Contract analysis

I. Executive Summary This memorandum analyzes the income tax allowance ("ITA") component of Ridgeline Midstream Services LLC's ("Ridgeline") cost of service, as originally filed on May 12, 2022, and as revised in the current tariff redesign being prepared for submission in the rate proceeding pending before the Federal Energy Regulatory Commission ("FERC" or the "Commission") in Docket Nos. RP22-847-000 (rate case) a

1. Grossed-Up Income Tax Allowance Methodology. The ITA is computed using the standard FERC grossed-up methodology, which ensures that the pipeline recovers sufficient revenue to cover both its after-tax cost of equity capital and the income tax obligation generated by the allowed equity return. We set forth the grossed-up formula, apply it to both the original and revised filings, and demonstrate the mathematical de

2. Applicable Combined Effective Tax Rate. The combined effective income tax rate of approximately 26.13% reflects the 21% federal corporate income tax rate (per the Tax Cuts and Jobs Act of 2017) and the 6.5% West Virginia corporate net income tax rate, with the state tax treated as deductible for federal income tax purposes under the standard grossed-up methodology. We analyze potential issues concerning the exclus

3. Partnership vs. Corporate Form Considerations. Ridgeline is a single-member Delaware limited liability company treated as a disregarded entity for federal income tax purposes, with all income flowing through to its sole member, Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted limited company. Under FERC's revised policy on income tax allowances for pass-through entities, Ridgeline is eligible for th

4. Impact of the Revised ROE on the ITA. We present a sensitivity analysis demonstrating the effect on the ITA of the various ROE proposals advanced by the parties: Ridgeline's revised proposal of 12.50%, the Appalachian Transmission Pipeline Company ("ATPC") proposal of 10.75%, and the Marcellus Gas Producers Coalition ("MGPC") proposal of 11.25% (as advocated in the testimony of Dr. Eleanor Vasquez). We quantify th

II. Background A. Ridgeline Midstream Services LLC — Entity Structure and Ownership Ridgeline Midstream Services LLC is a Delaware limited liability company organized under the Delaware Limited Liability Company Act, 6 Del. C. § 18-101 et seq. Ridgeline maintains its principal office at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301, and its registered agent in Delaware is Capitol Filings Inc

III. Applicable Income Tax Rates A. Federal Income Tax Rate The applicable federal corporate income tax rate for purposes of the ITA calculation is 21%. This rate was established by the Tax Cuts and Jobs Act of 2017 ("TCJA"), Pub. L. 115-97, which amended Section 11(b) of the Internal Revenue Code to impose a flat federal corporate income tax rate of 21%, effective for taxable years beginning after December 31, 2017.

IV. Grossed-Up Income Tax Allowance Methodology A. Overview of the Grossed-Up Approach The grossed-up income tax allowance methodology is the standard approach used in FERC cost-of-service rate-making to ensure that a regulated pipeline recovers sufficient revenue to cover both its after-tax cost of equity capital and the income taxes associated with the authorized equity return. The objective of the gross-up is stra

V. Partnership vs. Corporate Form Considerations A. FERC Policy on Income Tax Allowance for Pass-Through Entities The eligibility of partnerships, limited liability companies, and other pass-through entities to include an income tax allowance in their FERC-jurisdictional cost of service has been the subject of significant regulatory evolution over the past two decades. This issue is directly relevant to Ridgeline, wh

VI. ADIT and Deferred Tax Considerations A. Accumulated Deferred Income Taxes (ADIT) The accumulated deferred income taxes ("ADIT") balance reflected in Ridgeline's rate base is ($12.45 million), which operates as a reduction to the rate base. The ADIT represents the cumulative difference between income taxes computed on a book basis and income taxes actually paid, arising from the use of different depreciation metho

VII. Revenue Credits and Their Interaction with ITA The interaction between revenue credits and the income tax allowance warrants brief discussion, both to clarify the mechanics of the cost-of-service calculation and to address the superficial numerical coincidence in the original filing. In the original filing of May 2022, revenue credits of ($16.10 million) were applied as an offset against the gross cost-of-servic

VIII. Comparison to Intervenor and FERC Staff Positions A. ATPC Position The Appalachian Transmission Pipeline Company ("ATPC") is a neighboring interstate natural gas pipeline that interconnects with the Ridgeline Pipeline System. ATPC intervened and filed a protest on August 15, 2022. ATPC is represented by William Pratt of Kellner, Royce & Dillard LLP, One PPG Place, Suite 2800, Pittsburgh, Pennsylvania 15222. ATP

1. Partnership-form ITA eligibility. Trial Staff may request documentation of DEH's actual U.S. income tax liability to verify that Ridgeline's sole member bears a demonstrated tax obligation on the pipeline income. This is the most likely area of Trial Staff inquiry, and it can be addressed through the proactive measures recommended in Section V.D of this memorandum.