TransCanada PipeLines said Monday it reached a five-year settlement with shippers that will result in a proposed C7.5-cent/Gj increase in Eastern Zone tolls for 2007 to C$1.02/Gj from the 2006 level of C94.5 cents/Gj and will give the pipeline several operational performance incentives. The agreement also covers tolls and costs for years 2008-2011 on the Canadian Mainline.

"TransCanada will achieve increased equity earnings and additional revenues through performance under various incentive programs, while customers will benefit from lower tolls and share the benefit of incentive program outcomes," said CEO Hal Kvisle.

Stakeholders agreed that the cost of capital will reflect a rate of return on common equity, as determined by the National Energy Board's (NEB) formula, on a deemed common equity ratio of 40%, an increase from 36%. The remaining capital structure will consist of senior debt following the redemption of U.S. dollar-denominated preferred securities currently in the Canadian Mainline's rate base. The foreign exchange gain expected to be realized as a result of the redemption of the preferred securities will be amortized over five years and will reduce the tolls paid by shippers.

The settlement results in a net revenue requirement of $1.6 billion for 2007. It establishes the Canadian Mainline's fixed operating, maintenance and administration (OM&A) costs for each year of the settlement. Any variance between actual OM&A costs and those agreed to in the settlement will accrue to TransCanada from 2007 to 2009. Variances on OM&A costs will be shared 50/50 between TransCanada and customers in 2010 and 2011. All other cost elements of the revenue requirement will be treated on a flow-through basis.

The performance-based incentive arrangements, which are similar to those agreed to in the 2006 settlement, are focused on aligning interests in achieving cost savings and increased value, thereby providing mutual benefits to both TransCanada and its customers.

TransCanada and stakeholders have agreed to a slight decrease in the depreciation rate and agreed to put into abeyance until 2012 the requirement for an updated depreciation study due in 2008.

TransCanada said it will seek NEB approval for a change in 2007 interim tolls to align with tolls in the settlement. With NEB approval, the terms of the settlement will be effective Jan. 1, 2007 for five years.

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