EXHIBIT G-1
KeySpan Corporate Services LLC
Form of
SERVICE AGREEMENT
This Service Agreement ("Agreement") dated as of _________,___ by and
between KeySpan Corporate Services LLC ("KCS"), a New York limited liability
company and _____________[list companies} (individually a "Client Company" and
collectively, the "Client Companies"). KCS and the Client Companies may each be
referred to herein as a "Party," and collectively referred to herein as the
"Parties."
WITNESSETH:
WHEREAS, KCS 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 KCS 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, KCS and the Client Companies desire for KCS 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 KCS 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, KCS 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, KCS 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 KCS by
providing KCS an executed service request in the form set forth in Exhibit II.
(b) By December 1 of calendar year, KCS 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 KCS in
writing of the services it elects to receive from KCS 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 KCS, (ii) the cost for the services covered by the
activity, project, program or work order shall include any expense incurred by
KCS 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
KCS 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 KCS
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 KCS.
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,
KCS and ________ agree that because of the agreements set forth in Section
1.4(a) above, ______________ will not accept services from KCS 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, KCS shall
provide the services hereunder at cost. Exhibit I hereto sets forth the rules
KCS shall use for determining and allocating costs to the Client Companies. KCS
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 KCS 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, KCS shall render a
monthly bill to each Client Company which shall reflect the billing information
necessary to identify the costs charged for the services KCS provided in the
preceding month. A Client Company shall pay its invoice to KCS 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 KCS and a Client Company until (a) terminated by the
Client Company upon sixty (60) days advance written notice to KCS, or (b)
terminated by KCS 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 KCS:
[Insert Name and address]
To Client Company:
The name and address of the person designated in writing to KCS on
the date the Client Company executes this Agreement.
4.3. Accounts. All accounts and records of KCS 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, KCS shall permit a Client Company reasonable access
to the accounts and records of KCS 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,
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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. KCS 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 KCS. 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 KCS and the Client Companies
other than that of independent contractors.
4.12. Assignment. KCS 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 KCS. 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, KCS 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 CORPORATE SERVICES LLC
By:
---------------------------
Name:
Title:
[LIST CLIENT COMPANIES]
By:
---------------------------
Name:
Title:
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EXHIBIT I
Description of Services, Cost Accumulation, Assignment, Allocation
Methodologies and Policies and Procedures for KCS
A. Description of Services Offered by KeySpan Corporate Services
1. Corporate Affairs
Provide services in support of corporation strategies for managing relationships
with federal, state and local governments, agencies and legislative bodies.
Formulate and assist with public relations and communications, programs and
administration of corporate philanthropic and community affairs programs,
creative and production services and media relations.
2. Customer Services
Provide services and systems dedicated to customer service, including meter
reading and billing, remittance, credit, collections, customer relations,
customer communication and advocacy, call center operations, customer offices
and field operations, revenue protection and customer strategy.
3. Environmental Services
Provide consulting, assessment, investigation, remediation and other activities
as required by Client Companies to ensure full compliance with applicable
environmental statutes and regulations, permitting, licensing, due diligence,
waste management, emergency response and laboratory operations.
4. Executive and Administrative
Advise and assist Client Companies in the formulation and execution of general
plans and policies of Client Companies. Advise and assist Client Companies as to
operations, the issuance of securities, the preparation of filings arising out
of or required by the various federal and state securities, business, public
utilities and corporation laws, the selection of executive and administrative
personnel, the representation of Client Companies before regulatory bodies,
proposals for capital
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expenditures, budgets, financing, acquisition and disposition of properties,
expansion of business, rate structures, public relationships and other related
matters.
5. Financial Services
Accounting - Perform, advise and assist Client Companies in accounting matters,
including the research and development of accounting practices, procedures and
controls, the maintenance of the general ledger and related subsidiary systems,
the preparation and analysis of financial reports, and the processing of certain
transactions such as accounts payable, payroll, customer accounting, cash
management and fixed assets.
Auditing - Periodically conduct operating audits and audits of the accounting
records and other records maintained by Client Companies and coordinating their
examination, where applicable, with that of independent public accountants. The
audit staff will report on their examination and submit recommendations, as
appropriate, on improving methods of internal control, accounting procedures and
operating procedures and policies.
Financial Planning - Advise and assist Client Companies with operating and
capital budgets and capital expenditure decisions. Perform economic analysis,
short and long-term financial forecasting, merger and acquisition analysis,
financing related activities, and activities relating to rating agency
relationships for Client Companies and the consolidated entity.
Investor Relations and Shareholder Services - Provide fair and accurate analysis
of KeySpan Corporation and its operating subsidiaries and its outlook within the
financial community, enhancing KSE's position in the energy industry; balancing
and diversifying shareholder investment in KSE through a wide range of
activities; providing feedback to KSE and its operating subsidiaries regarding
investor concerns, trading and ownership; holding periodic analysts meetings;
and providing various operating data as requested or required by investors.
Risk Management - Advise and assist Client Companies in securing requisite
insurance, in the purchase and administration of all property, casualty and
marine insurance, and workers' compensation, in the settlement of insured claims
and in providing risk prevention advice.
Tax - Perform, advise and assist Client Companies in the preparation of Federal,
state and local income and franchise tax returns, calculation and accrual of
book income taxes, due diligence in connection with acquisitions and performance
of tax planning functions.
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Treasury/Finance - Provide services related to managing all administrative
activities associated with financing, including management of capital structure;
cash, credit and risk management activities; investment and commercial banking
relationships; and general financing activities, pension, 401K and venture
capital investments.
6. Human Resources
Provide central administration for payroll, and employee benefit and pension
plans of Client Companies. Perform policy, planning and analysis functions as
related to compensation and benefit plans. Advise and assist Client Companies in
the administration of such plans and prepare and maintain records of said plans.
Direct and administer all medical and health activities of Client Companies.
Advise and assist Client Companies in the formulation and administration of
employee staffing and performance evaluation, the design and administration of
training programs for employee career development, the design and administration
of diversity and EEO programs.
Advise and assist Client Companies in the formulation and administration of
employee relations policies and programs relating to the relevant Client
Companies' employee and labor relations.
7. Information Technology
Provide the organization and resources for the operation of an information
technology function including the development, implementation and operation of a
centralized data processing facility and the management of a telecommunications
network. This function includes the central processing of computerized
applications and support of individual applications in Client Companies.
Develop, implement, operate and maintain those computerized applications for
Client Companies that can be economically best accomplished on a centralized
basis.
Software Pooling - Accept from Client Companies ownership of and rights to use,
assign, license or sub-license all software owned, acquired or developed by or
for Client Companies which Client Companies can and do transfer or assign to it.
Preserve and protect the rights to all such software to the extent reasonable
and appropriate under the circumstances; license Client Companies, on a
non-exclusive, no charge or at-cost basis, to use all software which KCS has the
right to sell, license or sub-license; and, at KCS' expense, permit Client
Companies to enhance any such software and license others to use all such
software and enhancements to the extent that KCS shall have the legal right to
so permit.
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8. Legal and Regulatory
Legal and Regulatory - Provide advice and assistance with respect to legal and
regulatory issues as well as regulatory compliance, including Act authorizations
and compliance, as well as other regulatory and trade matters under other
Federal and State laws. Represent the Client Companies before Federal and State
courts and regulatory agencies and in arbitration and other dispute resolution
proceedings.
Corporate Secretary's Office - Provide all necessary functions required of a
publicly held corporation; coordinating information and activities among
shareholders, the transfer agent, and Board of Directors; providing direct
services to security holders; conducting the annual meeting of shareholders and
ensuring proper maintenance of corporate records, as well as other activities
related to corporate governance.
9. Operating Services
Facilities Management and Real Estate - Perform planning, administration and
operations related to managing Client Company properties, including leasing,
renting company properties and permitting and purchase and sale of real
property. Administer duplicating services, mailroom operations and print shops.
Perform activities related to maintaining company properties, determining
requirements and designing occupancy layouts.
Fleet Management - Perform activities related to purchasing, leasing, and
maintaining vehicles for Client Companies.
Materials Management and Purchasing - Advise and assist Client Companies in the
procurement of real and personal property, materials, supplies and services,
conduct purchase negotiations, prepare procurement agreements and administer
programs of material control, and provide warehousing and distribution services
for Client Companies.
Security - Provide activities to ensure a secure working environment, protect
and safeguard company assets, safeguard and transport company receipts, and
performance of investigations.
10. Strategic Planning and Corporate Performance
Perform strategic planning, administration and implementation of corporate
branding, customer relationship marketing, new business ventures, market
research and metrics, market intelligence, marketing competency management and
measurement, business improvement and e-commerce as related to all Client
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Companies - both individually and as a whole. Determine, implement and track
corporate performance goals, initiatives and measures.
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 KCS, including a reasonable return on capital which will reflect a
capitalization of KCS of no more than equity of ten percent (10%), and all
associated taxes.
KCS 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 KCS 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, KCS 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. KCS will establish annual budgets for controlling the
expenses of each department.
Monthly KCS 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, KCS costs 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 KCS 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 KCS pursuant to the project or activity regardless of whether
the services associated with such costs have been completed.
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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 KCS 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
Corporate Affairs 3-point formula (1,2)
Customer Services # of phone calls
# of bills
# of meters
% of Accounts Receivable
# of customers
3-point formula (1,2)
Environmental Services Clearing
Property
3-point formula (1,2)
Executive and Administrative 3-point formula (1,2)
Financial Services 3-point formula (1,2)
Property
# of Meters
# of Bills
General Engineering Clearing
Property
3-point formula (1,2)
Human Resources # of Employees
3-point formula (1,2)
Information Technology # of Meters
# of employees
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Revenue
Clearing
3-point formula (1,2)
Legal and Regulatory 3-point formula (1,2)
Marketing and Sales 3-point formula (1,2)
Operating Services sendout
# of bills
# of meters
# of vehicles
% of square footage occupied
# of employees
Clearing
3-point formula (1,2)
Research and Development 3-point formula (1,2)
Strategic Planning and Corporate Performance
3-point formula (1,2)
Definition of Allocation Factors to be used by KCS
% of Accounts Receivable - A ratio based on the Accounts Receivable balance 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.
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 Bills - A ratio based on the number of customer bills processed 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.
Clearing - All related costs are accumulated to these accounts and distributed
out monthly based on associated charges.
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# of Customers - A ratio based on the number of customers 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 Employees - A ratio based on the number of full time employees 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.
# of Phone Calls - A ratio based on the number of telephone calls handled 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.
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.
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% of Square Footage Occupied - A ratio based on the square footage of office and
non office space occupied, 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.
# of Vehicles - A ratio based on the number of vehicles 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.
C. Accounting Policies and Procedures
Introduction
The purpose of this procedure is to document accounting policies and
procedures by which KCS, 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, KCS and each
Client Company may enter into non-binding service level agreements (SLAs). The
areas in KCS 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 foster a true client/provider operating culture
within KCS. 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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KCS 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. KCS will use this system to maintain an
accounting system to record all costs of operations.
The cost of work performed by KCS 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 KCS. To the extent practicable, KCS 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 KCS 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 KCS 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 KCS 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 KCS will be strictly
controlled by the
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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 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 KCS 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. KCS Cross Charges: Certain KCS overhead costs, such as the
cost of benefits, purchasing and storeroom management,
procurement and materials management, and building services
are charged to KCS functions that utilize these services and
included in their standard rate for billing to Client
Companies. In addition, certain KCS direct charges, such as
vehicles and building services are charged to KCS functions
to the extent these functions utilize these services. These
charges are included in the amounts that these functions
bill to Client Companies.
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Monitoring
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The Accounting Services department shall be responsible for reviewing,
monitoring and maintaining the process for the accumulation of KCS 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 KCS.
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
-------
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.
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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 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 KCS. 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 KCS 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 KCS 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 KCS 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 KCS 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
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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 KCS to operate efficiently and cost effectively,
and provide high quality service, KCS 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 KCS. These reviews will be part of the annual budget development process and
the completion of the Service Agreements between KCS and its customers.
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EXHIBIT II
Form of Initial Service Request
The undersigned requests from KeySpan Corporation Services LLC all
of the services selected below. The services requested hereunder shall commence
on ______________ and be provided through ___________________.
Service Yes No
------- --- --
Corporate Affairs ____ ____
Customer Service ____ ____
Environmental Services ____ ____
Executive and Administrative ____ ____
Financial Services ____ ____
Accounting Auditing ____ ____
Financial Planning ____ ____
Investor Relations and Shareholder Serv. ____ ____
Risk Management ____ ____
Tax ____ ____
Treasury/Finance ____ ____
Human Resources ____ ____
Information Technology ____ ____
Legal and Regulatory ____ ____
Legal and Regulatory ____ ____
Corporate Secretary's Office ____ ____
Operating Services ____ ____
Facilities Management & Real Estate ____ ____
Fleet Management ____ ____
Materials Management and Purchasing ____ ____
Security ____ ____
Strategic Planning and Corp Performance ____ ____
[Client Company]
By:
---------------------------
Name:
Title:
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