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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 Companies
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
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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. Cost 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
company 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, these costs are directly charged to
East East Corporation. Strategic planning costs associated with the
existing portfolio of companies are allocated 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
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
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company 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 company are directly
charged to the benefiting 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 company are directly
charged to the benefiting 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 company are
directly charged to the benefiting 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
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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. Indirect attributable 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 will be directly assigned or billed to
the Client.
2. Costs accumulated in a work request number for services specifically
performed for two or more Clients will be distributed among the
Clients using methods determined on a case-by-case basis consistent
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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 Clients will be allocated among all
Clients and billed to them using the global allocator factor.
COST ALLOCATION
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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.
3. To allocate indirectly attributable costs that are common to all
client entities using the global allocator factor taking into
consideration the relative size of each 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 utility 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 based on the global
allocator factor.
ALLOCATION METHODS
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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 companies 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:
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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 clients.
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 clients.
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 clients.
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
client services. The purpose is to recover indirect administrative and general
expenses incurred and not otherwise charged directly to these clients for
certain activities. The adder also includes expenses associated with office
facilities, including furniture and office equipment, used in performing these
administrative functions.
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 Clients. 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
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excluding pension, payroll taxes and other employee benefits) and gross revenues
during the pervious 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.
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