UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.               )

 

 

ENERGY EAST CORPORATION
Portland, Maine

Dear Shareholders:

You are cordially invited to attend the Annual Meeting of Stockholders of Energy East Corporation, which will be held on June 14, 2007, at 9:00 A.M. (Eastern Daylight Time) at the Citibank Auditorium, 12th Floor, 399 Park Avenue, New York, New York.

At the meeting we will report on our business and we will vote on the items set forth in the accompanying Notice of Annual Meeting of Stockholders, including the election of 11 directors.

Joseph J. Castiglia and Lois B. DeFleur will be retiring from the Board this June and are, therefore,  not included in our nominees for election this year. Mr.  Castiglia and Dr. DeFleur both joined the Board in 1995 and were instrumental in the Company’s transformation into a super-regional energy services and delivery company. We are very grateful for their leadership and many valuable contributions, and will miss their participation.

We are very pleased that Thomas B. Hogan, Jr., a former partner and chief operating officer of the Northeast Practice of Deloitte & Touche and Patricia M. Nazemetz, Vice President, Human Resources for Xerox Corporation are new nominees this year.

Stockholders of record have three ways to vote their shares by proxy: (a) by mail, (b) by telephone and (c) via the internet. To vote by telephone or via the internet, you should follow the instructions on the enclosed proxy form. To vote by mail, you should complete and return the enclosed proxy card in the envelope provided; the envelope requires no postage if mailed in the United States.

	Yours sincerely,
	Wesley W. von Schack
	Chairman of the Board

 

ENERGY EAST CORPORATION
Portland, Maine

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To be held June 14, 2007

To the holders of common stock of
Energy East Corporation:

The Annual Meeting of Stockholders of Energy East Corporation will be held on June 14, 2007, at 9:00 A.M. (Eastern Daylight Time) at the Citibank Auditorium, 12th Floor, 399 Park Avenue, New York, New York.

The meeting is being held:

(1)         To elect 11 directors to serve for a term expiring at the 2008 Annual Meeting;

(2)         To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2007;

and for the transaction of any other business properly brought before the meeting or any adjournment thereof.

Holders of record of common stock at the close of business on April 23, 2007, are entitled to notice of, and to vote at, the meeting. Stockholders are reminded that their shares cannot be voted unless they return a signed proxy card, they vote via the internet or by telephone, or they make other arrangements to have their shares represented at the meeting. You may revoke your proxy at any time before the vote is taken by voting again by telephone or via the Internet, by delivering to the Vice President-General Counsel of the Company a written revocation or a proxy with a later date or by oral revocation in person to any of the persons named on the enclosed proxy card at the Annual Meeting.

	By Order of the Board of Directors,
	Paul K. Connolly, Jr.
	Vice President–General Counsel
Dated: April 25, 2007

 

Please mark, sign and date the enclosed proxy and return it in the envelope enclosed for your convenience or follow the instructions on the enclosed proxy form to vote by telephone or via the Internet.

TABLE OF CONTENTS

 

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PROXY STATEMENT
Annual Meeting of Stockholders
To be held June 14, 2007

This proxy statement is furnished in connection with the solicitation of proxies on behalf of the Board of Directors of Energy East Corporation (the Company), for use at the Company’s Annual Meeting of Stockholders to be held on June 14, 2007, at the Citibank Auditorium, 12th Floor, 399 Park Avenue, New York, New York. This proxy statement and the form of proxy will first be mailed to holders of common stock on or about May 2, 2007. The mailing address of the Company is 52 Farm View Drive, New Gloucester, Maine 04260.

Annual Report

An Annual Report to Stockholders for the year ended December 31, 2006, including the Company’s consolidated financial statements, has been mailed to all stockholders of record. The Annual Report is not a part of this proxy statement.

Outstanding Voting Securities

The close of business on April 23, 2007, has been fixed as the record date for determining the stockholders entitled to vote at the meeting. As of the record date, the Company had outstanding 158,031,822 shares of common stock and there were 29,258 stockholders of record. Holders of common stock have one vote per share for all purposes.

Your proxy represents the number of shares registered in your name as well as the number of whole shares credited to your account from dividends reinvested and optional cash payments under the Company’s Investor Services Program. If you participate in any of the Tax Deferred Savings Plans of New York State Electric & Gas Corporation, the Rochester Gas and Electric Corporation Savings Plus Plan, The Southern Connecticut Gas Company Target Plan, the Central Maine Power Company Savings and Investment Plans, the Connecticut Natural Gas Corporation Employee Savings Plans, The Berkshire Gas Company 401(k) Plans, the Energy East Management Corporation Tax Deferred Savings Plan or the Utility Shared Services Corporation Tax Deferred Savings Plan, your proxy constitutes an instruction for the trustees of such plans to vote the whole shares in your account in such plans in the manner specified on your proxy.

Corporate Governance

The Board of Directors has long considered best practices in corporate governance to be vitally important to the Company’s reputation and long-term performance, and to ensure that the Company’s management team remains accountable for the Company’s performance. In that regard, the Company maintains transparency in its financial disclosures and complies with the corporate governance listing standards of the New York Stock Exchange. The Company continues to be rated in the top 5% of Standard & Poor’s 400 companies for excellence in corporate governance by Institutional Shareholder Services.

The Board of Directors has adopted Corporate Governance Guidelines designed to ensure that it is providing effective and efficient governance. Under these guidelines, the non-management directors meet in executive session at least once each calendar quarter with no members of management present. In April 2006 the Company amended its Corporate Governance Guidelines to establish the position of Lead Director who will (i) preside at all meetings of stockholders and meetings of the Board at which the Chairman is not present, including executive sessions; (ii) set the agenda for executive sessions of the non-management directors; (iii) confer with the Chairman on the agenda for Board meetings; and (iv) serve as a liaison between the Chairman and the non-management directors. Joseph J. Castiglia was appointed Lead Director on June 8, 2006. The Board of Directors held 14 meetings in 2006 and the non-management directors met in executive session 4 times. Additionally one full Board meeting each year is dedicated to strategic planning matters.

The Company’s Code of Conduct demands the highest ethical standards in the conduct of the Company’s business and applies to directors and every employee of the Company including its principal executive, financial and accounting officers. In 2007, our Board adopted a formal written policy regarding approval of any related-party transactions. The Corporate Governance Guidelines, the Code of Conduct, the Related-Party Transactions Policy, as well as the charters of the Audit Committee, the Compensation and Management Succession Committee and the Nominating and Corporate Governance Committee are available on the Company’s Website: www.energyeast.com and are available in printed form upon request.

Correspondence to the Board as a whole, the non-management directors as a group, or to any individual director, should be sent to the Company’s Vice President-General Counsel at 52 Farm View Drive, New Gloucester, Maine 04260. Complaints regarding accounting, internal control over financial reporting or auditing matters are reported to the Company’s Compliance Officer. The Chairperson of the Audit Committee is immediately informed of any material accounting complaints and is periodically informed of all such complaints.

Director Independence

The Corporate Governance Guidelines provide that a substantial majority of the Board will meet the criteria for independence required by the New York Stock Exchange. Mr. von Schack, the Chief Executive Officer is the only non-independent director and does not serve on any of the Board’s committees. The Board has determined that Mr. Brandi, Mr. Cardis, Mr. Castiglia, Dr. DeFleur, Ms. Howard, Mr. Jagger, Mr. Kaplan, Mr. Lynch, Mr. Moynihan and Mr. Rich, and our new nominees Mr. Hogan and Ms. Nazemetz, are independent, taking into account all relevant facts and circumstances and the following standards(1) adopted by the Board in compliance with applicable New York Stock Exchange (NYSE) listing standards:

A director may not be deemed independent if:

·       the director is or was during the last three years, an employee of the Company or any of its subsidiaries;

·       an immediate family member of the director is, or was during the last three years, an executive officer of the Company or any of its subsidiaries;

(1)          For purposes of these standards: (a) an “immediate family member” means a director’s spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) who shares such director’s home; and (b) the term “executive officer” means a president, principal financial officer, principal accounting officer, vice president in charge of a principal business unit, division or function or any other officer or person who performs a policy-making function.

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·       the director or an immediate family member of the director received during any 12 month period within the preceding three years, or anticipates receiving during any twelve-month period, more than $100,000 in direct compensation from the Company and its subsidiaries, other than director and committee fees and pension or other forms of deferred compensation for prior service, provided such compensation is not contingent in any way upon continued service;

·       (i) the director or an immediate family member of the director is a current partner of a firm that is the Company’s internal or external auditor; (ii) the director is a current employee of such a firm; (iii) the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or (iv) the director or an immediate family member of the director was within the last three years (but is no longer) a partner or employee of such a firm and personally worked on the Company’s audit within that time;

·       the director or any immediate family member of the director is, or has been within the last three years, employed as an executive officer of another company where any of the Company’s present executive officers at the same time serves or served on that company’s compensation committee;

·       the director is a current employee, or an immediate family member of the director is a current executive officer, of a company that made during the last three fiscal years, or anticipates making payments to, or received during the last three fiscal years, or anticipates receiving payments from, the Company and its subsidiaries for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other company’s consolidated gross revenues;

·       the director is an executive officer or an employee, or an immediate family member of the director is an executive officer, of a charitable organization to which the Company and its subsidiaries made during the preceding three years, or anticipates making, charitable contributions that in any single fiscal year of such organization exceed the greater of $1 million, or 2% of such charitable organization’s consolidated gross revenues;

·       the director is a partner, member, of counsel or holds a similar position with a firm that provided, or anticipates providing, legal, investment banking, accounting, consulting or similar advisory services to the Company or any of its subsidiaries and whose fees for such services are in excess of 5% of such firm’s gross revenues for its last complete fiscal year;

·       the director currently owns more than 3% of the Company’s common stock; or

·       the director is an executive officer, partner or owner of 10% or more of the equity interests of a company that is indebted to the Company and its subsidiaries in an amount in excess of the greater of $100,000, or 1% of the total consolidated assets of such other entity as of the end of such company’s last complete fiscal year.

Related-Party Transactions Policy

Because transactions with senior officers, directors or holders of a significant number of shares of the Company’s common stock present a heightened risk of conflicts of interest, our Board has adopted a written policy to ensure that such transactions, if any, are only made on terms that are fair and reasonable to the Company. The policy may be viewed at our Website: www.energyeast.com. The policy applies to certain transactions with the Company in which any of the following persons has, or will have, a direct or indirect interest: (i) any executive officer, director or director nominee of the Company; (ii) a shareholder beneficially owning in excess of five percent of the outstanding common stock of the Company; (iii) a person who is an immediate family member of the foregoing persons; or (iv) entities that are owned or controlled by the foregoing persons or in which they have a substantial ownership interest.

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The Nominating and Corporate Governance Committee is responsible for reviewing and approving these transactions and it must find that a transaction is fair and reasonable to the Company before approving the transaction. The Chairperson of the Nominating and Corporate Governance Committee may approve certain related-party transactions, subject to ratification by the Nominating and Corporate Governance Committee at its next regularly scheduled meeting. No director who has an interest in a related party transaction may participate in any discussion or decisions on such transaction, other than to provide required information.

Voting Rights

In voting for Proposal 1 (the election of directors), you may vote in favor of all nominees or withhold your votes as to all or as to a specific nominee. The 11 nominees receiving the highest number of affirmative votes cast by holders of common stock entitled to vote shall be elected to serve as directors. As a result, votes that are withheld will not be counted and will have no effect on the vote in connection with the election of directors. In voting for Proposal 2 (ratification of independent registered public accounting firm) you may vote in favor of, or against, or may abstain from voting on such proposal. The vote required to approve Proposal 2 is the affirmative vote of a majority of the votes cast by holders of common stock entitled to vote. With respect to Proposal 2 abstentions will be voted neither “for” nor “against” and will have no effect on the vote in connection with such proposal.

Under the current rules of the New York Stock Exchange, member brokerage firms that hold shares in street name for beneficial owners may, to the extent that such beneficial owners do not furnish voting instructions with respect to any or all proposals submitted for stockholder action, vote in their discretion upon proposals which are considered “discretionary” proposals under the rules of the New York Stock Exchange. Member brokerage firms that have received no instructions from their clients as to “non-discretionary” proposals do not have discretion to vote on these proposals. Member brokerage firms may vote on Proposals 1 and 2, which are each considered discretionary, if they have not received voting instructions from beneficial owners.

In determining whether a quorum is present, all duly executed proxies (including those marked “abstain” or “withhold”) will be counted. A proxy that does not include voting instructions from a beneficial owner or their broker will not be counted for purposes of determining whether a quorum is present.

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PROPOSAL 1: ELECTION OF DIRECTORS
(Item 1 on proxy card)

Your Board of Directors consists of 11 directors elected annually at each annual meeting of stockholders for a term expiring at the next annual meeting of stockholders. Joseph J. Castiglia and Lois B. DeFleur will retire from the Board of Directors on June 14, 2007. Upon their retirement the number of directors on the Board will remain at 11.

The nominees for election at this Annual Meeting to serve as directors for a term expiring at the 2008 Annual Meeting of Stockholders and until their successors shall be elected and shall qualify are: James H. Brandi, John T. Cardis, Thomas B. Hogan, Jr., G. Jean Howard, David M. Jagger, Seth A. Kaplan, Ben E. Lynch, Peter J. Moynihan, Patricia M. Nazemetz, Walter G. Rich and Wesley W. von Schack.

Unless otherwise specified on a proxy, shares represented by proxies in the accompanying form received on behalf of the Board of Directors will be voted for the election of James H. Brandi, John T. Cardis, Thomas B. Hogan, Jr., G. Jean Howard, David M. Jagger, Seth A. Kaplan, Ben E. Lynch, Peter J. Moynihan, Patricia M. Nazemetz, Walter G. Rich and Wesley W. von Schack. While it is not anticipated that any of the nominees will be unable to qualify or accept office, if one or more should be unable to do so, the proxy holders reserve the right to vote for any substitute nominee or nominees designated by the Board of Directors.

All current directors were present at the 2006 Annual Meeting. All current directors attended 75% or more of the total number of meetings of the Board of Directors and the committees of the Board on which they served.

The following sets forth information for each nominee for election at the 2007 Annual Meeting.

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(1)          The Company paid fees to Deloitte & Touche USA, LLP of $547,117 in 2006 for various tax and other non-audit services.

(2)          The Company paid fees to Xerox Corporation of $466,632 in 2006 for the lease and maintenance of equipment.

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Committees

The Board of Directors has an Audit Committee, a Compensation and Management Succession Committee, a Corporate Responsibility Committee and a Nominating and Corporate Governance Committee.

Audit Committee   The Audit Committee members are Messrs. Lynch (its Chairperson) Castiglia, Jagger, Kaplan and Moynihan. Each member of the Audit Committee is financially literate and meets the independence requirements of the New York Stock Exchange and the Securities and Exchange Commission. Each member of the Committee also possesses accounting or financial management expertise as defined by the New York Stock Exchange. The Board of Directors has determined that Messrs. Lynch, Castiglia and Moynihan are “audit committee financial experts” as defined under the rules of the Securities and Exchange Commission. Messrs. Lynch and Castiglia are or have been chief executive officers, Mr. Moynihan was a chief investment officer, and Mr. Castiglia is a retired certified public accountant. The Committee held 5 meetings in 2006 and Committee members met in executive session without management 5 times. In months where the Audit Committee does not meet it receives updates from the Chief Accounting Officer. The Committee annually evaluates its performance.

Compensation and Management Succession Committee   The Compensation and Management Succession Committee members are Messrs. Castiglia (its Chairperson) Brandi, Cardis, Lynch, and Rich, each of whom is independent in accordance with the requirements of the New York Stock Exchange. The Committee held 6 meetings in 2006 and Committee members met in executive session without management once. The Committee annually evaluates its performance.

The Board of Directors has delegated to the Company’s Compensation and Management Succession Committee responsibility for the development, oversight and administration of all components of the Company’s compensation program. The Committee recommends to the independent directors the compensation and benefits for the Company’s Chief Executive Officer (CEO) and recommends to the full Board the compensation and benefits for the other executive officers. The Committee makes awards under the Company’s equity-based plans. The Committee regularly reviews compensation practices and policies and evaluates the named executive officers’ performance on an individual basis. The Committee also recommends to the full Board compensation for directors.

The Compensation and Management Succession Committee conducts a formal CEO appraisal process annually, with input from other Board members. The CEO’s compensation reflects the Committee’s evaluation measured against the following criteria: (i) short-term and long-term strategy; (ii) financial and operating performance; (iii) management development; and (iv) executive, Board and governance leadership. In establishing compensation, the Committee also considers the CEO’s leadership in positioning the Company to meet the significant operational and regulatory challenges of today’s changing and dynamic energy industry.

The CEO annually reviews the performance of each named executive officer with the Committee. The conclusions reached and recommendations based on these reviews, including with respect to salary adjustments and annual award amounts, are presented to the Board. The CEO and Chief Administrative Officer report to the Committee on the implementation of compensation plans and programs.

The Committee may form, and delegate authority to, subcommittees when appropriate. It did not do so in 2006.

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For the 2006 fiscal year, the Committee retained Towers Perrin as its outside compensation consultant. The role of the consultant is to serve the Company and work for the Committee in its review of executive and director compensation practices, including the competitiveness of pay levels, executive compensation design issues, market trends, and technical considerations. The nature and scope of services rendered by Towers Perrin on the Committee’s behalf are described below:

·       Assist the Committee in decision making with respect to executive compensation, helping to ensure that the Committee’s actions are consistent with the Company’s business needs, pay philosophy, prevailing market practices, and relevant legal and regulatory mandates.

·       Provide market data as background against which the Committee can consider CEO and other executive officers base salary, bonus, and long-term incentive awards each year.

·       Advise the Committee on how best to interpret and apply data in making compensation decisions with respect to Company management while continuing to represent shareholders’ interests.

·       Provide ongoing support to management and the Committee on the latest regulatory, legal, and/or accounting considerations affecting compensation and benefit programs.

·       Assist with the assessment and redesign of any compensation or benefit programs, if desired or needed.

·       Assist the Committee with general and specific issues relating to executive talent management, as well as management transitions that occur from time to time.

·       Apprise the Committee about best practices with regard to director compensation.

The Committee did not direct Towers Perrin to perform the above services in any particular manner or under any particular method. The Committee has the final authority to hire and terminate the consultant, and the Committee evaluates the consultant periodically.

Effective March 1, 2007, the Committee retained Hewitt Associates to act as independent advisor to the Committee on executive compensation.

The Committee may use its discretion regarding each of the Company’s pay programs, but does so only in unusual circumstances that could not have been anticipated when goals were established.

Corporate Responsibility Committee   The Corporate Responsibility Committee members are Mr. Rich (its Chairperson) Mr. Brandi, Dr. DeFleur, Ms. Howard and Mr. Moynihan. Each member of the Corporate Responsibility Committee is independent. The Committee had 3 meetings in 2006. The Committee, among other things, makes recommendations and monitors the Company’s performance with respect to the Company’s operations, including customer service, customer satisfaction and environmental matters, and matters dealing with affirmative action, consumer and community relations, equal employment practices, diversity initiatives and charitable contributions.

Nominating and Corporate Governance Committee   The Nominating and Corporate Governance Committee members are Dr. DeFleur (its Chairperson) Mr. Cardis, Ms. Howard, Mr. Jagger and Mr. Kaplan, each of whom is independent in accordance with the requirements of the New York Stock Exchange. The Committee had 4 meetings in 2006. The Nominating and Corporate Governance Committee is responsible for recommending to the Board the slate of persons to be nominated to the Board, appointment of directors as members of committees of the Board, and candidates to fill vacancies on the Board of Directors. The Committee is also responsible for overseeing an annual evaluation of the Board of Directors and annually evaluating its own performance. The Committee also makes recommendations to the Board of Directors regarding corporate governance guidelines.

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The Committee works with an independent executive search firm to help identify, screen and recruit qualified director candidates. This year, a non-management director recommended Mr. Hogan and both he and Ms. Nazemetz were recommended by an executive search firm. Both nominees were recommended to the Board by the Committee.

Stockholders wishing to recommend candidates for consideration by the Nominating and Corporate Governance Committee should submit to the Company’s Vice President–General Counsel a notarized notice with the name, a statement of qualifications and the written consent of any candidate. Recommendations will be brought to the attention of the Nominating and Corporate Governance Committee for consideration. Stockholder recommendations will be given equal consideration with, and using the same criteria as, recommendations made by management, the Board or any outside search firm retained by the Nominating and Corporate Governance Committee. The criteria for evaluating director nominees are:

·       The proportion of the Board of Directors who meet the criteria for independence required by the New York Stock Exchange.

·       A candidate’s proven record of leadership and experience in the candidate’s field.

·       A candidate’s broad understanding of business, financial affairs, and the complexities of a business organization.

·       A candidate’s ability to work with other directors and executives of a corporation in accomplishing a corporation’s objectives and representing stockholders.

·       A candidate’s ability to devote sufficient time to effectively administer the Company’s business affairs.

·       A candidate’s educational background and expertise in a special area significant to the Company’s operations.

·       The diversity of the Board of Directors.

·       A candidate’s strength of character (i.e., honesty, integrity), independence of opinion and sound business judgment.

·       A candidate’s history of community involvement and awareness of responsibilities related to employees, customers, and civic and social issues.

·       A candidate’s potential for a conflict of interest. A director nominee should have no material interests that are materially adverse to, or in conflict with, the Company’s interests.

·       Legal considerations regarding a candidate’s potential interlocking directorates.

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Report of Audit Committee

The Audit Committee is directly responsible for the appointment, compensation, retention and oversight of the independent accountant engaged to audit the Company’s financial statements and the effectiveness of its internal control over financial reporting, and reviews with the independent accountant the audit plan and results of the audits. Each engagement of the independent accountant to perform audit or non-audit services is subject to pre-approval by the Audit Committee, as set forth in the Audit Committee Charter. The Audit Committee meets with the independent accountant, internal auditor and management to discuss the adequacy of the Company’s internal control over financial reporting, the annual and quarterly financial reporting process, and major risk exposures and steps that management has taken to monitor and control such exposures. It also meets with the internal auditor to discuss the results of completed internal audits and oversees the Company’s Corporate Compliance Program.

The Audit Committee has reviewed and discussed the consolidated financial statements with management and the independent accountant. The Audit Committee discussed with the independent accountant the matters required to be discussed by Statement on Auditing Standards No. 61 (Communication with Audit Committees). In addition, the Committee received the letter from the independent accountant required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and discussed with the independent accountant its independence from the Company and its management.

In reliance on the reviews and discussions referred to in the prior paragraph, the Audit Committee recommended to the Board of Directors that the audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, for filing with the Securities and Exchange Commission.

Audit Committee

 

Report of Compensation and Management Succession Committee

The Committee has reviewed and discussed the Compensation Discussion and Analysis beginning on page 14 with management. Based upon such review, the Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Company’s 2007 Proxy Statement.

Compensation and Management Succession Committee

 

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Security Ownership of Certain Beneficial Owners and Management

The following table indicates the amount and percentage of the Company’s common stock beneficially owned by each person known to the Company to be the owner of more than 5% of the Company’s common stock.

(1)          Based on Schedule 13G prepared by Barclays Global Investors NA, on behalf of beneficiaries of various trust accounts held by Barclays Global Investors, NA, Barclays Global Fund Advisors and other members of the same group with respect to the beneficial ownership of the Company’s common stock, filed with the Securities and Exchange Commission for the period ended December 31, 2006. The shares were acquired and are held in the ordinary course of business and not for the purpose of changing or influencing control of the Company. Barclays Global Investors NA reported sole dispositive power with respect to all of the shares and sole voting power with respect to 9,229,692 shares.

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The following table indicates the number of shares of common stock beneficially owned as of April 1, 2007: (i) by each director and nominee, (ii) by each of the executive officers named in the Summary Compensation Table included elsewhere herein, and (iii) by the 21 current directors and executive officers as a group, together with the percent of the outstanding securities so owned. None of the shares beneficially owned have been pledged.

Name of Beneficial Owner				Common Stock		Options Currently Exercisable or Excerisable within 60 Days of April 2007				Total Stock and Stock Based Holdings				Percent of Class
James H. Brandi				2,500			0				2,500				(4	)
John T. Cardis				2,000			0				2,000				(4	)
Joseph J. Castiglia				10,000			0				10,000				(4	)
Paul K. Connolly, Jr.				19,225			44,332				63,557				(4	)
Lois B. DeFleur				3,322			0				3,322				(4	)
Thomas B. Hogan, Jr.				0			0				0				(4	)
G. Jean Howard				2,759			0				2,759				(4	)
David M. Jagger				3,000			0				3,000				(4	)
Seth A. Kaplan				2,000			0				2,000				(4	)
Robert D. Kump				50,422	(1)		134,295				184,717				(4	)
Ben E. Lynch				3,026	(2)		0				3,026				(4	)
F. Michael McClain				43,311			30,962				74,273				(4	)
Peter J. Moynihan				4,000			0				4,000				(4	)
Patricia M. Nazemetz				0			0				0				(4	)
Walter G. Rich				2,000			0				2,000				(4	)
Robert E. Rude				53,966	(3)		90,296				144,262				(4	)
Wesley W. von Schack				550,960			1,150,645				1,701,605				(4	)
21 current directors and executive officers as a group				940,264			1,611,648				2,554,412				1.63	%

 

(1)          Includes 3,704 shares held jointly and over which Mr. Kump shares voting and investment power with his spouse, 28 and 21 shares held by Mr. Kump’s daughter and son, respectively, to which he expressly disclaims beneficial ownership, and 672 shares held by Mr. Kump’s mother which he serves as power of attorney to which he expressly disclaims beneficial ownership.

(2)          Includes 720 shares held by Mr. Lynch’s spouse to which he expressly disclaims beneficial ownership.

(3)          Includes 4,416 shares held jointly and over which Mr. Rude shares voting and investment power with his spouse and 36 shares held by Mr. Rude’s spouse to which he expressly disclaims beneficial ownership.

(4)          Less than 1.0% of the outstanding common stock.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons holding ten percent or more of the Company’s equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (SEC) and the New York Stock Exchange. Such reporting persons are also required to provide the Company with copies of all Section 16(a) forms they file. SEC regulations specify due dates for these reports. Based solely on its review of the copies of the reports received by it and certain written representations from certain reporting persons, the Company believes that during 2006 all filing requirements were satisfied by its directors and executive officers.

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Executive Compensation

Compensation Discussion and Analysis

This Compensation Discussion and Analysis describes our executive compensation policies, objectives and decisions. For a full understanding of the information presented, you should read and consider the following narrative discussion, together with the information in the tables below and the specific discussions that accompany the tables, as well as the Report of the Compensation and Management Succession Committee and the description of the role of our Compensation and Management Succession Committee included in this Proxy Statement.

Guiding Principles and Policies

The Company’s executive compensation program has two primary objectives:

·       To attract and retain talented senior executives.

·       To motivate senior executives by rewarding them for outstanding corporate and individual performance.

The Company adheres to the following fundamental principles as the basis for its executive compensation program:

·       Executive compensation should be determined by a Committee composed entirely of independent directors having sufficient resources to do its job, including access to independent, qualified experts.

·       Executive compensation should be closely aligned with both short-term and long-term shareholder interests.

·       Executive compensation should appropriately reflect an individual’s contribution to the achievement of corporate goals and objectives and as a result a significant component of compensation should be at risk.

·       Executive compensation should take into consideration the quality of customer service and operational excellence delivered by the business units or functions for which the executive is responsible.

·       Executives should be required to build and maintain significant equity investments in the Company.

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Overview of Executive Compensation Components

The Company’s compensation programs for its named executive officers consist of the components set forth in the table below.

 

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Additional Information Regarding Compensation Program Design

Compensation Benchmarking with Peer Companies

The Committee collects and analyzes compensation market data annually. Compensation of the named executive officers is compared to survey data of comparable positions at companies in both the energy industry and general industry.  Energy industry market data is derived using size-adjusted data from Towers Perrin’s Energy Industry Executive Compensation Database, which contains compensation information from nearly 100 energy and utility companies. General industry market data is derived using size-adjusted data from Towers Perrin’s Executive Compensation Database, which contains compensation information from 820 companies.

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The Committee targets median levels for total compensation as well as for base pay, short-term and long-term incentives. Ultimately, the independent members of the Board, acting on the Committee’s recommendation, have the final decision in determining the appropriate compensation amounts to retain, motivate, and reward the CEO and other named executive officers.

Base Salary

The Compensation and Management Succession Committee recommends to the Board the base salaries of the named executive officers in accordance with the general philosophy described above, comparing the named executive officers’ current levels with those at the median of the market. Base salaries are evaluated annually however, adjustments are made as necessary–generally less frequently than on an annual basis. In addition to market competitiveness, the Committee also considers a number of quantitative and qualitative factors, including: (i) our overall financial and operational achievements, as well as the performance of the business or function for which the individual is responsible; (ii) the individual’s experience and responsibilities; (iii) the individual’s effectiveness in performing those responsibilities; (iv) the individual’s role in leading or helping implement our short-term and long-term strategies; and (v) the market for individuals with the relevant skills, experience and expertise. As requested by the Committee, the CEO provides input for the base salaries for all named executive officers other than himself.

Annual Executive Incentive Plan

The Annual Executive Incentive Plan, AEIP or the plan, directly ties compensation to specific company financial goals, as well as individual performance objectives. Individual performance objectives are identified by the Committee as a means of promoting the fundamental compensation principles outlined above (including rewarding customer service and operational excellence) and are consistent with objectives generally used in short-term incentive plans in the utility industry. The awards under the plan are determined through a two-step process: achievement of individual performance goals and the attainment of corporate earnings goals.

At the beginning of the year, the Committee recommends to the Board an earnings threshold and maximum earnings range for the administration of the AEIP. If the threshold is not achieved, awards are not made under the Plan (irrespective of the named executive officer’s individual performance). At the same time, the Board approves individual performance objectives for each of the named executive officers. Each named executive officer has several individual performance objectives, for example: pre-determined corporate and business area financial targets, completion of critical business projects, energy delivery and reliability, customer satisfaction, operating plan execution, workforce diversity, employee safety, and succession planning. Each objective is assigned a weighting (percentage) that is multiplied times base salary if the threshold corporate earnings goal is attained. Assigned weightings are increased up to two times if the maximum earnings goal is attained or exceeded. Objectives more critical to the business are given more significant weight than other objectives. The CEO’s performance is evaluated differently than the other named executive officers. The CEO’s incentive award is based on the average performance of those executives that report to him compared to their objectives. As requested by the Committee, the CEO and Chief Administrative Officer provide input for these performance objectives for all named executive officers.

In 2006, the named executive officers had the following range of potential payouts, as a percentage of base salary, based upon achievement of individual performance objectives and attainment of corporate earnings goals: Mr. von Schack–threshold met 0-100%, maximum achieved 0-200%; Mr. Rude–threshold met 0-55%, maximum achieved 0-110%; Messrs. Connolly, Kump and McClain–threshold met 0-45%, maximum achieved 0-90%. These percentages are determined based on market-competitiveness and comparison of the individual named executive officers’ roles and responsibilities.

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The following is an example of how the AEIP is calculated, assuming: (i) a named executive officer had a total AEIP opportunity of 45% at threshold to 90% at maximum, (ii) the executive achieved all of his individual performance objectives, (iii) the threshold earnings goal set by the Committee was $X/share, (iv) the maximum earnings goal set by the Committee was $Z/share, and (v) the actual earnings were $Y/share (Y being the midpoint between X and Z); the named executive officer would receive an AEIP award of 67.5% of base salary.

Long-Term Incentive Program

The Company’s long-term incentive program consists of stock options and performance-accelerated restricted stock. The Committee establishes guidelines for long-term incentive awards for each level of management and in setting the guidelines, it considers an individual’s organizational position, historical performance, prior awards, current performance and potential future contribution to the Company. As requested by the Committee, the CEO and Chief Administrative Officer provide input for these guidelines for all named executive officers.

The Committee grants named executive officers approximately 10% stock options/tandem SARs and 90% performance-accelerated restricted stock, based on value. The Committee’s long-term awards emphasize performance-accelerated restricted shares rather than stock options/tandem SARs because the Company’s stock price has been relatively stable with a significant portion of shareholder value being attributable to dividends.

We only issue SARs in tandem with stock options, although they may be issued on a free-standing basis. Tandem SARs represent the holder’s right to receive an amount equal to the excess of the fair market value of a share of the Company’s common stock (determined on the date of the exercise of the SAR) over the exercise price of the related option. In accordance with the terms of the Stock Option Plan the exercise price is set at the closing price of the common stock on the date prior to the date of grant. The Stock Option Plan provides for the award of shares of the Company’s common stock to individuals, subject to restrictions on transfer, including those imposed by the Securities Act and the Exchange Act, and such other restrictions as the Committee may impose. An individual may not receive awards covering more than 400,000 shares of common stock in any one calendar year. Options must be exercised within ten years of the date of grant or they are forfeited. Stock options/SARs vest within two years; with one-third vesting immediately at grant, a second third vesting on the first day of the year following their grant, and the final third vesting a year later.

Recipients of performance-accelerated restricted stock under the Restricted Stock Plan are entitled to receive the cash equivalent of any dividends declared thereon and to vote the shares.

The Committee has the flexibility under the Stock Option Plan and the Restricted Stock Plan to accelerate vesting of awarded shares.

2006 Compensation

Base Salary.   The Compensation and Management Succession Committee determines the base salaries of the named executives in accordance with the general compensation philosophy described above and typically reviews base salaries on an annual basis. In recommending any increase, the Committee considers general industry and peer industry compensation information and the named executive officer’s individual performance and prior salary increases. In 2006 there were no adjustments to base salary for any of the named executive officers, and their base salaries were below the market median.

Annual Executive Incentive Plan.   The Compensation and Management Succession Committee set the 2006 AEIP objectives to be challenging and require significant individual and Company achievement to be accomplished. Over the past six years, on average, the Company has achieved threshold earnings 100% of

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the time and maximum earnings approximately 17% of the time. On average over the last six years, an executive officer has been awarded approximately 76.8% of his maximum incentive opportunity. The degree of difficulty in achieving the 2006 objectives was expected to be similar to that of objectives in prior years. Overall payouts pursuant to the AEIP for 2006 were lower than previous years due to the non-attainment of certain operating plan objectives, which will reduce the Company’s future earnings, and lower than expected earnings at several utilities in 2006. In 2006, the Company achieved earnings 10% above the threshold but 68% of the maximum award level. The named executive officers had the following individual performance objectives, achievement levels and AEIP awards for 2006:

Mr. von Schack:   Based upon the performance of his direct reports, he achieved 62% of his performance objective and received an AEIP bonus of 103% of base salary.

Mr. Rude:   Satisfactory operating plan execution; achievement of pre-determined corporate and business area financial targets; and succession planning. Mr. Rude achieved 53% of his individual performance objectives established by the Committee and received and AEIP bonus of 49% of base salary.

Mr. Connolly:   Satisfactory operating plan execution; achievement of pre-determined corporate and business area financial targets; successful Sarbanes-Oxley 404 compliance; and certain critical corporate projects. Mr. Connolly achieved 44% of his individual performance objectives established by the Committee and received an AEIP bonus of 34% of base salary.

Mr. Kump:   Development of growth opportunities; achievement of pre-determined corporate and business area financial targets; satisfactory operating plan execution; successful Sarbanes-Oxley 404  compliance; achievement of business area affirmative action goals; and succession planning. Mr. Kump achieved 64% of his individual performance objectives established by the Committee and received an AEIP bonus of 49% of base salary.

Mr. McClain:   Successful information technology infrastructure replacement; achievement of certain information technology performance standards; achievement of pre-determined corporate and business area financial targets; achievement of business area affirmative action goals; development of growth opportunities; and succession planning. Mr. McClain achieved 82% of his individual performance objectives established by the Committee and received an AEIP bonus of 62% of base salary.

In calculating awards under the AEIP, the Committee eliminated from earnings a one-time charge of five cents per share for the recognition of unamortized expense resulting from the redemption of junior subordinated debt and associated trust preferred securities. This elimination did not affect the satisfaction of the earnings threshold.

Long-Term Incentive Plan.   In 2006 the named executive officers received the following stock options/tandem SARs under the Stock Option Plan: Mr. von Schack 75,000; Mr. Rude 15,000; Mr. Connolly 11,000; Mr. Kump 11,000; and Mr. McClain 11,000. Mr. Connolly received an additional grant of 50,000 stock options/tandem SARs as a signing bonus conditioned on his commencement of employment with the company on January 1, 2006.

In 2006 the named executive officers received the following performance-accelerated restricted stock awards under the Restricted Stock Plan; Mr. von Schack 89,100 shares; Mr. Rude 15,000 shares;  Mr. Connolly 9,500 shares; Mr. Kump 9,500 shares; and  Mr. McClain 9,500 shares. Mr. von Schack received additional shares of performance accelerated restricted stock under the terms of his employment agreement (this award is described in the Grants of Plan-Based Awards Table).

Pursuant to the Energy East Restricted Stock Plan, participants, including each named executive officer, were granted restricted stock awards in 2006. The Stock vests on January 1, 2012, subject to early vesting as follows: (i) one half of each grant vests on the day following any December 31st on which the total shareholder return (stock price appreciation, dividends and any other shareholder distributions) from

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the date of grant is at least equal to 25%, and (ii) the remaining half vests on the day following any December 31st on which the total shareholder return from the date of grant is at least equal to 50%. Dividends on restricted stock are paid as compensation prior to vesting and are paid after vesting in a manner consistent with all dividends on non-restricted Energy East common stock. All assumptions made in the valuation of awards of stock and options were made in accordance with FAS 123R and such assumptions are discussed in footnote 12 to the Company’s audited financial statements for 2006 included in the Company’s Annual Report on Form 10-K for the period ended December 31, 2006.

Long-term incentives are at risk for two reasons. First multi-year vesting schedules require continued service before awards are earned—if an executive leaves or is terminated for cause, awards are forfeited. Second, in the case of stock options, no value is delivered to executives unless Energy East’s stock price increases after the date of grant. The following table illustrates the allocation percentage of total direct compensation among salary, short-term and long-term incentive compensation for the named executive officers (additional detail regarding the compensation paid to these individuals in 2006 is contained in the Summary Compensation Table).

 

Pension Plans

The named executive officers are eligible to receive benefits under qualified and nonqualified retirement plans. The nonqualified plans include: (i) a plan designed to restore benefits that would have been paid to the named executive officer if certain Federal tax limitations were not in effect–the ERISA Excess Plan, and (ii) a Supplemental Executive Retirement Plan or SERP, which provides eligible employees with a total retirement benefit (including benefits under all Company plans and Social Security based on age and/or years of service) of up to 75% of the average of their highest three consecutive years of eligible compensation within the last five years of employment. A detailed description of each of the retirement plans is located in the narrative to the Pension Benefits Table.

Stock Ownership Guidelines

Named executive officers must maintain a prescribed level of ownership in the Company to closely align their interests with those of shareholders and demonstrate their confidence in the Company, including their long-term commitment to it. All stock holdings count toward this requirement, including both vested and unvested restricted stock grants; options do not count toward the ownership requirement. The named executive officers’ stock ownership guidelines as a multiple of base salary is as follows: Mr. von Schack 5x; Mr. Rude 3x; Mr. Connolly 2x; Mr. Kump 2x; and Mr. McClain 2x. Named executive officers have until the later of 2008, or five years after becoming a senior executive, in which to satisfy these guidelines. The Committee oversees compliance with this policy. Considering the time frames described above, in 2006 all named executive officers were in compliance with the stock ownership guidelines.

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Employment Agreements

The Company has entered into employment agreements with the following named executive officers, (certain details of the agreements are set forth in the relevant compensation tables and the related notes and narratives included below).

Agreement with the Chief Executive Officer

Mr. von Schack has an agreement with a term ending on June 30, 2007 that provides for automatic one-year extensions unless either party to the agreement gives notice that such agreement is not to be extended. This agreement provides a minimum base salary, long-term incentive grants, and a SERP benefit. The details of the long-term incentive grant provisions are discussed in the Outstanding Equity Awards Table narrative, and the SERP benefit is discussed in the narrative to the Pension Benefits Table. The agreement was entered into in order to encourage continuity of Mr. von Schack’s employment, provide incentives to transform the Company, and to remain market competitive.

Agreement with the Chief Integration Officer

Mr. McClain has an agreement with a three-year term that is automatically extended each month unless either party gives written notice that the agreement is not to be extended. This agreement provides a minimum base salary, SERP benefit, and severance provisions. Details on the SERP benefit are provided in the narrative to the Pension Benefits Table and details of the severance provisions are located in the Potential Payments Upon Termination or Change-in-Control Table and narrative. The agreement was entered into to assist in retaining Mr. McClain, and to remain market competitive.

Additional Named Executive Officer Agreements

Messrs. Rude, Connolly, and Kump each have change-in-control agreements and general severance agreements. The change-in-control agreements require that there be both a change-in-control and a termination of employment under certain circumstances before benefits are paid. Details of the change-in-control agreements and severance agreements are located in the Potential Payments Upon Termination or Change-in-Control section below.

Timing of Compensation Decisions

Consistent with its historic practices, the Committee generally awards stock options/SARs and performance-accelerated restricted stock shares and determines annual incentives at its February meeting. The Committee considers what, if any, material non-public information exists at the time it approves equity award grants. As previously stated, base salary changes are made on an ad hoc basis, generally less frequently than on an annual basis.

Tax Matters

Section 162(m) of the Internal Revenue Code generally disallows a tax deduction to a company for compensation in excess of one million dollars paid to a company’s CEO and each of the next four most highly compensated executive officers, except that qualifying performance based compensation that meets certain specified criteria is not subject to Section 162(m). While the Committee recognizes the importance of tax deductibility, it believes that it is critical to balance tax deductibility with ensuring that the Company’s programs are designed appropriately to recognize and reward executive performance. Thus, the Committee reviews tax consequences as well as other relevant considerations when making compensation decisions within the context of the overall operation of the Company’s compensation program and considers what actions should be taken, if any, to operate the compensation program in a tax-

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effective manner. We are generally not able to deduct awards made under our AEIP, Stock Option and Restricted Stock plans.

Policy on Recovery of Awards

The Company currently has no policy with respect to recovery or the granting of additional awards when the performance measures upon which they are based are restated or otherwise adjusted in a manner that would reduce or increase the size of an award or payment. The Company has not had a restatement or adjustment of earnings that would have required an increase or reduction in the size of awards previously granted.

Summary Compensation Table—2006

(1)   On February 8, 2007, Mr. McClain was promoted to Senior Vice President and Chief Development and Integration Officer and Mr. Kump was promoted to Senior Vice President and Chief Financial Officer.

(2)   Represents a signing bonus paid to Mr. Connolly conditioned on his commencement of employment with the Company on January 1, 2006.

(3)   Reflects the dollar amounts recognized for financial statement reporting purposes for the fiscal year ended December 31, 2006, in accordance with FAS 123(R) of awards granted in and prior to 2006 pursuant to the Company’s Restricted Stock Plan and 2000 Stock Option Plan, respectively. Assumptions used in the calculation of these amounts are included in footnote 12 to the Company’s audited financial statements for the fiscal year ended December 31, 2006 included in its Annual Report on Form 10-K for such period. The amounts for Messrs. von Schack, Connolly and McClain recognize that they are retirement-eligible and amounts are fully expensed in the year granted.

a)     In 2006, Mr. von Schack received a grant of $2,784,591 under the Company’s Restricted Stock Plan that was expensed and fully amortized; the balance expensed and percentage amortized in 2006 for grants made in 2004 and 2005 (previously reported in our proxy statements as compsensation received for those years) was $804,266 (35%) and $1,072,329 (36%), respectively.

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Similarly, for the other named executive officers the amounts expensed and the percentage amortized in 2006 pursuant to the Company’s Restricted Stock Plan for grants made in 2004, 2005 and 2006, respectively, were (i) Mr. Rude were $49,858 (35%), $91,944 (36%) and $186,225 (50%), respectively; (ii) Mr. McClain were $49,858 (35%), $71,616 (36%), and $235,885 (100%), respectively; and (iii) Mr. Kump were $49,858 (35%), $71,616 (36%) and $43,979 (19%), respectively. For Mr. Connolly the amount expensed and the percentage amortized was $235,885 (100%) for a grant made in 2006.

b)     The amounts expensed in 2006 pursuant to the Company’s 2000 Stock Option Plan represents the estimated value using Black Scholes for the 2006 grant and the change in value from amounts previously reported in our proxy statement as compensation as of 12/31/05 to 12/31/06 using Black Scholes for all prior year grants. Those amounts for (i) Mr. von Schack for grants made in 1999, 2000, 2001, 2003, 2004, 2005 and 2006, respectively, were $38,514, $176,000, $302,000, $132,300, $180,900, $91,270 and $135,065, respectively; (ii) Mr. Rude for grants made in 1999, 2004, 2005 and 2006, respectively, were $7,703, $13,134, $8,042 and $27,013, respectively; (iii) Mr. McClain for grants made in 2004, 2005 and 2006, respectively, were $4,467, $8,042 and $19,823, respectively; and (iv) Mr. Kump for grants made in 1999, 2004, 2005 and 2006, respectively, were $7,703, $39,400, $8,042 and $19,823, respectively. For Mr. Connolly the amount expensed was $146,074 for grants made in 2006.

(4)   Reflects the increase in the actuarial present value in the accumulated pension benefits at December 31, 2005 and the accumulated pension benefits at December 31, 2006 of all defined benefit plans for each of the named executive officers.

(5)   Mr. von Schack received financial planning services, a club membership fee and tax reimbursements on the foregoing items of $12,206. Messrs. Rude and Kump also received financial planning services and tax reimbursements for such services.

Grants of Plan-Based Awards—2006

 

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(1)   Pursuant to the Energy East 2000 Stock Option Plan, participants were granted options to purchase a specified number of shares of Energy East common stock at the exercise price specified. These options were granted in tandem with the same number of SARs and are for a term of ten years from the date of grant. See the discussion of stock options and SARs in the Long-term Incentive Program section of the Compensation Discussion and Analysis for information on this Plan.

Options and tandem SARs were granted on February 17, 2006 and the right to exercise vests in three installments as follows: (a) 33-1¤3% vested February 17, 2006; (b) an additional 33-1¤3% vested on January 1, 2007; and (c) the remaining 33-1¤3% will vest on January 1, 2008.

Options and tandem SARs were granted on January 3, 2006 and the right to exercise vests in three installments as follows: (a) 33-1¤3% vested on January 3, 2006; (b) an additional 33-1¤3% vested on January 1, 2007; and (c) the remaining 33-1¤3% will vest on January 1, 2008.

Pursuant to the Energy East Restricted Stock Plan, participants were granted restricted stock awards. See the discussion of performance-accelerated restricted stock in the Long-term Incentive Plan section of the Compensation Discussion and Analysis for information on this Plan.

(2)   Equity awards approved by the Compensation and Management Succession Committee on February 8, 2006 were granted on February 17, 2006 in order to allow shares to be purchased for treasury to make the restricted stock grants and for the grant of options and tandem SARs to coincide with the restricted stock grants.

(3)   In addition to the annual long-term incentive grants under the Stock Option and Restricted Stock Plans, Mr. von Schack’s employment agreement provides for awards of restricted stock beginning in 2005 through 2009, if he is an active employee on July 1 of each such year. The agreement provides for awards in the amount of 23,913 shares on July 1, 2006, 47,826 shares on July 1, 2007 and 2008, and 95,652 shares on July 1, 2009. These awards were provided to retain Mr. von Schack as CEO.

(4)   Mr. Connolly’s grant of stock option/tandem SARs was approved on December 8, 2005 by the Compensation and Management Succession Committee and was conditioned on his commencement of employment on January 3, 2006.

(5)   There is no target amount under the AEIP. The targets shown assume that earnings performance for 2006 was the same as in 2005 and that individual performance targets were achieved at the average level of achievement realized for 2005.

(6)   Performance-accelerated restricted shares.

(7)   Under the terms of our 2000 Stock Option Plan, the exercise price is based on the closing price of our common stock on the date prior to the grant date.

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Outstanding Equity Awards at Fiscal Year End

(1)   331¤3% of grant was unvested on December 31, 2006 and vested on January 1, 2007.

(2)   (a) 331¤3% vested on grant date, February 17, 2006; (b) an additional 331¤3% vested on January 1, 2007; and (c) the remaining 331¤3% will vest on January 1, 2008.

(3)   (a) 331¤3% vested on grant date, January 3, 2006; (b) an additional 331¤3% vested on January 1, 2007; and (c) the remaining 331¤3% will vest on January 1, 2008.

(4)   Restricted shares were unvested on December 31, 2006 and vested on January 1, 2007.

(5)   Restricted shares will vest on January 1, 2010, if not vested sooner under performance acceleration provisions.

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(6)   Restricted shares will vest on January 1, 2011, if not vested sooner under performance acceleration provisions.

(7)   Restricted shares will vest on January 1, 2012, if not vested sooner under performance acceleration provisions.

Option Exercises and Stock Vested

The named executive officers did not exercise any options during 2006 and no restricted shares vested during 2006.

Pension Benefits

 

(1)   Mr. von Schack’s employment agreement provides that, for purposes of the Company’s SERP, his pension benefit is calculated as if his total years of service are 40 years.

(2)   Mr. Connolly receives the greater of (i) his actual years of service, or (ii) 5 years of service under the Company’s SERP for both benefit accrual and vesting and retirement eligibility purposes.

(3)   Mr. McClain’s employment agreement provides that, for purposes of the Company’s SERP, his pension benefit is calculated as if his total years of service are 13.83 years.

Narrative to the Pension Benefits Table

Mr. von Schack’s employment agreement provides that if he retired from the Company after his sixtieth birthday, he would be credited with the maximum years of employment service for pension purposes. His agreement was amended in 2004 because the Company wanted to provide him with an incentive not to retire and to continue to guide the execution of the Company’s strategy . In order to retain

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him, his employment agreement was amended so that the amount of any lump sum payment to which he may be entitled under the SERP will be no less than the amount he would have been entitled to if he retired on May 1, 2004. His employment agreement provides that for purposes of determining his SERP benefit, his final average earnings will be based on his base salary at retirement plus the highest three-year average of Annual Executive Incentive Plan (AEIP) awards out of the last five years. The AEIP award is a factor in determining the SERP benefit because it is part of total compensation and is directly tied to performance. Including the AEIP in the calculation of the SERP benefit provides an additional incentive to maintain a high level of performance until retirement.

The additional service credits provided to Mr. McClain and Mr. Connolly were provided as part of their compensation packages at the time they were initially hired by the Company and were provided as an inducement to secure the services of these two executives.

Named executive officers of Energy East participate in various qualified pension plans as shown below. Qualified pension plans are offered to virtually all employees as part of a market competitive compensation package. The qualified pension plans are noncontributory, tax-qualified defined benefit plans and are funded under trust arrangements and, in some cases, insurance contract(s). Amounts contributed by the Company into the qualified pension plan trusts are computed on an actuarial basis.

Qualified Plans.

The Retirement Benefit Plan for Employees of New York State Electric & Gas Corporation (“NYSEG Retirement Plan”) provides qualified retirement benefits for hourly and salaried employees, the named executive officers of the Company and certain of its affiliates, based on length of service and average earnings (including performance-based awards paid beginning in 2002 for salaried employees) for the five highest paid consecutive years during last 10 years of employment service. The NYSEG Retirement Plan provides normal retirement benefits at age 65, unreduced early retirement benefits at age 60, and reduced early retirement benefits at age 55 with 10 years of service. For participants terminating before eligibility for retirement, the plan pays a deferred to age 65 benefit under the plan formula. Participants may elect to receive a lump sum distribution of their deferred to age 65 benefit at any time after terminating with five or more years of service. The plan formula for salaried employees is shown below:

The sum of:

·  1.37% of the first $10,000 of average earnings plus 1.65% of the average earnings in excess of $10,000 multiplied by years of credited service up to 35 years; and 1% of average earnings multiplied by credited service in excess of 35 years but not exceeding 40 years.

·  For participants who retire on or after age 55 with 10 years of service but before age 60, benefits paid from the plan are reduced 3% each year that actual age at retirement precedes age 60.

The NYSEG Retirement Plan pays benefits in an annuity form or as a lump sum at the election of the participant. The lump sum is based on a deferred to age 65 benefit and does not include any early retirement enhancements. The following company executives participate in the NYSEG Retirement Plan and their current eligibility for benefits is as follows:  Mr. von Schack is eligible for unreduced retirement; Messrs. Rude, McClain and Kump are eligible for a deferred to age 65 benefit.

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