B-1 (Revised)
Appendix A
Description of Services to be Provided by Energy East Management Corporation
(Service Company) and Determination of Charges for Such Services to the Client
Entities
This document sets forth the methodologies used to accumulate the costs of
services performed by Energy East Management Corporation (EE Management) and to
assign or allocate such costs to utility subsidiaries within Energy East
("Client Entities").
DESCRIPTION OF SERVICES
-----------------------
A description of each of the services performed by EE Management, which may be
modified from time to time, is presented below.
1. Accounting services include the maintenance of books and records,
preparation of financial and statistical reports, tax filings and other
accounting functions and the associated supervision to assure compliance
with applicable laws and regulations. Accounting costs associated with
preparation of consolidated financial results and reporting, consolidated
tax matters, research and other compliance filings for Client Entities are
allocated using the global allocator factor, which is based on the
Massachusetts Formula. Costs associated with payroll processing are
allocated using the number of employees ratio. Costs associated with
accounts payable processing are allocated using the accounts payable ratio.
2. Audit services include the management of an entity-wide framework of
corporate controls. Audit costs associated with individual Client Entity
audits are directly charged to the benefiting Client Entity. General
administrative and planning costs are allocated using the global allocator
factor.
3. Corporate planning services include the preparation of corporate plans,
budgets and financial forecasts, monitoring trends and evaluating business
opportunities. These costs are allocated using the global allocator factor.
4. Executive services include general and administrative management and
strategic planning. General and administrative management costs are
allocated using the global allocator factor. For strategic planning
activities such as mergers, acquisitions, etc that are typically performed
for the holding company, a generic work request will be utilized to collect
charges related to ongoing strategic analyses and unique work order
requests will be established at the initiation of each specific project.
The costs recorded in these work requests will be charged directly to
Energy East Corporation. Strategic planning costs associated with one or
more Client Entities will be allocated to such entities using the global
allocator factor.
5. Finance and treasury services include the coordination of activities
relating to securities issuances, cash management services, investing
activities, investor relations, monitoring capital markets, performing
<PAGE>
financial and economic analysis and administering insurance programs. Costs
such as cash management services, securities issuances, investing
activities, performing financial and economic analysis, insurance costs,
etc that can be associated to an individual Client Entity are directly
charged to the benefiting Client Entity. Other costs such as monitoring
capital markets are allocated using the global allocator factor.
6. Governmental affairs services include monitoring, reviewing and researching
legislation and lobbying government officials. The costs of legislative
matters for an individual Client Entity are directly charged to that Client
Entity. Other administrative and general costs are allocated using the
global allocator factor.
7. Human resource services include the establishment, administration and
compliance of policies and procedures in the areas of employment,
compensation, benefits, employee health, welfare, and safety, and the
coordination of contract negotiation and relations with labor unions. Costs
are allocated using the number of employees ratio.
8. Legal services include the coordination and direction of law and regulatory
departments within the Energy East system. Costs related to specific legal
matters for an individual Client Entity are directly charged to that Client
Entity. Other administrative and general costs are allocated using the
global allocator factor.
9. Other corporate support services may include coordination and direction of
computer technology and information/telecommunication services, purchasing,
contract administration, and corporate communications services. Costs for
an individual Client Entity are directly charged to that Client Entity.
Other administrative and general costs are allocated using the global
allocator factor.
EE Management's accounting, billing and cost allocation methods utilize the
"Uniform System of Accounts for Mutual Service Companies and Subsidiary Service
Companies" and are structured so as to comply with the Commission standards for
service companies in registered holding-company systems.
COST ASSIGNMENT
---------------
EE Management maintains an accounting system that enables costs to be identified
by Work Request (W/R) number. These W/R numbers used in combination with
Accounts, Resource Codes, Product/Service Codes and Client Entity numbers will
indicate whether the cost is a direct charge or the result of an allocated
charge. The primary inputs to the accounting system are time reports, accounts
payable invoices and journal entries. Charges for labor are calculated using the
employees' hourly rate. All EE Management employees will maintain a record of
their time. Employees will utilize separate work requests to record their
activities, including the services provided directly to Client Entities. All
employees will charge their time on a daily basis using designated increments.
The time sheets will be reviewed and approved by department supervisors. The
wages of those employees, such as administrative assistants and secretaries, who
generally assist employees who provide services directly to system companies,
will be allocated based on the allocation of the wages of the employees they
assist. Time records will be maintained for three years. Indirect attributable
2
<PAGE>
costs are charged to the services performed in proportion to the directly
assigned costs or other appropriate cost allocators.
Cost will be accumulated by work request number and assigned as follows:
1. Costs accumulated in a work request number for services specifically
performed for a single Client Entity will be directly assigned or billed to
that Client Entity.
2. Costs accumulated in a work request number for services specifically
performed for two or more Client Entities will be distributed among those
Client Entities using methods determined on a case-by-case basis consistent
with the nature of the work performed and on one of the allocation methods
described below.
3. Costs accumulated in a work request number for services of a general nature
which are applicable to all Client Entities will be allocated among all
Client Entities, including the holding company, and billed to them using
the global allocator factor.
COST ALLOCATION
---------------
EE Management uses cost allocation methods designed to fully distribute costs.
EE Management's cost allocation methodology is comprised of the following three
steps:
1. To "direct charge" all labor, materials and other expenses to Client
Entities whenever feasible.
2. To allocate directly attributable costs to Client Entities based upon a
measurable cost causing relationship, i.e., payroll department costs are
allocated on the number of employees for each Client Entity.
3. To allocate indirectly attributable costs that are common to all Client
Entities, including the holding company, using the global allocator factor
taking into consideration the relative size of each Client Entity with
regards to gross revenues, gross payroll expense and plant.
Costs that can be directly attributed to direct charges are allocated in
proportion to the direct charges or other appropriate cost allocations. For
example, direct labor charged to prepare testimony for a specific Client Entity
not only includes the direct payroll charge (the hourly rate times the hours
reported) but also includes the cost of that individual's proportional payroll
overhead cost, and such other overheads as common asset usage, occupancy charges
and management overhead charges (commonly referred in aggregate as an
Administrative and General Overhead).
General and administrative costs that are not associated with a specific,
identifiable, causal relationship are pooled and allocated to all Client
Entities, including the holding company.
3
<PAGE>
ALLOCATION METHODS
------------------
ALLOCATIONS RELATED TO DIRECT LABOR CHARGES
The following allocations will be applied to the Direct Labor Charges:
Payroll Overhead Charge will be calculated to recover costs associated with
labor, such as pension, benefits, lost time and payroll taxes. The payroll
overhead costs will be charged to Client Entities based on direct labor charges.
The rate is computed by dividing the annual payroll overhead expenses by the
annual base labor dollars.
Other Allocations applied to Direct Labor Charges will consist of the following:
1. Common Asset Usage Overhead:
The Common Asset Usage Overhead allocates the cost of furniture and desktop
equipment (including PC's) used by EE Management. The rate is calculated by
dividing the economic carrying costs of the assets by the total actual
labor dollars of employees using those assets. This overhead is directly
applied to all EE Management labor charged or allocated to Client Entities.
2. Occupancy Overhead:
The Occupancy Overhead allocates costs related to the workspace occupied by
EE Management employees. The rate is calculated by dividing the economic
carrying costs for the buildings by the total actual labor dollars of
employees working in those buildings. This overhead is directly applied to
all EE Management labor charged or allocated to Client Entities.
3. Management Overhead:
This overhead represents the management cost of a function within EE
Management. It is based on the ratio of EE Management supervisory wages to
all other wages. This fixed rate is applied to all direct labor charged to
Client Entities.
AN ALTERNATIVE ALLOCATION APPLIED TO DIRECT LABOR CHARGES OR OTHER DIRECT
CHARGES
An alternative allocation applied to direct labor charges or other direct
charges is commonly referred to as an Administrative and General Support Adder.
This overhead is a general overhead used in place of other specific
administrative and general support overheads and is added to total costs of
services. The purpose is to recover indirect administrative and general expenses
incurred and not otherwise charged directly to Client Entities for certain
activities. The adder also includes expenses associated with office facilities,
including furniture and office equipment, used in performing these
administrative functions.
4
<PAGE>
ALLOCATIONS RELATED TO DISTRIBUTED SERVICES
The following ratios will be used to allocate costs for services not directly
assigned but pooled and allocated based on a causal measurement:
Number of Employees Ratio - Based on the number of employees benefiting from the
performance of a service. This ratio will be determined annually based on actual
count of applicable employees at the end of the previous calendar year and may
be adjusted periodically due to a significant change.
Accounts Payable Ratio - Based on the number of invoices processed for each of
the specific Client Entities. This ratio is determined annually based on the
actual count of invoices at the end of the previous calendar year and may be
adjusted periodically due to a significant change.
Global Allocator Factor - This formula will be determined annually based on the
average of gross plant (original plant in service), gross payroll charges
(salaries and wages, including overtime, shift premium and lost time, but
excluding pension, payroll taxes and other employee benefits) and gross revenues
during the previous calendar year and may be adjusted for any known and
reasonable quantifiable events or at such time as may be required due to
significant changes. This formula is commonly referred to as the Massachusetts
Formula.
5
