-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WVFVae1hGu0Gj6kjjZDGEIfZBSHH07Yqibc6oJtnVrwNaijNL7PXa1ztcTxmZxCd DNWOauSlYFveptiMgpUiQA== 0000071297-98-000017.txt : 19980319 0000071297-98-000017.hdr.sgml : 19980319 ACCESSION NUMBER: 0000071297-98-000017 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980318 FILED AS OF DATE: 19980318 SROS: BSE SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NEW ENGLAND ELECTRIC SYSTEM CENTRAL INDEX KEY: 0000071297 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 041663060 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: DEF 14A SEC ACT: SEC FILE NUMBER: 001-03446 FILM NUMBER: 98568415 BUSINESS ADDRESS: STREET 1: 25 RESEARCH DR CITY: WESTBOROUGH STATE: MA ZIP: 01581 BUSINESS PHONE: 5083669011 DEF 14A 1 NEW ENGLAND ELECTRIC SYSTEM 25 RESEARCH DRIVE WESTBOROUGH, MASSACHUSETTS 01582 March 9, 1998 Re: NEES Companies Incentive Thrift Plan I NEES Companies Incentive Thrift Plan II Yankee Thrift Plan Yankee Thrift Plan II Dear NEES Shareholder: ---------------------- Under the thrift plans, NEES common shares are held by the trustee. As beneficial owner of NEES common shares through one or more of the plans, you have a right to direct the trustee how to vote at the 1998 New England Electric System Annual Meeting of shareholders. Shareholders who own NEES common shares directly vote through a proxy. Plan participants have a somewhat different procedure. Included in this package is a voting instruction card on which you instruct the trustee how to vote. Your share balance in each of the plans in which you participate appears at the top of the enclosed voting instruction card. Please note that all of the shares in the plans must be voted. Therefore, the trustee will vote shares for which it does not receive instructions in the same proportion as those for which it does. We would appreciate your voting on the election of directors and other matters as set forth in the accompanying proxy statement. Please take the time to review the proxy material, complete your voting instruction card, and mail the card in the enclosed envelope. Your voting instruction will be kept confidential by an independent proxy tabulator. Sincerely, (Facsimile Signature) (Facsimile Signature) Joan T. Bok Richard P. Sergel Chairman President and of the Board Chief Executive Officer NEW ENGLAND ELECTRIC SYSTEM 25 RESEARCH DRIVE WESTBOROUGH, MASSACHUSETTS 01582 March 9, 1998 Dear Shareholder: The directors and officers of New England Electric System invite you to attend the Annual Meeting of shareholders to be held on Tuesday, April 28, 1998, at 10:30 A.M. at Mechanics Hall at 321 Main Street in Worcester, Massachusetts. The historic Mechanics Hall building is handicapped accessible. The business part of the meeting is fully described in the accompanying Notice of Annual Meeting and Proxy Statement. At the conclusion of the formal portion of the meeting, there will be a discussion of the Company's operations, followed by a question and answer period. We would appreciate your voting, signing, and dating the proxy, and mailing it promptly in the enclosed postage-paid envelope, even if you plan to attend the meeting in person. Please enclose a note if you would like to receive directions to the meeting and information on parking arrangements. Sincerely, (Facsimile Signature) (Facsimile Signature) Joan T. Bok Richard P. Sergel Chairman President and of the Board Chief Executive Officer NEW ENGLAND ELECTRIC SYSTEM 25 RESEARCH DRIVE WESTBOROUGH, MASSACHUSETTS 01582 NOTICE OF ANNUAL MEETING The 1998 Annual Meeting of the shareholders of New England Electric System will be held at Mechanics Hall at 321 Main Street in Worcester, Massachusetts, on Tuesday, April 28, 1998, at 10:30 A.M., E.D.S.T., for the following purposes, all as set forth in the accompanying proxy statement: 1. To fix the number of directors; 2. To elect directors; 3. To consider and vote on two shareholder proposals if presented at the meeting; and 4. To transact such other business as may properly come before the meeting or any adjournment thereof. Shareholders of record at the close of business on March 9, 1998, will be entitled to vote at the meeting. By order of the Board of Directors, (Facsimile Signature) Cheryl A. LaFleur, Secretary March 9, 1998 PROXY STATEMENT NEW ENGLAND ELECTRIC SYSTEM 25 RESEARCH DRIVE WESTBOROUGH, MASSACHUSETTS 01582 ANNUAL MEETING OF SHAREHOLDERS, APRIL 28, 1998 The Board of Directors of New England Electric System is soliciting proxies in the accompanying form. Proxies may be revoked at any time prior to being used by completing a new proxy, by notifying the Company in writing of such revocation, or by voting in person at the Annual Meeting. All shares represented by properly executed proxies will be voted at the Annual Meeting or any adjournment thereof as specified in such proxies. The Company's annual report for 1997, which includes financial statements and a summary of important developments during 1997, has been mailed to shareholders on or about March 10, 1998. The approximate date on which the proxy statement and form of proxy are first being sent is March 18, 1998. Holders of common shares of record at the close of business on March 9, 1998, are entitled to vote at the Annual Meeting. At that date there were 64,178,488 common shares outstanding and each share is entitled to one vote. An affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote is required for approval of each of the items being submitted to the shareholders for their consideration. Votes for directors will be counted by the Company as (i) For or (ii) Withhold Authority; abstentions have the same effect as "Withhold Authority" votes. Votes concerning other matters will be counted by the Company as (i) For, (ii) Against, or (iii) Abstain; abstentions are counted separately, but have the same effect as "Against" votes. Broker nonvotes (shares held by brokers or nominees as to which instructions have not been received from the beneficial owners and the broker or nominee does not have discretionary voting power on the particular matter) are counted as not represented at the meeting for all matters. 1. FIXING THE NUMBER OF DIRECTORS The Board of Directors recommends a vote IN FAVOR of this proposal. The persons named on the accompanying proxy will vote, unless otherwise directed, to fix the number of directors at thirteen. The Company's Agreement and Declaration of Trust provides that the Board may fix the number of directors at a number between eleven and sixteen until the next annual meeting of shareholders. 2. ELECTION OF DIRECTORS The persons named on the accompanying proxy will vote, unless otherwise directed, for the election of the thirteen nominees listed below as directors of the Company. All of the elected directors will hold office until the next annual meeting of shareholders or the special meeting held in lieu thereof and until their respective successors are chosen and qualified. All of the nominees for election as directors, except Messrs. Houston and Sergel, were elected directors by the shareholders at the 1997 Annual Meeting. Messrs. Houston and Sergel were elected directors by the Board of Directors effective February 6, 1998, upon Mr. Rowe's resignation as director, president, and chief executive officer of the Company to become chairman, president, and chief executive officer of Chicago-based Unicom Corporation and its subsidiary Commonwealth Edison. The Company knows of no reason why any of the nominees would be unable to act as a director, but, if any of them should become unavailable to serve, the persons named on the accompanying proxy have the authority to vote for any other person nominated and recommended by the Nominating Committee. If an alternative nominee is not recommended by the Nominating Committee, the number of directors will be reduced. Certain information regarding each nominee for director is given below. This information has been furnished to the Company by the respective nominees. Joan T. Bok Director since 1979 Chairman of the Board. Mrs. Bok, 68 years of age, was elected Chairman in 1984 and held that position through 1993, when she was elected Chairman of the Board. From July 1988 until February 1989, she also served as President and Chief Executive Officer. Until December 31, 1997, Mrs. Bok served as a director of each of the Company's direct subsidiaries, including Massachusetts Electric Company, The Narragansett Electric Company, and New England Power Company. Mrs. Bok has announced her intention to retire as Chairman of the Board in April 1998 but is seeking re-election as a director. She is a director of Avery Dennison Corporation, John Hancock Mutual Life Insurance Company, and Solutia, Inc., and is a Trustee of the Boston Athenaeum and the Urban Institute. William M. Bulger Director since 1996 President of the University of Massachusetts, Boston, Massachusetts. Mr. Bulger, 64 years of age, served as President of the Massachusetts State Senate from July 1978 to January 1996. He also serves as a director of Citizens Bank and is a Trustee of Massachusetts General Hospital, the Boston Public Library, and the Museum of Fine Arts. He is a corporator of the Children's Museum and the Winsor School and is on the board of overseers of the Boston Symphony Orchestra. Alfred D. Houston Director since 1998 Executive Vice President. Mr. Houston, 57 years of age, has served as Executive Vice President of the Company since 1994 and as Chief Financial Officer from 1984 to 1998. He was Senior Vice President from 1987 to 1994. He is an officer or director of a number of the Company's subsidiaries, including The Narragansett Electric Company and New England Power Company. The Board of Directors has previously announced its intention to elect Mr. Houston as Chairman in April 1998. Mr. Houston is a Trustee of the Boston Ballet, Nichols College, and the Massachusetts Taxpayers Foundation. Paul L. Joskow Director since 1987 Professor of Economics and Management and Chairman, Department of Economics, Massachusetts Institute of Technology, Cambridge, Massachusetts. Professor Joskow, 50 years of age, teaches and conducts research in the fields of industrial organization, government regulation, antitrust law and economics, and energy economics. He was named Chairman of the Economics Department in 1994. Professor Joskow is a director of State Farm Indemnity Company and a Trustee of the Putnam Funds. He is also a director of the Whitehead Institute for Biomedical Research, President of the Yale University Council, and a Special Consultant to National Economic Research Associates, Inc. John M. Kucharski Director since 1989 Chairman and Chief Executive Officer of EG&G, Inc., Wellesley, Massachusetts. Mr. Kucharski, 62 years of age, is a director of State Street Boston Corporation and Nashua Corporation. He also serves as Trustee of George Washington University and Marquette University. Edward H. Ladd Director since 1974 Chairman of Standish, Ayer & Wood, Inc. (investment counselors), Boston, Massachusetts. Mr. Ladd, 60 years of age, is a director of Harvard Management Company and Greylock Management Company. He is also a Trustee of Wheelock College and an Overseer of Beth Israel Deaconess Hospital. Joshua A. McClure Director since 1978 Former President of American Custom Kitchens, Inc., Providence, Rhode Island. Mr. McClure, 66 years of age, is a director of the Westerly Pawcatuck YMCA and the North End Crime Watch and Community Development Corporation. He is also a member of the Building Committee of the Westerly Senior Center, and a director of the Washington County Housing Authority. George M. Sage Director since 1975 President and Treasurer of Bonanza Bus Lines, Inc., Providence, Rhode Island. Mr. Sage, 66 years of age, is a director of Collette Travel, Inc. and the American Bus Association. Mr. Sage also serves as a director of United Way of Southeastern New England and is a director and member of the Executive Committee of Business Development of Rhode Island. He is also a Trustee of St. Andrew's School. Richard P. Sergel Director since 1998 President and Chief Executive Officer. Mr. Sergel, 48 years of age, was elected President and Chief Executive Officer of the Company in February, 1998. From 1996 to 1998, he served as Senior Vice President and from 1992 to 1995, he served as Vice President of the Company. He is a director of a number of the Company's subsidiaries, including Massachusetts Electric Company and The Narragansett Electric Company. Mr. Sergel is a director of United Way of Merrimack Valley and the Lowell Plan. Charles E. Soule Director since 1994 Retired President and Chief Executive Officer of Paul Revere Insurance Group, Worcester, Massachusetts. Mr. Soule, 63 years of age, retired as President and Chief Executive Officer of Paul Revere Insurance Group, a subsidiary of Textron, Inc. in 1997, a position he held since 1990. Mr. Soule is Executive in Residence at The American College. Mr. Soule also serves as a Trustee for the Westboro Savings Bank. He was a member of the Massachusetts Electric Company Board of Directors from 1991 to 1993. Anne Wexler Director since 1981 Chairman of The Wexler Group (management consultants), Washington, D.C. The Wexler Group is a subsidiary of Hill and Knowlton. Ms. Wexler, 68 years of age, served as Assistant to the President of the United States from 1978 to 1981 with responsibility for liaison with the business community and other major interest groups. She is a director of Alumax, Inc., Comcast Corporation, Dreyfus Index Funds, Dreyfus Mutual Funds, NOVA Corporation, and Wilshire Target Funds Inc. James Q. Wilson Director since 1982 Professor Emeritus of Management at The University of California at Los Angeles, Los Angeles, California. Professor Wilson is 66 years of age. He is a director of State Farm Insurance Company and Protection One, Inc. and a Trustee of the American Enterprise Institute, the RAND Corporation, and the Randolph Foundation. James R. Winoker Director since 1991 Chief Executive Officer of Belvoir Properties, Inc. (real estate investment), Providence, Rhode Island. Mr. Winoker, 66 years of age, has served as Chief Executive Officer of Belvoir Properties, Inc. since 1994. He was Treasurer of Belvoir Properties, Inc. from 1980 to 1994 and President of B.B. Greenberg Co. (jewelry manufacturers) from 1970 to 1994. A receiver was appointed for B.B. Greenberg Co. in 1994. Mr. Winoker is also a director of Original Bradford Soap Works, Inc. BOARD STRUCTURE AND COMPENSATION The Company has an Executive Committee, an Audit Committee, a Compensation Committee, a Corporate Responsibility Committee, and a Nominating Committee. The committee memberships listed below are as of March 1, 1998. The members of the Executive Committee are Mrs. Bok, Mr. Houston, Mr. Joskow, Mr. Ladd, Mr. Sage, Mr. Sergel and Ms. Wexler. Mrs. Bok serves as the Chairman of this Committee. During the intervals between meetings of the Board of Directors, the Executive Committee has all the powers of the Board that may be delegated. The members of the Audit Committee are Messrs. Bulger, Joskow, Soule, and Winoker. Mr. Joskow serves as the Chairman of this Committee. The Audit Committee reviews with the independent public accountants the scope of their audit and management's financial stewardship for the current and prior years. This Committee also recommends to the Board of Directors the independent public accountants to be engaged for the coming year. The members of the Compensation Committee are Mr. Kucharski, Mr. Sage, and Ms. Wexler. Mr. Sage serves as the Chairman of this Committee. The Compensation Committee is responsible for executive compensation, including the administration of certain of the Company's incentive compensation plans. The members of the Corporate Responsibility Committee are Mrs. Bok, Mr. McClure, Mr. Sergel, Mr. Wilson, and Mr. Winoker. Mr. Wilson serves as the Chairman of this Committee. The Corporate Responsibility Committee reviews compliance with laws and regulations, offers guidance in considering public policy issues, and helps to assure ethical conduct. The members of the Nominating Committee are Mr. Joskow, Mr. Ladd, Mr. Sage, and Ms. Wexler. Mr. Ladd serves as Chairman of this Committee. The Nominating Committee functions as a Corporate Governance Committee and also considers and evaluates director candidates, determines criteria and procedures for selecting nonmanagement directors, and conducts periodic reviews of director performance. This Committee also considers written recommendations from shareholders for nominees to the Board. The Chairman of the Executive Committee receives an annual retainer of $12,000. Other members of the Executive Committee, except Messrs. Houston and Sergel, receive an annual retainer of $5,000. The Chairmen of the Audit, Compensation, Corporate Responsibility, and Nominating Committees each receive an annual retainer of $6,000. Other members of the Audit, Compensation, and Corporate Responsibility Committees, except Mr. Sergel, receive annual retainers of $4,000. There is no retainer for the other members of the Nominating Committee. All directors participating in a Committee meeting, except Messrs. Houston and Sergel, receive a meeting fee of $1,000 plus expenses. Members of the Board of Directors, except Messrs. Houston and Sergel, receive annually a retainer of $20,000 and 300 common shares of the Company and receive a meeting fee of $1,000 plus expenses for each meeting attended. The Company permits directors to defer all or a portion of any cash retainers, meeting fees, and retainer shares under a deferred compensation plan. At the end of the deferral period, the compensation is paid out in the same form, cash or shares, as was deferred. Deferred shares do not have voting rights or other rights associated with ownership while deferred. A special account is maintained on the Company's books showing the amounts deferred and the interest accrued thereon. Group life insurance of $80,000 is provided to each member of the Board of Directors. Director contributions to qualified charities are matched by the Company under a matching gift program, which has a maximum limit of $3,500. Pursuant to a director retirement plan, nonemployee directors who have served on the Board of the Company for 5 years or more will receive a retirement benefit upon the later of the director's retirement from the Board or age 60. The benefit level is 100% of the annual cash retainer for directors who served on the Board for 10 or more years and 75% of the annual cash retainer for directors who served between 5 and 10 years. There are no death benefits under the plan. The Board of Directors held 9 meetings in 1997. The Executive, Audit, Compensation, Corporate Responsibility, and Nominating Committees held 2, 3, 3, 3, and 2 meetings, respectively, in 1997. All directors attended at least 75% of the aggregate number of meetings of the Board of Directors and the committees of which they were members. During 1997, Mr. Joskow did consulting work for the Company or subsidiaries of the Company under a separate consulting contract for which he was paid approximately $30,000. These consulting services were not related to his duties as a Board member. During 1997, Mrs. Bok served as a consultant to the Company. Under the terms of her contract, she received a retainer of $100,000. Mrs. Bok also served as a director for each of the Company's direct subsidiaries during 1997. She agreed to waive the normal fees and annual retainers otherwise payable for services by nonemployees on these boards and received in lieu thereof a single annual stipend of $60,000. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Winoker served as a member of the Company's Compensation Committee for a portion of 1997. Mr. Winoker is Chief Executive Officer of Belvoir Properties, Inc. (Belvoir). A subsidiary of the Company entered into a three-year lease for office space in 1996 with Belvoir with an annual rent of $34,000. Belvoir also leases two parcels of land in Providence, Rhode Island from a subsidiary of the Company under a twenty-year lease with an initial annual rent of approximately $60,000. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Under the securities laws, the Company's officers and directors are required to file reports on Forms 3, 4, and 5 of share ownership and changes in share ownership with the Securities and Exchange Commission and New York Stock Exchange. Based solely on its review of copies of such forms, it appears that all directors and officers filed all of their required forms on a timely basis, with two exceptions. Mr. Sage inadvertently filed one form late reporting the purchase of 400 shares of the Company and Mr. Winoker inadvertently was late in reporting one purchase of 500 shares of the Company. TOTAL COMMON EQUITY BASED HOLDINGS The following table lists the holdings of Company common shares and deferred shares by the Company's directors, the executive officers named in the Summary Compensation Table, and for directors and all executive officers as a group. The information includes all whole shares beneficially owned, directly or indirectly, as of March 2, 1998.
Shares Deferred Beneficially Share Name Owned (a) Equivalents(b) Total - ---- ----------- -------------- ------- Joan T. Bok 13,605 13,605 William M. Bulger 100 1,272 1,372 Alfred D. Houston 13,688 11,558 25,246 Michael E. Jesanis 4,000 5,847 9,847 Paul L. Joskow 2,829 313 3,142 John M. Kucharski 2,800 2,800 Edward H. Ladd 6,475 6,475 Cheryl A. LaFleur 3,191 5,787 8,978 Joshua A. McClure 2,461 307 2,768 John W. Rowe (c) 14,823 25,355 40,178 George M. Sage 4,000 4,000 Richard P. Sergel 8,086 8,313 16,399 Charles E. Soule 1,270 5,201 6,471 Anne Wexler 2,629 2,629 James Q. Wilson 3,508 3,508 James R. Winoker 2,300 2,300 All of the above and other executive officers, as a group 97,363 (d) 69,882 167,245 (18 persons) (a) Number of shares beneficially owned includes: (i) shares directly owned by certain relatives with whom directors or officers share voting or investment power; (ii) shares held of record individually by a director or officer or jointly with others or held in the name of a bank, broker, or nominee for such individual's account; (iii) shares in which certain directors or officers maintain exclusive or shared investment or voting power whether or not the securities are held for their benefit; and (iv) with respect to the executive officers of the Company, allocated shares in the Incentive Thrift Plan described below. (b) Deferred share equivalents are held under the Company's Deferred Compensation Plan or pursuant to individual deferral agreements. Under the Plan or deferral agreements, executives may elect to defer cash compensation and share awards. There are various deferral periods available under the plans. At the end of the deferral period, the compensation is paid out in the same form, cash or shares, as was deferred. The rights of the executives to payment are those of general, unsecured creditors. While deferred, the shares do not have voting rights or other rights associated with ownership. As cash dividends are declared, the number of deferred share equivalents will be increased as if the dividends were reinvested in the Company's common shares. Deferred share equivalents for directors are held under the Directors Deferred Compensation Plan. See Board Structure and Compensation for a description of that plan. Potential share awards under the Long-Term Performance Share Award Plan are not included in this table. (c) Mr. Rowe, former President and Chief Executive Officer, resigned effective February 6, 1998. (d) Amount is less than 1% of the total number of shares of the Company outstanding.
SHARE OWNERSHIP GUIDELINES The Company has long recognized the importance of consistent alignment of executive interests with those of shareholders. In 1995, the Compensation Committee of the Board voted that it is expected that executives will own shares or share equivalents to certain minimum levels within five years of being subject to the requirement. For Mr. Sergel, the level is 40,000 shares. For Mr. Houston, the level is 25,000 shares. For the other executives listed in the Executive Compensation Summary Table, the level is 7,000 to 15,000 shares. Other executives are expected to hold from 2,000 to 7,000 shares depending on their compensation levels and bonus plans. In 1996, the Board of Directors voted that members of the Board were expected to own 2,500 shares within five years of being subject to that requirement. To further reinforce the importance of executive share ownership, all shares awarded to Company officers under the Incentive Share and the Long-Term Performance Share Award Plans, described below, are restricted for five years, unless deferred, at the officer's option, until termination of service or ten years. SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS Listed below is the only person or group known to the Company as of March 9, 1998 to beneficially own 5% or more of the Company's common shares. However, T. Rowe Price Trust Company disclaims beneficial ownership of all such shares. The quantity of shares listed below is as of December 31, 1997. Amount and Nature Name and Address of of Beneficial Percent of Beneficial Owner Ownership Common Shares - --------------------------- ----------------- ------------- T. Rowe Price Trust Company 5,377,414 shares 8.3% 100 East Pratt Street as trustee for Baltimore, MD 21202 Company employee benefits plans, including those discussed herein. REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION To the Shareholders of New England Electric System: As members of the Compensation Committee (the Committee) of the Board of Directors (the Board), we have the responsibility for executive compensation, including the administration of certain of the Company's incentive compensation plans. The Company's total compensation package is designed to attract, retain, and reward superior managers who are committed to solid financial performance and who successfully can lead the Company as our industry becomes increasingly competitive. The compensation package reflects the fact that these managers' backgrounds are not necessarily limited to our Company or industry. Total compensation consists of Base Salary, Incentive Compensation (performance based, at risk compensation), and Benefits. The Committee periodically reviews each component of the Company's executive compensation program to ensure that pay levels and incentive opportunities are competitive and that incentive opportunities are linked to Company performance. The Company's general compensation philosophy is that (1) the Base Salary ranges should be competitive, with individual salaries reflecting performance and experience; (2) a significant portion of management compensation should be tied to achievement of corporate goals in order to maintain a sharp focus on corporate performance; (3) substantial portions of incentive compensation should be in shares so as to consistently align the interest of management and the Company's shareholders and customers; and (4) an ever higher percentage of total compensation should be at risk and share-based as one moves upward through management. The compensation of the Chief Executive Officer, Mr. Rowe in 1997 and Mr. Sergel in 1998, is based on these considerations. As discussed below, the incentive compensation plans are being restructured to reflect the new focus of the Company during and following divestiture. Compensation Decisions - ---------------------- The Board votes the compensation of the Chief Executive Officer and Mr. Houston, acting upon recommendations of the Committee. The Committee reports its decisions to the Board. After meeting in executive session without any Company officers present and discussing the reports made by the Committee, the Board unanimously has accepted each of the recommendations described below made in 1997 and to date in 1998. The Committee also votes the compensation of all other Company executive officers listed in the Summary Compensation Table, as well as other senior employees. The Board has ratified the compensation decisions for these executive officers. Although Company management may be present during Committee discussions of officers' compensation, Committee decisions with respect to the compensation of Mr. Rowe were reached in executive session. Under Section 162(m) of the Internal Revenue Code, tax deductions are limited for compensation above $1 million, not including amounts deferred. Mr. Rowe's total compensation of $898,435 in cash and $152,206 in deferred shares for 1997 exceeded $1 million. Given the mandatory deferral of his plan share bonuses, the Internal Revenue Code provisions do not currently impact the Company. Total compensation for each of the other executive officers is below the $1 million threshold. The Committee has not, therefore, had to address issues related to Section 162(m) and does not expect to in the near future, but will continue to monitor these issues. Base Salary - ----------- Base Salary levels are established after consideration of the appropriate market to determine the salary range for a position. Extensive salary survey analyses are compiled annually and presented to the Committee for review. Salary ranges are then defined on the basis of those market surveys. These surveys may include some of the same companies included in incentive compensation plan comparisons or in the corporate performance chart. In November 1997, after consideration of multiple surveys prepared by various consulting organizations and industry groups, and taking into account the continued outstanding performance of the Company and Mr. Rowe's leadership in the restructuring of the electric utility industry, the Committee recommended the base salary for Mr. Rowe be set at $625,200 for 1998. This would have placed Mr. Rowe somewhat above the 50th percentile in the compensation surveys. The Board adopted this recommendation. On February 10, 1998, upon Mr. Rowe's resignation as President and Chief Executive Officer of the Company, the Committee considered the appropriate compensation for Messrs. Sergel and Houston in view of their new responsibilities. The Committee reviewed information developed from multiple compensation surveys for the 50th percentile for corporations in the same revenue range as the Company. This data was further stratified between the utility industry and general industry. The Committee considered the relative experience and past performance of, and our future expectations for, Messrs. Houston and Sergel, the historical compensation levels in the Company for their new positions, and comparative salary data presented to us. We further reviewed the Company's compensation philosophy as to the relative values for base salary, incentive compensation, and benefits. We then recommended the base salaries for Mr. Houston and for Mr. Sergel be set at $450,000 per year, effective February 1, 1998. As described below, we determined an appropriate change in control agreement for Mr. Sergel and supplemental insurance annuity benefits for Mr. Houston. The Board adopted our recommendations. In November 1997, the Committee reviewed the performance of each individual in the compensation group below the Chief Executive Officer, and, after the Committee's subjective analysis of their performance and discussion with the Chief Executive Officer, we set the salaries for these individuals. Performance Based Incentive Compensation - ---------------------------------------- Performance Based Incentive Compensation (at risk compensation or bonus) is designed to deliver rewards above base salary, if the Company and the individual executives perform well. Annual Target Plans ------------------- For 1997, the incentive components of the annual target compensation plans were based on formulae with defined threshold targets. Under the formulae, in order for any plan bonuses to be awarded, the Company must achieve a return on equity that places the Company in the top 50% of the approximately 80 electric utilities in the national utility group (the national grouping) or in the top 50% of the New England/New York regional utilities (the regional grouping). See the Return on Equity graph, below. The Board, in response to extraordinary events, may enhance or curtail the actual return on equity used to determine whether the Company met the targets. The Board did not do so for 1997. On February 24, 1998, the Committee voted the bonuses under these plans. For the maximum incentive to be awarded, the Company had to achieve a return on equity in the top 25% of both the national and regional groupings and the Company's cost per kilowatt-hour must be the lowest or next lowest of a selected group of New England electric utilities. In 1997, if only one of the return on equity targets had been met, Mr. Rowe and Mr. Houston would have received a formula bonus of 12% of base pay in cash and 7.2% in shares. The maximum would have been 50% of base pay in cash and 30% in shares. Based on the performance described below, their formula bonus (cash and shares) was 42.5% of base pay in cash and 25.5% in shares. For purposes of determining the bonus amount for 1997, the Company placed in the 79th percentile in return on shareholder equity of the national grouping and first in the regional grouping. The Company placed third in the regional grouping with respect to lowest customer cost per kilowatt-hour in 1997. No bonus awards would have been made under the plans if earnings were not sufficient to cover dividends, even if the return on equity targets had been met. Mr. Rowe's and Mr. Houston's bonuses under the plan were directly related to achievement of the above described corporate targets. For 1997, the incentive compensation plan bonuses of the other executives were additionally dependent upon the achievement of individual goals. The participants in the incentive compensation plans are awarded common shares of the Company under the Incentive Share Plan, approved by the shareholders in 1990. No discretion is exercised by the Committee in the awarding of shares generated by the formulae. An individual's award of shares under the Incentive Share Plan is a fixed percentage of her or his cash award for that year from the incentive compensation plan in which she or he participates. For Mr. Rowe and Mr. Houston, the percentage was 60%. If no cash award is made, no shares are distributed under the formulae. Further, total plan awards of shares in any calendar year cannot exceed one-half of one percent (0.5%) of the number of outstanding shares at the end of the previous calendar year. (The incentive plan shares awarded, including those restricted or deferred, for 1997 were approximately .06% of the number of outstanding shares.) As noted above under Share Ownership Guidelines, the share awards of Company officers were restricted. New Annual Target Plans ----------------------- Over several meetings in 1997, the Committee considered the appropriate structure of the annual bonus plans. We decided to replace the existing plans because: the Company is shifting from a vertically integrated utility to being primarily a transmission and distribution company; the Company's strategic plan calls for new business development in competitive new areas; and comparative return on equity and cost per kilowatt-hour measurements will become increasingly less representative as the prime measures of success as different utilities proceed through competitive transitions at different times and at different rates. The incentive compensation plans therefore were revised to reflect the achievement of core business operating income and strategic objectives. Annual income targets will be established by the Board of Directors prior to or early in the plan year. In addition, strategic objectives will be established for each year. For 1998 those objectives are: achieving recovery of stranded investments; maximizing the return on the sale of the generation business; running the best wires business in the Northeast; increasing the size of the energy delivery business; and profiting from growth in unregulated ventures. Participants in the senior plan and other principal System officers will share all five of these objectives. Other participants may have some but not all of these objectives depending upon their responsibilities within the Company. Benchmarks have been established for each of the strategic objectives. The Committee retains the discretion to adjust the benchmarks as it deems necessary in response to unanticipated events during the year. For Messrs. Sergel and Houston, achievement of the operating income target would provide a formula bonus of 15% to 25% of base pay. Achievement above that target and achievement of all strategic objectives in full would produce an award of 50% of base pay in cash and 30% in shares. Special Bonus Awards -------------------- In its review of Company performance in 1997 as part of its evaluation of the annual target plans, the Committee noted the strong earnings of the Company in a very difficult year, the success achieved to date in meeting the strategic objectives, particularly those relating to the recovery of stranded investment and maximizing the return from the sale of the generation business, and recommended to the Board special cash bonuses of $147,000 to Mr. Houston and $126,000 to Mr. Sergel. We also voted the special bonuses to other officers which are reflected in the compensation table. Three-Year Target Plan ---------------------- In order to increase executive focus on multi-year performance, in 1995 the Company established the Long-Term Performance Share Award Plan described below. No payout was made in 1997 nor will be made under this plan until the Spring of 1999. Under this plan, awards are based upon various measures of Company performance over a three-year period. Each award factor or measurement functions independently. The factors change from year to year and include financial and operating performance. The factors may be related to those in the incentive plans. The factors are established by the Committee at the beginning of each cycle. All participants share the same factors and factor weights. Performance is rated on rolling three-year periods, with a new cycle beginning each year. An individual's potential award under the plan is a fixed percentage of her or his base pay on January 1 of the first year of the plan measurement period. For Mr. Rowe, that percentage was 50%. Under the terms of this plan, Mr. Rowe forfeited his allocated shares as a result of his resignation. Percentages for other executives range from 15% to 50%. No dividends accrue on the allocated shares until awarded. At the end of the three-year cycle, the participant receives actual shares based upon the performance against the various factors. For example, for the first cycle, 20% of the shares are dependent upon total shareholder return compared to other regional utilities. See Estimated Future Payouts under Non-Stock Price-Based Plans, below. Benefits - -------- The executive benefits are designed both to provide a competitive package and to retain Company flexibility in staffing management to meet changing conditions. Respectfully submitted, New England Electric System Compensation Committee John M. Kucharski George M. Sage Anne Wexler CORPORATE PERFORMANCE Total Return The following graph shows total shareholder return for the Company (capital appreciation plus reinvested dividends) for the years 1992 through 1997, as compared to the Standard & Poor's 500 Index and the Edison Electric Institute (EEI) Index of 100 investor-owned electric companies, assuming the investment of $100 on December 31, 1992.
NEES S & P 500 EEI Index ---- --------- --------- 1992 100.00 100.00 100.00 1993 107.25 110.08 111.15 1994 94.06 111.53 98.29 1995 124.27 153.44 128.78 1996 116.71 188.67 130.32 1997 152.60 251.61 166.00
Note: The share price performance shown on the graph above is not necessarily indicative of future price performance. Return on Equity The following graph shows the return on equity of Company common shares for the years 1993 through 1997 compared to a national grouping of approximately 80 electric utilities and a regional grouping of utilities in the New York and New England area. As discussed in the report of the Compensation Committee, return on equity has been a key driver of the Company's incentive compensation program.
NEES National Regional Grouping Grouping ---- -------- -------- 1993 12.6% 11.9% 11.4% 1994 12.7% 11.4% 11.4% 1995 12.8% 11.7% 10.4% 1996 12.6% 11.4% 11.1% 1997 12.8% 10.9% 10.6%
Note: The earnings performance shown on the graph above is not necessarily indicative of future performance. EXECUTIVE COMPENSATION The following table gives information with respect to all compensation for services in all capacities for the Company and its subsidiaries for the years 1995 through 1997 to or for the benefit of the Chief Executive Officer and the four other most highly compensated executive officers of the Company. SUMMARY COMPENSATION TABLE
Long Term Compen- Annual Compensation (b) sation ----------------------- --------- Other Restricted Name and Annual Share All Other Principal Salary Bonus Compensa- Awards Compensa- Position (a) Year ($) ($)(c) tion ($)(d) ($)(e) tion ($)(f) - ------------ ---- ------ ------ ----------- --------- ---------- Richard P. 1997 244,893 242,020 8,764 51,043 781 Sergel, 1996 212,700 110,724 5,366 138,376 3,535 President and 1995 184,956 139,373 4,877 0 3,424 Chief Executive Officer (elected 2/6/98) John W. Rowe, 1997 597,600 285,692 12,599 152,206 2,544 Former President 1996 537,600 287,896 9,093 370,288 4,891 and Chief 1995 537,600 427,213 9,568 0 4,750 Executive Officer Alfred D. 1997 345,072 314,028 9,616 88,573 1,836 Houston, 1996 335,016 167,306 6,265 182,267 4,649 Executive Vice 1995 262,800 177,663 5,753 0 4,180 President Cheryl A. LaFleur 1997 176,388 192,437 6,827 37,768 335 Senior 1996 165,624 89,477 4,059 106,020 3,251 Vice President, 1995 125,616 107,617 116 0 2,721 General Counsel and Secretary Michael E. 1997 164,736 188,213 7,399 31,866 320 Jesanis, Senior 1996 153,995 80,070 4,007 101,376 3,218 Vice President 1995 140,784 85,703 275 27,718 3,012 and Chief Financial Officer
(a) Officers of the Company also hold various positions with subsidiary companies. Compensation for these positions is included in this table. (b) Includes deferred compensation in category and year earned. (c) The bonus figures represent: cash bonuses under an incentive compensation plan; the all-employee goals program; the variable match of the Incentive Thrift Plan including related deferred compensation plan matches; special cash bonuses; and unrestricted shares under the Incentive Share Plan. See descriptions under Plan Summaries. In 1996 and 1997, the bonus amounts were all cash or contributions to the Incentive Thrift Plan, including related deferred compensation plan matches. In 1995, Mr. Sergel's bonus was $96,649 in cash and contributions and $42,724 in shares; Mr. Rowe's bonus was $276,728 in cash and contributions and $150,485 in shares; Mr. Houston's bonus was $123,160 in cash and contributions and $54,503 in shares; Ms. LaFleur's bonus was $84,370 in cash and contributions and $23,247 in shares; and Mr. Jesanis's bonus was $85,703 in cash and contributions and $27,718 in shares. (d) Includes amounts reimbursed by the Company for the payment of taxes on certain noncash benefits and Company contributions to the Incentive Thrift Plan that are not bonus contributions including related deferred compensation plan match. See description under Plan Summaries. (e) The incentive share awards for the named executives made for 1996 and 1997 were in the form of restricted shares (with a five-year restriction) or deferred share equivalents, deferred for receipt for at least five years, at the executive's option. As cash dividends are declared, the number of deferred share equivalents will be increased as if the dividends were reinvested in shares. See also Payments Upon a Change in Control below. The shares awarded for 1995 were not restricted and the value of the awards is included in the bonus column. As of December 31, 1997, the following executive officers held the amount of restricted and deferred share equivalents with the value indicated: Mr. Sergel 8,698 shares, $371,840 value; Mr. Rowe 28,380 shares, $1,213,245 value; Mr. Houston 11,689 shares, $499,705 value; Ms. LaFleur 5,890 shares, $251,798 value; and Mr. Jesanis 6,233 shares, $266,461 value. The value was calculated by multiplying the closing market price on December 31, 1997, by the number of shares. No awards vested during 1997 under the Company's Long-Term Performance Share Award Plan. See Long Term Incentive Plan - Awards in Last Fiscal Year. (f) Includes Company contributions to life insurance. See description under Plan Summaries. The life insurance contribution is calculated based on the value of term life insurance for the named individuals. The premium costs for most of these policies have been or will be recovered by the Company. Prior to 1997, this column also included Company contributions to the Incentive Thrift Plan that are not bonus contributions. These figures are now included in the Other Annual Compensation column. PAYMENTS UPON A CHANGE OF CONTROL OR TERMINATION OF EMPLOYMENT The Company has agreements with certain of its executives, including those named in the Summary Compensation Table, which provide severance benefits in the event of certain terminations of employment following a Change in Control of the Company (as defined below). The terms of the agreements are for three years with automatic annual extensions, unless terminated by the Company. If, following a Change of Control, the executive's employment is terminated other than for cause (as defined) or if the executive terminates employment for good reason (as defined), the Company will pay to the executive a lump sum cash payment equal to three times (two times for some executives) the sum of the executive's most recent annual base compensation and the average of his or her bonus amounts for the prior three years. If Mr. Sergel receives payments under his severance agreement that would subject him to any federal excise tax due under section 280G of the Internal Revenue Code, he will receive a cash "gross-up" payment so he would be in the same net after-tax position he would have been in had such excise tax not been applied. In addition, the Company will provide disability and health benefits to the executive for two to three years, provide such post-retirement health and welfare benefits as the executive would have earned within such two to three years, and grant two or three additional years of pension credit. Change in Control, including potential change of control, occurs (1) when any person becomes the beneficial owner of 20% of the voting securities of the Company, (2) when the prior members of the Board no longer constitute a 2/3 majority of the Board, or (3) the Company enters into an agreement that could result in a Change in Control. Upon a change in control a participant in the deferred compensation plan has the option of receiving a full distribution of the participant's cash and share accounts and the actuarial value of future benefits from the insurance related benefits under a prior plan, all less 10%. The Company's bonus plans, including the incentive compensation plans described in the Compensation Committee report, the Incentive Thrift Plan, and the Goals Program, provide for payments equal to the average of the bonuses for the three prior years in the event of a Change of Control. These payments would be made in lieu of the regular bonuses for the year in which the Change in Control occurs. The Long-Term Performance Share Award Plan provides for a cash payment equal to the value of the performance shares in the participant's account times the average achievement percentage for the Incentive Thrift Plan for the three prior years. The Company's Retirees Health and Life Insurance Plan has provisions preventing changes in benefits adverse to the participants for three years following a Change in Control. The Incentive Share Plan and related Incentive Share Deferral Agreements provide that, upon the occurrence of a change in control (defined more narrowly than in the other plans), any restrictions on shares and account balances would cease. In light of the changes in the utility industry, the Company has determined that executive officers (including those listed in the Summary Compensation Table, but excluding Messrs. Houston and Sergel) would receive a benefit equal to one and one-half times annual compensation, for a severance other than one for cause or following a change in control. PLAN SUMMARIES A brief description of the various plans through which compensation and benefits are provided to the named executive officers is presented below to better enable shareholders to understand the information presented in the tables shown earlier. The general provisions of the incentive compensation plans are described in the report of the Compensation Committee. The amounts of compensation and benefits provided to the named executive officers under the plans described below are presented in the Summary Compensation Table. Goals Program The Goals Program establishes goals annually. For 1997, these goals related to earnings per share, customer costs, safety, absenteeism, demand-side management results, generating station availability, transmission reliability, environmental and OSHA compliance, and customer satisfaction. Some goals apply to all employees, while others apply to particular functional groups. Depending upon the number of goals met, and provided the minimum earnings goal is met, employees may earn a cash bonus of 1% to 4-1/2% of their compensation. Incentive Thrift Plan The Incentive Thrift Plan (a 401(k) program) provides for a match of 40% of up to the first 5% of base compensation contributed to the Company's Incentive Thrift Plan (shown under Other Annual Compensation in the Summary Compensation Table) and, based on an incentive formula tied, in 1997, to earnings per share, may fully match the first 5% of base compensation contributed (the additional amount, if any, is shown under Bonus in the Summary Compensation Table). Under Federal law, contributions to these plans are limited. In 1997, the contribution amount was limited to $9,500. Deferred Compensation Plan The Deferred Compensation Plan offers executives the opportunity to defer base pay and bonuses. The plan offers the option of investing at the prime rate or in Company shares; however, share bonuses may only be deferred in a share account. Under Federal law, the Incentive Thrift Plan, described above, is required to limit participant base compensation to $160,000 in calculating the Company match. Under the Deferred Compensation Plan, the Company will make a contribution to an executive's share account equivalent to the resultant reduction in his match under the Incentive Thrift Plan. Life Insurance The Company has established for the named executive officers life insurance plans funded by individual policies. The combined death benefit under these insurance plans is three times the participant's annual salary. These plans are structured so that, over time, the Company should recover the cost of the insurance premiums. After termination of employment, Messrs. Rowe and Houston may elect, commencing at age 55 or later, to receive an annuity income equal to 40% of final annual salary for Mr. Rowe and 22.5% of 1998 annual salary plus 40% of final annual salary for Mr. Houston. In that event, the life insurance is reduced over fifteen years to an amount equal to the participant's final annual salary. Due to changes in the tax law, this plan was closed to new participants, and an alternative was established with only a life insurance benefit. Financial Counselling The Company pays for personal financial counselling for senior executives. As required by the IRS, a portion of the amount paid is reported as taxable income for the executive. Financial counselling is also offered to other employees through seminars conducted at various locations each year. Other The Company does not have any share option plans. LONG TERM INCENTIVE PLAN - AWARDS IN LAST FISCAL YEAR The following table shows the potential awards, for those executive officers named in the Summary Compensation Table, under the Long-Term Performance Share Award Plan (more fully described in the Compensation Committee Report on page ___) for the performance cycle commencing January 1, 1997. The Company's performance will be measured over the three- year period ending December 31, 1999. Estimated Future Payouts under Non-Stock Price-Based Plans ---------------------------------- Number of Common Share Performance Name Equivalents(a) Period Threshold(b) Target(c) - ---- ----------- --------- --------- ------ Richard P. Sergel 3,266 3 years 20 3,266 John W. Rowe (d) 8,617 3 years 0 0 Alfred D. Houston 4,976 3 years 30 4,976 Cheryl A. LaFleur 2,543 3 years 15 2,543 Michael E. Jesanis 1,188 3 years 7 1,188 (a) Amounts are denominated in common share units. No dividends are attributable to share units. At the end of the cycle, awards are paid either in shares or in cash (valued at the five-day average price prior to the January 15 following the close of the performance cycle). (b) The awards in this column represent the threshold number of shares that could be earned if the minimum attainment level is reached for one factor. The minimum payout upon failure to achieve any of the goals would be 0. (c) The awards in this column represent the target (and maximum) number of shares that could be earned if the maximum performance is achieved for all factors. (d) Upon Mr. Rowe's resignation in February 1998, he became ineligible to receive any award under the Long-Term Performance Share Award Plan. The Long-Term Performance Share Award Plan provides awards based on various measures of Company performance over a three-year period. Each award factor functions independently. The performance targets for each cycle are set by the Compensation Committee. The measures of performance for the cycle commencing January 1, 1997 are as follows: total shareholder return compared to the national group (60th-75th percentile); total shareholder return compared to the regional group (50th-75th percentile); maintenance or improvement of bond ratings; new business development; growth of transmission and distribution business; and system service levels, measured by system reliability and regulatory compliance. The national grouping is composed of approximately 80 electric utilities. The regional grouping is composed of New England/New York regional utilities. RETIREMENT PLANS The following chart shows estimated annual benefits payable to executive officers under the qualified pension plan and the supplemental retirement plan, assuming retirement at age 65 in 1998. PENSION PLAN TABLE
FIVE-YEAR 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS AVERAGE SERVICE SERVICE SERVICE SERVICE SERVICE SERVICE COMPENSATION - ------------ ------- ------- ------- ------- ------- ------- $ 300,000 60,300 87,500 114,700 141,100 167,500 184,100 $ 400,000 81,000 117,500 154,000 189,600 225,100 241,600 $ 500,000 101,700 147,600 193,500 238,100 282,700 311,000 $ 600,000 122,400 177,600 232,900 286,600 340,300 374,500 $ 700,000 143,100 207,700 272,300 335,100 397,900 437,900 $ 800,000 163,800 237,700 311,700 383,600 455,500 501,400 $ 900,000 184,500 267,800 351,100 432,100 513,100 564,800 $1,000,000 205,200 297,800 390,500 480,600 570,700 628,300 $1,100,000 225,900 327,900 429,900 529,100 628,300 691,700 $1,200,000 246,600 357,900 469,300 577,600 685,900 755,200 $1,300,000 267,300 388,000 508,700 626,100 743,500 818,700 $1,400,000 288,000 418,000 548,100 674,600 801,100 882,100
For purposes of the retirement plans, Mr. Sergel, Mr. Rowe, Mr. Houston, Ms. LaFleur, and Mr. Jesanis currently have 19, 20, 35, 12, and 15 credited years of service, respectively. Benefits under the pension plans are computed using formulae based on percentages of highest average compensation computed over five consecutive years. The compensation covered by the pension plan includes salary, bonus, and incentive share awards. Long-Term Performance Share Awards will not be included. The benefits listed in the pension table are not subject to deduction for Social Security and are shown without any joint and survivor benefits. If the participant elected at age 65 a 100% joint and survivor benefit with a spouse of the same age, the benefit shown would be reduced by approximately 16%. The pension plan table above does not include annuity payments to be received in lieu of life insurance for Messrs. Rowe and Houston. Those payments are described above under Plan Summaries. The Company covers the full cost of post-retirement health benefits for the senior executives listed in the Summary Compensation Table. 3. SHAREHOLDER PROPOSAL REGARDING SPLITTING OF SHARES Mr. Robert A. Ritchie, 116 Castletown Road, Timonium, Maryland 21093, beneficial owner of 2,028 shares of the Company, has stated his intention to present a proposal concerning the splitting of the Company's shares for consideration by the shareholders at the Annual Meeting. The Board of Directors is opposed to Mr. Ritchie's proposal for the reasons set forth below. The following are the text of the proposal and supporting statement supplied by Mr. Ritchie: Resolved: That the shareholders of New England Electric System recommend that the Board of Directors take the necessary action to authorize a split of outstanding NEES common shares. Supporting Statement: Recently, Ford Investor Services of San Diego studied the effects of stock splits on underlying stock prices over a 20-year time period. They discovered that stocks split two-for-one showed excess performance over both six-month and one year holding periods compared with stocks that were not split. This finding is not surprising in view of the fact that a two-for-one stock split would reduce the then current price of NEES common shares by about 50%, thus making the stock more attractive and affordable to all potential investors -- particularly to individual investors who directly hold about 46 percent of all stocks. Current shareholders, of course, would benefit by receiving one additional common share from NEES for each share owned before the effective date of a two-for-one split. As previously stated by NEES in its mailing of February 21, 1986, which dealt with its last (1986) two-for-one stock split: "The share split will not alter the proportionate ownership interest of any shareholder, as each such shareholder now owns twice as many shares." In addition, NEES noted: "The share split will not result in any gain or loss for federal income tax purposes." Finally, most investors view stock splits positively as an indication that the Board of Directors of a company is a progressive one -- striving to increase investors' interest and stockholders' equity in the company. RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors recommends a vote AGAINST the proposal. The Board of Directors periodically considers whether to split the Company's common shares. In fact, the Board did take the necessary actions to split the Company's shares in 1986. The Company notes that a share split may not always result in increased liquidity and market price of shares. In addition, while a stock split may lower the brokerage costs for new shareholders, existing shareholders may have to pay higher brokerage fees to carry out transactions in the split shares. A share split is also costly to carry out. With the pending sale of its nonnuclear generation business, the Board feels that a share split would be unwise at this time. The Company is in the process of transforming itself from an electric utility system offering generation, transmission and distribution services to a "wires" company delivering electricity and entering new unregulated businesses. The Company monitors all the relevant financial information and will continue to evaluate if and when it is appropriate to split the shares. 4. SHAREHOLDER PROPOSAL REGARDING CHARITABLE CONTRIBUTIONS Mr. John Jennings Crapo, P. O. Box 151, Cambridge, Massachusetts 02140-0002, the owner of 70 common shares of the Company, has stated that he intends to present a proposal concerning charitable contributions for consideration by the shareholders at the Annual Meeting. The Board of Directors is opposed to Mr. Crapo's proposal for the reasons set forth below. The following is the text of the proposal supplied by Mr. Crapo: Resolved: The Stockholders of the New England Electric System ("The Holding Company") request the Board of Directors (The "Board") of the Holding Company publish in the proxy statement of the next two successive Shareholder Annual Meetings an appendix concerning the charitable donations program of the Holding Company for the immediate past calendar year with the following information: (i) An explanation of at least five hundred words explaining the standards of the Holding Company and the procedures of the Holding Company governing its donations to Internal Revenue Service ("IRS") approved private foundations to include standards for rejection of such help. (ii) An enumeration of IRS qualifying charities and IRS approved foundations which our Board plans to help in the ensuing calendar year, included with each charity and foundation an elucidation of at least twenty-six words how it complied with the standards and procedures enumerated in (i). RECOMMENDATION OF THE BOARD OF DIRECTORS The Board of Directors recommends a vote AGAINST the proposal. The Company believes the appendix proposed to be added to the Company's proxy statement on charitable contributions would be lengthy, expensive to produce and mail, and of little utility to most shareholders, singling out an item that represents less than one-tenth of one percent of operating expenses to more comprehensive examination than is allotted to other much more significant items of expense. The first part of the proposal provides for an explanation of at least 500 words of the standards and procedures the Company uses in evaluating requests. The Company's policies with respect to charitable giving are fairly standard in the business community. The Company and its subsidiaries receive many requests for giving and generally make contributions that support the communities in and near the subsidiaries' service territories. The majority of decisions made with respect to individual charitable donations are made in the local offices of the Company's subsidiaries. These local offices can best evaluate the charitable organizations and their respective contributions to the community. They generally give to non-profit organizations in the areas of health and human services, civics, arts/culture, and education. The Company does not believe that its proxy statement is the proper forum for discussion of its charitable giving activities. The second part of the proposal would require at least 26 words to be written on each charitable organization expected to receive a donation from the Company in the following year. The Company receives literally hundreds of requests for donations each year. It is impossible to predict in advance which organizations will apply for a contribution. Furthermore, the proposed appendix to the proxy statement would be extremely lengthy. Not including contributions made through the Company's employee matching gifts program, the Company made contributions to over 500 organizations in 1997. Assuming a twenty-six word explanation for each organization, this would add approximately 25 pages to the proxy statement each year. The Company estimates that the additional printing and postage would cost the Company approximately $30,000 each year. In sum, the Company believes that it has a modest, responsible charitable giving policy and practice that is in the best interest of the shareholders and that most shareholders would not be interested in receiving a lengthy report each year on the subject. Further, management will respond openly to any specific shareholder inquiries concerning charitable contributions. OTHER MATTERS The Company is not aware of any matter that may properly be presented for action at the meeting other than the matters set forth herein. If any other matter should be presented at the meeting upon which a vote properly may be taken, the proxies in the accompanying form confer upon the persons named therein, or their substitutes, discretionary authority to vote in respect of any such matter in accordance with their judgment. The firm of Coopers & Lybrand L.L.P. is the independent certified public accountant appointed by the Board of Directors for the Company for the current calendar year. Representatives of Coopers & Lybrand L.L.P. are expected to be present at the Annual Meeting and available to respond to appropriate questions on the financial statements of the Company and may make a statement if they so desire. The expense of preparing and mailing this proxy statement and other incidental expenses of solicitation will be paid by the Company. Arrangements will be made with brokerage houses and other custodians, nominees, and fiduciaries to send proxies and proxy material to their principals, and the Company will reimburse them for the expense of doing so. Officers and regular employees of a subsidiary of the Company may solicit proxies through the use of the mails or by telephone, facsimile, or electronic mail. Georgeson & Company Inc., New York, New York has been retained to assist the Company in the solicitation of proxies, primarily from brokers, banks, and other nominees, at an estimated initial cost of $11,000 plus reimbursement of reasonable out-of-pocket expenses. By completing the enclosed proxy you are voting the shares of the Company held in your name and, in the event you are participating therein, those held by you under the dividend reinvestment and common share purchase plan and restricted shares under the Incentive Share Plan. In the event common shares are held in trust for you as a participant in one or more thrift plans, you will receive a separate form for instructing the trustee how to vote those shares. SHAREHOLDER PROPOSALS From time to time shareholders present proposals which may be proper subjects for inclusion in the proxy statement and for consideration at the annual meeting. In order for a shareholder proposal to be considered for inclusion in the proxy statement for the Company's next regularly scheduled annual meeting of shareholders, it must be received by the Company on or before November 9, 1998. Please forward any proposal to the Secretary of the Company. The name "New England Electric System" means the trustee or trustees for the time being (as trustee or trustees but not personally) under an agreement and declaration of trust dated January 2, 1926, as amended, which is hereby referred to, and a copy of which as amended has been filed with the Secretary of The Commonwealth of Massachusetts. Any agreement, obligation or liability made, entered into or incurred by or on behalf of New England Electric System binds only its trust estate, and no shareholder, director, trustee, officer or agent thereof assumes or shall be held to any liability therefor. By order of the Board of Directors, (Facsimile Signature) Cheryl A. LaFleur, Secretary March 9, 1998 For shareholder information or assistance, write or call Shareholder Services at: New England Electric System, Shareholder Services, P. O. Box 770, Westborough, MA 01581, toll-free number (800) 466-7215, fax (508) 836-0276, or e-mail shrser@neesnet.com. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS NEW ENGLAND ELECTRIC SYSTEM PROXY FOR THE ANNUAL MEETING OF SHAREHOLDERS ON APRIL 28, 1998 The Shareholder(s) listed on the reverse side appoints JOAN T. BOK, CHERYL A. LAFLEUR, and RICHARD P. SERGEL, and each of them, Proxies, with full power of substitution, to represent the Shareholder(s) at the above annual meeting, and at any and all adjournments thereof, and to vote thereat the number of shares which the Shareholder(s) would be entitled to vote if then personally present, with all the powers the Shareholder(s) would then possess, but especially, without limiting the foregoing, to vote as specified herein on the proposals set forth in the proxy statement: Election of Directors--The thirteen nominees are J. T. Bok, W. M. Bulger, A. D. Houston, P. L. Joskow, J. M. Kucharski, E. H. Ladd, J. A. McClure, G. M. Sage, R. P. Sergel, C. E. Soule, A. Wexler, J. Q. Wilson, and J. R. Winoker. To withhold authority to vote for any nominee, print that nominee's name in the space provided below: _____________________________________________________________ (PLEASE SIGN and DATE ON REVERSE SIDE) THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2 1. Fix the number of Directors at 13. FOR AGAINST ABSTAIN / / / / / / 2. Election of the Nominees (except those I have listed on the reverse side). FOR WITHHOLD AUTHORITY / / / / THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST ITEMS 3 and 4 3. Shareholder proposal regarding the splitting of shares. FOR AGAINST ABSTAIN / / / / / / 4. Shareholder proposal regarding charitable contributions. FOR AGAINST ABSTAIN / / / / / / THIS PROXY WILL BE VOTED AS SPECIFIED. IF NOT SPECIFIED ABOVE, THE PROXIES WILL VOTE "FOR" ITEMS 1 AND 2 AND "AGAINST" ITEMS 3 AND 4. A majority of the Proxies present and acting at the meeting in person or by substitute (or, if only one shall be so present, then that one) shall have and may exercise all of the powers of said Proxies hereunder. Dated: ___________, 1998 Signed: __________________ Signed:___________________ (Sign exactly as name appears to the left.) When signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. If more than one name is shown, including the case of joint tenants, each party should sign. IMPORTANT: WE URGE YOU TO VOTE, SIGN, DATE AND MAIL THIS PROXY PROMPTLY TO ASSURE YOUR REPRESENTATION AT THE MEETING. THIS VOTING INSTRUCTION CARD IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS NEW ENGLAND ELECTRIC SYSTEM FOR THE ANNUAL MEETING OF SHAREHOLDERS ON APRIL 28, 1998 To: T. ROWE PRICE, Trustee under the Thrift Plans. As a participant in one or more of the thrift plans, I hereby direct T. Rowe Price, Trustee, to vote or to give a proxy to vote, in accordance with my directions on the reverse side, the common shares of New England Electric System which are allocated to my account (also a proportionate number of those shares which have not been allocated to participants or for which no instruction cards are received) at the above annual meeting, and at any and all adjournments thereof, and in the Trustee's discretion it is authorized to vote or to give a proxy to vote upon such other business as may properly come before the meeting. Election of Directors -- The thirteen nominees are J. T. Bok, W. M. Bulger, A. D. Houston, P. L. Joskow, J. M. Kucharski, E. H. Ladd, J. A. McClure, G. M. Sage, R. P. Sergel, C. E. Soule, A. Wexler, J. Q. Wilson, and J. R. Winoker. To withhold authority to vote for any nominee, print that nominee's name in the space provided below: (PLEASE SIGN and DATE ON REVERSE SIDE) THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1 AND 2 1. Fix the number of Directors at 13. FOR AGAINST ABSTAIN / / / / / / 2. Election of the Nominees (except those I have listed on the reverse side). FOR WITHHOLD AUTHORITY / / / / THE BOARD OF DIRECTORS RECOMMENDS A VOTE AGAINST ITEMS 3 and 4 3. Shareholder proposal regarding the splitting of shares. FOR AGAINST ABSTAIN / / / / / / 4. Shareholder proposal regarding charitable contributions. FOR AGAINST ABSTAIN / / / / / / THIS INSTRUCTION CARD WILL BE VOTED AS SPECIFIED. IF NOT SPECIFIED ABOVE, THE SHARES REPRESENTED BY THIS CARD WILL BE VOTED "FOR" ITEMS 1 AND 2 AND "AGAINST" ITEMS 3 AND 4. ________________________________________________________________ Dated: , 1998 Signed: (Sign exactly as name appears to the left.) When signing as attorney, executor, administrator, trustee, or guardian, please give full title as such. IMPORTANT: WE URGE YOU TO VOTE, SIGN, DATE AND MAIL THIS CARD PROMPTLY TO ASSURE YOUR REPRESENTATION AT THE MEETING. -----END PRIVACY-ENHANCED MESSAGE-----