Contract analysis

I. Executive Summary The purpose of this memorandum is to present the updated discounted cash flow ("DCF") proxy group analysis as of the third quarter of 2024, supporting a revised return on equity ("ROE") of 12.50% for Ridgeline Midstream Services LLC ("Ridgeline" or the "Company") for inclusion in the redesigned tariff filing to be submitted on or before February 21, 2025, in FERC Docket Nos. RP22-847-000 (rate ca

II. Background and Procedural Context A. Original ROE Filing and Deficiency Ridgeline Midstream Services LLC filed its application for an initial tariff rate under Section 4 of the Natural Gas Act ("NGA"), 15 U.S.C. § 717c, and the Commission's regulations at 18 C.F.R. Part 154, on May 12, 2022. The application proposed a recourse rate of $0.2265/Dth, comprised of a reservation charge of $0.2223/Dth and a usage charg

III. FERC Legal Standards for ROE Determination A. The Two-Step DCF Methodology FERC has long employed the discounted cash flow ("DCF") methodology for determining the appropriate ROE for natural gas pipeline companies under Sections 4 and 5 of the Natural Gas Act. The DCF approach is grounded in the foundational principles established by the United States Supreme Court in Bluefield Waterworks & Improvement Co. v. Pu

IV. Proxy Group Identification and Selection A. Initial Screening Universe The proxy group analysis began with the identification of all publicly traded U.S. companies that derive at least 50% of their consolidated revenues from FERC-jurisdictional natural gas transportation, gathering, processing, or related midstream services. This threshold ensures that the proxy group is composed of companies whose market valuati

V. DCF Analysis — Detailed Methodology and Inputs A. Dividend Yield Calculation (D₁/P₀) Consistent with FERC practice, we calculated the dividend yield for each proxy group member using a six-month average stock price measured from April 1, 2024 through September 30, 2024. The six-month averaging period is designed to smooth the effects of short-term stock price volatility, market fluctuations, and idiosyncratic trad

1. Short-Term Growth Rate The short-term growth rate for each proxy group member was derived from consensus analyst earnings growth estimates obtained from two recognized financial data services: Trident Financial Data Services and Meridian Equity Research. Consensus estimates from these services aggregate the projections of multiple equity research analysts covering each company, providing a market-based measure of

2. Long-Term GDP Growth Rate Consistent with FERC's established methodology, we employ the long-term nominal GDP growth rate of the United States as the proxy for the sustainable long-term growth rate of the proxy group companies. This approach rests on the well-accepted economic principle that mature regulated utilities and pipeline companies cannot be expected to sustain growth rates indefinitely that materially ex

3. Two-Step Growth Rate Computation Applying the two-step growth rate formula (g = short-term growth × ⅔ + long-term GDP growth × ⅓), we compute the blended growth rate for each proxy group member as follows: The two-step blended growth rates range from 3.15% (Clarkfield Natural Gas Partners LP) to 5.89% (Prairie Basin Energy Inc.). The median blended growth rate is 4.56%, and the mean is 4.46%. C. Individual DCF Res

VI. Placement of Ridgeline Within the Zone of Reasonableness A. Risk Factors Supporting Above-Median Placement The determination of where within the zone of reasonableness to place the ROE for a specific pipeline requires a careful assessment of the company's risk profile relative to the proxy group. As discussed below, five significant risk factors—each individually recognized by FERC in prior proceedings—support pl

1. Single-Asset Risk Ridgeline operates a single 187-mile, 24-inch-diameter natural gas pipeline extending from the Wetzel County Interconnect in Wetzel County, West Virginia, to the Waynesburg Compressor Station in Greene County, Pennsylvania. The system includes three compressor stations (Wetzel, Mannington, and Waynesburg) with an aggregate compression capacity of 45,000 horsepower and a certificated design capaci

2. New-Entrant / Start-Up Risk Ridgeline's pipeline was placed in service on October 1, 2021, giving the system less than four years of operating history as of the date of this analysis. The pipeline was constructed at an original cost of $587.2 million, but the system has not yet established a track record of consistent throughput at or near its design capacity. Current throughput is approximately 680 MMcf/d, repres

3. Regulatory Risk Ridgeline has never had a FERC-approved tariff rate. The current proceeding—FERC Docket Nos. RP22-847-000 and RP22-847-001—represents the Company's initial tariff rate filing. This distinguishes Ridgeline from every member of the proxy group, each of which operates under one or more established FERC-approved tariff rates with decades of regulatory history. The regulatory risk facing Ridgeline is he

4. Leverage and Financial Risk The financial risk of Ridgeline's equity holders is significantly elevated by the Company's actual capital structure, which is far more leveraged than the 55% equity / 45% debt regulatory capital structure proposed for ratemaking purposes. The total debt on the Ridgeline system consists of $400 million in term loan borrowings (under a credit agreement with Pinnacle National Bank, N.A. a

5. Geographic Concentration and Market Risk Ridgeline's entire system is located within the Appalachian Basin, spanning portions of West Virginia and Pennsylvania. The system's receipt point at the Wetzel County Interconnect and its delivery point at the Waynesburg Compressor Station are both situated within the heart of the Marcellus and Utica shale production region. While the Appalachian Basin is currently the mos

VII. Comparison to Opposing Parties' ROE Proposals A. ATPC's Proposed 10.75% ROE ATPC, through its counsel William Pratt of Kellner, Royce & Dillard LLP (One PPG Place, Suite 2800, Pittsburgh, PA 15222), filed answering testimony on January 9, 2023, proposing an ROE of 10.75% for Ridgeline. This proposal was based on ATPC's contention that Ridgeline should be treated as an average-risk natural gas pipeline and placed

VIII. Impact on Revised Cost of Service and Proposed Rate A. Revised Rate of Return Calculation The revised rate of return is calculated using the unchanged capital structure and cost of debt, combined with the revised 12.50% ROE: Capital Structure: 55% equity / 45% debt (unchanged from original filing) Revised ROE: 12.50% Cost of Debt: 5.25% (unchanged; weighted average of SOFR + 325 bps on term loan and 7.875% on s