EXHIBIT G-3
KeySpan Engineering & Survey Inc.
Form of
SERVICE AGREEMENT
This Service Agreement ("Agreement") dated as of _________,___ by and
between KeySpan Engineering & Survey Inc. ("KENG"), a New York limited liability
company and _____________[list companies} (individually a "Client Company" and
collectively, the "Client Companies"). KENG and the Client Companies may each be
referred to herein as a "Party," and collectively referred to herein as the
"Parties."
WITNESSETH:
WHEREAS, KENG 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 KENG 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, KENG and the Client Companies desire for KENG 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 1
SERVICES
1.1. Services Offered. Exhibit I to this Agreement describes the
services that KENG 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, KENG 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, KENG may
arrange, where it deems appropriate, for the services of such experts,
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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 KENG by
providing KENG an executed service request in the form set forth in Exhibit II.
(b) By December 1 of calendar year, KENG 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 KENG in
writing of the services it elects to receive from KENG 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 KENG, (ii) the cost for the services covered by the
activity, project, program or work order shall include any expense incurred by
KENG 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
KENG 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
KENG 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 KENG.
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.
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(b) Notwithstanding anything in this Agreement to the contrary,
KENG and ________ agree that because of the agreements set forth in Section
1.4(a) above, ______________ will not accept services from KENG 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, KENG shall
provide the services hereunder at cost. Exhibit I hereto sets forth the rules
KENG shall use for determining and allocating costs to the Client Companies.
KENG 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 KENG 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, KENG shall render a
monthly bill to each Client Company which shall reflect the billing information
necessary to identify the costs charged for the services KENG provided in the
preceding month. A Client Company shall pay its invoice to KENG 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 KENG and a Client Company until (a) terminated by the
Client Company upon sixty (60) days advance written notice to KENG, or (b)
terminated by KENG 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.
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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 KENG:
[Insert Name and address]
To Client Company: The name and address of the person
designated in writing to KENG on the date the Client Company
executes this Agreement.
4.3. Accounts. All accounts and records of KENG 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, KENG shall permit a Client Company reasonable access
to the accounts and records of KENG 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, directly or indirectly,
under any employee benefit plan or arrangement except as expressly provided for
thereunder.
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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. KENG 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 KENG and the Client Company as a managerial tool to
facilitate matching the Client Companies needs to the capabilities of KENG.
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 KENG and the Client Companies
other than that of independent contractors.
4.12. Assignment. KENG 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 KENG. This Agreement shall inure to the benefit and
shall be binding upon the Parties and their permitted successors and assigns.
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IN WITNESS WHEREOF, KENG 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 Engineering & Survey Inc.
By:
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Name:
Title:
[LIST CLIENT COMPANIES]
By:
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Name:
Title:
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EXHIBIT I
Description of Services, Cost Accumulation, Assignment
and Allocation Methodologies for KENG
A. Description of Services Offered by KeySpan Engineering Survey Inc.
General Engineering
Advise and assist Client Companies in the study, planning, engineering,
maintenance and construction of energy plant facilities of each Client Company
and of the Gas Systems and the Electric Systems as a whole, and advise, assist
and manage the planning, engineering (including maps and records) and
construction operations of Client Companies. Develop and administer quality
assurance programs of Client Companies.
Develop long-range operational programs for all the Client Companies and advise
and assist each Client Company in the coordination of such programs with the
programs of the other Client Companies.
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 KENG, including a reasonable return on capital which will reflect a
capitalization of KENG of no more than equity of ten percent (10%), and all
associated taxes.
KENG 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 KENG 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,
KENG may arrange where it deems appropriate, for the services of experts,
consultants, advisors and other persons with necessary
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qualifications as are required to perform such services. KENG will establish
annual budgets for controlling the expenses of each department.
Monthly KENG 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, KENG 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.
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 KENG 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 KENG 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 KENG 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
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General Engineering Clearing
Property
3-point formula (1,2)
Human Resources # of Employees
3-point formula (1,2)
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Definition of Allocation Factors to be used by KENG
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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.
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.
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 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
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The purpose of this procedure is to document accounting policies and
procedures by which KENG, 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, KENG and each
Client Company may enter into non-binding service level agreements (SLAs). The
areas in KENG which are operating under a Shared Services philosophy would be
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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 KENG to better foster a true client/provider operating culture
within KENG. 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
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KENG 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. KENG will use this system to maintain an
accounting system to record all costs of operations.
The cost of work performed by KENG 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 KENG. To the extent practicable, the KENG employees shall
be required to directly charge their time to an appropriate cost object through
the time reporting system. The following guidelines are provided to ensure
accuracy and efficient time keeping by KENG 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 KENG personnel to guide the establishment of the necessary cost
objects to charge costs to a Client Company. When a service requested by a
Client
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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 KENG 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 KENG 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.
KENG 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 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 paragraph A, above,
will be allocated based on the allocation ratios defined in
Section B of this Exhibit I. Allocation ratios will be
reevaluated by KENG 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.
C. KENG Cross Charges: Certain KENG overhead costs, such as the
cost of benefits, purchasing and storeroom management,
procurement and materials management, and building services
are charged to KENG functions that utilize these services
and included in their standard rate for billing to Client
Companies. In addition, certain KENG direct charges, such as
vehicles and building services are charged to KENG functions
to the extent these functions utilize these services. These
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charges are included in the amounts that these functions
bill to Client Companies.
Monitoring
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The Accounting Services department shall be responsible for reviewing,
monitoring and maintaining the process for the accumulation of KENG 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 KENG.
3. Analyze the reasonableness of charges in the cost
management information system.
4. Review and evaluate the reasonableness of the
monthly bill 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
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Monthly, the Accounting Services Manager will prepare and submit a bill
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 bill will be approved on a timely basis by the appropriate
officer of each Client Company.
The monthly bills will contain the following information:
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1. The Client Company.
2. The cost of each service billed to the Client
Company.
3. For each service, the bill 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 bill.
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 KENG. 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 KENG 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
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If there is a dispute between a Client Company and KENG 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 KENG 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
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The Internal Audit department shall perform an audit of the KENG
billing process every year. Computer systems, billings 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.
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Evaluation and Measurement
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In order to encourage KENG to operate efficiently and cost effectively,
and provide high quality service, KENG 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 KENG. These reviews will be part of the annual budget development process and
the completion of the Service Agreements between KENG and its customers.
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EXHIBIT II
Form of Initial Service Request
The undersigned requests from KENG all of the services selected below.
The services requested hereunder shall commence on ______________ and be
provided through _____________________.
Service Yes No
------- --- --
General Engineering ___ ___
[Client Company]
By:
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Name:
Title:
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