Exhibit B-2
FORM OF SERVICE AGREEMENT BETWEEN
ENERGY EAST MANAGEMENT AND NON-UTILITY SUBSIDIARY
SERVICE AGREEMENT
This Service Agreement is made and entered into this _____ day of
___________, by and between __________________ ("Client Company") and Energy
East Management Corporation ("Service Company").
WITNESSETH
WHEREAS, the Securities and Exchange Commission ("SEC") has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility
Holding Company Act of 1935 ("Act") the organization and conduct of the business
of Service Company, in accordance herewith, as a wholly-owned subsidiary service
company of Energy East Corporation ("Energy East"); and
[WHEREAS, Client Company is a non-utility company subsidiary of Energy East
and an associate of Service Company;] [remove if client is Energy East] and
WHEREAS, Service Company and Client Company have entered into this Service
Agreement whereby Service Company agrees to provide and Client Company agrees to
accept and pay for various services as provided herein at cost, with cost
determined in accordance with applicable rules and regulations under the Act,
which require Service Company to fairly and equitably allocate costs among all
associate companies to which it renders services (collectively, the "Client
Companies"), including Client Company.
NOW THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties to this Service Agreement covenant and agree as
follows:
ARTICLE I - SERVICES
Section 1.1 Service Company shall furnish to Client Company, as requested
by Client Company, upon the terms and conditions hereinafter set forth, such of
the services described in Appendix A hereto, at such times, for such periods and
in such manner as Client Company may from time to time request and that Service
Company concludes it is able to perform. Service Company shall also provide
Client Company with such special services, in addition to those services
described in Appendix A hereto, as may be requested by Client Company and that
1
Service Company concludes it is able to perform. In supplying such services,
Service Company may arrange, where it deems appropriate, for the services of
such experts, consultants, advisers, and other persons with necessary
qualifications as are required for or pertinent to the provision of such
services.
Section 1.2 Client Company shall take from Service Company such of the
services described in Section 1.1, and such additional general or special
services, whether or not now contemplated, as are requested from time to time by
Client Company and that Service Company concludes it is able to perform.
Section 1.3 The cost of the services described herein or contemplated to be
performed hereunder shall be directly assigned, distributed or allocated by
activity, project, program, work order or other appropriate basis. Client
Company shall have the right from time to time to amend or alter any activity,
project, program or work order provided that (i) any such amendment or
alteration that results in a material change in the scope of the services to be
performed or equipment to be provided is agreed to by Service Company, (ii) the
cost for the services covered by the activity, project, program or work order
shall include any expense incurred by Service Company as a direct result of such
amendment or alteration of the activity, project, program or work order, and
(iii) no amendment or alteration of an activity, project, program or work order
shall release Client Company from liability for all costs already incurred by or
contracted for by Service Company pursuant to the activity, project, program or
work order, regardless of whether the services associated with such costs have
been completed.
Section 1.4 Service Company shall use its best efforts to maintain a staff
trained and experienced in the services described in Appendix A.
ARTICLE II - COMPENSATION
Section 2.1 As compensation for the services to be rendered hereunder,
Client Company shall pay to Service Company all costs that reasonably can be
identified and related to particular services performed by Service Company for
or on its behalf. The methods for assigning or allocating Service Company costs
to Client Company, as well as to other associate companies, are set forth in
Appendix A.
Section 2.2 It is the intent of this Service Agreement that charges for
services shall be distributed among Client Companies, to the extent possible,
based upon direct assignment. The amounts remaining after direct assignment
shall be allocated among the Client Companies using the methods identified in
Appendix A. The method of assignment or allocation of cost shall be subject to
review by the Service Company annually, or more frequently if appropriate. Such
method of assignment or allocation of costs may be modified or changed by the
Service Company without the necessity of an amendment to this Service Agreement;
provided that, in each instance, all services rendered hereunder shall be at
actual cost thereof, fairly and equitably assigned or allocated, all in
accordance with the requirements of the Act and any orders promulgated
thereunder. The Service Company shall review with the Client Company any
2
proposed material change in the method of assignment or allocation of costs
hereunder and the parties must agree to any such changes before they are
implemented. In addition, no such agreed upon material change shall be made
unless and until the Service Company shall have first given written notice to
the SEC not less than 60 days prior to the proposed effective date thereof.
Section 2.3 Service Company shall render a monthly report to Client Company
that shall reflect the information necessary to identify the costs charged for
that month in accordance with the Uniform System of Accounts for Mutual and
Subsidiary Service companies. Client Company shall remit to Service Company all
charges billed to it within 30 days of receipt of the monthly report. Any
amounts not paid by the due date will be subject to a late charge of .5% per
month until remittance is received.
Section 2.4 It is the intent of this Service Agreement that the payment for
services rendered by Service Company to Client Company under this Service
Agreement shall cover all the costs of its doing business including, but not
limited to, salaries and wages, office supplies and expenses, outside services
employed, property insurance, injuries and damages, employee pensions and
benefits, miscellaneous general expenses, rents, maintenance of structures and
equipment, depreciation and amortization, and compensation for use of capital as
permitted by Rule 91 of the SEC's regulations under the Act.
ARTICLE III - TERM
This Service Agreement shall become effective as of the date first written
above, subject only to the receipt of any required regulatory approvals from the
SEC, and shall continue in force until terminated by Service Company or Client
Company, upon not less than 90 days prior written notice to the other party.
This Service Agreement shall also be subject to termination or modification at
any time, without notice, if and to the extent performance under this Service
Agreement may conflict with the Act or with any rule, regulation or order of the
SEC adopted before or after the date of this Service Agreement.
ARTICLE IV - MISCELLANEOUS
Section 4.1 All accounts and records of Service Company shall be kept in
accordance with the General Rules and Regulations promulgated by the SEC
pursuant to the Act, in particular, the Uniform System of Accounts for Mutual
Service Companies and Subsidiary Service Companies in effect from and after the
date hereof.
Section 4.2 New direct or indirect subsidiaries of Energy East which may
come into existence after the effective date of this Service Agreement, may
become additional client companies of Service Company and subject to a service
agreement with Service Company. The parties hereto shall make such changes in
the scope and character of the services to be rendered
3
and the method of assigning, distributing or allocating costs of such services
as specified in Appendix A, subject to the requirements of Section 2.2, as may
become necessary to achieve a fair and equitable assignment, distribution, or
allocation of Service Company costs among all associate companies including the
new subsidiaries.
Section 4.3 Service Company shall permit Client Company access to its
accounts and records including the basis and computation of allocations.
4
IN WITNESS WHEREOF, the parties hereto have caused this Service Agreement
to be executed as of the date and year first above written.
ENERGY EAST MANAGEMENT CORPORATION
BY:
-----------------------------------
Name:
Title:
CLIENT COMPANY
BY:
-----------------------------------
Name:
Title:
The undersigned requests all services described in Appendix A and listed in the
Work Request Summary from Energy East Management Corporation. Services will
begin _________________________.
CLIENT COMPANY
BY:
-----------------------------------
Name:
Title:
5
Appendix A
DESCRIPTION OF SERVICES TO BE PROVIDED BY 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 non-utility subsidiaries and other business
units 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. 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 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.
6
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 Entity are directly
charged to that 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.
10. Commodity planning service includes coordination and direction of gas or
electric supply planning and procurement at utility or non-utility
companies. Costs for an individual Client Entity are directly charged to
the benefiting Client Entity. Costs for services that benefit all
applicable companies are allocated using the Commodity - 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.
7
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
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.
8
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.
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.
9
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.
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 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.
Commodity Global Allocator Factor - This formula is used to allocate the cost of
commodity planning, procurement, and sale that benefits Client Entities whose
responsibilities include planning for and procuring gas and/or electric supply.
The formula is derived through utilization of the gas and/or electric supply
costs of the applicable Client Entities and reflects the proportion of such
costs occurring between these entities.
10
