<PAGE>
YANKEE ENERGY SYSTEM, INC.
Notice of Annual Meeting of Shareholders
January 30, 1998
Meriden, CT
December 12, 1997
To the Shareholders:
The Annual Meeting of Shareholders of Yankee Energy System,
Inc., a Connecticut corporation, will be held at the Ramada Plaza
Hotel and Conference Center, 275 Research Parkway, Meriden,
Connecticut (see map on back cover) on Friday, January 30, 1998
at 10:30 a.m. for the following purposes:
1. To elect three directors for terms to expire at the 2001
Annual Meeting of Shareholders;
2. To ratify the appointment of Arthur Andersen LLP as
independent auditors for the year 1998; and
3. To transact any other business which may properly come
before the meeting.
Only shareholders of record at the close of business on
December 1, 1997 will be entitled to notice of and to vote at the
meeting or any adjournment thereof.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT
PROMPTLY IN THE ENVELOPE PROVIDED.
By Order of the
Board of Directors,
/s/ Mary J. Healey
Mary J. Healey
Vice President, General
Counsel and Secretary
<PAGE>
PROXY STATEMENT
This Proxy Statement is furnished to the shareholders of
Yankee Energy System, Inc. ("Yankee Energy" or the "Company") in
connection with the solicitation of proxies on behalf of the
Yankee Energy Board of Directors (the "Board") to be voted at the
Annual Meeting of Shareholders on January 30, 1998 and at any
adjournment(s) thereof (the "1998 Annual Meeting") for the
purposes set forth in the accompanying Notice of Annual Meeting
of Shareholders (the "Notice"). This Proxy Statement, the
Notice, the related proxy card and the 1997 Annual Report to
Shareholders are being mailed to shareholders beginning on or
about December 12, 1997. Yankee Energy's principal place of
business is 599 Research Parkway, Meriden, Connecticut 06450-
1030.
PROXIES
The proxies named on the enclosed proxy card were appointed
by the Board to vote the shares represented by the proxy card.
Upon receipt by the Company of a properly signed and dated proxy
card, the shares represented thereby will be voted in accordance
with the instructions on the proxy card. If a shareholder does
not return a signed proxy card, those shares so represented
cannot be voted by proxy. Shareholders are urged to mark the
boxes on the proxy card to show how their shares are to be voted.
If a shareholder returns a signed proxy card without marking the
boxes, the shares represented by the proxy card will be voted for
the election of directors and in favor of the other proposal set
forth in the Notice. The proxy card also confers discretionary
authority on the proxies to vote on any other matter not
currently known to management that may properly come before the
meeting.
Any proxy delivered pursuant to this solicitation is revocable at
the option of the person(s) executing the same (i) upon receipt
by the Company before the proxy is voted of a duly executed proxy
bearing a later date, (ii) by written notice of revocation to the
Secretary of the Company received before the proxy is voted or
(iii) by such person(s) voting in person at the 1998 Annual
Meeting.
VOTING STOCK
The record date for the determination of shareholders
entitled to notice of and to vote at the 1998 Annual Meeting was
the close of business on December 1, 1997. On such date there
were 10,457,061 shares of Common Stock outstanding and entitled
to vote. Each share of Common Stock is entitled to one vote.
The presence, in person or by proxy, of holders of a majority of
the outstanding shares of Common Stock entitled to vote shall
constitute a quorum at the 1998 Annual Meeting. Votes will be
totaled at the 1998 Annual Meeting by two inspectors of election
appointed by the Board.
OWNERSHIP OF VOTING STOCK BY MANAGEMENT
The following table sets forth certain information with
respect to the beneficial ownership of the Common Stock of the
Company as of December 1, 1997 by (i) each director and nominee
for director of the Company, (ii) each executive officer named in
the Summary Compensation Table, and (iii) all directors and
executive officers as a group. Except as indicated by footnote,
the persons named in the table have sole voting and investment
power with respect to all shares shown as beneficially owned by
them.
<TABLE>
<CAPTION>
Shares Beneficially
Name of Beneficial Owner Owned (1)
- ------------------------ -------------------
<S> <C>
Michael E. Bielonko(2) . . . . . . . . . . . 7,719
Sanford Cloud, Jr. . . . . . . . . . . . . . 1,520
Charles E. Gooley(3) . . . . . . . . . . . . 7,614
Eileen S. Kraus. . . . . . . . . . . . . . . 2,736
Steven P. Laden . . . . . . . . . . . . . . . 636
Frederick M. Lowther(4). . . . . . . . . . . 4,025
Emery G. Olcott. . . . . . . . . . . . . . . 5,027
Ellen J. Quinn (5) . . . . . . . . . . . . . 3,354
John J. Rando . . . . . . . . . . . . . . . . 372
Branko Terzic(6) . . . . . . . . . . . . . . 13,155
Nicholas L. Trivisonno(7). . . . . . . . . . 4,850
Patricia M. Worthy . . . . . . . . . . . . . 300
Directors and Executive Officers
As a Group (16 persons)(8) . . . . . . . . . 66,124
</TABLE>
(1) As of December 1, 1997, each of the directors and executive
officers identified above and all directors and executive
officers of the Company as a group beneficially owned less
than one percent of the outstanding Common Stock of the
Company. The number of shares shown includes 450 shares of
restricted stock held by each of Messrs. Lowther and Olcott,
300 shares of restricted stock held by each of Messrs.
Cloud, Trivisonno and Rando and 150 shares of restricted
stock held by each of Ms. Kraus and Ms. Worthy granted under
the Company's Non-Employee Directors' Restricted Stock Plan,
which shares had not vested by December 1, 1997. The number
of shares shown also includes 162 shares of restricted stock
held by Ms. Quinn and 2,000 shares of restricted stock held
by Mr. Terzic granted under the Company's 1991 Long-Term
Incentive Compensation Plan, which shares had not vested by
December 1, 1997. Pursuant to the terms of each plan, such
individuals have the power to vote and receive dividends
with respect to such shares but do not have dispositive
power with respect to such shares until such shares are
vested.
(2) Includes 150 shares owned by Mr. Bielonko's children and
4,660 shares subject to currently exercisable stock options.
(3) Includes 5,780 shares subject to currently exercisable stock
options.
(4) Includes 325 shares owned by Mr. Lowther's spouse.
(5) Includes 1,900 shares subject to currently exercisable stock
options.
(6) Includes 8,520 shares subject to currently exercisable stock
options.
(7) Includes 1,300 shares held jointly with Mr. Trivisonno's
spouse, with whom he shares voting and investment power.
(8) Includes an aggregate of 7,231 shares of non-vested
restricted stock held by directors and executive officers
and an aggregate of 25,300 shares subject to currently
exercisable stock options held by executive officers.
The above shares do not include amounts that have been
credited to participating directors' stock unit accounts under
the Company's Non-Employee Director Deferred Compensation Plan.
1. ELECTION OF DIRECTORS
The Company's Restated Certificate of Incorporation provides
that the directors of the Company shall be divided into three
classes, as nearly equal in number as possible, with each class
having a three-year term. The Board, pursuant to the Company's
Restated Certificate of Incorporation, has fixed the number of
directorships at nine. The Board has nominated Eileen S. Kraus,
Branko Terzic and Patricia M. Worthy for election to serve as
directors of the Company until the 2001 Annual Meeting of
Shareholders of the Company and until their successors are
elected and qualified. Proxies may not be voted for a greater
number of persons than the number of nominees named. Each
nominee is currently a director of the Company. In the event any
of the nominees becomes unavailable for election to the Board, an
event which the Board does not expect, the shares represented by
a proxy may be voted for a substitute nominee to be designated by
the Board or a committee thereof, unless the proxy withholds
authority to vote for all nominees.
Due to the press of business at his principal place of
employment, Nicholas L. Trivisonno will not continue on the Board
after the January 30, 1998 Board meeting. The Company is
grateful for his distinguished service as a member of the Board
since 1990 which has included the position of Chairman of the
Audit and Finance Committees. His sound advice and industry
experience have been invaluable to the Company, the Board and
Management. The Board and the Company extend their sincere
appreciation and best wishes to him.
If a quorum is present at the 1998 Annual Meeting, the
election of directors will require the affirmative vote of a
plurality of the votes cast by the shares of Common Stock of the
Company entitled to vote. Abstentions by holders of such shares
and broker non-votes with respect to the election of directors
will not be included in determining whether nominees have
received the vote of such plurality.
The following information relates to the nominees named
above and to the other directors of the Company whose terms will
continue after the 1998 Annual Meeting.
NOMINEES FOR TERMS EXPIRING IN 2001
Principal Occupation and Other Information
Photo insert of Eileen S. Kraus.
Chairman, Connecticut, Fleet National Bank since December 1,
1995. Previously, she was President of Shawmut Bank
Connecticut, N.A. and Vice Chairman of Shawmut National
Corporation from September 1992 until December 1, 1995, Vice
Chairman, Consumer Banking and Marketing Groups of predecessor
banks from 1990 to 1992, and Executive Vice President of
predecessor banks from 1987 to 1990. She is a director of CPC
International, Kaman Corporation and The Stanley Works. She is
a trustee of Mount Holyoke College, a trustee and executive
committee member of Kingswood-Oxford School, vice president of
Horace Bushnell Memorial Hall, and a director and executive
committee member of the Connecticut Business and Industry
Association.
Eileen S. Kraus
Age 59
Director since 1990
- ---------------------------------------------------------------
Photo insert of Branko Terzic.
Chairman, President and Chief Executive Officer of Yankee Energy
System, Inc. and Chairman and Chief Executive Officer of its
direct subsidiaries. Mr. Terzic became Chairman in August 1995,
Chief Executive Officer in March 1995 and President in September
1994. He was also Chief Operating Officer from September 1994 to
March 1995. From June 1993 to September 1994, Mr. Terzic was
Managing Director of Arthur Andersen Economic Consulting,
Washington, D.C. From October 1990 to May 1993, he served as a
Commissioner of the Federal Energy Regulatory Commission.
Branko Terzic
Age 50
Director since 1994
- --------------------------------------------------------------
Photo Insert of Patricia M. Worthy.
Professor, Howard University School of Law since 1992.
Previously, she served as Chief of Staff and Legal Counsel to
Mayor Sharon Kelly of Washington, D.C. from 1991 to 1992 and was
Commissioner, District of Columbia Public Service Commission from
1980 to 1983, and then served as Chairman of the Commission from
1983 to 1991. She served as a member of the board of the public
broadcasting network, WETA, and serves as Chairman of the
District of Columbia Judicial Nomination Commission.
Patricia M. Worthy
Age 53
Director Since 1996
- -----------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THESE
NOMINEES
<PAGE>
OTHER DIRECTORS
Principal Occupation and Other Information
- ------------------------------------------
Terms Expiring in 1999:
Photo insert of Sanford Cloud, Jr.
President and Chief Executive Officer of The National Conference,
New York, New York since April 1994. Previously, he was a partner
in the law firm of Robinson & Cole, Hartford, CT from January
1993 until March 1994 and Vice President of Aetna Life and
Casualty Co. from December 1986 until December 1992. Mr. Cloud
is a director of The Advest Group, Inc. He also serves as
Chairman of The Children's Fund of Connecticut.
Sanford Cloud, Jr.
Age 53
Director Since 1995
- -----------------------------------------------------------------
Photo insert of John J. Rando.
Senior Vice President of Digital Equipment Corporation's Services
Division since June 1997. Previously, Mr. Rando served as Vice
President and General Manager of Digital's Services Division from
July 1996 to June 1997, and as Vice President and General Manager
of Digital's Multivendor Customer Services Division from December
1992 to June 1996.
John J. Rando
Age 45
Director Since May 1997
<PAGE>
OTHER DIRECTORS
Principal Occupation and Other Information
- -------------------------------------------
Terms Expiring in 2000:
Photo insert of Frederick M. Lowther.
Partner in the law firm of Dickstein, Shapiro, Morin & Oshinsky,
LLP, Washington, D.C., since 1973. He has been a member of the
firm's Executive Committee and chairman of its Compensation
Committee since 1989. He is a director of EEX Corporation and
Poseidon Resources Corporation, and is a member of the Advisory
Board of Shell Technology Ventures, Inc.
Frederick M. Lowther
Age 54
Director since 1992
- -----------------------------------------------------------------
Photo insert of Emery G. Olcott.
Chairman, President and Chief Executive Officer of Packard
BioScience Company (f/k/a Canberra Industries, Inc.) since 1971.
Packard is a manufacturer and distributor of analytical
instruments and chemicals. He is a trustee of the Loomis Chaffee
School in Windsor, Connecticut.
Emery G. Olcott
Age 59
Director since 1989
- -----------------------------------------------------------------
<PAGE>
Board Committees and Meetings
Standing committees of the Board include the Executive
Committee, the Audit Committee, the Finance Committee, the
Organization and Compensation Committee and the Committee on
Board Affairs.
The Executive Committee is currently composed of Branko
Terzic (Chairperson), Emery G. Olcott and Nicholas L. Trivisonno.
The Executive Committee has certain powers and authority of the
Board in the management and control of the business of the
Company between meetings of the Board. The Executive Committee
met once during fiscal 1997.
The Audit Committee is currently composed of Nicholas L.
Trivisonno (Chairperson), Sanford Cloud, Jr., Eileen S. Kraus,
John J. Rando and Patricia M. Worthy. The Audit Committee
oversees the Company's internal accounting controls, recommends
to the Board the appointment of a firm of certified public
accountants to conduct the annual audit of the Company's
financial statements, reviews reports from the independent
auditors and makes such recommendations to the Board as it deems
appropriate. The Audit Committee met three times during fiscal
1997.
The Finance Committee is currently composed of Sanford
Cloud, Jr. (Chairperson), John J. Rando, Nicholas L. Trivisonno
and Patricia M. Worthy. The Finance Committee met six times
during fiscal 1997 to review the dividend policy and the
financial plans and budgets of the Company in order to determine
whether they are fiscally sound and consistent with the Company's
overall business goals.
The Organization and Compensation Committee is currently
composed of Emery G. Olcott (Chairperson), Eileen S. Kraus and
Frederick M. Lowther. The Organization and Compensation
Committee is responsible for organization, succession and
executive compensation and administers the Company's Annual, 1991
and 1996 Long-Term Incentive Compensation Plans, the Non-Employee
Directors' Restricted Stock Plan and the Non-Employee Director
Deferred Compensation Plan. The Organization and Compensation
Committee met eight times during fiscal 1997.
The Committee on Board Affairs is currently composed of
Eileen S. Kraus (Chairperson), Frederick M. Lowther and Emery G.
Olcott. The Committee on Board Affairs recommends to the Board
criteria for the selection of candidates for director, evaluates
candidates and recommends nominees to fill vacancies on the Board
and seeks input from all non-employee directors on Chief
Executive Officer performance which forms the basis for a report
to the Organization and Compensation Committee and a
recommendation to the Board. The Committee on Board Affairs also
reviews and makes recommendations to the Board on corporate
governance practices and on the compensation program for all non-
employee directors. The Committee on Board Affairs met six times
during fiscal 1997.
The Board held nine meetings during the fiscal year ended
September 30, 1997. Each director attended at least 75 percent
of the aggregate of (i) the total number of meetings of the
Board, and (ii) the total number of meetings held by all
committees of the Board on which such director served.
Corporate Governance
In August 1997, the Committee on Board Affairs initiated a
new process to evaluate Board performance and effectiveness. As
a first step, all directors completed a Board evaluation
questionnaire which addressed goals relating to: (i) the Board's
knowledge and understanding of the Company's vision, business,
strategic and financial plans; (ii) the effectiveness of Board,
committee structure, meetings and corporate governance processes;
(iii) succession planning; and (iv) the adequacy of information
and resources available to the Board to discharge its
responsibilities.
In October 1997, the Chairperson of the Committee on Board
Affairs presented a report of the assessments and recommendations
to the full Board. The Board believed that the areas of greatest
strength were its oversight of strategic and financial plans,
the effectiveness of Board and committee meetings and its
corporate governance processes. The Board recognized the need to
continue to focus its efforts on knowledge of the Company's
business in light of the major changes occurring in the natural
gas business and to improve succession planning.
The Committee on Board Affairs intends to continue to make
and implement changes to improve Board effectiveness based on
suggestions received from directors and management in fiscal year
1998 and beyond.
Director Compensation
In fiscal year 1997, non-employee directors received an
annual retainer of $15,000, consisting of $10,000 in Common Stock
of the Company and $5,000 in cash, each paid in equal
installments on a quarterly basis in December, March, June and
September. Chairpersons of Board committees received an
additional annual cash retainer of $1,500. Non-employee
directors also received $1,000 for each Board and committee
meeting attended. Directors who are full-time employees of the
Company or a subsidiary receive no additional compensation for
services as a member of the Board or any committee of the Board.
Under the Non-Employee Directors' Restricted Stock Plan,
established in 1991 to promote ownership of the Company's Common
Stock by members of the Board, each non-employee director, upon
his or her election or reelection to the Board, receives an award
of 450 restricted shares of the Company's Common Stock. One-
third of such restricted shares of Common Stock vests each year
at subsequent annual meetings of shareholders. The Board may
make appropriate adjustments in share amounts in the event of any
change in the Company's Common Stock, such as a stock split, or
other change in the Company's corporate structure or distribution
to shareholders. Participants in the plan have voting rights and
rights to receive dividends and other distributions with respect
to such shares, but until their vesting, such shares are subject
to the plan's provisions on forfeiture and restrictions on
disposition. In January 1997, Mr. Lowther and Mr. Olcott each
received 450 shares upon election to a three-year term, and 150
shares vested for all non-employee directors upon completion of a
year of their respective terms.
The Company's Non-Employee Director Deferred Compensation
Plan permits non-employee directors to defer all or a portion of
total fees for all services rendered as a director, including
meeting fees, committee chairperson retainers, quarterly
retainers paid in the Company's Common Stock and vested shares of
restricted stock awarded pursuant to the Company's Non-Employee
Directors' Restricted Stock Plan. A non-employee director may
elect to have deferred cash compensation credited to either a
cash account or a stock unit account. Amounts credited to a
director's cash account will be credited on a monthly basis with
interest at an annual rate equal to the rate of return of Yankee
Gas Services Company, the Company's principal operating
subsidiary, as filed with the Connecticut Department of Public
Utility Control. Amounts credited to a director's stock unit
account will be credited initially as a dollar amount which shall
be converted into stock units on a quarterly basis by dividing
the dollar amount by the closing price of the Company's Common
Stock on the last day of each quarter. Stock units will be
further credited with an amount equal to the dividends payable if
the stock represented by the stock units had been outstanding.
Quarterly retainers paid in the Company's Common Stock and vested
shares of restricted stock deferred by a director pursuant to the
Non-Employee Director Deferred Compensation Plan will be
automatically allocated to such director's stock unit account.
A non-employee director may also elect among various options
as to how and when compensation deferred pursuant to the Plan
will be paid to the director. The director may elect to commence
payment of deferred compensation at a specified future date or
after the date on which the participant ceases to be a director
for any reason. A director may also elect to receive payment as
a single lump sum or over a fixed period of time. Amounts
credited to the director's cash account will be paid in cash.
Amounts credited to the director's stock unit account will be
paid in cash or in shares of the Company's Common Stock, based on
the prior election of the director.
Certain Transactions
During fiscal year 1997, the Company engaged the law firm of
Dickstein Shapiro Morin & Oshinsky, LLP, of which Frederick M.
Lowther, a director of the Company, is a partner.
ORGANIZATION AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Organization and Compensation Committee of the Board
(the "Committee"), which is comprised of three non-employee
directors, is responsible for recommending to the Board the
Company's executive compensation policies and the annual
compensation of the Company's executive officers and other
members of senior management. In connection with these
responsibilities, the Committee administers the Company's 1991
and 1996 Long-Term Incentive Compensation Plans, and a
subcommittee comprised of Emery G. Olcott and Eileen S. Kraus has
authority to grant stock options and other awards under these
plans. The Committee also oversees the Non-Employee Directors'
Restricted Stock Plan and the Non-Employee Director Deferred
Compensation Plan.
Executive Compensation Policies
The Company's executive compensation policies are designed
to attract and retain high quality executives critical to the
long-term success of the Company, to motivate and reward
achievement of performance goals and to align the interest of
executive officers with the interest of the Company's other
shareholders. Consistent with this philosophy, the Company has
established a competitive and appropriate total compensation
package for executive officers and other members of senior
management consisting primarily of base salary, annual cash
bonuses pursuant to the Company's Annual Incentive Compensation
Plan and stock options, restricted stock grants and stock
appreciation rights pursuant to the Company's 1996 Long-Term
Incentive Compensation Plan. Executive officers' salaries are
positioned to be consistent with the competitive practice of a
peer group (the "Peer Group") of investor-owned gas utilities
located throughout the United States with annual revenues and
operating characteristics similar to Yankee Gas Services Company.
The Board of Directors, upon the recommendation of the
Committee, underscored the importance of linking executive and
shareholder interests by adopting in September 1997 stock
ownership guidelines for senior management of the Company. Under
the guidelines, the target ownership of the Company's Common
Stock is directly related to the officer's corporate position,
with the greatest ownership target for the Chief Executive
Officer ("CEO"). The target for the CEO is 100% of annual base
salary. The target for the other four officers named in the
Summary Compensation Table is 75% of annual base salary. Each
officer is expected to achieve the ownership target within a
period of five years commencing October 1, 1997 for existing
officers and within five years for officers who become subject to
the stock ownership guidelines. From time to time and at the
sole discretion of the Committee, these targets and time frames
may be adjusted. Share and share equivalents earned under the
Company's compensation plans, including restricted stock awards
and share equivalents measured by the unrealized gain portion of
in-the-money stock options and benefit plan investments in the
Company's Common Stock are included in determining compliance
with the ownership targets.
In keeping with this philosophy, payment of incentive
compensation (both annual and long-term) commencing in fiscal
1998 will be calculated as cash awards but paid primarily in
Company Common Stock.
The Company's incentive plans are designed so that the total
executive compensation package is competitive with the Peer
Group. The Board intends to generally ensure that compensation
expenses are deductible under Section 162(m) of the Internal
Revenue Code. Section 162(m) generally disallows a tax deduction
for public companies for compensation, other than qualifying
performance-based compensation, over $1 million paid to certain
executive officers.
Elements of Executive Compensation
Base Salary. The Company maintains formal salary grades and
ranges for its executive officers. Positions are graded based
upon responsibility level. Salary ranges at each position are
established at the market average of the Peer Group. In 1997,
salary increases were determined based on individual performance,
the location of the individual's salary in the position's salary
range and a competitive increase in the payroll budget.
Annual Incentive Compensation Plan. Executive officers are
eligible to receive an annual performance-based cash award
pursuant to the Company's Annual Incentive Compensation Plan.
The Board established this plan to enhance the Company's
financial and operating performance, customer service, employee
safety and corporate efficiency. Each year, the Committee
establishes corporate and individual performance goals for the
CEO and other executive officers based upon strategic priorities.
The 1997 performance goals were based on customer service
satisfaction, profitability and enhancement of shareholder value,
expansion of markets and market growth, and public and employee
safety. The goals are weighted relative to their importance to
the Company and the relative impact each executive officer will
have upon their results. Each executive has a threshold, target
and maximum incentive amount expressed as a percentage of base
salary. In 1997, these amounts were 15 percent, 30 percent and
45 percent, respectively, of base salary for the CEO, and 10
percent, 20 percent and 30 percent, respectively, for the other
executive officers. The Committee may adjust the incentive cash
award amount by an index or "modifier" determined by the
Committee. The modifier is based on the Company's actual profit
performance and serves to maintain a correlation between an
executive officer's incentive cash award and the returns realized
by the Company's shareholders. The index may modify award
amounts by as much as 50 percent. In 1997, incentive cash awards
were decreased by 10 percent to reflect the modifier. The plan
is intended to pay fully competitive annual cash compensation
when performance against goals matches the target level.
At the end of each fiscal year, the Committee reviews a
management report on results versus goals and meets with the CEO
to evaluate the performance of the other executive officers. The
Committee also meets in the absence of the CEO to evaluate his
performance. As part of the process, the Committee receives a
report from the Committee on Board Affairs on CEO performance
which is developed from input received from all non-employee
directors. This performance, expressed as a percentage with
attainment of all goals rated as 100 percent, is used in the
determination of annual cash bonus amounts. The Committee has
the authority to modify the mathematical results of applying the
terms of the plan when the Committee, exercising sound business
judgment, deems it prudent to do so.
Long-Term Incentive Compensation Plan. Pursuant to the
terms of the 1996 Long-Term Incentive Compensation Plan, the
Committee has the authority to award to executive officers and
other key employees restricted stock, stock options and stock
appreciation rights. The ability to grant a variety of awards
enables the Committee to respond to changing strategic,
competitive, regulatory, tax and accounting forces in an
efficient manner. Over time and through the use of the grant of
awards, the Committee intends to achieve the objective of causing
the executive officers and other senior management to be
significant shareholders of the Company so that their interests
are aligned with the interests of the Company's other
shareholders.
CEO Compensation
The 1997 compensation for Mr. Terzic, the Company's CEO, was
determined substantially in conformance with the policies applied
to all other executive officers of the Company. The Committee
received a report on CEO performance from the Committee on Board
Affairs which was based on input from all non-employee directors.
The Committee then evaluated the performance of the CEO and
reported its compensation recommendation to the Board. For 1997,
the base salary of Mr. Terzic was increased to $300,000 from his
1996 base salary of $283,500. This increase occurred on June 1,
1997. Incentive cash compensation for Mr. Terzic was based on
performance against a series of five stated goals, reflecting a
combination of both corporate and individual objectives. The
five goals, in summary, were: (i) overall job performance; (ii)
implement corporate development as approved by the Board; (iii)
develop a strategic plan and achieve targeted consolidated
earnings for Yankee Energy and its Subsidiaries; (iv) enhance
core utility profitability; and (v) enhance executive management
team performance. Based on all information available to it, the
Committee concluded that Mr. Terzic had achieved a level of
performance for all goals combined at approximately 80% of
threshold. The calculated level was then decreased by 10% to
reflect the modifier of overall Company performance. This
resulted in an incentive cash award of $32,850.
Emery G. Olcott (Chairperson)
Eileen S. Kraus
Frederick M. Lowther
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding
the compensation paid by the Company and its subsidiaries to the
five most highly compensated executive officers of the Company
during the last fiscal year for services rendered in all
capacities to the Company and its subsidiaries.
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
----------- All
Annual Compensation Securities Other
Name and ---------------------- Underlying Compen-
Principal Fiscal Salary Bonus Options/ sation
Position Year ($) ($) SARs (#) ($)(1)
- ----------------- ------ ------- ------ -------- -----
<S> <C> <C> <C> <C> <C>
Branko Terzic 1997 285,625 32,850 0 0
Chairman, 1996 268,125 81,000 12,600 0
President and 1995 257,292 72,500 0 0
Chief Executive
Officer
Charles E. Gooley 1997 184,384 37,800 0 0
Executive 1996 170,000 33,300 6,400 1,980
Vice President 1995 162,671 29,900 0 2,029
Michael E.
Bielonko (2) 1997 148,200 7,500 0 0
President of 1996 139,725 31,900 5,300 1,980
Yankee Energy 1995 133,708 21,900 0 2,029
Services Company
Steven P. Laden (3) 1997 128,750 32,800 0 39,465
Vice President 1996 27,060 0 0
33,417
Ellen J. Quinn (4) 1997 115,892 33,000 0 0
Vice President 1996 100,983 31,500 3,800 2,180
1995 84,330 13,600 0 1,980
</TABLE>
- --------------------
(1) This compensation includes the dollar value of the Company's
match under the Company's 401(k) Plan. Mr. Laden received a
signing bonus of $33,417 in 1996, and received payment for
relocation expenses of $39,465 in 1997.
(2) Mr. Bielonko became President of Yankee Energy Services
Company, a wholly-owned subsidiary of the Company, in
December 1996. Previously, he served as Chief Financial
Officer of the Company.
(3) Mr. Laden became Vice President of the Company in July 1996.
(4) Ms. Quinn became Vice President of the Company in May 1995.
Previously, she served as Director of Corporate and
Environmental Planning.
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
The following table sets forth certain information with
respect to the individuals named in the Summary Compensation
Table regarding options held as of September 30, 1997.
<PAGE>
AGGREGATED OPTION EXERCISES IN LAST
FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Unexercised Options
Shares Options at At Fiscal
Acquired Fiscal Year Year-End
on Value End (#) ($)(1)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
- --------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Branko Terzic 0 0 8,520/14,080 $13,860/$9,240
Charles E. Gooley 0 0 5,780/ 8,120 $ 9,270/$6,180
Michael E. Bielonko 0 0 4,660/ 6,640 $ 7,416/$4,944
Steven P. Laden 0 0 - -
Ellen J. Quinn 0 0 1,900/ 3,800 $ 2,348/$1,566
</TABLE>
- --------------------
(1) Based on the fair market value of the Company's Common Stock
as of September 30, 1997 ($23.69), less the exercise price of the
options.
Executive Agreements
Effective September 14, 1994, the Company entered into a
three-year employment agreement with Branko Terzic, the Company's
Chairman, President and Chief Executive Officer. The agreement
provides that Mr. Terzic shall receive a base salary of at least
$250,000 a year. Pursuant to the terms of the agreement, Mr.
Terzic has received 4,000 shares of restricted Common Stock of
the Company, non-qualified stock options to purchase 10,000
shares of the Company's Common Stock and a $25,000 signing bonus.
In addition, the agreement provides that if, after a "change in
control" of the Company, (i) Mr. Terzic terminates his employment
with the Company by reason of (a) a material reduction in his
authority, duties or responsibilities or (b) a reduction in his
total compensation in violation of the terms of the agreement, or
(ii) the Company terminates Mr. Terzic's employment for a reason
other than death or disability or cause, Mr. Terzic will be
entitled to a severance payment. The amount payable to Mr.
Terzic upon the occurrence of any of the foregoing events is
equal to three times Mr. Terzic's base salary then in effect.
Such amount is immediately due and payable upon his termination.
A "change in control" is deemed to have occurred if any person
becomes the beneficial owner, directly or indirectly, of 25% or
more of the Company's Common Stock or there is a change in the
majority of the members of the Board in connection with certain
transactions, including any tender offer or merger of the
Company. The agreement will be automatically renewed on each
successive January 1, unless not later than December 15 of the
preceding year, one of the parties notifies the other of the
desire not to extend the agreement.
The Company also has entered into Change in Control
Executive Severance Agreements with each of Messrs. Gooley,
Bielonko, Laden and Ms. Quinn. The intent of the agreements is
to assure continuity in the management of the operations of the
Company in the event of a "change in control." A change in
control is defined as occurring when (i) any person becomes the
beneficial owner, directly or indirectly, of 25% or more of the
Company's Common Stock, (ii) there is a change in the majority of
the Board during a 25-month period, (iii) a consolidation or
merger of the Company is consummated in which the Company is not
the continuing or surviving corporation or pursuant to which the
Company's Common Stock would be converted into cash, securities
or other property, other than a merger of the Company in which
the holders of the Company's Common Stock have the same
proportionate ownership of Common Stock of the surviving
corporation, (iv) the consummation of any sale, lease, exchange
or other transfer of a majority of the Company's assets, (v) the
Company's shareholders approve any plan or proposal for the
liquidation or dissolution of the Company, or (vi) the Board
determines that a change in control has occurred. These
agreements provide that in the event that the executive officer's
employment is terminated within two years of a change in control
either by (i) the Company for reasons other than for disability,
death or cause, or (ii) the executive officer due to (a) material
diminution in status, position, duties or responsibilities, (b) a
reduction in total compensation, or (c) assignment to a location
more than 50 miles from the executive officer's current place of
employment, the executive officer is entitled to a severance
payment. The amount payable upon the occurrence of any of the
foregoing events is two times the sum of the executive officer's
annual base salary at the date of the change in control plus the
average annual incentive compensation paid to the executive
officer in the two fiscal years prior to the fiscal year in which
the change in control occurs. In addition, the executive officer
shall be entitled to participate in all benefit plans in which
such officer participated in prior to the termination, and if the
executive officer is age 55 or older on the date of termination
of employment, such officer shall be entitled to receive service
credit under the Company's pension plans until his or her normal
retirement date. The agreements will be automatically renewed on
each successive January 1, unless not later than December 1 of
the preceding year, one of the parties notifies the other that he
or she does not wish to extend the agreement, except that the
agreement shall be automatically extended for 24 months after any
change in control.
Retirement Plans
The following table sets forth the annual pension benefits
payable upon normal retirement at age 65, pursuant to the Yankee
Energy System, Inc. Retirement Plan (the "Retirement Plan",
described below) and the Company's Excess Benefit Plan (the
"Excess Benefit Plan", described below), based upon the average
annual earnings and years of service indicated.
<TABLE>
<CAPTION>
Average Annual
Earnings for the Highest
Consecutive 60 Months of
Last 120 Months Prior
to Normal Retirement Years of Service
- -------------------- ---------------------------------
15 20 25
---- ---- ----
<S> <C> <C> <C>
$ 75,000 $15,776 $21,035 $ 26,294
125,000 27,026 36,035 45,044
175,000 38,276 51,035 63,794
225,000 49,526 66,035 82,544
275,000 60,776 81,035 101,294
325,000 72,026 96,035 120,044
375,000 83,276 111,035 138,794
</TABLE>
<TABLE>
<CAPTION>
Average Annual
Earnings for the Highest
Consecutive 60 Months of
Last 120 Months Prior
to Normal Retirement Years of Service
- -------------------- ---------------------------------
30 35 40
---- ---- ----
<S> <C> <C> <C>
$ 75,000 $31,552 $36,811 $ 38,686
125,000 54,052 63,061 66,186
175,000 76,552 89,311 93,686
225,000 99,052 115,561 121,186
275,000 121,552 141,811 148,686
325,000 144,052 168,061 176,186
375,000 166,552 194,311 203,686
</TABLE>
Pursuant to provisions of the Internal Revenue Code,
compensation earned that is used in calculating retirement
benefits under the Retirement Plan is limited to a maximum of
$160,000. This affects the benefit calculation for certain
individuals and effectively reduces their benefits under the
Retirement Plan. The Company's Excess Benefit Plan provides
benefits not payable under the Retirement Plan due to the
$160,000 limitation. The maximum annual benefit that can be paid
in 1997 to a participant from a tax qualified benefit plan is
$125,000.
All employees of the Company, including the executive
officers named in the Summary Compensation Table, are entitled to
participate in the Retirement Plan, which is a non-contributory,
defined benefit retirement plan. Retirement benefits are based
on years of credited service and the employee's average annual
earnings, which is the average of an employee's five highest
years of earnings during the last ten years of employment. The
benefits presented are based on straight life annuity and do not
take into account any reduction for joint and survivorship
annuity payments. The Retirement Plan provides for several
optional forms of benefit payments, including a straight life
annuity option, a contingent annuitant option, a ten-year certain
and life option and a level income option. Retirement benefits
under the Retirement Plan are not reduced by the employee's
Social Security benefits. Contributions, which are actuarially
determined, are made to the Retirement Plan by the Company for
the benefit of all employees covered by the Retirement Plan. The
Retirement Plan provides for continued benefit accruals for
employees who work beyond age 65.
As of September 30, 1997, the years of credited service
under the Retirement Plan for Messrs. Terzic, Gooley, Bielonko,
Laden and Ms. Quinn were 6, 16, 20, 2, and 15, respectively.
The years of credited service for certain of the executive
officers named above include prior service under the Northeast
Utilities Service Company Retirement Plan. Messrs. Terzic and
Laden each received two years of credited service for every one
year of service completed pursuant to agreements with the
Company.
Under federal law, an employee's benefits under a qualified
pension plan, such as the Retirement Plan, are limited to certain
amounts. The Company has adopted the Excess Benefit Plan in
which all of the executive officers named in the Summary
Compensation Table participate. The Excess Benefit Plan
supplements the benefits of a participant in the Retirement Plan
in an amount by which such participant's benefits under the
Retirement Plan are limited by law. The Excess Benefit Plan also
provides for the payment of additional retirement benefits in the
same manner as under the Retirement Plan on remuneration paid
under certain management incentive plans. The Excess Benefit
Plan is an unfunded plan that is not intended to meet the
qualification requirements of Section 401 of the Internal Revenue
Code.
Corporate Performance Graph
The following graph and table compare the total shareholder
returns over the last five fiscal years to the Standard & Poor s
500 Stock Index ("S&P 500"), Standard & Poor's Utility Index
("S&P Utility") and a "Peer Group" consisting of natural gas
distribution companies comparable to Yankee Energy. The Peer
Group is composed of Bay State Gas Company, Colonial Gas Company,
Connecticut Energy Corporation, CTG Resources, Inc., New Jersey
Resources Corporation, North Carolina Natural Gas Corporation,
Providence Energy Corporation, Public Service Company of North
Carolina, and South Jersey Industries, Inc. In future proxy
statements, the Peer Group will be included in place of the S&P
Utilities because the Company believes the Peer Group reflects
companies that are generally comparable in size and operating
characteristics of Yankee Energy, and therefore provides a more
appropriate basis of comparison than does the S&P Utilities.
Total return values for the S&P 500, S&P Utility, Peer Group and
Yankee Energy were calculated based on cumulative total return
values assuming the reinvestment of dividends. The shareholder
returns shown on the graph below are not necessarily indicative
of future performance.
(Graph shows information outlined in the following table.)
<TABLE>
<CAPTION>
Total Shareholder Returns
Fiscal Yankee Peer S&P S&P
Year Energy Group 500 Utility
---- ------ ----- --- -------
<S> <C> <C> <C> <C>
1992 100 100 100 100
1993 138 125 113 124
1994 118 105 117 108
1995 124 116 152 138
1996 141 137 183 149
1997 154 160 257 170
</TABLE>
2. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The firm of Arthur Andersen LLP served as independent
auditors for the Company for the fiscal year ended September 30,
1997. Pursuant to the recommendation of the Audit Committee, the
Board has appointed that firm to continue in that capacity for
the fiscal year 1998, and recommends that a resolution be
presented to shareholders at the 1998 Annual Meeting to ratify
their appointment.
In the event the shareholders fail to ratify the appointment
of Arthur Andersen LLP, the Board will appoint other independent
public accountants as auditors. Representatives of Arthur
Andersen LLP will attend the 1998 Annual Meeting. They will have
the opportunity to make a statement and respond to appropriate
questions from shareholders.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THIS
PROPOSAL
OTHER MATTERS
The Board does not know of any matters that will be
presented for action at the 1998 Annual Meeting other than those
described above and matters incident to the conduct of the
meeting. If, however, any other matters not currently known to
management should come before the 1998 Annual Meeting, it is
intended that the shares represented by the accompanying proxy
will be voted on such matters in accordance with the discretion
of the holders of such proxy.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company.
Proxies may be solicited by directors, officers or regular
employees of the Company in person, by telephone or telegram.
The Company has retained ChaseMellon Shareholder Services to
assist in the solicitation and sending of proxy material. The
Company will pay approximately $5,500 for these services.
SHAREHOLDER PROPOSALS FOR 1998
Pursuant to Securities and Exchange Commission regulations,
shareholder proposals submitted for next year's proxy statement
must be received by the Company no later than the close of
business on August 14, 1998 to be considered. Proposals should
be addressed to Mary J. Healey, Vice President, General Counsel
and Secretary, Yankee Energy System, Inc., 599 Research Parkway,
Meriden, CT 06450-1030.
Shareholders holding at least five percent of the voting
power of the issued and outstanding Common Stock of the Company
may nominate candidates for election to the Board if a written
notice setting forth (i) the name, age, business address and
residence address of each person to be nominated, (ii) the
principal occupation or employment of each such person, (iii) the
number of shares of capital stock of the Company which are
beneficially owned by each such person, (iv) a statement that
each such person is willing to be nominated and (v) such other
information concerning each such person as would be required
under the rules of the Securities and Exchange Commission to be
included in a proxy statement soliciting proxies for the election
of such person as a director is submitted and received by the
Secretary of the Company not less than 90 days prior to a meeting
of shareholders called for election of directors.
PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
