced Energy Systems, Inc. 19,209 - - COM/Energy Marketing, Inc. 17,990 - - $8,727,513 $8,294,889 $8,679,077 Employer Contributions 1997 1996 1995 Cambridge Electric Light Company $ 302,097 $ 310,388 $ 317,289 Canal Electric Company 256,419 260,990 258,375 Commonwealth Electric Company 1,672,192 1,788,366 1,813,432 Commonwealth Gas Company 1,366,255 1,108,006 1,439,253 COM/Energy Services Company 558,343 585,299 564,381 Advanced Energy Systems, Inc. 6,784 - - COM/Energy Marketing, Inc. 10,349 - - $4,172,439 $4,053,049 $4,392,730 Participation by employees is voluntary and may begin as of the first day of any month by notifying the respective employer in writing on or before the fifteenth day of the preceding month coincident with or next following eligibility. Of the 1,781 individuals eligible to participate at December 31, 1997, 1,748 (98.1%) Participants were active and fully vested in the Plan. (4) Investments (a) Description of Investment Funds The following is a description of the twelve Investment Funds in which a Participant may allocate his or her contributions and matching Employer contributions: Commonwealth Energy System Common Share Fund - Consists of Common Shares of Beneficial Interest of Commonwealth Energy System purchased on the open market or through the System's Dividend Reinvestment and Common Share Purchase Plan. The System's Common Shares may also be acquired directly from the System, if such Common Shares are made available by the Board of Trustees of the System, based on the fair market value at the time of acquisition. The Common Shares are acquired with employee contributions and Employer contribu- tions, dividends and interest income. The Trustee, at its discretion, will determine the manner in which such shares may be acquired. The Fund provides the possibility of long-term growth through increases in the market value of <PAGE 34> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS the Common Shares and the reinvestment of the dividends. Participants may not allocate more than fifty percent (50%) of their contributions to this Fund. Vanguard Money Market Reserves-Prime Portfolio - A mutual fund that seeks the maximum current income that is consistent with preservation of capital and liquidity. Value is added primarily by emphasizing specific issues and sectors of the money market that appear to be attractively priced based upon historical yield spread relationships. Average maturity for the Fund is normally maintained in the range of 30-70 days, and the Fund can own no security with a maturity longer than one year. Such money market instruments include domestic certificates of deposit and bankers' acceptances, commercial paper, U.S. Treasury and Government agency securities and repurchase agree- ments on such securities and up to fifty percent (50%) of net assets can be invested in Eurodollar certificates of deposit issued by approved U.S. banks. Vanguard Windsor II - A mutual fund having a primary objective to provide long-term growth of capital and income. As a secondary objective, the Fund seeks a reasonable level of current income. The Fund is a value-oriented growth and income fund seeking investment opportunities primarily in common stocks that are out of favor or undervalued. Vanguard Fixed Income Securities Fund-Short-Term Corporate Portfolio - A mutual fund that seeks to provide a high level of current income consistent with a two to three-year average maturity. By investing in relatively short maturity investment-grade bonds, the Portfolio is designed to help preserve capital. Vanguard Wellington Fund - A mutual fund designed to pursue conservation of capital, reasonable current income and profits without undue risk. Conservatively structured, the Fund uses a balanced investment approach allocating 60%-70% of net assets to equities and the remainder to fixed income securities. The fixed income securities reduce the Fund's exposure to risks of common stocks while common stocks are selected from dividend-paying medium and large-capitalization stocks whose prospects are improving. The objective is to identify these companies before their values are recognized in the marketplace. Vanguard International Growth Portfolio - A mutual fund that seeks long- term capital growth by investing in common stocks of companies based outside the United States that have above-average growth potential. Vanguard Index Trust-Extended Market Portfolio - A mutual fund that attempts to provide investment results that parallel the performance of the unmanaged Wilshire 4500 Equity Index, an index consisting primarily of mid- and small capitalization companies. To minimize tracking errors and to allocate the Portfolio's transaction costs (bid/ask spreads, commissions and market impact) equitably since these costs are not reflected in the performance of market indexes, the Portfolio assesses a 0.25% transaction fee on shares purchased. Vanguard Explorer Fund - A mutual fund that seeks long-term growth of capital by investing primarily in common stocks of small and emerging growth <PAGE 35> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS companies. Vanguard LIFEStrategy Funds - Consist of four Portfolios that attempt to maximize total investment return (i.e. capital growth and income), subject to different investment guidelines and asset allocation policies. These Funds invest in other Vanguard mutual funds, representing different combinations of stocks, bonds and reserves, and reflecting varying degrees of investment risk and reward. The four Portfolios are: The Income Portfolio seeks to provide current income. The Conservative Growth Portfolio seeks to provide current income and low to moderate growth of capital. The Moderate Growth Portfolio seeks to provide growth of capital and a reasonable level of current income. The Growth Portfolio seeks to provide growth of capital. (b) Investment Funds Accounts The Board maintains for each Participant in the Plan, under each Fund in which all or part of his or her contributions and the applicable Employer contributions are invested, a separate Member Account that includes a Pay Deferral Account for current pre-tax contributions. In addition, the Member Account may include previous after-tax contributions. The Board also maintains a separate Company Account (for each Participant) that includes Employer contributions made on behalf of Participants. These Accounts reflect the portion of each Participant's interest in the Fund that is attributable to the contributions to such Accounts. The Plan permits Participants to transfer amounts between Funds on a daily basis, subject to certain limitations. Effective January 1, 1998, a Participant may request to rollover an "eligible rollover distribution" as defined in Section 402(c)(4) of the IRC from a qualified plan or a distribution from a conduit Individual Retirement Account to the Plan. The Board will maintain a separate Rollover Account for each Participant and all Participants are fully vested in their Rollover Account at all times. The Plan Trustee may, at its discretion, temporarily invest funds designated for a particular Fund in short-term interest-bearing securities or may retain certain amounts of cash in each Fund without interest being credited thereon, for the purpose of more effectively timing the purchase of investments or liquidity needs for the several Funds. All contributions are transmitted weekly to the Plan Trustee. A Participant's choice of contribution allocation to eligible Funds will continue until changed by such Participant. Investment designations may be changed daily by contacting a Vanguard Participant Services representative. All interest, dividends, and other income, as well as any cash from the sale or exchange of securities or other property produced by each of the Funds will be reinvested in the same Fund that produced such interest, dividends and <PAGE 36> EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS other income. (5) Party in Interest Commonwealth Energy System is a "party in interest" as that term is defined in Section 3.14 of ERISA. Certain transactions involving the acquisition and distribution of securities are made at the direction of Participants in the Plan who elect to participate in the Commonwealth Energy System Common Share Fund as one of their investment options. These transactions are reflected in the accompanying financial statements at market value and are net of brokerage commissions relating to the acquisition of these securities. During the years ended December 31, 1997, 1996 and 1995, the Plan Trustee purchased Common Shares of Commonwealth Energy System, made distributions of Common Shares to Participants and sold Common Shares to accommodate cash distributions as follows: Commonwealth Energy System Common Share Fund Shares Shares Sold / Distributed Purchased Cost Shares Aggregate Value 1997 198,067 $4,667,158 721,145 $10,862,830 1996 258,747 9,134,782 453,158 8,876,352 1995 360,946 7,226,244 414,822 5,706,748 The Plan Trustee also represents a party in interest to the Plan due to the Plan's investments in Funds of the Plan Trustee. (6) Loans to Plan Participants Participants may request a loan from the Plan for a minimum amount of $1,000. The amount of the loan shall not exceed the lesser of $50,000 or fifty percent (50%) of the balance of the Participant's total value in the various Funds of the Plan. The interest rate on a loan is based on the prime rate at BankBoston, N.A. on the first day of the quarter preceding the loan request plus one percent. Participants may choose a repayment period of one to five years. For the years 1997, 1996 and 1995, the interest rates ranged from 9.5% to 10%. Eligible Participants have the option of securing a second loan from the Plan including requests for up to a thirty (30) year loan to purchase a primary residence. (7) Reportable Transactions Under ERISA, transactions which, individually or in the aggregate with the same issuer, exceed five percent (5%) of the current value of Plan assets at the beginning of the Plan year are "reportable transactions." Details of these reportable transactions are set forth in Schedule II of this report. <PAGE 37> Schedule I Employer Identification Number: 04-1662010 Plan Number: 091187 EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES ITEM 27A: SCHEDULE OF INVESTMENTS DECEMBER 31, 1997 Market Value Name of Issuer and Number of at End of Title of Issue Shares or Units Cost Period Commonwealth Energy System Common Share Fund: Common Shares of Beneficial Interest - Commonwealth Energy System* 2,665,415 $ 40,721,007 $ 88,626,418 Vanguard Funds*: Money Market Reserves- Prime Portfolio 25,809,453 25,809,453 25,809,453 Windsor II 3,855,142 75,297,619 110,334,177 Fixed Income Securities Fund- Short-Term Corporate Portfolio 496,570 5,351,640 5,367,919 Wellington 1,531,336 35,992,819 45,097,834 International Growth Portfolio 577,907 8,927,674 9,471,899 Index Trust- Extended Market Portfolio 224,852 5,718,340 6,914,193 Vanguard Explorer Fund 53,179 2,986,614 2,940,817 Vanguard LIFEStrategy Fund - Income Portfolio 36,638 439,223 455,415 Vanguard LIFEStrategy Fund - Conservative Growth Portfolio 62,798 797,944 841,499 Vanguard LIFEStrategy Fund - Moderate Growth Portfolio 124,021 1,715,063 1,836,746 Vanguard LIFEStrategy Fund - Growth Portfolio 102,937 1,523,563 1,651,103 Total Vanguard Funds 164,559,952 210,721,055 Total Investments $205,280,959 $299,347,473 Loans to Participants $ 8,939,289 $ 8,939,289 * Represent parties in interest to the Plan The accompanying notes are an integral part of this schedule. <PAGE 38> Schedule II Employer Identification Number: 04-1662010 Plan Number: 091187 EMPLOYEES SAVINGS PLAN OF COMMONWEALTH ENERGY SYSTEM AND SUBSIDIARY COMPANIES ITEM 27D: SCHEDULE OF REPORTABLE TRANSACTIONS (a) FOR THE YEAR ENDED DECEMBER 31, 1997 Purchase PURCHASES Price Vanguard International Growth Portfolio (b) $ 7,215,563 Vanguard Money Market Reserves- Prime Portfolio (b) 30,353,275 Vanguard Windsor II Fund (b) 31,704,791 Vanguard Wellington Fund (b) 13,961,043 Commonwealth Energy System Common Share Fund (b) 13,989,333 Selling Historical SALES Price Gain Vanguard International Growth Portfolio (b) $ 6,890,780 $ 465,802 Vanguard Money Market Reserves- Prime Portfolio (b) 33,092,740 - Vanguard Windsor II Fund (b) 24,914,690 6,684,232 Vanguard Wellington Fund (b) 10,542,652 2,125,014 Commonwealth Energy System Common Share Fund (b) 27,656,201 8,224,434 (a) Fund investments with transactions or a series of transactions in excess of five percent (5%) of the current value of the Plan's assets as of the beginning of the Plan year. (b) Represent parties in interest to the Plan The accompanying notes are an integral part of this schedule.