Contract analysis

I. INTRODUCTION AND QUALIFICATIONS A. Identity and Position

1. Q. Please state your name, title, and business address. A. My name is Angela Moretti. I am the Vice President, Finance & Treasurer of Ridgeline Midstream Services LLC ("Ridgeline" or the "Company"). My principal office is located at 700 Kanawha Boulevard East, Suite 1400, Charleston, West Virginia 25301. Ridgeline is a Delaware limited liability company whose sole member is Dunmore Energy Holdings Ltd. ("DEH"), a

2. Q. What are your current responsibilities at Ridgeline? A. As Vice President, Finance & Treasurer, I have oversight of all financial reporting, treasury operations, rate filings, and capital structure management for Ridgeline. I am responsible for managing the Company's relationships with its lenders and noteholders, overseeing the preparation of all regulatory filings with financial components, supervising the Co

3. Q. Please describe your professional background and qualifications. A. I have over twenty years of professional experience in energy finance, pipeline cost-of-service regulation, and FERC rate proceedings. I hold a Bachelor of Science in Finance from the University of Virginia (2001) and a Master of Business Administration from the Wharton School of the University of Pennsylvania (2006), with a concentration in Fi

4. Q. What is the purpose of your supplemental testimony? A. This supplemental pre-filed direct testimony supplements and updates my original pre-filed direct testimony filed on December 5, 2022, in Docket Nos. RP22-847-000 and RP22-847-001. The purpose of this supplemental testimony is to present the following revised cost-of-service components and rate design parameters: (a) A revised total cost of service of $103.

5. Q. What prompted this supplemental filing? A. This supplemental filing responds to the Deficiency Letter dated January 19, 2023, issued by the FERC Office of Energy Market Regulation ("OEMR"), which identified fourteen (14) deficiency items in the Company's original application. My testimony specifically addresses the revisions relevant to cost of service, rate base, capital structure, and rate design, and directl

6. Q. Did you engage outside advisors in the preparation of this supplemental testimony? A. Yes. This testimony was prepared in coordination with Braswell Energy Consulting Group LLC ("BEC"), engagement number BEC-2023-0041, led by Dr. Raymond Braswell. Dr. Braswell is a former FERC economist who was engaged by Dunmore Energy Holdings Ltd. on April 15, 2023, to provide expert economic consulting services in support o

7. Q. Please summarize the principal changes between the original filing and this revised filing. A. The following table summarizes the key changes between the original filing dated May 12, 2022, and this revised supplemental filing: As shown above, while the revised ROE and WACC are lower than originally proposed—reflecting a 150-basis-point reduction in ROE—the total cost of service has increased by $5.79 million,

8. Q. What exhibits are you sponsoring in connection with this supplemental testimony? A. I am sponsoring twelve supplemental exhibits, designated Exhibit AM-S1 through Exhibit AM-S12, as follows: • Exhibit AM-S1: Revised Statement A — Cost of Service Summary ($103.15 million) • Exhibit AM-S2: Revised Statement B — Rate Base Summary ($612.40 million) • Exhibit AM-S3: Revised Statement C — Depreciation Schedule ($14.6

II. OVERVIEW OF THE RIDGELINE PIPELINE SYSTEM A. System Description

9. Q. Please describe the Ridgeline Pipeline System. A. The Ridgeline Pipeline System (the "System" or the "Pipeline") is a 187-mile, 24-inch-diameter high-pressure natural gas transmission pipeline extending from the Wetzel County Interconnect in Wetzel County, West Virginia, to the Waynesburg Compressor Station in Greene County, Pennsylvania. The receipt point at the Wetzel County Interconnect is located at approxi

10. Q. Please describe Ridgeline's corporate structure. A. Ridgeline Midstream Services LLC is a limited liability company organized and existing under the laws of the State of Delaware. Ridgeline's sole member is Dunmore Energy Holdings Ltd. ("DEH"), a Cayman Islands exempted limited company. DEH's registered address is 4th Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1002, Cayman Isl

11. Q. Please describe the proposed interconnection that is the subject of Docket No. RP22-847-001. A. Ridgeline has proposed a physical interconnection with Appalachian Trunk Pipeline Company, LLC ("ATPC"), a Pennsylvania limited liability company with FERC Code 840117, at the Wetzel County Interconnect. The proposed interconnection would be located at ATPC Milepost 412.6 on ATPC's mainline system. ATPC operates a 6

III. RATE BASE A. Overview of Rate Base Components

12. Q. Please describe the total rate base for the Ridgeline Pipeline System. A. The total rate base for the Ridgeline Pipeline System is $612.40 million, calculated as of the end of the twelve-month test year ended March 31, 2022. This amount remains unchanged from the rate base presented in the Company's original application filed on May 12, 2022. The rate base is composed of the following elements: Each component

13. Q. What is the gross plant in service included in Ridgeline's rate base? A. Ridgeline's gross plant in service is $587.2 million, representing the original construction cost of the Pipeline and all associated facilities as recorded on Ridgeline's books of account at historical cost. This amount includes all costs associated with the construction and commissioning of the 187-mile pipeline, the three compressor sta

14. Q. What is the accumulated depreciation reflected in the rate base? A. Accumulated depreciation as of the end of the test year (March 31, 2022) is $23.49 million. Ridgeline depreciates its pipeline and compressor station assets using the straight-line method at an annual depreciation rate of 2.5%, which corresponds to an estimated useful life of 40 years. The annual depreciation expense on gross plant of $587.2 m

15. Q. Please explain the working capital allowance included in rate base. A. The working capital allowance included in rate base is $18.64 million. The Commission's standard methodology for computing the working capital component of rate base for natural gas pipeline companies begins with the so-called "one-eighth formula," which provides a simplified proxy for cash working capital by computing one-eighth of the sum

16. Q. Please explain the ADIT adjustment to rate base. A. Accumulated Deferred Income Taxes of ($12.45 million) are deducted from rate base, consistent with the Commission's normalization requirements. ADIT arises from the timing differences between the accelerated depreciation method used for federal and state income tax purposes—specifically, the Modified Accelerated Cost Recovery System ("MACRS")—and the straight

17. Q. What other items are included in rate base? A. The remaining $42.50 million of rate base consists of three components: (a) Gas Stored Underground and In Transit: $27.80 million, representing the value of natural gas held in pipeline inventory (linepack) and in transit at the average balance during the test year. This gas is necessary for the operation of the Pipeline and represents an investment by Ridgeline t

18. Q. Has the rate base changed from the original filing? A. No. The total rate base of $612.40 million is unchanged from the rate base presented in Ridgeline's original application filed on May 12, 2022. The revisions presented in this supplemental testimony relate to the return on rate base (due to the reduced ROE), the operating expense components of the cost of service, revenue credits, and the billing determina

IV. CAPITAL STRUCTURE A. Proposed Capital Structure

19. Q. What is Ridgeline's proposed capital structure for ratemaking purposes? A. Ridgeline proposes a capital structure consisting of 55% equity and 45% debt for purposes of computing its weighted average cost of capital. This capital structure is unchanged from the original filing and reflects the actual capitalization of Ridgeline Midstream Services LLC as a single-asset pipeline entity. The Commission's longstand

20. Q. Please describe the equity component of Ridgeline's capital structure. A. The equity component represents 55% of Ridgeline's total capitalization. Ridgeline's sole equity holder is Dunmore Energy Holdings Ltd. DEH contributed equity capital of $37.2 million to fund the construction of the Ridgeline Pipeline System. This equity contribution was calculated as the residual of the total construction cost of $587.2

21. Q. Please describe the senior secured credit facility. A. Ridgeline entered into a Credit Facility Agreement dated September 15, 2021 (the "Credit Facility" or the "Credit Agreement"), providing for a $400 million term loan and a $75 million revolving credit facility. The administrative agent under the Credit Agreement is Pinnacle National Bank, N.A., with principal offices at 600 Travis Street, Suite 4200, Houst

22. Q. Please describe the second lien notes. A. On September 22, 2021, Ridgeline issued $150 million in aggregate principal amount of 7.875% Second Lien Senior Secured Notes due 2030 (the "Second Lien Notes"). The Second Lien Notes were issued in a private placement to two institutional investors: Harborview Capital Management LLC, a New York-based credit fund managed by Samantha Hu, Portfolio Manager, which purchas

23. Q. What is the weighted average cost of debt used in the WACC calculation? A. The weighted average cost of debt is 5.25%. This figure is calculated by weighting the cost of each debt instrument by its outstanding principal balance as of the test year date. Specifically, the calculation combines the effective interest rate on the term loan (SOFR + 325 basis points, which at the test year date produced an all-in ra

24. Q. Is Ridgeline's proposed 55/45 equity-to-debt capital structure reasonable? A. Yes. The proposed 55% equity and 45% debt capital structure is within the range of capital structures that the Commission has accepted for comparable interstate natural gas pipeline companies. In my experience with pipeline rate proceedings, the Commission has generally found capital structures with equity ratios in the range of 40%

V. RETURN ON EQUITY A. Revised ROE Proposal

25. Q. What is Ridgeline's revised proposed return on equity? A. Ridgeline's revised proposed return on equity is 12.50%, reduced from the 14.00% ROE proposed in the original filing of May 12, 2022. This revision directly addresses Deficiency Item 1 in the OEMR Deficiency Letter dated January 19, 2023, which identified inadequate cost-of-service support for the originally proposed ROE, specifically noting the absence

26. Q. Why has Ridgeline reduced its proposed ROE from 14.00% to 12.50%? A. The original proposed ROE of 14.00% was based on a DCF proxy group analysis utilizing market data through year-end 2021. The OEMR Deficiency Letter correctly noted that this analysis did not reflect the substantial changes in capital market conditions, interest rate environments, and risk premium assessments that occurred between 2021 and the

27. Q. How does Ridgeline's revised ROE compare to the positions taken by intervenors in this proceeding? A. In their answering testimony filed on January 9, 2023, the intervenors proposed the following ROE levels: (a) Appalachian Trunk Pipeline Company, LLC (ATPC): 10.75%, as presented in the testimony of ATPC's witness, sponsored through counsel William Pratt of the firm Kellner, Royce & Dillard LLP; (b) Marcellus

28. Q. What risk factors support an ROE at the proposed level of 12.50%? A. Several risk factors specific to Ridgeline support an ROE at or above the median of the proxy group range: (a) Construction-Era Risk Premium: Although the Pipeline has been in service since October 1, 2021, it is still in its early operating years, and the original construction commitment carried significant project development and execution

VI. WEIGHTED AVERAGE COST OF CAPITAL A. WACC Calculation

29. Q. Please present Ridgeline's revised weighted average cost of capital. A. Ridgeline's revised WACC is 9.2375%, calculated as follows: The revised WACC of 9.2375% compares to the original WACC of 10.0625%, which was calculated as (0.55 × 14.00%) + (0.45 × 5.25%) = 7.70% + 2.3625% = 10.0625%. The reduction of 82.5 basis points in the WACC is entirely attributable to the 150-basis-point reduction in the proposed RO

30. Q. What is the revised return on rate base? A. The revised return on rate base is $56.57 million, calculated by applying the revised WACC of 9.2375% to the total rate base of $612.40 million: $612.40 million × 9.2375% = $56.57 million (rounded) The original return on rate base was $61.62 million ($612.40 million × 10.0625% = $61.62 million). The revised return therefore represents a reduction of $5.05 million fro

VII. OPERATING EXPENSES A. Depreciation Expense

31. Q. What is the annual depreciation expense included in the revised cost of service? A. The annual depreciation expense included in the revised cost of service is $14.68 million, unchanged from the original filing. This amount is computed using the straight-line depreciation method at an annual rate of 2.5% applied to gross plant in service of $587.2 million: $587.2 million × 2.5% = $14.68 million The 2.5% annual

32. Q. What is the revised O&M expense? A. The revised O&M expense is $13.92 million, an increase of $1.48 million from the $12.44 million included in the original filing. The increase reflects the Company's updated current-cost estimates based on actual operational experience accumulated since the Pipeline's October 1, 2021 in-service date. At the time of the original filing in May 2022, the Pipeline had been in ser

33. Q. What is the revised A&G expense? A. The revised A&G expense is $5.14 million, an increase of $0.32 million from the $4.82 million included in the original filing. The principal components of the A&G expense are: (a) Management and Administrative Salaries: $2.07 million, representing the allocated costs of corporate management and administrative personnel, including a portion of my own compensation and the comp

34. Q. What is the amount of taxes other than income included in the cost of service? A. Taxes other than income total $3.80 million, unchanged from the original filing. This amount comprises property taxes and franchise taxes levied on Ridgeline's pipeline assets and operations in West Virginia and Pennsylvania. Specifically, Ridgeline pays property taxes to county assessors in the West Virginia counties traversed b

35. Q. What is the revised income tax allowance? A. The revised income tax allowance is $15.04 million, a reduction of $1.06 million from the $16.10 million included in the original filing. The reduction is directly attributable to the lower taxable income resulting from the reduced ROE. Because the income tax allowance is computed on the equity return component of the cost of service, a reduction in the ROE from 14.

36. Q. Does Ridgeline's organizational form affect its eligibility for an income tax allowance? A. Ridgeline is a limited liability company, and its sole member, DEH, is a Cayman Islands exempted limited company. Under the Commission's income tax allowance policy, as most recently articulated in Inquiry Regarding the Commission's Policy for Recovery of Income Tax Costs, 162 FERC ¶ 61,227 (2018), and in the Sterling R

VIII. REVENUE CREDITS AND ADJUSTMENTS A. Revenue Credits

37. Q. What are the revised revenue credits? A. The revised revenue credits are ($6.00 million), reduced from the ($16.10 million) included in the original filing. This represents a $10.10 million reduction in the amount of ancillary revenue that offsets the cost of service. Revenue credits serve to reduce the cost of service that must be recovered through firm transportation rates by crediting to the cost of service

38. Q. Why have the revenue credits decreased so significantly from the original filing? A. The original filing included revenue credit projections of ($16.10 million), which were based on management's optimistic projections at the time of the original filing in May 2022. Those projections assumed that the Pipeline would achieve near-full utilization relatively quickly after the in-service date, thereby generating su

IX. TOTAL REVISED COST OF SERVICE A. Cost-of-Service Summary Table

39. Q. Please summarize the total revised cost of service. A. The following table presents a complete comparison of the original and revised cost-of-service components: The revised total cost of service is $103.15 million, an increase of $5.79 million (approximately 5.9%) over the original filing of $97.36 million. The component details are set forth in Exhibit AM-S1 (Revised Statement A — Cost of Service Summary). B

40. Q. Please explain why the total cost of service increased despite the reduction in the proposed ROE. A. The net increase of $5.79 million in the total cost of service is the product of several offsetting adjustments. Despite the $5.05 million reduction in the return on rate base (resulting from the 150-basis-point reduction in ROE from 14.00% to 12.50%) and the $1.06 million reduction in the income tax allowance

X. REVISED RATE DESIGN AND BILLING DETERMINANTS A. Change in Load Factor Assumption

41. Q. What change has Ridgeline made to the load factor assumption used in deriving the recourse rate? A. Ridgeline has revised its load factor assumption from 100% in the original filing to 75% in this supplemental filing. This revision directly addresses Deficiency Item 4 in the OEMR Deficiency Letter, which identified insufficient support for the 100% load factor billing determinant assumption underlying the orig

42. Q. What are the revised billing determinants? A. The revised billing determinants are 328,500,000 Dth/yr, calculated as follows: Design Capacity: 1,200,000 Dth/d Days per Year: 365 Load Factor: 75% Billing Determinants = 1,200,000 Dth/d × 365 days × 75% = 328,500,000 Dth/yr The original billing determinants were 438,000,000 Dth/yr, calculated using the same design capacity of 1,200,000 Dth/d but at a 100% load fa

43. Q. What rate design methodology does Ridgeline employ in the revised tariff? A. The revised tariff employs a modified fixed-variable ("MFV") rate design methodology, which has been updated from the straight fixed-variable ("SFV") approach used in the original filing. Under the MFV methodology, the reservation rate is designed to recover all fixed costs of service, including the return on rate base, depreciation,

44. Q. What is the revised proposed recourse rate? A. The revised proposed recourse rate is $0.3140/Dth, composed of a reservation component of $0.3102/Dth and a usage component of $0.0038/Dth. The total recourse rate is derived by dividing the total cost of service by the revised billing determinants: Total Cost of Service: $103,150,000 Billing Determinants: 328,500,000 Dth/yr Total Recourse Rate: $103,150,000 ÷ 328

45. Q. How does the revised recourse rate compare to the originally proposed rate? A. The revised recourse rate of $0.3140/Dth compares to the original proposed rate of $0.2265/Dth, representing an increase of $0.0875/Dth, or approximately 38.6%. The table below compares the original and revised rate components: The increase in the total recourse rate is driven primarily by two factors: (i) the reduction in the load