SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------------------------------------------- FORM 11-K FOR ANNUAL REPORTS OF EMPLOYEE STOCK PURCHASE, SAVINGS AND SIMILAR PLANS PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------------------------------------------------- (Mark one) [X] ANNUAL REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] FOR YEAR ENDED DECEMBER 31, 1997 or [ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No fee required] For the transition period from to ------- --------- ----------------------------------------------------- COMMISSION FILE NUMBER 0-17605 A. Full title of the plan and the address of the plan, if different from that of the issuer named below: YANKEE ENERGY SYSTEM, INC. 401(k) EMPLOYEE STOCK OWNERSHIP PLAN B. Name of issuer of the securities held pursuant to the plan and the address of its principal executive office: YANKEE ENERGY SYSTEM, INC. 599 Research Parkway Meriden, CT 06450 YANKEE ENERGY SYSTEM, INC. 401(k) EMPLOYEE STOCK OWNERSHIP PLAN FINANCIAL STATEMENTS AND SCHEDULES AS OF DECEMBER 31, 1997 AND 1996 INDEX REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS FINANCIAL STATEMENTS Statement of Net Assets Available for Benefits as of December 31, 1997 Statement of Net Assets Available for Benefits as of December 31, 1996 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1997 Statement of Changes in Net Assets Available for Benefits for the Year Ended December 31, 1996 NOTES TO FINANCIAL STATEMENTS AND SCHEDULES SUPPLEMENTAL SCHEDULES: Schedule I: Item 27a - Schedule of Assets Held for Investment Purposes as of December 31, 1997 Schedule II: Item 27d - Schedule of Reportable Transactions for the Year Ended December 31, 1997 All schedules, except as set forth above, are omitted as not applicable or not required. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Plan Administrator of the Yankee Energy System, Inc. 401(k) Employee Stock Ownership Plan: We have audited the accompanying statements of net assets available for benefits of Yankee Energy System, Inc. 401(k) Employee Stock Ownership Plan (the Plan) as of December 31, 1997 and 1996, and the related statements of changes in net assets available for benefits for the years then ended. These financial statements and schedules referred to below are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements 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 the 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 Plan as of December 31, 1997 and 1996, and the changes in net assets available for benefits for the years then ended 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. The supplemental schedules of reportable transactions and assets held for investment purposes are presented for purposes of additional analysis and are not a required part of the basic financial statements but are supplementary 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 supplemental schedules have been subjected to the auditing procedures applied in the audit 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. Hartford, Connecticut May 29, 1998 YANKEE ENERGY SYSTEM, INC. 401(k) EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AS OF DECEMBER 31, 1997 Merrill Lynch Retirement Cash Preservation Fund Trust ---------- ------------- ASSETS: Cash $90,629 $ - Short term investments - 7,910,067 Mutual funds - - Common stock - - Employer contributions receivable - 7,212 Employee contributions receivable - 44,590 Accrued interest receivable 8,950 - -------- ------------ Total assets 99,579 7,961,869 -------- ------------ LIABILITIES: Note payable-long term Note payable-current - - Accounts payable - - -------- ----------- Total liabilities - - -------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $ 99,579 $7,961,869 ========= =========== Merrill Lynch Growth Fund Northeast Investment and Utilities Retirement Stock Class A Fund -------------- ----------- ASSETS: Cash $ - $ - Short term investments - - Mutual funds 6,984,408 - Common stock - 1,047,860 Employer contributions receivable 4,202 - Employee contributions receivable 53,412 - Accrued interest receivable - - ----------- ----------- Total assets 7,042,022 1,047,860 ----------- ----------- LIABILITIES: Note payable-long term Note payable-current - - Accounts payable - - ---------- ----------- Total liabilities - - ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $7,042,022 $1,047,860 ========== =========== Merrill Merrill Lynch Lynch Basic Value Capital Fund Fund Class A Class A ----------- ---------- ASSETS: Cash $ - $ - Short term investments - - Mutual funds 4,394,646 2,213,837 Common stock - - Employer contributions receivable 2,506 2,076 Employee contributions receivable 30,682 18,051 Accrued interest receivable - - ----------- ----------- Total assets 4,427,834 2,233,964 ----------- ----------- LIABILITIES: Note payable-long term Note payable-current - - Accounts payable - - ---------- ----------- Total liabilities - - ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $4,427,834 $2,233,964 ========== ========== Merrill Lynch YES, Inc. Global Loan Allocation Fund Fund Class A ---------- ------------ ASSETS: Cash $ - $ - Short term investments 951,067 - Mutual funds - 712,512 Common stock - - Employer contributions receivable - 670 Employee contributions receivable - 7,096 Accrued interest receivable - - ----------- ----------- Total assets 951,067 720,278 ----------- ----------- LIABILITIES: Note payable-long term Note payable-current - - Accounts payable - - ---------- ----------- Total liabilities - - ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $ 951,067 $ 720,278 ========== ========== YES, Inc. YES, Inc. Voluntary Allocation Stock Fund Fund ---------- --------- ASSETS: Cash $ - $ - Short term investments - - Mutual funds - - Common stock 3,980,953 1,936,395 Employer contributions receivable 531,686 1,869 Employee contributions receivable - 11,622 Accrued interest receivable - - ----------- ----------- Total assets 4,512,639 1,949,886 ----------- ----------- LIABILITIES: Note payable-long term Note payable-current - - Accounts payable - - ---------- ----------- Total liabilities - - ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $4,512,639 $1,949,886 ========== ========== Loan 1997 Suspense Total -------- ---------- ASSETS: Cash $ - $ 90,629 Short term investments - 8,861,134 Mutual funds - 14,305,403 Common stock 2,224,355 9,189,563 Employer contributions receivable - 550,221 Employee contributions receivable - 165,453 Accrued interest receivable - 8,950 ----------- ----------- Total assets 2,224,355 33,171,353 ----------- ----------- LIABILITIES: Note payable-long term Note payable-current 200,000 200,000 Accounts payable 400,000 400,000 ---------- ----------- Total liabilities 600,000 600,000 ---------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $1,624,355 $32,571,353 ========== =========== The accompanying notes are an integral part of these financial statements. YANKEE ENERGY SYSTEM, INC. 401(k) EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF NET ASSETS AVAILABLE FOR BENEFITS AS OF DECEMBER 31, 1996 Merrill Lynch Retirement Cash Preservation Fund Trust ------- ------------ ASSETS: Cash $3,289 $ - Short term investments - 7,504,288 Mutual funds - - Common stock - - Employer contributions receivable - 6,358 Employee contributions receivable - 37,672 Accrued interest receivable 6,058 - ---------- ---------- Total assets 9,347 7,548,318 ---------- ---------- LIABILITIES: Note payable-long term - - Note payable-current - - Accounts payable - - ---------- ---------- Total liabilities - - ---------- ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 9,347 $7,548,318 ============ ========== Merrill Lynch Growth Fund Northeast Investment and Utilities Retirement Stock Class A Fund -------------- --------- ASSETS: Cash $ - $ - Short term investments - - Mutual funds 5,444,954 - Common stock - 1,346,425 Employer contributions receivable 2,840 - Employee contributions receivable 39,311 - Accrued interest - - receivable ---------- ---------- Total assets 5,487,105 1,346,425 ---------- ---------- LIABILITIES: Note payable-long term - - Note payable-current - - Accounts payable - - ---------- ---------- Total liabilities - - ---------- ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 5,487,105 $1,346,425 =========== ========== Merrill Lynch Basic Value Merrill Lynch Fund Capital Fund Class A Class A ------------- ------------- ASSETS: Cash $ - $ - Short term investments - - Mutual funds 2,877,346 1,616,090 Common stock - - Employer contributions receivable 1,691 1,439 Employee contributions receivable 24,489 14,483 Accrued interest receivable - - ---------- ---------- Total assets 2,903,526 1,632,012 ---------- ---------- LIABILITIES: Note payable-long term - - Note payable-current - - Accounts payable - - ---------- ---------- Total liabilities - - ---------- ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 2,903,526 $1,632,012 =========== ========== Merrill Lynch Yes, Inc. Global Loan Allocation Fund Fund Class A --------- ------------ ASSETS: Cash $ - $ - Short term investments 641,534 - Mutual funds - 383,005 Common stock - - Employer contributions receivable - 430 Employee contributions receivable - 6,452 Accrued interest receivable - - ---------- ---------- Total assets 641,534 389,887 ---------- ---------- LIABILITIES: Note payable-long term - - Note payable-current - - Accounts payable - - ---------- ---------- Total liabilities - - ---------- ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 641,534 $ 389,887 =========== ========== YES, Inc. YES, Inc. Allocation Voluntary Fund Stock Fund ---------- ---------- ASSETS: Cash $ - $ - Short term investments - - Mutual funds - - Common stock 3,004,905 1,752,396 Employer contributions receivable 453,532 2,015 Employee contributions receivable - 10,950 Accrued interest receivable - - ---------- ---------- Total assets 3,458,437 1,765,361 ---------- ---------- LIABILITIES: Note payable-long term - - Note payable-current - - Accounts payable - - ---------- ---------- Total liabilities - - ---------- ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 3,458,437 $1,765,361 =========== ========== Loan 1996 Suspense Total -------- ----- ASSETS: Cash $ - $ 3,289 Short term investments - 8,145,822 Mutual funds - 10,321,395 Common stock 2,235,151 8,338,877 Employer contributions receivable - 468,305 Employee contributions receivable - 133,357 Accrued interest receivable - 6,058 ---------- ---------- Total assets 2,235,151 27,417,103 ---------- ---------- LIABILITIES: Note payable-long term 600,000 600,000 Note payable-current 400,000 400,000 Accounts payable - - ---------- ---------- Total liabilities 1,000,000 1,000,000 ---------- ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS $ 1,235,151 $26,417,103 =========== =========== The accompanying notes are an integral part of these financial statements. YANKEE ENERGY SYSTEM, INC. 401(k) EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1997 Participant Directed -------------------- Merrill Lynch Cash Retirement Fund Preservation Trust ------ ------------------ ADDITIONS: Employee contributions and rollovers $ - $ 501,591 Employer contributions - 80,099 Interfund transfers in - 817,274 Earnings - Interest 2,246 22,946 Dividends - 498,892 Realized gain (loss) - - Unrealized gain (loss) - - ------------- ------------ Total additions 2,246 1,920,802 ------------ ------------ DEDUCTIONS: Interfund transfers out - 1,089,426 Benefit payments (87,986) 417,825 Interest expense - - ------------ ---------- Total deductions (87,986) 1,507,251 ------------ ---------- Net increase (decrease) 90,232 413,551 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 9,347 7,548,318 ------------ ---------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 99,579 $7,961,869 =========== ========== Participant Directed -------------------------------- Merrill Lynch Growth Fund Northeast Investment and Utilities Retirement Stock Class A Fund -------------- ---------- ADDITIONS: Employee contributions and rollovers $ 632,772 $ - Employer contributions 40,609 - Interfund transfers in 584,797 - Earnings - Interest 16,042 - Dividends 551,523 24,170 Realized gain (loss) 134,653 (176,425) Unrealized gain (loss) 356,739 45,303 ------------- ------------ Total additions 2,317,135 (106,952) ------------ ------------ DEDUCTIONS: Interfund transfers out 480,600 121,692 Benefit payments 281,618 69,921 Interest expense - - ------------ ---------- Total deductions 762,218 191,613 ------------ ---------- Net increase (decrease) 1,554,917 (298,565) NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 5,487,105 1,346,425 ------------ ---------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 7,042,022 $ 1,047,860 =========== ========== Participant Directed -------------------------------- Merrill Lynch Merrill Lynch Basic Value Capital Fund Fund Class A Class A ------------- ------------- ADDITIONS: Employee contributions and rollovers $ 382,515 $ 204,417 Employer contributions 23,753 20,299 Interfund transfers in 557,437 169,691 Earnings - Interest 9,916 7,872 Dividends 327,192 180,196 Realized gain (loss) 58,317 10,272 Unrealized gain (loss) 520,943 175,699 ------------- ----------- Total additions 1,880,073 768,446 ------------ ----------- DEDUCTIONS: Interfund transfers out 231,238 136,224 Benefit payments 124,527 30,270 Interest expense - - ------------ ---------- Total deductions 355,765 166,494 ------------ ---------- Net increase (decrease) 1,524,308 601,952 NET ASSETS AVAILABLE FOR PLAN BENEFITS, beginning of year 2,903,526 1,632,012 ------------ ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS, end of year $ 4,427,834 $ 2,233,964 =========== ========== Participant Directed -------------- Merrill Lynch Global YES, Inc. Allocation Loan Fund Fund Class A --------- ------------ ADDITIONS: Employee contributions and rollovers $ - $ 115,365 Employer contributions - 7,004 Interfund transfers (322,609) 188,801 Earnings - Interest - 1,787 Dividends - 89,538 Realized gain (loss) - 2,748 Unrealized gain (loss) - (36,449) ------------- ------------ Total additions (322,609) 368,794 ------------- ----------- DEDUCTIONS: Interfund transfers out (632,142) 37,825 Benefit payments - 578 Interest expense - - ------------- ---------- Total deductions (632,142) 38,403 ------------ ---------- Net increase (decrease) 309,533 330,391 NET ASSETS AVAILABLE FOR PLAN BENEFITS, beginning of year 641,534 389,887 ------------ ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS, end of year $ 951,067 $ 720,278 =========== ========== Participant Directed -------------- YES, Inc. YES, Inc. Allocation Voluntary Fund Stock Fund ---------- ---------- ADDITIONS: Employee contributions and rollovers $ - $ 148,551 Employer contributions 531,686 20,572 Interfund transfers - 67,039 Earnings - Interest - 57,613 Dividends - 100,870 Realized gain (loss) 8,310 18,975 Unrealized gain (loss) 805,365 381,526 ------------- ------------ Total additions 1,345,361 795,146 ------------- ------------ DEDUCTIONS: Interfund transfers out 106,068 491,499 Benefit payments 185,091 119,122 Interest expense - - ------------ ---------- Total deductions 291,159 610,621 ------------ ---------- Net increase (decrease) 1,054,202 184,525 NET ASSETS AVAILABLE FOR PLAN BENEFITS, beginning of year 3,458,437 1,765,361 ------------ ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS, end of year $ 4,512,639 $ 1,949,886 =========== ========== Loan 1997 Suspense Total -------- ----- ADDITIONS: Employee contributions and rollovers $ - $1,985,211 Employer contributions - 724,022 Interfund transfers in - 2,062,430 Earnings - Interest - 118,422 Dividends - 1,772,381 Realized gain (loss) - 56,850 Unrealized gain (loss) 442,737 2,691,863 ------------- ------------ Total additions 442,737 9,411,179 ------------- ------------ DEDUCTIONS: Interfund transfers out - 2,062,430 Benefit payments - 1,140,966 Interest expense 53,533 53,533 ------------ ---------- Total deductions 53,533 3,256,929 ------------ ---------- Net increase (decrease) 389,204 6,154,250 NET ASSETS AVAILABLE FOR PLAN BENEFITS, beginning of year 1,235,151 26,417,103 ------------ ---------- NET ASSETS AVAILABLE FOR PLAN BENEFITS, end of year $ 1,624,355 $32,571,353 =========== =========== The accompanying notes are an integral part of these financial statements. YANKEE ENERGY SYSTEM, INC. 401(K) EMPLOYEE STOCK OWNERSHIP PLAN STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEAR ENDED DECEMBER 31, 1996 Participant Directed ------------- Merrill Lynch Retirement Cash Preservation Fund Trust ---------- ------------ ADDITIONS: Employee contributions and rollovers $ - $ 522,829 Employer contributions - 92,877 Interfund transfers in - 8,015,932 Earnings - Interest 3,902 16,054 Dividends - 460,811 Realized gain (loss) - - Unrealized gain (loss) - - ---------- ----------- Total additions 3,902 9,108,503 ----------- ----------- DEDUCTIONS: Interfund transfers out - 8,304,202 Benefit payments (43,488) 815,616 Interest expense - - ------------ ----------- Total deductions (43,488) 9,119,818 ------------ ----------- Net increase (decrease) 47,390 (11,315) NET ASSETS AVAILABLE FOR BENEFITS, beginning of year (38,043) 7,559,633 ------------ ----------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 9,347 $ 7,548,318 ================ =============== Participant Directed ---------------------------------- Merrill Lynch Growth Fund Northeast Investment and Utilities Retirement Stock Class A Fund --------------- ---------- ADDITIONS: Employee contributions and rollovers $ 455,932 $ - Employer contributions 36,917 - Interfund transfers in 514,186 - Earnings - Interest 10,252 - Dividends 403,618 180,442 Realized gain (loss) 18,955 (174,552) Unrealized gain (loss) 767,965 (1,123,798) ----------- ------------ Total additions 2,207,825 (1,117,908) ----------- ------------ DEDUCTIONS: Interfund transfers out 536,912 284,207 Benefit payments 95,986 170,834 Interest expense - - ----------- ----------- Total deductions 632,898 455,041 ----------- ----------- Net increase (decrease) 1,574,927 (1,572,949) NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 3,912,178 2,919,374 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 5,487,105 $ 1,346,425 =========== =========== Participant Directed ---------------------------------- Merrill Lynch Basic Value Merrill Lynch Fund Capital Fund Class A Class A ------------- ------------- ADDITIONS: Employee contributions and rollovers $ 305,796 $ 178,113 Employer contributions 22,085 19,631 Interfund transfers in 286,737 221,832 Earnings - Interest 5,230 4,965 Dividends 189,645 152,542 Realized gain (loss) 23,071 4,282 Unrealized gain (loss) 201,889 19,176 ----------- ----------- Total additions 1,034,453 600,541 ----------- ----------- DEDUCTIONS: Interfund transfers out 99,466 102,754 Benefit payments 232,219 133,268 Interest expense - - ----------- ----------- Total deductions 331,685 236,022 ----------- ----------- Net increase (decrease) 702,768 364,519 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 2,200,758 1,267,493 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 2,903,526 $ 1,632,012 =========== =========== Participant Directed -------------- Merrill Lynch YES, Inc. Global Loan Allocation Fund Fund Class A --------- ------------ ADDITIONS: Employee contributions and rollovers $ - $ 58,146 Employer contributions - 4,058 Interfund transfers in (157,164) 197,097 Earnings - Interest - 726 Dividends - 34,166 Realized gain (loss) - 122 Unrealized gain (loss) - 5,192 ----------- ----------- Total additions (157,164) 299,507 ------------ ----------- DEDUCTIONS: Interfund transfers out (464,282) 5,546 Benefit payments 5,034 8,076 Interest expense - - ------------ ----------- Total deductions (459,248) 13,622 ------------ ----------- Net increase (decrease) 302,084 285,885 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 399,450 104,002 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 641,534 $ 389,887 =========== =========== Participant Directed ------------- YES, Inc. YES, Inc. Voluntary Allocation Stock Fund Fund ---------- --------- ADDITIONS: Employee contributions and rollovers $ - $ 153,995 Employer contributions 454,268 25,290 Interfund transfers in - 70,522 Earnings - Interest - 8,565 Dividends 155 126,651 Realized gain (loss) (1,417) 869 Unrealized gain (loss) (593,296) (315,788) ------------ ------------ Total additions (140,290) 70,104 ------------ ------------ DEDUCTIONS: Interfund transfers out 120,423 159,914 Benefit payments 298,637 114,052 Interest expense - - ----------- ----------- Total deductions 419,060 273,966 ----------- ----------- Net increase (decrease) (559,350) (203,862) NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 4,017,787 1,969,223 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 3,458,437 $ 1,765,361 =========== =========== Loan 1996 Suspense Total -------- ----- ADDITIONS: Employee contributions and rollovers $ - $ 1,674,811 Employer contributions - 655,126 Interfund transfers in - 9,149,142 Earnings - Interest - 49,694 Dividends - 1,548,030 Realized gain (loss) - (128,670) Unrealized gain (loss) (525,770) (1,564,430) ------------ ------------ Total additions (525,770) 11,383,703 ------------ ------------ DEDUCTIONS: Interfund transfers out - 9,149,142 Benefit payments - 1,830,234 Interest expense (47,748) (47,748) ------------ ----------- Total deductions (47,748) 10,931,628 ------------ ----------- Net increase (decrease) (478,022) 452,075 NET ASSETS AVAILABLE FOR BENEFITS, beginning of year 1,713,173 25,965,028 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS, end of year $ 1,235,151 $26,417,103 =========== =========== The accompanying notes are an integral part of these financial statements. YANKEE ENERGY SYSTEM, INC. 401(K) EMPLOYEE STOCK OWNERSHIP PLAN NOTES TO FINANCIAL STATEMENTS AND SCHEDULES DECEMBER 31, 1997 AND 1996 1. Establishment of The Plan: ------------------------- The Yankee Energy System, Inc. 401(k) Employee Stock Ownership Plan (the Plan) was established and effective on July 1, 1989 (the effective date) following the divestiture of the gas business of the Connecticut Light and Power Company (CL&P), a wholly owned subsidiary of Northeast Utilities (NU), and the related creation of Yankee Energy System, Inc. (YES). Each transferred gas employee participating in the Northeast Utilities Tax Reduction Act Employee Stock Ownership Plan (TRAESOP), Payroll Based Employee Stock Ownership Plan (PAYSOP) or Supplemental Retirement Savings Plan became a participant in the Plan effective July 1, 1989. Participant account balances and $7,203,056 in assets were transferred to the Plan on the effective date. The assets were comprised of NU common stock and cash. 2. Plan Description: ---------------- The following description of the Plan provides only general information. Participants should refer to the Plan agreement for a more complete description of the Plan's provisions. General - ------- The Plan is a defined contribution 401(k) Employee Stock Ownership Plan established to provide benefits to eligible employees. Participation in the Plan is voluntary. Union employees become eligible to participate on the first day of the month following the completion of one year of service. Non-union employees become eligible to participate on the first day of the month following the completion of six months of service. Contributions - ------------- Participants contribute between 1% and 12% of compensation subject to limitations set forth by the Plan. Investment of employee contributions in the various funds is at the employees' discretion. YES matches 100% of non-union employee pre-tax contributions annually up to 3% of compensation and 50% of union employee pre-tax contributions each month up to 5% of compensation. Benefit payments - ---------------- Unless a participant elects otherwise, benefit distributions are made in a lump sum not later than sixty days following the end of the Plan year following the later of the participant's 65th birthday, the 10th anniversary of the date on which participation commenced or the termination of employment. In the event of the death of a participant prior to distribution, benefits will be paid to a designated beneficiary in a lump sum. Vesting - ------- Non-union employees become 100% vested upon commencing participation in the Plan. Union employees shall at all times be fully vested in employee contributions and will vest in the employer contributions in accordance with the following schedule: Years of Service Vesting % ---------------- -------- 1 20% 2 40% 3 60% 4 80% 5 or more 100% The account balances of union employees, as of June 3, 1989, formerly participating in the NU Supplemental Retirement Savings Plan and NU TRAESOP and PAYSOP became fully vested on July 1, 1989. Not withstanding the foregoing, union participants shall be fully vested in employer contributions upon reaching age 65 or in the event of death or total disability. Any union employee forfeitures will be used to reduce future employer contributions. Loans - ----- Participants may borrow up to the lesser of 50% of the participant's vested interest in his total account or $50,000, reduced by the highest outstanding balance of loans from the Plan during the one-year period preceding the date of the loan. Investment options - ------------------ The Plan consists of ten funds as follows: Cash Fund - Represents a cash fund which is used as a temporary account for overnight transactions and features an investment sweep option to earn interest daily. Merrill Lynch Retirement Preservation Trust - Provides preservation of participants' investments, liquidity and current income that is typically higher than money market funds. Merrill Lynch Growth Fund for Investment and Retirement Class A - Invests in securities, primarily equities. Northeast Utilities Stock Fund - Account maintains Northeast Utilities stock belonging to transferred CL&P and Northeast Utilities Service Company (NUSCO) employees formerly participating in the NU Supplemental Retirement Savings Plan. Merrill Lynch Basic Value Fund Class A - Invests in securities, primarily equities. Merrill Lynch Capital Fund Class A - Invests in equity securities, corporate bonds and money market securities. YES, Inc. Loan Fund - Represents a clearing account for participant loans. Merrill Lynch Global Allocation Fund Class A - Invests in U.S. and foreign equity, debt and money market securities. YES, Inc. Allocation Fund - Represents the employer matching fund which invests in Yankee Energy System, Inc. common stock. YES, Inc. Voluntary Stock Fund - Invests in Yankee Energy System, Inc. common stock. 3. Summary of Significant Accounting Policies: ------------------------------------------ Basis of accounting - ------------------- The accompanying financial statements and schedules of the Plan have been prepared on the accrual basis of accounting. Administrative expenses - ----------------------- Administrative expenses of the Plan are paid from the Plan assets unless paid by Yankee Energy System, Inc. (the Company). Administrative expenses of approximately $59,000 and $41,000 were paid by the Company in 1997 and 1996, respectively. Valuation of investments - ------------------------ The Plan's investments are stated at fair value. Securities traded on the national securities exchange are valued at the last reported sales price on the last business day of the plan year. Investments traded in the over-the-counter market and listed securities for which no sale was reported on that date are valued at the last reported bid price. Use of estimates in the preparation of financial statements- ----------------------------------------------------------- The preparation of financial statements in conformity with generally accepted accounting principles and the Department of Labor Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974 requires management of the plan to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates. 4. Investments: ----------- The fair market value of individual investments that represent 5% or more of the Plan's total net assets as of December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- Yankee Energy System, Inc. common stock $8,141,703 $6,992,452 Northeast Utilities common stock - 1,346,425 Merrill Lynch Growth Fund Investment and Retirement Class A 6,984,408 5,444,954 Merrill Lynch Retirement Preservation Trust Money Market 7,910,067 7,504,288 Merrill Lynch Basic Value Fund Class A 4,394,646 2,877,346 Merrill Lynch Capital Fund Class A 2,213,837 1,616,090 During 1997, the Plan's investments appreciated in fair value by $2,748,713 as follows: Net Appreciation (Depreciation) in Fair Value During Year ------------- Year ended December 31, 1997: Fair value as determined by quoted market value: Mutual funds $ 1,222,922 YES, Inc. common stock 1,656,913 NU common stock (131,122) ----------- $ 2,748,713 =========== During 1996, the Plan's investments depreciated in fair value by $1,693,100, as follows: Net Appreciation (Depreciation) in Fair Value During Year ----------------- Year ended December 31, 1996: Fair value as determined by quoted market value: Mutual funds $ 1,040,652 YES, Inc. common stock (1,435,402) NU common stock (1,298,350) ------------ $(1,693,100) ============ 5. Note Payable: ------------ The Plan has secured a $4,000,000 loan from a commercial bank to Fleet Bank, N.A., the former trustee, the proceeds of which were used to buy YES common stock for the Plan. YES has guaranteed the loan. The loan will be repaid over a ten year period ending July 1, 1999 at $400,000 per year plus interest at a rate of 10.38%. Employer non-union matching contributions are used to make annual principal payments. Interest is paid from the earnings of the YES, Inc. loan fund. As the loan is paid down, an equivalent amount of YES stock, which serves as collateral, is released and allocated to participants. 6. Tax Status: ---------- The Plan obtained its latest determination letter on March 20, 1996 in which the Internal Revenue Service stated that the form of the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code. The Plan has been amended since the determination letter was received. However, the Plan administrator believes that the Plan is currently designed and being operated in compliance with the applicable requirements of the Internal Revenue Code. Therefore, the Plan administrator believes that the Plan was qualified as of the financial statement date. 7. Voting Rights: ------------- Each participant is entitled to exercise voting rights attributable to the shares allocated to his account and is notified by Merrill Lynch (the Trustee) prior to the time that such rights are to be exercised. The Trustee is not permitted to vote any share for which instructions have not been given by a participant. The Trustee is required, however, to vote any unallocated shares on behalf of the collective best interest of plan participants and beneficiaries. 8. Termination of the Plan: ----------------------- YES may suspend, terminate, or completely discontinue contributions under the Plan with respect to its employees subject to the provisions of the Employee Retirement Income Security Act of 1974 relating to plan terminations. Upon termination or partial termination of the Plan, the rights of all affected participants to their accounts to the date of such termination shall be fully vested to the extent funded. 9. Subsequent Event: ---------------- During 1998, the following changes to the Plan were made: Effective January 1, 1998, YES will match 100% of non- union Yankee Energy Services Company employee pre-tax contributions annually up to 5% of compensation. Effective July 1, 1998, the Plan added five additional investment options. MFS Strategic Income Fund - Invests in foreign and domestic fixed income securities. Alliance Premier Growth Fund - Invests in a limited number of primarily large U. S. company common stocks and other equity securities. Lord Abbett Developing Growth Fund - Invests in small company stocks. AIM International Equity Fund - Invests in primarily foreign equity securities. S&P 500 Index Fund - Invests in securities listed on Standard & Poor's 500 Index. SCHEDULE I EIN# 06-1236430 PLAN# 001 YANKEE ENERGY SYSTEM, INC. 401 (k) EMPLOYEE STOCK OWNERSHIP PLAN ITEM 27a - SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AS OF DECEMBER 31, 1997 (c)Description of investment, including maturity date, rate of (a)(b) Identity of issue, borrower interest, collateral, lessor or similar party par or maturity value - ---------------------------------- ---------------------- [S] [C] Common Stock: ------------ *Yankee Energy System, Inc. 305,081 shares *Northeast Utilities 88,711 shares Total common stock Mutual Funds: ------------ *Merrill Lynch Growth Fund Investment and Retirement Class A 244,084 shares *Merrill Lynch Basic Value Fund Class A 118,517 shares *Merrill Lynch Capital Fund Class A 64,151 shares *Merrill Lynch Global Allocation Fund Class A 50,390 shares Total Mutual Funds Short Term Investments: ---------------------- *Merrill Lynch Retirement Preservation Trust 7,910,067 shares *YES, Inc. Loan Fund 951,067 shares Total short term investments Total investments [/TABLE] (a)(b) Identity of issue, borrower (e) Current lessor or similar party (d) Cost Value - ---------------------------------- -------- ---------- Common Stock: ------------ *Yankee Energy System, Inc. $ 6,674,943 $ 8,141,703 *Northeast Utilities 1,920,471 1,047,860 ----------- ----------- Total common stock 8,595,414 9,189,563 ----------- ----------- Mutual Funds: ------------ *Merrill Lynch Growth Fund Investment and Retirement Class A 5,976,198 6,984,408 *Merrill Lynch Basic Value Fund Class A 3,596,456 4,394,646 *Merrill Lynch Capital Fund Class A 2,000,291 2,213,837 *Merrill Lynch Global Allocation Fund Class A 746,801 712,512 ----------- ----------- Total Mutual Funds 12,319,746 14,305,403 ----------- ----------- Short Term Investments: ---------------------- *Merrill Lynch Retirement Preservation Trust 7,910,067 7,910,067 *YES, Inc. Loan Fund 951,067 951,067 ----------- ----------- Total short term investments 8,861,134 8,861,134 ----------- ----------- Total investments $29,776,294 $32,356,100 =========== =========== *Indicates a party in interest. The accompanying notes are an integral part of this schedule. SCHEDULE II EIN# 06-1236430 PLAN# 001 YANKEE ENERGY SYSTEM, INC. 401(k) EMPLOYEE STOCK OWNERSHIP PLAN ITEM 27d - SCHEDULE OF REPORTABLE TRANSACTIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (a) Identity of (b) Description (c) Purchase party involved of asset price - --------------- --------------- ------------ Merrill Lynch Retirement Preservation Trust $1,913,022 - Merrill Lynch Growth Fund Investment and Retirement Class A 1,810,281 Merrill Lynch Basic Value Fund 1,293,806 Class A - (a) Identity of (b) Description (d) Selling party involved of asset price - --------------- --------------- ------------ Merrill Lynch Retirement Preservation Trust $ - 1,496,845 Merrill Lynch Growth Fund Investment and Retirement - Class A 748,080 Merrill Lynch Basic Value Fund Class A - 355,765 (a) Identity of (b) Description (e) Lease party involved of asset Rental - --------------- --------------- ------------ Merrill Lynch Retirement Preservation Trust $ - - Merrill Lynch Growth Fund Investment and Retirement Class A - - Merrill Lynch Basic Value - Fund Class A - (a) Identity of (b) Description (f) Expense incurred party involved of asset with transaction - --------------- --------------- -------------------- Merrill Lynch Retirement Preservation Trust $ - - Merrill Lynch Growth Fund Investment and Retirement Class A - - Merrill Lynch Basic Value - Fund Class A - (a) Identity of (b) Description (g) Cost of party involved of asset asset - --------------- --------------- ------------ Merrill Lynch Retirement Preservation Trust $1,913,022 1,496,845 Merrill Lynch Growth Fund Investment and 1,810,281 Retirement Class A 613,427 Merrill Lynch Basic Value 1,293,808 Fund Class A 297,447 (h) Current value (a) Identity of (b) Description of an asset on party involved of asset transaction date - --------------- --------------- -------------------- Merrill Lynch Retirement $1,913,022 Preservation Trust 1,496,845 Merrill Lynch Growth Fund Investment and Retirement 1,810,281 Class A 748,080 Merrill Lynch Basic Value 1,293,806 Fund Class A 355,765 (a) Identity of (b) Description (i) Net gain party involved of asset or (loss) - --------------- --------------- ------------ Merrill Lynch Retirement $ - Preservation Trust - Merrill Lynch Growth Fund - Investment and Retirement Class A 134,653 Merrill Lynch Basic Value - Fund Class A 58,318 The accompanying notes are an integral part of this schedule. Pursuant to the requirements of the Securities Exchange Act of 1934, the Form 11-K has been signed below by the following persons in the capacities indicated. Date Title Signature June 30, 1998 Chairman, President and /s/Branko Terzic Chief Executive Officer ---------------------- Branko Terzic June 30, 1998 Vice President and /s/Michael E. Bielonko Chief Financial Officer ---------------------- Michael E. Bielonko June 30, 1998 Controller /s/Nicholas A. Rinaldi ---------------------- Nicholas A. Rinaldi June 30, 1998 Director /s/Sanford Cloud, Jr. ---------------------- Sanford Cloud, Jr. June 30, 1998 Director /s/ Eileen S. Kraus ----------------------- Eileen S. Kraus June 30, 1998 Director /s/Frederick M. Lowther ----------------------- Frederick M. Lowther June 30, 1998 Director /s/ Emery G. Olcott ----------------------- Emery G. Olcott June 30, 1998 Director /s/ John J. Rando ------------------------ John J. Rando June 30, 1998 Director /s/ Patricia M. Worthy ----------------------- Patricia M. Worthy