<PAGE>
 
                                                                   EXHIBIT 10.21

                           YANKEE ENERGY SYSTEM, INC.

                   1996 LONG-TERM INCENTIVE COMPENSATION PLAN
                            Amended October 27, 1998


SECTION 1.  PURPOSE.
            ------- 

     The purposes of the 1996 Long-Term Incentive Compensation Plan (the "Plan")
are (i) to attract and retain outstanding executives in key management portions
of Yankee Energy System, Inc. (the "Company"), its parent (if any) and any
subsidiaries of the Company (collectively the "Related Corporations"), (ii) to
promote the achievement of long-term corporate goals through the use of
performance-based incentives, (iii) to create parallel interests between
executives and shareholders by providing for some portion of executive
compensation in the form of common stock, and (iv) to reward performance and to
foster Company identification on the part of key middle managers.

     The Plan will provide a means whereby officers, executive and managerial
employees of the Company and any Related Corporations may (a) purchase stock in
the Company pursuant to options which qualify as "incentive stock options"
("Incentive Stock Options") under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), (b) purchase stock in the Company pursuant to
options granted hereunder which do not qualify as Incentive Stock Options ("Non-
Qualified Options"); (c) may be awarded stock in the Company ("Awards"); and (d)
may receive stock appreciation rights ("SARs").  Both Incentive Stock Options
and Non-Qualified Options are referred to hereafter individually as an "Option"
and collectively as "Options."  As used herein, the terms "parent" and
"subsidiary" mean "parent corporation" and "subsidiary corporation" as those
terms are defined in Section 424 of the Code.  Options, Awards and SARs are
referred to hereafter individually as a "Plan Benefit" and collectively as "Plan
Benefits."  Officers, executive and managerial employees of the Company and any
Related Corporations are referred to herein as "Participants."


SECTION 2.  ADMINISTRATION.
            -------------- 

     2.1    BOARD OF DIRECTORS AND THE COMMITTEE.
            ------------------------------------ 

     The Plan will be administered by the Board of Directors of the Company
whose construction and interpretation of the terms and provisions hereof shall
be final and conclusive.  The Board of Directors may in its sole discretion
grant Options, issue shares upon exercise of such Options, grant Awards and
grant SARs all as provided in the Plan.  The Board of Directors shall have
authority, subject to the express provisions of the Plan, to construe the Plan
and its related agreements, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of the
respective Option, Award and SAR agreements, which need not be identical, and to
make all other determinations in the judgment of the Board of Directors
necessary or desirable 

            
<PAGE>
 
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any related agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination made in
good faith. The Board of Directors may delegate any or all of its powers under
the Plan to the Organization and Compensation Committee or other Committee (the
"Committee") appointed by the Board of Directors consisting of at least two
members of the Board of Directors, who shall serve at the discretion of the
Board of Directors. If Plan Benefits are to be approved solely by the Committee,
the members of the Committee shall at all times be: (i) "outside directors" as
that term is defined in Treas. Reg. (S)1.162-27(e)(3) (or any successor
regulation); and (ii) "non-employee directors" within the meaning of Rule 16b-3
(or any successor rule) under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), as such terms are interpreted from time to time. If the
Committee is so appointed, all references to the Board of Directors herein shall
mean and relate to such Committee, unless the context otherwise requires.

     2.2    COMPLIANCE WITH SECTION 162(M) OF THE CODE.
            ------------------------------------------ 

     Section 162(m) of the Code generally limits the tax deductibility to
publicly held companies of compensation in excess of $1,000,000 paid to certain
"covered employees" ("Covered Employees").  It is the Company's intention to
preserve the deductibility of such compensation to the extent it is reasonably
practicable and to the extent it is consistent with the Company's compensation
objectives.  For purposes of this Plan, Covered Employees of the Company shall
be those employees of the Company described in Section 162(m)(3) of the Code.


SECTION 3.  ELIGIBILITY.
            ----------- 

     3.1    INCENTIVE STOCK OPTIONS.
            ----------------------- 

     Participants shall be eligible to receive Incentive Stock Options pursuant
to the Plan; provided that no Participant shall be granted any Incentive Stock
Option under the Plan who, at the time such Option is granted, owns, directly or
indirectly, Common Stock of the Company possessing more than 10% of the total
combined voting power of all classes of stock of the Company or of its Related
Corporations, unless the requirements of Section 6.6(b) hereof are satisfied.
In determining whether this 10% threshold has been reached, the stock
attribution rules of Section 424(d) of the Code shall apply.

     3.2    NON-QUALIFIED OPTIONS, AWARDS AND SARS.
            -------------------------------------- 

     Non-Qualified Options, Awards and SARs may be granted to any Participant,
subject to Section 8 with respect to Annual Incentive Awards and Section 9 with
respect to Long-Term Incentive Awards.

     3.3    GENERALLY.
            --------- 

<PAGE>
 
     The Board of Directors may take into consideration a Participant's
individual circumstances in determining whether to grant Plan Benefits.
Granting of Plan Benefits for any individual shall neither entitle that
individual to, nor disqualify that individual from, participation in any other
grant of Plan Benefits.

     3.4    STOCK OWNERSHIP GUIDELINES POLICY.
            --------------------------------- 

     Compliance with the Company's Stock Ownership Guidelines Policy, as adopted
by the Board of Directors on September 23, 1997 and as amended from time to
time, is required in order to be eligible to receive Plan Benefits.
Noncompliance with the Stock Ownership Guidelines Policy will result in the
suspension of eligibility of the Participant for awards of Plan Benefits;
provided, however, that prior awards of Plan Benefits (whether or not vested)
and eligibility for Awards under Section 8 or Section 9 if the Participant was
in compliance at the beginning of the fiscal year or Performance Cycle, as the
case may be, shall not be affected by noncompliance.


SECTION 4.  STOCK SUBJECT TO PLAN.
            --------------------- 

     Subject to adjustment as provided in Sections 11 and 12 hereof, the stock
to be offered under the Plan shall consist of shares of the Company's Common
Stock, $5.00 par value, (the "Common Stock") and the maximum number of shares
which will be reserved for issuance, and in respect of which Plan Benefits may
be granted pursuant to the provisions of the Plan, shall not exceed in the
aggregate five hundred twenty-two thousand four hundred seventy seven (522,477)
shares.  Such shares may be authorized and unissued shares, treasury shares or
shares purchased on the open market.  If an Option or SAR granted hereunder
shall expire or terminate for any reason without having been exercised in full,
or if the Company shall reacquire any unvested shares issued pursuant to Awards,
any such shares so reacquired shall again be available for subsequent grants of
Plan Benefits under the Plan.  Stock issued pursuant to the Plan may be subject
to such restrictions on transfer, repurchase rights or other restrictions as
shall be determined by the Board of Directors.


SECTION 5.  GRANTING OF PLAN BENEFITS.
            ------------------------- 

     Plan Benefits may be granted under the Plan at any time after adoption of
the Plan by the Board of Directors and prior to October 22, 2006; provided,
however, that nothing in the Plan shall be construed to obligate the Company to
grant Plan Benefits to a Participant or anyone claiming under or through a
Participant.  The date of grant of Plan Benefits under the Plan will be the date
specified by the Board of Directors at the time the Board of Directors grants
such Plan Benefits; provided, however, that such date shall not be prior to the
date on which the Board of Directors takes such action.  The Board of Directors
shall have the right, with the consent of a Participant, to convert an Incentive
Stock Option granted under the Plan to a Non-Qualified Option pursuant to
Section 6.7.  Plan Benefits may be granted alone or in addition to other grants
under the Plan.


SECTION 6.  SPECIAL PROVISIONS APPLICABLE TO OPTIONS AND SARS.
            ------------------------------------------------- 

<PAGE>
 
     6.1    PURCHASE PRICE AND SHARES SUBJECT TO OPTIONS AND SARS.
            ----------------------------------------------------- 

            (a)  The purchase price per share of Common Stock deliverable upon
     the exercise of an Option shall be determined by the Board of Directors;
     provided, however, that the exercise price shall not be less than 100% of
     --------  -------
     the fair market value of such Common Stock on the day the Option is granted
     (except as modified in Section 6.6(b) hereof in the case of an Incentive
     Stock Option ).

            (b)  Options granted under the Plan may provide for the payment of
     the exercise price by delivery of (i) cash or a check payable to the order
     of the Company in an amount equal to the exercise price of such Options,
     (ii) shares of Common Stock of the Company owned by the Participant having
     a fair market value equal in amount to the exercise price of the Options
     being exercised, or (iii) any combination of (i) and (ii). The fair market
     value of any shares of the Company's Common Stock which may be delivered
     upon exercise of an Option shall be determined by the Board of Directors.
     The Board of Directors may also permit Participants, either on a selective
     or aggregate basis, to simultaneously exercise Options and sell the shares
     of Common Stock thereby acquired, pursuant to a brokerage or similar
     arrangement, approved in advance by the Board of Directors, and to use the
     proceeds from such sale as payment of the purchase price of such shares.

            (c)  If, at the time an Option is granted under the Plan, the
     Company's Common Stock is publicly traded, "fair market value" shall be
     determined as of the last business day for which the prices or quotes
     discussed in this sentence are available prior to the date such Option is
     granted (the "Determination Date") and shall mean (i) the average (on the
     Determination Date) of the high and low prices of the Common Stock on the
     principal national securities exchange on which the Common Stock is traded,
     if such Common Stock is then traded on a national securities exchange; (ii)
     the last reported sale price (on the Determination Date) of the Common
     Stock on The Nasdaq Stock Market if the Common Stock is not then traded on
     a national securities exchange; or (iii) the closing bid price (or average
     of bid prices) last quoted (on the Determination Date) by an established
     quotation service for over-the-counter securities, if the Common Stock is
     not reported on The Nasdaq Stock Market. However, if the Common Stock is
     not publicly traded at the time an Option is granted under the Plan, "fair
     market value" shall be deemed to be the fair value of the Common Stock as
     determined by the Board of Directors after taking into consideration all
     factors which it deems appropriate, including, without limitation, recent
     sale and offer prices of the Common Stock in private transactions
     negotiated at arm's length.

            (d)  The maximum number of shares with respect to which Options or
     SARs may be granted to any employee, including any cancellations or
     repricings which may occur, shall be limited to 50,000 shares in any
     calendar year.

     6.2    DURATION OF OPTIONS AND SARS.
            ---------------------------- 

     Subject to Section 6.6(b) hereof, each Option and SAR and all rights
thereunder shall be 

<PAGE>
 
expressed to expire on such date as the Board of Directors may determine, but in
no event later than ten years from the day on which the Option or SAR is granted
and shall be subject to earlier termination as provided herein.

     6.3  EXERCISE OF OPTIONS AND SARS.
          ---------------------------- 

          (a) Subject to Section 6.6(b) hereof, each Option and SAR granted
     under the Plan shall be exercisable at such time or times and during such
     period as shall be set forth in the instrument evidencing such Option or
     SAR.  To the extent that an Option or SAR is not exercised by a Participant
     when it becomes initially exercisable, it shall not expire but shall be
     carried forward and shall be exercisable, on a cumulative basis, until the
     expiration of the exercise period.  No partial exercise may be for less
     than ten (10) full shares of Common Stock (or its equivalent).

          (b) The Board of Directors shall have the right to accelerate the date
     of exercise of any installments of any Option or SAR; provided that the
     Board of Directors shall not accelerate the exercise date of any
     installment of any Option granted to a Participant as an Incentive Stock
     Option (and not previously converted into a Non-Qualified Option pursuant
     to Section 6.7) if such acceleration would violate the annual vesting
     limitation contained in Section 422(d)(1) of the Code, which provides
     generally that the aggregate fair market value (determined at the time the
     Option is granted) of the stock with respect to which Incentive Stock
     Options granted to any Participant are exercisable for the first time by
     such Participant during any calendar year (under all plans of the Company
     and any Related Corporations) shall not exceed $100,000.

     6.4  NONTRANSFERABILITY OF OPTIONS AND SARS.
          -------------------------------------- 

     No Option or SAR granted under the Plan shall be assignable or transferable
by the Participant, either voluntarily or by operation of law, except by will or
the laws of descent and distribution or, with respect to Non-Qualified Options
and SARs, pursuant to a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the
rules promulgated thereunder.  During the life of the Participant, the Option or
SAR shall be exercisable only by him or her.  If any Participant should attempt
to dispose of or encumber his or her Options or SARs, other than in accordance
with the applicable terms of a Non-Qualified Stock Option Agreement or SAR
Agreement, his or her interest in such Options or SARs shall terminate.

     6.5  EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH ON OPTIONS AND SARS.
          ---------------------------------------------------------------- 

          (a) If a Participant ceases to be employed by the Company or a Related
     Corporation for any reason, including retirement but other than death, any
     Option or SAR granted to such Participant under the Plan shall immediately
     terminate; provided, however, that in the case of a Participant who
                --------  -------                                       
     terminates employment as the result of permanent and total disability,
     normal retirement as defined in the Company's pension plan or early
     retirement with approval of the Board of Directors, any portion of such
     Option or SAR which 

<PAGE>
 
     was otherwise exercisable on the date of termination of the Participant's
     employment may be exercised within a one-year period following the date on
     which the Participant ceased to be so employed, or within the three-month
     period following such date in the case of an Incentive Stock Option, but in
     no event after the expiration of the exercise period. Any such exercise may
     be made only to the extent of the number of shares subject to the Option or
     SAR which were purchasable or exercisable on the date of such termination
     of employment. If the Participant dies during the applicable one-year or
     three-month period, the Option or SAR shall be exercisable by the
     Participant's personal representatives, heirs or legatees to the same
     extent and during the same period that the Participant could have exercised
     the Option or SAR on the date of his or her death.

          (b) If the Participant dies while an employee of the Company or any
     Related Corporation, any Option or SAR granted to such Participant under
     the Plan shall be exercisable by the Participant's personal
     representatives, heirs or legatees, for the purchase of or exercise
     relative to that number of shares and to the same extent that the
     Participant could have exercised the Option or SAR on the date of his or
     her death.  The Option or SAR or any unexercised portion thereof shall
     terminate unless so exercised prior to the earlier of the expiration of one
     year from the date of such death or the expiration of the exercise period.

     6.6  DESIGNATION OF INCENTIVE STOCK OPTIONS; LIMITATIONS.
          --------------------------------------------------- 

     Options granted under the Plan which are intended to be Incentive Stock
Options qualifying under Section 422 of the Code shall be designated as
Incentive Stock Options and shall be subject to the following additional terms
and conditions:

          (a) Dollar Limitation.  The aggregate fair market value (determined at
              -----------------                                                 
     the time the option is granted) of the Common Stock for which Incentive
     Stock Options are exercisable for the first time during any calendar year
     by any person under the Plan (and all other incentive stock option plans of
     the Company and any Related Corporations) shall not exceed $100,000.  In
     the event that Section 422(d)(1) of the Code is amended to alter the
     limitation set forth therein so that following such amendment such
     limitation shall differ from the limitation set forth in this Section
     6.6(a), the limitation of this Section 6.6(a) shall be automatically
     adjusted accordingly.

          (b) 10% Shareholder.  If any Participant to whom an Incentive Stock
              ---------------                                                
     Option is to granted pursuant to the provisions of the Plan is on the date
     of grant the owner of stock possessing more than 10% of the total combined
     voting power of all classes of stock of the Company or any Related
     Corporations, then the following special provisions shall be applicable to
     the Incentive Stock Option granted to such individual:

              (i)  The option price per share of the Common Stock subject to
          such Incentive Stock Option shall not be less than 110% of the fair
          market value of one share of Common Stock on the date of grant; and

              (ii) The option exercise period shall not exceed five years from
          the date 

<PAGE>
 
          of grant.

     In determining whether the 10% threshold has been reached, the stock
     attribution rules of Section 424(d) of the Code shall apply.

          (c) Except as modified by the preceding provisions of this Section
     6.6, all of the provisions of the Plan shall be applicable to Incentive
     Stock Options granted hereunder.

     6.7  CONVERSION OF INCENTIVE STOCK OPTIONS INTO NON-QUALIFIED OPTIONS;
          -----------------------------------------------------------------
          TERMINATION OF INCENTIVE STOCK OPTIONS.
          -------------------------------------- 

     The Board of Directors, at the written request of any Participant, may in
its discretion take such actions as may be necessary to convert such
Participant's Incentive Stock Options (or any installments or portions of
installments thereof) that have not been exercised on the date of conversion
into Non-Qualified Options at any time prior to the expiration of such Incentive
Stock Options, regardless of whether the Participant is an employee of the
Company or a Related Corporation at the time of such conversion.  Such actions
may include, but not be limited to, extending the exercise period or reducing
the exercise price of the appropriate installments of such Options.  At the time
of such conversion, the Board of Directors (with the consent of the Participant)
may impose such conditions on the exercise of the resulting Non-Qualified
Options as the Board of Directors in its discretion may determine, provided that
such conditions shall not be inconsistent with the Plan.  Nothing in the Plan
shall be deemed to give any Participant the right to have such Participant's
Incentive Stock Options converted into Non-Qualified Options, and no such
conversion shall occur until and unless the Board of Directors takes appropriate
action.  The Board of Directors, with the consent of the Participant, may also
terminate any portion of any Incentive Stock Option that has not been exercised
at the time of such termination.

     6.8  STOCK APPRECIATION RIGHTS.
          ------------------------- 

     An SAR is the right to receive, without payment, an amount equal to the
excess, if any, of the fair market value of a share of Common Stock on the date
of exercise over the grant price, which amount will be multiplied by the number
of shares with respect to which the SARs shall have been exercised.  The grant
of SARs under the Plan shall be subject to the following terms and conditions
and shall contain such additional terms and conditions, not inconsistent with
the express terms of the Plan, as the Board of Directors shall deem desirable:

          (a) Grant.  SARs may be granted in tandem with, in addition to or
     completely independent of any Plan Benefit.

          (b) Grant Price.  The grant price of an SAR may be the fair market
     value of a share of Common Stock on the date of grant or such other price
     as the Board of Directors may determine.

          (c) Exercise.  An SAR may be exercised by a Participant in accordance
     with procedures established by the Board of Directors or as otherwise
     provided in any agreement 

<PAGE>
 
     evidencing any SARs. The Board of Directors may provide that an SAR shall
     be automatically exercised on one or more specified dates.

            (d) Form of Payment.  Payment upon exercise of an SAR may be made in
     cash, in shares of Common Stock or any combination thereof, as the Board of
     Directors shall determine, provided, however, that any SAR exercised upon
     or subsequent to the occurrence of a Change in Control (as defined in
     Section 12(b) hereof) shall be paid in cash.

            (e) Fair Market Value.  Fair market value shall be determined in
     accordance with Section 6.1(c) with the "Determination Date" being
     determined by reference to the date of grant or the date of exercise of an
     SAR, as applicable.

     6.9    RIGHTS AS A SHAREHOLDER.
            ----------------------- 

     The holder of an Option or SAR shall have no rights as a shareholder with
respect to any shares covered by the Option or SAR until the date of issue of a
stock certificate to him or her for such shares.  Except as otherwise expressly
provided in the Plan, no adjustment shall be made for dividends or other rights
for which the record date is prior to the date such stock certificate is issued.

     6.10   SPECIAL PROVISIONS APPLICABLE TO NON-QUALIFIED OPTIONS AND SARS
            ----------------------------------------------------------------
            GRANTED TO COVERED EMPLOYEES.
            ---------------------------- 

     In order for the full value of Non-Qualified Options or SARs granted to
Covered Employees to be deductible by the Company for federal income tax
purposes, the Company may intend for such Non-Qualified Options or SARs to be
treated as "qualified performance-based compensation" as described in Treas.
Reg. (S)1.162-27(e) (or any successor regulation). In such case, Non-Qualified
Options or SARs granted to Covered Employees shall be subject to the following
additional requirements:

            (a) such options and rights shall be granted only by the Board of
     Directors; and

            (b) the exercise price of such Options and the grant price of such
     SARs granted shall in no event be less than the fair market value of the
     Common Stock as of the date of grant of such Options or SARs.


SECTION 7.  SPECIAL PROVISIONS APPLICABLE TO AWARDS.
            --------------------------------------- 

     7.1    GRANTS OF AWARDS.
            ---------------- 

     The Board of Directors may grant a Participant an Award subject to such
terms and conditions as the Board of Directors deems appropriate, including,
without limitation: restrictions on the pledging, sale, assignment, transfer or
other disposition of such shares; the requirement that the Participant forfeit
all or a portion of such shares back to the Company upon voluntary or other
termination (for any reason other than death, permanent and total disability,
normal retirement as 

<PAGE>
 
defined in the Company's pension plan or early retirement with the approval of
the Board); and provisions disallowing a Participant receiving an Award from
making, in connection with such Award, the election permitted under Section
83(b) of the Code.

     7.2  CONDITIONS.
          ---------- 

     Approvals of Awards may be subject to the following conditions:

          (a) Each Participant receiving an Award shall enter into an agreement
     (a "Stock Restriction Agreement") with the Company, if required by the
     Board of Directors, in a form specified by the Board of Directors agreeing
     to such terms and conditions of the Award as the Board of Directors deems
     appropriate.

          (b) The Board of Directors may determine that the Company will not
     issue certificates for shares until the restrictions on such shares have
     lapsed.

          (c) Shares issued and transferred to a Participant pursuant to an
     Award may, if required by the Board of Directors, be deposited with the
     Treasurer or other officer of the Company designated by the Board of
     Directors to be held until the lapse of the restrictions upon such shares,
     and each Participant shall execute and deliver to the Company stock powers
     enabling the Company to exercise its rights hereunder.

          (d) Certificates for shares issued pursuant to an Award shall, if the
     Company shall deem it advisable, bear a legend to the effect that they are
     issued subject to specified restrictions.

          (e) Certificates representing the shares issued pursuant to an Award
     shall be registered in the name of the Participant and shall be owned by
     such Participant.  Such Participant shall be the holder of record of such
     shares for all purposes, including voting and receipt of dividends paid
     with respect to such shares.

     7.3  NONTRANSFERABILITY.
          ------------------ 

     Shares issued pursuant to an Award may not be sold, assigned, transferred,
alienated, commuted, anticipated, or otherwise disposed of (except by will or
the laws of descent and distribution or pursuant to a qualified domestic
relations order as defined by the Code or Title I of ERISA or the rules
promulgated thereunder), or pledged or hypothecated as collateral for a loan or
as security for the performance of any obligation, or be otherwise encumbered,
and are not subject to attachment, garnishment, execution or other legal or
equitable process, prior to the lapse of restrictions on such shares, and any
attempt at action in contravention of this Section shall be null and void.  If
any Participant should attempt to dispose of or encumber his or her shares
issued pursuant to an Award prior to the lapse of the restrictions imposed on
such shares, his or her interest in such shares awarded to him or her shall
terminate.

     7.4  EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH ON AWARDS.
          ------------------------------------------------------ 

<PAGE>
 
     If, prior to the lapse of restrictions applicable to Awards, the
Participant ceases to be an employee of the Company or the Related Corporations
for any reason other than death, permanent and total disability, normal
retirement or early retirement with the approval of the Board of Directors,
Awards to such Participant, as to which restrictions have not lapsed, shall be
forfeited to the Company, effective on the date of the Participant's termination
of employment.  The Board of Directors shall have the sole power to decide in
each case whether leaves of absence shall be deemed a termination of employment.


SECTION 8.  SPECIAL PROVISIONS APPLICABLE TO ANNUAL INCENTIVE AWARDS.
            -------------------------------------------------------- 

     8.1  FORM OF ANNUAL INCENTIVE AWARDS.
          ------------------------------- 

     Effective with the fiscal year ending September 30, 1998, Annual Incentive
Awards may be granted to eligible Participants based on performance against
predetermined goals for a fiscal year of the Company.  The Annual Incentive
Awards shall be calculated and be payable in cash, less applicable withholding
and FICA; provided, however, that Participants may elect to have all or part of
Annual Incentive Awards paid in restricted shares of Common Stock.  The portion
of an Annual Incentive Award paid in restricted shares of Common Stock shall be
an Award within the meaning of, and shall comply with, Section 7 of the Plan, as
modified by this Section 8 and other provisions of the Plan applicable to
Awards.

     8.2  ELIGIBILITY.
          ----------- 

     A Participant must be in a position eligible for participation for a period
of six months or more during the fiscal year.  Any Annual Incentive Award to a
Participant who has been in an eligible position for at least six months, but
less than the entire fiscal year, shall be prorated based on the actual number
of days that the Participant was in such eligible position.

     8.3  MAXIMUM ANNUAL INCENTIVE AWARD.
          ------------------------------ 

     For each fiscal year, the Board of Directors will determine the maximum
Annual Incentive Award for each Participant or class of Participants, expressed
as a percentage of salary range midpoints in effect at the beginning of that
fiscal year; provided that any Participant whose salary exceeds the salary range
midpoint on October 1, 1997 or on the date the individual becomes a Participant
will have the Annual Incentive Award calculated on the basis of such salary
amount until such time as the salary range midpoint exceeds the Participant's
salary.

     8.4  INCENTIVE POOL.
          -------------- 

     The Annual Incentive Award Pool available for distribution to all
Participants shall be the sum of the products of the maximum Annual Incentive
Award percentages times the applicable salary or salary range midpoints of the
Participants, as adjusted retrospectively by the Board of Directors to reflect
actual profits for the fiscal year.

<PAGE>
 
     8.5  PERFORMANCE MEASURES.
          -------------------- 

     The Board of Directors shall approve performance measures for each fiscal
year for the purpose of determining the percentage of the maximum Annual
Incentive Award to which each Participant or class of Participants is entitled.
The Board of Directors may also determine the relative weights to be given to
corporate and individual goals.

     8.6  ELECTION FOR STOCK.
          ------------------ 

     At the election of a Participant, all or part of the Annual Incentive Award
shall be an Award of Common Stock for that number of shares determined by
dividing the cash award by the per share price of the Common Stock, based on the
reported close price of the Common Stock on the New York Stock Exchange on the
last day of the fiscal year to which the Annual Incentive Award relates, or if
such information is not available as of such date, as of the first business day
prior to such date on which the Common Stock was traded.  A Participant electing
to receive payment of all or part of an Annual Incentive Award in stock must
submit a written election form to the Company prior to the beginning of the
fiscal year to which such Annual Incentive Award relates; provided, however,
that with respect to the Company's 1998 fiscal year, such election will be valid
if it is made within 60 days after the beginning of the 1998 fiscal year.

     8.7  COMPANY TAX CONTRIBUTION.
          ------------------------ 

     With respect to the portion of an Annual Incentive Award payable in
restricted Common Stock, the Company agrees that, upon the lapsing of the
restrictions on any such Common Stock, it will make a cash payment to the
Participant in an amount equal to 20% of the value of such shares on the date
such restrictions lapse, which amount represents a Company contribution toward
any taxes otherwise due and owing by the Participant by virtue of the lapsing of
the restrictions on the Common Stock.  For purposes of this Section 8.7, the
value of the shares on the date the restrictions are lifted shall be the fair
market value of the Common Stock on such date determined in accordance with
Section 6.1(c) or, if the information is not available as of such date, as of
the first business day prior to the date the restrictions lapse on which the
Common Stock was traded.

     8.8  FRACTIONAL SHARES.
          ----------------- 

     No fractional shares of Common Stock shall be issued or delivered pursuant
to any Annual Incentive Award.  The Board of Directors shall determine whether
cash shall be paid in lieu of such fractional shares or whether any rights
thereto shall be forfeited or otherwise eliminated.

     8.9  DEFERRAL OF AWARD.
          ----------------- 

     If permitted by the Board of Directors, a Participant may elect to defer
payment of all or part of an Annual Incentive Award.  Deferral of Annual
Incentive Awards shall be governed by such terms and conditions as the Board of
Directors shall authorize.

<PAGE>
 
     8.10 TERMINATION OF EMPLOYMENT.
          ------------------------- 

     If a Participant's employment is terminated prior to payment of an Annual
Incentive Award, except for death, Disability, normal retirement (as defined in
the Company's pension plan) or early retirement with the permission of the
Board, the Annual Incentive Award shall be canceled.  For purposes of this
Section 8, Disability shall mean the inability of a Participant, as determined
by the Board of Director, substantially to perform such Participant's regular
duties and responsibilities due to a medically determinable physical or mental
illness that has lasted (or can reasonably be expected to last) for a period of
six (6) months or longer.


SECTION 9.  SPECIAL PROVISIONS APPLICABLE TO LONG-TERM INCENTIVE AWARDS.
            ----------------------------------------------------------- 

     9.1  FORMS OF LONG-TERM INCENTIVE AWARDS.
          ----------------------------------- 

     Effective October 1, 1997, Long-Term Incentive Awards may be granted to
eligible Participants at the close of each Performance Cycle based on the
Company's performance against predetermined Performance Goals for the
Performance Cycle.  Long-Term Incentive Awards shall be calculated in cash and
be payable one-half in unrestricted shares of Common Stock, less applicable
withholding and FICA, and one-half in restricted shares of Common Stock.  A
Long-Term Incentive Award shall be an Award within the meaning of, and shall
comply with, Section 7 of the Plan, as modified by this Section 9 and other
provisions of the Plan applicable to Awards.

     9.2  ELIGIBILITY.
          ----------- 

     Participation in the Plan with respect to a Performance Cycle will be
limited to members of the Covered Group.  The Covered Group for each Performance
Cycle shall be determined independently from any prior Performance Cycle.

     9.3  LONG-TERM INCENTIVE AWARD LEVELS.
          -------------------------------- 

          (a) At the start of each Performance Cycle, the Chief Executive
     Officer of the Company will recommend, for approval by the Board of
     Directors, one or more specific Performance Goals for such Performance
     Cycle for each Participant Group and the relative weights of each
     Performance Goal (such weights to total 100%).

          (b) The business criteria to be used for purposes of establishing
     Performance Goals for Long-Term Incentive Awards shall be selected from
     among the following alternatives, each of which may be based on absolute
     standards or peer industry group comparatives and may be applied at various
     organizational levels (e.g., corporate, business 

<PAGE>
 
     unit, division): (i) total shareholder return; (ii) stock price increase;
     (iii) dividend payout as percentage of net income; (iv) return on equity;
     (v) return on capital; (vi) cash flow; (vii) economic value added; (viii)
     market share; (ix) customer/employee satisfaction as measured by survey
     instruments; (x) earnings per share; (xi) revenue; (xii) workplace
     diversity; (xiii) safety; (xiv) personal performance; (xv) productivity
     measures; (xvi) diversification of business opportunities; (xvii) price to
     earnings ratio; (xviii) expense ratios; (xix) total expenditures; (xx)
     completion of key projects and (xxi) profit margin.

          (c) At the start of each Performance Cycle, the Chief Executive
     Officer of the Company will recommend, for approval by the Board of
     Directors, with respect to each Performance Goal, the actual performance
     results necessary to achieve the Threshold, Target and Maximum Performance
     Levels.

          (d) The Board of Directors may, in its sole discretion, modify
     Performance Goals or the formula for applying such Performance Goals during
     a Performance Cycle; provided, however, that any amendment of the
     performance goals or formula will be made in good faith and in response to
     unforeseen circumstances or significantly changed conditions; and provided,
     further, that in no case may the Board of Directors adopt any such
     modification that would increase a Long-Term Incentive Award otherwise
     payable to a Covered Employee.

          (e) A Participant's Award for any Performance Cycle with respect to
     each Performance Goal applicable to that Participant shall be (i) the
     Salary Range Midpoint applicable to the Participant at the start of the
     Performance Cycle, (ii) multiplied by the relative weight of such
     Performance Goal, (iii) with the product of (i) and (ii) multiplied by the
     applicable percentage interpolated from those set forth in the applicable
     table below, depending upon the Participant's Job Level and the actual
     Performance Level of each of the Participant's Performance Goals in
     relation to the Threshold, Target and Maximum Performance Levels.  The
     maximum amount of any Long-Term Incentive Award payable to a Participant
     for any Performance Cycle shall not exceed $400,000.  The Board of
     Directors will certify in writing whether and the extent to which each
     Participant has satisfied the Performance Goals for the Performance Cycle.
     No Long-Term Incentive Award shall be paid with respect to a particular
     Performance Goal unless the Threshold Performance Level has been achieved
     with respect to that Performance Goal.

<TABLE>
<CAPTION>
=========================================================================================================
                                           Percentage of Salary Range Midpoint
=========================================================================================================
<S>                                   <C>                 <C>               <C>               <C>
Job Level                             Below Threshold     Threshold         Target            Maximum
=========================================================================================================
 .  Chief Executive Officer            0%                  25%               50%               100%
---------------------------------------------------------------------------------------------------------
</TABLE> 

<PAGE>
 
<TABLE> 
--------------------------------------------------------------------------------------------------------- 
<S>                                   <C>                 <C>               <C>                <C> 
 .  Executive Vice President           0%                  20%               40%                80%
---------------------------------------------------------------------------------------------------------
 .  Vice President                     0%                  15%               30%                60%
---------------------------------------------------------------------------------------------------------
 .  Other Officers and Key             0%                  10%               20%                40%
   Employees
---------------------------------------------------------------------------------------------------------
</TABLE>

          To the extent a Participant changes Job Levels and/or Participant
     Groups during a Performance Cycle, the Board of Directors shall determine
     the methodology for calculating the Participant's Long-Term Incentive Award
     for such Performance Cycle.

     9.4  PAYMENT OF LONG-TERM INCENTIVE AWARDS.
          ------------------------------------- 

          (a) Long-Term Incentive Awards will be paid within 60 days following
     the Payment Date.

          (b) Long-Term Incentive Awards shall be calculated in cash, but shall
     be paid to Participants in shares of Common Stock based on the reported
     close price of the Common Stock on the New York Stock Exchange on the
     Payment Date, or if such information is not available as of the Payment
     Date, as of the first business day prior to the Payment Date on which the
     Common Stock was traded.  Fifty percent of the Long-Term Incentive Award,
     less applicable withholding and FICA taxes, shall be issued in unrestricted
     Common Stock.  Fifty percent of the Long-Term Incentive Award shall be
     issued as an Award of restricted stock pursuant to Section 7.

          (c) No fractional shares of Common Stock shall be issued or delivered
     pursuant to any Long-Term Incentive Award.  The Board of Directors shall
     determine whether cash shall be paid in lieu of such fractional shares or
     whether any rights thereto shall be forfeited or otherwise eliminated.

          (d) If permitted by the Board of Directors, a Participant may elect to
     defer payment of all or part of the Long-Term Incentive Award attributable
     to a Performance Cycle.  Deferral of awards shall be governed by such terms
     and conditions as the Board of Directors shall authorize.

     9.5  PARTICIPATION FOR A PORTION OF A PERFORMANCE CYCLE.
          -------------------------------------------------- 

          (a) If an individual becomes a Participant during a Performance Cycle,
     but not later than the first day of the third Performance Year of the
     Performance Cycle, the 

<PAGE>
 
     Participant shall be entitled to earn a pro rata Long-Term Incentive Award
     for such Performance Cycle. The pro rata Long-Term Incentive Award shall be
     determined by multiplying the Long-Term Incentive Award otherwise payable
     by a fraction, the numerator of which is the number of whole months of
     participation completed during such Performance Cycle, and the denominator
     of which is the number of months in such Performance Cycle. This provision
     may apply to more than one Performance Cycle.

          (b) If a Participant is employed and is a member of the Covered Group
     upon the completion of a Performance Cycle, the Participant's Long-Term
     Incentive Award, if any, for that Performance Cycle shall become vested,
     and thereafter shall only be forfeited for Cause.  If, prior to the end of
     a Performance Cycle, a Participant ceases employment with the Company or is
     transferred or assigned to a position outside of the Covered Group, no
     Long-Term Incentive Award shall be payable to such Participant with respect
     to that Performance Cycle.  Notwithstanding the above, if employment ceases
     during the last Performance Year of a Performance Cycle as a result of the
     Participant's Disability, death, reaching a Retirement Date under the
     Qualified Retirement Plan or early retirement with the consent of the Board
     of Directors, a pro rata Long-Term Incentive Award otherwise earned by such
     Participant shall be payable.  The pro rata Long-Term Incentive Award shall
     be determined by multiplying the Long-Term Incentive Award otherwise
     payable by a fraction, the numerator of which is the number of whole months
     of participation completed during such Performance Cycle, and the
     denominator of which is the number of months in such Performance Cycle.  In
     the event of the Participant's death, any such pro rata Long-Term Incentive
     Award shall be paid to the Participant's Beneficiary.  Any such pro rata
     Long-Term Incentive Award may be forfeited for Cause.

          (c) In the event of termination of this Section 9 or the Plan, the
     Company shall be obligated to pay:  (i) the Long-Term Incentive Award to
     which each Participant would have been otherwise entitled for a Performance
     Cycle completed before the date on which such termination occurs, and (ii)
     a pro rata Long-Term Incentive Award earned by Participants for the
     Performance Cycle next ending after the date on which such termination
     occurs, determined by multiplying the Long-Term Incentive Award otherwise
     payable by a fraction, the numerator of which is the number of whole months
     of employment completed prior to the applicable event during such
     Performance Cycle, and the denominator of which is the number of months in
     such Performance Cycle; provided, however, that if the Board of Directors
     is unable to differentiate performance as of the date on which such
     termination occurs, it will defer to Target Performance Levels for purposes
     of calculating Long-Term Incentive Awards.  No Long-Term Incentive Award
     shall be payable for any subsequent Performance Cycle.  No amendment shall
     result in any Participant receiving less than the amounts due in accordance
     with the preceding sentence if termination had occurred on the date of that
     amendment.  Except for the foregoing, the Company shall have no further
     obligations under this Section 9 or the Plan.

     9.6  DEFINITIONS APPLICABLE TO SECTION 9.
          ----------------------------------- 

          (a) BENEFICIARY.  The person, trustee or other entity designated by
              -----------                                                    
     the Participant, 

<PAGE>
 
     on a form established by the Company, to receive a benefit hereunder in the
     case of the Participant's death. In the event that no Beneficiary has been
     so named, or no named Beneficiary is living, the Participant's estate shall
     be the Beneficiary.

          (b) CAUSE.  A determination by the Company that the Participant has
              -----                                                          
     engaged in activity in her or his dealings with the Company which, if
     proved in a criminal proceeding, could result in the Participant's
     conviction for a felony, or that is (i) grossly negligent or intentional
     and (ii) results in material harm to Company.

          (c) COVERED GROUP.  The officers and selected key executives of the
              -------------                                                  
     Company who are approved by the Board of Directors for participation in the
     Plan with respect to a particular Performance Cycle.

          (d) DISABILITY.  The inability of a Participant, as determined by the
              ----------                                                       
     Board of Directors, substantially to perform such Participant's regular
     duties and responsibilities due to a medically determinable physical or
     mental illness that has lasted (or can reasonably be expected to last) for
     a period of six (6) consecutive months or longer.

          (e) JOB LEVEL.  Each Participant's position shall be categorized in
              ---------                                                      
     one of the following Job Levels:  Chief Executive Officer; Executive Vice
     President; Vice President; Other Officer or Key Employee.  Jobs Levels
     shall be a determining factor in calculating the magnitude of a
     Participant's Long-Term Incentive Award.

          (f) LONG-TERM INCENTIVE AWARD.  An Award granted to a Participant
              -------------------------                                    
     under this Section 9.

          (g) PARTICIPANT.  A member of the Covered Group.
              -----------                                 

          (h) PARTICIPANT GROUP.  One or more Participants who are subject to
              -----------------                                              
     the same Performance Goals.

          (i) PAYMENT DATE.  The last date of the Performance Cycle.  Because
              ------------                                                   
     Performance Cycles overlap by one year, Payment Dates occur every two
     years.

          (j) PERFORMANCE CYCLE.  The period of three consecutive Performance
              -----------------                                              
     Years which precedes the year in which a Long-Term Incentive Award is paid.
     The first Performance Cycle begins October 1, 1997.  Each subsequent
     Performance Cycle will begin at a two year interval from the commencement
     of the previous Performance Cycle.

          (k) PERFORMANCE GOAL.  A goal established for a Participant Group with
              ----------------                                                  
     respect to a particular Performance Cycle, as described in Section 9.6(j).

          (l) PERFORMANCE LEVEL.  A measure of the achievement of a Performance
              -----------------                                                
     Goal.  For each Performance Goal, a Threshold, Target and Maximum
     Performance Level shall be designated.  At the end of a Performance Cycle,
     an actual Performance Level shall be 

<PAGE>
 
     determined by the Board of Directors through interpolation of the
     designated Performance Levels.

          (m) PERFORMANCE YEAR.  A twelve consecutive month period within a
              ----------------                                             
     Performance Cycle, which begins on October 1 and ends on September 30.

          (n) QUALIFIED RETIREMENT PLAN.  The Yankee Energy System, Inc.
              -------------------------                                 
     Retirement Plan or the Yankee Energy System, Inc. 401(k) Employee Stock
     Ownership Plan.

          (o) SALARY RANGE MIDPOINT.  An amount announced by the Board of
              ---------------------                                      
     Directors at the start of each Performance Cycle with respect to each Job
     Level within the Covered Group.

SECTION 10.  REQUIREMENTS OF LAW.
             ------------------- 

     10.1 VIOLATIONS OF LAW.
          ----------------- 

     No shares shall be issued and delivered upon exercise of any Option or the
making of any Award or the payment of any SAR unless and until, in the opinion
of counsel for the Company, any applicable registration requirements of the
Securities Act of 1933, any applicable listing requirements of any national
securities exchange on which stock of the same class is then listed, and any
other requirements of law or of any regulatory bodies having jurisdiction over
such issuance and delivery, shall have been fully complied with.  Each
Participant may, by accepting Plan Benefits, be required to represent and agree
in writing, for himself or herself and for his or her transferees by will or the
laws of descent and distribution, that the stock acquired by him, her or them is
being acquired for investment.  The requirement for any such representation may
be waived at any time by the Board of Directors.

     10.2 COMPLIANCE WITH RULE 16B-3.
          -------------------------- 

     The intent of this Plan is to qualify for the exemption provided by Rule
16b-3 under the Exchange Act.  To the extent any provision of the Plan does not
comply with the requirements of Rule 16b-3, it shall be deemed inoperative to
the extent permitted by law and deemed advisable by the Board of Directors and
shall not affect the validity of the Plan.  In the event Rule 16b-3 is revised
or replaced, the Board of Directors may exercise discretion to modify this Plan
in any respect necessary to satisfy the requirements of the revised exemption or
its replacement.

SECTION 11.  RECAPITALIZATION.
             ---------------- 

     In the event that dividends are payable in Common Stock of the Company or
in the event there are splits, sub-divisions or combinations of shares of Common
Stock of the Company, the number of shares available under the Plan shall be
increased or decreased proportionately, as the case may be, and the number of
shares deliverable upon the exercise thereafter of any Option previously 

<PAGE>
 
granted shall be increased or decreased proportionately, as the case may be,
without change in the aggregate purchase price, the number of shares subject to
Awards as to which restrictions have not lapsed shall be increased or decreased
proportionately, as the case may be, and the number of shares to which granted
SARs relate shall be increased or decreased proportionately, as the case may be,
and the grant price of such SARs shall be decreased or increased
proportionately, as the case may be.

SECTION 12.  CHANGE IN CONTROL AND REORGANIZATION.
             ------------------------------------ 

          (a) For purposes of this Plan, a Change in Control shall mean (i) the
     acquisition by a third person, including a "person" as defined in Section
     13(d)(3) of the Exchange Act, of beneficial ownership (as defined in Rule
     13d-3 under the Exchange Act) directly or indirectly, of securities of the
     Company representing twenty-five percent (25%) or more of the total number
     of votes that may be cast for the election of the directors of the Company;
     or (ii) as the result of, or in connection with, any tender or exchange
     offer, merger, consolidation or other business combination, sale of assets
     or one or more contested elections, or any combination of the foregoing
     transactions, the persons who were directors of the Company shall cease to
     constitute a majority of the Board of the Company.  In the event of a
     Change of Control of the Company, except as the Board of Directors may
     expressly provide otherwise, all restrictions and conditions applicable to
     Awards then outstanding shall be deemed satisfied as of the date of the
     Change of Control and all Options awarded at least six (6) months prior to
     the Change of Control shall be exercisable as of such date.  Any SAR
     exercised upon or subsequent to the occurrence of a Change in Control shall
     be paid in cash.

          (b) In the case of any tender or exchange offer, merger, consolidation
     or other business combination or sale of all or substantially all of the
     assets of the Company, which does not constitute a Change in Control, or in
     the case of a reorganization or liquidation of the Company, the Board of
     Directors of the Company, or the board of directors of any corporation
     assuming the obligations of the Company hereunder shall, as to outstanding
     Plan Benefits, (i) make appropriate provision for the protection of any
     such outstanding Plan Benefits by the substitution on an equitable basis of
     appropriate stock of the Company or of the merged, consolidated or
     otherwise reorganized corporation which will be issuable in respect of the
     shares of Common Stock of the Company; provided only that the excess of the
     aggregate fair market value of the shares subject to the Plan Benefits
     immediately after such substitution over the purchase price thereof is not
     more than the excess of the aggregate fair market value of the shares
     subject to such Plan Benefits immediately before such substitution over the
     purchase price thereof, (ii) upon written notice to the Participants,
     provide that all unexercised Plan Benefits must be exercised within a
     specified number of days of the date of such notice or such Plan Benefits
     will be terminated, or (iii) upon written notice to the Participants,
     provide that the Company or the merged, consolidated or otherwise
     reorganized corporation shall have the right, upon the effective date of
     any such merger, consolidation, sale of assets or reorganization, to
     purchase all Plan Benefits held by each Participant and unexercised as of
     that date at an amount equal to the aggregate fair market value on such
     date

                                       18
<PAGE>
 
     of the shares subject to the Plan Benefits held by such Participant over
     the aggregate purchase or grant price therefor, such amount to be paid in
     cash or, if stock of the merged, consolidated or otherwise reorganized
     corporation is issuable in respect of the shares of the Common Stock of the
     Company, then, in the discretion of the Board of Directors, in stock of
     such merged, consolidated or otherwise reorganized corporation equal in
     fair market value to the aforesaid amount. In any such case the Board of
     Directors shall, in good faith, determine fair market value and may, in its
     discretion, advance the lapse of any waiting or installment periods and
     exercise dates.

SECTION 13.  NO SPECIAL EMPLOYMENT RIGHTS.
             ---------------------------- 

     Nothing contained in the Plan or in any Plan Benefit documentation shall
confer upon any Participant receiving a grant of any Plan Benefit any right with
respect to the continuation of his or her employment by the Company (or any
Related Corporation) or interfere in any way with the right of the Company (or
any Related Corporation), subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such employment or to
increase or decrease the compensation of the Participant from the rate in
existence at the time of the grant of any Plan Benefit.  Whether an authorized
leave of absence or absence in military or government service shall constitute
termination of employment shall be determined by the Board of Directors in
accordance with applicable law.

SECTION 14.  AMENDMENT OF THE PLAN.
             --------------------- 

     The Board of Directors may at any time and from time to time suspend or
terminate all or any portion of the Plan or modify or amend the Plan in any
respect.  The termination or any modification or amendment of the Plan shall
not, without the consent of an recipient of any Plan Benefit, affect his or her
rights under any Plan Benefit previously granted.  With the consent of the
affected Participant, the Board of Directors may amend outstanding agreements
relating to any Plan Benefit in a manner not inconsistent with the Plan.  The
Board of Directors hereby reserves the right to amend or modify the terms and
provisions of the Plan and of any outstanding Options to the extent necessary to
qualify any or all Options under the Plan for such favorable federal income tax
treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code, provided, however, that
the consent of a Participant is required if such amendment or modification would
cause unfavorable income tax treatment for such Participant.

SECTION 15.  WITHHOLDING.
             ----------- 

     The Company's obligation to deliver shares of stock upon the exercise of
any Option or SAR or the granting of an Award and to make payment upon exercise
of any SAR shall be subject to the satisfaction by the Participant of all
applicable federal, state and local income and employment tax withholding
requirements.

                                       19
<PAGE>
 
SECTION 16.  EFFECTIVE DATE AND DURATION OF THE PLAN.
             --------------------------------------- 

     16.1    EFFECTIVE DATE.
             -------------- 

     The Plan shall become effective when adopted by the Board of Directors, but
no Incentive Stock Option granted under the Plan shall become exercisable unless
and until the Plan shall have been approved by the Company's shareholders.  If
such shareholder approval is not obtained within 12 months after the date of the
Board's adoption of the Plan, then any Incentive Stock Options previously
granted under the Plan shall terminate and no further Incentive Stock Options
shall be granted.  Subject to such limitation, Options, SARs and Awards may be
granted under the Plan at any time after the effective date and before the date
fixed herein for termination of the Plan.

     16.2    DURATION.
             -------- 

     Unless sooner terminated in accordance with Section 12 hereof, the Plan
shall terminate upon the earlier of (i) the tenth anniversary of the date of its
adoption by the Board of Directors or (ii) the date on which all shares
available for issuance under the Plan shall have been issued pursuant to any
Awards or the exercise or cancellation of Options and SARs granted hereunder.
If the date of termination is determined under (i) above, then Plan Benefits
outstanding on such date shall continue to have force and effect in accordance
with the provisions of the instruments evidencing such Plan Benefits.

SECTION 17.  GOVERNING LAW.
             ------------- 

     The Plan and all actions taken thereunder shall be governed by the laws of
the State of Connecticut.

                                       20