Exhibit No. B-2
This
Service Agreement (the “Agreement”) is made and entered into this ____
day of [ ], 2004, by and between Black
Hills Power, Inc. (“Client Company”) and Black Hills Services Company,
Inc. (“Service Company”).
WITNESSETH
WHEREAS,
the Securities and Exchange Commission (the “SEC”) has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility Holding
Company Act of 1935 (the “Act”) the organization and conduct of the
business of Service Company, in accordance herewith, as a wholly-owned subsidiary service
company of Black Hills Corporation (“Black Hills”).
WHEREAS,
Client Company is a utility operating company subsidiary of Black Hills and an affiliate
of Service Company.
WHEREAS,
Service Company and Client Company have entered into this Service Company whereby Service
Company agrees to provide and Client Company agrees to accept and pay for various services
as provided herein at cost, with cost determined in accordance with applicable rules and
regulations under the Act, which require Service Company to fairly and equitably allocate
costs among all associate companies to which it renders services, including Client
Company.
NOW
THEREFORE, in consideration of the premises and the mutual agreements herein contained,
the parties to this Agreement covenant and agree as follows:
ARTICLE 1
SERVICES
Section 1.1
Service Company shall furnish to Client Company, as requested by Client Company, upon the
terms and conditions hereinafter set forth, such of the services described in Appendix 1hereto,
at such times, for such periods and in such manner as Client Company may from time to
time request and that Service Company concludes it is able to perform. Service Company
shall also provide Client Company with such special services, in addition to those
services described in Appendix 1 hereto, as may be requested by Client
Company and that Service Company concludes it is able to perform. Service Company shall
use its best efforts to maintain a staff trained and experienced in the design,
construction, operation, maintenance, and management of public utility properties, and
shall keep itself and its personnel available to provide services to Client Company so
long as it is authorized to do so by the appropriate federal and state regulatory
agencies. In supplying such services, Service Company may arrange, where it deems
appropriate, for the services of such experts, consultants, advisers, and other persons
with necessary qualifications as are required for or pertinent to the provision of such
services.
Section 1.2
Client Company shall take from Service Company such of the services described in Section 1.1,
and such additional general or special services, whether or not now contemplated as are
requested from time to time by Client Company and that Service Company concludes it is
able to perform.
1
Section 1.3
The services described herein or contemplated to be performed hereunder shall be directly
assigned, distributed or allocated by activity, project, program, work order or other
appropriate basis. Client Company shall have the right from time to time to amend, alter
or rescind any activity, project, program or work order provided that (i) any such
amendment or alteration that results in a material change in the scope of the services to
be performed or equipment to be provided is agreed to by Service Company, (ii) the
cost for the services covered by the activity, project, program or work order shall
include any expense incurred by Service Company as a direct result of such amendment,
alteration or rescission of the activity, project program or work order, and (iii) no
amendment, alteration or rescission of any activity, project, program or work order shall
release Client Company from liability for all costs already incurred by or contracted for
by Service Company pursuant to the activity, project, program or work order, regardless
of whether the services associated with such costs have been completed.
ARTICLE 2
COMPENSATION
Section 2.1
As compensation for the services to be rendered hereunder, Client Company shall pay to
Service Company all costs which reasonably can be identified and related to particular
services performed by Service Company for or on Client Company’s behalf (except as
may otherwise be permitted by the SEC). The methods for assigning or allocating Service
Company costs to Client Company, as well as to other associate companies, are set forth
in Appendix 1.
Section 2.2
The methods of assignment, distribution or allocation of costs described in Appendix 1 shall
be subject to review annually, or more frequently if appropriate. Such methods of
assignment, distribution or allocation of costs may be modified or changed by Service
Company; provided, however, that no changes will be made to the methods of assignment,
distribution, or allocation set forth herein or in Appendix 1 hereto unless
first authorized by the SEC in accordance with the procedures specified in Section 2.3.
Service Company shall advise Client Company from time to time of such changes.
Section 2.3
No change in the organization of the Service Company, the type and character of the
companies to be serviced, the methods of allocating costs to associate companies, or in
the scope or character of the services to be rendered that are subject to Section 13
of the Act, or any rule, regulation or order thereunder, shall be made (i) unless
and until Service Company shall first have given the SEC written notice of the proposed
change or (ii) such change is otherwise permitted by SEC rule or practice. If, upon
the receipt of any such notice, the SEC shall notify Service Company within the 60-day
period that a question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order thereunder,
the proposed change shall not become effective unless and until Service Company shall
have filed with the SEC an appropriate declaration regarding such proposed change and the
SEC shall have permitted such declaration to become effective.
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Section 2.4
Service Company shall render a monthly statement to Client Company that shall reflect the
billing information necessary to identify the costs charged for that month. By the
[twentieth (20th)] day of each month, Client Company shall remit to Service Company all
charges billed to it.
Section 2.5
It is the intent of this Agreement that the payment for services rendered by Service
Company to Client Company under this Agreement shall cover all the costs of Service
Company doing business (less the costs of services provided to affiliated companies not a
party to this Agreement and to other non-affiliated companies, and credits for any
miscellaneous items), including, but not limited to, salaries and wages, office supplies
and expenses, outside services employed in rendering the services hereunder, property
insurance, injuries and damages, employee pensions and benefits, miscellaneous general
expenses, rents, maintenance of structures and equipment, depreciation and amortization,
and compensation for use of capital as permitted by Rule 91 of the SEC’s
regulations under the Act.
ARTICLE 3
TERM
Section 3.1
This Agreement shall become effective on the date of Client Company’s receipt of
required regulatory approval, and shall continue in force until terminated by Service
Company or Client Company, upon not less than one year’s prior written notice to the
other party. 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 Agreement.
ARTICLE 4
LIMITATION OF
LIABILITY AND INDEMNIFICATION
Section 4.1
In performing the services hereunder, Service Company will exercise due care to assure
that the services are performed in an appropriate manner, meet the standards and
specifications set forth in any applicable request for service and comply with the
applicable standards of law and regulation. However, failure to meet these obligations
shall in no event subject Service Company to any claims by or liabilities to Client
Company other than to reperform the services and be reimbursed at cost for such
reperformance. Service Company makes no other warranty with respect to its performance of
the services, and Client Company agrees to accept such services without further warranty
of any nature.
Section 4.2
To the fullest extent allowed by law, Client Company shall and does hereby indemnify and
agree to save harmless and defend Service Company, its agents and employees from
liabilities, taxes, losses, obligations, claims, damages, penalties, causes of action,
suits, costs and expenses or judgments of any nature, on account of, or resulting from
the performance and prosecution of any services performed on behalf of Client Company
pursuant to this Agreement, whether or not the same results or allegedly results from the
claimed or actual negligence or breach of warranty of, or willful misconduct by, Service
Company or any of its employees, agents, clients, or contractors or its or their
subcontractors or any combination thereof.
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ARTICLE 5
MISCELLANEOUS
Section 5.1
All accounts and records of Service Company shall be kept in accordance with either 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 or the Uniform System of Accounts Prescribed for Public Utilities and Licensees
subject to the Provisions of the Federal Power Act promulgated by the Federal Energy
Regulatory Commission, as each is in effect from and after the date hereof.
Section 5.2
New direct or indirect non-utility subsidiaries of Black Hills, which may come into
existence after the effective date of this Agreement, may become additional client
companies of Service Company and subject to a service agreement with Service Company, or
an existing client company may wish to obtain additional services from Service Company.
Likewise, an existing direct or indirect subsidiary of Black Hills may cease to be a
client company or cease to take individual services from Service Company. In either
event, the parties hereto shall make such changes in the scope and character of the
services to be rendered and in the method of assigning, distributing or allocating costs
of such services as specified in Appendix 1, subject to the requirements of
Section 2.3, as may become necessary to achieve a fair and equitable
assignment, distribution, or allocation of Service Company costs among all associate
companies.
Section 5.3
In the event Client Company changes the scope of services that it takes from Service
Company (as provided in Section 1.2 and subject to Section 1.3)
or terminates this Agreement (pursuant to Section 3.1), the Service Company
may ▇▇▇▇ such Client Company a charge that reflects a proportionate share of any
significant residual fixed costs (i.e. incurred costs or commitments to incur costs) that
were incurred or committed to incur in contemplation of providing such Client Company
service prior to the notice of termination. Examples of fixed costs include, but are not
limited to, costs to upgrade computer hardware and software systems to meet Client Company’s
specifications.
Section 5.4
Service Company shall permit Client Company access to its accounts and records, including
the basis and computation of allocations; provided that the scope of access and
inspection is limited to accounts and records that are related to Service Company’s
transactions with Client Company.
Section 5.5
Appendix 1 is expressly incorporated herein and made a part hereof.
Section 5.6
It is the intent of the parties hereto that the determination of the costs as used in
this Agreement shall be consistent with, and in compliance with, the rules and
regulations of the SEC, as they are now read or hereafter may be modified by the SEC.
Section 5.7
This Agreement and the rights hereunder may not be assigned without the mutual written
consent of all parties hereto.
* * * * * * *
4
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the
date and year first above written.
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BLACK HILLS SERVICES COMPANY, INC. |
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By:_______________________________
Name:_____________________________
Title:______________________________ |
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By:_______________________________
Name:_____________________________
title:______________________________ |
5
APPENDIX 1
DESCRIPTION OF
SERVICES TO BE PROVIDED BY BLACK HILLS SERVICES
COMPANY, INC. AND DETERMINATION OF CHARGES FOR SUCH SERVICES TO THE
UTILITY OPERATING COMPANIES AND OTHER AFFILIATES
Description of Services
Provided
A description of the services
provided by Black Hills Services Company, Inc. is detailed below. Identifiable costs will
be directly assigned to the utility company subsidiaries (the “Operating
Companies”) and other affiliates of Black Hills. For costs that are for services
of a general nature and cannot be directly assigned, the method of allocation is described
below for each service provided. If specific conditions are met (as outlined in the [Black
Hills Energy Services Policies and Procedures Manual]), an alternative Labor Dollars Ratio
may be used to allocate non-labor costs for any service.
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a)
Executive Management Services |
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Description
– Represents charges for Black Hills executive management and services, including,
but not limited to, officers of Black Hills. |
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Methods
of Allocation – Executive Management indirect costs will be allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description
– Provides communications to investors and the financial community. Coordinates the
transfer agent and shareholder record keeping functions and plans the annual shareholder
meeting. |
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Methods
of Allocation – Investor Relations indirect costs will be allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description
– Reviews internal controls and procedures to ensure assets are safeguarded and
transactions are properly authorized and recorded. Evaluates contract risks. |
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Method
of Allocation – Internal Audit indirect costs will e allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description
– Provides legal services related to labor and employment law, litigation, contracts,
rates and regulation, environmental matters, real estate and other legal matters. |
1
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Method
of Allocation – Legal indirect costs will be allocated based on a three-factor
formula that is comprised of the average of the Revenue Ratio, the Employee Ratio and the
Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description– Provides
claims services related to casualty, public and company claims. |
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Method
of Allocation – Claims Services costs will be direct charged, and administrative
support functions that cannot be direct charged will be allocated using the Labor Dollars
Ratio. |
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f)
Corporate Communications |
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Description
– Provides corporate communications, speech writing and coordinates media services.
Provides advertising and branding development for the companies within Black Hills.
Manages and tracks all contributions made on behalf of Black Hills and its subsidiaries. |
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Method
of Allocation – Corporate Communications indirect costs will be allocated based
on a three-factor formula that is comprised of the average of the Revenue Ratio, the
Employee Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black
Hills. |
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g)
Employee Communications |
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Description– Develops
and distributes communications to employees. |
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Method
of Allocation – Employee Communications indirect costs will be allocated based
on the Employee Ratio. |
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h)
Corporate Strategy & Business Development |
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Description
– Facilitates development of corporate strategy and prepares strategic plans,
monitors corporate performance and evaluates business opportunities. Develops and
facilitates process improvements. |
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Method
of Allocation – Corporate Strategy & Business Development indirect costs will
be allocated based on a three-factor formula that is comprised of the average of the
Revenue Ratio, the Employee Ratio and the Total Asset Ratio with 15 percent of Assets
assigned to Black Hills. |
2
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Description– Monitors,
reviews and researches government legislation. |
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Method
of Allocation – Government Affairs indirect costs will be allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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j)
Facilities & Real Estate |
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Description
– Operates and maintains office buildings and service centers. Procures real estate
and administers real estate leases. Administers contracts to provide security,
housekeeping and maintenance services for such facilities. Procures office furniture and
equipment. |
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Method
of Allocation – Facilities & Real Estate indirect costs will be allocated to
the Operating Companies based on the Square Footage Ratio. |
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k)
Facilities Administrative Services |
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Description
– Includes but is not limited to the functions of Mail Delivery, Duplicating and
Records Management. |
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Method
of Allocation – Facilities Administrative Services indirect costs will be
allocated based on a three-factor formula that is comprised of the average of the Revenue
Ratio, the Employee Ratio and the Total Asset Ratio with 15 percent of Assets assigned to
Black Hills. |
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Description
– Includes contract negotiations, development and management of supplier
relationships and acquisition of goods and services. Also includes inventory, planning and
forecasting, ordering, accounting and database management. Warehousing services includes
receiving, storing, issuing, shipping, returns, and distribution of material and parts. |
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Method
of Allocation – Supply Chain will be direct charged, and administrative support
functions that cannot be direct charged will be allocated using the Labor Dollars Ratio. |
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m)
Supply Chain Special Programs |
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Description
– Develops and implements special programs utilized across the company such as
procurement cards, travel services and compliance with corporate MWBE (minority women
business expenditures) program goals. |
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Method
of Allocation – Supply Chain Special Programs indirect costs will be allocated
based on a three-factor formula that is comprised of the average of the Revenue Ratio, the
Employee Ratio and the Total Asset Ratio. |
3
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Description
– Establishes and administers policies related to employment, compensation and
benefits. Maintains HR computer system, the tuition reimbursement plan, and diversity
program. Coordinates the bargaining strategy and labor agreements with union employees.
Provides technical and professional development training and general HR support services. |
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Methods
of Allocation – Human Resources indirect costs will be allocated based on the
Employee Ratio. |
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Description
– Coordinates activities related to securities issuance, including maintaining
relationships with financial institutions, cash management, investing activities and
monitoring the capital markets. Performs financial and economic analysis. |
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Method
of Allocation – Finance & Treasury indirect costs will be allocated based on
a three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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p)
Accounting, Financial Reporting & Taxes |
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Description
– Maintains the books and records. Prepares financial and statistical reports, tax
filings and ensures compliance with applicable laws and regulations. Maintains the
accounting systems. Coordinates the budgeting process. |
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Method
of Allocation – Accounting, Financial Reporting & Taxes indirect costs will
be allocated based on a three-factor formula that is comprised of the average of the
Revenue Ratio, the Employee Ratio and the Total Asset Ratio with 15 percent of Assets
assigned to Black Hills. |
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q)
Business Unit Accounting and Budgeting |
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Description– Provides
financial analysis, budgeting and administrative support for the business units. |
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Method
of Allocation – Business Unit Accounting and Budgeting indirect costs will be
allocated based on a three-factor formula that is comprised of the average of the Revenue
Ratio, the Employee Ratio and the Total Asset Ratio. |
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Description– Processes
payments to vendors and prepares statistical reports. |
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Method
of Allocation – Payment & Reporting indirect costs will be allocated to the
Operating Companies based on the Invoice Transaction Ratio. |
4
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Description– Processes
payments received from customers of the Operating Companies and affiliates. |
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Method
of Allocation – Receipts Processing indirect costs will be allocated based on the
Customer Bills Ratio. |
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Description
– Processes payroll including but not limited to time reporting, calculation of
salaries and wages, payroll tax reporting and compliance reports. |
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Method
of Allocation – Payroll indirect costs will be allocated based on the Employee
Ratio. |
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Description
– Determines the Operating Companies’ regulatory strategy, revenue requirements
and rates for electric and gas customers. Coordinates the regulatory compliance
requirements and maintains relationships with the regulatory bodies. |
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Method
of Allocation – Rates & Regulation indirect costs will be allocated to the
Operating Companies based on the Revenue Ratio or the Labor Dollars Ratio. |
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v)
Energy Supply Engineering and Environmental |
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Description
– Provides engineering services to the generation business. Establishes policies and
procedures for compliance with environmental laws and regulations. Researches emerging
environmental issues and monitors compliance with environmental requirements. Oversees
environmental clean up projects. |
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Method
of Allocation – Energy Supply Engineering and Environmental services will be
direct charged, and administrative support functions that cannot be direct charged will be
allocated using the Labor Dollars Ratio. |
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w)
Energy Supply Business Resources |
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Description
– Provides performance, specialists and analytical services to the Operating
Companies’ generation facilities. |
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Method
of Allocation – Energy Supply Business Resources indirect costs will be allocated
using the MWh Generation Ratio. |
5
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x)
Energy Markets Regulated Trading & Marketing |
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Description
– Provides electric trading services to the Operating Companies’ electric
generation systems including load management, system optimization and resource
acquisition. |
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Method
of Allocation – Energy Markets Regulated Trading & Marketing indirect costs
will be allocated to the Operating Companies based on the Total MWh Sales Ratio. |
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y)
Energy Markets –Fuel Procurement |
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Description– Purchases
fuel for Operating Companies electric generation systems (excluding nuclear). |
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Method
of Allocation – Energy Markets Fuel Procurement indirect costs will be allocated
based on the MWh Generation Ratio. |
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z)
Energy Delivery Marketing |
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Description
– Develops new business opportunities and markets the products and services of the
[Delivery Business Unit]. |
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Method
of Allocation – Energy Delivery Marketing will be direct charged. |
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aa)
Energy Delivery Construction, Operations & Maintenance (COM) |
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Description– Constructs,
maintains and operates electric and gas delivery systems. |
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Method
of Allocation – Energy Delivery COM indirect costs will be allocated based on the
Delivery Services Gross Plant Ratio. |
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bb)
Energy Delivery Engineering/Design |
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Description
– Provides engineering and design services in support of capacity planning,
construction, operations and material standards. |
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Method
of Allocation – Energy Delivery Engineering/Design services will be direct
charged, and administrative support functions that cannot be direct charged will be
allocated using the Labor Dollars Ratio. |
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Description
– Provides marketing and sales services for the electric and natural gas customers of
the Operating Companies and affiliates, including strategic planning, segment
identification, business analysis, sales planning and customer services. |
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Method
of Allocation – Marketing & Sales indirect costs will be allocated based on
the Revenue Ratio. |
6
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Description
– Provides service activities to retail and wholesale customers. These services
include meter reading, customer billing, call center and credit and collections. |
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Method
of Allocation – Customer Service indirect costs will be allocated based on the
Customers Ratio. |
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ee)
Information Technology |
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Description
– Provides various communications and electronic data processing services including
but not limited to, development and support of mainframe computer software applications,
procurement and support of personal computers, operation of a data center and installation
and operation of a communications system. Also administers the IBM contract that may
provide for the services listed above. |
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Method
of Allocation – Information Technology will be direct charged. |
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Description– Provides
aviation and travel services to employees. |
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Method
of Allocation – Aviation Services will be direct charged. |
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Description– Oversees
the Operating Companies’ Fleet Services Group. |
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Method
of Allocation – Fleet will be direct charged. |
Allocation Ratios
The following ratios will be utilized
as outlined above.
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Customer
Bills Ratio – Based on the average of the monthly total number of customer bills
issued during the prior year ending December 31, the numerator of which is for an
applicable Operating Company or affiliate company and the denominator of which is for all
applicable Operating Companies and affiliate companies. This ratio will be determined
annually, or at such a time as may be required due to significant changes. |
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Customers
Ratio – Based on the average of the monthly total electric customers (and/or gas
customers, or residential, business and large commercial and industrial customers where
applicable) for the prior year ending December 31, the numerator of which is for an
applicable Operating Company or affiliate company and the denominator of which is for all
applicable Operating Companies and affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes. |
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Delivery
Services Gross Plant Ratio – Based on transmission and distribution gross plant
for the [Delivery Business Unit], both electric and gas for the prior year ending December
31, the numerator of which is an applicable Operating Company and the denominator of which
is for all applicable Operating Companies. This ratio will be determined annually, or at
such time as may be required due to significant changes. |
7
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Employee
Ratio – Based on the number of employees at the end of the prior year ending
December 31, the numerator of which is for an applicable Operating Company or affiliates
company and the denominator of which is for all applicable Operating Companies and
affiliates companies. This ratio will be determined annually, or at such time as may be
required due to significant changes. |
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Invoice
Transaction Ratio – Based on the sum of the monthly number of invoice
transactions processed for the prior year ending December 31, the numerator of which is
for an applicable Operating Company or affiliate company and the denominator of which is
for all applicable Operating Companies and affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant changes. |
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Labor
Dollars Ratio – Based on the [ ] department
(performing center) labor dollars charged to Operating Companies and other affiliates for
the month. The numerator of which is the labor dollars charged to an Operating Company or
affiliate company and the denominator of which is for all Operating Companies and
affiliate companies charged by the department for the month. |
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MWh
Generation Ratio – Based on the sum of the monthly electric MWh generated during
the prior year ending December 31, the numerator of which is for an applicable Operating
Company and the denominator of which is for all applicable Operating Companies. This ratio
will be determined annually, or at such time as may be required due to significant
changes. |
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Revenue
Ratio – Based on the sum of the monthly revenue amounts for the prior year ending
December 31, the numerator of which is for an applicable Operating Company or affiliates
company and the denominator of which is for all applicable Operating Companies and
affiliates companies. This ratio will be determined annually, or at such time as may be
required due to significant changes. |
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Square
Footage Ratio – Based on the total square footage as of December 31 for the prior
year, the numerator of which is for an applicable Operating Company or affiliate company
and the denominator of which is for all applicable Operating Companies and affiliate
companies. This ratio will be determined annually, or at such time as may be required due
to significant changes. |
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Total
Assets Ratio – Based on the total assets as of December 31 for the prior year,
the numerator of which is for an applicable Operating Company or affiliate company and the
denominator of which is for all applicable Operating Companies and affiliate companies.
This ratio will be determined annually, or at such time as may be required due to
significant changes. |
8
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Total
Assets Ratio, with 15 Percent of Assets assigned to Black Hills – Based on the
total assets as of December 31 for the prior year, the numerator of which is for an
applicable Operating Company or affiliates company and the denominator of which is for all
applicable Operating Companies and affiliate companies. Black Hills will be assigned
fifteen percent of the total assets. This ratio will be determined annually, or at such
time as may be required due to significant changes. |
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Total
MWh Sales Ratio – Based on the sum of monthly electric MWh sold through the
[Energy Trading Division] unit, for the prior year ending December 31, the numerator of
which is an applicable Operating Company and the denominator of which is for all
applicable Operating Companies. This ratio will be determined annually, or at such time as
may be required due to significant changes. |
9
Exhibit No. B-2
This
Service Agreement (the “Agreement”) is made and entered into this ____
day of [ ], 2004, by and between [insert
name of Black Hills non-utility subsidiary] (“Client Company”) and Black
Hills Services Company, Inc. (“Service Company”).
WITNESSETH
WHEREAS,
the Securities and Exchange Commission (the “SEC”) has approved and
authorized as meeting the requirements of Section 13(b) of the Public Utility Holding
Company Act of 1935 (the “Act”) the organization and conduct of the
business of Service Company, in accordance herewith, as a wholly-owned subsidiary service
company of Black Hills Corporation (“Black Hills”).
WHEREAS,
Client Company is a subsidiary of Black Hills and an affiliate of Service Company, and is
not a utility operating company.
WHEREAS,
Service Company and Client Company have entered into this Service Company whereby Service
Company agrees to provide and Client Company agrees to accept and pay for various services
as provided herein at cost, with cost determined in accordance with applicable rules and
regulations under the Act, which require Service Company to fairly and equitably allocate
costs among all associate companies to which it renders services, including Client
Company.
NOW
THEREFORE, in consideration of the premises and the mutual agreements herein contained,
the parties to this Agreement covenant and agree as follows:
ARTICLE 1
SERVICES
Section 1.1
Service Company shall furnish to Client Company, as requested by Client Company, upon the
terms and conditions hereinafter set forth, such of the services described in Appendix 1hereto,
at such times, for such periods and in such manner as Client Company may from time to
time request and that Service Company concludes it is able to perform. Service Company
shall also provide Client Company with such special services, in addition to those
services described in Appendix 1 hereto, as may be requested by Client
Company and that Service Company concludes it is able to perform. Service Company shall
use its best efforts to maintain a staff trained and experienced in the design,
construction, operation, maintenance, and management of public utility properties, and
shall keep itself and its personnel available to provide services to Client Company so
long as it is authorized to do so by the appropriate federal and state regulatory
agencies. In supplying such services, Service Company may arrange, where it deems
appropriate, for the services of such experts, consultants, advisers, and other persons
with necessary qualifications as are required for or pertinent to the provision of such
services.
Section 1.2
Client Company shall take from Service Company such of the services described in Section 1.1,
and such additional general or special services, whether or not now contemplated as are
requested from time to time by Client Company and that Service Company concludes it is
able to perform.
1
Section 1.3
The services described herein or contemplated to be performed hereunder shall be directly
assigned, distributed or allocated by activity, project, program, work order or other
appropriate basis. Client Company shall have the right from time to time to amend, alter
or rescind any activity, project, program or work order provided that (i) any such
amendment or alteration that results in a material change in the scope of the services to
be performed or equipment to be provided is agreed to by Service Company, (ii) the
cost for the services covered by the activity, project, program or work order shall
include any expense incurred by Service Company as a direct result of such amendment,
alteration or rescission of the activity, project program or work order, and (iii) no
amendment, alteration or rescission of any activity, project, program or work order shall
release Client Company from liability for all costs already incurred by or contracted for
by Service Company pursuant to the activity, project, program or work order, regardless
of whether the services associated with such costs have been completed.
ARTICLE 2
COMPENSATION
Section 2.1
As compensation for the services to be rendered hereunder, Client Company shall pay to
Service Company charges for services that are to be no less than cost, except as may
otherwise be permitted by the SEC, insofar as costs can reasonably be identified and
related by Service Company to its performance of particular services for or on behalf of
Client Company. The methods for assigning or allocating Service Company costs to Client
Company, as well as to other associate companies, are set forth in Appendix 1.
Section 2.2
The methods of assignment, distribution or allocation of costs described in Appendix 1 shall
be subject to review annually, or more frequently if appropriate. Such methods of
assignment, distribution or allocation of costs may be modified or changed by Service
Company; provided, however, that no changes will be made to the methods of assignment,
distribution, or allocation set forth herein or in Appendix 1 hereto unless
first authorized by the SEC in accordance with the procedures specified in Section 2.3.
Service Company shall advise Client Company from time to time of such changes.
Section 2.3
No change in the organization of the Service Company, the type and character of the
companies to be serviced, the methods of allocating costs to associate companies, or in
the scope or character of the services to be rendered that are subject to Section 13
of the Act, or any rule, regulation or order thereunder, shall be made (i) unless
and until Service Company shall first have given the SEC written notice of the proposed
change or (ii) such change is otherwise permitted by SEC rule or practice. If, upon
the receipt of any such notice, the SEC shall notify Service Company within the 60-day
period that a question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order thereunder,
the proposed change shall not become effective unless and until Service Company shall
have filed with the SEC an appropriate declaration regarding such proposed change and the
SEC shall have permitted such declaration to become effective.
2
Section 2.4
Service Company shall render a monthly statement to Client Company that shall reflect the
billing information necessary to identify the costs charged for that month. By the
[twentieth (20th)] day of each month, Client Company shall remit to Service Company all
charges billed to it.
Section 2.5
It is the intent of this Agreement that the payment for services rendered by Service
Company to Client Company under this Agreement shall cover all the costs of Service
Company doing business (less the costs of services provided to affiliated companies not a
party to this Agreement and to other non-affiliated companies, and credits for any
miscellaneous items), including, but not limited to, salaries and wages, office supplies
and expenses, outside services employed in rendering the services hereunder, property
insurance, injuries and damages, employee pensions and benefits, miscellaneous general
expenses, rents, maintenance of structures and equipment, depreciation and amortization,
and compensation for use of capital as permitted by Rule 91 of the SEC’s
regulations under the Act.
ARTICLE 3
TERM
Section 3.1
This Agreement shall become effective on the date of Client Company’s receipt of
required regulatory approval, and shall continue in force until terminated by Service
Company or Client Company, upon not less than one year’s prior written notice to the
other party. 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 Agreement.
ARTICLE 4
LIMITATION OF
LIABILITY AND INDEMNIFICATION
Section 4.1
In performing the services hereunder, Service Company will exercise due care to assure
that the services are performed in an appropriate manner, meet the standards and
specifications set forth in any applicable request for service and comply with the
applicable standards of law and regulation. However, failure to meet these obligations
shall in no event subject Service Company to any claims by or liabilities to Client
Company other than to reperform the services and be reimbursed at cost for such
reperformance. Service Company makes no other warranty with respect to its performance of
the services, and Client Company agrees to accept such services without further warranty
of any nature.
Section 4.2
To the fullest extent allowed by law, Client Company shall and does hereby indemnify and
agree to save harmless and defend Service Company, its agents and employees from
liabilities, taxes, losses, obligations, claims, damages, penalties, causes of action,
suits, costs and expenses or judgments of any nature, on account of, or resulting from
the performance and prosecution of any services performed on behalf of Client Company
pursuant to this Agreement, whether or not the same results or allegedly results from the
claimed or actual negligence or breach of warranty of, or willful misconduct by, Service
Company or any of its employees, agents, clients, or contractors or its or their
subcontractors or any combination thereof.
3
ARTICLE 5
MISCELLANEOUS
Section 5.1
All accounts and records of Service Company shall be kept in accordance with either 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 or the Uniform System of Accounts Prescribed for Public Utilities and Licensees
subject to the Provisions of the Federal Power Act promulgated by the Federal Energy
Regulatory Commission, as each is in effect from and after the date hereof.
Section 5.2
New direct or indirect non-utility subsidiaries of Black Hills, which may come into
existence after the effective date of this Agreement, may become additional client
companies of Service Company and subject to a service agreement with Service Company, or
an existing client company may wish to obtain additional services from Service Company.
Likewise, an existing direct or indirect subsidiary of Black Hills may cease to be a
client company or cease to take individual services from Service Company. In either
event, the parties hereto shall make such changes in the scope and character of the
services to be rendered and in the method of assigning, distributing or allocating costs
of such services as specified in Appendix 1, subject to the requirements of
Section 2.3, as may become necessary to achieve a fair and equitable
assignment, distribution, or allocation of Service Company costs among all associate
companies.
Section 5.3
In the event Client Company changes the scope of services that it takes from Service
Company (as provided in Section 1.2 and subject to Section 1.3)
or terminates this Agreement (pursuant to Section 3.1), the Service Company
may ▇▇▇▇ such Client Company a charge that reflects a proportionate share of any
significant residual fixed costs (i.e. incurred costs or commitments to incur costs) that
were incurred or committed to incur in contemplation of providing such Client Company
service prior to the notice of termination. Examples of fixed costs include, but are not
limited to, costs to upgrade computer hardware and software systems to meet Client Company’s
specifications.
Section 5.4
Service Company shall permit Client Company access to its accounts and records, including
the basis and computation of allocations; provided that the scope of access and
inspection is limited to accounts and records that are related to Service Company’s
transactions with Client Company.
Section 5.5
Appendix 1 is expressly incorporated herein and made a part hereof.
Section 5.6
It is the intent of the parties hereto that the determination of the costs as used in
this Agreement shall be consistent with, and in compliance with, the rules and
regulations of the SEC, as they are now read or hereafter may be modified by the SEC.
Section 5.7
This Agreement and the rights hereunder may not be assigned without the mutual written
consent of all parties hereto.
* * * * * * *
4
IN
WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the
date and year first above written.
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BLACK HILLS SERVICES COMPANY, INC. |
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By:_______________________________
Name:_____________________________
Title:______________________________ |
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By:_______________________________
Name:_____________________________
title:______________________________ |
5
APPENDIX 1
DESCRIPTION OF
SERVICES TO BE PROVIDED BY BLACK HILLS SERVICES
COMPANY, INC. AND DETERMINATION OF
CHARGES FOR SUCH SERVICES TO THE
UTILITY OPERATING COMPANIES AND OTHER AFFILIATES
Description of
Services Provided
A description of the services
provided by Black Hills Services Company, Inc. is detailed below. Identifiable costs will
be directly assigned to the utility company subsidiaries (the “Operating
Companies”) and other affiliates of Black Hills. For costs that are for services
of a general nature and cannot be directly assigned, the method of allocation is described
below for each service provided. If specific conditions are met (as outlined in the [Black
Hills Energy Services Policies and Procedures Manual]), an alternative Labor Dollars Ratio
may be used to allocate non-labor costs for any service.
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hh)
Executive Management Services |
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Description
– Represents charges for Black Hills executive management and services, including,
but not limited to, officers of Black Hills. |
| |
Methods
of Allocation – Executive Management indirect costs will be allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Asset Ratio with 15 percent of Assets assigned to Black Hills. |
| |
Description
– Provides communications to investors and the financial community. Coordinates the
transfer agent and shareholder record keeping functions and plans the annual shareholder
meeting. |
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Methods
of Allocation – Investor Relations indirect costs will be allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description
– Reviews internal controls and procedures to ensure assets are safeguarded and
transactions are properly authorized and recorded. Evaluates contract risks. |
| |
Method
of Allocation – Internal Audit indirect costs will e allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description
– Provides legal services related to labor and employment law, litigation, contracts,
rates and regulation, environmental matters, real estate and other legal matters. |
1
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Method
of Allocation – Legal indirect costs will be allocated based on a three-factor
formula that is comprised of the average of the Revenue Ratio, the Employee Ratio and the
Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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Description– Provides
claims services related to casualty, public and company claims. |
| |
Method
of Allocation – Claims Services costs will be direct charged, and administrative
support functions that cannot be direct charged will be allocated using the Labor Dollars
Ratio. |
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mm)
Corporate Communications |
| |
Description
– Provides corporate communications, speech writing and coordinates media services.
Provides advertising and branding development for the companies within Black Hills.
Manages and tracks all contributions made on behalf of Black Hills and its subsidiaries. |
| |
Method
of Allocation – Corporate Communications indirect costs will be allocated based
on a three-factor formula that is comprised of the average of the Revenue Ratio, the
Employee Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black
Hills. |
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nn)
Employee Communications |
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Description– Develops
and distributes communications to employees. |
| |
Method
of Allocation – Employee Communications indirect costs will be allocated based on
the Employee Ratio. |
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oo)
Corporate Strategy & Business Development |
| |
Description
– Facilitates development of corporate strategy and prepares strategic plans,
monitors corporate performance and evaluates business opportunities. Develops and
facilitates process improvements. |
| |
Method
of Allocation – Corporate Strategy & Business Development indirect costs will
be allocated based on a three-factor formula that is comprised of the average of the
Revenue Ratio, the Employee Ratio and the Total Asset Ratio with 15 percent of Assets
assigned to Black Hills. |
2
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Description– Monitors,
reviews and researches government legislation. |
| |
Method
of Allocation – Government Affairs indirect costs will be allocated based on a
three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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qq)
Facilities & Real Estate |
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Description
– Operates and maintains office buildings and service centers. Procures real estate
and administers real estate leases. Administers contracts to provide security,
housekeeping and maintenance services for such facilities. Procures office furniture and
equipment. |
| |
Method
of Allocation – Facilities & Real Estate indirect costs will be allocated to
the Operating Companies based on the Square Footage Ratio. |
| |
rr)
Facilities Administrative Services |
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Description
– Includes but is not limited to the functions of Mail Delivery, Duplicating and
Records Management. |
| |
Method
of Allocation – Facilities Administrative Services indirect costs will be
allocated based on a three-factor formula that is comprised of the average of the Revenue
Ratio, the Employee Ratio and the Total Asset Ratio with 15 percent of Assets assigned to
Black Hills. |
| |
Description
– Includes contract negotiations, development and management of supplier
relationships and acquisition of goods and services. Also includes inventory, planning and
forecasting, ordering, accounting and database management. Warehousing services includes
receiving, storing, issuing, shipping, returns, and distribution of material and parts. |
| |
Method
of Allocation – Supply Chain will be direct charged, and administrative support
functions that cannot be direct charged will be allocated using the Labor Dollars Ratio. |
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tt)
Supply Chain Special Programs |
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Description
– Develops and implements special programs utilized across the company such as
procurement cards, travel services and compliance with corporate MWBE (minority women
business expenditures) program goals. |
| |
Method
of Allocation – Supply Chain Special Programs indirect costs will be allocated
based on a three-factor formula that is comprised of the average of the Revenue Ratio, the
Employee Ratio and the Total Asset Ratio. |
3
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Description
– Establishes and administers policies related to employment, compensation and
benefits. Maintains HR computer system, the tuition reimbursement plan, and diversity
program. Coordinates the bargaining strategy and labor agreements with union employees.
Provides technical and professional development training and general HR support services. |
| |
Methods
of Allocation – Human Resources indirect costs will be allocated based on the
Employee Ratio. |
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Description
– Coordinates activities related to securities issuance, including maintaining
relationships with financial institutions, cash management, investing activities and
monitoring the capital markets. Performs financial and economic analysis. |
| |
Method
of Allocation – Finance & Treasury indirect costs will be allocated based on
a three-factor formula that is comprised of the average of the Revenue Ratio, the Employee
Ratio and the Total Asset Ratio with 15 percent of Assets assigned to Black Hills. |
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ww)
Accounting, Financial Reporting & Taxes |
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Description
– Maintains the books and records. Prepares financial and statistical reports, tax
filings and ensures compliance with applicable laws and regulations. Maintains the
accounting systems. Coordinates the budgeting process. |
| |
Method
of Allocation – Accounting, Financial Reporting & Taxes indirect costs will
be allocated based on a three-factor formula that is comprised of the average of the
Revenue Ratio, the Employee Ratio and the Total Asset Ratio with 15 percent of Assets
assigned to Black Hills. |
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xx)
Business Unit Accounting and Budgeting |
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Description– Provides
financial analysis, budgeting and administrative support for the business units. |
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Method
of Allocation – Business Unit Accounting and Budgeting indirect costs will be
allocated based on a three-factor formula that is comprised of the average of the Revenue
Ratio, the Employee Ratio and the Total Asset Ratio. |
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Description– Processes
payments to vendors and prepares statistical reports. |
| |
Method
of Allocation – Payment & Reporting indirect costs will be allocated to the
Operating Companies based on the Invoice Transaction Ratio. |
4
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Description– Processes
payments received from customers of the Operating Companies and affiliates. |
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Method
of Allocation – Receipts Processing indirect costs will be allocated based on the
Customer Bills Ratio. |
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Description
– Processes payroll including but not limited to time reporting, calculation of
salaries and wages, payroll tax reporting and compliance reports. |
| |
Method
of Allocation – Payroll indirect costs will be allocated based on the Employee
Ratio. |
| |
Description
– Determines the Operating Companies’ regulatory strategy, revenue requirements
and rates for electric and gas customers. Coordinates the regulatory compliance
requirements and maintains relationships with the regulatory bodies. |
| |
Method
of Allocation – Rates & Regulation indirect costs will be allocated to the
Operating Companies based on the Revenue Ratio or the Labor Dollars Ratio. |
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ccc)
Energy Supply Engineering and Environmental |
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Description
– Provides engineering services to the generation business. Establishes policies and
procedures for compliance with environmental laws and regulations. Researches emerging
environmental issues and monitors compliance with environmental requirements. Oversees
environmental clean up projects. |
| |
Method
of Allocation – Energy Supply Engineering and Environmental services will be
direct charged, and administrative support functions that cannot be direct charged will be
allocated using the Labor Dollars Ratio. |
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ddd)
Energy Supply Business Resources |
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Description
– Provides performance, specialists and analytical services to the Operating
Companies’ generation facilities. |
| |
Method
of Allocation – Energy Supply Business Resources indirect costs will be allocated
using the MWh Generation Ratio. |
5
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eee)
Energy Markets Regulated Trading & Marketing |
| |
Description
– Provides electric trading services to the Operating Companies’ electric
generation systems including load management, system optimization and resource
acquisition. |
| |
Method
of Allocation – Energy Markets Regulated Trading & Marketing indirect costs
will be allocated to the Operating Companies based on the Total MWh Sales Ratio. |
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fff)
Energy Markets – Fuel Procurement |
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Description– Purchases
fuel for Operating Companies electric generation systems (excluding nuclear). |
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Method
of Allocation – Energy Markets Fuel Procurement indirect costs will be allocated
based on the MWh Generation Ratio. |
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ggg)
Energy Delivery Marketing |
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Description
– Develops new business opportunities and markets the products and services of the
[Delivery Business Unit]. |
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Method
of Allocation – Energy Delivery Marketing will be direct charged. |
| |
hhh)
Energy Delivery Construction, Operations & Maintenance (COM) |
| |
Description– Constructs,
maintains and operates electric and gas delivery systems. |
| |
Method
of Allocation – Energy Delivery COM indirect costs will be allocated based on
the Delivery Services Gross Plant Ratio. |
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iii)
Energy Delivery Engineering/Design |
| |
Description
– Provides engineering and design services in support of capacity planning,
construction, operations and material standards. |
| |
Method
of Allocation – Energy Delivery Engineering/Design services will be direct
charged, and administrative support functions that cannot be direct charged will be
allocated using the Labor Dollars Ratio. |
| |
Description
– Provides marketing and sales services for the electric and natural gas customers of
the Operating Companies and affiliates, including strategic planning, segment
identification, business analysis, sales planning and customer services. |
| |
Method
of Allocation – Marketing & Sales indirect costs will be allocated based on
the Revenue Ratio. |
6
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Description
– Provides service activities to retail and wholesale customers. These services
include meter reading, customer billing, call center and credit and collections. |
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Method
of Allocation – Customer Service indirect costs will be allocated based on the
Customers Ratio. |
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lll)
Information Technology |
| |
Description
– Provides various communications and electronic data processing services including
but not limited to, development and support of mainframe computer software applications,
procurement and support of personal computers, operation of a data center and installation
and operation of a communications system. Also administers the IBM contract that may
provide for the services listed above. |
| |
Method
of Allocation – Information Technology will be direct charged. |
| |
Description– Provides
aviation and travel services to employees. |
| |
Method
of Allocation – Aviation Services will be direct charged. |
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Description– Oversees
the Operating Companies’ Fleet Services Group. |
| |
Method
of Allocation – Fleet will be direct charged. |
Allocation Ratios
The following ratios will be utilized
as outlined above.
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Customer
Bills Ratio – Based on the average of the monthly total number of customer bills
issued during the prior year ending December 31, the numerator of which is for an
applicable Operating Company or affiliate company and the denominator of which is for all
applicable Operating Companies and affiliate companies. This ratio will be determined
annually, or at such a time as may be required due to significant changes. |
| |
Customers
Ratio – Based on the average of the monthly total electric customers (and/or gas
customers, or residential, business and large commercial and industrial customers where
applicable) for the prior year ending December 31, the numerator of which is for an
applicable Operating Company or affiliate company and the denominator of which is for all
applicable Operating Companies and affiliate companies. This ratio will be determined
annually, or at such time as may be required due to significant changes. |
| |
Delivery
Services Gross Plant Ratio – Based on transmission and distribution gross plant
for the [Delivery Business Unit], both electric and gas for the prior year ending December
31, the numerator of which is an applicable Operating Company and the denominator of which
is for all applicable Operating Companies. This ratio will be determined annually, or at
such time as may be required due to significant changes. |
7
| |
Employee
Ratio – Based on the number of employees at the end of the prior year ending
December 31, the numerator of which is for an applicable Operating Company or affiliates
company and the denominator of which is for all applicable Operating Companies and
affiliates companies. This ratio will be determined annually, or at such time as may be
required due to significant changes. |
| |
Invoice
Transaction Ratio – Based on the sum of the monthly number of invoice
transactions processed for the prior year ending December 31, the numerator of which is
for an applicable Operating Company or affiliate company and the denominator of which is
for all applicable Operating Companies and affiliate companies. This ratio will be
determined annually, or at such time as may be required due to significant changes. |
| |
Labor
Dollars Ratio – Based on the [ ] department
(performing center) labor dollars charged to Operating Companies and other affiliates for
the month. The numerator of which is the labor dollars charged to an Operating Company or
affiliate company and the denominator of which is for all Operating Companies and
affiliate companies charged by the department for the month. |
| |
MWh
Generation Ratio – Based on the sum of the monthly electric MWh generated during
the prior year ending December 31, the numerator of which is for an applicable Operating
Company and the denominator of which is for all applicable Operating Companies. This ratio
will be determined annually, or at such time as may be required due to significant
changes. |
| |
Revenue
Ratio – Based on the sum of the monthly revenue amounts for the prior year ending
December 31, the numerator of which is for an applicable Operating Company or affiliates
company and the denominator of which is for all applicable Operating Companies and
affiliates companies. This ratio will be determined annually, or at such time as may be
required due to significant changes. |
| |
Square
Footage Ratio – Based on the total square footage as of December 31 for the prior
year, the numerator of which is for an applicable Operating Company or affiliate company
and the denominator of which is for all applicable Operating Companies and affiliate
companies. This ratio will be determined annually, or at such time as may be required due
to significant changes. |
| |
Total
Assets Ratio – Based on the total assets as of December 31 for the prior year,
the numerator of which is for an applicable Operating Company or affiliate company and the
denominator of which is for all applicable Operating Companies and affiliate companies.
This ratio will be determined annually, or at such time as may be required due to
significant changes. |
8
| |
Total
Assets Ratio, with 15 Percent of Assets assigned to Black Hills – Based on the
total assets as of December 31 for the prior year, the numerator of which is for an
applicable Operating Company or affiliates company and the denominator of which is for all
applicable Operating Companies and affiliate companies. Black Hills will be assigned
fifteen percent of the total assets. This ratio will be determined annually, or at such
time as may be required due to significant changes. |
| |
Total
MWh Sales Ratio – Based on the sum of monthly electric MWh sold through the
[Energy Trading Division] unit, for the prior year ending December 31, the numerator of
which is an applicable Operating Company and the denominator of which is for all
applicable Operating Companies. This ratio will be determined annually, or at such time as
may be required due to significant changes. |
9