<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-K


[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended September 30, 1998

                                      OR


[  ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from __________ to _________


                        Commission File Number 0-10721


                          YANKEE ENERGY SYSTEM, INC.
           --------------------------------------------------------

            (Exact name of registrant as specified in its charter)




                                      
                                           599 Research Parkway        
   Connecticut          06-1236430              Meriden, CT          06450-1030
----------------       ------------       ----------------------    ------------
                 
(State or other      (I.R.S. Employer     (Address of principal      (Zip Code)
jurisdiction of      Identification No.)   executive offices)
incorporation or
organization)
                 

                                (203) 639-4000
                        ------------------------------
             (Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

  Title of each class                  Name of each exchange on which registered
 ---------------------                 -----------------------------------------

Common Stock, Par Value $5 Per Share
and Common Share Purchase Rights               New York Stock Exchange    
------------------------------------   -----------------------------------------

Securities registered pursuant to Section 12(g) of the Act:

                                     None
                              -------------------
                               (Title of class)


Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X   No __
                                              -        

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [   ]

The aggregate market value of the voting stock held by non-affiliates of the
registrant at December 7, 1998 was $303,472,555.04 based on the closing price of
$28.81 per share.  On December 7, 1998, the Company had 10,583,887 shares of
common stock outstanding.

Documents Incorporated by Reference                 Part of Form 10-K
-----------------------------------                 ------------------

Annual Report to Shareholders for the 
Fiscal Year Ended September 30, 1998                     Part II

Proxy Statement For Annual Shareholders' 
Meeting to be held on January 29, 1999                   Part III
<PAGE>
 
                          YANKEE ENERGY SYSTEM, INC.
                                   FORM 10-K
                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                       PAGE
                                                                                                       ----
<S>                                                                                                    <C>
                                    PART I

Item 1.    Business...................................................................................
                  The Company ........................................................................
                  Gas Markets and Customers...........................................................
                  Gas Supply .........................................................................
                  Regulation and Rates ...............................................................
                  Energy Services ....................................................................
                  Competition ........................................................................
                  Environmental Matters ..............................................................
                  Franchises .........................................................................
                  Employees ..........................................................................
                  Forward-Looking Statements .........................................................
Item 2.    Properties ................................................................................
Item 3.    Legal Proceedings .........................................................................
Item 4.    Submission of Matters to a Vote of Security Holders .......................................
           Executive Officers of the Company .........................................................

                                    PART II

Item 5.    Market for Company's Common Equity and Related Stockholders Matters........................
Item 6.    Selected Financial Data ...................................................................
Item 7.    Management's Discussion and Analysis of Financial Conditions and Results Of Operations.....
Item 7a.   Quantitative and Qualitative Disclosures About Market Risk ................................
Item 8.    Financial Statements and Supplementary Data................................................
Item 9.    Changes In and Disagreements with Accountants on Accounting and Financial Disclosure.......

                                   PART III

Item 10.   Directors and Executive Officers of the Company............................................
Item 11.   Executive Compensation.....................................................................
Item 12.   Security Ownership of Certain Beneficial Owners and Management.............................
Item 13.   Certain Relationships and Related Transactions ............................................

                                    PART IV

Item 14.   Exhibits, Financial Statement Schedules and Reports on Form 8-K............................
           Signatures.................................................................................      
</TABLE>
<PAGE>
 
                                    PART 1


ITEM 1.  BUSINESS

THE COMPANY

   Yankee Energy System, Inc. ("Yankee Energy" or the "Company"), is a public
utility holding company incorporated in Connecticut in 1989.  The Company is
primarily engaged in the retail distribution of natural gas through its wholly-
owned subsidiary, Yankee Gas Services Company ("Yankee Gas"), a Connecticut
public service company. Yankee Gas serves approximately 183,000 residential,
commercial and industrial customers in 68 cities and towns in Connecticut.  The
Company is exempt from registration under the Public Utility Holding Company Act
of 1935.

   The Company has four additional wholly-owned operating subsidiaries which
support the Company's core natural gas distribution business or allow the
Company to position itself in the market place as a provider of a full range of
energy-related mechanical services to commercial, industrial and institutional
customers.

   Yankee Energy Services Company ("YESCo") provides comprehensive building
automation services, including engineering, installing, and maintaining building
control systems through its YESCo Controls Division and comprehensive heating
ventilation and air-conditioning ("HVAC"), boiler and refrigeration equipment
services and installation through its YESCo Mechanical Services Division.
During fiscal 1998, YESCo's Power Division also provided expertise related to
the production of thermal and/or electric power. R.M. Services, Inc., directly
and under contract with Dun and Bradstreet Receivables Management Services,
provides residential collection services for companies throughout the United
States, and Yankee Energy Financial Services Company ("Yankee Financial")
provides a full range of equipment and home improvement financing services
through various programs, such as the Hometown Energy Loan Program. Finally,
NorConn Properties, Inc. ("NorConn"), owns selected system real estate and
leases it to Yankee Gas.

   After completing a recent review of the various operating functions of YESCo,
management of the Company has decided to focus the efforts of YESCo on its
Controls and HVAC lines of business and to significantly reduce its cost
structure.  As a result, the Company intends to dispose of the assets of the
YESCo Power Division in fiscal 1999.  In addition, the Company has restructured
its HVAC business, including the consolidation of four locations into one
operating center, the elimination of redundant administrative and operating
positions and better focusing its business both geographically by ceasing all
non-Connecticut activities and operationally by discontinuing its HVAC equipment
sales operation.

GAS MARKETS AND CUSTOMERS

   General.  Yankee Gas operates the largest natural gas distribution system in
Connecticut as measured by number of customers and size of service territory.
Total throughput (sales and transportation) for fiscal 1998 was 47.1 billion
cubic feet ("Bcf").  In fiscal 1998, total gas operating revenues were comprised
of the following: 47% residential; 26% commercial; 18% industrial; and the
remaining 9% other.  Yankee Gas provides firm gas sales service to customers who
require a continuous gas supply throughout the year, such as residential
customers who rely on gas for their heating, hot water, and cooking needs.
Yankee Gas also provides interruptible gas sales service to certain commercial
and industrial customers that have the capability to switch from natural gas to
an alternative fuel on short notice.  Yankee Gas can interrupt service to these
customers during peak demand periods.  Yankee Gas offers firm and interruptible
transportation
<PAGE>
 
services to customers who purchase gas from sources other than Yankee Gas. In
addition, Yankee Gas performs gas exchanges and capacity releases to marketers
to reduce its overall gas expense.

Firm Sales.  In fiscal 1998, total firm gas sales of 26 Bcf accounted for
approximately 84% of total throughput and approximately 84% of the Company's
total operating revenues.  Firm gas sales, particularly sales for residential
space heating, are highly seasonal.  In fiscal 1998, about 65% of total firm
sales occurred in the five months from November through March. The following
tables set forth certain information with respect to firm sales in fiscal 1998.

                            FISCAL 1998 FIRM SALES
<TABLE>   
<CAPTION>  
                                                                Volumes as   
                     Average Number   Volumes                  a Percent of  
                      of Customers    in Bcf       Revenues     Firm Sales  
                     --------------   -------      --------    ------------  
     <S>             <C>              <C>        <C>           <C>    
     Residential         160,917       11.9      $134,359,345       46     
     Commercial           17,762        6.9        66,726,188       26     
     Industrial            1,728        7.3        36,051,517       28     
                         -------       ----      ------------      ---     
                         180,407       26.1      $237,137,050      100% 
</TABLE> 

   Interruptible Sales.  In fiscal 1998, total interruptible gas sales of 4.9
Bcf accounted for approximately 16% of total throughput and approximately 7% of
the Company's total operating revenues.  The price charged for interruptible
sales service is a market price based on the cost of the customer's alternative
fuel, which is usually oil.  Interruptible sales depend upon the availability of
gas supplies and, generally, have provided lower margins than firm sales.
Yankee Gas has authorization from the Connecticut Department of Public Utility
Control (the "DPUC") to engage in flexible pricing to meet market prices for
alternative fuels available to interruptible customers.  The following table
sets forth certain information with respect to interruptible sales in fiscal
1998.

                        FISCAL 1998 INTERRUPTIBLE SALES

<TABLE>
<CAPTION>
                                  Average Number  Volumes                 
                                   of Customers   in Bcf    Revenues      
                                  --------------  -------   --------      
     <S>                          <C>             <C>       <C>           
     Commercial and Industrial        241           4.9     $20,066,670    
</TABLE>

   Transportation Services.  Yankee Gas offers firm and interruptible
transportation service to its industrial and commercial customers.  In fiscal
1998, total transportation sales accounted for approximately 8% of the Company's
total operating revenues.  These transportation services permit customers who
desire to purchase gas from sources other than Yankee Gas to do so, provided
they have made all the necessary  arrangements with the transmission pipelines
to deliver their gas to the Yankee Gas distribution system.  Industrial and
commercial customers can purchase gas directly from producers and suppliers and
contract for transportation services rather than purchase gas solely from the
local distribution system.  Generally, interruptible transportation service is
highly sensitive to alternative fuel prices as well as to the availability of
interstate pipeline capacity into the region.   Under existing tariff
structures, the financial condition of the Company is unaffected by customers
electing to use transportation service in lieu of making gas purchases from
Yankee Gas.
<PAGE>
 
   Market Expansion Strategy.   The Company is near completion of a customer and
market segmentation study that the Company believes will provide an in-depth
analysis of customer use of the Company's products and services and will be used
to identify additional sales opportunities.  As this study is completed,
marketing information about current customers and new opportunities will direct
the Company's efforts to expand its distribution service.  These efforts are
expected to focus on increasing the number of residential households using
natural gas, increasing the uses of natural gas by existing Yankee Gas
customers, and increasing the overall number of both large and small customers
through expansion of Yankee Gas' distribution system within its service
territory.  In the residential market, Yankee Gas focuses marketing efforts on
households along Yankee Gas' existing mains because they present opportunities
to increase gas sales with little or no capital investment.  In the commercial
and industrial markets, the Company seeks to expand gas sales by increasing
sales to existing customers for both traditional and innovative uses, such as
infrared heating, cooling and electric generation.  The Company also emphasizes
attracting new commercial and industrial customers within its service territory.

   The emergence of natural gas vehicles creates a potential new market for the
natural gas industry.  The establishment of natural gas vehicle fueling
stations, however, is essential to the development of this market. Yankee Gas,
in cooperation with various oil companies and gasoline retailers, has opened
retail public natural gas vehicle refueling stations in Windsor Locks, Norwalk,
and Meriden, Connecticut. Yankee Gas operates two refueling stations for its own
fleet of approximately 110 natural gas vehicles.

GAS SUPPLY

   In 1992, the Federal Energy Regulatory Commission ("the FERC") issued Order
No. 636, which required natural gas pipeline companies to separate or "unbundle"
their services.  Prior to the issuance of Order No. 636, natural gas pipeline
companies sold pipeline services, such as gas purchasing, storage and
transportation, as a package.  In 1993, the interstate pipeline companies that
provided natural gas to Yankee Gas complied with Order No. 636.  As a result,
Yankee Gas executed contracts with interstate pipeline companies for services to
transport gas from production and underground storage areas to Yankee Gas'
service territory to replace the traditional merchant services previously
provided by the pipeline companies. Yankee Gas concurrently replaced the gas
supply traditionally obtained from the pipeline companies' merchant services
with firm purchases directly from producers and/or marketing companies.  The
FERC continues to regulate the rates charged by interstate pipeline companies
for transportation and storage of natural gas, but does not regulate the price
of natural gas purchased by the Company from producers and marketing companies.

   Interstate pipelines delivered over 99.9 percent of Yankee Gas' 1998 fiscal
year requirements to its distribution system. Interstate pipeline capacity
enabled Yankee Gas to meet its firm customers' requirements with pipeline
supplies for more than 99.9 percent of the year.

   The following table sets forth sources of fiscal 1998 gas supply (including
purchases for storage injections):

<TABLE>
<CAPTION>
                                           Percent of 
     Source                               Total Supply
     ------                               ------------
     <S>                                  <C>         
     Alberta Northeast Gas, Limited          54.76
     Other Canadian Supplies                 21.72
     Domestic Supply                         23.51
     Other (Peaking)                          0.01
                                            ------ 
                         Total              100.00%
</TABLE> 
<PAGE>
 
     Yankee Gas is entitled to purchase 68,460 thousand cubic feet ("Mcf") per
day of gas, or about 25 Bcf annually, from Canadian gas suppliers. The sales
contracts between Yankee Gas and its Canadian suppliers expire in 2003 and 2006.
Most of the gas purchased from the Canadian suppliers is delivered in the United
States by the Iroquois Gas Transmission System, L.P. ("Iroquois"). The
transportation contract between Yankee Gas and Iroquois expires in 2011.

     During fiscal 1998, Yankee Gas' largest Canadian supplier was Alberta
Northeast Gas, Limited ("ANE"). ANE is an entity formed by several utilities in
the Northeast to aggregate the purchase of gas from Western Canada and to
facilitate its sale to local gas distribution company ("LDC") owners at the
United States-Canadian border. Yankee Gas held a 15.9 percent equity interest in
ANE until July 1, 1998 at which time Yankee Gas reduced its equity interest to
5.3 percent.

     Yankee Gas also holds pipeline transportation and storage service contracts
with Tennessee Gas Pipeline Company ("Tennessee"), Algonquin Gas Transmission
Company ("Algonquin"), Texas Eastern Transmission Corporation ("Texas Eastern"),
CNG Transmission Corporation ("CNG Transmission"), Transcontinental Gas Pipe
Line Company ("Transco"), and National Fuel Gas Supply Corporation ("National
Fuel") as summarized below:


TRANSPORTATION SERVICE CONTRACTS:

<TABLE> 
<CAPTION> 
                                    Annual Transport
               Pipeline                 Quantity               Expiration
               --------                 --------               ----------
               <S>                  <C>                        <C> 
               Tennessee                27.7 Bcf                 2000-2017
               Algonquin                39.6 Bcf                 1999-2014
               Texas Eastern            38.2 Bcf                 2000-2014
               CNG Transmission          2.7 Bcf                 2003-2012
               Transco                  0.63 Bcf                 2008
               National Fuel            2.63 Bcf                 1999-2003
</TABLE> 

STORAGE SERVICE CONTRACTS:

<TABLE> 
<CAPTION> 
                                    Annual Storage
               Pipeline                Quantity                Expiration
               --------                --------                ----------
               <S>                  <C>                        <C> 
               Tennessee                1.9 Bcf                  2000
               Texas Eastern            1.7 Bcf                  2012-2013
               CNG Transmission         1.4 Bcf                  2003-2012
               National Fuel            0.8 Bcf                  1999
</TABLE> 


     Although several contracts are scheduled to terminate during 1999 and 2000,
they may be continued on a year to year basis by mutual consent of the parties.
Yankee Gas has terminated its National Fuel storage and 2 Bcf of its National
Fuel transportation effective March 31, 1999. Yankee Gas has also terminated 1.8
Bcf of Algonquin transportation effective October 31, 1999. Yankee Gas has
entered comprehensive gas supply agreements with Engage Energy US, L.P.
("Engage") and TransCanada Gas Services Inc. ("TransCanada") which optimize
portions of its supply portfolio. Specifically, the Engage agreement 
<PAGE>
 
optimizes gas supply delivered to Yankee Gas by Algonquin and expires in 2000
while the TransCanada agreement optimizes gas supply delivered by Tennessee and
expires in 2001. Under these agreements, the supplier delivers Yankee Gas' full
fuel requirements on the respective pipeline while optimizing the value of the
supply and associated transportation and storage during off-peak conditions. The
agreements also provide Yankee Gas with enhanced supply flexibility.

Yankee Gas does not have sufficient capacity entitlements on the interstate
pipelines to serve its firm customers with pipeline-delivered gas at all times.
During the winter, therefore, whenever daily firm demand exceeds the amount of
gas delivered by the pipelines, service to interruptible customers is curtailed.
Yankee Gas supplements pipeline gas with a propane-air mixture produced at
facilities within Yankee Gas' service territory and with contracted peaking gas
supplies. In fiscal 1998, these gas supplies comprised less than 1 percent of
Yankee Gas' total supply.


REGULATION AND RATES

    Federal Regulation. Although Yankee Gas is not subject to FERC jurisdiction,
the FERC does regulate the interstate pipelines serving Yankee Gas' service
territory. Yankee Gas, therefore, is directly and substantially affected by the
FERC's policies and actions. Accordingly, Yankee Gas closely follows and, when
appropriate, participates in proceedings before the FERC.

    Connecticut Regulation. Yankee Gas is subject to regulation by the DPUC,
which, among other things, has jurisdiction over rates, accounting procedures,
certain dispositions of property and plant, mergers and consolidations,
issuances of securities, standards of service, management efficiency and
construction and operation of distribution, production and storage facilities.

    The DPUC may, after a special public hearing, order an interim rate decrease
if it finds that Yankee Gas' return on equity exceeds a reasonable rate of
return and rates are more than just, reasonable and adequate as determined by
the DPUC. The DPUC also is empowered to grant an interim rate increase under
compelling circumstances.

    Yankee Gas sells gas to its retail customers under rate schedules filed with
and approved by the DPUC. Firm sales rates are subject to monthly adjustments
pursuant to a Purchased Gas Adjustment ("PGA") clause approved by the DPUC. The
PGA passes through to customers most changes in the cost of gas purchased by
Yankee Gas. These adjustments are designed to collect or refund differences
between actual purchased gas costs and the costs included in Yankee Gas' base
rates. In 1997, the DPUC conducted a review of the Connecticut LDCs' PGA
mechanism to determine if any changes were warranted. The most significant
change approved by the DPUC was the authorization for LDCs to pass on to
customers the costs of the Connecticut Gross Earnings Tax related to PGA
revenues.

    Yankee Gas' rate order, effective for service rendered on and after October
1, 1992, allowed a return on equity (ROE) of 12.43 percent and provided for
favorable accounting treatment for environmental cleanup costs, post-retirement
benefits and certain other major items.

    On August 25, 1996, Yankee Gas filed an application with the DPUC for a
Financial and Operation Review (Review) of Yankee Gas. This Review was required
under Connecticut law because Yankee Gas had not undergone a rate proceeding
within the four years preceding the 1996 application. The DPUC issued a decision
on July 9, 1997, which called for a reduction of Yankee Gas' ROE from 12.43
percent to 11.15 percent. The DPUC believed that lower interest rates and
allowed rates of return for other Connecticut 
<PAGE>
 
utilities justified a lower ROE for Yankee Gas. On October 1, 1997, the DPUC
approved an amendment to the settlement agreement between Yankee Gas and the
Connecticut Office of Consumer Counsel that, among other things, required Yankee
Gas to credit $3.2 million to firm sales customers through the PGA during fiscal
1998. As of September 30, 1998, the entire $3.2 million had been accrued and
approximately $2.9 million had been credited to firm sales customers. The
remaining $0.3 million has been included in the Company's annual deferred fuel
calculation and credited to firm sales customers beginning in October 1998.

      Pursuant to the settlement agreement with the Connecticut Office of
Consumer Counsel, Yankee Gas agreed not to apply for a rate increase prior to
October 1, 2000, except in the event of certain circumstances that would have a
significant adverse effect on Yankee Gas' financial condition. If such an event
arises, Yankee Gas has the option to apply to the DPUC for a rate increase or to
retain up to 80% of any off system sales margin and excess interruptible margin.

      FERC Order No. 636. In implementing Order No. 636, the FERC recognized
that the restructuring of the pipelines' traditional services would cause
pipelines to incur transition costs in several areas. The FERC has permitted
certain transition costs to be recovered by the pipeline companies from their
customers.

      In July 1994, the DPUC issued an order permitting the recovery of
transition costs billed by pipelines under Order No. 636 through various
mechanisms authorized by the DPUC. Through September 30, 1998, Yankee Gas has
paid approximately $20.5 million of transition costs and an additional $2.5
million are anticipated. To date, Yankee Gas has collected $46.3 million through
a combination of credits received from pipeline refunds, capacity release
agreements, deferred gas costs credits, off system sales margins and excess
interruptible margins. The DPUC approved the settlement agreement in January
1996 and an amendment thereto in October 1997 between Yankee Gas and the
Connecticut Office of Consumer Counsel that permits Yankee Gas to retain
over-collected transition cost credits to offset certain deferred regulatory
assets. As of September 30, 1998, excess collections of approximately $25.8
million were applied against the deferred regulatory assets specified in the
agreement.

      In January 1996, the DPUC, in response to Order No. 636, authorized the
Connecticut LDCs to offer unbundled firm transportation rates to its commercial
and industrial customers. The DPUC's decision permits Yankee Gas to offer a
variety of service options to its commercial and industrial firm transportation
customers. Yankee Gas implemented new firm transportation rates and services in
April 1996. In October, 1998, the DPUC issued a decision making a number of
modifications to the commercial and industrial firm transportation program.
These modifications, which will become effective on January 1, 1999, are
designed to simplify and improve the program based on the initial firm
transportation experience. As of September 30, 1998, Yankee Gas had
approximately 3,100 customers under firm transportation service. The conversion
by existing customers to transportation service will result in decreased
revenues for Yankee Gas, as that portion of revenues representing gas costs will
be borne directly by these customers who will purchase their own gas directly.
Yankee Gas, however, does not expect customer conversions to transportation
services to affect its net income because the cost of gas has traditionally been
a pass through item with no income impact. The DPUC's decision did not address
Yankee Gas' revenue requirement.

      Order No. 636 also authorizes LDCs to make off system sales or to release
firm pipeline capacity and Yankee Gas has engaged in these activities to
maximize revenues and for effective gas supply planning.
<PAGE>
 
ENERGY SERVICES

      On May 6, 1998, Yankee Gas filed an application with the DPUC to
discontinue on-demand, non-contract service work. Following the issuance of a
draft decision requiring Yankee Gas to continue to provide this type of service
work, Yankee Gas withdrew its application. Yankee Gas intends to petition the
DPUC for an increase in the applicable service rates. This decision will not
have a material impact on the Company's financial condition or results of
operations.

      The Company has refocused its mission to diversify into energy-related
businesses. This has resulted in a restructuring of YESCo, which included
consolidation of facilities and elimination of certain positions of the HVAC
division and a decision to close down the Power Division and sell its Power
Projects. The elimination of redundant administrative and operating positions
better focuses the business both geographically by ceasing all non-Connecticut
activities and operationally by discontinuing HVAC equipment sales operation.

         YESCo provides comprehensive building automation services, including
engineering, installing, and maintaining building control systems through its
YESCo Controls Division and comprehensive HVAC, boiler and refrigeration
equipment services and installation through its YESCo Mechanical Services
Division. During fiscal 1998, YESCo's Power Division also provided expertise
related to the production of thermal and/or electric power.


COMPETITION

      Yankee Gas' principal competitors are unregulated fuel-oil retailers and
regulated electric utilities. Natural gas competes with oil and electricity in
many commercial and industrial applications and in residential space and water
heating, clothes drying and cooking. Demand for natural gas is affected by the
marketing and pricing of competing sources of energy.

      Yankee Gas may also face competition from other LDCs. In the past, LDCs
did not directly compete with other LDCs for retail customers because the
territories they serve are fixed by franchise. However, since 1993, LDCs began
marketing efforts within the service territory of other LDCs under blanket
certificates granted by the FERC. These certificates allow gas to be sold, but
not necessarily delivered, in the service territory of another LDC. Within
Yankee Gas' service territory, Yankee makes available its transportation
services to move other parties' gas through its distribution system. The Company
believes that deregulation of the sale of natural gas has created an opportunity
for its commercial and industrial customers to achieve savings on the purchase
price of natural gas by helping its customers lower the purchase price of
natural gas. The Company believes it will achieve more throughput through its
distribution system. This volume increase is expected to result in higher
transportation margin. The Company further believes that increasing competition
in gas marketing will result in growth in the Company's gas distribution
business. There can be no assurance, however, that such deregulation and
increased competition in gas marketing will have a beneficial effect on the
Company's results of operations.

      Federal regulation also permits customers within Yankee Gas' distribution
system to connect directly with transmission pipelines and bypass Yankee Gas'
distribution system. A Connecticut statute currently prohibits an interstate
pipeline from bypassing a LDC without the DPUC's prior approval. The Company
believes that Yankee Gas is successfully addressing the threat of bypass by its
industrial customers by understanding what services they need and executing
market-competitive gas service agreements. There is, however, a potential risk
of loss of revenues from bypass of Yankee Gas' distribution system.
<PAGE>
 
      One of Yankee Gas' largest customers during fiscal 1998 was the Foxwoods
Hotel and Casino (Foxwoods), operated by the Mashantucket Pequot Indian Tribe,
(the "Pequots"). The City of Norwich, Connecticut has completed construction of
a pipeline extending from its distribution system to Foxwoods and began service
to Foxwoods on December 1, 1998. Norwich, pursuant to its agreement with the
Pequots, will become the sole provider of gas transportation service to the
Pequots. The Company is currently negotiating with the Pequots to recover its
investment in facilities previously constructed to serve them.


ENVIRONMENTAL MATTERS

      The Company is subject to federal and state environmental regulation of
its operations and properties and has an ongoing monitoring program to review
compliance with existing environmental standards. Such regulation may result in
future environmental liabilities that may include significant expenses to
remove, contain or remediate contamination, including coal tar deposits, caused
by operations of former gas manufacturing plants by Yankee Gas' predecessor
companies prior to the introduction of pipeline gas into the region during the
1950s. Those predecessor companies disposed of the coal tar in accordance with
the standard operating practices of the time.

      Fourteen sites containing coal tar became the property of Yankee Gas at
the time of divestiture from its former parent company. Yankee Gas has reported
the results of environmental studies conducted at these sites to the Connecticut
Department of Environmental Protection ("DEP"). Eight of the fourteen sites are
currently listed on the Connecticut Inventory of Hazardous Waste Sites.
Inclusion of a site on this list is an indication that remediation may be
required in the future.

      Significant remediation efforts have been conducted at three of these
properties. In addition, the Company has developed a cost estimate for the
remaining sites based on various factors including the probability of clean-up.
The Company recorded a liability of $35 million in fiscal year 1993 for future
environmental cleanup.

      Recovery of remediation costs has been specifically allowed by Yankee Gas'
1992 rate case decision. Currently, $325,000 is allowed annually in rates and an
additional $2.5 million annually may be deferred. If costs are expected to
exceed $2.5 million on an annual basis, Yankee Gas is required to petition the
DPUC for review and additional authorization. The DPUC has stated that "to the
extent that coal tar remediation expenses are prudently incurred, they should be
allowed as proper operating expenses."

      The Company expects to finance environmental remediation expenditures
through a combination of internally generated funds, short-term debt and through
funds received from certain of its insurance carriers in settlement of certain
claims for actual or potential contamination at certain sites that may give rise
to environmental liabilities, which funds have totaled $9.6 million as of
September 30, 1998.

      Management does not believe that the Company's environmental expenditures
will have a material adverse effect on its operations, liquidity or financial
position, based on known facts and existing laws and regulations and the
anticipated period over which expenditures will be made.
<PAGE>
 
FRANCHISES

      Yankee Gas and its predecessors in interest have held valid franchises to
sell gas in the areas in which Yankee Gas supplies gas service. Such franchises
are perpetual but remain subject to the power of alteration, amendment or repeal
by the General Assembly of the State of Connecticut, the power of revocation by
the DPUC and certain approvals, permits and consents of public authorities and
others prescribed by statute. Yankee Gas franchises include, among other rights
and powers, the rights and powers to manufacture, generate, purchase, transmit
and distribute gas, to sell gas at wholesale to other utility companies and
municipalities and to erect and maintain certain facilities on public highways
and grounds, all subject to such consents and approvals of public authorities
and others as may be required by law. The franchises include the power of
eminent domain.


EMPLOYEES

      Yankee Energy has no employees. Its subsidiaries employ approximately 830
people.


FORWARD-LOOKING STATEMENTS

      This report contains statements which, to the extent they are not
recitations of historical fact, constitute "forward-looking statements" within
the meaning of the Securities Litigation Reform Act of 1995. Such
forward-looking statements, including statements regarding the Company's
expectations for demand and sales of natural gas and related services, involve
risks and uncertainties. Actual results may differ materially from such
forward-looking statements for reasons including, but not limited to, changes to
and developments in the legislative and regulatory environments affecting the
Company's business, the impact of competitive products and services, changes in
the natural gas industry caused by deregulation, weather and other factors,
certain environmental matters, internal and/or third party delays or failures in
achieving Year 2000 compliance and other risks described in this report and the
Company's other filings with the Securities and Exchange Commission.


ITEM 2.  PROPERTIES

      Yankee Gas' property consists primarily of its gas distribution facilities
including, distribution lines (mains and services), meters, pumps, valves and
pressure and flow controllers. Yankee Gas owns various propane facilities with a
combined storage capacity equivalent to approximately 245,000 Mcf. In the
opinion of management, Yankee Gas' distribution system is in good condition.
Virtually all of the gas properties are subject to the lien of the Yankee Gas
first mortgage bond indenture. Yankee Gas also owns service buildings in
Meriden, Waterbury, Torrington, Mystic, Shelton, Bethel and Danielson,
Connecticut.

      NorConn owns the Company's headquarters building in Meriden, Connecticut
and currently leases it to Yankee Gas. This is the site of the Company's
corporate administrative and staff functions including the Customer Service
Center. NorConn also owns and leases to Yankee Gas a service building in East
Windsor.
<PAGE>
 
ITEM 3.  LEGAL PROCEEDINGS

      Municipal Tax Assessment. In fiscal 1996, Yankee Gas received revised
property tax bills from the City of Meriden, Connecticut (the "City"). The City
is asserting a claim for the payment of approximately $5.0 million of back taxes
and interest resulting from a retroactive reassessment and revaluation of Yankee
Gas' personal property filings. The City did not locate or identify any property
which Yankee Gas omitted from its filings. The tax bills reflect a reassessment
of property at higher rates than those previously assessed by the City. Yankee
Gas is currently in the process of litigating this retroactive reassessment and
the Court recently recommended that the parties attempt mediation/arbitration of
the issue. The parties have begun the process and are currently selecting a
mediator acceptable to both. Although it is anticipated that the outcome of the
City's claim will not have a material impact on the Company, based on the
information available at this time, management cannot predict what the ultimate
impact might be.

      Licensing Issue. In November 1995, The Connecticut Heating and Cooling
Contractors Association, Inc. and others filed a purported class action suit
against Yankee Gas and Connecticut's two other LDCs, Connecticut Natural Gas
Corporation and The Southern Connecticut Gas Company in Connecticut Superior
Court. The action alleges that the LDCs unfairly competed with licensed plumbers
and contractors by performing customer service work using employees who did not
possess Connecticut state trade licenses. In January 1998, the court struck 31
of the plaintiffs' 32 counts contained in their complaint, leaving one count
alleging violations of Connecticut's antitrust statute. The court also ruled
that although the plaintiffs' action purported to be a class action, the
plaintiffs failed to obtain certification as such. Thereafter, the plaintiffs
filed another purported class action against all three LDCs alleging unfair
trade practices and additional separate actions against each LDC alleging
various business torts.

      The LDCs have asserted that such licenses are not required for this work
based on a statutory exemption enacted in 1965 and amended in 1967. However, in
a separate proceeding, a Connecticut Superior Court has upheld an administrative
ruling against the LDCs' position, which was affirmed on appeal. In 1995, the
Connecticut General Assembly enacted legislation that established prospectively
a separate procedure for State certification of gas service employees.

      Recently, the lawsuits were transferred to the Complex Litigation Docket
of the Superior Court where the presiding judge chose to try the case against
Connecticut Natural Gas ("CNG") first and no other material action in Yankee
Gas' lawsuit will be taken pending the outcome of the CNG trial which is
expected to commence in August 1999. While the ultimate results of the suits
cannot be determined, management does not expect that they will have a material
adverse effect on the Company's consolidated results of operations or financial
position.

      Other legal proceedings involving the Company and its subsidiaries are
litigation incidental to the conduct of the Company's business which, in
management's opinion, will not have a material impact on the Company's financial
condition or results of operation.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      There was no matter submitted to a vote of security holders during the
fourth quarter of 1998.
<PAGE>
 
                       EXECUTIVE OFFICERS OF THE COMPANY

NAME               AGE   POSITION AND BUSINESS EXPERIENCE DURING PAST FIVE YEARS
----               ---   -------------------------------------------------------

Charles E. Gooley   45   President and Chief Executive Officer of the Company
                         and Chairman and Chief Executive Officer of its direct
                         subsidiaries, Yankee Gas, Yankee Financial, YESCo and
                         NorConn since September 1998 and President of Yankee
                         Gas since May 1997. Previously, he served as Executive
                         Vice President of the Company and its direct
                         subsidiaries, Yankee Gas, YESCo, NorConn, and Yankee
                         Financial, from July 1994 to September 1998, and as
                         Vice President, General Counsel and Assistant Secretary
                         of the Company from July 1989 to July 1994.

J. Kingsley Fink    46   Vice President-Operations of Yankee Gas since October
                         1997. Previously, he was President of his own
                         consulting company from 1996 to 1997. Prior thereto he
                         served in various operating positions at Florida Power
                         and Light Company over a 14-year period.

Mary J. Healey      47   Vice President, General Counsel and Secretary of the
                         Company and its direct subsidiaries since January 1995.
                         Previously, she served as Secretary and Assistant
                         General Counsel of the Company from January 1992 to
                         January 1995 and as Secretary and Counsel of the
                         Company from July 1989 to January 1992.

Thomas J. Houde     51   Vice President of the Company and its direct
                         subsidiary, Yankee Gas, since January 1992. Previously,
                         he served as Director, Corporate Planning, Rates and
                         Economic Analysis of Yankee Gas from March 1990 to
                         December 1991.

Steven P. Laden     50   Vice President of the Company and its direct
                         subsidiary, Yankee Gas since July 1996. From October
                         1991 to July 1996, He served as Vice President of
                         Marketing of Southern Union Company, a company engaged
                         in various aspects of the energy business including the
                         distribution of natural gas in Texas and Missouri.

Ellen J. Quinn      42   Vice President of the Company and Yankee Gas since May
                         1995. Previously, she served as Director, Corporate and
                         Environmental Planning from October 1992 to May 1995,
                         and as Manager, Corporate and Environmental Planning
                         from March 1990 to October 1992.

James M. Sepanski   41   Vice President and Chief Financial Officer of the
                         Company and its direct subsidiaries, Yankee Gas, YESCo,
                         NorConn, and Yankee Financial, and President of RM
                         Services, Inc., since July 1997. From 1989 to June
                         1997, he was a partner at Arthur Andersen LLP.

      All executive officers are elected annually by the Company's Board of
Directors. There are no family relationships among the executive officers and
directors nor are there any arrangements or understandings between any executive
officer and any other person pursuant to which the officer was selected.

<PAGE>
 
                                    PART II


ITEM 5.   MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      Yankee Energy declared and paid regular quarterly cash dividends in fiscal
1997 and 1998. The dividend paid for the first two quarters of 1997 was $.325
per share and $.335 per share in the last two quarters of 1997. The dividend
paid for the first two quarters of 1998 was $.335 per share and $.345 per share
in the last two quarters of 1998. Other information required by this item is
incorporated herein by reference to Yankee Energy's 1998 Annual Report to
Shareholders ("1998 Annual Report"), subsection entitled "Shareholder and Stock
Information".


ITEM 6.   SELECTED FINANCIAL DATA

    Information required by this item is incorporated herein by reference to the
1998 Annual Report.


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
          RESULTS OF OPERATIONS

    Information required by this item is incorporated herein by reference to the
1998 Annual Report.


ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Not applicable.


ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The Consolidated Financial Statements of Yankee Energy and the Notes
thereto, together with the report thereon of the Company's Management and of
Arthur Andersen LLP are incorporated herein by reference to the 1998 Annual
Report.


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE

    None.
<PAGE>
 
                                   PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

      Information regarding Yankee Energy's directors is incorporated herein by
reference to the Company's Proxy Statement for its Annual Meeting of
Shareholders to be held on January 29, 1999 (the "1999 Proxy Statement").

      Information regarding the Company's executive officers follows Item 4 in
Part I of this Form 10-K.


ITEM 11.  EXECUTIVE COMPENSATION

      Information regarding compensation of Yankee Energy's executive officers,
except the Report of the Organization and Compensation Committee and the Stock
Performance Graph, is incorporated herein by reference to the 1999 Proxy
Statement.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      Information regarding the beneficial ownership of shares of Common Stock
of the Company by certain persons is incorporated herein by reference to the
1999 Proxy Statement.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      Information regarding certain transactions of the Company is incorporated
herein by reference to the 1999 Proxy Statement.
<PAGE>
 
                                    PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)   1.  Financial Statements:

          The following Consolidated Financial Statements of Yankee Energy are
          incorporated herein by reference to the Company's 1998 Annual Report
          in response to Item 8 hereof:

          (i)    Report of Independent Public Accountants.

          (ii)   Consolidated Statements of Income for the years ended
                 September 30, 1998, 1997 and 1996.

          (iii)  Consolidated Balance Sheets at September 30, 1998 and 1997.

          (iv)   Consolidated Statements of Cash Flows for the years ended
                 September 30, 1998, 1997 and 1996.

          (v)    Consolidated Statements of Capitalization at September 30,
                 1998 and 1997.

          (vi)   Consolidated Statements of Common Shareholders' Equity for the
                 years ended September 30,1998, 1997 and 1996.

          (vii)  Notes to Consolidated Financial Statements.

      2.  Financial Statement Schedules:

          The following schedules of the Company are included on the attached
          pages as indicated:

                                                                          PAGE
                                                                          ---- 
          Report of Independent Public Accountants on Schedules........... S-1

          Schedule II Valuation and Qualifying Accounts and Reserves for
          the years ended September 30, 1998, 1997 and 1996............... S-2

      3.  Exhibits:

          Exhibits for Yankee Energy are listed in the Index to Exhibits.. E-1

(b)   Reports on Form 8-K:

    On October 29, 1997, the Company filed a Current Report on Form 8-K dated
October 1, 1997, reporting in Item 5 thereof the final decision of the
Connecticut Department of Public Utility Control in the Financial and
Operational Review of Yankee Gas Services Company.

    On October 5, 1998, the Company filed a Current Report on Form 8-K dated
September 29, 1998, reporting in Item 5 thereof the resignation of Branko Terzic
as Chairman, CEO and President of the Company and its subsidiaries and the
appointment by the Board of Directors of Charles E. Gooley as his successor.

<PAGE>
 
                                  SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                                    YANKEE ENERGY SYSTEM, INC.
                                                    --------------------------
                                                            (Registrant)


Date:  December 8, 1998                             By   /s/ Charles E. Gooley
                                                         ---------------------
                                                          Charles E. Gooley

                             President, Chief Executive Officer and a Director

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

DATE                    TITLE                             SIGNATURE
----                    -----                             ---------

December 8, 1998       President, Chief Executive        /s/ Charles E. Gooley 
                                                         ---------------------
                       Officer and a Director                Charles E. Gooley

December 8, 1998       Vice President and                /s/ James M. Sepanski
                                                         ---------------------
                       Chief Financial Officer               James M. Sepanski

December 8, 1998       Controller                        /s/ Nicholas A. Rinaldi
                                                         -----------------------
                                                             Nicholas A. Rinaldi

December 8, 1998       Chairman of the Board             /s/ Emery G. Olcott
                                                         --------------------
                                                             Emery G. Olcott

December 8, 1998       Director                          /s/ Sanford Cloud, Jr.
                                                         ---------------------- 
                                                             Sanford Cloud, Jr.

December 8, 1998       Director                          /s/ Eileen S. Kraus
                                                         ------------------- 
                                                             Eileen S. Kraus

December 8, 1998       Director                          /s/ John J. Rando
                                                         -----------------   
                                                             John J. Rando

December 8, 1998       Director                          /s/ Patricia M. Worthy
                                                         ---------------------- 
                                                             Patricia M. Worthy

<PAGE>
 
                              ARTHUR ANDERSEN LLP
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and
   Shareholders of Yankee Energy System, Inc.:


We have audited, in accordance with generally accepted auditing standards, the
financial statements included in Yankee Energy System, Inc.'s annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated November 16, 1998. Our audit was made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index of financial statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

Arthur Andersen LLP
Hartford, Connecticut
November 16, 1998
<PAGE>
 
                  YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                         YEAR ENDED SEPTEMBER 30, 1998
                                  SCHEDULE II
                            (Thousands of Dollars)

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------------------------
Column A                         Column B                     Column  C                      Column D             Column E    
                                                              Additions                                                       
                                                   ----------------------------------                                         
                                                       (1)                   (2)                                              
                                 Balance at         Charged to            Charged to                                          
                                 beginning          costs and             other accounts-    Deductions-          Balance at  
Description                      of period          expenses              describe           describe             end of period
----------------------------------------------------------------------------------------------------------------------------------
RESERVES DEDUCTED FROM ASSETS
  TO WHICH THEY APPLY:
<S>                              <C>                <C>                   <C>                <C>                  <C> 
    Reserves for uncollectible
    accounts                      $7,713             $6,477                  $0              $6,058(a)              $ 8,132
                                  ======             ======                  ==              =========              =======

    Other property and 
    investment impairment:
                                  $    0             $2,037                  $0              $    0                 $ 2,037
                                  ------             ------                  --              ---------              -------
     TOTAL                        $7,713             $8,514                  $0              $6,058                 $10,169
          
RESERVES NOT APPLIED AGAINST ASSETS:

    Injuries and
    damages(b)                    $1,038             $  300                  $0              $  751                 $   587

    Medical(d)                    $1,042             $2,246                  $0              $2,408(e)              $   880

    Restructuring                 $    0             $  925                  $0              $    0                 $   925
                                  ------             ------                  --              ---------              -------

     TOTAL                        $2,080             $3,471                  $0              $3,159                 $ 2,392
                                  ======             ======                  ==              =========              =======
</TABLE> 

(a)      Amounts charged off as uncollectible after deducting customers'
         deposits and recoveries of accounts previously charged off.
(b)      Provided to cover claims for injuries to employees, for workmen's
         compensation, for bodily injury to others and property damage.
(c)      Principally payments for various injuries and damages and expenses in
         connection therewith.
(d)      Provided to cover employee medical claims.
(e)      Principally payments for various employee medical expenses and expenses
         in connection therewith.
<PAGE>
 
<TABLE> 
<CAPTION> 
                                            YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
                                          VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                                                   YEAR ENDED SEPTEMBER 30, 1997
                                                            SCHEDULE II
                                                      (Thousands of Dollars)
---------------------------------------------------------------------------------------------------------------------------------- 
Column A                    Column B                      Column  C                   Column D           Column E
                                                          Additions                  
                                               ----------------------------------    
                                                  (1)                   (2)          
                            Balance at         Charged to            Charged to      
                            beginning          costs and             other accounts-  Deductions-        Balance at 
Description                 of period          expenses              describe         describe           end of period    
---------------------------------------------------------------------------------------------------------------------------------- 
<S>                         <C>                <C>                   <C>              <C>                <C> 
RESERVES DEDUCTED FROM ASSETS
 TO WHICH THEY APPLY:  

   Reserves for uncollectible
   accounts                  $7,259            $4,673                $0               $4,219(a)          $7,713

RESERVES NOT APPLIED AGAINST ASSETS:

  Injuries and
  damages (b)                $1,510            $1,230                $0               $1,702(c)          $1,038
                                                                        
  Medical(d)                 $1,118            $2,385                $0               $2,461             $1,042
                             ------            ------                --               ------             ------

              TOTAL          $2,628            $3,615                $0               $4,163             $2,080
                             ======            ======                ==               ======             ======
</TABLE> 

(a)  Amounts charged off as uncollectible after deducting customers' deposits
     and recoveries of accounts previously charged off.
(b)  Provided to cover claims for injuries to employees for workmen's
     compensation, for bodily injury to others and property damage.
(c)  Principally payments for various injuries and damages and expenses in
     connection therewith.
(d)  Provided to cover employee medical claims.
(e)  Principally payments for various employee medical expenses and expenses in
     connection therewith.

<PAGE>
 
                  YANKEE ENERGY SYSTEM, INC. AND SUBSIDIARIES
                VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                         YEAR ENDED SEPTEMBER 30, 1996
                                  SCHEDULE II
                            (Thousands of Dollars)

<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------------------------
Column A                        Column B                      Column  C                      Column D                Column E
                                                              ADDITIONS                   
                                                   ----------------------------------     
                                                       (1)                   (2)          
                                Balance at         Charged to             Charged to      
                                beginning          costs and              other accounts-    Deductions-             Balance at 
Description                     of period          expenses               describe           describe                end of period
----------------------------------------------------------------------------------------------------------------------------------
RESERVES DEDUCTED FROM ASSETS
  TO WHICH THEY APPLY:
<S>                             <C>                <C>                    <C>                <C>                     <C>   
  Reserves for uncollectible
  accounts                       $5,481             $5,608                    $0              $3,830(a)                $7,259


RESERVES NOT APPLIED
  AGAINST ASSETS:

  Injuries and
  damages(b)                     $  801             $1,462                    $0              $  753(c)                $1,510

  Medical(d)                     $1,273             $2,277                    $0              $2,382(e)                $1,118
                                 ------             ------                    --              ---------                ------

                Total            $2,074             $3,689                    $0              $3,135                   $2,628
                                 ======             ======                    ==              =========                ======
</TABLE> 

(a)      Amounts charged off as uncollectible after deducting customers'
         deposits and recoveries of accounts previously charged off.
(b)      Provided to cover claims for injuries to employees for workmen's
         compensation, for bodily injury to others and property damage.
(c)      Principally payments for various injuries and damages and expenses in
         connection therewith.
(d)      Provided to cover employee medical claims.
(e)      Principally payments for various employee medical expenses and expenses
         in connection therewith.
<PAGE>
 
                               INDEX TO EXHIBITS


EXHIBIT NUMBER        DESCRIPTION OF EXHIBIT
--------------        ----------------------

(3)

     3.1              Restated Certificate of Incorporation of Yankee Energy
                      System, Inc. (the "Company") (Incorporated by reference to
                      Form 10 Registration Statement dated April 14, 1989 and
                      amendments thereto, File No. 0-17605 ("Form 10")).

     3.2              Amended Bylaws of the Company (Incorporated by reference
                      to Form 10).

(4)

     4.1              Specimen of the Company's Common Stock (Incorporated by
                      reference to Form 10).

     4.2              Rights Agreement between the Company and The Connecticut
                      Bank and Trust Company, N.A., as Rights Agent, dated
                      November 20, 1989 (Incorporated by reference to Form 8-A
                      Registration Statement dated December 7, 1989, File No. 0-
                      17605).

     4.3              Amendment to Rights Agreement dated May 10, 1990
                      (Incorporated by reference to Form 8 dated May 30, 1990,
                      File No. 0-17605).

     4.4              Amendment to Rights Agreement dated January 23, 1991
                      (Incorporated by reference to Form 8 dated January 31,
                      1991, File No. 0-17605).

     4.5              Term Loan Agreement between NorConn Properties, Inc. and
                      Fleet Bank dated as of January 31, 1996. (To be submitted
                      to the Commission upon request.)

     4.6              Bond Purchase Agreement dated July 1, 1989 between Yankee
                      Gas and the Purchasers identified therein (Incorporated by
                      reference to Form 10).

     4.7              Indenture of Mortgage and Deed of Trust dated 1, 1989
                      between Yankee Gas and The Connecticut National Bank, as
                      Trustee (Incorporated by reference to Form 10).

     4.8              Guaranty of the Company with Term Loan dated July 20, 1989
                      between United Bank & Trust Company, as Trustee of the
                      Trust of the 401(k) Employee Stock Ownership Plan and The
                      National Bank of Boston (Incorporated by reference to Form
                      10-K for the fiscal year ended December 31, 1989, File No.
                      0-17605 ("1989 Form 10-K")).

     4.9              First Supplemental Indenture of Mortgage and of Trust
                      dated April 1, 1992 between Yankee Gas and The Connecticut
                      National Bank, as (Incorporated by reference to Form 1992
                      ("Form S-3")).
<PAGE>
 
     4.10             Second Supplemental Indenture of Mortgage and Deed of
                      Trust dated December 1, 1992 between Yankee Gas and The
                      Connecticut National Bank, as Trustee (Incorporated by
                      reference to Form 10-K for the fiscal year ended September
                      30, 1992, File No. 0-17605 ("1992 Form 10-K")).

     4.11             Bond Purchase Agreement dated April 1, 1992 between Yankee
                      Gas and the Purchasers identified therein (Incorporated by
                      reference to Form S-3).

     4.12             Bond Purchase Agreement dated December 1, 1992 between
                      Yankee Gas and Purchaser identified therein (Incorporated
                      by reference to 1992 Form 10-K).

     4.13             Third Supplemental Indenture of Mortgage and Deed of Trust
                      dated June 1, 1995 between Yankee Gas and Shawmut Bank
                      Connecticut, N.A., as Trustee. (Incorporated by reference
                      to Form 10-K for the fiscal year ended September 30, 1995,
                      File No. 0-10721 ("1995 Form 10-K")).

     4.14             Bond Purchase Agreement dated June 22, 1995 between Yankee
                      Gas and Purchaser identified therein. (Incorporated by
                      reference to 1995 Form 10-K).

     4.15             Fourth Supplemental Indenture of Mortgage and Deed of
                      Trust dated April 1, 1997 between Yankee Gas and Fleet
                      National Bank, as Trustee. (Incorporated by reference to
                      Form 10-K for the fiscal year ended September 30, 1997,
                      File No. 0-10721 ("1997 Form 10-K")).

     4.16             Bond Purchase Agreement dated April 1, 1997 between Yankee
                      Gas and Purchaser. (Incorporated by reference to 1997 Form
                      10-K).
(10)

     10.1             Asset Transfer Agreement among Northeast Utilities Service
                      Company ("NUSCO"), The Connecticut Light and Power Company
                      ("CL&P"), the Company, Yankee Gas and Housatonic
                      Corporation dated June 30, 1989 (Incorporated by reference
                      to Form 10).

     10.2             Environmental Liability Sharing and Indemnity Agreement
                      dated June 30, 1989 between Yankee Gas and CL&P
                      (Incorporated by reference to Form 10).

     10.3             Rate Case Decision dated August 26, 1992 (Incorporated by
                      reference to 1992 Form 10-K).

     10.4             Lease Agreement between Yankee Gas and NorConn Properties,
                      Inc. dated October 1, 1990 (Incorporated by reference to
                      Form S-1 Registration Statement #33-40758 dated May 22,
                      1991 and amendment thereto dated June 18, 1991 ("Form S-
                      1")).

     10.5+            Non-Employee Director Deferred Compensation Plan
                      (Incorporated by reference to Form 10-K for the fiscal
                      year ended September 30, 1996, File No. 0-10721 ("1996
                      Form 10-K")).

     10.6+            1991 Long-Term Incentive Compensation Plan (Incorporated
                      by reference to Proxy Statement dated December 24, 1990).
<PAGE>
 
     10.7+            Non-Employee Directors' Stock Compensation Plan
                      (Incorporated by reference Form 10-K for the fiscal year
                      ended September 30, 1991, File No. 0-17605 ("1991 Form 10-
                      K").

     10.8+            Severance Pay Plan (Incorporated by reference to 1991 Form
                      10-K).

     10.9             Service Agreement #800308 dated June 1, 1993, applicable
                      to Rate Schedule FT-1 (Firm Transportation) between Texas
                      Eastern Transmission Company ("Texas Eastern") and Yankee
                      Gas (Incorporated by reference to Form 10-K for the fiscal
                      year ended September 30,1993, File No. 0-17605 ("1993 Form
                      10-K")).

     10.10            Service Agreement #1596 dated September 1, 1993,
                      applicable to Rate Schedule FT-A (Firm Transportation)
                      between Tennessee Gas Pipeline ("Tennessee") and Yankee
                      Gas (Incorporated by reference to 1993 Form 10-K).

     10.11            Service Agreement #333 dated September 1,1993, applicable
                      to Rate Schedule FT-A (Firm Transportation) between
                      Tennessee and Yankee Gas (Incorporated by reference to
                      1993 Form 10-K).

     10.12            Transportation Agreement dated February 7, 1991 between
                      Iroquois Gas System, L.P. ("Iroquois") and Yankee Gas for
                      transportation of Canadian gas purchased (Incorporated by
                      reference to Form S-1).

     10.13            Service Agreement dated February 7, 1991 between Alberta
                      Northeast Gas Ltd. ("ANE" and Yankee Gas for purchase of
                      gas from ATCOR Limited (Incorporated by reference to Form
                      S-1).

     10.14            Service Agreement dated February 7, 1991 between ANE and
                      Yankee Gas for purchase of gas from PROGAS Limited
                      (Incorporated by reference to Form S-1).

     10.15            Service Agreement dated February 7, 1991 between ANE and
                      Yankee Gas for purchase of gas from AEC Oil and Gas
                      Company (Incorporated by reference to Form S-1).

     10.16            Service Agreement dated February 7, 1991 between ANE and
                      Yankee Gas for purchase of gas from TransCanada Pipelines
                      (Incorporated by reference to Form S-1).

     10.17+           Form of Change in Control Executive Severance Agreement
                      for Charles E. Gooley, Mary J. Healey, Thomas J. Houde,
                      Steven P. Laden, Ellen J. Quinn, James M. Sepanski, and J.
                      Kingsley Fink (Incorporated by reference to 1995 Form 10-
                      K).

     10.18            $60 million Revolving Credit Agreement among Yankee Gas
                      and several banks dated February 2, 1995. (Incorporated by
                      reference to 1995 Form 10-K).

     10.19            Agreement for Systems Operations Services among Yankee Gas
                      and Integrated Systems Solutions Corporation ("ISSC")
                      dated August 12, 1991 (Incorporated by reference to 1992
                      Form 10-K).
<PAGE>
 
     10.20            Stipulation and Agreement dated January 3, 1996 between
                      Yankee Gas and the Office of Consumer Counsel.
                      (Incorporated by reference to 1996 Form 10-K).

     10.21*+          1996 Long-Term Incentive Compensation Plan, as amended.

     10.22            Amendment to Stipulation and Agreement dated October 1,
                      1997 between Yankee Gas and Connecticut Office of Consumer
                      Counsel. (Incorporated by reference to 1997 Form 8-K).

     10.23            Credit Agreement dated as of June 11, 1998 by and among
                      Yankee Energy System, Inc., the lenders identified
                      therein, and the Bank of New York as administrative agent
                      for each of the lenders (Incorporated by reference to Form
                      10-Q for the quarter ended June 30, 1998, File No. 0-
                      10721).

     10.24+*          Severance Agreement and Release by and between Michael E.
                      Bielonko and Yankee Energy System, Inc. dated as of
                      September 10, 1998.

     10.25+*          Separation Agreement and General Release by and among
                      Branko Terzic, Yankee Energy System, Inc. and Yankee Gas
                      Services Company dated as of September 29, 1998.

     11*              Statement re: Computation of per share earnings.

     13*              1998 Annual Report to Shareholders.

     21*              Subsidiaries of the registrant.

     23*              Consent of Arthur Andersen LLP.

     27*              Financial Data Schedule.


*  Filed herewith.
+  Management contract or compensatory plan.
<PAGE>
 
                               INDEX TO EXHIBITS

Exhibit Number      Description of Exhibit
--------------      ----------------------

(3)

  3.1               Restated Certificate of Incorporation of Yankee Energy
                    System, Inc. (the "Company") (Incorporated by reference to
                    Form 10 Registration Statement dated April 14, 1989 and
                    amendments thereto, File No. 0-17605 ("Form 10")).

  3.2               Amended Bylaws of the Company (Incorporated by reference to
                    Form 10).

(4)

  4.1               Specimen of the Company's Common Stock  (Incorporated by
                    reference to Form 10).

  4.2               Rights Agreement between the Company and The Connecticut
                    Bank and Trust Company, N.A., as Rights Agent, dated
                    November 20, 1989 (Incorporated by reference to Form 8-A
                    Registration Statement dated December 7, 1989, File No. 0-
                    17605).

  4.3               Amendment to Rights Agreement dated May 10, 1990
                    (Incorporated by reference to Form 8 dated May 30, 1990,
                    File No. 0-17605).

  4.4               Amendment to Rights Agreement dated January 23, 1991
                    (Incorporated by reference to Form 8 dated January 31, 1991,
                    File No. 0-17605).

  4.5               Term Loan Agreement between NorConn Properties, Inc. and
                    Fleet Bank dated as of January 31, 1996. (To be submitted to
                    the Commission upon request.)

  4.6               Bond Purchase Agreement dated July 1, 1989 between Yankee
                    Gas and the Purchasers identified therein (Incorporated by
                    reference to Form 10).

  4.7               Indenture of Mortgage and Deed of Trust dated 1, 1989
                    between Yankee Gas and The Connecticut National Bank, as
                    Trustee (Incorporated by reference to Form 10).

  4.8               Guaranty of the Company with Term Loan dated July 20, 1989
                    between United Bank & Trust Company, as Trustee of the Trust
                    of the 401(k) Employee Stock Ownership Plan and The National
                    Bank of Boston (Incorporated by reference to Form 10-K for
                    the fiscal year ended December 31, 1989, File No. 0-17605
                    ("1989 Form 10-K")).

  4.9               First Supplemental Indenture of Mortgage and of Trust dated
                    April 1, 1992 between Yankee Gas and The Connecticut
                    National Bank, as (Incorporated by reference to Form 1992
                    ("Form S-3")).
<PAGE>

     4.10      Second Supplemental Indenture of Mortgage and Deed of Trust dated
               December 1, 1992 between Yankee Gas and The Connecticut National
               Bank, as Trustee (Incorporated by reference to Form 10-K for the
               fiscal year ended September 30, 1992, File No. 0-17605 ("1992
               Form 10-K")).

     4.11      Bond Purchase Agreement dated April 1, 1992 between Yankee Gas
               and the Purchasers identified therein (Incorporated by reference
               to Form S-3).

     4.12      Bond Purchase Agreement dated December 1, 1992 between Yankee Gas
               and Purchaser identified therein (Incorporated by reference to
               1992 Form 10-K).

     4.13      Third Supplemental Indenture of Mortgage and Deed of Trust dated
               June 1, 1995 between Yankee Gas and Shawmut Bank Connecticut,
               N.A., as Trustee. (Incorporated by reference to Form 10-K for the
               fiscal year ended September 30, 1995, File No. 0-10721 ("1995
               Form 10-K")).

     4.14      Bond Purchase Agreement dated June 22, 1995 between Yankee Gas
               and Purchaser identified therein. (Incorporated by reference to
               1995 Form 10-K).

     4.15      Fourth Supplemental Indenture of Mortgage and Deed of Trust dated
               April 1, 1997 between Yankee Gas and Fleet National Bank, as
               Trustee. (Incorporated by reference to Form 10-K for the fiscal
               year ended September 30, 1997, File No. 0-10721 (?1997 Form 10-
               K?)).

     4.16      Bond Purchase Agreement dated April 1, 1997 between Yankee Gas
               and Purchaser. (Incorporated by reference to 1997 Form 10-K).
(10)

     10.1      Asset Transfer Agreement among Northeast Utilities Service
               Company ("NUSCO"), The Connecticut Light and Power Company
               ("CL&P"), the Company, Yankee Gas and Housatonic Corporation
               dated June 30, 1989 (Incorporated by reference to Form 10).

     10.2      Environmental Liability Sharing and Indemnity Agreement dated
               June 30, 1989 between Yankee Gas and CL&P (Incorporated by
               reference to Form 10).

     10.3      Rate Case Decision dated August 26, 1992 (Incorporated by
               reference to 1992 Form 10-K).

     10.4      Lease Agreement between Yankee Gas and NorConn Properties, Inc.
               dated October 1, 1990 (Incorporated by reference to Form S-1
               Registration Statement #33-40758 dated May 22, 1991 and amendment
               thereto dated June 18, 1991 ("Form S-1")).

     10.5+     Non-Employee Director Deferred Compensation Plan (Incorporated by
               reference to Form 10-K for the fiscal year ended September 30,
               1996, File No. 0-10721 ("1996 Form 10-K")).

     10.6+     1991 Long-Term Incentive Compensation Plan (Incorporated by
               reference to Proxy Statement dated December 24, 1990).

<PAGE>

     10.7+            Non-Employee Directors' Stock Compensation Plan
                      (Incorporated by reference Form 10-K for the fiscal year
                      ended September 30, 1991, File No. 0-17605 ("1991 Form 10-
                      K").

     10.8+            Severance Pay Plan (Incorporated by reference to 1991 Form
                      10-K).

     10.9             Service Agreement #800308 dated June 1, 1993, applicable
                      to Rate Schedule FT-1 (Firm Transportation) between Texas
                      Eastern Transmission Company ("Texas Eastern") and Yankee
                      Gas (Incorporated by reference to Form 10-K for the fiscal
                      year ended September 30,1993, File No. 0-17605 ("1993 Form
                      10-K")).

     10.10            Service Agreement #1596 dated September 1, 1993,
                      applicable to Rate Schedule FT-A (Firm Transportation)
                      between Tennessee Gas Pipeline ("Tennessee") and Yankee
                      Gas(Incorporated by reference to 1993 Form 10-K).

     10.11            Service Agreement #333 dated September 1, 1993, applicable
                      to Rate Schedule FT-A (Firm Transportation) between
                      Tennessee and Yankee Gas (Incorporated by reference to
                      1993 Form 10-K).

     10.12            Transportation Agreement dated February 7, 1991 between
                      Iroquois Gas System, L.P. ("Iroquois") and Yankee Gas for
                      transportation of Canadian gas purchased (Incorporated by
                      reference to Form S-1).

     10.13            Service Agreement dated February 7, 1991 between Alberta
                      Northeast Gas Ltd. ("ANE" and Yankee Gas for purchase of
                      gas from ATCOR Limited (Incorporated by reference to Form
                      S-1).

     10.14            Service Agreement dated February 7, 1991 between ANE and
                      Yankee Gas for purchase of gas from PROGAS Limited
                      (Incorporated by reference to Form S-1).

     10.15            Service Agreement dated February 7, 1991 between ANE and
                      Yankee Gas for purchase of gas from AEC Oil and Gas
                      Company (Incorporated by reference to Form S-1).

     10.16            Service Agreement dated February 7, between ANE and Yankee
                      Gas for purchase of gas from TransCanada Pipelines
                      (Incorporated by reference to Form S-1).

     10.17+           Form of Change in Control Executive Severance Agreement
                      for Charles E. Gooley, Mary J. Healey, Thomas J. Houde,
                      Steven P. Laden, Ellen J. Quinn, James M. Sepanski, and J.
                      Kingsley Fink (Incorporated by reference to 1995 Form 10-
                      K).

     10.18            $60 million Revolving Credit Agreement among Yankee Gas
                      and several banks dated February 2, 1995. (Incorporated by
                      reference to 1995 Form 10-K).

     10.19            Agreement for Systems Operations Services among Yankee Gas
                      and Integrated Systems Solutions Corporation ("ISSC")
                      dated August 12, 1991 (Incorporated by reference to 1992
                      Form 10-K).

<PAGE>
 

  10.20             Stipulation and Agreement dated January 3, 1996 between
                    Yankee Gas and the Office of Consumer Counsel. (Incorporated
                    by reference to 1996 Form 10-K).

  10.21*+           1996 Long-Term Incentive Compensation Plan, as amended.

  10.22             Amendment to Stipulation and Agreement dated October 1, 1997
                    between Yankee Gas and Connecticut Office of Consumer
                    Counsel. (Incorporated by reference to 1997 Form 8-K).

  10.23             Credit Agreement dated as of June 11, 1998 by and among
                    Yankee Energy System, Inc., the lenders identified therein,
                    and the Bank of New York as administrative agent for each of
                    the lenders (Incorporated by reference to Form 10-Q for the
                    quarter ended June 30, 1998, File No. 0-10721).

  10.24+*           Severance Agreement and Release by and between Michael E.
                    Bielonko and Yankee Energy System, Inc. dated as of
                    September 10, 1998.

  10.25+*           Separation Agreement and General Release by and among Branko
                    Terzic, Yankee Energy System, Inc. and Yankee Gas Services
                    Company dated as of September 29, 1998.

  11*               Statement re: Computation of per share earnings.
                 
  13*               1998 Annual Report to Shareholders.

  21*               Subsidiaries of the registrant.

  23*               Consent of Arthur Andersen LLP.

  27*               Financial Data Schedule.


*  Filed herewith.
+ Management contract or compensatory plan.