EXHIBIT G-2
KeySpan Utility Services LLC
Form of
SERVICE AGREEMENT (KUS)
This Service Agreement ("Agreement") dated as of _________,___ by and
between KeySpan Utility Services LLC ("KUS"), a New York limited liability
company and _____________[list companies} (individually a "Client Company" and
collectively, the "Client Companies"). KUS and the Client Companies may each be
referred to herein as a "Party," and collectively referred to herein as the
"Parties."
WITNESSETH:
WHEREAS, KUS is a wholly owned subsidiary of KeySpan Corporation
("KeySpan") which is a registered holding company under the Public Utility
Holding Company Act of 1935, as amended (the "Act");
WHEREAS, the Securities and Exchange Commission (the "SEC") has approved
and authorized KUS as a service company pursuant to Section 13(b) of the Act and
the SEC regulations promulgated thereunder to provide services to KeySpan and
its subsidiaries; and
WHEREAS, KUS and the Client Companies desire for KUS to provide, and the
Client Company to accept, the services provided for hereunder in accordance with
the terms of this Agreement.
NOW THEREFORE, in consideration of the mutual representations, covenants
and agreements hereinafter set forth, and intending to be legally bound hereby,
the Parties hereto agree as follows:
ARTICLE I
SERVICES
1.1. Services Offered. Exhibit I to this Agreement describes the services
that KUS offers to furnish to a Client Company (in accordance with the terms and
conditions set forth herein) upon written request of such Client Company. In
addition to the services described in Exhibit I hereto, KUS may also provide a
Client Company with such special services, as may be requested by such Client
Company in writing, which the Service Company concludes it is able to perform.
In supplying services hereunder to a Client Company, KUS 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 performance of such services.
1.2. Services Selected.
(a) Each Client Company shall make its initial selection of the
services set forth in Section 1.1 above that it agrees to receive from KUS by
providing KUS an executed service request in the form set forth in Exhibit II.
(b) By December 1 of calendar year, KUS shall send an annual service
proposal to each Client Company listing the services proposed for the next
calendar year. By December 31, each Client Company shall notify KUS in writing
of the services it elects to receive from KUS during the next calendar year.
1.3. Modification of Services. A Client Company shall have the right from
time to time to amend, alter or rescind any activity, project, program or work
order provided that (i) such amendment or alteration which results in a material
change in the scope of the services to be performed or equipment to be provided
is agreed to by KUS, (ii) the cost for the services covered by the activity,
project, program or work order shall include any expense incurred by KUS as a
direct result of such amendment, alteration or rescission of the activity,
project, program or work order, and (iii) no amendment, alteration or rescission
of an activity, project, program or work order shall release a Client Company
from liability for all costs already incurred by or contracted for by KUS
pursuant to the activity, project, program or work order, regardless of whether
the services associated with such costs have been completed. Any request made by
a Client Company pursuant to this Section 1.3 shall be in writing to KUS and
shall take effect on the first day of the first calendar month which is at least
thirty (30) days after the day that the Client Company sent the written notice
to KUS.
1.4. Service Receipt Limitations.
(a) __________[insert utility name] agrees that:
(i) it will not incur a charge hereunder except in accordance
with ________________ [insert applicable State] and the rules, regulations and
orders of the _________________[insert name of applicable state public service
commission] promulgated thereunder; and
(ii) it will not seek to reflect in rates any cost incurred
hereunder to the extent disallowed by the ___________ Public Service Commission.
2
(b) Notwithstanding anything in this Agreement to the contrary, KUS
and ________ agree that because of the agreements set forth in Section 1.4(a)
above, ______________ will not accept services from KUS hereunder if the cost to
be charged for such services differs from the amount of the charges
___________is permitted to incur under _______________ [insert applicable State]
and the rules, regulations and orders of the _________________[insert name of
applicable state public service commission] promulgated thereunder.
ARTICLE 2
COMPENSATION AND BILLING
2.1. Compensation. As and to the extent required by law, KUS shall provide
the services hereunder at cost. Exhibit I hereto sets forth the rules KUS shall
use for determining and allocating costs to the Client Companies. KUS shall
advise the Client Companies from time to time of any material change in the
method of assignment or allocation of costs hereunder, and no such material
change shall be made unless and until KUS shall have first given written notice
to the SEC not less than sixty (60) days prior to the proposed effective date
thereof.
2.2. Invoices. By the ___ day of each month, KUS shall render a monthly
xxxx to each Client Company which shall reflect the billing information
necessary to identify the costs charged for the services KUS provided in the
preceding month. A Client Company shall pay its invoice to KUS within ___ days
after receiving the invoice.
ARTICLE 3
TERM AND TERMINATION
3.1. Effective Date. This Agreement shall become effective on the date
hereof, subject to receipt of all required federal or state regulatory
approvals.
3.2. Termination. This Agreement shall continue in full force and effect
with respect to KUS and a Client Company until (a) terminated by the Client
Company upon sixty (60) days advance written notice to KUS, or (b) terminated by
KUS upon sixty (60) days advance written notice to a Client Company. This
Agreement shall also be subject to termination or modification at any time,
without notice, if and to the extent performance under this 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.
3
ARTICLE 4
MISCELLANEOUS
4.1. Modification. Except as set forth in Article 2 and Sections 1.3, 3.2
and 4.4, no amendment or other modification of this Agreement shall be effective
unless made in writing and executed by all of the Parties to this Agreement.
4.2. Notices. Where written notice is required by this Agreement, said
notice shall be deemed given when mailed by United States registered or
certified mail, postage prepaid, return receipt requested, addressed as follows:
To KUS:
[Insert Name and address]
To Client Company: The name and address of the person designated
in writing to KUS on the date the Client Company executes this
Agreement.
4.3. Accounts. All accounts and records of KUS 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. Upon
request, KUS shall permit a Client Company reasonable access to the accounts and
records of KUS relating to the services performed for such Client Company
hereunder.
4.4. Additional Client Companies. After the effective date of this
Agreement, any new or existing direct or indirect subsidiary of KeySpan may
become an additional Client Company under this Agreement by becoming a signatory
to this Agreement.
4.5. Waiver. Except as otherwise provided in this Agreement, any failure of
a Party to comply with any obligation, covenant, agreement, or condition herein
may be waived by the Party entitled to the benefits thereof only by a written
instrument signed by the Party granting such waiver, but such waiver or failure
to insist upon strict compliance with such obligation, covenant, agreement, or
condition shall not operate as a waiver of, or estoppel with respect to, any
subsequent or other failure.
4.6. No Third Party Beneficiaries. Nothing in this Agreement is intended to
confer upon any other person except the Parties any rights or remedies hereunder
or shall create any third party beneficiary rights in any person. No provision
of this Agreement shall create any rights in any such persons in respect of any
benefits that may be provided,
4
directly or indirectly, under any employee benefit plan or arrangement except as
expressly provided for thereunder.
4.7. Governing Law This Agreement shall be governed by and construed in
accordance with the laws of the State of New York (regardless of the laws that
might otherwise govern under applicable principles of conflicts of law).
4.8. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
4.9. Entire Agreement. This Agreement including the exhibits referred to
herein or therein, constitute the entire agreement and understanding of the
Parties in respect of the transactions contemplated by this Agreement. KUS and
each Client Company may enter into non-binding service level agreements (as
described more fully in the policies and procedures to be set forth in Exhibit
I), the purpose of which will be to set forth in general terms the shared
service expectations between KCS and the Client Company as a managerial tool to
facilitate matching the Client Companies needs to the capabilities of KUS. There
are no restrictions, promises, representations, warranties, covenants or
undertakings other than those expressly set forth or referred to herein or
therein. This Agreement supersedes all prior agreements and understandings
between the Parties with respect to the transactions contemplated by this
Agreement.
4.10. Severability. If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law or public
policy, all other conditions and provisions of this Agreement shall nevertheless
remain in full force and effect.
4.11. Independent Contractor Status. Nothing in this Agreement shall be
construed as creating any relationship between KUS and the Client Companies
other than that of independent contractors.
4.12. Assignment. KUS shall not assign this Agreement, or any of its rights
or obligations hereunder without the prior written consent of the Client
Companies, such consent not to be unreasonably withheld. A Client Company shall
not assign this Agreement, or any of its rights or obligations hereunder without
the prior written consent of KUS. This Agreement shall inure to the benefit and
shall be binding upon the Parties and their permitted successors and assigns.
5
IN WITNESS WHEREOF, KUS and the Client Companies have caused this Service
Agreement to be signed by their respective duly authorized officers as of the
date first above written.
KEYSPAN UTILITY SERVICES LLC
By:____________________________
Name:
Title:
[LIST CLIENT COMPANIES]
By:____________________________
Name:
Title:
6
EXHIBIT I
Description of Services, Cost Accumulation, Assignment
and Allocation Methodologies for KUS
A. Description of Services Offered by KeySpan Utility Services
1. Fuel Management
Manage Client Companies' purchase, sale, movement, transfer and accounting of
gas quantities to ensure continued recovery of all prudently incurred energy
purchase costs through local jurisdictional cost recovery mechanisms.
Provide services and systems dedicated to energy marketing, including marketing
and trading of gas and energy price risk management. Develop marketing and sales
programs in physical and financial markets for regulatory and specific
contractual requirements. Activities include short-term planning, billing and
reconciliations.
2. Marketing and Sales
Plan, formulate and implement marketing and sales programs, as well as provide
associated marketing services to assist Client Companies with improving customer
satisfaction, load retention and shaping, growth of residential,
commercial/industrial energy sales and deliveries, energy conservation and
efficiency. Assist Client Companies in carrying out policies and programs for
the development of plant locations and of industrial, commercial and wholesale
markets. Develop and administer Marketing research and planning programs as well
as advertising/telemarketing programs. Perform load research, econometric
modeling, and sales and revenue forecasting for jurisdictional gas subsidiaries.
3. Meter Operations
Purchase, repair and refurbish meters for Client Companies.
4. Research and Development
7
Investigate and conduct research relating to production, utilization, testing,
manufacture, transmission, storage and distribution of energy. Keep abreast of
and evaluate for Client Companies all research developments and programs of
significance affecting Client Companies and the energy industry. Advise and
assist in the solution of technical problems arising out of Client Companies'
operations.
5. Gas and Electric Transmission and Distribution Planning
Provide gas and electric transmission and distribution planning services as
related to system and safety reliability, expansion and load handling
capabilities.
B. Methods of Allocation
Cost of service will be determined in accordance with the Act and the rules and
regulations and orders thereunder, and will include all costs of doing business
incurred by KUS, including a reasonable return on capital which will reflect a
capitalization of KUS of no more than equity of ten percent (10%), and all
associated taxes.
KUS will maintain an accounting system for accumulating all costs on a project,
activity or other appropriate basis. The accounting system will use codes to
assign charges to the applicable costs center, project, activity and account.
Records will be kept by each cost center of KUS in order to accumulate all costs
of doing business. Expenses of the department will include salaries and wages of
employees, materials and supplies and all other expenses attributable to the
department. Labor cost will be loaded for fringe benefits and payroll taxes. To
the extent practicable, time records of hours worked by service company
employees will be kept by project and activity. In supplying services, KUS may
arrange where it deems appropriate, for the services of experts, consultants,
advisors and other persons with necessary qualifications as are required to
perform such services. KUS will establish annual budgets for controlling the
expenses of each department.
Monthly KUS costs will be directly assigned to Client Companies where possible.
Amounts that cannot be directly assigned will be allocated to Client Companies
by means of equitable allocation formulae or clearing accounts. To the extent
possible, such allocations shall be based on cost-causation relationships. All
other allocations will be broad based. In some instances, KUS cost centers which
perform work for other service company cost centers may use a surrogate
allocation method that mimics the allocations of the receiver cost center. Each
formula will have an appropriate basis such as meters, square footage, etc.
8
Each Client Company will take agreed upon services and such additional or
general or special services, whether or not now contemplated, as are requested
from time to time by such Client Company and which KUS concludes it is able to
perform. No amendment, alteration or rescission of an activity or project shall
release a Client Company from liability for all costs already incurred by, or
contracted for, by KUS pursuant to the project or activity regardless of whether
the services associated with such costs have been completed.
Allocation percentages will be calculated on historical data where appropriate
and updated annually. Due to the unique nature of the management services
agreement contract with the Long Island Power Authority (LIPA), the bases of the
LIPA (such as revenues, assets, etc. managed on their behalf) will be included,
with the applicable Client Company's data, in order to determine appropriate
allocations.
The method of assignment or allocation of costs shall be reviewed annually or
more frequently if appropriate. If the use of a basis of allocation would result
in an inequity because of a change in operations or organization, then KUS may
adjust the basis to effect an equitable distribution.
The applications of Service Allocations are described more fully below.
Service Department
Or Function Basis of Allocation
------------------ -------------------
Customer Services # of phone calls
# of bills
# of meters
% of Accounts Receivable
# of customers
3-point formula (1,2)
Fuel Management sendout
3-point formula (1,2)
Research and Development 3-point formula (1,2)
Meter Operations # of meters
Gas and Electric Transmission and
Distribution Planning Property
9
Definition of Allocation Factors to be used by KUS
--------------------------------------------------
Assets - A ratio based on total assets at the end of the year, the numerator of
which is for a specific client company and the denominator being all recipient
client companies. This ratio will be calculated annually based on actual
experience.
# of Meters - A ratio based on the number of meters at the end of the year, the
numerator of which is for a specific client company and the denominator being
all recipient client companies. This ratio will be calculated annually based on
actual experience.
Payroll - A ratio based on total wages, salaries, commissions and other forms of
compensation paid during the year which are reportable, for federal income tax
purposes, as taxable income to the employee, the numerator of which is for a
specific client company and the denominator being all recipient client
companies. This ratio will be calculated annually based on actual experience.
Property - A ratio based on gross fixed assets, valued at original acquisition
costs, and investments owned in other companies, including construction work in
progress, at the end of the year, the numerator of which is for a specific
client company and the denominator being all recipient client companies. This
ratio will be calculated annually based on actual experience.
Revenue - A ratio based on the revenue for the previous calendar year, the
numerator of which is for a specific client company and the denominator being
all recipient client companies. This ratio will be calculated annually based on
actual experience.
Sendout - A ratio based on the sendout for the previous calendar year, including
gas used by the Client entity but excluding Transportation customer volumes
delivered for another gas supplier, the numerator of which is for a specific
client company and the denominator being all recipient client companies. This
ratio will be calculated annually based on actual experience.
3-Point Formula (1,2) - This formula consists of three factors. It is designed
to be an equitable and feasible tool to act as a surrogate when direct charging
or cost causal relationships can not be established. It is a calculated ratio,
which compares each of the formula factors for the Client Company to the total
of the same factors for all recipient Client Companies. The factors for (1)
would be an equal weighting of Revenue, Property and Payroll (i.e., the
"Massachusetts" Formula). The factors
10
for (2) would be an equal weighting of Revenue, Assets, and Expenses. These
ratios will be calculated annually based on actual experience.
C. Accounting Policies and Procedures
Introduction
------------
The purpose of this procedure is to document accounting policies and
procedures by which KUS, will provide services to Client Companies in accordance
with the terms of the Service Agreement. The Service Agreement will be
administered in accordance with the Act.
Non-Binding Service Level Agreements (SLA)
------------------------------------------
As mentioned in Section 4.9 of the Service Agreement, KUS and each
Client Company may enter into non-binding service level agreements (SLAs). The
areas in KUS which are operating under a Shared Services philosophy would be
utilizing the SLAs in addition to the Service Agreement. The SLA is a managerial
tool which is meant to facilitate matching the Client Companies needs to the
capabilities of KCS to better xxxxxx a true client/provider operating culture
within KUS. The SLA would typically include greater detail involving some or all
of the following: work to be performed, performance standards and client
satisfaction issues.
Cost Management
---------------
KUS will maintain a cost management information system which allows it
to accumulate costs via cost objects. Cost objects are collection tools and
include: Projects, Activities, and Cost Centers. Projects and Activities
constitute a work order system for charging costs to specific activities. These
tools collect costs for a limited amount of time and either transfer the dollars
to a cost center, if they are an expense, or to an asset and/or balance sheet
account for capitalized costs. Cost Centers collect resource costs and are the
final receiver of expenses collected in Project Activities as described above.
This system supports the philosophy of separating costs by business group and
legal entity on a fully costed basis. KUS will use this system to maintain an
accounting system to record all costs of operations.
The cost of work performed by KUS will be collected in Project
Activities and Cost Centers. Time records and expense statements will be used to
track resource consumption. Labor related costs are expected to be the most
significant costs for KUS. To the extent practicable, the KUS employees shall be
required to directly charge their time to an appropriate cost object through the
time reporting
11
system. The following guidelines are provided to ensure accuracy and efficient
time keeping by KUS employees:
1. Time should be entered daily into the appropriate time reporting
system. If this is not practical, the employee should prepare
manually prepared time records, substantiating later electronic
time entry.
2. In no event should normal time entry be delayed past the end of
the pay period.
3. Employees should keep track of time in 15 minute increments.
4. Employee time shall be approved by the employee's supervisor
using the time reporting system.
Costs will be charged to Client Company Cost Centers, Project Activities as work
is performed and costs are incurred. The billing process agreed upon in the SLA
will be used by KUS personnel to guide the establishment of the necessary cost
objects to charge costs to a Client Company. When a service requested by a
Client Company was not specified in the most recent Service Agreement, a new
cost object may be created. In this instance, the new cost object will be agreed
upon by the KUS department to provide the service and the business group of the
Client Company to receive the service. The Accounting Services department is
responsible to ensure that all of the billing methodologies are consistent with
the Service Agreement approved by the SEC. The establishment of cost objects
within the cost management information system for use by KUS will be strictly
controlled by the Accounting Services department. The Accounting Services
department will ensure that all cost objects have been authorized by the
appropriate Shared Services department and the Client Company business group.
KCS will have a tiered approach to billing Client Companies. First and
foremost, costs will be directly charged when practicable. Secondly, costs will
be allocated to the appropriate Client organization using the appropriate
allocation ratio. Finally, any residuals will be allocated using the appropriate
allocation ratio.
A. Direct Charges: Labor related services consumed for an Project or
Activity performed specifically for a Client organization will be
directly charged to that cost object at a standard rate per unit of
labor or unit of services. The standard rate includes actual incurred
cost, including procurement and storeroom costs, benefit and payroll
taxes and overhead costs. Vehicle costs and occupancy costs, will be
charged directly to client organizations at standard unit rate. When
12
identifiable, standard rates, will be directly charged to a Client
Company Project, Order or Cost Center. Any residuals or variances will
be assigned or allocated to the appropriate Client Company.
B. Allocations: Costs accumulated that apply to all Client Companies or
to a group of Client Companies, which have not been directly charged
as described in item A above, will be allocated based on the
allocation ratios defined in Section B of this Exhibit I. Allocation
ratios will be reevaluated by KUS and expressly approved by each
Client Company on at least an annual basis. More frequent
reevaluations will be made when significant residuals result. Any
revisions to allocation methods will be agreed upon with the Client
Companies before modifications are implemented. The Accounting
Services department shall be responsible for ensuring that any
revisions to allocation methodologies are approved by the Client
Companies and the SEC on a timely basis.
X. XXX Cross Charges: Certain KUS overhead costs, such as the cost of
benefits, purchasing and storeroom management, procurement and
materials management, and building services are charged to KUS
functions that utilize these services and included in their standard
rate for billing to Client Companies. In addition, certain KUS direct
charges, such as vehicles and building services are charged to KUS
functions to the extent these functions utilize these services. These
charges are included in the amounts that these functions xxxx to
Client Companies.
Monitoring
----------
The Accounting Services department shall be responsible for reviewing,
monitoring and maintaining the process for the accumulation of KUS costs charged
to Client Companies, whether through direct charges or allocations. In
connection with this responsibility, the Accounting Services department shall:
1. Review and approve all Service Agreements.
2. Control the establishment of all cost objects for billing by KUS.
3. Analyze the reasonableness of charges in the cost management
information system.
13
4. Review and evaluate the reasonableness of the monthly xxxx to
each Client Company.
The Accounting Services department shall be responsible for updating
all allocations used by the cost management information system. Supporting
workpapers will be maintained with the Accounting Services department. The
Accounting Services department will be responsible to ensure that all
allocations are proper, accurate and current. Also, the Accounting Services
department shall be responsible for ensuring that changes to the allocation
methodologies have been approved by the SEC. Any modification of an allocation
methodology which requires filing under 60-day letter procedures based on
existing SEC guidelines shall be filed on a timely basis. The current guidelines
require SEC approval of a modification of an allocation methodology if the
change will cause the lesser of $50,000 or five percent (5%) change in the
annual allocation of costs among Client Companies. The Accounting Services
department shall be responsible for ensuring to the extent practicable that the
allocation methodologies are consistent with any orders or directives issued by
utility rate setting regulatory bodies having jurisdiction over the Company.
Billing
-------
Monthly, the Accounting Services Manager will prepare and submit a xxxx
to each Client Company. The Accounting Services department shall be responsible
for reviewing the monthly bills, as necessary, with the pertinent officers of
the Client Companies, or their designees, who are responsible for approval of
the bills. Each xxxx will be approved on a timely basis by the appropriate
officer of each Client Company.
The monthly bills will contain the following information:
1. The Client Company.
2. The cost of each service billed to the Client Company.
3. For each service, the xxxx will show each Client Company order,
project, or cost center charged for the service.
The cost management information system will contain detailed
information supporting each service charged to a Client Company. Using the cost
management information system, the Accounting Services department will provide
the officer of the Client Company, or his designee, detailed information on
direct and allocated charges as may be required in order to approve the xxxx.
14
Furthermore, each Client Company organization head and project manager
is responsible for validating, in a timely manner, costs charged to their
organization or project, including amounts billed by KUS. This validation is a
key component of KeySpan's system of internal controls. Using the cost
management information system, cost centers are able to drill down on all costs
billed to them by KUS to determine the specifics of each cost. The Accounting
Services department will assist Client Company organizations, as necessary, to
research and validate charges to their organizations.
When an erroneous charge is discovered, the Accounting Services
department is responsible for correction of the error in the subsequent month.
Dispute Resolution
------------------
If there is a dispute between a Client Company and KUS concerning the
appropriateness of an amount billed to a Client Company, the Accounting Services
department will meet with the appropriate representatives for the Client Company
cost center and KUS to resolve the dispute. If the dispute cannot be resolved by
the Accounting Services department, the issue will be referred to the Chief
Financial Officer for final resolution.
Internal Audit
--------------
The Internal Audit department shall perform an audit of the KUS billing
process every year. Computer systems, xxxxxxxx and source documents will be
examined to ensure, on a test basis, that the services provided are authorized,
documented and accurately recorded in the accounting records. The audits will
include an examination of the allocation factors used to ensure that the
methodologies have been approved by the SEC. Also, the audits will evaluate the
adequacy of the system of internal controls over the billing process and the
reasonableness of each allocation methodology used to distribute costs to the
Client Companies.
Evaluation and Measurement
--------------------------
In order to encourage KUS to operate efficiently and cost effectively,
and provide high quality service, KUS will initiate a customer review process.
The customer review process will be based on a customer-oriented service
philosophy and measure success based on customer satisfaction. It will allow for
customer input into the volume and value of the products and services provided
by KUS. These reviews will be part of the annual budget development process and
the completion of the Service Agreements between KUS and its customers.
15
EXHIBIT II
Form of Initial Service Request
The undersigned requests from KeySpan Utility Services LLC all of
the services selected below. The services requested hereunder shall commence on
______________ and be provided through _____________________.
Service Yes No
------- --- --
Fuel Management ___ ___
Marketing and Sales ___ ___
Meter Operations ___ ___
Research and Development ___ ___
[Client Company]
By
-----------------------------
Name:
Title:
16
