Proof of Tariff (or Demand Charge) Calculation Two ways of calculating pipeline economics: (a) (b) Specify the

tariff (or demand charge) as an input assumption IRR (or ROE) floats as a model output Specify the IRR (or ROE) as an input assumption Tariff (or demand charge) floats as a model output

The following calculation addresses the latter case: Three basic relationships: (1) Profit = Revenue Opex Capex Tax (2) (3) Revenue = Tariff X Throughput Tax = Tax Rate X (Revenue Opex Depreciation)

Substitutions: (4) Profit = Revenue Opex Capex Tax Rate X (Revenue Opex Depreciation) (5) (6) Profit = (1 Tax Rate) X Revenue (1 Tax Rate) X Opex + (Tax Rate X Depreciation) Capex Profit = (1 Tax Rate) X (Tariff X Throughput) (1 Tax Rate) X Opex + (Tax Rate X Depreciation) Capex

Assuming Profit is based on 15% Rate of Return (Specified in Model): (7) 0 = [(1 Tax Rate) X PV15(Tariff X Throughput)] [(1 Tax Rate) X PV15(Opex)] + [Tax Rate X PV15(Depreciation)] PV15(Capex) (8) [(1 Tax Rate) X PV15(Tariff X Throughput)] = [(1 Tax Rate) X PV15(Opex)] [Tax Rate X PV15(Depreciation)] + PV15(Capex)

Since Tariff is a constant value in the equation: (9) [(1 Tax Rate) X Tariff X PV15(Throughput)] = [(1 Tax Rate) X PV15(Opex)] [Tax Rate X PV15(Depreciation)] + PV15(Capex) (10) Tariff = [(1 Tax Rate) X PV15(Opex)] [Tax Rate X PV15(Depreciation)] + PV15(Capex) [(1 Tax Rate) X PV15(Throughput)]

April 21, 2012