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TransCanada Reaches Settlement for 2006 Canadian Mainline Tolls

TransCanada Corp. announced Thursday it reached a settlement with shippers, customers and other interested parties regarding 2006 tolls on its Canadian Mainline natural gas transmission system that would set the annualized benchmark Eastern Zone toll for 2006 at C94.5 cents/GJ, a rate significantly less than last year's due to increased throughput and cost savings.

The settlement set lower rates by "quite a significant amount which will make the pipeline more competitive," said Nick Schultz, a vice president of the Canadian Association of Petroleum Producers. "It's a win-win for everyone, the pipeline, producers and consumers," who all signed off on the settlement. Schultz credited "a lot of creativity on all sides" in building in incentives for efficiency.

Craig Frew, TransCanada vice president, noted the company had reached a "significant alignment with shippers," particularly on items such as fuel charges. Under the new settlement the pipeline has an incentive to cut fuel charges, which have become more important as the cost of the fuel has increased. TransCanada also will give an estimated fuel consumption number in advance that "will come as close as possible to actual consumption," Frew said, adding this is important for shippers who pay the fuel costs in kind to be able to estimate how much gas to put into the pipe.

Frew estimated about 80% of pipeline capacity is under firm contract. The settlement also includes a capacity release incentive for space TransCanada holds on Great Lakes Gas Transmission. Revenue sharing will encourage TransCanada to aggressively manage and release capacity it doesn't need on any particular day.

The settlement, which is subject to approval by the National Energy Board (NEB), results in a revenue requirement of C$1.8 billion for 2006. It establishes the Canadian Mainline's fixed operating, maintenance and administration (OM&A) costs for 2006 at C$174.2 million, which is 6% higher than the OM&A costs of C$164.2 million incurred in 2005.

The negotiating parties agreed that the cost of capital for 2006 will consist of the weighted average cost of debt capital, preferred securities and cost of equity reflecting a rate of return on common equity of 8.88%, as determined for 2006 under the NEB's return adjustment formula, on a deemed common equity ratio of 36%. The return on equity rate in 2005 was 9.56% (see NGI, Feb. 21, 2005).

"TransCanada is committed to strengthening the collaborative relationship we have with our customers and achieving a balance of our respective interests," said CEO Hal Kvisle. "By offering TransCanada the potential for a modest increase in earnings for achieving specific performance measures that benefit customers, this settlement further strengthens our alignment with our customers and continues to lay the groundwork for longer-term incentive programs."

There is no change in depreciation rates or methodology from 2005 to 2006. Depreciation expense for 2006 is expected to be $402 million.

Interim tolls will continue to be charged for transportation service on the Canadian Mainline until final tolls are approved by the NEB pursuant to this settlement. With NEB approval, the terms of this settlement will be effective Jan. 1, 2006 for one year.

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